ECON 2201 CH. 11 & 12 Quizzes for Final Exam

Scenario 12.3: Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.3. What price would this new drink sell for if it sold in a competitive market? $3 $27 $16.50 $13.50 0

$3

This market situation is much like a pure monopoly except that its member firms tend to cheat on agreed upon price and output strategies. What is it? Market sharing monopoly Duopoly Natural monopoly Cartel

Cartel

An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of a two-part tariff. first-degree price discrimination. bundling. second-degree price discrimination. tying.

a two-part tariff.

For most residential telephone service, people pay a monthly fee to have a hookup to the telephone company's line plus a fee for each call actually made. Under this pricing scheme, the telephone company is using second-degree price discrimination. limit pricing. a two-part tariff. two stage price discrimination.

a two-part tariff.

Bundling products makes sense for the seller when firms cannot price discriminate. the products are complementary in nature. consumers have heterogeneous demands. both A and C.

both A and C.

Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then: consumer surplus increases, producer surplus must decline. consumer and producer surplus must increase. consumer surplus increases, producer surplus may increase or decrease. consumer and producer surplus must decline.

consumer surplus increases, producer surplus may increase or decrease.

A firm setting a two-part tariff with only one customer should set the entry fee equal to marginal revenue. price. marginal cost. consumer surplus.

consumer surplus.

Excess capacity in monopolistically competitive industries results because in equilibrium firms make positive economic profit. price equals marginal cost. each firm's output level is too great to minimize average cost. each firm's output level is too small to minimize average cost.

each firm's output level is too small to minimize average cost.

You interview with an athletic footwear manufacturer that has annual advertising expenditures of $32 million and total sales revenue of $100 million, and the firm selects the profit maximizing level of advertising expenditures. If the advertising elasticity of demand is 0.4, then you know that "Rule of Thumb for Advertising" implies that the demand for the firm's products is: inelastic. unit elastic. zero. elastic.

elastic.

Scenario 12.3: Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.3. What will be the price of this new drink in the long run if the industry is a Cournot duopoly? $9 $13.50 $3 $12 none of the above

$9

Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users? -1.5 -1.0 -0.67 We do not have enough information to answer the question.

-1.5

Club Med, which operates a number of vacation resorts, offers vacation packages at a lower price in the winter (i.e., the "off season") than in the summer. This practice is an example of: bundling. intertemporal price discrimination. two-part tariff. peak-load pricing. Both A and B are correct.

Both A and B are correct.

Scenario 12.2: You are studying a market for which the kinked demand curve model applies. The kinked demand curve is as follows: Q = 1200 - 5P for 0 Q < 150 Q = 360 - P for 150 Q The marginal cost is given as: MC = Q Refer to Scenario 12.2. Suppose that the marginal cost falls such that: MC = Q - 10 What is the profit maximizing level of output? 120 171.43 150 all of the above none of the above

150

Scenario 12.2: You are studying a market for which the kinked demand curve model applies. The kinked demand curve is as follows: Q = 1200 - 5P for 0 Q < 150 Q = 360 - P for 150 Q The marginal cost is given as: MC = Q Refer to Scenario 12.2. Suppose that the marginal cost falls such that: MC = Q - 10 What is the profit maximizing level of output? 150 120 171.43 all of the above none of the above

150

Johnny's Shop-and-Pay is a regional grocery chain, and their marketing manager is trying to determine the profit-maximizing coupon program for the store's laundry detergent brand. Coupon users at the store have an elasticity of demand for this product that equals -3, and the elasticity of demand for non-users of the coupon for the store brand equals -1.5. If the full retail (undiscounted) price of the detergent is $10 per box, what is the optimal discount to provide for coupon users? The optimal strategy is to charge the same price to both groups 50% off 25% off 75% off

50% off

*(Start of Ch. 12) Although firms earn zero profits in the long run, why is the outcome from monopolistic competition considered to be inefficient? Quantity is lower than the perfectly competitive outcome. Price exceeds marginal cost. Goods are not identical. A and B are correct. B and C are correct.

