Question 1

Which of the following is NOT conducive to the successful operation of a cartel?

Accepted Answer

A)  Market demand for the good is relatively inelastic. 
B)  The cartel supplies all of the world's output of the good. 
C)  Cartel members have substantial cost advantages over non-member producers. 
D)  The supply of non-cartel members is very price elastic. 
A)  Market demand for the good is relatively inelastic. 
B)  The cartel supplies all of the world's output of the good. 
C)  Cartel members have substantial cost advantages over non-member producers. 
D)  The supply of non-cartel members is very price elastic. D

Question 2

A market with few entry barriers and with many firms that sell differentiated products is

Accepted Answer

A)  purely competitive. 
B)  a monopoly. 
C)  monopolistically competitive. 
D)  oligopolistic. 
A)  purely competitive. 
B)  a monopoly. 
C)  monopolistically competitive. 
D)  oligopolistic. C

Question 3

Under the kinked demand model, suppose the firm's demand curve shifts rightward but the price at which the kink occurs remains the same. In this case, the firm:

Accepted Answer

A)  does not change its output. 
B)  increases output. 
C)  decreases output. 
D)  We do not have enough information to answer this question. 
A)  does not change its output. 
B)  increases output. 
C)  decreases output. 
D)  We do not have enough information to answer this question. B

Question 4

Suppose two firms with differentiated products are competing on price. The reaction curve for Firm 1 is P1 = 4 + 0.5 P2, and the reaction curve for Firm 2 is P2 = 4 + 0.5P1. What is the equilibrium price outcome in this market?

Accepted Answer

A)  P1 = P2 = 4 
B)  P1 = P2 = 6 
C)  P1 = P2 = 8 
D)  P1 = 6 and P2 = 8 
A)  P1 = P2 = 4 
B)  P1 = P2 = 6 
C)  P1 = P2 = 8 
D)  P1 = 6 and P2 = 8

Question 5

The market structure of Red Raider Gear is best characterized by monopolistic competition. Red Raider Gear is one of the producers in this market. The demand for Red Raider Gear is: Qd = 50 - P $\iff$ P = 50 - Qd. The resulting marginal revenue curve is MR(Qd) = 50 - 2 Qd. The Red Raider Gear cost function is C(Q) = (1/8)Q2 + 555.56. Therefore we have MC (Q) = 0.25Q. Determine the profit maximizing level of output and the price charged to customers for Red Raider Gear. Is this a long-run equilibrium?

Accepted Answer

To determine Red Raider's optimal output

Question 6

What characteristic of monopolistic competition may help to offset the inefficiency of this market structure?

Accepted Answer

A)  Free entry and exit imply that firms produce at minimum long-run average cost. 
B)  Consumers may value the product diversity that allows them to choose from a wide variety of differentiated products. 
C)  Consumers may feel better about the inefficiency if they know that firms earn zero profits. 
D)  Consumers may prefer this outcome to monopoly or monopsony. 
A)  Free entry and exit imply that firms produce at minimum long-run average cost. 
B)  Consumers may value the product diversity that allows them to choose from a wide variety of differentiated products. 
C)  Consumers may feel better about the inefficiency if they know that firms earn zero profits. 
D)  Consumers may prefer this outcome to monopoly or monopsony.

Question 7

Suppose the market demand curve for a Bertrand duopoly is downward sloping. What happens to the Nash equilibrium price and market quantity if the constant marginal cost declines?

Accepted Answer

A)  Price and quantity decline 
B)  Price increases and quantity declines 
C)  Price decreases and quantity increases 
D)  Price and quantity increase 
A)  Price and quantity decline 
B)  Price increases and quantity declines 
C)  Price decreases and quantity increases 
D)  Price and quantity increase

Question 8

Which of the following is true in the Stackelberg model?

Accepted Answer

A)  The first firm produces less than its rival. 
B)  The first firm produces more than its rival. 
C)  Both firms produce the same quantity. 
D)  Both firms have a reaction curve. 
A)  The first firm produces less than its rival. 
B)  The first firm produces more than its rival. 
C)  Both firms produce the same quantity. 
D)  Both firms have a reaction curve.

Question 9

Hale's One Stop Gas and Auto Service competes with Murray's Gas and Service Mart. The local demand is given by: P = 2.50 - 0.01Q. Hale's marginal cost function is:   
(qH) = 0.35 qH. Murray's marginal cost function is:   
(qM) = 0.30 qM. Given the demand relationship above, Hale's marginal revenue function is:   
( qH, qM) = 2.50 - 0.02 qH - 0.01 qM. Determine Hale's reaction function. Murray's marginal revenue function is:   
(qM, qH) = 2.50 - 0.02 qM - 0.01 qH. Determine Murray's reaction function. What is the Cournot solution?

