Exam 3

Profit (Formula)

(P - ATC) x Q

Kinked demand curve

1. Firms don't want to change price 2. Firms don't need to change price

Cartel (definition)

An agreement between firms (or countries) in an industry to formally collude on price (quota price) and output (quota output) and then agree on the distribution of production

$100 million

Antel and IMD both produce similar computer chips and the two companies dominate this market The table below shows the choices available to Antel and IMD in terms of total output and the profits they would make in each of these situations Using what you know about the prisoner's dilemma, what would be the profit for Antel in millions?

Second-degree price discrimination (definition)

Charging different prices based on the quantity purchased

D. All of the above

Components of a game include: A. Players B. Strategies C. Payoffs D. All of the above

Rent seeking (definition)

Costly actions (such as lobbying) taken to avoid or limit competition

C. I and II

I. The firm must have market power II. The firm must be able to prevent arbitrage of its product III. The firm must face a perfectly elastic demand curve IV. The firm must operate in a perfectly competitive industry Which of the following requirements is necessary to practice price discrimination? A. II, III, and IV B. I, III, and IV C. I and II D. III and IV

(75, 15)

Sequential game - use backwards induction

sequential move

In _________ games, one player at a time makes a move

MR = MC

Profit is maximized at the quantity at which ________

A. Make a profit

The graph shows the short-run cost, revenue, and perceived demand curves for all firms in the convenience store market, which is a monopolistically competitive market. Use the graph to answer the question What profitability will firms in this industry? achieve in the short run? A. Make a profit B. Break even C. Make a loss

Monopolistic competition (example)

The restaurant industry

Game theory (definition)

The study of how individuals and firms make strategic decisions to achieve their goals when other players or factors can influence that outcome

Kinked demand curve model

What explains why oligopoly prices tend to remain stable over time?

Product differentiation

__________ is the key to monopolistic competition

Economies of scale

Match this scenario to the correct source of monopoly market power One electric company can operate at a lower cost than multiple electric companies

Innovation

Monopolies create benefits in terms of ___________

Not a characteristic of oligopoly

Determine if this is a characteristic of oligopoly or not a characteristic of oligopoly Large number of firms producing differentiated products

Characteristics of oligopoly

-Relatively few firms -Interdependent decision making -Substantial barriers to market entry -Potential for long-run economic profit _Shared market power and considerable control over price

A. Cooperate

Antel and IMD both produce similar computer chips and the two companies dominate this market The table below shows the choices available to Antel and IMD in terms of total output and the profits they would make in each of these situations What would be the best collective option for both firms? The firms should A. Cooperate B. Act independently

A characteristic of oligopoly

Determine if this is a characteristic of oligopoly or not a characteristic of oligopoly Firms must consider competitors' reactions when making decisions

market demand curve

A monopoly's demand curve is the __________

Second-degree price discrimination

Determine the type of price discrimination for this scenario Art's Mac-n-Cheese sells for $0.99 at the Piggly Wiggly, but Bulky Warehouse sells a package of 12 boxes for $10

less

Marginal revenue is _________ than price for a monopoly

downward, flat (elastic)

Monopolistically competitive firms face a ________ sloping demand curve that is relatively ________ because of competition

An example of market power

Please determine whether or not this scenario is an example of market power or not an example of market power Hanz owns the only German-food restaurant in his town, and no other such places exist for hundreds of miles in any direction

-Economies of scale -Control over significant input -Government franchise -Patent -Copyright

The five sources of market power

B. Total revenue

The graph shows the costs, revenue, and demand facing a monopolistically competitive firm. Refer to the graph to answer the question The area covered by rectangle A B F E is the firm's A. Total cost B. Total revenue C. Profit D. None of the above

58

A monopolist makes self-cleaning jackets. At a price of $100 each, it can sell 20 jackets. At a price of $98 dollars each, it can sell 21 jackets. Assume the monopolist cannot price discriminate So the marginal revenue of selling the 21st jacket is? (Hint, find TR of charging at $100 and $98)

$2000

A monopolist makes self-cleaning jackets. At a price of $100 each, it can sell 20 jackets. At a price of $98 dollars each, it can sell 21 jackets. Assume the monopolist cannot price discriminate When charging $100 per jacket, total revenue is

