Table 10–5
55)
Refer to Table 10–5. Is a situation in which Coke produces a low quantity (Q) and Pepsi produces a
high quantity an equilibrium?
55)
A)
Yes, because each is earning its highest profit.
B)
No, because Pepsi has an incentive to produce a low quantity.
C)
Yes, because each is not earning its highest profit.
D)
No, because Coke has an incentive to produce a high quantity.
56)
The DeBeers Company of South Africa was able to block competition through
56)
A)
economies of scale.
B)
a government–imposed barrier to entry.
C)
differentiating its product.
D)
ownership of an key input.
D
D
Table 10–3
Quantity Price
(Dollars)
Total Revenue
(Dollars)
Total Variable
Cost
(Dollars)
Total Cost
(Dollars)
0$22 $0 $0 $50
120 20 16 66
219 38 31 81
318 54 45 95
417 68 59 109
516 80 75 125
615 90 93 143
714 98 112 162
813 104 140 190
912 108 180 230
10 11 110 230 280
Table 10–3 shows the firm’s demand and cost schedules for a firm in monopolistic competition.
57)
Refer to Table 10–3. What is the best course of action for the firm in the short run?
57)
A)
It should shut down.
B)
It should increase its sales by lowering its price.
C)
It should stay in business because it covers some of its fixed cost.
D)
It should not cut its price but it should increase its sales by advertising.
58)
A monopolistically competitive firm that is earning profits in the short run will, in the long run,
experience all of the following except
58)
A)
demand for the firm’s product becomes more elastic.
B)
new rivals entering the market.
C)
a decrease in the number of rival products.
D)
a decrease in demand for its product.
59)
The key characteristics of a monopolistically competitive market structure include
59)
A)
firms try to maximize revenue.
B)
firms sell similar, but not identical, products.
C)
few firms.
D)
high barriers to entry.
60)
Which of the following economists did not help to develop game theory analysis?
60)
A)
John Nash
B)
Oskar Morgenstern
C)
John von Neumann
D)
Adam Smith
61)
Long–run equilibrium under monopolistic competition is similar to long–run equilibrium under
perfect competition in that
61)
A)
firms earn zero economic profits.
B)
firms produce at the minimum point of their average cost curves.
C)
price equals marginal cost.
D)
price equals marginal revenue.
Figure 10–5
62)
Refer to Figure 10–5. What is the profit–maximizing output level?
62)
A)
Q1 units
B)
Q2 units
C)
Q3 units
D)
Q4 units
63)
A prisoners’ dilemma leads to a noncooperative equilibrium
63)
A)
because each player had agreed before the game started to minimize the harm that he can
inflict on the other players.
B)
because each player is uncertain how other players will play the game.
C)
because each rational player has a dominant strategy to play a certain way regardless of what
other players do.
D)
because players must choose from have a limited number of non–dominant strategies.
64)
Oligopolies exist and do not attract new rivals because
64)
A)
there can be no product differentiation.
B)
of competition.
C)
the firms keep profits and prices so low that no rivals are attracted.
D)
of barriers to entry.
65)
The study of how people make decisions in situations where attaining their goals depends on their
interactions with others is called
65)
A)
game theory.
B)
dominant strategy equilibrium.
C)
Nash equilibrium.
D)
the prisoners’ dilemma.
Figure 10–3
Figure 10–3 shows short run cost and demand curves for a monopolistically competitive firm in the market for designer
watches.
66)
Refer to Figure 10–3. What area represents the total variable cost of production?
66)
A)
P1bdP3
B)
0P0aQa
C)
P0abP1
D)
0P1bQa
67)
The value of the four–firm concentration ratio that many economists consider indicative of the
existence of an oligopoly in a particular industry is
67)
A)
anything greater than 10 percent.
B)
anything greater than 30 percent.
C)
anything greater than 20 percent.
D)
anything greater than 40 percent.
68)
If an industry is made up of five identical firms, the four–firm concentration ratio is
68)
A)
80%.
B)
100%.
C)
5%.
D)
20%.
69)
You have just opened a new Italian restaurant in your hometown where there are three other
Italian restaurants. Your restaurant is doing a brisk business and you attribute your success to your
distinctive northern Italian cuisine using locally grown organic produce. What is likely to happen
to your business in the long run?
69)
A)
If you continue to maintain consistent quality you will be able to earn profits indefinitely.
B)
If your success continues you will establish a franchise and expand your market size.
