Exam 2

Multiple Choice 2 points each 1) Suppose Boeing and Airbus have entered into a cartel agreement that will enable them to boost their profits. What occurs if Boeing decides to cheat on the agreement? a. Boeing lowers the price of its airplanes. b. The total industry output increases. c. The total profits in the airliner industry will decrease. d. All of the above answers are correct. 2) Which of the following is a difference between perfect competition and monopolistic competition? a. Perfect competition has a large number of independently acting sellers. b. In monopolistic competition, entry into the industry is unblocked. c. Only firms in monopolistic competition can earn an economic profit in the short run. d. Firms in monopolistic competition compete on their product’s price as well as its quality and marketing 3) Which of the following is a distinguishing characteristic of oligopolies? a. a standardized product b. the goal of profit maximization c. the interdependence among firms d. downward-sloping demand curves faced by firms Page 1 of 9 4) A firm in monopolistic competition has a ____ market share and ____ influence the price of its good or service. a. large; can b. large; cannot c. small; can d. small; cannot 5) A perfectly competitive firm should hire additional units of labor in a competitive labor market if a. marginal revenue is less than marginal cost b. the wage rate is higher than the average total cost. c. total revenue exceeds total cost d. the value of marginal product of labor exceeds the wage rate 6) If perfectly competitive firms are making an economic profit, then a. the market must be in long-run equilibrium. b. some firms will exit the market. c. new firms will enter the market. d. the government will tax them out of existence. 7) A change in the wage rate a. shifts the supply of labor curve so that the supply becomes more elastic. b. shifts the supply of labor curve leftward. c. shifts the supply of labor curve rightward. d. does not shift the supply of labor curve but instead leads to a movement along it. 8) An individual firm in a perfectly competitive industry faces a demand curve with a. unit elasticity b. zero elasticity c. infinite elasticity d. elasticity greater than zero but less than one. 9) Which of the following statements is true? a. Long-run average cost is increasing when there are economies of scale. b. Average fixed costs are always decreasing. c. Marginal revenue is always greater than demand. d. Labor is a variable cost only in the long-run. Page 2 of 9 10) If 9 workers can produce 1,550 units of output and 10 workers can produce 1,700 units of output, then the marginal product of the 10th worker is a. 1,700 units. b. 170 units. c. 150 units. d. It is impossible to calculate with the information given. 11) In which of the following market types do all firms sell products so identical that buyers do not care from whom they buy? a. perfect competition b. monopolistic competition c. oligopoly d. monopoly 12) Cheating on a collusive agreement is more likely when a. a price floor is in effect. b. antitrust legislation is poorly enforced. c. it is easy to observe the other firms' prices. d. the number of firms is large. 13) In the long run, a firm in a perfectly competitive market will a. earn zero economic profit, that is, it will earn a normal profit. b. earn zero normal profit but it will earn an economic profit. c. remove all competitors and become a monopolistically competitive firm. d. go out of business. 14) Which of the following is found ONLY in oligopoly? a. Producers who sell identical products. b. One firm’s actions affect another firm’s profit. c. Entry into the industry is blocked. d. Sellers face a downward sloping demand curve for their product. 15) When the average product is at its maximum, a. the marginal product is increasing as output increases. b. the marginal product is negative. c. it is equal to the marginal product. d. total product is also at its maximum. Page 3 of 9 16) When oligopolists make joint decisions concerning their prices and output levels, they are a. a natural oligopoly b. a cartel c. a duopoly d.. la cosa nostra 17) The above figure shows a perfectly competitive firm. If the market price is $15, the firm a. is incurring an economic loss. b. is earning an economic profit. c. is earning a normal profit. d. will immediately shut down. Page 4 of 9 18) The range in which an oligopolist’s output falls is less than or equal to the output level in ____ and more than or equal to the output level in ____. a. monopolistic competition; monopoly b. monopolistic competition; perfect competition c. perfect competition; monopoly d. monopoly; monopolistic competition 19) Relative to a competitively organized industry, a monopoly a. b. c. d. produces less output, charges lower prices and earns economic profits. produces more output, charges higher prices and earns economic profits. produces less output, charges lower prices and earns only a normal profit. produces less output, charges higher prices and earns economic profits. 20) Economic profits [ Π(q) ] are: a. b. c. d. the opportunity costs of all inputs. the difference between total revenue and total costs. a rate of profit that is just sufficient to keep owners and investors satisfied. anything greater than the normal opportunity cost of investing. Page 5 of 9 Short Answer 15 points each 1) The diagram below shows the cost curves for a perfectly competitive wheat farmer. a. At what price does the wheat farmer shut down? b. What is the minimum price the wheat farmer must receive to earn an economic profit? c. Indicate how much economic profit (or loss) the farmer will realize when the price of wheat is $4.00/bushel by adding a shaded rectangle to the diagram below. d. In the diagram below, draw the farmer’s marginal revenue and demand curves when the price of wheat is $2.50/bushel e. How many bushels of wheat does the farmer produce if the price is $2.00 per bushel? f. How many bushels of wheat does the farmer produce if the price is $1.50 per bushel? Page 6 of 9 2) Suppose that a firm in a perfectly competitive market has the following revenue and cost functions: R(q) = pq and C(q) = 55 + 0.1q + 0.05q2. Since this firm can sell any quantity of production at a market price of p, its marginal revenue is p. Further, take as a given that its marginal cost is 0.1 + 0.1q. MR(q) = p and MC(q) = 0.1 + 0.1q. a. Write an expression for this firm’s fixed cost and average fixed cost. b. Write an expression for this firm’s variable cost and average variable cost. c. If the market price for this firm’s product is $5.00 per unit, at what output level does this firm maximize its profits? d. How much economic profit or loss does this firm make at its profit maximizing output level when p = $5.00? e. At a market price of $5.00 per unit, how much economic profit does this firm make at its profit maximizing output level if fixed costs are now $120.05? f. Using the original revenue and cost functions, how much economic profit or loss does this firm make if the market price of its product drops to $2.50 per unit? g. At a price of $2.50 per unit, will the firm temporarily shut down or will it continue producing some positive level of output? Page 7 of 9 3) Fill in the blanks in the following table describing industrial organization under the four listed market structures: Number of Firms HerfindahlHirschman Index Pricing Power Product Differentiation “Efficient” Output Level Elasticity of Demand Example Perfect Competition A great many (near infinite) Monopolistic Competition Oligopoly Monopoly 0 None (price taker) No Yes ∞ Alfalfa, Corn, Wheat, &c. Page 8 of 9 4) Coke’s Strategies Advertise $110 Advertise Pepsi’s Strategies Don’t Advertise $120 I -$200 $310 $325 Don’t Advertise $305 III -$120 II IV $305 Coke and Pepsi must decide whether or not to advertise their new energy drinks, Coke Sugar Bomb and Pepsi Gut Slayer, resp. The payoff matrix above represents the weekly profit ($1,000s) available to the firms under the different advertising strategies. a. What is the dominant strategy for Coke? b. What is the dominant strategy for Pepsi? c. Which quadrant represents the equilibrium that will result if both firms act independently and compete with one another? What is the name of this equilibrium? d. Which quadrant represents the equilibrium that will result if the two firms successfully collude? If the two firms collude, what is Pepsi’s incentive to cheat on the collusive agreement? e. Write a 5-page review of the 2001 film A Beautiful Mind starring Russell Crowe and Jennifer Connelly. Page 9 of 9