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#1: The Monopolistic Competitor
Economic v. Accounting Profit
MC-1) A profit just sufficiently large enough to sustain
a business in the long run (without attracting
competition) is also called
a. break even
b. zero economic profit
c. normal accounting profit
d. all of the above
e. none of the above
MC-2) Firms will enter an industry that has no barriers
to entry if
a. there are no economic losses
b. there are accounting profits
c. there are economic profits
d. there are no accounting losses
e. there is a normal accounting profit
MC-3) If a firm is making a zero economic profit it
a. will exit the industry in the long run
b. other firms in the industry will exit in the long run
c. is doing better than the alternative
d. is doing just as well to the alternative
e. is making an abnormally large accounting profit
which attracts competition in the long run
The following questions concern the following scenario.
A profit maximizing sole proprietorship has revenue of
$210,000. Employee costs are $50,000. Rent is
$24,000. Materials are $65,000. Interest is $12,000.
Besides the loan, the owner also invested $50,000 of her
own money on which she could have received an interest
rate of 6%. The owner quit an $80,000 a year job to start
this business.
MC-4) In the above scenario, the employee costs are
a. an explicit cost
b. an accounting cost
c. an opportunity cost
d. an economic cost
e. all of the above
MC-5) In the above scenario, the total of explicit costs is
a. $74,000
b. $139,000
c. $151,000
d. $201,000
e. $281,000
MC-6) In the above scenario, accounting profit is
a. $-71,000
b. $9,000
c. $59,000
d. $71,000
e. $136,000
MC-7) In the above scenario, implicit costs are
a. $80,000
b. $83,000
c. $120,00
d. $123,000
e. $281,000
MC-8) In the above scenario, opportunity costs are
a. $136,000
b. $221,000
c. $234,000
d. $281,000
e. $284,000
MC-9) In the above scenario, economic profit is
a. $-74,000
b. $-71,000
c. $-52,000
d. $-24,000
e. $-11,000
MC-10) Given the above scenario, economics predicts
a. this firm will shut down in the short run
b. new firms will enter the industry
c. this firm will exit in the long run
d. the owner will raise the price of their good
e. the “normal” profit will increase
Monopolistic Competitor
Figure 1
$11
$9
$8
$6
$4
$3
$2
50
80 100 130 160 180 200
20
MC-11) The profit maximizing quantity for the firm in
Figure 1 is
a. 50
b. 80
c. 100
d. 130
e. 180
MC-12) The profit maximizing price for the firm in
Figure 1 is
a. $11
b. $9
c. $8
d. $6
e. $3
MC-13) The total cost for the firm in Figure 1 will be
a. $3
b. $100
c. $200
d. $300
e. $780
MC-14) The total revenue for the firm in Figure 1 will
be
a. $300
b. $400
c. $780
d. $800
e. $1200
MC-15) The firm in Figure 1 will make a profit of
a. $500
b. $550
c. $600
d. $800
e. $1,220
MC-16) For the monopolistically competitive firm in
Figure 1, in the long run we expect to see this firm’s
demand curve
a. shift right and become more inelastic
b. shift right and become more elastic
c. shift left and become more inelastic
d. shift left and become more elastic
e. none of the above, the curve stays the same
MC-17) For the monopolistically competitive firm in
Figure 1, in the long run in this industry we expect to see
a. firms enter and this firm will produce less.
b. firms enter and this firm will produce more.
c. firms enter and this firm will produce the same
d. firms exit and this firm will produce less.
e. firms exit and this firm will produce more.
MC-18) Monopolistically competitive firms are
different from perfectly competitive firms because
monopolistically competitive firms
a. have some control over the price of their product.
b. can earn profits in the long run
c. have barriers to entry
d. produce homogeneous goods
e. are few in number in the industry
MC-19) Monopolistically competitive firms are
different from monopolies because monopolistically
competitive firms
a. make profits in the long run
b. are price takers
c. have barriers to entry
d. face competition in the long run
e. have a downward sloping demand curve
MC-20) Which of the following actions would not be a
strategy a monopolistically competitive firm would use
to gain economic profits
a. offer exceptional customer service
b. differentiate their good
c. offer a special low sale price
d. develop a brand name
e. advertise their good
MC-21) Which of the following is not a characteristic of
monopolistic competitors?
a. There are no barriers to entry
b. Firms produce a homogeneous product
c. Individual firms face a downward sloping demand
curve
d. Firms can make a profit in the short run
e. Firms breakeven in the long run
MC-22) Which of the following is an important
characteristic of monopolistic competitors?
a. Each firm is large and comprises a significant share
of the market
b. Each firm is like a small monopoly that makes
profit in the long run
c. Each firm produces a good that is different from
what other firms are producing in that industry
d. There are large barriers to entry that keep new firms
out
e. The demand curve that each firm faces is perfectly
elastic
MC-23) As competition enters a monopolistically
competitive industry, a firm in that industry will observe
their demand curve
a. decrease and become more inelastic
b. increase and become more inelastic
c. decrease and become more elastic
d. increase and become more elastic
e. decrease and become perfectly inelastic
MC-24) Monopolistic Competitors are different than
Monopolies because Monopolistic Competitors
a. make profit in the long run but not the short run
b. face a perfectly elastic demand curve, not a
downward sloping one
c. cannot make profit in the short run or long run
d. breakeven in the long run
e. have MR = P
MC-25) Monopolistic Competitors are different than
Perfectly Competitive Firms because Monopolistic
Competitors
a. face a downward sloping demand curve
b. can make profit in the long run
c. can make profit in the short run
d. have significant barriers to entry
e. identical products
#2: Perfect Competition
A Competitive Industry & Firm Defined
PC-1) In a perfectly competitive industry, the market
demand curve is
a. Vertical
b. horizontal
c. downward sloping
d. upward sloping
e. perfectly inelastic
PC-2) In a perfectly competitive industry, the demand
curve the firm sees is
a. vertical
b. horizontal
c. downward sloping
d. upward sloping
e. perfectly inelastic
PC-3) A competitive firm is a price taker because
a. they sell at a profit maximizing price
b. MC = MR
c. the firm is small and insignificant
d. there are barriers to entry
e. all of the above
PC-4) Which of the following statements about the
perfectly competitive firm is not true?
