Econ Test 3
What is the difference between a pure strategy and a mixed strategy?
A pure strategy involves choosing one action, while a mixed strategy involves choosing different actions randomly according to preassigned probabilities.
All of the following statements describe a duopoly with homogeneous products, cost structures, and effort except: A. The market demand curve is elastic. Your answer is correct.B. If prices are equal, each firm will have half of the demand. C. The residual demand curve is less than the market demand curve. D. Price-cutting will drive prices down to marginal cost.
A. the market demand curve is elastic
Which of the following is not an example of monopolistic competition? A. Toothpaste producers. B. Gift shop. C. Fashion retailers. D. Pharmaceuticals.
D. Pharmaceuticals
Which of the following factors will not lead to zero economic profit in long-run equilibrium in a monopolistically competitive market? A. Entry of many new firms in the long-run. B. Advertising and innovating the product. C. Establishing the brand name of the product. D. None of the above factors.
D. none of the above factors
As we saw, the tax incedence resulting from the previous questions were identical. Why do consumers actually pay more of the tax, regardless of on which side the tax is legally imposed?
Demand is more inelastic than supply in the marijuana market
Which of the following is not an externality?
Jordan has lung cancer from smoking cigarettes.
Consider the market for craft beer. Suppose the government institutes a tax on sellers of $1 per craft beer. How would this impact the market?
Supply would shift up by $1
What elements must be known to set up a simultaneous move game?
The players, the strategies, the payoffs.
A neighborhood's members-only swimming pool is a
club good
Radio spectrum is a
common pool resource
The tragedy of the commons results when ___________.
common pool resources are overused.
every nash equilibrium is not a ________ equilibrium
dominant strategy
Suppose there are four firms in a market and each of them sells differentiated products. If the four firms engage in a price war, then ____________.
each firm's profit will be less than with collusion but not zero.
In the model of an oligopoly with identical (homogeneous) products, the price is likely to be ___________.
equal to marginal cost
firms earn economic profits in the long run perfect competition: ______ monopoly: ______ monopolistic competition: _____
false; true; false
In competitive markets, tax incidence, as well as the equilibrium, is independent of whether the tax is imposed on consumers or sellers because:
if it is imposed on the seller, the seller will raise the price and pass it to the consumer.
The deadweight loss ______ the foregone benefit to society of the externality.
is equal to
Negative externalities impose an additional cost that:
is not explicitly recognized by the buyers and sellers in the market.
Public goods are _____ in rivalry and _____ in excludability.
low, low
A product with no close substitutes.
monopoly
Lauren mentions that it is extremely windy today. This is an example of:
not an externality
Firm sets market price depending on other firm's market price.
oligopoly
What must you, as the consultant, construct for Chevron before you can determine if there is a dominant strategy equilibrium?
payoff matrix
Firms with zero ability to affect price.
perfect competition
The Coase Theorem states that ____________.
private bargaining will result in an efficient allocation of resources.
Health insurance is a
private good
The demand curve will ________ and its slope will be ________ if a firm exits the market.
shift right; steeper
When you want to encourage an activity, you should ______it
subsidize
For economic profit to exist within a duopoly with homogeneous goods:
the firms would have to agree to a set price.
Tax incidence refers to ____________.
who bears the burden of a tax.
Firm A uses production technology that affects the environment. Which of the following are command-and-control policies used by the government to regulate firm A?
-The government makes it compulsory for firm A to use environment friendly technology. -Firm A is not allowed by the government to produce more than 100 units if it does not use environment-friendly technology.
Therefore, the market-based approach to deal with the externality is to use a _______ causing _______ in the quantity produced by the companies towards the socially optimal level.
-corrective tax -a reduction
A corrective subsidy would be used when marginal social benefit is _____ than market demand. This causes the _____ to internalize the externality.
-greater -consumer
How does a command-and-control policy differ from a market-based policy? With a command-and-control policy, _____________________________ while with a market- based policy, _____________________________.
-the government directly regulates the allocation of resources -the government provides incentives for private organizations to internalize the externality
The Coase Theorem will will breakdown when ____________.
-there are a large number of agents -transaction costs become high -when property rights are not clearly defined
All of the following statements about market structures are true except: A. Monopolistic competitors practice marginal cost pricing. Your answer is correct.B. Oligopolists often practices game theory. C. Perfect competitors can have short-run economic profits. D. Monopolists' sales revenues are constrained by market demand.
A. Monopolistic competitors practice marginal cost pricing.
All of the following statements describe a duopoly with differentiated products except: A. When one company reduces prices or makes its product more attractive, it reduces the demand for the product of the other firms in the market. B. No company is able to capture the entire market. C. When consumers view the products as more substitutable, prices are higher. D. Firms respond to a competitor before the competitor is actually competing.
C. When consumers view the products as more substitutable, prices are higher.
Which of the following is not a characteristic of monopolistic competition? (Check all that apply.) A. Sellers are price-makers. B. Slope of the demand curve is negative. C. Entry and exit is not easy. Your answer is correct.D. Products are perfect substitutes.
