Limit pricing is:
A. a strategy whereby a firm temporarily prices below its marginal costs to drive
competitors out of the market.
B. a strategy used by a vertically integrated firm to raise rivals costs of inputs, while
holding constant final product prices.
C. a strategy whereby an incumbent maintains a price below the monopoly price in
order to prevent entry.
D. the act of charging a low price initially upon entering a market to gain market share.
Consider a market characterized by the following inverse demand and supply functions:
PX = 10 – 2QX and PX = 2 + 2QX. Compute the loss in social welfare when an $8 per
unit price floor is imposed on the market.
A. $0.
B. $1.
C. $2.
D. $3.
Consider a Cournot duopoly with the following inverse demand function: P = 50 –
0.2Q1 – 0.2Q2. The firms marginal costs are identical and are given by MCi(Qi) = 2.
Based on this information, firm 1 and 2s reaction functions are:
A. r1(Q2) = 120 – 0.5Q1 and r2(Q1) = 120 – 0.5Q2.
B. r1(Q2) = 120 – 0.5Q2 and r1(Q2) = 120 – 0.5Q1.
C. Q1 = 240 – 0.75Q2 and Q2 = 240 – 0.75Q1.
D. Q1 = 240 – 0.5Q2 and Q2 = 240 – 0.5Q1.
Limit pricing will effectively deter entry when:
A. the incumbent links the pre-entry price to post-entry profits.
B. the incumbent has incomplete information.
C. the entrant must commit to enter the market.
D. All of the statements associated with this question are correct.
Explain how each of the following affects the optimal method of acquiring an input.
a. A complex contracting environmentb.
b. A specialized investmentc.
c. Opportunismd.
d. Bargaining costse.
e. The costs of bureaucracy
f. Gains from specialization
Refer to the figure below. Suppose that the marginal benefit of writing a contract is
$100 and the marginal cost of that contract is $100. Based on this information, the
optimal contract length should be:
A. increased by half.
B. increased by two-thirds.
C. decreased.
D. held constant at the contract length where MB = 100 and MC = 100.
The law of demand states that if the price of a good falls and all other things remain the
same, the
A. quantity demanded of the good falls.
B. quantity demanded of the good rises.
C. demand of the good rises.
D. all of the statements associated with this question are correct.
Which of the following conditions correctly describes a Nash equilibrium when two
firms are in the market?
A. π1(s1
*, s2
*) ≥ π1(s1, s2
*) for all s1.
B. π1(s1
*, s2
*) ≥ π1(s1, s2
*) for all s1 and π2(s1
*, s2
*) ≥ π2(s1
*, s2) for all s2.
C. π1(s1
*, s2
*) ≥ π2(s1, s2
*) for all s1 and π2(s1
*, s2
*) ≥ π1(s1
*, s2) for all s2.
D. π1(s1, s2
*) ≥ π2(s1
*, s2
*) for all s1 and π2(s1
*, s2) ≥ π1(s1
*, s2
*) for all s2.
The equilibrium consumption bundle is:
A. the bundle where the budget line and the indifference curve meet.
B. the affordable bundle that yields the greatest satisfaction to the consumer.
C. any bundle that is the farthest from the origin.
D. any affordable bundle in the budget set.
Consider a market consisting of two firms where the inverse demand curve is given by
P = 500 – 2(Q1 + Q2). If the Stackelberg leaders and followers marginal costs are zero,
the leaders marginal revenue is:
A. MR(QL, QF) = 125 – QL + 0.5QF.
B. MR(QL) = 250 – 2QL.
C. MR(QF) = 250 – 2QF.
D. MR(QL, QF) = 125 – 0.5QL + QF.
Suppose a monopolist has positive fixed costs and constant marginal costs. If the
government regulates a monopolys price to marginal cost, in the long run:
A. the monopolist will earn a profit if ATC > MC.
B. the monopolist will exit the industry.
C. the monopolist will earn a profit if ATC > P.
D. the monopolist will earn zero profits.
You are the manager of a firm that produces output in two plants. The demand for your
firms product is P = 120 – 6Q, where Q = Q1 + Q2. The marginal costs associated with
producing in the two plants are MC1 = 2Q1 and MC2 = 4Q2. How much output should
be produced in plant 1 in order to maximize profits?
A. 3
B. 6
C. 9
D. 12
When a buyer does not observe the quality, based on the following table, what is the
highest price she will offer for a used car if she ignores adverse selection?
A. $10,000
B. $5,000
C. $7,500
D. $7,000
Consider a market characterized by the following inverse demand and supply functions:
PX = 10 – 2QX and PX = 2 + 2QX. Compute the surplus producers receive when an $8
per unit price floor is imposed on the market.
A. $1.
B. $2.
C. $3.
D. $5.