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#1: The Monopolistic Competitor

Economic v. Accounting Profit

MC-1) A profit just sufficiently large enough to sustain

a business in the long run (without attracting

competition) is also called

a. break even

b. zero economic profit

c. normal accounting profit

d. all of the above

e. none of the above

MC-2) Firms will enter an industry that has no barriers

to entry if

a. there are no economic losses

b. there are accounting profits

c. there are economic profits

d. there are no accounting losses

e. there is a normal accounting profit

MC-3) If a firm is making a zero economic profit it

a. will exit the industry in the long run

b. other firms in the industry will exit in the long run

c. is doing better than the alternative

d. is doing just as well to the alternative

e. is making an abnormally large accounting profit

which attracts competition in the long run

The following questions concern the following scenario.

A profit maximizing sole proprietorship has revenue of

$210,000. Employee costs are $50,000. Rent is

$24,000. Materials are $65,000. Interest is $12,000.

Besides the loan, the owner also invested $50,000 of her

own money on which she could have received an interest

rate of 6%. The owner quit an $80,000 a year job to start

this business.

MC-4) In the above scenario, the employee costs are

a. an explicit cost

b. an accounting cost

c. an opportunity cost

d. an economic cost

e. all of the above

MC-5) In the above scenario, the total of explicit costs is

a. $74,000

b. $139,000

c. $151,000

d. $201,000

e. $281,000

MC-6) In the above scenario, accounting profit is

a. $-71,000

b. $9,000

c. $59,000

d. $71,000

e. $136,000

MC-7) In the above scenario, implicit costs are

a. $80,000

b. $83,000

c. $120,00

d. $123,000

e. $281,000

MC-8) In the above scenario, opportunity costs are

a. $136,000

b. $221,000

c. $234,000

d. $281,000

e. $284,000

MC-9) In the above scenario, economic profit is

a. $-74,000

b. $-71,000

c. $-52,000

d. $-24,000

e. $-11,000

MC-10) Given the above scenario, economics predicts

a. this firm will shut down in the short run

b. new firms will enter the industry

c. this firm will exit in the long run

d. the owner will raise the price of their good

e. the “normal” profit will increase

Monopolistic Competitor

MC-11) The profit maximizing quantity for the firm in

Figure 1 is

a. 50

b. 80

c. 100

d. 130

e. 180

$2

50

$4

$6

$8

$9

$11

100

80

130

160

200

$3

180

Figure 1

MC-12) The profit maximizing price for the firm in

Figure 1 is

a. $11

b. $9

c. $8

d. $6

e. $3

MC-13) The total cost for the firm in Figure 1 will be

a. $3

b. $100

c. $200

d. $300

e. $780

MC-14) The total revenue for the firm in Figure 1 will

be

a. $300

b. $400

c. $780

d. $800

e. $1200

MC-15) The firm in Figure 1 will make a profit of

a. $500

b. $550

c. $600

d. $800

e. $1,220

MC-16) For the monopolistically competitive firm in

Figure 1, in the long run we expect to see this firm’s

demand curve

a. shift right and become more inelastic

b. shift right and become more elastic

c. shift left and become more inelastic

d. shift left and become more elastic

e. none of the above, the curve stays the same

MC-17) For the monopolistically competitive firm in

Figure 1, in the long run in this industry we expect to see

a. firms enter and this firm will produce less.

b. firms enter and this firm will produce more.

c. firms enter and this firm will produce the same

d. firms exit and this firm will produce less.

e. firms exit and this firm will produce more.

MC-18) Monopolistically competitive firms are

different from perfectly competitive firms because

monopolistically competitive firms

a. have some control over the price of their product.

b. can earn profits in the long run

c. have barriers to entry

d. produce homogeneous goods

e. are few in number in the industry

MC-19) Monopolistically competitive firms are

different from monopolies because monopolistically

competitive firms

a. make profits in the long run

b. are price takers

c. have barriers to entry

d. face competition in the long run

e. have a downward sloping demand curve

MC-20) Which of the following actions would not be a

strategy a monopolistically competitive firm would use

to gain economic profits

a. offer exceptional customer service

b. differentiate their good

c. offer a special low sale price

d. develop a brand name

e. advertise their good

MC-21) Which of the following is not a characteristic of

monopolistic competitors?

a. There are no barriers to entry

b. Firms produce a homogeneous product

c. Individual firms face a downward sloping demand

curve

d. Firms can make a profit in the short run

e. Firms breakeven in the long run

MC-22) Which of the following is an important

characteristic of monopolistic competitors?

a. Each firm is large and comprises a significant share

of the market

b. Each firm is like a small monopoly that makes

profit in the long run

c. Each firm produces a good that is different from

what other firms are producing in that industry

d. There are large barriers to entry that keep new firms

out

e. The demand curve that each firm faces is perfectly

elastic

MC-23) As competition enters a monopolistically

competitive industry, a firm in that industry will observe

their demand curve

a. decrease and become more inelastic

b. increase and become more inelastic

c. decrease and become more elastic

d. increase and become more elastic

e. decrease and become perfectly inelastic

MC-24) Monopolistic Competitors are different than

Monopolies because Monopolistic Competitors

a. make profit in the long run but not the short run

b. face a perfectly elastic demand curve, not a

downward sloping one

c. cannot make profit in the short run or long run

d. breakeven in the long run

e. have MR = P

MC-25) Monopolistic Competitors are different than

Perfectly Competitive Firms because Monopolistic

Competitors

a. face a downward sloping demand curve

b. can make profit in the long run

c. can make profit in the short run

d. have significant barriers to entry

e. identical products

#2: Perfect Competition

A Competitive Industry & Firm Defined

PC-1) In a perfectly competitive industry, the market

demand curve is

a. Vertical

b. horizontal

c. downward sloping

d. upward sloping

e. perfectly inelastic

PC-2) In a perfectly competitive industry, the demand

curve the firm sees is

a. vertical

b. horizontal

c. downward sloping

d. upward sloping

e. perfectly inelastic

PC-3) A competitive firm is a price taker because

a. they sell at a profit maximizing price

b. MC = MR

c. the firm is small and insignificant

d. there are barriers to entry

e. all of the above

PC-4) Which of the following statements about the

perfectly competitive firm is not true?

