1.Consider the following entry game. Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard", firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are Nash equilibrium strategies?
a) (enter, hard) and (not enter, hard)
b) (enter, soft) and (not enter, soft)
c) (not enter, hard) and (enter, soft)
d) (enter, hard) and (not enter, soft)
2.Suppose P = 20 - 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. If fixed costs are zero and the firm engages in two-part pricing, the most profits the firm will earn is:
3. play 2
t1 t2 t3
play 1 S1 10,0 5,1 4,-200
S2 10,100 5,0 0,-100
Which of the following pair of strategies constitute a Nash equilibrium of the game?
a) S1, t1
b) S1, t2
c) S2, t1
d) both b and c
4.Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm one commits to this collusive output, it pays firm two to
a) cheat by producing more output.
b) cheat by producing less output.
c) cheat by raising prices.
d) none of the above
5.The production function for a competitive firm is Q = K.5L.5. The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit. The maximum profits are
d. none of the above.
6. When there are economies of scope between products, selling off an unprofitable subsidiary
a) could lead to a major reduction in costs.
b) could lead to only a minor reduction in costs.
c) could lead to only a minor reduction in sales.
d) could lead to a major reduction in sales.
7. The industry elasticity of demand for gadgets is -2, while the elasticity of demand for an individual gadget manufacturer's product is -2. Based on the Rothschild approach to measuring market power, we conclude that
a) there is little monopoly power in this industry.
b) there is significant monopoly power in this industry.
c) the Herfindahl index for this industry is -2.
d) the Herfindahl index for this industry is 2.
8.A student in a managerial economics class calculated the four-firm concentration ratio and HHI for industries A and B. What is the proper conclusion she can draw from the following findings?
Industry A Industry B
4-Firm CR 0.9 1
HHI 3200 2500
a) Industry B is a monopoly.
b) The market power of firms in industry A is greater than that in industry B.
c) C4 is higher for Industry A while the HHI is higher for Industry B. This inconsistency must be due to a calculation error.
d) Neither industry is perfectly competitive.
9.If the profit-maximizing markup factor in a 3-firm Cournot oligopoly is -2, what is the corresponding market elasticity of demand?
10.A local video store estimates their average customer's demand per year is Q = 7 - 2P, and knows the marginal cost of each rental is $0.5. How much should the store charge for an annual membership in order to extract all the consumer surplus via an optimal two-part pricing strategy?
11.Eric provides cheese (H) and milk (M) to the market with the following total cost function C(H, M) = 10 + 0.4 H2 + 0.2M2. The price of cheese and milk in the market are $2 and $5 respectively. Assume that the cheese and milk markets are perfectly competitive. What output of milk maximizes profits?
12.An unregulated industry has a Lerner index of zero. These numbers:
a) reveal that social welfare would be improved by regulating the firms.
b) are consistent with the industry being monopolistically competitive.
c) are consistent with the industry being perfectly competitive.
d) a. and b.
Microeconomic Multiple Choice Questions
1) Which of the following is a normative statement ?
A) Next year inflation rate will be under 4%(B) Consumers will buy more gasoline over Christmas Holiday even if the price of gas is 10 cent higher than it was during the Thanksgiving Holiday(C) the government cuts in welfare spending impose an unfair hardship on the poor.(D) the current butter surplus is the result of federal policies.
2) A point inside a production possibilities frontier :
A) Could indicate that the resource are misallocated(B) Is more efficient that a point on the production possibilities frontier (C) Reflects the fact that more technology needs to be developed to fully employ all resources(D) Implies that too much labor and not enough capital is being used.
3) A reduction in the price of a good
A) Shifts the goods demand curve leftward and also decrease the quantity demanded(B) Shifts the goods demand curve leftward but does not decrease the quantity demanded(C) Does not shift the goods demand curve leftward but does decrease the quantity demanded(D) Neither shifts the goods demand curve leftward nor decrease the quantity demanded.
4) The demand for movies is unit elastic if:
A) A 5% decrease in the price leads to an infinite increase in the quantity demanded.(B) A 5% increase in the price leads to a 5% decrease in the quantity demanded.(C) Any increase in the price leads to a 2% decrease in the quantity demanded (D) A 5 % increase in the price leads to a 5% increase in total revenue.
5) Producers' total revenue will increase if
A) Income increase and the good is an inferior good(B) the price rise and demand is elastic (C) the price rises and the demand is inelastic (D) Income falls and the goods is a normal good
6) Competitive market will generally produce
A) Too much of a public good (B) Too little of a public good (C)The efficient amount of a public good (D) The efficient amount of a public good in a short run but not in the long run.
