Set Problem #3.2 Answer Key
Use Figure 1 for questions 1-8. 1. A monopolist facing the demand and cost conditions in Figure 1 would choose to operate at point ____ unless her fixed costs were more than ____. a. B, 400 b. C, 1800 c. A, 1200 d. C, 60 e. C, 120
2. Relative to a competitive equilibrium, monopoly equilbrium generates "deadweight loss" equal to: a. 200 b. 400 c. 600 d. 800 e. 900
3. You share the market with another firm. If you know that your rival will produce an output of 20. Your best response is to produce an output of ___. a. 50 b. 20 c. 60 d. 40 e. 100
4. You share the market with another firm and agree to collude. You agree that each of you will produce an output of ____. a. 20 b. 40 c. 50 d. 60 e. 30
5. You share the market with another firm. If you know that your rival will produce an output of 40. Your best response is to produce an output of ___. a. 50 b. 20 c. 40 d. 60 e. 100
6. In a Cournot-Nash equilibrium, each "player" (A) maximizes her own profits, expecting that the other (B) will: a. match A's output b. not change his (B's) output d. produce in a different market e. respond strategically c. produce what the market will bear
7. Under conditions described in Figure 1, each rival will produce q = ____ in Cournot-Nash equilibrium. a. 20 b. 40 c. 50 d. 60 e. 30
8. In the Cournot-Nash equilibrium, price(s) will be: a. $60 per unit for each player b. $60 per unit for the "first mover", $40 for the second c. $40 per unit for each player d. $20 per unit for each player e. $60 per unit for the "first mover", $20 for the second Use Figure 2 for questions 9-12. 9. In a Cournot-Nash equilibrium with two rivals, each of them will end up with a profit of ____. a. 200 b. 400 c. 100 d. 20 e. 0
10. Collusion is difficult to enforce because, at least in theory: a. cheating benefits both parties c. cheating is impossible to detect b. cheating is a dominant strategy for both parties d. colluders are unscrupulous e. all of the above
11. If the two rivals could enforce a collusion, they would both end up with a profit of ____. a. 250 b. 450 c. 150 d. 900 e. 500
12. If "Firm A" faithfully produced the agreed-upon output quota, "Firm B"s best response would be to produce an output of ____. a. 15 c. 20 c. 22.5 d. 30 e. 45
Use Table 1 for questions 13-14 13. The numbers in the matrix represent profits earned by Players 1 (upper right) and 2 (lower left). In a dominant strategy equilibrium, Player 1 chooses strategy ___ and Player 2 chooses strategy ___. a. B, B b. A, A c. A, B d. B, A
14. If Players 1 and 2 can enforce collusion, Player 1 chooses strategy ___ and Player 2 chooses strategy ___. a. B, B b. A, A c. A, B d. B, A
15. Free riding is an economic "problem" because it a. is unfair to those who b. contribute makes production of public goods impossible c. tends to cause underproduction of public goods d. is a dominant strategy e. provides important information to the government For 16-17, consider a "Final Jeopardy" Game, in which the sole objective is to win the game (not to maximize prize money. The third-place contestant is out of the game. The leader has $15,000 and expected to bet "high". 16. The second place contestant has $12,000. It would be irrational for her to bet: a. any sum of money d. more than $6,000 b. more than $3,000 e. less than $6,000 c. less than $3,000
17. The second place contestant has $9,000. It would be irrational for her to bet: a. any sum of money d. more than $5,000 b. more than $3,000 e. less than $5,000 c. less than $3,000
18. General Foods had to recall shipments of chocolate because of salmonella contamination. The company blamed Valley Lea dairies for failure to adhere to production guidelines. This is an example of a. asymmetry of information d. irrational behavior b. adverse selection c. moral hazard e. the principal-agent problem
19. The cost of a face lift is $10,000, but is worth only $5,000 to Biff. Biff decided to have a face lift because his insurance policy covered it. This is an example of a. asymmetry of information d. irrational behavior b. adverse selection c. moral hazard e. the principal-agent problem
20. In the case of Stambovsky v. Ackley, the judge's reference to a mystic or psychic accompanying the Terminix man was an implicit recognition of the problem known as a. asymmetry of information d. promissory estoppel b. adverse selection e. negative externality c. moral hazard
21. According to Friedman (Hidden Order, Ch. 11), cross-licensing of patents is an effective way to a. spread innovation b. promote competition c. police collusion d. build networks
22. Of the two demand curves facing a monopolistic competitor, the flatter one is based on the assumption that: a. all firms charge the same price b. all firms charge different prices c. one firm varies it price while all others hold their price constant d. competitors react to price changes by other firms, but will not imitate them exactly Use Figure 3 to answer questions 23-25. 23. The monopolistically competitive firm in Figure 3 will produce ___ units of output in short-run equilibrium. a. q1 b. q2 c. q3 d. q4
24. If Figure 3 applies to a representative firm in monopolistic competition, entry will cause: a. price to be driven to p3 in the long-run c. the d curve to shrink until tangent to AC b. price to be driven to p2 in the long-run d. MC to intersect AC to the left of its minimum point
25. In a zero-profit equilibrium, the monopolistically competitive firm will be operating where: a. p = MC b. p = Minimum ATC c. p > minimum ATC d. MC = ATC