Final Exam

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Consider the same below about funding and construction of a dam to protect a 1,000-person town. Contributions to the Dam Fund, once made, cannot be recovered, and all citizens must contribute $1,000 to the dam in order for it to be built. The dam, if built, is worth $70,000 to each citizen. Refer to the game in Scenario 13.7. If each player chose a maximin strategy, the outcome would be:

$0, $0

Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q TC = 4Q MC = 4 Refer to Scenario 10.1. How much profit will she make?

$1,296

Bancroft Pharmaceuticals has a patent on a new medication used to treat high blood pressure, so it is the monopoly seller of this new drug product. The marginal cost of producing one dose of the drug is $10, and the elasticity of demand for the product is -3. What is the profit maximizing monopoly price for this patented drug product?

$15

You work as a marketing analyst for a pharmaceutical firm, and you are trying to gather information about the marginal cost of production for a competing firm. You know that they have a patent on a popular medication that sells for $20 per dose, and you believe the elasticity of demand for this product is roughly -4. Assuming the competing firm acts as a profit-maximizing monopolist, what is the competing firm's approximate marginal cost of production?

$15 per dose

You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. The florist's cost for the arrangement is $200. You finally settled on a price of $250. Refer to Scenario 13.1. At your negotiated price your consumer surplus is:

$250

Scenario 12.2: Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.2. What price would this new drink sell for if it sold in a competitive market?

$3

Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows: Q = 6000 - 5P MR = 1200 - 0.4Q Refer to Scenario 12.1 What will be the price in the long run if the industry is a Cournot duopoly?

$400

The marginal cost of a monopolist is constant and is $10. The marginal revenue curve is given as follows: MR = 100 - 2Q The profit maximizing price is:

$55

Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows: Q = 6000 - 5P MR = 1200 - 0.4Q Refer to Scenario 12.1 What is the profit maximizing price of a monopolist?

$600

DVDs can be produced at a constant marginal cost of $5 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the price elasticities of demand for these two movies?

-1.33 and -1.2, respectively

What is the value of the Lerner index under perfect competition?

0

The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. What level of output maximizes revenue?

125

The marginal revenue of green ink pads is given as follows: MR = 2500 - 5Q The marginal cost of green ink pads is 5Q. Refer to Scenario 10.7. How many ink pads will be produced to maximize profit?

250

John is the manufacturer of red rubber balls (Q). He has a red rubber ball manufacturing plant in California, Florida and Montana. The total cost of producing red rubber balls at each of the three plants is given by the following table: Refer to Scenario 10.6. If red rubber balls can be produced at any of the three plants, what is the marginal cost of 5th red rubber ball?

4

Suppose there are seven firms in a market where the three largest firms supply 20% of the market-clearing quantity and the other four firms supply 10% of the market-clearing quantity. What is the five-firm concentration ratio (i.e., the share of total sales controlled by the five largest firms in the market)?

80%

Which of the following is NOT true for monopoly?

At the profit maximizing output, price equals marginal cost.

Which oligopoly model(s) have the same results as the competitive model?

Bertrand

In the _____, two duopolists compete by simultaneously selecting price

Bertrand model

Consider the following game: Which of the following is true about the game in Scenario 13.2?

Both ABC and XYZ offer a rebate as a dominant strategy

Use the following two statements to answer this question: I. A firm can exert monopoly power if and only if it is the sole producer of a good. II. The degree of monopoly power a firm possesses can be measured using the Lerner Index.

Both I and II are false

Consider the following payoff matrix for a game in which two firms attempt to collude under the Bertrand model: Here, the possible options are to retain the collusive price (collude) or to lower the price in attempt to increase the firm's market share (cut). The payoffs are stated in terms of millions of dollars of profits earned per year. What is the Nash equilibrium for this game?

Both firms cut prices (12, 12)

Consider the following game in which two firms decide how much of a homogeneous good to produce. The annual profit payoffs for each firm are stated in the cell of the game matrix, and Firm A's payoffs appear first in the payoff pairs: What are the dominant strategies in this game?

