Practice exam no. 1 ECOS3003 Page | 1
Practice exam number 1 ECOS3003
1. Consider the following game. Player A and B simultaneously choose to work on either Project 1
(P1) or Project 2 (P2). The payoffs are as follows: if both players choose P1 the payoffs are 6 to A and
2 to B; if A chooses P1 and B chooses P2 the payoffs are 0 to each party; likewise, if A chooses P2
and B chooses P1 the payoffs are 0 to each party; and, finally, if A chooses P2 and B P2 the payoffs
are 3 to both players.
What are all of the Nash equilibria of this game?
a. (P1, P1)
b. (P1, P1), (P2, P2)
c. (P1, P1), (P2, P2) and (Player A plays P1 with probability 1/3, Player B plays P1 with probability
1/2)
d. (P1, P1), (P2, P2) and (Player A plays P1 with probability 3/5, Player B plays P1 with probability
1/3)
e. (P1, P2), (P2, P2) and (Player A plays P1 with probability 1/2, Player B plays P1 with probability
2/3).
2. Consider the following sequential game. Player A can choose between two tasks, T1 and T2. After
having observed the choice of A, Player B chooses between two projects P1 or P2. The payoffs are as
follows: If A chooses T1 and B chooses P1 the payoffs are (12, 8), where the first payoff is for A and
the second for B; if A chooses T1 and B opts for P2 the payoffs are (20, 7); if A chooses T2 and B P1
the payoffs are (10, 15); finally, if A chooses T2 and B chooses P2 the payoffs are (18, 12).
What is the subgame perfect equilibrium and is it efficient?
a. (T1, P1); no it is not efficient
b. (T1, P1); yes it is efficient
c. (T2, P2); yes, it is efficient
d. (T2, P1); no it is not efficient
e. None of the above
f. All of the above, including (e)
g. a and b
h. e and f.
3. What is NOT a way to credibly to commit to delegate real authority, when it is not possible to
assign formal authority to an agent?
a. ensure the decision needs to be made with urgency
b. write a legally binding contract specifying a penalty if the principal intervenes
c. increase the number of the principals with a stake in the project
d. increase the number of agents performing independent tasks
e. develop a reputation for not meddling/intervening with an agent’s decision
Practice exam no. 1 ECOS3003 Page | 2
4. A team of two workers, Fred and Harriet, both can choose to be Lazy or to work Hard. If Fred is
Lazy and Harriet is also Lazy the payoffs are (2, -2) to Fred and Harriet, respectively; if Fred is Lazy
and Harriet works Hard the payoffs are (-2, 2); If Fred works Hard and Harriet is Lazy the payoffs are
(-2, 2); and, finally, if they both work Hard the payoffs are (2, -2).
What is the Nash equilibrium?
a. (Lazy, Lazy), (Hard, Hard), where the first strategy is Fred’s and the second Harriet’s
b. (Lazy, Lazy), (Hard, Hard) and (Fred is Lazy with probability ½, Harriet is Lazy with probability
1/2)
c. (Lazy, Hard), (Hard, Lazy)
d. (Fred is Lazy with probability ½, Harriet is Lazy with probability 1/2)
e. There are no Nash equilibria in this game
5. The Basic Principle of Value Maximisation:
a. says that contract will be designed to achieve the efficient level of effort.
b. suggests the principal will need to coerce the agent into accepting a contract that increases surplus
and agent effort.
c. is an application of the gains from trade.
d. suggests that self-interested parties will typically engage in conflict and surplus destruction.
e. says that only when parties’ interests are inherently aligned that surplus will be maximised.
7. Which statement is true?
a. Size is a component of the architecture of organisations.
b. Organisation architecture is determined by the strategy of a firm, but the reverse is also true.
c. Firms should concentrate on maximising firm value, and largely ignore its organisational
architecture.
d. The organisational architecture of a firm consists of the 3 complementary components of a firm’s
business environment, being: technology, markets and regulation.
e. None of the above statements are true.
8. Corporate culture
a. can impede change of an organisation’s architecture.
b. is important in terms of corporate image, but is not important for the operation of an organisation.
c. is a substitute, but not a complement, to the formal aspects of a firm’s organisational architecture.
d. should be avoided by an organisation, given its informal and nebulous nature.
e. consists of only the formal contracts between employees and the firm.
