question
Firms that exhibit price-taking behavior
answer
have outputs that are too small to influence market price and thus take it as given
question
A horizontal demand curve for a firm implies that
answer
the firm is selling in a competitive market
question
If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
answer
there is free entry and exit
question
Which of the following products would be sold in a competitive market?
answer
avocados
question
The short run is
answer
a period of time in which at least one input cannot be varied
question
If a firm is a price taker, then its marginal revenue will always equal
answer
price
question
An increase in the cost of an input in the short run will result in
answer
a leftward shift in the firm's short-run supply curve
question
If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be true
answer
p<AVC for all levels of output
question
The competitive firm's supply curve is equal to
answer
the portion of its marginal cost curve that lies above AVC
question
If market price is greater than the minimum of AVC but below the minimum of AC, then
answer
revenue covers variable costs and some of the fixed costs, although profit is negative
question
In the long run,
answer
the firm shuts down if revenue is less than its avoidable costs
question
Which is an important aspect of the perfectly competitive market that leads to long run equilibrium
answer
freedom of entry and exit
question
A firm will enter a competitive market when
answer
it can earn a positive long-run profit
question
If firms in a competitive market are not identical, then the long-run market supply curve will be
answer
upward sloping
question
With identical firms, constant input prices, and all the other characteristics of a competitive market
answer
a shift in demand has no effect on the long-run average cost, resulting in change in equilibrium quantity but not price
question
In the long run, firms in a competitive market
answer
earn zero economic profit
question
Government intervention (assume binding price ceilings or price floors) in a perfectly competitive market
answer
reduces economic well-being
question
Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy. Mary refused. One can conclude that Mary's consumer surplus from the toy is
answer
at least $95
question
Producer surplus is equal to
answer
the difference between price and marginal cost for all units sold
question
Deadweight loss occurs when
answer
surplus losses to one group due to intervention are not offset by surplus gains to another
question
For a monopoly, marginal revenue is less than price because
answer
the demand for the firm's output is downward sloping
question
If the inverse demand function for a monopoly's product is p=100-2Q, then the firm's marginal revenue function is
answer
100-4Q
question
If the inverse demand curve a monopoly faces is p=100-2Q, and MC is constant at 16, then profit maximization
answer
is achieved when 21 units are produced
question
If the inverse demand curve a monopoly faces is p=100-2Q, and MC is constant at 16, then profit maximization is achieved when the monopoly sets price equal to
answer
58
question
A monopoly that is maximizing profits operates in the _____ portion of the demand curve
answer
elastic
question
The ability of a monopoly to charge a price that exceeds marginal cost depends on
answer
price elasticity of demand
question
A monopoly incurs a marginal cost of $1 for each unit produced. If the price elasticity of demand equals -2.0, the monopoly maximizes profit by charging a price of
answer
$2.00
question
The more elastic the demand curve, a monopoly
answer
will lose more sales as it raises its price
question
The more elastic the demand facing a firm,
answer
the lower the value of the Lerner index
question
Which of the following is NOT associated with a high degree of monopoly power?
answer
Significant price competition among firms in the market
question
The monopolist that maximizes profit
answer
imposes a cost on society because the selling price is equal to marginal cost
question
With respect to monopolies, deadweight loss refers to the
answer
net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy
question
A market failure occurs
answer
when there is a non-optimal allocation that leads to an inefficient market
question
Which of the following statements about natural monopolies is true?
answer
For natural monopolies, marginal cost is always below average cost
question
The figure below shows the demand and marginal cost curves for a monopoly. The deadweight loss of this monopoly equals
answer
c + f
question
Which of the following is most likely the most beneficial form of monopoly advantage?
answer
better production methods
question
All of the following government actions create barriers to entry EXCEPT
answer
requiring a pizza parlor to get a business license
question
For network externalities to occur
answer
there must be a critical mass of users
question
Which of the following products benefits from network externalities?
answer
Twitter
question
If a firm uses introductory pricing, it is likely ____ short run profit and _____ long run profit
answer
reducing; maximizing
question
When firms discriminate they turn _____ into ______
answer
consumer surplus, profit
question
When firms price discriminate they
answer
sell to new consumers that would not have bought at the profit-maximizing uniform price
question
Which of the following conditions must be true so that a firm can profitably price discriminate?
answer
The good cannot be easily resold
question
Which of the following sellers is most able to perfectly price discriminate?
