ECON 705 Mod. 6 Self-Assessment Test with Solutions

ECON 705 Mod. 6 Self-Assessment Test with Solutions 1. The ability of a firm to raise its price while still maintaining a certain amount of sales means that the firm Select one: a. produces a complementary good. b. faces perfectly elastic demand for its product. c. produces a perfect substitute for the other products in the industry. 2. All of the following could be a barrier to entry except Select one: a. large economies of scale. b. occupational licenses (e.g., teacher certification, lawyers passing the bar exam, etc.). c. government-granted monopoly rights, as exists for many utility companies in cities. 3. A firm with market power has a demand curve that slopes downward; this implies that Select one: a. price is less than marginal revenue. b. the selling price of the current unit must be set equal to the selling price of the previous unit sold. d. marginal revenue is greater than marginal cost. 4. Firms with market power determine the optimal price and quantity by Select one: a. setting the price equal to the market price, and then equating that price with MCMC to find quantity. b. setting quantity at the point of minimum average total cost (ATCATC), and setting price equal to that ATCATC times the concentration ratio. c. adding the average fixed cost to the average total cost to find price, and producing the quantity that yields that price on the firm's demand curve. the firm demand curve. 5. A monopoly is producing a level of output at which price is $320, marginal revenue is $290, average total cost is $300, marginal cost is $290. The firm's current choice of output is Select one: a. too high. c. too low. d. More information is needed to answer this question. 6. A monopoly is producing a level of output at which price is $320, marginal revenue is $290, average total cost is $330, marginal cost is $290, and average fixed cost is $25. In the short run, this firm should choose to Select one: a. shut down. b. produce, because it would earn $30 profit per unit. d. produce and break even (zero profit). 7. A graph showing demand (DD ) and marginal revenue (MRMR ), average total cost (ATCATC ), average variable cost (AVCAVC ), and short-run marginal cost (MCMC ), with quantity (QQ ) on the horizontal axis and demand, marginal revenue, and costs in dollars on the vertical axis. DD and MRMR both have vertical intercepts of $8; MRMR has horizontal intercept at 80 units and DD has horizontal intercept at 160 units. At Q=45Q=45 , ATC=MRATC=MR at $3.50; at this Q,MC=$1.50,AVC=$2,D=$6Q,MC=$1.50,AVC=$2,D=$6 . At Q=60Q=60 , MRMR , AVCAVC , and MCMC all intersect at $2; at this Q,ATC=$3,D=$5Q,ATC=$3,D=$5 . At Q=75Q=75 , ATC=MCATC=MC at $3; at this Q,MR=$0.50,AVC=$2,D=$4Q,MR=$0.50,AVC=$2,D=$4 . At Q=80Q=80 , MC=DMC=D at $4; at this Q,MR=$0,AVC=$2,ATC=$3Q,MR=$0,AVC=$2,ATC=$3 . At Q=100Q=100 , ATC=DATC=D at $3; at this Q, AVC=$2.50AVC=$2.50 . At Q=105Q=105 , AVC=DAVC=D at $2.50; at this Q,ATC=$3.25Q,ATC=$3.25 . The profit-maximizing level of output is Select one: a. 80 units. b. 75 units. c. 105 units. d. 60 units. – where MC = MR 8. In the graph above, the firm will sell its output at a price of Select one: a. $3. b. $5. c. $2. d. $6. 9. In the graph above, the firm will be Select one: a. earning positive profit. b. earning a loss and should shut down. c. earning a loss but should stay open. d. breaking even. 10. In a monopolistically competitive market, Select one: b. every firm's demand curve is equivalent to every other firm's demand curve. c. one firm has a significant advantage in terms of market share compared to the other firms. d. it is prohibitively expensive for new firms to enter. 11. A monopolistic competitor is similar to a monopolist in that Select one: b. both earn positive economic profit in the long run. c. both are able to enforce significant entry barriers against potential competitors. d. both can set price above marginal cost. 12. In the long run, monopolistically competitive firms will Select one: b. deter entry of new firms and thus restrict market supply. c. increase the amount of substitute products produced in the industry. d. break even. 13. A graph showing demand (DD ) and marginal revenue (MRMR ), average total cost (ATCATC ), average variable cost (AVCAVC ), and short-run marginal cost (MCMC ), with quantity of output (QQ ) on the horizontal axis and revenue and costs in dollars on the vertical axis. DD and MRMR both have vertical intercepts of $40; MRMR has horizontal intercept at 400 units and DD has horizontal intercept at 800 units. At Q=150Q=150 , MC=$5MC=$5 , MR=AVC=$24MR=AVC=$24 , D=$33D=$33 , and ATC=$35ATC=$35 . At Q=300Q=300 , MR=MC=$10MR=MC=$10 , AVC=$20AVC=$20 , D=$25D=$25 , and ATC=$30ATC=$30 . At Q=450Q=450 , MRMR is negative, DD , AVCAVC , and MCMC all intersect at $17, and ATC=$26ATC=$26 . At Q=550Q=550 , MRMR is negative, D=$13D=$13 , AVC=$17AVC=$17 , and MC=ATCMC=ATC at $26. If the firm decided to produce 200 units of output, what would be the marginal revenue and the price? Select one: b. MR=$20MR=$20 , P=$7.50P=$7.50 c. MR=$0MR=$0 , P=$20P=$20 d. MR=$20MR=$20 , P=$20 14. In the graph above, the firm's optimal price is and optimal quantity is . Select one: b. $30; 350 units c. $10; 300 units d. $20; 250 units 15. In the graph above, the firm in the short run would be Select one: a. earning positive profit. b. breaking even. d. earning a loss and should shut down. 16. A distinguishing characteristic of oligopoly markets is that Select one: a. there are a large number of firms, each producing close substitutes for each other. b. entry barriers are sufficiently high to prevent any more than one firm existing in the industry. c. a firm's profitability depends on its own, as well as rival firms', decisions. d. the output of a single firm is extremely small relative to the output of all firms in the industry. 17. In game theory, a dominated strategy is Select one: a. a strategy that allows one firm to achieve greater profits than the profits of rival firms. b. a strategy that is chosen second in a sequential game. c. a strategy with the lowest payoff which nonetheless is chosen by both firms. d. a strategy whose payoffs are always lower than other strategies. 18. Two law firms compete for most of the market in the small town of Grumbleton, and must choose their advertising levels simultaneously. The following payoff table facing the two firms, Jackie Chiles Law, LLC and Lionel Hutz Law Firm, shows the weekly profit outcomes for the various advertising decision combinations. Use this payoff table to answer the following three questions. [Blank for Formatting] Hutz Advertising Level: Low Hutz Advertising Level: High Chiles Advertising Level: Low $2500/$2500 $1500/$3500 Chiles Advertising Level: High $3500/$1500 $2000/$2000 Jackie Chiles Law, LLC has Select one: a. a dominant strategy: choose a low level of advertising. b. a dominated strategy; never choose a high level of advertising. c. a dominant strategy: choose a high level of advertising. d. no dominant strategy; choose a high level if Hutz chooses high, and a low level if Hutz chooses low. 19. Lionel Hutz Law Firm has Select one: a. a dominated strategy: never choose a low level of advertising if Chiles chooses high, and never choose a high level of advertising if Chiles chooses low. b. a dominant strategy: choose a high level of advertising. c. no dominant strategy since Hutz profits are earned after profits are earned by Chiles. d. a dominant strategy: choose a low level of advertising. 20. Where is the Nash equilibrium outcome? Select one: a. Chiles choose high and Hutz choose low since Hutz has a dominant strategy while Chiles has a dominated strategy. b. Both choose low with Chiles getting a slightly larger profit. c. Chiles choose low and Hutz choose high because Hutz's low strategy is dominated. d. Both choose high and earn a relatively low combined profit. 21. Kramerica Industries and Vandelay Industries are two companies that make pricing decisions (high or low). Because of different schedules for their annual meetings, every year Kramerica makes its pricing decision first, then Vandelay makes its decision. The game tree looks like this: A game tree showing decisions between Kramerica and Vandelay . Kramerica makes the first choice at node 1, choosing either high or low. If Kramerica chooses high, Vandelay (at node 2) chooses either high (in which case Kramerica earns $20,000 and Vandelay earns $8,500) or low (in which case Kramerica earns $16,000 and Vandelay earns $9,700). If Kramerica chooses low at node 1, Vandelay (at another node 2) chooses either high (in which case Kramerica earns $23,000 and Vandelay earns $7,300) or low (in which case Kramerica earns $14,000 and Vandelay earns $6,800). Using backward induction, Kramerica presumes that if it chooses high, Vandelay will choose Select one: b. high. 22. Vandelay has Select one: a. a strategy of choosing low if Kramerica chooses high, and high if Kramerica chooses low. b. a strategy of choosing high if Kramerica chooses high, and low if Kramerica chooses low. c. a dominant strategy of choosing high. 23. The Nash equilibrium outcome is for Kramerica to choose and then Vandelay to choose . Select one: a. high; low b. low; low d. high; high 24. While they may be used to better inform or attract consumers, why else might firms use practices like price matching and sale-price guarantees? Select one: b. They are implicit ways firms can monitor each other's pricing and better cooperate with each other. c. To reduce their fixed costs. d. To make their products seem more homogenous (having closer substitutes).