You have 80 minutes to complete this examination. The examination will be graded out of a possible 100 points. The maximum points awarded to each question are indicated in parentheses beside the question number.

1. (25 pts. total, 5 pts. each) Indicate whether the following statements are true or false, and explain why in a couple of sentences.
1. A monopolist that produces a good and could sell it in two markets will never sell it in the market with a lower willingness to pay.
2. A high Herfindahl-Hirschman Index (HHI) always indicates the presence of market power.
3. In all markets where there are only one or two sellers, total surplus (consumer surplus + producer surplus) is less than it would be if there were more sellers.
4. Economies of scale are one reason why stores like Lowes and Home Depot are so successful vis a vis "Mom and Pop" type hardware stores; however, economies of scope have had no role in the success of these big box retailers.
5. There is no specific relationship between elasticity of demand and monopoly power.

 
2. (25 pts.) Two firms in an industry sell a homogeneous good. They both have 0 fixed costs and a constant marginal cost of $6. The aggregate demand curve is P = 30 - 2Q where Q is the aggregate demand and P is price. Assume each firm simultaneously selects quantity and then price is set so that the market clears.
1. Compute the best response functions of the two firms.
2. Compute the Nash equilibrium pair of quantities, q₁* and q₂*.
3. What price will result if this strategy combination were played?
4. Assume there are n identical firms in the market that simultaneously select quantities. As n gets large, to what will the market price converge?

 
3. (25 pts.) Firm A and Firm B are the only two firms that produce widgets. Assume the following things about this market:

1. Use a matrix to diagram this game, making sure to include all necessary items to describe the game.
2. Find the Nash Equilibrium/Equilibria of this game.
3. Assume that Firm A institutes a "price protection" plan. This plan states that if Firm B has a lower price than Firm A, Firm A will rebate the difference to its customers. Draw the new game matrix that reflects this modification. What is/are the NE of this game?
4. How can price protection plans enhance firms' ability to collude? Explain.

 
4.    (25 pts.) In both the DuPont case and the NCAA case, the two sides argued for different market definitions. Using at least one of these cases to support your answer, discuss/explain the following. Why is market definition important in anti-trust cases? Why is it not obvious what the appropriate market is? What are some ways to determine what the appropriate market is?