a. The demand curve the firm sees is perfectly
elastic
b. There is easy entry into, and exit from, the market
c. MR = P
d. If a firm cuts production, it will drive the price of
the good up
e. There are many firms
PC-5) Which of the following is not an assumption
about perfectly competitive firms?
a. Firms produce heterogeneous products
b. There are no barriers to entry or exit
c. Everyone has full information
d. The firm is a price taker
e. There are many firms in the industry
PC-6) A perfectly competitive firm
a. can attract more customers by pricing below the
market price
b. can increase profits by lowering her price.
c. will lose all of its customers if it prices above the
market price
d. can increase its total revenue by pricing above the
market price
e. can increase its total revenue by decreasing her
price below the market price
PC-7) The MR for a competitive firm is
a. zero
b. equal to the market price of the good
c. declining at an increasing rate
d. declining at a decreasing rate
e. equal to ATC
PC-8) To maximize profit, a competitive firm should
produce the quantity where
a. MC = ATC
b. P = ATC
c. P = MC
d. P = AVC
e. P = MR
The Supply Curve in Competitive Industry
PC-9) The short run supply curve of a competitive
firm is
a. the MC curve above the shut down point
b. the ATC curve
c. the ATC curve above MC
d. the MR curve
e. nonexistent
PC-10) The short run supply curve of a competitive
industry is
a. perfectly elastic
b. perfectly inelastic
c. the sum of the firms’ supply curves
d. equal to the average cost of all firms
e. the same as the supply curve of the largest firm in
the industry
PC-11) When more firms enter a competitive industry,
the short run industry supply curve will
a. become more steep
b. shift to the left
c. increase
d. move downward
e. become perfectly elastic
Figure 1
18
MC
ATC
AVC
14.50
14
9
7
70
80 90 100
PC-12) Using Figure 1, if the market price is $9, the
firm should produce
a. 70
b. 80
c. 90
d. 100
e. Not enough information to tell
PC-13) Using Figure 1, if the market price is $18, the
firm should produce
a. 70
b. 80
c. 90
d. 100
e. 0
PC-14) Using Figure 1, if the market price is $14, the
firm should produce
a. 70
b. 80
c. 90
d. 100
e. 0
PC-15) Using Figure 1, if the market price is $18, the
firm will earn an economic profit of
a. -50
b. 50
c. 350
d. 1800
e. Not enough information to tell
PC-16) Using Figure 1, if the market price is $9, the
firm will earn an economic profit of
a. -440
b. -160
c. -50
d. 160
e. 720
PC-17) Using Figure 1, if the firm produces 80 goods,
the firm’s total costs will be:
a. 600
b. 720
c. 800
d. 1160
e. 1440
PC-18) Using Figure 1, if the market price is $6, the
firm should produce
a. 70
b. 80
c. 90
d. 100
e. 0
PC-19) Using Figure 1, if the market price is $9 and
there are 150 firms in the industry, the quantity
supplied in the industry will be:
a. 100
b. 150
c. 1,350
d. 12,000
e. 15,000
Perfect Competition, Industry
Figure 1
Industry
Rep. Firm
S1
2
S
S3 S4
S5
$6
$4
15 25
45 75 125 150
(in 1000’s)
250
PC-20) Using Figure 1, if there are 5,000 firms in this
perfectly competitive industry, the industry’s supply
curve is
a. S1
b. S2
c. S3
d. S4
e. S5
PC-21) Using Figure 1, S2 would represent the supply
curve of the industry if there are this many firms in the
industry
a. 2,000
b. 3,000
c. 4,000
d. 5,000
e. 6,000
PC-22) Using Figure 1, if there are 5,000 firms in this
perfectly competitive industry, and the firms are
making an accounting profit, the industry supply curve
will shift to
a. S1
b. S2
c. S3
d. S4
e. not enough information to say
PC-23) Using Figure 1, if there are 5,000 firms in this
perfectly competitive industry, and the firms are
suffering an economic loss, the industry supply curve
will shift to
a. S1
b. S2
c. S3
d. S4
e. not enough information to say
PC-24) Using Figure 1, the industry supply curve is
given by S4. The quantity supplied by the industry
with a price of $4 is
a. 90,000
b. 105,000
c. 120,000
d. 135,000
e. 150,000
PC-25) Using Figure 1, the bottom of the S1 curve is
defined by
a. industry demand curve
b. the bottom of LRAC
c. the Break Even point
d. the Shut Down Point
e. the lowest point of MC
Competitive Industry Long Run Equilibrium
PC-26) There is an increase in demand in a perfectly
competitive industry. Which of the following does not
happen in the short run
a. The market price rises
b. Firms will make economic profits
c. New firms enter the industry
d. Quantity produced in the industry increases
e. Quantity produced by each firm increases
PC-27) There is an increase in demand in a perfectly
competitive industry. Which of the following does not
happen in the long run (from the short run equilibrium)
a. The market price falls
b. The market supply curve increases
c. New firms enter the industry
d. Quantity produced in the industry increases
e. Quantity produced by each firm increases
PC-28) There is a decrease in demand in a perfectly
competitive industry. Which of the following happens
in the short run
a. The market price rises
b. Firms break even
c. Firms exit the industry
d. Quantity produced in the industry decreases
e. Quantity produced by each firm increases
PC-29) There is a decrease in demand in a perfectly
competitive industry. Which of the following does not
happen in the long run (from the short run equilibrium)
a. The market price rises
b. Firms will break even
c. New firms enter the industry
d. Quantity produced in the industry decreases
e. Quantity produced by each firm increases
PC-30) The long run supply curve in a perfectly
competitive industry is (assuming constant cost
industry)
a. sum of all firms’ supply curves
b. downward sloping if there are economies of scale
c. vertical if there are finite resources
d. perfectly elastic
e. U-shaped
PC-31) In a perfectly competitive industry, the
position if the long run supply curve is determined by
a. demand
b. shut down point
c. minimum of long run average cost
d. diminishing returns
e. bottom of MC or highest point of MP
PC-32) In an increasing cost industry, the long run
supply curve is ________, and in a decrease cost
industry, the long run supply curve is _________
a. upward sloping; downward sloping
b. downward sloping; upward sloping
c. perfect inelastic; elastic
d. elastic; perfectly inelastic
e. vertical; horizontal
PC-33) With an increase in demand, in the long run,
price will _______ in an increasing-cost industry and
________ in a decreasing-cost industry
a. rise; fall
b. stay the same; stay the same
c. rise; stay the same
d. stay the same; rise
e. fall; rise
PC-34) A perfectly competitive industry will move
along a long run supply curve by
a. increases or decreases in the price
b. each representative firm producing more or less in
the short run
c. each representative firm producing more or less in
the long run
d. firms entering or exiting the industry
e. changes in technology
PC-35) Resources are limited in this industry; so, as
more firms enter, the cost of production gets bid up.