C)
Your competitors are likely to change their menus to make their products more similar to
yours.
D)
Your success will invite others to open competing restaurants and ultimately your profits will
be driven to zero.
70)
How does the long run equilibrium of a monopolistically competitive industry differ from that of a
perfectly competitive industry?
70)
A)
A firm in monopolistic competition will earn economic profit but a firm in perfect
competition earns zero profit.
B)
A firm in monopolistic competition produces an allocatively efficient output level while a
firm in perfect competition produces a productively efficient output level.
C)
A firm in monopolistic competition will charge a price higher than the average cost of
production but a firm in perfect competition charges a price equal to the average cost of
production.
D)
A perfectly competitive firm produces at minimum average total cost but a monopolistically
competitive firm does not.
Table 10–4
Alistair Luggage and Baine Baggage are the only firms with similar products in the upscale town of Montecito. Each firm
must decide on whether to increase its advertising budget to compete for customers. If one firm increases its advertising
budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 10–4 shows the
payoff matrix for this advertising game.
71)
Refer to Table 10–4. If Alistair assumes that Baine would increase its advertising budget, what
should it do?
71)
A)
Alistair should reduce its advertising budget.
B)
Alistair should also increase its advertising budget.
C)
Alistair should keep its own budget the same and allow Baine to incur the higher cost.
D)
Being a duopolist, Alistair is not affected by Baine’s choices because it has a secure 50 percent
market share.
72)
Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of
competition in an industry?
72)
A)
Concentration ratios are calculated for the national market, even though the competition in
some industries is mainly local.
B)
Concentration ratios do not address the fact that competition sometimes exists between firms
in different industries.
C)
Concentration ratios assign weights to only the four largest firms in an industry.
D)
Concentration ratios do not include sales in the United States by foreign firms.
C
B
73)
If a monopolistically competitive firm produces an output where marginal revenue is $23 and
marginal cost is $19 then to maximize profit the firm should
73)
A)
increase output.
B)
shutdown.
C)
continue to produce the same quantity.
D)
decrease output.
Figure 10–3
Figure 10–3 shows short run cost and demand curves for a monopolistically competitive firm in the market for designer
watches.
74)
Refer to Figure 10–3. What area represents the loss made by the firm?
74)
A)
the area P0adP3
B)
the area P2cdP3
C)
the area P1bcP2
D)
the area P0acP2
B
75)
When a monopolistically competitive firm lowers its price to increase its sales it experiences a gain
in revenue due to the
75)
A)
output effect.
B)
price effect.
C)
substitution effect.
D)
income effect.
A
A
Figure 10–7
Figure 10–7 shows short–run cost and demand curves for a monopolistically competitive firm in the market for designer
watches.
76)
Refer to Figure 10–7. If the diagram represents a typical firm in the designer watch market, what is
likely to happen in the long run?
76)
A)
Inefficient firms will exit the market and new cost efficient firms will enter the market.
B)
Firms will have to raise their prices to cover costs of production.
C)
The firms that are making losses will be purchased by their more successful rivals.
D)
Some firms will exit the market causing demand to increase for firms remaining in the
market.
77)
A reason why there is more competition among restaurants than among large discount department
stores is that restaurants
77)
A)
unlike department stores, have to abide by government sanitation rules.
B)
have more elastic demand for their product compared to department stores.
C)
unlike department stores, do not have significant economies of scale.
D)
have to cater to a variety of consumer tastes while department stores do not.
C
D
78)
In an oligopoly, firms can increase their market power by
78)
A)
colluding to set prices.
B)
undertaking heavy advertising expenditure.
C)
pursuing dominant strategies.
D)
selling to buyers who have market power.
79)
In the short run a profit–maximizing firm’s decision to produce should be guided by whether
79)
A)
its marginal profit is maximized.
B)
it makes a profit.
C)
its total revenue exceeds its fixed cost.
D)
its total revenue covers its variable cost.
D
A
Figure 10–3
Figure 10–3 shows short run cost and demand curves for a monopolistically competitive firm in the market for designer
watches.
80)
Refer to Figure 10–3. What area represents the total fixed cost of production?
80)
A)
P1bdP3
B)
0P1aQa
C)
P0adP3
D)
That information cannot be determined from the graph.
81)
Marginal revenue equals marginal cost for a monopolistically competitive firm at an output equal
to 66 units and a price of $18. If average total cost at this output is $16.55 then total profit is
81)
A)
$1.45.
B)
$95.70.
C)
$1,188.
