Economics - Homework 8, Economics - Homework 9, Economics - Homework 10 - Custom Scholars
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Economics – Homework 8, Economics – Homework 9, Economics – Homework 10

question
A very large number of small sellers who sell identical products imply

A. a multitude of vastly different selling prices.

B. the inability of one seller to influence price.

C. a downward sloping demand for each seller's product.

D. chaos in the market.
answer
the inability of one seller to influence price.
question
Both individual buyers and sellers in perfect competition

A. have to take the market price as a given.

B. can influence the market price by joining with a few of their competitors.

C. can influence the market price by their own individual actions.

D. have the market price dictated to them by government.
answer
have to take the market price as a given.
question
Both buyers and sellers are price takers in a perfectly competitive market because

A. each buyer and seller is too small relative to others to independently affect the market price.

B. the price is determined by government intervention and dictated to buyers and sellers.

C. both buyers and sellers in a perfectly competitive market are concerned for the welfare of others.

D. each buyer and seller knows it is illegal to conspire to affect price.
answer
each buyer and seller is too small relative to others to independently affect the market price.
question
The demand curve for each seller's product in perfect competition is horizontal at the market price because

A. each seller is too small to affect market price.

B. the price is set by the government.

C. all the demanders get together and set the price.

D. all the sellers get together and set the price.
answer
each seller is too small to affect market price.
question
An individual seller in perfect competition will not sell at a price lower than the market price because

A. demand is perfectly inelastic.

B. the seller can sell any quantity she wants at the prevailing market price.

C. the seller would start a price war.

D. demand for the product will exceed supply.
answer
the seller can sell any quantity she wants at the prevailing market price.
question
In a perfectly competitive market the term "price taker" applies to

A. buyers but not sellers.

B. sellers and buyers.

C. firms but not buyers.

D. only the smallest sellers and buyers.
answer
sellers and buyers.
question
If the market price is $25, the average revenue of selling five units is

A. $5.

B. $12.50.

C. $25.

D. $125.
answer
$25.
question
Figure 12-1
Refer to Figure 12-1. If the firm is producing 700 units

A. it is making a profit.

B. it is making a loss.

C. it should increase its output to maximize profit.

D. it should cut back its output to maximize profit.
answer
it should cut back its output to maximize profit.
question
Figure 12-1
Refer to Figure 12-1. If the firm is producing 200 units

A. it should cut back its output to maximize profit.

B. it breaks even.

C. it is making a loss.

D. it should increase its output to maximize profit.
answer
it should increase its output to maximize profit.
question
If a perfectly competitive firm's price is above its average total cost, the firm

A. should shut down.

B. is incurring a loss.

C. is earning a profit.

D. is breaking even.
answer
is earning a profit.
question
Figure 12-4
Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. Refer to Figure 12-4. If the market price is $30, the firm's profit-maximizing output level is

A. 0.

B. 130.

C. 180.

D. 240.
answer
180.
question
Figure 12-4
Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.Refer to Figure 12-4. If the market price is $30 and the firm is producing output, what is the amount of the firm's profit or loss?

A. loss of $1,080

B. profit of $1,440

C. profit of $1,300

D. loss of $2,520
answer
loss of $1,080
question
A perfectly competitive firm earns a profit when price is

A. above minimum average total cost.

B. equal to minimum average fixed cost.

C. equal to minimum average variable cost.

D. equal to minimum average total cost.
answer
above minimum average total cost.
question
Figure 12-5
Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. Refer to Figure 12-5. If the market price is $20, what is the firm's profit-maximizing output?

A. 750 units

B. 1,100 units

C. 1,350 units

D. 1,800 units
answer
1,350 units
question
Figure 12-5
Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. Refer to Figure 12-5. The firm's manager suggests that the firm's goal should be to maximize average profit. If the firm does this, what is the amount of profit that it will earn?

A. $6,600

B. $6,750

C. $12,150

D. $36,000
answer
$6,600
question
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, the firm

A. should increase output.

B. is earning a profit.

C. should increase price.

D. should shut down.
answer
should shut down.
question
A perfectly competitive firm's supply curve is its

A. marginal cost curve.

B. marginal cost curve above its minimum average fixed cost.

C. marginal cost curve above its minimum average total cost.

D. marginal cost curve above its minimum average variable cost.
answer
marginal cost curve above its minimum average variable cost.
question
When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell

A. the output where average total cost equals price.

B. nothing at all; the firm shuts down.

C. any positive output the entrepreneur decides upon because all of it can be sold.

D. the output where marginal revenue equals marginal cost.
answer
nothing at all; the firm shuts down.
question
In the short run, a firm that is operating at a loss has two options. These options are

A. to reduce output or reduce its variable costs.

B. to shut down temporarily or continue to produce.

C. to go out of business or declare bankruptcy.

D. to adopt new technology or change the size of its physical plant.
answer
to shut down temporarily or continue to produce.
question
If a firm shuts down it

A. will produce nothing but must pay its fixed and variable costs.

B. will earn enough revenue to cover its variable costs but not all of its fixed costs.

C. will suffer a loss equal to its fixed costs.

D. will produce nothing but must pay its variable costs.
answer
will suffer a loss equal to its fixed costs.
question
If a perfectly competitive firm's total revenue is less than its total variable cost, the firm

A. should continue to produce and increase its demand.

B. should adopt new technology in order to lower its costs of production.

C. should raise its price above its average variable cost.

D. should stop production by shutting down temporarily.
answer
should stop production by shutting down temporarily.
question
If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then

A. firms are breaking even.

B. existing firms will exit the industry.

C. market supply will remain constant.

D. new firms are attracted to the industry.
answer
new firms are attracted to the industry.
question
In the long run, a perfectly competitive market will

A. supply whatever amount consumers will buy at a price which earns the market an economic profit.

B. generate a long-run equilibrium where the typical firm operates at a loss.

C. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.

D. produce only the quantity of output that yields a long-run profit for the typical firm.
answer
supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.
question
Figure 12-1
Refer to Figure 12-3. If the firm is producing 500 units, what is the amount of its profit or loss?

A. profit equivalent to the area A

B. profit of $280

C. loss equivalent to the area A

D. There is insufficient information to answer the question.
answer
There is insufficient information to answer the question.
question
Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's average profit?

