Micro Economics Quizzes Ch. 11-14

One framework used to analyze strategic choices is:

game theory

(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a pay-per-view football game on cable TV. Assume that the marginal cost and average cost are a constant $40. If the cable company practices perfect price discrimination, consumer surplus will be:

$0

(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a pay-per-view football game on cable TV. Assume that the marginal cost and average cost are a constant $40. If the cable company practices perfect price discrimination, deadweight loss will be:

$0

(Table: Total Cost and Output) Look at the table Total Cost and Output, which describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $67.50, how much is Sergei's profit at the profit-maximizing output?

$100.00

(Figure: A Profit-Maximizing Monopoly Firm) Look at the figure A Profit-Maximizing Monopoly Firm. This firm's profit per unit is:

$12

(Figure: A Profit-Maximizing Monopoly Firm) Look at the figure A Profit-Maximizing Monopoly Firm. This firm's cost per unit at its profit-maximizing quantity is:

$18

Suppose that a monopoly computer chip maker increases production from 10 microchips to 11 microchips. If the market price declines from $30 per unit to $29 per unit, marginal revenue for the eleventh unit is:

$19

(Table: Demand and Total Cost) Look at the table Demand and Total Cost. Lenoia runs a natural monopoly producing electricity for a small mountain village. The table shows Lenoia's demand and total cost of producing electricity. The marginal revenue of the fourth unit of production is:

$250

If a perfectly competitive firm sells 10 units of output at $30 per unit, its marginal revenue is:

$30

(Table: Demand and Total Cost) Look at the table Demand and Total Cost. Lenoia runs a natural monopoly firm producing electricity for a small mountain village. The table shows Lenoia's demand and total cost of producing electricity. To maximize profits, Lenoia should charge a price of:

$400

(Table: Cost Data) Look at the table Cost Data. The average total cost of producing 6 purses is:

$50

(Table: Cost Data) Look at the table Cost Data. The average total cost of producing 2 purses is:

$60

(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a pay-per-view football game on cable TV. Assume that the marginal cost and average cost are a constant $20. If the cable company is a monopoly, how much is consumer surplus when the monopolist maximizes profit?

$80

Valid graph

-MC: goes up -ATC above AVC line and never should touch -on a graph with x-axis (output) and y-axis (cost)

A monopoly will have a Herfindahl-Hirschman index equal to:

10,000

(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a pay-per-view football game on cable TV. Assume that the marginal cost and average cost are a constant $20. If the cable company is in a perfectly competitive industry, how many subscriptions will it sell?

8

What is a natural monopoly?

A monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors

(Figure: Payoff Matrix for Ajinomoto and ADM) Look at the figure Payoff Matrix for Ajinomoto and ADM. The Nash equilibrium combination occurs when ADM produces _____ million pounds and Ajinomoto produces _____ million pounds.

Both 30; 40 and 40; 30 are Nash Equilibrium

(Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The profit-maximizing price is price:

N

(Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The marginal cost of producing the profit-maximizing quantity is cost:

P

Based on the graph, classify the statements as true or false. (graph: long-run industry supply curve completely horizontal. short-run industry supply curve line sloping upwards)

TRUE: -this is a constant-cost industry -with free entry and exit, the price elasticity of supply is higher in the long run than in the short run FALSE: -the short-run industry supply curve is perfectly elastic

(Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. If the firm is trying to maximize its profit, the per-unit profit is:

The difference between N and where ATC at output R. (explanation: Per-unit profit is the difference between price and average total cost)

The following payoff matrix depicts the profits for the only two firms in this oligopolistic industry. In each cell, the 1st number is Firm A's profit and the 2nd number is Firm B's Profit.

There is no Nash Equilibrium in this game.

If the price is consistently below average total cost, then in the short run a perfectly competitive firm should:

There is not enough information given to answer this question.

To be called an oligopoly, an industry must have:

a small number of interdependent firms.

(Figure: Short-Run Costs) Look at the figure Short-Run Costs. A is the _____ cost curve.

marginal

The short-run supply curve for a perfectly competitive firm is its:

marginal cost curve above its average variable cost curve.

