question
"No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist."
A monopoly is more likely to persist if the cross price elasticity of demand is
A monopoly is more likely to persist if the cross price elasticity of demand is
answer
positive and less than 1.
question
a. Which of the following is not a major barrier to entry into an industry?
b. Which of the following is a true statement?
b. Which of the following is a true statement?
answer
a. Diminishing marginal returns
b. Unfair competition is a barrier with no social justification.
b. Unfair competition is a barrier with no social justification.
question
Assume that a pure monopolist and a purely competitive firm have the same unit costs. In this case, determine what is true with respect to (a) price, (b) output, and (c) profits.
1. PMonopoly > PCompetition
2. PMonopoly < PCompetition
3. PMonopoly = PCompetition
4. QMonopoly > QCompetition
5. QMonopoly < QCompetition
6. QMonopoly = QCompetition
7. ProfitMonopoly > ProfitCompetition
8. ProfitMonopoly < ProfitCompetition
9. ProfitMonopoly = ProfitCompetition
a. Which of the combinations above are accurate?
b. Assume that a pure monopolist and a purely competitive firm have the same unit costs. In the case of a pure monopolist, resources will be allocated
c. Even though both monopolists and competitive firms follow the MC = MR rule in maximizing profits, there are differences in the economic outcomes because
d. The costs of a purely competitive firm and a monopoly may be different because
e. If a monopoly can experience economies of scale, it can
1. PMonopoly > PCompetition
2. PMonopoly < PCompetition
3. PMonopoly = PCompetition
4. QMonopoly > QCompetition
5. QMonopoly < QCompetition
6. QMonopoly = QCompetition
7. ProfitMonopoly > ProfitCompetition
8. ProfitMonopoly < ProfitCompetition
9. ProfitMonopoly = ProfitCompetition
a. Which of the combinations above are accurate?
b. Assume that a pure monopolist and a purely competitive firm have the same unit costs. In the case of a pure monopolist, resources will be allocated
c. Even though both monopolists and competitive firms follow the MC = MR rule in maximizing profits, there are differences in the economic outcomes because
d. The costs of a purely competitive firm and a monopoly may be different because
e. If a monopoly can experience economies of scale, it can
answer
a. 1, 5, and 7
b. inefficiently, because the monopolist does not produce at the point of minimum ATC and does not equate price and MC.
c. pure competitors are small with no market power.
d. monopolies might experience economies of scale not available to competitive firms.
e. reduce the price below a pure competitor and improve resource allocation.
b. inefficiently, because the monopolist does not produce at the point of minimum ATC and does not equate price and MC.
c. pure competitors are small with no market power.
d. monopolies might experience economies of scale not available to competitive firms.
e. reduce the price below a pure competitor and improve resource allocation.
question
Indicate whether each of the following statements is true or false:
answer
a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay.
False
b. The pure monopolist seeks the output that will yield the greatest per-unit profit.
False Correct
c. An excess of price over marginal cost is the market's way of signaling the need for more production of a good.
True Correct
d. The more profitable a firm, the greater its monopoly power.
Cannot be determined Correct
e. The monopolist has a pricing policy; the competitive producer does not.
True Correct
f. With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.
True
False
b. The pure monopolist seeks the output that will yield the greatest per-unit profit.
False Correct
c. An excess of price over marginal cost is the market's way of signaling the need for more production of a good.
True Correct
d. The more profitable a firm, the greater its monopoly power.
Cannot be determined Correct
e. The monopolist has a pricing policy; the competitive producer does not.
True Correct
f. With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.
True
question
Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a text. Which of the following statements is true?
answer
The author would prefer a lower price than the publisher.
question
U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. U.S. pharmaceutical companies, for profit reasons, oppose laws allowing reimportation of drugs to the United States because reimportation would
answer
make it much more difficult to maintain the differing prices.
question
It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. This proposal
answer
does not consider that the output of natural monopolists would still be at the suboptimal level where P > MC.
question
The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:
answer
Downsloping.
question
Refer to the demand schedule below.
a. Use the demand schedule to calculate total revenue and marginal revenue at each quantity.
c. Suppose the marginal cost of successive units of output was zero. What output would the profit-seeking firm produce? (Assume the firm can only produce whole units.)
a. Use the demand schedule to calculate total revenue and marginal revenue at each quantity.
c. Suppose the marginal cost of successive units of output was zero. What output would the profit-seeking firm produce? (Assume the firm can only produce whole units.)
answer
a.
