CH sample multiple choice - 120

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1 Class: Date: CH sample multiple choice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Because of the number of firms in monopolistic competition a. each firm has a large market share. b. it is possible for the firms to collude. c. no one firm can dominate the market. d. one firm has the ability to dictate market conditions. e. each firm must carefully monitor what its competitors do. 2. Product differentiation means a. firms sell products that are very dissimilar. b. products sold by different firms are slightly different. c. charging a higher price to consumers with high willingness to pay. d. charging a lower price to consumers with low willingness to pay. e. that a single firm sells many different types of products. 3. Because of product differentiation, firms a. do not have to compete because their products are unique. b. cannot compete on price. c. can compete on the basis of quality. d. are unable to compete by using advertising. e. must compete on only price. 4. A high-quality manufacturer in monopolistic competition charges a. higher prices and advertises quality differences. b. lower prices and advertises price differences. c. lower prices and advertises quality differences. d. higher prices and advertises price differences. e. the same price as low-quality manufacturers but advertises quality differences. 5. The four-firm concentration ratio is the percentage of the value of total revenue accounted for by the a. 4 largest firms in an industry. b. 4 smallest firms in an industry. c. 50 smallest firms in an industry. d. 50 largest firms in an industry. e. 4 middle-sized firms in an industry. 6. An industry is considered monopolistic competition if the four-firm concentration ratio a. exceeds 60 percent. b. is less than 100 percent. c. is less than 40 percent. d. exceeds 33 percent. e. is between 90 percent and 100 percent. 7. If the four-firm concentration ratio for the market for diapers is 73 percent, then this industry is best characterized as a. a monopoly. b. monopolistic competition. c. an oligopoly. d. perfect competition. e. either a monopoly or monopolistic competition. 2

2 8. A market in which the Herfindahl-Hirschman Index exceeds 1,800 is considered to be a. competitive. b. not competitive. c. moderately competitive. d. purely competitive. e. either a monopoly or monopolistic competition. 9. For the monopolistically competitive firm, the demand curve a. is a horizontal line. b. has a positive slope. c. is vertical. d. has a negative slope. e. is the same as the marginal revenue curve. 10. When a firm maximizes its profit, which of the following is correct for firms in monopolistic competition and perfect competition? a. P = MC for both types of firms. b. P = MC = MR for firms in perfect competition and P > MC = MR for firms in monopolistic competition. c. MC = MR for firms in perfect competition and MR > MC for firms in monopolistic competition. d. P > MC = MR for firms in both perfect competition and monopolistic competition. e. P = ATC always for firms in both perfect competition and monopolistic competition. 11. To maximize profit, a firm in monopolistic competition will produce the quantity where marginal revenue a. is greater than marginal cost. b. equals zero. c. is less than marginal cost. d. equals marginal cost. e. equals average total cost. 2

3 12. Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. Kevin will train how many clients per day? a. 4 b. 6 c. 10 d. between 2 and 4 e. None of the above answers is correct. 13. Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. If Kevin trains 5 clients per day, he will his profit and will. a. maximize; earn normal profit b. not maximize; earn a normal profit anyway c. maximize; earn an economic profit d. not maximize; earn an economic profit anyway e. not maximize; incur an economic loss 14. Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. What price will Kevin charge per session? a. $100 b. $60 c. $40 d. $20 e. $80 3

4 15. In monopolistic competition, there are barriers to entry and so firms in monopolistic competition earn an economic profit in the long run. a. high; can b. high; cannot c. no; can d. no; cannot e. sometimes; can sometimes 16. A firm in monopolistic competition is a. efficient because in the long run it earns only a normal profit. b. efficient because it produces at the minimum average total cost. c. inefficient because price exceeds marginal cost. d. efficient because of the ease of entry. e. efficient because it produces where MR = MC. 17. One sign of inefficiency in monopolistic competition is that a. marginal revenue equals marginal cost. b. price exceeds marginal cost. c. price is less than marginal cost. d. price is less than marginal revenue. e. in the long run price equals average total cost. 18. One of the major benefits to society of monopolistic competition is a. high prices. b. restricted output. c. product differentiation. d. the excess capacity. e. the markup. 19. For a firm in monopolistic competition, the efficient scale is the amount of output at which is a minimum. a. fixed cost b. average total cost c. average variable cost d. average fixed cost e. marginal cost 20. Which of the following is correct? a. A firm in monopolistic competition does not have excess capacity in the long run. b. A firm in perfect competition operates at maximum average total cost in the long run. c. In the long run, a firm in monopolistic competition maximizes its profit at a point where price is equal to average total cost but the average total cost is not minimized. d. In the long run, a firm in monopolistic competition earns a normal profit and its price is equal to the minimum average total cost. e. In the long run, a firm in monopolistic competition can earn an economic profit because of product differentiation. 21. Firms in monopolistic competition will spend money on innovation a. so that other firms can make substitute products. b. in order to make the demand for their products more elastic. c. so that they can produce a good or service that at least temporarily does not have any close substitutes. d. because they have funds set aside for research. e. in order to signal quality. 4

