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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically…

Chapter 08 Managing in Competitive, Monopolistic, and Monopolis Multiple Choice Questions

1. You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 78 - 15Q, where Q = Q 1 + Q2. The marginal cost associated with producing in the two plants are MC 1 = 3Q1 and MC2 = 2Q2. How much output should be produced in plant 1 in order to maximize profits? A. 1 b. 2 c. 3 d. 4

Difficulty: Hard

2. You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 78 - 15Q, where Q = Q 1 + Q2. The marginal cost associated with producing in the two plants are MC 1 = 3Q1 and MC2 = 2Q2. What price should be charged to maximize profits? a. $20.5 B. $40.5

c. $60.5 d. $80.5

Difficulty: Hard

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3. You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 78 - 15Q, where Q = Q 1 + Q2. The marginal cost associated with producing in the two plants are MC 1 = 3Q1 and MC2 = 2Q2. What price should be charged in order to maximize revenues? A. $39 b. $47 c. $52 d. $56

Difficulty: Hard

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4. Which of the following is true under monopoly? a. Profits are always positive B. P > MC c. P = MR d. All of the above are true for monopoly

Difficulty: Medium

5. You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q2. The profit-maximizing output for your firm is a. 4/5 b. 10 C. 5 d. 45

Difficulty: Medium

6. You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q2. Your firm's maximum profits are a. 125 b. 250 c. 100 D. 85

Difficulty: Medium

7. You are the manager of a monopoly that faces a demand curve described by P = 230 - 20Q. Your costs are C = 5 + 30Q. The profit-maximizing output for your firm is a. 4 B. 5 c. 6 d. 7

Difficulty: Medium

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8. You are the manager of a monopoly that faces a demand curve described by P = 230 - 20Q. Your costs are C = 5 + 30Q. The profit-maximizing price is a. 150 b. 90 C. 130 d. 110

Difficulty: Medium

9. You are the manager of a monopoly that faces a demand curve described by P = 230 - 20Q. Your costs are C = 5 + 30Q. Your firm's maximum profits are A. 495 b. 475 c. 480 d. 415

Difficulty: Medium

10. You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 120 - 6Q, where Q = Q 1 + Q2. The marginal cost associated with producing in the two plants are MC 1 = 2Q1 and MC2 = 4Q2. How much output should be produced in plant 1 in order to maximize profits? a. 3 B. 6 c. 9 d. 12

Difficulty: Hard

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11. You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 120 - 6Q, where Q = Q 1 + Q2. The marginal cost associated with producing in the two plants are MC 1 = 2Q1 and MC2 = 4Q2. What price should be charged to maximize profits? a. 60 B. 66 c. 70 d. 76

Difficulty: Hard

12. You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 120 - 6Q, where Q = Q 1 + Q2. The marginal cost associated with producing in the two plants are MC 1 = 2Q1 and MC2 = 4Q2. What price should be charged in order to maximize revenues? a. 6 b. 2 c. 24 D. 60

Difficulty: Hard

13. In a competitive industry with identical firms, long run equilibrium is characterized by a. P = AC b. P = MC c. MR = MC D. All of the statements associated with this question are correct

Difficulty: Easy

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14. Which of the following is true? a. A monopolist produces on the inelastic portion of its demand b. A monopolist always earns an economic profit c. The more inelastic the demand, the closer marginal revenue is to price D. In the short run a monopoly will shutdown if P < AVC

Difficulty: Hard

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15. You are the manager of a firm that sells its product in a competitive market at a price of $40. Your firm's cost function is C = 60 + 4Q2. The profit-maximizing output for your firm is a. 4 B. 5 c. 10 d. 15

Difficulty: Medium

16. You are the manager of a firm that sells its product in a competitive market at a price of $40. Your firm's cost function is C = 60 + 4Q2. Your firm's maximum profits are a. 36 b. 60 C. 40 d. 80

Difficulty: Medium

17. You are the manager of a monopoly that faces a demand curve described by P = 85 - 5Q. Your costs are C = 20 + 5Q. The profit-maximizing output for your firm is a. 6 b. 5 c. 7 D. 8

Difficulty: Medium

18. You are the manager of a monopoly that faces a demand curve described by P = 85 - 5Q. Your costs are C = 20 + 5Q. The profit-maximizing price is A. 45 b. 55 c. 60 d. 50

Difficulty: Medium

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19. You are the manager of a monopoly that faces a demand curve described by P = 85 - 5Q. Your costs are C = 20 + 5Q. The revenue maximizing output is a..85 b. 9 c. 10 D. None of the statements associated with this question are correct

Difficulty: Hard

20. You are the manager of a firm that sells its product in a competitive market at a price of $60. Your firm's cost function is C = 50 + 3Q2. The profit-maximizing output for your firm is A. 10 b. 20 c. 30 d. 40

Difficulty: Medium

21. You are the manager of a firm that sells its product in a competitive market at a price of $60. Your firm's cost function is C = 50 + 3Q2. Your firm's maximum profits are A. 250 b. 400 c. 450 d. 500

Difficulty: Medium

22. You are the manager of a monopoly that faces a demand curve described by P = 63 - 5Q. Your costs are C = 10 + 3Q. The profit-maximizing output for your firm is a. 3 b. 4 c. 5 D. 6

Difficulty: Medium

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23. You are the manager of a monopoly that faces a demand curve described by P = 63 - 5Q. Your costs are C = 10 + 3Q. The profit-maximizing price is a. 20 b. 27 C. 33 d. 55

Difficulty: Medium

24. You are the manager of a monopoly that faces a demand curve described by P = 63 - 5Q. Your costs are C = 10 + 3Q. Your firm's maximum profits are a. 0 b. 66 c. 120 D. 170

Difficulty: Medium

25. You are the manager of a monopoly that faces a demand curve described by P = 63 - 5Q. Your costs are C = 10 + 3Q. The revenue maximizing output is a. 10/63 b. 5 C. 6.3 d. None of the statements associated with this question are correct

Difficulty: Hard

26. Which of the following is true under monopoly? a. Profits are always positive b. P > minimum of ATC c. P = MR D. None of the statements associated with this question are correct

Difficulty: Medium

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27. In the long-run, monopolistically competitive firms: a. Charge prices equal to marginal cost B. Have excess capacity c. Produce at the minimum of average total cost d. Have excess capacity and produce at the minimum of average total cost

Difficulty: Easy

28. If a monopolistically competitive firm's marginal cost increases, then in order to maximize profits the firm will A. Reduce output and increase price b. Increase output and decrease price c. Increase both output and price d. Reduce both output and price

Difficulty: Medium

29. Which of the following market structures would you expect to yield the greatest product variety? a. Monopoly B. Monopolistic Competition c. Bertrand Oligopoly d. Perfect Competition

Difficulty: Easy

30. The primary difference between Monopolistic Competition and Perfect Competition is a. The ease of entry and exit into the industry b. The number of firms in the market c. All of the statements associated with this question are correct D. None of the statements associated with this question are correct

Difficulty: Easy

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31. Which of the following industries is best characterized as monopolistically competitive? A. Toothpaste b. Crude oil c. Agriculture d. Local telephone service

Difficulty: Medium

32. Which of the following is an example of monopoly? a. Shoe industry in the United States B. Local utility industry in a small town c. Newspaper industry in New York City d. Bread industry in New York City

Difficulty: Medium

33. Differentiated goods are a feature of a: a. Perfectly competitive market B. Monopolistically competitive market c. Monopolistic market d. Monopolistically competitive market and monopolistic market

Difficulty: Easy

34. Firms have market power in: a. Perfectly competitive markets b. Monopolistically competitive markets c. Monopolistic markets D. Monopolistically competitive markets and monopolistic markets

Difficulty: Easy

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35. There is no market supply curve in a a. Perfectly competitive market b. Monopolistically competitive market c. Monopolistic market D. Monopolistically competitive and monopolistic markets

Difficulty: Medium

36. Suppose that initially the price is $50 in a perfectly competitive market. Firms are making zero economic profits. Then the market demand shrinks permanently and some firms leave the industry and the industry returns back to a long-run equilibrium. What will be the new equilibrium price, assuming cost conditions in the industry remain constant? A. $50 b. $45 c. Lower than $50 but exact value cannot be known without more information d. Larger than $45 but exact value cannot be known without more information

Difficulty: Hard

37. Which of the following statements concerning monopoly is NOT true? a. A market may be monopolistic because there are some legal barriers b. A monopoly has market power C. A monopoly is always undesirable d. There is some deadweight loss in a monopolistic market

Difficulty: Medium

38. Which of the following features is common to both perfectly competitive markets and monopolistically competitive markets? a. Firms produce homogeneous goods b. There is free entry c. Long run profits are zero D. There is free entry and long run profits are zero

Difficulty: Medium

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39. The source(s) of monopoly power for a monopoly may be: a. Economies of scale b. Economies of scope c. Patents D. All of the statements associated with this question are correct

Difficulty: Medium

40. Economies of scale exist whenever: A. Average total costs decline as output increases b. Average total costs increase as output increases c. Average total costs are stationary as output increases d. Average total costs increase as output increases and average total costs are stationary as output increases

Difficulty: Easy

41. The number of efficient plants compatible with domestic consumption of the refrigerator industry in Sweden is 0.7. Which of the following implications is (are) correct? A. In the absence of imports, the refrigerator industry in Sweden is monopolistic b. The refrigerator industry in Sweden is perfectly competitive c. The refrigerator industry in Sweden is monopolistically competitive d. None of the statements associated with this question are correct

Difficulty: Medium

42. A monopoly has two production plants with cost functions C 1 = 50 + 0.1 Q12 and C2 = 30 + 0.05 Q22. The demand it faces is Q = 500 - 10 P. What is the condition for profit maximization? a. MC1(Q1) = MC2(Q2) = P(Q1 + Q2) B. MC1(Q1) = MC2(Q2) = MR(Q1 + Q2) c. MC1(Q1 + Q2) = MC2(Q1 + Q2) = P (Q1 + Q2) d. MC1(Q1 + Q2) = MC2(Q1 + Q2) = MR (Q1 + Q2)

Difficulty: Medium

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43. A monopoly has two production plants with cost functions C 1 = 50 + 0.1 Q12 and C2 = 30 + 0.05 Q22. The demand it faces is Q = 500 - 10 P. What is the profit maximizing level of output? A. Q1 = 62.5; Q2 = 125 b. Q1 = 125; Q2 = 62.5 c. Q1 = Q2 = 125 d. Q1 = Q2 = 62.5

Difficulty: Hard

44. A monopoly has two production plants with cost functions C 1 = 50 + 0.1 Q12 and C2 = 30 + 0.05 Q22. The demand it faces is Q = 500 - 10 P. What is the profit maximizing price? a. $12.5 per unit b. $6.25 per unit C. $31.25 per unit d. $18.75 per unit

Difficulty: Hard

45. Which of the following is a correct representation of the profit maximization condition for a monopoly? a. P = MR B. MC = MR c. P = ATC + MR d. MR = MC + ATC

Difficulty: Easy

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46. Let the demand function for a product be Q = 100 - 2P. The inverse demand function of this demand function is: a. Q = 100 + 2P B. P = 50 - 0.5Q c. P = 50 + 0.5Q d. None of the statements associated with this question are correct

Difficulty: Medium

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47. A linear demand function exhibits: a. Constant demand elasticity b. More elastic demand as output increases C. Less elastic demand as output increases d. Insufficient information to determine

Difficulty: Easy

48. Which of the following is not a basic feature of a monopolistically competitive industry? a. There are many buyers and sellers in the industry b. Each firm in the industry produces a differentiated product c. There is free entry and exit into the industry D. Each firm owns a patent on its product

Difficulty: Medium

49. In the long-run, monopolistically competitive firms produce a level of output such that a. P > MC b. P = ATC c. ATC > minimum of average costs D. All of the statements associated with this question are correct

Difficulty: Medium

50. Chris raises cows and produces cheese and milk because he enjoys: a. Economies of scale B. Economies of scope c. Cost complementarity d. None of the statements associated with this question are correct

Difficulty: Medium

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51. What contributes to the existence of multiproduct firms? a. Economies of scale b. Economies of scope c. Cost complementarity D. Economies of scope and cost complementarity

Difficulty: Easy

52. Which of the following is (are) basic feature(s) of a perfectly competitive industry? a. Buyers and sellers have perfect information b. There are no transaction costs c. There is free entry and exit in the market D. All of the statement associated with this question are correct

Difficulty: Easy

53. In the long-run, perfectly competitive firms produce a level of output such that: a. P = MC b. P = minimum of AC C. P = MC and P = minimum of AC d. None of the statements associated with this question are correct

Difficulty: Easy

Use the following information to answer questions 54 and 55. A monopoly has produced a product with a patent for the last few years. The patent is going to expire.

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54. What will likely happen to the demand for the patent-holder's product when the patent runs out? a. Demand will increase B. Demand will decline c. Nothing d. None of the statements associated with this question are correct

Difficulty: Medium

55. What will happen after the patent expires? a. The incumbent will leave the market b. The incumbent will retain its status as a monopoly but produce at a lower price C. Some firms will enter the industry d. None of the statements associated with this question are correct

Difficulty: Medium

56. You are a manager in a perfectly competitive market. The price is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q2. What level of output should you produce in the short-run? a. 5 b. 8 C. 10 d. 15

Difficulty: Medium

57. You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q 2. What price should you charge in the shortrun? a. $12 B. $14 c. $16 d. $18

Difficulty: Easy

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58. You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q 2. What level of profits will you make in the short-run? a. $20 B. $40 c. $60 d. $80

Difficulty: Medium

59. You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q 2. What will happen in the long-run if there is no change in the demand curve? a. Some firms will leave the market eventually B. Some firms will enter the market eventually c. There will be neither entry nor leave d. None of the statements associated with this question are correct

Difficulty: Medium

60. A perfectly competitive firm faces a: A. Perfectly elastic demand function b. Perfectly inelastic demand function c. Demand function with unitary elasticity d. None of the statements associated with this question are correct

Difficulty: Medium

61. A firm has a total cost function of C(Q) = 50 + 10Q 1/2. The firm experiences A. Economies of scale b. Constant returns to scale c. Diseconomies of scale d. All of the statements associated with this question are correct depending on the quantity

Difficulty: Hard

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62. A firm can produce two products with the cost function C(Q 1, Q2) = 10 + 5Q1 + 5Q2 0.2Q1Q2. The firm enjoys: a. Economies of scale in the two products separately b. Economies of scope C. Cost complementarity d. Economies of scale in the two products separately and cost complementarity

Difficulty: Medium

63. "Monopolistic competition is literally a kind of competition. Hence, there is no deadweight loss in a monopolistically competitive market." a. The statement is by definition correct but empirically incorrect b. The statement is correct C. The statement is incorrect d. None of the statements associated with this question are correct

Difficulty: Medium

64. 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 cheese maximizes profits? a. 2 B. 2.5 c. 5 d. 10

Difficulty: Hard

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65. 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? a. 1.25 B. 12.5 c. 15 d. 20

Difficulty: Hard

66. You are a manager for a monopolistically competitive firm. From experience, the profitmaximizing level of output of your firm is 100 units. However, it is expected that prices of other close substitutes will fall in the near future. How should you adjust your level of production in response to this change? a. Produce more than 100 units B. Produce less than 100 units c. Produce 100 units d. Insufficient information to decide

Difficulty: Medium

67. Which of the following statements is not correct about monopoly? a. A monopolist generally faces a downward sloping demand curve B. Monopolists always make positive profits in the long-run c. A monopoly may make negative profits in the short-run d. There is no close substitute for a monopoly's product

Difficulty: Easy

Use the following information to answer questions 68 and 69: You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 20-Q, where Q = Q 1 + Q2. The marginal cost associated with producing in the two plants are MC1 = 2 and MC2 = 2Q2.

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68. How much output should be produced in plant 1 in order to maximize profits? a. 1 b. 4 C. 8 d. 11

Difficulty: Medium

69. What is the profit-maximizing price that the firm should charge? a. $8 b. $9 C. $11 d. $12

Difficulty: Medium

70. Which of the following is true under monopoly? a. P > ATC B. P > MC c. P = MR d. P = ATC

Difficulty: Easy

71. You are the manager of a firm that sells its product in a competitive market at a price of $60. Your firm's cost function is C = 33 + 3Q2. The profit-maximizing output for your firm is a. 3 b. 5 c. 6 D. 10

Difficulty: Easy

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72. You are the manager of a monopoly that faces an inverse demand curve described by P = 200 - 15Q. Your costs are C = 15 + 20Q. The profit-maximizing price is a. $20 B. $110 c. $135 d. $290

Difficulty: Medium

73. Which of the following industries is best characterized as monopolistically competitive? A. Cereal b. Crude oil c. Wheat d. Local electricity service

Difficulty: Easy

74. Differentiated goods are not a feature of a a. Perfectly competitive market b. Monopolistically competitive market c. Monopolistic market D. Perfectly competitive market and monopolistic market

Difficulty: Easy

75. One of the sources of monopoly power for a monopoly may be a. Diseconomies of scale b. Differentiated products C. Patents d. Free entry and exit

Difficulty: Easy

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76. Let the demand function for a product be Q = 50 - 5P. The inverse demand function of this demand function is: a. Q = 25 + P B. P = 10 - 0.2Q c. P = 10 + 0.2Q d. P = 50 - 0.2Q

Difficulty: Medium

77. A firm has a total cost function of C(Q) = 75 + 25Q 1/2. The firm experiences A. Economies of scale b. Diseconomies of scale c. Constant returns to scale d. All of the statements associated with this question are correct

Difficulty: Medium

78. In a competitive industry with identical firms, long run equilibrium is characterized by a. P > AC b. P < MC C. MR = MC d. MR < P

Difficulty: Easy

79. You are the manager of a firm that sells its product in a competitive market at a price of $48. Your firm's cost function is C = 60 + 2Q2. Your firm's maximum profits are a. $192 B. $228 c. $348 d. $576

Difficulty: Medium

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80. In the long-run, monopolistically competitive firms charge prices a. Equal to marginal cost b. Below marginal cost c. Equal to the minimum of average total cost D. Above the minimum of average total cost

Difficulty: Medium

81. There is a market supply curve in a A. Perfectly competitive market b. Monopolistically competitive market c. Monopolistic market d. Perfectly competitive market and monopolistically competitive market

Difficulty: Easy

82. Which of the following features is common to both perfectly competitive markets and monopolistically competitive markets? a. Firms produce homogeneous goods b. Prices are equal to marginal costs in the long-run C. Long run profits are zero d. Prices are above marginal costs in the long-run

Difficulty: Hard

83. Consider a monopoly where the inverse demand for its product is given by P = 200 - 5Q. Based on this information, the marginal revenue function is a. MR(Q) = 400 - 2.5Q b. MR(Q) = 400 - 10Q C. MR(Q) = 200 - 10Q d. MR(Q) = 200 - 2.5Q

Difficulty: Easy

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84. Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q 2. At the profitmaximizing combination of output and price, deadweight loss is A. $32 b. $64 c. $128 d. Cannot be determined with the given information

Difficulty: Hard

85. Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q 2. At the profitmaximizing combination of output and price, consumer surplus is a. $32 B. $64 c. $128 d. Cannot be determined with the given information

Difficulty: Medium

86. Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q 2. At the profitmaximizing combination of output and price, monopoly profit is a. $32 b. $64 C. $92 d. $128

Difficulty: Medium

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87. Suppose a perfectly competitive market conditions are characterized by the following inverse demand and inverse supply functions: P = 100 - 5Q and P = 10 + 5Q. Then, the demand curve facing an individual firm operating in this market is a. P = 100 - 5Q b. A horizontal line at $9 C. A horizontal line at $55 d. P/N = (100 - 5Q)/N, where N is the total number of firms in the competitive market

Difficulty: Medium

88. Which of the following is true about where a profit-maximizing monopoly will produce on a linear demand curve when it has positive marginal costs? a. It will produce output on the inelastic portion of the demand curve b. It will produce output where MR < 0 c. It will produce output where MR = 0 D. It will produce output on the elastic portion of the demand curve

Difficulty: Medium

89. Suppose a monopolist knows the own-price elasticity of demand for its product is -3 and that its marginal cost of production is constant MC(Q) = 10. To maximize its profit, the monopoly price is a. $1.50 per unit b. $6.67 per unit c. $10 per unit D. $15 per unit

Difficulty: Medium

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90. Compute the marginal revenue when the price elasticity of demand is -0.25. A. -3P, meaning marginal revenue is negative and 3 times less than price b. 3P, meaning marginal revenue is positive and 3 times greater than price c. -0.33P, meaning that marginal revenue is negative and one-third of the price d. -0.25P, meaning that marginal revenue is negative and one-fourth of the price

Difficulty: Hard

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91. Suppose that a monopolistically competitive market is at the long-run equilibrium. Based on this information which of the following conclusion is NOT true? a. P > MC B. Deadweight loss is zero c. P = ATC > minimum of ATC d. Firms' profits are zero

Difficulty: Medium

92. The first-order conditions for a monopoly to maximize profits are a. dR(Q)/dQ = dC(Q)/dQ b. MR(Q) = MC(Q) c. dπ(Q)/dQ = 0 D. All of the statements associated with this question are correct

Difficulty: Hard

93. Consider firms operating in an industry where the own-price elasticity of demand is infinite; that is, EQ,P = -∞. Use this information to determine the type of industry in which these firms operate and the optimal advertising-to-sales ratio. A. Perfectly competitive industry and $0 b. Monopolistically competitive industry and $ ∞ c. Perfectly competitive industry and $ ∞ d. Monopolistic industry and $0

Difficulty: Medium

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94. SeaSide Industries currently spends 5 percent of its sales on advertising. Suppose that the elasticity of advertising for Seaside is 0.2. Determine the optimal profit margin over price (P MC)/P. a. 4 percent b. 10 percent C. 25 percent d. None of the computations associated with this question are correct

Difficulty: Hard

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95. Which of the following is a strategy(ies) used by firms in monopolistically competitive industries to convince consumers that their product is better than its rivals' products? a. Comparative advertising b. Niche marketing c. Equity marketing D. Comparative advertising or niche marketing

Difficulty: Easy

96. Which of the following conditions must hold to ensure that profits are, in fact, at a maximum? a. d(MC(Q))/dQ > 0 b. d(MC(Q))/dQ < 0 c. d2π(Q)/dQ2 < 0 D. d(MC(Q))/dQ > 0 and d 2π(Q)/dQ2 < 0

Difficulty: Hard

97. The second-order condition for a firm maximizing its profit operating in a monopolistically competitive market is a. -(d2C(Q)/dQ2) < 0 B. (d2R (Q)/dQ2) - (d2C(Q)/dQ2) < 0 c. (d2R (Q)/dQ2) = (d2C(Q)/dQ2) d. (dMR/dQ) > (dMC/dQ)

Difficulty: Medium

Essay Questions

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98. Pic Industries produces plastic toothpicks that it sells to distributors in the Southwest. During the early 1990s, the price of the plastic it uses to produce toothpicks fell by 46 percent, due to a local glut of recycled plastic containers. Assuming that the market for plastic toothpicks most closely resembles that of perfect competition and that other firms in the industry do not experience similar cost savings in the short run, what impact would this have on the profit-maximizing output, price, and profits of Pic Industries? Other things equal, the fall in the price of plastic would shift Pic's marginal cost curve to the right. To maximize profits, Pic should increase its output. Since other firms in the industry do not enjoy the reduction in marginal costs, the market supply curve would not change and the market price of toothpicks would remain unchanged. Pic Industries would enjoy higher profits in the short-run.

