Chapter 12
Under a Cournot duopoly, the collusion curve represents: A) all possible allocations of the pure monopoly quantity among the two firms in the duopoly. B) all possible allocations of the pure monopoly quantity that would be possible if the two firms in the duopoly did not cooperate. C) all optimal price-quantity outcomes for a cartel rather than a Cournot duopoly. D) the potential profits to be earned by firms in a collusive cartel.
A
What is one difference between the Cournot and Stackelberg models? A) In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm sets its output level first. B) In Stackelberg, both firms make output decisions simultaneously, and in Cournot, one firm sets its output level first. C) In Cournot, a firm has the opportunity to react to its rival. D) Profits are zero in Cournot and positive in Stackelberg.
A
In the Stackelberg model, there is an advantage A) to waiting until your competitor has committed herself to a particular output level before deciding on your output level. B) to being the first competitor to commit to an output level. C) to the firm with a dominant strategy. D) to producing an output level which is identical to a monopolistʹs output level.
B
Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens OPECʹs share of the world oil market? A) Increases B) Decreases C) Remains the same D) We do not have enough information to answer this question.
B
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? A) Coke B) Royal Crown C) Both firms should have identical monopoly power D) We do not have enough information to answer this question.
B
Why donʹt some firms in monopolistic competition earn losses in the long run? A) The firms have enough monopoly power to ensure they always earn profits. B) Free entry allows enough firms to remain in the market and maintain the critical mass of firms required to attract customers. C) Free exit implies that any unprofitable firms leave the market in the long run. D) In the long run, firms will build enough brand loyalty among customers to ensure a profitable level of sales.
C
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? A) Increases B) Decreases C) Remains the same D) We do not have enough information to answer this question.
B
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 will be the price in the long run if the industry is a Cournot duopoly? A) $400 B) $600 C) $800 D) $900 E) Competition will drive the price to zero.
A
For which of the following market structures is it assumed that there are barriers to entry? A) Perfect competition B) Monopolistic competition C) Monopoly D) all of the above E) B and C only
C
Is there a first-mover advantage in the Bertrand duopoly model with homogenous products? A) Yes, first-movers always hold the advantage over other firms. B) Yes, first-movers may have an advantage, but it depends on the model assumptions. C) No, first-movers cannot choose a profit maximizing quantity because the second-mover can always produce a bit less and earn higher profits. D) No, the second-mover would be able to set a slightly lower price and capture the full market share.
D
The market structure in which there is interdependence among firms is A) monopolistic competition. B) oligopoly. C) perfect competition. D) monopoly.
B
A situation in which each firm selects its best action, given what its rivals are doing, is called a A) Nash equilibrium. B) Cooperative equilibrium. C) Stackelberg equilibrium. D) zero sum game.
A
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? A) $400 B) $600 C) $800 D) $900 E) none of the above
B
Which of the following can be thought of as a barrier to entry? A) scale economies. B) patents. C) strategic actions by incumbent firms. D) all of the above
D
Which of the following is true for both perfect and monopolistic competition? A) Firms produce a differentiated product. B) Firms face a downward sloping demand curve. C) Firms produce a homogeneous product. D) There is freedom of entry and exit in the long run.
D
Which one of the following statements is a common criticism of the original Bertrand duopoly model? A) Firms never choose optimal prices as strategic variables. B) Firms would more naturally choose quantities if goods are homogenous. C) The assumption that market share is split evenly between the firms is unrealistic. D) A and B are correct. E) B and C are correct.
E
A monopolistically competitive firm in long-run equilibrium: A) will make negative profit. B) will make zero profit. C) will make positive profit. D) Any of the above are possible.
B
The market structure in which strategic considerations are most important is A) monopolistic competition. B) oligopoly. C) pure competition. D) pure monopoly.
B
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 are possible.
D
Which of the following is NOT conducive to the successful operation of a cartel? A) Market demand for the good is relatively inelastic. B) The cartel supplies all of the worldʹs output of the good. C) Cartel members have substantial cost advantages over non-member producers. D) The supply of non-cartel members is very price elastic.
D
In the __________, one firm sets its output first, and then a second firm, after observing the first firmʹs output, makes its output decision. A) Cournot model B) model of monopolistic competition C) Bertrand model D) kinked-demand model E) none of the above
E
The most important factor in determining the long-run profit potential in monopolistic competition is A) free entry and exit. B) the elasticity of the market demand curve. C) the elasticity of the firmʹs demand curve. D) the reaction of rival firms to a change in price.
A
Which of the following markets is most likely to be oligopolistic? A) The market for corn B) The market for aluminum C) The market for colas D) The market for ground coffees
B
A market with few entry barriers and with many firms that sell differentiated products is A) purely competitive. B) a monopoly. C) monopolistically competitive. D) oligopolistic.
C
Use the following two statements about monopolistic competition to answer this question. 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. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false.
C
Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run? A) P = MC. B) MC = ATC. C) P > MR. D) Profit equals zero.
D
Which of the following is true in the Stackelberg model? A) The first firm produces less than its rival. B) The first firm produces more than its rival. C) Both firms produce the same quantity. D) Both firms have a reaction curve.
B
Although firms earn zero profits 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 not identical. D) A and B are correct. E) B and C are correct.