5 22. Firms in monopolistic competition compete with each other in three areas: a. quantity, barriers to entry, advertising. b. economies of scale, price, and marketing. c. concentration ratios, quality, and price. d. price, marketing, and quality. e. economies of scale, barriers to entry, and concentration ratios. 23. Firms in monopolistic competition a. face a downward-sloping demand curve. b. cannot charge a markup because there are no dominant firms. c. definitely do not benefit from advertising. d. produce at the efficient scale in the long run. e. generally have low to nonexistent selling costs. 24. Advertising costs a. make the marginal revenue more elastic. b. shift the ATC curve upward. c. shift the marginal cost curve rightward. d. indirectly shift the marginal cost curve upward. e. affect the marginal cost but not the total cost. 25. The firm in the above figure has an economic profit of. a. $0 b. $80 c. $160 d. more than $161 e. less than zero, that is, the firm has an economic loss 5

6 26. An industry with a large number of firms, differentiated products, and free entry and exit is called a. perfect competition. b. monopolistic competition. c. oligopoly. d. monopoly. e. monopolistic oligopoly. 27. In monopolistic competition, the products of different sellers are assumed to be a. identical. b. similar but slightly different. c. unique without any close or perfect substitutes. d. perfect substitutes. e. either identical or differentiated. 28. Which of the following is true about monopolistic competition but false about perfect competition? a. There are a large number of independently acting sellers. b. There are no barriers to entry. c. Firms can earn an economic profit in the short run. d. Firms compete on their product's price as well as its quality and marketing. e. Firms cannot earn an economic profit in the long run. 29. The United Company competes with many other firms each producing slightly different products. Firms freely enter and exit this industry. The type of industry United Company operates in is. a. a monopoly b. monopolistic competition c. oligopoly d. perfect competition e. oligopolistic monopoly 30. As the degree of product differentiation increases among the products sold in a monopolistically competitive industry, a. the cost of production falls. b. the demand curve for each seller's product becomes more horizontal. c. each seller's demand becomes more inelastic. d. the amount of marketing expenditures decreases for each firm. e. sellers can no longer earn an economic profit. 31. For a firm in monopolistic competition, marketing a. means only selling at a lower price than rivals. b. takes the forms of advertising and packaging. c. means producing more output to lower average costs. d. consists of changing the marginal cost and marginal revenue curves. e. None of the above answers is correct. 32. Firms in monopolistic competition have demand curves that are a. horizontal. b. vertical. c. downward sloping. d. upward sloping. e. U-shaped. 6

7 33. As a firm in monopolistic competition sets the price for its product, the firm faces a tradeoff between a. supply and demand. b. efficiency and equity. c. internal and external economies of scale. d. price and the quantity it can sell. e. its marginal revenue and its price. 34. Which of the following four-firm concentration ratios would be the best indicator of a monopoly? a percent b. 31 percent c. 78 percent d. 100 percent e. 89 percent 35. What is the four-firm concentration ratio if the four largest firms in an industry account for 5 percent, 6 percent, 7 percent, and 8 percent of total revenue? a. 26 percent b. 174 percent c. 1,680 d. There is enough information given to answer the question, but none of the answers above are correct. e. There is not enough information given to answer the question. 36. Suppose there are 7 firms in the candy industry with the market shares shown below. What is the HHI for the industry? a b c d. 100 e A market is considered competitive if the Herfindahl-Hirschman Index (HHI) is and its four-firm concentration ratio is. a. high; high b. high; low c. low; high d. low; low e. between 30 percent and 70 percent; greater than 5,000 7

