Managerial Economics quizzes 8-10

In a monopoly where the marginal revenue and price are, respectively, given by $0.50 and $2, the price elasticity of demand is

-4/3

Which of the following industries is best characterized as monopolistically competitive ?

cereal

Firm 1 and firm 2 compete as a Cournot oligopoly. There is an increase in marginal cost for firm 1. Which of the following is not true?

Both firm 1's and firm 2's reaction functions are shifted.

There are many different models of oligopoly because

beliefs play an important role in oligopolistic competition and oligopoly is the most complicated type of market structure.

Refer to the accompanying normal-form game of advertising depicted here. Firm A Firm B Advertise Do Not Advertise Advertise $0, $0 $175, −$100 Do Not Advertise −$100, $175 $125, $125 Suppose there is a 20 percent chance that the advertising game depicted shown above will end in the next period. What is the present value to firm B of cheating on the collusive strategy?

$175

Consider two firms competing to sell a homogeneous product by setting price. The inverse demand curve is given by P = 20 − Q. Firm 1 has MC1(Q1) = 2 and firm 2 has MC2(Q2) = 2.25. Based on this information, we can conclude that the market price will be

$2 and firm 1 will produce 18 units and firm 2 will produce 0 units.

A new firm enters a market that is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms coexist after the entry?

$20

Two identical firms compete as a Cournot duopoly. The demand they face is P = 600 − 5Q. The cost function for firm 1 is C1(Q1) = 20Q1, and the cost function for firm 2 is C2(Q2) = 40Q2. The equilibrium price charged in the market is

$220

A monopoly has two production plants with cost functions C1 = 50 + 0.1Q12 and C2 = 30 + 0.05Q22. The demand it faces is Q = 500 − 10P. What is the profit-maximizing price?

$31.25 per unit

The graph shows monopolistic firms cost and revenue curves. What is the marginal cost at the profit-maximizing output?

$40

You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q2. What level of profits will you make in the short run?

$40

The graph shows a monopolistic firms cost and revenue curves. What is the profit -maximizing price?

$70

The second- order condition for a monopoly maximizing its profit is

(d2R(Q)/dQ2) − (d2C(Q)/dQ2) < 0 or (dMR/dQ) < (dMC/dQ).

You are the manager of a firm that sells its product in a competitive market at a price of $60. Your firm's cost function is C = 33 + 3Q2. The profit-maximizing output for your firm is

10

Eric provides cheese (H) and milk (M) to the market with the following total cost function: C(H, M) = 10 + 0.4H2 + 0.2M2. The prices of cheese and milk in the market are $2 and $5, respectively. Assume that the cheese and milk markets are perfectly competitive. What output of milk maximizes profits?

12.5

You are the manager of a firm that sells its product in a competitive market at a price of 200. Your firm's cost function is C = 40 + 5Q2. The profit-maximizing output for your firm is

20

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 120 − 6Q, where Q = Q1 + Q2. The marginal costs associated with producing in the two plants are MC1 = 2Q1 and MC2 = 4Q2. How much output should be produced in plant 1 in order to maximize profits?

6

You are the manager of a monopoly that faces a demand curve described by P = 63 − 5Q. Your costs are C = 10 + 3Q. The profit-maximizing output for your firm is

6

If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. Which of the following is true?

A secure strategy for firm A is to not advertise

Which of the following is (are) basic feature(s) of a perfectly competitive industry

All of the statements associated with this question are correct

Which of the following is a valid critique of the use of game theory in economics?

All of the statements associated with this question are correct

The profits of the leader in a Stackelberg duopoly

Are greater than those of the follower

Tom and Jack are the only two local gas stations. Although they have different constant marginal costs, they both survive continued competition. Tom and Jack do not constitute a

Bertrand oligopoly

A new firm enters a market which is initially serviced by a Cournot duopoly charging a price of $10. What will the new market price be should the three firms coexist after the entry?