9. Which of the following makes the most sense?
a. The U-form is more desirable in large, diversified firms.
b. The U-form is less desirable in small, single-product firms
c. The M-form is more desirable in unstable technological environments
d. The M-form is less desirable in large, diversified firms.
e. No firm would wish to use a U-form structure.
Practice exam no. 1 ECOS3003 Page | 3
10. Decision management is defined as:
a. Ratification and monitoring of a decision.
b. Implementation and monitoring of a decision.
c. Ratification and implementation of a decision.
d. Initiation and ratification of a decision.
e. Initiation and implementation of a decision
For the next five questions, consider a scenario based on the Aghion and Tirole (1997) model of
formal and real authority studied in class.
There is a Principal and an agent, and the principal needs to decide on which project to implement. If
the principal’s preferred project is implemented the agent gets b = 40 and the principal gets surplus of
B = 120. If the agent’s preferred project is implemented the agent gets b = 90 and the principal gets a
return of B = 80.
Ex ante all projects look alike; assume that if the principal is uninformed she will follow the
recommendation of the agent. The principal can expend effort E to become informed. The principal
can either expend effort E = 0, which will give her a zero probability of becoming informed.
Alternatively, she can expend effort E = c at the cost of c, which will mean that she is informed with
probability ½ (that is, she is informed with probability ½ if effort cost is c).
On the other hand, the agent can become informed at zero cost, so we can assume that he will always
be informed.
The principal has a choice – she can retain formal authority to make the decision for herself (P-formal
authority), or she can delegate the formal decision making rights to the agent (delegation).
11. If the principal has P-formal authority she will try to be informed (expend effort E = c). With
delegation she will not bother putting in effort (E = 0). Ignoring her ex ante effort costs E, the
principal’s expected return Up from P-formal authority and from delegation Upd are:
a. Up = 115; Upd = 80
b. Up = 150; Upd = 80
c. Up = 90; Upd = 100
d. Up = 100; Upd = 80
e. None of the above.
12. What is the highest value of effort cost c such that the principal will choose to retain formal
authority?
a. 50
b. 70
c. 30
d. 35
e. 20
Practice exam no. 1 ECOS3003 Page | 4
Now assume that this is an infinite horizon game in that there are an infinite number of periods, and in
each period a project can be chosen to be implemented with the same potential payoffs as outlined
above. All parties have a discount factor of δ, where 0 ≤ δ ≤ 1. Further, now assume that the principal
cannot formally delegate authority to the agent, but would like to commit to not intervene using the
following trigger strategy:
In the first period choose to remain uninformed about the potential project but pay the agent
$30. Then ask the agent for a recommendation and implement the agent’s recommendation.
In any subsequent period, if the agent ‘cheated’ and did not recommended the principal’s
preferred project in any previous period, she will expend effort E = c (that is, try to become informed,
implement her preferred project if she can but follow the agent’s recommendation in that period
otherwise). If the agent recommended the principal’s preferred project in every previous period, she
will remain uninformed (E = 0), pay the agent $30 and follow the agent’s recommendation.
13. What is the agent’s expected payoff Ua if he cooperates and recommends the principal’s preferred
project in every period?
a. Ua = 70/(1 – δ)
b. Ua = 90
c. Ua = 80/(1 – δ)
d. Ua = 75/(1 + δ)
e. Ua = 65/(1 - δ)
14. What is the agent’s expected payoff Uach if he cheats and recommends his own preferred project?
a. Uach = 120
b. Uach = 120 + δ.65/(1 – δ)
c. Uach = 120 + δ.40/(1 – δ)
d. Uach = 100 + 80/(1 – δ)
e. Uach = 100 + 90/(1 – δ)
15. For what value of δ will this trigger strategy be able to sustain cooperation (in which the agent
truthfully recommends the principal’s preferred project in every period, despite the principal being
uninformed and the agent having real authority)?
a. δ ≥ 1/5
b. δ ≥ 4/5
c. δ ≥ 5/8
d. δ ≥ 3/4
e. δ ≥ 10/11