A and B are correct.

Which oligopoly model(s) have the same results as the competitive model? Stackelberg Cournot Bertrand Both Cournot and Stackelberg

Bertrand

Use the following statements to answer this question. I. To maximize profit, a firm will advertise more when the advertising elasticity is larger. II. To maximize profit, a firm will advertise more when the price elasticity of demand is smaller. Both I and II are false. I is true, and II is false. Both I and II are true. I is false, and II is true.

Both I and II are true.

Use the following statements to answer this question: I. Cartels are illegal in the United States. II. Once price and production levels are agreed upon, each member of a cartel has an incentive to "cheat" on the agreement. Both I and II are false. I is true, and II is false. Both I and II are true. I is false, and II is true.

Both I and II are true.

Consider the following payoff matrix for a game in which two firms attempt to collude under the Bertrand model. Firm B cuts Firm B colludes Firm A cuts 6,6 24,0 Firm A colludes 0,24 12,12 Here, the possible options are to retain the collusive price (collude) or to lower the price in attempt to increase the firm's market share (cut). The payoffs are stated in terms of millions of dollars of profits earned per year. What is the Nash equilibrium for this game? Both firms cut prices. A cuts and B colludes. B cuts and A colludes. Both firms collude.

Both firms cut prices.

Two firms operating in the same market must choose between a collude price and a cheat price. Firm A's profit is listed before the comma, B's outcome after the comma. If each firm tries to choose a price that is best for it, regardless of the other firm's price, which of these statements is correct? Both firms should charge a collude price. Firm A should charge the collude price, Firm B should charge a cheat price. Firm A should charge a cheat price, Firm B should charge a collude price. Both firms should charge a cheat price.

Both firms should charge a cheat price. (https://lms.uconn.edu/courses/1/1155-UCONN-ECON-2201-SEC10-1185/ppg/Chapter%2012%20Quiz0402131157/f1q65g1.jpg)

Albatross Software has two main products: WindSong is a program that can be used to edit audio files and SunBurst is a program that can be used to edit digital photos. The two major types of customers are small businesses and home users. The small business customers have a reservation price of $300 for WindSong and $450 for SunBurst. The home users have a reservation price of $100 for WindSong and $125 for SunBurst. Which of the following statements is true? Bundling the two software products is not likely to be profitable because the demands are positively correlated. Bundling the two software products is likely to be profitable because the demands are negatively correlated. Bundling the two software products is not likely to be profitable because the consumer demands are homogeneous. Bundling the two software products is not likely to be profitable because the marginal cost of producing software is positive by very small.

Bundling the two software products is not likely to be profitable because the demands are positively correlated.

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens to the price of oil on the world market? Decreases Remains the same Increases We do not have enough information to answer this question.

Decreases

The authors note that advertising can make the consumer demand for a product more elastic (price responsive) by expanding the potential range of consumers. As this change in demand occurs (ceteris paribus), what happens to the optimal advertising-sales ratio? We do not have enough information to answer this question Decreases Remains the same Increases

Decreases

Automobile manufacturers commonly sell new car models at the full suggested retail price during the first few years the car is on the market, and they do not offer rebates or discounts. After the initial sales period, the manufacturers typically offer rebates or discounts on these models. The marginal cost of manufacturing the cars is constant across time. Which of the following statements is true? The firms practice peak-load pricing by charging a higher price in the initial sales period. The marginal revenue from buyers who purchase these cars after the initial sales period must be lower that the marginal revenue from early buyers. Early buyers have higher reservation prices for the new models, and the manufacturers maximize profits by charging these buyers a higher price. To maximize profits, the firms equate the buyers' reservation prices across time.

Early buyers have higher reservation prices for the new models, and the manufacturers maximize profits by charging these buyers a higher price.