The relationship between the factors of production used by a firm and the maximum output possible is called the

production function

The marginal cost curve often decreases at first and then starts to increase. This is explained by

the law of diminishing returns

If they continue to grow only hay, how many acres should Hayfever Farms devote to growing hay in order to maximize profits?

want MC = MR to maximize profits

The Sherman Antitrust Act:

was aimed at preventing the establishment of more monopolies and was the beginning of antitrust policy.

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. If these two producers formed a cartel, split the production of output equally, and acted to maximize total industry profits, each firm's output would be _____ and each firm's profit would be _____.

250; $1,250

Classify the assumptions according to whether or not each item is an assumption made under perfect competition (also known as pure competition or competitive industry).

Assumed in perfect competition: -price-taking behavior Not assumed in perfect competition: -a small number of producers -significant barriers to entry -firms selling a similar but differentiated good

Which of the statements is NOT true?

Costs that are small and unimportant with little impact on profits are called marginal costs.

(Figure: The Profit-Maximizing Firm in the Short Run) Look at the figure The Profit-Maximizing Firm in the Short Run. If the market price is P4, the firm will produce quantity _____ and _____ in the short run.

q3; make a profit

If rival solar roof panel manufacturers in Reno limit production and _____ prices in a way that increases their profits without meeting with one another in a formal way, they are engaging in _____ collusion.

raise; tacit

One thing that distinguishes the short run and the long run is

the existence of at least one fixed output

Perfect competition is characterized by:

the inability of any one firm to influence price.

In the short run, perfectly (or purely) competitive firms will maximize their profit by producing which of the choices? Select all that apply.

-the quantity where marginal revenue = marginal cost -the quantity where price equals marginal cost

(Table: Labor and Output) Look at the table Labor and Output. The marginal product of the fifth worker is:

4

Which of the following scenarios best describes an oligopolistic industry?

Coca-Cola and Pepsi sell most of the soft drinks consumed around the world.

Which of the statements is true of the prisoner's dilemma?

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

Suppose that in the small town, Prairie, there are only two cable providers. What type of market structure does the local cable market have?

duopoly

The long run is best defined as a time period

during which all inputs can be varied

Price discrimination leads to a _____ price for consumers with a _____ demand.

higher; less elastic

(Figure: A Rock Climbing Shoe Monopoly) Look at the figure A Rock Climbing Shoe Monopoly. If the firm acts to maximize profit, the firm will earn profit equal to:

(P1 - P4) × Q2

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 economics, the short run is defined as:

the period in which some inputs are considered to be fixed in quantity.

A group of sellers who agree to restrict their collective output in order to drive up prices above marginal costs is a

cartel

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X and Y, if firm X were to choose its dominant strategy, it would:

choose a high price

Equations

total cost - fixed cost = variable cost fixed cost + variable cost = total cost change in total cost / change in quantity = marginal cost total cost / quantity = average cost (or ATC) variable cost / quantity = average variable cost

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. If these two producers formed a cartel and acted to maximize total industry profits, total industry output would be _____ and the price would be _____.

500; $5

(Figure: Marginal Product of Labor) Look at the figure The Marginal Product of Labor. The total product for three workers is _____ bushels.

51

There are many differences between a market served by a monopoly and a market that is perfectly competitive. Sort the items according to whether they are associated with a single-price monopoly or perfect competition.

A CHARACTERISTIC OF MONOPOLY: -the price is higher than in other market structures -firms can earn positive economic profit in the long run -there are significant barriers to entry A CHARACTERISTIC OF PERFECT (PURE) COMPETITION: -an efficient quantity is produced -firms have no market power

(Figure: Payoff Matrix for Ajinomoto and ADM) Look at the figure Payoff Matrix for Ajinomoto and ADM. The optimal combination for maximum combined profit occurs when ADM produces _____ million pounds and Ajinomoto produces _____ million pounds.

Both 40; 30 and 30; 40

(Table: Production Function for Soybeans) Look at the table Production Function for Soybeans. Assume that the fixed input, capital, is 10 acres of land and a tractor, which have a combined cost of $150 per day. The cost of labor is $100 per worker per day. The total cost of producing 25 bushels of soybeans is:

$250

(Figure: Revenues, Costs, and Profits for Tomato Producers II) Look at the figure Revenues, Costs, and Profits for Tomato Producers II. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $10. At the farmer's profit-maximizing output, total revenue is _____, total cost is _____, and profit is _____.

