Micro Final

Across most industries, oligopoly is far more common than either perfect competition or monopoly. True or false

True

In the 1960s and 1970s, General Motors often set prices for the new model year and Ford and Chrysler would follow. This was a form of tacit collusion known as price leadership. True or False

True

Oligopoly first became an issue in the United States in the second half of the nineteenth century, when the growth of railroads allowed for a national market for goods. True or False

True

Suppose all of the firms in an industry form a cartel and succeed in raising the price to the monopoly level by reducing output. Any single firm will find that it can increase its profits by cheating on the cartel agreement. True or False

True

Tacit collusion is most likely to occur if there are only a few firms in the industry. True or False

True

The term imperfect competition is used to refer to both oligopoly and monopolistic competition. True or False

True

Until 1890, trusts in which firms in an industry agreed to limit production and raise prices were legal in the United States. True or False

True

The Sherman Antitrust Act: A. was aimed at preventing the establishment of more monopolies and was the beginning of antitrust policy. B. introduced the HHI measure to industries. C. initially allowed firms to collude legally. D. allowed the establishment of trusts.

A. was aimed at preventing the establishment of more monopolies and was the beginning of antitrust policy.

(Figure: Payoff Matrix for Jake and Zoe) Look at the figure Payoff Matrix for Jake and Zoe, the only producers of slushies in their tourist town. Every week, each decides whether to price high or price low for the following week. The figure shows the profit per week earned by their two firms. Suppose the firms each decide to price high initially and adopt a tit-for-tat strategy for the following weeks. After a few weeks, Jakes profit would be _____ and Zoe's profit would be _____. A. $800; $800 B. $1,000; $1,000 C. $1,500; $200 D. $200; $1,500

B. $1,000; $1,000

(Figure: Monopolistic Competition III) The figure Monopolistic Competition III shows the demand, marginal revenue, marginal cost, and average total cost curves for Pat's Pizza Parlor, a monopolistic competitor in the food-to-go industry. Pat's Pizza Parlor's maximal profit will be: A. $0. B. $350. C. $700. D. $900.

B. $350

(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water Heaters. The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them. Suppose they agree to produce only 25 water heaters each. If Rheem cheats on the agreement and produces 30 water heaters, what is the quantity effect for Rheem? A. $1,000 B. $4,500 C. $2,000 D.$9,000

B. $4,500

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly, and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, the market price of gadgets will be: A. $4. B. $5. C. $6. D. $7.

B. $5

(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. Assume that the crude oil industry is a duopoly and the marginal cost of producing crude oil is zero. Suppose that the two firms are maximizing industry profit and splitting the profit evenly. If firm 1 decides to cheat and increase production by 10 more barrels, the price of crude oil will be: A. $0. B. $70. C. $80. D. $160.

B. $70

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly, and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, Margaret's profit will be _____, and Ray's profit will be _____. A. $1500; $1,000 B. $900; $600 C. $1,400; $1,000 D. $1,000; $1,400

B. $900; $600

(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water Heaters. The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them. Suppose they agree to produce only 25 water heaters each. If Rheem cheats on the agreement and produces 30 water heaters, what is the price effect for Rheem? A. -$1,000 B. -$2,500 C. $2,000 D. $1,000

B. -$2,500

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. If industry output is 300 gadgets produced by Margaret and 200 gadgets produced by Ray and if Ray decides to increase output by 100, industry output will be: A. 700 B. 600 C. 500 D. 400

B. 600

In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium is for: A. Neither to confess B. Both to confess C. One to confess and the other not to confess D. This game does not have a Nash equilibrium

B. Both to confess

Which of the following is CORRECT about celebrity spokespersons? A. Celebrities are better informed about the relative merits of different products than the rest of us. B. Celebrity advertising signals consumers that the product is reliable, because the firm is willing to pay the high fees associated with hiring a celebrity. C. Consumers assume that the celebrity has researched the product and that the claims being made on his or her behalf are true. D. None of the statements is correct.

B. Celebrity advertising signals consumers that the product is reliable, because the firm is willing to pay the high fees associated with hiring a celebrity.

One framework used to analyze strategic choices is: A. the tacit supply curve model. B. game theory. C. perfect competition. D. risk assessment.

B. Game theory

(Figure: The Restaurant Market) The figure The Restaurant Market shows curves facing a typical restaurant. Assume that many firms, differentiated products, and easy entry and exit characterize the restaurant industry. The restaurant shown here will maximize profits at quantity: A. Q1. B. Q2. C. Q3. D. Not enough information is given to answer the question.

B. Q2

An unwritten, unspoken agreement through which firms limit competition among themselves is called: A. satisfying. B. tacit collusion. C. overt collusion. D. a cartel.