Which of the following is NOT a condition for third degree price discrimination? Economies of scale Separate markets Different own price elasticities of demand Monopoly power

Economies of scale

Use the following statements to answer this question: I. Under the dominant firm model, the dominant firm effectively acts like a monopolist who is facing the excess market demand that cannot be supplied by the fringe firms. II. Under the dominant firm model, the fringe firms also act like profit maximizing monopolists. I is true and II is false I is false and II is true I and II are true I and II are false

I is true and II is false

What happens to the profit-maximizing cartel price and quantity if the marginal cost of production declines? The sellers are no longer price takers, so the change in marginal cost has no impact on the cartel outcome. The sellers retain the same pricing strategy and capture higher per-unit profits. The cartel price increases and market quantity declines. If demand is downward sloping, the optimal cartel price should decline and the market quantity should increase.

If demand is downward sloping, the optimal cartel price should decline and the market quantity should increase.

Which of the following statements is true? If marginal costs are constant, then it is optimal to advertise until the last dollar spent on advertising generates one additional dollar of sales. If the advertising elasticity of demand is positive, then the demand curve must be upward sloping. If the advertising elasticity of demand declines and consumer demand becomes more price elastic, then the optimal advertising-to-sales ratio declines. If the demand curve shifts leftward as the advertising expenditure increases, then the advertising elasticity of demand is positive.

If the advertising elasticity of demand declines and consumer demand becomes more price elastic, then the optimal advertising-to-sales ratio declines.

In the Stackelberg model, suppose the first-mover has MR = 15 - Q1, the second firm has reaction function Q2 = 15 - Q1/2, and production occurs at zero marginal cost. Why doesn't the first-mover announce that its production is Q1 = 30 in order to exclude the second firm from the market (i.e., Q2 = 0 in this case)? This is a possible outcome from the Stackelberg duopoly under these conditions. In this case, MR is negative and is less than MC, so the first-mover would be producing too much output. In this case, MR is negative and is less than MC, so the first-mover would be producing less than the optimal quantity. We do not have enough information to determine if this is an optimal outcome for this case.

In this case, MR is negative and is less than MC, so the first-mover would be producing too much output.

Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry? It does not produce at minimum average cost, and average cost is increasing. It produces at minimum average cost. It does not produce at minimum average cost, and average cost is decreasing. Either B or C could be true.

It does not produce at minimum average cost, and average cost is decreasing.

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits? MRA = MRB = MC. (MRA - MRB) = (1 - MC). MRA = MRB. PA = PB = MC.

MRA = MRB = MC.

The authors explain that the international copper cartel (CIPEC) has been largely ineffective in raising the price of copper in world markets, and the reason is mainly due to the relatively elastic demand for copper. Suppose the cartel recognized that there are multiple uses for copper, and some of the uses have few substitute products (e.g., copper electrical wire) while others have several close substitutes (e.g., copper water pipes). If cartel attempted to raise the price of copper in one of these sub-markets, which market should the cartel choose? Market with several close substitutes because demand is more elastic. Market with few close substitutes because demand is more elastic. Market with several close substitutes because demand is more inelastic. Market with few close substitutes because demand is more inelastic.

Market with few close substitutes because demand is more inelastic.

Suppose the market demand curve is P = 40 - 2Q and the constant marginal cost of production is MC = 20. Which of the following is a valid expression for the collusion curve? Q1 = Q2 = 5 Q1 = 40 - Q2 Q1 = 5 - Q2 Q = 5

Q = 5

In a Cournot duopoly, we find that Firm 1's reaction function is Q1 = 50 - 0.5Q2, and Firm 2's reaction function is Q2 = 75 - 0.75Q1. What is the Cournot equilibrium outcome in this market? Q1 = 60 and Q2 = 60 Q1 = 20 and Q2 = 20 Q1 = 20 and Q2 = 60 Q1 = 60 and Q2 = 20

Q1 = 20 and Q2 = 60

Suppose the market demand curve for a Bertrand duopoly is downward sloping. What happens to the Nash equilibrium price and market quantity if the constant marginal cost declines? Price increases and quantity declines Price decreases and quantity increases Price and quantity increase Price and quantity decline

Price decreases and quantity increases

Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run? Profit equals zero. MC = ATC. P > MR. P = MC.

