ECO Study Guide

Suppose the accompanying table describes the relationship between price and quantity demanded for a monopolist. The marginal revenue of the fifth unit of output is:

$2

Suppose a monopolist faces the market demand curve shown below. What is this monopolist's marginal revenue as it expands output from 3 to 4 units per week?

$3

Suppose a monopolist faces the market demand curve shown below. What's the horizontal intercept of this monopolist's marginal revenue curve?

$5

Suppose a monopolist faces the market demand curve shown below. What's the highest price this monopolist can charge if wants to sell 4 units per week?

$6

Suppose the accompanying table describes the relationship between price and quantity demanded for a monopolist. Quantity Price 1 $10 2 $9 3 $8 4 $7 5 $6 6 $5 7 $4 8 $3 The marginal revenue of the third unit of output is:

$6

Why might an appliance retailer hammer dents into the sides of its stoves and refrigerators?

Because doing so is an effective way of offering discounts to only the most highly price-sensitive customers.

In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping. Perfectly competitive firms have no control over the price they charge for their product. For a natural monopoly, average cost declines as the number of units produced increases over the relevant output range.

False True True

Which of the following industries does not fit the natural monopoly model?

Fast food restaurants

Start-up costs:

are the one-time costs incurred when beginning the production of a new product.

Psychological incentives:

can serve as commitment devices.

Emotions like guilt and sympathy:

can solve commitment problems.

OPEC is an example of a:

cartel

A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n):

cartel.

When players cannot achieve their goals because they are unable to make credible threats or promises, the situation is called a:

commitment problem.

A ______ describes the possible moves in a game in sequence and lists the payoffs to each possible combination of moves.

decision tree

in tit-for-tat, if your partner ______ in your first interaction, then you will ______ in your next interaction.

defects; defect

The primary objective of an imperfectly competitive firm is to:

maximize profit.

In many cities in the United States, a single firm provides electricity. Those firms are:

monopolists.

A price setter is a firm that:

has some degree of control over its price.

Natural monopolies are most likely to arise when firms have:

high start-up costs and low marginal costs.

A credible threat is:

in the threatener's interest to carry out.

Both a perfectly competitive firm and a monopolist find that:

it is best to expand production until the benefit and the cost of the last unit produced are equal.

suppose Big Dairy Inc. has a monopoly in the market for milk and currently sells 1,000 gallons of milk a day at a price of $6 per gallon. Big Dairy Inc.'s marginal revenue from producing its 1,000th gallon of milk is:

less than $6.

A firm is most likely to experience economies of scale if its start-up costs are high and its marginal cost is ______.

low

Given the demand curve it faces, if an imperfectly competitive firm wants to sell another unit of output, it must:

lower its price.

For all firms, the additional revenue collected from the sale of one additional unit of output is termed:

marginal revenue.

The reason economists consider monopoly to be socially undesirable is that monopolists:

produce less than the socially optimal level of output.

"Market power" refers to a firm's ability to:

raise its price without losing all of its sales.

Why do price discrimination and the existence of slightly different variants of the same product tend to go hand in hand? By introducing slightly different variants of the product, firms that price discriminate are able to

separate buyers based on their willingness to pay

Suppose a monopolist faces the market demand curve shown below. What's the vertical intercept of this monopolist's marginal revenue curve?

$10

Which of the following firms is most likely to be a pure monopolist?

The only gas station in a small, isolated town

Which of the following is NOT an example of a good with network economies?

A computer printer

A single-priced, profit-maximizing monopolist:

Always charges a price above the marginal cost of production.

What pricing practice is explained by the same logic as the appliance seller's scratch-n-dent sale?

Discounts for product buyers who mail in rebate coupons

Which of the following is NOT a commitment device?

High fines for illegal parking on campus

If a monopolist could perfectly price-discriminate:

The marginal revenue curve and the demand curve would coincide.

A dominant strategy exists if:

a player has a strategy that yields the highest payoff regardless of the other player's choice.

A strategy that limits defection in a repeated prisoner's dilemma game is:

a tit-for-tat strategy.

According to the textbook, the most important and enduring source of market power is:

economies of scale.

Patents, which confer market power, are intended to:

encourage innovation by helping firms recoup the costs of research and development.

Suppose the market for milk is perfectly competitive, and the equilibrium price of milk is $6 per gallon. If a firm that produces milk increases its output by 1 gallon, then its marginal revenue will be:

equal to $6.

The essential feature that differentiates imperfectly competitive firms from perfectly competitive firms is that an imperfectly competitive firm:

faces a downward-sloping demand curve.

A monopoly that results from economies of scale is called a(n):

natural monopoly.

Most cartels cease to be effective because:

of the incentive to cheat on the cartel agreement.

If a firm functions in an oligopoly, it is:

one of a small number of firms that produce goods that are either close or perfect substitutes.

High fines for illegal parking on campus.

only when dining in a restaurant at which he often eats.

According to the textbook, the owners of restaurants encourage tipping in order to:

solve a commitment problem with their wait staff.

A monopolistically competitive firm:

sometimes distinguishes its output from that of its competitors by locating in a more convenient place.

In sequential games, the player who moves first:

sometimes has an advantage and sometimes has a disadvantage.

When a pharmaceutical company introduces a new drug, its research and development costs are ______, and the cost of the chemicals used in manufacturing the drug are ______.

start-up costs; variable costs

Game theory provides tools that are used to model:

strategic interdependencies.

Suppose a perfectly competitive firm and a monopolist are both charging $5 for their respective products. From this, one can infer that:

the marginal benefit from selling an additional unit of output is $5 for the competitive firm and less than $5 for the monopolist.

A payoff matrix shows:

the payoffs for each possible combination of strategies.

The three elements of a game are:

the players, the strategies, and the payoffs.

In the Nash equilibrium of a prisoner's dilemma:

there is unrealized opportunity for both to gain.

When a perfectly competitive firm sells additional units of output, ______, and when a monopolist sells additional units of output, ______.

total revenue always rises; total revenue could rise, fall, or remain unchanged

When marginal revenue is zero:

total revenue is maximized.