Homework 4

A dominant strategy is -a strategy that is obviously the best for each firm that is a party to a business decision. -a strategy that is the best for a firm no matter what strategies other firms use. -an equilibrium where each firm chooses the best strategy, given the strategies of other firms. -a strategy chosen by two firms that decide to charge the same price or otherwise not to compete.

a strategy that is the best for a firm no matter what strategies other firms use

Refer to Figure 10-9. At the profit-maximizing quantity, what is the difference between the monopoly's price and the marginal cost of production? $8 $11.50 $21 There is no difference.

$21

Refer to Figure 10-6. The monopolist earns a profit of -$0. -$170. -$248. -$372.

$248

Which of the following will not happen as a consequence of a monopolistically competitive firm suffering economic losses in the short run? -In the long run, the firm will be able to charge a price that is greater than its average total cost. -The firm will exit the industry if it continues to suffer economic losses. -The firm's demand curve will shift to the right if it stays in business in the long run. -The firm will break even if its stays in business in the long run.

In the long run, the firm will be able to charge a price that is greater than its average total cost

Excess capacity is a characteristic of monopolistically competitive firms. What does excess capacity mean? -It means that firms hire more than the minimum number of workers needed to produce the profit-maximizing level of output. -It means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves. -It means that firms build plants that are not large enough to achieve minimum efficient scale. -It means that firms produce with inefficient combinations of resources.

It means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves

Refer to Table 11-3. What are the profit-maximizing/loss-minimizing output level and price? -Q = 0 (firm should not produce) -Q = 3; P = $18 -Q = 4; P = $17 -Q = 5; P = $16

Q = 4; P = $17

Natural resource cartels such as OPEC are inherently unstable because their members operate with excess capacity and have an incentive to cheat on their output quotas. -True -False

True

Refer to Table 11-13. If the two firms collude, is there an incentive for either to cheat on the collusion agreement? -No, neither firm can gain by cheating. -Yes, but only Zuma is in a position to gain by cheating. -Yes, either firm can gain if it, alone, cheats. -Yes, but only Wide Awake is in a position to gain by cheating.

Yes, either firm can gain if it, alone, cheats

After having a monopoly in the diamond market for many years, by 2000, De Beers faced competition from other companies. To maintain its market share, De Beers -adopted a strategy of differentiating its diamonds. Each of its diamonds is now marked with a microscopic brand. -lowered the prices of its diamonds to make the market appear less profitable to potential competitors. -bought diamond mines in Canada and Russia that had been its competitors. -began buying so-called "blood diamonds" in order to keep these diamonds out of the control of other diamond companies.

adopted a strategy of differentiating its diamonds. Each of its diamonds is now marked with a microscopic brand

Consumers benefit from monopolistic competition by -paying the same price as everyone else. -paying the lowest possible price for the product. -being able to purchase high-quality products at low prices. -being able to choose from products more closely suited to their tastes.

being able to choose from products more closely suited to their tastes

Economic efficiency requires that a natural monopoly's price be -equal to average variable cost where it intersects the demand curve. -equal to the lowest price the firm can charge and still make a normal profit. -equal to marginal cost where it intersects the demand curve. -equal to average total cost where it intersects the demand curve.

equal to marginal cost where it intersects the demand curve

To be a natural monopoly, a firm must -control a key resource input. -have significant network externalities. -be in a government-regulated market. -have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms.

have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms

A characteristic found only in oligopolies is -break-even level of profits. -products that are slightly different. -independence of firms. -interdependence of firms.

interdependence of firms

In long-run equilibrium, compared to a perfectly competitive market, a monopolistically competitive industry produces a ________ level of output and charges a ________ price. -higher; higher -lower; lower -lower; higher -higher; lower

lower; higher

Refer to Figure 10-2. If the firm's average total cost curve is ATC 1, the firm will -suffer a loss. -break even. -make a profit. -face competition.

make a profit

If firms in a monopolistically competitive industry are making profits in the short run, then -barriers to entry will be erected to keep out rivals. -some firms will ultimately exit the industry. -new firms will enter the market. -they will resort to advertising wars to help sustain these profits.

new firms will enter the market

An example of a barrier to entry is -product differentiation. -occupational licensing. -increasing marginal costs. -high profits.

occupational licensing

A monopolistically competitive firm faces a downward-sloping demand curve because -it is able to control price and quantity demanded. -of product differentiation. -there are few substitutes for its product. -its market decisions are affected by the decisions of its rivals.

of product differentiation

A form of implicit collusion where one firm in an oligopoly announces a price change which is matched by other firms in the same industry is -"follow the leader" pricing. -retaliation pricing. -price leadership. -"tit-for-tat" pricing.

price leadership

For allocative efficiency to hold -the average variable cost must be minimized in production. -the average total cost must be minimized in production. -price must equal marginal revenue of the last unit sold. -price must equal the marginal cost of the last unit produced.

price must equal the marginal cost of the last unit produced