B. Tacit collusion

_____ is the unwritten or unspoken agreement through which firms limit _____. A. A satisfying agreement; price increases B. Tacis collusion; competition among themselves C. Overt collusion; competition among rivals D. A cartel; price changes

B. Tacit collusion; competition among themselves

Both monopolists and cartel members will find that a drop in price leads to: A. a quantity effect that reduces total revenue. B. a price effect that reduces total revenue. C. a quantity effect that has no effect on total revenue. D. neither a price nor a quantity effect.

B. a price effect that reduces total revenue.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town. Gary summarizes his pricing strategy as, "I'll do to Frank what Frank did to me last time." This is an example of: A. a dominant strategy. B. a tit-for-tat strategy. C. an irrational strategy. D. product differentiation.

B. a tit-for-tat strategy.

Which of the following is most likely to be observed when firms engage mainly in nonprice competition? A. actively encouraging the sale of generic as opposed to brand-name products B. advertising and product differentiation C. discounts offered through coupons D. low interest rates for financing the purchase of big-ticket items

B. advertising and product differentiation

Monopolistic competition in an industry results in: A. overutilization of plants. B. chronic excess capacity. C. less advertising than in perfect competition. D. lower prices than in perfect competition.

B. chronic excess capacity

When the profit-maximizing level of output is less than the output associated with the minimum possible average total cost of production, a firm is said to have: A. economic profits. B. excess capacity. C. advertising. D. excess production.

B. excess capacity

Scenario: Payoff Matrix for Two Firms The following table provides the payoff matrix for two firms, firm A and firm B. They are the only two firms in the industry and can either compete or cooperate with each other, with the following profit results reflecting their actions. (Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms, firm A: A. has a dominant strategy to compete. B. has a dominant strategy to cooperate. C. has two dominant strategies. D. has no dominant strategy.

B. has a dominant strategy to cooperate.

Oligopoly is a market structure characterized by: A. independence in decision making. B. interdependence: each firm's decision affects the profit of the other firms. C. substantial diseconomies of scale. D. a large number of small firms.

B. interdependence: each firm's decision affects the profit of the other firms.

(Figure: Monopolistic Competitor) The firm shown in the figure Monopolistic Competitor may engage in advertising because: A. it does not know any better. B. its price is greater than its MC. C. its profits are negative. D. this will decrease its excess capacity levels.

B. its price is greater than its MC.

In many cities you can stay at a Holiday Inn in the downtown area, in a suburban community, or near the airport. These Holiday Inn establishments are examples of product differentiation by: A. type. B. location. C. quality. D. style.

B. location

Oligopolies are industries: A. dominated by one seller who shares market power equally with all other sellers. B. made up of few firms, each with some market power and therefore aware of their interdependence with the other firms. C. composed of many buyer and sellers, all of whom are price takers. D. that are the same as monopolistically competitive industries except that they sell a standardized product.

B. made up of few firms, each with some market power and therefore aware of their interdependence with the other firms.

The Herfindahl-Hirschman index is a measure of concentration found by: A. squaring the percentage market share of each firm in the industry. B. squaring the percentage market share of each firm in the industry and then summing the squared market shares. C. summing the percentage market shares of each firm in the industry. D. squaring the sums of the concentration ratios found in an industry survey of the largest four and largest eight firms.

B. squaring the percentage market share of each firm in the industry and then summing the squared market shares.

In the long run, monopolistically competitive firms tend to have: A. high economic profits. B. zero economic profits. C. negative economic profits. D. substantial economic losses.

B. zero economic profits.

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly, and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, how many gadgets will Margaret sell? A.500 B.200 C.300 D.600

C. 300

(Figure: Firms in Monopolistic Competition) In panel (A) of the figure Firms in Monopolistic Competition, the profit-maximizing quantity of output is determined by the intersection at point: A. K. B. P. C. N. D. O.

C. N

To be called an oligopoly, an industry must have: A. independence in decision making. B. a horizontal demand curve. C. a small number of interdependent firms. D. relatively easy entry and exit.

C. a small number of interdependent firms.

Firms in the monopolistically competitive movie industry face excess capacity. This means that there are _____ movies than the output at which _____ cost is minimized. A. fewer; marginal B. more; average total C. fewer; average total D. more; marginal

C. fewer; average total

(Figure: Monopolistic Competition III) The figure Monopolistic Competition III shows the demand, marginal revenue, marginal cost, and average total cost curves for Pat's Pizza Parlor, a monopolistic competitor in the food-to-go industry. In the long run, the demand curve for Pat's Pizza Parlor will shift to the _____ as competitors _____ the market. A. right; enter B. right; leave C. left; enter D. left; leave

C. left; enter

A trust: A. is a government agency that regulates natural monopolies. B. is the new organization that is formed when two firms merge. C. occurs when shareholders of the major companies in an industry turn over their shares to a board of trustees who then control all of the companies. D. is another name for a large insurance company.

