ECON 302 CH 8, 11

A perfectly competitive industry has 100 high-cost producers, each with a short-run supply curve given by QH = 16P, and 100 low-cost producers, each with a short-run supply curve given by QL = 24P. The industry demand curve is given by Qd = 100,000 - 1,000P. At market equilibrium, industry producer surplus is:

$800,000.

(Table 11.1) If state law prevented car dealerships from opening on Sunday, Henry's Hyundai would earn _____ and Nancy's Nissan would earn _____.

$80K; $80K

Suppose that both firms are producing 100 units of output. If the firms want to increase profit, firm A should produce ________ output and firm B should produce __________ output

less; more

A street vendor's annual license fee was recently increased by the city. The street vendor's:

marginal and average variable cost curves will not be affected.

The Nash equilibrium in Bertrand competition with identical goods:

occurs when each firm sets price equal to marginal cost.

A perfectly competitive firm maximizes profit by producing 500 units of output, selling each unit for $10. The firm's average variable cost is $7 and average fixed cost is $2. What is the firm's producer surplus?

$1,500

Figure 11.3) The graph depicts a four-firm industry with no fixed costs. Suppose that the four firms are colluding by acting like a monopolist, with each firm producing one-fourth of the market output. If one of the firms cheats on the cartel agreement and produces an additional unit of output, the profits of each of the compliant firms go from:

$16 to $14.

(Figure 11.2) The graph depicts the market demand curve for a two-firm industry with no fixed costs. Suppose that the two firms are colluding by acting like a monopolist, with each firm producing half the market output. If one of the firms cheats on the cartel agreement and produces an additional unit of output, its profits will rise from:

$16 to $18.

Pizza Plus operates in a monopolistically competitive industry and faces an inverse demand curve of P = 30 - 2Q, where Q is measured in hundreds of pizzas per week and P is the price per pizza. The marginal cost per pizza is $6. What price should Pizza Plus charge per pizza to maximize profit?

$18

In an identical-product Bertrand oligopoly, the market inverse demand curve is P = 100 - 0.5Q. Firm A's average cost and marginal cost are constant at $20; Firm B's average cost and marginal cost are constant at $10. What is the equilibrium price in this market?

$19.99

Chauncey's Burgers sells hamburgers in a monopolistically competitive industry. Chauncey faces an inverse demand curve of P = 9 - 0.4Q, where Q is measured in hamburgers per hour and P is the price per hamburger. The total cost is TC = 20 + Q, and marginal cost is constant at $1. What is Chauncey's hourly profit?

$20

Taggart Express operates in a monopolistically competitive industry. Its inverse demand curve is P = 80 - Q. The total cost curve is TC = 20Q and marginal cost is constant at $20. What is the long-run equilibrium price?

$20

A firm's short-run total cost is TC = 10,100 + 7,700Q - 100Q2 + Q3/3, and its marginal cost is MC = 7,700 - 200Q + Q2. What is the firm's shutdown price?

$200

Suppose that two manufacturers produce identical fireproof safes at a constant marginal cost of $90. The market inverse demand curve for fireproof safes is P = 450 - 2Q, where Q is the total output of fireproof safes produced by the two manufacturers, q1 + q2. The firms compete by simultaneously choosing their quantity to produce. At Nash equilibrium, what is the market price of a fireproof safe?

$210

In Bertrand competition with differentiated products and zero marginal costs, Firm A faces the demand curve qA = 80 - 2PA + 0.50PB. If Firm A expects Firm B to charge a price of $20, what price should Firm A charge?

$22.50

The market inverse demand curve is P = 60 - Q. The three firms in this industry are acting like a monopolist, evenly splitting output. The marginal cost is $6. Suppose one of the firms produces an additional unit of output. The cheating firm's profit will change from:

$243 to $260.

In a perfectly competitive market, each firm has a long-run total cost given by LTC = 100Q - 10Q2 + 1/3Q3 and long-run marginal cost curve given by LMC = 100 - 20Q + Q2. What is the market's long-run equilibrium price?

$25

(Figure 8.7) If the market price is $6, this perfectly competitive firm will earn profits of:

$27.