Below $10

Which of the following are price-setting oligopoly models?

Bertrand

Juan and Bethany own the only two local florist shops. Although they have different constant marginal costs, they both survive continued competition. Juan and Bethany do not constitute a:

Bertrand oligopoly

Consider a market consisting of two firms where the inverse demand curve is given by P = 500 − 2Q1 − 2Q2. Each firm has a marginal cost of $50. Based on this information, we can conclude that consumer surplus in the different equilibrium oligopoly models will follow which of the following orderings?

CSBertrand > CSStackelberg > CSCournot > CSCollusion

One of the characteristics of a contestable market is that

Consumers react quickly to a price change

A slight increase in the marginal cost of a firm definitely leads to a reduction in its output if the firm competes in the

Cournot fashion and Bertrand fashion.

A monopoly has two production plants with cost functions C1 = 50 + 0.1Q12 and C2 = 30 + 0.05Q22. The demand it faces is Q = 500 − 10P. What is the condition for profit maximization?

MC1(Q1) = MC2(Q2) = MR(Q1 + Q2).

Which of the following statements is true?

When demand is elastic, marginal revenue is positive and total revenue increases as price falls.

Suppose that a monopolistically competitive market is at the long-run equilibrium. Based on this information, which of the following conclusions is not true?

Deadweight loss is zero

An important condition for a contestable market is that

Existing firms cannot respond quickly to entry by lowering their price

Which of the following is a correct statement about a Nash equilibrium in a two-player game?

Given another player's strategy, no player can improve her welfare by unilaterally changing her strategy.

Firms will try to signal superior quality of their goods by

Issuing warranties or guarantees

Samuel is the manager of a firm that sells its product in a monopolistically competitive market with (inverse) demand given by P = 40 − 0.5Q. The firm's cost function can be represented by C(Q) = 40 + 5Q2. What is the firm's marginal cost?

MC = 10Q.

Consider a Stackelberg duopoly with the following inverse demand function: P = 100 − 2Q1 − 2Q2. The firms' marginal costs are identical and are given by MCi = 2. Based on this information, the Stackelberg follower's marginal revenue function is

MR2(Q1,Q2) = 100 − 2Q1 − 4Q2.

Consider a Stackelberg duopoly with the following inverse demand function: P = 200 − 8Q1 − 8Q2. The firms' marginal costs are identical and are given by MCi = 6. Based on this information, the Stackelberg follower's marginal revenue function is

MR2(Q1,Q2) = 200 − 8Q1 − 16Q2.

Differentiated goods are a feature of

Monopolistically competitive markets

A coordination problem usually occurs in situations where there is

More than one Nash equilibrium

Suppose that you are a manager. You are considering whether or not to monitor employees with the payoffs in the normal-form accompanying game.

None of the answers is correct

Which of the following is true?

None of the answers is correct

Consider a Stackelberg duopoly with the following inverse demand function: P = 100 − 2Q1 − 2Q2. The firms' marginal costs are identical and are given by MCi = 2. Based on this information, the Stackelberg leader's reaction function is

None of the provided answers

Collusion is

Not found among the provided answers

An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which of the following is most likely?

Other firms match price increases but do not match price reductions.

Let the demand function for a product be Q = 50 − 5P. The inverse demand function of this demand function is

P = 10 − 0.2Q.

Which of the following is true under perfect competition

P = MR

Consider a market consisting of two firms where the inverse demand curve is given by P = 500 − 2Q1 − 2Q2. Each firm has a marginal cost of $50. Based on this information, we can conclude that equilibrium price in the different oligopoly models will follow which of the following orderings?

PBertrand < PStackelberg < PCournot < PCollusion

The source(s) of monopoly power for a monopoly may be

Patents and economies of scale and scope

You are a manager for a monopolistically competitive firm. From experience, the profit-maximizing level of output of your firm is 100 units. However, it is expected that prices of other close substitutes will fall in the near future. How should you adjust your level of production in response to this change?