C. entry and exit is not easy and D. products are perfect substitutes
For a market to be characterized as an oligopoly, there must be __________. A. few sellers. B. homogeneous or differentiated products. C. a possibility of positive economic profits in the long run. D. all of the above
D. all of the above
Consider the market for packs of cigarettes. Suppose the government institutes a tax on buyers of $3 per pack of cigarettes. How would this impact the market?
Demand would shift up by $3
Suppose the government institutes a tax on consumers of $5 per gram of marijuana. How would this impact the market?
Demand would shift up by $5
A tax that creates deadweight loss in a market is a...
Distortionary Tax
What approach would be the least effective way to deal with free riders?
Exclude citizens from benefiting from the good or service.
Firms A and B plan to collude in an economy for their similar products, which includes the grim strategy for punishment. They plan to set the price of their product at $8. The marginal cost of Firm A is $5 and Firm B is $4.50. If firm A is impatient to earn more profits and Firm B wishes to last in the business for the long-run, which of the following situations would likely occur?
Firm A reduces the price to $7 causing Firm B to reduce its price to $4.50.
Which of the following common features do monopolistically competitive markets and monopolies share?
Firms face downward-sloping demand curves.
Now suppose their office passes a rule that says employees are not allowed to listen to music on their speakers while working. As before, Jones and Smith can bargain at a zero cost. What will be the final outcome in this case?
Jones buys headphones to listen to music, giving him net benefits worth $150. Smith does not suffer any damages.
Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost curves, would you expect prices to be higher in a monopoly or a monopolistically competitive market?
Monopoly, because its demand is more inelastic.
Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive market?
No, because firms restrict output to raise price.
Is the entire burden of the tax always borne by those on whom it is imposed?
Not necessarily, since the burden of the tax depends on price elasticity.
Which of the following best illustrates the tragedy of the commons?
Overfishing in public waters.
You are the County Commissioner of Hazard County. Dwight's neighbors bring a complaint before you that Dwight's hog farm is creating a terrible odor, and they are demanding government action. You respond to the neighbor's complaints by putting a tax on Dwight's hog production. Taxing Dwight's hog production is an example of ________________
Pigouvian taxation
In an industrial township, unplanned growth resulted in several companies polluting the environment with inefficient disposal of waste from the production process. In this case, the production of the companies is such that _______.
Qmarket>Qoptimal
Which of the following is the outcome of bargaining when Jones and Smith can bargain at zero cost?
Smith gives $50 to Jones, and Jones agrees to listen to music using his headphones.
After much backlash, the government decides eliminate the $5-per-gram tax on consumers. Instead, the government replaces it with a $5-per-gram tax on sellers. How would this impact the market?
Supply would shift up by $5
What happens in a monopolistically competitive market when new firms enter the market?
The existing firm's demand curve shifts in and becomes flatter.
Positive externality will occur when _____.
The marginal social benefit is greater than the marginal cost to produce at the market equilibrium
Suppose Good A belongs to a market where the firms earn zero economic profits in the long-run and entry of new firms will result in price changes that operate through shifts in the market supply curve for Good A. Which market structure does Good A belong to?
The perfectly competitive market.
Which of the following is not a common characteristic between a monopoly and monopolistic competition?
The products sold have close substitutes.
How is a monopolistically competitive market similar to a perfectly competitive market?
There are no restrictions on the entry of new firms.
Why does a monopolistically competitive industry make zero economic profit in the long-run?
There is the free entry of many firms in the long-run.
Why is it difficult for the market to deliver socially efficient quantities of goods like clean air or street lighting?
These are examples of public goods; therefore, even if you do not pay for the good you still get to enjoy it.
What is the intent of a Pigouvian tax?
To induce producers of a negative externality to reduce production to the socially optimal level.
You respond to the business leaders' request by giving Ms. Daisy money to buy more flowers. Giving Ms. Daisy money to buy more flowers is an example of:
a Pigouvian subsidy
Jeb mentions that the hog farm down the road from his house is creating a very nasty smell. This is an example of:
a negative externality
The prisoners' dilemma is ____________ with a ____________ equilibrium that is not the best outcome for both players.
a simultaneous move game; dominant strategy.
The economic profits made by a monopolistically competitive firm decreases when there is __________________ and is equal to zero __________________.
an entry of a new firm; when in long-run equilibrium.
As long as a monopolistic competitor has a downward-sloping demand curve, it will produce at a level that is _______ the efficient scale of production and set a price _______ its marginal cost.
below; above
Externalities are called market failures because they ___________.
cause markets to produce suboptimal social outcomes.
An example of an oligopoly is the __________.
cell phone market
A pure strategy involves ____________.
choosing one particular action for a situation.