D
In the __________, each firm treats the output of its competitor as fixed and then decides how much to produce. A) Cournot model B) model of monopolistic competition C) Stackelberg model D) kinked-demand model E) none of the above
A
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 A) price leadership. B) collusion. C) the dominant firm model. D) the Stackelberg model. E) none of the above
A
The Cournot equilibrium can be found by treating __________ as a pair of simultaneous equations and by finding the combination of Q1 and Q2 that satisfy both equations. A) the reaction curves for firms 1 and 2 B) the market supply curve and the market demand curve C) the contract curve and the market demand curve D) the contract curve and the market supply curve E) the firmʹs supply curve and the firmʹs demand curve
A
Collusion can earn higher prices and higher profits under the Bertrand model, but why is this an unlikely outcome in practice? A) Firms prefer to remain independent of other firms so that their pricing plans can be more flexible over time. B) The collusive firms have an incentive to gain market share at the expense of the other firms by cutting prices. C) The federal antitrust authorities have an easier time catching firms that collude on price rather than quantity. D) none of the above
B
Excess capacity in monopolistically competitive industries results because in equilibrium A) each firmʹs output level is too great to minimize average cost. B) each firmʹs output level is too small to minimize average cost. C) firms make positive economic profit. D) price equals marginal cost.
B
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 doesnʹt 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)? A) In this case, MR is negative and is less than MC, so the first-mover would be producing less than the optimal quantity. B) In this case, MR is negative and is less than MC, so the first-mover would be producing too much output. C) This is a possible outcome from the Stackelberg duopoly under these conditions. D) We do not have enough information to determine if this is an optimal outcome for this case.
B
The oligopoly model that is most appropriate when one large firm usually takes the lead in setting price is the __________ model. A) Cournot B) Stackelberg C) game theory D) prisonerʹs dilemma
B
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? A) Duopoly B) Cartel C) Market sharing monopoly D) Natural monopoly
B
What happens to an incumbent firmʹs demand curve in monopolistic competition as new firms enter? A) It shifts right. B) It shifts left. C) It becomes horizontal. D) New entrants will not affect an incumbent firmʹs demand curve.
B
Which of the following is true in long-run equilibrium for a firm in a monopolistic competitive industry? A) The demand curve is tangent to marginal cost curve. B) The demand curve is tangent to average cost curve. C) The marginal cost curve is tangent to average cost curve. D) The demand curve is tangent to marginal revenue curve.
B
A __________ shows how much a firm will produce as a function of how much it thinks its competitors will produce. A) contract curve B) demand curve C) reaction curve D) Nash equilibrium curve E) none of the above
C
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 cartelʹs action effective? A) The cartel would have to seek permission from the U.S. Department of Justice. B) The cartel would have to get the cooperation of all other copper producers in order to raise the price by some positive amount. C) 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. D) none of the above
C
Which of the following is NOT regarded as a source of inefficiency in monopolistic competition? A) The fact that price exceeds marginal cost B) Excess capacity C) Product diversity D) The fact that long-run average cost is not minimized E) all of the above
C
Which of the following is true in long-run equilibrium for a firm in monopolistic competition? A) MC = ATC. B) MC > ATC. C) MC < ATC. D) Any of the above may be true.
C
Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry? A) It produces at minimum average cost. B) It does not produce at minimum average cost, and average cost is increasing. C) It does not produce at minimum average cost, and average cost is decreasing. D) Either B or C could be true.
C
Which statement most nearly describes a Nash equilibrium applied to price competition? A) Two firms cooperate and set the price that maximizes joint profits. B) Each firm automatically moves to the purely competitive equilibrium because it knows the other firm will eventually move to that price anyway. C) Given the prices chosen by its competitors, no firm has an incentive to change their prices from the equilibrium level. D) One dominant firm sets the price, and the other firms take that price as if it were given by the market.
C
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? A) Aluminum ingots B) Industrial concrete C) Steel beams D) Luxury yachts
D
If all producers in a market are cartel members, then the demand curve facing the cartel is A) the market demand curve. B) horizontal. C) identical to the demand curve in the dominant firm model. D) identical to the monopolistʹs demand curve.
D
In comparing the Cournot equilibrium with the competitive equilibrium, A) both profit and output level are higher in Cournot. B) both profit and output level are higher in the competitive equilibrium. C) profit is higher, and output level is lower in the competitive equilibrium. D) profit is higher, and output level is lower in Cournot.
D
In the Cournot duopoly model, each firm assumes that A) rivals will match price cuts but will not match price increases. B) rivals will match all reasonable price changes. C) the price of its rival is fixed. D) the output level of its rival is fixed.
D
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? A) Market with several close substitutes because demand is more elastic. B) Market with several close substitutes because demand is more inelastic. C) Market with few close substitutes because demand is more elastic. D) Market with few close substitutes because demand is more inelastic.
D
Monopolistically competitive firms have monopoly power because they A) face downward sloping demand curves. B) are great in number. C) have freedom of entry. D) are free to advertise.
A
Which of the following is true about the demand curve facing the dominant firm? A) It equals market demand minus fringe firmsʹ supply curve. B) It is identical to market demand. C) It equals market demand minus demand facing the fringe firms. D) It is horizontal.
A
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? A) The reaction functions do not have to be straight lines, and they are only drawn this way in the book to keep the figures simple. B) Cournot thought the lines would be straight, but this was proven wrong by other economists. C) Marginal revenue is always linear when marginal costs are constant. D) We know that the marginal revenue curves for linear demand curves are also straight lines.
D
