Econ ch 5 quizzes

Which of the following statements are applicable to the Cournot model?

(ii) Industry profits in the Cournot model will be less than under a monopoly or a cartel. (iii) Profits in the Cournot model will be higher than under perfect competition. (iv) Nash equilibrium in the model occurs where the outputs chosen by each firm are consistent with each other. (v) Firms choose price and output in response to output set by rivals.

If a firm charges each customer the maximum price they are willing to pay for each unit of a product, this is called

1st degree

Critics of advertising contend that

A. advertising is intended to change people's preferences and to create wants that otherwise would not have existed. B. advertising may reduce competition by creating a barrier to the entry of new firms into an industry. C. the information content of advertising is minimal at best and deliberately deceptive at worst.

The assumption of free entry implies that

A. if firms in an industry are making excessively high profits, new firms are likely to enter the industry. Correct

Because of a patent, XYZ plc is the only manufacturer of milk cartons with a special re-closable pourer. XYZ plc can earn supernormal profit on the sale of milk cartons with these pourers

A. in the long run because entry into the industry by new firms is blocked. Correct

Third-degree price discrimination is only effective when

A. the markets can be separated. Incorrect B. the firm can set its price. C. demand elasticity differs in each market.

E-commerce is a good example of a very competitive market because

A. there are many firms. B. low start-up costs generally make entry easy. C. e-commerce increases available information.

Game theory is applied to

B. strategic behaviour based on assumptions about rivals' behaviour. Correct

In monopolistic competition, the costs of less than optimal production may be counteracted by

B. the gain in economic welfare that results from production differentiation.

Which of the following statements is FALSE? Select one:

C. For a market to be contestable, the product must be produced with a labour intensive technology. Correct

Which of the following defines a first-mover advantage?

C. When a firm gains from being the first one to take action. Correct

Market power is

C. a firm's ability to raise price without losing all demand for its product. Correct

A market is defined as perfectly contestable if

D. entry to it and exit from it are both costless. Correct

If firms in a duopoly make price and output decisions on the assumption that its rival will produce a particular quantity, this is called the

cournot model

If a firm experiences lower average costs of production as a consequence of producing a range of products , the firm is experiencing

economies of scope

Which type of barrier to entry would allow an electricity distribution company to maintain a monopoly over the local supply of electricity?

legal controls

Under perfect competition, a firm will increase output if

marginal cost is less than price. Correct

To maximise profit, a monopolistically competitive firm will produce where

marginal revenue equals marginal cost.

If a game player chooses a strategy in which the best outcome is better than the best outcome of other strategies, this is called

maximax.

if a game player chooses a strategy in which the worst outcome is better than the worst outcome of all other possible strategies, this is called

maximin

For a monopoly to be a natural monopoly

maximum economies of scale must be realised at an output that is more than half of total demand in the market.

In the short run, a monopolistic competitor

may make either positive, negative or zero economic profits.

In London there are a large number of retail clothing stores. Each store is slightly different from every other store. Retail clothing stores are an example of what market structure?

monopolistic competition

Economists would expect to find excess production capacity under conditions of

monopolistic competition. Correct

When ________ substitutes exist, a monopolist has ________ power to raise price.

more; less

The condition for long-run equilibrium in a monopolistically competitive industry is

price equals long-run average cost.

In monopolistic competition at the profit maximising price,

price is greater than marginal revenue.

Paul's bakery, a monopolistically competitive firm, is incurring a loss. This firm will continue to produce as long as

price is greater than or equal to average variable cost.

A monopolistically competitive firm that is incurring a loss will shut down if

price is less than average variable cost.

Which of the following aspects of oligopoly is NOT in the public interest?

prices are set collusively

We call a game in which players can only choose strategies which are better for themselves if they are allowed to collude, the

prisoner's dilemma

We call a game in which players, by choosing strategies which are best for themselves in the absence of collusion, end up in a worse situation than if they were able to collude

prisoner's dilemma

Relative to a competitively organised industry, a monopoly

produces less output, charges higher prices and earns supernormal profit.

If you were running a firm in a perfectly competitive industry you would spend most of your time making decisions about

production

When firms collude on price they also often have to agree on

quotas

A ________ is used to show how a firm's optimal output varies according to the output chosen by its rival.

reaction function

If a firm bases its price decisions on the assumption that its rivals will produce a particular quantity, it will end up making

supernormal profit, but less than if it were a monopoly.

