Test Bank Chapter 15 Using Noncompetitive Market Models 389 - Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key by Edgar K. Browning, Mark A. Zupan. DOCX document preview.
Package: Test Bank
Title: Microeconomics: Theory and Application, 12e
Chapter Number: 15
Question Type: Multiple Choice
1. The following figure shows the marginal cost [MC], marginal revenue [FH], and demand [FG] curves for a monopolist who faces constant costs.
Under competitive conditions, what is the equilibrium price and output?
a. P2 and Q2
b. P1 and Q1
c. P3 and Q3
d. F and zero output
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
2. The following figure shows the marginal cost [MC], marginal revenue [FH], and demand [FG] curves for a monopolist who faces constant costs.
The monopolist produces output equal to _____ in equilibrium.
a. Q2
b. Q1
c. Q3
d. Q4
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
3. The following figure shows the marginal cost [MC], marginal revenue [FH], and demand [FG] curves for a monopolist who faces constant costs.
What is most likely to happen if the market is oligopolistic as compared to a monopolistic market structure?
a. The deadweight loss in the market will be greater.
b. The equilibrium output will be lower.
c. The equilibrium price in the market will be lower.
d. The price and output will remain unchanged.
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
4. In most models of oligopoly _____.
a. the output is higher than the output in a pure monopoly
b. the price is higher than the price in a pure monopoly
c. the price is lower than the price under perfect competition
d. the output is the same as the output under perfect competition
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
5. The following figure shows the marginal cost [MC], marginal revenue [FH] and demand [FG] curves for a monopolist who faces constant costs.
Given that P1= $100, P2 = $50, Q2= 2,000 units, and Q1=1,000 units, what is the deadweight loss of a monopoly?
a. $10,000
b. $2,000
c. $50,000
d. $25,000
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
6. The following figure shows the marginal revenue curve [MR], the demand curve, and the marginal cost curve [MC] for a monopolist with constant costs.
The deadweight loss due to the monopoly is _____.
a. $150
b. $300
c. $450
d. $600
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
7. The following figure shows the marginal revenue curve [MR], the demand curve, and the marginal cost curve [MC] for a monopolist with constant costs.
The change in consumer surplus due to the shift from perfect competition to monopoly is _____.
a. $150
b. –$300
c. –$450
d. $600
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
8. The following figure shows the marginal revenue curve [MR], the demand curve, and the marginal cost curve [MC] for a monopolist with constant costs.
The change in producer surplus due to the shift from perfect competition to monopoly is _____.
a. –$150
b. –$300
c. $150
d. $300
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
9. The following figure shows the marginal revenue curve [MR], the demand curve, and the marginal cost curve [MC] for a monopolist with constant costs.
Since there is a positive deadweight loss from monopoly, which of the following statements must be true?
a. The gain in producer surplus should not exceed $450.
b. The loss in total surplus should be lesser than or equal to $300.
c. The loss in consumer surplus should not exceed $600.
d. The gain in total surplus should exceed the loss in consumer surplus.
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
10. The following figure shows the marginal revenue curve [MR], the demand curve, and the marginal cost curve [MC] for a monopolist with constant costs.
Suppose that the market were served by an oligopoly such that the equilibrium output was 450. Then the welfare loss would be _____ as compared to the welfare loss of _____ under monopoly.
a. $37.50; $150
b. $75; $150
c. $37.50; $450
d. $75; $450
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
11. The following figure shows the marginal revenue curve [MR], the demand curve, and the marginal cost curve [MC] for a monopolist with constant costs.
Suppose that the market were served by an oligopoly such that the equilibrium output was 450. Then the welfare loss under oligopoly would be _____ percent of that under monopoly.
a. 400
b. 100
c. 75
d. 25
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
12. Suppose that at the competitive equilibrium, the elasticity of demand is 1.50. If the price under monopoly is 10 percent higher than under perfect competition, assuming identical cost curves, it can be concluded that the monopoly output is _____ percent below the competitive output.
a. 67
b. 1.5
c. 15
d. 0.67
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
13. Suppose that the elasticity of demand at a competitive equilibrium is 2.50. If the price under monopoly is 10 percent higher than under perfect competition, assuming identical cost curves, one can conclude that the monopoly output is _____ percent below of the competitive output.
a. 25
b. 40
c. 2.5
d. 4
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
14. Why are the estimates of the deadweight loss of monopoly not large?
a. Monopolized sectors of the economy are large relative to the whole economy.
b. Pure monopolies are not pervasive in market economies.
c. Monopolies tend to operate in markets with below average prices.
d. Although consumer surplus falls, total surplus actually increases in a monopoly.
