question
Which of the following is not needed for price discrimination to be possible?
a) The firm must have market power.
b) The firm must be able to prevent resale and arbitrage.
c) The firm must eventually learn about its customers' demands.
d) The firm's customers must have different demand curves.
a) The firm must have market power.
b) The firm must be able to prevent resale and arbitrage.
c) The firm must eventually learn about its customers' demands.
d) The firm's customers must have different demand curves.
answer
The firm's customers must have different demand curves.
(Some indirect price discrimination schemes, such as block pricing and two-part tariffs, do not require that customers have different demand curves.)
(Some indirect price discrimination schemes, such as block pricing and two-part tariffs, do not require that customers have different demand curves.)
question
Relative to standard monopoly pricing, first-degree price discrimination results in:
a) higher consumer surplus, higher producer surplus, and higher total surplus.
b) lower consumer surplus, higher producer surplus, and higher total surplus.
c) lower consumer surplus, higher producer surplus, and lower total surplus.
d) lower consumer surplus, lower producer surplus, and lower total surplus.
a) higher consumer surplus, higher producer surplus, and higher total surplus.
b) lower consumer surplus, higher producer surplus, and higher total surplus.
c) lower consumer surplus, higher producer surplus, and lower total surplus.
d) lower consumer surplus, lower producer surplus, and lower total surplus.
answer
lower consumer surplus, higher producer surplus, and higher total surplus.
(Since the firm can charge each customer exactly what she is willing to pay, it sells the same quantity that would be sold under perfect competition. Thus there is no deadweight loss and total surplus is maximized. All of the surplus goes to producers, however, so consumer surplus decreases and producer surplus increases relative to standard monopoly pricing.)
(Since the firm can charge each customer exactly what she is willing to pay, it sells the same quantity that would be sold under perfect competition. Thus there is no deadweight loss and total surplus is maximized. All of the surplus goes to producers, however, so consumer surplus decreases and producer surplus increases relative to standard monopoly pricing.)
question
Relative to perfect competition, first-degree price discrimination results in:
a) higher consumer surplus, higher producer surplus, and higher total surplus.
b) lower consumer surplus, higher producer surplus, and equal total surplus.
c) lower consumer surplus, higher producer surplus, and lower total surplus.
d) lower consumer surplus, lower producer surplus, and lower total surplus.
a) higher consumer surplus, higher producer surplus, and higher total surplus.
b) lower consumer surplus, higher producer surplus, and equal total surplus.
c) lower consumer surplus, higher producer surplus, and lower total surplus.
d) lower consumer surplus, lower producer surplus, and lower total surplus.
answer
lower consumer surplus, higher producer surplus, and equal total surplus.
(Since the firm can charge each customer exactly what she is willing to pay, it sells the same quantity that would be sold under perfect competition. Thus there is no deadweight loss and total surplus is maximized just as it is in perfect competition. All of the surplus goes to producers, however, so consumer surplus decreases and producer surplus increases relative to perfect competition.)
(Since the firm can charge each customer exactly what she is willing to pay, it sells the same quantity that would be sold under perfect competition. Thus there is no deadweight loss and total surplus is maximized just as it is in perfect competition. All of the surplus goes to producers, however, so consumer surplus decreases and producer surplus increases relative to perfect competition.)
question
If market demand is P = 100 - Q and the firm has a constant marginal cost of 20, then with first-degree price discrimination, the firm's producer surplus will be:
a) $800.
b) $1,600.
c) $2,400.
d) $3,200.
a) $800.
b) $1,600.
c) $2,400.
d) $3,200.
answer
$3,200.
(Producer surplus is the same as what total surplus would be under perfect competition, which is the entire area between the demand curve and the marginal cost curve, or $3,200.)
(Producer surplus is the same as what total surplus would be under perfect competition, which is the entire area between the demand curve and the marginal cost curve, or $3,200.)
question
In order for third-degree discrimination to be possible, which of the following features is not required?
a) market power
b) prevention of resale
c) identification of each customer's demand before purchase
d) customers with different demand curves
a) market power
b) prevention of resale
c) identification of each customer's demand before purchase
d) customers with different demand curves
answer
identification of each customer's demand before purchase
(The firm need only be able to identify different groups of consumers with different price sensitivities.)