Price Quantity Demanded Total Revenue Marginal Revenue
$7.00 0 $0.00 —
6.50 1 $6.50 $6.50
6.00 2 $12.00 $5.50selected answer correct
5.50 3 $16.50 $4.50selected answer correct
5.00 4 $20.00 $3.50selected answer correct
4.50 5 $22.50 $2.50selected answer correct
4.00 6 $24.00 $1.50selected answer correct
3.50 7 $24.50 $0.50selected answer correct
3.00 8 $24.00 $-0.50selected answer correct
2.50 9 $22.50 $-1.50selected answer correct
c. 7 units
Price Quantity Demanded Total Revenue Marginal Revenue
$7.00 0 $0.00 —
6.50 1 $6.50 $6.50
6.00 2 $12.00 $5.50selected answer correct
5.50 3 $16.50 $4.50selected answer correct
5.00 4 $20.00 $3.50selected answer correct
4.50 5 $22.50 $2.50selected answer correct
4.00 6 $24.00 $1.50selected answer correct
3.50 7 $24.50 $0.50selected answer correct
3.00 8 $24.00 $-0.50selected answer correct
2.50 9 $22.50 $-1.50selected answer correct
c. 7 units
question
How often do perfectly competitive firms engage in price discrimination?
answer
Never
question
Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. In order to maximize profit, the monopolist should charge a higher price to the group that has:
answer
The lower elasticity of demand.
question
The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price:
answer
May be so low that the regulated monopoly can't break even.
question
Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. Note that output is measured as the number of bottles of vitamins produced per day and that costs include a normal profit.
Instructions: In part a, round your answers to 2 decimal places. In parts c and d, enter your answers as whole numbers.
a. What is ATC per unit for each level of output listed in the table?
b. Is this a decreasing-cost industry?
c. Suppose that the market price for a bottle of vitamins is $2.50 and that at that price the total market quantity demanded is 75,000,000 bottles. How many firms will there be in this industry?
d. Suppose that, instead, the market quantity demanded at a price of $2.50 is only 75,000. How many firms do you expect there to be in this industry?
e. Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure?
Instructions: In part a, round your answers to 2 decimal places. In parts c and d, enter your answers as whole numbers.
a. What is ATC per unit for each level of output listed in the table?
b. Is this a decreasing-cost industry?
c. Suppose that the market price for a bottle of vitamins is $2.50 and that at that price the total market quantity demanded is 75,000,000 bottles. How many firms will there be in this industry?
d. Suppose that, instead, the market quantity demanded at a price of $2.50 is only 75,000. How many firms do you expect there to be in this industry?
e. Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure?
answer
a.
Output TC MC ATC
25,000 $100,000 $0.50 $4.00
50,000 150,000 1.00 $3.00
75,000 187,500 2.50 $2.50
100,000 275,500 3.00 $2.75
b. no
c. 1,000 firms
d. 1 firm
e. yes
Output TC MC ATC
25,000 $100,000 $0.50 $4.00
50,000 150,000 1.00 $3.00
75,000 187,500 2.50 $2.50
100,000 275,500 3.00 $2.75
b. no
c. 1,000 firms
d. 1 firm
e. yes
question
A new production technology for making vitamins is invented by a college professor who decides not to patent it. Thus, it is available for anybody to copy and put into use. The TC per bottle for production up to 100,000 bottles per day is given in the following table.
a. What is ATC for each level of output listed in the table?
b. Suppose that for each 25,000-bottle-per-day increase in production above 100,000 bottles per day, TC increases by $5,000 (so that, for instance, 125,000 bottles per day would generate total costs of $85,000 and 150,000 bottles per day would generate total costs of $90,000). Is this a decreasing-cost industry?
c. Suppose that the price of a bottle of vitamins is $1.33 and that at that price the total quantity demanded by consumers is 75,000,000 bottles. How many firms will there be in this industry?
d. Suppose that, instead, the market quantity demanded at a price of $1.33 is only 75,000. How many firms do you expect there to be in this industry?
e. Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure?
a. What is ATC for each level of output listed in the table?
b. Suppose that for each 25,000-bottle-per-day increase in production above 100,000 bottles per day, TC increases by $5,000 (so that, for instance, 125,000 bottles per day would generate total costs of $85,000 and 150,000 bottles per day would generate total costs of $90,000). Is this a decreasing-cost industry?
c. Suppose that the price of a bottle of vitamins is $1.33 and that at that price the total quantity demanded by consumers is 75,000,000 bottles. How many firms will there be in this industry?
d. Suppose that, instead, the market quantity demanded at a price of $1.33 is only 75,000. How many firms do you expect there to be in this industry?
e. Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure?
answer
a.
