Quiz #6

A monopolistically competitive industry is like a perfectly competitive industry in the sense that: Answers: non-price competition is significant in both industries. there are no substantial barriers to entry in both cases. economic profits in long run equilibrium are zero in both cases. both (b) and (c) are true.

there are no substantial barriers to entry in both cases. economic profits in long run equilibrium are zero in both cases. Correct both (b) and (c) are true.

Which is the following is true of games, in interactions between oligopolists?

Most games are noncooperative games.

Exhibit 15-6 Coca-Cola New ads No new ads Pepsi New advertisingcampaign P: $80 mil C: $80 mil P: $180 mil C: $40 mil No new advertisingcampaign P: $40 mil C: $180 mil P: $100 mil C: $100 mil Refer to Exhibit 15-6. In this situation:

Pepsi's dominant strategy is to introduce new ads.

In the long run a perfectly competitive firm operates ____ and a monopolistically competitive firm operates ____.

at the efficient scale; with excess capacity

In a typical cartel agreement, the cartel maximizes profit when it:

behaves as a monopolist.

Which of the following industries would most likely represent monopolistic competition?

clothing

In monopolistically competitive markets in long run equilibrium:

less than the efficient level of output will be produced because price exceeds marginal cost.

In most areas, there are a large number of qualified primary care physicians whose services are highly personalized. In addition to price, factors such as age, sex, location, and personality influence the choice of physician. The primary care physician market is probably:

monopolistically competitive.

The restaurant market in San Francisco is probably best categorized as:

monopolistically competitive.

If a profit-maximizing monopolistic competitor earns positive economic profits in the short run:

new firms will be attracted to the industry.

The tools of "game theory" are most helpful to economists in markets characterized by:

new firms will enter the market.

Under conditions of oligopoly, economies of large-scale production mean that:

small firms are at a disadvantage in competing with relatively large firms.

The ____ effect is a ____ network externality where a consumer wants to own a unique good.

snob; negative

When new firms choose to enter monopolistically competitive markets:

some firms in the market must be making economic profits.

A "Prisoners' Dilemma" game demonstrates how ____ is often rational for individuals even though ____.

the failure to cooperate; cooperation would make everyone better off

If the ice cream industry is monopolistically competitive, then:

the price of ice cream equals average cost in long-run equilibrium.

The following payoff matrix shows the possible sentences that two suspects, who are arrested on suspicion of car theft, could receive. The suspects are interrogated separately and are unable to communicate with one another. Suspect 2 Confess Don't Confess Suspect 1 Confess 1: 6 years 2: 6 years 1: 1 year 2: 10 years Don'tConfess 1: 10 years 2: 1 year 1: 2 years 2: 2 years Refer to Exhibit 15-1. The game is called the "Prisoners' Dilemma" becaus

the prisoners, by acting in their own private interests, end up worse off than otherwise could be the case.

Due to the entry and exit of firms in a monopolistically competitive market:

economic profits and economic losses are dissipated in the long run.

Monopolistic competition is similar to monopoly in that:

firms have some influence over the product price.

Mutual interdependence means that:

firms must anticipate the possible reaction of rivals to their own economic behavior.

Which of the following is not common to perfect competition and monopolistic competition?

Product differentiation

Monopolistic and perfect competition are alike in that:

firms earn a normal rate of return in the long run.

Which of the following is generally true of a monopolistic competitor operating in the long run?

price greater than minimum average total cost

In monopolistically competitive markets, economic losses ____, and ____ shifts the demand curve of the remaining firms to the ____.

signal some remaining firms to exit; exit; right

When firms exit a monopolistically competitive industry:

the average revenue received by remaining firms will increase at each level of output.

When firms exit a monopolistically competitive industry:

the demand curves of remaining firms are increased at each level of output.

Exhibit 14-1 Refer to Exhibit 14-1. Based on the graph, what is the maximum amount of profit this firm could earn?

$210

Exhibit 14-5 The graph depicts a monopolistically competitive firm's demand, marginal revenue, and cost curves. Refer to Exhibit 14-5. If the firm produces the profit-maximizing (or loss-minimizing) level of output, it will produce: Answers: 100 sweaters each week. 85 sweaters each week. 70 sweaters each week. 60 sweaters each week.

60 sweaters each week

Exhibit 14-3 The following diagrams depict firms in monopolistically competitive markets. Refer to Exhibit 14-3. Graph ____ demonstrates firms exiting the market, and a resulting ____ of the firm's share of the market. Answers: A; increase B; increase A; decrease B; decrease

A; increase

Which of the following statements is incorrect? Answers: Advertising can lower the costs to consumers of acquiring information. Advertising tends to increase competition in imperfectly competitive industries. Even though advertising increases total production costs, it may indeed provide a useful service to consumers. Advertising is only useful as a way to manipulate consumer tastes.

Advertising is only useful as a way to manipulate consumer tastes.

Which of the following is characteristic of an oligopolistic industry? Answers: homogeneous or differentiated products few firms interdependence large barriers to entry all of the above

All of the above

f the firm in the graph below represents the typical firm in a monopolistically competitive industry, what would be most likely to occur?

Existing firms would be likely to exit this industry.

Which of the following statements characterize an oligopoly market?

Firms are aware that their own economic behavior will influence the decisions of rivals.

The Organization of Petroleum Exporting Countries is an example of:

a periodically successful cartel.

Firms in monopolistically competitive markets can differentiate their products on the basis of: Answers: geographical location. service. credit terms. all of the above.

all of the above. geographical location. service. credit terms

Which of the following is characteristic of monopolistically competitive industries? Answers: Product differentiation. A substantial likelihood of collusion. Relatively small market shares of each producer. Both (a) and (c) are characteristics of monopolistically competitive industries.

Both (a) and (c) are characteristics of monopolistically competitive industries Product differentiation/Relatively small market shares of each producer.

Bert and Ernie are noncolluding oligopolists. If both choose a high price strategy, each makes $40 in profits; if both choose a low price strategy, each makes $30 in profits. If Bert chooses a high price strategy and Ernie chooses a low price strategy, Bert makes $20 in profits and Ernie makes $60 in profits, while if Bert chooses a low price strategy and Ernie chooses a high price strategy, Bert makes $60 in profits and Ernie makes $20 in profits. Which combination of pricing strategies would you expect Bert and Ernie to adopt if they act independently?

Both choose a low price strategy.

Exhibit 15-6 Coca-Cola New ads No new ads Pepsi New advertisingcampaign P: $80 mil C: $80 mil P: $180 mil C: $40 mil No new advertisingcampaign P: $40 mil C: $180 mil P: $100 mil C: $100 mil Refer to Exhibit 15-6. The manufacturers of Pepsi and Coca-Cola must each decide whether to launch new ad campaigns to advertise their respective soft drinks. The payoff matrix shows the profits earned from sales of Pepsi and Coca-Cola under alternative advertising scenarios. Based on this information, one can say that: Answers: if Pepsi introduces new ads and Coca-Cola does not, then profits from the sale of Pepsi equal $80 million. Coca-Cola will earn the greatest profit if it advertises and Pepsi does not. Pepsi will earn the greatest profit if it introduces new ads. combined profits for the two firms will be greatest if neither firm were to introduce new ads.

Coca-Cola will earn the greatest profit if it advertises and Pepsi does not.