ECONOMICS CHAPTER 12

Use the following statements to answer this question: I. Cartels are illegal in the United States. II. Once price and production levels are agreed upon, each member of a cartel has an incentive to cheat on the agreement. A) Both I and II are true. C) I is false, and II is true. B) I is true, and II is false. D) Both I and II are false.

Answer: A Diff: 1 Section: 12.6

Use the following statements to answer this question: I. Under the dominant firm model, the dominant firm effectively acts like a monopolist who is facing the excess market demand that cannot be supplied by the fringe firms. II. If the fringe supply curve shifts leftward in the dominant firm model, then the resulting market equilibrium price is __________ and the dominant firm s quantity __________. A) lower, decreases C) higher, decreases B) lower, increases D) higher, increases

Answer: D Diff: 2 Section: 12.5

A monopolistically competitive firm in long-run equilibrium: A) will make negative profit. B) will make zero profit. C) will make positive profit. D) Any of the above are possible.

B

In the Stackelberg model, suppose the first-mover has MR = 15 - Q1, the second firm has reaction function Q2 = 15 - Q1/2, and production occurs at zero marginal cost. Why doesn t the first-mover announce that its production is Q1 = 30 in order to exclude the second firm from the market (i.e., Q2 = 0 in this case)? A) In this case, MR is negative and is less than MC, so the first-mover would be producing less than the optimal quantity. B) In this case, MR is negative and is less than MC, so the first-mover would be producing too much output. C) This is a possible outcome from the Stackelberg duopoly under these conditions. D) We do not have enough information to determine if this is an optimal outcome for this case.

B

A market structure in which there is one large firm that has a major share of the market and many smaller firms supplying the remainder of the market is called: A) the Stackelberg Model. B) the kinked demand curve model. C) the dominant firm model. D) the Cournot model. E) the Bertrand model.

C

A market with few entry barriers and with many firms that sell differentiated products is A) purely competitive. B) a monopoly. C) monopolistically competitive. D) oligopolistic.

C

For which of the following market structures is it assumed that there are barriers to entry? A) Perfect competition B) Monopolistic competition C) Monopoly D) all of the above E) B and C only

C

Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogeneous products A) results in the same output but a higher price. B) results in the same output but a lower price. C) results in a larger output at a lower price. D) results in a smaller output at a higher price. E) any of the above may result.

C

In the Bertrand model with homogeneous products, A) the firm that sets the lower price will capture all of the market. B) the Nash equilibrium is the competitive outcome. C) both firms set price equal to marginal cost. D) all of the above E) the outcome is inconclusive.

D

In the Cournot duopoly model, each firm assumes that A) rivals will match price cuts but will not match price increases. B) rivals will match all reasonable price changes. C) the price of its rival is fixed. D) the output level of its rival is fixed.

D

Is there a first-mover advantage in the Bertrand duopoly model with homogenous products? A) Yes, first-movers always hold the advantage over other firms. B) Yes, first-movers may have an advantage, but it depends on the model assumptions. C) No, first-movers cannot choose a profit maximizing quantity because the second-mover can always produce a bit less and earn higher profits. D) No, the second-mover would be able to set a slightly lower price and capture the full market share.

D

The authors cited statistical evidence that the price elasticity of demand for Royal Crown cola is -2.4, and the price elasticity of demand for Coke is roughly -5.5. Which firm likely has stronger brand loyalty among customers that provides greater potential for monopoly power in the cola market? A) Coke B) Royal Crown C) Both firms should have identical monopoly power D) We do not have enough information to answer this question.

b

A situation in which each firm selects its best action, given what its rivals are doing, is called a A) Nash equilibrium. B) Cooperative equilibrium. C) Stackelberg equilibrium. D) zero sum game.

A

In the __________, each firm treats the output of its competitor as fixed and then decides how much to produce. A) Cournot model B) model of monopolistic competition C) Stackelberg model D) kinked-demand model E) none of the above

A

In the dominant firm model, the fringe firms A) are price takers. B) maximize profit by equating average revenue and average cost. C) determine their price and output before the dominant firm determines its price and output. D) all of the above E) none of the above

A

In the dominant firm model, the smaller fringe firms behave like: A) competitive firms. B) Cournot firms. C) Stackelberg firms. D) Bertrand firms. E) monopolists.