A. (P - ATC) × Q

B. P - TC

C. P - ATC

D. (P × Q) - TC
answer
P - ATC
question
Table 12-3
Arnie sells basketballs in a perfectly competitive market. Table 12-3 summarizes Arnie's output per day (Q), total cost (TC), average total cost (ATC) and marginal cost (MC). Refer to Table 12-3. What price (P) will Arnie charge and how much profit will he earn if the market price of basketballs is $12.50?

A. Price and profit cannot be determined from the information given.

B. P = $12.50; profit = $52.50

C. P = $20; profit = $75.00.

D. P = $12.50; profit = $22.50
answer
P = $12.50; profit = $22.50
question
A firm will make a profit when

A. P > AVC

B. P = MC

C. P = ATC

D. P > ATC
answer
P > ATC
question
A firm will break even when

A. P = ATC

B. P < AVC

C. P = AVC

D. P > ATC
answer
P = ATC
question
Figure 12-9
Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.
Refer to Figure 12-9. At price P1, the firm would produce

A. Q1 units

B. Q3 units.

C. Q5units.

D. zero units.
answer
zero units.
question
Figure 12-10
Refer to Figure 12-10. The firm's short-run supply curve is its

A. marginal cost curve from c and above.

B. marginal cost curve from d and above.

C. marginal cost curve from b and above.

D. marginal cost curve.
answer
marginal cost curve from b and above.
question
The key characteristics of a monopolistically competitive market structure include

A. barriers to entry are strong.

B. many small (relative to the total market) sellers acting independently.

C. sellers have no incentive to advertise their products.

D. all sellers sell a homogeneous product.
answer
many small (relative to the total market) sellers acting independently.
question
Which of the following characteristics is common to monopolistic competition and perfect competition?

A. Each firm faces a downward -sloping demand curve.

B. Firms take market prices as given.

C. Entry barriers into the industry are low.

D. Firms produce identical products.
answer
Entry barriers into the industry are low.
question
A major difference between monopolistic competition and perfect competition is

A. the degree by which the market demand curves slope downwards.

B. the barriers to entry in the two markets.

C. that products are not standardized in monopolistic competition unlike in perfect competition.

D. the number of sellers in the markets.
answer
that products are not standardized in monopolistic competition unlike in perfect competition.
question
The key characteristics of a monopolistically competitive market structure include

A. high barriers to entry.

B. sellers acting to maximize revenue.

C. sellers selling similar but differentiated products.

D. few sellers.
answer
sellers selling similar but differentiated products.
question
A monopolistically competitive firm faces a downward-sloping demand curve because

A. there are few substitutes for its product.

B. it is able to control price and quantity demanded.

C. of product differentiation.

D. its market decisions are affected by the decisions of its rivals.
answer
of product differentiation.
question
If a firm faces a downward-sloping demand curve

A. it must reduce its price to sell more units.

B. it will always make a profit.

C. the demand for its product must be inelastic.

D. it can control both price and quantity sold.
answer
it must reduce its price to sell more units.
question
What is the profit-maximizing rule for a monopolistically competitive firm?

A. to produce a quantity that maximizes total revenue

B. to produce a quantity that maximizes market share

C. to produce a quantity such that marginal revenue equals marginal cost

D. to produce a quantity such that price equals marginal cost
answer
to produce a quantity such that marginal revenue equals marginal cost
question
Table 13-2
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 13-2 shows the firm's demand and cost schedules. Refer to Table 13-2. What is Eco Energy's profit?

A. $125

B. $140

C. $145

D. $150
answer
$145
question
If price exceeds average variable cost but is less than average total cost, a firm

A. should stay in business for a while longer until its fixed costs expire.

B. should further differentiate its product.

C. is making some profit but less than maximum profit.

D. should shut down.
answer
should stay in business for a while longer until its fixed costs expire.
question
Table 13-3
Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm. Refer to Table 13-3. What is the amount of the firm's loss at its optimal output level?

A. $0

B. $41

C. $45

D. $50
answer
$41
question
A monopolistically competitive industry that earns economic profits in the short run will

A. experience a rise in demand in the long run.

B. continue to earn economic profits in the long run.

C. experience the entry of new rival firms into the industry in the long run.

D. experience the exit of existing firms out of the industry in the long run.
answer
experience the entry of new rival firms into the industry in the long run.
question
In the long run, if price is less than average cost

A. there is profit incentive for firms to enter the market.

B. the market must be in long-run equilibrium.

C. there is no incentive for the number of firms in the market to change.

D. there is an incentive for firms to exit the market.
answer
the market must be in long-run equilibrium.
question
In the long run, what happens to the demand curve facing a monopolistically competitive firm that is earning short-run profits?

A. The demand curve will shift to the right and became less elastic.

B. The demand curve will shift to the left and became more elastic.

C. The demand curve will shift to the right and became more elastic.

D. The demand curve will shift to the left and became less elastic.
answer
The demand curve will shift to the left and became more elastic.
question
Figure 13-11
Refer to Figure 13-11. The firm represented in the diagram

A. makes zero accounting profit.

B. should expand its output to take advantage of economies of scale.

C. makes zero economic profit.

D. should exit the industry.
answer
makes zero economic profit.
question
Which of the following is not a characteristic of long-run equilibrium in a monopolistically competitive market?

A. Marginal revenue equals marginal cost.

B. Selling price equals average total cost.

C. Production is at minimum average total cost.

D. Selling price is greater than marginal cost.
answer
Production is at minimum average total cost.
question
For productive efficiency to hold

A. price must equal the marginal cost of the last unit produced.

B. price must equal marginal revenue of the last unit sold.

C. average total cost is minimized in production.

D. average variable cost is minimized in production.
answer
average total cost is minimized in production.
question
For allocative efficiency to hold

A. price must equal the marginal cost of the last unit produced.

B. average total cost is minimized in production.

C. average variable cost is minimized in production.

D. price must equal marginal revenue of the last unit sold.
answer
price must equal the marginal cost of the last unit produced.
question
Is a monopolistically competitive firm productively efficient?

