Econ Ch. 12
What is the monopoly price of this new drink?
$16.50
What will be the price in the long run if the industry is a Cournot duopoly?
$400
Suppose that the marginal cost falls such that MC = Q - 10 What is the profit maximizing level of output?
150
Suppose that the marginal cost increases such that: MC = Q +10 What is the profit maximizing level of output?
150
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 What is the profit maximizing level of output?
150
Suppose that the marginal cost increase such that: MC = Q + 10 What is the profit maximizing price?
210
Which of the following can be though as a barrier to entry? A) scale economies B) patents C) strategic actions by incumbent firms D) all of the above
ALL OF THE ABOVE
Which of the following statements is a common criticism of the original Bertrand duopoly model? B) Firms would more nauturally choose quantities if goods are homogenous C) the assumption that market share is split evenly between the firms is unrealistic
B AND C are correct
In which oligopoly models do firms earn zero profit?
Bertrand
Which oligopoly models have the same results as the competitive model?
Bertrand
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 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 cheat price
Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens OPEC's share of the world oil market?
Decreases
Why don't some firms in monopolistic competition earns losses in the long run?
Free exit implies that any unprofitable firms leave the market in the long run
I. In the long run, the price of the good will equal the minimum of the average cost. II. In the short run, firms may earn a profit?
I FALSE II TRUE
Which of the following is true in long-run equilibrium for a firm in monopolistic competition?
MC<ATC
Collusion can earn higher prices and higher profits under the Bertrand model, but why is this an unlikely outcome in practice?
The collusive firms have an incentive to gain market share at the expense of the other firms by cutting prices
Which of the following is true in the Stackelberg model?
The first firm produces less than its rival.
For a market with a linear demand curve and constant marginal cost of production, why are the reaction functions for the Cournot duopoly sellers also straight lines?
We know the marginal revenue curves for linear demand curves are also straight lines
In the dominant firm model, the smaller fringe firms behave like
competitive firms
The key disadvantage of the kinked demand model is that
does not explain why prices may be rigid in an oligopoly
Monopolistically competitive firms have monopoly power because they
face downward sloping demand curves
The most important factor in determining the long-run profit potential in monopolistic competition is
free entry & exit
The Prisoners' Dilemma is a particular type of game in which negotiation and enforcement of binding contracts is not possible, and such games are known as
noncooperative games
In the kinked demand curve model, if one firm reduces its price
other firms will also reduce their price
Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run?
profit equals zero
In comparing the Counot equilibrium with the competitive equilibrium
profit is higher and output level is lower in Cournot
Which of the following is true in long-run equilibrium for a firm in a monopolistic competitive industry?
the demand curve is tangent to average cost curve
Which of the following markets is most likely to be oligopolistc?
the market for aluminum
In the Stackelberg model, there is an advantage
to being the first competitor to commit to an output level
A monopolistically competitive firm in the long-run equilibrium
will make zero profit
What will be the price of this new drink in the long run if the firms in the industry collude with one another to maximize joint profit?
$16.50
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. What price would this new drink sell for if it sold in a competitive market?
$3
What will be the price of the this new drink in the long run if the industry is a Bertrand duopoly?
$3
Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows: Q = 6000 - 5P MR = 1200-0.4Q What is the profit maximizing price of a monopolist?
$600
What will be the price of this new drink in the long run if the industry is a Cournot duopoly?
$9
Suppose the marginal cost falls such that: MC = Q - 10 What is the profit maximizing price?
210
What is the profit maximizing price?
210
Although firms earn zero profit in the long run, why is the outcome from monopolistic competition considered to be inefficient? A) price exceeds marginal cost B) quantity is lower than the perfectly competitive outcome. C) goods are no identical
A & B
In the Bertrand model with homogeneous products, A) the firm that sets the lower price will capture all of the market B) the Nash equilibrium is the competitive outcome C) both firms set price equal to marginal cost
ALL OF THE ABOVE
A monopolistically competitive firm in short-run equilibrium A) will make negative profit (lose money) B. will make zero profit (break even) C) will make positive profit D) any of the above
ANY OF THE ABOVE
Consider the following payoff matrix for a game in which two firms attempt to collude under the Bertrand model: 6,6 24,0 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).
BOTH FIRMS CUT PRICES
I. Cartels are illegal in the US. II. Once price and production levels are agreed upon, each member of a cartel has an incentive to "cheat" on the agreement
BOTH TRUE
In the _____, two duopolists compete by simultaneously selecting price
Bertrand model
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?
Cartel
In the _____, each firm treats the output of its competitor as fixed and then decides how much to produce
Cournot model
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
I. Under the dominant firm model, the dominant firm effectively acts like a monopolist who is facing excess market demand that cannot be supplied by the fringe firms. II. 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; INCREASE
What is one difference between the Cournot and Stackelberg models?
