ECON 101: Quiz 7 CH. 14-15 ReView

For an industry to be considered an oligopoly, it must have:

a small number of interdependent firms.

(Table: Demand Schedule for Whatchamacallits) Use Table: Demand Schedule of Whatchamacallits. The marketfor whatchamacallits consists of two producers, Emma and Joshua. Each firm can produce whatchamacallits withno marginal cost or fixed cost. If these two producers formed a cartel, split the production of output equally, andacted to maximize total industry profits, each firm's output would be _____, and each firm's profit would be_____.

250; $1,250

_____ occurs if Toyota offers rebates on its hybrid car and Nissan follows suit.

Price leadership

Advertising is an economically productive activity and NOT a waste of resources because it:

can convey information about a product.

(Figure: Short Run and Long Run Profit in Monopolistic Competition) Use Figure: Short Run and Long Run Profitin Monopolistic Competition. If other firms see economic profits in the industry, they will enter it, and the demandcurve for firms already in the industry will shift to the _____; in the long run, this will result in an economic profit_____ zero and a price _____ ATC.

can decrease costs of production.

In the small Caribbean nation of Jamaica, large barriers to entry in the sugar industry explain why the two sugarproducers in the country:

can earn an economic profit in the long run.

Ms. Stewart's home help shop, a monopolistically competitive firm, sells a box for bread for $26. The firm'smarginal cost is $17, and its marginal revenue is $17. To maximize profit, Ms. Stewart should

do nothing, as this is the profit maximizing output.

(Figure: Monopolistic Competition in the Market for Cell Phones) Use Figure: Monopolistic Competition in theMarket for Cell Phones. The firm depicted in the figure produces the output that maximizes profits (minimizeslosses). In this case, the firm is earning:

economic losses.

A dominant-strategy equilibrium exists in a game when:

every player has a clear best action that does not depend on the actions of the other players.

Jessie is a student at the University of Alaska. She is not an economics major (too bad for her), but she does knowthat the market structure known as monopolistic competition is characterized by:

free entry and exit in the long run.

In a long-run equilibrium, firms in a monopolistically competitive industry sell at a price:

greater than marginal cost.

Suppose Abigail owns a monopolistically competitive retail business. Abigail's profit-maximizing price is $24, her profit-maximizing output is 1,800 units per week, and her profits are $3,600 per week. Abigail decides that she wants higher profits and therefore raises her price to $27. At the new price:

her marginal revenue will exceed her marginal cost.

(Figure: Payoff Matrix for Alex and Sybil) Use Figure: Payoff Matrix for Alex and Sybil. Alex and Sybil are theonly producers of frozen yogurt in their town. Every week, each decides how much frozen yogurt to produce forthe following week. The figure shows the profit per week earned by their two firms. The dominant strategy forSybil is:

high output.

A(n) _____ is an industry with only a small number of producers

oligopoly

Firms that operate in a monopolistically competitive industry face a downward-sloping demand curve as a result of:

product differentiation.

(Figure: Profit Maximization for Domino's Pizza in Monopolistic Competition) Use Figure: Profit Maximization forDomino's Pizza in Monopolistic Competition. Suppose that Domino's Pizza introduces a technical innovation thatreduces individual franchise costs, so that ATC falls to ATC'. Before the cost reduction, the franchise's economic profit at the profit-maximizing quantity was:

$0.

(Figure: Profit Maximization for Domino's Pizza in Monopolistic Competition) Use Figure: Profit Maximization forDomino's Pizza in Monopolistic Competition. Suppose that Papa John introduces a technical innovation thatreduces individual franchise costs, so that ATC falls to ATC'. After the cost reduction, the firm's economic profit atthe new profit-maximizing quantity is:

$1,500.

(Table: Demand Schedule for Whatchamacallits) Use Table: Demand Schedule of Whatchamacallits. The marketfor whatchamacallits consists of two producers, Emma and Joshua. Each firm can produce whatchamacallits withno marginal cost or fixed cost. Suppose that these two producers have formed a cartel, agreed to split productionof output evenly, and are maximizing total industry profits. If Emma decides to cheat on the agreement and sell 100more whatchamacallits, the market price of whatchamacallits will be:

$4.

(Table: GoGo Gas and Fanny's Fantastic Fuel) Use Table: GoGo Gas and Fanny's Fantastic Fuel. The tableshows a payoff matrix for GoGo Gas and Fanny's Fantastic Fuel in a small town. Each firm can set either a highprice or a low price, and customers view both gas stations as nearly perfect substitutes. Profits in each cell of thepayoff matrix are given as (GoGo's profit, Fanny's profit). If each firm sets the price independently, the Nashequilibrium outcome will be:

$50, $50.

Suppose an industry is composed of seven producers with market shares given in the table below. A) Compute the Herfindahl-Hirschman index (HHI) for this market. B) If firms B and C merge, how will this affect the HHI, all else equal? C) If, instead, firm A splits into two equal-sized competing firms, how would this affect the HHI, all else equal? Support your answers with specific calculations. Do your results make sense?

A) HHI = 1,600 + 400 + 225 + 100 + 81 + 25 + 1 = 2,432. B) After the merger of B and C, the HHI = 1,600 + 1,225 + 100 + 81 + 25 + 1 = 3,032. Yes, this makes sense.When two large rivals merge, the industry becomes more concentrated. C) After the split of firm A, the HHI = 400 + 400 + 400 + 225 + 100 + 81 + 25 + 1 = 1,632. This also makessense. If a large firm splits into competing firms, the industry becomes more competitive, and market power, asmeasured by the HHI, will fall.