$2058

A monopolist makes self-cleaning jackets. At a price of $100 each, it can sell 20 jackets. At a price of $98 dollars each, it can sell 21 jackets. Assume the monopolist cannot price discriminate When charging $98 per jacket, total revenue is

C. Marginal revenue equals marginal cost

A monopolistic competitor wishing to maximize profit will select a quantity where A. Marginal cost equals demand B. Marginal cost equals average cost C. Marginal revenue equals marginal cost D. Marginal revenue equals average cost

$100 million

Antel and IMD both produce similar computer chips and the two companies dominate this market The table below shows the choices available to Antel and IMD in terms of total output and the profits they would make in each of these situations Using what you know about the prisoner's dilemma, what would be the profit for IMD in millions?

Five steps to maximizing profit

-Find where MR = MC -Find optimal Q -Find optimal P -Find ATC -Find profit

Long-run adjustments

-If firms are earning economic profits, new firms will enter the industry -Competition reduces the demand for each individual seller, shifting the demand curve to the left -Each seller earns normal profits, so that price equals average total cost

Characteristics of monopolistic competition

-Many buyers and sellers -Differentiated products -No barriers to market entry or exit -No long-run economic profit -Some control over price

Conditions for price discrimination

-Must have some control over price -Must be able to separate the market into groups based on elasticities of demand -Must be able to prevent arbitrage

Prisoner's Dilemma

-Occurs in noncooperative games -The Nash equilibrium outcome is inferior to another outcome that can be achieved with cooperations

Characteristics of monopoly

-One firm -No close substitutes for product -Significant barriers to entry -Potential long-run economic profit -Substantial market power and control over price (price makers)

Solving for Nash equilibrium in a simultaneous-move game

-Players are analyzed in a game table -Analysis uses the best-response technique -An outcome that is selected as a best response by all players is a Nash equilibrium

Components of a game

-Players information -Strategies outcomes -Payoffs

Two basic game theory assumptions

-Preferences are clearly defined: The objectives of each player are well known -Players rationally choose strategies to achieve objectives: Players make decisions that are consistent with their goals

Inefficiencies of monopoly

-Rent seeking -X-inefficiency

Cartels are more stable when

-They have fewer members and each member has similar goals -They are maintained with legal provisions -They are unable to differentiate their products -Each firm has a similar cost structure -There are significant barriers to entry

Example of Prisoner's Dilemma outcomes

-Trade barriers -Political campaigns -Legal disputes -Competitive business pricing

Game theory applications include

-War litigation -Business pricing politics -Board games

C. Microsoft & Yellow Cap

-Yellow Cap NYC Taxi: New York Taxi & Limousine Commission has granted the cab license to operate -Burger king: It competes for fast-food customers with McDonald's, but their products are highly substitutable -Microsoft: People want to use a common operating system, Microsoft Window Which company can monopolize? A. Yellow cap B. Burger King & Yellow Cap C. Microsoft & Yellow Cap D. Microsoft

B. The firm would earn more profits by increasing output

Assume that a monopolistically competitive firm faces the following situation: P = $16, output = 9,000 units, MC = $11, ATC = $10, AVC = $7, and MR = $14. Which statement is correct regarding profit maximization? A. The firm is maximizing profits B. The firm would earn more profits by increasing output C. The firm is minimizing its losses D. The firm would earn higher profits if it decreases output

A. No player has an incentive to unilaterally change strategies

A Nash equilibrium occurs when A. No player has an incentive to unilaterally change strategies B. Each player has an incentive to unilaterally change strategies C. Both players can cooperate to increase their payoffs D. No player can earn a higher payoff from any other strategy

A. The firm is maximizing profits

Assume that a monopolistically competitive firm faces the following situation: P = $18, output = 12,000 units, MC = $13, ATC = $14, AVC = $12, and MR = $13. Which statement is correct regarding profit maximization? A. The firm is maximizing profits B. The firm would earn more profits by increasing output C. The firm is minimizing its losses D> The firm would earn higher profits it