North West Water has a monopoly over local water supply. If North West Water is producing where marginal revenue is less than marginal cost,

the firm could increase profits by reducing output.

If a monopolist produces output in more than one plant, output should be distributed among those plants so that

the marginal revenue of producing the last unit of output in each plant is the same for all plants.

If the industry is an oligopoly, the price charged and the quantity produced are likely to be the same as if the industry were a monopoly if

the oligopolists collude.

Which of the following defines the Nash equilibrium?

the position resulting from everyone making their optimal decision based on their assumptions about their rivals' decisions.

For a monopolist to sell more units of output without increasing advertising

the price of the output must be reduced.

The table in Box 5.4 of Sloman and Garratt's Essentials of Economics (sixth edition) indicates that both parties will be better off when they

trust each other.

Which of the following defines countervailing power?

when the power of an oligopolistic/monopolistic seller is offset by powerful buyers, which can prevent the price from being pushed up

In June 2000, a US Federal Judge ruled that Microsoft should be split into two in order to

E. prevent it operating as a monopoly. Correct

If firms follow the prices of a firm that is thought to be typical of the industry, this is called

barometric price leadership.

As more firms enter the market, we would expect a monopolistic competitor's demand curve to

become more elastic

In monopolistic competition, firms achieve some degree of market power

by producing differentiated products.

Dickens Light, an unregulated monopolist, determines the price it will charge by

finding the point on the demand curve that corresponds to the profit-maximising level of output.

Imperfect competition occurs when

firms are neither monopolies nor perfect competitors.

In a monopolistically competitive industry,

firms are small relative to the total market.

Monopolistic competition differs from perfect competition primarily because under monopolistic competition

firms can differentiate their products.

If firms in a monopolistically competitive industry are incurring losses, then in the long run

firms will leave this industry until the remaining firms are earning just a normal profit.

The long-run equilibrium outcomes in monopolistic competition and perfect competition are similar, because in both market structures

firms will only earn a normal profit.

A good example of a perfectly competitive industry is

fresh vegetables.

Which of the following is NOT a characteristic of monopolistic competition?

mututal interdependence

It would be inefficient to break up a

natural monopoly.

For a monopolist, if total revenue increases as output decreases, then marginal revenue is

negative

You are given the following information about an oligopolistic industry: (i) there are few firms in the industry; (ii) there is not a dominant supplier; (iii) the firms' products are close substitutes for each other. Which combination of these features is likely to encourage collusion between the firms in the industry? Select one:

(i) there are few firms in the industry; (iii) the firms' products are close substitutes for each other.

The amount of output that a monopolist supplies depends

. on both its marginal cost curve and the demand curve that it faces. Correct

A 5-firm concentration ratio shows

: the sales of the five largest firms, as a proportion of the total industry's sales.

Which of the following is NOT an advantage of perfect competition?

A firm cannot achieve economies of scale.

Which of the following is LEAST likely to be considered by a firm in an imperfectly competitive industry?

A wheat farmer in East Anglia

Which of the following are limitations of the theory of monopolistic competition?

A. Information may be imperfect. B. It doesn't consider a firm's decisions on advertising and product development. C. We can't derive the demand curve for the industry. D. Firms differ from each other in size, cost structure and the product they produce.

E-commerce is introducing more competition to markets by

A. making larger markets available. B. lower start-up costs for firms. C. greater information on product availability and quality. D. introducing greater price transparency.

In a multiple move game, firms will take account of

A. rivals' past actions. B. rivals' anticipated reactions to the firm's next move.

Which one of the following would NOT be a barrier to firms entering an industry?

An upward-sloping long-run average cost curve.

In which market structure could price discrimination NOT occur?

B. perfect competition Correct

'Countervailing power' is a term used to describe

B. powerful buyers who keep down the prices of powerful producers. Correct

Which one of the following strategies chosen by an oligopolist would be classed as a maximin strategy?

Choosing the policy whose worst outcome is better than the worst outcomes of all alternative policies.

The Nash equilibrium in this game is in cell:

D

The fast food industry is NOT considered perfectly competitive because

E. the firm's products are differentiated. Correct

Which one of the following statements is NOT applicable to the Bertrand model?

Firms make only a small amount of supernormal profit when the market is in equilibrium.

The long-run equilibrium outcomes in monopolistic competition and monopoly are similar in which respect?

Firms produce at a point where price is greater than marginal cost.