99. Beta Industries manufactures floppy disks that consumers perceive as identical to those produced by numerous other manufacturers. Recently, Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost function is . a. What are the firm's fixed costs? b. What is the firm's marginal cost? Now suppose other firms in the market sell the product at a price of $10 c. How much should this firm charge for the product? d. What is the optimal level of output to maximize profits? e. How much profit will be earned? f. In the long run, should this firm continue to operate or shut down? Why? a. Fixed costs = 20 b. Marginal costs = 4Q c. P = $10 d. The firm should produce such that MC = P, i.e. 4Q = 10. This implies that Q = 2.5 units e. Profits are ($10)(2.5) - 20 - 2(2.5) 2 = -$7.5 f. Since the firm is earning losses, in the long-run it will shut down if the market conditions do not change

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100. Keds - the traditional maker of white canvas tennis shoes - was near oblivion in the early 1980s because competitors like Nike, Reebok, Adidas, and Brooks took away many of its customers. If you were at the helm of Keds, what would you have done to turn the company around? The market for tennis shoes is one that approximates that of monopolistic competition. Thus, a sensible strategy for Keds would have been to for Keds to increase variety in terms of color and style, while keeping to a simple comfortable canvas design. At the same time, it could increase advertising to emphasize the price and color advantages of its canvas design over the competition. In fact, this is precisely what Keds did, and as a result sales increased by tenfold from 1982 to 1988. By differentiating its product from competitors, it was able to amass some short-run profits. (See Laura Jereski, "Back in the Game," Forbes, October 31, 1988).

101. Manufacturers of laundry detergent and dishwashing soap reinvest a relatively large percentage of their sales revenues on advertising campaigns. Most of these advertisements that appear on television stress the fact that their product is "New and Improved." Why? The market for many of these products is monopolistically competitive, and thus the tendency is for the firms to earn long-run economic profits of zero. The firms hope that by continually advertising new and improved features of their products, they can reap some short-term profits.

102. Suppose the cost function for your firm is: . a. What is the average fixed cost of producing 5 units of output? b. What is the average variable cost of producing 5 units of output? c. What are the average total cost and marginal cost of producing 5 units of output? a. AFC(5) = $50/5 = $10 b. AVC(5) = [4(5) + 2(5) 2]/5 = $14 c. ATC(5) = AVC(5) + AFC(5) = $24; MC(5) = 4 + 4(5) = $24

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103. U.S. Airways experienced huge losses for several years in the 1990s, yet it continued to operate its fleets. Why didn't U.S. Airways shut down its operations to avoid the losses? It was covering its variable costs (the cost of fuel, pilots, mechanics, flight attendants, and the like). Had it shut down its operations, losses would have been even higher, due to the high fixed costs associated with its fleet of aircraft.

104. In 1994 Pentium users around the world learned that their $4.00 pocket calculator could perform some operations more accurately than their $5,000 desktop computers. It took several months before Intel - the maker of the chip - agreed to offer its customers replacement chips. In contrast, Wal-Mart guarantees satisfaction to all customers, with a "no questions asked" return policy on nearly all of the products it sells. Why do you think these firms employ such different consumer relations policies? Intel has much more monopoly power than Walmart. Walmart must strive to differentiate itself from competitors to earn profits, and one way it does so is through its return policy.

105. Suppose you are the manager of Alpha Enterprises - a firm that holds a patent that makes it the exclusive manufacturer of bubble memory chips. Based on the estimates provided by a consultant, you know that the relevant demand and cost functions for bubble memory chips are ; . a. What is the firm's inverse demand function? b. What is the firm's marginal revenue when producing 4 units of output? c. What are the levels of output and price when you are maximizing profits? d. What will be the level of your profits? a. P = 50 - 2Q b. MR(Q) = 50 - 4Q; MR(4) = 50 - 4(4) = $34 c. Setting MR = MC yields 50 - 4Q = 2, or Q = 12. P = 50 - 2(12) = $26 d. Profits are ($26)(12) - 74 = $238

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106. Suppose you are a monopolist operating two plants at different locations. Both plants produce the same product;

is the quantity produced at plant 1, and

is the quantity

produced at plant 2. You face the following inverse demand function: . The cost functions for the two plants are ; a. What are your marginal revenue and marginal cost functions? b. To maximize profits, how much should you produce at plant 1? At plant 2? c. What is the price that maximizes profits? d. What are the maximum profits?

, where .

a. MR = 500 - 4Q; MC1 = 4Q1; MC2 = 2Q2 b. Profits are maximized when MC 1 = MC2 = MR. This implies Q 1 = 31.25 and Q2 = 62.5 c. Q = 93.75; P = 500 - 2(Q1 + Q2) = 500 - 2(93.75) = $312.50 d. Maximum profits are $23,392.50

107. Why does the government grant patents to investors? Why does the government give monopoly power to utility companies? The rationale behind granting monopoly power to a new inventor is based on the following argument. Inventions take many years and considerable sums of money to develop. Once an invention becomes public information in the absence of a patent system, other firms could produce the product and compete against the firm that developed it. In the absence of a patent system, there would be a reduced incentive on the part of firms to develop new products. The government gives monopoly power to utility companies because they are assumed to be a natural monopoly.

108. Would you expect an industry to be monopolistically competitive if consumers did not value variety in the market? Explain. If consumers did not value variety in the market, then firms in a "monopolistically competitive market" would produce homogeneous goods. That is, the market would be perfectly competitive rather than monopolistically competitive.

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109. What is the primary facet of monopolistic competition that does not allow for the presence of long-run profits? If firms are making short-run profits in a monopolistically competitive industry, what will eventually occur that will cause long-run economic profits to be zero? The driving force of zero long-run profits is free entry, which allows new firms to come to compete for the positive profits. Since this entry stops only when the profits return to zero, this ensures the long-run economic profits are zero.

110. Regardless of the economic environment, every firm will maximize profits by operating at the minimum point of its average total cost curve. Is this statement true or false? Explain. False. To maximize profits, firms set MR = MC. The only market environment in which this necessarily implies production at the minimum of average costs is in long run equilibrium under perfect competition. In the short-run, even perfectly competitive firms may produce at an output different from minimum average costs.

111. What market can you think of, besides that for VCRs, that has shown short-run profits but, over time, has seen profits disappear due to entry? The market for IBM compatible personal computers.

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112. You are a manager in a perfectly competitive market. The price in your market is $35. Your total cost curve is . a. What level of output should you produce in the short run? b. What price should you charge in the short run? c. Will you make any profits in the short run? d. What will happen in the long run? e. How would your answer change if your costs were

?

a. Setting price equal to marginal cost implies $35 = 2 + Q. The short-run output level is Q = 33 b. $35 per unit c. Profits are ($35)(33) - [10 + 2(33) +.5(33) 2] = $534.5 d. New firms will enter and price will be lowered until profit is zero e. With this cost function, short-run output falls to Q =.5, but price remains at $35. In the short-run, profits are - $72.5. The firm will shut down in the long run in the absence of a change in market conditions

113. You are the manager of a firm that has an exclusive license to produce your product. The inverse market demand curve is . Your cost function is . Determine the output you should produce, the price you should charge, and your profits. Here, MR = 900-3Q and MC = 2 + 2Q. Setting MR = MC yields 900 - 3Q = 2 + 2Q. Solving for Q gives us Q = 179.6. Inserting this into the inverse demand function yields P = 9001.5(179.6) = $630.60. Your maximum profits are thus PQ - C(Q) = ($630.60)(179.6) [2(179.6) +(179.6)2] = $80,640.40.

114. Monsanto, the maker of Nutrasweet, owned the patent to aspartame, the official name of the sweetener. In 1987 Monsanto's patent expired in Europe, allowing other firms to produce aspartame under other brand names. What impact do you think this had on the market for aspartame and Monsanto's profits? When the patent expired in Europe, new firms entered the market to produce aspartame under other names. Most likely, there is some brand loyalty and consumers probably do not view these new products as perfect substitutes for Nutrasweet. Consequently, the market for aspartame probably moved from monopoly to monopolistic competition, and Monsanto's profits fell as a result of the increased entry.

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115. If a monopolist has an own-price demand elasticity of -.8, is it maximizing profits? Explain. No. An inelastic demand implies negative marginal revenue. Since profit maximization requires marginal revenue to equal marginal cost, the firm is producing too much output (marginal cost cannot be negative).

116. You are a monopolist with the following cost and demand conditions: and . a. Determine the profit-maximizing output and price b. Graph this solution c. Show your profits and the deadweight loss to society in your graph d. Determine the actual amount of deadweight loss a. Equating MR and MC yields 100 - 4Q = 2Q. Solving for Q yields Q = 16 2/3. By plugging this back in to the inverse demand equation, we get P = $66 2/3 Figure 8-19

b. See Figure 8-19 c. See Figure 8-19 d. Under perfect competition, market equilibrium is where the demand curve intersects industry marginal cost. Thus, the competitive price is $50, and the quantity is 25 units. The deadweight triangle in Figure 8-19 is.5(66.67 - 33.33)(25 - 16.67) = $138.86

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117. You are the manager of a monopolistically competitive firm. The present demand curve you face is . Your cost function is a. What level of output should you choose to maximize profits? b. What price should you charge? c. What will happen in your market in the long run? Explain.

.

a. Setting MR = MC yields Q = 4 b. P = 100 - 4(4) = $84 per unit c. Profits are 84(4) - [50 + 8.5(16)] = $150. Since profits are greater than zero, new firms will be attracted to the industry until profits fall to zero

118. Would you expect the demand for a monopolistically competitive firm's product to be more or less elastic than that for a monopolist's product? Explain. In general, the demand for a monopolistically competitive firm's product should be more elastic than that of a monopolist's product because there are close substitutes for the former but not for the latter. The existence of close substitutes makes a monopolistically competitive firm's quantity demanded more responsive to price.

119. You are the manager of a monopolistically competitive firm. The inverse demand for your product is given by , and your marginal cost is . a. What is the profit-maximizing level of output? b. What is the profit-maximizing price? c. What are the maximum profits? d. What do you expect to happen to the demand for your product in the long run? Explain a. Setting MR = MC yields 200 - 20Q = 5 + Q, or Q = 9.29 b. P = 200 - 10(9.29) = $107.1 c. This part will be hard for most students. Total cost is the integral of marginal cost: or C(Q) = 5Q + Q2/2 + FC. Thus, profits are $905.36 - FC d. If fixed costs are lower than $905.36, the positive profits will induce entry. In the long run, this will decrease the demand for your product

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120. Genentech owns a patent on tissue plasminogen activator (TPA), which is an enzyme that helps the body break down blood clots. TPA is particularly valuable to cardiac patients, since it often allows heart problems to be treated with medication rather than surgery. Recently, however, firms in the medical industry have come under fire by some members of Congress and the press for charging high prices and earning monopoly profits. Do you think cardiac patients would benefit if the government stripped Genentech and other pharmaceutical firms of their patents? Explain. In the short run, eliminating the patent might allow other firms to enter and lower the price to cardiac patients. In the long run, however, it is not at all clear that cardiac patients would benefit. Absent patent protection, firms like Genentech would be unwilling to invest the substantial sums in R&D that are required to develop products like TPA. The monopoly profits earned by Genentech are its reward for developing the new product, and taking away that reward would likely harm cardiac patients in the long run.

121. You are the general manager of TU modems Inc., and your accounting department has provided you with the following information about the total cost of producing three potential quantities of a commercial-grade modem:

The market is saturated with modems, and your sales department has been able to identify only one potential buyer of your modems. This customer has numerous alternative options and as a result is only willing to pay $300 per modem for an order of 100,000 modems. You must decide whether to sign a contract under these terms or simply shut down your operations. What is your optimal decision? The only costs relevant for making this decision are your variable costs of producing 100,000 units. These relevant costs include materials ($250,000) and labor ($10,000). The depreciation reflects a charge for expenditures already made, and thus this amount will be lost regardless of your decision. By signing the contract, your revenues increase by $30,000,000 and your variable costs increase by only $260,000. You should sign the contract because doing so adds $29,740,000 to your bottom line that you will not get if you shut down your operation.

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122. A monopolist estimated that the own-price elasticity of demand for its product is -4.5 and its advertising elasticity of demand is 1.5. Assuming these elasticities are constant, what fraction of the firm's revenues should the firm "reinvest" in advertising to maximize profits? To find the profit-maximizing advertising-to-sales ratio, we simply plug EQ,P = - 4.5 and EQ,A = 1.5 into the formula for the optimal advertising-to-sales ratio: . Thus, the firm's optimal advertising-to-sales ratio is 33.33 percent - to maximize profits, the firm should spend one-third of its revenues on advertising.

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123. The XYZ company produces output using labor (which it purchases on an as-needed basis in the market for unskilled workers at a wage of $5 per hour) and one machine (which it is obligated to lease at a rental rate of $300 per hour). The planning horizon precludes XYZ from renting or purchasing any additional machines, as the current machine has a capacity of 80 units of output per hour, which exceeds the projected demand for the firm's product. The firm has no alternative use for the machine it leases, and the contract precludes it from subleasing it to another party. The company currently employs one worker who produces 10 units of output per hour. A recent report from the engineering department reveals that, given the plant's current capacity, two workers could produce 20 units of output per hour, three workers could produce 30 units of output per hour, and four workers could produce a total of 40 units of output per hour. a. Complete the following table

b. Suppose that XYZ can sell up to 40 units of output per hour at a price of $.60 per unit but cannot even get a penny for units produced in excess of 40 units per hour. How much output should XYZ produce each hour in order to maximize profits? c. At what price would XYZ find it profitable to shut down its operation?

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a. Hourly Cost Data, XYZ Company

b. 40 units, since MB = $0.60 > MC = $0.50 for all units below 40, and MB = 0 for units produced in excess of 40 c. Part (b) revealed that if the firm operates, it should produce 40 units. It should shut down if the profits from operating are less than the profits it would earn by shutting down. The calculations are: i. Profits if the firm operates and charges a price of "P" for 40 units: 40 P - 300 - 20 ii. Profits if the firm shuts down: -$300. Shut down if -$300 > 40 P - 300 - 20 iii. Solving for P gives us: "Shut down if P < $0.50

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Chapter 09 Basic Oligopoly Models Multiple Choice Questions

1. The Cournot theory of oligopoly assumes rivals will A. Keep their output constant b. Increase their output whenever a firm increases its output c. Decrease output whenever a firm increases its output d. Follow the learning curve

Difficulty: Easy

2. Which of the following is true? a. In Bertrand oligopoly each firm believes that their rivals will hold their output constant if it changes its output b. In Cournot oligopoly firms produce an identical product at a constant marginal cost and engage in price competition c. In oligopoly a change in marginal cost never has an affect on output or price D. None of the statements associated with this question are true

Difficulty: Medium

3. In a Sweezy Oligopoly, a decrease in a firm's marginal cost generally leads to: a. Reduced output and a higher price b. Increased output and a lower price c. Higher output and a higher price D. None of the statements associated with this question are true

Difficulty: Easy

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4. Bertrand model of oligopoly reveals that a. Capacity constraints are not important in determining market performance B. Perfectly competitive prices can arise in markets with only a few firms c. Changes in marginal cost do not affect prices d. All of the statements associated with this question are true

Difficulty: Easy

5. Which of the following are quantity setting oligopoly models? a. Stackelberg b. Cournot c. Bertrand D. Stackelberg and Cournot

Difficulty: Easy

6. Which of the following are price setting oligopoly models? a. Stackelberg b. Cournot C. Bertrand d. Cournot and Stackelberg

Difficulty: Easy

7. Both firms in a Cournot duopoly would enjoy higher profits if A. The firms simultaneously reduced output below the Nash equilibrium level b. Each firm simultaneously increased output above the Nash equilibrium level c. One firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output d. The firms simultaneously reduced output below the Nash equilibrium level and one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output

Difficulty: Hard

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8. Which of the following is not a feature of Sweezy oligopoly? a. There are two firms in the market serving many consumers B. The firms produce homogenous products c. Each firm believes that rivals will cut their prices in response to a price reduction, but will not raise their prices in response to a price increase d. Barriers to entry exist

Difficulty: Medium

9. Which of the following is a profit-maximizing condition for a Cournot oligopolist? A. MR = MC b. Q1 = Q2 =... = Qn c. P = MR d. All of the statements associated with this question are correct

Difficulty: Medium

10. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms co-exist after the entry? a. $25 B. $20 c. $15 d. None of the statements associated with this question are correct

Difficulty: Hard

11. "An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is: a. True B. False c. True of homogeneous product industries d. None of the statements associated with this question are correct

Difficulty: Medium

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12. "Tom and Jack are the only two local gas stations. Although they have different constant marginal costs, they both survive continued competition." Tom and Jack do not constitute a: a. Sweezy oligopoly b. Cournot oligopoly c. Stackelberg oligopoly D. Bertrand oligopoly

Difficulty: Medium

13. A market is not contestable if: a. All producers have access to the same technology b. Consumers respond quickly to a price change c. Existing firms cannot respond quickly to entry by lowering their price D. There are sunk costs

Difficulty: Easy

14. Firm A has a higher marginal cost than firm B's. They compete in a homogeneous product Cournot duopoly. Which of the following results will not occur? a. QA < QB b. ProfitA < ProfitB c. Revenue of firm A < Revenue of firm B D. PriceA < PriceB

Difficulty: Easy

15. If firms compete in a Cournot fashion, then each firm views the A. Output of the rival as given b. Prices of rivals as given c. Profits of rivals as given d. All of the statements associated with this question are correct

Difficulty: Medium

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16. Two firms compete in a Stackelberg fashion and firm two is the leader, then A. Firm one views the output of firm two as given b. Firm two views the output of firm one as given c. All of the statements associated with this question are correct d. None of the statements associated with this question are correct

Difficulty: Hard

17. With linear demand and constant marginal cost, a Stackelberg leader's profits are ___________ the follower. a. Less than b. Equal to C. Greater than d. Either less than or greater to

Difficulty: Medium

18. An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which of the following is most likely? a. The firm competes with others in the Cournot fashion B. Other firms match price increases but do not match price reductions c. Other firms match price reductions but do not match price changes d. The firm competes with others in the Bertrand fashion

Difficulty: Medium

19. When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will: a. Produce more output and charge a lower price than firm 2 B. Produce more output and charge the same price as firm 2 c. Produce less output and charge the same price as firm 2 d. Produce less output and charge a higher price than firm 2

Difficulty: Medium

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20. A slight increase in the marginal cost of a firm definitely leads to a reduction in its output if the firm competes in the: a. Sweezy fashion b. Cournot fashion c. Bertrand fashion D. Cournot fashion and Bertrand fashion

Difficulty: Hard

21. The market demand in a Bertrand duopoly is P = 10 - 3Q, and the marginal costs are $1. Fixed costs are zero for both firms. Which of the following statement(s) is/are true? a. P = $1 b. Profits of Firm One = profits of Firm Two c. Producer's surplus of Firm One = producer's surplus of Firm Two D. All of the statements associated with this question are correct

Difficulty: Easy

22. If firms are in Cournot equilibrium: a. Each firm could increase profits by unilaterally increasing output b. Each firm could increase profits by unilaterally decreasing output c. Firms could increase profits by jointly increasing output D. Firms could increase profits by jointly reducing output

Difficulty: Easy

23. A firm's isoprofit curve is defined as the combinations of outputs produced by: a. A firm that earns it the same level of profits B. All firms that yield the firm the same level of profit c. All firms that makes total industry profits constant d. None of the statements associated with this question are correct

Difficulty: Easy

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24. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. The equilibrium output of each firm is: a. 8 B. 16 c. 32 d. 36

Difficulty: Medium

25. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits of: a. $1,024 b. $2,048 c. $4,096 D. $512

Difficulty: Medium

26. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. In equilibrium, the deadweight loss is: a. $128 B. $256 c. $384 d. $512

Difficulty: Hard

27. Which of the following statements is not a condition for a Stackelberg oligopoly? A. The market is contestable b. Barriers to entry exist c. A single firm (the leader) selects an output before all other firms choose their outputs d. The firms produce either differentiated or homogeneous products