7) Underproduction implies that for the last unit produced:
A)Marginal social benefits exceeds marginal social cost (B) Marginal social benefits equals marginal social cost(C) Marginal social cost exceeds marginal social benefit (D) the deadweight lose is zero.
8) A sale tax will be divided so that:
A) The buyer pay the full amount if supply is perfectly inelastic(B) the seller pay the full amount if supply is perfectly inelastic. (C) the seller pay the full amount if supply is perfectly elastic (D) Both buyer and seller pays some of the tax if the supply is perfectly elastic
9)Dean spend all his income on movies and soda. Movies cost $6 each and soda cost $.50 a can. In a diagram with movies on the horizontal axis and soda on the vertical axis Dean budge line:
A) becomes steeper to the right (B) Becomes shallower to the right(C) has a constant positive slope (D) has a constant negative slope
10) Sarah consume only strawberries and cream, and she is spending all of her income. Her marginal utility of her last dish of strawberries is 200 and her marginal utility of her last pint of cream is 200. The price of strawberries is $1.00 per dish and the price of cream is $2.00 per pint. To maximize her utility, Sarah should
A)Buy more strawberries and less cream(B) Buy more cream and less strawberries (C) Not change her purchase of strawberry cream.(D) Definitely buy no cream at her consumer equilibrium.
11) Marginal utility theory concludes that a decrease in the price for a good increases the quantity demanded and
A)Increase the demand for substitutes (B) Decrease the demand for complements (C) Increase income (D) increase total utility
12) Suppose that Dave has $200 to spend per week and buys only magazine and pizza. The price of pizza is $10 and the price of a magazine is $5. What is Dave real income in terms of the magazines?
A)20. (B) 40 (C) 200. (D) 10.
13)Any point a given indifference curve is
A) Inferior to any point on the indifference curve(B) Preferred to any point on the indifference curve(C) Definitely affordable (D) Definitely unaffordable
13) A chief reason firms gives employees bonuses based on the firms profit is to cope with
A) The tax laws (B) The law of diminishing returns (C) the principal-agent problem (D) unions
14)If a firm's marginal product of labor is less than its average product of labor then an increase in the quantity of labor it employs definitely will:
A) Decrease the total product (B) Decrease its average product of labor (C) increase its marginal product of labor (D) not change its average product of labor
15) A firms average variable cost is $60, its fixed cost is $3000 and its output is 600units Its average cost is :
A) less than $58 (B)between $58 and $62. (C) between $62 and $64 (D) more than $64
16) When economies of scale are present, the LRAC curve touches each short-run ATC curve
A) To the left of the ATC curve's minimum point (B) To the right of the ATC curve's minimum point (C)at the ATC curve's minimum point (D) No points
17) In a perfect competitive firm's marginal cost exceeds its marginal revenue at its current output. To increase its profit the firm will
A)lower its prices (B) raise it prices (C) decrease its output (D) increase its output
18)In demand for its product is elastic, a monopoly's:
A) Total revenue is unchanged when the firm lower its prices(B)Total revenue decrease when the firm lower its price(C) Marginal revenue is positive (D) Marginal revenue is zero.
19)Compared to a single -price monopoly, a perfectly competitive industry produces
A) less output and has a lower price(B) ) less output and has a higher price(C)more output and has a lower price(D) more output and has a lower price
20)A price discriminating monopolist charges lower prices to customers with
A) lower supply elasticities. (B) Higher supply elasticities (C) lower average willingness to pay (D) higher average willingness to pay
21) In the dominant firm model of oligopoly the dominant firm charges
A) a lower price than larger firms (B) the same price as the smaller firms (C) a higher price than the smaller firms (D) a price equal to its marginal revenue
22) According to economic model of public choice the object of politicians is to
A) promote the social interest (B) get elected and remain in office (C) maximize free-ridership (D) maximize total public utility
23) According to capture theory, regulation occurs because a
A) small group of loser from regulation loses a great deal per person(B) small group of winners from regulation gains a great deal per person(C) large groups of winners from regulation gains only a small amount per person. (D) deadweight loss escape market discipline
24) Although the effects of antitrust law have varied over the years the overall thrust appears to have been to
A)reduce deadweight loss as suggested by the capture theory (B) reduce deadweight loss as suggested by the social interest theory(C) increase producer surplus as suggested by the capture theory (D) increase producer surplus as suggested by the social interest theory
25) Public universities, by charging tuition
A)Below the marginal cost of education, decrease the number of student (B) Below the marginal cost of education, increase the number of student (C) above the marginal cost of education decrease the number of students(D) above the marginal cost of education increase the number of students