Output TC ATC
25,000 $50,000 $2.00
50,000 70,000 $1.40
75,000 75,000 $1.00
100,000 80,000 $0.80
b. yes
c. one firm
d. one firm
e. no
Output TC ATC
25,000 $50,000 $2.00
50,000 70,000 $1.40
75,000 75,000 $1.00
100,000 80,000 $0.80
b. yes
c. one firm
d. one firm
e. no
question
Suppose you have been tasked with regulating a single monopoly firm that sells 50-pound bags of concrete. The firm has fixed costs of $10 million per year and a variable cost of $1 per bag no matter how many bags are produced.
Instructions: Enter your answers as whole numbers. In part e, round your answer to 2 decimal places.
a. If this firm kept on increasing its output level, would ATC per bag ever increase?
b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge?
At that price, what would be the size of the firm's profit or loss?
Would the firm want to exit the industry?
c. You find out that if you set the price at $2 per bag, consumers will demand 10 million bags. How big will the firm's profit or loss be at that price?
d. If consumers instead demanded 20 million bags at a price of $2 per bag, how big would the firm's profit or loss be?
e. Suppose that demand is perfectly inelastic at 20 million bags, so that consumers demand 20 million bags no matter what the price is. What price should you charge if you want the firm to earn only a fair rate of return? Assume as always that TC includes a normal profit.
Instructions: Enter your answers as whole numbers. In part e, round your answer to 2 decimal places.
a. If this firm kept on increasing its output level, would ATC per bag ever increase?
b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge?
At that price, what would be the size of the firm's profit or loss?
Would the firm want to exit the industry?
c. You find out that if you set the price at $2 per bag, consumers will demand 10 million bags. How big will the firm's profit or loss be at that price?
d. If consumers instead demanded 20 million bags at a price of $2 per bag, how big would the firm's profit or loss be?
e. Suppose that demand is perfectly inelastic at 20 million bags, so that consumers demand 20 million bags no matter what the price is. What price should you charge if you want the firm to earn only a fair rate of return? Assume as always that TC includes a normal profit.
answer
a. no
This is a decreasing-cost industry.
b. $1 per bag
loss =$10 million
yes
c. $0
d. profit = 10 mil
e. $1.50 per bag
This is a decreasing-cost industry.
b. $1 per bag
loss =$10 million
yes
c. $0
d. profit = 10 mil
e. $1.50 per bag
question
Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers as shown in the table below.
a. Calculate the missing total-revenue and marginal-revenue amounts for Group 1.
b. Assume that MC is $13 in both markets and MC = ATC at all output levels. What price will the firm charge in each market?
c. Based solely on these two prices, which market has the higher price elasticity of demand?
d. What will be this monopolist's total economic profit?
a. Calculate the missing total-revenue and marginal-revenue amounts for Group 1.
b. Assume that MC is $13 in both markets and MC = ATC at all output levels. What price will the firm charge in each market?
c. Based solely on these two prices, which market has the higher price elasticity of demand?
d. What will be this monopolist's total economic profit?
answer
b.
Group 1: 6 units at a price of $48
Group 2: 6 units at a price of $33
c. The second market has the higher price elasticity of demand.
d. 330
Group 1: 6 units at a price of $48
Group 2: 6 units at a price of $33
c. The second market has the higher price elasticity of demand.
d. 330
question
Suppose that a monopoly has costs for the various levels of output shown below.
This is
This is
answer
Output Total Cost Average Total Cost
100 $1,000 $10.00
500 $4,000 $8.00
1,500 $8,000 $5.33
6,000 $24,000 $4.00
30,000 $48,000 $1.60
a natural monopoly.
