Chs.12 & 13 Monopolistic Competition and Oligopoly and Game Theory

Revised Spring 2008

Multiple Choice (100 points):

Scenario 1:

Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows:

Q = 6000 - 5P MR = 1200 - 0.4Q

1) Refer to Scenario 1. What will be the price in the long run if the industry is a Cournot duopoly?a) Competition will drive the price to zerob) $900c) $400d) $600e) $800

2) Refer to Scenario 1. What is the profit maximizing price of a monopolist? a) $900b) $400c) $600d) $800e) none of the above

3) A cartel selects the profit-maximizing level of output by:a) setting the industry price equal to the sum of individual producers' marginal costs.b) setting each firm's marginal revenue equal to its marginal cost.c) setting the marginal revenue derived from the industry demand curve equal to the horizontal sum of the

individual producers' marginal costs.d) setting each firm's price equal to its marginal cost.

4) Which of the following is NOT a good example of a monopolistically competitive industry? a) Agriculture.b) The hotel industry.c) The retail clothing industry.d) The restaurant industry.

5) Which of the following is NOT regarded as a source of inefficiency in monopolistic competition?a) the fact that long-run average cost is not minimized.b) the fact that price exceeds marginal cost.c) excess capacity.d) product diversity.e) all of the above.

6) A monopolistically competitive market is characterized by all of the following except a) downward sloping demand curves.b) economic profits in the long-run.c) easy entry.d) differentiated products.

7) Monopolistic competition differs from pure competition in that:

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a) each firm sells a somewhat differentiated productb) there are fewer firms in the industry. c) each firm has perfect market power. d) significant barriers to entry exist.

8) In the Cournot duopoly model, each firm assumes thata) the price of its rival is fixed.b) the output level of its rival is fixed.c) rivals will match price cuts but will not match price increases.d) rivals will match all reasonable price changes.

9) Firms with only limited market power: a) face the same downward-sloping demand as firms with unlimited market power.b) face a perfectly price-elastic demand.c) face a much more price-elastic demand than firms with unlimited market power.

d) face a much more price-inelastic demand than firms with unlimited market power.

10) A situation in which each firm is doing the best it can, given what its rivals are doing is called aa) Cooperative equilibrium.b) Nash equilibrium.c) zero sum game.d) Stackelberg equilibrium.

11) In the kinked demand curve model, if one firm reduces its pricea) other firms will also reduce their price.b) other firms will raise their price.c) other firms will compete on a non-price basis.d) both (a) and (c) are correct. e) both (b) and (c) are correct.

12) Which of the following is NOT conducive to the successful operation of a cartel?a) Market demand for the good is relatively inelastic.b) Cartel members have substantial cost advantages over non-member producers.c) The supply of non-cartel members is very price elastic.d) The cartel supplies all of the world's output of the good.

13) The demand facing a monopolistically competitive firm is drawn assuming that: a) all firms in the industry have implicitly agreed on a set price.b) the firm's competition will match all price changes. c) because the firm is relatively small, it makes short-run decisions considering whether other firms will

react.d) because the firm is relatively small, its competition will generally not react to any change in price.

14) What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?a) It becomes horizontal.b) New entrants will not affect an incumbent firm's demand curve.c) It shifts right.d) It shifts left.

15) A monopolistically competitive firm maximizes short-run profits by: a) setting marginal revenue equal to marginal cost.b) setting price equal to marginal cost. c) producing at the minimum point on the ATC curve.

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d) setting price equal to marginal revenue.

16) Which of the following is an example of an attempt at product differentiation?a) packaging.b) credit terms.c) free delivery.d) all of the above.

17) Low profits in monopolistically competitive industries are most likely attributed to: a) intense competition brought about by ease of entry and exit. b) the fact that there are too few sellers.c) poor business decisions. d) the fact that firms do not operate at the minimum point on the short-run average cost curve.

18) Which of the following is NOT necessarily a characteristic of an oligopolistic market? a) A highly differentiated product.b) The presence of significant barriers to entry.c) A small number of firms. d) Firms which are large relative to the market.

