Econ Test 3

A firm that has market power has the ability
to affect the price of its own product

Which of the following is NOT a characteristic of a monopoly?
A monopolist is a price-taker

When economists say a market has “barriers to entry” they refer to
factors that prevent other firms from challenging a firm with market power

When a firm is awarded a patent, it is given monopoly rights to the production of that product for _____ years.

_____ is a monopoly that exists in an industry where the large economies of scale acts as its barrier to entry.
A natural monopoly

Facebook is a social networking website that is used by a growing number of individuals. Because of its popularity, it is now more difficult for a new networking websites to enter and compete with Facebook. Facebook enjoys _____ as a barrier for others to enter the market.
a network externality

The demand curve that a monopolist faces is
the market demand curve

Refer to Table 10.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fourth unit of output is

Which of the following best characterizes the tradeoff faced by a monopolist when deciding what quantity to produce?
The firm gets more revenue from new customers by increasing output, but gets less revenue from existing customers given that if lowered its price.

In the long run, the main reason that a monopolist can earn positive economic profits while a perfectly competitive firm cannot is
there are no barriers to entry in a perfectly competitive market.

Suppose that Figure 10.4 shows a monopolist’s demand curve, marginal revenue, and its costs. The monopolist would maximize its profit by producing a quantity of
30 units

Suppose that Figure 10.4 shows a monopolist’s demand curve, marginal revenue, and its costs. The monopolist would maximize its profit by charging a price of

Suppose that Figure 10.4 shows a monopolist’s demand curve, marginal revenue, and its costs. At the profit maximizing output level, the monopolist’s profit would be

Suppose that Figure 10.4 shows an industry’s market demand, its marginal revenue, and the production costs of a representative firm. If the industry was perfectly competitive, it would produce a quantity of
50 units

Refer to Figure 10.4. If the market was perfectly competitive, the consumer surplus would be

Refer to Figure 10.4. If the market was a monopoly, the consumer surplus would be

When governments grant patents
Both A and B are correct. (cons pay higher price, producers earn profits that are higher)

Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most correct?
The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent.

Price discrimination is when a firm charges
different prices for the same goods to different consumers.

Which conditions must hold if a firm is to engage in price discrimination?
It must be extremely difficult, if not impossible, for one consumer to resell a product to another.

A school bookstore tried to engage in price discrimination by selling novels to students and faculty for different prices. Its strategy was to increase prices to faculty and decrease prices to students. What is the most likely reason that this strategy failed?
There was nothing to prevent students from purchasing novels and reselling them to faculty.

Price discrimination always benefits
the firm and may benefit or harm the consumer.

Which of the following would NOT be considered price discrimination?
charging more money for a large luxury car than a small economy car.

Many hotel chains offer senior citizen discounts to members of AARP. This suggests that the hotels believe that senior citizens have a _____ demand for hotel rooms than non-seniors.
more elastic

Price discrimination is related to elasticity because
the firm can increase revenues by charging customers with elastic demands lower prices and charging customers with inelastic demands higher prices.

Because demand for air travel from people who are traveling on vacation is more _____, the airlines offer leisure travelers lower prices than business travelers.

If your marginal cost is $1 and you are interested in maximizing your revenues, how would you adjust your prices?
Decrease student price and increase faculty price.

Table 10.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its revenue from students under single price policy?

When a second firm enters a monopolist’s market
market price will drop.

When a second firm enters a market, the original firm’s profits decline because
all of the above are correct. (og firm pr decr, og firm qty decr, og firm ATC incr)

Empirical studies suggest that when a large number of firms are present in a market, prices are usually _____ and profits are usually _____ than when there are only a few firms in a market.
lower; lower

After the U.S. government deregulated the trucking industry
freight prices fell

The Motor Carrier Act of 1980 resulted in
All of the above are correct (lower freight prices, more firms, lower value of truck lic.)