You are the County Commissioner of Hazard County. There is a popular lake for fishing located in eastern Hazard County on county-owned park land, which is open to the public. Recently, the Reed brothers have started using large nets to catch large amounts of fish, severely depleting the amount of fish left for other fishermen. The fish in the lake are an example of a:
common pool resource
When there is no dominant strategy, a player's optimal strategy ____ on the choices of the other player
depends
Oligopolistic firms that sell differentiated products determine their prices when prices are __________.
determined simultaneously by the firms as best responses given other firm prices.
When developing a dominant strategy in a simultaneous-move game, a player:
devises the same best response to every possible strategy of the other player.
How are the products sold by a monopolistically competitive firm different from the products sold in a competitive market? Unlike products sold in a competitive market, the products sold in a monopolistically competitive market are ___________.
differentiated
The free-rider problem arises when an individual ____________.
does not pay for a good because nonpayment does not prevent consumption.
After you examine the payoffs, you discern that BP's best response is to always bid low. Then bidding low would be BP's ______.
dominant strategy
More than one Nash equilibrium is possible if:
each player's best response changes based on the other player's strategy.
In an oligopoly with differentiated products:
economic profit will exist.
Collusive agreements between oligopolists would allow price to _______ marginal cost, resulting in positive economic profits. The breaking of a collusive agreement would involve one firm ________ its price and increasing market share. A grim strategy would ________ firms from breaking a collusive agreement.
exceed; lowering; discourage
What is not an example of a real life zero sum game?
free market transaction
Common pool resources are ____ in rivalry and ____ excludability
high, low
What approach would be the least effective way to deal with the overfishing problem?
limit who is allowed to fish in the lake
Suppose the government levies a corrective tax on the companies' production. The per unit tax charged would be such that it equals ________________________ of an externality.
marginal external cost
Consider four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Firms in all four market structures maximize profits by producing the quantity where ___________.
marginal revenue equals marginal cost.
Seller A increases the price of its good by 20% and still enjoys a high market demand. Due to the high demand, there is an increase in the number of similar sellers in the long-run. This is an example of ________.
monopolistic competition.
Suppose you and your friends decide to go to the beach during spring break. You need to fly from Kansas City to Miami and over 12 separate airlines provide the service. This market is best characterized as ___________.
monopolistic competition.
every dominant strategy equilibrium is a _______.
nash equilibrium
You are the County Commissioner of Hazard County. Jeb brings a complaint before you that Dwight's hog farm is creating a terrible odor. The noxious odor from Dwight's hog farm is a:
negative externality
In a Nash equilibrium:
neither player can change strategy and improve his or her payoff.
When Jones and Smith can bargain at zero cost, the new rule of the office has ______ impact on achieving the economically efficient outcome.
no
Public goods are
non-rival and non-excludable
Which method is not a recommended approach supported by externality theory to deal with this problem?
nonprofit intervention
If this externality from Dwight's farm is left unaddressed, then Dwight will continue to _____ in regards to the social surplus optimum.
overproduce
George mentions that Ms. Daisy has planted some lovely new roses in front of her store. This is an example of:
positive externality
You are the County Commissioner of Hazard County. Local business leaders are thrilled that Ms. Daisy has planted a panorama of flowers around her store front designed to look like cute kittens. Tourists have been coming from neighboring towns to see the flowers, and this tourism has been increasing business activity for many businesses. The local business leaders would like you to convince Ms. Daisy to plant more flowers so that tourism continues to increase. The business generated for other stores by Ms. Daisy's flower display is an example of a:
positive externality
A mosquito control program in a city is a
public good
A video on YouTube is a
public good
Suppose that a goalie is playing a mixed strategy between diving to the left and the right. A player decides which strategy to employ when playing a game with mixed strategies by choosing ____________.
randomly.
common pool resource goods are
rival
In a monopolistically competitive market, a firm earning negative economic profit in the short run will ____________.
shut down only if price is less than average variable cost.
when you want to discourage an activity, you should ______ it
tax
A collusive agreement between two firms is likely to break down when ____________.
the market has little long minus term value.
A dominant strategy equilibrium exists if:
the relevant strategy for each player is a dominant strategy.
A zero-sum game is when ___________.
the sum of the payoffs is zero.
The overfishing by the Reed brothers is an example of
tragedy of the commons
Firms equate price and marginal cost. perfect competition: ______ monopoly: ______ monopolistic competition: _____
true; false; false
new firms are free to enter the industry in the long run. perfect competition: ______ monopoly: ______ monopolistic competition: _____
true; false; true
firms equate marginal revenue and marginal cost perfect competition: ______ monopoly: ______ monopolistic competition: _____
true; true; true
In the short run, a monopolistic competitor _____ practice marginal cost pricing. In the long run, a monopolistic competitor _____ earn an economic profit.
will not; will not
Suppose that a player has a dominant strategy. Would she choose to play a mixed strategy (such as playing two strategies each with probability 50-50)? Why or why not?
No, because it would involve choosing actions other than the dominant strategy.
In a game with mixed strategies, does either of the players have a dominant strategy? Why or why not?
no, because the best choice in a mixed strategy game is to pick a random strategy.