ECON 300 QUIZ FLASHCARDS FOR FINAL

You and your roommate, Harold, are very hungry and are thinking about going out to dinner. Harold will drive and gets to choose where to go. He prefers White Castle, but you prefer Taco Bell because White Castle makes you sick and you would rather not eat than go to White Castle. If you wait for one hour, Taco Bell will deliver a meal to your house. Harold cannot go to dinner without you because he does not know how to get to either restaurant, so he promises that if you agree to go out now, he will choose Taco Bell. If you are both purely self-interested, what should you do?

Stay home and wait for Taco Bell to deliver.

Which of the following is true about the comparison between the predicted outcomes of the collusion, Cournot, and Bertrand models?

The Bertrand model predicts the lowest price.

Which of the following features is not needed for price discrimination using a two-part tariff to work?

The firm's customers must have different demand curves.

Which of the following is not needed for price discrimination to be possible?

The firm's customers must have different demand curves.

Consider this game. Which of the following statements is true?

The game has only one Nash equilibrium, and the equilibrium strategies are dominant.

The amount of utility Alec gets from income is governed by the function U = √I. He has made an investment that has a 40% chance of paying $900 and a 60% chance of paying $90,000. Alec wants to buy an insurance plan for his investment. Which of the following policies would give him complete insurance?

The insurer pays Alec $53,460 if the investment pays $900, and Alec pays a premium of $35,640 to the insurance company if the investment pays $90,000. (This guarantees that he receives his expected payoff from the uninsured investment of $54,360. If the investment pays $900, he receives $53,460 + $900 = $54,360. If the investment pays $90,000, he receives $90,000 − $35,640 = $54,360.)

Which of the following conditions do not have to be met in order for indirect price discrimination by versioning to work?

The marginal costs of producing each version of the product must be the same.

Assuming a firm has the same cost structure regardless of the market structure, which of the following statements about the long run outcomes under perfect competition and monopolistic competition is true?

The price charged by the firm is higher under monopolistic competition.

Which of the following statements about interest rates is true?

The real interest rate may be either higher or lower than the nominal interest rate. (In periods of deflation, when the inflation rate is negative, the real interest rate will be greater than the nominal interest rate.)

An airline sells seats on its flights to business travelers whose demand is QB = 300 - P and to vacation travelers whose demand is QV = 150 - 0.5P. Combined market demand is Q = 450 - 1.5P. The marginal cost and average total cost of providing a seat on a flight are $200. How much higher will profit be if the airline uses third-degree price discrimination instead of charging all travelers the same price?

$0

Sally sells seashells by the seashore. When Sally prices her shells at $7 each, she sells five. When she prices her shells at $6, she sells six. What is her marginal revenue from selling a sixth seashell?

$1

If interest compounds at 5%, then the present discounted value of $1,403.91 received 5 years from now is:

$1,100 (The present discounted value of the amount is $1,403.91/(1 + 0.05)^5 = $1,100.)

An investment of $1,000 earns compound interest at a rate of 3% per year. How much will this investment be worth in 5 years?

$1,159.27 (The formula to calculate the value of an investment with compound interest is $1,000(1 + 0.03)^5 = $1,159.27.)

If market demand is P = 1,000 - 5Q and a monopolist has a constant marginal cost of $200, then the deadweight loss resulting from monopoly is:

$16

The amount of utility Alec gets from income is governed by the function U = √I. He is considering an investment that has a 40% chance of paying $900 and a 60% chance of paying $90,000. Alec's risk premium associated with this investment is:

$17,496. (Alec's expected income from the investment is 0.4 × 900 + 0.6 × 90,000 = $54,360. But his expected utility is 0.4 × 30 + 0.6 × 300 = 192. The guaranteed income it would take to gain this amount of utility is 192^2 = $36,864 (the certainty equivalent). Alec's risk premium is thus $54,360 − $36,864 = $17,496.)

An investment has a 20% chance of paying $1 million and an 80% chance of paying $100,000. The expected benefit payout of this investment is:

$280,000 (The expected value of the investment is 0.2 × 1,000,000 + 0.8 × 100,000 = 200,000 + 80,000 = $280,000.)

If market demand is P = 100 - Q and the firm has a constant marginal cost of 20, then with first-degree price discrimination, the firm's producer surplus will be:

$3,200.

