If you advertise and your rival advertises, you each will earn $3 million in profits. If
neither of you advertises, you will each earn $7 million in profits. However, if one of
you advertises and the other does not, the firm that advertises will earn $10 million and
the non-advertising firm will earn $1 million. If you and your rival plan to be in
business for only one year, the Nash equilibrium is for your firm:
A. and your rival to advertise.
B. and your rival not to advertise.
C. to advertise and your rival not to advertise.
D. not to advertise and your rival to advertise.
A potential entrant knows that it faces a (inverse) residual demand curve given by P =
90 – 3Q. While the entrant does not know the inverse market demand, it does know that
the incumbent committed to producing 10 units. Using this information, which of the
following equations best summarizes the inverse market demand curve?
A. P = 60 – 3Q
B. P = 80 – 3Q
C. P = 50 – 3Q
D. None of the statements is correct.
“Monopolistic competition is literally a kind of competition. Hence, there is no
deadweight loss in a monopolistically competitive market.”
A. The statement is by definition correct but empirically incorrect.
B. The statement is correct.
C. The statement is incorrect.
D. None of the answers is correct.
The purpose of the Clean Air Act (1970) was to:
A. reduce market power.
B. control negative externalities.
C. improve competition across international markets.
D. help make information easily obtainable for producers and consumers.
Advertising provides consumers with information about the underlying existence or
quality of a product. These types of advertising messages are called
A. persuasive advertising.
B. informative advertising.
C. green advertising.
D. influential advertising.
Compute the present value of a preferred stock that pays, in perpetuity, an annual cash
flow of $200 at an annual interest rate of 5 percent.
A. $190.48
B. $210
C. $4,000
D. $4,200
Which of the following is incorrect?
A. Accounting profits generally overstate economic profits.
B. Accounting profits do not take opportunity cost into account.
C. Economic costs include not only the accounting costs but also the opportunity costs
of the resources used in production.
D. Managers should only be interested in accounting profits.
The Cobb-Douglas production function is:
A. Q = aK + bL.
B. Q = min{bK, cL}.
C. Q = max{bK, cL}.
D. Q = KaL.
Which of the following is NOT a basic feature of a monopolistically competitive
industry?
A. There are many buyers and sellers in the industry.
B. Each firm in the industry produces a differentiated product.
C. There is free entry and exit into the industry.
D. Each firm owns a patent on its product.
How much would consumers in the figure below spend to persuade politicians to
regulate the monopolys price to marginal (or average) cost?
A. $24
B. $16
C. $8
D. $0
How can a firm in a merger avoid antitrust action by the government?
A. Prove that the industrys HHI is over 1800.
B. Prove that efficiency will improve from the resulting merger.
C. Prove that price will not increase from the resulting merger.
D. None of the statements are correct.
A negative externality:
A. is a payment received to parties not involved in the production or consumption of a
good.
B. is a cost borne by parties not involved in the production or consumption of a good.
C. results from the absence of well-defined property rights.
D. is a cost borne by parties not involved in the production or consumption of a good
and results from the absence of well-defined property rights.
If firms compete in a Cournot fashion, then each firm views the:
A. output of rivals as given.
B. prices of rivals as given.
C. profits of rivals as given.
D. All of the statements associated with this question are correct.
There are five firms in an industry. You know sales of the four largest firms are
$1,000,000, $500,000, $400,000, and $178,000. If the C4 ratio is 95 percent, then the
HHI is:
A. 1,810.
B. 2,755.
C. 3,038.
D. 5,017.
The source(s) of monopoly power for a monopoly may be:
A. economies of scale.
B. economies of scope.
C. patents.
D. All of the statements associated with this question are correct.
Suppose the demand for X is given by Qx
d = 100 – 2PX + 4PY + 10M + 2A, where PX
represents the price of good X, PY is the price of good Y, M is income and A is the
amount of advertising on good X. Good X is
A. an inferior good.
B. a normal good.
C. a Giffen good.
D. a complement.
The substitution effect isolates the change in the consumption of a good caused by:
A. the lower “real” income.
B. the change in consumer preferences.
C. the change in the market rate of substitution.
D. None of the statements is correct.