Exam 3 Questions and Answers

What market structure is this? What is the MR associated with the 3rd unit? What is the ATC associated with producing 7 units? What is the profit-maximizing Q?

perfect competition since price-taker {2 points} 6 for each unit since price-taker {2 points} ATC = TC/Q = 70/7 = 10 {2 poitns} MR=MC at Q=4 {4 points}

Game theory, which is used in studying oligopoly behavior, originated from the study of games such as the following, except A.) solitaire. B.) poker. C.) chess. D.) checkers.

A.) solitaire.

Use the following graph for a pure monopoly operating in the short-run to answer the next question. To maximize profits, this firm should charge a price of . A.) 0C B.) not labeled on the graph C.) 0B D.) 0A

C.) 0B

Use the following graph to answer the next question. Which point is not on the perfectly competitive firm's short-run supply curve? A.) F B.) H C.) E D.) G

C.) E

Identify Q* and P* for this monopolistically competitve firm. {4 points} Calculate profit. {3 points} Explain the long run adjustment process. {3 points}

2 points: Q* = 160 2 points: P* = 16 3 points: profit = Q(P-ATC) = 160(16-13) = 480 3 points: Because the barriers to entry are low, the profit would incentivize additional firms to enter the market which would drive profits down. They would only be able to maintain profit in the long run to the extent that they can differentiate their product.

If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then average total cost must be A.) $200. B.) $3,200. C.) $800. D.) $250.

A.) $200.

Use the following graph to answer the next question. The perfectly competitive firm will maximize profits if it produces and sells output at A.) C. B.) A. C.) B. D.) K.

A.) C.

Use the graph for a perfectly competitive firm to answer the next question. If the firm is maximizing profits in the short run, the amount of economic profit per unit is A.) EH. B.) DB. C.) DH. D.) DE.

A.) EH.

Two players are trying to maximize their payoffs in the matrix below: Move A Player 1 & 2: (50,20) Move A Player 1 & Move B Player 2: (40,80) Move B Player 1 & 2: (10,60) Move B Player 1 & Move A Player 2: (25,40) What is the Nash equilibrium? A.) Player 1 will Move A while Player 2 will Move B B.) Player 1 will Move A and Player 2 will Move A C.) Player 1 will move B and Player 2 will Move B D.) Player 1 will Move B while Player 2 will Move B

A.) Player 1 will Move A while Player 2 will Move B

If a perfectly competitive firm is facing a situation where the price of its product is lower than the average total cost, which of the following statements is true? A.) The firm is generating a loss, and if things are not expected to improve the firm will leave the industry. B.) The firm may be earning some accounting profits, but less than what it could earn elsewhere. C.) Other firms will want to enter the industry because of the economic profits generated by the firm. D.) The firm may earn economic profits in the long run if it expands its plant in order to exploit economies of scale.

A.) The firm is generating a loss, and if things are not expected to improve the firm will leave the industry.

The ability of Intel to spread product development cost over a larger number of units of output arises from A.) economies of scale. B.) constant returns to scale. C.) minimum efficient scale. D.) diseconomies of scale.

A.) economies of scale.

Which of the following firms is considered a monopolistically competitive firm using the four-firm concentration ratio? Firm A: Four-Firm Concentration ratio=35% Firm B: Four-Firm Concentration ratio=25% A.) Neither Firm A nor Firm B B.) Both Firm A and Firm B C.) Firm B D.) Firm A

B.) Both Firm A and Firm B

A firm doubles the quantity of all resources it employs and, as a result, total output doubles. Which of the following is correct? A.) The law of diminishing returns is proven wrong. B.) The long-run average total cost is horizontal. C.) The example is for the short run rather than the long run. D.) There are increasing returns to scale.

B.) The long-run average total cost is horizontal.

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output level of 1,000 units is $2.50. The minimum possible average variable cost is $2. The market price of the product is $2.50. To maximize profits, the firm should A.) increase production to more than 1,000 units. B.) continue producing 1,000 units. C.) decrease production to less than 1,000 units. D.) shut down

B.) continue producing 1,000 units.

