Micro Review

HW 5- 7) The table given below describes the payoffs to Jack and Jill when each chooses to produce rock, scissors, or paper. The payoff matrix indicates the dollar payments from the loser to the winner.Assume for this question that "paper" is not allowed as a choice and identify the Nash equilibrium, if any. (see hw for picture) a. (Rock, Rock) b. (Scissors, Scissors) c. (Rock, Scissors) d. There is no Nash equilibrium.

a. (Rock, Rock)

HW 5- 2) The table given below represents the payoff matrix of firms A and B, when they choose to produce low or high output. In each cell, the figure on the left indicates Firm B's payoffs and the figure on the right indicates Firm A's payoffs. Which firm has a dominant strategy? (see hw for picture) a. Firm A b. Firm B c. Both Firm A and Firm B d. Neither Firm A nor Firm B

a. Firm A

HW 5-13) Which of the following, if true, would decrease the stability of a cartel? a. The cartel includes a large number of competitive firms. b. Cheating by any of the cartel members is punishable. c. The cartel involves repeat games. d. The cartel is enforceable.

a. The cartel includes a large number of competitive firms.

32) A firm that has monopoly power _____. a. can profitably set price above marginal cost b. sells goods at higher prices due to economies of scale c. faces a horizontal demand curve d. produces easily substitutable goods

a. can profitably set price above marginal cost

HW 5- 12) Assume that two firms are engaged in a pricing rivalry and attempt collusion. If each firm knows that the pricing game will last for a finite number of periods, and the collusion contract is not enforceable, then they will have an incentive to: a. cheat in every period. b. cheat in alternate periods. c. cheat in every period but the first. d. cheat in every period but the last.

a. cheat in every period

HW 5- 17) A tit-for-tat strategy is one in which: a. each player mimics the action taken by the other player in the previous period. b. each player does the opposite of the action taken by the other player in the previous period. c. each player randomly chooses an action. d. one player always plays the same strategy irrespective of the other player's choice.

a. each player mimics the action taken by the other player in the previous period.

15) The demand curve for a firm operating in a monopoly market is the same as _____. a. its average revenue curve b. the industry supply curve c. its marginal revenue curve d. its marginal cost curve

a. its average revenue curve

38) The deadweight loss of a monopoly arises from: a. the loss of consumer surplus being greater than the gain in producer surplus. b. the transfer of producer surplus to consumers. c. the loss in producer surplus being greater than the gain in consumer surplus. d. the combined loss of consumer and producer surplus.

a. the loss of consumer surplus being greater than the gain in producer surplus.

28) . Magic Card Company produces packs of cards at a marginal cost of $2 per deck. If they currently sell their product at $5 per deck, what is the value of the Lerner index of monopoly power? a. 0.4 b. 0.6 c. 2.5 d. 5

b. 0.6

HW 5- 3) The table given below shows the payoffs to Firm A and Firm B if they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm A's payoffs and the figure on the right indicates Firm B's payoffs. Which of the following describes the dominant-strategy equilibrium in this game? (see hw for picture) a. Both firms produce low output b. Both firms produce high output c. Firm A produces low output and Firm B produces high output d. Firm A produces high output and Firm B produces low output

b. Both firms produce high output

37) The following figure shows the marginal revenue [MR], demand, and average cost [AC] curves for a profit-maximizing monopolist. The loss in welfare in the market due to the monopoly firm is _____. (see hw for picture) a. IFA b. FGH c. AFGB d. BGEO

b. FGH

10) The following figure shows the intersection of the demand and supply curves for a commodity in the domestic market at price P2 and quantity Q2, in the absence of trade. With trade, the supply curve shifts to Supplytrade. The net gain to domestic residents when they trade with foreign suppliers is represented by ____. (see hw for picture) a. d + e b. h + i c. k + l + m d. f + g + j

B) h + i

5) When a price ceiling is imposed in a competitive market at a level below the equilibrium price: a. the gain to producers outweighs the loss to consumers. b. the output level becomes inefficient. c. the total surplus in the market is not affected. d. the producer surplus is increased.

