Micro Final Study Guide

The purchase of Michelin Tire Company by General Motors is an example of a horizontal merger

False

Being too big a firm can be a per se violation of antitrust laws.

Ture

Oligopolies with kinked demand curves change their prices quickly and frequently.

False

Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is a competitive price taker? a. Marginal revenue and market price are equal for the competitive price taker but not for the monopolist. b. The monopolist does not always produce the output that equates marginal cost and marginal revenue; the competitive price taker does. c. The monopolist charges the highest price possible; the competitive price taker charges a price equal to its per-unit cost. d. A monopolist can earn economic profit in the short run; a competitive price taker cannot.

A. Marginal revenue and market price are equal for the competitive price taker but not for the monopolist.

Which of the following is a game theory strategy for oligopolists to avoid a low-price outcome? a. Tit-for-tat b. Win-win c. Last in-first out d. Second best

A. Tit-for-tat

Suppose costs are identical for the two firms in Exhibit 10-6. If both firms assume the other will compete and charge a lower price, equilibrium will be established by: a. Widget Co. charging the low price and Ajax Co. charging the low price. b. Widget Co. charging the high price and Ajax Co. charging the low price. c. Widget Co. charging the low price and Ajax Co. charging the high price. d. Widget Co. charging the high price and Ajax Co. charging the high price.

A. Widget Co. charging the low price and Ajax Co. charging the low price.

The goal of any monopolist is to maximize: a. economic profits. b. normal profits. c. price. d. consumer welfare. e. output.

A. economic profits.

In long-run equilibrium, output is expanded to the minimum long-run average total cost by: a. perfectly competitive firms but not by monopolistically competitive firms. b. monopolistically competitive firms but not by perfectly competitive firms. c. both monopolistically competitive firms and perfectly competitive firms. d. neither perfectly competitive firms nor monopolistically competitive firms.

A. perfectly competitive firms but not by monopolistically competitive firms.

What are the characteristics of an oligopoly?

An oligopoly market is characterized by a few dominant firms selling either a standardized or differentiated product. An oligopoly is also characterized by mutual interdependence and has strong barriers to entry keeping potential competitors out of the market.

Under what conditions might a monopoly lose money?

Any firm could incur losses if demand is weak and/or costs are high.

Suppose costs are identical for the two firms in Exhibit 10-7. If both firms assume the other will compete and charge a lower price, equilibrium will be established by: a. Camel charging the high price and Marlboro charging the high price. b. Camel charging the low price and Marlboro charging the low price. c. Camel charging the low price and Marlboro charging the high price. d. Camel charging the high price and Marlboro charging the low price.

B. Camel charging the low price and Marlboro charging the low price.

Suppose costs are identical for the two firms in Exhibit 10-6. Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price. Under these "tit-for-tat" conditions, equilibrium will be established by: a. Widget Co. charging the high price and Ajax Co. charging the low price. b. Widget Co. charging the high price and Ajax Co. charging the high price. c. Widget Co. charging the low price and Ajax Co. charging the low price. d. Widget Co. charging the low price and Ajax Co. charging the high price.

B. Widget Co. charging the high price and Ajax Co. charging the high price.

The task of economic regulation is to: a. protect monopoly profits. b. approximate the results of the competitive market. c. replace competition with government ownership. d. ensure laissez faire. e. increase competition within the market.

B. approximate the results of the competitive market.

Assume costs are identical for the two firms in Exhibit 10-7. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by: a. Camel charging the low price and Marlboro charging the high price. b. Camel charging the high price and Marlboro charging the low price. c. Camel charging the high price and Marlboro charging the high price. d. Camel charging the low price and Marlboro charging the low price.

C. Camel charging the high price and Marlboro charging the high price.

Which of the following is a distinction between perfectly competitive and monopolistic competition? a. Perfectly competitive firms must compete with rival sellers; monopolistically competitive firms do not confront rival sellers. b. Monopolistically competitive firms can raise their price without losing sales; perfectly competitive firms must lower their price in order to sell more of their product. c. Perfectly competitive firms confront a perfectly elastic demand curve; monopolistically competitive firms face a downward-sloping demand curve. d. Perfectly competitive firms may make either economic profits or losses in the short run, but monopolistically competitive firms always earn an economic profit.

C. Perfectly competitive firms confront a perfectly elastic demand curve; monopolistically competitive firms face a downward-sloping demand curve.

If marginal costs increase, a monopolist will: a. decrease price and increase output. b. decrease both price and output. c. increase price and decrease output. d. increase both price and output. e. keep both price and output at the same level.

C. increase price and decrease output.

In Exhibit 13-3, if this industry is regulated and the regulatory commission wants revenue to just cover cost, the proper price and output combination to be set is: a. price = $8; output = 25. b. price = $8; output = 30. c. price = $5; output = 40. d. price = $4; output = 25. e. price = $10; output = 25.

