Deck 8: Imperfect Competition

Question 1

Game theory:

A) Is used to analyze strategic interaction among rivals.
B) Can be used to analyze the pricing behavior of rival firms in imperfectly competitive industries.
C) Can be used to analyze the output decisions of rival firms in imperfectly competitive.
D) Is useful for analyzing the moves and countermoves of players in sequential-move games.
E) All of the above are correct.

Answer 1

All of the above are correct.

Question 2

Game theory:

A) Is useful when analyzing strategic pricing behavior of individual firms in imperfectly competitive industries.
B) Is the study of the strategic behavior involving the interaction of two or more players.
C) Is useful when predicting the outcome of a two-person, non-cooperative, one-time game.
D) Is useful for analyzing strategic output-setting behavior of imperfectly- competitive firms.
E) All of the above are correct.

Answer 2

Is useful for analyzing strategic output-setting behavior of imperfectly- competitive firms.

Question 3

Strategic interaction:
I. Is more pronounced the larger the number of firms in an industry.
II. Is a distinguishing characteristic of industries with a large number of firms, but in which a relatively few large firms account for a large proportion of industry output.
III. Is more pronounced the fewer the number of firms in an industry.
Which of the following is correct?

A) I only.
B) II only.
C) III only.
D) I and II only.
E) II and III only.

Answer 3

II and III only.

Question 4

The Cournot duopoly model assumes that :

A) Each firm decides what price to charge and that their rivals will not respond.
B) Each firm decides what price to charge and that their rivals will respond.
C) Each firm decides how much to produce and that their rivals will not respond.
D) Each firm decides how much to produce and that their rivals will respond.

Question 5

The Cournot model suggests, ceteris paribus, that the profit-maximizing price will be:

A) Higher than the monopoly price.
B) Lower than the monopoly price but higher than a perfectly competitive price.
C) Higher than both the monopoly and perfectly competitive price.
D) Lower than the perfectly competitive price.
E) Lower than both the monopoly and perfectly competitive price.

Question 6

The Bertrand model assumes that:

A) Each firm decides what price to charge and that their rivals will not respond.
B) Each firm decides what price to charge and that their rivals will respond.
C) Each firm decides how much to produce and that their rivals will not respond.
D) Each firm decides how much to produce and that their rivals will respond.

Question 7

Other things being equal, the Cournot model suggests that profit-maximizing firms in an oligopolistic industry:
I. Charge a higher price than monopolies.
II. Charge a higher price than perfectly-competitive firms.
III. Charge a lower price than monopolies.
IV. Charge a lower price than perfectly-competitive firms.
Which of the following is correct?

A) I only.
B) II only.
C) I and II only.
D) II and III only.
E) I and IV only.

Question 8

According to the Cournot model, if two firms in the industry face identical demands for their product:

A) Both firms will end up with an equal share of total industry output.
B) The first firm to enter the industry will end up producing 2/3 of industry output while the second firm will end up producing 1/3 of industry output.
C) The first firm to enter the industry will end up producing 1/3 of industry output while the second firm will end up producing 2/3 of industry output.
D) The first firm to enter the industry will end up producing 3/8 of industry output while the second firm will end up producing 1/4 of industry output.

Question 9

Suppose that the reaction functions for two identical Cournot firms are given by the equations q₁ = 50 !3q₂ and q₂ = 50 !3q₁. If the market demand for the output of these two firms is q_T = 125 !5p, the market price of this product is:

A) $0
B) $10
C) $12.50
D) $20
E) $25

Question 10

In a Cournot-Nash equilibrium:

A) Firms firm select their output levels to maximize joint profits.
B) Firms select an output level that maximizes product prices.
C) A firm selects its output level to maximize total revenues given the output level of its rivals.
D) A firm selects its output level that maximizes its own profit given the output level of its rivals.
E) None of the above are correct.

Question 11

-Figure 8.1 depicts the market demand for the product produced by n firms producing an identical product in which the marginal cost of production for each firm is MC = 0. According to the Cournot model, total industry output is (Q_T) is given by the equation:

A) QN/n.
B) (nQN )/(4n + 1).
C) (n + 1)QN.
D) nQN/(n + 1).
E) None of the above.

Question 12

-Figure 8.1 depicts the market demand for the product produced by n firms producing an identical product in which MC = 0 for each firm. If Q' = 5,000 and there are 99 firms in the industry, total industry output according to the Cournot model is:

A) 50 units.
B) 1,237.5 units.
C) 500,000 units.
D) 4,950 units.
E) None of the above.

