Econ Exam 3
What is the optimal strategy for McDonald's?
Build a large store
Frank Gunter owns an apple orchard. He employs 100100 apple pickers and pays them $1414 per hour to pick apples, which he sells for $2.802.80 per box. If Frank is maximizing profits, what is the marginal revenue product LOADING... of the last worker he hired? What is that worker's marginal product LOADING... ?
Marginal revenue product of the last workerequals=$ 1414 per hour. (Enter your response as an integer.) Marginal product of the last workerequals= 55 boxes per hour. (Enter your response as an integer.)
The marginal revenue product of labor (MRP Subscript Upper LMRPL) for an employer is shown in the figure to the right. Suppose the market wage is $14.0014.00 per hour. How many hours of labor should the employer hire?
The employer should hire 33 hours of labor
If the labor supply curve shifts to the rightright and the labor demand curve remains unchanged, what will happen to the equilibrium wage and the equilibrium level of employment?
The equilibrium wage decreasesdecreases and the equilibrium level of employment increasesincreases .
If the labor demand curve shifts to the rightright and the labor supply curve remains unchanged, what will happen to the equilibrium wage and the equilibrium level of employment?
The equilibrium wage increasesincreases and the equilibrium level of employment increasesincreases .
What is the marginal revenue product of the secondsecond worker?
The secondsecond worker's marginal revenue product is $ 50005000
Suppose the wage increasesincreases. What effect will this have on a worker's labor supply
The substitution effect of a wage increaseincrease causes the worker to supply a largera larger quantity of labor. The income effect of a wage increaseincrease causes the worker to supply a smallera smaller quantity of labor. If the substitution effect is bigger than the income effect, then the supply curve will slope upwardupward .
What is a monopoly? A monopoly is
a firm that is the only seller of a good or service that does not have a close substitute.
Sean Astin, who played Sam in the Lord of the Rings movies, wrote the following about an earlier film he had appeared in: "Now I was in a movie I didn't respect, making obscene amounts of money (five times what a teacher makes, and teachers do infinitely more important work) ..." Source: Sean Astin, with Joe Layden, There and Back Again: An Actor's Tale, New York: St. Martin's, 2004, p. 35. Are salaries determined by the importance of the work being done? If not, what are they determined by? Salaries are determined
by the marginal revenue product of the last worker hired and the supply of labor.
Is the columnist correct that when real hourly wages rise, the price of time increases? Briefly explain. The columnist is
correct because the wage is the opportunity cost of leisure.
The company sells the pads for dogs at a higher price than the pads for people because
dog owners are willing to pay more.
What is the marginal productivity theory of income distribution? The marginal productivity theory of income distribution suggests that
income is determined by the marginal productivity of the factors of production that individuals own.
Under what circumstances can a firm successfully practice price discrimination? To successfully practice price discrimination,
some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.
What is personnel economics? Personnel economics is
the application of economic analysis to human resource issues such as the link between differences among jobs and differences in the way workers are paid. B. the application of economic analysis to human resource issues such as promotionspromotions.
Perfect price discrimination is
unlikely to occur because firms typically do not know how much each consumer is willing to pay.
Why is the supply curve of labor usually upward sloping?
As the wage decreasesdecreases, the opportunity cost of leisure decreasesdecreases, causing individuals to devote lessless time to working.
What is the law of one price?
Identical products should sell for the same price everywhere, assuming no transactions costs.
What effect will changes in labor supply have on the equilibrium wage and employment?
If the labor supply curve shifts to the leftleft, then the equilibrium wage will rise and employment will fall .
Does a product always have to sell for the same price everywhere? Briefly explain.
No. The law of one price only holds exactly when transactions costs are zero.
If a monopolist's price is $50 a unit and its marginal cost is $25, then
Not enough information is given to say what the firm should do to maximize profit.
Why do oligopolies exist?
Oligopolies exist due to barriers to entry .
If wages increase, will a worker supply more labor?
Only if the substitution effect is larger than the income effectthe substitution effect is larger than the income effect.
Refer to the diagram to the right which shows the demand and cost curves facing a monopolist. The firm's profit maximizing price is
P3.