The describes
a. diminishing returns
b. increasing cost industry
c. decreasing cost industry
d. economies of scale
e. diseconomies of scale
Figure 2
S1
S2
S3
S4
PC-36) Using Figure 2, this is the industry short run
supply curve
a. S1
b. S2
c. S3
d. S4
PC-37) Using Figure 2, this is the constant-cost
industry long run supply curve
a. S1
b. S2
c. S3
d. S4
PC-38) Using Figure 2, this is the increasing-cost
industry long run supply curve
a. S1
b. S2
c. S3
d. S4
PC-39) Using Figure 2, this is the decreasing-cost
industry long run supply curve
a. S1
b. S2
c. S3
d. S4
#3: Implications of Long Run Average Cost
Figure 1
LRAC1
LRAC2
LRAC3
P1
5
LRAC4 LRAC
Firm
For all the following questions, Figure 1 has the LRAC’s
of five different perfectly competitive industries.
LRAC-1) Gardening service firms are small with only a
few employees. Assuming the industry is in long run
equilibrium, which LRAC would best represent gardening
service firms?
a. LRAC1
b. LRAC2
c. LRAC3
d. LRAC4
e. LRAC5
LRAC-2) The firms of this industry are large but the
product has a higher price. Assuming the industry is in
long run equilibrium, which LRAC would best represent
this industry?
a. LRAC1
b. LRAC2
c. LRAC3
d. LRAC4
e. LRAC5
LRAC-3) Assuming the industry is in long run
equilibrium, the industry represented by this cost curve
will have the highest price.
a. LRAC1
b. LRAC2
c. LRAC3
d. LRAC4
e. LRAC5
LRAC-4) Assuming the industry is in long run
equilibrium, this industry has firms whose size is quite
varied. There are small firms, mediums firms, and large
firms. The industry would be best characterized by this
cost curve.
a. LRAC1
b. LRAC2
c. LRAC3
d. LRAC4
e. LRAC5
LRAC-5) Assuming the industry is in long run
equilibrium, an industry with large firms producing an
inexpensive product would be characterized by this cost
curve.
a. LRAC1
b. LRAC2
c. LRAC3
d. LRAC4
e. LRAC5
LRAC-6) The firms of an industry have the cost curve
LRAC5 The current market price is P1. We know that:
a. The industry is long run equilibrium because the firm
has a LRAC curve
b. The industry is long run equilibrium because the price
crosses the LRAC curve
c. In the long run, firms will enter, and price will fall
d. In the long run, firms will exit, and price will fall
e. In the long run, each firm will produce less and price
will fall.
LRAC-7) This industry is in long run equilibrium, and
price is at P1. This industry would be represented by this
cost curve:
a. LRAC1
b. LRAC2
c. LRAC3
d. LRAC4
e. LRAC5
LRAC-8) The LRAC’s of an industry are represented by
LRAC1. The current market price is P1. What does theory
predict will happen next:
a. No change
b. Firms enter, and price falls
c. Firms exit, and price falls
d. Firms enter, and price rises
e. Firms exit, and price rises
LRAC-9) The firms of an industry have the cost curve
LRAC2 The current market price is P1. We know that:
a. Firms are breaking even
b. Firms are making a profit, and more firms will enter
the industry
c. Firms are making a profit, and firms will exit the
industry
d. Firms are suffering a loss, and more firms will enter
the industry.
e. Firms are suffering a loss, and firms will exit the
industry.
#4: Game Theory
GT-1) Game theory is
a. economic theory of people having fun
b. economic theory of people utilizing leisure time
c. mathematical analysis of models of cooperation and
conflict between rational decision makers
d. mathematical and economic analysis of decisions
involving random, chance events
e. economic theory of using games to increase
productivity of workers
GT-2) A game like chess where players take alternating
turns making decisions is this type of game
a. Strategic game
b. Prisoners game
c. Sequential game
d. Turn after turn game
e. All of the above
GT-3) Which is the following is a simultaneous game
a. Rock, Paper, Scissors
b. Tic-Tac-Toe
c. Chess
d. Monopoly
e. All of the above are simultaneous games
GT-4) In the game Rock, Paper, Scissors, a pure (not
mixed) strategy Nash equilibrium is
a. Always choose rock
b. There are three: both players choosing the same thing,
both choosing rock, paper, or scissors.
c. There are three Nash equilibriums: you choose rock if
the other player chooses scissors, paper if the other
player chooses rock, and scissors if the other player
chooses paper.
d. There are six Nash equilibriums: whenever the players
do not choose the same thing because if they choose
the same thing, you do the game again.
e. There is no pure strategy in Rock, Paper, Scissors
that’s a Nash Equilibrium
GT-5) In game theory, a “mixed strategy” means the
player should
a. choose a different strategy than your opponent
b. choose the same strategy as your opponent
c. choose a strategy other than the Nash equilibrium and
other than the dominant strategy
d. alternate which strategy you pick from round to round
e. create a new middle strategy that’s in the middle of
your current strategies.