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
15. Which of the following cannot directly be measured when calculating the deadweight loss from a monopoly?
a. The excess of price over marginal cost
b. The number of industries that are monopolistic in nature
c. The magnitude of output restriction
d. The actual output of monopolistic industries
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
16. The value of the difference between price and marginal cost is a measure of profit per unit only if:
a. marginal cost equals marginal revenue.
b. marginal cost equals average revenue.
c. average cost is greater than marginal revenue.
d. average cost equals marginal cost.
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
17. The excess of price over marginal cost is not the best measure of profit per unit because:
a. marginal cost is not always equal to average cost.
b. it shows the accounting profit of a firm and not the economic profit.
c. it does not take into account the variable costs of the firm.
d. profitable firms produce at a level where price is less than marginal cost.
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
18. Which of the following is a consequence of a monopoly?
a. An expansion of output beyond the efficient level
b. A redistribution of income from consumers to producers
c. A fall in price below the efficient level
d. An increase in the total surplus in the market
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
19. Deadweight losses due to monopoly include:
a. the transfer of producer surplus to consumers.
b. costs of acquiring and maintaining the monopoly position.
c. the redistribution of income in favor of consumers.
d. the excess of actual output over competitive output.
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
20. In order to maximize profits, firms must produce at the lowest possible cost. However when producing at a cost that is higher than necessary:
a. a monopoly firm can continue to operate with lower profits but a competitive firm will have to exit the market.
b. a monopoly firm has the incentive to lower cost and increase profit but a competitive firm will increase price and remain in the market.
c. a monopoly firm will expand output and increase price while a competitive firm will not change output or price.
d. a monopoly firm has the incentive to produce at the lowest cost possible while a competitive firm will only earn a lower economic profit.
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
21. Until 1992, WordPerfect® produced the dominant word processing system for the personal computer [PC] platform. After 1992, Microsoft’s Word for Windows® dominated the PC platform, largely by offering consumers a better program at a much lower price. This example illustrates:
a. the dynamic view of a natural monopoly.
b. the need for government regulation of a monopoly market.
c. how a lack of competition produces instability in markets.
d. the inefficiency of a monopoly in the word processing market.
Learning Objective: Determine the relative magnitude of the deadweight loss of monopoly.
22. Assume that Bosch is a company that manufactures printers for home computers. The printers are designed such that they do not work as effectively after a certain number of prints have been taken. Bosch also offers a warranty on the printer equal to the average time it takes to print that many pages. This is an example of _____.
a. iterated dominance
b. planned obsolescence
c. a commitment strategy
d. a natural monopoly
Learning Objective: Ascertain the extent to which, if any, monopolies suppress innovations.
23. When a company practices planned obsolescence, it _____.
a. produces a product that is of a higher quality at a much lower cost
b. does not produce goods that are expected to last for a long period of time
c. recalls goods for which demand has fallen significantly in the market
d. differentiates its product slightly and sells the product at a much higher price
Learning Objective: Ascertain the extent to which, if any, monopolies suppress innovations.
24. Which of the following is true of monopolies and their incentive to innovate?
a. Monopolies have the incentive to suppress innovation in order to sustain abnormal profits.
b. Monopolies do not have the incentive to innovate, even in the short run, unless they receive patents for their invention.
c. Monopolies do not have the incentive to innovate because they will continue to earn zero economic profits even with innovation.
d. Monopoly firms have the incentive to innovate and introduce new products in order to expand their profit.
Learning Objective: Ascertain the extent to which, if any, monopolies suppress innovations.
25. Which of the following is not likely to be a social loss due to monopoly power?
a. The welfare loss from the suppression of innovative products by monopolists
b. The higher production costs incurred by a monopolist due to the lack of competition
c. The resources spent by monopolists to secure their monopoly privilege
d. The loss incurred due to marginal-cost pricing by the monopolist
Learning Objective: Ascertain the extent to which, if any, monopolies suppress innovations.