B) the output level becomes inefficient

16) The following table shows the total revenue and total cost for a monopolist at various levels of output. The economic profit earned by the firm by producing the profit-maximizing level of output is ________. (see hw for picture) a. $13 b. $9 c. $18 d. $4

C) $18

1) Suppose the demand for raspberry frozen yogurt can be represented by the equation QD = 5 - 2P, and the supply is given by the equation QS = 3P. Which of the following is the best estimate of the consumer surplus in this market? A) $2 B) $1.25 C) $2.25 D) $3.75

C) $2.25

The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P2 and quantity B. The aggregate consumer surplus after a price ceiling is set at P1 is _____. (see hw for picture) a. LFP2 b. LEP3 c. LEJP2 d. LEIP1

D) LEIP1

3) In the long run, aggregate producer surplus is zero in: a. industries with positive accounting profits. b. industries with a positive economic profit. c. decreasing-cost industries. d. constant-cost competitive industries.

D) constant-cost competitive industries

HW 5- 20) Empirical analysis with respect to the used car market suggests that: a. the "lemons" model holds and in the end bad cars totally drive out good cars from the market. b. the lack of information among consumers drives up the price of bad cars. c. consumers are partially informed about the quality of used cars making the "lemons" model only partly valid. d. consumers do not try to gather information to any appreciable degree and depend on the recommendations made by the sellers

c. consumers are partially informed about the quality of used cars making the "lemons" model only partly valid.

21) In response to a rightward shift in the demand for a commodity, a monopoly firm that is producing at the profit-maximizing level of output will: a. decrease price and output. b. decrease output and increase price. c. increase price but maintain the level of output. d. increase output and price.

c. increase price but maintain the level of output.

27) A profit-maximizing monopolist will maximize both total revenue and economic profit at the same price when _____, given that there are no fixed costs. a. the marginal cost curve is upward-sloping b. demand is perfectly inelastic c. marginal cost is zero d. marginal revenue is an increasing function of quantity produced

c. marginal cost is zero

HW 5- 1) The three most common elements in game theory models are: a. firms, choices, and profit. b. labor, capital, and returns. c. players, strategies, and payoffs. d. firms, inputs, and output

c. players, strategies, and payoffs.

24) Monopoly power does not guarantee positive profits because _____. a. demand elasticity in monopoly markets is relatively low b. monopoly firms are price takers c. sales and profits of monopoly firms are restricted by the demand curve d. the monopolist's demand curve is the same as the marginal revenue curve

c. sales and profits of monopoly firms are restricted by the demand curve

HW 5- 15) A repeated game is a game: a. that is played simultaneously by different sets of players. b. that is played more than once, but under different rules each time. c. that is played more than once, by the same set of players. d. that is played by a different set of players each time.

c. that is played more than once, by the same set of players.

9) For an excise tax which causes output in a market to fall to zero: a. the tax revenue and deadweight loss are both zero. b. the tax revenue is positive but there is no deadweight loss. c. the deadweight loss is equal to the total surplus before the tax. d. the deadweight loss is equal to the producer's surplus

c. the deadweight loss is equal to the total surplus before the tax.

20) The following figure shows the marginal cost [MC], average cost [AC], marginal revenue [MR], and demand curves for a profit-maximizing monopolist. The profit earned by the monopolist is given by the area _____. a. BHLM b. IDN c. AFLM d. AFHB

d. AFHB

19) Which of the following conditions generally holds when a monopoly firm is producing its profit-maximizing level of output? a. Marginal cost [MC] = marginal revenue [MR] = average cost [AC] = average revenue [AR] b. MC = MR > AC c. MC = MR = price d. MC = MR < AR

d. MC = MR < AR

HW 5- 16) Which of the following, if true, would allow oligopolists to enjoy greater profits through collusion? a. The collusion contract is non-binding. b. The game is being played only once. c. The players are not allowed to interact among themselves. d. The collusion contract is enforced by an external authority.

d. The collusion contract is enforced by an external authority.

HW 5- 9) Which of the following is true for a two-person game which has a Nash equilibrium? a. Only one of the two players will have a dominant strategy. b. The game must have a dominant-strategy equilibrium. c. The dominant strategy of the players must be different. d. The game may or may not have a dominant-strategy equilibrium.

d. The game may or may not have a dominant-strategy equilibrium.

