ECON Final
Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. How much less do each of these firms earn in the Nash equilibrium than if they jointly maximize profits?
$20
There are just two producers of a certain product. Each is considering offering promotional discounts. At the Nash equilibrium, how much profit will Firm A earn?
$80,000
Which of the following statements is correct?
-If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. -Although the logic of self-interest decreases a duopoly's price below the monopoly price, it does not push the duopolists to reach the competitive price. -Although the logic of self-interest increases a duopoly's level of output above the monopoly level, it does not push the duopolists to reach the competitive level. >>>All of the above are correct<<<
In game theory, a Nash equilibrium is
-an outcome in which each player is doing his best given the strategies chosen by the other players -an outcome in which no player wishes to change her chosen strategy given the strategies chosen by the other players -the outcome that occurs when all players have a dominant strategy >>>All of the above are correct<<<
Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. If the two companies make their pricing decisions independently, then it is likely that ABC will
-charge a high price only if QRS charges a high price -charge a high price only if QRS charges a low price. -charge a high price regardless of whether QRS charges a high price or a low price >>>None of the above are correct<<<
In the prisoners' dilemma game, self-interest leads
-each prisoner to confess -to a breakdown of any agreement that the prisoners might have made before being questioned -to an outcome that is not particularly good for either prisoner >>>All of the above are correct<<<
The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Assume there are two profit-maximizing internet radio providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. How many subscriptions will be sold altogether when this market reaches a Nash equilibrium?
4,000
What is a cartel, and what are its challenges?
A group of firms colluding to fix prices/output to maximize profits. Challenges: Incentive to cheat, enforceability issues, and trust among members.
What does the demand curve look like for a single firm in perfect competition?
A horizontal line, indicating that the firm is a price taker.
What is deadweight loss in a monopoly?
A loss in consumer and producer surplus not accruing to anyone due to pricing above marginal cost.
What defines a monopoly?
A market structure with a single producer of a unique good with no close substitutes.
What defines an oligopoly?
A market with few firms holding a large market share, emphasizing interdependence among firms.
What is a simple monopoly?
A monopoly where the firm charges a single price to all consumers.
What is the monopolist's dilemma?
A price maker must balance setting a price and selling quantity, facing a downward-sloping demand curve and marginal revenue decreasing faster than average revenue.
What is the Nash equilibrium in the context of oligopoly?
A stable point where no firm can benefit by changing strategies unilaterally.
What is the profit-maximizing condition for a firm in the short run?
AR = MR = MC
What is the long-run equilibrium condition in perfect competition?
AR = MR = MC = LRATC, resulting in zero economic profit.
How are Average Revenue (AR) and Marginal Revenue (MR) calculated in perfect competition?
AR: Total Revenue (TR) divided by quantity (Q). MR: Change in revenue divided by change in quantity.
How does accounting profit differ from economic profit?
Accounting profit: Total revenue minus total explicit costs. Economic profit: Total revenue minus total explicit and implicit costs
In the long run, what happens to inputs and costs?
All inputs and costs are variable.
What is the Long Run Average Cost (LRAC) curve?
An 'envelope curve' that encompasses several short-run cost curves.
What is the Law of Diminishing Marginal Returns?
As one variable input increases while others remain constant, additional output eventually decreases.
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits: Does either Firm W or Firm H have a dominant strategy?
Both Firm W and Firm H have a dominant strategy
What are the three types of monopolies?
Closed: Legal restrictions prevent competition (e.g., patents). Natural: Duplication of services is wasteful. Open: Temporary advantage (e.g., first smartphones).
The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). If Paul chooses Turn, what will John choose to do and what will John's payoff equal?
Drive Straight, 20
Why is there deadweight loss in monopolistic competition?
Due to loss of total surplus from pricing above marginal cost.
What are variable costs?
Explicit and implicit costs of variable inputs that change with the level of output.
What are firms primarily focused on as entities?
Firms are profit-maximizing entities.
Define fixed costs and sunk costs.
Fixed Costs: Costs of fixed inputs that do not vary with output. Sunk Costs: Costs that cannot be recovered at all.
What is the difference between implicit and explicit costs?
Implicit costs: Opportunity costs of resources used. Explicit costs: Out-of-pocket costs.
How does game theory help understand oligopoly behavior?
It models strategic interactions, including options (strategies), payoffs, and outcomes like Nash equilibrium.
Why is economic profit significant for entrepreneurs?
It provides justification for starting a business and motivates innovation when it is not part of rent-seeking activities.
What are the key features of a competitive market?
Large number of firms (price takers) Homogenous product Free entry and exit (no sunk costs)
What is the time horizon difference between the long run and short run in business activity?