Difficulty: Easy

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28. With a linear inverse demand function and the same constant marginal costs for both firms in a homogeneous product Stackelberg duopoly, which of the following will result? a. Profits of leader > Profits of follower b. QL = 2QF c. PL > PF D. Profits of leader > Profits of follower and Q L = 2QF

Difficulty: Medium

29. Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm two commits to this collusive output, it pays firm one to A. Cheat by producing a higher level of output b. Cheat by producing a lower level of output c. Cheat by raising prices d. None of the statements associated with this question are correct

Difficulty: Medium

30. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The outputs of the two firms are: A. QL = 16; QF = 8 b. QL = 24; QF = 12 c. QL = 12; QF = 8 d. QL = 20; QF = 15

Difficulty: Medium

31. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The profits of the two firms are: A. πL = $384; πF = $192 b. πL = $192; πF = $91 c. πL = $56; πF = -$28 d. πL = $56; πF = $28

Difficulty: Hard

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32. From a consumer's point of view, which type of oligopoly is most desirable? a. Sweezy b. Cournot c. Stackelberg D. Bertrand

Difficulty: Easy

33. Collusion in oligopoly is difficult to achieve because: a. It is prohibited by law b. Every firm has an incentive to cheat given that others follow the agreement c. Firms usually take care of consumers' interests as a decision priority D. It is prohibited by law and every firm has an incentive to cheat given that others follow the agreement

Difficulty: Medium

34. Since the end of the war in the Persian Gulf, the world price of oil has fallen. But in some areas, consumers have seen little relief at the pump. This phenomenon can be explained by the theory of: a. Perfect competition b. Monopolistic competition C. Oligopoly d. Monopoly

Difficulty: Medium

35. The spirit of equating marginal cost with marginal revenue is not held by a. Perfectly competitive firms b. Oligopolistic firms c. Perfectly competitive firms and oligopolistic firms D. None of the statements associated with this question are correct

Difficulty: Easy

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36. MCI announced a price discount plan for small firms. Their stock immediately fell in price. This shows that: A. MCI is probably competing in a Bertrand oligopolistic industry b. Stockholders are sometimes not rational c. There is increased demand for MCI's stock d. AT&T sold out its stock of MCI just after the announcement

Difficulty: Easy

37. An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What kind of oligopoly does the firm most likely belong to? A. Sweezy b. Cournot c. Stackelberg d. Bertrand

Difficulty: Easy

38. There are many different models of oligopoly because: a. Beliefs play an important role in oligopolistic competition b. Firms do not maximize profits in oligopolistic competition c. Oligopoly is the most complicated type of market structure D. Beliefs play an important role in oligopolistic competition and oligopoly is the most complicated type of market structure

Difficulty: Easy

39. Which of the following is not a type of market structure? a. Monopolistic competition b. Perfect competition C. Monopolistic oligopoly d. Monopoly

Difficulty: Easy

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40. Ed just finished an empirical study of oligopoly. He found the following result: "In the examined industry, a firm's demand curve is such that other firm's match price increases but do not match price reductions." What kind of oligopoly is the examined industry? a. Sweezy model b. Cournot model c. Stackelberg model D. None of the statements associated with this question are correct

Difficulty: Medium

41. Which of the following is true: a. If there are only two firms in a market, prices must be above marginal cost b. If there is only one firm in a market, prices must be above marginal cost c. All of the statements associated with this question are correct D. None of the statements associated with this question are correct

Difficulty: Hard

42. Which firm would you expect to make the lowest profits, other things equal: A. Bertrand oligopolist b. Cournot oligopolist c. Sweezy oligopolist d. Stackelberg leader

Difficulty: Medium

43. Which would you expect to make the highest profits, other things equal? a. Bertrand oligopolist b. Cournot oligopolist C. Stackelberg leader d. Stackelberg follower

Difficulty: Medium

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44. When firm one acts as a Stackelberg leader: a. Firm two produces the monopoly output b. Firm one's profit is less than its profit if they compete in a Cournot fashion c. Firm two will earn more than if they compete in a Cournot fashion D. None of the statements associated with this question are correct

Difficulty: Hard

45. Firm one and firm two compete as a Cournot oligopoly. There is an increase in marginal cost for firm one. Which of the following is not true? a. Firm one will produce less b. Firm two will produce more C. Both firm one's and firm two's reaction functions are shifted d. Profits of firm one will decrease

Difficulty: Medium

46. Two firms produce different goods. Firm one has a positive-sloped reaction function. This can be explained best by a. Homogeneous product Cournot oligopoly b. Homogeneous product Bertrand oligopoly C. Heterogeneous product Bertrand oligopoly d. None of the statements associated with this question are correct

Difficulty: Hard

47. A duopoly in which both firms have a Lerner index of monopoly power equal to 0 is probably a: a. Sweezy oligopoly b. Cournot oligopoly c. Stackelberg oligopoly D. Bertrand oligopoly

Difficulty: Medium

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48. The inverse demand in a Cournot duopoly is P = a - b (Q1 + Q2), and costs are C1(Q1) = c1Q1 and C2(Q2) = c2Q2. The government has imposed a per unit tax of $t on each unit sold by each firm. The equilibrium output of each firm is the same as a situation where each firm's: a. Demand increases by t b. Demand decreases by t C. Marginal cost increases by t d. Marginal cost decreases by t

Difficulty: Hard

49. The inverse demand in a Cournot duopoly is P = a - b (Q1 + Q2), and costs are C1(Q1) = c1Q1 and C2(Q2) = c2Q2. The Government has imposed a per unit tax of $t on each unit sold by each firm. The tax revenue is: a. T times the total output of the two firms should there be no sales tax B. Less than t times the total output of the two firms should there be no sales tax c. Greater than t times the total output of the two firms should there be no sales tax d. None of the statements associated with this question are correct

Difficulty: Medium

50. The producer's surplus of all firms in an oligopoly is usually the least in the case of a: a. Sweezy oligopoly b. Cournot oligopoly c. Stackelberg oligopoly D. Bertrand oligopoly

Difficulty: Easy

51. The Bertrand theory of oligopoly assumes A. Firms set prices b. Rivals will increase their output whenever a firm increases its output c. Rivals will decrease output whenever a firm decreases its output d. Rivals will follow the learning curve

Difficulty: Easy

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52. Which of the following is true? a. In Bertrand oligopoly each firm reacts optimally to price changes b. In Cournot oligopoly firms engage in quantity competition c. In Sweezy oligopoly a change in marginal cost may not have an effect on output or price D. All of the statements associated with this question are correct

Difficulty: Medium

53. In a Cournot oligopoly, a decrease in a firm's marginal cost leads to a. Reduced output and a higher price b. Reduced output and a lower price c. Higher output and a higher price D. Higher output and a lower price

Difficulty: Easy

54. The Sweezy model of oligopoly reveals that a. Capacity constraints are not important in determining market performance b. Perfectly competitive prices can arise in markets with only a few firms C. Changes in marginal cost may not affect prices d. All of the statements associated with this question are correct

Difficulty: Easy

55. Which of the following is not a quantity-setting oligopoly model? a. Stackelberg b. Cournot C. Bertrand d. All of the above are quantity setting models

Difficulty: Easy

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56. In the presence of large sunk costs, which of the following market structures generally leads to the highest price? a. Stackelberg b. Cournot c. Bertrand D. Monopoly

Difficulty: Easy

57. Both firms in a Cournot duopoly would experience lower profits if A. There was an increase in marginal production costs b. Each firm simultaneously increased output above the Nash equilibrium level c. One firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output d. There was an increase in marginal production costs and ne firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output

Difficulty: Hard

58. Which of the following is a feature of a contestable market? a. There are several firms in the market serving many consumers b. There is a single firm in the market serving many consumers c. The market price is equal to marginal cost D. There is a single firm in the market serving many consumers and the market price is equal to marginal cost

Difficulty: Medium

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59. Which of the following is true of a perfectly contestable market? A. P = MC b. P > MC c. P < ATC d. P > MC and P < ATC

Difficulty: Medium

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60. A new firm enters a market which is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the three firms co-exist after the entry? a. $20 B. Below $20 c. Above $20 d. None of the statements associated with this question are correct

Difficulty: Hard

61. "An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is true of: a. Bertrand and Cournot oligopolies b. Cournot and Stackelberg oligopolies c. Bertrand and Stackelberg oligopolies D. None of the statements associated with this question are correct

Difficulty: Medium

62. Sue and Jane own two local gas stations. They have identical constant marginal costs, but earn zero economic profits. Sue and Jane constitute a. A Sweezy oligopoly b. A Cournot oligopoly C. A Bertrand oligopoly d. None of the statements associated with this question are correct

Difficulty: Medium

63. The profits of the leader in a Stackelberg duopoly A. Are greater than those of the follower b. Equal those of the follower c. Are less than those of the follower d. Are greater than those of a Sweezy oligopolist

Difficulty: Hard

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64. An important condition for a contestable market is: a. All producers have different technologies b. There are high transaction costs C. Existing firms cannot respond quickly to entry by lowering their price d. There are sunk costs

Difficulty: Easy

65. The Cournot theory of oligopoly is based on the assumption that each firm believes that rivals will A. Keep their output constant if it changes its output b. Increase their output whenever it increases its output c. Decrease their output whenever it increases its output d. Randomly change output whenever it changes its output

Difficulty: Easy

66. Which of the following is true? a. In Bertrand oligopoly markets each firm believes that their rivals will hold their output constant if it changes its output b. In Cournot oligopoly market firms produce an identical product at a constant marginal cost and engage in price competition C. In Sweezy oligopoly markets each firm believes rivals will cut their prices in response to a price reduction, but will not raise prices in response to price increases d. In oligopoly market a change in marginal cost never has an affect on output or price

Difficulty: Medium

67. Which of the following are not price setting oligopoly models? a. Stackelberg b. Cournot c. Bertrand D. Stackelberg and Cournot

Difficulty: Easy

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68. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $30. Assuming that the new firm is equally as efficient as the incumbent firms, what will the new price be should the three firms co-exist after the entry? a. Above $30 b. Below $30 C. Equal to $30 d. Unable to tell given the information provided

Difficulty: Easy

69. One of the characteristics of a contestable market is that a. All firms have different productive technology B. Consumers react quickly to a price change c. Existing firms respond quickly to entry by lowering their price d. There are sunk costs

Difficulty: Easy

70. Firm A has a higher marginal cost than firm B. They compete in a homogeneous product Cournot duopoly. Which of the following results will not occur? A. Q A > Q B b. ProfitA < ProfitB c. Revenue of firm A < Revenue of firm B d. PriceA = PriceB

Difficulty: Easy

71. The market demand in a Bertrand duopoly is P = 15 - 4Q, and the marginal costs are $3. Fixed costs are zero for both firms. Which of the following statement(s) is/are true? A. P = $3 b. P = $10 c. P = $15 d. None of the statements associated with this question are correct

Difficulty: Easy

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72. Two identical firms compete as a Cournot duopoly. The inverse market demand they face is P = 80 - 4Q. The cost function for each firm is C(Q) = 8Q. The price charged in this market will be a. $12 B. $32 c. $48 d. $56

Difficulty: Medium

73. Two firms compete as a Stackelberg duopoly. The inverse market demand they face is P = 62 - 4.5Q. The cost function for each firm is C(Q) = 8Q. The outputs of the two firms are: a. QL = 48; QF = 24 b. QL = 35; QF = 6 C. QL = 6; QF = 3 d. None of the statements associated with this question are correct

Difficulty: Medium

74. Which of the following is not a feature of Sweezy oligopoly? a. There are a few firms in the market serving many consumers b. The firms produce differentiated products c. Each firm believes that rivals will cut their prices in response to a price reduction, but will not raise their prices in response to a price increase D. Free entry and exit occurs in the market

Difficulty: Easy

75. The profits of the follower in a Stackelberg duopoly a. Are greater than those of the leader b. Equal those of the leader C. Are less than those of the leader d. All the statements associated with this question are correct

Difficulty: Easy

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76. If firms are in Cournot equilibrium, they could increase profits by a. Jointly increasing output B. Jointly reducing output c. Unilaterally increasing prices d. Unilaterally reducing prices

Difficulty: Easy

77. 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 statements associated with this question are correct

Difficulty: Hard

78. There are many different models of oligopoly because: a. Beliefs are not incorporated in oligopolistic competition b. Firms do not maximize profits in oligopolistic competition C. Oligopoly is the most complicated type of market structure d. Both a and c

Difficulty: Easy

79. Consider a Cournot duopoly with the following inverse demand function: P = 100 -2Q1 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information firm 1 and 2's marginal revenue functions are a. MR1(Q1,Q2) = 100 - 2Q1 - Q2 and MR2(Q1,Q2) = 100 - Q1 - 2Q2 B. MR1(Q1,Q2) = 100 - 4Q1 - 2Q2 and MR2(Q1,Q2) = 100 - 2Q 1 - 4Q2 c. MR1(Q1,Q2) = 100 - 2Q1 - 4Q2 and MR2(Q1,Q2) = 100 - 4Q1 - 2Q2 d. MR1(Q1,Q2) = 24.5 - 0.5Q2 and MR2(Q1,Q2) = 24.5 - 0.5Q1

Difficulty: Medium

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80. Consider a Cournot duopoly with the following inverse demand function: P = 100 - 2Q1 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information firm 1 and 2's reaction functions are a. r1(Q2) = 24.5 - 0.5Q1 and r2(Q1) = 24.5 - 0.5Q2 B. r1(Q2) = 24.5 - 0.5Q2 and r1(Q2) = 24.5 - 0.5Q1 c. Q1 = 49 - 0.5Q2 and Q2 = 49 - 0.5Q1 d. Q1 = 49 - 0.25Q2 and Q2 = 49 - 0.25Q1

Difficulty: Medium

81. Consider a Cournot duopoly with the following inverse demand function: P = 100 - 2Q1 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information consumer surplus in this market is a. $16.33 b. $32.67 c. $1,067.11 D. $2,134.22

Difficulty: Hard

82. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the Stackelberg leader's marginal revenue function is a. MR(QL) = 50 - 2QL + c1 B. MR(QL) = 50 - 2QL + c2 c. MR(QF) = 100 - 2QF + c1 d. MR(QF) = 100 - QF + c2

Difficulty: Hard

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83. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the Stackelberg follower's marginal revenue function is A. MRF(QL,QF) = 100 - 2Q L - 4QF b. MRF(QL,QF) = 100 - 4QL - 2QF c. MRF(QL,QF) = 100 - 2Q L - QF d. MRF(QL,QF) = 100 - QL - 2QF

Difficulty: Medium

84. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the Stackelberg follower's reaction function is a. QF = 24.5 - 0.25QL b. QF = 49 - 0.25QF C. QF = 24.5 - 0.5QL d. QF = 24.5 - QL

Difficulty: Medium

85. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the Stackelberg leader's reaction function is a. QL = 24.5 - 0.5QF b. QL = 50 - 0.5QF c. QL = 49 - 0.5QF D. None of the statements associated with this question are correct

Difficulty: Easy

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86. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the consumer surplus in this market is a. $36.75 b. $73.50 C. $1,352.40 d. $2,704.80

Difficulty: Hard

87. Consider two firms competing to sell a homogeneous product by setting price. The inverse demand curve is given by P = 6 - Q. If each firms' cost function is Ci(Qi) = 6 + 2Q i, then each firm will symmetrically produce units of output and earn. a. 4 units; profits of $6 b. 2 units; profits of $2 c. 4 units; losses of $2 D. 2 units; losses of $6

Difficulty: Medium

88. Consider two firms competing to sell a homogeneous product by setting price. The inverse demand curve is given by P = 6 - Q. If each firms' cost function is Ci(Qi) = 2Qi, then consumer surplus in this market is a. $2 b. $4 C. $8 d. There is insufficient information to determine consumer surplus in this market

Difficulty: Medium

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89. Consider two firms competing to sell a homogeneous product by setting price. The inverse demand curve is given by P = 15 - Q. Firm 1 has MC1(Q1) = 1 and firm 2 has MC2(Q2) = 1.05. Based on this information we can conclude that the market price will be a. $1 and each firm will produce 7 units b. $1.05 and each firm will produce 6.975 units C. $1.04 and firm 1 will produce 13.96 units and firm 2 will produce 0 units d. $1 and firm 1 will produce 14 units and firm 2 will produce 0 units

Difficulty: Hard

90. An increase in firm 2's marginal cost will cause a. A downward shift in firm 1's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity b. An upward shift in firm 1's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity C. A downward shift is firm 2's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity d. An upward shift in firm 2's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity

Difficulty: Hard

91. A decrease in firm 1's marginal cost will cause a. A downward shift in firm 1's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity B. An upward shift in firm 1's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity c. A downward shift is firm 2's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity d. An upward shift in firm 2's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity

Difficulty: Hard

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92. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q1 - 2Q2. Each firm has a marginal cost of $50. Based on this information we can conclude that consumer surplus in the different equilibrium oligopoly models will follow which of the following orderings. a. CSCollusion > CSStackelberg > CSCournot > CSBertrand B. CSBertrand > CSStackelberg > CSCournot > CSCollusion c. CSBertrand > CSCournot > CSStackelberg > CSCollusion d. CSStackelberg > CSBertrand > CSCournot > CSCollusion

Difficulty: Medium

93. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q1 - 2Q2. Each firm has a marginal cost of $50. Based on this information we can conclude that aggregate quantity in the different equilibrium oligopoly models will follow which of the following orderings. a. QCollusion < QStackelberg < QCournot < QBertrand B. QCollusion < QCournot < QStackelberg < QBertrand c. QBertrand < QCollusion < QCournot < QStackelberg d. QBertrand < QStackelberg < QCournot < QCollusion

Difficulty: Medium

94. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q1 - 2Q2. Each firm has a marginal cost of $50. Based on this information we can conclude that equilibrium price in the different oligopoly models will follow which of the following orderings. A. PBertrand < PStackelberg < PCournot < PCollusion b. PStackelberg < PCollusion < PCournot < PBertrand c. PCollusion < PCournot < PStackelberg < PBertrand d. PBertrand < PCournot < PStackelberg < PCollusion

Difficulty: Easy

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95. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q1 - 2Q2. Each firm has a marginal cost of $50. Based on this information we can conclude that aggregate profits in the different equilibrium oligopoly models will follow which of the following orderings. a. πBertand > πCollusion > πStackelberg > πCournot B. πCollusion > πCournot > πStackelberg > πBertand c. πCollusion > πStackelberg > πCournot > πBertand d. None of the statements associated with question are correct

Difficulty: Medium

Essay Questions

96. In Gelate, Pennsylvania, the market for compact discs has evolved as follows. There are two firms that each use a marquee to post the price they charge for compact discs. Each firm buys CDs from the same supplier at a cost of $5.00 per disc. The inverse market demand in their area is given by , where Q is the total output produced by the two firms. a. Solve for the Bertrand equilibrium price and market output. b. Would your answer differ if the products were not perfect substitutes? Explain. a. P = MC = $5. To find industry output, we find Q such that P = 5 = 10 - 2Q. Solving for Q gives us industry output of 2.5 units. b. When goods are perfect substitutes, firms are forced to charge a price equal to marginal cost, otherwise they sell nothing. However, if consumers view the goods as heterogeneous (differentiated products) a firm does not loose the entire market if it prices above another firm's price.

97. Suppose you are the manager of a medium-sized firm that operates in an industry that has a four-firm concentration ratio of 100 percent. All firms in the industry are of equal size. In order to determine your firm's optimal output and price, you must obtain information about how rivals would respond to changes in your decisions. If you were the manager, how would you obtain this information?

One method would be to study the history of how rivals responded to changes in your past pricing policies.

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98. You are the manager of a firm operating in a differentiated-product oligopoly. Show graphically your optimal response to an increase in marginal cost if a. You believe rivals will follow price reductions but not price increases. b. You believe rivals will hold output constant if you decrease output. c. You believe rivals will follow price increases but not price decreases.

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a. In this case, the demand function for a Sweezy oligopolist is given by ABC in Figure 9-3a, and marginal revenue curve is ADEF. So long as marginal cost changes by a small amount, your output will remain at Q. For large increases in MC, the profit-maximizing level of output will fall. Figure 9-3a

b. In this case, the initial Cournot equilibrium is given by point A in Figure 9-3b. An increase in firm one's marginal cost results in a new Cournot equilibrium at point B. Thus, the manager of firm one should reduce output to maximize profits. Figure 9-3b

c. In this case, the demand curve is ABC in Figure 9-3c, while MR is ADEF. An increase in marginal cost from MC to MC* leads to a reduction in the profit-maximizing level of output. Figure 9-3c

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99. The (inverse) demand in a Cournot duopoly is and and

and cost are

. Show that the Cournot equilibrium levels of output are .

Equating MR = MC for firm one yields a - b (Q1 + Q2) - bQ1 = c1. This yields a reaction function for firm one of

Similarly, equating MR = MC for firm two yields a - b (Q1 + Q2) - bQ2 = c2, so two's reaction function is

Solving these two equations simultaneously gives us the desired result.

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100. The market for widgets consists of two firms that produce identical products. Competition in the market is such that each of the firms independently produces a quantity of output, and these quantities are then sold in the market at a price that is determined by the total amount produced by the two firms. Firm 2 is known to have a cost advantage over Firm 1. A recent study found that the (inverse) market demand curve faced by the two firms is and costs are and a. Determine the marginal revenue for each firm. b. Determine the reaction function for each firm.

.

c. How much output will each firm produce in equilibrium? d. What are the equilibrium profits for each firm? a. MR1 = 280 - 2Q2 - 4Q1 and MR2 = 280 - 2Q1 - 4Q2. b. Firm one will produce such that MR1 = MC1, or 280 - 2Q2 - 4Q1 = 3. Thus, the reaction function of firm one is r 1(Q2) = 69.25 -.5Q 2. Firm two will produce such that MR2 = MC2, or 280 - 2Q1 + 4Q2 = 2. The reaction function for firm two is thus r2(Q1) = 69.5 -.5Q1. c. Solving Q1 and Q2 from the two reaction functions, we have

d. Π1 = 95(46) - 3(46) = $4,232; Π2 = 95(46.5) - 2(46.5) = $4,324.5.