Refer to the graph to the right. What point represents the price and output level combination that a monopoly will choose?
Point B
Refer to the diagram to the right which shows the demand and cost curves facing a monopolist. To maximize profit, the firm will produce
Q2.
Suppose a firm produces hardware that plays video games using workers according to the table below. Suppose also that its output sells for $250250 per unit. Is the firm experiencing the effects predicted by the law of diminishing returns LOADING...
The firm is experiencing diminishing returns.
If a monopolist's marginal revenue is $15 a unit and its marginal cost is $25, then to maximize profit the firm should decrease output.
True
Many people have predicted that the price of natural resources should rise consistently over time in comparison to the price of other goods because the demand curve is rising while the supply curve must be shifting inward as natural resources are used up. However, the relative prices of most natural resources have not been increasing. Choose the graph showing the demand and supply for natural resources that can explain why prices haven't risen, even though demand has increased.
XX
Which of the following factors shifts the labor supply curve?
a change in demographics B. a change in population C. a change in alternatives available in other labor markets
The substitution effect of a wage increase
causes a worker to supply a larger quantity of labor, and the income effect causes a worker to supply a smaller quantity of labor.
What is "natural" about a natural monopoly? A natural monopoly
develops automatically due to economies of scale.
Is perfect price discrimination economically efficient? Perfect price discrimination is
efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.
When a firm moves from straight-time pay to commission or piece-rate pay, the productivity of a firm's employees may
increase as less productive employees leave and those who remain have an incentive to sell more.
Suppose Sony makes PlayStation 3 using laborlabor. In what way is laborlabor a derived demand? LaborLabor for Sony to make PlayStation 3 is a derived demand because
it depends on consumer demand for PlayStation 3.
If piece-rate or commission systems of compensating workers have important advantages for firms, why don't more firms use them? Some firms don't use piece-rate or commission systems of compensation because
it is difficult to measure outputmeasure output.
What is a monopsony? A monopsony is
the only buyer of a factor of production
How can we measure the opportunity cost of leisure? The opportunity cost of leisure is
the wage rate.
A columnist writing in the Wall Street Journal argues that because "hourly wages in real terms" rose, the "price of time" also rose. Source: Brett Arends, "Spend Some Time, Save Some Money," Wall Street Journal, May 19, 2009. What is the "price of time"? The price of time is
the wage.
What are the three most important variables that cause the market supply curve for labor to shift? The supply curve for labor shifts with changes in
the population, demographics, and opportunities in other labor markets.
If labor demand is unchanged, a decrease in labor supply will ________ the equilibrium wage and ________ the number of workers employed.
increase; decrease
If labor supply is unchanged, an increase in labor demand will ________ the equilibrium wage and ________ the number of workers employed.
increase; increase
How is the prisoner's dilemma result changed in a repeated game? In a repeated game,
players can employ retaliation strategies.
Refer to the diagram to the right which shows the demand and cost curves facing a monopolist. If the firm's average total cost curve is ATC3, the firm will
suffer a loss.
The great baseball player Ty Cobb was known for being very thrifty. Near the end of his life he was interviewed by a reporter who was surprised to find that Cobb used candles, rather than electricity, to light his home. From Ty Cobb's point of view, was the local electric company a monopoly? For Cobb, the local electric company
was not a monopoly because candles were a good substitute for electricity.
What is odd pricing? Odd pricing is
when prices end in "9."
Refer to the diagram to the right which shows the demand and cost curves for a monopolist. What is the amount of the monopoly's profit?
$2,700
Refer to the diagram to the right which shows the demand and cost curves for a monopolist. What is the price charged for the profitminus−maximizing output level?
$34
Assume the table above gives the monthly demand and costs for subscriptions to basic cable for Comcast, a cable television monopoly in Philadelphia. If Comcast maximizes its profits how much profit will it earn?
$4
Is price discrimination illegal? In recent years, the courts have interpreted the
Robinson-Patman Act such that price discrimination is illegal if it reduces competition.
A flight route is served by American Airlines (AA) and Southwest Airlines (SW). Suppose American is the industry leader. American will decide whether to raise airfares, and then Southwest will decide whether to match the price increase. What is the Nash equilibrium of the game?