The pizza delivery industry is oligopolistic in a particular town. Joe's pizzeria raises its prices by 10% but all the other pizzerias in town keep their prices the same. Which of the following is the most likely to occur?

Joe's pizzeria will lose some of its customers.

Which of the following is NOT true of the long-run equilibrium under monopolistic competition?

LRAC is at its lowest point.

You live in a small town and there is only one Indian restaurant in the town. The next Indian restaurant is 30 miles away. Is this Indian restaurant a monopoly?

No, because there are close substitutes for the Indian restaurant such as other restaurants in town, and Indian food sold in the local supermarket.

Which of the following statements about perfect competition is FALSE?

Perfectly competitive firms are productively and allocatively efficient in the short run.

In the dominant firm price leadership model, the dominant firm will produce where

The correct answer is: marginal revenue equals marginal cost.

A firm charging different buyers different prices for the same product is practising

The correct answer is: price discrimination.

If a monopolist faces a lower MC curve than a perfectly competitive firm, which of the following may occur?

The monopolist will produce at a lower price than it would were it to face the MC curve of the perfectly competitive firm.

Which of the following statements about contestable markets is FALSE?

The threat of competition will be greater the higher the entry costs to the industry.

Monopolies may become inefficient without competitive pressure resulting in higher costs; this is sometimes called

X inefficiency

An industry that realises such large economies of scale in producing its product that single-firm production of that good or service is most efficient is called

a natural monopoly

The feature that distinguishes monopolistic competition from perfect competition is that monopolistically competitive firms are

able to differentiate their product.

'Average cost pricing' is the term used to describe the situation where a firm

adds a percentage mark-up to the average cost of production.

A dominant strategy, as seen by a firm, is one that is

always chosen no matter what the assumption about rivals' behaviour.

The basic social purpose of advertising, according to its supporters, is to

assist consumers in making informed, rational choices.

The term 'collusive oligopoly' is now given to what used to be called a

cartel

Two industries' 5-firm concentration ratios are 25% and 50%. This suggests that

competition is greater in the first.

The degree of competition in an industry can be calculated by measuring the

concentration ratio.

McCains, the frozen food producer, is a monopolistically competitive firm. McCains is currently selling frozen chips at a price of £2. McCains' marginal cost is 50 pence and marginal revenue is 50 pence. This firm should ________ to maximise profits.

continue to produce the same output level

In a perfectly competitive industry, the market demand curve is

downward sloping

Assume that the wool industry is a perfectly competitive industry. The market demand curve for wool is ________ and each individual wool producer's demand curve is ________.

downward sloping; horizontal

In the long run, monopolistically competitive firms will most probably

earn only a normal profit because entry into the industry is free.

For a natural monopolist, fixed costs are very ________, while marginal costs are relatively ________.

high; low

The bus service to the areas where you live is Select one:

highly contestable

Which of the following options would you classify the market for parcels delivery as?

highly contestable

A perfectly elastic demand curve implies that ceteris paribus

if a firm raises its price even a bit above the market price, it will sell nothing.

For situations where firms face competition but have control over price, economists use the term

imperfect competition

When are threats and promises important?

in multiple move games

The XYZ Computer company has a monopoly over the production of a specialised 3D colour plotter. The XYZ Computer company will find it profitable to reduce output as long as marginal revenue

is less than marginal cost.

Philippa grows lettuces commercially. This is a perfectly competitive business and Philippa faces a perfectly elastic demand curve. If she wants to try to increase revenues she should

keep the price the same but produce more to increase sales.

The Rare Bird Company has a monopoly in the sale of macaws in Ruritania. When the Rare Bird Company sells three macaws its marginal revenue is £30. When it sells four macaws its marginal revenue will be

less than 30

When a product or service is used by everyone in the market and all users benefit from having access to other users, this is an example of

network economies

A pure monopoly is an industry with a single firm that produces a product for which there are

no close substitutes and in which there are significant barriers to entry.

In the long run, in monopolistic competition there can be

no supernormal profits or losses.

Box 5.3 of Sloman's Essentials of Economics (sixth edition) considers OPEC, the oil cartel. A cartel is most likely to appear in which type of market structure?

oligopoly

The market structure in which behaviour of any given firm depends on the behaviour of the other firms in the industry is

oligopoly

The market structure where the best strategy for a firm depends on the choice of strategy by other firms is called

oligopoly

If a monopolistically competitive firm were making positive economic profits, we would expect

other firms to enter the market.

