Test2-MC-Solutions

ECO 3139 - Test 2 Part 1: Multiple choice, Choose the best answer. Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Game theory shows that A) interdependencies between firms have to be taken into account when few firms dominate the market. B) in an oligopolistic market, firms are likely to collude. C) sometimes pursuing profit maximization will not yield the highest joint profit. D) All of the above. 1) 2) What aspects of a game are specified by "the rules of the game"? A) information available to each player B) timing of players' moves C) payoffs D) All of the above 2) 3) The "Normal - Form" of a game is a description including A) the players. B) the payoffs. C) the strategies possible. D) All of the above 3) 4) The above figure shows a payoff matrix for two firms, A and B, that must choose between a high - price strategy and a low - price strategy. For firm B, A) there is no dominant strategy. B) setting a low price is the dominant strategy. C) setting a high price is the dominant strategy. D) doing the opposite of firm A is always the best strategy. 4) 1

5) The above figure shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. How many Nash equilibria are there? A) 4 B) 1 C) 2 D) 0 5) 6) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is true ? A) Only firm A will enter the market. B) Only firm B will enter the market. C) Neither firm entering is a Nash equilibrium. D) The outcome of the game is unpredictable. 6) 2

10) A competitive market structure differs from the monopoly, oligopoly, and monopolistic competition structures in the A) amount of long run profit. B) producers' ability to set price. C) entry conditions. D) profit maximization condition. 10) 11) Monopolistic Competition and perfect competition differ because A) only perfectly competitive firms will set MR = MC. B) only monopolistic competition allows for entry of other firms in the long run. C) only monopolistically competitive firms will set MR = MC. D) only competitive firms take the price as given. 11) 12) Regardless of market structure, all firms A) produce a differentiated product. B) maximize profit by setting marginal revenue equal to marginal cost. C) consider the actions of rivals. D) have the ability to set price. 12) 13) A cartel is a group of firms that attempts to A) maximize joint profit. B) increase consumer surplus. C) maximize joint revenue. D) behave independently. 13) 14) Which of the following will facilitate the enforcement of a cartel? A) most - favored - customer clauses B) meet the competition or price match C) reports of bids on government contracts D) All of the above 14) 15) The benefits from cartelizing are greater if A) the market demand elasticity is lower. B) each firm cuts its output more. C) the market demand elasticity is higher. D) the market price is higher. 15) 16) Two firms sell 100% orange juice in 10 ounce bottles. The juice is only good for one week. The two firms have contracts for all the oranges produced in a large geographic area. Each firm decides how many bottles of juice to produce at the same time. This market is best described with a A) Bertrand model. B) Cournot model. C) monopolistic competition model. D) Stackelberg model. 16) 17) The Cournot Model of Oligopoly assumes that A) firms make their decisions simultaneously. B) firms decide what quantity to produce. C) firms do not cooperate. D) All of the above. 17) 18) The Stackelberg model is more appropriate than the Cournot model in situations where A) all firms enter the market simultaneously. B) there are more than two firms. C) one firm makes its output decision before the other. D) firms will be likely to collude. 18) 4

19) The Bertrand model of price setting assumes that a firm chooses its price A) independently of what price other firms charge. B) so that joint profits are maximized. C) subject to what price rival firms are charging. D) without considering the shape of the demand curve. 19) 20) Monopolistically competitive firms face downward sloping residual demand curves because these firms A) have relatively few rivals (compared to competition). B) sell differentiated products. C) Both A and B. D) None of the above. 20) 21) In the short run, a monopolistic competitor A) sets MR = MC. B) produces at minimum efficient scale. C) produces where P = AC. D) sets P = MC. 21) 22) In the long run, a monopolistic competitor A) produces where P = AC. B) sets P > MC. C) sets MR = MC. D) All of the above. 22) 23) Minimum efficient scale refers to the lowest level of output at which A) the firm can earn a profit. B) the average cost curve is downward sloping. C) average cost is minimized. D) the firm will operate. 23) 24) The number of firms in a monopolistically competitive market will be smaller if A) the market demand curve shifts rightward. B) fixed costs are smaller. C) minimum efficient scale is lower. D) fixed costs are larger. 24) 25) In the long run, a monopolistically competitive firm A) operates at full capacity. B) produces at minimum average cost. C) earns zero economic profit. D) All of the above. 25) 5