101. When MCI announced a price discount plan designed to induce small firms to use its services, the price of its stock immediately declined. Why do you think the stock market reacted negatively to MCI's plan to attract new customers? The most likely reason the market did not respond favorably to MCI's plan is that investors recognized the market for long-distance services is oligopolistic; competitors like AT&T would likely react to MCI's plan by changing their own pricing structure. In fact, this is precisely what did happen; 6 days after the MCI announcement, AT&T followed with a similar plan. Effectively, MCI's action initiated a "price war" that parallels our analysis of Bertrand competition.

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102. The inverse demand curve for a Stackelberg duopoly is

. The leader's

cost structure is . The follower's cost structure is . a. Determine the reaction function for the follower. b. Determine the equilibrium output levels for both the leader and the follower. c. What are the profits for the leader? For the follower? a. The follower's reaction function is Q F = 831.25 -.5QL. b. The leader's output is

Similarly, QF = 831.25 -.5(832.9) = 414.8 units. Thus, the price of output is given by P = 10,000 - 6(832.9 + 414.8) = $2,513.8. c. ΠL = 2513.8(832.9) - 15(832.9) = $2,081,250.5; ΠF = $1,032,354.2.

103. What real-world evidence would lead you to believe that firms were acting as Cournot oligopolists? Stackelberg oligopolists? Bertrand oligopolists? Evidence of Cournot oligopoly would be a situation where firms make quantity-setting decisions. Evidence of Stackelberg behavior includes one firm setting output prior to other firms in the market, who take the leader's output as given. Evidence of Bertrand oligopoly would be severe price competition, with low prices and profits.

104. Zelda Industries is the only firm of its kind in the world. Due largely to historical accident, it began producing streganomas in 1985 in a vacant warehouse. Virtually anyone with a degree in college chemistry could easily replicate the firm's formula, which is not patent protected. Nonetheless, since 1985 Zelda has averaged accounting profits of 6 percent on investment. This rate is comparable to the average interest rate that large banks paid on deposits over the period. Do you think Zelda is earning monopoly profits? Why? No. In fact, Zelda could have invested funds over the period at 6 percent. Its accounting profits of 6 percent translate into zero economic profits. Most likely, Zelda operates in a contestable market, and is disciplined by the threat of entry by other firms. Therefore, Zelda cannot charge prices in excess of marginal cost.

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105. You are the manager of a firm in a new industry. You have gotten the jump on the only other producer in the market. You know what your competitor's cost function is, and it knows yours. Your products, although different to experts, are indistinguishable to the average consumer. Your marketing research team has provided you with the following market demand curve:

. Your cost function is

. Your competitor's cost function

is . Your diligent effort will allow you to decide how much of your product to provide and allow you to place it on the market shortly before your competitor will be able to make its product available for sale. What output level will you choose, and what price will you charge? Explain. You are clearly a Stackelberg leader, and should set the Stackelberg output to maximize your profits. To use the formulas in the text, you first need to convert the given demand equation (Q = 1250 -.5P) into the corresponding inverse demand function. To do this, solve the given demand equation for P to get P = 2500 - 2Q. Based on this inverse demand function, use the formula in the text to solve for your Stackelberg output as the leader. This is given by the formula QA = (a + c B - 2cA)/2b = (2500 + 6 - 2(8))/4 = 622.5 units. The follower will produce QB = (a - c B)/2b -.5QA = [2500 - 6]/4 -.5(622.5) = 312.25 units. Thus, the price of output will be P = 2500 - 2(622.5 +312.25) = $630.50.

106. You are a potential entrant into a market that previously has had entry blocked by the government. Your market research has estimated that the inverse market demand curve for this industry is

, where

. You estimate that if you enter the

market, your own cost function will be . The government has invited your firm to enter the industry, but it will require you to pay a one-time license fee of $100,000. You do not know the cost functions of the firms presently in the market; however, the price is now $16,000. Last year 87 units were sold by existing firms. Would you choose to enter this market? Explain. In this case, your inverse demand function remains at P = 22,500 - 75(87) - 75Q y = 15,975 75Qy. Equating MR = MC yields 15,975 - 150 Qy = 15,300. Solving for Qy yields the profitmaximizing output by the entrant, assuming existing firms hold output constant: Qy = 4.5 units. The corresponding price is P = 22,500 - 75(87 + 4.5) = $15,637.5. Profits if you enter (net of the license fee) are $15,637.5(4.5) - 15,300(4.5) - 100,000 = $-98,481.25. Thus, it would not pay to enter the industry if you expect rivals to maintain their present output.

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107. Compare and contrast the output levels and profits for the Cournot, Stackelberg, and Bertrand models. Use the following cost and demand conditions for your comparison, and suppose there are two firms: costs of zero.

. Each firm has a marginal cost of $20 and fixed

108. Over the past 20 years, the 12 members of the Organization of Petroleum and Exporting Countries have made repeated attempts to restrict output in order to maintain high crude oil prices. Between 1990 and 1995, however, crude oil prices have dropped by about 20 percent, due in part to increased production from the former Soviet Union, Latin America, Asia, and the North Sea. In light of these increases in oil production from non-OPEC countries, what must OPEC do to maintain the price of oil at its desired level? Do you think this will be easy for OPEC to do? Explain. OPEC must decrease its total quantity of oil produced by the amount that non-OPEC countries increase their oil production. This will be difficult for OPEC to do. As demand and cost conditions change, old collusive agreements no long suit the new environment. Moreover, even in the absence of changing demand or cost conditions, each firm has an incentive to cheat on collusive agreements, as shown in the text.

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109. In the late 1990s, Chrysler announced a new incentive program on its minivans that included subsidized interest rates and cash allowances. Under the plan, consumers could enjoy financing rates as low as 4.9 percent, as well as a $500 cash allowance toward the lease or purchase of a new minivan. What changes in sales would you anticipate if you were the manager of a Dodge/Plymouth franchise? Why? Other things equal, your sales would rise. However, given the oligopolistic nature of the industry, you should anticipate that automakers like General Motors and Ford will likely counter with similar incentive programs, which will mitigate to some extent the sales increase you otherwise would have enjoyed.

110. Orion and Zeda are the only producers of a unique product that sold in a market where the inverse demand curve is . The firms produce identical products and have identical cost functions given by . The managers of each firm must decide on their outputs on Monday morning and then bring products to market by noon. a. What is each firm's marginal revenue? Marginal cost? b. Equate each firm's marginal revenue to marginal cost. c. Use your result in part ( b) to solve for each firm's reaction function. d. Use your results in part ( c) to solve for the Cournot equilibrium levels of output for each firm. a. MRO = 200 - 4qo - 2qz; MRz = 200 - 2qo - 4qz ;MCO = MCz = 4. b. MRO = MCO → 200 - 4qo - 2qz = 4; MRz = MCz → 200 - 2qo - 4qz = 4. c. and d. Substituting qz into qo from part (c) yields an equilibrium output for Orion of 32.7 units. Likewise, substituting qo into qz from part (c), equilibrium output for Zeda is 32.7 units.

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111. You are the CEO of ClipIt, a paper clip manufacturer. Your company enjoys a patented technology that allows it to produce paper clips faster and at a lower cost than your only rival, FastenIt. Clipit uses this advantage to be the first to choose its profit-maximizing output level in the market. The inverse demand function for paper clips is , ClipIt's costs are , and FastenIt's costs are . a. What is ClipIt's profit-maximizing output level? FastenIt's? b. What is the market's equilibrium price? c. How much profit does each firm earn? d. Ignoring antitrust considerations, would it be profitable for your firm to merge with FastenIt? If not, explain why not; if so, put together an offer that would permit you to profitably complete the merger. a. Stackelberg leader's profit-maximizing quantity is 125 units; Stackelberg follower's profit maximizing quantity is 61.5 units. b. P = $127.00. c. d. Assuming that the merged firms adopted ClipIt's patented technology that allows it to produce at a lower cost of CC(QC) = 2QC, a merger would be profitable. Profits of the merged firm would be $30,000.50 compared to joint (industry) profits of $23,189.50 when firms compete in a Stackelberg setting.

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Chapter 10 Game Theory: Inside Oligopoly Multiple Choice Questions

1" Consider the #ollo$ing in#ormation #or a sim%ltaneo%s move game& '# yo% advertise and yo%r rival advertises, yo% each $ill earn (5 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (15 million and the non advertising #irm $ill earn (1 million" '# yo% and yo%r rival plan to *e in *%siness #or only one year, the +ash e%ili*ri%m is A. or each #irm to advertise ." or neither #irm to advertise C" or yo%r #irm to advertise and the other not to advertise /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

2" Consider the #ollo$ing in#ormation #or a sim%ltaneo%s move game& '# yo% advertise and yo%r rival advertises, yo% each $ill earn (5 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (15 million and the non advertising #irm $ill earn (1 million" '# yo% and yo%r rival plan to *e in *%siness #or 10 years, then the +ash e%ili*ri%m is A. or each #irm to advertise every year ." or neither #irm to advertise in early years, *%t to advertise in later years C" or each #irm to not advertise in any year /" or each #irm to advertise in early years, *%t not advertise in later years

Difficulty: Medium

8-80


3" Consider the #ollo$ing in#ormation #or a sim%ltaneo%s move game& '# yo% advertise and yo%r rival advertises, yo% each $ill earn (5 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (15 million and the non advertising #irm $ill earn (1 million" '# yo% and yo%r rival plan to hand yo%r *%siness do$n to yo%r children and this *e%est goes on #orever then a +ash e%ili*ri%m $hen the interest rate is ero is A. or each #irm to not advertise %ntil the rival does, and then to advertise #orever ." or yo%r #irm to never advertise C" or yo%r #irm to al$ays advertise $hen yo%r rival does /" or each #irm to advertise %ntil the rival does not advertise, and then not advertise #orever

Difficulty: Medium

4" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (4 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (1 million and the non advertising #irm $ill earn (5 million" '# yo% and yo%r rival plan to *e in *%siness #or only one year, the +ash e%ili*ri%m is " or each #irm to advertise B. or neither #irm to advertise C" or yo%r #irm to advertise and the other not to advertise /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

5" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (4 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (1 million and the non advertising #irm $ill earn (5 million" '# yo% and yo%r rival plan to *e in *%siness #or 10 years, then the +ash e%ili*ri%m is " or each #irm to advertise every year ." or neither #irm to advertise in early years, *%t to advertise in later years C. or each #irm to not advertise in any year /" or each #irm to advertise in early years, *%t not advertise in later years

Difficulty: Medium

8-81


6" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (4 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (1 million and the non advertising #irm $ill earn (5 million" '# yo% and yo%r rival plan to hand yo%r *%siness do$n to yo%r children and this *e%est goes on #orever then a +ash e%ili*ri%m is #or each #irm to " +ot advertise %ntil the rival does, and then to advertise #or ever B. +ever advertise C" l$ays advertise /" dvertise %ntil the rival does not advertise, and then not advertise #orever

Difficulty: Medium

%estions , 8, and ! are *ased on the #ollo$ing game, $here #irms one and t$o m%st independently decide $hether to charge high or lo$ prices"

" hich o# the #ollo$ing are +ash e%ili*ri%m payo##s in the one-shot game7 " 0, 0 ." 5, -5 C" -5, 5 D. 10, 10

Difficulty: Medium

8-82


8" hich o# the #ollo$ing are the +ash e%ili*ri%m payo##s each period i# the game is repeated 10 times7 " 0, 0 ." 5, -5 C" -5, 5 D. 10, 10

Difficulty: Medium

!" %ppose the game is in#initely repeated" 9hen the *est the #irms co%ld do in a +ash e%ili*ri%m is to earn per period" " 0, 0 ." 5, -5 C" -5, 5 D. 10, 10

Difficulty: Medium

10" Consider the #ollo$ing entry game" )ere, #irm . is an e:isting #irm in the mar;et, and #irm  is a potential entrant" irm  m%st decide $hether to enter the mar;et play enter or stay o%t o# the mar;et play not enter" '# #irm  decides to enter the mar;et, #irm . m%st decide $hether to engage in a price $ar play hard, or not play so#t" .y playing hard, #irm . ens%res that #irm  ma;es a loss o# (1 million, *%t #irm . only ma;es (1 million in pro#its"
Difficulty: Hard

8-83


11" Consider the #ollo$ing entry game" )ere, #irm . is an e:isting #irm in the mar;et, and #irm  is a potential entrant" irm  m%st decide $hether to enter the mar;et play enter or stay o%t o# the mar;et play not enter" '# #irm  decides to enter the mar;et, #irm . m%st decide $hether to engage in a price $ar play hard, or not play so#t" .y playing hard, #irm . ens%res that #irm  ma;es a loss o# (1 million, *%t #irm . only ma;es (1 million in pro#its"
Difficulty: Hard

ns$er %estions 12-15 *ased on the #ollo$ing in#ormation #or a one-shot game&

12" hat are dominant strategies #or irm  and irm . respectively7 " >o$ price, high price ." )igh price, lo$ price C" )igh price, high price D. >o$ price, lo$ price

Difficulty: Medium

8-84


13" hat are sec%re strategies #or #irm  and #irm . respectively7 " >o$ price, high price ." )igh price, lo$ price C" )igh price, high price D. >o$ price, lo$ price

Difficulty: Medium

14" hat are the +ash e%ili*ri%m strategies #or #irm  and . respectively7 " >o$ price, high price ." )igh price, lo$ price C" )igh price, high price D. >o$ price, lo$ price

Difficulty: Medium

15" '# this one-shot game is repeated 100 times, the +ash-e%ili*ri%m payo##s o# the players $ill *e ???????????????? each period" A. 2, 2 ." 10, -8 C" -8, 10 /" 6, 6

Difficulty: Easy

16" hich o# the #ollo$ing are important determinants o# coll%sion in pricing games7 " 9he n%m*er o# #irms ." irm sie C" )istory D. ll o# the statements associated $ith this %estion are correct

Difficulty: Easy

8-85


ns$er %estions 1-20 *ased on the #ollo$ing payo## matri:&

1" hat are the sec%re strategies #or irm  and irm . respectively7 A. >o$ price, high price ." )igh price, lo$ price C" )igh price, high price /" >o$ price, lo$ price

Difficulty: Medium

18" hich o# the #ollo$ing is tr%e7 "  dominant strategy #or irm  is high price ." 9here does not e:ist a dominant strategy #or irm  C"  dominant strategy #or irm . is lo$ price D. +one o# the statements associated $ith this %estion are correct

Difficulty: Hard

8-86


1!" hat are the +ash e%ili*ri%m strategies #or irm  and irm . respectively in a one-shot game7 A. >o$ price, lo$ price ." )igh price, high price C" >o$ price, high price /" >o$ price, lo$ price and high price, high price

Difficulty: Medium

20" '# this one-shot game is repeated three times, the +ash e%ili*ri%m payo##s #or irm  and . $ill *e ?????? each period A. 10, ! ." 11, 11 C" -10,  /" 15, 8

Difficulty: Medium

21" hich o# the #ollo$ing is tr%e7 " 'n a one-shot game, a coll%sive strategy al$ays represents a +ash e%ili*ri%m ."  per#ect e%ili*ri%m occ%rs $hen each player is doing the *est he can regardless o# $hat the other player is doing C" =ach +ash e%ili*ri%m is a per#ect e%ili*ri%m D. =very per#ect e%ili*ri%m is a +ash e%ili*ri%m

Difficulty: Medium

8-8


ns$er %estions 22-23 *ased on the #ollo$ing payo## matri:&

22" hich o# the #ollo$ing is tr%e7 "  dominant strategy #or irm  is high price B. 9here does not e:ist a dominant strategy #or irm  C"  dominant strategy #or irm . is lo$ price /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

23" hat are the +ash e%ili*ri%m strategies #or irm  and irm . respectively7 " >o$ price, lo$ price B. )igh price, high price C" >o$ price, high price /" >o$ price, lo$ price and high price, high price

Difficulty: Medium

8-88


24" hich o# the #ollo$ing is tr%e7 " 'n an in#initely repeated game, coll%sion is al$ays a +ash e%ili*ri%m B. 'n a #initely repeated game $ith a certain end period, coll%sion is %nli;ely *eca%se e##ective p%nishments cannot *e %sed d%ring any time period C" ll o# the statements associated $ith this %estion are correct /" +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

25" hich o# the #ollo$ing is tr%e7 " or a #initely repeated game, the game is played eno%gh times to e##ectively p%nish cheaters and there#ore coll%sion is li;ely ." 'n an in#initely repeated game $ith a lo$ interest rate, coll%sion is %nli;ely *eca%se the game %nravels so that e##ective p%nishment cannot *e %sed d%ring any time period C"  sec%re strategy is the optimal strategy #or a player no matter $hat the opponent does D. +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

26" hich o# the #ollo$ing enhances the a*ility o# $aste companies to coll%de7 A. /ecals on $aste receptacles ." )igh interest rates C" /i##erentiated nat%re o# prod%cts /" >arge n%m*er o# #irms

Difficulty: Hard

2" Coll%sion is& " >egal in the @nited tates ." +ot possi*le $hen #irms interact repeatedly #orever C" More li;ely in ind%stries $ith a large n%m*er o# #irms D. +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

8-8!


Ae#er to the #ollo$ing payo## matri: #or %estions 28-30&

28" 9he dominant strategy #or Blayer 2 is& " 91 ." 91 and t2 C" 93 D. +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

2!" 9he dominant strategy #or Blayer 1 is& " 1 ." 2 C" 1 and 2 D. +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

30" hich o# the #ollo$ing strategies constit%tes a +ash e%ili*ri%m o# the game& A. 1, t1 ." 2, t2 C" 2, t3 /" 1, t2

Difficulty: Medium

8-!0


31" hich o# the #ollo$ing conditions are necessary #or the e:istence o# a +ash e%ili*ri%m7 " 9he e:istence o# dominant strategies #or *oth players ." 9he e:istence o# a dominant strategy #or one player and the e:istence o# sec%re strategy #or another player C" 9he e:istence o# sec%re strategy #or *oth players D. +one o# the statements associated $ith this %estion are correct

Difficulty: Hard

Ae#er to the #ollo$ing payo## matri: #or %estions 32 and 33&

32" 9he dominant strategy o# Blayer 1 is& A. 1 ." 2 C" 1 and 2 /"  dominant strategy does not e:ist

Difficulty: Medium

33" hich o# the #ollo$ing pair o# strategies constit%te a +ash e%ili*ri%m o# the game7 " 1, t1 ." 1, t2 C" 2, t1 D. 1, t2 and 2, t1

Difficulty: Hard

8-!1


34" .ased on the #ollo$ing game, $hat are the sec%re strategies #or Blayer
A. 1 and t2 ." 1 and t1 C" 2 and t2 /" 2 and t1

Difficulty: Medium

35" hich o# the #ollo$ing is tr%e #or a +ash e%ili*ri%m o# a t$o-player game7 " 9he oint payo##s o# the t$o players are highest compared to other strategy pairs B. Diven another playerEs strategy stip%lated in that +ash e%ili*ri%m, a player cannot improve his $el#are *y changing his strategy C"  +ash e%ili*ri%m is al$ays %ni%e in real $orld pro*lems /" Diven another playerEs strategy stip%lated in that +ash e%ili*ri%m, a player cannot improve his $el#are *y changing his strategy and a +ash e%ili*ri%m is al$ays %ni%e in real $orld pro*lems

Difficulty: Medium

36" Dame theory is especially %se#%l #or analysis in the #ollo$ing types o# mar;ets& " Ber#ect competition ." Monopolistic competition C.
Difficulty: Easy

8-!2


3" =conomists %se game theory to predict the *ehavior o# oligopolists" hich o# the #ollo$ing is cr%cial #or the s%ccess o# the analysis7 " Ma;e s%re the payo##s re#lect the tr%e payo##s o# the oligopolists ." Ma;e s%re $hether the oligopolists move sim%ltaneo%sly or se%entially C" Ma;e s%re the pro*lem considered is o# a one-shot or repeated nat%re D. ll o# the a*ove

Difficulty: Medium

@se the #ollo$ing in#ormation to ans$er %estions 38 and 3!& %ppose that yo% are a manager" Fo% are considering $hether or not to monitor employees $ith the payo##s in the #ollo$ing normal #orm game"

38" hich o# the #ollo$ing pair o# strategies constit%te a +ash e%ili*ri%m7 " Manager monitors and $or;er $or;s ." Manager does not monitor and $or;er $or;s C" Manager monitors and $or;er shir;s D. +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

8-!3


3!" hat sho%ld the manager do to solve the shir;ing pro*lem7 " l$ays monitor ." +ever monitor C" incerely tell $or;ers not to shir; D. =ngage in random spot chec;s o# the $or; place

Difficulty: Easy

40" Management and a la*or %nion are *argaining over ho$ m%ch o# a (50 s%rpl%s to give to the %nion" 9he (50 is divisi*le %p to one cent" 9he players have one-shot to reach an agreement" Management has the a*ility to anno%nce $hat it $ants #irst, and then the la*or %nion can accept or reect the o##er" .oth players get ero i# the total amo%nts as;ed #or e:ceed (50" hich o# the #ollo$ing is tr%e7 " 9here are m%ltiple +ash e%ili*ria ." (25, (25 is a +ash e%ili*ri%m C"  +ash e%ili*ri%m is also a per#ect e%ili*ri%m D. 9here are m%ltiple +ash e%ili*ria and (25, (25 is a +ash e%ili*ri%m