A. Yes, because it produces where marginal cost equals marginal revenue.

B. Yes, because price equals average total cost.

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

D. No, because price is greater than marginal cost.
answer
No, because it does not produce at minimum average total cost.
question
Brand management refers to

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

B. picking a brand name for a new product that will attract attention.

C. selling the right to use a brand name in a particular market.

D. efforts to reduce the cost of production.
answer
the efforts to maintain the differentiation of a product over time.
question
Although advertising raises the price of a monopolistic competitor's product, it does confer a benefit to consumers. Which of the following is a benefit to consumers?

A. Advertising acts as a barrier to entry.

B. Advertised products tend to be of higher quality so consumers feel special when they consume advertised products.

C. Advertising could provide consumers with useful information about new products and enable them to comparison shop.

D. Advertising engenders brand loyalty.
answer
Advertising could provide consumers with useful information about new products and enable them to comparison shop.
question
A firm that successfully differentiates its product or lowers its average cost of production creates

A. value for its customers.

B. a perfectly inelastic demand curve for its product.

C. economies of scale.

D. entry barriers into its market.
answer
value for its customers.
question
Monopolistically competitive firms can differentiate their products

A. by equating price and average total cost.

B. by producing at minimum efficient scale.

C. through marketing.

D. by producing where marginal revenue equals marginal cost.
answer
through marketing.
question
To maximize their profits and defend those profits from competitors, monopolistically competitive firms must

A. lobby government to erect barriers to entry in their industries.

B. achieve economies of scale.

C. limit foreign competition in their markets by encouraging the government to impose tariffs and other trade restrictions.

D. differentiate their products.
answer
differentiate their products.
question
Figure 13-4
Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches. Refer to Figure 13-4. If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged?

A. P0

B. P1

C. P2

D. P3
answer
P2
question
Figure 13-4
Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches. Refer to Figure 13-4.What is the area that represents the total revenue made by the firm?

A. 0 P1 b Qa

B. 0 P0 a Qa

C. 0 P2 c Qa

D. 0 P3 d Qa
answer
0 P2 c Qa
question
A monopolistically competitive firm maximizes profit where

A. total revenue > marginal cost

B. marginal revenue > average revenue

C. price = marginal revenue

D. price > marginal cost.
answer
price > marginal cost.
question
Table 13-2
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 13-2 shows the firm's demand and cost schedules. Refer to Table 13-2. What is the output (Q) that maximizes profit and what is the price (P) charged?

A. P=$55; Q=5 cases

B. P=$50; Q=6 cases

C. P=$45; Q=7 cases

D. P=$40; Q=8 cases
answer
P=$50; Q=6 cases
question
Table 13-3
Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm. Refer to Table 13-3. What are the profit-maximizing/loss-minimizing output level and price?

A. Q=0 (firm should not produce)

B. Q=3; P=$18

C. Q=4; P=$17

D. Q=5; P=$16
answer
Q=4; P=$17
question
Figure 13-11
Refer to Figure 13-11. What is the monopolistic competitor's profit maximizing output?

A. Q1 units

B. Q2 units

C. Q3 units

D. Q4 units
answer
Q2 units
question
Figure 13-11
Refer to Figure 13-11. What is the monopolistic competitor's profit maximizing price?

A. P1

B. P2

C. P3

D. P4
answer
P4
question
An oligopolistic industry is characterized by all of the following except

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

B. production of standardized products.

C. existence of entry barriers.

D. the possibility of reaping long run economic profits.
answer
firms pursuing aggressive business strategies, independent of rivals' strategies.
question
An oligopoly firm is similar to a monopolistically competitive firm in that

A. both firms face the prisoner's dilemma.

B. both firms have market power.

C. both operate in a market in which there are entry barriers.

D. both firms are in industries characterized by an interdependent firm.
answer
both firms have market power.
question
An oligopolist differs from a perfect competitor in that

A. firms in an oligopoly do not produce homogeneous products while firms in perfect competition do.

B. there are no entry barriers in perfect competition but there are entry barriers in oligopoly.

C. there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power.

D. the market demand curve for a perfectly competitive industry is perfectly elastic but it is downward-sloping in an oligopolistic industry.
answer
there are no entry barriers in perfect competition but there are entry barriers in oligopoly.
question
Which of the following is the best example of an oligopolistic industry?

A. public education

B. the beauty products industry

C. the pharmaceutical industry

D. the beef market
answer
the pharmaceutical industry
question
A characteristic found only in oligopolies is

A. break even level of profits.

B. independence of firms.

C. products that are slightly different.

D. interdependence of firms.
answer
interdependence of firms.
question
Producing a differentiated product occurs in which of the following industries?

A. monopolistic competition only

B. monopolistic competition and oligopoly

C. oligopoly only

D. oligopoly, monopolistic competition and perfect competition
answer
monopolistic competition and oligopoly
question
Oligopolies are difficult to analyze because

A. the firms are so large.

B. oligopolies are a recent development so economists have not had time to develop models.

C. how firms respond to a price change by a rival is uncertain.

D. demand and cost curves do not exist for these types of industries.
answer
how firms respond to a price change by a rival is uncertain.
question
In an oligopoly market

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

B. individual firms pay no attention to the behavior of other firms.

C. advertising of one firm has no effect on all other firms.

D. the pricing decisions of all other firms have no effect on an individual firm.
answer
one firm's pricing decision affects all the other firms.
question
Marginal revenue for an oligopolist is

A. horizontal on a price-quantity diagram.

B. identical to the demand for the firm's product.

C. downward sloping beneath the firm's demand curve.

D. difficult to determine because the firm's demand curve is typically unknown.
answer
difficult to determine because the firm's demand curve is typically unknown.
question
Which of the following is not a reason why government officials are willing to impose entry barriers?

A. to promote an equitable distribution of income

B. to increase economic efficiency

C. to encourage innovation which may improve the standard of living in the long run

D. to raise revenue
answer
to promote an equitable distribution of income
question
A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called

A. the Porter's Competitive Forces
plan.

B. game theory.

C. a business strategy.

D. a payoff matrix.
answer
a business strategy.
question
What is the dominant strategy in the prisoner's dilemma?

A. There is no dominant strategy.

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

C. Do not confess because the other prisoner will most likely confess.

D. Do nothing in the hope that the other prisoner will also do nothing.
answer
Each prisoner confesses because this is the rational action to pursue.
question
The prisoner's dilemma illustrates

A. why firms will not cooperate if they behave strategically.

B. why firms have an incentive to cheat on agreements.

C. how cooperation in strategic situations lead to the economically efficient market outcome.

D. how oligopolists engage in implicit collusion under strategic situations.
answer
why firms will not cooperate if they behave strategically.
question
Table 14-1
Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Is there a dominant strategy for Godrickporter and if so, what is it?