Question 13

-Figure 8.1 depicts the market demand for the product produced by n firms producing an identical product in which MC = 0 for each firm. If Q' = 100,000 and total industry output is 95,000 units, there are _____ in the industry according to the Cournot model.

A) 6.
B) 13.
C) 19.
D) 24.
E) None of the above.

Question 14

Suppose that there are four identical firms in an industry. The Cournot model predicts that the output of each firm will be:

A) Equal to one-fourth the output of the remaining firms in the industry.
B) Equal to one-third the output of all the remaining firms in the industry.
C) Exactly equal to the output of the each of the remaining firms in the industry.
D) Answers b and c are correct.
E) Cannot be determined from the information provided.

Question 15

Suppose that two firms in a duopoly set output according to the Cournot model. If demand is linear and the marginal cost of production for each firm is zero:

A) Total industry output will be exactly one-half of the output in perfect competition.
B) The two firms will engage in marginal cost pricing, just as in perfect competition.
C) Total industry output will be less than the total output in perfect competition, but Greater than one-half the output in perfect competition.
D) Total industry output is less than the output in monopoly.
E) The duopoly price is greater than the monopoly price.

Question 16

Suppose that two firms in a duopoly set output according to the Cournot model.:

A) Total industry output is greater than monopoly output.
B) Total industry output is greater than output in perfect competition.
C) The duopoly price is less than the equilibrium price in perfect competition.
D) The duopoly price is greater than the monopoly price.
E) None of the above are correct.

Question 17

Suppose that an industry consists of two firms producing an identical product in which there is no brand loyalty by consumers. The inverse market demand for the combined output of both firms is P = 5 !0.001 (Q_A + Q_B). The marginal cost of production by firm A and firm B are $2 and $1, respectively. Firm A's best-response function is:

A) Q_A = 2,000 !0.5Q_B.
B) Q_A = 1,500 !0.5Q_B.
C) Q_B = 2,000 !0.5Q_A.
D) Q_B = 1,500 !0.5Q_A.
E) None of the above.

Question 18

Suppose that an industry consists of two firms producing an identical product in which there is no brand loyalty by consumers. The inverse market demand for the combined output of both firms is P = 5 !0.001 (Q_A + Q_B). The marginal cost of production by firm A and firm B are $2 and $1, respectively. Firm B's best-response function is:

A) Q_A = 2,000 !0.5Q_B.
B) Q_A = 1,500 !0.5Q_B.
C) Q_B = 2,000 !0.5Q_A.
D) Q_B = 1,500 !0.5Q_A.
E) None of the above.

Question 19

Suppose that an industry consists of two firms producing an identical product in which there is no brand loyalty by consumers. The inverse market demand for the combined output of both firms is P = 5 !0.001 (Q_A + Q_B). The marginal cost of production by firm A and firm B are $2 and $1, respectively. Firm A produces:

A) 667 units.
B) 1,500 units.
C) 1,667 units.
D) 2,000 units.
E) 2,334 units.

Question 20

Suppose that an industry consists of two firms producing an identical product in which there is no brand loyalty by consumers. The inverse market demand for the combined output of both firms is P = 5 !0.001 (Q_A + Q_B). The marginal cost of production by firm A and firm B are $2 and $1, respectively. Firm B produces:

A) 667 units.
B) 1,500 units.
C) 1,667 units.
D) 2,000 units.
E) 2,334 units.

Question 21

Suppose that an industry consists of two firms producing an identical product in which there is no brand loyalty by consumers. The inverse market demand for the combined output of both firms is P = 5 !0.001 (Q_A + Q_B). The marginal cost of production by firm A and firm B are $2 and $1, respectively. Total industry output is:

A) 667 units.
B) 1,500 units.
C) 1,667 units.
D) 2,000 units.
E) 2,334 units.

Question 22

Suppose that an industry consists of two firms producing an identical product in which there is no brand loyalty by consumers. The inverse market demand for the combined output of both firms is P = 5 !0.001 (Q_A + Q_B). The marginal cost of production by firm A and firm B are $2 and $1, respectively. Firm A charges a price of:

A) $2.00.
B) $2.50.
C) $2.67
D) $3.33
E) None of the above.

Question 23

Suppose that an industry consists of two firms producing an identical product in which there is no brand loyalty by consumers. The inverse market demand for the combined output of both firms is P = 5 !0.001 (Q_A + Q_B). The marginal cost of production by firm A and firm B are $2 and $1, respectively. Firm B charges a price of:

A) $2.00.
B) $2.50.
C) $2.67
D) $3.33
E) None of the above.

