Micro HW 4

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Which of the following is a characteristic of a monopoly?

There is only one seller in the market.

Perfect competition is characterized by all of the following except

heavy advertising by individual sellers.

The price of a seller's product in perfect competition is determined by

market demand and market supply.

Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen?

The firm will not sell any output.

In perfect competition

the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.

If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is

$25

Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?

The firm will be able to increase its profits temporarily, but in the long run its profits will be eliminated as other firms copy the innovation.

In August 2008, Ethan Nicholas developed the iShoot application for the apple
iPhone 3G, and within five months had earned $800,000 from this program. By May
2009, Nicholas had dropped the price from $4.99 to $1.99 in an attempt to maintain sales.
This example indicates that in a competitive market,

earning an economic profit in the long run is extremely difficult.

A perfectly competitive wheat farmer in a constant-cost industry produces 3,000
bushels of wheat at a total cost of $36,000. The prevailing market price is $15. What will
happen to the market price of wheat in the long run?

The price falls to $12.

If a typical firm in a perfectly competitive industry is incurring losses, then

some firms witl exit in the long run, causing market supply to decrease and market

If a typical firm in a perfectly competitive industry is earning profits, then

new firms will enter in the long run causing market supply to increase, market price to
fall and profits to decrease.

A perfectly competitive firm's supply curve is its

marginal cost curve above its minimum average variable cost.

The key characteristics of a monopolistically competitive market structure include

sellers selling similar but differentiated products

In monopolistic competition there is/are

many sellers who each face a downward-sloping demand curve.

For a monopolistically competitive firm, marginal revenue

is less than the price.

If the demand curve for a firm is downward-sloping, its marginal revenue curve

will lie below the demand curve.

When a monopolistically competitive firm cuts its price to increase its sales, it experiences a gain in revenue due to the

output effect.

When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the

price effect

In the short run, a profit-maximizing firm's decision to produce should be guided by whether

its total revenue covers its variable cost

You have just opened a new Italian restaurant in your hometown where there are
three other Italian restaurants. Your restaurant is doing a brisk business and you attribute
your success to your distinctive northern Italian cuisine using locally grown organic
produce. What is likely to happen to your business in the long run?

Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero.

How does the long run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry?

A firm in monopolistic competition does not take full advantage of its economies of scale but a firm in perfect competition produces at the lowest average cost possible.

Which of the following is not a characteristic of long-run equilibrium in a monopolistically competitive market?

Production is at minimum average total cost.

Is a monopolistically competitive firm productively efficient?

No, because it does not produce at minimum average total cost.

Is a monopolistically competitive firm productively efficient?

No, because price is greater than marginal cost.

Consumers benefit from monopolistic competition by

being able to choose from products more closely suited to their tastes.

Brand management refers to

the efforts to maintain the differentiation of a product over time.

An oligopolistic industry is characterized by all of the following except

firms pursuing aggressive business strategies, independent of rivals' strategies.

A four-firm concentration ratio measures

the fraction of an industry's sales accounted for by the four largest firms.

The value of the four-firm concentration ratio that many economists consider indicative of the existence of an oligopoly in a particular industry is

anything greater than 40 percent.

In an oligopoly market

one firm's pricing decision affects all the other firms.

Marginal revenue for an oligopolist is

difficult to determine because the firm's demand curve is typically unknown.

Oligopolies exist and do not attract new rivals because

of barriers to entry.

Which of the following is important in determining the extent of competition in an industry?

the minimum efficient scale of production relative to market demand

Patents, tariffs and quotas are all examples of

government-imposed barriers.

The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called

game theory.

A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called

a business strategy.

All of the following are characteristics of game theory except

rules that determine what actions are allowable.

Suppose we want to use game theory to analyze how an oligopolist selects its optimal price. The cells of the payoff matrix show

the profit that each producer can expect to earn from every combination of strategies by the firms in the market.

A dominant strategy

is one that is the best for a firm, no matter what strategies other firms use.

A Nash equilibrium is

reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.

Collusion between two firms occurs when

firms explicitly or implicitly agree to adopt a uniform business strategy.

What is a prisoner's dilemma?

a game in which players act in rational, self-interested ways that leave everyone worse off

What is the dominant strategy in the prisoner's dilemma?

Each prisoner confesses because this is the rational action to pursue.

Which of the following is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma?

advertising that it will match its rival's price

In most business situations where firms compete, often they can escape the prisoner's dilemma and reach the most profitable outcome. Which of the following is a reason for this?

Most games are repeated games and firms can employ retaliation strategies against those who do not cooperate.

Should other firms, such as Apple or Toshiba, decide to develop and sell a laptop-tablet hybrid to compete with the one being developed by Intel, this best describes which of the five competitive forces?

the threat from potential entrants

A monopoly is a seller of a product

without a close substitute.

In Walnut Creek, California, there are three very popular supermarkets: Safeway, Whole Foods and Lunardi's. While Safeway remains open twenty-four hours a day, Whole Foods and Lunardi's close at 9 pm. Which of the following statements is true?

Safeway has a monopoly at midnight but not during the day.

A monopoly is characterizedby all of the following except

there are only a few sellers each selling a unique product.

A monopolist faces

a downward-sloping demand curve.

Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?

Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.

A patent or copyright is a barrier to entry based on

government action to protect a producer.

For which of the following firms is patent protection of vital importance?

pharmaceutical firms

The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds?

because previously owned diamonds would be a close substitute to newly mined diamonds and therefore reduce De Beers' market power

In a natural monopoly, throughout the range of market demand

marginal cost is below average total cost and pulls average total cost downward.

What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?

Economics of scale produce a decreasing ATC curve over the relevant range of market demand. ATC contines to be lower as output increases. Consumers benefit beacause they can obtain the good at lower prices.

The demand curve for the monopoly's product is

the market demand for the product

A monopolist's profit maximizing price and output correspond to the point on a graph

where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.

Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit maximizing outputs?

Marginal revenue is less than price.

Long-run economic profits would most likely exist in which market structure?

monopoly and oligopoly

A profit maximizing monopoly's price is

greater than the price that would prevail if the industry was perfectly competitive.

Compared to perfect competition, the consumer surplus in a monopoly

is lower because price is higher and output is lower.

Relative to a perfectly competitive market, a monopoly results in

a gain in producer surplus less than the loss in consumer surplus.

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