100 $1,000 $10.00
500 $4,000 $8.00
1,500 $8,000 $5.33
6,000 $24,000 $4.00
30,000 $48,000 $1.60
a natural monopoly.
question
"Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point." This statement recognizes that products of monopolistically competitive firms
answer
may give them some monopoly power, given strong consumer preferences for their product. However, consumers will substitute away if prices become too high relative to similar products offered in the market.
question
a. "Competition in quality and service may be just as effective as price competition in giving buyers more for their money." This statement is true
b. Monopolistically competitive firms frequently prefer nonprice competition to price competition because
b. Monopolistically competitive firms frequently prefer nonprice competition to price competition because
answer
a. if consumers value quality and service more than a lower price.
b. price competition can lead to lower economic profits or even loss.
b. price competition can lead to lower economic profits or even loss.
question
There are 10 firms in an industry, and each firm has a market share of 10 percent. The industry's Herfindahl index is:
answer
1,000.
question
In the small town of Geneva, there are 5 firms that make watches. The firms' respective output levels are 30 watches per year, 20 watches per year, 20 watches per year, 20 watches per year, and 10 watches per year. The four-firm concentration ratio for the town's watch-making industry is:
answer
90%
question
Which of the following best describes the efficiency of monopolistically competitive firms?
answer
Neither allocatively efficient nor productively efficient.
question
Suppose that the most popular car dealer in your area sells 10 percent of all vehicles.
Instructions: Enter your answers as whole numbers.
a. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that the Herfindahl index could possibly take for car dealers in your area?
b. In that same situation, what would the four-firm concentration ratio be?
Instructions: Enter your answers as whole numbers.
a. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that the Herfindahl index could possibly take for car dealers in your area?
b. In that same situation, what would the four-firm concentration ratio be?
answer
a. 1,000
b. 40 %
b. 40 %
question
Suppose that a monopolistically competitive restaurant is currently serving 230 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $12 per meal.
Instructions: Enter your answers as whole numbers.
a. What is the size of this firm's profit or loss?
b. Will there be entry or exit?
Will this restaurant's demand curve shift left or right?
c. Suppose that the allocatively efficient output level in long-run equilibrium is 200 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $8. What is the size of the firm's economic profit?
d. Suppose that the allocatively efficient output level in long-run equilibrium is 200 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $8. Is the deadweight loss for this firm greater than or less than $60?
Instructions: Enter your answers as whole numbers.
a. What is the size of this firm's profit or loss?
b. Will there be entry or exit?
Will this restaurant's demand curve shift left or right?
c. Suppose that the allocatively efficient output level in long-run equilibrium is 200 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $8. What is the size of the firm's economic profit?
d. Suppose that the allocatively efficient output level in long-run equilibrium is 200 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $8. Is the deadweight loss for this firm greater than or less than $60?
answer
a. $460
b. entry
left
c. $0
d. less than
b. entry
left
c. $0
d. less than
question
a. The difference between monopolistic competition and pure competition is that in comparison to pure competition, monopolistic competition has
b. The difference between monopolistic competition and pure monopoly is that in comparison to monopolistic competition, pure monopoly has
c. Product differentiation
d. Firms will enter a monopolistically competitive industry when there are
b. The difference between monopolistic competition and pure monopoly is that in comparison to monopolistic competition, pure monopoly has
c. Product differentiation
d. Firms will enter a monopolistically competitive industry when there are
answer
a. fewer firms, product differentiation, some price control, and relatively easy but not barrier-free entry.
b. one firm, a unique product, price control, and entry barriers.
c. provides an advantage in the market.
d. economic profits. This will shift demand to the left, reducing the firm's market share and its economic profit.
b. one firm, a unique product, price control, and entry barriers.
c. provides an advantage in the market.
d. economic profits. This will shift demand to the left, reducing the firm's market share and its economic profit.
question
Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 23%, 22%, 18%, 12%, 11%, 8%, and 6%.
Instructions: Enter your answers as whole numbers.
a. What is the four-firm concentration ratio of the hamburger industry in this town?
b. What is the Herfindahl index for the hamburger industry in this town?
c. If the top three sellers combined to form a single firm, what would happen to the four-firm concentration ratio and to the Herfindahl index?
Instructions: Enter your answers as whole numbers.
a. What is the four-firm concentration ratio of the hamburger industry in this town?
b. What is the Herfindahl index for the hamburger industry in this town?
c. If the top three sellers combined to form a single firm, what would happen to the four-firm concentration ratio and to the Herfindahl index?
answer
a. 75 %
b. 1,702
c.
Four-firm concentration ratio = 94%
Herfindahl index = 4,334
b. 1,702
c.
Four-firm concentration ratio = 94%
Herfindahl index = 4,334
question
Consider the diagram below depicting the revenue and cost conditions faced by a monopolistically competitive firm, and then answer the following questions.