Produce less than 100 units

Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 − 3Q. The cost function for each firm is C(Q) = 4Q. The outputs of the two firms are

Q1 = 16 and Q2 = 8.

Based on the accompanying game, what are the secure strategies for player 1 and player 2? Player 1 Player 2 t1 t2 S1 10,15 15,8 S2 −10,7 10,20

S1 and t2

Annie owns a florist and operates in a perfectly competitive market. Suppose that price per unit is $12. If at the point where MC and MR curves intersect, ATC = $18 and AVC = $15, then Annie will

Shut down in the short run

An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What kind of oligopoly does the firm most likely belong to?

Sweezy

Which of the following is not an important determinant of collusion in pricing games?

The importance and magnitude of the item in a consumers' budget

Which of the following is true about Sweezy oligopoly

The marginal revenue function has a downward "jump" or "discontinuity."

"Monopolistic competition is literally a kind of competition. Hence, there is no deadweight loss in a monopolistically competitive market."

The statement is incorrect

A market is not contestable if

There are sunk costs

Which of the following is a feature of a contestable market

There is a single firm in the market serving many consumers and the market price is equal to marginal cost.

Which of the following is not true for a monopolistically competitive firm in the long run?

They produce at the output level where ATC is minimum.

Game theory suggests that, in the absence of patents, the privately motivated innovation decisions of firms might lead to

Too little innovation

Which of the following industries is best characterized as monopolistically competitive

Toothpaste

Suppose University Cereal operates in a monopolistic competition market and its cost and revenue curves are represented in the figure. Which of the following statements is true at the profit-maximizing production level?

University Cereal is having zero profit since its total cost equals total revenue and is in long-run equlibrium.

Chris raises cows and produces cheese and milk because he enjoys

economies of scope

Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million. If you and your rival plan to be in business for 10 years, then the Nash equilibrium is

for each firm to advertise every year.

If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. If you and your rival plan to be in business for 10 years, then the Nash equilibrium is

for each firm to not advertise in any year.

Two firms produce different goods. Firm 1 has a positive-sloped reaction function. This can be explained best by

heterogeneous product Bertrand oligopoly.

In the accompanying game, firms 1 and 2 must independently decide whether to charge high or low prices. Firm 1 Firm 2 High Price Low Price High Price (10,10) (5,−5) Low Price (5,−5) (0,0) A dominant strategy for firm 1 is

high price.

If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever), then a Nash equilibrium is for each firm to

never advertise.

Ed just finished an empirical study of oligopoly. He found the following result: "In the examined industry, a firm's demand curve is such that other firms match price increases but do not match price reductions." What kind of oligopoly is the examined industry?

none of the provided answers

There is a market supply curve in a

perfectly competitive market.

The Bertrand model of oligopoly reveals that

perfectly competitive prices can arise in markets with only a few firms.

Consider a Cournot duopoly with the following inverse demand function: P = 50 − 0.2Q1 − 0.2Q2. The firms' marginal costs are identical and are given by MCi(Qi) = 2. Based on this information, firm 1 and 2's reaction functions are

r1(Q2) = 120 − 0.5Q2 and r1(Q2) = 120 − 0.5Q1.

Which of the following is not an important determinant of collusion in pricing games?

the average fixed cost to produce the product

If you advertise and your rival advertises, you each will earn $3 million in profits. If neither of you advertises, you will each earn $7 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $10 million and the non-advertising firm will earn $1 million. If you and your rival plan to be in business for 15 years, then the Nash equilibrium is for

you and your rival to advertise every year.

Firm A Firm B C D A 0,7 5,2 B 5,1 0,8 Which of the following represents firm B's strategies?

{C, D}

Which of the following correctly measures the profit of a monopoly?

π = TR − TC and π = (P − ATC)Q.

Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 − 3Q. The cost function for each firm is C(Q) = 4Q. The profits of the two firms are

π1 = $384 and π2 = $192.