An investment costs $400 initially, then earns $300 in years 2, 3, and 4. If the annual interest rate is 4%, what is the net present value of this investment?

$432.53 (The net present value of the investment is −500 + 300/(1 + 0.04) + 300/(1 + 0.04)^2 + 300/(1 + 0.04)^3 = 432.53.)

This table shows the willingness to pay of the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?

$60 for the weight room, $140 for the pool, or $175 for both

You are considering buying a house. Your mortgage requires monthly payments of $2,500 for 360 months. The interest rate is fixed at 4%. What is the present discounted value of your mortgage?

$62,499.95 (The present discounted value of this stream of payments is 2,500/0.04(1 - 1/(1+0.04)^860) = $62499.95.)

Consider this graph of a monopolist's marginal cost, average total cost, demand, and marginal revenue curves. In this situation, the price the monopolist would charge is:

$70

What is the mixed-strategy Nash equilibrium of this game? The strategies are stated as follows: (probability that Player 1 plays T, probability that Player 1 plays B); (probability that Player 2 plays L, probability that Player 2 plays R).

(0.9, 0.1); (0.5, 0.5)

This game has only one Nash equilibrium, which can be found by eliminating dominant strategies. What is this Nash equilibrium?

(Bump, Twist)

In this prisoner's dilemma game, (C, C) is the unique Nash equilibrium when the game is played only once. If the game is instead repeated 100 times, what does game theory predict will be the likely outcome in the first play of the game?

(C, C)

In the game displayed above, if both Me! and Famous play a maximin strategy, then the likely outcome of the game is:

(CI, CI)

In this game, Congress has four options: to pass a welfare bill, a farm subsidy bill, or an omnibus bill that combines the farm and welfare bills; or no legislation at all. The President can then veto the bill if he chooses to do so, and the veto cannot be overturned. Congress likes the farm bill and hates the welfare bill, while the President hates the farm bill and loves the welfare bill. What is the equilibrium outcome of this game?

(Congress Passes the Omnibus Bill; President Allows)

In this entry-deterrence game, what is the equilibrium?

(Entrant Enters, Incumbent Does Not Fight)

In this prisoner's dilemma game, (C, C) is the unique Nash equilibrium when the game is played only once. If the game is instead repeated infinitely and both players follow a grim reaper strategy, what minimum amount does $1 in period 2 have to be worth today in order for (NC, NC) to be an equilibrium?

20 cents

Two milk producers, A and B, each with a marginal cost of $50, form an oligopoly whose market demand is P = 650 − 10Q. If the firms attempt to collude and firm B produces 15 gallons (half the monopoly output), what is firm A's optimal quantity?

22.5

Two milk producers, A and B, each with a marginal cost of $50, form an oligopoly whose market demand is P = 650 − 10Q. If the market is defined by Stackleberg competition and firm A moves first, what quantity will firm A produce?

30 gallons

If market demand for capital is QD = 130 - 10r and the market supply of capital is QS = 10 + 20r, then the market equilibrium interest rate is:

4%. (Equilibrium occurs where QD = QS, so 130 − 10r = 10 + 20r. Solving this equation for r yields 6)

A firm wants to offer a quantity discount in order to price-discriminate between buyers who are relatively uninterested in the product and buyers who are obsessively interested in it. The uninterested customers have demand of QU = 30 - 0.5P. The package offered to them contains 10 units of the good at a price of $40 each. Which of the following packages designed for the obsessed customers are incentive compatible?

60 units at a price of $20 each

How long will it take an investment to double in value if it is compounding at a rate of 9%?

8 years (Using the rule of 72, this is how long it will take if the interest rate is 9% (72/9 = 8).)

In the game displayed here, what side payment could Player 1 offer to Player 2 in order to maximize payoffs?

After playing up, give Player 2 a payment of 3 to play down.

Which of the following statements about simultaneous-move games is true?

All games have at least one Nash equilibrium.

If this game is infinitely repeated, which of the following statements is true?

Any set of strategies can be a Nash equilibrium in the first play.

Two firms form an oligopoly in the market for soft drinks. Each must decide whether to advertise its product in order to try to attract customers away from the competition. Advertising is very expensive, and if both firms do it, there will be no net effect of the advertising; both firms will end up with the same number of customers they started with. But if only one firm advertises, it will pull away a substantial number of customers from the competition. What is the likely outcome of this situation?

