. Which of the following is an example of a barrier to entry?
a. Dawn charges a higher price than her competitors for her landscape-architecture services.
b. Rhianna obtains a copyright for a short story that she wrote and published.
c. Debbie offers free samples of her chocolate chip cookies to attract new customers.
d. Bev charges a lower price than her competitors for her desktop-publishing services.
2. When a firm operates under conditions of monopoly, its price is
a. not constrained.
b. constrained by marginal cost.
c. constrained by demand.
d. constrained only by its social agenda.
3. Which of the following statements is correct?
a. Panel C represents the typical demand curve for a perfectly competitive industry.
b. Panel B represents the typical demand curve for a monopoly.
c. Panel B represents the typical demand curve for a perfectly competitive firm.
d. All of the above are correct.
4. Sally owns the only shoe store in town. She has the following cost and revenue information.
Sally will maximize her profits by selling
a. 3 pairs of shoes.
b. 4 pairs of shoes.
c. 6 pairs of shoes.
d. 7 pairs of shoes.
5. The social cost of a monopoly is equal to its
a. economic profit.
b. fixed cost.
c. dead weight loss.
d. variable cost.
6. A firm operating in a monopolistically competitive market can earn economic profits in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.
7. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will
a. shift to the left.
b. shift to the right.
c. shift in a direction that is unpredictable without further information.
d. remain unchanged. It is the supply curve that will shift.
8. The figure is drawn for a monopolistically-competitive firm.
Efficient scale is reached
a. at 100 units.
b. at 133.33 units.
c. between 133.33 units and 154.92 units.
d. at 154.92 units.
9. Economists John Kenneth Galbraith and Friedrich Hayek disagreed about the roles of advertising and government. Which of the following is correct?
a. Galbraith thought advertising artificially enhanced consumers’ desires for private goods, while Hayek thought no producer could “determine” consumers’ tastes though advertising.
b. Galbraith believed in enhancing personal freedoms, while Hayek advocated larger government.
c. Galbraith thought advertising was a waste of resources because it did not influence consumers, while Hayek thought advertising was powerful enough to “determine” consumers’ tastes.
d. Galbraith believed that the government should not interfere in markets, while Hayek believed that there was insufficient government regulation of marketing.
10. According to one theory, advertising sends a signal to consumers about the quality of the product being offered. An implication of this theory is that
a. the actual quality of the product is irrelevant.
b. the content of the advertisement is irrelevant.
c. advertising is not in the best interest of society.
d. it is irrational for firms to pay famous people large amounts of money to appear in their advertisements.
11. Firms that spend a large amount of money on advertising a particular product are likely to be providing consumers with
a. information about the availability of the product.
b. information about product price.
c. a signal of product quality.
d. a good example of wasted resources.
12. A firm can earn economic profits in the short run
a. only when the market is perfectly competitive.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.
13. As the number of firms in an oligopoly market
a. decreases, the price charged by firms likely decreases.
b. decreases, the market approaches the competitive market outcome.
c. increases, the market approaches the competitive market outcome.
d. increases, the market approaches the monopoly outcome.
14. For cartels, as the number of firms (members of the cartel) increases,
a. the monopoly outcome becomes more likely.
b. the magnitude of the price effect decreases.
c. the more concerned each seller is about its own impact on the market price.
d. the easier it becomes to observe members violating their agreements.
15. The table shows the town of Driveaway’s demand schedule for gasoline. Assume the town’s gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost.
If the market for gasoline in Driveaway is perfectly competitive, then the equilibrium price of gasoline is
a. $0 and the equilibrium quantity is 400 gallons.
b. $1 and the equilibrium quantity is 350 gallons.
c. $2 and the equilibrium quantity is 300 gallons.
d. $4 and the equilibrium quantity is 200 gallons.
16. When strategic interactions are important to pricing and production decisions, a typical firm will
a. set the price of its product equal to marginal cost.
b. consider how competing firms might respond to its actions.
c. generally operate as if it is a monopolist.
d. consider exiting the market.
17. The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul).
If John chooses Drive Straight, what will Paul choose to do and what will Paul’s payoff equal?
a. Turn, 5
b. Drive Straight, 0
c. Turn, 10
d. Drive Straight, 200
18. Antitrust laws in general are used to
a. prevent oligopolists from acting in ways that make markets less competitive.
b. encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
c. encourage frivolous lawsuits among competitive firms.
d. encourage all firms to cut production levels and cut prices.
19. Tying involves a firm
a. colluding with another firm to restrict output and raise prices.
b. selling two individual products together for a single price rather than selling each product individually at separate prices.
c. temporarily cutting the price of its product to drive a competitor out of the market.
d. requiring that the firm reselling its product do so at a specified price.
20. Assume that a local bank sells two services, checking accounts and ATM card services. The bank’s only two customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that the bank can provide each of these services at zero marginal cost.
If the bank is unable to use tying, what is the profit-maximizing price to charge for unlimited use of an ATM card?
21. If the ABC company owns the exclusive rights to mine land in Afghanistan for Lapis Lazuli, a rare stone used in jewelry which is found only in Afghanistan, the company benefits from a barrier to entry.
22. The best solution to the problem of welfare loss from monopoly is public ownership.
23. Government intervention always reduces monopoly deadweight loss.
24. The “competition” in monopolistically competitive markets is most likely a result of having many sellers in the market.
25. A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or zero profits in the short run.
26. In the long run, monopolistically competitive firms produce where demand equals average total cost.
27. Brand names are rarely used to convey information about product quality.
28. If the output effect from increased production is larger than the price effect, then an oligopolist would increase production.
29. In the prisoners’ dilemma game, confessing is a dominant strategy for each of the two prisoners.
30. In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an undesirable outcome for the firms that are involved.