Economics Exam
Product differentiation a. refers to product price differences between sellers b. refers to differences in location, customer service, packaging, and style c. is a negative characteristic of monopolistic competition d. decreases the elasticity of demand for the industry demand curve
B
The prisoners' dilemma is a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
True
A maker of electronic equipment will not allow retailers to handle its line of equipment if they sell it below the factory list price. This is an example of a. resale price maintenance agreement b. a tying contract c. price discrimination d. exclusive dealing
A
At the present level of production, a monopolistically competitive firm observes that P = $100, MR = $50, MC = $50, and ATC = $75. On the basis of these figures, we can say a. the firm is maximizing profit b. the firm should shut down c. the firm should continue to produce but should reduce its rate of output d. the firm should expand production
A
A Nash equilibrium occurs when a. oligopolists cooperate with one another b. economic actors who are interacting choose their best strategy given the strategies chosen by others c. the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost d. a monopolist is forced to produce the efficient level of output
B
In long-run equilibrium, the monopolistically competitive firm a. produces at its minimum long-run average cost b. experiences excess capacity c. can earn economic profits if it is efficient d. is just covering its average fixed costs of production
B
A distinguishing characteristic of market structure is a. unionization b. female percentage of the work force c. level of executive compensation d. number of firms
D
A monopolist maximizes profit by a. charging the highest price possible b. producing the output for which average total cost is minimized c. producing the output for which price equals marginal cost d. producing the output for which marginal revenue equals marginal cost
D
Price discrimination requires a. downward sloping-demand curves b. different elasticities of demand in different markets c. an ability to prevent buyers from reselling at a lower price d. all of the above
D
What are the attributes of a monopolistically competitive market?
Each firm produces a product that is at least slightly different from those of other firms. Each firm faces a downward-sloping demand curve. Firms can enter and leave the market without restrictions. Thus the number of firms in the market adjusts until economic profits are driven to zero.
A firm is said to be an oligopoly if it has a low percentage concentration ratio.
False
Explain the product-variety externality and the business-stealing externality
The product-variety externality occurs when a new firm considers entering a market to introduce a new product. Entry of the new firm conveys a positive externality to consumers because they get some consumer surplus from the introduction of a new product. The business-stealing externality occurs when other firms lose customers and profits from the entry of a new competitor. Entry of new firms imposes a negative externality on existing firms.
T/F: A benevolent social planner who wanted to maximize total surplus in the market would ask the monopolist to produce the level of output where the demand curve and marginal-cost curve intersect.
True
In the case of price discrimination, price is lower in the market having a. the more elastic demand b. the less elastic demand c. more consumers d. fewer consumers
A
Explain the behavior of the monopolist's marginal revenue.
A monopolist's marginal revenue slopes downward, and is always less than the price of its good. This is because it faces a downward sloping demand curve. To sell one more unit of output, the monopolist must drop its price for every unit it sells. This drop in price reduces the revenue on the units it was already selling. Hence, the monopolist's marginal revenue is less than its price.
Why would a perfectly price discriminating monopolist earn more profit than a normal monopolist?
A perfectly price discriminating monopolist will sell to each consumer at the price that he/she is willing and able to pay; thus consumer surplus is zero. The monopolist gets the entire consumer surplus. Total surplus is now the monopolist's profits. A normal monopolist will charge each consumer the identical price, so some consumers will receive consumer surplus.
Remembering the illustration of Bonnie and Clyde in the prisoners' dilemma game where neither has any information of the other's decision, the best possible outcome for Clyde would be a. if both confessed b. if neither confessed c. if Clyde remained silent and Bonnie confessed d. to confess while Bonnie remained silent
D
The goal of any kind of collusion is to a. increase the market share of all firms in an industry b. punish consumers c. reduce the number of sellers in the cartel d. boost the profits of firms in an industry
D
Which of the following statements about collusive arrangements is correct? a. Collusion is always easy to detect in the business sector b. The larger the number of firms in an industry, the easier it is to maintain collusion c. There is no tendency to cheat on agreements d. They create the opportunity for firms to make economic profits
D
Oligopolies have no trouble maintaining monopoly profits, because there is no evidence of self interest in this type of market structure.
False
T/F: Patents and copyright laws have little effect on monopolies
False
Explain what would happen in a monopolistically competitive market if firms are making economic profits
New firms will enter the market and increase the supply of products from which customers can choose, thereby reducing the demand faced by each firm already in the market. The firm's demand curve will shift to the left. This causes profits to fall. This continues until the firms in the industry are making zero economic profits. The market would then have reached long-run equilibrium.