C. occurs when shareholders of the major companies in an industry turn over their shares to a board of trustees who then control all of the companies.

A gas station operates in a monopolistically competitive market and is in short-run equilibrium. Suppose that a fixed cost for this firm decreases. As a result, the firm's price will _____, the firm's output will _____, and the firm's economic profit will _____. A. increase; increase; increase B. increase; increase; decrease C. stay the same; stay the same; increase D. decrease; stay the same; increase

C. stay the same; stay the same; increase

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. If these two producers formed a cartel, agreed to split production of output evenly, and acted to maximize total industry profits, total industry profit would be: A. $10,000. B. $5,000. C. $2,500. D. $1,600.

D. $1,600

A monopoly will have a Herfindahl-Hirschman index equal to: A. 1. B. 100. C. 1,000. D. 10,000.

D. 10,000

(Figure: Pricing Strategy in Cable TV Market I) In the figure Pricing Strategy in Cable TV Market I, the dominant strategy for CableSouth: A. is to advertise. B. is not to advertise. C. is to do whatever CableNorth does. D. does not exist.

D. Does not exist

(Figure: Payoff Matrix for Jake and Zoe) Look at the figure Payoff Matrix for Jake and Zoe, the only producers of slushies in their tourist town. Each week, each decides whether to price high or price low for the following week. The figure shows the profit per week earned by their two firms. According to the Nash equilibrium, Jake prices _____ and Zoe prices _____. A. High; high B. High; low C. Low; high D. Low; low

D. Low; Low

_____ occurs if Ford offers rebates on its most popular truck and Chevrolet follows A. Tacit collusion B. Nonprice competition C. Antitrust policy D. Price leadership

D. Price leadership

(Figure: Monopoly Profits in Duopoly) Given the duopoly industry illustrated in the figure Monopoly Profits in Duopoly, if each firm acted on the belief that it faced demand curve D2 and acted without consideration of the other, each firm would attempt to maximize economic profits by producing quantity _____ and setting price equal to _____. A. Q4; P1 B. Q4; P2 C. Q1; P4 D. Q2; P2

D. Q2; P2

(Figure: Monopoly Profits in Duopoly) The figure Monopoly Profits in Duopoly shows how an industry consisting of two firms that face identical demand curves (D1) can collude to increase profits. The market demand curve is D2. Which of the following assumptions is part of the analysis illustrated by the model? A. The two firms have identical marginal cost but different average total cost. B. The two firms sell differentiated products. C. The MR curve is not relevant to either firm's choices. D. The firms can act as a cartel and maximize their combined economic profit.

D. The firms can act as a cartel and maximize their combined economic profit.

The owners of the gas stations in a town are trying to set up a cartel that will raise the price of gasoline. Which of the following will INCREASE the chances that the cartel will fail because of cheating by the owners? A. All of the gas stations face the same cost B. There are only a few gas stations C. The gas stations are producing as much as they can D. The gas stations vary in terms of the services that they provide

D. The gas stations vary in terms of the services that they provide

When a firm responds to a rival's cheating by cheating and to a rival's cooperation by cooperating, that firm is practicing a _____ strategy. A. Dominant B. Trigger C. Conclusive D. Tit-for-tat

D. Tit-for-tat

Which of the following is a form of strategic behavior intended to influence the future actions of other players? A. Dormant strategy B. Trigger strategy C. Conclusive strategy D. Tit-for-tat strategy

D. Tit-for-tat strategy

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly, and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, Margaret's price effect will be a(n) _____ in profit of _____. A. decrease; $400 B. increase; $400 C. increase; $200 D. decrease; $200

D. decrease; $200

OPEC is: A. the Organization of Petroleum Exporting Countries. B. an international cartel made up of oil-producing countries. C. the cartel that was responsible for the large increases in crude oil prices in the 1970s. D. described by all of these answer choices.

D. described by all of these answer choices.

Because most communities have a large number of similar but not identical substitutes, the market for financial planners is best considered to be: A. a monopoly. B. an oligopoly. C. perfect competition. D. monopolistically competitive.