8 38. One problem with measures of market concentrations is that they do not a. account for barriers to entry. b. allow for all market types. c. account for the difficulty in collecting total revenue data. d. create meaningful comparisons across industries. e. accurately measure concentration in markets with fewer than 4 firms. 39. Each of the ten firms in an industry has 10 percent of the industry's total revenue. The four-firm concentration ratio is a. 80. b c. 1,000. d. 40. e If a monopolistically competitive seller's marginal cost is $3.56, the firm will increase its output if a. its marginal revenue is less than $3.56. b. its marginal revenue is equal to $3.56. c. its marginal revenue is more than $3.56. d. average total cost is less than $3.56. e. Both answers A and D are correct. 41. If a monopolistically competitive seller's marginal cost is $3.56, the firm will decrease its output if a. its marginal revenue is less than $3.56. b. its marginal revenue is equal to $3.56. c. its marginal revenue is more than $3.56. d. its average total cost is equal to $4.00. e. Both answers B and D are correct. 8

9 42. The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium price at this restaurant is per meal. a. $20 b. $30 c. $50 d. less than $20 e. more than $50 9

10 43. The above figure shows a motel engaged in monopolistic competition with other motels. Figure shows the equilibrium in which the motel is. a. short-run; earning an economic profit b. short-run; earning a normal profit c. long-run; earning an economic profit d. long-run; earning a normal profit e. short-run; incurring an economic loss 44. In the long run, a firm in monopolistic competition will produce a. where average total cost is minimized. b. where price equals average total cost but average total cost is not at its minimum. c. zero output. d. any possible amount of output. e. where price equals marginal cost. 45. When a monopolistically competitive firm's demand curve shifts leftward, what happens to its marginal revenue curve? a. Nothing, the marginal revenue curve is unchanged. b. It disappears. c. It shifts rightward. d. It shifts leftward. e. None of the above is correct because the effect on the marginal revenue curve depends on whether the demand was initially elastic or inelastic. 10

11 46. Even though monopolistic competition results in inefficiency, it does have which of the following benefits for society? a. Firms earn normal profit in the long run. b. Firms can earn an economic profit in the short run. c. Product differentiation benefits consumers. d. Marginal cost equals price in the long run. e. The premise of the question is incorrect because nothing in monopolistic competition justifies any economic inefficiency. 47. Which of the following is an advantage of monopolistic competition? a. production at the lowest possible average cost b. product variety c. only essential costs are incurred d. long-run profitability e. the firms have excess capacity so they are always willing to increase their production 48. A monopolistically competitive firm maximizes profit by equating a. price and marginal revenue. b. price and marginal cost. c. demand and marginal cost. d. marginal revenue and marginal cost. e. price and average total cost. 49. A firm in monopolistic competition definitely incurs an economic loss if a. price equals marginal revenue. b. price is less than average total cost. c. marginal revenue equals marginal cost. d. marginal revenue is less than average total cost. e. price is greater than marginal cost. 50. In the long run, a firm in monopolistic competition a. can only earn a normal profit. b. produces at a minimum average total cost. c. has deficient capacity. d. can earn either a normal profit or an economic profit. e. produces a quantity where its demand curve is upward sloping. 51. A firm's efficient scale of production is the output at which its a. marginal cost is at a minimum. b. average total cost is at a minimum. c. profit is maximized. d. marginal revenue is at a maximum. e. marginal revenue equals marginal cost. 52. In the long run, a firm in monopolistic competition excess capacity and a firm in perfect competition excess capacity. a. has; has b. has; does not have c. does not have; has d. does not have; does not have e. might have; might have 11

12 53. For a firm in monopolistic competition to undertake product development, the marginal cost of the development must be the marginal benefit of the development to consumers. a. greater than b. less than c. not comparable to d. equal to or less than e. None of the above because a monopolistically competitive firm undertakes product development if the marginal cost of the development is less than or equal to the marginal revenue from the development. 54. Firms attempt to create a consumer perception of product differentiation through i. packaging. ii. marketing. iii. advertising. a. i only. b. ii only. c. ii and iii. d. i and iii. e. i, ii, and iii. 55. In the long run, advertising by all firms in a monopolistically competitive industry a. increases all firms' demand. b. decreases all firms' demand. c. lowers all firms' costs. d. might increase or decrease all firms' demand. e. lowers all firms' prices. 56. When weighing the efficiency of monopolistic competition, which of the following should be considered? i) The information provided by advertising. ii) Extra product variety. iii) The extra cost of excess capacity. a. ii only. b. i and iii. c. ii and iii. d. i, ii, and iii. e. iii only. 57. The decision to innovate a. depends on the marketing department's needs. b. depends on whether the firm wants to benefit its customers. c. is based on the marginal cost and the marginal revenue of innovation. d. is unnecessary in a monopolistically competitive market. e. None of the above answers is correct. 58. For a firm in monopolistic competition, selling costs a. increase costs and reduce profits. b. always increase demand. c. can change the quantity produced and lower the average total cost. d. can lower total cost. e. has no effect on the quantity sold. 12

