Economics Practice Problems for Spring 2006 - University of Illinois at Urbana-Champaign, Quizzes of Economics

Download Economics Practice Problems for Spring 2006 - University of Illinois at Urbana-Champaign and more Quizzes Economics in PDF only on Docsity! University of Illinois at Urbana-Champaign Spring 2006 Department of Economics Econ 480 Practice Problems These are meant to help you in your preparation for for the final; you do not have to turn them in. “Chapter, problem” problems are from the book. Problem numbers for the 2nd edition are in italics; Problem numbers for the 3rd edition are in bold. 1. Gap and Hollister are two stores that have to decide whether to run sales next weekend. The following table describes their profits, depend- ing on their choices of action: Hollister sale price regular price Gap sale 20,10 50,5 reg. price 5, 30 30, 25 (a) Does anybody have a dominant strategy? Can the game be solved using dominance? (b) Find all Nash equilibria in this game. (c) Suppose the game is repeated every week, and the store owners are patient (that is, the time discount factor δ is quite close to 1). Find an equilibrium that leads to each store making more money each week than in any of the equilibria in item (b). Make sure you fully describe the players strategies, not just the equilibrium outcomes. (d) Suppose firms are now impatient: δ = 1/3. Would Hollister want to deviate from the equilibrium you proposed in item (c)? What about Gap? 2. Chapter 14, problem 1: 2 Firms compete Cournot-style, marginal cost for both is 20, demand is P = 260− 2Q. (a) If they interact once, what are the equilibrium quantities? What is the market price? What are each firm’s profits? 1