Question 24

According to the Bertrand model, if both firms in the industry face identical demands and marginal cost of production:

A) The first firm to enter the industry will charge a higher price than the second firm.
B) The first firm to enter the industry will charge a lower price than the second firm.
C) Both firm's will charge the same price.
D) The first firm to enter the industry will earn higher profits than the second firm.
E) The first firm to enter the industry will earn lower profits than the second firm.

Question 25

According to the Bertrand model, if both firms in the industry face identical demands but different marginal production costs, then:

A) The first firm to enter the industry will charge a higher price than the second firm.
B) The first firm to enter the industry will charge a lower price than the second firm.
C) Both firm's will end up charging the same price.
D) The firm with the lowest marginal cost will become a monopoly.
E) The firm with the highest marginal cost will charge a higher price.

Question 26

The Bertrand model assumes:

A) Demand is linear.
B) Goods and services produced by the two firms in the industry are perfect complements.
C) Firms determine prices simultaneously.
D) Answers a and c.
E) All of the above are correct.

Question 27

A firm's reaction function in the Bertrand model:

A) Summarizes the dominated strategies of each firm.
B) Is a firm's best response to a price charged by a rival.
C) Is a firm's best response to each rival's level of output.
D) None of the above are true.
E) All of the above are true.

Question 28

According to the Bertrand paradox, if two firms produce a homogeneous product and have identical marginal cost, each firm:

A) Sets price equal to marginal cost.
B) Earns zero economic profit.
C) Charges the same price that is greater than marginal cost.
D) Charges a different price that is greater than marginal cost.
E) Answers a and b are correct.

Question 29

Which of the following predictions of the Bertrand model appear to be unrealistic in the real world:

A) Firms in imperfectly-competitive markets tend to charge prices that are greater than marginal cost.
B) As the number of firms enter the industry prices tend to fall.
C) Firms in imperfectly-competitive markets tend to earn zero economic profits.
D) All of the above are unrealistic.
E) None of the above are unrealistic.

Question 30

The unrealistic predictions of the simple Bertrand model may be explained by the assumption of:

A) Output differentiation.
B) The ability of firms to fully satisfy market demand at any price.
C) The dynamic nature of the of the price-setting game.
D) Capacity constraints.
E) The assumption of constant marginal cost.

Question 31

-Consider Figure 8.2, which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, firm 2's reaction function is given by the line segment:

A) DCB
B) DCA
C) ABC
D) PNCB
E) PNCA

Question 32

-Consider Figure 8.2, which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, firm 1's reaction function is given by the line segment:

A) DCB
B) DCA
C) ABC
D) PNCB
E) PNCA

Question 33

-Consider Figure 8.2, which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, the marginal cost of production for both firms is:

A) PN.
B) 0.
C) Greater than zero but less than PN.
D) Greater than PN.
E) Cannot be determined on the basis of the information provided.

Question 34

-Consider Figure 8.2, which depicts two firms producing a homogeneous product at the same constant marginal cost. The Bertrand-Nash equilibrium:

A) Occurs when both firms charge a zero price.
B) Occurs when both firms charge a price equal to marginal cost.
C) Occurs when both firms earn zero economic profit.
D) Is the same as you would expect to see in a perfectly competitive industry.
E) All of the above are correct.

Question 35

-Consider Figure 8.3, which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, firm 1's reaction function is given by the line segment:

A) DECB.
B) DECA.
C) P₁ DECA.
D) P₁ DECB.
E) ECA.

Question 36

-Consider Figure 8.3, which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, firm 2's reaction function is given by the line segment:

A) DECB.
B) DECA.
C) P₁ DECA.
D) P₁ DECB.
E) ECA.

Question 37

-Consider Figure 8.3, which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, the marginal cost of production for both firms is:

A) 0.
B) PN.
C) Greater than zero but less than PN.
D) Greater than PN but less than P*.
E) Greater than P* but less than PN.

Question 38

-Consider Figure 8.3, which depicts two firms producing a homogeneous product at the same constant marginal cost. The Bertrand-Nash equilibrium:

A) Is for both firms to charge a zero price.
B) Is for both firms to charge a price of PO.
C) Is for both firms to charge a price between PN and PO, such as P*.
D) Is for both firms to charge a price of PN.
E) Is for the firm to enter the market first to charge a price of PN, while the second firm charges a price that is between PN and PO, such as P*.