Both firms produce low levels of output

Consider the following game in which two firms decide how much of a homogeneous good to produce. The annual profit payoffs for each firm are stated in the cell of the game matrix, and Firm A's payoffs appear first in the payoff pairs: What is the Nash equilibrium for this game?

Both firms produce low levels of output

Two firms operating in the same market must choose between a collude price and a cheat price. Firm A's profit is listed before the comma, B's outcome after the comma. If each firm tries to choose a price that is best for it, regardless of the other firm's price, which of these statements is correct?

Both firms should charge a cheat price

The Matching Pennies game is an example of a:

Constant-sum game

Which of the following is NOT a key component of every game?

Cooperation

Zinc Communications developed a new type of cellular telephone that has a three-dimensional (3-D) screen. The company holds a patent on this technology, so they are the only seller of the 3-D phone when it is introduced. Over time, other companies introduce phones that are similar but not identical (i.e., they do not violate the patent held by Zinc). What happens to the demand for 3-D phones facing Zinc and to the profit-maximizing price for the 3-D as these similar products enter the market?

Demand becomes more elastic, price declines

Zinc Communications developed a new type of cellular telephone that has a three-dimensional (3-D) screen. The company holds a patent on this technology, so they are the only seller of the 3-D phone when it is introduced. Over time, other companies introduce phones that are similar but not identical (i.e., they do not violate the patent held by Zinc). What happens to the demand for 3-D phones facing Zinc and to the profit-maximizing price for the 3-D phone as these similar products enter the market?

Demand becomes more elastic, price declines

BioMed Pharmaceutical has held a patent on an important heart medication called Heartex, but the patent will expire in the coming year. After the patent expires, other firms can legally sell the same medication as a generic drug product. What will happens to the demand for Heartex and to the Lerner index for this product as the generic drugs enter the market?

Demand becomes more elastic; Lerner index declines

Which factors determine the firm's elasticity of demand?

Elasticity of market demand, number of firms, and the nature of interaction among firms

Which one of the following statements is a common criticism of the original Bertrand duopoly model?

Firms would more naturally choose quantities if goods are monogenous and the assumption that market share is split evenly between the firms is unrealistic are correct.

Which statement most nearly describes a Nash equilibrium applied to price competition?

Given the prices chosen by its competitors, no firm has an incentive to change their prices from the equilibrium level.

Use the following statements to answer this question: I. A player must have at least one dominant strategy in a game. II. If neither player in a game has a dominant strategy in a game, then there is no equilibrium outcome for the game.

I and II are false.

Use the following two statements about monopolistic competition to answer this question. I. In the long run, the price of the good will equal the minimum of the average cost. II. In the short run, firms may earn a profit.

I is false, and II is true.

In the Stackelberg model, suppose the first-mover has MR = 15 - Q1, the second firm has reaction function Q2 = 15 - Q1/2, and production occurs at zero marginal cost. Why doesn't the first-mover announce that its production is Q1 = 30 in order to exclude the second firm from the market (i.e., Q2 = 0 in this case)?

In this case, MR is negative and is less than MC, so the first-mover would be producing too much output.

Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry?

It does not produce at minimum average cost, and average cost is decreasing

Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry?

It does not produce at minimum average cost, and average cost is decreasing.

Which of the following statements represents a key point about strategic decision making?

It is essential to understand your opponent's point of view and to deduce his or her likely responses to your actions.

For which of the following market structures is it assumed that there are barriers to entry?

Monopoly

A situation in which each firm selects its best action, given what its rivals are doing, is called a:

Nash equilibrium

Consider the following game: Which of the following is TRUE for the game in Scenario 13.4?

Neither company has the dominant strategy

There are two independent dealers for Sporto automobiles in a large city. The dealers decide to run a cooperative advertising campaign in which both dealers are listed in local newspapers ads, and they can purchase larger ads that are more likely to attract attention and generate more auto sales if the dealers commit more funds to the joint advertising budget. Is this an example of a cooperative constant-sum game?