(The firm need only be able to identify different groups of consumers with different price sensitivities.)
question
A golf course has frequent players whose demand is Qf = 24 - 0.3P and infrequent players whose demand is Qi = 10 - 0.1P. Combined market demand is Q = 34 - 0.4P. The marginal cost and average total cost of providing a round of golf are $20. How much higher will profit be if the golf course uses third-degree price discrimination instead of charging all golfers the same price?
a) $0
b) $7.50
c) $10
d) $110
a) $0
b) $7.50
c) $10
d) $110
answer
$7.50
(The two groups do have different demand elasticities, so there is an advantage to third-degree price discrimination.)
(The two groups do have different demand elasticities, so there is an advantage to third-degree price discrimination.)
question
An airline sells seats on its flights to business travelers whose demand is QB = 300 - P and to vacation travelers whose demand is QV = 150 - 0.5P. Combined market demand is Q = 450 - 1.5P. The marginal cost and average total cost of providing a seat on a flight are $200. How much higher will profit be if the airline uses third-degree price discrimination instead of charging all travelers the same price?
a) $0
b) $250
c) $400
d) $1,000
a) $0
b) $250
c) $400
d) $1,000
answer
$0
(There is no difference because the optimal price for each group is the same ($250). Third-degree price discrimination is impossible in this case because the two groups have the same price elasticity of demand at their optimal quantities (-5).)
(There is no difference because the optimal price for each group is the same ($250). Third-degree price discrimination is impossible in this case because the two groups have the same price elasticity of demand at their optimal quantities (-5).)
question
If a firm practices third-degree price discrimination, the price charged should be higher in the market where demand is:
a) higher.
b) lower.
c) more price elastic.
d) less price elastic.
a) higher.
b) lower.
c) more price elastic.
d) less price elastic.
answer
less price elastic.
(In each submarket, the percentage markup over marginal cost should be equal to the inverse of the price elasticity of demand for that market. Thus, the market with the lower elasticity should be charged the higher price.)
(In each submarket, the percentage markup over marginal cost should be equal to the inverse of the price elasticity of demand for that market. Thus, the market with the lower elasticity should be charged the higher price.)
question
The key difference between markets where third-degree price discrimination is possible and markets where second-degree price discrimination is possible is whether:
a) resale is possible.
b) customers have the same demand curves.
c) firms have market power.
d) firms can identify customers' demand before the customers make a purchase.
a) resale is possible.
b) customers have the same demand curves.
c) firms have market power.
d) firms can identify customers' demand before the customers make a purchase.
answer
firms can identify customers' demand before the customers make a purchase.
(Second-degree price discrimination is possible when firms cannot directly observe which customers have which type of demand before purchase. Third-degree price discrimination is not possible if this is the case.)
(Second-degree price discrimination is possible when firms cannot directly observe which customers have which type of demand before purchase. Third-degree price discrimination is not possible if this is the case.)
question
In order for price discrimination via a quantity discount to work:
a) customers who purchase larger quantities must have relatively elastic demand.
b) customers who purchase larger quantities must have relatively inelastic demand.
c) customers who pay a relatively high price must have relatively elastic demand.
d) customers who pay a relatively low price must have relatively inelastic demand.
a) customers who purchase larger quantities must have relatively elastic demand.
b) customers who purchase larger quantities must have relatively inelastic demand.
c) customers who pay a relatively high price must have relatively elastic demand.
d) customers who pay a relatively low price must have relatively inelastic demand.
answer
customers who purchase larger quantities must have relatively elastic demand.
(If customers pay a lower per-unit price when they buy larger quantities, it must be the case that those who buy larger quantities have more-elastic demand.)