Question 39

-Consider Figure 8.4 which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, firm 2's reaction function is given by the line segment:

A) ABC
B) EBD
C) CBD
D) ABE
E) F

Question 40

-Consider Figure 8.4 which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, firm 1's reaction function is given by the line segment:

A) ABC
B) EBD
C) CBD
D) ABE
E) F

Question 41

-Consider Figure 8.4 which depicts two firms producing a homogeneous product at the same constant marginal cost. According to the Bertrand model, the marginal cost of production for both firms is:

A) A
B) E
C) F
D) Answers a and b are correct.
E) Cannot be determined on the basis of the information provided.

Question 42

-Consider Figure 8.4 which depicts two firms producing a homogeneous product at the same constant marginal cost. The Bertrand-Nash equilibrium:

A) Occurs when both firms charge a zero price.
B) Occurs when both firms charge a price equal to marginal cost.
C) Occurs when both firms earn zero economic profit.
D) Is the same as you would expect to see in a Cournot industry.
E) Answers b and c.

Question 43

As a practical matter, which of the following predictions of the Bertrand model appear to be unrealistic:

A) Firms in imperfectly-competitive markets practice in marginal cost pricing.
B) As the number of firms enter the industry prices fall.
C) Firms in imperfectly-competitive markets earn zero economic profits.
D) All of the above are unrealistic.
E) None of the above are unrealistic.

Question 44

As a practical matter, which of the following predictions of the Bertrand model appear to be unrealistic:

A) Firms in imperfectly-competitive markets tend to charge prices that are greater than marginal cost.
B) As the number of firms enter the industry prices to fall.
C) Firms in imperfectly-competitive markets earn zero economic profits.
D) All of the above are unrealistic.
E) None of the above are unrealistic.

Question 45

-Refer to Figure 8.5, which depicts two firms engaged in Bertrand price competition in markets X and Y. The two firms have the same marginal cost of production in each market, although marginal cost is not is not the same in both markets. The reaction functions of firms 1 and 2 in market X are ABC and DBE, respectively. The reaction functions of firms 1 and 2 in market Y are given by the line segments FGH and IGJ, respectively. The marginal cost of production of both firms in market X is:

A) A
B) F
C) I
D) J
E) H

Question 46

-Refer to Figure 8.5, which depicts two firms engaged in Bertrand price competition in markets X and Y. The two firms have the same marginal cost of production in each market, although marginal cost is not is not the same in both markets. The reaction functions of firms 1 and 2 in market X are ABC and DBE, respectively. The reaction functions of firms 1 and 2 in market Y are given by the line segments FGH and IGJ, respectively. The price charged by both firms market X is:

A) A
B) F
C) D
D) J
E) Both a and c are correct.

Question 47

-Refer to Figure 8.5, which depicts two firms engaged in Bertrand price competition in markets X and Y. The two firms have the same marginal cost of production in each market, although marginal cost is not is not the same in both markets. The reaction functions of firms 1 and 2 in market X are ABC and DBE, respectively. The reaction functions of firms 1 and 2 in market Y are given by the line segments FGH and IGJ, respectively. The price charged by both firms market Y is:

A) A
B) F
C) D
D) I
E) Both b and d are correct.

Question 48

If the firms in a duopoly are incapable of satisfying total market demand at any price, the Bertrand model predicts that:

A) Both firms will engage in marginal cost pricing.
B) Both firms will set output levels simultaneously.
C) Both firms will earn positive economic profits.
D) Both firms will charge the same price.
E) Answers c and d are correct.

Question 49

If the firms in a duopoly are incapable of satisfying total market demand at any price, the Bertrand model predicts that:

A) Both firms will charge a price that is greater than marginal cost.
B) Both firms will set output levels simultaneously.
C) Both firms will earn zero economic profits.
D) Both firms will charge the different price.
E) Answers a and d are correct.

Question 50

If Bertrand competitors cannot differentiate their products, whichever firm sets the higher price will:

A) Earn zero economic profits.
B) Earn positive economic profits.
C) Capture the entire market.
D) Earn greater economic profits than a firm setting a lower price.
E) Sell nothing.

Question 51

If Bertrand competitors sell differentiated products:

A) The firm charging the highest price will earn zero economic profits.
B) The firm charging the highest price will sell nothing.
C) Neither firm will capture the entire market by undercutting its rival's price.
D) The firm charging the lowest price will capture the entire market.
E) None of the above.

Question 52

The Bertrand-Nash equilibrium in which firms with the same marginal cost first choose output levels resembles:

A) A long-run competitive equilibrium.
B) A Cournot-Nash equilibrium.
C) A contestable monopoly.
D) Barometric price leadership.
E) Collusive price-setting behavior.