In Cournot, both firms make output decisions simultaneously and in Stackelberg one firm sets its output level first
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 Q1 = 30 in order to exclude the second firm from the market
In this case, MR is negative and is less than MC, so the first mover would be producing too much input.
Cartels can more easily detect cheating by cartel members if the products sold by each member are largely homogeneous. As product quality varies, the observed prices charged by cartel members may be due to differences in the products, or they may be due to cheating. Which of the following goods would more difficult to monitor for potential cheating?
Luxury yachts
The authors explain that the international copper cartel (CIPEC) has been largely ineffective in raising the price of copper in the world markets, and the reason is mainly due to their 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 those sub-markets, which market should the cartel choose?
Market with few close substitutes because demand is more inelastic
For which of the following market structures is it assumed that there are barriers to entry?
Monopoly
In the ____, one firm sets its output first, and then a second firm, after observing the first firm's output, makes its output decision A) Cournot model B) model of monopolistic competition C) Bertrand model D) kinked demand model E) NONE
NONE
What will be the price of this new drink in the long run if the industry is a Stackelberg duopoloy A) $3 B) $9 C) $12 D) $13.50 E) NONE
NONE
The kinked demand curve model is based on the assumption that each firm A) considers its rival output to be fixed B) considers its rivals price to be fixed C) believe rivals will match all price changes D) believes rivals will never match price changes E) NONE
NONE OF THE ABOVE
A situation in which each firm selects its best action, given what its rivals are doing is called a
Nash equilibrium
Is there a first mover advantage in the Bertrand duopoly model with homogeneous products?
No, the second mover would be able to set a slightly lower price and capture the full market share.
The authors cited statistical evidence that the price elasticity for demand for Royal Crown cola is -2.4, and the 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
The oligopoly model that is most appropriate when one large firm usually takes the lead in setting price is the ____ model.
Stackelberg
The authors explain that the international copper cartel (CIPEC) has been largely ineffective in raising the price of copper in the world markets, and the reason is mainly due to their 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 find a way to keep the buyers in the low-price market from reselling the copper to buyers in the high price market.
Which of the following is NOT conducive to the successful operation of a cartel?
The supply of non-cartel members is very price elastic
Consider the following payoff matrix for a game in which two firms attempt to collude under the Bertrand model 6,6 24,8 8,24 12,12
There are two Nash equilibria: A cuts and B colludes, and A colludes and B cuts.
Under a Cournot duopoly, the collusion curve represents:
all possible allocations of the pure monopoly quantity among the two firms in the duopoly.
In the dominant firm model, the fringe firms
are price takers
Excess capacity in monopolistically competitive industries results because in equilibrium
each firm's output level is too small to minimize average cost.
Which statement most nearly describes a Nash equilibrium applied to price competition?
given the prices chosen by its competitors, no firm has an incentive to change their prices form the equilibrium level
If all producers in a market are cartel members, then the demand curve facing the cartel is
identical to the monopolist's demand curve
Under the kinked demand model, suppose the firm's demand curve shift rightward but the price at which the kink occurs remains the same. In this case, the firm:
increases output
Which of the following is true of the output level produced by a firm in the long-run equilibrium in a monopolistically competitive industry?
it does not produce at minimum average cost, and average cost is decreasing.
Which of the following is true about the demand curve facing the dominant firm?
it equals market demand minus fringe firms' supply cuve
What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?
it shifts left
The oligopoly model that predicts that oligopoly price will tend to be very rigid is the ___ model
kinked demand
A market with few entry barriers and with many firms that sell differentiated products is:
monopolistically competitive
Under the kinked demand curve model, an increase in marginal cost will lead to
neither a change in output level nor a change in price
The market structure in which strategic consideration are most important is
oligopoly
The market structure in which there is interdependence among firms is
oligopoly
Suppose that three oligopolistic firms are currently charging $12 for their product. The three firms are about the same size. Firm A decides to raise its price to $18 and announces to the press that it is doing so because higher prices are needed to restore economic vitality to the industry. Firms B and C go along with Firm A and raise their prices as well. This is an example of
price leadership
Which of the following is NOT regarded as a source of inefficiency in monopolistic competition?
product diversity
A _____ shows how much a firm will produce as a function of how much it thinks its competitors will produce
reaction curve
Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogeneous products
results in larger output at a lower price
A market structure in which there is one large firm that has a major share of the market and many smaller firms supplying the remainder of the market is called:
the dominant firm model
In the Cournot duopoly model, each firm assumes that
the output level of its rival is fixed
The Cournot equilibrium can be found be treating ____ as a pair of simultaneous equations and by finding the combination of Q1 and Q2 that satisfy both equations
the reaction curves for firms 1 and 2
Which of the following is true for both perfect and monopolistic competition?
there is freedom of entry and exit in the long run