Exam 4 Study Guide

Question 1

A “search good” is:

Answer 1

Like a peach that can be examined for flaws

Question 2

A firm in pure competition would shut down when:

Answer 2

Price is less than average variable cost

Question 3

All of the following are mechanisms which reduce the adverse selection problem except ___.

Answer 3

High interest rates

Question 4

All of the following are true for both competition and monopolistic competition in the long run, except one of them. Which is it?

Answer 4

P = MC

Question 5

An “experience good” is one that:

Answer 5

Has undetectable quality when purchased

Question 6

Asset specificity is largest when

Answer 6

Very valuable assets are non-redeploy-able

Question 7

Buyers anticipate that the temporary warehouse seller of unbranded computer equipment will

Answer 7

Produces only one quality

Question 8

Experience good are products or services

Answer 8

Whose quality is undetectable when purchased

Question 9

If price exceeds average costs under pure competition, ___ firms will enter the industry, supply will ___, and price will be driven ___.

Answer 9

More; Increase; Down

Question 10

In long-run equilibrium, all firms in a pure competition market situation operating under a condition of certainty will have identical costs even though they may use different production and operation techniques.

Answer 10

True

Question 11

In pure competition:

Answer 11

A, B, C

Question 12

In the long-run, firms in a monopolistically competitive industry will

Answer 12

Tend to just cover costs, including normal profits

Question 13

In the purely competitive case, marginal revenue (MR) is equal to:

Answer 13

Price

Question 14

In the short-run for a purely competitive market, a manufacturer will stop production when:

Answer 14

The contribution to fixed costs is zero or less

Question 15

Long distance telephone service has become a competitive market. The average cost per call is $0.05 a minute, and it’s declining. The likely reason for the declining price for long distance service is:

Answer 15

Entry into this industry pushes prices down

Question 16

The fraudulent delivery of low quality experience goods at high prices is more likely if

Answer 16

None of the above

Question 17

The main difference between perfect competition and monopolistic competition is:

Answer 17

The degree of product differentiation

Question 18

The market for “lemons” is one in which

Answer 18

All of the above

Question 19

The price for used cars is well below the price of new cars of the same general quality. This is an example of:

Answer 19

A Lemon’s Market

Question 20

The problems of asymmetric information exchange arise ultimately because

Answer 20

One party cannot independently verify the information of another

Question 21

To escape adverse selection and elicit high quality experience good buyers can

Answer 21

None of the above

Question 22

To remain competitive today, many companies commit themselves to

Answer 22

B and C

Question 23

Uncertainty includes all of the following except ___.

Answer 23

Unverifiable claims

Question 24

Under asymmetric information,

Answer 24

At best, you get what you pay for

Question 25

What is the profit maximization point for a firm in a purely competitive environment?

Answer 25

The output where P = MC

Question 26

Which of the following statements is (are) true concerning a pure competition situation

Answer 26

Both B and C Firms must sell at or below market price Marginal revenue is equal to price

Question 27

Microsoft's success over Apple although Apple had a technologically superior product is the result of:

Answer 27

Increasing returns in a network-based business

Question 28

Which of the following relate(s) to gross profit margin?

Answer 28

The profit margin after subtracting variable manufacturing costs

Question 29

A monopolist faces the following demand curve: P = 12 - .3Q with marginal costs of $3. What is the monopolistic PRICE?

Answer 29

P = $7.50

Question 30

A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 - 3Q. The fixed cost is $10 and the variable cost per unit $2. What is the maximizing QUANTITY for this monopoly.

Answer 30

Q = 10

Question 31

A monopoly will always produce less than a purely competitive industry, ceteris paribus.

Answer 31

False

Question 32

Declining cost industries

Answer 32

Have marginal cost curve below their average cost curve

Question 33

Globo Public Supply has $1,000,000 in assets. Its demand curve is: p = 206 - .20*Q and its total cost function is: TC = 20,000 + 6*Q where TC excludes the cost of capital. If Globo Public Supply is UNREGULATED, find Globo's optimal price.

Answer 33

$106

Question 34

In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to be found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

Answer 34

Price would be below average cost.

Question 35

In the case of pure monopoly:

Answer 35

A and B only The firm's profit is maximized at the price and output combination where marginal cost equals marginal revenue. The demand curve is always elastic.