American will leave fares unchanged and Southwest will leave fares unchanged.
Refer to the diagram to the right which shows the demand and cost curves for a monopolist. What is likely to happen to this monopoly in the long run?
As long as there are entry barriers, this firm will continue to enjoy economic profits.
Suppose a cable company provides cable service to a small town. The total revenue, marginal revenue, total cost, and marginal cost of providing various quantities of cable subscriptions (units in thousands per month) are presented in the table below.
Assume the local cable company is a monopoly. To maximize profits, the monopoly should produce 44 (thousand) units. (Enter a numeric response using an integer.) At that level of output, the cable company will earn economic profits of $ 140140 (thousand per month) .
What is perfect price discrimination?
Charging every consumer a different price equal to their willingness to pay.
Under U.S. copyright LOADING... law, authors have the exclusive right to their writings during their lifetimeslong dash—unless they sell this right, as most authors do to their publisherslong dash—and their heirs retain this exclusive right for 70 years after their death. The historian Thomas Macaulay once described the copyright law as "a tax on readers to give a bounty to authors." Source of quotation from Macaulay: Thomas Mallon, Stolen Words: The Classic Book on Plagiarism, San Diego: Harcourt, 2001 (original ed. 1989), p. 59. In what sense does the existence of the copyright law impose a tax on readers? What "bounty" do copyright laws give authors?
With copyrights, books cost more and authors earn more on them than if there were no copyrights.
Give an example of a public franchise and an example of a public enterprise. An example of a public franchise is
a firm that is the sole, government-designated provider of electricityelectricity, and an example of a public enterprise is the government directly providing waterwater.
A monopoly is a market structure that is characterized by
a single seller of a good or service that does not have a close substitute
The figure to the right shows the average total cost curve for a firm producing electricity and the total demand for electricity in the firm's market. If the firm is a monopoly and produces 36 billion kilowatt hours of electricity per year, then its average total cost of production will be $ . 14.14 per kilowatt hour. (Enter a numeric response using a real number rounded to two decimal places.) Now suppose instead that two firms are in the market, each producing half of the market's electricity. If each firm has the same average total cost curve, then the average cost of producing electricity will now be $ . 22.22 per kilowatt hour. If one of the two firms expands production, then that firm will
be able to offer lower prices, driving the other firm out of business.
Most movie theatres charge different prices to different groups of customers for movie admission but not on movie popcorn. Which of the following is a reason for this?
because it is easier to limit resale in movie admissions but not in popcorn
In 2013, the Rock and Roll Hall of Fame and Museum charged adults $22 for admission. Seniors (65 years and older) and military personnel were charged $17, and children between 9 and 12 years old were charged $13. Source: www.rockhall.com. Using the admission fees as a guide, rank these groups based on their elasticities of demand from most to least elastic.
children 9 to 12 years old; seniors and military personnel; adults
Why is the demand curve for labor downward sloping? The demand curve is downward sloping
due to the law of diminishing returns.
Do airlines practice price discrimination LOADING... ? Explain. Airlines
engage in price discrimination by reducing the price on seats that they expect will not be soldreducing the price on seats that they expect will not be sold. For example, business travelers have a more inelastic demand than leisure travelers, so airlines charge business travelers a higher price.
The federal government has passed various laws addressing mergers. What did the Federal Trade Commission ActFederal Trade Commission Act do? The Federal Trade Commission Act
established the Federal Trade Commissionestablished the Federal Trade Commission.
Refer to the diagram to the right which shows the demand and cost curves facing a monopolist. If the firm's average total cost curve is ATC1, the firm will
make a profit.
What is the purpose of the antitrust laws? Antitrust laws are intended to
make illegal any attempts to form a monopoly or to collude.
Long run economic profits would most likely exist in which market structure?
monopoly and oligopoly
Which are more economically efficient, perfectly competitive markets or monopolies? Compared to monopolies, perfectly competitive markets are
more economically efficient because they result in more economic surplus.
The demand curve for the monopoly's product is
the market demand for the product.