Average cost pricing a. limits a regulated monopolist to normal profits b. requires that the company receive a public subsidy c. leads to efficient allocation of resources d. does all of the above
A
Brand names exist because they a. enable producers to act as price setters b. enable producers to earn economic profits c. make entry into a market more difficult d. provide consumers with low-cost information
A
In Canada, pharmaceutical products are restricted from advertising to the general public. Such restrictions may a. reduce the competitive nature of the pharmaceutical industry in Canada b. limit doctors' choices to prescribe c. make drugs less expensive d. enhance the social well-being of Canadians
A
In a monopolistic competitive market, the free entry of firms ensures that a. both economic profits and losses evaporate over the long term b. the market will always operate at full capacity c. firms will never make economic or accounting profits d. firms will shut down once too many enter the market
A
The marginal revenue curve for a monopoly a. lies below its demand curve b. is upward sloping c. is greater than the average revenue curve d. can never be negative
A
There are many firms in the case of a. perfect competition and monopolistic competition b. monopolistic competition and oligopoly c. perfect competition and oligopoly d. monopoly
A
Which of the following is correct? a. In the short run, a monopolistically competitive firm can earn an economic profit b. In the long run, a monopolistic competitive firm can earn an economic profit c. In the short run, a monopolistically competitive firm will shut down if price is greater than average variable cost d. A monopolistically competitive firm produces at the point where marginal revenue equals average total cost
A
In the case of monopoly a. all firms in the industry produce close substitutes b. a single firm supplies the industry's entire output c. the demand for the firm's output is perfectly elastic d. the firm is the only buyer of a particular input
B
Monopolistic competition is characterized by a. homogeneous output throughout the industry b. a large number of sellers in the industry c. the inability of firms to influence the price of output d. high barriers to entry
B
Monopoly leads to inefficient allocation of resources because a. MR > MC b. P > MC c. P < MC d. MR < MC
B
Posting a list price below cost in hopes of gaining market share is an example of a. resale price maintenance b. predatory pricing c. tying d. long-term solid business practice
B
Which of the following describes the problem of "excess capacity"? a. underutilization of resources and not enough firms b. producing output below efficient scale c. more output produced by the typical monopolistically competitive firm than would be produced by a perfectly competitive firm d. too many goods chasing too few resources
B
Which of the following is a barrier to entry? a. a downward sloping demand curve b. a single producer is more efficient than a large number of producers c. no close substitute for a product d. a homogeneous product
B
If OPEC is to be successful, each member state should a. produce the most that it can b. agree on the price, but be free to produce any amount c. agree on both the price and the amount to produce individually d. agree on the amount to produce but not on the price
C
If the regulatory commission sets the price required for efficient allocation of resources, the firm a. earns an economic profit b. earns a normal profit c. will incur losses d. may earn an economic profit, but only if it minimizes the average cost of production
C
The major threat to a cartel is a. increases in input prices b. kinked demand curves c. firms secretly cutting price d. cost reductions
C
The shaving industry has a multitude of products including razors, blades, lotions, etc. This industry is an example of a a. perfectly competitive market b. monopoly c. oligopoly d. monopolistic competitive market
C
Which of the following characteristics does not influence market structure? a. the type of product the firm sells b. the firm's ability to influence price c. whether the firm owns or rents its inputs d. the number of firms in the industry
C
Which of the following conditions must hold for a monopolistically competitive firm to be in the long-run equilibrium? a. P = MC and P = ATC b. P = MR and MR = MC c. MR = MC and P = ATC d. MR = MC and P> ATC
C
Which of the following correctly describes long-run equilibrium for the oligopolist? a. P > MC b. P< MC c. P = MC d. MC = zero
C
Which of the following is NOT a barrier to entry for a monopoly to exist? a. The critical resource is owned by a single company b. The costs of production make a single producer more efficient than many producers c. International trade agreements restrict production domestically d. The government grants exclusive rights to a single producer
C
Which of the following is not a characteristic of a monopolistically competitive industry? a. many buyers and sellers b. free entry c. product standardization d. downward-sloping demand curve facing each firm in the industry
C
Which one of the following holds for a monopoly but does not hold for a firm selling output in a perfectly competitive market? a. To produce more output the firm must purchase more inputs b. Higher amounts of output cost more to produce c. To sell more output the firm must lower the price d. The firm can shut down production in the short run
C
Costs of regulation include a. costs of conforming to federal regulation b. inefficient resource allocation mandated by regulation c. administrative costs d. all of the above
D
In what sense is monopolistic competition similar to monopoly? a. barriers to entry b. number of producers in the industry c. differentiated products among the industry's producers d. product demand curves that are downward-sloping
D
Which of the following is NOT true for a natural monopoly? a. Economies of scale exist b. If more firms entered the market, total output per firm would decrease c. In some cases, the size of the market may be a determinate for existence of a natural monopoly d. Governments may issue exclusive rights of production to a specific firm
D
Explain how game theory can be applied to the arms race between the United States of America and the former Soviet Union during the era of the Cold War
During the Cold War the United States and the Soviet Union faced the decision whether to build new weapons or to disarm. Each country preferred to have more arms than the other because a larger arsenal would give the country more influence in world affairs. But each country also preferred to live in a world safe from the other country's weapons. Both countries used the dominant strategy theory. The Soviet Union chose to arm, and the United States did the same to prevent the loss of power. If the Soviet Union had chosen to disarm, the United States would have been better off arming because doing this would have made it more powerful. Thus each country chose to continue the arms race resulting in the inferior outcome in which both countries were at risk.
Predatory pricing occurs when firms with market power use that power to raise prices above the competitive level.