26. A monopolist might find it profitable to suppress an innovative new product if:
a. the firm would lose its monopoly status by introducing the invention.
b. it owns all the sources of supply of the inputs used in the production process.
c. it could prevent other firms from copying the invention.
d. the projected demand for the product is inelastic.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
27. A natural monopoly is defined as an industry in which:
a. regulatory barriers to entry prevent the operation of more than one firm.
b. the marginal cost curve of the dominant firm is upward sloping.
c. the monopoly firm is not regulated by the government.
d. the average cost of the firm declines over the entire range of market demand.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
28. Which of the following is true of a natural monopoly?
a. The operation of more than one firm reduces the production efficiency of the market.
b. The good that is sold by a natural monopoly is easily substitutable.
c. The firm produces at the point where marginal revenue equals price.
d. The natural monopoly market has no barriers to entry and exit.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
29. Increasing competition in a market characterized by natural monopoly would:
a. increase output and lower prices, increasing efficiency in production.
b. result in an inefficient outcome as the real cost of production will be too high.
c. increase the number of units sold as well as the profits of the monopolist.
d. lower the average cost of production for all firms in the market.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
30. Which of the following statements correctly identifies the problem with regulating a natural monopoly?
a. It is difficult to identify a natural monopoly.
b. If a natural monopoly lowers its prices, it will have to shut down to cut losses.
c. The real cost of serving the market will be higher if there is more than one firm.
d. The cost of regulating a natural monopoly is lower than the welfare cost.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
31. Which of the following, if true, would be considered a natural monopoly?
a. The pharmaceuticals industry where patents form a barrier to entry
b. The airlines industry that has high fixed costs and high operating costs
c. The software industry that has very low marginal costs
d. The utilities industry that has falling average costs over the entire range of output
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
32. Which of the following, if true, is the best example of a natural monopoly?
a. The oil distribution industry where one distribution network serves the whole market
b. The pharmaceutical industry where patents form a barrier to entry
c. The beverages industry where the cost of capital is high and variable costs are low
d. The hospitality industry where variable costs are higher than fixed costs
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
33. The following figure shows the marginal cost [MC], marginal revenue [FH] and demand [FG] curves for a monopolist who faces constant costs.
If the regulator sets a maximum price of P2, the monopolist’s demand curve is _____.
a. P2EG
b. FG
c. the marginal cost curve
d. FH
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
34. When the average cost curve declines after intersecting the demand curve for a natural monopoly, which of the following must necessarily be true?
a. The marginal cost curve lies below the average cost curve at the point of intersection.
b. Marginal cost is also declining after the point of intersection.
c. The average cost curve and the marginal cost curve are parallel after the point of intersection.
d. The price is equal to marginal cost
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
35. The following figure shows the average cost [AC], marginal cost [MC], and demand [D] curves for a natural monopoly; Qi denotes quantity and Pi denotes price.
If the monopoly is forced to use the average-cost pricing policy, it would:
a. produce Q2 at a price P3 and make zero economic profit.
b. produce Q3 at a price P4 and make positive economic profit.
c. produce Q1 at a price P1 and make zero economic profit.
d. produce Q2 at a price P3 and make positive economic profit.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
36. The following figure shows the average cost [AC], marginal cost [MC], and demand [D] curves for a natural monopoly; Qi denotes quantity and Pi denotes price.
If the maximum price allowed is P1, the firm will produce a quantity equal to_____.
a. Q1
b. Q2
c. Q3
d. 0
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
37. The following figure shows the average cost [AC], marginal cost [MC], and demand [D] curves for a natural monopoly; Qi denotes quantity and Pi denotes price.
Which of the following price and output combinations would an unregulated monopolist choose?
a. P2,Q2
b. P1,Q1
c. P3,Q2
d. P4,Q3
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
38. The following figure shows the average cost [AC], marginal cost [MC], and demand [D] curves for a natural monopoly; Qi denotes quantity and Pi denotes price.
