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 School  of  Business  and  Economics  

EXAMINATION Version:

Course : Managerial Economics Code: EBC2023

Coordinator(s): Christina Rott
Date : 11 June 2018 Time: 13:00-16:00
Location : MECC Expofoyer

Switch off all your electronic devices. Take off your watch. Put them
in your bag (under your table) or on the floor,
not within arm’s reach! Otherwise we will report this as possible
fraud to the Board of Examiners.

Any changes to the examination after the official end of the examination will be reported as
possible fraud to the Board of Examiners.

If a report of irregularity has been made, the Board of Examiners will invite you for a hearing.
Possible sanctions are:
Ø complete or partial voidance or annulment of the relevant examination;
Ø exclusion from participation or further participation of one or more examinations or
exams at the SBE for a period of time to be determined by the Board of Examiners, with
a maximum period of one year;
Ø termination of the student’s registration for the concerning study programme.

This examination consists of: (please check if you received all pages, before you start
answering)
4 Numbered pages (Front page included)
7 Questions

You are allowed to make use of:

Non-programmable pocket calculator: Only Casio FX 82 or Casio FX 85
Non-electronic dictionary (Own language/English and vice versa)

Norm:
Closed book exam. To pass the exam, the student must obtain 55 or more points.

Publication of the results: within 15 workdays

Procedure for comments and inspection:

Comments: Any comments about the examination itself must be delivered via a link - provided
via “My Courses” > Examination material- at the latest five (5) days after the examination date.

You will have the possibility to an exam inspection after the results have been published. If you
wish to come to the exam inspection, you can find the inspection date and procedure via the
course page in “My Courses".

Particulars:
---

You have to hand in the entire examination set. It is not allowed to take
home, copy or photograph the examination or parts of it!
(In case of Multiple Choice questions: You can write your answers of MC questions on a piece of scrap paper and take it home).

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EBC2023 MANAGERIAL ECONOMICS

RESIT 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 and
that both firms, firm 1 and firm 2, have the same fixed marginal costs
MC1 = MC2 = MC = AC .
a. (5 points) Define the situation as a game: specify the set of players, actions, outcomes,
and payoffs. Which type of game is this?
b. (10 points) Find the Nash equilibrium of this game (using the above information).
c. (5 points) Calculate each firm’s equilibrium profit.
d. (5 points) Plug in the following numbers (𝑎 = 20, 𝑀𝐶 = 8) and calculate the
equilibrium quantities, price, and profits of firm 1 and firm 2.

2. Consider the following extensive-form game with players A and B.

A
c d

B
B
h i
e f g
A
A
4 1 2
5 9 6
l m n
k

6 7 2 9
6 7 8 5

a. (10 points) How many (pure) strategies does each player have? Explain your answer.
Solve the game by backward induction and indicate each player’s choices at each
decision node (either by drawing the game tree on your answer sheet or by explaining
the choices in words on your answer sheet).
b. (5 points) State the equilibria that you get when you solve the game by backward
induction (= subgame-perfect Nash Equilibria). Indicate the corresponding
equilibrium path, and choices off the equilibrium path for each equilibrium.

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3. (15 points) Find all Nash equilibria (pure and mixed strategy) of the following normal form
game:
Player 2

L (s) C (t) R (1-s-t)

U (p) 4, 5 5, 6 6, 5

Player 1 M (q) 3, 8 5, 5 8, 5

D (1-p-q) 3, 4 6, 5 7, 6

4. (10 points) Consider the utility function u(x) = x 2 . Consider a gamble which gives A Euro
with probability p and B > A Euro with probability 1− p . This gamble’s expected value is
pA + (1− p)B Euro. Show graphically that u(x) represents a risk-seeking utility:
u[ pA + (1− p)B] < pu(A) + (1− p)u(B) for any A , B and p . Indicate the relevant values on
the x-axis and on the y-axis.

5. (10 points) The following game is played for 10 rounds.

Player 2

C D N

C 3, 3 0, 7 0, 0

Player 1 D 7, 0 2, 2 0, 0

N 0, 0 0, 0 0, 0

Can the outcome (C, C) be sustained at least for some rounds in a subgame-perfect Nash
Equilibrium? Elaborate. Describe the subgame-perfect Nash Equilibrium of this game.

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6. (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.

7. Imagine that there are two types of individuals: sporty individuals and lazy individuals. All
individuals, sporty and lazy, have a utility function 𝑈 𝑥 = 𝑥 and an income 𝐼 = 40,000.
Sporty individuals have a probability of 𝜋! = 0.01 to get sick and need an expensive
treatment with cost 𝑇 = 30,000. Lazy individuals have a probability of 𝜋! = 0.02 to get sick
and need an expensive treatment with cost 𝑇 = 30,000. Half of the population is lazy. A
health insurance company knows that half of the population is lazy, but cannot observe an
individual’s type (sporty or lazy).
a. (5 points) What is the expected cost for the insurance company if they decide to offer
an insurance contract and cannot differentiate between sporty and lazy individuals?
What is the lowest price p that the insurance company is willing to accept?
b. (10 points) Are both types of individuals willing to pay this lowest price?

In case you finished the exam before 16.00h: please leave the examination hall as quiet as
possible, so you will not disturb the students who are trying to concentrate on their work!

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