Both firms advertise.

In this game, called Matching Pennies, Player 1 wins if both players play the same side of a penny, and Player 2 wins if the players play opposite sides of a penny. Which of the following statements is true?

Both players using each of their strategies with probability 0.5 is a Nash equilibrium.

A firm faces a market demand curve P = 50 - 5Q. It has a constant marginal cost of $10. Relative to standard monopoly pricing, how would a block pricing strategy where the first four units can be purchased for a price of $30 each but two more units can be purchased for an additional $20 each change consumer surplus and producer surplus?

Consumer surplus would increase by $10, and producer surplus would increase by $20.

Which of the following features is needed to make bundling a possible price discrimination strategy but is not required for any other price discrimination strategies?

Demand for two products must be negatively correlated.

Which of the following statements about sequential-move games is true?

Depending on the game's payoffs, either player could have an advantage.

Equilibrium in oligopoly is different from other market structures because:

Each firm's action influences what the other companies want to do.

Total demand for a product is 3,000 units. There are two firms, A and B, in this market. Each has a marginal cost of $50. What price and quantity will each firm produce if the firms engage in Bertrand competition?

Each will produce 1,500 units and charge a price of $50.

You are trying to decide whether you want to learn to program in HTML5 or Java. Both are widely used now, but the probability that each will become the dominant programming language for Web-based applications in one year is 0.8 for HTML5 and 0.2 for Java. You can get a permanent job (so payments will go on in perpetuity) that pays $50,000 per year if the language is in use. A class in Java costs $2,000 and a class in HTML5 costs $10,000. You can take either class any year, but you can only take one. The market interest rate is 5%. What should you do?

Wait and decide which class to take in one year.(The expected value of this choice is $840,000 (40,000 + 0.8 × 50,000/0.05), which is less than what you can get by waiting to choose until next year.)

You are trying to decide whether you want to learn to program in HTML5 or Java. Both are widely used now, but the probability that each will become the dominant programming language for Web-based applications in one year is 0.95 for HTML5 and 0.05 for Java. You can get a permanent job (so payments will go on in perpetuity) that pays $50,000 per year if the language is in use. A class in Java costs $2,000 and a class in HTML5 costs $10,000. You can take either class any year, but you can only take one. The market interest rate is 5%. What should you do?

Wait and decide which class to take in one year.(The expected value of this choice is $990,000 (40,000 + 0.95 × 50,000/0.05), which is better than the other three alternatives.)

Two firms, A and B, each with a marginal cost of $50, form an oligopoly whose market demand is P = 650 − 10Q. If the firms are able to collude successfully, what quantity will each produce and what price will they charge?

a quantity of 15 each and a price of $350

Under Bertrand competition, firms have the same marginal cost but produce differentiated products, so:

all firms charge the same price.

Which of the following results in the highest amount of consumer surplus?

block pricing

If the number of firms in the cartel increases:

collusion becomes more difficult.

If a firm has market power and marginal cost is constant relative to perfect competition:

consumer surplus is lower, producer surplus is higher, and total surplus is lower.

A monopolist faces a demand curve of P = 40 - 0.5Q and has a constant marginal cost of $6. If the government imposes a price ceiling at $7:

consumer surplus will increase, producer surplus will decrease, and the deadweight loss will be smaller.

In order for price discrimination via a quantity discount to work:

customers who purchase larger quantities must have relatively elastic demand.

A reduction in a monopolist's marginal cost will cause it to:

decrease price and increase quantity.

If business confidence increases and more firms seek to expand their factories, the present discounted value of an individual's investment that provides payments for the next three years will:

decrease. (This event will cause demand for capital to rise, increasing the market equilibrium interest rate, which will decrease the present discounted value of individuals' investments.)

The interest rate that individuals use to calculate present discounted value:

determined by capital markets. (The market interest rate is a price that is determined by the market supply and demand for capital.)

A monopolist's supply curve:

does not exist.

The key difference between markets where third-degree price discrimination is possible and markets where second-degree price discrimination is possible is whether:

firms can identify customers' demand before the customers make a purchase.

In the Cournot competition model:

firms choose the quantity that maximizes their own profit given the choice of the other firms.

Which of the following results in the highest amount of total surplus?

first-degree price discrimination

If market demand is perfectly elastic, then a monopolist:

has no market power.