a. The demand curve the firm sees is perfectly

elastic

b. There is easy entry into, and exit from, the market

c. MR = P

d. If a firm cuts production, it will drive the price of

the good up

e. There are many firms

PC-5) Which of the following is not an assumption

about perfectly competitive firms?

a. Firms produce heterogeneous products

b. There are no barriers to entry or exit

c. Everyone has full information

d. The firm is a price taker

e. There are many firms in the industry

PC-6) A perfectly competitive firm

a. can attract more customers by pricing below the

market price

b. can increase profits by lowering her price.

c. will lose all of its customers if it prices above the

market price

d. can increase its total revenue by pricing above the

market price

e. can increase its total revenue by decreasing her

price below the market price

PC-7) The MR for a competitive firm is

a. zero

b. equal to the market price of the good

c. declining at an increasing rate

d. declining at a decreasing rate

e. equal to ATC

PC-8) To maximize profit, a competitive firm should

produce the quantity where

a. MC = ATC

b. P = ATC

c. P = MC

d. P = AVC

e. P = MR

The Supply Curve in Competitive Industry

PC-9) The short run supply curve of a competitive

firm is

a. the MC curve above the shut down point

b. the ATC curve

c. the ATC curve above MC

d. the MR curve

e. nonexistent

PC-10) The short run supply curve of a competitive

industry is

a. perfectly elastic

b. perfectly inelastic

c. the sum of the firms’ supply curves

d. equal to the average cost of all firms

e. the same as the supply curve of the largest firm in

the industry

PC-11) When more firms enter a competitive industry,

the short run industry supply curve will

a. become more steep

b. shift to the left

c. increase

d. move downward

e. become perfectly elastic

Figure 1

70 80 90 100

14

9

7

MC

ATC

18

14.50 AVC

PC-12) Using Figure 1, if the market price is $9, the

firm should produce

a. 70

b. 80

c. 90

d. 100

e. Not enough information to tell


firm should produce

a. 70

b. 80

c. 90

d. 100

e. 0


firm should produce

a. 70

b. 80

c. 90

d. 100

e. 0


firm will earn an economic profit of

a. -50

b. 50

c. 350

d. 1800

e. Not enough information to tell


firm will earn an economic profit of

a. -440

b. -160

c. -50

d. 160

e. 720

PC-17) Using Figure 1, if the firm produces 80 goods,

the firm’s total costs will be:

a. 600

b. 720

c. 800

d. 1160

e. 1440


firm should produce

a. 70

b. 80

c. 90

d. 100

e. 0

PC-19) Using Figure 1, if the market price is $9 and

there are 150 firms in the industry, the quantity

supplied in the industry will be:

a. 100

b. 150

c. 1,350

d. 12,000

e. 15,000

Perfect Competition, Industry

Figure 1

PC-20) Using Figure 1, if there are 5,000 firms in this

perfectly competitive industry, the industry’s supply

curve is

a. S1

b. S2

c. S3

d. S4

e. S5

PC-21) Using Figure 1, S2 would represent the supply

curve of the industry if there are this many firms in the

industry

a. 2,000

b. 3,000

c. 4,000

d. 5,000

e. 6,000

Rep. Firm Industry

15 25

$6

$4

75 150 250 (in 1000’s) 125 45

S2 S3 S4 S5

S1


perfectly competitive industry, and the firms are

making an accounting profit, the industry supply curve

will shift to

a. S1

b. S2

c. S3

d. S4

e. not enough information to say


perfectly competitive industry, and the firms are

suffering an economic loss, the industry supply curve

will shift to

a. S1

b. S2

c. S3

d. S4

e. not enough information to say

PC-24) Using Figure 1, the industry supply curve is

given by S4. The quantity supplied by the industry

with a price of $4 is

a. 90,000

b. 105,000

c. 120,000

d. 135,000

e. 150,000

PC-25) Using Figure 1, the bottom of the S1 curve is

defined by

a. industry demand curve

b. the bottom of LRAC

c. the Break Even point

d. the Shut Down Point

e. the lowest point of MC

Competitive Industry Long Run Equilibrium

PC-26) There is an increase in demand in a perfectly

competitive industry. Which of the following does not

happen in the short run

a. The market price rises

b. Firms will make economic profits

c. New firms enter the industry

d. Quantity produced in the industry increases

e. Quantity produced by each firm increases

PC-27) There is an increase in demand in a perfectly


happen in the long run (from the short run equilibrium)

a. The market price falls

b. The market supply curve increases


d. Quantity produced in the industry increases


PC-28) There is a decrease in demand in a perfectly

competitive industry. Which of the following happens

in the short run


b. Firms break even

c. Firms exit the industry

d. Quantity produced in the industry decreases


PC-29) There is a decrease in demand in a perfectly


happen in the long run (from the short run equilibrium)


b. Firms will break even


d. Quantity produced in the industry decreases


PC-30) The long run supply curve in a perfectly

competitive industry is (assuming constant cost

industry)

a. sum of all firms’ supply curves

b. downward sloping if there are economies of scale

c. vertical if there are finite resources

d. perfectly elastic

e. U-shaped

PC-31) In a perfectly competitive industry, the

position if the long run supply curve is determined by

a. demand

b. shut down point

c. minimum of long run average cost

d. diminishing returns

e. bottom of MC or highest point of MP

PC-32) In an increasing cost industry, the long run

supply curve is ________, and in a decrease cost

industry, the long run supply curve is _________

a. upward sloping; downward sloping

b. downward sloping; upward sloping

c. perfect inelastic; elastic

d. elastic; perfectly inelastic

e. vertical; horizontal

PC-33) With an increase in demand, in the long run,

price will _______ in an increasing-cost industry and

________ in a decreasing-cost industry

a. rise; fall

b. stay the same; stay the same

c. rise; stay the same

d. stay the same; rise

e. fall; rise

PC-34) A perfectly competitive industry will move

along a long run supply curve by

a. increases or decreases in the price

b. each representative firm producing more or less in

the short run

c. each representative firm producing more or less in

the long run

d. firms entering or exiting the industry

e. changes in technology

PC-35) Resources are limited in this industry; so, as

more firms enter, the cost of production gets bid up.

