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11/01/2016
Econ 323 Microeconomic Theory
Practice Exam 2 with Solutions
Chapter 10, Question 1
Which of the following is not a condition for perfect competition? Firms
a. take prices as given
b. sell a standardized product
c. are protected by barriers to entry
d. have perfect information
e. none of the above
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Chapter 10, Question 2
If FC > 0, at the output where P = MC = AVC, the firm earns
a. negative economic profit equal to –FC
b. zero economic profit
c. positive economic profit equal to FC
d. cannot tell from the information provided
e. none of the above
Chapter 10, Question 3
At the output where P = MC = ATC, the firm earns
a. negative economic profit
b. zero economic profit
c. positive economic profit
d. cannot tell from the information provided
e. none of the above
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Chapter 10, Question 4
At the output where P = MC = ATC, the firm should a. shut down immediately and permanently
b. produce in the short run but not in the long run c. keep producing
d. shut down for now but enter again once can adjust fixed costs
e. none of the above
Chapter 10, Question 5
Which is the largest?
a. AFC
b. ATC
c. AVC
d. cannot tell from the information provided
e. none of the above
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Chapter 10, Question 6
A firm in a competitive industry has a total cost function of 0.2 ² 5 50, whose corresponding marginal cost curve is 0.4 5. If the firm faces a price of 7, what quantity should it sell?
a. 5
b. 10
c. 20
d. 25
e. none of the above
6a , 7
0.4
5, 0.4
2, 5.
Chapter 10, Question 7
And what profit does the firm make at this price? a. 75
b. ‐10
c. ‐25
d. ‐45
e. none of the above
7d π
7 5
0.2 25
25
0.2
5 50
35 80
50
45.
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Chapter 10, Question 8
And should the firm shut down? a. yes, shut down right away
b. not in the short run but yes shut down in the long run
c. yes shut down in the short run but not in the long run
d. no, should never shut down
e. none of the above
8b Fixed costs are
50 (substitute 0 into TC). Profits are negative but not as negative as –FC. Best to produce in the short run and loose 45 instead of losing 50 if were to produce nothing. In the long run, all costs are variable, so will want to shut down and earn zero profit.
Chapter 10, Question 9
And if the firm instead faces a price of 15, what quantity should it sell? a. 5
b. 10
c. 20
d. 25
e. none of the above
9d , 15
0.4
5, 0.4
10, 25.
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Chapter 10, Question 10
And what profit does the firm make at the new higher price? a. 75 b. ‐10
c. ‐25
d. ‐45
e. none of the above
10a π
15 25
0.2 625
0.2
125 50
5 375
50
300
75.
Price
Chapter 10, Questions 6‐10
MC
15
AVC
P
7
5
5
25 Quantity
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Chapter 11, Question 11
The marginal revenue curve of a single‐price monopolist a. lies above the demand curve
b. lies below the demand curve
c. lies along the demand curve
d. is a horizontal line
e. none of the above
Chapter 11, Question 12
Which statement is true for a profit‐maximizing monopolist? It
a. faces a downward sloping demand curve
b. can avoid diminishing returns to production
c. will not produce where marginal cost equals marginal revenue
d. can charge whatever price it wants
e. none of the above
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Chapter 11, Question 13
Which of the following would erode the monopoly pricing power of a firm that was controlling a market? a. new technology developed by the firm that lowered its long‐run average costs
b. substitutes for its product that are developed by other firms
c. a tax on corporate profits
d. all of these would reduce the monopoly power of the firm
e. none of the above
Chapter 11, Question 14
If a profit‐maximizing monopolist faces a linear demand curve and has zero marginal cost, it will produce at the quantity where
a. marginal revenue equals zero
b. price equals marginal cost
c. price equals marginal revenue
d. price equals average variable cost
e. none of the above
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Chapter 11, Question 15
A natural monopoly always has a. a downward sloping long run average cost curve
b. an upward sloping marginal cost curve
c. its profit maximization point where price = marginal cost
d. extensive patent rights
e. none the above
Chapter 11, Question 16
A monopolist has a demand curve given by 90 and a total cost curve given by 30 . The associated marginal cost curve is 30. What is the monopolist's marginal revenue curve?
a.
90 b.
c.
90 3
d.
90 4
e. none of the above
16b Marginal revenue has the same vertical intercept and twice the slope as the linear demand curve.
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Chapter 11, Question 17
And what is the monopolist's profit maximizing quantity? a. 10
b. 20
c. d. 40
e. none of the above
17c , 90
2
30, 2
60, 30.
Chapter 11, Question 18
And what price will the monopolist charge?
a. P = 80
b. P = 70
c. P = 60
d. P = 50
e. none of the above
18c 90
90
30
60.
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Chapter 11, Question 19
And how much economic profit will the monopolist earn?
a. 500
b. 800
c. 900
d. 1,200
e. none of the above
19c π
30
60
30 30
900
Chapter 11, Question 20
And what quantity would the monopolist pick if instead of charging a single price, it could perfectly discriminate? a.
10
b. 20
c.
30
d. 40
e. none of the above
20e Sell all units valued above marginal cost 30
60.
