ECH Chapter 13 & 14 Quiz

If a monopolist is producing a quantity that generates MC > MR, then profit:

can be increased by increasing price.

If a monopolist is producing a quantity that generates MC < MR, then profit:

can be increased by increasing production.

An extreme case of oligopoly in which firms collude to raise joint profits is known as a:

cartel.

A strategy that is the same regardless of the action of the other player in a game is a _____ strategy.

dominant

A natural monopoly exists when:

economies of scale provide large cost advantages to having one firm produce the industry's output.

The most important source of oligopoly in an industry is:

economies of scale.

The purpose of the trusts established in the United States in the late 1800s was to:

engage in monopoly pricing.

Reference: Ref 14-21 (Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms, firm B:

has a dominant strategy to cooperate.

Game theory is commonly used to explain behavior in oligopolies, because oligopolies are characterized by:

interdependence.

If large fixed costs result in ATC falling as output increases and this occurs over the relevant range of output, this industry is a:

natural monopoly.

Suppose that each of the two firms in a duopoly has the independent choice of advertising or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million and the other gets profit of $2 million. According to game theory, if the firms collude to maximize joint profits:

neither will advertise.

Suppose that a monopoly firm is required to pay a new annual license fee to do business in its city and that the fee is somewhat less than the economic profit the firm is now earning. In response to the increase in fees, the firm will:

not change its price.

Temporary monopolies via the provision of sole ownership rights to profit from the production, use, or sale of a good are provided by:

patents and copyrights.

Reference: Ref 14-21 (Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms, if both firms pursue their dominant strategies:

their joint profits are maximized.

Which of the following is a form of strategic behavior intended to influence the future actions of other players?

tit-for-tat strategy

Which of the following is TRUE?

If demand is downward-sloping, P > MR.

Which of the following is TRUE?

MR = MC is a profit-maximizing rule for any firm.

Which of the following is TRUE?

Monopolies produce too little and charge too much from the standpoint of efficiency.

_____ firms have the most market power.

Monopoly

Which of the following statements about the differences between monopoly and perfect competition is INCORRECT?

Monopoly profits can continue in the long run because the monopoly produces more and charges a higher price than a comparable perfectly competitive industry.

In monopoly:

a basic condition for efficiency is violated because P > MC.

A formal agreement to limit production and raise prices leads to:

a cartel.

An industry with only two firms is generally called:

a duopoly.

To be called an oligopoly, an industry must have:

a small number of interdependent firms.

The demand curve for a monopoly is:

above the marginal revenue curve.

A dominant strategy equilibrium occurs when:

all players make the same choice regardless of the action of the other players.

An industry that is dominated by a few firms, each of which recognizes that its own choices can affect the choices of its rivals and vice versa, is:

an oligopoly.

Suppose that each of the two firms in a duopoly has the independent choice of advertising or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million and the other gets profit of $2 million. According to game theory, the Nash equilibrium is:

both will advertise.

If a monopolist is producing a quantity that generates MC = P, then profit:

can be increased by decreasing production.

In the classic prisoners' dilemma with two accomplices in crime, the dominant strategy for each individual is to:

confess

Which of the following is (are) barrier(s) to entry?

control of scarce resources, economies of scale, and patents and copyrights

The pricing in monopoly prevents some mutually beneficial trades. The value of these unrealized mutually beneficial trades is called:

deadweight loss.

Goods that are subject to network externalities tend to be ones:

for which the value of the good to an individual is higher when more people use it.

One framework used to analyze strategic choices is:

game theory.

The study of behavior in situations of interdependence is known as:

game theory.

If the state government gave you the exclusive right to sell cement to municipalities, your monopoly would result from:

government restrictions to entry.

Reference: Ref 14-21 (Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms, firm A:

has a dominant strategy to cooperate.

If a product's usefulness increases with the number of users, it:

has network externalities.

A monopoly is producing output so that average total cost is $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, to maximize profits this firm should:

increase output.

If a monopolist is producing a quantity that generates MC = MR, then profit:

is maximized.

Suppose the elasticity of demand for tickets to Broadway shows is 2.0 for men and 0.3 for women. To use price discrimination to increase profits, the producers should charge lower prices to _____ because their demand is _____.

men; elastic

An industry with a single producer that sells a single product with no substitutes is a:

monopoly

The outcome of a strategic choice is called a:

payoff.

