ECON final TAMU

Sequential games are used to analyze

situations in which one firm acts and other firms respond.

Assume that a monopolist practices perfect price discrimination. The firm will produce an output rate

that is equal to the efficient level of output.

Market power refers to

the ability of a firm to charge a price higher than the marginal cost of production.

A perfectly competitive firm cannot practice price discrimination because

the firm can only charge the market price.

One requirement for a firm pursuing a price-discrimination strategy is the ability to segment the market for its product. This means that

the firm must be able to divide the market in a way that makes arbitrage impossible.

If a natural monopoly regulatory commission sets a price where marginal cost is equal to demand

the firm would incur a loss.

A four-firm concentration ratio measures

the fraction of an industry's sales accounted for by the four largest firms.

The demand curve for a monopoly's product is

the market demand for the product.

Successful price discrimination cannot take place if

the market is perfectly competitive.

A possible advantage of a horizontal merger for the economy is that

the merged firm might reap economies of scale which could translate into lower prices.

Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising budget to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 2 shows the payoff matrix for this advertising game. 16) Refer to Table 2. If Alistair assumes that Baine would increase its advertising budget, what should it do?

Alistair should also increase its advertising budget.

Refer to Figure 1. 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.

Refer to Table 2. What is the Nash equilibrium in this game?

Both Alistair and Baine increase their advertising budgets.

Refer to Table 3. If the firms cooperate, what prices will they select?

Both firms will select a high price.

Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 3 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. 21) Refer to Table 3. If the firms act out of individual self-interest, which prices will they select?

Both firms will select a low price.

Refer to Figure 1. Suppose Plato Playhouse price discriminates. Which of the following statements is true?

By charging two different prices, the theatre company essentially allows those willing to pay higher prices to subsidize those who are not.

Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?

Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.

Refer to Figure 1. What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium?

Either offer of $30 or $40 per copy of the software package is accepted and these two equilibria are subgame-perfect equilibria.

Refer to Figure 2. The deadweight loss due to a monopoly is represented by the area

FHE.

Refer to Table 4. Which of the following statements is true?

Given that Perfect offers same-day delivery, Florabunda's best strategy is to offer same-day delivery.

Refer to Table 1. What is the Nash equilibrium in this game?

Godrickporter increases its advertising budget, but Star Connections does not.

Refer to Figure 2. Does it make sense for Netflix to lower its price in order to deter Spotify's entry into the streaming video market?

No, because Netflix will make a higher profit by keeping its subscription price unchanged, whether Spotify enters the market or not.

Netflix (N) was one of the first companies to offer streaming video services and is still considered a leader in the industry. Spotify (S) offers a music streaming service and is considering entering the video streaming business. At this point, Netflix has to decide whether or not to lower its subscription price in order to deter Spotify's entry into the market. Figure 2 shows the decision tree for the Netflix-Spotify entry game. 30) Refer to Figure 2. If Netflix lowers its price, will this deter Spotify from setting up a streaming video service?

No, because Spotify will make a profit if it competes with Netflix.

Refer to Table 1. Is there a dominant strategy for Star Connections and if so, what is it?

No, its outcome depends on what Godrickporter does.

Refer to Figure 1. In a real world situation involving Rainbow Writer and Odeon, what scenario below might permit Rainbow Writer to rationally refuse an offer from Odeon of $40 per copy of the software package?

Odeon's competitors are also interested in bundling Rainbow Writer's software.

Assume Table 2 gives the monthly demand and costs for subscriptions to basic cable for Comcast, a cable television monopoly in Philadelphia. 17) Refer to Table 2. If Comcast wants to maximize its profits, what price (P) should it charge and how many cable subscriptions per month (Q) should it sell?

P = $14; Q = 6

Refer to Table 1. What is the firm's profit-maximizing output and what is the price charged to sell this output?

P = $70; Q = 13

Refer to Figure 3. If the government regulates Erickson Power Company so that the firm can earn a normal profit, the price would be set at ________ and the output level is ________.

P2, Q3

Refer to Figure 3. The profit-maximizing price is

P3.

Refer to Table 3. If Brawny Juice selects a high price, what is Power Fuel's best strategy and what will Power Fuel earn as a result of this strategy?

Power Fuel will select a low price and earn $16 million.

Refer to Table 3. Which of the following is true?