Suppose the firm produces where there is allocative effciency.
a. The resulting price and quantity combination is illustrated in graph above by point
b. At this resulting price and quantity combination, the firm would experience
Suppose the firm produces where there is allocative effciency.
a. The resulting price and quantity combination is illustrated in graph above by point
b. At this resulting price and quantity combination, the firm would experience
answer
a. D
b. an economic profit.
b. an economic profit.
question
Answer the following questions, which relate to measures of concentration.
Instructions: Enter your answers as whole numbers.
a. What is the meaning of a four-firm concentration ratio of 60 percent?
What is the meaning of a four-firm concentration ratio of 90 percent?
Which of the following is a shortcoming of concentration ratios as measures of monopoly power?
b. Suppose that the five firms in industry A have annual sales of 30, 30, 20, 10, and 10 percent of total industry sales. For the five firms in industry B, the figures are 60, 25, 5, 5, and 5 percent. Calculate the Herfindahl index for each industry and compare their likely competitiveness.
Instructions: Enter your answers as whole numbers.
a. What is the meaning of a four-firm concentration ratio of 60 percent?
What is the meaning of a four-firm concentration ratio of 90 percent?
Which of the following is a shortcoming of concentration ratios as measures of monopoly power?
b. Suppose that the five firms in industry A have annual sales of 30, 30, 20, 10, and 10 percent of total industry sales. For the five firms in industry B, the figures are 60, 25, 5, 5, and 5 percent. Calculate the Herfindahl index for each industry and compare their likely competitiveness.
answer
a.
The largest four firms in the industry account for 60 percent of sales.
The largest four firms in the industry account for 90 percent of sales.
They do not account for interindustry competition.
b.
Herfindahl index for industry A = 2,400
Herfindahl index for industry B = 4,300
Your comparison of their likely competitiveness: Industry A will be more competitive than industry B.
The largest four firms in the industry account for 60 percent of sales.
The largest four firms in the industry account for 90 percent of sales.
They do not account for interindustry competition.
b.
Herfindahl index for industry A = 2,400
Herfindahl index for industry B = 4,300
Your comparison of their likely competitiveness: Industry A will be more competitive than industry B.
question
Refer to the profit payof matrix and answer the following questions. All profit figures are in thousands.
a. Using the payoff matrix, X and Y are
b. Using the payoff matrix, and assuming no collusion between X and Y, what is the likely pricing outcome?
c. Refer to the matrix above. Price collusion is mutually profitable because each firm would achieve
d. There might be a temptation to cheat on the collusive agreement because each firm could achieve
a. Using the payoff matrix, X and Y are
b. Using the payoff matrix, and assuming no collusion between X and Y, what is the likely pricing outcome?
c. Refer to the matrix above. Price collusion is mutually profitable because each firm would achieve
d. There might be a temptation to cheat on the collusive agreement because each firm could achieve
answer
a. interdependent, because their profits depend not just on their own price but also on the other firm's price.
b. Both firms will set price at $35.
c. higher profits.
d. higher profits
b. Both firms will set price at $35.
c. higher profits.
d. higher profits
question
a. Price collusion occurs in oligopolistic industries because
b. Assess the economic desirability of collusive pricing.
c. Price leadership is legal in the United States, whereas price-fixing is not. This is because price leadership is
b. Assess the economic desirability of collusive pricing.
c. Price leadership is legal in the United States, whereas price-fixing is not. This is because price leadership is
answer
a. price competition can lower revenue for all firms.
b. Collusive pricing is economically desirable from the oligopoly's viewpoint because it results in monopoly profits.
c. not an agreement, whereas price-fixing is.
b. Collusive pricing is economically desirable from the oligopoly's viewpoint because it results in monopoly profits.
c. not an agreement, whereas price-fixing is.
question
a. Advertising is an important aspect of monopolistic competition and oligopoly because
b. Advertising promotes efficiency and benefits consumers by
c. Which of the following statements is true?
b. Advertising promotes efficiency and benefits consumers by
c. Which of the following statements is true?
answer
a. brand distinction encourages consumer loyalty, which increases profits.
b. providing information about new products, increasing sales and output, and lowering average total cost.
c. Persuasive advertising can be excessive, creating a barrier to entering the industry.
b. providing information about new products, increasing sales and output, and lowering average total cost.
c. Persuasive advertising can be excessive, creating a barrier to entering the industry.
question
The following game-theory matrix involves two firms and their decisions on high versus low advertising budgets and the effects of each on profits.
a.
b. What is the equilibrium outcome and payoffs given these strategies?
c. Can these two firms do better?
a.
b. What is the equilibrium outcome and payoffs given these strategies?
c. Can these two firms do better?
answer
a. What is the best strategy for Firm A?