The describes

a. diminishing returns

b. increasing cost industry

c. decreasing cost industry

d. economies of scale

e. diseconomies of scale

Figure 2

PC-36) Using Figure 2, this is the industry short run

supply curve

a. S1

b. S2

c. S3

d. S4

PC-37) Using Figure 2, this is the constant-cost

industry long run supply curve

a. S1

b. S2

c. S3

d. S4

PC-38) Using Figure 2, this is the increasing-cost


a. S1

b. S2

c. S3

d. S4

PC-39) Using Figure 2, this is the decreasing-cost


a. S1

b. S2

c. S3

d. S4

S2

S3

S4

S1

#3: Perfectly Competitive Industry including Long Run

Figure 1

PCI-1) Using Figure 1, these graphs represent

a. A monopoly

b. Two firms of a duopoly

c. One representative firm in an oligopolistic

industry

d. Monopolistic Competition

e. Perfect Competition

PCI-2) Using Figure 1, curve A represents

a. A firm’s supply

b. A firm’s long run average cost

c. The industry supply

d. Total market demand

e. A firm’s demand

PCI-3) Using Figure 1, curve B represents






PCI-4) Using Figure 1, curve C represents






PCI-5) Using Figure 1, curve E represents






PCI-6) Using Figure 1, if this market is characterized

by curves A, B, C, and E (but not D), the long run

equilibrium price is (assuming constant cost industry)

a. P1

b. P2

c. P3

d. Above P1

e. Somewhere between P2 and P3


by curves A, B, C, and E (but not D), then we know

a. Firms are losing money

b. The industry is in long run equilibrium

c. Firms are producing Q1

d. New firms will enter the industry in the short run

e. New firms will enter the industry in the long run


by curves A, B, C, and E (but not D), then current

market equilibrium price and quantity is

a. P1 , Q1

b. P2 , Q1

c. P3 , Q1

d. P2 , Q5

e. P3 , Q6


by curves A, B, C, and E (but not D), a representative

firm is currently producing ___, but in the long run, it

will be producing ___

a. Q1 , Q4

b. Q5 , Q4

c. Q2 , Q1

d. Q6 , Q4

e. Q2 , Q5

C

D

Q1

P1

Q2 Q3 Q4 Q5 Q6

P2

P3

P1

P2

P3

Industry Rep. Firm

A

B E

Q7


by curves A, B, C, and E (but not D), then we predict

in the long we would observe

a. Price will rise

b. Price will fall

c. Firms will produce more

d. Firms will exit the industry

e. Less will be produced in the industry


by curves A, B, C, and E (but not D), then the long

run market equilibrium price and quantity is

a. P3 , Q4

b. P2 , Q5

c. P1 , Q5

d. P2 , Q2

e. P3 , Q6

PCI-12) Using Figure 1, firms are currently ____, so in

the long run, we expect to see _____

a. Making a profit; firms enter

b. Suffering a loss; firms enter

c. Breaking even; no change

d. Making a profit; firms exit

e. Suffering a loss; firms exit

Figure 2

The following questions use Figure 2. The industry is

in long run equilibrium and is characterized by LRAC1.

A new technology has recently been developed which

shifts the firms’ LRAC to LRAC2. Firms have yet to

utilize the new technology.

PCI-13) This new technology

a. Creates greater economies of scale

b. Reduces the amount of economies of scale

c. Favors small firms

d. Increases cost

e. Doesn’t affect marginal cost

PCI-14) With the new technology, in the long run, we

expect to see

a. Larger firms selling goods at a higher price

b. Larger firms selling goods at a lower price

c. Smaller firms selling goods at a higher price

d. Smaller firms selling goods at a lower price

e. Same size of firms, but more of them, selling

goods at a lower price

PCI-15) What is the current industry quantity (before

the technology change), and what will be the long run

equilibrium industry quantity (as a result of the

technology change)?

a. Q2 and Q4

b. Q5 and Q4

c. Q5 and Q6

d. Q6 and Q4

e. Q2 and Q1

Q1

P1

Q2 Q4 Q5 Q6

P2

P1

P2

Industry Rep. Firm

LRAC1

LRAC2

Figure 3

The following questions use Figure 3. The industry is

in long run equilibrium and is characterized by LRAC1.

A new technology has recently been developed which

shifts the firms’ LRAC to LRAC2. Firms have yet to

utilize the new technology.

PCI-16) What is the current industry quantity (before

the technology change), and what will be the long run

equilibrium industry quantity (as a result of the

technology change)?

a. Q2 and Q4

b. Q5 and Q4

c. Q5 and Q6

d. Q6 and Q4

e. Q2 and Q1

PCI-17) What is the current firm quantity (before the

technology change), and what will be the long run

equilibrium firm quantity (as a result of the technology

change)?

a. Q2 and Q4

b. Q5 and Q4

c. Q5 and Q6

d. Q6 and Q4

e. Q2 and Q1

PCI-18) What is the current market price (before the

technology change), and what will be the long run

equilibrium market price (as a result of the technology

change)?

a. P1 and P2

b. P1 and P1

c. P2 and P1

d. P2 and P2

e. P1 and a price between P1 and P2

PCI-19) In the long run, in this market, we expect to

see

a. Larger firms, but more of them

b. Larger firms, but fewer of them

c. Smaller firms, but more of them

d. Smaller firms, but fewer of them

e. Smaller firms, but the same number of them

PCI-20) This new technology

a. Reduces the amount economies of scale

b. Favors smaller firms

c. Reduces costs

d. Will create a need for more, but smaller, firms

e. All the above

a.