The demand curve faced by a perfectly competitive firm A.) is identical to the market demand curve. B.) is the same as its marginal revenue curve. C.) yields constant total revenues even when price changes. D.) has unitary elasticity.

B.) is the same as its marginal revenue curve.

A monopolistically competitive industry is like a purely competitive industry in that A.) each industry produces a standardized product. B.) neither industry has significant barriers to entry. C.) firms in both industries face a horizontal demand curve. D.) nonprice competition is a feature in both industri

B.) neither industry has significant barriers to entry.

Use the following graph to answer the next question. If the industry were perfectly competitive, the market price would be A.) lower than $8. B.) $8 C.) $14 D.) $16

C.) $14

Use the following graph to answer the next question. How much profit will this firm make? A.) $500 B.) $400 C.) $200 D.) $900

C.) $200

Use the following table to answer this question, which provides information on the production of a product that requires one variable input. The marginal product of the 30th input item is Input: 0, 10, 20, 30, 40, 50, 60 Total Product: 0, 200, 600, 720, 820, 900, 980 A.) 120 B.) 24 C.) 12 D.) 200

C.) 12

Use the following graph to answer the next question. What is the profit-maximizing quantity of output for this pure monopoly? A.) 0C B.) 0A C.) 0D D.) 0B

D.) 0B

Use the information in the table below. Total Sales: Firm 1, Firm 2, Firm 3, Firm 4 Industry 1: $5.3m, $199,000, $2.6m, $850,000 What percent of total sales does Firm 1 make up in Industry 1? A.) 25% B.) 53% C.) 89% D.) 59%

D.) 59%

Which of the following constitutes an implicit cost to the Asarta Manufacturing Company? A.) Payments using economic profits resulting from current production B.) Payments of wages to its office workers C.) Rent paid for the use of equipment owned by the Butters Machinery Company D.) Foregone interest income from using savings to pay for operating expenses

D.) Foregone interest income from using savings to pay for operating expenses

Third-degree price discrimination is more common in service industries because____. A.) all firms in these industries have significant monopoly power over price B.) the costs of providing such industries' products to different groups of buyers vary dramatically C.) the price elasticity of demand is the same for all groups of buyers in these industries D.) low price buyers will find it virtually impossible to resell the products of such industries to high price buyers

D.) low price buyers will find it virtually impossible to resell the products of such industries to high price buyers

Answer the next question based on the following payoff matrix for a duopoly in which the numbers indicate the profit in millions of dollars for each firm. High Price Firm A and B = $250, $250 High Price Firm A and Low B = $200, $325 Low Price Firm A and B = $175, $175 Low Price Firm A and High B = $325, $200 If firm B adopts the high-price strategy, then firm A would adopt the A.) low-price strategy and earn $175. B.) high-price strategy and earn $200. C.) high-price strategy and earn $250. D.) low-price strategy and earn $325.

D.) low-price strategy and earn $325.

A nondiscriminating pure monopoly is generally viewed as being____. A.) both productively and allocatively efficient B.) allocatively efficient, but not productively efficient C.) productively efficient, but not allocatively efficient D.) neither productively nor allocatively efficient

D.) neither productively nor allocatively efficient

A pure monopoly may generate economic profits because_____. A.) of advertising B.) marginal revenue is constant as sales increase C.) of rising average fixed costs D.) of barriers to entry

D.) of barriers to entry

In which industry is monopolistic competition most likely to be found? A.) mining B.) utilities C.) agriculture D.) retail trade

D.) retail trade

Explain why a firm may or may not choose to advertise depending on the market structure they are selling in. Provide a clear argument for each market structure. Do advertisements increase or decrease efficiency? Why?

{6 points} Perfectly competitive firms do not advertise because their products are identical and they have no ability to increase price to recoup the costs. Monopolies do not advertise because they don't have any competitors. While advertisement is possible in oligopolies, it is more common in monopolistic competition because they use marketing to differentiate their product. {4 points} Advertisements improve market efficiency if they provide useful information about the product. Advertisements that manipulate consumers into thinking the product is better or more unique than it is decreases market efficiency.