Accepted Answer

To determine Hale's reaction function, w

Question 10

Scenario 12.2:
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 $\impliedby$ Q < 150
Q = 360 - P for 150 $\impliedby$ Q
The marginal cost is given as:
MC = Q
-Refer to Scenario 12.2. Suppose that the marginal cost falls such that:
MC = Q - 10
What is the profit maximizing price?

Accepted Answer

A)  205.72 
B)  240 
C)  210 
D)  all of the above 
E)  none of the above 
A)  205.72 
B)  240 
C)  210 
D)  all of the above 
E)  none of the above

Question 11

The market for an industrial chemical has a single dominant firm and a competitive fringe comprised of many firms that behave as price takers. The dominant firm has recently begun behaving as a price leader, setting price while the competitive fringe follows. The market demand curve and competitive fringe supply curve are given below. Marginal cost for the dominant firm is $0.75 per gallon.
QM = 140,000 - 32,000P
QF = 60,000 + 8,000P,
where QM = market quantity demanded, and QF = the supply of the competitive fringe. Quantities are measured in gallons per week, and price is measured as a price per gallon.
a. Determine the price and output that would prevail in the market under the conditions described above. Identify output for the dominant firm as well as the competitive fringe.
b. Assume that the market demand curve shifts rightward by 40,000 units. Show that the dominant firm is indeed a price leader. What output (leader and follower) and market price will prevail after the change in demand?

Accepted Answer

a. Q_M = 140,000 - 32,000P Q_F = 60,000 + 8,

Question 12

A market structure in which there is one large firm that has a major share of the market and many smaller firms supplying the remainder of the market is called:

Accepted Answer

A)  the Stackelberg Model. 
B)  the kinked demand curve model. 
C)  the dominant firm model. 
D)  the Cournot model. 
E)  the Bertrand model. 
A)  the Stackelberg Model. 
B)  the kinked demand curve model. 
C)  the dominant firm model. 
D)  the Cournot model. 
E)  the Bertrand model.

Question 13

Excess capacity in monopolistically competitive industries results because in equilibrium

Accepted Answer

A)  each firm's output level is too great to minimize average cost. 
B)  each firm's output level is too small to minimize average cost. 
C)  firms make positive economic profit. 
D)  price equals marginal cost. 
A)  each firm's output level is too great to minimize average cost. 
B)  each firm's output level is too small to minimize average cost. 
C)  firms make positive economic profit. 
D)  price equals marginal cost.

Question 14

What condition may provide for a relatively small degree of inefficiency under monopolistic competition?

Accepted Answer

A)  There is a single seller and no product differentiation. 
B)  The marginal cost of production is less than the market price. 
C)  The demand curve is relatively elastic so that the price is near the long-run minimum average cost. 
D)  There is only one buyer in the market. 
A)  There is a single seller and no product differentiation. 
B)  The marginal cost of production is less than the market price. 
C)  The demand curve is relatively elastic so that the price is near the long-run minimum average cost. 
D)  There is only one buyer in the market.

Question 15

If all producers in a market are cartel members, then the demand curve facing the cartel is

Accepted Answer

A)  the market demand curve. 
B)  horizontal. 
C)  identical to the demand curve in the dominant firm model. 
D)  identical to the monopolist's demand curve. 
A)  the market demand curve. 
B)  horizontal. 
C)  identical to the demand curve in the dominant firm model. 
D)  identical to the monopolist's demand curve.

Question 16

Bartels and Jaymes are two individuals who one day discover a stream that flows wine cooler instead of water. Bartels and Jaymes decide to bottle the wine cooler and sell it. The marginal cost of bottling wine cooler and the fixed cost to bottle wine cooler are both zero. The market demand for bottled wine cooler is given as:
P = 90 - 0.25Q
where Q is the total quantity of bottled wine cooler produced and P is the market price of bottled wine cooler.
a. What is the economically efficient price of bottled wine cooler?
b. What is the economically efficient quantity of bottled wine cooler produced?
c. If Bartels and Jaymes were to collude with one another and produce the profit-maximizing monopoly quantity of bottled wine cooler, how much bottled wine cooler will they produce?
d. Given the output level in (c), what price will Bartels and Jaymes charge for bottled wine cooler?
e. At the output level in (c), what is the welfare loss?
f. Suppose that Bartels and Jaymes act as Cournot duopolists, what are the reaction functions for Bartels and for Jaymes?
g. In the long run, what level of output will Bartels produce if Bartels and Jaymes act as Cournot duopolists?
h. In the long run, what will be the price of wine coolers be if Bartels and Jaymes act as Cournot duopolists?
i. Suppose that after Bartels and Jaymes have arrived at their long run equilibrium as Cournot duopolists, another individual, Paul Mason, discovers the streams. Paul Mason, who will sell no wine cooler before its time, decides to bottle wine coolers. There are now three Cournot firms producing at once. In the long run, what level of output will Bartels produce?