GT-6) Games can be made more complicated by
a. adding more players than two
b. adding more options from which a player can choose
c. having more than a single round of play
d. having some uncertainty of outcomes
e. all of the above
GT-7) Games in which the winnings of one player are
equal to the losses of the other players
a. are properly called puzzles, not games
b. are impossible to analyze
c. are called zero-sum games
d. are called simultaneous games
e. do not have a Nash equilibrium
GT-8) Examples of non zero-sum games are
a. very rare so they are not analyzed
b. probably most common, so they need to be studied
c. mathematically equivalent to zero-sum games
d. impossible to describe mathematically
e. always of a “win-lose” variety
GT-9) Zero-sum games are
a. games of pure conflict
b. the most common and realistic games
c. the economically most interesting games
d. games that offer the possibility of no one losing
e. all of the above
GT-10) In sequential games, a suggestion for finding a
best possible action is to
a. find a dominant strategy
b. find a Nash equilibrium
c. look forward and reason backward
d. always take the path of least resistance
e. chart the middle course
GT-11) In chess, a best strategy has never been found
because
a. There’s no Nash equilibrium
b. There are so many different possible outcomes, it’s
been impossible to reason backwards the best strategy
c. The optimal strategy is a mixed strategy which means
you never do the same thing
d. It is a simultaneous game so there is no reasoning
backwards
e. Chess involves humans who are occasionally
irrational
GT-12) In the “original” version of the Prisoners’
Dilemma (where there are two prisoners), if Prisoner 1
does not confess, then Prisoner 2
a. can be better off if they confess
b. will not be interrogated by the police
c. will receive no punishment by also not confessing
d. will have to confess or else receive the most severe
punishment
e. none of the above
GT-13) In the “original” version of the Prisoners’
Dilemma (where there are two prisoners), if one prisoner
confesses, the other prisoner
a. should not confess
b. will want to confess to avoid a severe punishment
c. will get off without punishment
d. will not confess to avoid a long sentence
e. cannot do anything because the first prisoner already
confessed
GT-14) In the “original” version of the Prisoners’
Dilemma (where there are two prisoners), the dominant
strategy
a. does not exist
b. has both prisoners remaining silent and not confessing
to reduce punishment
c. has each prisoner confessing which always seems
better no matter what the other prisoner does
d. leads to collusion between the two prisoners
e. all of the above
GT-15) Players in a Prisoners’ Dilemma game are more
likely to choose the cooperative strategy if
a. the gains from defection is very large
b. players can communicate in advance
c. one player pre-commits
d. the game is played in multiple rounds
e. the game is simultaneous
GT-16) If playing multiple rounds of a Prisoners’
Dilemma, the best strategy seems to be
a. Tit for tat
b. Tit for tat but with added forgiveness
c. Nash Equilibrium
d. Dominant Strategy
e. Mixed strategy
Table 1 – “A Stag Hunt”
Hunter A
Hunt the Stag
Hunt
the Stag
Hunter
B
Hunt
the Hare
Hunt the Hare
A: 3
B: 3
A: 1
B: 0
A: 0
B: 1
A: 1
B: 1
GT-17) In table 1, if A hunts the stag and B hunts the hare,
a. A and B both get nothing
b. A and B both get the maximum that’s possible
c. A gets a little, B gets nothing
d. A gets nothing, B gets a little
e. A and B both get a little
GT-18) In table 1, an important part of this game is that
a. hares are too small to feed two people
b. both players have to cooperate together to successfully
hunt the stag
c. it is always better to hunt a hare than a stag
d. it is always better to hunt the stag than a hare
e. if both players hunt the stag, they’ll scare it away and
be unsuccessful
GT-19) In table 1, the dominant strategy is
a. hunt the stag
b. hunt the hare
c. hunt the stag only if your opponent is hunting the stag
d. hunt the stag only if your opponent is hunting the hare
e. there is no dominant strategy
GT-20) In table 1, the (pure strategy) Nash equilibrium is
a. both players hunting the stag
b. both players hunting the hare
c. there are two: both players hunting the stag and both
players hunting the hare
d. hunt the hare unless the other player has a credible
policy to hunt the stag, then hunt the stag
e. there is no Nash equilibrium
GT-21) In table 1, the efficient outcome is
a. both players hunting the stag
b. both players hunting the hare
c. there are two: both players hunting the stag and both
players hunting the hare
d. one person hunts the hare and one person hunts the
stag
e. there is no efficient outcome
GT-22) In table 1, the Stag Hunt game is not a prisoners’
dilemma because
a. players are worse off, not better, if they cooperate
with each other
b. there is no Nash equilibrium
c. if players cooperate with each other, there’s no
incentive to cheat on or break the cooperation
d. both players receive a benefit instead of a punishment
e. the dominant strategy is to cooperate with each other
instead of competing with each other
GT-23) In the Stag Hunt game, as seen in table 1, some
players will tend to choose the low-risk strategy. This
means players will choose to
a. hunt the stag
b. hunt the hare
c. follow a mixed strategy of sometimes hunting the hare
and sometimes the stag to ensure they don’t always
miss out.
d. wait and see.
e. not play the game.
GT-24) In the Stag Hunt game, as seen in table 1, some
players will tend to choose a high-reward strategy instead
of low-risk. This means players will choose to
a. hunt the stag
b. hunt the hare
c. follow a mixed strategy of sometimes hunting the hare
and sometimes the stag to ensure they don’t always
miss out.
d. wait and see.
e. not play the game.