Profit equals zero.

The authors cited statistical evidence that the price elasticity of demand for Royal Crown cola is -2.4, and the price elasticity of demand for Coke is roughly -5.5. Which firm likely has stronger brand loyalty among customers that provides greater potential for monopoly power in the cola market? Royal Crown Coke Both firms should have identical monopoly power We do not have enough information to answer this question.

Royal Crown

The oligopoly model that is most appropriate when one large firm usually takes the lead in setting price is the ________ model. Stackelberg prisoner's dilemma Cournot game theory

Stackelberg

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct? The Japanese firm will sell steel at a higher price abroad than they will charge domestic users. The Japanese firm will sell more steel abroad than they will sell in Japan. Insufficient information exists to determine whether the price or quantity will be higher or lower abroad. The Japanese firm will sell more steel in Japan than they will sell abroad. The Japanese firm will sell steel at a lower price abroad than they will charge domestic users.

The Japanese firm will sell steel at a lower price abroad than they will charge domestic users.

The authors explain that the international copper cartel (CIPEC) has been largely ineffective in raising the price of copper in world markets, and the reason is mainly due to the relatively elastic demand for copper. Suppose the cartel recognized that there are multiple uses for copper, and some of the uses have few substitute products (e.g., copper electrical wire) while others have several close substitutes (e.g., copper water pipes). To increase profits, the cartel could raise the price of copper in the sub-markets with relatively inelastic demand. What else would the cartel have to do in order to make the cartel's action effective? The cartel would have to seek permission from the U.S. Department of Justice. The cartel would have to find a way to keep the buyers in the low-price market from reselling the copper to buyers in the high-price market. The cartel would have to get the cooperation of all other copper producers in order to raise the price by some positive amount. none of the above

The cartel would have to find a way to keep the buyers in the low-price market from reselling the copper to buyers in the high-price market.

Why are many oligopolistic market outcomes conveniently described by a Prisoners' Dilemma? The firms can always achieve the outcome that maximizes joint outcomes. The outcome of a Prisoners' Dilemma is always identical to the perfectly competitive outcome. The firms could do better than the Nash equilibrium if they collude. The outcome of a Prisoners' Dilemma is always efficient.

The firms could do better than the Nash equilibrium if they collude.

Which of the following is true in the Stackelberg model? Both firms produce the same quantity. Both firms have a reaction curve. The first firm produces less than its rival. The first firm produces more than its rival.

The first firm produces more than its rival.

Which of the following markets is most likely to be oligopolistic? The market for aluminum The market for colas The market for ground coffees The market for corn

The market for aluminum

What is the potential drawback if firms follow a price leadership model in an actual market? Disputes about which firm should be the price leader may lead to price wars. Excessive price signalling may force all of the firms to adopt price-taking strategies, which reduces overall profits among the firms. Signalling efforts increase the firms' fixed costs of production. The price leader's behavior may be interpretted as collusion and be subject to antitrust sanctions.

The price leader's behavior may be interpretted as collusion and be subject to antitrust sanctions.

Which of the following statements about setting optimal two-part tariffs for many consumers is NOT true? The total profits is composed of the profit from the entrance fee (tariff) and from the profit from sales to buyers. The profit from the entrance fee (tariff) is a convex function of the tariff because if first declines and then increases as the tariff increases. The profit from the entrance fee (tariff) is a concave function of the tariff because it first increases and then decreases as the tariff increases. The number of buyers (entrants) declines as the entrance fee (tariff) increases.