answer
a college or university
question
Consumers who place a high value on a good are better off with pricing in the following order:
answer
competitive market; single-price monopoly; perfect price discrimination
question
A perfect price discriminator
answer
charges each buyer her reservation price
question
The deadweight loss generated by a perfect-price-discriminating monopoly
answer
equals zero
question
If people posing as a vacationer were able to purchase large numbers of airline tickets from the airlines and later resell them to business travelers
answer
group price discrimination on the part of airlines would no longer be profit maximizing
question
A firm practicing group price discrimination that has constant marginal cost will
answer
maximize total profit by maximizing profit for each group separately
question
A group price discriminator sells its product in Florida for three times the price it sets in New York. Assuming the fir faces the same constant marginal cost in each market and the price elasticity of demand in New York is -2.0, the demand in Florida
answer
has an elasticity of -1.2
question
Nonlinear price discrimination
answer
sets the price consumers pay based on quantity purchased
question
An electricity provider charges consumer $0.20 per kWh for the first 100 kWh, $0.25 per kWh for the next 50 kWh, and $0.27 per kWh for all subsequent kWh of usage. This would be considered
answer
an example of increasing-block pricing
question
Stores such as Costco and Sam's Club require an annual membership before you can shop there. This is a form of
answer
two-part pricing
question
Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p=5-(1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. The profit maximizing two-part tariff results in the firm selling
answer
8 hours
question
Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p=5-(1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. The profit-maximizing two-part tariff yields total revenue of
answer
$24
question
If a firm is to capture all consumer surplus with two-part pricing when customers are different
answer
it must be able to charge different access fees
question
If Ben values good X more than good Y and Catherine values good Y more than good X a firm can increase its profits by
answer
bundling the goods
question
If Chip and Cathy have different valuations on dancing and dinner as in the table below, what is the maximum profit Sammy can extract from Chip and Cathy for an evening's entertainment at Sammy's dinner theater if Sammy's marginal cost is $25 for dinner and $5 for dancing per person? You may compare a pure bundling price $75, a pair of separated prices: $30 for dinner and $35 for dancing, and mixed bundling price: bundle price of $75, $38 for dinner and $46 for dancing
answer
$90
question
Which of the following is an example of peak-load pricing?
answer
charging more for electricity on hot days
question
Where there is a capacity constraint
answer
firms can use peak-load pricing to increase profits during periods of high demand
question
Each member of a cartel
answer
agrees to reduce output lower than it would if it were acting independently
question
If a cartel is unable to monitor its members and punish those firms that violate the agreement, then
answer
the cartel will fail
question
A typical firm in a cartel will hold which of the following attitudes?
answer
If I alone cheat, I'm better off, if everyone cheats, I'm worse off
question
Which of the following conditions can help prolong the life of a cartel?
answer
There are only a few firms in the market and they all belong in the cartel
question
The use of "most-favored-customers" clauses is an example of
answer
incenting members to maintain the cartel, because if they lower the price of one customers, they have to lower it for previous customers as well
question
Suppose two identical Cournot duopolist firms operate at zero marginal cost (MC=0). The market demand is p=a-bQ.
Firms 1's best-response function is
Firms 1's best-response function is
answer
q1=(a-bq2)/2b
question
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 $3 (MC=3) for every firm is this market.
What will be the price of this new drink if the industry is a Cournot duopoly of two identical firms?
P=30-Q
The marginal cost to produce this new drink $3 (MC=3) for every firm is this market.
What will be the price of this new drink if the industry is a Cournot duopoly of two identical firms?
answer
$12
question
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 $3 (MC=3) for every firm is this market.
What will be the price of this new drink in the long run if the industry is a Bertrand duopoly of two identical firms?
P=30-Q
The marginal cost to produce this new drink $3 (MC=3) for every firm is this market.
What will be the price of this new drink in the long run if the industry is a Bertrand duopoly of two identical firms?
answer
$3
question
In the simplest version of the Cournot model, we assume the firms
answer
set quantities independently and simultaneously/the firms are in a Nash equilibrium
question
If a firm is selling a quantity that is not on its best-response curve it
answer
will want to change its behavior
question
If differentiation makes the market demand curve less elastic, then
answer
price markup over marginal cost is higher than when products are identical
question
If a firm's marginal costs ____ then its ____.
answer
fall; best-response curve shifts outward from the origin
question
Mergers are closely scrutinized by the government because
answer
they might allow the firms involved to dominate the market and act as a legalized cartel (monopoly)
question
In a Bertrand model with identical products
answer
price is the same as in a competitive market equilibrium
question
Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogeneous products
answer
results in a larger output at a lower price
question
In a Bertrand model with differentiated products
answer
firms can set price above marginal cost
question
A market with few entry barriers and with many firms that sell differentiated products id
answer
monopolistically competitve
question
Firms in monopolistic competition seek to differentiate their product
answer
to strengthen their demand and to make it more inelastic
question
If AC<p where MR=MC in monopolistic competition
answer
firms earn positive profits and new firms will enter
question
Suppose a monopolistically competitive industry evolved into a perfectly competitive industry. Which of the following statements is correct?