$30; $48; -$18

(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a pay-per-view football game on cable TV. Assume that the marginal cost and average cost are a constant $20. If the cable company is in a perfectly competitive industry, how much is consumer surplus?

$320

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, the market price of gadgets will be:

$4

(Figure: The Average Total Cost Curve) Look at the figure The Average Total Cost Curve. The total cost of producing five pairs of boots is approximately:

$408

HHI

-HHI = percentage/amount squared + other amount squared etc. -HHI is a barometer of an industry's market structure -HHI<1000 indicates a strongly competitive market -1000<HHI<1800 indicates a mildly competitive market -HHI>1800 shows an oligopolistic market structure

(Table: Total Cost for a Perfectly Competitive Firm) Look at the table Total Cost for a Perfectly Competitive Firm. If the market price is $4.50, the profit-maximizing output is _____ units.

8

The statements and equations show various ways of defining average variable cost, marginal cost, and average total cost. TC is used to abbreviate total cost, VC is used to abbreviate variable cost, and Q is used to abbreviate quantity. Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost.

Average variable cost: -VC/Q -the sum of all costs that change as output changes divided by the number of units produced Marginal Cost: -(triangle)TC/(triangle)Q -the amount by which total cost increases when an additional unit is produced Average (total) cost: -TC/Q -total cost divided by quantity of output

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X and Y, if firm X and firm Y wish to maximize joint profits:

Firm Y should choose a dominant strategy and Firm X, a nondominant strategy.

Antel and IMD both produce similar computer chips, and the two companies dominate this market. The table shows the choices available to Antel and IMD in terms of total output and the profits they would make in each of these situations. Use this table to answer the four questions. a. Using what you know about the prisoner's dilemma, what would be the profit for Antel and IMD in millions? (both act independently and increase production) b. What would be the best collective option for both firms? c. Select all of the reasons Antel and IMD would make more profit at the original constant production level?

a. Antel's profit: $100 million IMD profit: $100 million b. the firms should cooperate c. The original production level is more profitable because...it restricts the supply of computer chips, they can both charge more for the product at the given level of production

In perfectly competitive long-run equilibrium:

all firms produce at the minimum point of their average total cost curves.

Product differentiation is most likely to occur when firms:

have tacit agreements not to engage in price wars.

(Table: Cost Data) Look at the table Cost Data. When the purse factory produces 5 units of output (purses):

marginal cost is above average total cost, and average total cost is rising. (explanation: A is the correct answer and D isn't. At 5 units output level, the MC for the next one is (300-240)=60. The average TC is 240/5=48. So MC>ATC, ATC is rising. However, D is incorrect since MC is larger than both ATC and AVC)

For firms in perfectly (purely) competitive markets, long‑run economic profits are zero because firms will exit this market if profits are less than that and enter if profits are greater than that.

(CH. 12)

Determine if each example represents a barrier to entry or not.

IS AN EXAMPLE OF A BARRIER TO ENTRY: -Pfizer is the only firm that is legally allowed to produce and sell Lipitor, a best-selling cholesterol drug -DeBeers owns nearly all of the world's diamond mines -Boeing already serves a large fraction of the jumbo jet market and is able to produce at a lower average cost than any potential competitors IS NOT AN EXAMPLE OF A BARRIER TO ENTRY: -Tinseltown Theatres shows almost all the most popular newly-released movies.

Classify the statements as either true or false.

TRUE -airlines are often able to price discriminate -all else being equal, single price monopolistic competitors earn lower profits than firms than can price discriminate FALSE: -price discrimination is illegal under all circumstances -firms do not have an incentive to price discriminate because it results in some groups paying a lower price than others -perfect price discrimination occurs when perfectly competitive firms charge some people higher prices than others -price discrimination only occurs with natural monopolies

Tyler and Jen are arrested and charged with armed robbery. The police interview both suspects separately about their involvement in the crime. The table shows the sentences that Tyler and Jen will receive given their choices. Use the table to answer the three questions. a. If Tyler trusts Jen to remain silent, what should he do to minimize his sentence? b. If Tyler thinks Jen will confess, what should he do to minimize his sentence? c. What will be the dominant strategy outcome for Tyler and Jen?

a. tom should confess b. tom should confess c. the dominant strategy outcome is they get 12 years (both confess)

(Table: Cost Data) Look at the table Cost Data. The marginal cost of producing the fifth purse is:

$50

(Table: Total Cost and Output) Look at the table Total Cost and Output, which describes Sergei's costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $67.50, how many tubs of ice cream will Sergei's firm produce?

