Micro Exam 3

A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called a. a competitive equilibrium. b. an open-market solution. c. a socially-optimal solution. d. a Nash equilibrium.

d. a Nash equilibrium.

Refer to Table 17-13. When this game reaches a Nash equilibrium, annual profit will grow by a. $1.5 million for HomeMax and by $1.0 million for Lopes. b. $3.4 million for HomeMax and by $0.4 million for Lopes. c. $0.6 million for HomeMax and by $3.2 million for Lopes. d. $2.5 million for HomeMax and by $2.0 million for Lopes.

a. $1.5 million for HomeMax and by $1.0 million for Lopes.

Which of the following are necessary characteristics of a monopoly? (i) The firm is the sole seller of its product. (ii) The firm's product does not have close substitutes. (iii) The firm generates a large economic profit. (iv) The firm is located in a small geographic market. a. (i) and (ii) only b. (i) and (iii) only c. (i), (ii), and (iii) only d. (i), (ii), (iii), and (iv)

a. (i) and (ii) only

Lori and Maya are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $10,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $16,000 and the other will earn $6,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $30,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Lori will a. advertise on TV and earn $10,000. b. advertise on radio and earn $14,000. c. not advertise at all and earn $20,000. d. None of the above is correct. Lori and Maya do not have dominant strategies.

a. advertise on TV and earn $10,000.

The typical firm in the US economy a. has some degree of market power. b. sells its product for a price that is equal to the marginal cost of producing the last unit. c. is perfectly competitive. d. is a monopoly.

a. has some degree of market power.

As the number of firms in an oligopoly increases, the a. price approaches marginal cost, and the quantity approaches the socially efficient level. b. price and quantity approach the monopoly levels. c. price effect exceeds the output effect. d. individual firms' profits increase.

a. price approaches marginal cost, and the quantity approaches the socially efficient level.

If Levi Strauss & Co. were to require every retailer that carried its clothing to charge customers $42 for each pair of jeans, Levi Strauss & Co. would be practicing a. resale price maintenance. b. fixed retail pricing. c. tying. d. cost plus pricing.

a. resale price maintenance.

A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet browser into its Windows operating system, to be sold as one unit. This practice is known as a. tying. b. predation. c. wholesale maintenance. d. retail maintenance.

a. tying.

Refer to Figure 15-7. A profit-maximizing monopolist would incur total costs of a. $81. b. $120. c. $144. d. $240.

b. $120.

Black Box Cable Refer to Scenario 15-7. What is the deadweight loss associated with the nondiscriminating pricing policy compared to the price discriminating policy? a. $375,000 b. $400,000 c. $475,000 d. It cannot be determined from the information provided.

b. $400,000

Refer to Figure 15-9. The deadweight loss caused by a profit-maximizing monopoly amounts to a. $250. b. $500. c. $750. d. $1,000.

b. $500.

Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $0? a. $6 b. $8 c. $10 d. $12

b. $8

Which of the following statements is correct for a monopolist? (i) The firm maximizes profits by equating marginal revenue with marginal cost. (ii) The firm maximizes profits by equating price with marginal cost. (iii) Demand equals marginal revenue. (iv) Average revenue equals price. a. (i), (iii), and (iv) only b. (i) and (iv) only c. (i), (ii), and (iv) only d. (i), (ii), (iii), and (iv)

b. (i) and (iv) only

A monopolist can sell 300 units of output for $45 per unit. Alternatively, it can sell 301 units of output for $44.60 per unit. The marginal revenue of the 301st unit of output is a. -$120.00. b. -$75.40. c. -$0.40. d. $75.40.

b. -$75.40.

Refer to Figure 15-9. To maximize its profit, a monopolist would choose which of the following outcomes? a. 100 units of output and a price of $20 per unit b. 100 units of output and a price of $40 per unit c. 150 units of output and a price of $30 per unit d. 200 units of output and a price of $40 per unit

b. 100 units of output and a price of $40 per unit

Refer to Figure 15-7. In order to maximize profits, the monopolist should produce a. 9 units. b. 12 units. c. 15 units. d. more than 15 units.

b. 12 units.

Refer to Figure 16-2. The firm's profit-maximizing level of output is a. 16 units. b. 24 units. c. 32 units. d. 48 units.

b. 24 units.

