Test 6
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 1. (2 points) The key characteristic of oligopoly is
a.

that firms are price takers

b.

strategic interdependence among firms

c.

strategic independence among firms

d.

that firms deal with few resource suppliers

e.

a low minimum efficient scale of production

____ 2. (2 points) By keeping new firms from entering the market, oligopolies are more likely to have
a.

longrun economic profit

b.

low prices

c.

great efficiency

d.

decreasing marginal costs

e.

economies of scale

____ 3. (2 points) One explanation for why oligopolies exist is that
a.

it is easier to regulate a smaller number of firms

b.

minimum efficient scale is small relative to the market, allowing a large number of firms to achieve minimum longrun average total cost

c.

minimum efficient scale is large relative to the market, allowing only a few firms to achieve minimum longrun average total cost

d.

minimum efficient scale may be greater than the market quantity demanded at the price equal to minimum longrun average total cost

e.

competitive pricing drives firms from the market

____ 4. (2 points) Figure 1010 shows the longrun market demand curve and the cost structure for a typical monopolistic competitor. The minimum efficient scale (MES) is
a.

0

b.

200 units

c.

400 units

d.

800 units

e.

1,200 units

____ 5. (2 points) An oligopolist cannot use the MR = MC rule to find its equilibrium output level because
a.

oligopolists do not face stable demand curves for their output

b.

oligopolists do not try to maximize profits in the long run

c.

it is too difficult to estimate marginal cost

d.

the rule applies only in perfect competition

e.

the minimum efficient scale exceeds total quantity demanded

____ 6. (2 points) The prisoner's dilemma demonstrates that
a.

breaking out of prison may be too costly for most prisoners

b.

the opportunity cost of being a prisoner is indeterminate

c.

the dominant strategies followed by two prisoners may lead to disequilibrium that is unpredictable

d.

the weak strategy may be followed by both prisoners if the opportunity cost is low

e.

the dominant strategies followed by two players may lead to an equilibrium that is less not optimal for both players together

____ 7. (2 points) A strategy that is best for a player regardless of the strategy of the other player is called a(n)
a.

subsistence strategy

b.

determinant strategy

c.

dominant strategy

d.

independent strategy

e.

autonomous strategy

____ 8. (2 points) A Nash equilibrium
a.

occurs when quantity demanded equals quantity supplied

b.

exists when each player in a game is taking its best action  given the actions taken by the other players

c.

exists when each player in a game picks the collectively optimal strategy

d.

is a kind of equilibrium that exists only in an oligopoly

e.

is a kind of equilibrium that exists only in a duopoly

____ 9. (2 points) In a Nash equilibrium
a.

any player can improve his outcome by changing one other player's strategy

b.

any player can improve his outcome by forcing other players to adopt their dominant strategies

c.

no player plays her dominant strategy

d.

no player can improve his own outcome

e.

no player can improve his outcome by changing only his own strategy

____ 10. (2 points) Figure 1013 shows the payoff matrix for the only two auto dealerships in a community, Jim's Autos and Tim's Autos. The matrix shows the profits that each firm would earn from choosing either a low price or a high price. In this example,
a.

both firms would be best off if they charged a low price

b.

there is no equilibrium to the market

c.

both firms would be best off if they charged a high price

d.

both firms will go out of business in the long run

e.

the market is more efficient than a perfectly competitive market

____ 11. (2 points) Figure 1013 shows the payoff matrix for two large auto dealerships, Jim's Autos and Tim's Autos. The matrix shows the profits that each firm would earn from choosing either a low price or a high price. The equilibrium level of profit for Jim's Autos would be
a.

$250,000

b.

$100,000

c.

$200,000

d.

$50,000

e.

$150,000

____ 12. (2 points) Under price leadership
a.

the leader must be the dominant firm in the industry

b.

all firms follow price changes initiated by the leader

c.

price cuts are followed by other firms in the industry, but price increases are not

d.

price increases are followed by other firms in the industry, but price cuts are not

e.

price wars often occur as a result of titfortat strategies

____ 13. (2 points) Sarah and Marisa are the only two babysitters available in a small town. Figure 1015 indicates different combinations of hourly rates charged by the two teenagers, along with their weekly net earnings. If Marisa is the acknowledged price leader, then
a.

in equilibrium, both will charge $4 per hour

b.

in equilibrium, both will charge $5 per hour

c.

in equilibrium, Sarah will charge $5 per hour; Marisa will charge $4 per hour

d.

in equilibrium, Sarah will charge $4 per hour; Marisa will charge $5 per hour

e.

there is no predictable equilibrium

____ 14. (2 points) The firm depicted in Figure 1016 is one of three identical noncollusive oligopolists in an industry, where each charges price P_{2} and sells Q_{3}. If the three firms form a cartel, the price and output combination for this firm will involve a
a.

higher price and lower output

b.

higher price and higher output

c.