If the maximum price allowed in the market is P1, output levels below Q1 will:
a. yield more economic profit than at Q1.
b. yield positive but lesser economic profit than at Q1.
c. yield negative economic profit.
d. yield zero economic profit.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
39. For a natural monopoly where average cost declines after intersecting the demand curve, marginal-cost pricing would lead to:
a. a horizontal demand curve.
b. a surplus and a consequent fall in price.
c. an economic loss for the firm.
d. a higher price than under average-cost pricing.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
40. The figure below shows the profit-maximizing output and price of monopolist.
Given that the monopolist is producing the profit-maximizing level of output, what is the maximum amount of revenue that the monopolist can give up and still remain in business?
a. ABCD
b. ABFE
c. BGF
d. EFQ20
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
41. Which of the following will be true if a regulator uses average-cost pricing to regulate a natural monopoly?
a. The natural monopoly will incur losses.
b. The output will be lower than that of an unregulated monopoly.
c. There will be an efficiency gain in the market.
d. The firm will benefit more than the consumers.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
42. Which of the following is true of a natural monopoly that is regulated by the average-cost pricing strategy?
a. The natural monopoly will earn positive economic profit.
b. The natural monopoly will produce less output than an unregulated monopoly.
c. The equilibrium price of the natural monopoly is now the same as the competitive price.
d. A part of the deadweight loss from an unregulated monopoly is eliminated.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
43. One of the practical difficulties in regulating a natural monopoly using average-cost pricing is:
a. that the average-cost pricing rule leads to losses which must be subsidized.
b. that the price ceiling from average-cost pricing is likely to result in shortages.
c. that the monopoly has no incentive to minimize costs.
d. it will result in a surplus in the market leading to a drastic fall in the price.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
44. The following figure shows the average cost [AC], marginal cost [MC], and demand [D] curves for a natural monopoly; Qi denotes quantity and Pi denotes price.
If the firm practices marginal-cost pricing, the equilibrium price would be _____.
a. P1
b. P2
c. P3
d. P4
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
45. The following figure shows the average cost [AC], marginal cost [MC], and demand [D] curves for a natural monopoly; Qi denotes quantity and Pi denotes price.
Under marginal-cost pricing, the monopoly would earn:
a. negative economic profit equal to P3CBP2.
b. positive economic profit equal to P2BQ2O.
c. negative economic profit equal to FBQ2Q1.
d. positive economic profit equal to FCQ2Q1.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
46. The following figure shows the average cost [AC], marginal cost [MC], and demand [D] curves for a natural monopoly; Qi denotes quantity and Pi denotes price.
Under marginal-cost pricing, a firm would require a government subsidy of at least _____ to remain profitable.
a. P3CBP2
b. P1AFP2
c. P3CQ2O
d. FBQ2Q1
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
47. Which of the following is not a problem associated with regulation of a natural monopoly?
a. Regulation using average-cost pricing reduces a firm’s incentive to keep costs down.
b. Regulation stifles the incentive that firms have to innovate.
c. Regulators do not have full information about a firm’s demand and cost functions.
d. Regulation increases collusion and cartelization among firms.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
48. Which of the following is not a problem faced by regulators while regulating a natural monopoly such as cable television or electric utility company?
a. Regulators lack sufficient information regarding the monopolists cost structure.
b. Regulation reduces the incentive for the monopolist to reduce costs.
c. Regulation may cause the monopolist to suppress innovation and new product development.
d. Regulation of a monopoly usually leads to a decline in total surplus.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
49. Which of the following is true of public ownership of a natural monopoly?
a. Most publicly owned natural monopolies run economic losses.
b. In publicly owned monopolies, the incentive to minimize cost is higher.
c. Public ownership of natural monopolies reduces production efficiency in the market.
d. Natural monopolies that are publicly owned tend to innovate and create cost-saving technologies.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
50. Which of the following is necessary for a Nash equilibrium in a two-player game where both players have three strategies each?
a. The players should behave altruistically.
b. At least one of the two players should have a dominant strategy.
c. The game should be simultaneous and not sequential.
d. It is not necessary for either player to have a dominant strategy.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
51. In game theory, the concept of _____ can be used to arrive at an equilibrium in a game with no dominant strategies.
a. multiple iterations
b. non-cooperation
c. iterated dominance
d. best response
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
52. What is meant by iterated dominance?
a. It refers to the process of co-operation among players to maximize the total payoff.
b. It refers to the elimination of a strategy that is dominated by another strategy in a game.
c. It refers to games in which players make decisions in a sequential manner.
d. It is a strategy that is employed by one player without observing the strategies of other players.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
53. The following payoff matrix shows the profits accruing to two firms, Company C and Company D, under different pricing strategies. In each cell, the figure on the left indicates Company C’s payoff and the figure on the right indicates Company D’s payoff.
