Question 1

Productive efficiency does not hold for a profit-maximizing,monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies of scale region of its average total cost curve.

Accepted Answer

A) True 
 B)False

Question 2

When an oligopoly is in a Nash equilibrium

Accepted Answer

A)  firms have colluded to set their prices. 
B)  firms will not behave as profit maximizers. 
C)  a firm will not take into account the strategies of its rivals. 
D)  a firm will choose its best pricing strategy, given the strategies that it observes other firms have taken.

Question 3

Monopolistically competitive firms have downward-sloping demand curves.In the long run,monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run

Accepted Answer

A)  monopolistically competitive markets achieve productive efficiency. 
B)  monopolistically competitive markets achieve allocative efficiency. 
C)  monopolistically competitive firms earn economic profits. 
D)  monopolistically competitive firms have excess capacity.

Question 4

Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium?

Accepted Answer

A)  Marginal revenue is equal to marginal cost. 
B)  Price is equal to average revenue. 
C)  The firm has excess capacity. 
D)  Price is equal to marginal cost.

Question 5

Is a monopolistically competitive firm allocatively efficient?

Accepted Answer

A)  No, because it does not produce at minimum average total cost. 
B)  Yes, because it produces where marginal cost equals marginal revenue. 
C)  No, because price is greater than marginal cost. 
D)  Yes, because price equals average total cost.

Question 6

A fundamental assumption in game theory is that players do not interact with each other.

Accepted Answer

A) True 
 B)False

Question 7

Suppose two firms in a duopoly implicitly collude and charge a high price.How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

Accepted Answer

A)  The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact. 
B)  The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same. 
C)  The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion. 
D)  The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available.

Question 8

Table 11-15
 
-Refer to Table 11-15.Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Ecuador for the production of oil.Saudi Arabia and Ecuador must decide how much oil to produce.Since the demand for oil is inelastic,relatively low production rates drive up prices and profits.Saudi Arabia,the world's largest and lowest-cost producer,is able to influence market price; it has an incentive to keep output low.Ecuador,on the other hand,is a relatively high-cost producer with much smaller reserves.Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Ecuador $15 million to produce a low output.
a.Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Ecuador $15 million to produce a low output.
b.What is the dominant strategy for each country in this new game?
c.What is the new Nash equilibrium?

Accepted Answer

The answer of Table 11-15
 
-Refer to Table 11-15.Suppose the...

Question 9

Which of the following will not happen as a consequence of a monopolistically competitive firm suffering economic losses in the short run?

Accepted Answer

A)  The firm's demand curve will shift to the right if it stays in business in the long run. 
B)  The firm will exit the industry if it continues to suffer economic losses. 
C)  The firm will break even if its stays in business in the long run. 
D)  In the long run, the firm will be able to charge a price that is greater than its average total cost.

Question 10

If a monopolistically competitive firm breaks even,the firm is earning as much in this industry as it could in any other comparable industry.

Accepted Answer

A) True 
 B)False

Question 11

Figure 11-16
 
-Refer to Figure 11-16.Figure 11-16 depicts a monopolistically competitive barber shop.Use the diagram to answer the following questions.
a.Suppose the average variable cost of production is $15 when output equals 110 haircuts and $15.25 when output equals 140 haircuts.If the firm wants to maximize its profit or minimize its losses,how many haircuts will it produce and what price should it charge? Explain your answer.
b.Calculate the firm's profit or loss.
c.What is likely to happen in this industry over time as it moves to its new long-run equilibrium?
d.Suppose the barber shop depicted in the diagram remains in the industry.Is this barber shop likely to produce this same quantity of haircuts as in part (a)in the long run?

Accepted Answer

The answer of Figure 11-16
 
-Refer to Figure 11-16.Figure 11-16...

Question 12

Why does a prisoner's dilemma lead to a noncooperative equilibrium?