Q1

P1

Q2 Q4 Q5 Q6

P2

P1

P2

Industry Rep. Firm

LRAC1

LRAC2

Figure 4

PCI-21) If this industry is in long run equilibrium,

which curve represents the current industry supply

curve?

a. A

b. B

c. C

d. D

e. E

PCI-22) If this industry is in long run equilibrium,

what is the equilibrium market price and quantity?

a. P3 , Q5

b. P2 , Q2

c. P1 , Q5

d. P2 , Q4

e. P3 , Q3

C

D

P1

Q1 Q3 Q4 Q5

P2

P3

P1

P2

P3

Industry Rep. Firm

E A

B

Q2

#4: Game Theory

GT-1) Game theory is

a. economic theory of people having fun

b. economic theory of people utilizing leisure time

c. mathematical analysis of models of cooperation and

conflict between rational decision makers

d. mathematical and economic analysis of decisions

involving random, chance events

e. economic theory of using games to increase

productivity of workers

GT-2) A game like chess where players take alternating

turns making decisions is this type of game

a. Strategic game

b. Prisoners game

c. Sequential game

d. Turn after turn game

e. All of the above

GT-3) Which is the following is a simultaneous game

a. Rock, Paper, Scissors

b. Tic-Tac-Toe

c. Chess

d. Monopoly

e. All of the above are simultaneous games

GT-4) In the game Rock, Paper, Scissors, a pure (not

mixed) strategy Nash equilibrium is

a. Always choose rock

b. There are three: both players choosing the same thing,

both choosing rock, paper, or scissors.

c. There are three Nash equilibriums: you choose rock if

the other player chooses scissors, paper if the other

player chooses rock, and scissors if the other player

chooses paper.

d. There are six Nash equilibriums: whenever the players

do not choose the same thing because if they choose

the same thing, you do the game again.

e. There is no pure strategy in Rock, Paper, Scissors

that’s a Nash Equilibrium

GT-5) In game theory, a “mixed strategy” means the

player should

a. choose a different strategy than your opponent

b. choose the same strategy as your opponent

c. choose a strategy other than the Nash equilibrium and

other than the dominant strategy

d. alternate which strategy you pick from round to round

e. create a new middle strategy that’s in the middle of

your current strategies.

GT-6) Games can be made more complicated by

a. adding more players than two

b. adding more options from which a player can choose

c. having more than a single round of play

d. having some uncertainty of outcomes

e. all of the above

GT-7) Games in which the winnings of one player are

equal to the losses of the other players

a. are properly called puzzles, not games

b. are impossible to analyze

c. are called zero-sum games

d. are called simultaneous games

e. do not have a Nash equilibrium

GT-8) Examples of non zero-sum games are

a. very rare so they are not analyzed

b. probably most common, so they need to be studied

c. mathematically equivalent to zero-sum games

d. impossible to describe mathematically

e. always of a “win-lose” variety

GT-9) Zero-sum games are

a. games of pure conflict

b. the most common and realistic games

c. the economically most interesting games

d. games that offer the possibility of no one losing

e. all of the above

GT-10) In sequential games, a suggestion for finding a

best possible action is to

a. find a dominant strategy

b. find a Nash equilibrium

c. look forward and reason backward

d. always take the path of least resistance

e. chart the middle course

GT-11) In chess, a best strategy has never been found

because

a. There’s no Nash equilibrium

b. There are so many different possible outcomes, it’s

been impossible to reason backwards the best strategy

c. The optimal strategy is a mixed strategy which means

you never do the same thing

d. It is a simultaneous game so there is no reasoning

backwards

e. Chess involves humans who are occasionally

irrational

GT-12) In the “original” version of the Prisoners’

Dilemma (where there are two prisoners), if Prisoner 1

does not confess, then Prisoner 2

a. can be better off if they confess

b. will not be interrogated by the police

c. will receive no punishment by also not confessing

d. will have to confess or else receive the most severe

punishment

e. none of the above


Dilemma (where there are two prisoners), if one prisoner

confesses, the other prisoner

a. should not confess

b. will want to confess to avoid a severe punishment

c. will get off without punishment

d. will not confess to avoid a long sentence

e. cannot do anything because the first prisoner already

confessed


Dilemma (where there are two prisoners), the dominant

strategy

a. does not exist

b. has both prisoners remaining silent and not confessing

to reduce punishment

c. has each prisoner confessing which always seems

better no matter what the other prisoner does

d. leads to collusion between the two prisoners

e. all of the above

GT-15) Players in a Prisoners’ Dilemma game are more

likely to choose the cooperative strategy if

a. the gains from defection is very large

b. players can communicate in advance

c. one player pre-commits

d. the game is played in multiple rounds

e. the game is simultaneous

GT-16) If playing multiple rounds of a Prisoners’

Dilemma, the best strategy seems to be

a. Tit for tat

b. Tit for tat but with added forgiveness

c. Nash Equilibrium

d. Dominant Strategy

e. Mixed strategy

Table 1 – “A Stag Hunt”

GT-17) In table 1, if A hunts the stag and B hunts the hare,

a. A and B both get nothing

b. A and B both get the maximum that’s possible

c. A gets a little, B gets nothing

d. A gets nothing, B gets a little

e. A and B both get a little

GT-18) In table 1, an important part of this game is that

a. hares are too small to feed two people

b. both players have to cooperate together to successfully

hunt the stag

c. it is always better to hunt a hare than a stag

d. it is always better to hunt the stag than a hare

e. if both players hunt the stag, they’ll scare it away and

be unsuccessful

GT-19) In table 1, the dominant strategy is

a. hunt the stag

b. hunt the hare

c. hunt the stag only if your opponent is hunting the stag

d. hunt the stag only if your opponent is hunting the hare

e. there is no dominant strategy

GT-20) In table 1, the (pure strategy) Nash equilibrium is

a. both players hunting the stag

b. both players hunting the hare

c. there are two: both players hunting the stag and both

players hunting the hare

d. hunt the hare unless the other player has a credible

policy to hunt the stag, then hunt the stag

e. there is no Nash equilibrium

GT-21) In table 1, the efficient outcome is

a. both players hunting the stag

b. both players hunting the hare

c. there are two: both players hunting the stag and both

players hunting the hare

d. one person hunts the hare and one person hunts the

stag

e. there is no efficient outcome

GT-22) In table 1, the Stag Hunt game is not a prisoners’

dilemma because

a. players are worse off, not better, if they cooperate

with each other

b. there is no Nash equilibrium

c. if players cooperate with each other, there’s no

incentive to cheat on or break the cooperation

d. both players receive a benefit instead of a punishment

e. the dominant strategy is to cooperate with each other

instead of competing with each other

GT-23) In the Stag Hunt game, as seen in table 1, some

players will tend to choose the low-risk strategy. This

means players will choose to

a. hunt the stag

b. hunt the hare

c. follow a mixed strategy of sometimes hunting the hare

and sometimes the stag to ensure they don’t always

miss out.

d. wait and see.

e. not play the game.