higher price and the same output

d.

lower price and more output

e.

lower price and the same output

____ 15. (2 points) The influence of technological change on market structure
a.

invariably leads to domination by a few firms

b.

depends on whether it increases or decreases minimum efficient scale

c.

tends to increase concentration

d.

depends on whether it increases or decreases the product's value

e.

depends on foreign competition

____ 16. (2 points) Which of the following might be an effect of advertising?
a.

all of the following

b.

increased product differentiation

c.

increased total costs of production

d.

increased average total costs of production

e.

increased demand for the product

____ 17. (2 points) Economic efficiency is achieved
a.

when all resources are fairly allocated

b.

when an economy is producing the maximum possible amount of goods and services

c.

when production or allocation of goods cannot be rearranged to make one person better off while harming no one else

d.

if production or allocation of goods cannot be rearranged to make at least one person better off

e.

if production or allocation of goods cannot be rearranged in a way the benefits more people than it harms

____ 18. (2 points) Economic efficiency is achieved
a.

automatically in a capitalist economy

b.

when every possible Pareto improvement is exploited

c.

when all markets are monopolized

d.

if income is fairly distributed

e.

whenever a voluntary transaction takes place

____ 19. (2 points) In order for a Pareto improvement to occur, someone must suffer a loss so that others may benefit from the improvement.
____ 20. (2 points) A Pareto improvement is
a.

an action in which the gains to the gainers outweigh the losses to the losers

b.

any action that does not harm a third party

c.

an action that makes at least one person better off, and no one worse off

d.

any action that involves a side payment to a third party

e.

the typical outcome of government action

____ 21. (2 points) When individuals trade in open markets,
a.

Pareto improvements occur

b.

Pareto improvements cannot occur

c.

the markets are economically efficient

d.

the markets are Pareto efficient

e.

there are barriers to trade

____ 22. (2 points) Tom carries on loud cellphone conversations in public places. He values such conversations at $1 per minute. Steve prefers piece and quiet. He would pay $2 per minute to avoid overhearing Tom's conversations. In this situation
a.

Tom should quit using his cellphone because that would be a Pareto improvement

b.

Tom should quit using his cellphone because that would be efficient

c.

If Steve made a side payment of $2 to Tom, that would be a Pareto improvement

d.

If Steve paid Tom 50 cents per minute to quit talking, that would be a Pareto improvement

e.

If Steve paid Tom $1.50 per minute to quit talking, that would be a Pareto improvement

____ 23. (2 points) The supply curve indicates
a.

the price that will be charged for each unit of a good or service

b.

how much people are willing to pay for a good or service

c.

the minimum price some seller must receive in order to supply each unit of a good or service

d.

the value of each unit of a good or service

e.

the maximum price some seller can expect to receive from supplying each unit of a good or service

____ 24. (2 points) At the output level corresponding to the efficient quantity of a good,
a.

the value of the last unit can be negative for some consumer

b.

the value of the last unit to some consumer equals the minimum price some seller must receive for producing it

c.

the distribution of the good is fair

d.

the minimum price some consumer must pay for the last unit equals the value of the unit to some producer

e.

the price is the lowest that a typical firm would ever be willing to accept

____ 25. (2 points) Market consumer surplus at any price
a.

is the area above the market supply curve and below the market demand curve

b.

is the area below the market supply curve and above the market demand curve

c.

is the area under the demand curve and above the market price

d.

is that price multiplied by the number of units demanded

e.

is the number of units demanded multiplied by the cost of producing them.

____ 26. (2 points) Suppose that a perfectly competitive market is in equilibrium. Then,
a.

the equilibrium quantity provides the maximum possible benefit to buyers

b.

the equilibrium quantity provides the maximum possible benefit to buyers and sellers combined

c.

total (producer + consumer) surplus is equal to price ´ quantity

d.

an additional unit, if produced, would produce a benefit that exceeds its cost of production

e.

an additional unit could be produced at a cost to some producer that is less than the benefit to some consumer

____ 27. (2 points) A price ceiling in a perfectly competitive market
a.

creates more harm for sellers than gain for buyers

b.

creates more harm for buyers than gain for sellers

c.

is effective only it if is set above the equilibrium price

d.

can turn an inefficient outcome into an efficient outcome

e.

is a Pareto improvement

____ 28. (2 points) A welfare loss in a market
a.

is the dollar difference between consumer surplus and producer surplus

b.

is measured as the area above the market price and to the left of the market quantity

c.

is the dollar value of potential benefits not achieved due to inefficiency in that market

d.

is typically due to government intervention in that market

e.

is typically minimized when a government sets a ceiling price

____ 29. (2 points) A price floor in a perfectly competitive market
a.

is efficient

b.

is a Pareto improvement

c.

is effective only if it is set below the equilibrium price

d.

transfers some surplus from consumers to producers

e.