answer
The industry would produce more output and charge a lower price after the change
question
Which of the following products would be sold in a competitive market?
answer
sweet onions
question
With identical firms, constant input prices, and all the other characteristics of a competitive makert
answer
the long-run equilibrium price is the minimum of the long-run average (total) cost curve
question
Assume government policy DECREASES the demand for milk
answer
The producer surplus of milk producers will decrease
question
A firm will exit a competitive market when
answer
the long-run profit would be negative
question
In the long run, profits will equal zero in a competitive market because of
answer
free entry and exit
question
If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
answer
it will minimize its loss by decreasing output so that price exceeds marginal cost
question
If market price is greater than or equal to the minimum of AVC but below the minimum of AC, then
answer
the firm will operate because its loss is less than if it shut down
question
If the market price is above a firm's average cost at the quantity produced
answer
the firm operates and makes a profit
question
A DECREASE in the cost of an input in the short run will result in
answer
a rightward shift in the firm's short-run supply curve
question
If the inverse demand curve a monopoly faces is p=150 - 3Q, and MC is constant at 30, then profit maximization
answer
is achieved when 20 units are produced
question
A monopoly incurs a marginal cost of $2 for each unit produced. If the price elasticity of demand equals -1.5, the monopoly maximizes profit by charging a price of
answer
$6.00
question
The situation in which a person places greater value on a good as fewer and fewer people possess it is called
answer
Snob Effect
question
Privatization of state-owned monopoly can
answer
allow governments to capture future producer surplus
question
Deadweight loss from monopoly power is expressed on a graph as the area between
answer
the market demand curve/average revenue curve and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets
question
The monopolist's supply curve
answer
doesn't exist
question
When firms price discriminate they
answer
sell to new consumers that would not have bought at the profit-maximizing uniform price without losing revenues on existing consumers because of the lower prices
question
Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p=8-q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $0.5. From each consumer, the profit-maximizing two-part tariff yields total PRODUCER SURPLUS of
answer
$28.125
question
For a bowling alley, Rolling4Fun Lanes, charge $75 for a bundle of bowling and dinner, dinner alone for $35 and bowling alone for $50. What will Eric and Frank purchase at Rolling4Fun Lanes?
answer
Eric purchases dinner only while Frank buys the bundle
question
Refer to Scenario Bundling 1. Assuming there is only one of each type, what is the total producers surplus from PURE bundling for Konon?
answer
$120
question
At the current marginal cost of a good sold by a monopoly firm, Al's consumer surplus equals 8 and Ben's consumer surplus equals 18. By using two-part pricing the monopolist could yield a profit of:
answer
18
question
A perfect price discriminating monopoly
answer
captures all consumer surplus
question
A primary difference between rebates and coupons?
answer
Rebates allow individuals to sort themselves into the high-elasticity group after the sale
question
If two identifiable markets differ with respect to their price elasticity of demand and resale is impossible, a firm with market power will
answer
set a lower price in the market that is more price elastic
question
Suppose a stream is discover 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=40-0.5Q
The marginal cost to produce this new drink is $4 (MC=4) for every firm in this market
What will the price of this new drink if the industry is a Cournot duopoly of two identical firms?
P=40-0.5Q
The marginal cost to produce this new drink is $4 (MC=4) for every firm in this market
What will the price of this new drink if the industry is a Cournot duopoly of two identical firms?
answer
$16
question
If AC=p where MR=MC in monopolistic compeitition
answer
firms earn zero profits and new firms will not enter and no existing firms will leave
question
A monopolisitcally competitive firm has the free entry characteristics of _____ and the price setting characteristics of ___.
answer
Perfect competition; a monopoly
question
In the _____, two duopolists compete by simultaneously selecting price
answer
Bertrand model
question
In a perfectly competitive market
answer
buyers are price-takers
question
If all conditions for a perfectly competitive market are met
answer
firms demand curve is horizontal
question
A profit maximizing firm selects output such that
answer
total profit is maximized
question
There are currently N identical firms in a market. If it is perfectly competitive market, the short-run market supply curve at any given price is
answer
N times the supply of an individual firm
question
Long-run market supply curves are upward sloping in a perfectly competitive market if
answer
the number of firms is restricted in the long run
question
Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. If the long-run supply curve is horizontal, then
answer
the long-run price will be $0.20 per pound
question
Long-run market supply curves are downward sloping if
answer
input prices fall as the industry expands
question
Assume government policy increases the demand for corn
answer
the producer surplus of corn growers will increase
question
What is one reason activists might lobby the government for regulation limiting the production of a product to less than would normally be in a perfectly competitive market?