If X = 135 and Y = 75, the method of iterated dominance can be used to conclude that company C’s strategy of choosing a _____ price is dominated by a strategy of a _____ price.
a. high; low
b. medium; low
c. low; medium
d. high; medium
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
54. The following payoff matrix shows the profits accruing to two firms, Company C and Company D, under different pricing strategies. In each cell, the figure on the left indicates Company C’s payoff and the figure on the right indicates Company D’s payoff.
If X = 145 and Y = 75, company D's strategy of choosing a _____ price is dominated by a strategy of _____ price.
a. high; low
b. medium; high
c. low; medium
d. high; medium
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
55. The following payoff matrix shows the profits accruing to two firms, Company C and Company D, under different pricing strategies. In each cell, the figure on the left indicates Company C’s payoff and the figure on the right indicates Company D’s payoff.
If X = 145 and Y = 62, it is evident that _____.
a. both firms have a dominant strategy.
b. neither firm has a dominant strategy.
c. only company C has a dominant strategy.
d. only company D has a dominant strategy.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
56. The following payoff matrix shows the profits accruing to two firms, Company A and Company B, under different pricing strategies. In each cell, the figure on the left indicates Company A’s payoff and the figure on the right indicates Company B’s payoff.
Which of the following is true?
a. Company A’s dominant strategy is to set a high price.
b. Company A’s dominant strategy is to set a medium price.
c. Company A’s dominant strategy is to set a low price.
d. Company A does not have a dominant strategy.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
57. The following payoff matrix shows the profits accruing to two firms, Company A and Company B, under different pricing strategies. In each cell, the figure on the left indicates Company A’s payoff and the figure on the right indicates Company B’s payoff.
Which of the following is true?
a. Company B’s dominant strategy is to set a high price.
b. Company B’s dominant strategy is to set a medium price.
c. Company B’s dominant strategy is to set a low price.
d. Company B does not have a dominant strategy.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
58. The following payoff matrix shows the profits accruing to two firms, Company A and Company B, under different pricing strategies. In each cell, the figure on the left indicates Company A’s payoff and the figure on the right indicates Company B’s payoff.
Company A's strategy of choosing a _____ price is dominated by a strategy of _____ price.
a. low; medium
b. medium; high
c. high; low
d. high; medium
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
59. The following payoff matrix shows the profits accruing to two firms, Company A and Company B, under different pricing strategies. In each cell, the figure on the left indicates Company A’s payoff and the figure on the right indicates Company B’s payoff.
Company B's strategy of choosing a _____ price is iteratively dominated by a strategy of _____ price.
a. low; high
b. medium; high
c. medium; low
d. high; low
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
60. Abbott and Costello are two firms that compete with each other in the market for ice-cream. They can price their product at a high, medium, or low price. The following matrix shows their profits from their respective pricing strategies.
What is Abbott's dominant strategy?
a. Abbott does not have a dominant strategy.
b. Abbott’s dominant strategy is selling at a high price.
c. Abbott’s dominant strategy is selling at a low price.
d. Abbott’s dominant strategy is selling at a medium price.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
61. Abbott and Costello are two firms that compete with each other in the market for ice-cream. They can price their product at a high, medium, or low price. The following matrix shows their profits from their respective pricing strategies.
What is the highest payoff from Abbott's dominated strategy?
a. $100
b. $115
c. $107
d. $60
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
62. Abbott and Costello are two firms that compete with each other in the market for ice-cream. They can price their product at a high, medium, or low price. The following matrix shows their profits from their respective pricing strategies.
What is the highest payoff in Costello's dominated strategy?
a. $107
b. $115
c. $100
d. $21
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
63. Abbott and Costello are two firms that compete with each other in the market for ice-cream. They can price their product at a high, medium, or low price. The following matrix shows their profits from their respective pricing strategies.