4

The market for breakfast cereal contains hundreds of similar products, such as Froot Loops, cornflakes, and Rice Krispies, that are considered to be different products by different buyers. This situation violates the perfect competition assumption of:

A standardized product

Everything Looks Like a Nail, Inc. is a manufacturing company that produces hammers. The company faces a number of different fixed and variable costs in the short run. Determine which of the costs are examples of fixed costs and which are examples of variable costs. Assume the company cannot easily adjust the amount of capital that it uses and that salaries are negotiated only once per year.

Fixed Costs: -lease on building -industrial equipment costs -interest on current debt -liability insurance costs -annual salary of top management Variable Costs: -cost of metal used in manufacturing -cost of wood used in manufacturing -postage and packaging costs

Which of the following is TRUE?

It is difficult to determine how much tacit collusion exists in a particular industry; hence tacit collusion remains hard to prosecute in the United States.

Consider a perfectly competitive firm in the short run. Assume the firm produces the profit-maximizing output and earns economic profits. Which statement is FALSE?

Price is equal to average total cost.

Determine if the statements and expressions regarding costs are true or false.

TRUE: -All costs are either fixed or variable -When fixed costs are positive, the average fixed cost curve is downward sloping -The ATC is always greater than or equal to AVC -ATC = (FC + VC) / Q -MC refers to the change in total cost associated with the production of another unit FALSE: -Average fixed costs is always higher than average variable cost -The ATC crosses the MC at the lowest point on the MC -The ATC is rising when the MC is below the ATC -The ATC is increasing whenever the MC is increasing -The VC curve is modeled as a horizontal line -TC = FC + VC + MC

(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a pay-per-view football game on cable TV. Assume that the marginal cost and average cost are a constant $30. If the cable company is a monopolist, how many subscriptions there will be?

around 3.8

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X and Y, if firm Y were to choose its dominant strategy, it would:

choose a high price

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, Margaret's profit will be _____ and Ray's profit will be _____.

$1,400; $1,000

(Table: Total Cost and Output) Look at the table Total Cost and Output, which describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $67.50, how much is Sergei's total revenue at the profit-maximizing output?

$270.00

Mr. Porter sells 10 bottles of champagne per week at $50 per bottle. He can sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity and the price effects on total revenue would be, respectively, an increase of _____ and a decrease of _____.

$45; $50

Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $5.825.82. Further, your marginal costs are $5.805.80. The previous cartel price was $10.00, when you and your competitor were price fixing. What price level do you now choose to maximize profits?

$5.81

(Figure and Table: Variable, Fixed, and Total Costs) Look at the figure and table Variable, Fixed, and Total Costs. When 51 bushels of wheat is produced, the average fixed cost is _____, average variable cost is _____, and average total cost is _____.

$7.84; $11.76; $19.60

(Figure: Revenues, Costs, and Profits for Tomato Producers) Look at the figure Revenues, Costs, and Profits for Tomato Producers. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $18. At the profit-maximizing quantity of output in the figure, the farmer's total revenue is _____, total cost is _____, and profit is _____.

$90; $70; $20

Iz, Lauren, Odd, and Ralph started a T‑shirt company. They can produce any number of T‑shirts at a cost of $2$2 per T‑shirt, both marginal and average. They are the only producers of T‑shirts. As monopolists, they charge $20$20 per T‑shirt and obtain total profits of $10,000$10,000. Now assume there are creative differences and they split the company in two. Lauren and Ralph join together and compete against Iz and Odd. If they compete on quantity, each company would produce 5050 T‑shirts and charge $12$12 a T‑shirt. For technical reasons, assume that the quantity demanded is greater than zero for all prices greater than $0. 1) If, however, Ralph and Lauren compete directly against Iz and Odd in prices, the market price for T‑shirts will be 2) And their profits will be 3) In response to the price war, Iz and Odd decide to put an iguana on the chest of their T‑shirt. They convince the world that the iguana is necessary for coolness. This type of behavior is called 4) What economic reason is likely to have caused Iz and Odd put an iguana on their T‑shirts?