Hunt the Stag Hunt the Hare

Hunter

B

A: 3

B: 3

Hunt

the Stag

Hunt

the Hare

A: 1

B: 0

A: 0

B: 1 A: 1

B: 1

Hunter A

GT-24) In the Stag Hunt game, as seen in table 1, some

players will tend to choose a high-reward strategy instead

of low-risk. This means players will choose to

a. hunt the stag

b. hunt the hare

c. follow a mixed strategy of sometimes hunting the hare

and sometimes the stag to ensure they don’t always

miss out.

d. wait and see.

e. not play the game.

Table 2 – “Game of Chicken”


a. swerve

b. don’t swerve

c. don’t swerve unless the other driver doesn’t

d. wait for the other person to swerve



a. both drivers swerve

b. both drivers don’t swerve

c. there are two: A swerves and B doesn’t, and vice

versa

d. there are two: they both swerve or they both don’t

swerve

e. there are three: A swerves, B swerves, or they both

swerve

GT-27) Game of Chicken is not a Prisoners Dilemma

because

a. players must cooperate to achieve the best outcome

b. players will always stay with their initial strategy

c. players cannot cooperate to produce a mutually

beneficial outcome

d. players will always do what they promise

e. all of the above

GT-28) One possible solution for a player in a Game of

Chicken is

a. credible pre-commitment

b. agreeing to do one thing then actually doing the

opposite

c. collusion

d. use “tit for tat”

e. penalties or consequences for breaking a promise

Table 3 – “Battle of Sexes”


a. go bicycling

b. play tennis

c. always do what the other person does

d. wait to see what the other person does



a. both players bicycle

b. both players play tennis

c. there are two: both bicycling and both playing tennis

d. there are two: A bicycles while B plays tennis and

vice versa

e. there is no Nash equilibrium

GT-31) In table 3, the “Battle of Sexes” game is not a

prisoners’ dilemma because

a. if players cooperate with each other, there’s no

incentive to cheat on or break the cooperation

b. players are worse off, not better, if they cooperate

with each other

c. there is no Nash equilibrium

d. both players receive a benefit instead of a punishment

e. the dominant strategy is to cooperate with each other

instead of competing with each other

GT-32) For pre-commitment to be an effective solution to

a game situation,

a. the game needs to have multiple rounds

b. it must be impossible or very expensive to violate the

pre-commitment

c. there must be a single Nash equilibrium

d. it must be a prisoner’s dilemma, not a game of

chicken

e. all of the above

GT-33) If a commitment, threat or promise is believed, it’s

referred to as being

a. credible

b. Nash

c. strategic

d. iron-clad

e. bone fide

Bicycling Tennis

Person B

A: 5

B: 3

Bicycling

Tennis

A: -2

B: -2

A: 1

B: 1 A: 3

B: 5

Swerve Don’t Swerve

Driver

B

A: -1

B: 3

Don’t

Swerve

Swerve

A: -3

B: -3

A: 0

B: 0 A: 3

B: -1

Driver A

Person A

GT-34) A method to make a commitment believed is

a. using a 3rd party agent to enforce the commitment

b. using a contract

c. having a reputation adhering to your commitment

d. burning your bridges

e. all of the above

Table 4

GT-35) For the game presented in Table 4, the Dominant

Strategy is

a. Always cooperate

b. Always defect

c. Always match your opponent

d. Use a mixed strategy

e. There is no Dominant Strategy

GT-36) For the game presented in Table 4, the (pure

strategy) Nash Equilibrium is

a. Both players cooperate

b. Both player defect

c. There are two, both players defect or both players

cooperate

d. There are two, one player defects while the other

cooperates

e. There is no pure strategy Nash equilibrium

GT-37) For the game in Table 4, the efficient outcome is

a. both players cooperate

b. both players defect

c. one player defects while the other cooperates

d. players mix their strategies

e. there is no efficient outcome

GT-38) The game in Table 4 is a

a. Prisoners’ Dilemma

b. Stag Hunt

c. Battle of the Sexes

d. Chicken

GT-39) For strategic plays like commitments, threats, and

promises to be effective, they must be

a. not credible

b. announced to your opponent

c. kept secret

d. mixed with other strategies

e. all of the above

For next set of descriptions, use the following answers to

identify to which game it applies. An answer may be used

more than once, and not all answers may be used.


b. Stag Hunt

c. Battle of the Sexes

d. Chicken

GT-40) A main issue of this game is the two players

agreeing upon which cooperating equilibrium will be

chosen

GT-41) A main issue of this game is that one player wins

and the other loses

GT-42) A main issue of this game is that though each

player would like to cooperate, they’d also like to break

that cooperation if it were to happen.

GT-43) A main issue of this game is assurance – that is,

each player needs to be assured that the other player will

do what they promise.

GT-44) “Tit for tat” is one of the best strategies for playing

multi-round versions of this game.

GT-45) Which game would best symbolize two football

teams playing in the Superbowl

GT-46) Which game would best symbolize two football

organizations that are both negotiating with a group of

players to sign with their teams.

GT-47) In this game, players are likely to promise to do

one thing, but then do something different.

GT-48) A possible solution to this game is to take turns on

which cooperating equilibrium is chosen.

GT-49) In this game, both players will promise to do the

same thing, but each hopes the other will break that

promise.

GT-50) In this game, both players may promise to do the

same thing, but each fears the other will break that

promise.

GT-51) Both the Democrat and Republican parties benefit

if the US is doing well, but each party would prefer the US

to do well in slightly different ways. This description

suggests the game between the Democrats and

Republicans is most like this game.

For next set of descriptions, use the following answers to

identify to which game it applies. An answer may be used

more than once, and not all answers may be used.

a. Pre-commitment

b. Warning

c. Threat

d. Assurance

e. Promise

Cooperate Defect

Person B

A: 0

B: 5

Defect

Cooperate

A: 1

B: 1

A: 3

B: 3 A: 5

B: 0

Person A

GT-52) You communicate to your opponent that you will

under specific circumstance undertake some action that

will benefit them, and it’s in your self-interest to follow

through and carry out the action



will harm them, but it’s not in your self-interest to follow



undertake a particular action no matter what your opponent

plans on doing.



will benefit them, but it’s not in your self-interest to follow




will harm them, and it’s in your self-interest to follow


GT-57) You’re playing a Prisoners’ Dilemma game (such

as in Table 4). You tell your opponent that if they defect,

you will defect too and you both will be worse off. This

statement is an example of what?