The profit from the entrance fee (tariff) is a convex function of the tariff because if first declines and then increases as the tariff increases.

Which of the following is NOT conducive to the successful operation of a cartel? Market demand for the good is relatively inelastic. The supply of non-cartel members is very price elastic. Cartel members have substantial cost advantages over non-member producers. The cartel supplies all of the world's output of the good.

The supply of non-cartel members is very price elastic.

Which of the following is true for both perfect and monopolistic competition? Firms face a downward sloping demand curve. Firms produce a homogeneous product. Firms produce a differentiated product. There is freedom of entry and exit in the long run.

There is freedom of entry and exit in the long run.

Which of the following strategies are used by business firms to capture consumer surplus? Bundling Price discrimination Two-part tariffs all of the above

all of the above

Season ticket holders for the St. Louis Rams received a surprise when they read the applications forms to renew their season tickets. In order to get their season ticket to the Rams' home games, they also had to buy tickets to the preseason games. Many season ticket holders grumbled about this practice as an underhanded way for the St. Louis Rams to get more money from its season ticket holders. This practice is an example of: intertemporal price discrimination. bundling. two-part tariff. peak-load pricing. Both A and B are correct.

bundling.

Third-degree price discrimination involves charging each consumer the same two part tariff. charging different prices to different groups based upon differences in elasticity of demand. the use of increasing block rate pricing. charging lower prices the greater the quantity purchased.

charging different prices to different groups based upon differences in elasticity of demand.

In the dominant firm model, the smaller fringe firms behave like: monopolists. Cournot firms. Stackelberg firms. Bertrand firms. competitive firms.

competitive firms.

For a two-part tariff imposed on two consumers, the entry fee is based on the: consumer surplus of the customer with higher willingness-to-pay. simple average of the consumer surplus for the two buyers. consumer surplus of the customer with lower willingness-to-pay. none of the above

consumer surplus of the customer with lower willingness-to-pay.

Under perfect price discrimination, consumer surplus is greater than zero. is maximized. equals zero. is less than zero.

equals zero.

The most important factor in determining the long-run profit potential in monopolistic competition is free entry and exit. the elasticity of the market demand curve. the reaction of rival firms to a change in price. the elasticity of the firm's demand curve.

free entry and exit.

If the fringe supply curve shifts leftward in the dominant firm model, then the resulting market equilibrium price is ________ and the dominant firm's quantity ________. higher, decreases lower, increases lower, decreases higher, increases

higher, increases

The oligopoly model that predicts that oligopoly prices will tend to be very rigid is the ________ model. kinked demand Cournot dominant firm Stackelberg

kinked demand

We may be tempted to determine the optimal level of advertising expenditures at the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one). In general, this rule will not allow the firm to maximize profits because it ignores the: marginal cost of additional sales generated by the advertising. price elasticity of demand. fixed costs of advertising. advertising-to-sales ratio.

marginal cost of additional sales generated by the advertising.

In peak-load pricing, marginal revenue in the peak period is greater than in the off-peak period. marginal revenue in the peak period is less than in the off-peak period. the sum of the marginal revenues is greater than the sum of the marginal costs. marginal revenue is equal in both periods.

marginal revenue in the peak period is greater than in the off-peak period.

A market with few entry barriers and with many firms that sell differentiated products is a monopoly. monopolistically competitive. purely competitive. oligopolistic.

monopolistically competitive.

In the ________, one firm sets its output first, and then a second firm, after observing the first firm's output, makes its output decision. model of monopolistic competition Cournot model kinked-demand model Bertrand model none of the above

none of the above

The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of bundling. second-degree price discrimination. tying. a two-part tariff. none of the above

none of the above

Suppose a firm produces identical goods for two separate markets and practices third-degree price discrimination. In the first market the firm charges $30 per unit, and it charges $22 per unit in the second market. Which of the following represents the ratio of price elasticities of demand in the two markets? E2 = E1 E2 = (22/30)E1 E2 = (29/21)E1 E2 = (21/29)E1 none of these

none of these

In the kinked demand curve model, if one firm reduces its price other firms will compete on a non-price basis. other firms will raise their price. other firms will also reduce their price. Both A and B are correct. Both B and C are correct.

other firms will also reduce their price.