Refer to the diagram to the right which shows the demand and cost curves facing a monopolist. Suppose the monopolist represented in the diagram to the right produces positive output. What is the profit maximizing/lossminus−minimizing output level?
630 units
Suppose that a monopolymonopoly becomes a perfectly competitive industryperfectly competitive industry.
As a result, consumer surplus will increaseincrease , producer surplus will decreasedecrease , and deadweight loss will decreasedecrease .
What is the Nash equilibrium for this game?
The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output.
Consider the market for oil. Suppose for simplicity that there are only two oil producing countrieslong dash—Saudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output. These output strategies with corresponding profits are depicted in the payoff matrix LOADING... to the right. Kuwait's profits are in red and Saudi Arabia's are in blue. Suppose the two countries form a cartel LOADING... . What is the cooperative equilibrium LOADING... ?
The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output.
The figure to the right shows the average cost of production (AC) for a cable company that is a monopoly as well as the corresponding demand (D) for cable subscriptions in the city to which the company provides service. Is this company a natural monopoly?
This firm is a natural monopoly because average cost is decreasing when it crosses demand.
What is cost-plus pricing? Cost-plus pricing is
charging consumers a price by adding a percentage markup to average cost.
If the government abolished copyright laws, then
the price of books would decrease, benefiting readers.
Give brief definitions of the following concepts: Game theory, cooperative equilibrium, noncooperative equilibrium, dominant strategy, and Nash equilibrium, and price leadership. To do this, identify the definition for each term from the following list.
1 Actions taken by a firm to achieve a goal, such as maximizing profits. 2 The study of how people make decisions where attaining goals depends on interactions with others. 3 A table that shows the payoffs each firm earns from every combination of firm strategies. 4 An agreement among firms to charge the same price or otherwise not to compete. 5 A strategy that is the best for a firm, no matter what strategies other firms use. 6. A situation in which each firm chooses the best strategy, given the strategies chosen by other firms. 7. A game outcome in which players seek to increase their mutual payoff. 8. A game outcome in which players pursue their own self-interest. 9. A situation in which no player can make himself better off by changing his decision at any decision node. 10. A situation where one firm announces a price change, which is matched by other firms in the industry. a. Game theory: 22. (Enter a numeric response corresponding to a definition listed above using an integer.) b. Cooperative equilibrium: 77. c. Noncooperative equilibrium: 88. d. Dominant strategy: 55. e. Nash equilibrium: 66. f. Price leadership: 1010.
A town has two gas stations, BP and the Mini-Mart (MM). The gas stations must choose whether to advertise their gasoline. The advertising strategies with corresponding profits are illustrated in the payoff matrix to the right. BP's profits are in red and the Mini-Mart's are in blue. What is each firm's dominant strategy? BP's dominant strategy is to advertise and the Mini-Mart's dominant strategy is to not advertise . What is the Nash equilibrium for this game?
BP will advertise and the Mini-Mart will not advertise.
Suppose Best Buy is the only electronics store in a particular market, but RadioShack is thinking about entering the market. Best Buy chooses how much to produce first and then RadioShack chooses whether to enter the industry. The strategies and corresponding profits for Best Buy (BB) and RadioShack (RS) are depicted in the decision tree to the right. What will the firms do?
Best Buy will choose the large quantity and RadioShack will not enter.
What happens if a perfectly competitive industry becomes a monopoly? Suppose the demand curve in the figure to the right is market demand and the corresponding market supply curve represents the marginal cost of production.
Compared to perfect competition, a profit-maximizing monopoly would decrease output by 22 units. (Enter your response as an integer.) In addition, a monopoly would raise price by $ 1.001.00.
Suppose that Symantec is a small firm that has developed anti-virus computer software. Symantec currently earns $44 million per year in profits from selling its software. Dell informs Symantec that it is considering installing the software on every new computer it sells. Dell currently earns profits of $30 million but expects to sell more computers at a higher price if it can install Symantec's software. Dell first chooses whether to offer Symantec $30 or $20 for each copy of its software, and then Symantec responds by either accepting or rejecting the offer. The strategies and corresponding profits (in millions) for Dell (D) and Symantec (S) are depicted in the decision tree to the right. What is the Nash equilibrium of the game?