GT-58) You’re playing a Prisoners’ Dilemma game (such

as in Table 4). You tell your opponent that if they

cooperate, you will cooperate too. This statement is an

example of what?

GT-59) This strategic play could allow you to win the

game of chicken

GT-60) In the game Stag Hunt (such as in table 1), if you

tell your opponent that you will cooperate (hunt the stag),

if your opponent also cooperates (hunts the stag), this is an

example of what?

GT-61) You’re playing a Battle of the Sexes game (it is in

both your self-interests to do the same thing). You want to

take a vacation to Mexico. Your partner wants to go to

Canada. You tell your opponent, “if you go to Canada,

I’m going to go to Mexico by myself.” This statement is

an example of what?

#5: Oligopoly and Game Theory

Table 1

Ol-1) In Table 1, if Firm B maintains their price while

Firm A cuts their price, firm B will experience a

a. Profit of $40,000

b. Profit of $80,000

c. Profit of $20,000

d. Profit of $60,000

e. Loss of $20,000

Ol-2) Using Table 1, Firm A’s dominate strategy is

a. to wait and see what Firm B does

b. is to maintain current price

c. is to cut current price

d. is to maintain price only if Firm B cuts their price

e. not enough information

Ol-3) Using Table 1, if both firms colluded the collusion

would be that

a. both firms maintain current price

b. both firms will lower their price

c. only firm A will lower its price

d. only firm B will lower its price

Ol-4) Using Table 1, if both firms adopt a strategy that will

minimize the damage the other firm can do, then

a. both firms maintain current price

b. both firms will lower their price

c. only firm A will lower its price

d. only firm B will lower its price

Ol-5) Using Table 1, if the two firms colluded they would

each make a profit of

a. $0

b. $20,000

c. $40,000

d. $60,000

e. $80,000

Ol-6) Using Table 1, if Firm A maintains their price, then

Firm B

a. will see their greatest profit by maintaining a high

price

b. will increase profits by cutting price because they’ll

steal customers away from Firm A

c. must maintain price in order not to lose market share

d. will increase profits by raising price and increase the

profit margin

e. will reduce their profits by cutting price.

Ol-7) Using Table 1, both Dominant Strategy and Nash

Equilibrium are that

a. Both firms maintain price until one firm lowers its

price and the other follows

b. Both firms will cut price

c. Collusion will result in each firm maintaining price

d. Both firms will trust each other

e. it is impossible to predict what each firm may do

Ol-8) Which of the following is not a characteristic of

oligopolies?

a. “game theory” is useful to understand firm behavior

b. firms are mutually interdependent

c. there are many firms in an oligopolistic market

d. there are significant barriers to entry

e. firms may try to collude to increase profits

Ol-9) Which of the following is not an obstacle to

collusion?

a. firms may cheat

b. there are high barriers to entry

c. legal restrictions

d. there are a large number of firms in the industry

e. all of the above are obstacles to collusion

Ol-10) The purpose of collusion is to

a. Keep the smallest firm in business by making a

normal profit

b. Charge the highest price possible

c. Maximize the largest firm’s profits

d. Make total profits in the industry the largest

e. Create economic efficiency

Ol-11) Contestable Market Theory suggests that

a. an oligopolistic or monopolistic industry will still be

efficient if the market is contestable

b. a monopolistic industry will become oligopolistic if a

firm contests it

c. a market can only be monopolized if it can withstand a

contest

d. oligopolistic firms will cheat on collusion agreements

e. oligopolistic firms will collude if firms have an

incentive to trust one another

C u t P r i c e M a i n t a i n P r i c e

C u t P r i c e

M a i n t a i n P r i c e

F i r m A

F i r m B

A ’ s P r o f i t : $ 4 0 , 0 0 0 B ’ s P r o f i t : $ 4 0 , 0 0 0




Ol-12) Using Table 2, if Firm A sets a price of $12, and

Firm B sets a price of $8, then Firm B will make a profit of

a. $17,000

b. $16,000

c. $15,000

d. $14,000

e. $8,000

Ol-13) Using Table 2, if the two firms colluded, they

would each charge a price of

a. $14

b. $12

c. $10

d. $8

e. None of the above, the two firms would not charge the

same price

Ol-14) Using Table 2, if both firms are charging $12, then

Firm B reduces price to $10, Firm B will

a. experience higher profits because they under -cut Firm

A’s price

b. experience lower profits because of less revenue from

the lower price even though they attract more

customers

c. want to raise price back to $12 to maximize profits

d. continue to reduce the price to $8 to increase profits

even further

e. hope that Firm A matches the price reduction to $10 to

increase industry profits

Ol-15) Using Table 2, if both firms are charging $10, then

Firm B reduces price to $8, Firm B will

a. have maximized profits

b. experience higher profits because they under-cut Firm

A’s price

c. experience lower profits because of less revenue from

the lower price even though they attract more

customers

d. suffer an economic loss

e. hope that Firm A matches the price reduction to $8

Ol-16) Using Table 2, if Firm B sets a price of $14, Firm

A would, to maximize its profit, set a price of

a. $14

b. $12

c. $10

d. $8

e. $14 or $10

Ol-17) Using Table 2, if Firm B sets a price of $8, Firm A

would, to maximize their profit, set a price of _____ and

make a profit of _____

a. $12; $8,000

b. $12; $14,000

c. $10; $11,000

d. $10; $13,000

e. $8; $10,000

Ol-18) Using Table 2, the dominant strategy for Firm B is

to

a. set a price of $14

b. set a price of $12

c. set a price of $10

d. always do what Firm A does


Ol-19) Using Table 2, the Nash Equilibrium is

a. both firms set a price of $14

b. both firms set a price of $12

c. both firms set a price of $10

d. both firms setting a price of $14, $12, $10, and $8 are

all Nash equilibriums

e. there isn’t a Nash Equilibrium because there is no

dominant strategy for either firm.