A

In the kinked demand curve model, if one firm reduces its price A) other firms will also reduce their price. B) other firms will compete on a non-price basis. C) other firms will raise their price. D) Both A and B are correct. E) Both B and C are correct.

A

Under a Cournot duopoly, the collusion curve represents: A) all possible allocations of the pure monopoly quantity among the two firms in the duopoly. B) all possible allocations of the pure monopoly quantity that would be possible if the two firms in the duopoly did not cooperate. C) all optimal price-quantity outcomes for a cartel rather than a Cournot duopoly. D) the potential profits to be earned by firms in a collusive cartel.

A

What is one difference between the Cournot and Stackelberg models? A) In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm sets its output level first. B) In Stackelberg, both firms make output decisions simultaneously, and in Cournot, one firm sets its output level first. C) In Cournot, a firm has the opportunity to react to its rival. D) Profits are zero in Cournot and positive in Stackelberg.

A

Which of the following is true about the demand curve facing the dominant firm? A) It equals market demand minus fringe firms supply curve. B) It is identical to market demand. C) It equals market demand minus demand facing the fringe firms. D) It is horizontal.

A

The market structure in which there is interdependence among firms is A) monopolistic competition. C) perfect competition. B) oligopoly. D) monopoly.

Answer: B Diff: 1 Section: 12.2

The oligopoly model that is most appropriate when one large firm usually takes the lead in setting price is the __________ model. A) Cournot C) game theory B) Stackelberg D) prisoner s dilemma

Answer: B Diff: 1 Section: 12.3

Use the following two statements about monopolistic competition to answer this question. I. In the long run, the price of the good will equal the minimum of the average cost. II. In the short run, firms may earn a profit. A) I and II are true. C) I is false, and II is true. B) I is true, and II is false. D) I and II are false.

Answer: C Diff: 1 Section: 12.1

Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run? A) P = MC. C) P > MR. B) MC = ATC. D) Profit equals zero.

Answer: D Diff: 1 Section: 12.1

In the Stackelberg model, there is an advantage A) to waiting until your competitor has committed herself to a particular output level before deciding on your output level. B) to being the first competitor to commit to an output level. C) to the firm with a dominant strategy. D) to producing an output level which is identical to a monopolist s output level.

B

In which oligopoly model(s) do firms earn zero profit? A) Cournot B) Bertrand C) Stackelberg D) Oligopoly firms always earn positive economic profits.

B

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens OPEC s share of the world oil market? A) Increases B) Decreases C) Remains the same D) We do not have enough information to answer this question.

B

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens to the price of oil on the world market? A) Increases B) Decreases C) Remains the same D) We do not have enough information to answer this question.

B

The Prisoners Dilemma is a particular type of game in which negotiation and enforcement of binding contracts is not possible, and such games are known as: A) cooperative games. B) noncooperative games. C) collusive games. D) Cournot games.

B

The market structure in which strategic considerations are most important is A) monopolistic competition. B) oligopoly. C) pure competition. D) pure monopoly.

B

This market situation is much like a pure monopoly except that its member firms tend to cheat on agreed upon price and output strategies. What is it? A) Duopoly B) Cartel C) Market sharing monopoly D) Natural monopoly

B

Under the kinked demand model, suppose the firm s demand curve shifts rightward but the price at which the kink occurs remains the same. In this case, the firm: A) does not change its output. B) increases output. C) decreases output. D) We do not have enough information to answer this question.

B

What happens to an incumbent firm s demand curve in monopolistic competition as new firms enter? A) It shifts right. B) It shifts left. C) It becomes horizontal. D) New entrants will not affect an incumbent firm s demand curve.

B

Which of the following is true in long-run equilibrium for a firm in a monopolistic competitive industry? A) The demand curve is tangent to marginal cost curve. B) The demand curve is tangent to average cost curve. C) The marginal cost curve is tangent to average cost curve. D) The demand curve is tangent to marginal revenue curve.

B

Which of the following is true in the Stackelberg model? A) The first firm produces less than its rival. B) The first firm produces more than its rival. C) Both firms produce the same quantity. D) Both firms have a reaction curve.