13 59. A firm faces a small number of competitors. This firm is competing in a. a monopoly. b. monopolistic competition. c. an oligopoly. d. perfect competition. e. a perfect multi-firm monopoly. 60. Firms in an oligopoly i. are independent of each others' actions. ii. can each influence the market price. iii. charge a price equal to marginal revenue. a. i only. b. ii only. c. iii only. d. i and iii. e. i, ii, and iii. 61. A group of firms that has entered into an agreement to restrict output and increase prices and profits is called a. a compliance. b. a cartel. c. an oligopoly. d. a duopoly. e. a multi-firm monopoly. 62. "Duopoly" is a. another name for monopoly. b. a special type of monopolistic competition. c. a two-firm oligopoly. d. a game with three players. e. the situation when a firm sets a duo (two) of different prices for its customers. 63. The range in which a duopoly's output falls is less than or equal to the output level in and more than or equal to the output level in. a. monopolistic competition; monopoly b. monopolistic competition; perfect competition c. perfect competition; monopoly d. monopoly; monopolistic competition e. monopoly; perfect competition 64. The possible alternatives for an oligopoly range from the monopoly case with to the perfectly competitive case with. a. high output; low output b. low prices; high prices c. low profits; high profits d. low output; high output e. no cooperation among the firms; much cooperation among the firms 13

14 65. Which of the following statements is correct? a. A firm in oligopoly will charge a price that is lower than the price charged in perfect competition. b. If firms in oligopoly look only at their own self-interest in deciding the output they should produce, the total market output will exceed that of a monopoly. c. If one oligopolist reduces the price of its product, its demand curve shifts leftward. d. Because many producers join to form a cartel, the market becomes monopolistic competition. e. It is in the self-interest of each firm in an oligopoly to take the actions that maximize all the firms' joint profit. 66. The major dilemma facing Boeing and Airbus is the a. fact that neither will respond to the behavior of the other. b. certainty surrounding the reaction of each firm to the behavior of the other firm. c. fact that if each firm separately tries to maximize its profit, it might wind up with less profit that otherwise. d. competition from other firms that drives their economic profit to zero. e. fact that when they collude to maximize their profit, the other firm's profit might be larger than its profit. 67. Which of the following is true? In the above figure, if the market is a. a monopoly, output will be Q 1 and price will be P 3. b. a monopoly, output will be Q 3 and price will be P 3. c. perfect competition, output will be Q 2 and price will be P 2. d. perfect competition, output will be Q 1 and price will be P 1. e. perfect competition, output will be Q 3 and price will be P 3. 14

15 68. Boeing and Airbus have entered into a cartel agreement that will enable them to boost their profits. What occurs if Boeing decides to cheat on the agreement? i. Boeing lowers the price of its airplanes. ii. The total industry output increases. iii. The total profits in the airplane industry will decrease. a. i only. b. ii only. c. iii only. d. i and ii. e. i, ii, and iii. 69. The concepts of mutual interdependence and game theory illustrate the fact that firms competing in oligopoly a. consider the actions of the rivals before changing the price of their product. b. ignore the actions of their rivals when considering price changes. c. engage in frequent price changes. d. never change prices. e. will mutually determine the combined best outcome for all players. 70. All games have which features? a. prices, rules, and payoffs b. rules, markets, and prices c. rules, strategies, and payoffs d. rules, strategies, and costs e. equilibrium, prices, and quantities 71. A Nash equilibrium i. is named after the Nobel prize winning economist, John Nash. ii. occurs when each player chooses the best strategy given the strategy of the other player. iii. must give the best possible outcome for each player. a. i only. b. ii only. c. iii only. d. i and ii. e. ii and iii. 72. A Nash equilibrium occurs when each player in a game takes the given the action of the other player. a. worst possible action for himself or herself b. best possible action for himself or herself c. most unpredictable possible action d. most mutually beneficial possible action e. best possible action for the other player 73. The prisoners' dilemma is an example of a. a cartel. b. a game played only once. c. an oligopoly. d. a repeated game. e. equilibrium in monopolistic competition. 15