Table 2 – “Game of Chicken”
Swerve
Don’t
Swerve
Driver
B
Swerve
Driver A
Don’t Swerve
A: -1
B: 3
A: -3
B: -3
A: 0
B: 0
A: 3
B: -1
GT-25) In table 2, the dominant strategy is
a. swerve
b. don’t swerve
c. don’t swerve unless the other driver doesn’t
d. wait for the other person to swerve
e. there is no dominant strategy
GT-26) In table 2, the (pure strategy) Nash equilibrium is
a. both drivers swerve
b. both drivers don’t swerve
c. there are two: A swerves and B doesn’t, and vice
versa
d. there are two: they both swerve or they both don’t
swerve
e. there are three: A swerves, B swerves, or they both
swerve
GT-27) Game of Chicken is not a Prisoners Dilemma
because
a. players must cooperate to achieve the best outcome
b. players will always stay with their initial strategy
c. players cannot cooperate to produce a mutually
beneficial outcome
d. players will always do what they promise
e. all of the above
GT-28) One possible solution for a player in a Game of
Chicken is
a. credible pre-commitment
b. agreeing to do one thing then actually doing the
opposite
c. collusion
d. use “tit for tat”
e. penalties or consequences for breaking a promise
Table 3 – “Battle of Sexes”
Bicycling
Bicycling
Person B
Tennis
Person A
Tennis
A: 5
B: 3
A: -2
B: -2
A: 1
B: 1
A: 3
B: 5
GT-29) In table 3, the dominant strategy is
a. go bicycling
b. play tennis
c. always do what the other person does
d. wait to see what the other person does
e. there is no dominant strategy
GT-30) In table 3, the (pure strategy) Nash equilibrium is
a. both players bicycle
b. both players play tennis
c. there are two: both bicycling and both playing tennis
d. there are two: A bicycles while B plays tennis and
vice versa
e. there is no Nash equilibrium
GT-31) In table 3, the “Battle of Sexes” game is not a
prisoners’ dilemma because
a. if players cooperate with each other, there’s no
incentive to cheat on or break the cooperation
b. players are worse off, not better, if they cooperate
with each other
c. there is no Nash equilibrium
d. both players receive a benefit instead of a punishment
e. the dominant strategy is to cooperate with each other
instead of competing with each other
GT-32) For pre-commitment to be an effective solution to
a game situation,
a. the game needs to have multiple rounds
b. it must be impossible or very expensive to violate the
pre-commitment
c. there must be a single Nash equilibrium
d. it must be a prisoner’s dilemma, not a game of
chicken
e. all of the above
GT-33) If a commitment, threat or promise is believed, it’s
referred to as being
a. credible
b. Nash
c. strategic
d. iron-clad
e. bone fide
GT-34) A method to make a commitment believed is
a. using a 3rd party agent to enforce the commitment
b. using a contract
c. having a reputation adhering to your commitment
d. burning your bridges
e. all of the above
Table 4
Person A
Cooperate
Defect
Person B
Cooperate
Defect
A: 0
B: 5
A: 1
B: 1
A: 3
B: 3
A: 5
B: 0
GT-35) For the game presented in Table 4, the Dominant
Strategy is
a. Always cooperate
b. Always defect
c. Always match your opponent
d. Use a mixed strategy
e. There is no Dominant Strategy
For next set of descriptions, use the following answers to
identify to which game it applies. An answer may be used
more than once, and not all answers may be used.
a.
Prisoners’ Dilemma
b.
Stag Hunt
c.
Battle of the Sexes
d.
Chicken
GT-40) A main issue of this game is the two players
agreeing upon which cooperating equilibrium will be
chosen
GT-41) A main issue of this game is that one player wins
and the other loses
GT-42) A main issue of this game is that though each
player would like to cooperate, they’d also like to break
that cooperation if it were to happen.
GT-43) A main issue of this game is assurance – that is,
each player needs to be assured that the other player will
do what they promise.
GT-44) “Tit for tat” is one of the best strategies for playing
multi-round versions of this game.
GT-36) For the game presented in Table 4, the (pure
strategy) Nash Equilibrium is
a. Both players cooperate
b. Both player defect
c. There are two, both players defect or both players
cooperate
d. There are two, one player defects while the other
cooperates
e. There is no pure strategy Nash equilibrium
GT-45) Which game would best symbolize two football
teams playing in the Superbowl
GT-37) For the game in Table 4, the efficient outcome is
a. both players cooperate
b. both players defect
c. one player defects while the other cooperates
d. players mix their strategies
e. there is no efficient outcome
GT-48) A possible solution to this game is to take turns on
which cooperating equilibrium is chosen.
GT-38) The game in Table 4 is a
a. Prisoners’ Dilemma
b. Stag Hunt
c. Battle of the Sexes
d. Chicken
GT-50) In this game, both players may promise to do the
same thing, but each fears the other will break that
promise.
GT-39) For strategic plays like commitments, threats, and
promises to be effective, they must be
a. not credible
b. announced to your opponent
c. kept secret
d. mixed with other strategies
e. all of the above
GT-46) Which game would best symbolize two football
organizations that are both negotiating with a group of
players to sign with their teams.
GT-47) In this game, players are likely to promise to do
one thing, but then do something different.
GT-49) In this game, both players will promise to do the
same thing, but each hopes the other will break that
promise.
GT-51) Both the Democrat and Republican parties benefit
if the US is doing well, but each party would prefer the US
to do well in slightly different ways. This description
suggests the game between the Democrats and
Republicans is most like this game.
For next set of descriptions, use the following answers to
identify to which game it applies. An answer may be used
more than once, and not all answers may be used.
a.
Pre-commitment
b.
Warning
c.
Threat
d.
Assurance
e.
Promise
GT-52) You communicate to your opponent that you will
under specific circumstance undertake some action that
will benefit them, and it’s in your self-interest to follow
through and carry out the action
GT-53) You communicate to your opponent that you will
under specific circumstance undertake some action that
will harm them, but it’s not in your self-interest to follow
through and carry out the action
GT-54) You communicate to your opponent that you will
undertake a particular action no matter what your opponent
plans on doing.
GT-55) You communicate to your opponent that you will
under specific circumstance undertake some action that
will benefit them, but it’s not in your self-interest to follow
through and carry out the action
GT-56) You communicate to your opponent that you will
under specific circumstance undertake some action that
will harm them, and it’s in your self-interest to follow
through and carry out the action
GT-57) You’re playing a Prisoners’ Dilemma game (such
as in Table 4). You tell your opponent that if they defect,
you will defect too and you both will be worse off. This
statement is an example of what?
GT-58) You’re playing a Prisoners’ Dilemma game (such
as in Table 4). You tell your opponent that if they
cooperate, you will cooperate too. This statement is an
example of what?
GT-59) This strategic play could allow you to win the
game of chicken
GT-60) In the game Stag Hunt (such as in table 1), if you
tell your opponent that you will cooperate (hunt the stag),
if your opponent also cooperates (hunts the stag), this is an
example of what?