No, the outcome of the advertising campaign depends on how much money the firms contribute to the campaign, so it is not constant sum

Roaring Lion Studios can produce DVDs at a constant marginal cost of $5 per disk, and the studio has just releasing the DVD for its latest hit film, Ernest Goes to the Hamptons. The retail price of the DVD is $25, and the elasticity of demand for this film is -2. Has the studio selected the profit-maximizing retail price for this DVD?

No, the retail price is too high

The monopoly supply curve is the:

None of these

What is the maximum value of the Lerner index?

One

Which of the following conditions, if present, is sufficient to make a game cooperative?

Players can negotiate binding contracts committing them to particular strategies.

Suppose the market demand curve for a Bertrand duopoly is downward sloping. What happens to the Nash equilibrium price and market quantity if the constant marginal cost declines?

Price decreases and quantity increases.

The authors cited statistical evidence that the price elasticity of demand for Royal Crown cola is -2.4, and the price elasticity of demand for Coke is roughly -5.5. Which firm likely has stronger brand loyalty among customers that provides greater potential for monopoly power in the cola market?

Royal Crown

Which of the following is NOT associated with a high degree of monopoly power?

Significant price competition among firms in the market

Which of the following is NOT associated with a high degree of monopoly power?

Significant price competition among firms in the market.

Which of the following are examples of cooperative games

The bargaining between a buyer and seller over the price of a car

Collusion can earn higher prices and higher profits under the Bertrand model, but why is this an unlikely outcome in practice?

The collusion firms have an incentive to gain market share at the expense of the other firms by cutting prices.

What condition may provide for a relatively small degree of inefficiency under a monopolistic competition?

The demand curve is relatively elastic so that the price is near the long-run minimum average cost.

Which of the following is true in long-run equilibrium for a firm in a monopolistic competitive industry?

The demand curve is tangent to average cost curve

Consider the Battle of the Sexes game: Suppose both players use mixed strategies for this game. Jim chooses wrestling with probability 0.9, and Joan chooses wrestling with probability 0.5. What are the expected payoffs for the players?

The expected payoffs are 0.95 for Joan and 0.55 for Jim

Why are many oligopolistic market outcomes conveniently described by a Prisoners' Dilemma?

The firms could do better than the Nash equilibrium if they collude

Which of the following is true in the Stackelberg model?

The first firm produces more than its rival

Refer to Figure 10.2.1 above. Which monopoly charges a greater price markup?

The monopoly in panel (b)

Refer to figure 10.2.1 above. Which monopoly has greater monopoly power?

The monopoly in panel (b).

Consider the following payoff matrix for a game in which two firms attempt to collude under the Bertrand model: Here, the possible options are to retain the collusive price (collude) or to lower the price in attempt to increase the firm's market share (cut). The payoffs are stated in terms of millions of dollars of profits earned per year. What is the Nash equilibrium for this game?

There are two Nash equilibria: A cuts and B colludes, and A colludes and B cuts

The firms in a market have decided not to compete with one another and have agreed to limit output and raise price.

This practice is known as collusion and is illegal in the United States

The firms in a market have decided not to compete with one another and have agreed to limit output and raise price.

This practice is known as collusion and is illegal in the United States.

Why can't two firms in a Prisoner's Dilemma enforce a better outcome that has higher payoffs?

Under an outcome with higher payoffs, the outcome is not a Nash equilibrium and each firm has an incentive to change their actions

For a market with a linear demand curve and constant marginal cost of production, why are the reaction functions for the Cournot duopoly sellers also straight lines?

We know that the marginal revenue curves for linear demand curves are also straight lines

A monopolistically competitive firm in long-run equilibrium:

Will make zero profit

Consider the following game: Which of the following is true for the game in Scenario 13.3?