HW 5- 6) The table given below describes the payoffs to Jack and Jill when each chooses to produce rock, scissors, or paper. The payoff matrix indicates the dollar payments from the loser to the winner. Identify the Nash equilibrium, if any. (see hw for picture) a. (Rock, Rock) b. (Rock, Paper) c. (Paper, Paper) d. There is no Nash equilibrium.

d. There is no Nash equilibrium

8) A per-unit excise tax on a single competitive firm causes: a. all cost curves, except the total fixed cost curve to increase by the amount of the tax. b. all per-unit cost curves to increase by less than the amount of the tax. c. all per-unit cost curves, except the marginal cost curve, to decrease by the amount of the tax. d. all per-unit cost curves and the marginal cost curve to increase by the amount of the tax.

d. all per-unit cost curves and the marginal cost curve to increase by the amount of the tax.

23) A profit-maximizing monopoly firm will earn excess profits if it is able to produce a level of output where: a. average revenue is equal to marginal cost. b. marginal revenue is greater than marginal cost. c. price is equal to marginal cost. d. average revenue is greater than average cost.

d. average revenue is greater than average cost.

31) All of the following are sources of monopoly power, except _____. a. patents b. unique access to an essential input c. economies of scale d. homogeneity of products

d. homogeneity of products

40) A price ceiling imposed by the government in a monopoly market can: a. lead to a decrease in output. b. increase the deadweight loss from a monopoly. c. raise prices and lower output. d. lead to a decline in product quality.

d. lead to a decline in product quality.

29) When the value of the Lerner index is zero for a firm: a. its demand curve is steeply sloped. b. its demand curve is non-linear. c. the demand for its product is unit elastic. d. the demand for its product is perfectly elastic.

d. the demand for its product is perfectly elastic

HW 5- 18) In an oligopoly game, the incentive to cheat is reduced when: a. it is a one-period game and there are only a few players. b. the game is repeated a finite number of times and all players are aware of it. c. it is a one-period game and the payoffs from cooperation are higher than the payoffs from cheating. d. the game is repeated indefinitely and there is a threat of retaliation in subsequent periods.

d. the game is repeated indefinitely and there is a threat of retaliation in subsequent periods.

30) The larger the value of the Lerner index for a firm, _____. a. the greater the difference between marginal cost and marginal revenue b. the smaller the difference between marginal cost and price c. the more price elastic the firm's demand curve d. the greater the firm's monopoly power

d. the greater the firm's monopoly power

39) When the government regulates the price in a monopoly market by setting price at the level where demand equals marginal cost: a. the monopolist reduces output resulting in a shortage in the market. b. the monopolist's marginal revenue curve becomes horizontal over all levels of output. c. the monopolist's profits are positive at the new price. d. the monopolist produces output at the efficient level.

d. the monopolist produces output at the efficient level.

17) Assume that Bost Incorporated sells game cartridges that can be used in a popular home video system. The company currently sells 300 cartridges per week and earns $500 in profit. The production manager calculates that the marginal cost of producing the next unit is $5, while marginal revenue from one additional unit is $10. Based on this information we would conclude that: a. Bost should reduce their output to 295 cartridges to increase profit. b. Bost's profit would fall to $495 by increasing output by 1 unit. c. Bost's profit would rise to $505 by increasing output by 1 unit. d. Bost's profit-maximizing output is 300 cartridges.

c. Bost's profit would rise to $505 by increasing output by 1 unit.

36) The following figure shows the downward-sloping demand curve [D] and marginal revenue [MR] curve and the upward-sloping marginal cost [MC] curve for a monopolist. If the government wishes to regulate the monopoly firm by restricting the price at C in the market, the demand curve will be equal to _____. (see hw for picture) a. VD b. CIJ c. CFD d. FD

c. CFD

HW 5- 11) Which of the following is likely to occur if two firms in a duopoly market decide to collude and produce the same output and charge the same price? a. Each firm will receive twice the profit they earned before the agreement. b. Together the firms will produce less than the monopoly output. c. Each firm will receive exactly half of the monopoly profit. d. None of the firms will have an incentive to charge a lower price.

c. Each firm will receive exactly half of the monopoly profit.