$197 million

Assume that a nine-firm cartel supplies 500 million units of Whatailsya energy drink at a price of $5.00 per unit. Each firm supplies an equal share of the cartel's output. One firm decides to cheat supplies 50 million extra units, causing the price of Whatailsya to decrease to $4.50 per unit Assuming that the loss due to the fall in price is evenly spread across all firms in the cartel, what is the net gain for the cheating firm, in millions of dollars? Round your answer to the nearest million

Not a characteristic of oligopoly

Determine if this is a characteristic of oligopoly or not a characteristic of oligopoly Free entry and exit

Not a characteristic of oligopoly

Determine if this is a characteristic of oligopoly or not a characteristic of oligopoly Large number of buyers and sellers

A characteristic of oligopoly

Determine if this is a characteristic of oligopoly or not a characteristic of oligopoly Significant barriers to entry

Third-degree price discrimination

Determine the type of price discrimination for this scenario Hungry Hungry Buffet charges $4.99 for kid's meals and $12.99 for adult meals

Perfect price discrimination

Determine the type of price discrimination for this scenario Pandy Jewelry charges each customer the maximum he or she is willing to pay for a particular piece of jewelry

Second-degree price discrimination

Determine the type of price discrimination for this scenario Totally Teeth, a toothbrush retail store, sells toothbrushes for $4.00 each, $7.00 for a two-pack, and $13.00 for a four-pack

A. They both get 12 years

Felix and Jocelyn are arrested and charged with armed robbery. The police interview both suspects separately about their involvement in the crime. Each suspect has to make a decision. They can betray the other suspect by confessing that they both committed the crime, or they can cooperate with the other suspect by remaining silent What will be the dominant strategy outcome for Felix and Jocelyn? A. They both get 12 years B. Felix gets 5 years, and Jocelyn gets 15 years C. Jocelyn gets 5 years, and Felix gets 15 years D. They both get 10 years

expand, increase profitability

If a firm is producing a quantity where marginal revenue exceeds marginal costs, the firm should _________ existing levels of production in order to __________

B. Q=4.5

If the firm has the ability to practice perfect price discrimination, what output level will the firm choose? A. Q=3 B. Q=4.5 C. Q=0

simultaneous-move

In __________ games, actions occur at the same time, such as offense and defense in a football game

A. Firm A hire a lawyer, Firm B hire a lawyer

Let's consider two firms, A and B, who have appointed an arbitrator to resolve a contractual dispute of $100 million. If neither firms hires a lawyer, the expected payoff is $50 million each. If a Firm A hires a lawyer but Firm B doesn't, the payoff A increases to $70 million and that of B reduces to $25 million and etc. What are the dominant strategies? A. Firm A hire a lawyer, Firm B hire a lawyer B. Firm A no lawyer, Firm B hire a lawyer C. Firm A hire a lawyer, Firm B no lawyer D. Firm A no lawyer, Firm B no lawyer

Government franchise

Match this scenario to the correct source of monopoly market power Only the United States Postal Service can deliver first-class mail by law

Copyright

Match this scenario to the correct source of monopoly market power The author of Economics for Dumbbells is given exclusive rights to produce this book

setting MR = MC

Monopolistically competitive firms maximize profits in the short run the same way as competitive and monopoly firms. By ________

Dominant strategy (definition)

Occurs when a player chooses the same action no matter what other players choose

Nash equilibrium

Occurs when all players in a game use an optimal strategy in response to all other players' strategies

X-inefficiency (definition)

Occurs when monopolies squander

using multiple prices captures more consumer surplus

On a graph, demand curve shifts out because ______

all consumer surplus

On a graph, first-degree price discrimination focuses on ________

A. Each customer a price equal to his or her maximum willingness to pay

Perfect price discrimination is characterized by charging: A. Each customer a price equal to his or her maximum willingness to pay B. Customers a different price, depending on their income C. Different prices to customers based on when they purchase the good or service D. Customers a different price, depending on their gender E> Prices that are different from competitors' prices

Not an example of market power

Please determine whether or not this scenario is an example of market power or not an example of market power Jim uses an online coupon site to buy a vacuum cleaner for below market price

An example of market power

Please determine whether or not this scenario is an example of market power or not an example of market power The four major American providers of orange juice, a staple food in the United States, collectively decide to increase prices