Ol-20) Using Table 2, at the Nash Equilibrium, Firm A’s

decision about price is based upon

a. tacit collusion with Firm B

b. both firms making the same amount of profit

c. a correct prediction of what Firm B will do

d. maximizing industry profits

e. dominant strategy

Ol-21) Using Table 2, both Firms charging a price of $12

is

a. A Nash equilibrium because profits are equal for both

firms

b. Not a Nash equilibrium because industry profits are

not maximized

c. A Nash equilibrium because industry profits are

maximized

d. Not a Nash equilibrium because if a firm sets a price

of $12, the other firm will want to price at $10. Then

the first firm won’t set a $12 price.

e. A Nash equilibrium since both firms are making the

same decision, a price of $12

Table 2 – Firm Profits

Firm A’s Pricing

$14 $12 $10 $8

Fir

m B

’s P

rici

ng

$14 A: $18k

B: $18k

A: $20k

B: $15k

A: $18k

B: $11k

A: $15k

B: $5k

$12 A: $15k

B: $20k

A: $16k

B: $16k

A: $17k

B: $12k

A: $14k

B: $8k

$10 A: $11k

B: $18k

A: $12k

B: $17k

A: $14k

B: $14k

A: $13k

B: $11k

$8 A: $5k

B: $15k

A: $8k

B: $14k

A: $11k

B: $13k

A: $10k

B: $10k

Ol-22) You work for the firm Acme electronics which

makes cell phones. The firm Visionary TV’s, a maker of

TV sets, contacts you and wants their firm and Acme to

work together on a joint project. The project would allow

your cell phones and their TV’s to work together. The

joint project requires both firms to spend millions of

dollars in development. If both firms do this, consumers

will value Acme’s phones more and profits will rise.

However, if only Acme develops the technology and

Visionary does nothing, the new technology has no value,

and Acme will lose the amount of the development cost.

This is an example of which game?


b. Stag Hunt

c. Battle of Sexes

d. Chicken

Ol-23) Continuing with the previous question, how should

you respond to Visionary’s overture?

a. Tell them you’ll jump right on that technology, but

then do nothing

b. Ask to see what work they’ve done so far, then set a

meeting three months from now for both firms to

compare progress

c. Ignore / dismiss Visionary, fearing it might be

construed as illegal collusion

d. Take turns developing the technology

e. Say you won’t develop the technology, but do it

anyway in secret

Ol-24) Continuing on with the previous questions, both

firms have embarked on the new technology. It turns out

there are two ways it could be done. The technology could

use infrared communication which would be cheaper and

more profitable for Visionary. Alternatively, the

technology could use Bluetooth communication which

would be cheaper and more profitable for Acme. If the

firms choose different communication methods, it won’t

work at all. Choosing which communication method is an

example of which game?


b. Stag Hunt

c. Battle of Sexes

d. Chicken

Ol-25) How should you respond to Visionary?

a. Immediately start production of phones with the

Bluetooth communication, knowing it would be

impossible to change production.

b. Promise to use infrared, and do it.

c. Promise to use infrared, but switch to Bluetooth.

d. Agree that both firms will use the least expensive

method

e. Pull out of the agreement to development the new

technology.

Ol-26) You are still working for Acme electronics. A

competitor of yours, Cell-Gamma, contacts you. Cell-

Gamma explains that another, a third, cell phone firm is

launching a new technology called “X-5”. This third firm

is going to advertise that X-5 is faster and better than the

4G technology that both you and Cell-Gamma use. The

advertising is a lie. X-5 is not better. If both you and Cell-

Gamma remain silent, people will believe the lie and

switch to the technology. Acme and Cell-Gamma will lose

profit. If either Acme or Cell-Gamma spends a few

million on an advertising campaign explaining the

inferiority of X-5 technology, both Acme and Cell-Gamma

will maintain their level of profit, minus the cost of the

information campaign. Even with the added advertising

costs, it is more profitable to advertise and repudiate the

bogus technology, exposing the lying firm. If both you

and Cell-Gamma advertise the inferiority of X-5, the

outcome is no better than if only one of you advertises,

though both firms now have added costs. This is an

example of which game?


b. Stag Hunt

c. Battle of Sexes

d. Chicken

Ol-27) Continuing with the above question, how should

you respond to Cell-Gamma?

a. Promise to advertise, but don’t

b. Promise to advertise, and do

c. Make no commitment

d. Wait and see

e. Explain that you had just fired your advertising firm,

so it would be impossible for Acme to combat the X-5

technology right then

#6: Industry Review

For next set of descriptions, use the following answers to identify what type of industry it applies to. An answer may be

used more than once, and not all answers may be used. Important: there may be more than one correct answer (a, b, c or

d) per question

a. Perfect Competition

b. Pure Monopoly

c. Monopolistic Competition

d. Oligopoly

IR-1) Barriers to entry keep out all but just a few large firms

IR-2) Is economically efficient

IR-3) Mutual interdependence is a characteristic of this industry

IR-4) The wine industry is made up of many firms. Each winery spends money to make itself stand out and develop

consumer loyalty. The wine industry would be best analyzed using this model

IR-5) There are barriers to entry

IR-6) Is made up of many small firms who produce identical products.

IR-7) Does not make profit in the long run

IR-8) Game theory is useful to describe firm interaction

IR-9) The airline industry is made up of many firms. However, most of the firms are very small and produce very little of

the total industry production. Most of the production in the industry is done by a few large firms. Those few large firms

would be best analyzed using this model

IR-10) Produces a product for which there is no close substitution, and there are significant barriers to entry

IR-11) Is susceptible to collusion

IR-12) Is a price taker

IR-13) Is a price maker

IR-14) Though this type of firm has some control over the price of their good, the firm will not make profit in the long run.