Recall the Application on “Name Brands Versus Store Brands.” In stores that introduce store brands at a lower price, usually the price of the name brand
fell, but stayed above the price of the store brand.

Which of the following is NOT a characteristic of a monopolistically competitive market?
Firms hold patents on their products.

Which of the following is NOT a characteristic of a monopolistically competitive market?
There are substancial barriers to entry.

Which of the following is the reason why pharmaceutical firms are NOT monopolistically competitive?
there are barriers of entry in the market, like patents

Monopolistically competitive firms differentiate their products by
all of the above (sell diff locat, create special aura, sell prods with slightly diff charac)

Nike has used Michael Jordan to create the impression that Air Jordan basketball shoes are superior to any other basketball shoe. Nike is attempting to
differentiate Air Jordan basketball shoes from other types of basketball shoes.

A monopolistically competitive market is one in which
many firms sell similar yet slightly different products.

The word “monopolistic” in the label “monopolistic competition” refers to the fact that
each firm produces a slightly different version of the product

The word “competition” in the label “monopolistic competition” refers to the fact that
firms vie against each other to get customers to buy their version of the product.

Under the conditions of monopolistic competition
economic profit is zero in the long run

If firms in a monopolistically competitive market are earning economic profits greater than zero in the short run, then in the long run
profits will decrease

Suppose that a monopolistically competitive market is in its long-run equilibrium. If the market demand curve shifts to the right due to change in consumer preferences,
firms will earn positive economic profits in the short-run

Suppose coffee is sold in a monopolistically competitive market, where coffee is differentiated by coffee shop location. As firms enter in the long run and the price of coffee falls
the market quantity of coffee demanded will increase, but the quantity of coffee supplied by any individual coffee shop declines.

As firms enter a monopolistically competitive market in the long run
price decreases, the market quantity demanded increases, and the quantity supplied by an individual firm decreases

Figure 11.1 depicts demand and costs for a monopolistically competitive firm. At the point maximizing output level,
this firm is earning economic profits equal to Q1 (P1-AC1).

Figure 11.2 shows demand and costs for a monopolistically competitive firm. At the profit maximizing output level, the firm’s profit is

Figure 11.3 shows demands and costs for a monopolistically competitive firm. When the firm’s demand curve shifts from D1 to D2 and to D3, in the long-run we would expect
the firm to earn a zero economic profit

The monopolistically competitive firm in Figure 11.5 will produce where

Where the monopolistically competitive firm in Figure 11.5 produces it will
make a zero economic profit

Recall the Application “Opening a Dunkin Donuts Shop”. The $40,000 franchise fee is a
fixed cost

A benefit to consumers of monopolistically competitive markets is that
consumers have a variety of products from which to choose

Monopolistically competitive markets are likely perfectly competitive markets because in both markets firms
face a large number of competitors

Which of the following characteristics of the monopolistically competitive and the perfectly competitive market will cause the firm to earn zero profits in the long run?
no barriers to entry

In which of the following ways is a monopolistically competitive firm like a perfectly competitive firm?
Long-run economic profits are equal to zero

The main purpose of hiring the celebrity endorser is to
make the customers try the product for the first time

If a firm that makes $100 profit per pair of shoes pays Lebron James $2,000,000 to endorse their basketball shoes, then to make the endorsement pay off they must sell at least
20,000 more pairs of shoes

When there are just a few firms in the industry, the industry structure is most likely to be
an oligopoly market

When a few firms sell similar products in a market, the market structure is most likely to be
an oligopoly

The four-firm concentration ratio measures the
percentage of total output in a market produced by the four largest firms

The four-firm concentration ratio for the cigarette market is 93%. This means that
all of the above (olig, four largest produce 93%, there is high deg. of concentr in cigs)

Oligopoly differs from monopoly and perfect competition in that
all of the above (firms act strat, there are few firms, firms consider each other)

Which one of the following is the best example of an oligopolistic industry?
soft drinks

