If you advertise and your rival advertises, you each will earn $5 million in profits. If
neither of you advertises, you will each earn $10 million in profits. However, if one of
you advertises and the other does not, the firm that advertises will earn $15 million and
the non-advertising firm will earn $1 million. Which of the following is true?
A. A dominant strategy for firm A is to advertise.
B. A dominant strategy for firm B is to advertise.
C. A Nash equilibrium is for both firms to advertise.
D. All of the statements associated with this question are correct.
You are the manager of a monopoly that faces a demand curve described by P = 10 –
2Q. Your costs are C = 20 + 2Q. The revenue-maximizing output is:
A. 1.5
B. 3
C. 4
D. None of the answers is correct.
The specificity of the asset (or investment) leads to the possibility of:
A. collusion.
B. prisoners dilemma.
C. opportunism.
D. None of the statements is correct.
By the completeness property, if neither A B nor B A hold, then:
A. the consumer is indifferent between A and B.
B. the consumer prefers bundle A.
C. the consumer prefers bundle B.
D. None of the statements is correct.
The tobacco industry has a Lerner index of 0.76. Based on this information, compute
the optimal markup factor.
A. 4.17 times price
B. 4.17 times marginal cost
C. 0.24 times price
D. There is not sufficient information to determine the optimal markup factor.
The number of efficient plants compatible with domestic consumption of the
refrigerator industry in Sweden is 0.7. Which of the following implications is(are)
correct?
A. In the absence of imports, the refrigerator industry in Sweden is monopolistic.
B. The refrigerator industry in Sweden is perfectly competitive.
C. The refrigerator industry in Sweden is monopolistically competitive.
D. None of the answers is correct.
Consider two firms competing to sell a homogeneous product by setting price. The
inverse demand curve is given by P = 20 – Q. Firm 1 has MC1(Q1) = 2 and firm 2 has
MC2(Q2) = 2.25. Based on this information, we can conclude that the market price will
be:
A. $2 and each firm will produce 9 units.
B. $2.25 and each firm will produce 8.875 units.
C. $2.24 and firm 1 will produce 17.76 units and firm 2 will produce 0 units.
D. $2 and firm 1 will produce 18 units and firm 2 will produce 0 units.
Which of the following is true?
A. A monopolist produces on the inelastic portion of its demand.
B. A monopolist always earns an economic profit.
C. The more inelastic the demand, the closer marginal revenue is to price.
D. In the short run, a monopoly will shut down if P < AVC.
A price-cost squeeze is a tactic used:
A. to prevent potential competitors from entering a market.
B. by a vertically integrated firm to squeeze the margins of its competitors.
C. by a vertically integrated firm to charge downstream rivals a prohibitive price for an
essential input, forcing rivals to use more costly substitutes or exit the industry.
D. to gain a critical mass of consumers by charging an initial low price.
Suppose that initially the price is $20 in a perfectly competitive market. Firms are
making zero economic profits. Then the market demand shrinks permanently, some
firms leave the industry, and the industry returns to a long-run equilibrium. What will
be the new equilibrium price, assuming cost conditions in the industry remain constant?
A. $20
B. $16
C. Lower than $20 but exact value cannot be known without more information.
D. Larger than $20 but exact value cannot be known without more information.
Which of the following is used to measure market structure and performance?
A. Four-firm concentration ratio
B. HHI (Herfindahl-Hirschman index)
C. Dansby-Willig Performance index
D. All of the answers are correct.
You are a hotel manager and you are considering four projects that yield different
payoffs, depending upon whether there is an economic boom or a recession. The
potential payoffs and corresponding payoffs are summarized in the following table.
If a manager adopted both project A and B simultaneously, the expected value of this
joint project would be:
A. 10
B. 20
C. 30
D. 40
Firms that use a price-matching strategy attempt to keep price at:
A. marginal cost.
B. the oligopoly price.
C. the monopoly price.
D. the oligopoly price or the monopoly price.
The difference between marginal benefits and marginal costs is the:
A. profits.
B. marginal net benefits.
C. opportunity cost.
D. accounting cost.
An industry consists of five firms with annual sales of $1,300, $500, $400, $100, and
$600. What is the industrys HHI?
A. 2,937
B. 5,654
C. 10,000
D. There is not sufficient information to compute the industry HHI.
Which of the following is probably not a normal good?
A. designer dresses.
B. lobster.
C. macaroni and cheese.
D. expensive automobiles.
What is the marginal cost of producing the fifth unit?
A. 270
B. 110
C. 50
D. 0
Running a supermarket involves:
A. a lower level of risk than running a gourmet shop.
B. a higher level of risk than running a gourmet shop.
C. the same level of risk as running a gourmet shop.
D. All of the statements associated with this question are correct.