#7: More Questions Exam 3

Cost Calculation Review

Table 1

Q TC

0 40

1 50

2 58

3 65

4 73

5 82

6 92

EM-1) Given the firm costs in Table 1, at a quantity of

4, Fixed Cost is

a. $0

b. $40

c. $73

d. $82

e. $113

EM-2) Given the firm costs in Table 1, at a quantity of

4, Variable Cost is

a. $8

b. $20

c. $33

d. $73

e. $82

EM-3) Given the firm costs in Table 1, at Q = 5, ATC is

a. $8

b. $8.2

c. $8.4

d. $16.4

e. $82

Demand and Marginal Revenue

Table 4

Q P

1 $24

2 $21

3 $18

4 $15

5 $12

6 $9

EM-4) Given the Demand Schedule in Table 4, this firm

a. Is perfectly competitive

b. Faces a perfectly elastic demand curve

c. Faces a perfectly inelastic demand curve

d. Has monopoly (market) power

e. Is a price taker

EM-5) Given the Demand Schedule in Table 4, what is

the Total Revenue if the firm prices its good at $18?

a. $0

b. $18

c. $36

d. $54

e. $72

EM-6) Given the Demand Schedule in Table 4, the

Marginal Revenue of the 5th good is

a. $-3

b. $0

c. $3

d. $12

e. $24

Efficiency

EM-7) The type of industry that is least efficient is

a. perfect competition

b. monopolistic competition

c. oligopoly

d. monopoly

e. contestable market

EM-8) Perfect competition will be efficient

a. in the short run

b. in the long run

c. when firms break even

d. at the minimum of LRAC

e. all of the above

EM-9) A monopolistically competitive firm will be

more efficient if

a. It has more market power

b. It is breaking even

c. Demand is more elastic

d. The product is well differentiated

e. Consumers are very brand loyal

EM-10) Perfectly competitive firms are also “productive

efficient” in the long run because

a. firms produce at lowest possible cost

b. firms are price takers

c. firms break even

d. production is where demand equals marginal cost

e. there are economies of scale

EM-11) An oligopolistic industry will be inefficient if

a. there are many firms in the industry

b. the firms effectively collude

c. it is a contestable market

d. firms earn normal profits

e. all of the above

EM-12) An oligopolistic industry is more likely to be

efficient if

a. it is a contestable market

b. there are many firms in the industry

c. there are lower barriers to firm entry

d. firms can easily cheat

e. all of the above

EM-13) Collusion has this impact upon economic

efficiency

a. It improves efficiency by raising producer surplus

(profits)

b. It reduces efficiency because companies will see an

increase in costs

c. It improves efficiency by allowing firms to produce

more expensive products with better quality

d. It reduces efficiency because firms agree to produce

fewer goods to increase price and profits

e. It improves efficiency because all firms agreed, and

voluntary agreement promotes efficiency

EM-14) To battle collusion, the government may use

this policy

a. anti-trust

b. direct regulation

c. government ownership

d. introduction of competition

e. all of the above

Demand Curves Firms Face

Figure 2

EM-15) Using Figure 2, which demand curve represents

a monopolistically competitive firm in long run

equilibrium?

a. D1

b. D2

c. D3

d. D4

e. D5


a monopolistically competitive firm in the short run

(only)?

a. D2

b. D2 & D3

c. D2, D3 & D4

d. D2, D3 & D5

e. All of the demand curves

EM-17) Using Figure 2, which demand curve would

suggest that new firms will enter and attempt to produce

close substitutes?

a. D1

b. D2

c. D2 & D3

d. D2, D3 & D4

e. D2, D3, D4 & D5

EM-18) Using Figure 2, which demand curve would a

firm desire to sell to?

a. D1

b. D2

c. D3

d. D4

e. D5


a perfectly competitive firm?

a. D1

b. D2

c. D3

d. D4

e. D5

EM-20) Using Figure 2, which demand curve would

generate economic efficiency?

a. D1

b. D2

c. D3

d. D4

e. D5


the most efficient firm who has market power (is a price

maker)

a. D1

b. D2

c. D3

d. D4

e. Not enough information to answer

D2

ATC

D3 D4 D5

D1

Figure 3

EM-22) Using Figure 3, this firm will shut down if the

price is less than

a. $2

b. $4

c. $6

d. $7

e. $10

EM-23) Using Figure 3, this firm will break even if the

price is

a. $2

b. $4

c. $6

d. $7

e. $10

EM-24) Using Figure 3, this firm will make an

economic profit if the price is above

a. $2

b. $4

c. $6

d. $7

e. $10

EM-25) In a highly competitive industry, if firms seek

profit maximization, in the long run, the firms’ actions

will lead to

a. firms making no profit

b. higher prices and fewer goods produced

c. inefficiency

d. much of the consumer surplus being lost and

converted to firm profit

e. abnormal or excessive profits and income

distribution becoming more unequal

EM-26) If there are substantial or significant barriers to

entry in an industry

a. The industry can maintain profits in the long run

b. The industry would probably not be accurately

described by monopolistic competition model

c. It could create inefficiency

d. The industry is not contestable

e. All of the above

100 120 140 160

6

4

2

10

7

#8: Monopolistic Competition Review

Figure, for the firm depicted in the graph:

Qty:

Price:

TC:

TR:

Profit:

What's efficient?

Price:

Qty:

At a quantity of 425, is

demand elastic or inelastic?

At a quantity of 600, is demand elastic or inelastic?

What will happen in the long run?

If this firm is a monopolistic competitor, in the long run, the firm will be producing fewer than how

many goods?

$8

200

$12

$16

$20

$22

$26

350 300 425 500 600

$10

550

#9: Perfect Competition Review

1) Fill in all blank spaces in questions below:

100 120 160 200

15

10

5

20

1617

7.5

4

80

At Q=100, VC = ____ TC = ________ At Q = 140, FC = ________

If Market Price is $10, then Q = ___, ATC = ___, TR = ___ , TC = ____, Profit = _____




If the Market in this graph is in long run equilibrium the price is: _______

There are 80 firms in the industry identical to the firm represented above. What is the quantity supplied in

the industry at a price of $10? _______

If the Industry for the firm above is in long run equilibrium, and the quantity demanded for the good if price

is $15 is 320,000, how many firms will there be in the industry?

2) Q TC

0 8

1 15

2 18

3 22

4 28

5 36

What is the MC of Good 4?___

What is the ATC of 5 goods? ____

What is the FC of 2 goods? ____

the monopolistic competitor - cabrillo collegepharvell/econ1b_files/study guide/sg questions...

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