Multiple Choice Answers

1) When a second firm enters a monopolist’s market, the initial demand curve facing the monopolist will:
A) shift to the left.
B) shift to the right.
C) remain the same.
D) none of the above

2) Which of the following is NOT a characteristic of a monopolistically competitive market?
A) There are many firms.
B) Firms sell products that are similar but not identical.
C) Firms must take the market price as given.
D) There are no artificial barriers to entry.

3) Suppose you operate in a monopolistically competitive market. If you sell your good at a price of $10 and your average cost of production is $8:
A) your market is in long-run equilibrium.
B) we can expect firms to enter your market and sell a similar good in the long run.
C) there will be no incentive for competing firms to enter your market in the long-run.
D) you cannot be in short-run equilibrium.

4) As firms enter a monopolistically competitive market in the long run:
A) price increases, the market quantity demanded increases, and the quantity supplied by an individual firm increases.
B) price decreases, the market quantity demanded increases, and the quantity supplied by an individual firm decreases.
C) price decreases, but firm profits increase as average costs decrease.
D) price increases and firm profits increase.

5) Figure 11.1 depicts demand and costs for a monopolistically competitive firm. At the profit maximizing output level,
A) this firm is earning economic profits equal to zero.
B) this firm is earning economic profits equal to Q1(P1 – AC1).
C) this firm is earning economic profits equal to P1(Q1 – AC1).
D) this firm is in long-run equilibrium.

6) If Figure 11.1 depicts the current situation for a monopolistically competitive firm, then in the long run we expect:
A) the firm’s demand curve to shift to the left.
B) the firm’s demand curve to shift to the right.
C) the price of the good to increase.
D) the quantity of the good sold by the firm to increase.

7) Figure 11.2 shows demand and costs for a monopolistically competitive firm. At the profit maximizing output level, the firm’s profit is:
A) $1,200.
B) $1,050.
C) $750.
D) $375.

8) Figure 11.2 shows demand and costs for a monopolistically competitive firm. In the long-run we expect:
A) more firms to enter the market.
B) the firm’s demand curve to shift to the right.
C) the price of the good to increase.
D) the average cost of production to decrease.

9) Figure 11.2 shows demand and costs for a monopolistically competitive firm. At the profit maximizing output level,
A) the firm is earning a positive economic profit and more firms are expected to enter the market.
B) the firm is earning a zero economic profit and no firms are expected to enter the market.
C) the firm is earning a negative economic profit and more firms are expected to leave the market.
D) There is not sufficient information.

10) Figure 11.2 shows demand and costs for a monopolistically competitive firm. In the long-run we expect:
A) the firm to produce more output at a higher price.
B) the firm to charge a price which is equal to its average cost of production.
C) the firm to experience a decrease in the average cost of production.
D) the firm to earn a greater profit.

11) Figure 11.2 shows demand and costs for a monopolistically competitive firm. In the long-run we expect:
A) the firm’s demand curve to shift to the right.
B) the firm’s marginal revenue curve to shift to the left.
C) the firm’s average cost curve to shift upward.
D) the firm’s marginal cost curve to shift downward.

12) If you were thinking of entering the ice cream business, would you make a product that is just like one that is already being produced? Explain.
No  – the market is saturated

13) The four-firm concentration ratio for the market depicted in Table 12.1 is:
A) 82%.
B) 40%.
C) 10%.
D) 92%.

14) Suppose that there are five firms in a market, each controlling 20% of the market. The HHI would equal
A) 2,000.
B) 100.
C) 20.
D) 1,000.

15) Figure 12.1 shows the market for a successful price-fixing arrangement (cartel) between two identical firms . When the two firms act like one and charge the same price, the market price will be ________ and each firm will produce and sell a quantity of ________.
A) $10; 200
B) $10; 100
C) $5; 500
D) $5; 250

16) Figure 12.1 shows a successful price-fixing arrangement (cartel) between two identical firms. When the two firms act like one and charge the same price, each firm will earn an economic profit of ________.
A) $1,250
B) $1,000
C) $500
D) $0

17) 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 ________.
A) higher; greater
B) higher; smaller
C) lower; greater
D) lower; smaller

18) Consider Figure 12.3. Becky’s dominant strategy is ________ and David’s dominant strategy is ________.
A) high; high
B) low; low
C) high; low
D) low; high

19) Consider Figure 12.3. Which of the following statements is true?
A) Both David and Becky have a dominant strategy.
B) Neither David nor Becky has a dominant strategy.
C) David has a dominant strategy but Becky does not.
D) Becky has a dominant strategy but David does not.

20) Consider Figure 12.3. David chooses to charge a low price:
A) only if Becky chooses a high price.
B) only if Becky chooses a low price.
C) regardless of whether Becky chooses a high or low price.
D) in order to induce Becky to choose a high price.

21) Consider Figure 12.3. If Becky’s payoff in the top rectangle were 300 instead of 90, the outcome of the game would be that:
A) both choose a high price.
B) both choose a low price.
C) Becky chooses a high price and David chooses a low price.
D) David chooses a high price and Becky chooses a low price.

22) Consider Figure 12.3. If David’s payoff in the bottom rectangle were 40 instead of 70, the outcome of the game would be that:
A) both choose a high price.
B) both choose a low price.
C) Becky chooses a high price and David chooses a low price.
D) David chooses a high price and Becky chooses a low price.

23) Consider Figure 12.3. If Becky’s payoff in the second rectangle from the top were 80 instead of 60, the outcome of the game would be that:
A) both choose a high price.
B) both choose a low price.
C) Becky chooses a high price and David chooses a low price.
D) David chooses a high price and Becky chooses a low price.

24) A Nash Equilibrium in a game is that outcome in which
A) each player is doing the best he or she can given the other player’s action.
B) the players’ profits are equal.
C) the players’ earn the highest profits possible.
D) neither player plays his or her dominant strategy.

25) The duopolists’ dilemma refers to the situation in which
A) duopolists would be better off maintaining high prices but face an incentive to choose a low price.
B) duopolists can only earn high profits by breaking the law.
C) duopolists who are engaged in price fixing have an incentive to report the behavior to the government.
D) duopolists do not have a dominant strategy.

26) Joe and Steve are duopolists who each can follow two strategies: cooperate and jointly act like a monopolist, or don’t cooperate (cheat) and act like duopolists. Their profits are as follows:
If both cooperate:       both receive $1 million
If one cooperates:       cooperator receives $200,000, cheater receives $1.2 million
If both cheat:  both receive $500,000
What will they do?

27) One method firms can use to solve the duopolists’ dilemma is to engage in:
A) predatory pricing.
B) tying contracting.
C) marginal cost pricing.
D) guaranteed price matching.

28) In Figure 12.6, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit maximizing price of $300 per ticket. What is Fly Smart’s profit per ticket?
A) $200
B) $120
C) $80
D) $0

29) The natural monopoly in Figure 13.3 wants to produce:
A) Q1.
B) Q2.
C) Q3.
D) Q4.

30) Where it wants to produce the firm in Figure 13.3 would be:
A) making a zero economic profit.
B) losing money.
C) making a positive economic profit.
D) breaking even.

31) Suppose an unregulated monopoly faces a negatively-sloped and steep average cost curve. If a second firm enters, what will happen to the first firm’s demand and average cost of production?