19) In equilibrium, Cournot duopolistsa) charge higher prices than if they were monopolists.b) produce about the same quantity as if they were in a perfectly competitive industry.c) produce about the same quantity as a monopolist.d) earn greater profit than if they formed a perfect cartel.e) earn greater profit than if they were perfect competitors.

20) A monopolistically competitive firm in long run equilibrium:a) will make positive profit.b) any of the above are possiblec) will make negative profit.d) will make zero profit.

21) In monopolistic competition, excess capacity is said to exist becausea) price is greater than marginal cost in equilibrium.b) output is less than that which minimizes LRAC.c) firms make excess profits.d) firms operate in the region of diseconomies of scale. e) all of the above.

22) A cartel is defined to be: a) a form of oligopoly in which firms formally agree to establish a common price, in effect acting as a

monopoly.b) a form of oligopoly in which firms formally agree to establish a common price, in effect acting as pure

competitors.c) a form of oligopoly in which firms tacitly agree to set prices.\d) any oligopolistic industry with fewer than four firms.

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Scenario 2:

You are studying a market for which the kinked demand curve model applies. The kinked demand curve is as follows:

Q = 1200 - 5P for 0 <= Q < 150

Q = 360 - P for 150 <= Q

The marginal cost is given as:

MC = Q

23) Refer to Scenario 2. What is the profit maximizing price?a) 240b) 210c) 205.72d) all of the abovee) none of the above

24) Refer to Scenario 2. What is the profit maximizing level of output?a) 120b) 150c) 171.43d) all of the abovee) none of the above

25) Refer to Scenario 2. Suppose that the marginal cost increases such that:MC = Q + 10

What is the profit maximizing level of output?

a) 150b) 171.43c) 120d) all of the abovee) none of the above

26) In infinitely repeated games the optimal strategy isa) reciprocal punishingb) prisoner's retaliationc) undercutting d) tit for tat

27) In Augustin Cournot's duopoly model, each firm assumes that:a) rivals will match all reasonable price changes b) each firm treats the price of its rival as fixed c) each firm treats the output level of its rival as fixedd) rivals will match price cuts, but will not match price increases

28) A monopolistically competitive firm has a:a) highly elastic demand curve.b) perfectly elastic demand curve.c) perfectly inelastic demand curve.d) highly inelastic demand curve.

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29) The kinked demand curve faced by an oligopolist is based on the assumption that:a) rivals will follow both a price decrease and a price increase.b) rivals will ignore both a price increase and a price decrease.c) rivals will follow a price increase but not a price cut.d) rivals will follow a price decrease but not a price increase.

30) Long-run equilibrium under monopolistic competition corresponds to:a) Price equal to marginal cost.b) Zero economic profits.c) Minimum per unit costs.d) all of the above.

31) The incentive for a member of a cartel to "cheat" is great because:a) members often have the same costs of production and long-term objectivesb) it is in the individual interest of the firm to restrict its own outputc) it is in the individual interest of the firm to charge a higher price than the price set by the carteld) it is in the individual interest of the firm to sell as much as possible at or even below the cartel price

32) In the Cournot duopoly model, the reaction curves:a) are horizontal if the firms are competitiveb) cross at the joint profit maximizing levels of outputc) show the firm's reaction to market priced) relate one firm's optimum quantity to the other firm's quantitye) relate the firm's quantity to its price and the price of the other firm

33) Which of the following is NOT a characteristic of an oligopolistic firm.a) control over priceb) perfectly elastic demand curvesc) mutual interdependenced) few sellers

34) Unlike a monopolistically competitive firm, an oligopoly is characterized by:a) independence among firmsb) product differentiationc) extensive use of advertisingd) interdependence among firms

USE THE FOLLOWING FIGURE TO ANSWER THE NEXT THREE QUESTIONS: Jake’s profits are shown before the comma, Jane’s after the comma.