False
T/F: A monopolistic competitive firm, like a perfectly competitive firm, could increase the quantity it produces and lower the average total cost of production.
False
T/F: Because competitive firms are price takers, they face downward-sloping demand curves. Because a monopoly is the sole producer in its market, it faces a horizontal market demand curve.
False
T/F: Excess capacity occurs under monopolistic competition because the price is always equal to the marginal revenue.
False
T/F: For a monopoly, price is equal to marginal revenue and is equal to marginal cost. For the competitive firm, price is greater than marginal revenue and is equal to marginal cost.
False
T/F: Marginal revenue for the monopoly is similar to marginal revenue for the competitive firm. It remains constant when the monopolist sells an additional unit of output.
False
T/F: Monopolistically competitive firms produce efficiently because they realize zero economic profits in the short run.
False
T/F: The monopolistically competitive firm maximizes profits by equating price and marginal revenue
False
Compare the long-run equilibrium in a monopolistically competitive market with the long-run equilibrium under perfect competition
In the long run under perfect competition, the firm produces at the efficient scale, where average total cost is minimized. Here the price equals the marginal cost. Under monopolistic competition, the firm produces at less than the efficient scale, and price is higher than marginal cost. In both cases, price equals average total cost and economic profits are zero.
State two arguments in defense of brand names
It is argued that a brand name is a useful way for consumers to ensure that the goods they buy are of high quality. Brand names provide consumers with information about quality, when quality cannot be easily judged in advance of purchase. Second, brand names give firms an incentive to maintain a high quality because the firms have a financial stake in maintaining the reputation of their brand names.
What is resale price maintenance? Why is it considered to violate competition law?
Resale price maintenance occurs when a firm (wholesaler) sells output to retailers at one price and requires the retailer to charge customers a stated higher price. Any retailer that charges less than the stated higher price would have violated its contract with the wholesaler. This prevents retailers from competing on price, so it is viewed as a violation of competition law.
What is the objective of price discrimination? What are the conditions that must be present for a firm to be able to price discriminate?
The goal is to maximize profits. The conditions are: 1) market power, (2) the firm must be able to separate customers according to their willingness to pay, and must be able to distinguish these differences in ability and willingness to pay on the basis of age or income, (3) The consumer must not be able to or must find it difficult to practise arbitrage, the process of buying a good in one market at a low price and selling it in another market at a higher price to profit from the price difference.
Explain the two effects that each individual oligopolist would have to consider in deciding how much of their product to produce
These are the output effect and the price effect. The output effect illustrates that if the price is above marginal cost, when the oligopolist sells one more unit at the going price this will raise profits. The price effect illustrates that if the oligopolist raises production this will increase the total amount sold, which will lower the price of the product and lower the profit on all the other units sold. If the output effect is larger than the price effect, the producer will increase production. If the price effect is larger than the output effect, the firm will not raise production. Each oligopolist continues to increase production until these two marginal effects exactly balance; each takes the other firm's production as given.
What is predatory pricing?
This occurs when a firm, usually an oligopoly, cuts its prices in order to drive a new competitor out of the market. If it is successful, then the firm can recapture its monopoly position and raise prices again.
As members of a cartel, individual firms must consider two basic effects of price and output levels, before making any decisions.
True
T/F: A natural monopoly arises because a single firm can supply a good or service to an entire market at lower cost than could two or more firms.
True
T/F: As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level of output.
True
T/F: Defenders of advertising argue that firms use advertising to provide information to customers. This information allows customers to make better choices about what to buy and enhances the ability of markets to allocate resources efficiently.
True
T/F: Simply advertising to the consumer may indicate something about the quality of your product to the consumer.
True
T/F: Since supply decisions cannot be analyzed without knowing the demand curve, monopolies essentially do not have a supply curve.
True
T/F: The quantity that minimizes average total cost is called the efficient scale of the firm. Monopolistic competitive firms produce below this level.
True
The cartel model of oligopoly assumes that oligopolies act as if they were monopolists that have assigned output quotas to individual member firms of the oligopoly so that total output is consistent with joint profit maximization.
True
Explain the effect on the monopolist's total revenue when it increases the amount it sells.
When a monopolist increases the amount it sells, it has two effects on total revenue (price times quantity): (1) The output effect: More output is sold, so quantity is higher. (2) The price effect: The price falls, so price is lower.
Compare the oligopoly's profit maximization level of production and price with the competitive firm and the monopoly
When firms in an oligopoly individually choose production to maximize profit, they produce a quantity of output greater than the level produced by the monopoly and less than the level produced by competition. The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost).
Use the date in the table below to answer the following questions: http://www.mankiwmicro4e.nelson.com/student/test/ch15.html a. Determine the profit maximizing price and output level. What is the amount of the monopolist's profit? b. Suppose the government were to regulate the monopolist to charge a price equal to average cost. What would be the price and output level? What would be the amount of economic profit?
a. Output would be where MR = MC, that is, 6 units. Price for 6 units is $150. The profit is $140. b. The price would be $130 and the quantity of output would be 8 units. Economic profit would be zero.
