Chapter 7, 8, 9 Questions PDF

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Chapter 7, 8, 9 Questions...

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Refer to the graph for a purely competitive firm in short-run equilibrium. The price being charged by the firm is given by:

A) B) C) D)

0F/0C. 0G/0C. 0F/0B. 0E/0A. Ans: C

If a purely competitive firm is producing at some level less than the profit-maximizing output, then: A) price is necessarily greater than average total cost. B) fixed costs are large relative to variable costs. C) price exceeds marginal revenue. D) marginal revenue exceeds marginal cost. Ans: D In the graph below, the area:

A) B) C) D)

0CGH represents the firm's total cost. ACGE represents the firm's total profit. 0AEH represents the firm's total profit. BCGF represents the firm's fixed costs of production. Ans: D

A purely competitive firm is producing at the point where its marginal cost equals the price of its product. If the firm increases its output, then total revenue will: A) increase and profits will increase. B) decrease and profits will increase. C) increase and profits will decrease. D) decrease and profits will decrease. Ans: C Suppose that when 3000 units of output are produced, the marginal cost of the 3001st unit is $2. This amount is equal to the minimum of average total cost, and marginal cost is rising. If the optimal level of output in the short run is 3300 units, then at this higher level of output marginal cost is: A) equal to $2 and marginal cost is equal to average total cost. B) less than $2 and marginal cost is greater than average total cost. C) greater than $2 and marginal cost is greater than average total cost. D) greater than $2 and marginal cost is less than average total cost. Ans: C Suppose that at 500 units of output marginal revenue is equal to marginal cost. The firm is selling its output at $5 per unit and average total cost at 500 units of output is $6. On the basis of this information we: A) can say that the firm should close down in the short run. B) can say that the firm can produce and realize an economic profit in the short run. C) cannot determine whether the firm should produce or shut down in the short run. D) can assume the firm is not using the most efficient technology. Ans: C A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 500 units is $1.50. The minimum possible average variable cost is $1.00. The market price of the product is $1.25. To maximize profit or minimize losses, the firm should: A) continue producing 500 units. B) produce less than 500 units. C) produce more than 500 units. D) shut down. Ans: B

Monopoly

At which of the following combinations of price and marginal revenue (P, MR) is the price elasticity of demand greater than 1? A) P = 15, MR = 8 B) P = 12, MR = 0 C) P = 8, MR = -2 D) P = 4, MR = -4 Ans: A The pure monopolist that is nondiscriminating must decrease price on all units of a product sold in order to sell additional units. This explains why: A) there are barriers to entry in pure monopoly. B) a monopoly has a perfectly elastic demand curve. C) marginal revenue is less than average revenue. D) total revenues are greater than total costs at the profit maximizing level of output. Ans: C For an imperfectly competitive firm: A) total revenue is a straight, upsloping line because a firm's sales are independent of product price. B) the marginal revenue curve lies above the demand curve because any reduction in price applies to all units sold. C) the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold. D) the marginal revenue curve lies below the demand curve because any reduction in price applies only to the extra unit sold. Ans: C A pure monopolist is selling 6 units at a price of $12. If the marginal revenue of the seventh unit is $5, then: A) price of the seventh unit is $10. B) price of the seventh unit is $11. C) price of the seventh unit is greater than $12. D) firm's demand curve is perfectly elastic. Ans: B

In moving down the elastic segment of the monopolist's demand curve, total revenue is: A) increasing, and marginal revenue is negative. B) decreasing, and marginal revenue is positive. C) decreasing, and marginal revenue is negative. D) increasing, and marginal revenue is positive. Ans: D For a pure monopolist the relationship between total revenue and marginal revenue is such that: A) marginal revenue is positive when total revenue is at a maximum. B) total revenue is positive when marginal revenue is increasing, but total revenue becomes negative when marginal revenue is decreasing. C) marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing. D) marginal revenue is positive so long as total revenue is positive. Ans: C

If a nondiscriminating pure monopolist decides to sell one more unit of output, the marginal revenue associated with that unit will be: A) equal to its price. B) the price at which that unit is sold less the price reductions which apply to all other units of output. C) the price at which that unit is sold plus the price increases which apply to all other units of output. D) indeterminate unless marginal cost data are known. Ans: B When a firm is on the inelastic segment of its demand curve, it can: A) increase total revenue by reducing price. B) decrease total costs by decreasing price. C) increase profits by increasing price. D) increase total revenue by more than the increase in total cost by increasing price. Ans: C Oligopoly is more difficult to analyze than other market models because: A) the number of firms is so large that market behavior cannot be accurately predicted. B) the marginal cost and marginal revenue curves of an oligopolist play no part in the determination of equilibrium price and quantity. C) of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models. D) unlike the firms of other market models, it cannot be assumed that oligopolists are profit maximizers. Ans: C

