ECO Multiple Choice and Short Question

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ECO 102 (Online) Exam 4
Questions 1-32 are worth 3 points each, thus there are 4 free points in this exam.
Question 33 is pure extra credit worth up to 6 points of extra credit.
Use the following to answer question 1:
1. Assume the above figure applies to a perfectly price discriminating monopolist, that is, to a monopolist
who is able to extract from each buyer the maximum price that buyer is willing to pay. The profitmaximizing
output:
A) will be l.
B) will be j.
C) will be k.
D) cannot be determined from the information given.
Use the following to answer questions 2:
2. Refer to the above diagram where the numerical data show profits in millions of dollars. Beta's
profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If both
firms follow a high-price policy:
A) Alpha will realize a $10 million profit and Beta a $30 million profit.
B) each will realize a $20 million profit.
C) Beta will realize a $10 million profit and Alpha a $30 million profit.
D) each will realize a $15 million profit.
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Exhibit 9-1
3. Refer to Exhibit 9-1. If the product is produced under perfect competition, what quantity will be produced
and what price will be charged?
a. Q1 units at P1
b. Q2 units at P1
c. Q1 units at P2
d. Q2 units at P2
4. Refer to Exhibit 9-1. If the product is produced under single-price monopoly, what quantity will be
produced and what price will be charged?
a. Q2 units at P1
b. Q1 units at P1
c. Q1 units at P2
d. Q2 units at P2
5. Refer to Exhibit 9-1 The deadweight loss of monopoly is identified by what area?
a. area Q1BAQ2
b. area BCA
c. area P1P2CB
d. area 0P1BQ1
e. none of the above
6. The difference between profit seeking under perfect competition and profit seeking under monopoly
is that
a. under the former output will increase and price will decrease, whereas under the latter only
output will increase.
b. under the former output will increase and price may increase, whereas under the latter
output will increase and price will decrease.
c. under the former new firms will enter the industry, whereas under the latter the firm will
simply raise its price and earn higher profits.
d. none of the above
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7. Barriers to entry for the monopolist include all of the following except
a. exclusive ownership of a scarce resource.
b. patents.
c. public franchises.
d. diseconomies of scale.
e. government licenses.
8. A monopoly
a. can charge whatever price it wants.
b. always earns a positive economic profit.
c. is constrained by marginal cost in setting price.
d. is constrained by demand in setting price.
e. all of the above
Exhibit 9-2
9. Refer to Exhibit 9-2. The monopolist is operating at
a. a zero economic profit.
b. a positive economic profit.
c. an economic loss.
d. a normal profit.
10. In a monopolistically competitive market, which of the following factors probably does not give rise to
product differentiation?
a. packaging of the product
b. brand names
c. loyalty of customers to a particular producer
d. quality difference
e. the small number of sellers
11. Compared to a monopolistic competitor, a monopolist produces a good with __________ substitutes and
so has a __________ elastic demand curve.
a. fewer; more
b. fewer; less
c. more; more
d. more; less
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12. One of the ways in which monopolistic competitors differ from perfect competitors is that
a. perfect competitors produce the quantity of output at which marginal revenue equals
marginal cost and monopolistic competitors do not.
b. perfect competitors produce a homogeneous product and monopolistic competitors do not.
c. there is easy entry and exit for a perfect competitor, but not for a monopolistic competitor.
d. a and c
e. b and c
13. In the price leadership theory,
a. all fringe firms are price searchers.
b. all fringe firms are price takers.
c. the dominant firm is a price taker.
d. a and c
14. A cartel is an organization of firms
a. dominated by one firm, which is usually referred to as the price leader.
b. that attempts to increase total (or industry) demand for their product.
c. that reduces output and increases price in an effort to increase joint profits.
d. that deliberately attempts to disrupt the market for political reasons.
15. For a monopolist to sell more units of output,
A) the price must be increased.
B) the price must be reduced.
C) demand must become more elastic.
D) the other competing firms must sell fewer units.
16. For a monopolist, price
A) equals marginal revenue at all output levels.
B) is less than marginal revenue.
C) is greater than marginal revenue.
D) can be greater than or less than marginal revenue.
17 Relative to a competitively organized industry, a monopoly is more likely to produce
A) more output, charges higher prices, and earns economic profits.
B) less output, charges lower prices, and earns economic profits.
C) less output, charges lower prices, and earns only a normal profit.
D) less output, charges higher price, and earns economic profits.