A. Yes, Godrickporter should reduce its advertising spending.

B. Yes, Godrickporter should increase its advertising spending.

C. Yes, Godrickporter's dominant strategy is to collude with Star Connections.

D. No, its outcome depends on what Star Connections does.
answer
Yes, Godrickporter should increase its advertising spending.
question
Table 14-1
Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Is there a dominant strategy for Star Connections and if so, what is it?

A. Yes, Star Connections should increase its advertising spending.

B. Yes, Star Connections should reduce its advertising spending.

C. No, its outcome depends on what Godrickporter does.

D. Yes, Star Connections' dominant strategy is to collude with Godrickporter.
answer
No, its outcome depends on what Godrickporter does.
question
Which of the following is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma?

A. reneging on a previous tacit agreement with rival firms to charge identical high prices

B. ignoring the pricing decisions of the other firms

C. producing more of its product

D. advertising that it will match its rival's price
answer
advertising that it will match its rival's price
question
Why does a prisoner's dilemma lead to a noncooperative equilibrium?

A. because players must choose from a limited number of non-dominant strategies

B. because each rational player has a dominant strategy to play a certain way regardless of what other players do

C. because each player had agreed before the game started to minimize the harm that he can inflict on the other players

D. because each player is uncertain how other players will play the game
answer
because each rational player has a dominant strategy to play a certain way regardless of what other players do
question
Table 14-2
Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000.Refer to Table 14-2. Is the current strategy in which each firm charges the low price and earns a profit of $7,000 a Nash equilibrium? If not, why and what is the Nash equilibrium?

A. Yes, the current situation is a Nash equilibrium.

B. No, the current situation is not a Nash equilibrium. The Nash equilibrium for each firm is to have the other charge a high price and for the firm in question charge a low price.

C. No, it is not a Nash equilibrium because each firm can do better by charging the high price. The Nash equilibrium occurs when each firm charges the high price and earns a profit of $10,000.

D. No, the current situation is not a Nash equilibrium; it is a dominant strategy equilibrium. There is no Nash equilibrium in this game.
answer
Yes, the current situation is a Nash equilibrium.
question
Table 14-2
Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000.Refer to Table 14-2. Suppose Wal-Mart and Target both advertise that they will match the lowest price offered by any competitor. What is the purpose of such a strategy?

A. to signal to each other not to charge below the current low price

B. to signal to each other that they intend to charge the high price

C. to signal to each other to share the market equally

D. to signal to each other that they will not hesitate to initiate a price war
answer
to signal to each other that they intend to charge the high price
question
In a decision tree, the difference between a decision node and a terminal node is that

A. at a decision node a decision must be made, while at a terminal node the final decision must be made.

B. at a decision node all participants make the same decision, while at a terminal node different players may make different decisions.

C. at a decision node all participants are free to make individual decisions but at a terminal node they must agree on a collective decision.

D. at a decision node, a decision must be made while a terminal node shows the payoff.
answer
at a decision node, a decision must be made while a terminal node shows the payoff.
question
Figure 14-1
Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche. Refer to Figure 14-1. Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market?

A. No, because BMW will enter the market regardless of Lexus' decision about its price.

B. Yes, it will drive BMW out of the market.

C. No, it should keep the same price and work to capitalize on its brand loyalty.

D. In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters.
answer
Yes, it will drive BMW out of the market.
question
Figure 14-1
Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche.Refer to Figure 14-1. If Lexus lowers its price, will this deter BMW from entering the market?

A. No, because BMW will still make a profit of $120 if it competes with Lexus.

B. Yes, because BMW will make a smaller profit than Lexus if it chooses to compete.

C. No, because BMW will be able to break Lexus' first mover advantage.

D. Yes, because BMW stands to lose $100 million if it competes with Lexus.
answer
Yes, because BMW stands to lose $100 million if it competes with Lexus.
question
In a subgame perfect equilibrium

A. each player's strategy constitutes a Nash equilibrium at every subgame of the original game.

B. the first mover has an advantage over other players.

C. the last mover has an advantage over other players.

D. each player has the same response as the others at every subgame of the tree.
answer
each player's strategy constitutes a Nash equilibrium at every subgame of the original game.
question
Figure 14-2
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. If the government delays Gigacom's entry and Xenophone moves first, is a threat by Gigacom that it will provide DSL service if Gigacom provides cable service a credible threat?

A. No, because Gigacom will lose $4.5 million in profits if it carries out its threat.

B. Yes, because Gigacom's DSL service will drive Xenophone out of business.

C. Yes, Xenophone stands to lose $3 million in profit.

D. No, because as a second mover, it has no choice but to abide by the choices of the first mover.
answer
No, because Gigacom will lose $4.5 million in profits if it carries out its threat.
question
Figure 14-2
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. If the government delays Gigacom's entry and Xenophone moves first, what is the likely outcome in the market?

A. Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.

B. Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million.

C. Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million.

D. Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.
answer
Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.
question
Figure 14-2
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. Now suppose that the government delays Xenophone's entry and Gigacom moves first, what is the likely outcome in the market?

A. Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.

B. Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.

C. Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million.

D. Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million.
answer
Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million.
question
In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use

A. bargaining games.

B. retaliation games.

C. sequential games.

D. follow-the-leader-games.
answer
sequential games.
question
All of the following are ways by which existing firms can deter the entry of new firms into an industry except

A. advertising products aggressively.

B. earning less than maximum profit.

C. threatening to raise prices.

D. continuously producing new and improved products.
answer
threatening to raise prices.
question
Sequential games are used to analyze

A. firms that are subject to the prisoner's dilemma.

B. situations in which one firm acts and other firms respond.

C. second-price auctions.

D. cartels.
answer
situations in which one firm acts and other firms respond.
question
Sequential games are often used to analyze which two types of business strategies?