In which of the following industry structures is the entry of new firms the most difficult? A) pure monopoly B) oligopoly C) monopolistic competition D) pure competition Ans: A Suppose that firms in this industry miraculously split up such that there were 100 firms, each with a one percent market share. The four-firm concentration ratio and the Herfindahl Index respectively would be: A) 100 percent and 10,000. B) 4 percent and 4. C) 100 percent and 16. D) 4 percent and 16. Ans: D The Herfindahl index for an industry is 2750. Which of the following sets of market shares and industry with four firms would produce such an index? A) 10, 30, 30, and 30 B) 15, 25, 25, and 35 C) 5, 25, 30, and 40 D) 15, 20, 30, and 35 Ans: D In the prisoner's dilemma each player ideally is best off if: A) if both prisoners deny. B) if both prisoners confess. C) if one prisoner denies and the other confess. D) if the district attorney is Angie Harmon. Ans: A

196. Refer to the above profits-payoff table for a duopoly. If the firms are acting independently and firm X sets its price at $6, firm Y will achieve the largest profit by selecting: A) a price higher than $6. B) a price between $5 and $6. C) $6. D) $5. E) $4. Ans: E Level: Difficult Main Topic: 10.4 Oligopoly pricing behaviour: A game theory overview Page: 262-263 Subtopic: Strategies in a two-firm oligopoly Type: Application 197. Refer to the above profits-payoff table for a duopoly. If initially firms X and Y are charging $5 and $4 respectively: A) the two firms will be maximizing joint profits. B) Y will find it advantageous to raise its price if it was certain X would not alter its price. C) X will find it advantageous to raise its price if it was certain Y would not alter its price. D) both firms would find it advantageous to collude to raise their prices by $1 each. Ans: D Level: Difficult overview Page: 262-263

Main Topic: 10.4 Oligopoly pricing behaviour: A game theory Subtopic: Strategies in a two-firm oligopoly Type: Application

198. Refer to the above profits-payoff table for a duopoly. If initially firm X's price was $6 and Y's price was $5: A) X would find it profitable to cut price, provided Y also cut price. B) Y would find it profitable to cut price, provided X also cut price. C) Y would find it profitable to raise price by $1, provided X would also raise price by $1. D) both firms would profit by simultaneously lowering their prices by $1. Ans: C Level: Difficult overview Page: 262-263

Main Topic: 10.4 Oligopoly pricing behaviour: A game theory Subtopic: Strategies in a two-firm oligopoly Type: Application

Use the following to answer questions 199-202:

199. The above matrix best illustrates: A) game theory. B) the principal-agent problem. C) product differentiation. D) price discrimination. Ans: A Level: Easy Main Topic: 10.4 Oligopoly pricing behaviour: A game theory overview Page: 262-263 Subtopic: Mutual interdependence revisited Type: Application 200. Refer to the above diagram where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If both firms follow a high-price policy: A) Alpha will realize a $10 million profit and Beta a $30 million profit. B) each will realize a $20 million profit. C) Beta will realize a $10 million profit and Alpha a $30 million profit. D) each will realize a $15 million profit. Ans: B Level: Moderate overview Page: 262-263

Main Topic: 10.4 Oligopoly pricing behaviour: A game theory Subtopic: Mutual interdependence revisited Type: Application

201. Refer to the above diagram wherein the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If Beta commits to a high-price policy, Alpha will gain the largest profit by: A) also adopting a high-price policy. B) adopting a low-price policy. C) adopting a low-price policy, but only if Beta agrees to do the same. Ans: B Level: Moderate overview Page: 262-263

Main Topic: 10.4 Oligopoly pricing behaviour: A game theory Subtopic: Mutual interdependence revisited Type: Application

202. Refer to the above diagram where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. With independent pricing the outcome of this duopoly game will gravitate to cell: A) A. B) B. C) C. D) D. Ans: D Level: Difficult overview Page: 262-263

Main Topic: 10.4 Oligopoly pricing behaviour: A game theory Subtopic: Mutual interdependence revisited Type: Application

Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly. Firm A Choice 1

Choice 2

Choice 1

A = $500 B = $500

A = $800 B = $100

Choice 2

A = $100 B = $800

A = $300 B = $300

Firm B

(a) Does this game have a dominant strategy equilibrium? If so, what is it? (b) Is the outcome that results when both firms make choice 1 a Nash equilibrium? (c) Is the outcome that results when both firms make choice 2 a Nash equilibrium? (a) The dominant strategy equilibrium in this game arises when both firms choose Choice 2. (b) This outcome is not a Nash equilibrium. Both firms would want to alter their choice from 1 to 2. (c) This outcome is a Nash equilibrium. Neither firm will want to change its choice given what the other firm has chosen. [text: MI p. 261]...