answer
They value producer surplus more than consumer surplus
question
If a market produces a level of output below the competitive equilibrium, then
answer
social welfare is not maximized
question
The monopolist's marginal revenue curve
answer
lies below the demand curve
question
If the inverse demand function for a monopoly's product is p=a-bQ, then the firm's marginal revenue function is
answer
c-2bQ
question
A monopolist that chooses price
answer
produces the same amount as a monopolist that chooses quantity
question
If the demand for a monopoly's output shifts rightward, the change in quantity produced is
answer
not predictable
question
What is the value of the Lerner Index under perfect competition
answer
0
question
Which factors determine the firm's elasticity of demand?
answer
availability of close substitutes, number of firms, and the proximity among competing firms
question
The situation in which one firm can produce the total output of the market at lower cost than several firms is called
answer
natural monopoly
question
From society's point of view, a monopolist produces too little because price
answer
exceeds marginal cost
question
Government actions that create monopolies
answer
create deadweight loss
question
A patent
answer
may not provide a barrier to entry
question
All firms can increase profits using price discrimination
answer
false, because some firms are in competitive markets
question
Why might luxury-goods retailers limit purchases on a good by consumers "due to popular demand"?
answer
Because they are limiting the possibility of arbitrage, where consumers buy in a low price area and resell in a higher price area
question
A perfect price discriminating monopoly
answer
captures all consumer surplus
question
For a perfect-price-discriminating monopoly, the marginal revenue curve
answer
is the demand curve
question
Suppose a profit-maximizing monopoly is able to employ group price discrimination. The marginal cost of providing the good is constant and the same in both markets. The marginal revenue the firm earns on the last unit sold in the market with the lower price will be
answer
equal to the marginal revenue the firm earns on the last unit sold in the market with the higher price
question
If the price of business broadband is greater than that of residential broadband, all else equal
answer
residential has great price elasticity that business
question
Firms use various methods for identifying customers such as ____ and ____
answer
observable characteristics such as age; their actions such as willingness to wait in long lines
question
Reverse auctions
answer
allow firms to identify customers that have very elastic demand curves
question
Many them parks charge an entrance fee and a per-ride fee equal to zero. This is an example of
answer
two-part pricing
question
Bundling raises higher revenues than selling the goods separately when
answer
demands for the two products are negatively correlated
question
What is the primary difference between bundling and tie-ins?
answer
Bundling is typically a one-off purchase
question
A local restaurant sells strawberry pie for $3.00 per slice. However, if you order the prime rib dinner you get a slice of pie for only a dollar. This is an example of
answer
bundling
question
Cartels can detect cheating by
answer
dividing the market by region so that each cartel member is the only seller in a particular region
question
The Cournot Model of Oligopoly assumes that
answer
-firms do not cooperate
-firms make their decisions simultaneously
-firms decide what quantity to produce
-firms make their decisions simultaneously
-firms decide what quantity to produce
question
In the Cournot model, if one firm increases its output
answer
the market price drops, reducing the revenues received by the other firms
question
In the Cournot model
answer
a firm's profits are interdependent
question
In the Cournot model, if the products differentiated
answer
the firm can shift its demand curve to the right and make it less elastic
question
The market structure in which there is interdependence among firms is
answer
oligopoly
question
In comparing the Cournot equilibrium with the competitive equilibrium
answer
profit is higher, and output level is lower in Cournot
question
Two identical firms that share a market and produce a homogeneous good will find which of the following market outcomes LEAST desirable?
answer
Bertrand Oligopoly
question
Which statement most nearly describes a Nash equilibrium applied to price competition?
answer
Give the prices chosen by its competitors, no firm has an incentive to change their prices from the equilibrium level
question
One criticism of the Bertrand pricing model is that
answer
when there is an oligopoly with no product differentiation, the model's prediction is inconsistent with reality
question
Firms, that produce identical products and have identical costs, in a monopolistically competitive market face ____ demand curves and earn ____ economic profits in the long run
answer
downward sloping; zero
question
What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?
answer
it shifts left
question
Which of the following is true in long run equilibrium for a firm in a monopolistic competitive industry?
answer
The demand curve is tangent to average cost curve
question
Excess capacity in monopolistically competitive industries results because in equilibrium
answer
each firm's output rate is too small to minimize average cost
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