Jane’s Strategies

Left Right

Up 6,6 20,5

Jake’s Strategies down 5,20 15,15

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35) In the payoff matrix above, which is correct?a) total payoff is maximized if Jake chooses "down" and Jane chooses "right"b) If Jane chooses "right", Jake should choose "down"c) If Jake chooses "down", Jane should choose "right"d) Jake will always be better off choosing "down"e) Jane will always be better off choosing "right"

36) The payoff matrix above is an example of the Prisoners' Dilemma because:a) neither player should choose to play this gameb) while the joint profit-maximizing strategy is clear, there is a dilemma when it comes to dividing the

profitsc) there are two pairs of strategies which would maximize joint profitsd) one player will choose upper right, and the other will choose lower lefte) although the joint profit-maximizing solution is clear, if one player chose it, the other definitely would

gain from not choosing it

37) Jake’s maximin strategy is:a) upb) down

38) In an oligopolistic industry where the dominant firm acts as price leader, the dominant firm:a) faces a perfectly elastic demand curveb) maximizes profits ignoring the actions of other firms in the industryc) faces a residual demand curve that determines its marginal revenue curve.d) must equate marginal cost with the residual demand curve

39) Once a cartel's profit-maximizing price is set: a) each member of the cartel is free to sell all it can produce at that priceb) the cartel must restrict supply to avoid a market shortagec) the cartel must restrict supply to avoid a market surplusd) market supply will automatically be restricted due to the lower demand resulting from a higher price

40) The oligopolistic model that is most appropriate when one large firm usually takes the lead in setting price is the: a) Stackelberg model b) prisoner's dilemma modelc) Cournot modeld) game theory model

41) Two firms operating in the same market must choose between a high price and a low price. Firm A's profit is listed before the comma, B's outcome after the comma.

Firm B Low Price High Price Firm A Low Price 18, 6 30, 8 High Price 6, 30 24, 32

If each firm tries to choose a price that is best for it, regardless of its competitor's price, which of the following statements is correct?

a) both firms will charge a high priceb) both firms will charge a low pricec) Firm A will charge a high price, Firm B will charge a low priced) Firm A will charge a low price, Firm B a high price

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42) In which of the following situations is the Cournot model most appropriate in explaining oligopolistic behavior?a) An industry composed of similar firms, and no one firm has a strong operating advantageb) An industry composed of similar firms, but one firm has a strong operating advantagec) An industry composed of similar firms, but one firm has a leadership positiond) An industry dominated by a large firm that usually takes the leadership position in setting price

Scenario 3:

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows:

P = 30 - Q

The marginal cost to produce this new drink is $3.

43) Refer to Scenario 3. What price would this new drink sell for if it sold in a competitive market?a) $13.50b) $16.50c) $27d) $0e) $3

44) Refer to Scenario 3. What is the monopoly price of this new drink?a) $16.50b) $27c) $0d) $3e) $13.50

45) Refer to Scenario 3. What will be the price of this new drink in the long run if the industry is a Cournot duopoly?a) $9b) $12c) $13.50d) $3e) none of the above

46) Refer to Scenario 3. What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly?a) $6.75b) $9.75c) $12.75d) $14.75e) none of the above

47) In which of the following situations is the Stackelberg model most appropriate in explaining oligopolistic behavior?a) An industry composed of similar firms, but one firm has a strong operating advantageb) An industry composed of similar firms, and no one firm has a strong operating advantagec) An industry dominated by a large firm that usually takes the lead in setting priced) An industry dominated by a large firm that does not take the lead in setting price

Use the following diagram to answer the next three questions.

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48) What output does the dominant firm produce?a) Q4

b) Q2

c) Q1

d) Q3

49) What output do the fringe firms produce?a) Q2

b) Q4

c) Q1

d) Q3

50) What price is charged by the dominant firm?a) P4

b) P1

c) P3

d) P2

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Q2Q1

P1

P2

P43P3

Q3

P0

Q4

Demand

MC dominant

MC fringe firms

Price

Quantity