ABM Final

Which of the following is a characteristic of a monopoly market?

substantial barriers to entry

The market price in a perfectly competitive market is $15 & 2,000 units are bought & sold. Assume the market becomes monopolized. What would you expect to happen to the number of units bought & sold?

It would fall below 2,000 units

Which of the following is a requirement for successful price discrimination?

sellers must have some market power

Suppose that a monopolist is selling 100 units of a product at a price of $20 each. If the avg variable cost at this level of output is $10.50 & avg fixed cost at this level of output is $8, how much total economic profit is the firm earning?

$150

Neither a monopoly nor a perfectly competitive firm:

face upward-sloping demand curves

What happens to consumer surplus when a firm engages in perfect price discrimination?

it is reduced to zero

Kip invents a device that extracts water from a tuna fish can after it is opened. Kip most likely have a monopoly on this invention bc he has:

a patent

The following figure depicts a monopoly market. Which area represents deadweight loss from monopoly?

In a competitive market, output would be Q2, where the short-run supply curve (the portion of the marginal cost curve above avg total cost) crosses demand. The output in a monopoly market is Q1.

Which of the following is NOT a requirement for successful price discrimination?

seller must provide a product for which there are no close substitutes & sellers must sell a product that has a high profit margin

Ken's Barber Shop has a tremendous amt of power over the market equilibrium price for haircuts in its geographic area. This means that Ken's Barber Shop:

has market power

The profit maximizing level of output for a monopoly occurs where:

MR = MC < P

___ involves charging different consumer groups a different price.

Third-degree price discrimination

Metropolitan Power & Light is a monopoly in the electrical generation & distribution industry. If its marginal revenue equals $2 when its output is 100,000kilowatt hours, what is its marginal cost if it is maximizing profits?

$2

For a competitive firm, the profit-maximizing quantity is found where marginal revenue (MR) equals marginal Cost (MC). For a monopoly, the profit-maximizing quantity is where:

MR = MC

IN August of 2010, Kodak & Apple were suing each other over the use of preview image technology. The dispute involved the unauthorized use of:

patents

The market price in a monopoly market is $15 & 2,000 units are bought & sold. Assume the market becomes perfectly competitive. What would you expect to happen to the number of units bought & sold?

it would rise above 2,000 units

The Archer Daniels Midland Company is an enormous conglomerate that grows & produces many food products. It is sometimes called the "supermarket to the world." The Company has given large donations to politicians. If these donations affect policies regarding the environment/agricultural price supports, then these financial gifts are an example of:

rent seeking

Metropolitan Power & Light is a monopoly in the electrical generation & distribution industry. It has spent a tremendous amt of money in lobbying efforts to limit the number of permits granted for wind & solar power generators. The company fears that these generators will create competition in the market. This lobbying effort is an example of:

rent seeking

Metropolitan Power & Light is a monopoly in the electrical generation & distribution industry. Since it does NOT face any competition in its industry, it has become quite lax in research & development & has NOT made any improvements to its efficiency. It also spends lavishly on its corporate retreats bc it has a high level of guaranteed profits every year. Its actions are an example of:

x-inefficiency

Market power enables businesses to:

set prices & reap profits

The National Football League (NFL) achieves market power through its ability to:

control inputs

Three barriers to entry that prevents firms from entering a market & competing in the market are control over inputs, economies of scale, &:

government protection through patents & copyrights

The figure represents a monopoly in which all customers pay the same price for the output of the monopoly. To maximize profits, the monopolist produces at a level of output in which:

marginal revenue equals marginal costs, & then the monopolist charges the highest price for that output indicated by the demand curve

A monopoly harms consumers bc:

prices are higher & output is lower than if the industry was perfectly competitive

When monopolies waste resources attempting to prevent other firms from competing w/ them, it is referred to as:

rent seeking

Price discrimination by a monopolist leads to the firm earning higher profits but it also delivers benefits to:

consumers, bc prices are lowered to potential consumers who otherwise might NOT have been able to buy the good

T/F: market power reaches its maximum potential in a monopoly

true

T/F: a profit-maximizing monopolist can charge any price to consumers

false

T/F: all monopolies earn profits

false

How do barriers to entry benefit a monopoly?

they deter new companies from competing w/ the monopolist; by avoiding potential competitors, the monopoly can maintain its market power & earn economic profits

What benefit does society derive by allowing some monopolies to be created?

While monopoly creates market power that typically results in higher prices & less output, likely yielding economic profits & reduced consumer surplus, there is still some possible benefit to society from a monopoly. Monopolies can be the drivers of innovation. Inventors & other creative people are incented to invest in products & services produced by monopolists bc of the possibility of realizing large economic profits.