A special case of an oligopoly where there are only two firms is called
a duopoly

An arrangement under which a number of firms acts as a single firm and coordinate their pricing decisions is
price fixing

Firms in a cartel usually charge
the same price

In general, the market price in an oligopoly market is
higher than in perfect competition

In general, the quantity of output in an oligopoly market is
lower than in perfect competition

Figure 12.1 shows a successful price-fixing arrangement (cartel) between two identical firms. If the cartel collapses and the two firms compete against each other, the price will be _____ and the quantity will be _____.
lower; greater

Figure 12.2 shows demand, marginal revenue, and costs of a duopolist. If the two duopolists have the same costs and split the market equally, each profit maximizing duopolist will earn a profit of _____.

The incentive to charge a low price even though it leads to lower profits in Figure 12.3 is an example of
the duopolists’ dilemma

Consider Figure 12.3. If Becky and David could coordinate their decisions then
they would both choose to charge a high price and earn profits of 90 each

Consider Figure 12.3. If the players choose independently, what will be the outcome?
Becky chooses a low price and David chooses a low price.

Price fixing tends to fail in an oligopoly because
each firm has an incentive to underprice the other firms.

An action that is the best choice under all conditions is known as a
dominant strategy

A Nash Equilibrium in a game is that outcome in which
each player is doing the best he or she can given the other player’s action

If a firm engages in guaranteed price matching, that firm picks a
high price but instantly switches to a low price if its competitors choose a low price.

The rational outcome to a guaranteed price matching or “meet-the-competition” policy is that
both firms will sell at the high price

What makes a grim trigger strategy “grim” is
if one player underprices, then the other player drops the price so far that profits for both firms are zero

Duopoly pricing, grim trigger strategy, and tit-for-tat all promote cartel pricing by
penalizing the underpricer

If two firms use a tit-for-tat scheme to maintain cartel pricing and one firm chooses a high price in the current time period then
the other firm will choose a high price in the next time period

The kinked demand curve model is a model of pessimism because each firm
assumes the worst about how its competitors will respond to a change in price.

In a kinked demand model, that part of the demand curve below the kink is
less elastic than the region above the kink

Under the kinked demand model when one firm _____ its price, the other firms _____ their price.
raises; don’t change

Consider Figure 12.5. If player A and Player B could cooperate then
A would spend 1 year in jail and B would spend 1 year in jail

Consider Figure 12.5. The “dilemma” in the prisoners’ dilemma is that
both players would be better off by not confessing, but confessing is a dominant strategy

An insecure monopoly is one where
the possibility of a second firm entering exists

Figure 12.8 depicts an advertising game between two stores. The outcome of the game will be that
both stores choose to advertise

A monopoly may arise due to
all of the above (patent, large eco of scale, net work ext)

A network externality is when
the value of a product to a consumer increase with the number of other consumers who use it

For a monopolist, marginal revenue _____ for all units of output except the first unit.
is less than the price of output

If a monopolist is maximizing its profits, we know that it has
equated marginal cost and marginal revenue

The firm in Figure 10.3 will charge

The firm in Figure 10.3 will produce

Where it wants to produce the firm in Figure 10.3 will
make a positive economic profit

Suppose that Figure 10.5 shows a monopolist’s demand curve, marginal revenue, and its cost. At the profit maximizing output level and price, the consumer surplus would be

When a second firm enters a monopolist’s market,
the former monopolist’s average cost increases as its output level decreases

The monopolistic competitive industry in Figure 11.5 will tend to
remain the same size

The more product differentiation in the market, the _____ the firm specific demand curve. The less product differentiation in the market, the _____ the firm specific demand curve.
steeper; flatter

An oligopoly might occur as a result of
all of the above (adver, econ of scale, govt barrier)

Consider Figure 12.3. Becky’s dominant strategy is _____ and David’s dominant strategy is _____.
low; low