A. deciding to end production of an unprofitable product and deciding to shut down temporarily

B. deterring entry by another firm and bargaining between firms

C. whether to invest in research and development and whether to offer employees an early retirement package

D. deciding to merge with another firm and deciding how much to spend on an advertising campaign
answer
deterring entry by another firm and bargaining between firms
1 of 90
question
A very large number of small sellers who sell identical products imply

A. a multitude of vastly different selling prices.

B. the inability of one seller to influence price.

C. a downward sloping demand for each seller's product.

D. chaos in the market.
answer
the inability of one seller to influence price.
question
Both individual buyers and sellers in perfect competition

A. have to take the market price as a given.

B. can influence the market price by joining with a few of their competitors.

C. can influence the market price by their own individual actions.

D. have the market price dictated to them by government.
answer
have to take the market price as a given.
question
Both buyers and sellers are price takers in a perfectly competitive market because

A. each buyer and seller is too small relative to others to independently affect the market price.

B. the price is determined by government intervention and dictated to buyers and sellers.

C. both buyers and sellers in a perfectly competitive market are concerned for the welfare of others.

D. each buyer and seller knows it is illegal to conspire to affect price.
answer
each buyer and seller is too small relative to others to independently affect the market price.
question
The demand curve for each seller's product in perfect competition is horizontal at the market price because

A. each seller is too small to affect market price.

B. the price is set by the government.

C. all the demanders get together and set the price.

D. all the sellers get together and set the price.
answer
each seller is too small to affect market price.
question
An individual seller in perfect competition will not sell at a price lower than the market price because

A. demand is perfectly inelastic.

B. the seller can sell any quantity she wants at the prevailing market price.

C. the seller would start a price war.

D. demand for the product will exceed supply.
answer
the seller can sell any quantity she wants at the prevailing market price.
question
In a perfectly competitive market the term "price taker" applies to

A. buyers but not sellers.

B. sellers and buyers.

C. firms but not buyers.

D. only the smallest sellers and buyers.
answer
sellers and buyers.
question
If the market price is $25, the average revenue of selling five units is

A. $5.

B. $12.50.

C. $25.

D. $125.
answer
$25.
question
Figure 12-1
Refer to Figure 12-1. If the firm is producing 700 units

A. it is making a profit.

B. it is making a loss.

C. it should increase its output to maximize profit.

D. it should cut back its output to maximize profit.
answer
it should cut back its output to maximize profit.
question
Figure 12-1
Refer to Figure 12-1. If the firm is producing 200 units

A. it should cut back its output to maximize profit.

B. it breaks even.

C. it is making a loss.

D. it should increase its output to maximize profit.
answer
it should increase its output to maximize profit.
question
If a perfectly competitive firm's price is above its average total cost, the firm

A. should shut down.

B. is incurring a loss.

C. is earning a profit.

D. is breaking even.
answer
is earning a profit.
question
Figure 12-4
Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. Refer to Figure 12-4. If the market price is $30, the firm's profit-maximizing output level is

A. 0.

B. 130.

C. 180.

D. 240.
answer
180.
question
Figure 12-4
Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.Refer to Figure 12-4. If the market price is $30 and the firm is producing output, what is the amount of the firm's profit or loss?

A. loss of $1,080

B. profit of $1,440

C. profit of $1,300

D. loss of $2,520
answer
loss of $1,080
question
A perfectly competitive firm earns a profit when price is

A. above minimum average total cost.

B. equal to minimum average fixed cost.

C. equal to minimum average variable cost.

D. equal to minimum average total cost.
answer
above minimum average total cost.
question
Figure 12-5
Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. Refer to Figure 12-5. If the market price is $20, what is the firm's profit-maximizing output?

A. 750 units

B. 1,100 units

C. 1,350 units

D. 1,800 units
answer
1,350 units
question
Figure 12-5
Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. Refer to Figure 12-5. The firm's manager suggests that the firm's goal should be to maximize average profit. If the firm does this, what is the amount of profit that it will earn?

A. $6,600

B. $6,750

C. $12,150

D. $36,000
answer
$6,600
question
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, the firm

A. should increase output.

B. is earning a profit.

C. should increase price.

D. should shut down.
answer
should shut down.
question
A perfectly competitive firm's supply curve is its

A. marginal cost curve.

B. marginal cost curve above its minimum average fixed cost.

C. marginal cost curve above its minimum average total cost.

D. marginal cost curve above its minimum average variable cost.
answer
marginal cost curve above its minimum average variable cost.
question
When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell

A. the output where average total cost equals price.

B. nothing at all; the firm shuts down.

C. any positive output the entrepreneur decides upon because all of it can be sold.

D. the output where marginal revenue equals marginal cost.
answer
nothing at all; the firm shuts down.
question
In the short run, a firm that is operating at a loss has two options. These options are

A. to reduce output or reduce its variable costs.

B. to shut down temporarily or continue to produce.

C. to go out of business or declare bankruptcy.

D. to adopt new technology or change the size of its physical plant.
answer
to shut down temporarily or continue to produce.
question
If a firm shuts down it

A. will produce nothing but must pay its fixed and variable costs.

B. will earn enough revenue to cover its variable costs but not all of its fixed costs.

C. will suffer a loss equal to its fixed costs.

D. will produce nothing but must pay its variable costs.
answer
will suffer a loss equal to its fixed costs.
question
If a perfectly competitive firm's total revenue is less than its total variable cost, the firm

A. should continue to produce and increase its demand.

B. should adopt new technology in order to lower its costs of production.

C. should raise its price above its average variable cost.

D. should stop production by shutting down temporarily.
answer
should stop production by shutting down temporarily.
question
If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then

A. firms are breaking even.

B. existing firms will exit the industry.

C. market supply will remain constant.

D. new firms are attracted to the industry.
answer
new firms are attracted to the industry.
question
In the long run, a perfectly competitive market will

A. supply whatever amount consumers will buy at a price which earns the market an economic profit.

B. generate a long-run equilibrium where the typical firm operates at a loss.

C. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.

D. produce only the quantity of output that yields a long-run profit for the typical firm.
answer
supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.
question
Figure 12-1
Refer to Figure 12-3. If the firm is producing 500 units, what is the amount of its profit or loss?

A. profit equivalent to the area A

B. profit of $280

C. loss equivalent to the area A

D. There is insufficient information to answer the question.
answer
There is insufficient information to answer the question.
question
Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's average profit?