Suppose that Bieber and Rihanna are duopolists in the music industry. In May, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By June, each singer is considering breaking the agreement. What would you expect to happen next? a. Bieber and Rihanna will determine that it is in each singer's self interest to maintain the agreement. b. Bieber and Rihanna will each break the agreement. Both singers' profits will decrease. c. Bieber and Rihanna will each break the agreement. Both singers' profits will increase. d. Bieber and Rihanna will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase.

b. Bieber and Rihanna will each break the agreement. Both singers' profits will decrease.

A monopolist a. has a supply curve that is upward-sloping, just like a competitive firm. b. does not have a supply curve because the monopolist sets its price at the same time it chooses the quantity to supply. c. has a horizontal supply curve, just like a competitive firm. d. does not have a supply curve because marginal revenue exceeds the price it charges for its products.

b. does not have a supply curve because the monopolist sets its price at the same time it chooses the quantity to supply.

A concentration ratio a. measures the percentage of total sales of the top firm in the industry. b. reflects the level of competition in an industry. c. is inversely related to the price charged by the top firm in the industry. d. All of the above are correct.

b. reflects the level of competition in an industry.

New firms will likely enter a monopolistically competitive market when price exceeds a. marginal revenue. b. average revenue. c. marginal cost. d. average total cost.

d. average total cost.

Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to a. increase their store and parking lot sizes. b. refrain from increasing their store and parking lot sizes. c. be more competitive in capturing market share. d. share the context of their conversation with the Federal Trade Commission.

b. refrain from increasing their store and parking lot sizes.

When a firm exits a monopolistically competitive market, the individual demand curves faced by all remaining firms in that market will a. shift in a direction that is unpredictable without further information. b. shift to the right. c. shift to the left. d. remain unchanged. It is the supply curve that will shift.

b. shift to the right.

Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $4? a. $6 b. $8 c. $10 d. $12

c. $10

Refer to Figure 15-7. A profit-maximizing monopolist would earn profits of a. $96. b. $117. c. $120. d. $126.

c. $120.

Refer to Figure 15-7. In order to maximize profits, the monopolist should charge a price of a. $9. b. $12. c. $20. d. $23.

c. $20.

Refer to Scenario 15-7. If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate? a. $500,000 b. $600,000 c. $850,000 d. $925,000

c. $850,000

Refer to Figure 15-9. To maximize total surplus, a benevolent social planner would choose which of the following outcomes? a. 100 units of output and a price of $20 per unit b. 150 units of output and a price of $20 per unit c. 150 units of output and a price of $30 per unit d. 200 units of output and a price of $20 per unit

c. 150 units of output and a price of $30 per unit

Refer to Figure 15-21. What is the price and quantity for this natural monopolist under fair return pricing? a. A and J b. E and J c. F and K d. H and L

c. F and K

A monopolist will choose to increase output when a. market price increases. b. at all levels of output, marginal cost increases. c. at the present level of output, marginal revenue exceeds marginal cost. d. the demand curve shifts to the left.

c. at the present level of output, marginal revenue exceeds marginal cost.

Refer to Table 17-13. Increasing the size of its store and parking lot is a dominant strategy for a. Lopes, but not for HomeMax. b. HomeMax, but not for Lopes. c. both stores. d. neither store.

c. both stores.

When a firm operates under conditions of monopoly, its price is a. not constrained. b. constrained by marginal cost. c. constrained by demand. d. constrained only by its social agenda.

c. constrained by demand.

Monopolistic competition is an a. efficient market structure because long-run profits are zero. b. efficient market structure because each firm produces at its efficient scale. c. inefficient market structure because there is deadweight loss. d. Both a and b are correct.

c. inefficient market structure because there is deadweight loss.

The equilibrium price in a market characterized by oligopoly is a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. d. lower than in monopoly markets and lower than in perfectly competitive markets.

c. lower than in monopoly markets and higher than in perfectly competitive markets.

Scenario 15-7 Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to 20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC. 20. Refer to Scenario 15-7. If Black Box Cable TV is unable to price discriminate, what price will it choose to maximize its profit, and what is the amount of the profit? a. price = $20; profit = $400,000 b. price = $20; profit = $330,000 c. price = $150; profit = $450,000 d. price = $150; profit = $600,000

c. price = $150; profit = $450,000

Refer to Figure 15-9. The monopolist's maximum profit a. is $1,600. b. is $2,000. c. is $2,500. d. cannot be determined from the diagram.

d. cannot be determined from the diagram.