When a firm sets its prices below average cost in order to drive out competitors, this is called

predatory pricing

In the Bertrand model, firms make price and output decisions by making assumptions about their rivals'

prices

A monopolist which incurs a loss will

produce as long as total revenue is sufficient to cover variable costs.

A monopolistically competitive firm engaging in non-price competition should spend

sufficient such that the marginal costs of the product development and advertising equals the marginal revenue earned.

Which of the following is an advantage of monopoly over perfect competition, assuming in both cases, the MC curve is the same?

t may experience economies of scale.

When firms act as if they had an agreement this is called

tacit collusion.

For monopolistically competitive firms in long-run equilibrium,

the demand curve must be tangent to the long-run average cost curve at the profit-maximising quantity.

The extent to which a monopolist can exercise market power is limited by

the ease with which consumers can substitute other products for the monopolist's product.

A firm's supply curve under perfect competition in the short run will be equal to

the upward-sloping portion of its MC curve above its AVC curve.

Under perfect competition, super profits are competed away in the long run because

there are no barriers to entry

Which of the following is NOT a decision over which a perfectly competitive firm has control?

what price to charge

If a natural monopoly is broken up into smaller competing firms, the price of the product

will increase because the smaller competing firms will face higher average costs of production than the natural monopolist will.

As new firms enter a monopolistically competitive industry, the demand curve facing each existing firm

will shift to the left and become more elastic because there are now more substitutes for its product.

From society's point of view, a monopolist produces too little because

The correct answer is: price exceeds marginal cost.

Which of the following statements does NOT refer to a characteristic of a perfectly competitive industry?

The demand curve facing each firm slopes downward and to the right.

Which of the following make collusion more likely?

There are significant barriers to entry.

Assume that the wool industry is a perfectly competitive industry. For which one of the following reasons would it be impossible for a wool producer to make supernormal profits in the long run?

There is free entry into the wool industry.

If a firm bases its price decisions on the assumption that its rivals will charge a particular price, it will end up making

just normal profit

If a firm charges all young people one price and all old people another price for the same product, this is called

3rd degree price discrimination.

Stereo Wall Ltd has a monopoly over the installation of large domestic video wall systems. If Stereo Wall Ltd's total revenue from installing ten wall systems is £83,000 and its total revenue from installing eleven wall systems is £88,000 what is the marginal revenue of the eleventh wall system?

5000

When a monopolist sells two units of output its total revenue is £150. When a monopolist sells three units of output its total revenue is £210. When the monopolist sells three units of output, the price per unit is:

70

XYZ Computer Company has a monopoly on the sale of a specialised 3D colour plotter. If it sells two of these plotters its total revenue is £2,000, and if it sells three plotters its total revenue is £2,700. The marginal revenue of the third plotter sold is:

700

The kinked demand theory of oligopoly is not really a price theory since

: it does not explain how the market price is determined.

If firms in a monopolistically competitive industry are earning supernormal profits, then in the long run

: new firms producing close substitutes will enter the industry and this entry will continue until supernormal profits are eliminated.

Which one of the following is true for the marginal firm under perfect competition?

It can earn supernormal profits in the SR but only normal profits in the LR.

The following diagram shows cost and revenue curves of a monopolist. The firm will produce at an output where:

MC = MR

Which ONE of the following applies to a profit-maximising monopoly but NOT to a profit-maximising perfectly competitive firm?

Marginal revenue is not equal to average revenue.

A price that is commonly used in an industry is called a/an

benchmark price

In oligopoly, firms

by virtue of their size are able to influence price regardless of whether or not the product is differentiated or standardised.

For a monopolist, price

is greater than marginal revenue.

A perfectly contestable monopoly is one in which

entry and exit costs are zero.

Suppose we know that a monopolist is maximising its profits. Which of the following is a correct inference? The monopolist has

equated marginal revenue and marginal cost.

A firm in a perfectly competitive market has no control over price because

every firm's product is a perfect substitute for every other firm's product, and there is a very large number of firms in the industry.

Joe's pizzeria raised its prices by 10% but all the other pizzerias in town kept their prices the same. It thus decides to lower its prices by 10%, only to find that the other pizzerias lower theirs too. This shows that the MR for Joe's pizzas

has a vertical section at the current output. Correct

Monopolistic competition differs from perfect competition primarily because

in monopolistic competition, firms can differentiate their products.

A monopolist will NOT produce

in the inelastic portion of its demand curve.