B

The authors explain that the international copper cartel (CIPEC) has been largely ineffective in raising the price of copper in world markets, and the reason is mainly due to the relatively elastic demand for copper. Suppose the cartel recognized that there are multiple uses for copper, and some of the uses have few substitute products (e.g., copper electrical wire) while others have several close substitutes (e.g., copper water pipes). To increase profits, the cartel could raise the price of copper in the sub-markets with relatively inelastic demand. What else would the cartel have to do in order to make the cartel s action effective? A) The cartel would have to seek permission from the U.S. Department of Justice. B) The cartel would have to get the cooperation of all other copper producers in order to raise the price by some positive amount. C) The cartel would have to find a way to keep the buyers in the low -price market from reselling the copper to buyers in the high-price market. D) none of the above

C

Which of the following is NOT regarded as a source of inefficiency in monopolistic competition? A) The fact that price exceeds marginal cost B) Excess capacity C) Product diversity D) The fact that long-run average cost is not minimized E) all of the above

C

Which of the following is true in long-run equilibrium for a firm in monopolistic competition? A) MC = ATC. B) MC > ATC. C) MC < ATC. D) Any of the above may be true.

C

Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry? A) It produces at minimum average cost. B) It does not produce at minimum average cost, and average cost is increasing. C) It does not produce at minimum average cost, and average cost is decreasing. D) Either B or C could be true.

C

Which statement most nearly describes a Nash equilibrium applied to price competition? A) Two firms cooperate and set the price that maximizes joint profits. B) Each firm automatically moves to the purely competitive equilibrium because it knows the other firm will eventually move to that price anyway. C) Given the prices chosen by its competitors, no firm has an incentive to change their prices from the equilibrium level. D) One dominant firm sets the price, and the other firms take that price as if it were given by the market.

C

Why don t some firms in monopolistic competition earn losses in the long run? A) The firms have enough monopoly power to ensure they always earn profits. B) Free entry allows enough firms to remain in the market and maintain the critical mass of firms required to attract customers. C) Free exit implies that any unprofitable firms leave the market in the long run. D) In the long run, firms will build enough brand loyalty among customers to ensure a profitable level of sales.

C

A monopolistically competitive firm in short-run equilibrium: A) will make negative profit (lose money). B) will make zero profit (break-even). C) will make positive profit. D) Any of the above are possible.

D

Cartels can more easily detect cheating by cartel members if the products sold by each member are largely homogeneous. As product quality varies, the observed prices charged by cartel members may be due to differences in the products, or they may be due to cheating. Which of the following goods would more difficult to monitor for potential cheating? A) Aluminum ingots C) Steel beams B) Industrial concrete D) Luxury yachts

D

For a market with a linear demand curve and constant marginal cost of production, why are the reaction functions for the Cournot duopoly sellers also straight lines? A) The reaction functions do not have to be straight lines, and they are only drawn this way in the book to keep the figures simple. B) Cournot thought the lines would be straight, but this was proven wrong by other economists. C) Marginal revenue is always linear when marginal costs are constant. D) We know that the marginal revenue curves for linear demand curves are also straight lines.

D

If all producers in a market are cartel members, then the demand curve facing the cartel is A) the market demand curve. B) horizontal. C) identical to the demand curve in the dominant firm model. D) identical to the monopolist s demand curve.

D

In comparing the Cournot equilibrium with the competitive equilibrium, A) both profit and output level are higher in Cournot. B) both profit and output level are higher in the competitive equilibrium. C) profit is higher, and output level is lower in the competitive equilibrium. D) profit is higher, and output level is lower in Cournot.

D

The authors explain that the international copper cartel (CIPEC) has been largely ineffective in raising the price of copper in world markets, and the reason is mainly due to the relatively elastic demand for copper. Suppose the cartel recognized that there are multiple uses for copper, and some of the uses have few substitute products (e.g., copper electrical wire) while others have several close substitutes (e.g., copper water pipes). If cartel attempted to raise the price of copper in one of these sub-markets, which market should the cartel choose? A) Market with several close substitutes because demand is more elastic. B) Market with several close substitutes because demand is more inelastic. C) Market with few close substitutes because demand is more elastic. D) Market with few close substitutes because demand is more inelastic.

D

Monopolistically competitive firms have monopoly power because they A) face downward sloping demand curves. B) are great in number. C) have freedom of entry. D) are free to advertise.