GT-61) You’re playing a Battle of the Sexes game (it is in
both your self-interests to do the same thing). You want to
take a vacation to Mexico. Your partner wants to go to
Canada. You tell your opponent, “if you go to Canada,
I’m going to go to Mexico by myself.” This statement is
an example of what?
#5: Oligopoly and Game Theory
Table 1
Fi rm A
Cut
P rice
Fi rm B
Maintain
P rice
Cut P rice
Maintain Pric e
A’s P rof it: $40, 000
B’s P rof it: $40, 000
A’s P rof it: $20, 000
B’s P rof it: $80, 000
A’s P rof it: $80, 000
B’s P rof it: $20, 000
A’s P rof it: $60, 000
B’s P rof it: $60, 000
Ol-1) In Table 1, if Firm B maintains their price while
Firm A cuts their price, firm B will experience a
a. Profit of $40,000
b. Profit of $80,000
c. Profit of $20,000
d. Profit of $60,000
e. Loss of $20,000
Ol-2) Using Table 1, Firm A’s dominate strategy is
a. to wait and see what Firm B does
b. is to maintain current price
c. is to cut current price
d. is to maintain price only if Firm B cuts their price
e. not enough information
Ol-3) Using Table 1, if both firms colluded the collusion
would be that
a. both firms maintain current price
b. both firms will lower their price
c. only firm A will lower its price
d. only firm B will lower its price
Ol-4) Using Table 1, if both firms adopt a strategy that will
minimize the damage the other firm can do, then
a. both firms maintain current price
b. both firms will lower their price
c. only firm A will lower its price
d. only firm B will lower its price
Ol-5) Using Table 1, if the two firms colluded they would
each make a profit of
a. $0
b. $20,000
c. $40,000
d. $60,000
e. $80,000
Ol-6) Using Table 1, if Firm A maintains their price, then
Firm B
a. will see their greatest profit by maintaining a high
price
b. will increase profits by cutting price because they’ll
steal customers away from Firm A
c. must maintain price in order not to lose market share
d. will increase profits by raising price and increase the
profit margin
e. will reduce their profits by cutting price.
Ol-7) Using Table 1, both Dominant Strategy and Nash
Equilibrium are that
a. Both firms maintain price until one firm lowers its
price and the other follows
b. Both firms will cut price
c. Collusion will result in each firm maintaining price
d. Both firms will trust each other
e. it is impossible to predict what each firm may do
Ol-8) Which of the following is not a characteristic of
oligopolies?
a. “game theory” is useful to understand firm behavior
b. firms are mutually interdependent
c. there are many firms in an oligopolistic market
d. there are significant barriers to entry
e. firms may try to collude to increase profits
Ol-9) Which of the following is not an obstacle to
collusion?
a. firms may cheat
b. there are high barriers to entry
c. legal restrictions
d. there are a large number of firms in the industry
e. all of the above are obstacles to collusion
Ol-10) The purpose of collusion is to
a. Keep the smallest firm in business by making a
normal profit
b. Charge the highest price possible
c. Maximize the largest firm’s profits
d. Make total profits in the industry the largest
e. Create economic efficiency
Ol-11) Contestable Market Theory suggests that
a. an oligopolistic or monopolistic industry will still be
efficient if the market is contestable
b. a monopolistic industry will become oligopolistic if a
firm contests it
c. a market can only be monopolized if it can withstand a
contest
d. oligopolistic firms will cheat on collusion agreements
e. oligopolistic firms will collude if firms have an
incentive to trust one another
Firm B’s Pricing
Table 2 – Firm Profits
Firm A’s Pricing
$14
$12
$10
$8
$14
A: $18k
B: $18k
A: $20k
B: $15k
A: $18k
B: $11k
A: $15k
B: $5k
$12
A: $15k
B: $20k
A: $16k
B: $16k
A: $17k
B: $12k
A: $14k
B: $8k
$10
A: $11k
B: $18k
A: $12k
B: $17k
A: $14k
B: $14k
A: $13k
B: $11k
$8
A: $5k
B: $15k
A: $8k
B: $14k
A: $11k
B: $13k
A: $10k
B: $10k
Ol-12) Using Table 2, if Firm A sets a price of $12, and
Firm B sets a price of $8, then Firm B will make a profit of
a. $17,000
b. $16,000
c. $15,000
d. $14,000
e. $8,000
Ol-13) Using Table 2, if the two firms colluded, they
would each charge a price of
a. $14
b. $12
c. $10
d. $8
e. None of the above, the two firms would not charge the
same price
Ol-14) Using Table 2, if both firms are charging $12, then
Firm B reduces price to $10, Firm B will
a. experience higher profits because they under -cut Firm
A’s price
b. experience lower profits because of less revenue from
the lower price even though they attract more
customers
c. want to raise price back to $12 to maximize profits
d. continue to reduce the price to $8 to increase profits
even further
e. hope that Firm A matches the price reduction to $10 to
increase industry profits
Ol-15) Using Table 2, if both firms are charging $10, then
Firm B reduces price to $8, Firm B will
a. have maximized profits
b. experience higher profits because they under-cut Firm
A’s price
c. experience lower profits because of less revenue from
the lower price even though they attract more
customers
d. suffer an economic loss
e. hope that Firm A matches the price reduction to $8
Ol-16) Using Table 2, if Firm B sets a price of $14, Firm
A would, to maximize its profit, set a price of
a. $14
b. $12
c. $10
d. $8
e. $14 or $10
Ol-17) Using Table 2, if Firm B sets a price of $8, Firm A
would, to maximize their profit, set a price of _____ and
make a profit of _____
a. $12; $8,000
b. $12; $14,000
c. $10; $11,000
d. $10; $13,000
e. $8; $10,000
Ol-18) Using Table 2, the dominant strategy for Firm B is
to
a. set a price of $14
b. set a price of $12
c. set a price of $10
d. always do what Firm A does
e. there is no dominant strategy
Ol-19) Using Table 2, the Nash Equilibrium is
a. both firms set a price of $14
b. both firms set a price of $12
c. both firms set a price of $10
d. both firms setting a price of $14, $12, $10, and $8 are
all Nash equilibriums
e. there isn’t a Nash Equilibrium because there is no
dominant strategy for either firm.