1) $2 2) $0 3) product differentiation 4) increase profits

Suppose Ralph has a chicken processing plant with the total cost function shown in the accompanying table. 1) What is Ralph's fixed cost? 2) Ralph pays his workers $100$100 each, and labor is the only variable cost. At a quantity of 60006000 chickens, how many workers does he hire? 3) Why does total cost increase faster as output increases?

1) $800 2) 10 3) There are diminishing returns to labor

The graph shows the relevant curves for a profit maximizing monopolist. Assume that it is possible for the firm to produce a quantity that is not a whole number. 1) What quantity will the firm produce? 2) What price will the firm charge? 3) What is the firm's profit?

1) 30.36 units 2) $20.59 3) $171.23

The table shows a hypothetical demand schedule for monosodium glutamate (MSG). Ajinomoto holds 5050% of the market, Jiali holds 3030% of the market, and Quingdao holds 2020% of the market. 1) Suppose the three firms agree to form a cartel to fix production of monosodium glutamate. Assume marginal cost equals zero, and the output is split equally across the firms. What quantity maximizes the cartel's profit? 2) Suppose Ajinomoto's marginal cost remains equal to zero, but for Jiali and Quingdao, marginal costs rise above zero. How would this affect the incentive of Ajinimoto to act noncooperatively and change its output?

1) 90 million pounds 2) Ajinimoto will have an incentive to increase its output of MSG

The graph shows the total revenue curve for a monopoly. Use this graph to answer the questions. It is possible that there is more than one correct response for each question. 1) The firm's total revenue is zero when producing which of the quantities? 2) The firm's marginal revenue is zero when producing which of the quantities?

1) Q4, Q0 2) Q2

Classify each statement about types of market structure as either true or false. 1) Monopolies produce differentiated products. 2) Monopolistic competition is a market structure that consists of a small number of producers. 3) Perfect (pure) competition is characterized by product differentiation. 4) Oligopolies exist in a market that has a small number of producers that may or may not exhibit product differentiation.

1) false 2) false 3) false 4) true

Suppose that the price of corn, a crop produced in a perfectly (or purely) competitive industry, increased 208% last year as demand for corn‑based ethanol fuel increased. 1) What do you expect to happen in the long run for the corn industry given this recent success? Suppose the firms in the market for bacon, also a perfectly (or purely) competitive industry, experienced losses last quarter due to people becoming increasingly concerned about how high-fat diets negatively impact health. 2) What do you expect to happen in the long run for the bacon industry?

1) profits will be equal to zero 2) profits will be equal to zero

The accompanying graph represents Hayden'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. 1) How many cups of frozen yogurt should Hayden sell? 2) How much should Hayden charge per cup?

1) q1 2) p4

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. 1) What is Disney's dominant strategy? 2) What is the Nash equilibrium in this game?

1) strategy one (To solve for a firm's optimal strategy, compare the payoffs for one firm holding the other firm's strategy constant. If Paramount chooses strategy 1, Disney could also choose strategy 1 and earn a profit of $75$75 million or choose strategy 2 and earn a profit of $25$25 million. Assuming Disney wishes to maximize profits, it would choose strategy 1. If Paramount chooses strategy 2, Disney could also choose strategy 2 and earn a profit of $150$150 million or choose strategy 1 and earn a profit of $300$300 million. It would still choose strategy 1. Regardless of Paramount's strategy, Disney will always choose strategy 1. This is called Disney's dominant strategy) 2) A (The Nash equilibrium occurs in cell A of the payoff matrix. Comparing these payoffs to the other payoffs, neither firm would wish to unilaterally deviate from this outcome. At all other outcomes, at least one firm has an incentive to change their strategy to earn a higher payoff. For example, although each firm is better off at D, each firm would also prefer to earn a higher payoff by unilaterally changing their strategy and earning a payoff at B or C. At B or C, the firm earning the lower payoff has an incentive to unilaterally change their strategy to earn the payoffs at A. Note, it is not actually necessary for both firms to have a dominant strategy for there to be a Nash equilibrium. If one firm has a dominant strategy, the other firm can reasonably expect it to play that strategy and thus will maximize the payoffs for just that scenario, even if it would mean a lower payoff for the other less likely scenario)

The graph shows the marginal cost (MC), average total cost (ATC), and marginal revenue (MR) curves for a perfectly (or purely) competitive firm. Note that the demand (D) curve is the same as the MR curve for such a firm. Assume that the cost curves are representative of other firms in the industry. 1) Given the current price, this firm will 2) In the long run, this market will 3) What is going to happen to the price of this product?