Difficulty: Medium

41" Management and a la*or %nion are *argaining over ho$ m%ch o# a (50 s%rpl%s to give to the %nion" 9he (50 is divisi*le %p to one cent" 9he players have one-shot to reach an agreement" Management has the a*ility to anno%nce $hat it $ants #irst, and then the la*or %nion can accept or reect the o##er" .oth players get ero i# the total amo%nts as;ed #or e:ceed (50" hich o# the #ollo$ing is not a +ash e%ili*ri%m7 " Management re%ests (50 and the la*or %nion accepts (0 B. Management re%ests (30 and the la*or %nion accepts (10 C" Management re%ests (25 and the la*or %nion accepts (25 /" +either management re%esting (50 and the la*or %nion accepting (0 nor management re%esting (30 and the la*or %nion accepting (10 are +ash e%ili*ria

Difficulty: Hard

8-!4


42" Management and a la*or %nion are *argaining over ho$ m%ch o# a (50 s%rpl%s to give to the %nion" 9he (50 is divisi*le %p to one cent" 9he players have one-shot to reach an agreement" Management has the a*ility to anno%nce $hat it $ants #irst, and then the la*or %nion can accept or reect the o##er" .oth players get ero i# the total amo%nts as;ed #or e:ceed (50" hich o# the #ollo$ing is a per#ect e%ili*ri%m7 A. Management re%ests (4!"!!, and the la*or %nion accepts (0"01 ." Management re%ests (25, and the la*or %nion accepts (25 C" Management re%ests (0, and the la*or %nion accepts (50 /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

43" Management and a la*or %nion are *argaining over ho$ m%ch o# a (50 s%rpl%s to give to the %nion" 9he (50 is divisi*le %p to one cent" 9he players have one-shot to reach an agreement" Management has the a*ility to anno%nce $hat it $ants #irst, and then the la*or %nion can accept or reect the o##er" .oth players get ero i# the total amo%nts as;ed #or e:ceed (50" '# yo% $ere the la*or %nion, $hich type o# r%les o# play $o%ld yo% pre#er to divide the (50 s%rpl%s7 "
Difficulty: Easy

44" hich o# the #ollo$ing is tr%e7 "  +ash e%ili*ri%m is al$ays per#ect B.  per#ect e%ili*ri%m is al$ays +ash C"  +ash e%ili*ri%m is al$ays per#ect in a m%ltistage game /" Ber#ect e%ili*ri%m and +ash e%ili*ri%m are the same concept *%t $ith di##erent names

Difficulty: Medium

8-!5


Ae#er to the #ollo$ing normal #orm game o# price competition #or %estions 45-4"

45" %ppose the game is in#initely repeated, and the interest rate is 10G" .oth #irms agree to charge a high price, provided no player has charged in lo$ price in the past" '# *oth #irms stic; to this agreement, then the present val%e o# irm Es payo##s are& A. 220 ." 110 C" 330 /" 550

Difficulty: Medium

46" %ppose that irm  deviates #rom a trigger strategy to s%pport a high price" hat is the present val%e o# Es payo## #rom cheating7 " 0 B. 50 C" 30 /" 20

Difficulty: Medium

8-!6


4" hat is the ma:im%m interest rate that can s%stain coll%sion7 " 30G ." 15G C. 66"G /" 20G

Difficulty: Hard

48" 't is easier to s%stain tacit coll%sion in an in#initely repeated game i#& " 9he present val%e o# cheating is higher ." 9here are more players in the game C. 9he interest rate is lo$er /" 9he present val%e o# cheating is higher and the interest rate is lo$er

Difficulty: Medium

4!" hen a $or;er anno%nces that he plans to %it, say ne:t month, the threat o# *eing #ired has no *ite" 9he $or;er may #ind it in his interest to shir;" hat can the manager do to overcome this pro*lem7 " ire the $or;er as soon as he anno%nces his plans to %it B. Brovide the $or;er some re$ards #or good $or; that e:tend *eyond the termination o# employment $ith yo%r #irm C" Monitor the $or;er more #re%ently than %s%al and #ire him $hen he is ca%ght shir;ing /" Bay the $or;er some re$ards $hen he anno%nces his plan to %it

Difficulty: Medium

50"  #initely repeated game di##ers #rom an in#initely repeated game in that& " 9he #ormer needs a lo$er interest rate to s%pport coll%sion than the latter needs B. 9here is an end-o#-period pro*lem #or the #ormer C"  coll%sive o%tcome can %s%ally *e s%stained in the #ormer *%t not the latter /" ll o# the statements associated $ith this %estion are correct

Difficulty: Hard

8-!


51" hich o# the #ollo$ing is a #actors a##ecting coll%sion in an in#initely repeated pricing game7 " +%m*er o# #irms ." irm sie C" )istory D. ll o# the statements associated $ith this %estion are correct

Difficulty: Easy

52"  coordination pro*lem arises $henever there& " 's no +ash e%ili*ri%m in a game ." 's a %ni%e +ash e%ili*ri%m *%t it is not very desira*le C. re m%ltiple +ash e%ili*riam /" re no dominant strategies #or *oth players

Difficulty: Medium

53" hich o# the #ollo$ing is the maor means to signal good %ality o# goods *y #irms7 " ales ." dvertisement C. arrantiesHg%arantees /" .oth a and *

Difficulty: Medium

54" hich o# the #ollo$ing is not tr%e7 " n e:tensive #orm representation %s%ally provides more in#ormation than a normal #orm representation o# a game B.  normal #orm game is most %se#%l #or se%ential-move games C" 9he notion o# per#ect e%ili*ri%m is more %se#%l in analying e:tensive #orm games than normal #orm games /" 9he notion o# credi*le threats ma;es more sense in e:tensive #orm representations than in normal #orm representations o# a game

Difficulty: Hard

8-!8


55"  +ash e%ili*ri%m $ith a non-credi*le threat as a component is& "  per#ect e%ili*ri%m B. +ot a per#ect e%ili*ri%m C"  se%ential e%ili*ri%m /"  some$hat per#ect e%ili*ri%m

Difficulty: Medium

56" hich o# the #ollo$ing is a valid criti%e o# the %se o# game theory in economics7 " Bayo##s to players may *e di##ic%lt to meas%re ." Blayers may not have complete in#ormation a*o%t each otherEs payo##s C" Dame theory ass%mes rational players D. ll o# the statements associated $ith this %estion are correct

Difficulty: Hard

@se the #ollo$ing in#ormation to ans$er %estions 5-5!& 9here are t$o e:isting #irms in the mar;et #or comp%ter chips" irm  ;no$s ho$ to red%ce the prod%ction costs #or the chip and is considering $hether to adopt the innovation or not" 'nnovation inc%rs a #i:ed set-%p cost o# C, $hile increasing the reven%e" )o$ever, once the ne$ technology is adopted, another #irm, ., can adopt it $ith a smaller set-%p cost o# CH2" '#  innovates and . does not,  earns (20 in reven%e $hile . earns (0" '#  innovates and . does li;e$ise, *oth #irms earn (15 in reven%e" '# neither #irm innovates, *oth earn (5"

5" @nder $hat condition $ill irm . have an incentive to adopt i# irm  adopts the innovation7 " C I 30 B. C J 30 C" 10 I C I 0 /" 35 I C I 25

Difficulty: Hard

8-!!


58" @nder $hat condition $ill irm  innovate7 " C I 30 ." C J 30 C. 10 I C I 0 /" 35 I C I 25

Difficulty: Hard

5!" '# C K 15, $hich is the per#ect e%ili*ri%m o# the game7 "  innovates, . does not ."  innovates, . innovates C. +either #irm innovates /" +one o# the statements associated $ith this %estion are correct

Difficulty: Hard

60" Dame theory s%ggests that, in the a*sence o# patents, the privately motivated innovation decisions o# #irms might lead to& A. 9oo little innovation ." 9oo m%ch innovation C" 9he socially e##icient level o# innovation /" +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

61" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (5 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (15 million and the non advertising #irm $ill earn (1 million" hich o# the #ollo$ing is tr%e7 "  dominant strategy #or irm  is to advertise ."  dominant strategy #or irm . is to advertise C"  +ash e%ili*ri%m is #or *oth #irms to advertise D. ll o# the statements associated $ith this %estion are correct

Difficulty: Medium

8-100


62" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (5 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (15 million and the non advertising #irm $ill earn (1 million" hich o# the #ollo$ing is tr%e7 "  sec%re strategy #or irm  is to not advertise ."  sec%re strategy #or irm . is to not advertise C" irm  does not have a sec%re strategy D. +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

63" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (5 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (15 million and the non advertising #irm $ill earn (1 million" %ppose this game is repeated #or a #inite n%m*er o# times, *%t the players do not ;no$ the e:act date at $hich the game $ill end" 9he players can earn coll%sive pro#its as a +ash e%ili*ri%m to the repeated play o# the game i# the pro*a*ility the game terminates in any period is " 1 ." Dreater than one C. Close to ero /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

64" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (4 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (1 million and the non advertising #irm $ill earn (5 million" hich o# the #ollo$ing is tr%e7 "  dominant strategy #or irm  is to advertise ."  dominant strategy #or irm . is to advertise C"  +ash e%ili*ri%m is #or *oth #irms to advertise D. +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

8-101


65" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (4 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (1 million and the non advertising #irm $ill earn (5 million" hich o# the #ollo$ing is tr%e7 A.  sec%re strategy #or irm  is to not advertise ."  sec%re strategy #or irm . is to advertise C" irm  does not have a sec%re strategy /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

66" '# yo% advertise and yo%r rival advertises, yo% each $ill earn (4 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn (10 million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (1 million and the non advertising #irm $ill earn (5 million" %ppose this game is repeated #or a #inite n%m*er o# times, *%t the players do not ;no$ the e:act date at $hich the game $ill end" 9he players can earn pro#its o# (10 each period as a +ash e%ili*ri%m to a repeated play o# the game i# the pro*a*ility the game terminates at the end o# any period is " Close to 1 ." Close to 0 C" .et$een ero and one D. ll o# the statements associated $ith this %estion are correct

Difficulty: Medium

8-102


%estions 6, 68, and 6! are *ased on the #ollo$ing game, $here #irms one and t$o m%st independently decide $hether to charge high or lo$ prices"

6" hich o# the #ollo$ing are sec%re strategies #or players one and t$o, respectively7 A. )igh Brice, )igh Brice ." )igh Brice, >o$ Brice C" >o$ Brice, )igh Brice /" >o$ Brice, >o$ Brice

Difficulty: Medium

68" '# player one charges a )igh Brice $hen player t$o charges a >o$ Brice, then player t$o earns& " 10 ." 5 C. -5 /" 0

Difficulty: Medium

8-103


6!"  dominant strategy #or #irm one is A. )igh price ." >o$ price C" /i##erent #rom #irm oneEs sec%re strategy /" >o$ price and di##erent #rom #irm oneEs sec%re strategy

Difficulty: Medium

0" Consider the #ollo$ing innovation game" irm  m%st decide $hether or not to introd%ce a ne$ prod%ct" irm . m%st decide $hether or not to clone #irm Es prod%ct" '# #irm  introd%ces and . clones, then #irm  earns (1 and . earns (10" '#  introd%ces and . does not clone, then  earns (10 and . earns (2" '# #irm  does not introd%ce, *oth #irms earn pro#its o# 0" hich o# the #ollo$ing is tr%e" " 9he s%*game per#ect +ash e%ili*ri%m pro#its are (10,2 ." 't is not in Es interest to introd%ce C" irm  does not care i# . clones D. +one o# the statements associated $ith this %estion are correct

Difficulty: Hard

1" Consider the #ollo$ing innovation game" irm  m%st decide $hether or not to introd%ce a ne$ prod%ct" irm . m%st decide $hether or not to clone #irm Es prod%ct" '# #irm  introd%ces and . clones, then #irm  earns (1 and . earns (10" '#  introd%ces and . does not clone, then  earns (10 and . earns (2" '# #irm  does not introd%ce, *oth #irms earn pro#its o# 0" )o$ many +ash e%ili*ria are there #or this game" " 0 B. 1 C" 2 /" 0, *%t there are sec%re strategies

Difficulty: Hard

8-104


ns$er %estions 2-4 *ased on the #ollo$ing in#ormation #or a one-shot game&

2" hat are the dominant strategies #or irm  and irm . respectively7 " >o$ price, high price ." )igh price, lo$ price C" )igh price, high price D. +either #irm has a dominant strategy

Difficulty: Medium

3" hat are sec%re strategies #or #irm  and #irm . respectively7 A. >o$ price, lo$ price ." )igh price, lo$ price C" )igh price, high price /" +either #irm has a sec%re strategy

Difficulty: Easy

4" hat are the +ash e%ili*ri%m strategies #or this game7 " >o$ price, lo$ price ." )igh price, high price C. >o$ price, lo$ price and high price, high price /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

8-105


or %estions 5-, consider the #ollo$ing in#ormation #or a sim%ltaneo%s move game& '# yo% advertise and yo%r rival advertises, yo% each $ill earn (3 million in pro#its" '# neither o# yo% advertise, yo% $ill each earn ( million in pro#its" )o$ever, i# one o# yo% advertises and the other does not, the #irm that advertises $ill earn (10 million and the non advertising #irm $ill earn (1 million"

5" '# yo% and yo%r rival plan to *e in *%siness #or only one year, the +ash e%ili*ri%m is #or yo%r #irm A. nd yo%r rival to advertise ." nd yo%r rival not to advertise C" 9o advertise and yo%r rival not to advertise /" +ot to advertise and yo%r rival to advertise

Difficulty: Easy

6" '# yo% and yo%r rival plan to *e in *%siness #or 15 years, then the +ash e%ili*ri%m is #or " Fo% and yo%r rival to not advertise in any year B. Fo% and yo%r rival to advertise every year C" +either #irm to advertise in early years, *%t to advertise in later years /" =ach #irm to advertise in early years, *%t not advertise in later years

Difficulty: Medium

" '# yo% and yo%r rival plan to hand yo%r *%siness do$n to yo%r children, and this *e%est goes on #orever, then a +ash e%ili*ri%m $hen the interest rate is ero is #or " Fo%r #irm to never advertise ." Fo%r #irm to al$ays advertise $hen yo%r rival does provided that the interest rate is s%##iciently large C. =ach #irm to not advertise %ntil the rival does, and then to advertise #orever provided the interest rate is s%##iciently lo$ /" =ach #irm to advertise %ntil the rival does not advertise, and then not advertise #orever

Difficulty: Hard

8-106


8" hich o# the #ollo$ing is a correct statement a*o%t a +ash e%ili*ri%m in a t$o-player game7 " 9he oint payo##s o# the t$o players are highest compared to other strategy pairs ."  +ash e%ili*ri%m is al$ays %ni%e in real $orld pro*lems C. Diven another playerEs strategy, no player can improve her $el#are *y %nilaterally changing her strategy /" ll o# the statements associated $ith this %estion are correct

Difficulty: Easy

!" Dame theory is *est applied to analysis o# " Ber#ect competition B.
Difficulty: Easy

80" hen analying the *ehavior o# oligopolists, $hich o# the #ollo$ing is cr%cial #or the s%ccess o# game theoretic analysis7 " Bayo##s do not need to re#lect the tr%e payo##s o# the oligopolists, they %st need to *e greater than or e%al to ero ." ss%me that oligopolists al$ays move sim%ltaneo%sly C" /o not constr%ct the payo##s o# the oligopolists to *e interdependent, as the payo## o# one player %s%ally does not a##ect the payo## o# the other players D. Ma;e s%re the pro*lem yo% are considering is o# a one-shot or repeated nat%re, and yo% model it accordingly *eca%se the order in $hich players ma;e decisions is important

Difficulty: Medium

8-10


81" Management and a la*or %nion are *argaining over ho$ m%ch o# a (50 s%rpl%s to give to the %nion" 9he (50 is divisi*le %p to one cent" 9he players have one-shot to reach an agreement" Management has the a*ility to anno%nce $hat it $ants #irst, and then the la*or %nion can accept or reect the o##er" .oth players get ero i# the total amo%nts as;ed #or e:ceed (50" hich o# the #ollo$ing is a +ash e%ili*ri%m7 A. Management re%ests (50 and the la*or %nion accepts (0 ." Management re%ests (35 and the la*or %nion accepts (10 C" Management re%ests (20 and the la*or %nion accepts (20 /" Management re%ests (25 and the la*or %nion accepts (10

Difficulty: Hard

82" hich o# the #ollo$ing is a correct statement7 "  +ash e%ili*ri%m is al$ays per#ect B.  per#ect e%ili*ri%m is al$ays +ash C"  +ash e%ili*ri%m is al$ays per#ect in a m%ltistage game /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

83" 't is easier to s%stain tacit coll%sion in an in#initely repeated game i# A. 9he present val%e o# cheating is lo$er than coll%sion ." 9here are many players C" 9he interest rate is higher /" 9he present val%e o# cheating is lo$er than coll%sion and the interest rate is higher

Difficulty: Easy

84" irms $ill try to signal s%perior %ality o# their goods *y " Ma;ing sales in#ormation availa*le to the p%*lic ." dvertising C. 'ss%ing $arranties or g%arantees /" Ma;ing sales in#ormation availa*le to the p%*lic and advertising

Difficulty: Easy

8-108


85"  coordination pro*lem %s%ally occ%rs in sit%ations $here there is " +o +ash e%ili*ri%m in a game ."  %ni%e, *%t %ndesira*le +ash e%ili*ri%m C"  %ni%e sec%re strategies #or *oth players D. More than one +ash e%ili*ri%m

Difficulty: Medium

86" hich o# the #ollo$ing is not an important determinant o# coll%sion in pricing games7 " 9he n%m*er o# #irms in the ind%stry ." 9he p%nishment mechanisms that are in place C" 9he history o# the partic%lar mar;et D. +one o# the statements associated $ith this %estion are corrects

Difficulty: Easy

Ae#er to the #ollo$ing normal #orm game o# price competition #or %estions 8-8!"

8" %ppose the game is in#initely repeated, and the interest rate is 5G" .oth #irms agree to charge a high price, provided no player has charged in lo$ price in the past" '# *oth #irms stic; to this agreement, then the present val%e o# irm .Es payo##s are& " 105 ." 1!0 C. 210 /" 525

Difficulty: Medium

8-10!


88" %ppose that irm  deviates #rom a trigger strategy to s%pport a high price" hat is the present val%e o# Es payo## #rom cheating7 " 5 ." 20 C. 25 /" 35

Difficulty: Easy

8!" hat is the ma:im%m interest rate that can s%stain coll%sion7 A. 66"G ." 33G C" 25G /" 15G

Difficulty: Hard

Ae#er to the #ollo$ing normal #orm game o# price competition #or %estion !0"

8-110


!0" irms  m%st decide $hether or not to introd%ce a ne$ prod%ct" '# irm  introd%ces a ne$ prod%ct, irm . m%st decide $hether or not to clone the prod%ct" 9he payo## str%ct%re o# the game is depicted in the a*ove tree diagram" 9he s%*-game per#ect +ash e%ili*ri%m to this game is " irm  plays 'ntrod%ceL irm . plays Clone i# irm  plays 'ntrod%ce B. irm  plays /o +ot 'ntrod%ceL irm . plays Clone i# irm  plays 'ntrod%ce C" irm  plays 'ntrod%ceL irm . plays /o +ot Clone i# irm  plays 'ntrod%ce /" irm  plays /o +ot 'ntrod%ceL irm . plays /o +ot Clone i# irm  plays 'ntrod%ce

Difficulty: Medium

Ae#er to the #ollo$ing normal #orm game o# price competition #or %estions !1-!2"

!1" irm . is the inc%m*ent #acing potential entry #rom its rivalL irm " irm Es strategies consist o# =ntry, tay <%tN" irm .Es strategies are then hard i# entryL hard i# stay o%tL so#t i# entryL so#t i# stay o%tN" ind the s%*game +ash e%ili*ri%m to this game, i# one e:ists" " irm  plays tay <%tNL irm . plays )ard i# =ntryN ." irm  plays =ntryNL irm . plays )ard i# =ntryN C. irm  plays =ntryNL irm . plays o#t i# =ntryN /" 9here is no s%*game +ash e%ili*ri%m to this game

Difficulty: Medium

8-111


!2" irm . is the inc%m*ent #acing potential entry #rom its rivalL irm " irm Es strategies consist o# =ntry, tay <%tN" irm .Es strategies are then hard i# entryL hard i# stay o%tL so#t i# entryL so#t i# stay o%tN" ind the non-s%*game +ash e%ili*ri%m to this game, i# one e:ists" A. irm  plays tay <%tNL irm . plays )ard i# =ntryN ." irm  plays =ntryNL irm . plays )ard i# =ntryN C" irm  plays =ntryNL irm . plays o#t i# =ntryN /" 9here is no non-s%*game +ash e%ili*ri%m to this game

Difficulty: Hard

!3" hich o# the #ollo$ing conditions correctly descri*es a +ash e%ili*ri%m $hen t$o #irms are in the mar;et7 " π1s1O,s2O ≥ π1s1,s2O #or all s1 B. π1s1O,s2O ≥ π1s1,s2O #or all s1 and π2s1O,s2O ≥ π2s1O,s2 #or all s2 C" π1s1O,s2O ≥ π2s1,s2O #or all s1 and π2s1O,s2O ≥ π1s1O,s2 #or all s2 /" π1s1,s2O ≥ π2s1O,s2O #or all s1 and π2s1O,s2 ≥ π1s1O,s2O #or all s2

Difficulty: Medium

Ae#er to the #ollo$ing normal #orm game o# price competition #or %estions !4-!6"

8-112


!4" or $hat val%es o# : is strategy / strictly dominant #or irm .7 A. ll : I 450 ." ll : J 450 C" : K 450 /" : J 50

Difficulty: Medium

!5" or $hat val%es o# : is strategy  strictly dominant #or irm 7 " ll : I 450 B. ll : J 450 C" : K 450 /" : J 50

