Economics Test 3

Suppose that in the previous problem the cost of a radio commercial rises to $4,756.91. Then, the firm should:

Realize that it is using the optimal combination of advertising media.

The kinked demand curve model was developed to help explain:

Rigidities observed in prices in oligopolistic industries.

Which of the following does NOT characterize monopolistic competition?

"Products are standardized". Because the following DO characterize monopolistic competition: It is easy to enter this industry, Monopoly profits tend to disappear as entry occurs and The demand curve of each firm is downward sloping.

An oligopoly is characterized by:

- A relatively small number of firms. - Either differentiated or undifferentiated products. - Actions of any individual firm will affect sales of other firms in the industry.

In the case of pure monopoly:

- One firm is the sole producer of a good or service which has no close substitutes. - One firm's profit is maximized at the price and output combination where marginal cost equals marginal revenue.

Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include:

- number and size distribution of sellers - size and frequency of orders - product heterogeneity

The maximum number of firms that can constitute an oligopolistic market structure is:

?

In an oligopolistic industry a barometric price leader is:

Any firm in an industry.

The profit-maximizing monopolist, faced with a negative-sloping demand curve, will always produce:

At an output short of that output where average costs are minimized.

For a typical competitive firm, the price in the long run equilibrium will tend to:

Be equal to average cost

Of the following, which is not an economic rationale for public utility regulation?

Constant cost industry.

The largest problem faced in cartel pricing agreements such as OPEC is:

Detecting violations of quota barriers by cartel participants.

In the next two questions, suppose that a firms uses two advertising media, T.V. and radio. At the current level of advertising, marginal sales revenue generated from a 30 second T.V. commercial is $127,000. The cost of the T.V. commercial is $44,950. Let the marginal sales revenue generated from a 30 second radio commercial be $13,440. The radio commercial costs $1,800. Presently, the firm should:

Expand radio commercials relatively more than T.V. commercials.

When free entry exists, the pure competitive model suggests that economic profit will always be equal to zero.

False. Economic profit will be zero in the long run, but in the short run, some firms may be making above normal economic profit.

It is more difficult to coordinate collusion for mature industries than industries that are relatively new.

False. Mature industries have greater social affiliations, and members of the industry know each other relatively well. This makes collusion more likely.

When the products are standardized, we can be sure that the industry will behave competitively.

False. Oligopolies may have differentiated or standardized products. There are more characteristics than just "standardized" products to make an industry competitive.

In the long run, firms operate at the lowest point of their average cost curve in competition and in monopolistic competition.

False. The do not generally operate at the lowest point of their average cost curve in monopolistic competition.

In the kinked demand curve theory, we expect rivals to copy price increases, but not to copy price cuts.

False. They copy price cuts, but do not follow price increases.

Collusion is harder to achieve if the costs of the firms in the group are similar.

False. When costs are similar, it is easier to get firms to agree on a price for the industry.

One virture of competition is that the division of output produced across firms is efficient. Suppose the marginal cost curves of two firms are: MC1 = 6 + 2Q1 andMC2 = 1 + 3Q2 Suppose that the sum of the outputs of firm 1 and firm 2 equals 100, then the efficient output division in competition will be:

Firm one produces more than firm two. (Q1=59 and Q2=41, there MC1=MC2)

Which is NOT a characteristic of an industry that displays pure competition?

Heterogeneous product.

The long-run equilibrium price charged by the monopolistic competitor is

Likely to lie somewhere between the perfect competitor's price and the monopolist's price.

In long-run equilibrium, a monopolistically competitive firm will find

Marginal cost below average total cost.

A conclusion that monopolistic competition will be characterized by excess capacity

Means that the firm does not operate its plant at the minimum point of the long-run average cost curve.

A market where a large number of differentiated sellers comprise the entire industry is referred to as:

Monopolistic competition.

The existence of economic profits in an industry signifies that consumers want:

More resources invested in the industry.

If the firms in a monopolistically competitive "industry" made economic profit,

New firms would enter their "industry" until the profit was eliminated.

In a competitive industry, if costs of production rise, we anticipate that:

Price will rise and quantity will fall.

When the Bell Telephone Company was relieved of its monopoly over long distance telephone service, many competitors entered the market. Economic theory predicted that

Prices would fall and the quantity of service available would increase.

For a competitive firm, if MC is below price:

Raise output to raise profit.

In the long-run, firms in a monopolistically competitive industry will

Tend to cover costs, including normal profits.

The firm under monopolistic competition is likely to produce less and set a higher price than under perfect competition because

The firm faces a downward sloping demand curve.

There are many reasons why monopolies arise. Which of these is not one of them?

The industry may be a decreasing cost industry.

In barometric price leadership:

The leader hopes the price change will be accepted by others.

The demand function is given by QD = 3000 - 10P, and the supply function is given by Qs = 300 + 5P. What is the competitive price and quantity in this industry?

The price will be $180 and the quantity will be 1,200.

Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.

True

The Nite Lite International is a manufacturing company that makes night lights sold at hardware stores and drug stores. Night lights are sold in a highly competitive market directly to hardware stores at a wholesale price of $0.49 each. The retail price of night lights varies, but the typical price is $1.19. You have just become the new president of Nite Light International and have learned that at the present level of production, marginal cost is about $0.37. Being the fantastic economist that you are, your recommendation would be:

To keep the price charged to hardware stores at $0.49 for Nite Lites and try to expand the number of hardware stores that will sell our products. (the wholesale price of $0.49 is competitive. There is no reason to lower price.)

Industry A has a five equal-sized firms, whereas Industry B has five firms, but the largest firm has a 40% market share. Other things being equal, we would more likely see collusion succeeding in industry B.

True

The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms.

True

The notion of being a price taker competitive firm is that there is no pricing strategy because you cannot charge more than your competitors without losing all your customers.

True