18 ________ is(are) protected by barriers to entry, specifically ________.
A) State lotteries; government rules
B) DeBeers Company; economies of scale
C) Cable companies; patents
D) All of the above are correct.
19 Although patents are a ________, they also provide ________.
A) collusive agreement; for free entry of new firms
B) collusive agreement; an incentive for invention and innovation
C) barrier to entry; for free entry of new firms
D) barrier to entry; an incentive for invention and innovation
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20 Which of the following statements regarding perfect price discrimination is FALSE?
A) Perfect price discrimination is charging different prices to different buyers.
B) Perfect price discrimination is an attempt by monopolists to capture consumer surplus
as profit.
C) Perfect price discrimination can eliminate the deadweight loss to society of a
monopoly.
D) Perfect price discrimination yields the same market price and output result as perfect
competition.
21 Entry to and exit from a ________ market are ________.
A) oligopolistic; easy
B) perfectly competitive; difficult
C) perfectly contestable; difficult
D) perfectly contestable; easy
22 In contestable markets, large oligopolistic firms end up behaving like
A) monopolistically competitive firms.
B) a monopoly.
C) perfectly competitive firms.
D) a cartel.
23 The colluding oligopoly will face market demand and produce up until the point at which
A) price and marginal cost are equal and price will be set equal to marginal cost.
B) marginal revenue and marginal cost are equal and price will be set above
marginal cost.
C) price and marginal revenue are equal and price will be set below marginal cost.
D) marginal revenue and marginal cost are equal and price will be set below
marginal cost.
24 A form of oligopoly in which a dominant firm sets the price and all smaller firms in the
industry follow the dominant firm's pricing policy is called
A) the Cournot model.
B) the contestable markets model.
C) a cartel.
D) the price-leadership model.
25 Predatory pricing is
A) often effective and a relatively inexpensive means of eliminating competition.
B) legal under the U.S. antitrust laws.
C) the practice by which a large, powerful firm attempts to drive its competitors out of t
he market by temporarily setting an artificially low price.
D) generally more effective when barriers to entry exist.
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Refer to the information provided in Table 14.2 below to answer the question that follows.
Table 14.2
B's Strategy
Advertise Don't Advertise
A's profit $100
million
A's profit $200
million
Advertise
B's profit $100
million B's profit $50 million
A's Strategy
Don't
A's profit $50
million
A's profit $75
million
Advertise
B's profit $200
million
B's profit $75
million
26 Refer to Table 14.2. Firm A's dominant strategy is to not advertise.
A) True
B) False
27 The case for advertising includes the fact that
A) it wastes society's scarce resources.
B) firms spend large sums of money to create meaningless differences among products.
C) it provides consumers with valuable information about product availability, quality,
and price.
D) it creates wants that otherwise would not have existed.
28 The case AGAINST advertising includes the fact that
A) firms spend large sums of money to create artificial differences among products.
B) it provides consumers with valuable information about product availability, quality,
and price.
C) it increases competition by decreasing barriers to entry of new firms into an industry.
D) it ensures high quality and efficient production.
29 Critics of advertising contend all of the following EXCEPT:
A) the information content of advertising is minimal at best and deliberately deceptive
at worst.
B) advertising is intended to change peoples'ʹpreferences and to create wants that
otherwise would not have existed.
C) advertising may reduce competition by creating a barrier to entry of new firms into
an industry.
D) advertising can easily turn into productive competition that increases welfare.
30 The right answer to the debate regarding the welfare effects of advertising is that
A) advertising always leads to concentration in an industry.
B) advertising always leads to positive economic profits in an industry.
C) advertising always improves the functioning of the market.
D) there is no right answer.
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31 A monopolistically competitive firm produces where
A) marginal revenue equals price.
B) its marginal revenue curve lies above its demand curve.
C) its marginal revenue curve intersects the quantity axis.
D) marginal revenue equals marginal cost.
32 If firms in a monopolistically competitive industry are earning economic profits, then in
the long run
A) these firms can continue earning economic profits because entry into the industry
is blocked.
B) new firms producing close substitutes will enter the industry and this entry will
continue until economic profits are eliminated.
C) new firms producing the exact same product will enter the industry and this entry will
continue until economic profits are eliminated.
D) the government will most likely regulate firms in this industry to reduce these
economic profits.
33 Explain what is meant by the tit-for-tat strategy. Explain it by referring to the payoff
matrix in question 26.