90
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Chapter 11, Question 16‐20
Price
90
60
MC
30
D
MR
0
0
30
45
60
Quantity
©2015 McGraw‐Hill Education. All Rights Reserved.
90
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Chapter 12, Question 21
A dominated strategy is one that yields ________ no matter what the other player chooses.
a. a higher payoff
b. a lower payoff
c. the largest possible minimum payoff
d. the smallest possible maximum payoff
e. none of the above
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Chapter 12, Question 22
When the timing of players’ choices matter, typically set up the series of decisions as a ________ game.
a. normal form
b. extensive form or sequential
c. abnormal form
d. intensive form
e. none of the above
Chapter 12, Question 23
A _______ strategy can elicit cooperation in a repeated Prisoner’s Dilemma game
a. tat‐for‐tit
b. tit‐for‐tat
c. Dominant
d. Maximin
e. none of the above
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Chapter 12, Question 24
In a Nash equilibrium, each player’s choice is optimal a. no matter what the other player chooses
b. given the other player’s choice
c. if the payer gets to pick first
d. under the assumption of bounded rationality
e. none of the above
Chapter 12, Question 25
The basic elements of a game in which people’s choices affect one another are
a. the players
b. the set of possible strategies
c. the payoff matrix
d. all of the above
e. none of the above
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Chapter 12, Questions 26‐30
Car Game
Firm 1
SUV
Firm 2
Sedan
SUV
Sedan
400 for Firm 1, 800 for Firm 1,
400 for Firm 2 1000 for Firm 2
1000 for Firm 1, 500 for Firm 1,
800 for Firm 2
500 for Firm 2
Chapter 12, Question 26
In the Car Game above, does Firm 1 have a dominant strategy?
a. Yes, SUV
b. Yes, Sedan
c. No, Firm 1 does not have a dominant strategy in this game.
d. Yes, to randomize between SUV and Sedan
e. None of the above
26c No, Firm 1 does not have a dominant strategy in this game. If Firm 2 picks SUV, Firm 1 picks Sedan (800 > 400). If Firm 2 picks Sedan, Firm 1 picks SUV. 15
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Chapter 12, Question 27
And does Firm 2 have a dominant strategy?
a. Yes, SUV
b. Yes, Sedan
c. No, Firm 2 does not have a dominant strategy in this game.
d. Yes, to randomize between SUV and Sedan
e. None of the above
27c No, Firm 2 does not have a dominant strategy in this game for that same reasons as for Firm 1 (the game is symmetric). If Firm 1 picks SUV, Firm 2 picks Sedan (800 > 400). If Firm 1 picks Sedan, Firm 2 picks SUV. Chapter 12, Question 28
And is there a Nash equilibrium fo this game?
a. Both firms pick SUVs.
b. Both firms pick Sedans.
c. Both a. and b. are Nash equilibria.
d. There is no Nash equilibrium.
e. None of the above
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Chapter 12, Question 28
28e A Nash equilibrium is the combination of strategies in a game such that neither player has any incentive to change strategies given the strategy of his opponent. There are two Nash equilibria: 1) Firm 1 picks SUV and Firm 2 picks Sedan, and 2) Firm 1 picks Sedan and Firm 2 picks SUV. The firms need to coordinate to pick different strategies from each other. If Firm 2 picks Sedan, Firm 1 does not want to change from its SUV (1000 > 500), and if Firm 1 picks SUV, Firm 2 does not want to change from its Sedan (800 > 400). Similarly if Firm 2 picks SUV, Firm 1 does not want to change from its Sedan (800 > 400), and if Firm 1 picks Sedan, Firm 2 does not want to change from its SUV (1000 > 500). Chapter 12, Question 29
And the maximin strategies for each firm are
a. Each firm picks SUV.
b. Each firm picks Sedan.
c. Firm 1 picks SUV and Firm 2 picks Sedan.
d. Firm 2 picks SUV and Firm 1 picks Sedan.
e. None of the above
29b Each firm picks Sedan. A maximin strategy chooses the option that makes the lowest payoff one can receive as large as possible. If Firm 1 picks Sedan, the worst payoff it can get is 500 but could get a lower payoff of 400 if picked SUV. Similarly for Firm 2.
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Chapter 12, Question 30
If Firm 1 picks first, then Firm 2, the equilibrium will be
a. Both firms pick SUVs.
b. Both firms pick Sedans.
c. Firm 1 picks SUV and Firm 2 picks Sedan.
d. Firm 2 picks SUV and Firm 1 picks Sedan.
e. None of the above
Chapter 12, Question 30
30c If Firm 1 picks first, then Firm 2, the equilibrium will be Firm 1 picks SUV and Firm 2 picks Sedan. Firm 1 will anticipate that Firm 2's best strategy will be to pick the opposite of whatever it picked: If Firm 1 picks SUV, Firm 2 will pick Sedan and if Firm 1 picks Sedan, Firm 2 will pick SUV. Firm 1 gets a larger payoff of $1000 vs $800 when it is the firm making the SUV and Firm 2 makes the Sedan versus if the roles were reversed. So Firm 1 will pick SUV and Firm 2 will respond by picking Sedan.
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