A

Suppose that three oligopolistic firms are currently charging $12 for their product. The three firms are about the same size. Firm A decides to raise its price to $18, and announces to the press that it is doing so because higher prices are needed to restore economic vitality to the industry. Firms B and C go along with Firm A and raise their prices as well. This is an example of A) price leadership. B) collusion. C) the dominant firm model. D) the Stackelberg model. E) none of the above

A

The Cournot equilibrium can be found by treating __________ as a pair of simultaneous equations and by finding the combination of Q1 and Q2 that satisfy both equations. A) the reaction curves for firms 1 and 2 B) the market supply curve and the market demand curve C) the contract curve and the market demand curve D) the contract curve and the market supply curve E) the firm s supply curve and the firm s demand curve

A

The most important factor in determining the long-run profit potential in monopolistic competition is A) free entry and exit. B) the elasticity of the market demand curve. C) the elasticity of the firm s demand curve. D) the reaction of rival firms to a change in price.

A

The oligopoly model that predicts that oligopoly prices will tend to be very rigid is the __________ model. A) Cournot C) dominant firm B) Stackelberg D) kinked demand

Answer: D Diff: 1 Section: 12.5

Collusion can earn higher prices and higher profits under the Bertrand model, but why is this an unlikely outcome in practice? A) Firms prefer to remain independent of other firms so that their pricing plans can be more flexible over time. B) The collusive firms have an incentive to gain market share at the expense of the other firms by cutting prices. C) The federal antitrust authorities have an easier time catching firms that collude on price rather than quantity. D) none of the above

B

Excess capacity in monopolistically competitive industries results because in equilibrium A) each firm s output level is too great to minimize average cost. B) each firm s output level is too small to minimize average cost. C) firms make positive economic profit. D) price equals marginal cost.

B

Which of the following markets is most likely to be oligopolistic? A) The market for corn B) The market for aluminum C) The market for colas D) The market for ground coffees

B

Which oligopoly model(s) have the same results as the competitive model? A) Cournot B) Bertrand C) Stackelberg D) Both Cournot and Stackelberg

B

he key disadvantage of the kinked-demand model is that it: A) explains why firms may collude, but it does not explain how they interact. B) does not explain why prices may be rigid in an oligopoly. C) requires the assumptions of perfect competition. D) only holds under price leadership.

B

A __________ shows how much a firm will produce as a function of how much it thinks its competitors will produce. A) contract curve B) demand curve C) reaction curve D) Nash equilibrium curve E) none of the above

C

Under the kinked demand curve model, an increase in marginal cost will lead to A) an increase in output level and a decrease in price. B) a decrease in output level and an increase in price. C) a decrease in output level and no change in price. D) neither a change in output level nor a change in price.

D

Which of the following can be thought of as a barrier to entry? A) scale economies. B) patents. C) strategic actions by incumbent firms. D) all of the above

D

Which of the following is NOT conducive to the successful operation of a cartel? A) Market demand for the good is relatively inelastic. B) The cartel supplies all of the world s output of the good. C) Cartel members have substantial cost advantages over non-member producers. D) The supply of non-cartel members is very price elastic.

D

Which of the following is true for both perfect and monopolistic competition? A) Firms produce a differentiated product. B) Firms face a downward sloping demand curve. C) Firms produce a homogeneous product. D) There is freedom of entry and exit in the long run.

D

In the __________, one firm sets its output first, and then a second firm, after observing the first firm s output, makes its output decision. A) Cournot model B) model of monopolistic competition C) Bertrand model D) kinked-demand model E) none of the above

E

The kinked demand curve model is based on the assumption that each firm A) considers its rival s output to be fixed. B) considers its rival s price to be fixed. C) believes rivals will match all price changes. D) believes rivals will never match price changes. E) none of the above

E

Which one of the following statements is a common criticism of the original Bertrand duopoly model? A) Firms never choose optimal prices as strategic variables. B) Firms would more naturally choose quantities if goods are homogenous. C) The assumption that market share is split evenly between the firms is unrealistic. D) A and B are correct. E) B and C are correct.

E

In the __________, two duopolists compete by simultaneously selecting price. A) Cournot model B) Nash model C) Bertrand model D) kinked-demand model E) none of the above

c

Although firms earn zero profits in the long run, why is the outcome from monopolistic competition considered to be inefficient? A) Price exceeds marginal cost. B) Quantity is lower than the perfectly competitive outcome. C) Goods are not identical. D) A and B are correct. E) B and C are correct.

d