You are a monopolist with the following cost and demand conditions: P = 100 – 2Q and
C(Q) = 50 + Q2.a. Determine the profit-maximizing output and price.b. Graph this
solution.c. Show your profits and the deadweight loss to society in your graph.d.
Determine the actual amount of deadweight loss.
The following provides information for a one-shot game.
What are the dominant strategies for firm A and firm B respectively?
A. (low price, high price)
B. (high price, low price)
C. (high price, high price)
D. Neither firm has a dominant strategy.
When firm 1 acts as a Stackelberg leader:
A. Firm 2 produces the monopoly output.
B. Firm 1s profit is less than its profit if they compete in a Cournot fashion.
C. Firm 2 will earn more than if they compete in a Cournot fashion.
D. None of the answers is correct.
Sue and Jane own two local gas stations. They have identical constant marginal costs,
but earn zero economic profits. Sue and Jane constitute:
A. a Sweezy oligopoly.
B. a Cournot oligopoly.
C. a Bertrand oligopoly.
D. None of the answers is correct.
Which of the following types of auctions was NOT described in the text?
A. English auction
B. Second-price sealed bid auction
C. Third-price sealed bid auction
D. Dutch auction
There are two existing firms in the market for computer chips. Firm A knows how to
reduce the production costs for the chip and is considering whether to adopt the
innovation or not. Innovation incurs a fixed setup cost of C, while increasing the
revenue. However, once the new technology is adopted, another firm, B, can adopt it
with a smaller setup cost of C/2. If A innovates and B does not, A earns $20 in revenue
while B earns $0. If A innovates and B does likewise, both firms earn $15 in revenue. If
neither firm innovates, both earn $5. Under what condition will firm A innovate?
A. C > 30
B. C < 30
C. 10 > C > 0
D. 35 > C > 25
Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If
the wage rate is $4 and the price of capital is $2, then in order to minimize costs the
firm should use:
A. more capital and less labor.
B. more labor and less capital.
C. three times more capital than labor.
D. none of the answers are correct.
The cost to a manager of doing a poor job running the firm is:
A. a decrease in his fixed salary.
B. a decrease in the profit of the firm.
C. a decrease in the sales of the firm.
D. an increase in the likelihood of being replaced.
If the price of a good Y falls, then the marginal rate of substitution between X and Y:
A. increases.
B. decreases.
C. remains the same.
D. depends on whether X and Y are normal or inferior goods, and we cannot tell
without that information.
Which of the following is true?
A. In Bertrand oligopoly markets, each firm believes that its rivals will hold their output
constant if it changes its output.
B. In Cournot oligopoly markets, firms produce an identical product at a constant
marginal cost and engage in price competition.
C. In Sweezy oligopoly markets, each firm believes rivals will cut their prices in
response to a price reduction, but will not raise prices in response to price increases.
D. In oligopoly markets, a change in marginal cost never has an effect on output or
price.
A monopoly has two production plants with cost functions C1 = 50 + 0.1Q1
2 and C2 =
30 + 0.05Q2
2. The demand it faces is Q = 500 – 10P. What is the profit-maximizing
price?
A. $12.5 per unit
B. $6.25 per unit
C. $31.25 per unit
D. $18.75 per unit
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 15 years, then the Nash equilibrium is for:
A. you and your rival to not advertise in any year.
B. you and your rival to advertise every year.
C. neither firm to advertise in early years, but to advertise in later years.
D. each firm to advertise in early years, but not advertise in later years.
The external marginal cost of producing coal is MCexternal = 6Q while the internal
marginal cost is MCinternal = 4Q. The inverse demand for coal is given by P = 120 – 2Q.
If the government taxed output at $2 per unit, what would a competitive industry
produce?
A. 10
B. 20
C. 15
D. 8
You are the manager of a car dealership that sells luxury automobiles, which are normal
goods. Although a recession is expected next year, you expect your clients incomes to
increase over the coming year. What will you do about ordering cars for next year as
compared to last year? Why?
Joes search costs are $7 per search. He wants to buy a video player for his wife for
Christmas, and the lowest price hes found so far is $200. Joe thinks one-third of the
stores charge $300 for a video player, one-third charge $200, and one-third charge
$185. Should Joe continue to search or should he buy a video player at a price of $200?
A monopolist estimates that the own price elasticity of demand for its product is -4.5
and its advertising elasticity of demand is 1.5. Assuming these elasticities are constant,
what fraction of the firms revenues should the firm “reinvest” in advertising to
maximize profits?
A risk-averse manager is considering two projects. The first is to introduce a new
product; the second is to revamp the production facilities at the existing plant. There is a
20 percent chance a rival will enter the market and an 80 percent chance it will not. If
the rival enters, the firm will lose $20,000 if it introduces the new product, whereas
revamping the production facilities will earn it $50,000 in profits. If the rival does not
enter, the firm will earn $15,000 if it introduces the new product, and revamping the
production facilities will earn net profits of $60,000. What should the manager do?
Why?
An economics professor went out to dinner one night and observed one of her students
drinking heavily. The next day was a final exam. When the professors husband found
out the student was in her class, he said the students behavior was irrational. The
professor disagreed. Under what condition is behavior irrational according to the
properties of consumer behavior discussed in the chapter? What situations could make
the students behavior rational?