1)earn a negative economic profit 2)experience exit by some firms 3) it will increase

(Figure: Cost Curves for Corn Producers) Look at the figure Cost Curves for Corn Producers. The market for corn is perfectly competitive. If the price of a bushel of corn is $10, in the short run, the farmer will produce _____ of corn and earn an economic _____ equal to _____.

3 bushels; profit; loss, -$15 (explanation: Please keep in mind, in the short run, as long as the price is higher/equal to the shut down price, the firm will still operate even though the profit might be negative)

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. Suppose that these two producers have formed a cartel and are maximizing total industry profits and splitting the production of output evenly between themselves. If Margaret decides to cheat on the agreement and sell 100 more gadgets, how many gadgets will she sell?

350

(Figure: Cost Curves for Corn Producers) Look at the figure Cost Curves for Corn Producers. The market for corn is perfectly competitive. If the price of a bushel of corn is $14, in the short run, the farmer will produce _____ of corn and earn an economic _____ equal to _____.

4 bushels; profit; $0

(Figure: Payoff Matrix for Gehrig and Gabriel) The figure Payoff Matrix for Gehrig and Gabriel describes two people who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. If both follow a tit-for-tat strategy, equilibrium will be reached when Gehrig produces _____ figurines and Gabriel produces _____ figurines.

5,000; 5,000

Which statement describes a monopoly?

A single firm produces a product with no close substitutes and control over the market place.

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X and Y, what's the Nash Equilibrium for this game?

H, H (explanation: Let's check four cells one by one. If they are in the up left cell, Y chooses L and X chooses L, giving Y choosing L, X has incentive to change from L to H to get $1800. Therefore, this cell isn't a Nash Equilibrium. If they are in the down left cell, Y chooses L and X chooses H, giving X choosing H, Y has incentive to change from L to H to get $2400. Therefore, this cell isn't a Nash Equilibrium. If they are in the up right cell, Y chooses H and X chooses L, giving Y choosing H, X has incentive to change from L to H to get $2000. Therefore, this cell isn't a Nash Equilibrium. If they are in the down right cell, Y chooses H and X chooses H, giving Y choosing H, X doesn't have incentive to change from H to L since $2000>$1800; giving X choosing H, Y doesn't have incentive to change from H to L since $2400>$2200. Therefore, this cell is a Nash Equilibrium)

Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to help or impede Nola and Charles colluding.

HELPS COLLUSION: -Charles and Nola both charge a fixed price per person for a party -Nola and Charles are regulars at the same coffee house. They talk regularly. IMPEDES COLLUSION: -A party planning school opens and the new graduates are ready to plan -Charles develops a signature appetizer that becomes the must-have appetizer in Trident -Nola lowers her price on national television -Nola's marginal cost is lower than Charles's -Most of the parties are given by Trident's largest employer, a water bottling plant

Which firm is most likely to be a natural monopoly?

Municipal Power Light, the local supplier of electricity

Suppose that Tamara and Vicki are both in the public eye. They get offers to sell secrets of the other to tabloids. If both keep the secrets, they are both better off than if they get exposed. If only one is exposed, the other person is better off than if no one was exposed. Their payoffs from each option are given in the payoff matrix. Suppose that Vicki and Tamara play the game over four television seasons, where each season is a new game. Consider the scenarios. Remember, a tit‑for‑tat strategy is one where the person starts by cooperating and then plays whatever strategy the other firm played last.

Over four seasons, how much will Vicki make if she and Tamara both play tit‑for‑tat? $32 Over four seasons, how much does Vicki make if she always exposes and Tamara plays tit‑for‑tat? $25 Over four seasons, how much will Vicki make if she plays a tit‑for‑tat strategy and Tamara always exposes? $17 Over four seasons, how much will Vicki make if she and Tamara both always expose? $20 Does Vicki have a dominant strategy when she and Tamara play for four seasons? NO, there is no dominant strategy between tit-for-tat and always expose in this situation

(Figure: A Rock Climbing Shoe Monopoly) Look at the figure A Rock Climbing Shoe Monopoly. If the firm acts to maximize profit, the firm will sell _____ pairs of shoes at _____ per pair.