D. monopolistically competitive

General Snacks is a typical firm in a market characterized by monopolistic competition. Initially, the market is in long-run equilibrium, and then there is an increase in the market demand for snacks. In the short run the price of snacks will _____ and the output of snacks will _____. A. fall; fall B. remain unchanged; remain unchanged C. rise; fall. D. rise; rise

D. rise; rise

Oligopoly is a market structure that is characterized by a _____ number of _____ firms that produce _____ products. A. large; relatively small and independent; identical B. small; independent; identical or differentiated C. large; relatively small and independent; differentiated D. small; interdependent; identical or differentiated

D. small; interdependent; identical or differentiated

A trust is a government agency that enforces laws limiting the power of oligopolies. True or False

False

A trust is the organization that is formed when two large companies merge. True or False

False

Tacit collusion is likely to occur when firms have different market shares. True or False

False

The purpose of the trusts established in the United States in the late 1800s was to decrease government spending and the size of the federal budget deficit. True or False

False

Firms in monopolistic competition can acquire some market power by: A. using price competition. B. engaging in tacit collusion. C. differentiating the product. D. increasing their output to the perfectly competitive level.

A. using price competition.

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. If industry output is 300 gadgets produced by Margaret and 200 gadgets produced by Ray and if Ray decides to increase output by 100, industry price will be: A. $4. B. $3. C. $2. D. $1.

A. $4

(Figure: Payoff Matrix for Gehrig and Gabriel) The figure Payoff Matrix for Gehrig and Gabriel describes two people who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. The combined profits of the two are maximized if Gehrig produces _____ figurines and Gabriel produces _____ figurines. A. 5,000; 5,000 B. 7,000; 7,000 C. 7,000; 5,000 D. 5,000; 7,000

A. 5,000; 5,000

(Figure: Profits in Monopolistic Competition) In panel (A) of the figure Profits in Monopolistic Competition, the profit-maximizing quantity of output is determined by the intersection at point: A. G. B. F. C. H. D. C.

A. G

(Figure: Payoff Matrix for the United States and the European Union) Look at the figure Payoff Matrix for the United States and the European Union. Suppose that the United States and the European Union both produce corn, and each region can make more profit if output is limited and the price of corn is high. The Nash equilibrium combination is for the United States to produce a _____ output and the European Union to produce a _____ output. A. High; high B. High; low C. Low; low D. Low; high

A. High;High

The outcome of a strategic choice is called a: A. Payoff B. Game C. Product D. Dilemma

A. Payoff

Which of the following is NOT a source of product differentiation? A. price B. location C. style D. quality

A. Price

If the Herfindahl-Hirschman index (HHI) for an industry is 900, the market is considered: A. strongly competitive. B. somewhat competitive. C. oligopolistic. D. monopolistic.

A. Strongly competitive

One of the earliest actions of antitrust policy was the breakup of: A. the Standard Oil Company. B. Bell Telephone. C. Microsoft. D. IBM.

A. The standard Oil Company

Tacit collusion is difficult if: A. there are many firms in the industry. B. the firms in the industry are producing differentiated products. C. firms have common interests. D. the oligopolists are selling to many small firms.

A. There are many firms in the industry

Scenario: Two Identical Firms Two identical firms make up an industry in which the market demand curve is represented by Q = 5,000 - 4P, where Q is the quantity demanded and P is price per unit. The marginal cost of producing the good in this industry is constant and equal to $650. Fixed cost is zero. Reference: Ref 14-20 (Scenario: Two Identical Firms) If one firm in the scenario Two Identical Firms decides to cheat, the cheating firm will: A. be able to increase its profits initially. B. find that cheating leads to a decrease in its profits alone. C. find that cheating initially leads to an increase in both firms' profits. D. find that the other firm has an increase in its profits alone.

A. be able to increase its profits initially.

(Figure: Payoff Matrix II for Blue Spring and Purple Rain) Payoff Matrix II for Blue Spring and Purple Rain describes two producers of bottled water. If both firms follow a tit-for-tat strategy, equilibrium will be reached when: A. both firms charge a high price. B. both firms charge a low price. C. Blue Spring charges a high price and Purple Rain charges a low price. D. Purple Rain charges a high price and Blue Spring charges a low price.

A. both firms charge a high price.

Monopolistic competitors sell products that are _____ and as a result, each firm has a _____ demand curve. A. imperfect substitutes; downward-sloping B. perfect substitutes; horizontal C. imperfect substitutes; horizontal D. perfect substitutes; downward-sloping

A. imperfect substitutes; downward-sloping

The broccoli market is perfectly competitive. This means that the price of broccoli is _____ than if the market were monopolistically competitive, and broccoli output is _____ than if it were monopolistically competitive. A. lower; higher B. lower; lower C. higher; lower D. higher; higher

A. lower; higher

Among the drawbacks of brand names is the fact that: A. they may encourage the consumption of expensive substitutes for generic items. B. they provide some assurance of consistency of quality. C. they convey information about the nature of the product. D. they indicate that the seller is engaged in repeated interaction with its customers.

A. they may encourage the consumption of expensive substitutes for generic items