Dell will offer $20 per copy of the software and Symantec will accept the offer.
Consider a market with two firms, Hewlett-Packard (HP) and Dell, that sell printers. Both companies must choose whether to charge a high price ($400400) or a low price ($250250) for their printers. These price strategies with corresponding profits are depicted in the payoff matrix LOADING... to the right. HP's profits are in red and Dell's are in blue. Suppose HP and Dell are initially at the game's Nash equilibrium. Then, HP and Dell advertise that they will match any lower price of their competitors. For example, if HP charges $250250, then Dell will match that price and also charge $250250. What effect will matching prices have on profits (relative to the Nash equilibrium without price matching)?
HP's profit will change by $ 2525 and Dell's profit will change by 2525.
Give an example of a government-imposed barrier to entry. An example of a government-imposed barrier to entry is
a tariff on imports and occupational licensing
How are decision trees used to analyze sequential games? A decision tree
contains decision nodes where firms must make decisions, arrows illustrating the decisions, and terminal nodes showing the resulting rates of return.
To have a monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalites create or remove barriers to entry? Explain. Network externalities
create barriers to entry because if a firm can attract enough customers initially, it can attract additional customers as its product's value increases by more people using it, which attracts even more customers.
In China, the government owns many more firms than in the United States. A former Chinese government official argued that a number of government-run industries such as oil refining were natural monopolies. Source: Shen Hong, "Former State Assets Regulator: SOE Monopolies 'Natural'," Wall Street Journal, January 4, 2012. Oil refining would be a natural monopoly in a country if
having multiple firms would be highly inefficient.
Baseball writer Rany Jazayerli assessed the Kansas City Royal's outfielder Jose Guillen as follows: "Guillen has negative value the way his contract stands." Source: Rany Jazayerli, "Radical Situations Call for Radical Solutions," ranyontheroyals.com, June 6, 2009. How could a baseball player's contract cause him to have negative value to a baseball team? Jose Guillen would have negative value to the Kansas City Royals if
his salary is greater than his marginal revenue producthis marginal revenue product.
For many years, De Beers of South AfricaDe Beers of South Africa essentially operated as a monopoly. What made this company a monopoly LOADING... ? De Beers of South AfricaDe Beers of South Africa was essentially a monopoly because
it had almost exclusive control of the world's supply of diamond depositsdiamond deposits, used to make diamond jewelrydiamond jewelry.
The Department of Justice would want to keep Apple from signing agency model contracts with publishers because it wants to
keep firms from artificially restricting competition to raise prices.
The publishers would want to continue signing such contracts because this would allow them to
keep prices higher.
According to an article in the Wall Street Journal, McDonald's and Burger King have much larger markups on French fries and sodas than on hamburgers. Is it likely that the companies believe that the demand for French fries and sodas is more elastic or less elastic than the demand for hamburgers? Briefly explain. Source: Diana Ransom, "Can They Really Make Money Off the Dollar Menu?" Wall Street Journal, May 21, 2009. McDonald's and Burger King likely believe that the demand for French fries and sodas is
less elastic because consumers are more likely to pay larger markups when they are less price sensitive.
Oligopolies exist because of barriers to entry. One of the most important barriers to entry is due to economies of scale. Why is this true? It is more likely for an industry to be an oligopoly than competitive in the presence of economies of scale because
minimum average cost occurs when firm output is a large fraction of industry output.
If a firm charges different consumers different prices for the same product and the difference cannot be attributed to cost variations, then it is engaging in
price discrimination.
[Related to Making the Connection] After a federal court judge had found Apple guilty of conspiring with book publishers to raise e-book prices, the Department of Justice recommended that the judge order Apple not to sign agency model contracts with publishers for five years. The publishers objected to the recommendation, arguing that the recommendation would "effectively punish the publishers by prohibiting agreements with Apple using an agency model." Source: Chad Bray, "Publishers Object to E-Book Plan for Apple," Wall Street Journal, August 7, 2013. Under the agency model, the publishers would set the
retail price of e-books and Apple would keep 30 percent of the price of every e-book it sold.