A. (P - ATC) × Q

B. P - TC

C. P - ATC

D. (P × Q) - TC
answer
P - ATC
question
Table 12-3
Arnie sells basketballs in a perfectly competitive market. Table 12-3 summarizes Arnie's output per day (Q), total cost (TC), average total cost (ATC) and marginal cost (MC). Refer to Table 12-3. What price (P) will Arnie charge and how much profit will he earn if the market price of basketballs is $12.50?

A. Price and profit cannot be determined from the information given.

B. P = $12.50; profit = $52.50

C. P = $20; profit = $75.00.

D. P = $12.50; profit = $22.50
answer
P = $12.50; profit = $22.50
question
A firm will make a profit when

A. P > AVC

B. P = MC

C. P = ATC

D. P > ATC
answer
P > ATC
question
A firm will break even when

A. P = ATC

B. P < AVC

C. P = AVC

D. P > ATC
answer
P = ATC
question
Figure 12-9
Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.
Refer to Figure 12-9. At price P1, the firm would produce

A. Q1 units

B. Q3 units.

C. Q5units.

D. zero units.
answer
zero units.
question
Figure 12-10
Refer to Figure 12-10. The firm's short-run supply curve is its

A. marginal cost curve from c and above.

B. marginal cost curve from d and above.

C. marginal cost curve from b and above.

D. marginal cost curve.
answer
marginal cost curve from b and above.
question
The key characteristics of a monopolistically competitive market structure include

A. barriers to entry are strong.

B. many small (relative to the total market) sellers acting independently.

C. sellers have no incentive to advertise their products.

D. all sellers sell a homogeneous product.
answer
many small (relative to the total market) sellers acting independently.
question
Which of the following characteristics is common to monopolistic competition and perfect competition?

A. Each firm faces a downward -sloping demand curve.

B. Firms take market prices as given.

C. Entry barriers into the industry are low.

D. Firms produce identical products.
answer
Entry barriers into the industry are low.
question
A major difference between monopolistic competition and perfect competition is

A. the degree by which the market demand curves slope downwards.

B. the barriers to entry in the two markets.

C. that products are not standardized in monopolistic competition unlike in perfect competition.

D. the number of sellers in the markets.
answer
that products are not standardized in monopolistic competition unlike in perfect competition.
question
The key characteristics of a monopolistically competitive market structure include

A. high barriers to entry.

B. sellers acting to maximize revenue.

C. sellers selling similar but differentiated products.

D. few sellers.
answer
sellers selling similar but differentiated products.
question
A monopolistically competitive firm faces a downward-sloping demand curve because

A. there are few substitutes for its product.

B. it is able to control price and quantity demanded.

C. of product differentiation.

D. its market decisions are affected by the decisions of its rivals.
answer
of product differentiation.
question
If a firm faces a downward-sloping demand curve

A. it must reduce its price to sell more units.

B. it will always make a profit.

C. the demand for its product must be inelastic.

D. it can control both price and quantity sold.
answer
it must reduce its price to sell more units.
question
What is the profit-maximizing rule for a monopolistically competitive firm?

A. to produce a quantity that maximizes total revenue

B. to produce a quantity that maximizes market share

C. to produce a quantity such that marginal revenue equals marginal cost

D. to produce a quantity such that price equals marginal cost
answer
to produce a quantity such that marginal revenue equals marginal cost
question
Table 13-2
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 13-2 shows the firm's demand and cost schedules. Refer to Table 13-2. What is Eco Energy's profit?

A. $125

B. $140

C. $145

D. $150
answer
$145
question
If price exceeds average variable cost but is less than average total cost, a firm

A. should stay in business for a while longer until its fixed costs expire.

B. should further differentiate its product.

C. is making some profit but less than maximum profit.

D. should shut down.
answer
should stay in business for a while longer until its fixed costs expire.
question
Table 13-3
Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm. Refer to Table 13-3. What is the amount of the firm's loss at its optimal output level?

A. $0

B. $41

C. $45

D. $50
answer
$41
question
A monopolistically competitive industry that earns economic profits in the short run will

A. experience a rise in demand in the long run.

B. continue to earn economic profits in the long run.

C. experience the entry of new rival firms into the industry in the long run.

D. experience the exit of existing firms out of the industry in the long run.
answer
experience the entry of new rival firms into the industry in the long run.
question
In the long run, if price is less than average cost

A. there is profit incentive for firms to enter the market.

B. the market must be in long-run equilibrium.

C. there is no incentive for the number of firms in the market to change.

D. there is an incentive for firms to exit the market.
answer
the market must be in long-run equilibrium.
question
In the long run, what happens to the demand curve facing a monopolistically competitive firm that is earning short-run profits?

A. The demand curve will shift to the right and became less elastic.

B. The demand curve will shift to the left and became more elastic.

C. The demand curve will shift to the right and became more elastic.

D. The demand curve will shift to the left and became less elastic.
answer
The demand curve will shift to the left and became more elastic.
question
Figure 13-11
Refer to Figure 13-11. The firm represented in the diagram

A. makes zero accounting profit.

B. should expand its output to take advantage of economies of scale.

C. makes zero economic profit.

D. should exit the industry.
answer
makes zero economic profit.
question
Which of the following is not a characteristic of long-run equilibrium in a monopolistically competitive market?

A. Marginal revenue equals marginal cost.

B. Selling price equals average total cost.

C. Production is at minimum average total cost.

D. Selling price is greater than marginal cost.
answer
Production is at minimum average total cost.
question
For productive efficiency to hold

A. price must equal the marginal cost of the last unit produced.

B. price must equal marginal revenue of the last unit sold.

C. average total cost is minimized in production.

D. average variable cost is minimized in production.
answer
average total cost is minimized in production.
question
For allocative efficiency to hold

A. price must equal the marginal cost of the last unit produced.

B. average total cost is minimized in production.

C. average variable cost is minimized in production.

D. price must equal marginal revenue of the last unit sold.
answer
price must equal the marginal cost of the last unit produced.
question
Is a monopolistically competitive firm productively efficient?

A. Yes, because it produces where marginal cost equals marginal revenue.

B. Yes, because price equals average total cost.

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

D. No, because price is greater than marginal cost.
answer
No, because it does not produce at minimum average total cost.
question
Brand management refers to

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

B. picking a brand name for a new product that will attract attention.

C. selling the right to use a brand name in a particular market.

D. efforts to reduce the cost of production.
answer
the efforts to maintain the differentiation of a product over time.
question
Although advertising raises the price of a monopolistic competitor's product, it does confer a benefit to consumers. Which of the following is a benefit to consumers?