In a perfectly competitive industry, there are two types of firms: low-cost producers and high-cost producers. The minimum average total cost of the high-cost producers is $150. The low-cost producers have a long-run total cost curve given by LTC = 150Q - 15Q2 + 0.4Q3, where LMC = 150 - 30Q + 1.2Q2. How much economic rent does the low-cost producer earn?

$3,125

Suppose the outboard motor market is characterized by Stackelberg competition. The market inverse demand curve for outboard motors is P = 10,000 - 50Q, where Q is the total market output produced by Mercury Marine and Yamaha, qM + qY. Suppose that the marginal cost for both firms is constant at $1,000. If Yamaha is the first-mover, what is the equilibrium price?

$3,250

Suppose the market for relay switches is considered perfectly competitive and is in equilibrium at a price of $5,000 per pallet of relay switches. Callahan Relay produces relay switches at an average total cost given by ATC = and marginal cost given by MC = 2Q, where Q measures pallets of relay switches. If Callahan Relay maximizes profit, how much profit will it earn?

$4.75 million

Consider two firms engaged in Bertrand competition with differentiated goods and zero marginal costs. Firm A's demand curve is qA = 60 - 0.50PA + 0.40PB. Firm B's demand curve is qB = 72 - 0.50PB + 0.40PA. In a Nash equilibrium, approximately how much profit does Firm A earn?

$5,588

Figure 11.6) The graph depicts a monopolistically competitive firm. The firm's current economic profit is _____, and its long-run economic profit is _____.

$6,000; $0

Consider the following information: Inverse market demand: P = 12 - 0.5(q1 + q2), where q1 and q2 are Firm 1's and Firm 2's output Firm 1's reaction function: q1 = 9 - 0.5q2 Firm 2's reaction function: q2 = 9 - 0.5q1 The marginal cost of production for both firms is constant at $3. The equilibrium prices in Cournot and Stackelberg competition are _____ and _____, respectively.

$6; $5.25

(Figure 8.10) Economic profit for this firm can be calculated as:

(160 - 130) × 80.

(Figure 8.9) At the profit-maximizing output level, this firm earns profit of:

-$20.

(Figure 8.11) If this firm operates, it earns a profit of _____, but if it shuts down, it earns a profit of _____.

-$9,000; -$5,000

(Figure 8.6) This firm maximizes profit by producing _____ units of output.

10

In Cournot competition, the market inverse demand curve is P = 240 - 0.5Q, where Q is the total output produced by Firm A and Firm B, qA + qB. The marginal cost for each firm is constant at $30. If Firm B produces 140 units of output, how much output should Firm A produce?

140

(Figure 11.1) The graph depicts the market demand curve for a two-firm industry. If the two firms collude and evenly split the market output, how much output will each firm produce?

150 units

A market is characterized with the inverse demand curve P = 130 - 1.5Q, and marginal cost of production is constant at $10. If this market is served by a two-firm cartel that evenly splits the market output, how much output does each firm produce?

20 units

The level of output where marginal revenue equals marginal cost is:

4

Why is the type of product sold in an industry an important characteristic?

A firm that can differentiate its product from that of rivals may be able to charge a higher price for a superior product.

(Figure 8.14) In this perfectly competitive industry, there are 100 firms with a short-run supply curve represented by S1 and 50 firms with a short-run supply curve represented by S2. At a market price of $4.50, industry output is:

500.

In a perfectly competitive market with 50 firms, output is zero at prices less than $20. At prices of $20 to $29.99, each firm will produce 1 unit of output. At any price of $30 or more, each firm will produce 3 units of output. At a price of $27, the industry produces _____ units, and at a price of $35, the industry produces _____units.

50; 150

(Figure 8.17) Initially, the constant-cost industry was in long-run equilibrium at point A when the demand for the good increased to D2. How much output will be produced in the long run as a result of the demand increase?

6,000

A two-firm cartel that produces at a constant marginal cost of $20 faces a market inverse demand curve of P = 100 - 0.50Q. Initially, both firms agree to act like a monopolist, each producing 40 units of output. If one of the firms cheats on the agreement (assuming the other firm is compliant and continues to produce at 40 units), how much output should the cheating firm produce to maximize profits?

60 units

In a perfectly competitive market with 2,000 firms, output is zero at prices less than $10. At prices of $10 to $19.99, each firm will produce 100 units of output. At any price of $20 or more, each firm will produce 300 units of output. As this industry expands output, however, prices of the key inputs to production increase substantially. The total industry output at a market price of $33 is:

600,000 or less.