(If customers pay a lower per-unit price when they buy larger quantities, it must be the case that those who buy larger quantities have more-elastic demand.)
question
A firm wants to offer a quantity discount in order to price-discriminate between buyers who are relatively uninterested in the product and buyers who are obsessively interested in it. The uninterested customers have demand of QU = 30 - 0.5P. The package offered to them contains 10 units of the good at a price of $40 each. Which of the following packages designed for the obsessed customers are incentive compatible?
a) 60 units at a price of $10 each
b) 40 units at a price of $10 each
c) 60 units at a price of $20 each
d) 40 units at a price of $15 each
a) 60 units at a price of $10 each
b) 40 units at a price of $10 each
c) 60 units at a price of $20 each
d) 40 units at a price of $15 each
answer
60 units at a price of $20 each
(Purchasing this package instead would decrease consumer surplus by $500.)
(Purchasing this package instead would decrease consumer surplus by $500.)
question
Which of the following conditions do not have to be met in order for indirect price discrimination by versioning to work?
a) The firm's customers must have different demand curves.
b) The marginal costs of producing each version of the product must be the same.
c) The firm must be able to prevent resale.
d) The firm must have market power.
a) The firm's customers must have different demand curves.
b) The marginal costs of producing each version of the product must be the same.
c) The firm must be able to prevent resale.
d) The firm must have market power.
answer
The marginal costs of producing each version of the product must be the same.
(The marginal cost of producing each version can be different, but the markup of price over marginal cost must be bigger for the versions bought by customers with less-elastic demand.)
(The marginal cost of producing each version can be different, but the markup of price over marginal cost must be bigger for the versions bought by customers with less-elastic demand.)
question
Willingness to pay (per month)
Weight machines
Abe $60
Betty 50
Chris 25
Indoor pool
Abe $50
Betty 125
Chris 140
This table shows the willingness to pay of the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?
a) $60 for the weight room, $140 for the pool, or $175 for both
b) $50 for the weight room, $125 for the pool, or $165 for both
c) $25 for the weight room, $50 for the pool, or $70 for both
d) $60 for the weight room, $130 for the pool, or $175 for both
Weight machines
Abe $60
Betty 50
Chris 25
Indoor pool
Abe $50
Betty 125
Chris 140
This table shows the willingness to pay of the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?
a) $60 for the weight room, $140 for the pool, or $175 for both
b) $50 for the weight room, $125 for the pool, or $165 for both
c) $25 for the weight room, $50 for the pool, or $70 for both
d) $60 for the weight room, $130 for the pool, or $175 for both
answer
$60 for the weight room, $140 for the pool, or $175 for both
(This set of prices would generate $295 of producer surplus, the most of the four options.)
(This set of prices would generate $295 of producer surplus, the most of the four options.)
question
Which of the following features is needed to make bundling a possible price discrimination strategy but is not required for any other price discrimination strategies?
a) Customers must have identical demand curves.
b) The firm does not learn about customer demand until after purchase.
c) Demand for two products must be negatively correlated.
d) The firm must not have market power.
a) Customers must have identical demand curves.
b) The firm does not learn about customer demand until after purchase.
c) Demand for two products must be negatively correlated.
d) The firm must not have market power.
answer
Demand for two products must be negatively correlated.
(This strategy works because a bundled pricing option that pairs a desired good with a less-desired good results in customers purchasing the good that they do not care for.)
(This strategy works because a bundled pricing option that pairs a desired good with a less-desired good results in customers purchasing the good that they do not care for.)
question
Which of the following features is not needed for price discrimination using a two-part tariff to work?
a) The firm must have market power.
b) The firm must be able to prevent resale.
c) The firm must learn about its customers' demands before purchases are made.
d) The firm's customers must have different demand curves.
a) The firm must have market power.
b) The firm must be able to prevent resale.
c) The firm must learn about its customers' demands before purchases are made.
d) The firm's customers must have different demand curves.
answer
The firm's customers must have different demand curves.
(Two-part tariffs are in fact easier to implement if all customers have identical demand because they can then all be charged the same fixed fee.)