High budget
The best strategy for Firm B?
High budget
b.
Firm A: $ 80
Firm B: $ 80
c. yes
High budget
The best strategy for Firm B?
High budget
b.
Firm A: $ 80
Firm B: $ 80
c. yes
question
Which of the following apply to oligopoly industries?
answer
A few large producers
Strategic Behavior
Strategic Behavior
question
Faceblock, Gargle+, and SnapHat are rival firms in an oligopoly industry. If kinked-demand theory applies to these three firms, Faceblock's demand curve will be:
answer
more elastic above the current price than below it.
question
Consider an oligopoly industry whose firms have identical demand and cost conditions. If the firms decide to collude, then they will want to collectively produce the amount of output that would be produced by:
answer
a pure monopolist.
question
In an oligopoly, each firm's share of the total market is typically determined by
answer
product development and advertising
question
Some analysts consider oligopolies to be potentially less efficient than monopoly firms because at least monopoly firms tend to be regulated. Arguments in favor of a more benign view of oligopolies include
answer
Oligopolies can be kept in line by foreign competition. checked
Oligopolistic industries may promote technological progress.
Oligopolies may engage in limit pricing to keep out potential entrants.
Oligopolistic industries may promote technological progress.
Oligopolies may engage in limit pricing to keep out potential entrants.
question
Collusive agreements can be established and maintained by:
answer
credible threats.
question
Property developers who build shopping malls like to have them "anchored" with the outlets of one or more famous national retail chains, like Target or Nordstrom. Having such "anchors" is obviously good for the mall developers because anchor stores bring a lot of foot traffic that can help generate sales for smaller stores that lack well-known national brands. But what's in it for the national retail chains? Why become an anchor?
answer
The anchor stores may feel there is a first-mover advantage to becoming one of only a few anchor stores at a new mall.
question
Suppose that the payouts at terminal B node change to (13,12) while everything else in the game stays the same. The new subgame perfect Nash equilibrium will consist of the two line segments:
answer
Don't build at BB followed by Build at HB2.
question
Refer to figure Figure 14.8.
In our background story, one truck maker (let's call it "Hord") got to go first because it had political connections. Another truck maker (let's call it "Nizzan") then had to go second. Now assume that their order is reversed, so that Nizzan goes first and then Hord goes second. When they play the game in this reversed order, which terminal node will the subgame perfect Nash equilibrium lead to? (Hint: Does it matter which firm goes first?)
In our background story, one truck maker (let's call it "Hord") got to go first because it had political connections. Another truck maker (let's call it "Nizzan") then had to go second. Now assume that their order is reversed, so that Nizzan goes first and then Hord goes second. When they play the game in this reversed order, which terminal node will the subgame perfect Nash equilibrium lead to? (Hint: Does it matter which firm goes first?)
answer
D
question
Consider a "punishment" variation of the two-firm oligopoly situation shown in the figure below. Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars is taken from the low-price firm and given to the high-price firm.
In order for both firms to always want to set the high price, the fine must be set just over what value?
In order for both firms to always want to set the high price, the fine must be set just over what value?
answer
$ 3 million
question
Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable). Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm claims the following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high price in the second game (as a reward to the other firm for cooperating in the first game).
a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which strategy will each firm choose in the second game?
b. Now move backward in time one step. Imagine that it is the start of the first game and each firm must decide what to do during the first game. Given your answer to a, is the publicly stated policy credible? (Hint: No matter what happens in the first game, what will both firms do in the second game?)
c. Given your answers to a and b, what strategy will each firm choose in the first game?
a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which strategy will each firm choose in the second game?
b. Now move backward in time one step. Imagine that it is the start of the first game and each firm must decide what to do during the first game. Given your answer to a, is the publicly stated policy credible? (Hint: No matter what happens in the first game, what will both firms do in the second game?)
c. Given your answers to a and b, what strategy will each firm choose in the first game?
answer
a. Low-price strategy
b. no
c. low-pricing strategy
b. no
c. low-pricing strategy
question
Examine the following game tree.
