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Chapter 17 Practice Questions



Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

 1. 

In a market that is characterized by imperfect competition,
a.
firms are price takers.
b.
there are always a large number of firms.
c.
there are at least a few firms that compete with one another.
d.
the actions of one firm in the market never have any impact on the other firms' profits.
 

 2. 

Monopolistically competitive firms are typically characterized by
a.
many firms selling products that are similar, but not identical.
b.
many firms selling identical products.
c.
a few firms selling products that are similar, but not identical.
d.
a few firms selling highly different products.
 

 3. 

The commercial jetliner industry, consisting of Boeing and Airbus, would best be described as a (an)
a.
perfectly competitive market.
b.
monopolistically competitive market.
c.
oligopoly.
d.
monopoly.
 

 4. 

In markets characterized by oligopoly,
a.
the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
b.
collusive agreements will always prevail.
c.
collective profits are always lower with cartel arrangements than they are without cartel arrangements.
d.
pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market.
 

 5. 

Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together,
a.
they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
b.
each firm's profit always ends up being zero.
c.
society is worse off as a result.
d.
Both a and c are correct.
 
 
Table 16-3

The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $100,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero.

Quantity
Price (per year)
  0
$120
3,000
$100
6,000
$ 80
9,000
$ 60
12,000
$ 40
15,000
$ 20
18,000
$ 0
 

 6. 

Refer to Table 16-3. If there is only one digital cable TV company in this market, what price would it charge for a premium digital channel subscription to maximize its profit?
a.
$40
b.
$60
c.
$80
d.
$100
 

 7. 

Refer to Table 16-3. Assume that there are two digital cable TV companies operating in this market. If they are able to collude on the price and quantity of subscriptions to sell, what price (P) will they charge, and how many subscriptions (Q) will they sell collectively?
a.
P = $40, Q = 12,000
b.
P = $60, Q = 9,000
c.
P = $80, Q = 6,000
d.
P = $100, Q = 3,000
 

 8. 

Refer to Table 16-3. Assume that there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are able to collude on the price and quantity of premium digital channel subscriptions to sell. As part of their collusive agreement they decide to take an equal share of the market. How much profit will each company make?
a.
$40,000
b.
$170,000
c.
$480,000
d.
$540,000
 

 9. 

Refer to Table 16-3. Assume that there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. How many premium digital channel cable TV subscriptions will be sold altogether when this market reaches a Nash equilibrium?
a.
3,000
b.
6,000
c.
9,000
d.
12,000
 

 10. 

In order to be successful, a cartel must
a.
find a way to encourage members to produce more than they would otherwise produce.
b.
agree on the total level of production for the cartel, but they need not agree on the amount produced by each member.
c.
agree on the total level of production and on the amount produced by each member.
d.
agree on the prices charged by each member, but they need not agree on amounts produced.
 

 11. 

As the number of firms in an oligopoly market
a.
decreases, the market approaches the cartel outcome.
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.
 

 12. 

Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect
a.
an increase in market output and an increase in the price of the product.
b.
an increase in market output and an decrease in the price of the product.
c.
a decrease in market output and an increase in the price of the product.
d.
a decrease in market output and a decrease in the price of the product.
 

 13. 

Cartels are difficult to maintain because
a.
antitrust laws are difficult to enforce.
b.
cartel agreements are conducive to monopoly outcomes.
c.
there is always tension between cooperation and self-interest in a cartel.
d.
firms pay little attention to the decision made by other firms.
 

 14. 

To increase their individual profits, members of a cartel have an incentive to
a.
charge a higher price than the other members of the cartel.
b.
increase production above the level agreed upon.
c.
ignore the choices made by the other firms and act as a monopolist.
d.
charge the same price a monopolist would charge.
 

 15. 

When price is above marginal cost, selling one more unit at the current price will increase profit. This concept is known as the
a.
income effect.
b.
price effect.
c.
output effect.
d.
cartel effect.
 

 16. 

The profit-maximizing price for a monopoly is a price that
a.
exceeds marginal cost.
b.
exceeds fixed costs.
c.
exceeds average revenue.
d.
equals marginal revenue.
 

 17. 

Oligopolies would like to act like a
a.
duopoly, but self-interest often drives them closer to the perfectly competitive outcome.
b.
competitive firm, but self-interest often drives them closer to the duopoly outcome.
c.
monopoly, but self-interest often drives them closer to the duopoly outcome.
d.
monopoly, but self-interest often drives them closer to the perfectly competitive outcome.
 

 18. 

The Sherman Antitrust Act
a.
was passed to encourage judicial leniency in the review of cooperative agreements.
b.
was concerned with self-interest dominated Nash equilibriums in prisoners' dilemma games.
c.
enhanced the ability to enforce cartel agreements.
d.
restricted the ability of competitors to engage in cooperative agreements.
 

 19. 

Economists claim that a resale price maintenance agreement is not anti-competitive because
a.
suppliers are never able to exercise noncompetitive market power.
b.
if a supplier has market power, it will be likely to exert that power through wholesale price rather than retail price.
c.
retail markets are inherently noncompetitive.
d.
retail cartel agreements cannot increase retail profits.
 

 20. 

Assume that Peach Computers has entered into a resale price maintenance agreement with Computer Super Stores Inc. (CSS Inc.) but not with CompuMart. In this case,
a.
the wholesale price of Peach computers will be different for CSS Inc. than it is for CompuMart.
b.
Peach computers will never increase profits by having a resale price maintenance agreement with all retail outlets that sell its products.
c.
CompuMart will benefit from customers who go to CSS Inc. for information about different computers.
d.
CSS Inc. will sell Peach computers at a lower price than CompuMart.
 

 21. 

Who wrote, "People of the same trade seldom meet together, but the conversation ends in a conspiracy against the public, or in some diversion to raise prices."?
a.
Thomas Jefferson
b.
Adam Smith
c.
Bill Gates
d.
Robert Axelrod
 

 22. 

Which of the following prohibits executives of competing firms from even talking about fixing prices?
a.
Sherman Act
b.
Clayton Act
c.
Federal Trade Commission
d.
U.S. Justice Department
 

 23. 

Predatory pricing occurs when a firm
a.
exercises its oligopoly power by raising its price through the formation of a cartel.
b.
exercises its monopoly power by raising its price.
c.
cuts its prices in order make itself more competitive.
d.
cuts its prices temporarily in order to drive out any competition.
 
 
Table 16-19

Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Matt, Brian) in each cell.
  
Brian
  
Low Price
High Price
Matt
Low Price
(1500, 1500)
(5000, 200)
High Price
(200, 3000)
(4000, 4000)
 

 24. 

Refer to Table 16-19. Which of the following statements is correct?
a.
Matt's dominant strategy is to charge a low price.
b.
Brian's dominant strategy is to charge a high price.
c.
The dominant strategy for both Brian and Matt is to charge a low price.
d.
Matt's dominant strategy is to charge a high price.
 

 25. 

Refer to Table 16-19. Which of the following statements is correct if Brian and Matt will play this game only once?
a.
The Nash equilibrium is for players to choose the low price.
b.
A Nash equilibrium cannot be established unless Brian and Matt collude.
c.
A Nash equilibrium cannot be established without the players repeating the game.
d.
The Nash equilibrium price is the low price.
 



 
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