What are the four most important ways a firm becomes a monopoly? The four main reasons a firm becomes a monopoly are:
the government blocks entry, control of a key resource, network externalities, and economies of scale.
One company sells underpads that can be used on the beds of people who are ill or the sleeping area for dogs that are being house trained. The packages for dogs are different and have a different brand name than the packages for people but the pads in the packages are identical. Recently on Amazon, the company was selling the pads for dogs at a price that was 11 percent higher than the price they charged for the pads for people. The company is able to price discriminate in this situation because
the markets are segmented with consumers with different elasticities.
If patents reduce competition, why does the federal government grant them? The federal government grants patents
to encourage firms to spend money on research to create new products.
Firms price discriminate
to increase profits.
What is an oligopoly? An oligopoly is a market structure
where a small number of interdependent firms compete.
A monopolist's profit maximizing price and output correspond to the point on a graph
where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.
What is a sequential game? A sequential game is a game
where one firm acts first and then the other firms respond
In the long run, the monopolist can earn
zero or positive economic profit.
What is the definition of monopoly?
A monopoly is a firm that is the only seller of a product in a given industry.
Suppose Eckerd Pharmacy is the only pharmacy in a particular market, but Walgreens PharmacyWalgreens Pharmacy is thinking about entering the market. Absent entry, Eckerd Pharmacy can maximize profits by producing a small quantity. However, by producing a large quantity, Eckerd Pharmacy can attempt to deter entry by reducing prices and, consequently, profits. Eckerd Pharmacy must choose how much to produce first and then Walgreens PharmacyWalgreens Pharmacy will choose whether to enter the industry. The strategies and corresponding profits for Eckerd (E) and Walgreens PharmacyWalgreens Pharmacy (Upper WW) are depicted in the decision tree to the right. What is the Nash equilibrium of the game?
Eckerd Pharmacy will choose the large quantity and Walgreens PharmacyWalgreens Pharmacy will not enter.
Bradford is a small town that currently has no fast-food restaurants. McDonald's and Burger King are both considering entering this market. Burger King will wait until McDonald's has made its decision before deciding whether to enter. Use the decision tree below to determine the optimal strategy for each company, assuming that the minimum rate of return that owners of fast-food restaurants require on their investment is 2020%. What is the optimal strategy for Burger King?
Enter the market if McDonalds builds a small store
Patents LOADING... are granted for 20 years, but pharmaceutical companies can't use their patent-guaranteed monopoly powers for anywhere near this long because it takes several years to acquire FDA approval of drugs. Suppose it is proposed that the life of drug patents be extended to 20 years after FDA approval. What would be the costs and benefits of this extension?
Firms could earn higher profits for a longer period of time, but consumers would lose because prices of drugs would stay higher longer. Firms would be more likely to develop more new products and consumers would gain from having a wider range of medicines.
Given the decision tree below, TruImage's profits are $1.5 million if the firm accepts Dell's contract offer of $20 per copy.
Given the decision tree above, will Dell offer TruImage a contract of $20 per copy or a contract of $30 per copy? $30
Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems?
If Apple's computer operating system and the Linux operating system were not considered close substitutes for Windows.
How does the prisoner's dilemma compare to the outcome of a repeated game?
In a repeated game, firms are more likely to charge a high price and receive high profits.
When a firm's demand curve slopes downward and the firm decides to cut price, which of the following happens?
It sells more units but receives lower revenue per unit.
Which of the following statements applies to a monopolist but NOT to a perfectly competitive firm at its profit maximizing output?
Marginal revenue is less than price.
Who is in charge of enforcing them?
The Federal Trade Commission The Antitrust Division of the U.S. Department of Justice
The table below shows the quantity of output produced by a monopoly that consumers demand at each price and the monopoly's cost structure. What are the profit-maximizing price and quantity?
The monopoly should produce 55 units of output and charge a price of $ 300300. (Enter your responses as integer values.) What is the monopoly's profit? The monopoly's profit is $ 816816.