(Two-part tariffs are in fact easier to implement if all customers have identical demand because they can then all be charged the same fixed fee.)
question
A firm faces a market demand curve P = 50 - 5Q. It has a constant marginal cost of $10. Relative to standard monopoly pricing, how would a block pricing strategy where the first four units can be purchased for a price of $30 each but two more units can be purchased for an additional $20 each change consumer surplus and producer surplus?
a) Consumer surplus would decrease by $10, and producer surplus would increase by $20.
b) Consumer surplus would increase by $10, and producer surplus would increase by $20.
c) Consumer surplus would increase by $20, and producer surplus would increase by $10.
d) Consumer surplus would increase by $20, and producer surplus would increase by $20.
a) Consumer surplus would decrease by $10, and producer surplus would increase by $20.
b) Consumer surplus would increase by $10, and producer surplus would increase by $20.
c) Consumer surplus would increase by $20, and producer surplus would increase by $10.
d) Consumer surplus would increase by $20, and producer surplus would increase by $20.
answer
Consumer surplus would increase by $10, and producer surplus would increase by $20.
(A price of $30 for four units produced maximizes profit under standard monopoly pricing. If an additional two units are then sold at a price of $20 each, the area above this price and below demand is $10, and the area below this price and above marginal cost is $20.)
(A price of $30 for four units produced maximizes profit under standard monopoly pricing. If an additional two units are then sold at a price of $20 each, the area above this price and below demand is $10, and the area below this price and above marginal cost is $20.)
question
Relative to standard monopoly pricing, block pricing:
a) decreases consumer surplus, increases producer surplus, and increases total surplus.
b) increases consumer surplus, increases producer surplus, and increases total surplus.
c) decreases consumer surplus, increases producer surplus, and decreases total surplus.
d) decreases consumer surplus, decreases producer surplus, and decreases total surplus.
a) decreases consumer surplus, increases producer surplus, and increases total surplus.
b) increases consumer surplus, increases producer surplus, and increases total surplus.
c) decreases consumer surplus, increases producer surplus, and decreases total surplus.
d) decreases consumer surplus, decreases producer surplus, and decreases total surplus.
answer
increases consumer surplus, increases producer surplus, and increases total surplus.
(Under block pricing, the standard monopoly pricing quantity and price still occur, so the surplus that results from it is still achieved. However, additional units beyond this are sold at a lower price, adding to both consumer and producer surplus, and thus total surplus.)
(Under block pricing, the standard monopoly pricing quantity and price still occur, so the surplus that results from it is still achieved. However, additional units beyond this are sold at a lower price, adding to both consumer and producer surplus, and thus total surplus.)
question
Which of the following results in the highest amount of producer surplus?
a) bundling
b) third-degree price discrimination
c) block pricing
d) two-part tariffs
a) bundling
b) third-degree price discrimination
c) block pricing
d) two-part tariffs
answer
two-part tariffs
(A two-part tariff maximizes total surplus, and all surplus achieved is total surplus. This strategy, along with first-degree price discrimination, achieves the highest possible amount of producer surplus.)
(A two-part tariff maximizes total surplus, and all surplus achieved is total surplus. This strategy, along with first-degree price discrimination, achieves the highest possible amount of producer surplus.)
question
Which of the following results in the highest amount of consumer surplus?
a) first-degree price discrimination
b) third-degree price discrimination
c) block pricing
d) two-part tariffs
a) first-degree price discrimination
b) third-degree price discrimination
c) block pricing
d) two-part tariffs
answer
block pricing
(Block pricing increases consumer surplus relative to standard monopoly pricing. All other strategies listed reduce consumer surplus relative to standard monopoly pricing.)
(Block pricing increases consumer surplus relative to standard monopoly pricing. All other strategies listed reduce consumer surplus relative to standard monopoly pricing.)
question
Which of the following results in the highest amount of total surplus?
a) third-degree price discrimination
b) block pricing
c) first-degree price discrimination
d) bundling
a) third-degree price discrimination
b) block pricing
c) first-degree price discrimination
d) bundling
answer
first-degree price discrimination
(First-degree price discrimination maximizes total surplus because the same quantity is produced as under perfect competition, but all surplus achieved is total surplus. This strategy achieves the highest possible amount of total surplus and has no deadweight loss.)