Difficulty: Medium

!6" or $hat val%es o# : is strategy ., / the only +ash e%ili*ri%m o# the game7 A. ll : I 450 ." ll : J 450 C" : K 450 /" : J 50

Difficulty: Medium

Ae#er to the #ollo$ing normal #orm game o# price competition #or %estions !-100"

8-113


!" hich o# the #ollo$ing represents irm Es #%ll strategy space7 " , CN B. , .N C" , C, , /, ., C, ., /N /" C, /N

Difficulty: Easy

!8" hich o# the #ollo$ing represents irm .Es #%ll strategy space7 " , CN ." , .N C" , C, , /, ., C, ., /N D. C, /N

Difficulty: Easy

!!" hich o# the #ollo$ing represents the set o# possi*le p%re strategy +ash e%ili*ri%m7 A. , CN ." , .N C" , C, , /, ., C, ., /N /" C, /N

Difficulty: Hard

100" hat are the p%re +ash e%ili*ri%m strategies #or this game7 " ., CN ." , C and ., /N C" , CN D. 9here is no p%re strategy +ash e%ili*ri%m to this game

Difficulty: Easy

8-114


Ae#er to the #ollo$ing normal #orm game o# *argaining game #or %estions 101-102"

101" %ppose that management and the %nion are *argaining over ho$ m%ch o# a (500 s%rpl%s to give to the %nion" 't is ass%med that the s%rpl%s can only *e split into (250 increments" %rthermore, negotiations are set %p s%ch that management and the %nion m%st sim%ltaneo%sly and independently $rite do$n the amo%nt o# s%rpl%s to allocate to the %nion" 9he payo## str%ct%re to this one-shot *argaining game is listed in the a*ove payo## matri:" ind the +ash e%ili*ri%mia to this game" " @nion $rite do$n (0 and Management $rite do$n (500 ." @nion $rite do$n (250 and Management $rite do$n (250 C" @nion $rite do$n (500 and Management $rite do$n (0 D. ll o# the statements associated $ith this %estion constit%te +ash e%ili*ria

Difficulty: Medium

8-115


102" %ppose that management and the %nion are *argaining over ho$ m%ch o# a (500 s%rpl%s to give to the %nion" 't is ass%med that the s%rpl%s can only *e split into (250 increments" %rthermore, negotiations are set %p s%ch that management and the %nion m%st sim%ltaneo%sly and independently $rite do$n the amo%nt o# s%rpl%s to allocate to the %nion" 9he payo## str%ct%re to this one-shot *argaining game is listed in the a*ove payo## matri:" 9he n%m*er o# ine##icient o%tcomes res%lting #rom the *argaining game is " 3 ." 5 C. 6 /" 8

Difficulty: Hard

8-116


Essay Questions

103" 'n a one-shot game, i# yo% advertise and yo%r rival advertises, yo% $ill each earn (5 million in pro#its" '# neither o# yo% advertise, yo%r rival $ill ma;e (4 million and yo% $ill ma;e (2 million" '# yo% advertise and yo%r rival does not, yo% $ill ma;e (10 million and yo%r rival $ill ma;e (3 million" '# yo%r rival advertises and yo% do not, yo% $ill ma;e (1 million and yo%r rival $ill ma;e (3 million" a" rite the a*ove game in normal #orm" *" /o yo% have a dominant strategy7 c" /oes yo%r rival have a dominant strategy7 d" hat is the +ash e%ili*ri%m #or the one-shot game7 e" )o$ m%ch $o%ld yo% *e $illing to *ri*e yo%r rival not to advertise7 a"

*" Fo%r dominant strategy is to advertise c" Fo%r rival does not have a dominant strategy d" 9he only +ash e%ili*ri%m is #or yo% to advertise and #or yo%r rival to advertise also e" Fo% are $illing to *ri*e yo%r rival not to advertise *y an amo%nt %p to (5 million" 9his is *eca%se $hen yo% *ri*e yo%r rival *y an amo%nt less than (5 million and i# yo%r rival really cooperates, then yo% can get (10 million gross pro#it" %*tracting the *ri*e, yo% still get an amo%nt o# net pro#it greater than $hat yo% other$ise get *y not *ri*ing" <# co%rse, this ignores legal considerations as $ell as the pro*lem o# ens%ring that yo%r rival does not cheat on the coll%sive agreement"

8-11


104" Fo% operate in a d%opoly in $hich yo% and a rival m%st sim%ltaneo%sly decide $hat price to advertise in the $ee;ly ne$spaper" '# yo% each charge a lo$ price, yo% each earn ero pro#its" '# yo% each charge a high price, yo% each earn pro#its o# (3" '# yo% charge di##erent prices, the one charging the higher price loses (5 and the one charging the lo$er price ma;es (5" a" ind the +ash e%ili*ri%m #or a one-shot version o# this game" *" +o$ s%ppose the game is in#initely repeated" '# the interest rate is 10 percent, can yo% do *etter than yo% co%ld in a one-shot play o# the game7 =:plain" c" =:plain ho$ history a##ects the a*ility o# #irms in this game to achieve an o%tcome s%perior to that o# the one-shot version o# the game" a" .oth players charging lo$ prices is a %ni%e +ash e%ili*ri%m #or a one-shot version o# the game"

*" 9he cooperative coll%sive o%tcome can *e s%stained in the in#initely repeated game $ith the #ollo$ing trigger strategy& Cooperate provided no player has ever cheated in the past" '# any player cheats, p%nish the player *y choosing the one-shot +ash e%ili*ri%m strategy #orever a#ter" 'n partic%lar, #or this game $e ;no$

9he le#t-hand side o# this e%ation represents the one-time gain o# *rea;ing the coll%sive agreement today" 9he right-hand-side represents the present val%e o# $hat is given %p in the #%t%re *y cheating today" ince the one-time gain is less than the present val%e o# $hat $o%ld *e given %p *y cheating, players #ind it in their interest to live %p to the agreement" c" .y de#inition, a trigger strategy stip%lates that each player %ses the history o# $hat its rival did to decide $hether it sho%ld cooperate or not" )ence, $henever one player cheats last period, the rival o# it sho%ld choose not to cooperate" 'n other $ords, history is very important"

8-118


105" Fo% are considering entering a mar;et serviced *y a monopolist" Fo% c%rrently earn (0 economic pro#its, $hile the monopolist earns (5" '# yo% enter the mar;et and the monopolist engages in a price $ar, yo% $ill lose (5 and the monopolist $ill earn (1" '# the monopolist doesnEt engage in a price $ar, yo% $ill each earn pro#its o# (2" a" rite o%t the e:tensive #orm o# the a*ove game" *" 9here are t$o +ash e%ili*ria #or the game" hat are they7 c" 's there a s%*game per#ect e%ili*ri%m7 =:plain" d" '# yo% $ere the potential entrant, $o%ld yo% enter7 =:plain $hy or $hy not" a" 9he e:tensive #orm is presented in ig%re 10-3 *elo$" ig%re 10-3

*"
8-11!


106"
10" 9he +C prohi*its schools that are ca%ght paying athletes #rom participating in *o$l games, and sometimes the p%nishment is even more severe" =:plain $hy schools donEt *rea; a$ay #rom the +C and #orm a leag%e in $hich athletes can legitimately *e paid" )int& @se hypothetical payo##s to constr%ct an ill%strative normal-#orm game in $hich the strategies are pay players and donEt pay players" 9hen analye the game in one-shot and in#initely repeated conte:ts"

9he a*ove hypothetical pay-o## matri: sho$s that, in a one-shot game, each school has an incentive to pay athletes, in an attempt to o*tain the *est athletes and *e ass%red o# *o$l reven%es" .%t $hen all schools do this, athletes e:tract virt%ally all o# the pro#its, and the schools are le#t $ith nothing" '# schools coll%de and agree not to pay athletes, each school earns higher pro#its, since less money goes to the athletes" 'n an in#initely repeated game, the schools threaten to p%nish those $ho pay athletes *y precl%ding them #rom participating in *o$l games long eno%gh to $ipe o%t any gains to cheating" 9his can s%pport the e%ili*ri%m $here schools do *etter than they $o%ld *y #orming an independent leag%e that permitted college athletes to *e paid larger s%ms"

8-120


108" .ased on yo%r ;no$ledge o# one-shot and repeated games, $o%ld yo% e:pect tipping *ehavior to di##er depending on $hether a person is eating in a hometo$n diner or in a resta%rant located in 9im*%;t%7 =:plain" =ating at the local diner is a repeated game& there is a high pro*a*ility that the $aiter at the local diner $ill serve yo% again and th%s can p%nish yo% ne:t time *y providing less service i# yo% donEt tip today" 'n contrast, in 9im*%;t%, yo% play a one-shot game and have a red%ced incentive to tip"

10!" ccording to a spo;esperson #or cereal ma;er Pellogg, … #or the past several years, o%r individ%al company gro$th has come o%t o# the other #ello$Es hide" ee "" cherer, 9he el#are =conomics o# Brod%ct Qariety& n pplication to the Aeady-to-=at Cereals 'nd%stry, Journal of Industrial Economics /ecem*er 1!! a" hat implications does this statement have #or the level o# advertising in the cereal ind%stry7 *" @sing the #ollo$ing hypothetical payo## matri:, e:plain ho$ trigger strategies can *e %sed to s%pport the coll%sive level o# advertising in an in#initely repeated game" or $hat val%es o# the interest can coll%sion *e s%stained7

a" 9he ne$s implies that advertising increases the demand #or a #irmEs prod%ct *y ta;ing c%stomers a$ay #rom other #irms in the ind%stry" 9he end res%lt in a one-shot game is that cereal #irms spend money on advertising, $ith no real change in their demand" *" 9he cooperative coll%sive o%tcome can *e s%stained in the in#initely repeated game $ith the #ollo$ing trigger strategy& /onEt advertise provided no player has ever cheated in the past" '# any player cheats, p%nish the player *y advertising #orever a#ter" 'n partic%lar, there is no incentive to cheat on this agreement i# " olving this #or i, $e see that #or any interest rate less than or e%al to 60 percent, there is no incentive to cheat"

8-121


110" Fo% are the manager o# a #irm that is *argaining $ith another #irm over ho$ m%ch to pay #or a ;ey inp%t yo%r #irm %ses in prod%ction" hich type o# *argaining $o%ld *e *etter #rom yo%r #irmEs point o# vie$, sim%ltaneo%s-move *argaining or ta;e-it-over-leave-it *argaining7 =:plain care#%lly" e%ential, ta;e-it or leave-it *argaining is pre#era*le #or the manager i# she has the #irst move advantage" 9his is *eca%se any proposal leaving a positive amo%nt o# money to la*or $ill *e accepta*le to the other #irm %nder this setting"

111" Fo% are the manager o# the .C novelty store, and yo%r only competitor is the RFS novelty store" Fo% are *oth trying to decide on $hich magic tric;s and party #avors to carry in stoc;" 9he prod%ct mi:es availa*le to *oth o# yo% are lo$, medi%m, and high in variety" Fo%r e:pected earnings in this mar;et are sho$n in the #ollo$ing ta*le"

a" ind the +ash e%ili*ri%m or e%ili*ria #or a sim%ltaneo%s-move, one-shot play o# this game" *" hat o%tcome $o%ld yo% e:pect in this one-shot game7 hy7 a" 9he only +ash e%ili*ri%m is that irm .C chooses medi%m $hile irm RFS chooses high" *" 'n a one-shot game, $e e:pect the t$o #irms to choose medi%m irm .C and high irm RFS to o*tain 225 and 1!5 %nits o# pro#it, respectively"

112" Fo% are the o$ner-operator o# the .etter Das tation in a small so%theastern to$n"
8-122


113" Fo% are the manager o# Copies re @s" 9he only other copy store in to$n, the Car*on Copy, recently got *ids on adding a color copier" Fo% m%st decide $hether to o*tain a color copier, *%t yo% can *ase decision on $hat yo%r rival does" '# yo%r rival adds a color copier and yo% donEt, yo% e:pect yo%r pro#its to #all *y (1,000 per $ee; and its pro#its to rise *y (1,500 per $ee;" Conversely, i# yo% add the color copier and yo%r rival does not, yo%r pro#its $ill increase *y (1,500 per $ee; and yo%r rivalEs pro#its $ill #all *y (1,000 per $ee;" )o$ever, i# yo% *oth do the same thing add color copies or not, yo% each e:pect pro#its to stay at their c%rrent level" ho$ the e:tensive #orm o# this game, and #ind the +ash e%ili*ri%m or e%ili*ria" 's there a s%*game per#ect e%ili*ri%m7 9he e:tensive #orm game is sho$n in ig%re 10-11" 9he s%*game per#ect +ash e%ili*ri%m is #or *oth o# yo% to add color copiers, to earn ero pro#its" ig%re 10-11

8-123


114" Fo% are the *argaining coordinator #or %n Car Man%#act%rers" t present yo% are renegotiating the la*or contract $ith the %nion representative" Fo% are *argaining over an e:pected 20 percent increase in earnings over the ne:t three-year contract period" Fo% are trying to decide $hether to o##er one-third, one-hal#, or all o# the increase in earnings to the %nion" 9he %nion r%les are s%ch that all contracts m%st *e voted on" 9he additional earnings are contingent on getting started on the ne$ contract ne:t $ee;" '# an agreement isnEt reached on the #irst ro%nd o# negotiations, the #irm $ill go o%t o# *%siness" 9he %nion representative tells yo% that i# yo% do not give the %nion all o# the additional pro#its, the %nion mem*ers $ill not vote #or the agreement" a" ho$ the e:tensive #orm o# this game" *" hat $ill yo% o##er the %nion7 hy7 a" ee ig%re 10-12" ig%re 10-12

*" 9he *argaining coordinator sho%ld o##er 33G o# the increase to the %nion" 9he %nion claims it $ill vote no i# yo% do so, *%t *y doing so, the #irm $ill go *an;r%pt and the mem*ers $ill lose their o*s" <*vio%sly, a 6" percent pay hi;e is pre#era*le #or the %nionL the @nionEs threat is not credi*le"

115" o%ld coll%sion *e more li;ely in the shoe ind%stry or in the airline ind%stry7 hy7 9he airline ind%stry seems to *e more li;ely to have coll%sion than the shoe ind%stry *eca%se the #ormer is more concentrated, sells more homogeneo%s prod%cts, has good records o# c%stomers, and has an easier opport%nity to o*serve and p%nish cheaters"

8-124


116" ccording to vario%s trade p%*lications, over 200,000 changes are made in air#ares each day" hy do yo% thin; this is the case7 .y randomiing prices it ma;es price shopping more costly to cons%mers, and red%ces the a*ility o# rivals to systematically %nderc%t their #ares"

11" 9$o e:ec%tives $ere arrested *y a%thorities #or em*eling money #rom their #irm" hort o# a con#ession, the prosec%tor only had eno%gh evidence to p%t them a$ay #or 10 years" Diven a con#ession, ho$ever, she $as certain to p%t them *ehind *ars #or li#e $itho%t parole, since they ;illed a la$ en#orcement o##icer $ho $as investigating the case" 9he prosec%tor p%t the t$o prisoners in separate rooms, and told them the #ollo$ing& '# yo% con#ess and yo%r partner does not, 'Ell give yo% a yearEs pro*ated sentence *%t p%t yo%r partner in the slammer #or li#e $itho%t parole" <# co%rse, i# yo%r partner con#esses and yo% donEt, yo%Ell get the li#e sentence $itho%t parole and heEll get one yearEs pro*ation" ' m%st $arn yo%, ho$ever, that i# yo% *oth con#ess 'Ell have eno%gh evidence to p%t yo% *oth a$ay #or li#e $itho%t parole" a" /o yo% thin; the prosec%torEs *argain $ill ind%ce the t$o e:ec%tives to con#ess7 =:plain" *" o%ld yo%r ans$er change i# the li#e sentence carried the possi*ility o# parole7 =:plain" a" Fes" Diven no parole, this is a one-shot game and the dominant strategy #or each e:ec%tive is to con#ess" +otice that *oth end %p $ith li#e sentences $itho%t parole" *" 't might" '# parole is a possi*ility, then the game is not a one shot game *%t a #initely repeated game $ith an %ncertain end-point the parole date" 'n this case, the e:ec%tives might *e a*le to s%ccess#%lly coll%de *y not con#essing -- provided that each e:ec%tive #ears that his o$n con#ession $ill res%lt in a s%##iciently harsh p%nishment i# the other e:ec%tive gets paroled"

8-125


118" 'n the early 1!!0s, there $as considera*le %ncertainty in the comp%ter ind%stry a*o%t $hether the dominant operating system #or #%t%re personal comp%ters $o%ld *e '.MEs <H2 or Microso#tEs indo$s" @ltimately, indo$s emerged as the dominant system despite the #act that several trade p%*lications vie$ed <H2 as the s%perior system" hy do yo% thin; this o%tcome prevailed7 9he pro*lem o# selecting an operating system can *e tho%ght o# as a coordination game, in $hich it is o#ten di##ic%lt to achieve a +ash e%ili*ri%m" Consider, #or e:ample, the decision *y personal comp%ter %sers to %se Microso#tEs indo$s operating system or '.MEs <H2" '# all other %sers decided to %se indo$s, then yo%r *est choice $o%ld also *e to %se indo$s, even i# yo% personally li;e the <H2 environment" 9his is *eca%se there $o%ld *e a m%ch greater selection o# so#t$are availa*le i# yo% %sed the same system that everyone else %ses"
8-126


11!" Fo% are the manager o# RFS 'nc" and m%st decide ho$ m%ch o%tp%t to prod%ce to ma:imie yo%r #irmEs pro#it" RFS and its rival, .C Corp", prod%ce a good that cons%mers vie$ as essentially identical" 9hese t$o #irms ma;e %p the entire ind%stry, so the mar;et price #or the good depends on the total amo%nt prod%ced *y the t$o #irms"  s%rvey reveals that the mar;et price o# the prod%ct depends on total mar;et o%tp%t as #ollo$s&

RFS and .C each %se la*or, materials, and machines to prod%ce o%tp%t" RFS p%rchases la*or and materials on an as-needed *asisL their machines $ere p%rchased three years ago and are *eing depreciated according to the straight-line method" RFSEs acco%nting department has provided the #ollo$ing data a*o%t its %nit prod%ction costs&

Aeports #rom ind%stry e:perts s%ggest that .CEs cost str%ct%re is similar to RFSEs cost str%ct%re and that technological constraints re%ire each #irm to prod%ce either 100 %nits or 200 %nits o# o%tp%t" a" .rie#ly e:plain $hich costs are relevant #or yo%r decision, and $hy" *" rite this game in normal #orm" c" )o$ many %nits sho%ld RFS prod%ce& 100 %nits or 200 %nits7

8-12


a" /irect la*or and direct materials, since they are varia*le costs" /epreciation is a #i:ed or s%n; cost, and is there#ore irrelevant to the decision the #irmEs #i:ed costs are (200, since (200H100 K (2 (200H200 K (1" 9hese later n%m*ers are the ones reported in the ta*le" *" 9he payo## matri: normal #orm *elo$ sho$s the relevant contri*%tions to overall pro#its the s%n; costs are irrelevant, remem*erT #or alternative levels o# o%tp%t *y the t$o #irms" 9he ;ey is to note that i# each #irm prod%ces 100 %nits, total mar;et o%tp%t is 200 %nits and the price is (6" RFSEs contri*%tions in this case are (6 - (5 : 100 K (100" '# one #irm prod%ces 100 %nits and the other #irm prod%ces 200 %nits, the mar;et price is (5" 'n this case, each #irms contri*%tions are ero the price e%als relevant %nit costs o# (5" '# *oth #irms prod%ce 200 %nits, the mar;et price is (4, and the contri*%tions o# each #irm are (4 - 5 : 200 K ( - 200"

c" 9he dominant strategy #or RFS is to prod%ce 100 %nits -- regardless o# $hat .C does, RFS is *etter o## prod%cing 100 %nits" 'mportantly, this is tr%e regardless o# $hether the game is sim%ltaneo%s move or se%ential move" 9he same is tr%e #or .C" 9h%s, i# RFS plays its dominant strategy it $ill contri*%te (100 to$ards itEs #i:ed costs o# (200" ny other strategy leads to lo$er contri*%tions and even greater losses"

8-128


120" 9$o #irms prod%ce identical prod%cts at ero cost, and they compete *y setting prices" '# each #irm charges a lo$ price, the *oth #irms earn pro#its o# ero" '# each #irm charges a high price, then each #irm earns pro#its o# (30" i# one #irm charges a high price and the other #irm charges a lo$ price, the #irm that charges the lo$est price earns pro#its o# (50 and the #irm charging the highest price earns pro#its o# ero" a" hich oligopoly model *est descri*es this sit%ation7 *" rite this game in normal #orm" c" %ppose the game is in#initely repeated" Can the players s%stain the coll%sive o%tcome as a +ash e%ili*ri%m i# the interest rate i# 50 percent7 =:plain" a" 9he .ertrand model Co%rnot and tac;el*erg are models o# %antity competition, and $eey ass%mes di##erentiated prod%cts" *"

c" '# it is possi*le to monitor the actions o# rivals and ignoring antitr%st considerations, the coll%sive o%tcome can *e s%stained in the in#initely repeated game $ith the #ollo$ing trigger strategy& Charge a high price provided no player has ever charged a lo$ price" '# any player charges a lo$ price, Up%nishE the player *y charging a lo$ price #orever a#ter" 9here is no incentive to cheat on this agreement since

"

8-12!