16 74. The prisoners' dilemma is similar to the problem faced by firms in an oligopoly in the United States because a. mutual interdependence exists, and collusion is illegal in the United States, so the firms cannot legally communicate. b. collusion is legal in the United States, and firms can communicate their pricing decisions to each other. c. failure to cooperate leads to better outcomes than cooperation. d. private prisons are run by oligopolies. e. the firms can communicate but mutual interdependence exists. 75. Suppose MCI and AT&T can each charge either 3 or 4 a minute for a long distance call. The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. If MCI charges 3 a minute and AT&T charges 4 a minute, then MCI's profit will be million and AT&T's profit will be million. a. $320; $320 b. $200; $500 c. $500; $200 d. $450; $450 e. $320; $ If two duopolists can stick to a cartel agreement to boost their prices, then both a. earn greater profits than if they did not collude. b. price at marginal cost. c. price below average total cost. d. decrease their economic profits. e. increase their production so that each produces more than if they did not collude. 16

17 77. The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the Nash equilibrium, Firm A will set a price of and Firm B will set a price of. a. $10; $20 b. $20; $10 c. $10; $10 d. $20; $20 e. $20; something, but more information is needed to determine Firm B's price 78. The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the above game, in the Nash equilibrium, a. Firm A and Firm B are both making $40,000 in economic profit. b. Firm A and Firm B are both making $55,000 in economic profit. c. Firm A is making $60,000 and Firm B is making $55,000 in economic profit. d. Firm A and Firm B are both making $60,000 in economic profit. e. Firm A and Firm B are both making $35,000 in economic profit. 79. The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. Which of the following statements is correct? a. If the firms play this game repeatedly, one would end up charging $20 and the other $10. b. If the firms cooperate, they could both earn $55,000 in economic profit. c. The Nash equilibrium in this game is for both firms to set P = $20 because that maximizes their combined profit. d. Firm B's strategy is to always set P= $20 because that gives Firm B the highest possible profit. e. If Firm B sets P = $20, then Firm A will maximize its profit by setting its P = $20. 17

18 80. Which of the following are characteristics of an oligopoly? i. The HHI for an oligopoly is between 100 and ii. There are a few firms that compete. iii. The firms can increase their profit by forming a cartel. a. i and ii b. i and iii c. ii and iii d. i, ii, and iii e. i only. 81. If a legal oligopoly exists, a. the firms always engage in a "tit for tat" strategy. b. there is the possibility that the market is large enough for more firms. c. the firms never collude. d. monopoly profits cannot be earned. e. the firms may legally merge and become a monopoly. 82. The range of output for a duopoly ranges between the a. perfectly competitive outcome and the monopolistically competitive outcome. b. efficient scale and the perfectly competitive outcome. c. minimum of ATC and the efficient scale. d. monopoly outcome and the perfectly competitive outcome. e. short-run perfectly competitive outcome and the long-run perfectly competitive outcome. 83. What is the conclusion in the prisoners' dilemma? a. Firms should not enter a legal duopoly. b. Two prisoners acting in their own best interest harm their joint interest. c. There is no Nash equilibrium available to the prisoners. d. Prisoners do not act interdependently. e. Duopolies almost always reach their best outcome. 84. Which of the following can be games played by firms in an oligopoly? i. choosing how much to spend on advertising ii. choosing how much to spend on R&D iii. choosing to enter a legal duopoly a. i and ii b. i and iii c. ii and iii d. ii only e. iii only. 85. Herb's Inc. has a large share of its market and is tempted to collude with the few firms that are in its market. Herb's operates in a. an oligopoly. b. a monopolistically competitive market. c. a monopoly market. d. a perfectly competitive market. e. collusively protected market. 18