(First-degree price discrimination maximizes total surplus because the same quantity is produced as under perfect competition, but all surplus achieved is total surplus. This strategy achieves the highest possible amount of total surplus and has no deadweight loss.)
question
Equilibrium in oligopoly is different from other market structures because:
a) The firms seek to maximize joint profit rather than their own individual profit.
b) Each firm's action influences what the other companies want to do.
c) There is no single equilibrium price.
d) There is no single equilibrium quantity.
a) The firms seek to maximize joint profit rather than their own individual profit.
b) Each firm's action influences what the other companies want to do.
c) There is no single equilibrium price.
d) There is no single equilibrium quantity.
answer
Each firm's action influences what the other companies want to do.
(For example, if one firm changes its quantity, then the quantity that maximizes profit for the other firms changes. This is not the case in all other market structures.)
(For example, if one firm changes its quantity, then the quantity that maximizes profit for the other firms changes. This is not the case in all other market structures.)
question
Two firms form an oligopoly in the market for soft drinks. Each must decide whether to advertise its product in order to try to attract customers away from the competition. Advertising is very expensive, and if both firms do it, there will be no net effect of the advertising; both firms will end up with the same number of customers they started with. But if only one firm advertises, it will pull away a substantial number of customers from the competition. What is the likely outcome of this situation?
a) Both firms advertise.
b) Only one firm advertises.
c) Neither firm advertises.
d) Both firms shut down production to avoid the advertising costs.
a) Both firms advertise.
b) Only one firm advertises.
c) Neither firm advertises.
d) Both firms shut down production to avoid the advertising costs.
answer
Both firms advertise.
(Although both firms are worse off because they pay the cost to advertise and gain no new customers, both firms advertising is the equilibrium outcome because each firm has an incentive to advertise if the other firm does not.)
(Although both firms are worse off because they pay the cost to advertise and gain no new customers, both firms advertising is the equilibrium outcome because each firm has an incentive to advertise if the other firm does not.)
question
Firms in an oligopoly:
a) have an easy time colluding with each other and acting as a single monopolist would because doing so increases profit.
b) never collude with each other.
c) always collude with each other.
d) have a difficult time doing so because each firm can increase profit by breaking the agreement and increasing output.
a) have an easy time colluding with each other and acting as a single monopolist would because doing so increases profit.
b) never collude with each other.
c) always collude with each other.
d) have a difficult time doing so because each firm can increase profit by breaking the agreement and increasing output.
answer
have a difficult time doing so because each firm can increase profit by breaking the agreement and increasing output.
(Assuming that all other firms are doing their part and are producing their share of the monopoly quantity, a firm's best response (the choice that maximizes profit given that other firms behave in this way) is to produce more than its share of the monopoly quantity.)
(Assuming that all other firms are doing their part and are producing their share of the monopoly quantity, a firm's best response (the choice that maximizes profit given that other firms behave in this way) is to produce more than its share of the monopoly quantity.)
question
Two firms, A and B, each with a marginal cost of $50, form an oligopoly whose market demand is P = 650 − 10Q. If the firms are able to collude successfully, what quantity will each produce and what price will they charge?
a) a quantity of 30 each and a price of $350
b) a quantity of 20 each and a price of $250
c) a quantity of 15 each and a price of $350
d) a quantity of 30 each and a price of $50
a) a quantity of 30 each and a price of $350
b) a quantity of 20 each and a price of $250
c) a quantity of 15 each and a price of $350
d) a quantity of 30 each and a price of $50
answer
a quantity of 15 each and a price of $350
(The total quantity and price that maximize a monopoly's profit are 30 and $350. The quantity is then divided equally between the two firms.)
(The total quantity and price that maximize a monopoly's profit are 30 and $350. The quantity is then divided equally between the two firms.)
question
If the number of firms in the cartel increases:
a) collusion becomes more difficult.
b) collusion becomes easier.
c) there is no impact on how difficult it is for the firms to collude.
d) the harm caused to firms who do not break the agreement grows.
a) collusion becomes more difficult.
b) collusion becomes easier.
c) there is no impact on how difficult it is for the firms to collude.
d) the harm caused to firms who do not break the agreement grows.
answer
collusion becomes more difficult.
