Tackle the Test: Free-Response Questions

  1. Question

    Refer to the payoff matrix provided. You and your competitor must decide whether or not to market a new product.

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    Rubric for FRQ 1 (6 points)

    1 point: $400

    1 point: Market the new product

    1 point: Yes

    1 point: Profits are greater (either $100 or $400 versus $0) if I market the new product, regardless of what my competitor does.

    1 point: Yes

    1 point: Both players marketing the product is a Nash equilibrium because neither side wants to change to not marketing, given what the other side is doing. (In fact, in this case both sides want to market the product regardless of what the other side is doing, so it is a dominant strategy equilibrium as well as a Nash equilibrium.)

  2. Question

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    Suppose there are two firms in an oligopoly, Firm A and Firm B. If both firms charge a low price, each earns $2 million in profit. If both firms charge a high price, each earns $3 million in profit. If one firm charges a high price and one charges a low price, customers flock to the firm with the low price, and that firm earns $4 million in profit while the firm with the high price earns $1 million in profit.