Microeconomics - multiple-choice

(See attached file for full problem description)

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1. The OPEC Cartel has had periods of success as well as failure. Of the following factors, which does not contribute to success in a cartel?

a. a low price elasticity of demand for oil (inelastic demand).
b. restricted supply of other forms of energy, such as nuclear.
c. together, members of OPEC control a large percentage of known oil reserves.
d. supply of crude oil by non-OPEC producers is very elastic.
e. all of the above factors contribute to cartel success.

2. Sony and Phillips are considering forming a consortium to control a new digital technology standard. Which of the following makes it harder to support a mutually beneficial consortium agreement?

a. legally enforceable contract provisions
b. observable actions by the parties
c. market gains from a coordinated standard
d. conflicting views on the value of each firm's technology
e. none of the above.

3. A monopolist could produce the socially efficient level of output by

a. equating MR and MC
b. equating P and MC
c. minimizing costs of production
d. producing where market demand is elastic
e. none of the above.

4. Which of the following can be thought of as a barrier to entry?

a. a MC curve that declines with output
b. patents
c. strategic actions by incumbent firms
d. all of these
e. none of these

USE THE FOLLOWING INFORMATION FOR THE NEXT TWO QUESTIONS:

Intel offered the (high capability) 486DX chip at a price of 588$ and the (low capability 486SX chip at a price of 333$. Suppose that there are two segments in the demand for chips: low-end users (buyer 1) and high-end users (buyer 2). A buyer will purchase at most one chip. The willingness-to-pay (i.e., the maximum amount a buyer would pay for a chip) of each buyer type for each kind of chip is given by

486DX 486SX
Buyer 1 $400 $350
Buyer 2 $750 $450

5. At the prices offered by Intel, you predict that

a. Each buyer type will purchase a 486DX chip

b. Each buyer type will purchase a 486SX chip

c. Buyer 2 will purchase a 486DX but Buyer 1 will not purchase either chip

d. Intel will earn revenues of $921 from the two buyer segments

e. Intel could earn higher revenues by offering only a 486DX and pricing it at $399 (i.e., do not offer the 486SX).

6. Consider alternative prices for the two chips. For the two buyers, Intel would earn the
highest revenue by

a. Charging a price for the 486DX of $749 and not offering the 486SX

b. Charging a price for the 486DX of $349 and not offering the 486SX

c. Maintaining the current offered prices.

d. Charging a price for the 486DX of $749 and for the 486SX of $349

e. Charging a price for the 486DX of $648 and for the 486SX of $349

7. For a firm with market power: the more inelastic the demand for a firm's product, the

a. larger the markup of price over cost
b. smaller the markup of price over cost
c. more likely it is that the firm must price as if it were in a perfectly
competitive market
d. none of the above.

8. Your firm has developed the expertise to sell consulting services to various governments who are seeking to privatize activities in the telecommunications sector.
Due to your expertise, there are no effective competitors at present and you have the
ability to choose the price for your consulting services. Due to budget deficits, the
elasticity of demand varies greatly across countries. You will charge the higher price in the market with the

a. more inelastic demand
b. more elastic demand
c. demand elasticity has no influence on this decision
d. lower marginal cost of delivering consulting services
e. none of the above.

Firm B

Low High
Price Price
_________________________
Low Price 20, 10 30, -5
Firm A

High Price 0, 40 25, 25
________________________

9. In the figure above, which of the following is true? (The first number in each cell is Firm A's profit.)

a. Firm B's dominant strategy is to charge a high price
b. Firm A's dominant strategy is to charge a high price, B's dominant strategy is
to charge a low price
c. Firm A's dominant strategy is a low price, B's dominant strategy is to charge
a high price
d. both firms' dominant strategy is to charge a high price
e. both firms' dominant strategy is to charge a low price

10. Firms X and Y are non-cooperative and each has resources to introduce only one new product. If X introduces Smoked Bacon, then Y cannot also successfully introduce Smoked Bacon. However, Y could successfully introduce Sausage Plus, a competing product. If the payoff matrix is as follows, which strategies for X and Y will yield a Nash equilibrium?

Firm Y
__________________________________
Smoked Bacon Sausage Plus
__________________________________
Smoked Bacon A. -6, -6 B. 12, 12
Firm X
Sausage Plus C. 12, 12 D. 10, 3
__________________________________

a. A only
b. B only
c. D only
d. B or C
e. none of the above.