Fred and Sally are planning on running competing restaurants. Each must decide whether to rent space or buy space. Fred goes first at decision node F. Sally goes second at either decision node S1 or decision node S2 (depending on what Fred chose to do at decision node F). Note that the payoff to Sally at terminal node A is X.
a. If X < 12, what terminal node will the subgame perfect Nash equilibrium path lead to?
b. If X > 12, what terminal node will the subgame perfect Nash equilibrium path lead to?
c. Suppose that X = 11 but that it is now possible for Fred to make a side payment of value V to Sally that will boost her payout at decision node A from X = 11 to X = 11 + V. What is the minimum amount that V can be such that the subgame perfect Nash equilibrium path will lead to terminal node A? Assume that V can take on only discrete units (0,1,2,3,...).
Fred and Sally are planning on running competing restaurants. Each must decide whether to rent space or buy space. Fred goes first at decision node F. Sally goes second at either decision node S1 or decision node S2 (depending on what Fred chose to do at decision node F). Note that the payoff to Sally at terminal node A is X.
a. If X < 12, what terminal node will the subgame perfect Nash equilibrium path lead to?
b. If X > 12, what terminal node will the subgame perfect Nash equilibrium path lead to?
c. Suppose that X = 11 but that it is now possible for Fred to make a side payment of value V to Sally that will boost her payout at decision node A from X = 11 to X = 11 + V. What is the minimum amount that V can be such that the subgame perfect Nash equilibrium path will lead to terminal node A? Assume that V can take on only discrete units (0,1,2,3,...).
answer
a. D
b. A
c. min 2
b. A
c. min 2
question
Suppose that Firm A and Firm B are independently deciding whether to sell at the low price or a higher price. The payoff matrix below shows the profits per year for each company resulting from the two price options.
a. Does Firm A have a dominant strategy?
b. Does Firm B have a dominant strategy?
c. What are the Nash equilibria in this game?
a. Does Firm A have a dominant strategy?
b. Does Firm B have a dominant strategy?
c. What are the Nash equilibria in this game?
answer
a. No, there is no dominant strategy for Firm A.
b. No, there is no dominant strategy for Firm B.
c.
Both Firm A and Firm B charge a low price.
Both Firm A and Firm B charge a high price.
b. No, there is no dominant strategy for Firm B.
c.
Both Firm A and Firm B charge a low price.
Both Firm A and Firm B charge a high price.
question
Suppose that Dandy Dog (DD) and Hungry Dog (HD) are competing in a booming hot dog market. Both are considering either expanding their current hot dog stand or building a new hot dog stand. Dandy Dog has the first-mover advantage. The figure below shows the extensive-form representation of the firms' choices.
he terminal nodes A through D show the following profits in millions for Dandy Dog (first value) and Hungry Dog (second value):
A B C D
($-3, $-5) ($12, $0) ($0, $12) ($0, $0)
he terminal nodes A through D show the following profits in millions for Dandy Dog (first value) and Hungry Dog (second value):
A B C D
($-3, $-5) ($12, $0) ($0, $12) ($0, $0)
answer
a. Given that Dandy Dog moves first, Dandy Dog will expand and earn a profit of $ 12 million.
b. Hungry Dog will build new and earn a profit of $ 0 million.
b. Hungry Dog will build new and earn a profit of $ 0 million.
question
Suppose that Big Bad Company (BB) is an existing firm producing bricks. New Entrant (NE) is a potential new entrant in the brick market. Big Bad says that if NE enters, then it will force them out of the market. Specifically, if BB keeps NE out of the market, it will earn $100 million in revenue. If NE enters and BB fights, BB will earn $-25 million and NE will earn $-25 million. If NE enters and BB does not fight, BB will earn $50 million and NE will earn $50 million.
Complete the blanks in the figure, where the terminal nodes c through i indicate the revenue earned by each specific firm:
Complete the blanks in the figure, where the terminal nodes c through i indicate the revenue earned by each specific firm:
answer
a. = New Entrant .
b. = Big Bad .
c. = 100 .
d. = 0 .
e. = -25 .
f. = -25 .
h. = 50 .
i. = 50 .
New Entrant (NE) should enter .
b. = Big Bad .
c. = 100 .
d. = 0 .
e. = -25 .
f. = -25 .
h. = 50 .
i. = 50 .
New Entrant (NE) should enter .
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