D)
$1,092.30.
B
82)
A market comprising of only two firms is called a
82)
A)
duopoly.
B)
competitive market.
C)
monopoly.
D)
monopolistically competitive market.
A
A
Table 10–4
Alistair Luggage and Baine Baggage are the only firms with similar products in the upscale town of Montecito. Each firm
must decide on whether to increase its advertising budget to compete for customers. If one firm increases its advertising
budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 10–4 shows the
payoff matrix for this advertising game.
83)
Refer to Table 10–4. Does Baine have a dominant strategy and if so, what is it?
83)
A)
Yes, Baine should keep its advertising budget as is.
B)
Yes, Baine should increase its advertising budget.
C)
There are two dominant strategies: if Alistair increases its advertising budget, then Baine’s
best bet is to keep its budget the same but if Alistair does not increase its spending then Baine
should raise its advertising budget
D)
No, there is no dominant strategy.
84)
If a firm faces a downward–sloping demand curve
84)
A)
it can control both price and quantity sold.
B)
the demand for its product must be inelastic.
C)
it must reduce its price to sell more output.
D)
it will always make a profit.
Table 10–4
Alistair Luggage and Baine Baggage are the only firms with similar products in the upscale town of Montecito. Each firm
must decide on whether to increase its advertising budget to compete for customers. If one firm increases its advertising
budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 10–4 shows the
payoff matrix for this advertising game.
85)
Refer to Table 10–4. How are the firms in this advertising game caught in a prisoners’ dilemma?
85)
A)
Only the first mover is caught in a prisoners’ dilemma because the second has a chance to
observe and respond.
B)
They are not in a prisoners’ dilemma because there is one clear strategy for each.
C)
They would be more profitable if they refrained from advertising but each fears that if it does
not advertise, it will lose customers.
D)
Since each firm is uncertain about the other’s behavior, each will adopt a wait–and–see
attitude which results in no increase in market share and no new customers.
86)
The key characteristics of a monopolistically competitive market structure include
86)
A)
all sellers sell a homogeneous product.
B)
barriers to entry are high.
C)
sellers have no incentive to advertise their products.
D)
many sellers of similar, but not identical, products.
D
87)
A characteristic found only in oligopoly markets is
87)
A)
no barriers to entry.
B)
that firms break even in the long run.
C)
independence of firms.
D)
interdependence of firms.
D
C
Table 10–2
Quantity
(Cases)
Price
(Dollars)
Total Revenue
(Dollars)
Total Cost
(Dollars)
1$75 $75 $60
270 140 85
365 195 105
460 240 115
555 275 130
650 300 155
745 315 190
840 320 230
935 315 280
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 10–2 shows the firm’s
demand and cost schedules.
88)
Refer to Table 10–2. What is Eco Energy’s profit?
88)
A)
$125
B)
$140
C)
$145
D)
$150
89)
In the United States the average person mostly patronizes firms that operate in
89)
A)
monopolistically competitive markets.
B)
monopoly markets.
C)
perfectly competitive markets.
D)
oligopoly markets.
90)
For a monopolistically competitive firm marginal revenue
90)
A)
is less than price.
B)
equals price.
C)
is greater than price.
D)
and price are unrelated.
91)
The “Discount Department Stores” industry is highly concentrated. What does this mean?
91)
A)
There are many large stores such as Wal–Mart, Target, Kohl’s, in this industry.
B)
A few large stores account for a significant portion of industry sales.
C)
The sales volume in this industry is consistently high.
D)
There is cut–throat competition in this industry because there are no barriers to entry.
Table 10–1
Quantity Price
(Dollars)
Total Revenue
(Dollars)
1$7.50 $7.50
27.00 14.00
36.50 19.50
46.00 24.00
55.50 27.50
65.00 30.00
92)
Refer to Table 10–1. What is the marginal revenue of the 3rd unit?
92)
A)
$5.50
B)
$1.83
C)
$0.50
D)
$6.50
93)
A major difference between monopolistic competition and perfect competition is that
93)
A)
the market demand curve in a monopolistically competitive market slopes downward. The
market demand curve in a perfectly competitive market is horizontal.
B)
there are barriers to entry in monopolistic competition. There are no barriers to entry in
perfectly competitive markets.
C)
government regulation restricts the ability of monopolistically competitive firms to change
their prices. Perfectly competitive firms face no price regulation.
D)
monopolistically competitive firms sell differentiated products. Perfectly competitive firms
sell identical products.