Suppose Securitex is a small firm that has developed a new anti-theft device for automobiles. Securitex currently sells its device online and earns profit of $99 million per year. GM is considering installing Securitex's system on its automobiles. The two firms first, however, must bargain over what price GM will pay Securitex for its software. GM chooses how much to offer Securitex for its system and then Securitex chooses whether to accept the offer and install its system on GM's automobiles. The strategies and corresponding profits for GM (GM) and Securitex (SX) are depicted in the decision tree to the right. Profits are in millions, and GM's payoffs represent the additional profit it can earn on its automobiles with Securitex's anti-theft system. What is the subgame-perfect equilibrium?
The subgame-perfect equilibrium is for GM to offer a lowlow price and for Securitex to accept the offer.
Suppose only two airlines, United and Delta, provide flights between Atlanta and KnoxvilleKnoxville. Both firms must choose whether to advertise or not advertise. The advertising strategies with corresponding profits are depicted in the payoff matrix to the right. United Airline's profits are in blue and Delta Airline's are in red. United Airline's dominant strategy is to advertise , and Delta Airline's dominant strategy is to advertise . What is the Nash equilibrium for this game?
United and Delta will both choose to advertise.
The graph to the right depicts the demand for cable subscriptionscable subscriptions from a local cable companylocal cable company along with the average total cost and marginal cost of producing cable subscriptionscable subscriptions. Suppose the local cable companylocal cable company is a monopoly.
What is the profit-maximizing quantity of cable subscriptionscable subscriptions? 4848 thousand subscriptions per monththousand subscriptions per month. (Enter a numeric response using an integer.) What is the corresponding profit-maximizing price? $ 9696 per subscriptionper subscription. (Enter a numeric response using a real number rounded to two decimal places.) Calculate the local cable companylocal cable company's profits. $ 432.00432.00 thousand per monththousand per month. (Enter a numeric response using a real number rounded to two decimal places.)
Refer to the diagram to the right which shows the demand and cost curves facing a monopolist. If the firm's average total cost curve is ATC2, the firm will
break even.
Arbitrage is
buying a product in one market at a low price and reselling it in another market at a higher price.
Three examples of oligopolies in the United States are industries that produce or sell
computers, athletic footware, and cigarettes.
What is price discrimination? Price discrimination is when
firms charge a higher price for a product when it is first introduced and a lower price later. B. firms charge a higher price to customers whose demand is less elasticwhose demand is less elastic and a lower price to consumers whose demand is more elasticwhose demand is more elastic. C. firms charge each consumer a different price equal to that consumer's willingness to pay.
What does the law of one price assert? According to the law of one price,
identical products should sell for the same price everywhere.
Price leadership is a form of ____________ in which one firm in an oligopoly announces a price change and the other firms in the industry match the change.
implicit collusion
For several years, a professor at Johns Hopkins University had been using the following grading scheme for his final exam: He would give an A to the student with the highest score. The grades of the remaining students were then based on what percentage their scores were of the top student's score. In the fall of 2012, the students in the class came up with the idea of boycotting the final exam. They stood in the hallway outside the classroom but did not enter the room to take the exam. After waiting for a time, the professor cancelled the exam and, applying his grading scale, gave everyone in the class an A on the exam. An article in the New York Times about this incident observes: "This is an amazing game theory outcome, and not one that economists would likely predict." Source: Catherine Rampell, "Gaming the System," New York Times, February 14, 2013. Game theory indicates the students' strategy was unlikely to work because
it is difficult to get a group of people to agree and not defect.
Suppose there are four dominant manufacturers of toilet tissue. The largest of these manufacturers announces that it will raise its prices by 15 percent due to higher paper costs. Within three days, the other three dominant toilet tissue manufacturers announce similar price hikes. The decision among the four companies to raise prices would
not be explicit collusion unless there was clear evidence of an agreement among the manufacturers.
Cost-plus pricing is
not consistent with a firm maximizing profits because it ignores demand.
An industry is a natural monopoly when
one firm can satisfy the entire market at the lowest cost.
What was the primary reason why Alcoa at one time faced limited competition due to barriers to entry? The primary reason that Alcoa faced limited competition was because
only Alcoa had access to most of the bauxite