11. Suppose two oligopolists, Firm A and Firm B, are faced with the choice of which of three prices to charge. Their respective payoff matrixes are as follows (the payoffs represent expected profits per period of time):

FIRM A'S MATRIX FIRM B'S MATRIX

Firm B's Prices Firm B's Prices

$4 $5 $6 $4 $5 $6

Firm $4 $12 $14 $17 Firm $4 $15 $14 $13
A's $5 $13 $16 $19 A's $5 $13 $12 $ 9
Prices $6 $14 $17 $20 Prices $6 $10 $ 9 $ 6

Assuming there are no opportunities for collusion, then

a. firm A should elect a price of $6
b. firm B should elect a price of $6
c. firm A can expect to earn profits of $20 per period
d. firm B can expect to earn profits of $6 per period
e. all of these.

Note: the payoff matrices above are no different in content than with the usual format. Rather than put all the information into one large matrix, the payoff information for each player is presented separately in order to keep them less cluttered.

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 4 QUESTIONS.
The market for an industrial chemical has a single dominant firm and a competitive fringe. The dominant firm acts as a price leader, setting a price for the chemical and each firm in the fringe acts as a price taker. Market demand (QD) and competitive fringe supply (QF) are as follows: QD = 140 - 32P
QF = 60 + 8P

where quantities are in thousands of gallons and price is in dollars per gallon. Marginal cost for the price leader is constant at MC = $0.75 per gallon. Let QL denote the quantity sold by the price leader.

12. When the leader sets P = 1, which of the following are correct:

I. The fringe will not be producing at this price
II. The price leader sells approximately 63% of all gallons sold
III. The fringe sells more gallons than the price leader
IV. The price leader sells approximately 37% of all gallons sold.

a. I only c. III only
b. II only d. III and IV only

13. As the leader increases the price P, then

a. QF rises but QL falls
b. QF and QL both rise
c. QF falls while QL rises
d. QF and QL both fall
e. the sum of QF and QL rises.

14. The profit-maximizing price for the price leader is

a. P = MC = 0.75
b. P = 1
c. P = 1.25
d. P = 1.375
e. none of the above.

15. Originally, the price leader was a monopolist due to patent protection. The competitive fringe became active after the patent expired. Compared to the original monopoly market, the market with the competitive fringe involves

a. larger consumers surplus for buyers than before
b. larger profits for the price leader than before
c. a smaller total quantity (QF + QL) than before
d. a higher price than before.

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 16-18

Estimated demand for a given brand of soccer shoes ("Didas") is given by

QD = 2200 - 60P - 30Pb + 10Pc + 200A

where QD = quantity demanded (in pairs of shoes)
P = price of (a pair of) "Didas" soccer shoes (in DM)
Pb = price of a soccer balls (in DM)
Pc = average price of shoes sold by competitors (in DM)
A = advertising expenditure (in DM100)

16. From this demand curve, one can infer that:

a. a higher level of advertising will lead to a higher quantity demanded for "Didas" shoes
b. "Didas" shoes and soccer balls are substitutes
c. the competitors' shoes and soccer balls are complements
d. all of the above
e. none of the above.

FOR QUESTIONS 17-18 suppose that P = 10, Pb = 20, Pc = 30, and A = 20.

17. In the current market situation the price elasticity of demand for "Didas" shoes is

a. elastic
b. inelastic
c. - 60
d. -1.38
e. None of the above

18. In the current market situation if advertising expenses increase by 1% then quantity demanded is going to

a. increase by more than 1% d. decrease by 1%
b. increase by less than 1% e. decrease by less than 1%
c. decrease by more than 1%

19. An investigation by the US Federal Trade Commission alleges collusion and
price fixing for compact disks (CDs) by major music companies. The investigation is
focused on the industry practice of "minimum advertised price (MAP)." Under this
practice, a CD retailer receives (from a music company) a cash payment intended for
cooperative advertising, provided that the retailer does not advertise or promote CDs at a price below the MAP. This practice

a. can provide incentives for retailers to invest in advertising
b. is an example of contractual tying
c. is not expected to promote aggressive pricing by retailers
d. all of the above (a, b, c) are correct
e. none of the above (a, b, c) are correct

20. In a recent Wall Street Journal article about Eastman Kodak Co. it is reported that "...a 9% drop in film prices, Kodak said it boosted film revenues 7% by selling 18% more rolls of film." Make the assumption that this corresponds to a movement along the demand curve for Kodak film. Which statement below is correct?

a. This information implies inelastic demand for Kodak film
b. Given the implied demand elasticity, Kodak could have increased profit by
raising prices rather than cutting them
c. A revenue increase is not consistent with a price decrease and a
quantity increase
d. The price elasticity of demand is -0.77
e. None of the above
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