Ol-20) Using Table 2, at the Nash Equilibrium, Firm A’s
decision about price is based upon
a. tacit collusion with Firm B
b. both firms making the same amount of profit
c. a correct prediction of what Firm B will do
d. maximizing industry profits
e. dominant strategy
Ol-21) Using Table 2, both Firms charging a price of $12
is
a. A Nash equilibrium because profits are equal for both
firms
b. Not a Nash equilibrium because industry profits are
not maximized
c. A Nash equilibrium because industry profits are
maximized
d. Not a Nash equilibrium because if a firm sets a price
of $12, the other firm will want to price at $10. Then
the first firm won’t set a $12 price.
e. A Nash equilibrium since both firms are making the
same decision, a price of $12
Ol-22) You work for the firm Acme electronics which
makes cell phones. The firm Visionary TV’s, a maker of
TV sets, contacts you and wants their firm and Acme to
work together on a joint project. The project would allow
your cell phones and their TV’s to work together. The
joint project requires both firms to spend millions of
dollars in development. If both firms do this, consumers
will value Acme’s phones more and profits will rise.
However, if only Acme develops the technology and
Visionary does nothing, the new technology has no value,
and Acme will lose the amount of the development cost.
This is an example of which game?
a. Prisoners’ Dilemma
b. Stag Hunt
c. Battle of Sexes
d. Chicken
Ol-23) Continuing with the previous question, how should
you respond to Visionary’s overture?
a. Tell them you’ll jump right on that technology, but
then do nothing
b. Ask to see what work they’ve done so far, then set a
meeting three months from now for both firms to
compare progress
c. Ignore / dismiss Visionary, fearing it might be
construed as illegal collusion
d. Take turns developing the technology
e. Say you won’t develop the technology, but do it
anyway in secret
Ol-24) Continuing on with the previous questions, both
firms have embarked on the new technology. It turns out
there are two ways it could be done. The technology could
use infrared communication which would be cheaper and
more profitable for Visionary. Alternatively, the
technology could use Bluetooth communication which
would be cheaper and more profitable for Acme. If the
firms choose different communication methods, it won’t
work at all. Choosing which communication method is an
example of which game?
a. Prisoners’ Dilemma
b. Stag Hunt
c. Battle of Sexes
d. Chicken
Ol-25) How should you respond to Visionary?
a. Immediately start production of phones with the
Bluetooth communication, knowing it would be
impossible to change production.
b. Promise to use infrared, and do it.
c. Promise to use infrared, but switch to Bluetooth.
d. Agree that both firms will use the least expensive
method
e. Pull out of the agreement to development the new
technology.
Ol-26) You are still working for Acme electronics. A
competitor of yours, Cell-Gamma, contacts you. CellGamma explains that another, a third, cell phone firm is
launching a new technology called “X-5”. This third firm
is going to advertise that X-5 is faster and better than the
4G technology that both you and Cell-Gamma use. The
advertising is a lie. X-5 is not better. If both you and CellGamma remain silent, people will believe the lie and
switch to the technology. Acme and Cell-Gamma will lose
profit. If either Acme or Cell-Gamma spends a few
million on an advertising campaign explaining the
inferiority of X-5 technology, both Acme and Cell-Gamma
will maintain their level of profit, minus the cost of the
information campaign. Even with the added advertising
costs, it is more profitable to advertise and repudiate the
bogus technology, exposing the lying firm. If both you
and Cell-Gamma advertise the inferiority of X-5, the
outcome is no better than if only one of you advertises,
though both firms now have added costs. This is an
example of which game?
a. Prisoners’ Dilemma
b. Stag Hunt
c. Battle of Sexes
d. Chicken
Ol-27) Continuing with the above question, how should
you respond to Cell-Gamma?
a. Promise to advertise, but don’t
b. Promise to advertise, and do
c. Make no commitment
d. Wait and see
e. Explain that you had just fired your advertising firm,
so it would be impossible for Acme to combat the X-5
technology right then
#6: Industry Review
For next set of descriptions, use the following answers to identify what type of industry it applies to. An answer may be
used more than once, and not all answers may be used. Important: there may be more than one correct answer (a, b, c or
d) per question
a.
Perfect Competition
b.
Pure Monopoly
c.
Monopolistic Competition
d.
Oligopoly
IR-1) Barriers to entry keep out all but just a few large firms
IR-2) Is economically efficient
IR-3) Mutual interdependence is a characteristic of this industry
IR-4) The wine industry is made up of many firms. Each winery spends money to make itself stand out and develop
consumer loyalty. The wine industry would be best analyzed using this model
IR-5) There are barriers to entry
IR-6) Is made up of many small firms who produce identical products.
IR-7) Does not make profit in the long run
IR-8) Game theory is useful to describe firm interaction
IR-9) The airline industry is made up of many firms. However, most of the firms are very small and produce very little of
the total industry production. Most of the production in the industry is done by a few large firms. Those few large firms
would be best analyzed using this model
IR-10) Produces a product for which there is no close substitution, and there are significant barriers to entry
IR-11) Is susceptible to collusion
IR-12) Is a price taker
IR-13) Is a price maker
IR-14) Though this type of firm has some control over the price of their good, the firm will not make profit in the long run.