(Figure 8.5) The graph shows a firm's marginal cost curve. This firm operates in a perfectly competitive industry with market demand and supply curves given by Qd = 100 - 8P and QS = -20 + 2P, where Q is measured in millions of units. Based on the figure, how many units of output will the firm produce at the equilibrium price?

800

In the market for lock washers, a perfectly competitive market, the current equilibrium price is $5 per box. Washer King, one of the many producers of washers, has a daily short-run total cost given by TC = 190 + 0.20Q + 0.0025Q2, where Q measures boxes of washers. Washer King's corresponding marginal cost is MC = 0.20 + 0.005Q. How many boxes of washers should Washer King produce per day to maximize profit?

B) 960

(Figure 8.12) The perfectly competitive firm's short-run supply curve is represented by points:

B, C, and D.

The total revenue curve for a perfectly competitive firm is represented by curve:

B.

CellBat and DuraBat are the only makers of lawn mower batteries. Their batteries are identical, produced at a constant marginal cost of $25. The market inverse demand curve for lawn mower batteries is P = 145 - 0.5Q, where Q is the total output produced by CellBat and DuraBat, qC + qD. How many batteries will each firm produce in Cournot equilibrium?

CellBat and DuraBat will each produce 80 batteries.

The output of firms is determined simultaneously in _____ competition but sequentially in _____ competition.

Cournot; Stackelberg

(Table 11.2) The table shows the payoffs associated with two levels of spending for recruitment of star football players. What is the Nash equilibrium?

Each school will spend lots of money on recruiting.

Which of the following characteristics does Bertrand competition with differentiated goods have in common with Bertrand competition with identical goods?

Firms set prices simultaneously.

Which of the following are model assumptions of Bertrand competition with identical goods? I. The firms compete by choosing the quantity of output produced. II. The firms agree to coordinate their output and pricing decisions to act like a monopolist. III. The firms compete by choosing the price of their product.

III. The firms compete by choosing the price of their product.

(Table 11.1) If car dealerships are allowed to be open on Sunday, what is the Nash equilibrium?

Henry earns $70K and Nancy earns $70K.

Which of the following statements is (are) TRUE? I. As market prices increase, industry output rises because individual firms have upward-sloping marginal cost curves. II. As market prices increase, industry output rises because high-cost producers enter the industry. III. As market prices increase, industry output rises because individual firms have upward-sloping short-run supply curves.

I. As market prices increase, industry output rises because individual firms have upward-sloping marginal cost curves. II. As market prices increase, industry output rises because high-cost producers enter the industry. III. As market prices increase, industry output rises because individual firms have upward-sloping short-run supply curves.

Which of the following statements is (are) TRUE? I. Free entry to a perfectly competitive industry results in the industry's firms earning zero economic profit in the long run, except for the most efficient producers, who may earn economic rent. II. In a perfectly competitive market, long-run equilibrium is characterized by LMC < P < LATC. III. If a competitive industry is in long-run equilibrium, a decrease in demand causes firms to earn negative profit because the market price will fall below average total cost.

I. Free entry to a perfectly competitive industry results in the industry's firms earning zero economic profit in the long run, except for the most efficient producers, who may earn economic rent. III. If a competitive industry is in long-run equilibrium, a decrease in demand causes firms to earn negative profit because the market price will fall below average total cost.

(Figure 8.3) The graph depicts the perfectly competitive market for walnuts. Which of the following statements is (are) TRUE? I. The demand curve facing a walnut grower is perfectly elastic at $1. II. If a walnut grower sold 80,000 pounds of walnuts, his total revenue would be $138,400. III. If a walnut grower sold one more pound of walnuts, his total revenue would increase by $1.73.

II. If a walnut grower sold 80,000 pounds of walnuts, his total revenue would be $138,400. III. If a walnut grower sold one more pound of walnuts, his total revenue would increase by $1.73.

The inverse market demand curve is P = 170 - 4Q. Two firms in this market are evenly splitting the output. Each firm produces the product at a constant marginal cost of $10. Which of the following statements is TRUE? I. If one firm produces 2 more units of output, its profits will rise to $864. II. If neither firm cheats, each firm will earn a profit of $800. III. If one firm produces 3 more units of output, the other firm's profits will fall to $680.