19 86. An oligopoly created because of economies of scale is called a a. natural oligopoly. b. legal oligopoly. c. public oligopoly. d. monopolistic oligopoly. e. scale oligopoly. 87. A cartel is a. a group of firms selling identical products but at slightly different prices. b. an agreement among firms to limit output, raise prices, and increase economic profit. c. the automobile producing industry. d. the only firm selling a particular product. e. an illegal agreement among firms which most often arises in monopolistically competitive markets. 88. The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the lowest price at which a firm could stay in business in the long run is per unit and the quantity demanded in the market at that price is units per hour. a. $15; 6,000 b. $10; 8,000 c. $10; 6,000 d. $25; 2,000 e. $10; 4,000 19

20 89. The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the figure shows a can profitably operate. a. natural monopoly in which 1 firm b. natural monopoly in which 2 firms c. natural oligopoly in which 3 firms d. natural oligopoly in which 2 firms e. natural oligopoly in which 8 firms 90. The fact that firms in oligopoly are interdependent means that a. there are barriers to entry. b. one firm's profits are affected by other firms' actions. c. they can produce either identical or differentiated goods. d. there are too many of them for any one firm to influence price. e. they definitely compete with each other so that the price is driven down to the monopoly level. 91. Collusion results when a group of firms i. act separately to limit output, lower prices, and decrease economic profits. ii. act together to limit output, raise prices, and increase economic profits. iii. in the United States legally fix prices. a. i only. b. ii only. c. iii only. d. i and iii. e. ii and iii. 20

21 92. If firms in an oligopolistic industry consistently cut their price to sell more output, what price and output will result? a. the monopoly price and output b. the competitive price and output c. the monopolistically competitive price and output d. a price lower than the competitive price and less output than the competitive amount e. a price lower than the competitive price and more output than the competitive amount 93. The above figure shows the market demand curve for long-distance telephone calls. Suppose the marginal cost of a long-distance telephone call is 2 a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as a monopoly, there are minutes of calls made per hour. a. between 0 and 3 million b. more than 3 million and less than or equal to 5 million c. more than 5 million and less than or equal to 7 million d. more than 7 million and less than or equal to 9 million e. more than 9 million 94. Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases its output, the market price and total economic profit of the two firms combined. a. falls; decreases b. falls; increases c. rises; decreases d. rises; increases e. falls; does not change 21

22 95. For a duopoly, the maximum total profit is reached when the duopoly produces a. the same amount of output as the competitive outcome. b. the same amount of output as the monopoly outcome. c. an amount of output that lies between the competitive outcome and the monopoly outcome. d. more output than the competitive outcome. e. less output than the monopoly outcome. 96. The players in a game theory situation often do not act in their joint interest because of which of the following? a. They do not realize the benefit of cooperation. b. Players strive to minimize their opponents' profits. c. Players do not understand the game and its payoffs. d. It is not in each player's self-interest to cooperate. e. Players understand the game but they do not know which action(s) will benefit their joint interest. 97. Which of the following is used to analyze all possible choices and outcomes in the prisoners' dilemma? a. the four-firm concentration ratio b. the payoff matrix c. product differentiation d. strategies e. the game-theory profit index 98. The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is a. Bonnie confesses only if she thinks Clyde denies committing the crime. b. Clyde confesses only if he thinks Bonnie denies committing the crime. c. both Bonnie and Clyde confess to the crime. d. both Bonnie and Clyde deny committing the crime. e. Clyde confesses and Bonnie might either confess or not confess, either outcome is consistent with the Nash equilibrium. 22

23 99. One of the main tools economists use to analyze strategic behavior is a. the Herfindahl-Hirschman Index. b. game theory. c. product differentiation. d. the collusion index. e. dual theory, which is used to study duopolies Game theory reveals that a. the equilibrium might not be the best solution for the parties involved. b. firms in oligopoly are not interdependent. c. each player looks after what is best for the industry. d. if all firms in an oligopoly take the action that maximizes their profit, then the equilibrium will have the largest possible combined profit of all the firms. e. firms in an oligopoly choose their actions without regard for what the other firms might do The prisoners' dilemma game a. shows that prisoners are better off if they cooperate. b. shows it is easy to cooperate. c. has an equilibrium in which both prisoners are made as well off as possible. d. would have the same outcome even if the prisoners can communicate and cooperate. e. has an equilibrium in which one prisoner is made as well off as possible and the other prisoner is made as worse off as possible When duopoly games are repeated and a "tit for tat" strategy is used, a. the competitive outcome is more likely to be reached than when the game is played once. b. the monopoly outcome is more likely to be reached than when the game is played once. c. both firms begin to incur economic losses. d. one firm goes out of business. e. because the game is repeated it is impossible to predict whether the competitive or the monopoly outcome is more likely From a social perspective, oligopoly is a. always efficient. b. efficient only if the firms cooperate. c. efficient only if the firms play non-repeated games. d. generally not efficient. e. efficient only if the firms innovate A firm in monopolistic competition has over its price and over the market average price. a. power; power b. power; no power c. no power; power d. no power; no power e. power only in the long run; no power 105. The freedom of entry and exit in monopolistic competition means that firms a. enter the market when economic losses are being suffered. b. exit the market when economic profits are being earned. c. enter the market when normal profits are being earned. d. can enter a market to compete for economic profits and leave when economic losses are being incurred. e. find it easy to permanently earn an economic profit. 23