Why might an airline company (assuming it's a monopoly) charge different fares to different groups of customers?

In order to maximize revenue generated from a given flight.

___ in an industry can be so large that demand is able to support only one firm

economies of scale

All of these are barriers to entry into an industry, EXCEPT:

relatively low marginal tax rates

Assume that the given level of output, a monopoly firm has marginal revenue of $9, its avg total cost is $9, & marginal cost is $7. If this firm were to continually increase its output, then:

prices will increase

The demand curve for a monopolist is:

the industry demand curve

Which statement abt the relationship btwn a firm's demand curve under perfect competition & a monopoly is TRUE?

under perfect competition, the demand curve is perfectly elastic; under a monopoly, the demand curve has elastic, unit-elastic, & inelastic portions

A deadweight loss:

is the same as welfare loss

An example of x-inefficiency is:

an executive, at corporate expense, hiring a limousine to travel one block. whenever it is raining

Which of these is NOT a condition necessary for price discrimination?

the product must be a durable good

A monopolist has four distinct groups of customers: group A has an elasticity of demand of 0.2, group b has an elasticity of demand of 0.8, group C has an elasticity of demand of 1.0, group D has an elasticity of demand of 2.0. The group paying the higest price for the product will be group:

A

When a business offers its customers bulk discounts, they are practicing:

second-degree price discrimination

Suppose a water utility compnay charges a residential customer $1.50 per 1,000 gallons for the first 30,000 gallons of water used, & $1.00 per 1,000 gallons for any amounts used in excess of 30,000 gallons of water. The water utility is practicing:

second-degree price discrimination

At movie theaters, lower prices are charged for matinees than for evening shows of the same film. The customers attending the matinees have:

higher elasticities of demand than customers attending the evening shows

If the public utility commission allows the water company to earn a normal profit, then it is enforcing a(n):

avg cost pricing rule

An unregulated natural monopolist would produce to the point at which:

MR = MC

The Federal Trade Commission Act prohibits:

unfair competitive practices and deceptive acts

If an industry is made up of five firms w/ market shares of 25%, 20%, 20%, 20%, & 15%, respectively, its Herfindahl-Hirschman Index is:

2,050

Assume that Coca-Cola has a market share of 40% and Pepsi has a market share of 30%. If Pepsi and Coca-Cola attempt to merge, will the Federal Trade Commission challenge the attempt in court?

yes; the industry is concentrated

(Figure: Monopolist Production) Based on the graph, if the marginal cost of production is constant at $20 per unit produced, then the monopolist would priduce ___ while the perfect competitor would produce ___.

20 units; 40 units

How are monopolistically competitive firms SIMILAR to monopolies?

the both produce less quantity than a competitive firm

An oligopoly models share several assumptions. Which of the following is among them?

There are significant barriers to entry

___ refer(s) to all possibilities, good & bad, that can occur.

outcomes

How does the equilibrium in a monopolistically competitive market compare to the equilibrium in a perfectly competitive market?

the equilibrium price is higher & the equilibrium output is lower in a monopolistically competitive market

Which of the following is TRUE of an oligopoly?

the firms are interdependent

Amco Airlines decides to lower its price in response to UN Airlines' price reduction. In game theory, this response is:

a strategy

Advanced Printing Systems is a firm in a monopolistically competitive market. If its marginal cost is $17 per unit in the short run, if it is maximizing a profit, & if it is selling at the equilibrium quantity, what is its marginal revenue?

$17

Which one of the following makes a cartel UNSTABLE?

the incentive to cheat

Which of the following rewards cooperation & punishes defection?

a tit-for-tat strategy

Advances Printing Systems is a firm in a monopolistically competitive market. If its marginal cost is $18 per unit in the short run, if it is maximizing profits, & if it is selling at the equilibrium quantity, what is its marginal revenue?

$18

Fat's Meats is in an oligopoly market. According to the kinked demand curve model, if it lowers its prices bc costs decrease, its competitors will:

lower their prices so they don't miss out on their market share

Find the Nash equilibrium of the following simultaneous-move noncooperative game w/ perfect information.

down & left

Advanced Printing Systems is a firm in a monopolistically competitive market. If it is selling its product at $11 at the equilibrium quantity & earning normal profit, what is its long-run avg total cost?

$11

Suppose that Subway & Quiznos both charge $7 for their foot-long sandwiches. Subway reduces the price of its foot-long sandwiches to $5. Quiznos waits to see the impact of its competitor's lower price before it responds. This is an example of:

a trembling hand trigger strategy -- allows for one mistake by the opponent before there is any retaliation

Fat's meats is part of the cartel that controls the kielbasa industry. What would cause instability in this cartel?