Long Run: All inputs and costs are variable. Short Run: At least one input and its cost are fixed.
What are economies of scale?
Long run average cost decreases as output increases.
What are diseconomies of scale?
Long run average cost increases as output increases.
What are constant returns to scale?
Long run average cost remains constant as output increases.
What is the profit-maximization rule for a monopoly?
MR = MC Price (AR) > MC
What characterizes monopolistic competition?
Many firms with differentiated products. Profit maximization where P > MR = MC. Zero economic profits in the long run.
What is the Marginal-Average Rule?
Marginal cost equals average cost at its minimum. If MC is above AC, AC increases. If MC is below AC, AC decreases.
How is marginal cost calculated?
Marginal cost is the ratio of change in total costs to the change in output.
What happens when there are positive economic profits in the short run?
New firms enter the market, driving prices down and eliminating profits.
What is the shut-down condition for a firm in the short run?
Operate if Price (P) ≥ Average Variable Cost (AVC). Shut down if Price (P) < AVC, as losses by operating exceed losses by shutting down.
Which of the following statements is true?
Policymakers have the difficult task of determining whether some firms' decisions have legitimate purposes even though they appear anti-competitive
What are some anti-competitive practices targeted by antitrust laws?
Resale price maintenance. Predatory pricing. Tying/bundling practices.
What are the conditions for price discrimination?
Reselling among consumers is prohibited. The monopolist knows consumers' price elasticity or willingness to pay
What public policies address oligopolies?
Sherman Antitrust Act (1890) and Clayton Antitrust Act (1914) aim to curb anti-competitive practices. Enforcement can be difficult and costly.
What happens when there are losses in the short run?
Some firms exit the market, reducing supply and restoring zero profit in the long run.
Why are sunk costs irrelevant in the shut-down decision?
Sunk costs cannot be recovered, so they do not affect the decision to shut down.
What determines the long-run slope of the supply curve under perfect competition?
The cost structure of the firms in the market.
What is the minimum efficient scale?
The output level at which economies of scale stop.
How is the marginal cost (MC) curve related to the firm's supply curve?
The rising part of the MC curve above AVC serves as the firm's individual supply curve.
What roles do advertising and branding play in monopolistic competition?
They signal quality to consumers. They affect price elasticity of demand and can increase profits.
What happens to total profit when Marginal Revenue (MR) exceeds Marginal Cost (MC)?
Total profit increases as long as MR > MC.
When can a monopolist experience a loss in the short run?
When Average Cost (AC) > Average Revenue (AR).
When does a firm make a positive profit in the short run?
When Price (P) > Average Total Cost (ATC).
Two restaurants with a focus on Mexican dining operate in Texama. Both Mitch's Mexican and Tim's Tacos need to decide whether to add Zesty Queso or Fresh Guacamole to their menus. The circumstances are that each firm wants to add only one of the two choices on their menu. Below you will find the profits for the stores, shown as: (1) the payoff to Mitch; (2) the payoff to Tim. Based upon the information from the table, what is the Nash Equilibrium?
Zesty Queso, Zesty Queso
If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they will produce collectively will
be greater than the monopoly quantity
In a typical cartel agreement, the cartel maximizes profit when it
behaves as a monopolist
The Sherman Antitrust Act prohibits price-fixing in the sense that
competing executives cannot even talk about fixing prices
The prisoners' dilemma game
has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other
As the number of firms in an oligopoly market
increases, the market approaches the competitive market outcome
Games that are played more than once generally
make collusive arrangements easier to enforce
The story of the prisoners' dilemma shows why
oligopolies can fail to cooperate, even when cooperation is in their best interest
The primary purpose of antitrust legislation is to
protect the competitiveness of U.S. markets
Resale price maintenance involves a firm
requiring that the firm reselling its product do so at a specified price
In the language of game theory, a situation in which each person must consider how others might respond to his or her own actions is called a
strategic situation
The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to
sue for up to three times the damages they incurred
In the prisoners' dilemma,
when each player chooses his dominant strategy the players reach a Nash equilibrium
Cartels are difficult to maintain because
each firm has an incentive to deviate from its agreed output level
The information in the table shows the total demand for water service in Takoma. Assume that there are two companies operating in Takoma. Each company that provides these services incurs an annual fixed cost of $400 and that the marginal cost of providing the service to each customer is exactly $2.00. Figures listed are for an annual service contract. The two water service providers in Takoma are able to form a successful cartel. If they collude on the quantity of service contracts each sells and split the market equally,
each firm will charge a price of $30 and each firm will sell 300 service contracts