Zport's dominant strategy is the low-profile tires

Your economics professor has decided that your class will not be graded on a curve but on an absolute scale. Therefore, it is possible for every student in the class to get an "A." Your grade will not depend in any way on your classmates' performance. Based on this information, you decide that you should study economics three hours each day, regardless of what your classmates do. In the language of game theory, your decision to study three hours is:

a dominant strategy

Andre Agassi, a star tennis player, is playing the number one player in the world, Roger Federer. Before the match, Agassi decided that he would serve 20 percent of his serves to Federer's backhand, 30 percent of his serves to Federer's forehand, and 50 percent of his serves straight at Federer. In the language of game theory, this is known as:

a mixed strategy.

A manufacturer of digital music players uses a proprietary file format that is not used by the other firms in the market. This action by the firm may be an example of using a ________ to reduce the number of firms in the market and to maintain a relatively inelastic demand for its products.

barrier to entry

Refer to Figure 12.2.1 above. The points A, B, and C in the figure correspond, in that order, to:

collusion, Cournot, and competitive equilibrium

A Nash equilibrium occurs when:

each firm is doing the best it can, given its opponents' actions

Excess capacity in monopolistically competitive industries results because in equilibrium:

each firm's output level is too small to minimize average cost

Excess capacity in monopolistically competitive industries results because in equilibrium:

each firm's output level is too small to minimize average cost.

Monopolistically competitive firms have monopoly power because they

face downward sloping demand curves

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a _____ price and sell a _____ quantity.

higher; smaller

When the demand curve is downward sloping, marginal revenue is:

less than price

Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers. As more types of MP3 players are introduced into the market, the demand facing Orange becomes _____ elastics and the Lerner index achieved by the firm in this market _____

more; declines

Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers. As more types of MP3 players are introduced into the market, the demand facing Orange becomes ________ elastic and the Lerner index achieved by the firm in this market ________.

more; declines

The Prisoners' Dilemma is a particular type of game in which negotiation and enforcement of binding contracts is not possible, and such games are known as:

noncooperative games

The market structure in which strategic considerations are most important is:

oligopoly

The market structure is which there is interdependence among firms is:

oligopoly

When a drug company develops a new drugs it is granted _____ making it illegal for other firms to enter the market until the _____ expires.

patent; patent

In a Nash equilibrium,

players may or may not have dominant strategies

Scenario 10.4: The demand for tickets to the Katy Perry concert (Q) is given as follows: Q = 120,000 - 2,000P The marginal revenue is given as: MR = 60 - .001Q The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point. A multiplant monopolist can produce her output in either of two plants. Having sold all of her output she discovers that the marginal cost in plant 1 is $30 while the marginal cost in plant 2 is $20. To maximize profits the firm will:

produce less output in plant 1 and more in plant 2

Scenario 10.4: The demand for tickets to the Katy Perry concert (Q) is given as follows: Q = 120,000 - 2,000P The marginal revenue is given as: MR = 60 - .001Q The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point. A multiplant monopolist can produce her output in either of two plants. Having sold all of her output she discovers that the marginal cost in plant 1 is $30 while the marginal cost in plant 2 is $20. To maximize profits the firm will:

produce less output in plant 1 and more in plant 2.

Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run?

profit equals zero

Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogeneous products

results in a larger output at a lower price

Monopoly power results from the ability to:

set price above marginal cost

The Lerner index measures:

the amount of monopoly power a firm chooses to exercises when maximizing profits.

A "mixed strategy" equilibrium means that:

the equilibrium strategy is an assignment of probabilities to pure strategies

The monopolist has no supply curve because:

the quantity supplied at any particular price depends on the monopolist's demand curve.

The Cournot equilibrium can be found by treating _____ as a pair of simultaneous equations and by finding the combination of Q1 and Q2 that satisfy both equations.

the reaction curves for firms 1 and 2

You are playing a game in which a dollar bill is auctioned. The highest bidder receives the dollar in return for the amount bid. However, the second-highest bidder must pay the amount that he or she bids, and gets nothing in return. The optimal strategy is:

to bid nothing

Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change would be:

to decrease the consumer surplus of Japanese rice to consumers.


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