121" %ppose the mar;et #or comp%ter chips is dominated *y t$o #irms& 'ntel and M/" 'ntel has discovered ho$ to ma;e s%perior chips and is considering $hether or not to adopt the ne$ technology" doption $o%ld entail a #i:ed set%p cost o# C *%t $o%ld increase reven%es" )o$ever, i# 'ntel adopts the ne$ technology, M/ can easily copy it at a lo$er set%p cost o# CH2" '# 'ntel adopts and M/ does not, 'ntel $o%ld earn (20 in revenues $hile M/ $o%ld earn (0" '# 'ntel adopts and M/ does li;e$ise, each #irm $ill earn (15 in revenues" '# 'ntel does not adopt the ne$ technology, it $ill earn (5 and M/ $ill earn (2" a" rite this game in e:tensive #orm" *" @nder $hat conditions i"e", #or $hat val%es o# C does M/ have an incentive to adopt the ne$ technology i# 'ntel introd%ces it7 c" '# C K 12, sho%ld 'ntel adopt the ne$ technology7 =:plain" a" ig%re 10-1!

*" M/Es payo## #rom adopting m%st e:ceed its payo## #rom not adopting" 9his is tr%e i# 15 CH2 I 0" olving #or C $e #ind that M/ has an incentive to adopt i# 'ntel adopts $henever C J 30" c" +o" hen C K 12, M/Es *est strategy is to adopt i# 'ntel dopts, $hich means 'ntel $o%ld earn only 3 *y adopting" .y not adopting, 'ntel can earn a payo## o# 5L 'ntelEs *est option is not to adopt" 9his is the only +ash e%ili*ri%m, and it is also a s%*game per#ect +ash e%ili*ri%m"

8-130


122" %ppose Bhilips and 9oshi*a are the #irst companies to introd%ce digital versatile dis; /Q/ machines to the mar;et" t%dies *y the #irms s%ggest that cons%mers $ho p%rchase cons%mer electronics are very *rand-loyal" 9o capt%re #%t%re loyalties, each #irm $ill attempt to ma:imie its initial mar;et share, #or one time only, *y setting prices" n economist has estimated the initial mar;et share o# each #irm %nder di##erent pricing scenarios" )er res%lts are capt%red in the #ollo$ing payo## matri:"

a" Diven this scenario, i# yo% $ere in charge o# pricing at Bhilips, $hat price $o%ld yo% charge7 =:plain" *" hat mar;et share $o%ld yo% anticipate as a res%lt o# yo%r pricing strategy7 =:plain" a" +ote that 9oshi*aEs dominant strategy is to charge a price o# (250" nticipating this, Bhilips sho%ld li;e$ise charge a price o# (250" 9his is the only +ash e%ili*ri%m to the game" *" Fo% sho%ld anticipate a mar;et share o# 60 percent"

8-131


Chapter 11 ricing !trategies "or #irms $ith Mar%et o$er Multiple Choice Questions

1" Fo% are the manager o# a Mom and Bop store that can *%y mil; #rom a s%pplier at (3"00 per gallon" '# yo% *elieve the elasticity o# demand #or mil; *y c%stomers at yo%r store is -4, then yo%r pro#it-ma:imiing price is " (2"00 ." (2"50 C. (4"00 /" (5"00

Difficulty: Medium

2" Fo% are the manager o# a gas station and yo%r goal is to ma:imie pro#its" .ased on yo%r past e:perience, the elasticity o# demand *y 9e:ans #or a car $ash is -4, $hile the elasticity o# demand *y non-9e:ans #or a car $ash is -6" '# yo% charge 9e:ans (20 #or a car $ash, ho$ m%ch sho%ld yo% charge a man $ith <;lahoma license plates #or a car $ash7 " (1"50 ." (15"00 C. (18"00 /" (20"00

Difficulty: Hard

3" hich o# the #ollo$ing is tr%e #or per#ect competition *%t not tr%e #or monopolistic competition and monopoly7 " MC K MA B. B K MC C" Bositive long r%n pro#its /" B K MC and positive long r%n pro#its

Difficulty: Easy

8-132


4"  monopoly prod%cing a chip at a marginal cost o# (6 per %nit #aces a demand elasticity o# -2"5" hich price sho%ld it charge to optimie it pro#its7 " (6 per %nit ." (8 per %nit C. (10 per %nit /" (12 per %nit

Difficulty: Medium

5"  monopoly prod%ces $idgets at a marginal cost o# (10 per %nit and ero #i:ed costs" 't #aces an inverse demand #%nction given *y B K 50 - " hich o# the #ollo$ing is the marginal reven%e #%nction #or the #irm7 " MA K 60 - 2 ." MA K 50 -  C" MA K 100 -  D. MA K 50 - 2

Difficulty: Easy

6"  monopoly prod%ces $idgets at a marginal cost o# (10 per %nit and ero #i:ed costs" 't #aces an inverse demand #%nction given *y B K 50 - " 9he monopoly price is& A. (30 ." (20 C" (10 /" (40

Difficulty: Medium

"  monopoly prod%ces $idgets at a marginal cost o# (10 per %nit and ero #i:ed costs" 't #aces an inverse demand #%nction given *y B K 50 - " 9he demand elasticity o# a $idget at the monopoly price and %antity is& A. -1"5 ." -2 C" -2"5 /" 2

Difficulty: Medium

8-133


8"  monopoly prod%ces $idgets at a marginal cost o# (10 per %nit and ero #i:ed costs" 't #aces an inverse demand #%nction given *y B K 50 - " hat are the pro#its o# the monopoly in e%ili*ri%m7 " (300 B. (400 C" (500 /" (600

Difficulty: Hard

!"  monopoly prod%ces $idgets at a marginal cost o# (10 per %nit and ero #i:ed costs" 't #aces an inverse demand #%nction given *y B K 50 - " %ppose #i:ed costs rise to (400" hat happens in the mar;et7 " 9he #irm $ill raise the price ." 9he #irm $ill sh%t do$n immediately C. 9he #irm contin%es to prod%ce the same o%tp%t and charge the same price /" 9he #irm $ill red%ce its o%tp%t and raise price

Difficulty: Hard

10" hich o# the #ollo$ing is not a condition #or a #irm to engage in price discrimination7 " Cons%mers are partitioned into t$o or more types, $ith one type having a more elastic demand than the other ." 9he #irm has a means o# identi#ying cons%mer types C. 9he cons%mers are ass%red to *e sincere in telling their tr%e nat%res /" 9here is no resale mar;et #or the good

Difficulty: Easy

8-134


11" %ppose B K 20 - 2 is the mar;et demand #%nction #or a local monopoly" 9he marginal cost is 2" 9he local monopoly tries to ma:imie its pro#its *y e%ating MC K MA and charging a %ni#orm price" hat $ill *e the e%ili*ri%m price and o%tp%t7 " (6"33, 3"33 %nits ." (6"33, 5 %nits C. (13"33, 3"33 %nits /" (10, 5 %nits

Difficulty: Easy

12" %ppose B K 20 - 2 is the mar;et demand #%nction #or a local monopoly" 9he marginal cost is 2" 9he #irm c%rrently %ses a standard pricing strategy" hich o# the #ollo$ing $ill allo$ the #irm to enhance the pro#its7 A. =ngage in t$o-part pricing ." =ngage in commodity *%ndling C" =ngage in randomied pricing /" =ngage in t$o-part pricing and engage in commodity *%ndling

Difficulty: Medium

13" %ppose B K 20 - 2 is the mar;et demand #%nction #or a local monopoly" 9he marginal cost is 2" '# #i:ed costs are ero and the #irm engages in t$o-part pricing, the most pro#its the #irm $ill earn is& " (5 ." (10 C. (25 /" (50

Difficulty: Hard

8-135


14" Cinemas sometimes give senior citiens disco%nts" hat is the possi*le privately motivated p%rpose #or them to do so7 " B%rely *eca%se entreprene%rs are *enevolent B. enior citiens have a more elastic demand #or movies than ordinary citiens C" enior citiens lac; recreational activities /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

15" hich o# the #ollo$ing pricing strategies does not %s%ally enhance the pro#its o# #irms $ith mar;et po$er7 " Brice matching ." Cross-s%*sidies C" 9$o-part pricing D. Marginal cost pricing

Difficulty: Medium

16" hich o# the #ollo$ing statements is tr%e7 " 9he more elastic the demand, the higher is the pro#it-ma:imiing mar;%p B. 9he more elastic the demand, the lo$er is the pro#it-ma:imiing mar;%p C" 9he higher the marginal cost, the lo$er the pro#it-ma:imiing price /" 9he higher the average cost, the lo$er the pro#it-ma:imiing price

Difficulty: Easy

1" 'n a Co%rnot oligopoly $ith +-#irms and identical marginal costs, the relationship *et$een the price elasticity o# mar;et demand and that o# the #irm is& " =M K = ." =M K += C. =M K =H+ /" +o deterministic relationship

Difficulty: Easy

8-136


18"  ne$ #irm s%ccess#%lly enters a three-#irm Co%rnot oligopoly $itho%t changing the demand and cost str%ct%res" 9he ne$ price *ecomes& " 5 percent o# the srcinal price ." 50 percent o# the srcinal price C" 9he same as the srcinal price D. @n;no$n #or lac; o# other in#ormation

Difficulty: Hard

1!" 9he idea o# charging t$o di##erent gro%ps o# cons%mers t$o di##erent prices is practiced in& A. Brice discrimination ." 9$o-part pricing C" Brice matching /" +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

20"
Difficulty: Easy

21" /%ring spring *rea;, st%dents have an elasticity o# demand #or a trip to lorida o# -3" )o$ m%ch sho%ld an airline charge st%dents #or a tic;et i# the price it charges the general p%*lic is (3607 ss%me the general p%*lic have an elasticity o# -2" " (240 ." (250 C" (260 D. (20

Difficulty: Medium

8-13


22"  local video store estimates their average c%stomerEs demand per year is  K  - 2B, and ;no$s the marginal cost o# each rental is (0"5" )o$ m%ch sho%ld the store charge #or an ann%al mem*ership in order to e:tract the entire cons%mer s%rpl%s via an optimal t$o-part pricing strategy7 A. (! ." (10 C" (11 /" (12

Difficulty: Hard

23"  local video store estimates their average c%stomerEs demand per year is  K  - 2B, and ;no$s the marginal cost o# each rental is (0"5" )o$ m%ch sho%ld the store charge #or each rental i# it engages in optimal t$o-part pricing7 " (0"35 B. (0"5 C" (0" /" (1"0

Difficulty: Easy

24"  local video store estimates their average c%stomerEs demand per year is  K  - 2B, and ;no$s the marginal cost o# each rental is (0"5" hat is the ann%al pro#it that the video store e:pects to ma;e on an average c%stomer i# it engages in optimal t$o-part pricing7 " (6 ." ( C" (8 D. (!

Difficulty: Hard

8-138


25" '# yo%r demand #or renting videos is  K 5 - 2B, sho%ld yo% p%rchase the ann%al mem*ership #rom a video store that charges (0"5 per rental, pl%s an ann%al mem*ership #ee o# (127 " /e#initely yes B. /e#initely no C" Bro*a*ly yes /" Cannot *e decided

Difficulty: Hard

26" hat price sho%ld a #irm charge #or a pac;age o# t$o shirts given a marginal cost o# (2 and an inverse demand #%nction B K 6 - 2 *y the representative cons%mer7 " (2 ." (6 C. (8 /" (10

Difficulty: Hard

2"  .road$ay theater sells $ee;day sho$ tic;ets at a lo$er price than #or a $ee;end sho$" 9his is an e:ample o#& " Brice discrimination ." Bea;-load pricing C. Brice discrimination or pea;-load pricing /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

28"  camp%s a%ditori%m sells tic;ets at hal# price to st%dents d%ring the last 30-min%tes *e#ore a concert starts" 9his is an e:ample o#& " Brice discrimination ." Bea;-load pricing C. Brice discrimination or pea;-load pricing /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

8-13!


2!"  necessary cost-side condition #or a #irm to implement a cross s%*sidiation pricing strategy is& " =conomies o# scale B. =conomies o# scope C" Constant marginal cost /" >imited capacity

Difficulty: Easy

30" 9he special cost str%ct%re that is necessary #or a #irm to adopt a pea;-load pricing policy is7 " =conomies o# scale ." =conomies o# scope C" Constant marginal cost D. >imited capacity

Difficulty: Easy

31" 9he special demand str%ct%re that ind%ces a #irm to %se a cross s%*sidiation strategy is& " Ber#ect s%*stit%tion among prod%cts ." 'mper#ect s%*stit%tion among prod%cts C" 'ndependent demand #or prod%cts D. 'nterdependent demand #or prod%cts

Difficulty: Easy

32" no$pea; ;i Aesort o##ers a price #or a li#t tic;et that is *arely over its marginal cost, *%t the high e%ipment rental #ee ;eeps generating *ig pro#its" hich pricing strategy is the management %sing7 " Brice discrimination ." 9$o-part pricing C" Commodity *%ndling D. Cross s%*sidiation

Difficulty: Easy

8-140


33" hich o# the #ollo$ing strategies $ill most li;ely not enhance pro#its in a .ertrand oligopoly7 A. 9$o-part pricing ." Brice matching C" Aandomied pricing /" .rand loyalty

Difficulty: Medium

34" irms that %se a price matching strategy attempt to ;eep price at& " Marginal cost ." 9he oligopoly price C. 9he monopoly price /" 9he oligopoly price or the monopoly price

Difficulty: Medium

35" Brice matching strategies may #ail to enhance pro#its $hen& " irms cannot prevent c%stomerEs #rom deceptive claims ." irms have di##erent marginal costs C. irms cannot prevent c%stomers #rom deceptive claims or #irms have di##erent marginal costs /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

36" hich o# the #ollo$ing statements a*o%t a price matching strategy is incorrect7 " 't may *e applied in sit%ations *esides .ertrand oligopoly B. 't re%ires that the #irms can monitor their rivalEs prices C" 't red%ces the incentive #or a rival #irm to initiate a price $ar /" 't only g%arantees to match prices that are advertised p%*licly

Difficulty: Hard

8-141


3" hich o# the #ollo$ing pricing policies compensate c%stomers i# the #irm #ails to provide the *est price in the mar;et7 " Brice matching B. .eat-or-pay C" .rand loyalty /" Aandomied pricing

Difficulty: Easy

38" hich gro%p o# policies aims at disco%raging rivals to enter a price $ar7 A. Brice matching, *eat-or-pay, and randomied pricing ." Brice matching, *rand loyalty, and commodity *%ndling C" Aandomied pricing, price discrimination, and cross s%*sidiation /" >oad-pea; pricing, t$o-part pricing, and price matching

Difficulty: Medium

3!" hich gro%p o# policies aims at e:tracting all cons%mer s%rpl%s7 " Brice discrimination and pea; load pricing ." Cross s%*sidiation and *rand loyalty C" Brice matching and randomied pricing D. 9$o-part pricing and commodity *%ndling

Difficulty: Medium

40" .rand loyalty can *e enhanced thro%gh& A. n advertising campaign ."  price $ar C" +either an advertising campaign nor a price $ar /" n advertising campaign and a price $ar

Difficulty: Easy

8-142


41" '# a prod%ct is perceived *y cons%mers as homogeneo%s, $hich o# the #ollo$ing strategies $ill $or; to ind%ce *rand loyalty7 " 'ntensive advertising campaign ." Brice $ars $ith competitors C. re%ent *%yer re*ate programs /" +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

42" 9he p%rpose o# randomied pricing is to red%ce& " Cons%mer price in#ormation only ." Competitor price in#ormation only C. .oth c%stomer and competitor in#ormation a*o%t price /" 9he #irmEs pricing in#le:i*ility

Difficulty: Medium

43" '# a monopolist claims his pro#it-ma:imiing mar;%p #actor is 3, $hat is the corresponding price elasticity o# demand7 A. -1"5 ." -2"0 C" -2"5 /" -3"0

Difficulty: Medium

44" '# the pro#it-ma:imiing mar;%p #actor in a 3-#irm Co%rnot oligopoly is -2, $hat is the corresponding mar;et elasticity o# demand7 " -1H2 B. -2H3 C" -1"0 /" -2"0

Difficulty: Hard

8-143


45"  #irm $ith mar;et po$er has an individ%al cons%mer demand o#  K 20 - 4B and costs o# C K 4" hat is the optimal amo%nt o# this prod%ct to pac;age in a single *loc;7 " 2 ." 3 C. 4 /" 5

Difficulty: Hard

46"  #irm $ith mar;et po$er has an individ%al cons%mer demand o#  K 20 - 4B and costs o# C K 4" hat is optimal price to charge #or a *loc; o# 20 %nits7 " (18 ." (36 C" (2 D. (!0

Difficulty: Medium

4"  #irm has capacity limitations and charges (30 #or their service d%ring daily pea; times" '# the mar;et demand elasticity drops #rom -3 d%ring pea; times to -5 at o## pea; times, ho$ m%ch sho%ld the #irm charge to earn the ma:im%m pro#it d%ring o## pea; times7 " (20 ." (21 C" (24 D. +ot eno%gh in#ormation to determine

Difficulty: Medium

48" hich o# the #ollo$ing pricing policies enhances pro#its *y creating *rand-loyal cons%mers7 A. re%ent #lyer programs ." .eat-or-pay strategies C" 9rigger strategies /" re%ent #lyer programs and *eat-or-pay strategies

Difficulty: Easy

8-144


4!" %ppose t$o types o# cons%mers *%y s%its" Cons%mers o# type  $ill pay (100 #or a coat, and (50 #or pants" Cons%mers o# type . $ill pay (5 #or a coat, and (5 #or pants" 9he #irm selling s%its #aces no competition and has a marginal cost o# ero" '# the #irm can identi#y each cons%mer type and can price discriminate, $hat is the optimal price #or a pair o# pants7 " Charge *oth types (150 ." Charge *oth types (5 C. Charge type  cons%mers (50, and type . cons%mers (5 /" Charge type  cons%mers (50, and type . cons%mers (50

Difficulty: Medium

50"  monopolist claims his pro#it-ma:imiing mar;%p #actor is 10" hat is the price elasticity o# demand #or the #irmEs prod%ct7 " -1"5 ." -2"0 C" -2"5 D. +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

51" '# the pro#it-ma:imiing mar;%p #actor in a 10-#irm Co%rnot oligopoly is -2, $hat is the corresponding mar;et elasticity o# demand7 " -1"0 ." -1"2 C" -2"0 D. +one o# the statements associated $ith this %estion are correct

Difficulty: Hard

8-145


52" 9he average cons%mer at a #irm $ith mar;et po$er has an inverse demand #%nction o# B K 10 - " 9he #irmEs cost #%nction is C K 2" '# the #irm engages in t$o part pricing, $hat is the optimal #i:ed #ee to charge each cons%mer7 " (2 B. (32 C" (64 /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

53" 9he average cons%mer at a #irm $ith mar;et po$er has an inverse demand #%nction o# B K 10 - " 9he #irmEs cost #%nction is C K 2" '# the #irm engages in t$o-part pricing, $hat is the optimal price to charge a cons%mer #or each %nit p%rchased7 " (0 ." (1 C" (4 D. +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

54" 9he average cons%mer at a #irm $ith mar;et po$er has an inverse demand #%nction o# B K 10 - " 9he #irmEs cost #%nction is C K 2" '# the #irm engages in optimal t$o-part pricing, it $ill earn pro#its o# " (2 B. (32 C" (64 /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

8-146


55" %ppose t$o types o# cons%mers *%y s%its" Cons%mers o# type  $ill pay (100 #or a coat, and (50 #or pants" Cons%mers o# type . $ill pay (5 #or a coat, and (5 #or pants" 9he #irm selling s%its #aces no competition and has a marginal cost o# ero" '# the #irm charges (100 #or a s%it $hich incl%des *oth pants and a coat, the #irm $ill sell a s%it to& " 9ype  cons%mers ." 9ype . cons%mers C. 9ype  cons%mers and type . cons%mers /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

56" %ppose t$o types o# cons%mers *%y s%its" Cons%mers o# type  $ill pay (100 #or a coat, and (50 #or pants" Cons%mers o# type . $ill pay (5 #or a coat, and (5 #or pants" 9he #irm selling s%its #aces no competition and has a marginal cost o# ero" '# the #irm charges (5 #or pants and (5 #or a coat, the #irm $ill sell a coat to& " 9ype  cons%mers ." 9ype . cons%mers C. 9ype  cons%mers and type . cons%mers /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

5" %ppose t$o types o# cons%mers *%y s%its" Cons%mers o# type  $ill pay (100 #or a coat, and (50 #or pants" Cons%mers o# type . $ill pay (5 #or a coat, and (5 #or pants" 9he #irm selling s%its #aces no competition and has a marginal cost o# ero" '# the #irm sells coats and pants #or (25 each, *%t o##ers a *%ndle containing *oth a coat and pants #or (150, ho$ many *%ndles $ill the #irm sell7 A. 0 ." 1 C" 2 /" 'ns%##icient in#ormation

Difficulty: Medium

8-14


58" %ppose t$o types o# cons%mers *%y s%its" Cons%mers o# type  $ill pay (100 #or a coat, and (50 #or pants" Cons%mers o# type . $ill pay (5 #or a coat, and (5 #or pants" 9he #irm selling s%its #aces no competition and has a marginal cost o# ero" 9he optimal commodity *%ndling strategy is& A. Charge (150 #or a s%it ." Charge (5 #or a s%it C" Charge (100 #or a s%it /" Charge (125 #or a s%it

Difficulty: Medium

5!" hen t$o or more divisions mar; %p prices in e:cess o# marginal cost, A. /o%*le marginaliation occ%rs ." 9$o-part pricing occ%rs C" econd-degree price discrimination occ%rs /" +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

60" 9o circ%mvent the pro*lem o# do%*le marginaliation& A. 9rans#er prices m%st *e set that ma:imie the overall val%e o# the #irm rather than the pro#its o# the %pstream division ." irms sho%ld engage in t$o-part pricing, %nless it is possi*le to engage in either #irst or second degree price discrimination C" irms sho%ld vertically integrate /" +one o# the statements associated $ith this %estion are correct

Difficulty: Medium

8-148


61" irst-degree price discrimination "
Difficulty: Easy

62" econd-degree price discrimination A. 's the practice o# posting a discrete sched%le o# declining prices #or di##erent ranges o# %antities ." =liminates the pro*lem o# do%*le marginaliation C" Aes%lts in trans#er pricing /" +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

63" Fo% are the manager o# a Mom and Bop store that can *%y mil; #rom a s%pplier at (2"00 per gallon" '# yo% *elieve the elasticity o# demand #or mil; *y c%stomers at yo%r store is -3, then yo%r pro#it-ma:imiing price is " (1"33 ." (2"5 C. (3"00 /" (4"50

Difficulty: Easy

@se the #ollo$ing in#ormation #or %estions 64-66"  monopoly prod%ces $idgets at a marginal cost o# (8 per %nit and ero #i:ed costs" 't #aces an inverse demand #%nction given *y B K 38 - "

8-14!