(Cheating becomes more rewarding and thus more pervasive as the number of firms in the cartel grows.)
(Cheating becomes more rewarding and thus more pervasive as the number of firms in the cartel grows.)
question
Which of the following factors does not make collusion easier?
a) a reliable way to detect and punish cheaters
b) little variation in marginal cost among the members of the cartel
c) firms in the cartel care about the future
d) an increase in the number of firms in the cartel
a) a reliable way to detect and punish cheaters
b) little variation in marginal cost among the members of the cartel
c) firms in the cartel care about the future
d) an increase in the number of firms in the cartel
answer
an increase in the number of firms in the cartel
(Cheating becomes more rewarding and thus more pervasive as the number of firms in the cartel grows, so maintaining collusion becomes more difficult, not easier.)
(Cheating becomes more rewarding and thus more pervasive as the number of firms in the cartel grows, so maintaining collusion becomes more difficult, not easier.)
question
In the market for widgets, two firms sell identical products, compete by choosing the price at which they sell their product, and choose their prices at the same time. What will the equilibrium price and quantity be relative to what would occur if the market were instead perfectly competitive?
a) the same quantity and the same price
b) a lower quantity and a higher price
c) a lower quantity and a lower price
d) a lower quantity and the same price
a) the same quantity and the same price
b) a lower quantity and a higher price
c) a lower quantity and a lower price
d) a lower quantity and the same price
answer
the same quantity and the same price
(Each firm has an incentive to undercut the other firm's price by one cent in order to capture the entire market and increase profit. This remains true until both firms cut their price all the way down to marginal cost, where firms break even. They will not cut their price any further because they would lose money if they did so.)
(Each firm has an incentive to undercut the other firm's price by one cent in order to capture the entire market and increase profit. This remains true until both firms cut their price all the way down to marginal cost, where firms break even. They will not cut their price any further because they would lose money if they did so.)
question
Total demand for a product is 3,000 units. There are two firms, A and B, in this market. Each has a marginal cost of $50. What price and quantity will each firm produce if the firms engage in Bertrand competition?
a) Each will produce 1,500 units and charge a price of $75 so that they each make a profit.
b) Each will produce 1,500 units and charge a price of $50.
c) One firm will charge $50 and sell no units; the other firm will charge $49.99 and produce 3,000 units.
d) One firm will charge $70 and sell no units the other firm will charge $69.99 and produce 3,000 units.
a) Each will produce 1,500 units and charge a price of $75 so that they each make a profit.
b) Each will produce 1,500 units and charge a price of $50.
c) One firm will charge $50 and sell no units; the other firm will charge $49.99 and produce 3,000 units.
d) One firm will charge $70 and sell no units the other firm will charge $69.99 and produce 3,000 units.
answer
Each will produce 1,500 units and charge a price of $50.
(For any price higher than $50, each firm has an incentive to undercut the other firm's price by one cent in order to capture the entire market and increase profit. This remains true until both firms cut their price all the way down to $50, where firms break even. They will not cut their price any further because they would lose money if they did so.)
(For any price higher than $50, each firm has an incentive to undercut the other firm's price by one cent in order to capture the entire market and increase profit. This remains true until both firms cut their price all the way down to $50, where firms break even. They will not cut their price any further because they would lose money if they did so.)
question
If the number of firms in the market under Bertrand competition increases:
a) the market price will decrease and the market quantity will increase because collusion becomes more difficult.
b) the market price will decrease due to the increased competition, but the market quantity will stay the same.
c) the market price and quantity will stay the same.
d) the market price will stay the same, but the market quantity will increase, since there are more firms producing the good.
a) the market price will decrease and the market quantity will increase because collusion becomes more difficult.
b) the market price will decrease due to the increased competition, but the market quantity will stay the same.
c) the market price and quantity will stay the same.
d) the market price will stay the same, but the market quantity will increase, since there are more firms producing the good.
answer
the market price and quantity will stay the same.
(Under the assumptions of the Bertrand model the equilibrium price is equal to marginal cost and the quantity is fixed regardless of how many firms are in the market.)