24 106. In monopolistic competition there are barriers to entry, so therefore in the long run, economic profit. a. no; is substantial b. no; equals zero c. many; equals zero d. many; is substantial e. many; might be earned depending on the degree of product differentiation 107. If a firm in the long run produces less than its efficient scale, it a. should raise its markup to increase its profit. b. should lower its markup to increase its profit. c. cannot be a perfectly competitive firm. d. should not advertise. e. must have its markup equal to zero The square of the percentage market share of each firm summed over the largest 50 firms in a market is the a. elasticity of demand value. b. elasticity of supply value. c. Herfindahl-Hirschman Index. d. four-firm concentration ratio. e. fifty-firm concentration ratio What is the Herfindahl-Hirschman Index if the four firms in an industry account for 62 percent, 15 percent, 15 percent, and 8 percent of total revenue? a. 100 b. 4,358 c. 111,600 d. 2,822 e. 6, In monopolistic competition there a. are many firms and many buyers. b. are several large firms. c. is one large firm. d. might be many, several, or one firm. e. are many firms but only a few buyers. 24

25 111. The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium quantity at this motel is rooms per day. a. 200 b. 300 c. 400 d. 500 e At a long-run equilibrium in monopolistic competition, price equals a. average total cost. b. marginal cost but not marginal revenue. c. marginal revenue but not marginal cost. d. zero. e. marginal revenue and marginal cost In monopolistic competition, the entry of new firms a. shifts existing firms' demand curves rightward. b. shifts existing firms' demand curves leftward. c. only results in a movement along the existing firms' demand curves. d. has no effect on the existing firms' demand curves. e. shifts existing firms' supply curves rightward If a firm is maximizing its profit and producing less than the output at which its average total cost is minimized, then that firm a. must be suffering an economic loss. b. must be earning an economic profit. c. has excess capacity. d. is producing at its capacity output. e. must be earning a normal profit. 25

26 115. A firm in monopolistic competition that introduces a new and differentiated product will temporarily have a demand for its product and is able to charge a a. less elastic; a lower price than before. b. less elastic; a higher price than before. c. more elastic; a lower price than before. d. more elastic; a higher price than before. e. less elastic; the same price as before If a few oil-producing countries in the Middle East decide to jointly limit the production of oil, a. they are forming a cartel. b. they would like the price of oil to be the same as if the market were perfectly competitive. c. game theory does not apply to their actions because they are nations, not firms. d. they will try to operate as a large, monopolistically competitive firm. e. they will agree to lower the price of oil in order to increase their profits The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the lowest price at which a firm could stay in business in the long run is per unit and the quantity demanded in the market at that price is units per hour. a. $20; 4,000 b. $10; 8,000 c. $10; 4,000 d. $20; 2,000 e. $20; 8, A tool that allows economists to analyze the strategic behavior of firms is a. game theory. b. the four-firm concentration ratio. c. the Herfindahl-Hirschman Index. d. the monopolistic duopolist. e. the concentration of power ratio. 26

27 119. In an oligopoly, there are a. many firms and barriers to entry. b. many firms and no barriers to entry. c. few firms and barriers to entry. d. few firms and no barriers to entry. e. barriers to entry and only one firm If both firms in a duopoly increase their production by one unit beyond the monopoly output, each firm's profit and the total profit of the duopoly. a. increases; increases b. does not change; does not change c. decreases; decreases d. does not change; increases e. decreases; does not change 27