Accepted Answer

A)  because each player had agreed before the game started to minimize the harm that he can inflict on the other players 
B)  because each player is uncertain how other players will play the game 
C)  because players must choose from a limited number of non-dominant strategies 
D)  because each rational player has a dominant strategy to play a certain way regardless of what other players do

Question 13

A monopolistically competitive firm that earns an accounting profit in the short run

Accepted Answer

A)  must also earn an economic profit in the short run. 
B)  does not earn enough to earn an economic profit in the short run. 
C)  could earn an economic profit, break even, or suffer an economic loss in the short run. 
D)  could earn an economic profit or break even, but could not suffer an economic loss in the short run.

Question 14

An equilibrium in which each player chooses its best strategy given the strategies chosen by the other players is called a Nash equilibrium.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry?

Accepted Answer

A)  Concentration ratios do not include sales in the United States by foreign firms. 
B)  Concentration ratios are calculated for the national market, even though the competition in some industries is mainly local. 
C)  Concentration ratios assign weights to only the four largest firms in an industry. 
D)  Concentration ratios do not address the fact that competition sometimes exists between firms in different industries.

Question 16

A member of a cartel earns more profits by producing more than its quota and selling at a price higher than the cartel's price.

Accepted Answer

A) True 
 B)False

Question 17

A monopolistically competitive firm that earns economic profits in the short run will face a more elastic demand curve in the long run.

Accepted Answer

A) True 
 B)False

Question 18

The marginal revenue of a monopolistically competitive firm

Accepted Answer

A)  cannot be negative because the price the firm charges will always be greater than zero. 
B)  can be negative if the firm charges a high price. 
C)  can be negative if the firm charges a low price. 
D)  will equal average revenue.

Question 19

The "Discount Department Stores" industry is highly concentrated.What does this mean?

Accepted Answer

A)  There are many large stores such as Walmart, Target, Kohl's, in this industry. 
B)  A few large stores account for a significant portion of industry sales. 
C)  There is cut-throat competition in this industry because there are no entry barriers. 
D)  The sales volume in this industry is consistently high.

Question 20

Which of the following explains why two firms,Apex and Bongo,would engage in implicit collusion,rather than explicit collusion?

Accepted Answer

A)  Implicit collusion allows Apex to increase its profits at the expense of Bongo without Bongo knowing that collusion has occurred; if Apex engages in explicit collusion, Bongo will realize collusion has taken place and retaliate against Apex. 
B)  Implicit collusion is less costly to both firms than explicit collusion; therefore, profits will be greater for both firms if they engage in implicit collusion. 
C)  explicit collusion is illegal; if the managers of Apex and Bongo engage in implicit collusion they may be within the law. 
D)  Implicit collusion always has an enforcement mechanism that forces both firms to collude; explicit collusion does not have an enforcement mechanism.

Exam 11: Monopolistic Competition and Oligopoly

Productive efficiency does not hold for a profit-maximizing,monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies of scale region of its average total cost curve.

When an oligopoly is in a Nash equilibrium

Monopolistically competitive firms have downward-sloping demand curves.In the long run,monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run

Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium?

Is a monopolistically competitive firm allocatively efficient?

A fundamental assumption in game theory is that players do not interact with each other.

Suppose two firms in a duopoly implicitly collude and charge a high price.How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

Which of the following will not happen as a consequence of a monopolistically competitive firm suffering economic losses in the short run?

If a monopolistically competitive firm breaks even,the firm is earning as much in this industry as it could in any other comparable industry.

Why does a prisoner's dilemma lead to a noncooperative equilibrium?

A monopolistically competitive firm that earns an accounting profit in the short run

An equilibrium in which each player chooses its best strategy given the strategies chosen by the other players is called a Nash equilibrium.

Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry?

A member of a cartel earns more profits by producing more than its quota and selling at a price higher than the cartel's price.

A monopolistically competitive firm that earns economic profits in the short run will face a more elastic demand curve in the long run.

The marginal revenue of a monopolistically competitive firm

The "Discount Department Stores" industry is highly concentrated.What does this mean?

Which of the following explains why two firms,Apex and Bongo,would engage in implicit collusion,rather than explicit collusion?