Q: Suppose the social demand for a public good is given by $$P_1 = 45 - Q$ and P_2$ = 10 - 0.25Q. $$What is the vertical sum of demand at $$Q = 10$$?

$$P_{social} = (45 - 10) + (10 - 0.25 \times 10) = 35 + 7.5 = 42.5$$

Question 1

In a Cournot duopoly, the market demand is given by $$P = 120 - Q$$, where $$Q = q_1$ + q_2$, and both firms have marginal cost MC = 30$. What is the Nash equilibrium quantity produced by each firm?

Accepted Answer

$$q_1$$ = $$q_2 = 30$

Question 2

Which of the following best describes the Stackelberg model of oligopoly competition?

Accepted Answer

One firm chooses its quantity first, and the other firm observes and responds.

Question 3

Suppose two firms are competing in a Bertrand model with identical products and marginal cost $$MC = 50. $$What is the expected market price at equilibrium?

Accepted Answer

$$P = 50$$

Question 4

In the context of game theory, what is a Nash equilibrium?

Accepted Answer

A situation where no player can improve their payoff by unilaterally changing their strategy.

Question 5

Consider the following payoff matrix for two firms deciding whether to advertise. Which strategy is dominant for both firms?

Firm 2
Advertise | Don't Advertise
Firm 1
Advertise: (4,4) | (6,2)
Don't Advertise: (2,6) | (5,5)

Accepted Answer

Both firms should choose 'Advertise'.

Question 6

A negative production externality occurs when:

Accepted Answer

A firm's production imposes a cost on others not reflected in the market price.

Question 7

Given the following: Private Marginal Cost $$PMC = 80 + Q$$, External Marginal Cost $$EMC = 40$$, and inverse demand $$P = 212 - Q. $$What is the competitive equilibrium quantity?

Accepted Answer

$$Q = 132$$

Question 8

Which of the following is NOT a solution to the externality problem?

Accepted Answer

Ignoring the externality

Question 9

Which of the following goods is both non-rival and non-excludable?

Accepted Answer

National defense

Question 10

The free rider problem is most likely to occur with which type of good?

Accepted Answer

Public goods

Question 11

Suppose the social demand for a public good is given by $$P_1 = 45 - Q$ and P_2$ = 10 - 0.25Q. $$What is the vertical sum of demand at $$Q = 10$$?

Accepted Answer

$$P_{social} = (45 - 10) + (10 - 0.25 	imes 10) = 35 + 7.5 = 42.5$$

Question 12

In a cartel, if one firm cheats by increasing its output above the agreed quota, what is the likely effect?

Accepted Answer

The cheating firm will earn more profit, but overall cartel profits will decrease.

Question 13

Which of the following statements about the Coase Theorem is correct?

Accepted Answer

Efficient outcomes are possible if property rights are well-defined and transaction costs are low.

Question 14

A common pool resource is characterized by:

Accepted Answer

Rivalry and non-excludability

Question 15

In a sequential game, what method is used to find the subgame perfect Nash equilibrium?

Accepted Answer

Backward induction

Question 16

If the private marginal cost is $$PMC = 80 + Q$$, the external marginal cost is $$EMC = 40$$, and the marginal benefit is $$MB = 212 - Q$$, what is the socially optimal quantity?

Accepted Answer

$$Q = 92$$

Question 17

Which of the following is a key difference between Cournot and Bertrand competition?

Accepted Answer

Cournot firms compete on quantity, Bertrand firms compete on price.

Question 18

Which of the following is an example of a positive consumption externality?

Accepted Answer

Vaccination leading to herd immunity

Question 19

In the context of public goods, what does 'vertical summation' refer to?

Accepted Answer

Adding individual willingness to pay at each quantity

Microeconomics Study Guide: Oligopoly, Game Theory, Externalities, and Public Goods

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