Not price discrimination

Sam, a third-grader, really likes to look for interesting bugs with other people during recess. Each of Sam's friends offers to look for bugs with Sam in exchange for him playing a game that he or she likes. Bill wants to play King of the Mountain, Suzie wants to play Hopscotc, and Johnny wants to play Slaps. Sam normally likes playing with each of his friends equally. Sam offers to trade one day of King of the Mountain with Bill for one day of looking for bugs. Sam does not like to play Hopscotch, so he offers to trade Suzie one day of Hopscotch for two days of looking for bugs. Sam knows that Johnny really likes playing slaps so, although Sam likes playing Slaps and King of the Mountain equally, he offers to trade Johnny one day of slaps for two days of looking for bugs. Is Sam's offer to Suzie price discrimination?

C. $6

Suppose a monopolist faces the demand relationship shown in the table. Marginal revenue for the second unit of output is: A. $7 B. $21 C. $6 D. $2

$1250

The accompanying graph depicts average total cost (ATC), marginal cost (MC), marginal revenue (M), and demand (D) facing a monopolistically competitive firm What is the firm's total cost?

$250

The accompanying graph depicts average total cost (ATC), marginal cost (MC), marginal revenue (M), and demand (D) facing a monopolistically competitive firm What is the firms total profit?

$1500

The accompanying graph depicts average total cost (ATC), marginal cost (MC), marginal revenue (M), and demand (D) facing a monopolistically competitive firm What is the firms total revenue?

$21

The accompanying graph depicts average total cost (ATC), marginal cost (MC), marginal revenue (M), and demand (D) facing a monopolistically competitive firm What is the total profit made by the firm?

A. q1

The accompanying graph represents Hadyen's Fro-Yo Emporium, which is the only seller of frozen yogurt in a small college town, showing the marginal cost (MC), average cost (AC), marginal revenue (MR), and demand (D) curves How many cups of frozen yogurt should Hayden sell? A. q1 B. q3 C. q4 D. q2

C. p4

The accompanying graph represents Hadyen's Fro-Yo Emporium, which is the only seller of frozen yogurt in a small college town, showing the marginal cost (MC), average cost (AC), marginal revenue (MR), and demand (D) curves How much should Hayden charge per cup? A. p1 B. p2 C. p4 D. p3

B. Break even or exit the market

The graph shows the short-run cost, revenue, and perceived demand curves for all firms in the convenience store market, which is a monopolistically competitive market. Use the graph to answer the question What profitability will firms in this industry most likely achieve in the long run? A. Make a loss B. Break even or exit the market C. Make a profit

C. More firms will enter the market

The graph shows the short-run cost, revenue, and perceived demand curves for all firms in the convenience store market, which is a monopolistically competitive market. Use the graph to answer the question What will happen to the number of firms in the industry as it moves from the short run to the long run? A. The same number of firms will be in the market B. Some firms will exit the market C. More firms will enter the market

A. Shift to the left

The graph shows the short-run cost, revenue, and perceived demand curves for all firms in the convenience store market, which is a monopolistically competitive market. Use the graph to answer the question What would you expect to happen to the perceived demand curve in the long run? A. Shift to the left B. Shift to the right C. Remain unchanged

higher, lower

Under conditions of monopoly, the price will be ________ and output will be ________ than under conditions of competition

B. Saudi Arabia low, Nigeria high

What are the dominant strategies A. Saudi Arabia low, Nigeria low B. Saudi Arabia low, Nigeria high C. Saudi Arabia high, Nigeria low D. Saudi Arabia high, Nigeria high

$2700

What is the new profit for this pharmaceutical company selling a new pill to prevent balding?

dominant strategy

When all players have a __________, a single Nash equilibrium will result

C. Firms sell similar, but not identical, products

Which of the following are characteristics of monopolistic competition? A. High barriers to enty B. Few firms compete C. Firms sell similar, but not identical, products D. All of the above

C. Firm can earn profits in the short run but not the long run

Which of the following is true of a monopolistically competitive firm? A. Firm can earn profits in both the short run and the long run B. Firm cannot earn profits in the short run or the long run C. Firm can earn profits in the short run but not the long run D. Firm can earn profits only in the long run