#7: More Questions Exam 3
Cost Calculation Review
Table 1
Q
0
1
2
3
4
5
6
TC
40
50
58
65
73
82
92
EM-1) Given the firm costs in Table 1, at a quantity of
4, Fixed Cost is
a. $0
b. $40
c. $73
d. $82
e. $113
EM-2) Given the firm costs in Table 1, at a quantity of
4, Variable Cost is
a. $8
b. $20
c. $33
d. $73
e. $82
EM-3) Given the firm costs in Table 1, at Q = 5, ATC is
a. $8
b. $8.2
c. $8.4
d. $16.4
e. $82
Demand and Marginal Revenue
Table 4
Q
1
2
3
4
5
6
P
$24
$21
$18
$15
$12
$9
EM-4) Given the Demand Schedule in Table 4, this firm
a. Is perfectly competitive
b. Faces a perfectly elastic demand curve
c. Faces a perfectly inelastic demand curve
d. Has monopoly (market) power
e. Is a price taker
EM-5) Given the Demand Schedule in Table 4, what is
the Total Revenue if the firm prices its good at $18?
a. $0
b. $18
c. $36
d. $54
e. $72
EM-6) Given the Demand Schedule in Table 4, the
Marginal Revenue of the 5th good is
a. $-3
b. $0
c. $3
d. $12
e. $24
Efficiency
EM-7) The type of industry that is least efficient is
a. perfect competition
b. monopolistic competition
c. oligopoly
d. monopoly
e. contestable market
EM-8) Perfect competition will be efficient
a. in the short run
b. in the long run
c. when firms break even
d. at the minimum of LRAC
e. all of the above
EM-9) A monopolistically competitive firm will be
more efficient if
a. It has more market power
b. It is breaking even
c. Demand is more elastic
d. The product is well differentiated
e. Consumers are very brand loyal
EM-10) Perfectly competitive firms are also “productive
efficient” in the long run because
a. firms produce at lowest possible cost
b. firms are price takers
c. firms break even
d. production is where demand equals marginal cost
e. there are economies of scale
EM-11) An oligopolistic industry will be inefficient if
a. there are many firms in the industry
b. the firms effectively collude
c. it is a contestable market
d. firms earn normal profits
e. all of the above
EM-12) An oligopolistic industry is more likely to be
efficient if
a. it is a contestable market
b. there are many firms in the industry
c. there are lower barriers to firm entry
d. firms can easily cheat
e. all of the above
EM-13) Collusion has this impact upon economic
efficiency
a. It improves efficiency by raising producer surplus
(profits)
b. It reduces efficiency because companies will see an
increase in costs
c. It improves efficiency by allowing firms to produce
more expensive products with better quality
d. It reduces efficiency because firms agree to produce
fewer goods to increase price and profits
e. It improves efficiency because all firms agreed, and
voluntary agreement promotes efficiency
EM-14) To battle collusion, the government may use
this policy
a. anti-trust
b. direct regulation
c. government ownership
d. introduction of competition
e. all of the above
Demand Curves Firms Face
Figure 2
ATC
D1
D
D5 D4
3
D
2
EM-15) Using Figure 2, which demand curve represents
a monopolistically competitive firm in long run
equilibrium?
a. D1
b. D2
c. D3
d. D4
e. D5
EM-16) Using Figure 2, which demand curve represents
a monopolistically competitive firm in the short run
(only)?
a. D2
b. D2 & D3
c. D2, D3 & D4
d. D2, D3 & D5
e. All of the demand curves
EM-17) Using Figure 2, which demand curve would
suggest that new firms will enter and attempt to produce
close substitutes?
a. D1
b. D2
c. D2 & D3
d. D2, D3 & D4
e. D2, D3, D4 & D5
EM-18) Using Figure 2, which demand curve would a
firm desire to sell to?
a. D1
b. D2
c. D3
d. D4
e. D5
EM-19) Using Figure 2, which demand curve represents
a perfectly competitive firm?
a. D1
b. D2
c. D3
d. D4
e. D5
EM-20) Using Figure 2, which demand curve would
generate economic efficiency?
a. D1
b. D2
c. D3
d. D4
e. D5
EM-21) Using Figure 2, which demand curve represents
the most efficient firm who has market power (is a price
maker)
a. D1
b. D2
c. D3
d. D4
e. Not enough information to answer
Figure 3
10
7
6
4
2
100 120 140 160
EM-22) Using Figure 3, this firm will shut down if the
price is less than
a. $2
b. $4
c. $6
d. $7
e. $10
EM-23) Using Figure 3, this firm will break even if the
price is
a. $2
b. $4
c. $6
d. $7
e. $10
EM-24) Using Figure 3, this firm will make an
economic profit if the price is above
a. $2
b. $4
c. $6
d. $7
e. $10
EM-25) In a highly competitive industry, if firms seek
profit maximization, in the long run, the firms’ actions
will lead to
a. firms making no profit
b. higher prices and fewer goods produced
c. inefficiency
d. much of the consumer surplus being lost and
converted to firm profit
e. abnormal or excessive profits and income
distribution becoming more unequal
EM-26) If there are substantial or significant barriers to
entry in an industry
a. The industry can maintain profits in the long run
b. The industry would probably not be accurately
described by monopolistic competition model
c. It could create inefficiency
d. The industry is not contestable
e. All of the above
#8: Monopolistic Competition Review
Figure, for the firm depicted in the graph:
Qty:
Price:
$26
TC:
$22
TR:
Profit:
$20
$16
$12
$10
What's efficient?
Price:
Qty:
$8
200
300 350
425
500 550 600
At a quantity of 425, is
demand elastic or inelastic?
At a quantity of 600, is demand elastic or inelastic?
What will happen in the long run?
If this firm is a monopolistic competitor, in the long run, the firm will be producing fewer than how
many goods?
#9: Perfect Competition Review
1) Fill in all blank spaces in questions below:
20
17
16
15
10
7.5
5
4
80 100 120 160 200
At Q=100, VC = ____ TC = ________
At Q = 140, FC = ________
If Market Price is $10, then Q = ___, ATC = ___, TR = ___ , TC = ____, Profit = _____
If Market Price is $15, then Q = ___, ATC = ___, TR = ___ , TC = ____, Profit = _____
If Market Price is $20, then Q = ___, ATC = ___, TR = ___ , TC = ____, Profit = _____
If Market Price is $4, then Q = ___, ATC = ___, TR = ___ , TC = ____, Profit = _____
If the Market in this graph is in long run equilibrium the price is: _______
There are 80 firms in the industry identical to the firm represented above. What is the quantity supplied in
the industry at a price of $10? _______
If the Industry for the firm above is in long run equilibrium, and the quantity demanded for the good if price
is $15 is 320,000, how many firms will there be in the industry?
2)
Q
0
1
2
3
4
5
TC
8
15
18
22
28
36
What is the MC of Good 4?___
What is the ATC of 5 goods? ____
What is the FC of 2 goods? ____