Power Fuel's dominant strategy is to select a low price.

Refer to Figure 3. The firm would maximize profit by producing

Q2 units.

Refer to Figure 4. In the absence of any government regulation, the profit-maximizing owners of this firm will produce ________ units and charge a price of ________.

Q2 units; P2

Refer to Figure 4. If the regulators of the natural monopoly allow the owners of the firm to break even on their investment the firm will produce an output of ________ and charge a price of ________.

Q3 units; P4

Figure 4 shows the market demand and cost curves facing a natural monopoly. 34) Refer to Figure 4. Suppose the government regulates this industry in order to remove the inefficiency implied by the behavior of the profit-maximizing owners. If regulators require that the firm produces the economically efficient output level, what is this level and what price will be charged?

Q4 units; P6

Refer to Figure 3. What is the economically efficient output level and what is the price at that level?

Q4, P1

Rainbow Writer (RW) is a small online company selling a highly rated software package for engraving words onto objects produced by 3D printers. The firm currently earns a profit of $2 million per year selling its package exclusively on its Website. Odeon, the producer of the most popular 3D printers has expressed interest in bundling Rainbow Writer's product with its printers. Odeon expects that bundling would further boost its sales and allow it to sell its printers at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 1 shows the decision tree for the Rainbow Writer-Odeon bargaining game. Refer to Figure 1. How will Rainbow Writer respond to Odeon's two possible offers?

Rainbow Writer will accept either offer.

Refer to Figure 1. Suppose Plato Playhouse charges a single price of Pd for each

The company is selling more than the profit-maximizing quantity in the non-student market and less than the profit-maximizing quantity in the student market.

The payoff matrix shown above assumes that Perfect Plants and Florabunda Florist must decide whether to offer same-day delivery for their products. The matrix shows how much profit each firm will earn if it does or does not offer same-day delivery. The amount of profit for one firm depends on whether the other firm offers same-day delivery. 32) Refer to Table 4. Which of the following statements is true?

The dominant strategy for both firms is to offer same-day delivery.

Refer to Figure 4. Which of the following would be true if government regulators require the natural monopoly to produce at the economically efficient output level?

The firm will sustain persistent losses and will not continue in business in the long run.

Which of the following is a necessary condition for successful price discrimination?

The seller must possess market power.

Refer to Table 2. How are the firms in this advertising game caught in a prisoner's dilemma?

They would be more profitable if they refrained from advertising but each fears that if it does not advertise, it will lose customers.

A market comprised of only two firms is called a

duopoly.

Buying at a low price in one market and reselling at a higher price in another market will

eventually eliminate most, but not necessarily all, of the price differences.

The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called

game theory.

Oligopolies are difficult to analyze because

how firms respond to a price change by a rival is uncertain.

According to the law of one price

if transaction costs are zero, identical goods should sell for the same price everywhere.

All of the following are characteristics of game theory except

independence among players.

A characteristic found only in oligopolies is

interdependence of firms.

A horizontal merger

is a merger between firms in the same industry.

A firm that has the ability to control to some degree the price of the product it sells

is a price maker.

A merger between firms at different stages of production of a good

is a vertical merger.

When a monopolist engages in perfect price discrimination, the quantity produced and sold

is larger than the quantity produced and sold if it adopted a single price.

A dominant strategy

is one that is the best for a firm, no matter what strategies other firms use.

Arbitrage

is the act of buying an item at a low price and reselling the item at a higher price.

Price discrimination

is the practice of charging different prices to different customers when the price differences cannot be attributed to variations in cost.

From an economic perspective, price discrimination is desirable because

it enables firms to increase profits with no loss in economic surplus, and in turn, this could provide firms with incentives to engage in beneficial product innovation.

Suppose that a price-discriminating producer divides its market into two segments. If the firm sells its product at a price of $34 in the market segment with relatively less-elastic customer demand, the price in the market segment with more-elastic customer demand will be

less than $34.

The size of a deadweight loss in a market is reduced by

market price being close to marginal cost.

With perfect price discrimination there is

no deadweight loss.