C. The fast food industry

Which of the markets is the best example of monopolistic competition? A. The market for sugar snap peas B. The market for cola C. The fast food industry D. Your town's utilities distributor(s) of electricity and water

E. In the prisoner's dilemma, firms could do better if they both did exactly the opposite of what they ultimately choose to do

Which of the statements is true of the prisoner's dilemma? A. The prisoner's dilemma is an example of a cooperative equilibrium B. In the game that includes two prisoners, from which this game derives its name, neither prisoner will confess and they will both walk free C. One player has a dominant strategy and the other has a mixed strategy D. Firms in a repeated game are more likely to fall into the other's prisoner dilemma E. In the prisoner's dilemma, firms could do better if they both did exactly the opposite of what they ultimately choose to do

D. A novel printed in the paperback that sells for more than the same book in electronic format

Which of these is NOT an example of price discrimination? A. Soup companies sending coupons to select buyers B. Retirees getting a discount at a local movie theater C. Drug companies charging people living in wealthier countries higher prices for a drug than they charge people living in a poorer country for the same drug D. A novel printed in the paperback that sells for more than the same book in electronic format

C. The demand curve is perfectly elastic

Which of these is NOT true about the demand curve of a monopolist? A. The firm's demand curve is the same as the market demand curve B. The demand curve is downward shifting C. The demand curve is perfectly elastic D. The marginal revenue curve is below the market demand curve

D. Tinseltown Theaters shows almost all of the most popular newly released movies

Which of these scenarios is NOT an example of a barrier to entry? A. Boeing serves a large fraction of the jumbo jet market and is able to produce at a lower average cost than any new entrant B. De Beers owns nearly all of the world's diamond mines C. Pfizer is the only firm that is legally allowed to to produce and sell Lipitor, a best-selling cholesterol drug D. Tinseltown Theaters shows almost all of the most popular newly released movies

A. Both confess

Which of these scenarios is predicted by game theory A. Both confess B. Prisoner A confess; Prisoner B remain silent C. Prisoner A remain silent; Prisoner B confess D. Both remain silent

Types of price discrimination

-First-degree -Second-degree -Third-degree

Kinked demand curve model assumptions

-If a firm raises its price, its competitors will not follow, causing a sharp decrease in quantity demanded -If a firm lowers its price, its competitors follow, resulting in only a small increase in quantity demanded

Basic components of game theory

-Players -Information -Strategies -Payoffs -Outcomes

D. Captures all consumer surplus

A monopolist practicing first-degree price discrimination A. Charges illegal prices B. Loses all producer surplus C. Has no producer surplus D. Captures all consumer surplus

B, C

Antel and IMD both produce similar computer chips and the two companies dominate this market The table below shows the choices available to Antel and IMD in terms of total output and the profits they would make in each of these situations Select all of the reasons that Antel and IMD would make more profit at the original constant production level? The original production level is more profitable because A. Overall demand for computer chips will increase B. They can both charge more for the product at given level of production C. It restricts the supply of computer chips

First-degree price discrimination (definition)

Firms capture all of consumer surplus by charging each consumer his or her maximum willingness-to-pay

C. differentiate their products

Firms in monopolistic competition A. Are price takers B. participate in markets where barriers to entry are present C. differentiate their products

no economic profits

In the long run, monopolistically competitive firms earn ___________

Deadweight loss (definition)

Inefficiency in the market where price is higher and output is lower

C. Third-degree price discrimination

Marta takes her 72-year-old mother and her 11-year-old son to the local water park. Marta $12 for her ticket, $8 for her mother's senior citizen ticket, and $6 for her son's children's ticket. This is an example of: A. First-degree price discrimination B. Second-degree price discrimination C. Third-degree price discrimination

Control over significant input

Match this scenario to the correct source of monopoly market power DeJeers Jewelers owns 80% of the world's diamond mines

Patent

Match this scenario to the correct source of monopoly market power Mary McFly invents a time machine and gets legal protection from competition

A. Participate in markets where barriers to entry are present

Monopolies and monopolistically competitive firms differ in that monopolies A. participate in markets where barriers to entry are present B. differentiate their products C. are price takers

profit-maximization rule

Monopolies maximize profit the same way that competitive firms do, by using the __________