When Abbott chooses the high-pricing strategy, Costello's highest possible profit is:
a. $115
b. $100
c. $107
d. $21
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
64. Abbott and Costello are two firms that compete with each other in the market for ice-cream. They can price their product at a high, medium, or low price. The following matrix shows their profits from their respective pricing strategies.
When Costello chooses the low-pricing strategy, Abbott's highest possible profit is:
a. $50
b. $21
c. $107
d. $115
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
65. Abbott and Costello are two firms that compete with each other in the market for ice-cream. They can price their product at a high, medium, or low price. The following matrix shows their profits from their respective pricing strategies.
Using the method of iterated dominance it can be concluded that the outcome of the given payoff matrix is:
a. a dominant-strategy equilibrium.
b. indeterminate as there are no dominant strategies.
c. both players choosing a low pricing strategy.
d. both players choosing a high pricing strategy.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
66. Abbott and Costello are two firms that compete with each other in the market for ice-cream. They can price their product at a high, medium, or low price. The following matrix shows their profits from their respective pricing strategies.
When the concept of iterated dominance is used, Abbott and Costello will:
a. not arrive at a unique pricing strategy.
b. use the medium-pricing strategy.
c. use the high-pricing strategy.
d. use the low-pricing strategy.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
67. Which of the following is true of a Nash equilibrium?
a. At least one of the players need to have a dominant strategy to arrive at a Nash equilibrium.
b. In a Nash equilibrium, one player has an incentive to change his strategy in order to increase his profit.
c. Each player’s strategy in a Nash equilibrium is the best possible strategy given the strategy of the other player.
d. In order to arrive at a Nash equilibrium, it is necessary for both players to credibly commit to a course of action.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
68. The following payoff matrix shows the profits accruing to two firms, Company A and Company B, under different pricing strategies. In each cell, the figure on the left indicates Company A’s payoff and the figure on the right indicates Company B’s payoff.
Using iterated dominance, one can conclude that in equilibrium:
a. company A chooses a high price and company B chooses a medium price.
b. both company A and company B choose a high price.
c. both company A and company B choose a medium price.
d. company A chooses a medium price and company B chooses a high price.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
69. The following payoff matrix shows the profits accruing to two firms, Company A and Company B, under different pricing strategies. In each cell, the figure on the left indicates Company A’s payoff and the figure on the right indicates Company B’s payoff.
Suppose that company A makes a credible commitment not to be undersold by company B. Then it is most likely that the companies A and B will:
a. both choose the high-price strategy.
b. both choose the medium-price strategy.
c. both choose the low-price strategy.
d. choose the low price strategy and high price strategy respectively.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
70. Refco is company that manufactures parts of a car engine for two major car manufacturers. It decides to shut down an assembly line that produces parts that are specially tailored for one of the car manufacturers. The other manufacturer then increases its order for parts made by Refco. In this example, Refco was practicing a _____.
a. loss leader strategy
b. price gouging strategy
c. commitment strategy
d. cost plus pricing strategy
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
Question Type: True/False
71. Monopolies have the incentive to suppress innovation in order to sustain abnormal profits.
Learning Objective: Ascertain the extent to which, if any, monopolies suppress innovations.
72. Monopolies do not have the incentive to innovate, even in the short run, unless they receive patents for their invention.
Learning Objective: Ascertain the extent to which, if any, monopolies suppress innovations.
73. Monopolies do not have the incentive to innovate because they will continue to earn zero economic profits even with innovation.
Learning Objective: Ascertain the extent to which, if any, monopolies suppress innovations.
74. Monopoly firms have the incentive to innovate and introduce new products in order to expand their profit.
Learning Objective: Ascertain the extent to which, if any, monopolies suppress innovations.