transfers some surplus from producers to consumers

____ 30. (2 points) The welfare loss due to a price floor
a.

is caused by a decrease in quantity

b.

is the dollar difference between producer surplus and consumer surplus

c.

is measured as the area above the market price and below the demand curve

d.

is measured as the area above both the market price and the supply curve

e.

is a Pareto improvement

Short Answer
31. Consider trade relations between the United States and Mexico. Assume that the leaders of the two countries believe that the payoffs to alternative trade policies are as follows:
United States
high tarriffs
Low tarriffs
U=30
U=25
Low tarriffs
M=25
M=10
Mexico
U=20
U=10
high tarriffs
M=20
M=30
Unit is in billion dollars

What is the dominant strategy for the United States? For Mexico? Explain. (7 points)

Define Nash Equilibrium. What is the Nash Equilibrium for trade policy? (7 points)

In 1993, the U.S. Congress ratified the North American Free Trade Agreement, in which the United States and Mexico agreed to reduce trade barriers simultaneously. Do the perceived payoffs shown here justify this approach to trade policy? (6 points)
32. Suppose the weekly quantity demand Qd for a good is given by the equation Qd=10,00080P, and the weekly quantity supplied Qs is given by Qs=20P, where P is the price per unit.
(a) What is the equilibrium price and quantity?(5 points)
(b)When the market is in equilibrium, draw a graph to show the value of consumer surplus, producer surplus and total benefit.(5 points)
(c)Draw a new graph and show the value of deadweight loss if a price ceiling of $80 is imposed on this market. (5 points)
(d)Draw a new graph and show the value of deadweight loss if a price floor of $110 is imposed on this market. (5 points)
Test 6
Answer Section
MULTIPLE CHOICE
1. ANS: B PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: Oligopoly
2. ANS: A PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: Why Oligopolies Exist
3. ANS: C PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: Why Oligopolies Exist
4. ANS: C PTS: 2 DIF: 3
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: Why Oligopolies Exist
5. ANS: A PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: Oligopoly Behavior Verses Other Market Structures
6. ANS: E PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: The Game Theory Approach
7. ANS: C PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: The Game Theory Approach
8. ANS: B PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: The Game Theory Approach
9. ANS: E PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: The Game Theory Approach
10. ANS: C PTS: 2 DIF: 3
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: The Game Theory Approach
11. ANS: B PTS: 2 DIF: 3
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: The Game Theory Approach
12. ANS: B PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: Cooperative Behavior in Oligopoly
13. ANS: A PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: Cooperative Behavior in Oligopoly
14. ANS: A PTS: 2 DIF: 3
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: Cooperative Behavior in Oligopoly
15. ANS: B PTS: 2 DIF: 3
NAT: financial theories, analysis, reporting, and markets LOC: Oligopoly
TOP: The Future of Oligopoly
16. ANS: A PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Monopolistic competition
TOP: Advertising and Market Equilibrium Under Monopolistic Competition
17. ANS: C PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: The Meaning of Efficiency
18. ANS: B PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: Pareto Improvements
19. ANS: B PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: Pareto Improvements
20. ANS: C PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: Pareto Improvements
21. ANS: A PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: Pareto Improvements
22. ANS: E PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: Side Payments and Pareto Improvements
23. ANS: C PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: Reinterpreting the Supply Curve
24. ANS: B PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: The Efficient Quantity of a Good
25. ANS: C PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: Consumer Surplus
26. ANS: B PTS: 2 DIF: 3
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: Perfect Competition and Efficiency: The Total Benefits View
27. ANS: A PTS: 2 DIF: 1
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: A Price Ceiling
28. ANS: C PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: A Price Ceiling
29. ANS: D PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: A Price Floor
30. ANS: A PTS: 2 DIF: 2
NAT: financial theories, analysis, reporting, and markets LOC: Efficiency and equity
TOP: A Price Floor
SHORT ANSWER
31. ANS:
(a)United States’ dominant strategy is high tariffs. Mexico’s dominant strategy is also high tariffs. Because they can get higher payoffs with high tariffs no matter the rival’s strategy.
(b) A Nash Equilibrium is a combination of strategies in which each player is making the best choice for him or herself, given the choices of all other players.
(c)If this is just a one shot game, then No, because each country has incentive to break the treat. Then the treat is not trustable, as proved by this model.
However, if this is a repeated game, and the two countries care about the long run benefit, then Yes, because if one country breaks the treat, the other country will play the high tariff as a punishment. This winwin solution will become true only in the long run story.
PTS: 20
32. ANS:
(a) The equilibrium price can be determined by equating the expressions for quantity demanded and quantity supplied: 10,000 – 80P = 20P. Solving this, we find that P* = 100. To determine the equilibrium quantity, substitute this price into either the demand or the supply equation, e.g., Q* = 20(100) = $2000 per unit.
(b),(c),(d), see lecture notes
PTS: 20 