I. If one firm produces 2 more units of output, its profits will rise to $864. II. If neither firm cheats, each firm will earn a profit of $800. III. If one firm produces 3 more units of output, the other firm's profits will fall to $680.

(Figure 8.18) Which of the following statements is (are) TRUE? I. In the long run, this firm will produce 500 units of output. II. In the short run, this firm produces 600 units of output. III. The long-run equilibrium price is $4. IV. At a price of $5, new firms will eventually enter the market, eliminating this firm's economic profits.

I. In the long run, this firm will produce 500 units of output. II. In the short run, this firm produces 600 units of output. III. The long-run equilibrium price is $4. IV. At a price of $5, new firms will eventually enter the market, eliminating this firm's economic profits.

Which of the following statements is TRUE? I. Oligopoly is a form of imperfect competition. II. Oligopoly firms produce only differentiated products. III. Unlike perfectly competitive markets, oligopoly markets have only a small number of firms.

I. Oligopoly is a form of imperfect competition. III. Unlike perfectly competitive markets, oligopoly markets have only a small number of firms.

With which of the following scenarios should a perfectly competitive firm shut down in the short run? I. P = $80, VC = $180,000, and Q = 2,000 II. TR = $45,000, AVC = $500, ATC = $600, and Q = $84 III. P = $11.55, ATC = $15, and AFC = $2

I. P = $80, VC = $180,000, and Q = 2,000 III. P = $11.55, ATC = $15, and AFC = $2

Which of the following statements is TRUE regarding collusion, Bertrand (identical products), and Cournot competition? I. Prices are highest in collusion, next highest in Cournot, and lowest in Bertrand. II. Output is highest in Bertrand, next highest in Cournot, and lowest in collusion. III. Profit is highest in Bertrand, next highest in Cournot, and lowest in collusion.

I. Prices are highest in collusion, next highest in Cournot, and lowest in Bertrand. II. Output is highest in Bertrand, next highest in Cournot, and lowest in collusion.

(Figure 8.15) Which of the following statements is (are) TRUE? I. Producer surplus = TR - VC = $25 - $15. II. The shaded area between the demand curve and marginal cost represents producer surplus and equals $10. III. The firm's profit = $10 - FC.

I. Producer surplus = TR - VC = $25 - $15. II. The shaded area between the demand curve and marginal cost represents producer surplus and equals $10. III. The firm's profit = $10 - FC.

Which of the following statements is TRUE? I. The gain in profit from cheating on a cartel agreement is greater if there are more firms in the cartel. II. In a cartel, compliant firms will earn rising profits as cheating firms lower prices by expanding output. III. If a firm cheats on a cartel agreement, the loss in profit to the compliant firm will be smaller in a two-firm cartel than a four-firm cartel.

I. The gain in profit from cheating on a cartel agreement is greater if there are more firms in the cartel. III. If a firm cheats on a cartel agreement, the loss in profit to the compliant firm will be smaller in a two-firm cartel than a four-firm cartel.

(Figure 8.1) Which of the following statements is (are) TRUE? I. The profit-maximizing output level is approximately 9 units. II. Profits are negative at 16 units of output. III. Marginal revenue equals marginal cost at 2 and 14 units of output.

I. The profit-maximizing output level is approximately 9 units. II. Profits are negative at 16 units of output.

Which of the following statements is (are) TRUE of price-taking firms? I. ΔTR/ΔQ = P = MR II. Price takers must lower their price to sell additional units of output because demand curves slope downward. III. If a price taker decides to increase output, the market price will decrease. IV. Examples of price takers include McDonald's, Burger King, Wendy's, and SONIC Drive-in.

I. ΔTR/ΔQ = P = MR

(Figure 8.8) Which of the following statements is (are) TRUE?

II. At prices above $5, the firm earns positive profit.

(Figure 8.19) The graph represents three perfectly competitive firms. Which of the following statements is (are) TRUE? I. In the long run, each firm will produce the same quantity of output. II. Firm 1 is the highest-cost producer and Firm 3 is the lowest-cost producer. III. Firm 3 will produce the most output in the long run.