Which of the following is not a way by which price-discriminating firms can segment a market?

on the basis of the supplier's marginal cost of production, for example requiring customers to pay a premium for customizing options

Refer to Figure 2. What prices are charged in the two markets?

price in market A = $10; price in market B = $15

Refer to Figure 1. What is the price charged in the two markets?

price in the student market = Pc; price in the non-student market = Pe

Refer to Figure 1. What is the quantity sold to each group of customers and what is the total quantity sold?

quantity sold to students = Qc; quantity sold to non-students = Qe; total sales = Qe + Qc

A Nash equilibrium is

reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.

Which of the following describes two-part tariff pricing?

A buyer pays an initial price for entrance to the market and an additional fee for each unit of the product purchased.

Refer to Figure 1. What is the amount of the monopoly's total cost of production?

$17,700

A monopoly producer of foreign language translation software faces a demand and cost structure as given in Table 1. 9) Refer to Table 1. What is the marginal revenue from the sale of the 12th unit?

$20

Refer to Figure 1. What is the amount of the monopoly's total revenue?

$20,400

Refer to Figure 1. What is the price charged for the profit-maximizing output level?

$34

Refer to Table 1. When producing the profit-maximizing output, what is the amount of the firm's profit?

$350

Refer to Table 2. If Comcast maximizes its profits how much profit will it earn?

$4

Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements comparing the conditions in the industry under both market structures is true?

A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good.

Figure 1 shows the demand and cost curves for a monopolist. 12) Refer to Figure 1. What is the profit-maximizing/loss-minimizing output level?

600 units

Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements regarding economic surplus in each market structure is true?

Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions economic surplus is less than under perfect competition and there is a deadweight loss.

Refer to Table 2. Does Alistair have a dominant strategy and if so, what is it?

Yes, Alistair should increase its advertising budget.

Refer to Table 1. Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $6,000 and Star Connections earns a profit of $12,000. Is there an incentive for any one firm to increase its advertising budget?

Yes, Godrickporter has an incentive to increase its advertising budget, but Star Connections does not.

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 1 shows the payoff matrix for this advertising game. 11) Refer to Table 1. Is there a dominant strategy for Godrickporter and if so, what is it?

Yes, Godrickporter should increase its advertising budget.

Refer to Table 3. If the two firms collude, is there an incentive for either to cheat on the collusion agreement?

Yes, either firm can gain if it, alone, cheats.

A monopolist faces

a downward-sloping demand curve.

What is a prisoner's dilemma?

a game in which players act in rational, self-interested ways that leave everyone worse off

A cartel is

a group of firms that enter into a formal agreement to fix prices to maximize joint profits.

Which of the following does not arise from price discrimination?

an increase in consumer surplus

A natural monopoly is most likely to occur in which of the following industries?

an industry where fixed costs are very large relative to variable costs

Refer to Figure 2. Compared to a perfectly competitive market, consumer surplus is lower in a monopoly by an amount equal to the

area P1P2EF.

Figure 3 shows the cost and demand curves for the Erickson Power Company. 26) Refer to Figure 3. Erickson Power is a natural monopoly because

average total cost is still declining when it intersects demand.

Consider the following actions undertaken by a firm: a. charging a higher price for products of higher quality b. charging different prices to different consumers for the same product when the variation cannot be explained by cost differences c. charging different prices for products of different qualities d. charging a lower price to match a competitor's price Which of the above will be considered price discrimination?

b only; charging different prices to different consumers for the same product when the variation cannot be explained by cost differences

Price discrimination is possible in which of the following market structures? a. perfect competition b. monopoly c. oligopoly d. monopolistic competition

b. monopoly c. oligopoly d. monopolistic competition

Refer to Figure 3. Why won't regulators require that Erickson Power produce the economically efficient output level?

because Erickson Power will sustain persistent losses and will not continue in business in the long run

A cooperative equilibrium results when firms

choose the strategy that maximizes the total game payoff.

Refer to Figure 2. What is the area that represents producer surplus under a monopoly?

the trapezium 0P1FH

Refer to Figure 2. What is the area that represents consumer surplus under a monopoly?

the triangle P0P1F

An oligopolist differs from a perfect competitor in that

there are no entry barriers in perfect competition but there are entry barriers in oligopoly.

A monopoly is characterized by all of the following except

there are only a few sellers, each selling a unique product.

Firms price discriminate

to increase profits.

Yield management is the practice of

using buyer data to rapidly adjust prices.

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.

A monopoly is a seller of a product

without a close substitute.