HW 5- 4) The table given below represents the payoff matrix of firms A and B, when they choose to produce low or high output. In each cell, the figure on the left indicates Firm B's payoffs and the figure on the right indicates Firm A's payoffs. Which of the following statements about the two firms must be true? (see hw for picture) a. If Firm B produces low output, Firm A will also produce low output. b. If Firm B produces high output, Firm A will produce low output. c. If Firm A produces high output, Firm B will also produce high output. d. If Firm A produces low output, Firm B will produce high output.

c. If Firm A produces high output, Firm B will also produce high output.

HW 5- 5) The table given below describes the payoffs to Jack and Jill when each chooses to produce rock, scissors, or paper. The payoff matrix indicates the dollar payments from the loser to the winner.Which of the following can be concluded from the information given in the table? (see hw for picture) a. Jill has a dominant strategy but Jack does not. b. Jack has a dominant strategy but Jill does not. c. Neither Jack nor Jill has any dominant strategy. d. Each outcome or strategic choice benefits the two players equally.

c. Neither Jack nor Jill has any dominant strategy.

12) Given that quotas benefit producers, who are few in number, at a greater expense to consumers, who are more in number, which of the following correctly explains why quotas are still in effect? a. Domestic consumers are better organized than domestic producers. b. Quotas reduce prices in domestic markets. c. The benefits of quotas are concentrated and visible while the costs are dispersed. d. When a quota is imposed by the importing country, it lowers prices in the global market.

c. The benefits of quotas are concentrated and visible while the costs are dispersed

HW 5- 10) The table given below shows the payoffs (in terms of years spent in the jail) to Sundance and Butch who choose between the options 'confess' and 'don't confess'. In each cell, the figure on the left indicates payoffs for Butch and the figure on the right indicates payoffs for Sundance.What values for X and Y will make this payoff matrix a prisoner's dilemma? (see hw for picture) a. X = 3 years, Y = 11 years b. X = 11 years, Y = 3 years c. X = 5 years, Y = 5 years d. X = 1 years, Y = 1 years

c. X = 5 years, Y = 5 years

22) An important difference between a monopoly and a competitive industry is that: a. a monopoly earns zero profits while competitive firms earn positive economic profits in the long run. b. a profit-maximizing monopolist equates price and marginal cost while profit-maximizing firms in competitive industries equate marginal revenue and marginal cost. c. a monopoly is a price maker while a competitive industry faces a horizontal demand curve. d. a monopoly has a vertical supply curve while a competitive firm's marginal cost curve is the supply curve.

c. a monopoly is a price maker while a competitive industry faces a horizontal demand curve

18) The following figure shows the downward-sloping demand curve [D] and marginal revenue [MR] curve and the upward-sloping marginal cost [MC] curve for a monopolist. An unregulated monopolist will sell _____ units of output at a price of_____ to maximize profit. a. J and W b. K and C c. J and B d. L and Z

A) J and W

2) The following figure shows the intersection of demand and supply at the price P2 and quantity Q2 in a competitive market. What is the producer surplus at the equilibrium level of output? (see hw for picture) A) f + g + j B) f +g + h + i + j C) f+ g D) i +h +g + f

A) f + g + j

The level of output produced by a firm is efficient if _____ at that level of output. a. marginal benefit equals marginal cost b. total cost equals total revenue c. fixed cost equals price d. average variable cost equals average revenue

A) marginal benefit equals marginal cost

11) The Candlemakers' petition was a satire of protectionism written and published in 1845. In the petition, candlemakers advocated that all businesses should shut their blinds and curtains and block all sunlight from entering their buildings. Although satirical, which of the following would be expected to take place if this policy were implemented? a. The net effect on employment would be negative since the demand for candles would decrease the number of jobs associated with the candlemaking industry. b. Since consumers would have to spend a larger proportion of their income on candles than before, the net effect of this policy would be to reduce spending on other domestic goods. c. Domestic citizens would be better off because it would increase consumer surplus. d. Although sunlight is a free alternative to candlelight during the daytime, a policy to block sunlight would productively allocate resources to domestic industries.

b. Since consumers would have to spend a larger proportion of their income on candles than before, the net effect of this policy would be to reduce spending on other domestic goods.