Question 36

In the electric power industry, residential customers have relatively ___ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial user generally are charged ___ rates.

Answer 36

Inelastic; higher

Question 37

Land's End estimates a demand curve for turtleneck sweaters to be: Log Q = .41 + 2.3 Log Y - 3 Log P Where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost or imported turtleneck sweaters is $9.00. The optimal monopoly price would be:

Answer 37

$13.50

Question 38

Of the following, which is not an economic rationale for public utility regulation?

Answer 38

Constant cost industry

Question 39

Regulatory agencies engage in all of the following activities except ___.

Answer 39

Setting federal and state income tax rates on regulated firms

Question 40

The demand curve facing the firm in ___ is the same as the industry demand curve

Answer 40

Pure monopoly

Question 41

The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:

Answer 41

Peak-load pricing

Question 42

The profit-maximizing monopolist, faced with a negative-sloping demand curve, will always produce:

Answer 42

At an output short of that output where average costs are minimized

Question 43

Unique Creations has a monopoly position in magnometers. If the marginal cost for a magnometer is $50 and the price elasticity for magnometers is -4, what is the optimal monopoly price?

Answer 43

$66.67

Question 44

When the cross elasticity of demand between one product and all other products is low, one in generally referring to a(n) ___ situation.

Answer 44

Monopoly

Question 45

Which of the following is a source of market power for a monoplist?

Answer 45

All of the above are sources of market power for a monopolist

Question 46

A cartel is a situation where firms in the industry

Answer 46

Have an agreement to restrict output

Question 47

A(n) ___ is characterized by a relatively small number of firms producing a product.

Answer 47

Oligopoly

Question 48

All of the following are possible ways to avoid price wars EXCEPT:

Answer 48

A through D Customer segmentation with revenue management. Growing the market. Reference prices and framing effects. To not start one.

Question 49

An oligopoly is characterized by:

Answer 49

A, B, and C A relatively small number of firms. Either differentiated or undifferentiated products. Actions of any individual firms will affect sales of other firms in the industry.

Question 50

Barometric price leadership exists when

Answer 50

One firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry

Question 51

Effective collusion generally is more difficult as the number of oligopolistic firms involved increases

Answer 51

True

Question 52

Effective oligopolistic collusion is more likely to occur when customer orders are small, frequent, and received on a regular basis as compared with large orders that are received infrequently at irregular intervals.

Answer 52

True

Question 53

Even ideal cartels tend to be unstable because

Answer 53

Firms can benefit by secretly selling more than they promised the other firms

Question 54

Exceptions to the prohibition against cartels exist for which of the following?

Answer 54

A through C Ocean shipping rates Various agricultural products such as milk and oranges Transoceanic airline routes

Question 55

Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include:

Answer 55

A, B, and C Number and size distribution of sellers Size and frequency of orders Product heterogeneity

Question 56

If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ___ of all firms is identical.

Answer 56

Marginal cost

Question 57

In a kinked demand market, whenever one firm decides to lower its price

Answer 57

Other firms will automatically follow

Question 58

In barometric price leadership, one firm announces a change in price:

Answer 58

That it hopes will be accepted by others

Question 59

In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-out level, assumes that the other firm's ___ will not change

Answer 59

Output

Question 60

In the absence of any legally binding enforcement mechanism, individual cartel producers may find it advantageous to cheat on the agreements and engage in secret price concessions:

Answer 60

True

Question 61

Regarding price leadership, which of the following is NOT true?

Answer 61

Once established, a barometric price leader will not change

Question 62

Some market conditions make cartels MORE likely to success in collusion. Which of the following will make collusion more successful?

Answer 62

The orders are small and frequent

Question 63

Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units. Suppose that the monopoly output is 5,000. For a 2-firm Cournot Oligopoly (N = 2) known as a duopoly, what is a likely Cournot QUANTITY for the industry?

Answer 63

6,667

Question 64

The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms

Answer 64

False

Question 65

The existence of a kinked demand curve under of oligopoly conditions may result in

Answer 65

Stable prices

Question 66

The kinked demand curve model helps to explain

Answer 66

Stabilities observed in prices in oligopolistic industries

Question 67

The largest problem faced in cartel pricing agreements such as OPEC is

Answer 67

Detecting violations of quota barriers by cartel participants

Question 68

Which of the following is an example of an oligopolistic market structure?

Answer 68

Air transport industries