A. Advertising acts as a barrier to entry.

B. Advertised products tend to be of higher quality so consumers feel special when they consume advertised products.

C. Advertising could provide consumers with useful information about new products and enable them to comparison shop.

D. Advertising engenders brand loyalty.
answer
Advertising could provide consumers with useful information about new products and enable them to comparison shop.
question
A firm that successfully differentiates its product or lowers its average cost of production creates

A. value for its customers.

B. a perfectly inelastic demand curve for its product.

C. economies of scale.

D. entry barriers into its market.
answer
value for its customers.
question
Monopolistically competitive firms can differentiate their products

A. by equating price and average total cost.

B. by producing at minimum efficient scale.

C. through marketing.

D. by producing where marginal revenue equals marginal cost.
answer
through marketing.
question
To maximize their profits and defend those profits from competitors, monopolistically competitive firms must

A. lobby government to erect barriers to entry in their industries.

B. achieve economies of scale.

C. limit foreign competition in their markets by encouraging the government to impose tariffs and other trade restrictions.

D. differentiate their products.
answer
differentiate their products.
question
Figure 13-4
Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches. Refer to Figure 13-4. If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged?

A. P0

B. P1

C. P2

D. P3
answer
P2
question
Figure 13-4
Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches. Refer to Figure 13-4.What is the area that represents the total revenue made by the firm?

A. 0 P1 b Qa

B. 0 P0 a Qa

C. 0 P2 c Qa

D. 0 P3 d Qa
answer
0 P2 c Qa
question
A monopolistically competitive firm maximizes profit where

A. total revenue > marginal cost

B. marginal revenue > average revenue

C. price = marginal revenue

D. price > marginal cost.
answer
price > marginal cost.
question
Table 13-2
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 13-2 shows the firm's demand and cost schedules. Refer to Table 13-2. What is the output (Q) that maximizes profit and what is the price (P) charged?

A. P=$55; Q=5 cases

B. P=$50; Q=6 cases

C. P=$45; Q=7 cases

D. P=$40; Q=8 cases
answer
P=$50; Q=6 cases
question
Table 13-3
Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm. Refer to Table 13-3. What are the profit-maximizing/loss-minimizing output level and price?

A. Q=0 (firm should not produce)

B. Q=3; P=$18

C. Q=4; P=$17

D. Q=5; P=$16
answer
Q=4; P=$17
question
Figure 13-11
Refer to Figure 13-11. What is the monopolistic competitor's profit maximizing output?

A. Q1 units

B. Q2 units

C. Q3 units

D. Q4 units
answer
Q2 units
question
Figure 13-11
Refer to Figure 13-11. What is the monopolistic competitor's profit maximizing price?

A. P1

B. P2

C. P3

D. P4
answer
P4
question
An oligopolistic industry is characterized by all of the following except

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

B. production of standardized products.

C. existence of entry barriers.

D. the possibility of reaping long run economic profits.
answer
firms pursuing aggressive business strategies, independent of rivals' strategies.
question
An oligopoly firm is similar to a monopolistically competitive firm in that

A. both firms face the prisoner's dilemma.

B. both firms have market power.

C. both operate in a market in which there are entry barriers.

D. both firms are in industries characterized by an interdependent firm.
answer
both firms have market power.
question
An oligopolist differs from a perfect competitor in that

A. firms in an oligopoly do not produce homogeneous products while firms in perfect competition do.

B. there are no entry barriers in perfect competition but there are entry barriers in oligopoly.

C. there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power.

D. the market demand curve for a perfectly competitive industry is perfectly elastic but it is downward-sloping in an oligopolistic industry.
answer
there are no entry barriers in perfect competition but there are entry barriers in oligopoly.
question
Which of the following is the best example of an oligopolistic industry?

A. public education

B. the beauty products industry

C. the pharmaceutical industry

D. the beef market
answer
the pharmaceutical industry
question
A characteristic found only in oligopolies is

A. break even level of profits.

B. independence of firms.

C. products that are slightly different.

D. interdependence of firms.
answer
interdependence of firms.
question
Producing a differentiated product occurs in which of the following industries?

A. monopolistic competition only

B. monopolistic competition and oligopoly

C. oligopoly only

D. oligopoly, monopolistic competition and perfect competition
answer
monopolistic competition and oligopoly
question
Oligopolies are difficult to analyze because

A. the firms are so large.

B. oligopolies are a recent development so economists have not had time to develop models.

C. how firms respond to a price change by a rival is uncertain.

D. demand and cost curves do not exist for these types of industries.
answer
how firms respond to a price change by a rival is uncertain.
question
In an oligopoly market

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

B. individual firms pay no attention to the behavior of other firms.

C. advertising of one firm has no effect on all other firms.

D. the pricing decisions of all other firms have no effect on an individual firm.
answer
one firm's pricing decision affects all the other firms.
question
Marginal revenue for an oligopolist is

A. horizontal on a price-quantity diagram.

B. identical to the demand for the firm's product.

C. downward sloping beneath the firm's demand curve.

D. difficult to determine because the firm's demand curve is typically unknown.
answer
difficult to determine because the firm's demand curve is typically unknown.
question
Which of the following is not a reason why government officials are willing to impose entry barriers?

A. to promote an equitable distribution of income

B. to increase economic efficiency

C. to encourage innovation which may improve the standard of living in the long run

D. to raise revenue
answer
to promote an equitable distribution of income
question
A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called

A. the Porter's Competitive Forces
plan.

B. game theory.

C. a business strategy.

D. a payoff matrix.
answer
a business strategy.
question
What is the dominant strategy in the prisoner's dilemma?

A. There is no dominant strategy.

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

C. Do not confess because the other prisoner will most likely confess.

D. Do nothing in the hope that the other prisoner will also do nothing.
answer
Each prisoner confesses because this is the rational action to pursue.
question
The prisoner's dilemma illustrates

A. why firms will not cooperate if they behave strategically.

B. why firms have an incentive to cheat on agreements.

C. how cooperation in strategic situations lead to the economically efficient market outcome.

D. how oligopolists engage in implicit collusion under strategic situations.
answer
why firms will not cooperate if they behave strategically.
question
Table 14-1
Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Is there a dominant strategy for Godrickporter and if so, what is it?