Fat's Meats could cheat & sell more kielbasa than it agreed to

Joe's Diner & Bev's Drive Thru, two competing restaurants, are considering whether or not to advertise. Each cell in the following table shows Bev's payoffs on the left & Joe's on the right, depending on their decisions. They play only once, choose at the same time, & have perfect information about the payoffs. Which type of game is that?

Prisoner's Dilemma

Advanced Printing Systems is a firm in a monopolistically competitive market. If it is selling its product at $12 at the equilibrium quantity & earning normal profit, what is the long-run avg total cost?

$12

Which of the following is a tit-for-tat strategy?

attacking one of your enemy's ships every time the enemy attacks one of your ships

Which characteristic does monopolistic competition NOT have in common w/ perfect competition?

products of individual firms are different

Which of the following products is likely to be the MOST differentiated?

garments sold to a retail customer

If Rosco's Tacos competes w/ eight other fast-food resteraunts in the same neighborhood, & two of those rival firms exit the market, then:

Rosco's demand curve will shift to the right

If firms in monopolistically competitive industry are experiencing economic losses in the short run, some firms will ___ the industry, ___ demand until each firm earns a normal profit

exit; increasing

Monopolistically competitive markets & perfectly competitive markets do NOT share which characteristic?

differentiated products

In an oligopoly, all the firms:

take their competitors into account when they make pricing decisions

Before deciding on a pricing strategy, Worldwide Widgets consults w/ its market intelligence team to understand what discounts the Gargantuan Gizmo Company is offering. The model BEST fits this industry is:

an oligopoly

Which action can help increase the stability of a cartel?

increase gov protection

If a cartel member is considering cheating in order to earn profits, it should:

increase the quantity it sells at the quota price

The industrial structure of cartels is an example of a(n):

cooperative game

A Nash equilibrium:

assumes that each player chooses his/her best strategy

Which games does NOT describe a Prisoner's Dilemma outcome?

a game of chicken in which one player backs down while the other player does not

The notion that individuals & firms are compelled to retaliate/punish others for engaging in noncooperative actions, but leaving the door open for future reconciliation, is BEST referred to as a(n):

tit-for-tat strategy

If Nintendo lowers the price of its product by $10, Sony responds by lowering the price of its own product by $10 & chooses NOT to cooperate again. This is an example of what type of game strategy?

grim trigger

If Nintendo lowers the price of its product by $10, Sony waits to see whether Nintendo's price cut was a temporary mistake. This is an example of what type of game strategy?

trembling hand trigger

Suppose a firm produces 20 units of output. At this level of output, ATC = 35, P = 50, MR = 30, and MC = 30. The firm's economic profit is:

$300

Game theory is the study of how:

people make decisions when each is acting in his/her own best interest, & have strategies that may yield different outcomes

A Nash equilibrium describes an outcome in which:

all players in a game maximize their expected payoffs given the information they have

When players in a game select a dominant strategy, they are:

selecting the best strategy regardless of their strategies their opponents choose

In many instances, competitive companies could agree w/ each other on key strategic items, & produce higher profits than what competition allows. Reasons this is NOT done include the ___, & the illegality of collusion.

absence of trust btwn companies

While prisoner's dilemma outcomes may produce worse results for competing companies than other alternate outcomes, such dilemmas can benefit:

third parties who do business w/ the competing companies

Some prisoner's dilemma outcomes can be resolved when the players engage in:

repeated games

T/F: Game theory can be applied in business, political science, military planning, & sports.

true

T/F: A Nash equilibrium always yields the best outcome for all participants in a game.

false

Prisoner's dilemma outcomes are uncommon

false

Provide an example of a third party benefiting from a prisoner's dilemma outcome while the game participants are worse off relative to other possible outcomes. Also, explain the nature of the benefit.

The customers (the third parties in this instance) of competing companies engaged in a game with a prisoner's dilemma might benefit from lower prices for both companies' goods and services as the companies are likely to engage in vigorous price competition.

Why is game theory important to economics?

Game theory is the study of how businesses and individuals interact with one another to achieve their goals. It helps us understand and predict behavior by participants in some economic decisions. Hence, it is an important tool for economists.

All of the following result in negative externalities, EXCEPT:

private schools

The market equilibrium price for a public good is where:

marginal cost equals the vertical summation of individual demands

A demand curve that incorporates only the private benefits of consumption when positive externalities exist would:

lie below & to the left of the demand curve that incorporates both the private & social benefits

The market demand for public goods is found by:

vertically adding the individual demand curves

What happens when the external costs of production are taken into consideration by producers?

the supply curve shifts to the left