Q2; P1

Categorize each statement as true or false.

TRUE: -price leadership occurs when one firm announces a price change and other firms match the announced price -price leadership is a form of implicit (tacit) collusion FALSE: -price leadership is illegal -price leadership prevents cooperation among competing firms

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X and Y, if firm X and firm Y wish to maximize joint profit:

X chooses Low Price and Y chooses High Price, i.e L, H

You own a lemonade stand in a competitive market, and as such, you are a price-taking firm. Which of the following events would most likely increase your market power?

You own exclusive rights to harvest lemons from all domestic citrus orchards.

If marginal cost is equal to average total cost:

average total cost is at its minimum

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

can be increased by decreasing production.

The large barriers to entry are a reason a monopoly:

earns an economic profit in the long run.

A firm's ___________________ are costs that are incurred even if there is no output. In the short run, these costs ___________________ as production increases.

fixed costs; do not change

(Figure: Costs and Profits for Tomato Producers) Look at the figure Costs and Profits for Tomato Producers. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $18. If the market price increases to $20, the farmer's marginal revenue _____ and the profit-maximizing output _____.

increases; increases

Price in a perfectly competitive industry:

is always equal to marginal revenue for the firm.

The city bus system charges lower fares to senior citizens than to other passengers. Assuming that this pricing strategy increases the profits of the bus system, we can conclude that senior citizens must have a _____ demand for bus service than other passengers.

more elastic

At the current level of output, Becca Furniture's marginal cost curve is above the average total cost curve. This means Becca Furniture's average total cost curve:

must be rising.

(Figure: Payoff Matrix for Gehrig and Gabriel) The figure Payoff Matrix for Gehrig and Gabriel describes two people who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. For Gehrig and Gabriel, the dominant strategy is to:

produce 7,000 figurines.

In the short run, if P = ATC, a perfectly competitive firm:

produces output and earns zero economic profit.

In game theory, a dominant strategy is

the best strategy to pick, no matter which moves are chosen by the other player

Marginal cost is defined as

the change in total costs from producing one more unit of output

A firm's ___________________ are costs that increase as quantity produced increases. These costs often show ___________________ illustrated by the increasingly steeper slope of the total cost curve.

variable costs; diminishing marginal returns

If two firms are identical in all respects except that one has more of the fixed input capital than another, the total product curve for the firm with more capital:

will lie above the total product curve for the firm with less capital

Bozo is a clown. He wants to start a clowning business where he sends other clowns out to birthday parties. Use the graph to answer the questions. What is the marginal product of the second unit of labor? Round your answer to the nearest whole birthday party.

-marginal product: 3 birthday parties -This production function demonstrates...diminishing marginal returns to labor (Diminishing output only occurs if the production function decreases as inputs increase. In this case, the output function is increasing. Similarly, a negative marginal product only occurs if the total output function is decreasing. Marginal cost decreases if the total output curve exhibits increasing marginal product of labor. An increasing marginal product of labor implies that fewer units of input are required to produce the same additional units of output. This increase in efficiency reduces the marginal cost of production)

(Figure: Payoff Matrix for Gehrig and Gabriel) The figure Payoff Matrix for Gehrig and Gabriel describes two people who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. The combined profits of the two are maximized if Gehrig produces _____ figurines and Gabriel produces _____ figurines.

5,000; 5,000

(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a pay-per-view football game on cable TV. Assume that the marginal cost and average cost are a constant $40. If the cable company practices perfect price discrimination, then it will sell _____ subscriptions.

6

(Scenario: Payoff Matrix for Firms A and B) In the scenario Payoff Matrix for Firms A and B. If they play the game for 10 times, what will be firm A's pay off if both A and B will choose "always choosing High price strategy", i.e the firm will always choose High price each time?

60 (explanation: If both A and B choose "always choosing High price strategy", they will always end at H, H cell for 10 times. The total payoff for A will be 6*10=60)

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. If the industry were perfectly competitive, the output would be _____ gadgets, and the price would be _____.

800; $2

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town. Gary and Frank decide to form a cartel to raise the price of gasoline. The total industry profits are highest when _____ cheat(s) on the agreement, and Gary's profits are highest when _____.

neither firm; Gary cheats but Frank does not