II. Firm 1 is the highest-cost producer and Firm 3 is the lowest-cost producer. III. Firm 3 will produce the most output in the long run.

(Figure 11.5) According to the figure, which of the following statements is TRUE? I. If Firm B expects Firm A to charge $3, Firm B should charge $5.50. II. If Firm A expects Firm B to charge $6, Firm A should charge $7. III. The Nash equilibrium is for each firm to charge the same price.

II. If Firm A expects Firm B to charge $6, Firm A should charge $7.

Crush and Frenzy both produce motorized bicycles, which are identical in all aspects. The total demand in this market is for Q motorized bicycles. The price of Crush's bicycle is PC and the price of Frenzy's bicycle is PF. If the firms are engaged in Bertrand competition, which of the following statements is TRUE? I. If PC > PP, Crush sells Q bicycles. II. If PC = PF, Crush sells 0.50Q bicycles. III. If PC < PF, Crush sells zero bicycles.

II. If PC = PF, Crush sells 0.50Q bicycles.

Which of the following characteristics relate(s) to perfect competition? I. An industry is dominated by several large firms. II. Consumers cannot distinguish one firm's product from another. III. New firms can easily enter the industry.

II. Consumers cannot distinguish one firm's product from another. III. New firms can easily enter the industry.

Which of the following statements is TRUE? I. Firms produce identical products. II. There are significant barriers to entry. III. Firms consider the production decisions of their rivals when setting output levels. IV. Firms act like monopolies by producing where marginal revenue equals marginal cost.

IV. Firms act like monopolies by producing where marginal revenue equals marginal cost.

Suppose that a firm is earning a 12% return on capital in a perfectly competitive industry, and the market return outside the industry is 9.5%. Which of the following statements is (are) TRUE?

In the long run, the firm's return on capital will be 9.5%.

To maximize profits, a firm should produce where:

MR = MC.

Which of the following is an example of Stackelberg competition?

Natura Pet Products introduced the first grain-free dog food; eventually, other dog food companies entered this market but had to limit their production plans, given Natura Pet Products' sizable market share.

Which of the following is NOT a feature of Cournot competition?

One firm sets its quantity to produce before the other firm.

Suppose a perfectly competitive industry has 300 firms, and the short-run supply curve for each firm is given by Q = 2P. What is the short-run industry supply curve?

QS = 600P

In a Cournot market with two firms, the inverse market demand curve is P = 50 - 2Q, where Q = q1 + q2 (Firm 1's output = q1; Firm 2's output = q2). If Firm 2 produces 10 units of output, what is Firm 1's residual demand curve?

P = 30 - 2q1

Two firms that are engaged in Stackelberg competition face the market inverse demand curve P = 100 - 2Q, where Q is the total market output comprising Firm 1's output, q1, and Firm 2's output, q2. Each firm produces the product at a constant marginal cost of $22. If Firm 2's reaction function is q2 = 22 - 0.5q1, what is Firm 1's (the first-mover's) inverse demand curve?

P = 56 - q1

Consider two firms engaged in Bertrand competition with differentiated goods and zero marginal costs. Firm A's demand curve: qA = 120 - 3PA + 2PB Firm B's demand curve: qB = 120 - 3PB + 2PA In a Nash equilibrium, what is each firm's price?

PA = $30; PB = $30

An industry faces the demand curve Q = 200 - P, where each firm produces an identical good at a constant marginal cost of $8. What are the Bertrand equilibrium price and quantity?

Q = 192; P = $8

Economists assume that firms maximize:

TR-TC

Two firms are in Bertrand competition with differentiated goods. Firm A faces the demand curve qA = 40 - PA + 0.50PB.What is Firm A's total revenue?

TRA = 40PA - + 0.50PAPB

Suppose the market for sprouts is in long-run equilibrium. In the short run, what will happen if an E. coli outbreak reduces the demand for sprouts?

The market price of sprouts will fall, causing each firm to produce fewer sprouts.

(Figure 8.13) What could have caused the supply and average variable cost curves to shift outward?

a decrease in wages

The idea that firms pursue actions to maximize profits is:

a reasonable assumption, because firms that do not maximize profits will see their market share drain away to their profit-maximizing rivals

Suppose that two firms are competing on price. The firms produce identical goods, and the marginal cost of each firm is constant at $15. If one firm is charging a price of $18, the other firm should:

charge $17.99.

