Chapter 4 AP Econ Test Review

The payoff matrix above shows the profits of two firms, Alpha and Beta, that compete against each other. Each firm must decide to set a high or low price. The first numeric entry shows Alpha's profits; the second entry shows Beta's profits. Each firm is aware of the information in this payoff matrix. Given that each firm is aware of the information in the payoff matrix, which of the following is true? Responses

Both Alpha and Beta have a dominant strategy to price low.

The above payoff matrix illustrates the daily profit for two restaurants, Amy's and Sam's. Each restaurant has the choice to lower prices for early bird customers or keep prices the same. The first entry in each cell indicates the profits for Amy's, and the second entry in each cell indicates the profits for Sam's. Each restaurant independently and simultaneously chooses its action and has complete information of the payoff matrix. Based on the information and assuming Amy's and Sam's do not cooperate, which action will each pursue?

Both Amy's and Sam's will lower prices.

The above payoff matrix illustrates the daily profit for two restaurant owners, Art and Zeb. Each owner has the choice to lower prices for early bird customers or keep prices the same. The first entry in each cell indicates the profits for Art, and the second entry in each cell indicates the profits for Zeb. Each restaurant independently and simultaneously chooses its action and has complete information of the payoff matrix. Which of the following is a Nash equilibrium?

Both Art and Zeb will lower prices.

The payoff matrix above shows the profits of two firms, Alpha and Beta, that compete against each other. Each firm must decide to set a high or low price. The first numeric entry shows Alpha's profits; the second entry shows Beta's profits. Each firm is aware of the information in this payoff matrix. Nash equilibrium occurs with which combination of strategies?

Both firms charging a low price

Which of the following is true of monopolistically competitive firms in long-run equilibrium?

Marginal revenue equals marginal cost, and price equals average total cost.

In which of the following market structures is firm interdependence and strategic behavior most commonly observed?

Oligopoly

What price will the firm charge?

P5

Which of the following explains why imperfectly competitive markets are inefficient?

Price is greater than marginal cost.

What is the firm's profit-maximizing quantity of output?

Q1

For the monopolistically competitive firm represented by the graph above, the allocatively efficient quantity of output is

Q3

Which of the following is true of a natural monopoly?

The average total cost decreases throughout the entire effective demand.

The above payoff matrix illustrates the daily profits for two restaurants. Each restaurant has the choice to lower prices for early bird customers or keep prices the same. The first entry in each cell indicates the profits for Art's, and the second entry in each cell indicates the profits for Zeb's. Each restaurant independently and simultaneously chooses its action and has complete information of the payoff matrix. Based on the information, does either firm have a dominant strategy?

The dominant strategy for Zeb's is to charge the same prices.

Assume a profit-maximizing monopolist is able to price discriminate, dividing its consumers into two distinct groups charging each a different price. Based on this information, which of the following is true?

The group with the more elastic demand will pay the lower price.

Which of the following is true for a monopolist that engages in perfect price discrimination?

The monopolist sells the allocatively efficient quantity of output.

Monopolistically competitive markets are characterized by

a large number of firms

One difference between monopolistic competition and oligopoly is that firms in monopolistic competition are assumed to

act independently in setting price and output

Which of the following is true for a firm in long-run equilibrium in monopolistic competition?

There is neither allocative nor productive efficiency.

If Zeta, a single producer, had exclusive control of a key resource needed to produce good Z , a likely result would be which of the following?

There would be a barrier to entry, and Zeta would have a monopoly on good Z

Based on the information in the above graph describing a monopolistically competitive firm, which of the following is true?

With the firm making economic profits, it can be expected that new firms will enter this market.

A firm with market power engages in price discrimination in order to

increase its profits

A monopolistically competitive firm's demand curve will be least elastic if

the number of rival firms producing more differentiated products decreases

Which of the following statements relating to a firm in an imperfectly competitive market and a firm in a perfectly competitive market is true?

An imperfectly competitive firm must lower its price to increase sales, while a perfectly competitive firm can increase sales by increasing output at the current price.

The graph shows the cost and revenue curves for a profit-maximizing monopolist that produces teddy bears. The letters in the graph represent the enclosed areas. If the monopolist engages in perfect price discrimination, which of the following will happen?

Consumer surplus and deadweight loss will be zero because all economic surplus will be transferred to producer surplus.

The graph shows the cost and revenue curves for a profit-maximizing monopolist that produces teddy bears. The letters in the graph represent the enclosed areas. If the monopolist charges a single price for teddy bears, which of the following describes an accurate outcome?

Consumer surplus equals area (a+b), producer surplus equals area (c+d), and deadweight loss equals area (e).

Which of the following is true in imperfectly competitive markets?

Firms must lower their product prices to sell additional units.

Based on the information in the graph above, what are the profit-maximizing output quantities for a single-price monopolist and for a monopolist that engages in perfect price discrimination?

For a single-price monopolist, Q0. With perfect price discrimination, Q3.