Refer to the normal-form game of price competition shown below.
Which of the following represents firm A’s full strategy space?
A. {A, C}
B. {A, B}
C. {(A, C), (A, D), (B, C), (B, D)}
D. {C, D}
Smyth Industries operated as a monopolist for the past several years, earning annual
profits amounting to $50 million, which it could have maintained if Jones Incorporated
did not enter the market. The result of this increased competition is lower prices and
lower profits; Smyth Industries now earns $10 million annually. The managers of
Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the
market so Smyth can regain its monopoly position (and profit). One of Smyth’s
managers suggests pricing its product 50 percent below marginal cost for exactly one
year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust
concerns, compute the present value of Smyth Industries’ profits, if it could have
remained a monopoly when the interest rate was 5 percent.
A. $100 million
B. $200 million
C. $210 million
D. $1.05 billion
In a competitive market, the market demand is Qd = 60 – 6P and the market supply is Q
= 4P. The full economic price under a price ceiling of $3 is
A. 6
B. 7
C. 8
D. 9
You are the manager of a monopoly that faces a demand curve described by P = 63 –
5Q. Your costs are C = 10 + 3Q. The profit-maximizing price is:
A. 20
B. 27
C. 33
D. 55
The producer’s surplus of all firms in an oligopoly is usually the least in the case of a:
A. Sweezy oligopoly.
B. Cournot oligopoly.
C. Stackelberg oligopoly.
D. Bertrand oligopoly.
For a cost function C = 100 + 10Q + Q2, the average variable cost of producing 20 units
of output is:
A. 10
B. 20
C. 30
D. None of the answers are correct.
It is easier to sustain tacit collusion in an infinitely repeated game if:
A. the present value of cheating is lower than collusion.
B. there are many players.
C. the interest rate is higher.
D. the present value of cheating is lower than collusion and the interest rate is higher.
When economies of scale are large, firms can reduce their average total cost by:
A. selling off their subsidiaries.
B. merging into even larger firms.
C. eliminating the bureaucratic costs.
D. hiring professional managers.
A network linking six users is typically:
A. less likely to exhibit bottlenecks than a network linking two users.
B. three times as valuable as a network linking two users.
C. more than three times as valuable as a network linking two users.
D. less than three times as valuable as a network linking two users.
Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a
coat and $50 for pants. Consumers of type B will pay $75 for a coat and $75 for pants.
The firm selling suits faces no competition and has a marginal cost of zero. If the firm
charges $75 for pants and $75 for a coat, the firm will sell a coat to:
A. type A consumers.
B. type B consumers.
C. type A consumers and type B consumers.
D. None of the answers are correct.
Given the production function Q = min{4K, 3L}, what is the average product of capital
when 8 units of capital and 16 units of labor are used?
A. 16
B. 2
C. 4
D. 32
Suppose a monopolist knows the own price elasticity of demand for its product is -3
and that its marginal cost of production is constant MC(Q) = 10. To maximize its profit,
the monopoly price is:
A. $1.50 per unit.
B. $6.67 per unit.
C. $10 per unit.
D. $15 per unit.
If the price of a good falls, then the equilibrium consumption of that good:
A. increases if it is an inferior good.
B. decreases if it is a normal good.
C. remains the same.
D. None of the statements is correct.
Consider a two-way network with 1,000 users. Adding one additional user to such a
network benefits all users by adding:
A. 999 potential connections to the network.
B. 1,000 potential connections to the network.
C. 2,000 potential connections to the network.
D. 999,000 potential connections to the network.
Suppose the interest rate is 5 percent, the expected growth rate of the firm is 2 percent,
and the firm is expected to continue forever. If current profits are $1,000, what is the
value of the firm?
A. $31,000
B. $30,000
C. $26,500
D. $35,000
An industry consists of four firms with annual sales of $3,000, $5,000, $4,000, and
$6,000. What is the industry’s HHI?
A. 1,659.
B. 2,654.
C. 10,000.
D. There is not sufficient information to compute the industry HHI.
Two executives were arrested by authorities for embezzling money from their firm.
Short of a confession, the prosecutor only had enough evidence to put them away for 10
years. Given a confession, however, she was certain to put them behind bars for life
without parole, since they killed a law enforcement officer who was investigating the
case. The prosecutor put the two prisoners in separate rooms and told them the
following: “If you confess and your partner does not, I’ll give you a year’s probated
sentence but put your partner in the slammer for life without parole. Of course, if your
partner confesses and you don’t, you’ll get the life sentence without parole and he’ll get
one year’s probation. I must warn you, however, that if you both confess I’ll have
enough evidence to put you both away for life without parole.”a. Do you think the
prosecutor’s bargain will induce the two executives to confess? Explain.b. Would your
answer change if the life sentence carried the possibility of parole? Explain.