Suppose the long-run equilibrium price in a perfectly competitive market is $100. When demand increases, if it is a(n) _____ industry, the long-run equilibrium price will _____ to reflect a _____ long-run average total cost.

decreasing-cost; fall; lower

A Nash equilibrium occurs when:

each firm is doing the best it can in light of the actions taken by other firms.

n a perfectly competitive industry, the equilibrium price is $56 and the minimum average total cost of the industry's firms is $40. If this is a constant-cost industry, we can expect that in the long run, firms will _____ the market, shifting the industry's short-run supply curve _____.

enter; outward until the new equilibrium price is $40.

In monopolistic competition, the long-run equilibrium price _____ marginal cost because _____.

exceeds; firms face downward-sloping demand curves

A firm should _____ output whenever MR exceeds MC because _____.

expand; revenues will rise by more than costs, increasing the firm's profit

In a perfectly competitive industry, the long-run equilibrium price is $12. If a technological innovation lowers production costs, the long-run equilibrium price will:

fall below $12.

Stu owns an ice cream parlor that is usually closed during the winter. This winter, however, Stu is considering opening his business in February instead of March. If Stu opens his store in February, he will earn total revenue of $4,000 for the month, incurring variable costs of $3,500 and fixed costs of $1,500. If the store remains closed during February, Stu will earn no revenues and incur fixed costs of $1,500. Stu should:

open in February because the $4,000 of total revenue exceeds the $3,500 of variable costs.

Pitch (a sticky black substance made from petroleum) is a key input in the production of clay targets. If the price of pitch falls, clay target manufacturers will encounter a(n) _____ shift of their marginal cost curve and a(n)_____ shift of their average variable cost.

outward; outward

(Figure 8.16) Which panel shows a representative firm (operating in a perfectly competitive industry) in a long-run equilibrium?

panel b

(Figure 11.4) In a Cournot market with two firms, the inverse market demand curve is P = 20 - 0.5Q, where Q = q1 + q2. (Firm 1's output = q1; Firm 2's output = q2.) If Firm 2 produces 20 units of output, Firm 1's residual marginal revenue curve is depicted in:

panel b.

(Figure 8.4) In a perfectly competitive market with 5,000 firms, the equilibrium price and quantity are $0.70 and 3.0 million units. The demand curve facing a firm in this market is represented by:

panel c.

In Bertrand competition with identical goods, the market outcome is MOST like:

perfect competition.

Consider a two-firm oligopoly facing a market inverse demand curve of P = 100 - 2(q1 + q2), where q1 is the output of Firm 1 and q2 is the output of Firm 2. Firm 1's marginal cost is constant at $12, while Firm 2's marginal cost is constant at $20. In Cournot equilibrium, how much output does each firm produce?

q1 = 16; q2 = 12

As firms enter a monopolistically competitive industry, the existing firms' demand curves will:

shift inward and become more elastic.

A market is served by two firms in Cournot competition, each with a constant marginal cost of $100. The market inverse demand curve is P = 2,000 - 50Q, where Q is the total market output produced by the two firms, q1 + q2. What is Firm 1's reaction function?

q1 = 19 - 0.5q2

In Stackelberg competition, the market inverse demand curve is P = 20 - 2(q1 + q2), where q1 and q2 are Firm 1's and Firm 2's output measured in hundreds of units. Firm 1, the first-mover, has a marginal cost of $4, and Firm 2 has a marginal cost of $2. How much output does each firm produce?

q1 = 350; q2 = 275

The market inverse demand curve is P = 90 - Q, where Q is the total market output consisting of Firm 1's output, q1, and Firm 2's output, q2. Both firms have a constant marginal cost of $10. If Firm 1 selects its output level first, how much output does each firm produce?

q1 = 40; q2 = 20

In Bertrand competition with differentiated goods, the demand curve for bags of Wilson tennis balls is qW = 80 - 4PW + 2PD , and the demand curve for bags of Dunlop tennis balls is qD = 80 - 2PD + PW. Two firms both have zero marginal costs. How many bags of tennis balls does each firm produce?

qW = 64; qD = 48

The perfectly competitive firm's short-run supply curve is:

the portion of its marginal cost curve that lies above average variable cost.