Two college students, Mary and Maggie, are spending spring break in Florida. Mary buys a cup of coffee each morning at the local Starbucks rather than from one of the local coffee shops. Maggie claims that Mary is irrational because she never purchases Starbucks coffee at home, and Starbucks coffee costs more than the coffee sold by local shops. An economist would most likely explain Mary's behavior by suggesting that a. Mary's behavior is rational, but Maggie's behavior is clearly irrational. b. Mary's behavior is clearly irrational, but Maggie's behavior is rational. c. the Starbucks brand name suggests consistent quality. d. the advertising by Starbucks in Florida is more persuasive than the advertising by Starbucks in Mary and Maggie's home town.

c. the Starbucks brand name suggests consistent quality.

Each firm in a monopolistically competitive industry faces a downward-sloping demand curve because a. there are many other sellers in the market. b. there are very few other sellers in the market. c. the firm's product is different from those offered by other firms in the market. d. the firm faces the threat of entry into the market by new firms.

c. the firm's product is different from those offered by other firms in the market.

Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. If they both agree to cooperate on a strategy that maximizes their joint profits, annual profit will grow by a. $1.0 million for Lopes and by $1.5 million for HomeMax. b. $0.4 million for Lopes and by $3.4 million for HomeMax. c. $3.2 million for Lopes and by $0.6 million for HomeMax. d. $2.0 million for Lopes and by $2.5 million for HomeMax.

d. $2.0 million for Lopes and by $2.5 million for HomeMax.

Refer to Figure 15-7. A profit-maximizing monopolist would earn total revenues of a. $81. b. $144. c. $225. d. $240.

d. $240.

Refer to Figure 16-2. In order to maximize profit, the firm will charge a price of a. $16. b. $24. c. $32. d. $36.

d. $36

Competitive firms differ from monopolies in which of the following ways? (i) Competitive firms do not have to worry about the price effect lowering their total revenue. (ii) Marginal revenue for a competitive firm equals price, while marginal revenue for a monopoly is less than the price it is able to charge. (iii) Monopolies must lower their price in order to sell more of their product, while competitive firms do not. a. (i) and (ii) only b. (ii) and (iii) only c. (i) and (iii) only d. (i), (ii), and (iii)

d. (i), (ii), and (iii)

Scenario 15-1 Consider a transportation corporation named Reading's that has just completed the development of a new light rail system in Minneapolis. Currently, there are plenty of seats on the train, and it is never crowded. Its capacity far exceeds the needs of the city. After just a few years of operation, the shareholders of Reading's experienced incredibly high rates of return on their investment due to the profitability of the corporation. Refer to Scenario 15-1. Which of the following statements is most likely to be true? (i) New entrants to the market know they will have a smaller market share than Reading's currently has. (ii) Reading's is most likely experiencing decreasing average total cost. (iii) Reading's is a natural monopoly. a. (i) and (ii) only b. (ii) and (iii) only c. (i) and (iii) only d. (i), (ii), and (iii)

d. (i), (ii), and (iii)

Refer to Figure 15-21. What is the price and quantity for this natural monopolist under socially optimal pricing? a. A and J b. E and J c. F and K d. H and L

d. H and L

Refer to Figure 16-2. Suppose that average total cost is $36 when Q=24. What is the profit-maximizing price and resulting profit? a. P=$24, profit=$0 b. P=$36, profit=$144 c. P=$36, profit=$48 d. P=$36, profit=$0

d. P=$36, profit=$0

The economic inefficiency of a monopolist can be measured by the a. number of consumers who are unable to purchase the product because of its high price. b. excess profit generated by monopoly firms. c. poor quality of service offered by monopoly firms. d. deadweight loss.

d. deadweight loss.

Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell a. industrial products. b. homogeneous products. c. consumer goods for which there are no close substitutes. d. highly-differentiated consumer goods.

d. highly-differentiated consumer goods.

The key issue in determining the efficiency of public versus private ownership of a monopoly is a. the tendency for efficient management of publicly owned enterprises. b. the inability of private monopolies to get rid of managers that are doing a bad job. c. the propensity of private monopolies to generate excessive profits. d. how ownership of the firm affects the cost of production.

d. how ownership of the firm affects the cost of production.

Refer to Figure 15-16. Which triangle represents the monopoly deadweight loss? a. the triangle with vertical lines that is bordered by ACT b. the triangle with vertical lines and light grey shading that is bordered by ABH c. the triangle with vertical lines and dark grey shading that is bordered by HIT d. the triangle with dark grey shading that is bordered by HKT

d. the triangle with dark grey shading that is bordered by HKT