A. Yes, Godrickporter should reduce its advertising spending.

B. Yes, Godrickporter should increase its advertising spending.

C. Yes, Godrickporter's dominant strategy is to collude with Star Connections.

D. No, its outcome depends on what Star Connections does.
answer
Yes, Godrickporter should increase its advertising spending.
question
Table 14-1
Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Is there a dominant strategy for Star Connections and if so, what is it?

A. Yes, Star Connections should increase its advertising spending.

B. Yes, Star Connections should reduce its advertising spending.

C. No, its outcome depends on what Godrickporter does.

D. Yes, Star Connections' dominant strategy is to collude with Godrickporter.
answer
No, its outcome depends on what Godrickporter does.
question
Which of the following is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma?

A. reneging on a previous tacit agreement with rival firms to charge identical high prices

B. ignoring the pricing decisions of the other firms

C. producing more of its product

D. advertising that it will match its rival's price
answer
advertising that it will match its rival's price
question
Why does a prisoner's dilemma lead to a noncooperative equilibrium?

A. because players must choose from a limited number of non-dominant strategies

B. because each rational player has a dominant strategy to play a certain way regardless of what other players do

C. because each player had agreed before the game started to minimize the harm that he can inflict on the other players

D. because each player is uncertain how other players will play the game
answer
because each rational player has a dominant strategy to play a certain way regardless of what other players do
question
Table 14-2
Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000.Refer to Table 14-2. Is the current strategy in which each firm charges the low price and earns a profit of $7,000 a Nash equilibrium? If not, why and what is the Nash equilibrium?

A. Yes, the current situation is a Nash equilibrium.

B. No, the current situation is not a Nash equilibrium. The Nash equilibrium for each firm is to have the other charge a high price and for the firm in question charge a low price.

C. No, it is not a Nash equilibrium because each firm can do better by charging the high price. The Nash equilibrium occurs when each firm charges the high price and earns a profit of $10,000.

D. No, the current situation is not a Nash equilibrium; it is a dominant strategy equilibrium. There is no Nash equilibrium in this game.
answer
Yes, the current situation is a Nash equilibrium.
question
Table 14-2
Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000.Refer to Table 14-2. Suppose Wal-Mart and Target both advertise that they will match the lowest price offered by any competitor. What is the purpose of such a strategy?

A. to signal to each other not to charge below the current low price

B. to signal to each other that they intend to charge the high price

C. to signal to each other to share the market equally

D. to signal to each other that they will not hesitate to initiate a price war
answer
to signal to each other that they intend to charge the high price
question
In a decision tree, the difference between a decision node and a terminal node is that

A. at a decision node a decision must be made, while at a terminal node the final decision must be made.

B. at a decision node all participants make the same decision, while at a terminal node different players may make different decisions.

C. at a decision node all participants are free to make individual decisions but at a terminal node they must agree on a collective decision.

D. at a decision node, a decision must be made while a terminal node shows the payoff.
answer
at a decision node, a decision must be made while a terminal node shows the payoff.
question
Figure 14-1
Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche. Refer to Figure 14-1. Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market?

A. No, because BMW will enter the market regardless of Lexus' decision about its price.

B. Yes, it will drive BMW out of the market.

C. No, it should keep the same price and work to capitalize on its brand loyalty.

D. In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters.
answer
Yes, it will drive BMW out of the market.
question
Figure 14-1
Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche.Refer to Figure 14-1. If Lexus lowers its price, will this deter BMW from entering the market?

A. No, because BMW will still make a profit of $120 if it competes with Lexus.

B. Yes, because BMW will make a smaller profit than Lexus if it chooses to compete.

C. No, because BMW will be able to break Lexus' first mover advantage.

D. Yes, because BMW stands to lose $100 million if it competes with Lexus.
answer
Yes, because BMW stands to lose $100 million if it competes with Lexus.
question
In a subgame perfect equilibrium

A. each player's strategy constitutes a Nash equilibrium at every subgame of the original game.

B. the first mover has an advantage over other players.

C. the last mover has an advantage over other players.

D. each player has the same response as the others at every subgame of the tree.
answer
each player's strategy constitutes a Nash equilibrium at every subgame of the original game.
question
Figure 14-2
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. If the government delays Gigacom's entry and Xenophone moves first, is a threat by Gigacom that it will provide DSL service if Gigacom provides cable service a credible threat?

A. No, because Gigacom will lose $4.5 million in profits if it carries out its threat.

B. Yes, because Gigacom's DSL service will drive Xenophone out of business.

C. Yes, Xenophone stands to lose $3 million in profit.

D. No, because as a second mover, it has no choice but to abide by the choices of the first mover.
answer
No, because Gigacom will lose $4.5 million in profits if it carries out its threat.
question
Figure 14-2
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. If the government delays Gigacom's entry and Xenophone moves first, what is the likely outcome in the market?

A. Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.

B. Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million.

C. Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million.

D. Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.
answer
Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.
question
Figure 14-2
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. Now suppose that the government delays Xenophone's entry and Gigacom moves first, what is the likely outcome in the market?

A. Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.

B. Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.

C. Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million.

D. Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million.
answer
Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million.
question
In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use

A. bargaining games.

B. retaliation games.

C. sequential games.

D. follow-the-leader-games.
answer
sequential games.
question
All of the following are ways by which existing firms can deter the entry of new firms into an industry except

A. advertising products aggressively.

B. earning less than maximum profit.

C. threatening to raise prices.

D. continuously producing new and improved products.
answer
threatening to raise prices.
question
Sequential games are used to analyze

A. firms that are subject to the prisoner's dilemma.

B. situations in which one firm acts and other firms respond.

C. second-price auctions.

D. cartels.
answer
situations in which one firm acts and other firms respond.
question
Sequential games are often used to analyze which two types of business strategies?

A. deciding to end production of an unprofitable product and deciding to shut down temporarily

B. deterring entry by another firm and bargaining between firms

C. whether to invest in research and development and whether to offer employees an early retirement package

D. deciding to merge with another firm and deciding how much to spend on an advertising campaign
answer
deterring entry by another firm and bargaining between firms
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