(Under the assumptions of the Bertrand model the equilibrium price is equal to marginal cost and the quantity is fixed regardless of how many firms are in the market.)
question
In the Cournot competition model:
a) firms charge the monopoly price.
b) firms achieve the greatest possible joint profit.
c) firms charge the same price as they would if the market were instead perfectly competitive.
d) firms choose the quantity that maximizes their own profit given the choice of the other firms.
a) firms charge the monopoly price.
b) firms achieve the greatest possible joint profit.
c) firms charge the same price as they would if the market were instead perfectly competitive.
d) firms choose the quantity that maximizes their own profit given the choice of the other firms.
answer
firms choose the quantity that maximizes their own profit given the choice of the other firms.
(Firms compete by simultaneously choosing their quantity, and each firm chooses a quantity such that all firms maximize profit given the choices of the other firms.)
(Firms compete by simultaneously choosing their quantity, and each firm chooses a quantity such that all firms maximize profit given the choices of the other firms.)
question
Two firms, A and B, each with a marginal cost of $50, form an oligopoly whose market demand is P = 650 − 10Q. If the market is defined by Cournot competition, what quantity will they produce and what price will they charge?
a) A quantity of 30 each and a price of $350
b) A quantity of 20 each and a price of $250
c) A quantity of 15 each and a price of $350
d) A quantity of 30 each and a price of $50
a) A quantity of 30 each and a price of $350
b) A quantity of 20 each and a price of $250
c) A quantity of 15 each and a price of $350
d) A quantity of 30 each and a price of $50
answer
A quantity of 20 each and a price of $250
(A quantity of 20 per firm and a price of $250 constitute the Nash equilibrium outcome.)
(A quantity of 20 per firm and a price of $250 constitute the Nash equilibrium outcome.)
question
Two milk producers, A and B, each with a marginal cost of $50, form an oligopoly whose market demand is P = 650 − 10Q. If the firms attempt to collude and firm B produces 15 gallons (half the monopoly output), what is firm A's optimal quantity?
a) 15
b) 20
c) 22.5
d) 30
a) 15
b) 20
c) 22.5
d) 30
answer
22.5
(Firm A's best response to any quantity firm B produces is QA = 30 − 0.5QB. So if firm B produces 15 gallons, firm A's best response is to produce 30 − 0.5(15) = 22.5 gallons.)
(Firm A's best response to any quantity firm B produces is QA = 30 − 0.5QB. So if firm B produces 15 gallons, firm A's best response is to produce 30 − 0.5(15) = 22.5 gallons.)
question
Which of the following is true about the comparison between the predicted outcomes of the collusion, Cournot, and Bertrand models?
a) The Bertrand model predicts the lowest price.
b) The Cournot model predicts the highest price.
c) The collusion model predicts the lowest total industry profit.
d) The Bertrand model predicts the highest total industry profit.
a) The Bertrand model predicts the lowest price.
b) The Cournot model predicts the highest price.
c) The collusion model predicts the lowest total industry profit.
d) The Bertrand model predicts the highest total industry profit.
answer
The Bertrand model predicts the lowest price.
(Firms charge the price that would be chosen under perfect competition, which is marginal cost. No firm would ever charge a price lower than marginal cost, else they would make a loss.)
(Firms charge the price that would be chosen under perfect competition, which is marginal cost. No firm would ever charge a price lower than marginal cost, else they would make a loss.)
question
If the number of firms in the market under Cournot competition increases:
a) the market price will decrease and the market quantity will increase.
b) the market price will decrease due to the increased competition, but the market quantity will stay the same.
c) the market price and quantity will stay the same.
d) the market price will stay the same, but the market quantity will increase, since there are more firms producing the good.
a) the market price will decrease and the market quantity will increase.
b) the market price will decrease due to the increased competition, but the market quantity will stay the same.
c) the market price and quantity will stay the same.
d) the market price will stay the same, but the market quantity will increase, since there are more firms producing the good.
answer
the market price will decrease and the market quantity will increase.
(The more firms there are, the closer price and quantity get to the perfectly competitive outcome.)
