EBC2023 MANAGERIAL ECONOMICS - FINAL EXAM
The exam is closed book. The points add up to 100. Good luck!
1. Consider the Cournot model. Assume that the inverse demand function is 𝑃 𝑄 = 𝑎 − 𝑄
where 𝑄 is the total demand on the market. Two firms, firm 1 and firm 2, have the same fixed
marginal cost 𝑀𝐶 = 𝑀𝐶! = 𝑀𝐶! = 𝐴𝐶 and maximize their respective profit (𝛱! and 𝛱! ).
a. (5 points) Define the situation as a game: specify the set of players, actions, outcomes,
and payoffs.
b. (10 points) Find the Nash equilibrium of this game (using the above information).
Calculate each firm’s equilibrium profit.
c. (5 points) Plug in the following numbers (𝑎 = 20, 𝑀𝐶 = 6) and calculate the
equilibrium quantities, price, and profits of firm 1 and firm 2.
2. Consider the Stackelberg model. Assume that the inverse demand function is 𝑃 𝑄 = 𝑎 − 𝑄
where 𝑄 is the total demand on the market. Two firms, firm 1 and firm 2, have the same fixed
marginal cost 𝑀𝐶 = 𝑀𝐶! = 𝑀𝐶! = 𝐴𝐶 and maximize their respective profit (𝛱! and 𝛱! ).
Firm 1 is the first mover.
a. (5 points) Define the situation as a game: specify the set of players, actions, outcomes,
and payoffs.
b. (5 points) Draw the game tree (including the players, actions and payoffs).
c. (10 points) Find the Nash equilibrium of this game (using the above information).
Calculate each firm’s equilibrium profit.
d. (5 points) Plug in the following numbers (𝑎 = 20, 𝑀𝐶 = 6) and calculate the
equilibrium quantities, price, and profits of firm 1 and firm 2.
3. (5 points) How do firm 1’s quantities and profits in exercise 1 and 2 compare? How do firm
2’s quantities and profits in exercise 1 and 2 compare? How do the prices differ? Is the
consumer surplus larger in Cournot or in Stackelberg? (You may be able to answer this
question even if you did not manage to do the calculations.)
4. (10 points) You decide to start a business together with your friend. Every week, you now
have to work to build up the business. For simplicity, you can assume that there are infinitely
many weeks ahead. The benefit you get out of the business depends on the effort you both put
into it and is shown in the table below. If one of you decides to quit, you both have to give up
the company. The probability that one of you gets fed-up and leaves the company is 10% after
each week. Thus, after each week, you both continue in the subsequent week with a
probability of 90%, which is equivalent to a discount factor of δ = 0.9 for both of you. You
meet in the beginning and discuss possible strategies. Is there a way to sustain High Effort? If
yes, describe your and your friend’s strategy. Is sustaining High Effort more or less profitable
than agreeing on Low Effort? Show mathematically.
Friend
High Effort Low Effort
High Effort 10, 10 2, 14
You
Low Effort 14, 2 6, 6
5. (15 points) Consider a Static Game of Incomplete Information (Player 1, a team leader
looking for a modest high-talent team member, decides between “Hire” or “Not hire”; Player
2, a junior colleague, has two types “Dull” or “Smart,” each type can be either “Modest” or
“Arrogant”):
Dull Smart
Modest Arrogant Modest Arrogant
Hire 2, 2 -2, 4 Hire 10, 9 8, 8
Not hire 3, 1 3, 3 Not hire 3, 4 3, 5
Suppose that player 1 believes that type “Dull” of player 2 happens with probability p. For
any p, find all Bayesian Nash Equilibria.
6. (15 points) Describe each of the following five concepts in one-two phrase(s): Expected
value, Expected utility, Certainty effect, Perception of low probability event, Prospect theory.
7. (10 points) Give definitions of Adverse Selection and Moral Hazard. Describe two tools that
can help overcome Adverse Selection and give a labor market example for both tools.