Accepted Answer

a.
The economically efficient level of p

Question 17

Scenario 12.2:
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 $\impliedby$ Q < 150
Q = 360 - P for 150 $\impliedby$ Q
The marginal cost is given as:
MC = Q
-Refer to Scenario 12.2. Suppose that the marginal cost increases such that:
MC = Q + 10
What is the profit maximizing level of output?

Accepted Answer

A)  171.43 
B)  120 
C)  150 
D)  all of the above 
E)  none of the above 
A)  171.43 
B)  120 
C)  150 
D)  all of the above 
E)  none of the above

Question 18

For which of the following market structures is it assumed that there are barriers to entry?

Accepted Answer

A)  Perfect competition 
B)  Monopolistic competition 
C)  Monopoly 
D)  all of the above 
E)  B and C only 
A)  Perfect competition 
B)  Monopolistic competition 
C)  Monopoly 
D)  all of the above 
E)  B and C only

Question 19

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens OPEC's share of the world oil market?

Accepted Answer

A)  Increases 
B)  Decreases 
C)  Remains the same 
D)  We do not have enough information to answer this question. 
A)  Increases 
B)  Decreases 
C)  Remains the same 
D)  We do not have enough information to answer this question.

Question 20

The most important factor in determining the long-run profit potential in monopolistic competition is

Accepted Answer

A)  free entry and exit. 
B)  the elasticity of the market demand curve. 
C)  the elasticity of the firm's demand curve. 
D)  the reaction of rival firms to a change in price. 
A)  free entry and exit. 
B)  the elasticity of the market demand curve. 
C)  the elasticity of the firm's demand curve. 
D)  the reaction of rival firms to a change in price.

Which of the following is NOT conducive to the successful operation of a cartel?

A market with few entry barriers and with many firms that sell differentiated products is

Under the kinked demand model, suppose the firm's demand curve shifts rightward but the price at which the kink occurs remains the same. In this case, the firm:

Suppose two firms with differentiated products are competing on price. The reaction curve for Firm 1 is P₁ = 4 + 0.5 P₂, and the reaction curve for Firm 2 is P₂= 4 + 0.5P₁. What is the equilibrium price outcome in this market?

What characteristic of monopolistic competition may help to offset the inefficiency of this market structure?

Suppose the market demand curve for a Bertrand duopoly is downward sloping. What happens to the Nash equilibrium price and market quantity if the constant marginal cost declines?

Which of the following is true in the Stackelberg model?

A market structure in which there is one large firm that has a major share of the market and many smaller firms supplying the remainder of the market is called:

Excess capacity in monopolistically competitive industries results because in equilibrium

What condition may provide for a relatively small degree of inefficiency under monopolistic competition?

If all producers in a market are cartel members, then the demand curve facing the cartel is

For which of the following market structures is it assumed that there are barriers to entry?

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens OPEC's share of the world oil market?

The most important factor in determining the long-run profit potential in monopolistic competition is

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Uncertainty and Consumer Behavior

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Markets With Asymmetric Information

Externalities and Public Goods

Filters

Exam 12: Monopolistic Competition and Oligopoly

Which of the following is NOT conducive to the successful operation of a cartel?

A market with few entry barriers and with many firms that sell differentiated products is

Under the kinked demand model, suppose the firm's demand curve shifts rightward but the price at which the kink occurs remains the same. In this case, the firm:

Suppose two firms with differentiated products are competing on price. The reaction curve for Firm 1 is P1 = 4 + 0.5 P2, and the reaction curve for Firm 2 is P2 = 4 + 0.5P1. What is the equilibrium price outcome in this market?

What characteristic of monopolistic competition may help to offset the inefficiency of this market structure?

Suppose the market demand curve for a Bertrand duopoly is downward sloping. What happens to the Nash equilibrium price and market quantity if the constant marginal cost declines?

Which of the following is true in the Stackelberg model?

A market structure in which there is one large firm that has a major share of the market and many smaller firms supplying the remainder of the market is called:

Excess capacity in monopolistically competitive industries results because in equilibrium

What condition may provide for a relatively small degree of inefficiency under monopolistic competition?

If all producers in a market are cartel members, then the demand curve facing the cartel is

For which of the following market structures is it assumed that there are barriers to entry?

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens OPEC's share of the world oil market?

The most important factor in determining the long-run profit potential in monopolistic competition is

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Uncertainty and Consumer Behavior

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Markets With Asymmetric Information

Externalities and Public Goods

Filters

Suppose two firms with differentiated products are competing on price. The reaction curve for Firm 1 is P₁ = 4 + 0.5 P₂, and the reaction curve for Firm 2 is P₂= 4 + 0.5P₁. What is the equilibrium price outcome in this market?