(The more firms there are, the closer price and quantity get to the perfectly competitive outcome.)
question
Under Stackleberg competition:
a) there is a first-mover advantage.
b) there is a second-mover advantage.
c) neither firm has an advantage, since both firms earn the same profit.
d) both firms produce the same quantity.
a) there is a first-mover advantage.
b) there is a second-mover advantage.
c) neither firm has an advantage, since both firms earn the same profit.
d) both firms produce the same quantity.
answer
there is a first-mover advantage.
(The first mover produces a higher quantity and earns a higher profit.)
(The first mover produces a higher quantity and earns a higher profit.)
question
Under Stackleberg competition between two firms, if both firms have the same marginal cost:
a) the total quantity produced is less than under Cournot competition.
b) both firms produce the same quantity.
c) the first mover earns a larger profit than the second mover.
d) The price is higher than under Cournot competition.
a) the total quantity produced is less than under Cournot competition.
b) both firms produce the same quantity.
c) the first mover earns a larger profit than the second mover.
d) The price is higher than under Cournot competition.
answer
the first mover earns a larger profit than the second mover.
(The first mover has an advantage and earns a higher profit, since it produces a larger quantity than the second mover.)
(The first mover has an advantage and earns a higher profit, since it produces a larger quantity than the second mover.)
question
Two milk producers, A and B, each with a marginal cost of $50, form an oligopoly whose market demand is P = 650 − 10Q. If the market is defined by Stackleberg competition and firm A moves first, what quantity will firm A produce?
a) 15 gallons
b) 20 gallons
c) 22.5 gallons
d) 30 gallons
a) 15 gallons
b) 20 gallons
c) 22.5 gallons
d) 30 gallons
answer
30 gallons
(Producing 30 maximizes profit if firm A anticipates that firm B's reaction function is QB = 30 − 0.5QA.)
(Producing 30 maximizes profit if firm A anticipates that firm B's reaction function is QB = 30 − 0.5QA.)
question
Under Bertrand competition with symmetric demand, firms have the same marginal cost but produce differentiated products, so:
a) all firms charge a price equal to marginal cost in equilibrium.
b) all firms charge the same price.
c) firms earn zero profit.
d) all firms charge different prices.
a) all firms charge a price equal to marginal cost in equilibrium.
b) all firms charge the same price.
c) firms earn zero profit.
d) all firms charge different prices.
answer
all firms charge the same price.
(Although the firms do not set price equal to marginal cost, they do charge the same price in equilibrium.)
(Although the firms do not set price equal to marginal cost, they do charge the same price in equilibrium.)
question
If products are differentiated instead of identical under Bertrand competition:
a) a firm's optimal price decreases as the price the other firm charges increases.
b) the prices charged by the firms are higher.
c) the total quantity produced by the firms is higher.
d) the profit earned by the firms is lower.
a) a firm's optimal price decreases as the price the other firm charges increases.
b) the prices charged by the firms are higher.
c) the total quantity produced by the firms is higher.
d) the profit earned by the firms is lower.
answer
the prices charged by the firms are higher.
(The firms now charge prices above marginal cost.)
(The firms now charge prices above marginal cost.)
question
Assuming a firm has the same cost structure regardless of the market structure, which of the following statements about the long run outcomes under perfect competition and monopolistic competition is true?
a) The firm produces a higher quantity under monopolistic competition.
b) The price charged by the firm is higher under monopolistic competition.
c) The firm's profit is higher under monopolistic competition.
d) The profit earned by firms is higher under perfect competition.
a) The firm produces a higher quantity under monopolistic competition.
b) The price charged by the firm is higher under monopolistic competition.
c) The firm's profit is higher under monopolistic competition.
d) The profit earned by firms is higher under perfect competition.
answer
The price charged by the firm is higher under monopolistic competition.
(Although firms make zero economic profit in the long run under both market structures, monopolistically competitive firms charge a higher price and produce a smaller quantity than perfectly competitive firms.)
(Although firms make zero economic profit in the long run under both market structures, monopolistically competitive firms charge a higher price and produce a smaller quantity than perfectly competitive firms.)
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