A local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of tying. Correct peak-load pricing. a two-part tariff. second-degree price discrimination. none of the above

peak-load pricing.

A local theater charges $5.00 for every matinee (daytime) ticket, but the ticket prices are much higher during the evening. This is an example of a two-part tariff. bundling. peak-load pricing. second-degree price discrimination. none of the above

peak-load pricing.

In comparing the Cournot equilibrium with the competitive equilibrium, both profit and output level are higher in Cournot. both profit and output level are higher in the competitive equilibrium. profit is higher, and output level is lower in the competitive equilibrium. profit is higher, and output level is lower in Cournot.

profit is higher, and output level is lower in Cournot.

A ________ shows how much a firm will produce as a function of how much it thinks its competitors will produce. demand curve Nash equilibrium curve contract curve reaction curve none of the above

reaction curve

The maximum price that a consumer is willing to pay for each unit bought is the ________ price. market auction consumer surplus choke reservation

reservation

Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogeneous products results in the same output but a lower price. results in a smaller output at a higher price. results in the same output but a higher price. results in a larger output at a lower price. any of the above may result.

results in a larger output at a lower price.

The manager of a firm is attempting to practice third degree price discrimination. She has equated the marginal revenue in each of her markets. By doing this her revenues are maximized given her level of output. profits are maximized. costs are minimized given her level of output. all of the above

revenues are maximized given her level of output.

Discrimination based upon the quantity consumed is referred to as ________ price discrimination. first-degree group second-degree third-degree

second-degree

Many cellular phone rate plans are structured as a combination of ________ price discrimination. first-degree and third-degree peak-load pricing and third-degree second-degree and third-degree first-degree and second-degree

second-degree and third-degree

An electric power company uses block pricing for electricity sales. Block pricing is an example of Block pricing is not a type of price discrimination. third-degree price discrimination. first-degree price discrimination. second-degree price discrimination.

second-degree price discrimination.

Grocery store chains advertise more than convenience stores because: the advertising elasticity of demand for convenience stores is near zero and is much smaller than for grocery store chains. the advertising elasticity of demand is smaller for grocery store chains than for convenience stores. convenience stores have more elastic demand for their products than grocery store chains. all of the above none of the above

the advertising elasticity of demand for convenience stores is near zero and is much smaller than for grocery store chains.

When a monopolist engages in perfect price discrimination, the marginal revenue curve becomes horizontal. the marginal revenue curve lies below the demand curve. the demand curve and the marginal revenue curve are identical. marginal cost becomes zero.

the demand curve and the marginal revenue curve are identical.

In the Cournot duopoly model, each firm assumes that rivals will match all reasonable price changes. the price of its rival is fixed. the output level of its rival is fixed. rivals will match price cuts but will not match price increases.

the output level of its rival is fixed.

The maximum price that a consumer is willing to pay for a good is called: the choke price. the block price. the first-degree price. the market price. the reservation price.

the reservation price.

A doctor charges two different prices for medical services, and the price level depends on the patients' income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of second-degree price discrimination. third-degree price discrimination. pricing at each consumer's reservation price. first-degree price discrimination.

third-degree price discrimination.

In the Stackelberg model, there is an advantage to producing an output level which is identical to a monopolist's output level. to the firm with a dominant strategy. to being the first competitor to commit to an output level. to waiting until your competitor has committed herself to a particular output level before deciding on your output level.

to being the first competitor to commit to an output level.

A pricing strategy that requires consumers pay an up-front fee plus an additional fee for each unit of product purchased is a two-part tariff. form of perfect price discrimination. tying contract. none of these.

two-part tariff.