HW 5- 19) Karen hires a carpenter from a firm providing carpentry services, for remodeling the cabinets in her kitchen. She is unaware of the productivity of the carpenter who is sent by the firm. The carpenter, however, is perfectly aware of the labor hours required for the task. Which of the following problems is being faced by Karen in this situation? a. A prisoner's dilemma b. The asymmetric information problem c. The moral hazard problem d. The tragedy of commons

b. The asymmetric information problem

HW 5- 8) The table given below represents the payoff matrix of firms A and B, when they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm B's payoffs and the figure on the right indicates Firm A's payoffs.If X = 10 and Y = 15, then which of the following conclusions can be drawn from the information given in the table? a. The game has a Nash equilibrium and a dominant-strategy equilibrium. b. The game has a Nash equilibrium but not a dominant-strategy equilibrium. c. The game does not have a Nash equilibrium but has a dominant-strategy equilibrium. d. The game has neither a Nash equilibrium nor a dominant-strategy equilibrium.

b. The game has a Nash equilibrium but not a dominant-strategy equilibrium.

7) Presently, the United States produces as well as imports crude oil. Suppose the government imposes a $10 per barrel excise tax on imported oil. What will happen? a. The price of oil will rise by $10; less oil will be consumed but sales of foreign producers will rise at the expense of domestic producers. b. The price of oil will rise; less oil will be consumed but sales of domestic producers will rise at the expense of the foreign oil producers. c. The price of oil will decline and more U.S.-produced oil will be sold in place of the heavily taxed foreign oil. d. The price of oil will decline and more oil will be consumed but the relative shares of the oil market between the U.S. and foreign oil producers will be unchanged.

b. The price of oil will rise; less oil will be consumed but sales of domestic producers will rise at the expense of the foreign oil producers

33) When the marginal cost for a monopoly firm is constant, the average cost curve is _____. a. U-shaped b. horizontal c. positively sloped d. non-linear

b. horizontal

26) A monopolist will never operate on the lower half of the demand curve because for this range of output: a. average revenue is negative. b. marginal cost exceeds marginal revenue. c. total revenue can be increased further. d. marginal revenue is positive.

b. marginal cost exceeds marginal revenue.

13) The monopolist's demand curve slopes downward because: a. the good sold by a monopolist is easily substitutable. b. the monopolist is a price maker in the market. c. average revenue decreases with each unit sold. d. the marginal product of labor is diminishing.

b. the monopolist is a price maker in the market.

14) The marginal revenue curve of a monopolist lies below the demand curve because: a. the demand curve is unit elastic. b. the monopolist must lower price on all units sold in order to sell additional units. c. the monopolist is a price taker. d. the marginal revenue curve coincides with the average revenue curve.

b. the monopolist must lower price on all units sold in order to sell additional units.

HW5 -14) In an oligopoly game, the greater the number of players who are colluding: a. the lower the possibility of cheating. b. the more elastic the demand curve of the cheater. c. the higher the payoff received by each player from colluding. d. the lower will be the profit from cheating.

b. the more elastic the demand curve of the cheater.

35) Which of the following statements about the effects of monopoly is incorrect? a. A monopoly restricts output to maximize profits. b. A monopoly raises price above the competitive level. c. A monopoly causes input prices to rise. d. A monopoly causes a redistribution of income.

c. A monopoly causes input prices to rise.

34) When comparing a monopoly firm and a competitive firm in the long run, which of the following statements is not correct? a. A monopoly firm does not need to produce output at the lowest possible cost but a competitive firm must. b. A monopoly firm earns economic profit at its profit-maximizing level of output but a competitive firm does not. c. A monopoly firm operates at the minimum point on its average cost curve but a competitive firm does not. d. A monopoly firm will produce more than the efficient level of output but a competitive firm will always produce the efficient level of output.

c. A monopoly firm operates at the minimum point on its average cost curve but a competitive firm does not.

25) Which of the following statements is true regarding a monopolist? a. A monopolist's short-run supply curve is upward-sloping. b. A decrease in demand will always cause a monopolist to reduce output. c. A monopoly firm that operates at a point above average total cost should shut down. d. Marginal revenue is greater than marginal cost for a profit-maximizing monopolist.

c. A monopoly firm that operates at a point above average total cost should shut down.