Not an example of market power

Please determine whether or not this scenario is an example of market power or not an example of market power The price of oil increases, causing the price of gasoline to increase as well

Price disrcimination

Sam, a third-grader, really likes to look for interesting bugs with other people during recess. Each of Sam's friends offers to look for bugs with Sam in exchange for him playing a game that he or she likes. Bill wants to play King of the Mountain, Suzie wants to play Hopscotc, and Johnny wants to play Slaps. Sam normally likes playing with each of his friends equally. Sam offers to trade one day of King of the Mountain with Bill for one day of looking for bugs. Sam does not like to play Hopscotch, so he offers to trade Suzie one day of Hopscotch for two days of looking for bugs. Sam knows that Johnny really likes playing slaps so, although Sam likes playing Slaps and King of the Mountain equally, he offers to trade Johnny one day of slaps for two days of looking for bugs. Is Sam's offer to Johnny price discrimination?

A. total cost

The graph shows the costs, revenue, and demand facing a monopolistically competitive firm. Refer to the graph to answer the question The area covered by rectangle C D F E is the firm's A. total cost B. total revenue C. profit D. none of the above

D. P1, Q1

What price and output levels correspond to the profit maximizing point for a monopolist in this graph? A. P3, Q1 B. P2, Q2 C. P2, Q1 D. P1, Q1

B. You travel but your friend studies

Suppose you and your best friend are each deciding whether to spend the weekend in Key West or to stay home and study for next week's exam. The payoffs for each of the four possible outcomes are shown in the table (where higher numbers are better and the first number in each box represents your payoff, while the second number represents your friend's payoff). Which of these scenarios is the Nash equilibrium? A. You and your friend both travel B. You travel but your friend studies C. You study but your friend travels D. You and your friend both study

less than price

What is true about any firm facing a downward-sloping demand curve? Marginal revenue is always

C. Profit

The graph shows the costs, revenue, and demand facing a monopolistically competitive firm. Refer to the graph to answer the question The area covered. by rectangle A B D C is the firm's A. total cost B. total revenue C. Profit D. None of the above

1. Marginal cost 2. Average cost 3. Demand 4. Marginal revenue

The graph shows the curves facing a profit maximizing monopolistic competitor. Label each curve with the appropriate term

Cartels

What reduces overall supply in order to raise prices and profits?

B. Are you able to prevent selling between customers?

Bree's Bait Shop is a successful store that specializes in highly effective fishing tackle. Bree has employed a high-tech computer tracking system that allows her to separate her customers into two different groups of consumers with differing price elasticities of demand. Bree is interested in increasing her profits through price discrimination and approaches your marketing firm for advice. Assuming her demand curve is downward sloping, you tell her there is one more crucial piece of information that you must have in order to advise her What do you ask Bree? A. Are your profits greater than your costs? B. Are you able to prevent selling between customers? C. What is your current output? D. What are your total costs?

A. Strategy 2

Disney and Paramount are both releasing an animated movie at the same time. Each company is fairly well known, and they are both deciding between pursuing two advertising strategies. Each firm knows that its profits will be affected by its own decision and the decision of the competing firm. The payoff matrix contains the estimated profits for both companies for all possible strategies. Paramount's profits are in the lower (green) triangle of each cell and Disney's profits are in the upper (blue) triangle of each cell. Profits (payoffs) are in millions of dollars. What is Disney's dominant strategy? A. Strategy 2 B. Strategy 1 C. Disney does not have a dominant strategy

B. D

Disney and Paramount are both releasing an animated movie at the same time. Each company is fairly well known, and they are both deciding between pursuing two advertising strategies. Each firm knows that its profits will be affected by its own decision and the decision of the competing firm. The payoff matrix contains the estimated profits for both companies for all possible strategies. Paramount's profits are in the lower (green) triangle of each cell and Disney's profits are in the upper (blue) triangle of each cell. Profits (payoffs) are in millions of dollars. What is the Nash equilibrium in this game? A. C B. D C. There is not a Nash equilibrium D. A E. B

Third-degree price discrimination (definition)

charging different prices to different groups of consumers with varying elasticities