75. It is difficult to identify a natural monopoly.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
76. If a natural monopoly lowers its prices, it will have to shut down to cut losses.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
77. When regulating a natural monopoly, the real cost of serving the market will be higher if there is more than one firm.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
78. The cost of regulating a natural monopoly is lower than the welfare cost.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
79. If regulators use average-cost pricing to regulate a natural monopoly, then the natural monopoly will incur losses.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
80. If regulators use average-cost pricing to regulate a natural monopoly, then the output will be lower than that of an unregulated monopoly.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
81. If regulators use average-cost pricing to regulate a natural monopoly, then there will be an efficiency gain in the market.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
82. If regulators use average-cost pricing to regulate a natural monopoly, then the firm will benefit more than the consumers.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
83. In the case of a natural monopoly that is regulated by the average-cost pricing strategy, the natural monopoly will earn positive economic profit.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
84. In the case of a natural monopoly that is regulated by the average-cost pricing strategy, the natural monopoly will produce less output than an unregulated monopoly.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
85. In the case of a natural monopoly that is regulated by the average-cost pricing strategy, the equilibrium price of the natural monopoly is now the same as the competitive price.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
86. In the case of a natural monopoly that is regulated by the average-cost pricing strategy, a part of the deadweight loss from an unregulated monopoly is eliminated.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
87. Most publicly owned natural monopolies run economic losses.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
88. In publicly owned monopolies, the incentive to minimize cost is higher.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
89. Public ownership of natural monopolies reduces production efficiency in the market.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
90. Natural monopolies that are publicly owned tend to innovate and create cost-saving technologies.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
91. At least one of the players need to have a dominant strategy to arrive at a Nash equilibrium.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
92. In a Nash equilibrium, one player has an incentive to change his strategy in order to increase his profit.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
93. Each player’s strategy in a Nash equilibrium is the best possible strategy given the strategy of the other player.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
94. In order to arrive at a Nash equilibrium, it is necessary for both players to credibly commit to a course of action.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
95. A public monopoly is an industry in which production cost is minimized if one firm supplies the entire output.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
96. USPS is a publically owned monopoly.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
97. Public ownership of a natural monopoly is prohibited in the US.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
98. Facebook is a natural monopoly.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
99. There are numerous natural monopolies.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
100. Natural monopolies can occur in any large industry.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
101. If regulators use average-cost pricing to regulate a natural monopoly, then other firms will enter the market.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
102. If regulators use average-cost pricing to regulate a natural monopoly, then there will be an efficiency loss in the market.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
Question Type: Essay
103. Intellectual property rights are protected by patents. One of the controversial aspects of the patent system is the patents that are granted to pharmaceutical companies. Critics of the patent system claim that these increase the price of life-saving drugs and make them unaffordable to the poor. For example, patents restrict the availability of AIDS medicine in developing countries that require them the most. What would happen if drugs were not allowed to be patented in the interests of increasing their availability at a lower price? How do the long-run and short-run effects differ?
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
104. Assume that Costco Chemicals is a chemical manufacturer located in the U.S. that serves almost the entire market. Based on Costco's market share, antitrust enforcement authorities allege that Costco has monopoly power and is exploiting this monopoly power at the cost of buyers. Assume that Costco hires you as a lawyer to present their case. How would you argue in favor of Costco?
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
105. What is a natural monopoly? Draw a diagram to illustrate the profit-maximizing output of a natural monopoly.
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
106. Answer the following:
a) Define and illustrate graphically average-cost pricing and marginal-cost pricing.
b) What are the problems faced in regulating natural monopolies?
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
107. Antitrust laws state that the practice of predatory pricing is illegal as it allows the firm to consolidate monopoly power by driving other firms out of the market. What might be the challenges that a regulator may face while trying to prosecute a firm that is said to practice predatory pricing? (Predatory pricing is a pricing strategy where a firm prices a product below average variable cost (or short-run marginal cost) to drive rival firms out of the market)
Learning Objective: Explore whether government intervention can promote efficiency in the case of natural monopoly.
108. Define and illustrate iterated dominance and commitment strategy.
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
109. Mike and Bill face the following payoff matrix.
What is the outcome of the game?
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
110. Two diners, that are located close to each other, compete aggressively for customers. One of their main strategies is the 'daily special' that they use to draw customers. The following payoff matrix shows how many customers they attract per day if their daily special is either beef stew [B], pot roast [P], or salmon pie [S].
What daily special will be chosen by Diner A and Diner B in equilibrium if they agree not to benefit at each other’s expense??
Learning Objective: Explore the concepts of iterated dominance and commitment in the context of game theory models.
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Connected Book
Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key
By Edgar K. Browning, Mark A. Zupan