If market demand is perfectly inelastic, then a monopolist:

has the greatest possible amount of market power.

Firms in an oligopoly:

have a difficult time doing so because each firm can increase profit by breaking the agreement and increasing output. See Section 11.2.

An individual is more risk-averse if:

her utility function is more curved. (If the utility function is flatter, the individual is less risk-averse, not more.)

In order for third-degree discrimination to be possible, which of the following features is not required?

identification of each customer's demand before purchase

Relative to standard monopoly pricing, block pricing:

increases consumer surplus, increases producer surplus, and increases total surplus.

The amount of utility Alec gets from income is governed by the function U = √I. He has made an investment that has a 40% chance of paying $900 and a 60% chance of paying $90,000. Alec bought an insurance plan for this investment that pays $30,000 if the investment pays $900 and pays the insurance company a premium of $20,000 if the investment pays $90,000. This plan:

is actuarially fair. (The plan raises his expected utility from 192 to 229.06. His expected utility without the plan is 0.4 × 900^½ + 0.6 × 90,000^½ = 192. His expected utility with the plan is 0.4 × 30,900^½ + 0.6 × 70,000^½ = 229.06.

If demand becomes less price elastic and marginal cost is constant, the firm's markup over marginal cost:

is larger.

If demand becomes more price elastic and marginal cost is constant, the gain in producer surplus a firm receives from having market power:

is smaller.

If a game has no dominant strategies:

it may or may not have multiple Nash equilibria.

If a firm practices third-degree price discrimination, the price charged should be higher in the market where demand is:

less price elastic.

Relative to perfect competition, first-degree price discrimination results in:

lower consumer surplus, higher producer surplus, and equal total surplus.

Relative to standard monopoly pricing, first-degree price discrimination results in:

lower consumer surplus, higher producer surplus, and higher total surplus.

A monopolist's percentage markup of price over marginal cost is higher when:

market demand is less elastic.

If the total cost function of a monopolist is TC = 200 + 20Q, then the primary barrier to entry that supports the firm's position is likely:

natural monopoly.

In order to maximize profit, a monopolist:

produces the quantity where marginal revenue equals marginal cost.

If a firm is a monopoly, marginal revenue is:

steeper than demand

Which of the following is the best measure of a firm's market power?

the firm's ability to price above marginal cost.

Under Stackleberg competition between two firms, if both firms have the same marginal cost:

the first mover earns a larger profit than the second mover.

If the number of firms in the market under Bertrand competition increases:

the market price and quantity will stay the same.

If the number of firms in the market under Cournot competition increases:

the market price will decrease and the market quantity will increase.

If demand becomes more price elastic but the quantity demanded at the current price does not change:

the price and quantity are unchanged in perfect competition but different if the firms have market power

If products are differentiated instead of identical under Bertrand competition:

the prices charged by the firms are higher.

If the government imposed a direct price regulation that did not allow a natural monopoly with constant marginal cost to charge a price higher than under perfect competition:

the regulation could cause the firm to shut down production.

In the market for widgets, two firms sell identical products, compete by choosing the price at which they sell their product, and choose their prices at the same time. What will the equilibrium price and quantity be relative to what would occur if the market were instead perfectly competitive?

the same quantity and the same price

The key feature of monopoly that drives the differences between it and other market structures is that:

there are barriers to entry into the market.

Under Stackleberg competition:

there is a first-mover advantage.

Which of the following results in the highest amount of producer surplus?

two-part tariffs

If the market demand equation is Q = 20 - 2P, the monopolist's marginal revenue equation is:

MR = 10 - Q

You are considering buying a new computer. The store offers you four payment plans: Plan A is $600 now plus $600 at the beginning of each of the next two years. Plan B is nothing now but payments of $1,000 at the beginning of each of the next two years. Plan C is $1,700 now but no further payments. Plan D is nothing now or next year, but $2,300 two years from now. If the annual interest rate is 10%, what is the best deal?

Plan A (The present discounted values of plans A through D are $1,641.32, $1,735.54, $1,700, and $1,900.83, respectively. Plan A thus has the lowest present discounted value and is the best option.)

What will be the outcome of the sequential-move game described here?

Player 1 plays up; Player 2 plays down.

What will be the outcome of the sequential-move game shown here?

Player 1 plays up; Player 2 plays up.