The purpose of antitrust policy is to:

prevent the exercise of monopoly power.

In contrast to perfect competition, a monopoly:

produces less at a higher price.

Oligopoly is a market structure that is characterized by a _____ number of _____ firms producing _____ products.

small; interdependent; identical or differentiated

When firms in a particular industry informally agree to charge the same price as the largest firm in that industry, it is called:

tacit collusion.

A monopoly is most likely to be temporary if the monopoly power is derived from:

technological change.

The demand curve facing a monopolist is always:

the same as the industry's demand curve.

A duopoly is an industry that consists of:

two firms.

Suppose the elasticity of demand for tickets to Broadway shows is 2.0 for men and 0.3 for women. To use price discrimination to increase profits, the producers should charge higher prices to _____ because their demand is _____.

women; inelastic

Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she wants to sell six, she can only charge $20,000 each. The price effect of selling the sixth motor home is:

-$5,000.

Which of the following statements concerning monopoly is TRUE?

A monopoly has no rivals.

_____ occurs when the only two firms in an industry agree to fix the price at a given level.

Collusion

When a monopolist practices price discrimination, the monopolist's profits will be lower than in a single-price monopoly.

False

The 1890 law intended to prevent the establishment of more monopolies and to break up existing ones in the United States was the:

Sherman Antitrust Act.

The first trust in the United States was established by _____ in the _____ industry.

Standard Oil; petroleum

Which of the following is NOT an example of price discrimination?

Street vendors increase the price of umbrellas when it is raining.

_____ is the unwritten or unspoken agreement through which firms limit _____.

Tacit collusion; competition among themselves

A disadvantage of public ownership of a monopoly is that publicly owned firms relatively little incentive to keep costs low or offer high-quality products.

True

A situation in which each firm acts to raise the profits of its rivals (and of itself) without any formal agreement between firms is known as tacit collusion.

True

A trust is a government agency that enforces laws limiting the power of oligopolies.

True

Advertising is an example of price leadership.

True

Antitrust legislation was first passed in the United States in 1776.

True

Cartels were legal in the United States until 1890.

True

Consumer surplus is higher under a single-price monopoly than under a perfectly price-discriminating monopoly.

True

If Delta offers free drinks and snacks on its flights, and Southwest follows, they are engaging in nonprice competition.

True

The pattern of behavior in which one company tacitly sets prices for the industry as a whole is known as price leadership.

True

When a monopolist practices price discrimination as opposed to setting a single price, deadweight loss decreases.

True

When a monopolist practices price discrimination, consumer surplus will be higher than the consumer surplus in a single-price monopoly.

True

When a monopolist practices price discrimination, producer surplus will be higher than in a single-price monopoly.

True

Reference: Ref 14-16 (Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water Heaters. The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them. If Rheem and Calefi get into a price war, the equilibrium price in the market will be:

$0.

Reference: Ref 14-16 (Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water Heaters. The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them. If they agree to collude, what price will the cartel charge and how many water heaters will the cartel sell?

$1,000; 50

Reference: Ref 14-16 (Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water Heaters. The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them. Suppose they agree to produce only 25 water heaters each. By how much does Rheem's profit rise if it cheats on the agreement and produces 30 water heaters?

$2,000

A well-known example of an international cartel is:

OPEC

A well-known example of an international cartel is:

OPEC.

A downward-sloping demand curve will ensure that:

P > MR.

Reference: Ref 14-17 (Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. For simplicity, assume that the marginal cost of producing crude oil is zero. There are only two producers of crude oil, and they cannot cooperate. But they play this game every week, each player has a tit-for-tat strategy, and the other player knows this. When both firms use a tit-for-tat strategy, firm 1 will produce _____ barrels, and firm 2 will produce _____ barrels.

40; 40

If the local phone company, a monopolist, perfectly price-discriminated, it would have lower total surplus than a monopolist that doesn't use price discrimination.

True

Oligopoly first became an issue in the United States in the second half of the nineteenth century, when the growth of railroads allowed for a national market for goods.

True

When a monopolist practices price discrimination as opposed to setting a single price, efficiency decreases.

True

When a monopolist practices price discrimination as opposed to setting a single price, the monopolist sells less but increases profits.

True