Sample exam 3 Flashcards
(33 cards)
As an economist, you are asked to model an oligopoly market with the following characteristics: firms produce an undifferentiated product, choose quantities, and then let the market determine the price. Further, when making output decisions, there is one firm that the other firms follow. Which oligopoly model would best predict actual behavior in this market?
Stackelberg firm
In the ____ model, firms simultaneously choose quantities without colluding.
Cournot
In the ____ model, a leader firm chooses its quantity, and then the other follower firms independently choose their quantities.
Stackelberg
In the ____ model, firms simultaneously and independently select prices.
Bertrand
Define duopoly -
An oligopoly with two (duo) firms.
Define the oligopoly equilibrium -
A situation in which no firm wants to change its behavior.
A monopolist observes that a potential rival is poised to enter the market. The monopolist can invest in an expensive piece of equipment that will significantly lower its marginal cost, but will raise its total costs. Should the monopolist make the investment?
A) No. Lowering marginal cost would force the firm to overproduce. B) No. This action is not profit maximizing; the higher total cost will cause the firm to lose money. C) Yes, but only if the potential entrant cannot make the same cost lowering investment. D) Yes, if the investment deters entry and the post investment profit is higher than post entry profit without the investment.
D) Yes, if the investment deters entry and the post investment profit is higher than post entry profit without the investment.
The possibility that a firm can earn positive long-run profits is determined by:
A) entry conditions B) the degree of product differentiation C) the ability to set price D) the number of firms
A) entry conditions
In the monopolistically competitive airlines model, what is the long-run equilibrium if firms face no fixed costs?
In the long run, firms will earn __a__ economic profit at a price equal to __b__ cost. Because fixed costs act as a barrier to entry, we’d expect the number of firms in equilibrium to __c__ as fixed costs decrease.
a. positive OR negative OR zero b. marginal OR average total OR average variable c. increase OR decrease OR stay the same
a) zero
b) average total
c) increase
Suppose a monopolist’s demand curve is P = 60 - Q, its cost function is TC = 10Q + 50, and its marginal cost is 10. If a governmental agency wished to set the price that maximized social welfare, that price would be
A) $35.00. B) $14.57. C) $11.02. D) $10.00.
D) $10.00
What is the effect of a lump-sum tax (which is like an additional fixed cost) on a monopoly?
In the short run, a lump-sum tax __a__ the monopoly’s profit-maximizing quantity if it produces and __b__ the monopoly’s likelihood of shutting down.
a. decreases OR does not affect OR increases b. decreases OR increases OR does not affect
a. does not affect
b. does not affect
What is the effect of a lump-sum tax (which is like an additional fixed cost) on a monopoly?
In the long run, a lump-sum tax __a__ the monopoly’s profit-maximizing quantity if it produces and __b__ the monopoly’s likelihood of shutting down.
a. does not affect OR decreases OR increases b. increases OR does not affect OR decreases
a. does not affect
b. increases
Why does differentiating its product allow an oligopoly to charge a higher price?
When an oligopoly firm differentiates its product, it
A) makes supply less elastic. B) makes demand less elastic. C) prevents new firms from entering its industry. D) reduces the average cost of production. E) essentially gains the advantage of moving second in a sequential game.
B) makes demand less elastic.
Price discrimination is welfare reducing.
A) False, price discrimination can increase the coverage of a market thereby increasing welfare. B) True, price discrimination limits the coverage of a market thereby increasing welfare. C) False, price discrimination limits the coverage of a market thereby increasing welfare. D) True, price discrimination can increase the coverage of a market thereby increasing welfare.
A) False, price discrimination can increase the coverage of a market thereby increasing welfare.
When a firm practices perfect price discrimination, it
A) produces the same quantity as would be produced by a competitive market. B) captures all the social gain. C) charges each consumer her reservation price. D) takes all consumer surplus from consumers. E) All of the above are true.
E) All of the above are true.
Charging higher prices to residential customers than to industrial customers is an example of
A) third-degree price discrimination. B) perfect price discrimination. C) quantity price discrimination. D) second-degree price discrimination. E) first-degree price discrimination.
A) third-degree price discrimination.
As discussed in the “Google Advertising” application, advertisers on Google’s web site bid for the right for their ads to be posted when people search for certain phrases. Should a firm that provides local services (such as plumbing or pest control) expect to pay more or less for an ad in a small town or a large city? Why?
A firm that provides local services should be willing to pay more for an ad
A) in a small town because customers are easier to reach. B) in a large city because advertisers are willing to pay more to be listed third. C) in a small town because there are fewer self-identified potential customers. D) in a large city because there are fewer customers. E) in a large city because in cities customer matches are easier to find.
C) in a small town because there are fewer self-identified potential customers.
If a monopoly chooses the optimal price instead of the optimal quantity, then its profits will be
A) unchanged because the optimal price and quantity yield the same profit. B) lower because costs are increasing in quantity. C) higher because a monopoly only has power to set price. D) higher because profit is increasing in price. E) lower because consumers are more sensitive to price.
A) unchanged because the optimal price and quantity yield the same profit.
Why can’t a monopoly choose both price and quantity?
A monopoly can’t choose both price and quantity because
A) a monopoly faces the treat of potential entrants. B) a monopoly faces no competition. C) a monopoly has the power to set price, not the demand curve. D) a monopoly produces a homogeneous product. E) a monopoly has no supply curve.
C) a monopoly has the power to set price, not the demand curve.
Market structure has implications for a firm’s profitability. Which of the following statements is true?
A) A competitive firm maximizes profits by producing at the quantity where marginal revenue equals marginal cost. B) A monopolist maximizes profit by producing at the quantity where marginal revenue equals marginal cost, but a competitive firm, being a price taker, must maximize revenue. C) A monopolistic firm, since it faces a downward-sloping demand curve, can earn positive economic profits in the long-run. D) Because it possesses significant market power, an oligopoly firm will always earn positive economic profits in the long-run.
A) A competitive firm maximizes profits by producing at the quantity where marginal revenue equals marginal cost.
Suppose there is a relatively large number of firms, a high degree of product differentiation, and free entry. What market structure is most likely to form?
A) A monopolistically competitive market B) An oligopolistic market C) A competitive market D) Either a monopolistic or competitive market
A) A monopolistically competitive market
A firm is a natural monopoly if
A) one firm can produce the total output of the market at lower cost than two or more firms could. B) any entrant would have the same costs. C) its profit does not increase with output. D) its marginal revenue is increasing faster than average costs. E) it has no fixed costs.
A) one firm can produce the total output of the market at lower cost than two or more firms could.
The more block prices a monopoly can set instead of setting a single price, the
A) smaller the deadweight loss. B) larger the total welfare. C) more producer surplus. D) All of the above.
D) All of the above.
Grocery store chains often set consumer-specific prices by issuing frequent-buyer cards to willing customers and collecting information about their purchases. Grocery store chains use that data to offer customized discount coupons to individuals. Which type of price discrimination – perfect, group, or nonlinear – are these personalized discounts?
Personalized grocery store discounts are a type of ____ price discrimination.
perfect