C. price = $5; output = 40.

In Exhibit 13-3, if this industry is regulated and the regulatory commission sets price equal to marginal cost, then: a. this firm would earn excess profit. b. price would equal ATC. c. the firm would suffer losses. d. revenue would just be sufficient to cover costs. e. total revenue would just cover marginal cost.

C. the firm would suffer losses.

In the short run both the monopolistically competitive firm and the perfectly competitive firm will charge a price equal to marginal cost.

False

Suppose costs are identical for the two firms in Exhibit 10-7. Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price. Under these "tit-for-tat" conditions, equilibrium will be established by: a. Camel charging the high price and Marlboro charging the high price. b. Camel charging the high price and Marlboro charging the low price. c. Camel charging the low price and Marlboro charging the low price. d. Camel charging the low price and Marlboro charging the high price.

D. Camel charging the low price and Marlboro charging the high price.

Assume costs are identical for the two firms in Exhibit 10-6. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by: a. Widget Co. charging the low price and Ajax Co. charging the high price. b. Widget Co. charging the high price and Ajax Co. charging the low price. c. Widget Co. charging the low price and Ajax Co. charging the low price. d. Widget Co. charging the high price and Ajax Co. charging the high price.

D. Widget Co. charging the high price and Ajax Co. charging the high price.

A monopoly: a. can increase price and increase output at the same time. b. can charge any price it wants and still sell all of its output. c. can sell any output it produces provided it accepts the market price. d. must lower price in order to increase output. e. faces a perfectly elastic demand curve.

D. must lower price in order to increase output.

In Exhibit 13-3, if this industry is regulated and the regulatory commission sets price equal to average total cost, then: a. this firm would earn excess profit. b. total revenue would equal marginal revenue. c. the firm would suffer losses. d. revenue would just be sufficient to cover costs. e. revenue would just be sufficient to cover marginal cost.

D. revenue would just be sufficient to cover costs.

The profit-maximizing output level for a monopolist is where the: a. price is maximized. b. output sold is maximized. c. ATC curve is minimized. d. maximum efficiency is achieved. e. MR = MC.

E. MR = MC.

In Exhibit 13-3, if this is an unregulated monopoly firm, the price and output which would maximize profits are: a. price = $8; output = 25. b. price = $8; output = 30. c. price = $5; output = 40. d. price = $4; output = 25. e. price = $10; output = 25.

E. price = $10; output = 25.

In Exhibit 13-3, if this industry is regulated and the regulatory commission wants price to be set equal to marginal cost, the proper price and output combination to be set is: a. price = $8; output = 25. b. price = $8; output = 30. c. price = $5; output = 40. d. price = $4; output = 25. e. price = $3; output = 50.

E. price = $3; output = 50.

A kinked demand curve is based on the actions of an oligopolist to follow a price increase but not a price reduction

False

A monopolist maximizes total revenue

False

A monopolist will charge a lower price and produce more output than if it was operating in a competitive market

False

A monopolistic competitive firm in the long run sets price equal to the minimum point on the long-run average cost curve.

False

A natural monopoly maximizes profits at the point at which price equals minimum average total cost.

False

Antitrust laws in other countries are much stronger than U.S. antitrust laws

False

Easy entry and exit cause oligopoly profits to be zero in the long run.

False

In order for a monopolist to earn an economic profit in short-run equilibrium, marginal revenue must be equal to zero.

False

What are the characteristics of monopolistic competition?

Monopolistic competition is characterized by a large number of sellers selling a differentiated product. There are relatively weak barriers to entry and firms compete aggressively on a non- price basis.

Apple Inc. and Sara Lee are two of the biggest firms in the United States, but they produce different products. Could they legally merge, or would their merger be struck down by the courts?

The courts have indicated that conglomerate mergers, such as this one, are virtually immune under existing laws. Since Congress does not seem inclined to challenge that interpretation, this merger would probably be allowed.

What are the conditions for price discrimination?

The firm must possess some ability to control market price (the firm must possess some monopoly power), the ability to segment customers based on their elasticity of demand, and the product cannot be easily resold.

A natural monopoly exists whenever economies of scale are very extensive.

True

According to critics, the Utah Pie case represents a failure by the Supreme Court to distinguish between injury to competition that benefits consumers and injury to a specific competitor

True

In a natural monopoly, the long-run average cost curve declines and therefore average cost is lower when there is only one seller.

True

In the long run, marginal cost must equal marginal revenue for a monopolistic competitive firm, but not at the minimum point of the long-run average cost curve.

True

Overconsumption of a product can be caused by imperfect information.

True

The purchase of Michelin Tire Company by General Motors is an example of a vertical merger.

True

The rule of reason would have not found a well-behaved, but gigantic, firm to be in violation of the antitrust laws.

True

Under fair-return pricing, a regulated natural monopoly will earn zero economic profit.

True