64" 9he monopoly price is& " (30 B. (23 C" (15 /" (8

Difficulty: Easy

65" hat are the pro#its o# the monopoly in e%ili*ri%m7 A. (225 ." (120 C" (345 /" +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

66" %ppose #i:ed costs rise to (200" hat $ill happen in the mar;et7 " 9he #irm $ill decrease its o%tp%t and lo$er its price ." 9he #irm $ill increase the price C" 9he #irm $ill sh%t do$n immediately D. 9he #irm contin%es to prod%ce the same o%tp%t and charge the same price

Difficulty: Medium

6" hich o# the #ollo$ing pricing strategies does not %s%ally enhance the pro#its o# #irms $ith mar;et po$er7 A. Marginal cost pricing ." Brice discrimination C" .loc; pricing /" Commodity *%ndling

Difficulty: Easy

8-150


68" hich o# the #ollo$ing is a correct statement7 " 9he lo$er the marginal cost, the higher the pro#it-ma:imiing price ." 9he lo$er the average cost, the higher the pro#it-ma:imiing price C" 9he more inelastic the demand, the higher is the pro#it-ma:imiing mar;%p D. 9he more elastic the demand, the higher is the pro#it-ma:imiing mar;%p

Difficulty: Hard

6!" 9he idea o# charging t$o di##erent gro%ps o# cons%mers t$o di##erent prices is practiced in& " 9$o-part pricing ." Brice matching C" Commodity *%ndling D. +one o# the statements associated $ith this %estion are correct

Difficulty: Easy

0" /%ring spring *rea;, st%dents have an elasticity o# demand #or a trip to Canc%n, Me:ico o# -4" )o$ m%ch sho%ld an airline charge st%dents #or a tic;et i# the price it charges the general p%*lic is (4207 ss%me the general p%*lic has an elasticity o# -2" " (210 B. (280 C" (160 /" (105

Difficulty: Hard

1"  local video store estimates their average c%stomerEs demand per year is  K 20 - 4B, and ;no$s the marginal cost o# each rental is (1"00" )o$ m%ch sho%ld the store charge #or an ann%al mem*ership in order to e:tract the entire cons%mer s%rpl%s via an optimal t$o-part pricing strategy7 " (20 B. (32 C" (40 /" (64

Difficulty: Medium

8-151


2" hat price sho%ld a #irm charge #or a pac;age o# t$o shirts given a marginal cost o# (4 and an inverse demand #%nction B K 8 - 2 *y the representative cons%mer7 " (4 ." (8 C. (12 /" (16

Difficulty: Easy

3" hich o# the #ollo$ing pricing policies does not e:tract the entire cons%mer s%rpl%s #rom the mar;et7 " irst-degree price discrimination B. Bea; load pricing C" 9$o-part pricing /" .loc; pricing

Difficulty: Easy

4" irms $ill o#ten implement randomied pricing in an attempt to red%ce "
Difficulty: Medium

5" 9o avoid the pro*lem o# do%*le marginaliation A. 9rans#er prices m%st *e set that ma:imie the overall val%e o# the #irm rather than the pro#its o# the %pstream division ." irms sho%ld p%t more emphasis on vertical integration C" irms sho%ld engage in t$o-part pricing /" irms sho%ld engage in commodity *%ndling, %nless it is possi*le to engage in either #irst or second degree price discrimination

Difficulty: Medium

8-152


6" 'n a Co%rnot oligopoly $ith +-#irms and identical marginal costs, the relationship *et$een the price elasticity o# demand #or the #orm and that o# the mar;et is " = K =M B. = K +=M C" = K =MH+ /" = K +H=M

Difficulty: Easy

" hich o# the #ollo$ing is a tr%e statement a*o%t the process o# cross-s%*sidiation, given a #irm is selling t$o prod%cts7 " 9he t$o prod%cts can not have interdependent demand #%nctions ." 9he #irm $ill sell *oth o# its prod%cts at prices set a*ove costs C. 9he #irm needs cost complementarities in the prod%ction o# the t$o goods /" 9he #irm $ill sell *oth o# its prod%cts at prices set a*ove costs and the #irm needs cost complementarities in the prod%ction o# the t$o goods

Difficulty: Medium

8" hich o# the #ollo$ing statements is tr%e regarding a simple pricing r%le #or monopoly and monopolistic competition7 " BV= H 1 W = X K MC ." B K V1 W = H =XMC C. BV1 W = H =X K MC /" ll o# the statements associated $ith this %estion are correct

Difficulty: Easy

!" hich o# the #ollo$ing statements is tr%e regarding pro#it-ma:imiing mar;%p #or a Co%rnot oligopoly $ith + identical #irms7 " BV+= H 1 W +=X K MC ." B K V1 W += H +=XMC C" BV+1 W =  H +=X K MC D. B K V+= H 1 W += XMC

Difficulty: Easy

8-153


80" hich o# the #ollo$ing is tr%e regarding the relationship *et$een the elasticity o# demand #or an individ%al #irm and the elasticity o# demand #or the mar;et in a Co%rnot oligopoly $ith 5 identical #irms7 A. = K d#p H dB × 5B H  ." = K d#p H dB × 5 H B C" =M K 5= /" = K 1H5=M

Difficulty: Hard

81" %ppose yo% compete in a Co%rnot oligopoly mar;et consisting o# 6 #irms" 9he e%ili*ri%m mar;et price and %antity are (5 and 10 %nits, respectively" 9he marginal cost #or each #irm is (3" .ased on this in#ormation $e ;no$ the price elasticity o# demand is A. -0"41 ." 0"16 C" -2"4 /" 9here is ins%##icient in#ormation to ans$er this %estion

Difficulty: Hard

82" %ppose that the demand #or a monopolistEs prod%ct is estimated to *e  d K 100 - 2B and itEs total costs are C K 10" @nder #irst-degree price discrimination the optimal prices, n%m*er o# total %nits e:changed, pro#it and cons%mer s%rpl%s are " B K (30L  K 40, Π K (800L C K (400 ." 10 ≤ B ≤ 100L  K 80L Π K (1600L C K (1600 C. 10 ≤ B ≤ 50;  K 80, Π K (1600L C K (0 /" B K(30L  K 40, Π K (600L C K (0

Difficulty: Medium

8-154


83" 9o engage in #irst-degree price discrimination a #irm m%st " .e a*le to set B I MC ." Pno$ each cons%merEs ma:im%m $illingness to pay C" Brevent lo$-val%e cons%mers #rom reselling to high-val%e cons%mers D. ll o# the statements associated $ith this %estion are correct

Difficulty: Medium

ns$er %estion 84 *ased on the #ollo$ing in#ormation&

84" 9he a*ove ta*le contains di##erent cons%mersE val%es #or three so#t$are titles& Bo$erBoint, =:cel and ord" %ppose there are 100 cons%mers o# each type" 't costs Microso#t (5 to prod%ce each piece o# so#t$are" '# Microso#t $ants to devise a pricing strategy that is incentive compati*le *et$een cons%mer types and $ill ma:imie its pro#it, then it sho%ld " Charge (50 #or Bo$erBoint, (80 #or =:cel and (5 #or ord ." Charge Charge (125 a single o# (250 (15 #or the#or*%ndle Bo$erBoint, =:cel and ord C" #orprice Bo$erBoint, =:celo# and (150 #or ord D. Charge (325 #or the *%ndle o# Bo$erBoint, =:cel and ord and permit cons%mers to p%rchase each so#t$are title individ%ally at (81"10 each

Difficulty: Hard

8-155


85" %ppose yo% are an analyst #or the Coca-Cola Company" n individ%alsE inverse demand #or Coca-Cola is estimated to *e B K !8 - 4 in cents" '# Coca-Cola is prod%ced according to the #ollo$ing cost #%nction C K 1,000 W 2 in cents, comp%te the optimal price and the n%m*er o# cans to sell as a single pac;age" " (1200 per pac;age and 12 cans B. (12 per pac;age and 24 cans C" (11"52 per pac;age and 12 cans /" (15 per pac;age and 16"6 cans

Difficulty: Hard

86" %ppose yo% are an analyst #or the Coca-Cola Company" n individ%alsE inverse demand #or Coca-Cola is estimated to *e B K !8 - 4 in cents" '# Coca-Cola is prod%ced according to the #ollo$ing cost #%nction C K 1,000 W 2 in cents, comp%te the s%rpl%s cons%mer receive $hen Coca-Cola charges the optimal *loc; price" A. (0 ." (11"52 C" (1152 /" (56

Difficulty: Medium

8" %ppose that Qerionireless has hired yo% as a cons%ltant to determine $hat price it sho%ld set #or calling services" %ppose that an individ%alsE inverse demand #or $ireless services in the greater .oston area is estimated to *e B K 100 - 33 and the marginal cost o# providing $ireless services to the area is (1 per min%te" hat is the optimal t$o-part price that yo% $o%ld s%ggest to Qerion7 " Charge a #i:ed #ee K (!5"5 and a %sage #ee o# (1 per min%te ." Charge a #i:ed #ee K (3 and a %sage #ee o# (0"33 per min%te C. Charge a #i:ed #ee K (148"50 and a %sage #ee o# (1 per min%te /" Charge a #i:ed #ee K (3 and a %sage #ee o# (3 per min%te

Difficulty: Medium

8-156


88" %ppose that Qerionireless has hired yo% as a cons%ltant to determine $hat price it sho%ld set #or calling services" %ppose that an individ%alsE inverse demand #or $ireless services in the greater .oston area is estimated to *e B K 100 - 33 and the marginal cost o# providing $ireless services to the area is (1 per min%te" Comp%te cons%mer s%rpl%s $hen Qerionireless charges an optimal t$o-part price" A. (0 ." (4"25 C" (148"50 /" 9here is ins%##icient in#ormation to comp%te cons%mer s%rpl%s

Difficulty: Medium

8!" %ppose that the inverse demand #or a do$nstream #irm is *y B K 150 - " 'ts %pstream division prod%ces a critical inp%t $ith costs o# C @d K 5d2" 9he do$nstream #irmEs cost is Cd K 10" hen there is no e:ternal mar;et #or the do$nstream #irmEs critical inp%t, the marginal reven%e #or the do$nstream #irm is A. MAd K 150 - 2 ." MAd K 150 -  C" MAd K 140 - 2 /" MAd K 140 - 

Difficulty: Easy

!0" %ppose that the inverse demand #or a do$nstream #irm is *y B K 150 - " 'ts %pstream division prod%ces a critical inp%t $ith costs o# C @d K 5d2" 9he do$nstream #irmEs cost is Cd K 10" hen there is no e:ternal mar;et #or the do$nstream #irmEs critical inp%t, the net marginal reven%e #or the do$nstream #irm is A. +MAd K 140 - 2 ." +MAd K 150 - 2 C" +MAd K 140 -  /" +MAd K 150 - 

Difficulty: Medium

8-15


!1" %ppose that the inverse demand #or a do$nstream #irm is *y B K 150-" 'ts %pstream division prod%ces a critical inp%t $ith costs o# C @d K 5d2" 9he do$nstream #irmEs cost is Cd K 10" hen there is no e:ternal mar;et #or the do$nstream #irmEs critical inp%t, the do$nstream #irm sho%ld prod%ce A. 11"6 %nits ." 12"5 %nits C" 14 %nits /" 15 %nits

Difficulty: Hard

!2" 9he price elasticity o# demand #or senior citiens p%rchasing co##ee #rom Mc/onaldEs is -5 $hile non senior citiens have a price elasticity o# demand e%al to -1"25" '# is cost Mc/onaldEs (0"02 to prod%ce a co##ee, the optimal price #or a c%p o# co##ee #or senior citiens and res%ltant marginal cost %nder third-degree price discrimination are, respectively, " (0"016 and (0"20 ." (0"02 and (0"80 C. (0"025 and (0"02 /" (0"10 and (0"02

Difficulty: Medium

!3" 9he price elasticity o# demand #or senior citiens p%rchasing co##ee #rom Mc/onaldEs is -5 $hile non senior citiens have a price elasticity o# demand e%al to -1"25" '# is cost Mc/onaldEs (0"02 to prod%ce a co##ee, the optimal price #or a c%p o# co##ee #or non senior citiens and res%ltant marginal cost %nder third-degree price discrimination are " (0"004 and (0"02 ." (0"02 and (0"80 C. (0"10 and (0"02 /" (10 and (0"20

Difficulty: Medium

8-158


Essay Questions

!4"  local dentist read an article p%*lished *y the merican /ental ssociation estimating that the elasticity o# demand #or the representative dentistEs services is -2"5" )o$ m%ch sho%ld the dentist mar; %p her price over marginal cost7 B K V=H1W=XMC K V2"5H1"5X K 1"6MC"

!5" Fo% are a tr%c; #armer and *ring prod%ce to a #armerEs mar;et every ednesday" Fo% have #o%nd that on a typical day #ive other #armers *ring their prod%ce to mar;et" Fears o# e:perience have ta%ght yo% that yo% ma;e the most money *y pricing yo%r prod%ce at 1"15 times yo%r marginal cost" hat is yo%r elasticity o# demand in this Co%rnot oligopoly7 hat it the mar;et elasticity o# demand7 ince, in Co%rnot oligopoly, B K V+=MH1 W +=MXMC, and + K 6, it #ollo$s that

9h%s the mar;et elasticity o# demand is -1"2" Fo%r elasticity o# demand is si: times the mar;et elasticity, or -"662"

8-15!


!6" Fo% are the only pharmacist in a small to$nL the ne:t closest dr%gstore is 50 miles a$ay" 9he pop%lation in yo%r to$n consists o# yo%ng #armers and older retired #amilies" Fo% have noticed that the yo%ng #armers are less sensitive to price changes than the retired pop%lation" peci#ically, yo% have #o%nd that the $or;ing pop%lation has an o$n price elasticity o# demand o# -2 and the retired #armers have an o$n price elasticity o# -4" )o$ can yo% %se this in#ormation to yo%r advantage7 ince the t$o gro%ps o# people have di##erent demand elasticity #or dr%gs, yo% sho%ld charge them di##erent prices #or the same dr%gs to ma:imie pro#its" or the $or;ing pop%lation, $hich has -2 as demand elasticity, yo% sho%ld #ollo$ the r%le

9hat is, yo% sho%ld charge yo%ng #armers a price that is 2 times yo%r marginal cost" or the retired pop%lation,

so yo% sho%ld charge them a price that is 1"33 times marginal cost"

8-160


!" Fo% have %st *een hired as manager o# a ne$ health spa in Aetirement Qillage, lorida" 9he o$ner has commissioned a mar;et st%dy that estimates the average c%stomerEs monthly demand c%rve #or visiting the health spa to *e

" 9he cost o# operating is

, $here Q is the n%m*er o# visits" 9he o$ner has *een charging a (20 per-month mem*ership #ee and a (5 per-visit #ee" Bart o# yo%r salary is 10 percent o# the monthly pro#its" %ggest a pricing strategy that $ill increase yo%r salary7 ith the srcinal pricing scheme, the n%m*er o# visits per c%stomer is " )ence, pro#it #rom each c%stomer is (20 W (5 - (348"5 K (11"5, and the compensation to the manager is 10G o# (11"5, or (11"5 per c%stomer" )o$ever, yo% may charge a price o# (3 e%al to marginal cost and charge a mem*ership #ee e%aling the cons%merEs s%rpl%s" 9his gives the n%m*er o# visits per c%stomer e%al to 9he cons%mer s%rpl%s is "5(200 - (34!"25 K (4,851"13" )ence, the mem*ership #ee sho%ld *e as high as (4,851"13 per person" Fo%r compensation $ill *e "10(4,851"13 K (485"11 per c%stomer"

!8" %ppose a typical cons%merEs inverse demand #%nction #or *ottled $ater at a resort area $here one #irm o$ns all the rights to a local spring is given *y " 9he marginal cost #or gathering and *ottling the $ater is (3 per gallon" ind the optimal n%m*er o# *ottles to pac;age together #or sale and the pro#it-ma:imiing price to charge #or the pac;age" ho$ the sol%tion graphically7 =ach pac;age sho%ld contain #o%r *ottles $hile the price #or each pac;age is (36" ith this pricing scheme, yo% capt%re a net pro#it (24, $hich is the shaded area in ig%re 11-5" ig%re 11-5

8-161


!!" s manager o# the only video store in to$n, yo% have noticed that on 9h%rsday thro%gh %nday the demand #or renting yo%r movies is m%ch higher than it is on Monday thro%gh ednesday" Fo% there#ore cond%cted a st%dy that revealed t$o di##erent mar;et demand c%rves"
L on $ee;days, it is

" 9he marginal cost o# renting a movie is ("50 50 cents" Fo%r average c%stomer never rents more than one movie at a time" hat pricing strategy $ill ma:imie yo%r pro#its7

9his manager ma:imie *y can engaging in t$o part pricing" ince di##ers $ee;ends and can $ee;days, thepro#its manager adopt t$o di##erent schemes"
100" /%ring the 1!!0s, several airlines $ere on the *rin; o# *an;r%ptcy" 9hese same airlines $ere giving a$ay millions o# dollars in #ree airline travel thro%gh their #re%ent-#lyer programs" /o yo% thin; it $o%ld have *een a good idea #or these airlines to eliminate their #re%ent-#lyer programs in order to earn higher pro#its7 =:plain" 't $o%ld pro*a*ly not *e a good idea #or an airline to %nilaterally eliminate its #re%ent #lyer program" irst, the airline $o%ld pro*a*ly lose c%stomers to other airlines that o##ered the program" econdly, #re%ent #lyer programs allo$ #irms to avoid some o# the pit#alls o# .ertrand competition *y creating *rand loyalty and hence some degree o# prod%ct di##erentiation" =liminating the programs $o%ld pro*a*ly res%lt in #e$er c%stomers and lo$er prices, $hich $o%ld harm the airlines since m%ch o# their costs are #i:ed"

101" Many resta%rants have #o%nd that it is advantageo%s to o##er #ree appetiers $ith a t$odrin; minim%m d%ring a limited n%m*er o# ho%rs" 's this pro#it-ma:imiing *ehavior7 hy or $hy not7 Fes, it pro*a*ly is" 9his is a case o# cross-s%*sidiation" 9he appetiers are typically %ite salty, leading c%stomers to *%y more drin;s than $o%ld other$ise *e the case"

8-162


102" Fo% r%n a gol# co%rse at a to%rist resort" t yo%r resort, there are t$o distinct gro%ps o# players"
"

" hat pricing strategy $ill ma:imie yo%r pro#its7 %ppose the marginal cost to the gol# co%rse o# each visit is ero" 9he most a c%stomer is $illing to pay is his or her total val%ation o# the %antity o# goods cons%med" 9he total val%ation the area %nderathe inverseo$ner demand c%rve and theishoriontal a:is #or that rangeiso#meas%red %antity" *y )ence, the most property is $illing to pay "5(100200 K (10,000 per month" 9he most a to%rist is $illing to pay is "5(40400 K (8,000 per $ee;" )ence, yo%r optimal pricing policy is& charge property o$ners a mem*ership #ee o# (10,000 per month per personL charge to%rists a mem*ership #ee o# (8,000 per $ee; per person" nd then let each gol#er play gol# #or #ree"

103" n a%to dealer in Chicago recently told his mother that he ma;es no money on the sales o# his cars *%t the mar;%p on accessories is 200 percent" Can this possi*ly *e a pro#itma:imiing strategy7 =:plain" Berhaps" .y charging a lo$ price #or the *ase car *%t optimally pricing a *%ndle o# options, the dealer may *e a*le to earn higher pro#its than *y attempting to ma;e a pro#it on each individ%al item separately"

104"
8-163


105" 'n most cities all l%m*er yards advertise that they have the lo$est price in to$n" 'n addition, they o#ten claim that they $ill match the prices o# any other l%m*er yards" 's this .ertrand competition that *rings a*o%t ero economic pro#its7 =:plain" +oL it act%ally leads to higher prices" +o #irm has an incentive to o##er lo$er prices, since doing so $ill not attract additional c%stomers the other #irm $ill match the lo$er price"

106" Drocery stores ma;e most o# their pro#its on so#t drin;s, *eer, chips, and candy"  cas%al loo; at prices o# these items reveals that these prices change e:tremely o#ten and can vary as m%ch as 50 percent" 's this *eca%se the $holesale price o# these items #l%ct%ates this dramatically, or is there some other possi*le e:planation7 9he #re%ent variation in prices on so#t drin;s, *eer, chips and candy is not d%e to the #l%ct%ation in the $holesale price o# these items" 't is *eca%se grocery storesE managers are engaging in randomied pricing, in an attempt to ;eep their rivals #rom *eing a*le to ;no$ $hat price to charge to steal their c%stomers"

10" Fo% are the o$ner o# a mom-and-pop store that *%ys mil; #rom a s%pplier at a cost o# (1 per gallon" '# yo% estimate the elasticity o# demand #or mil; sold at yo%r store to *e -3"5, $hat are yo%r pro#it-ma:imiing mar;%p and price7 B K V=H1 W =XMC K 1"4MC" 9h%s, yo%r price sho%ld *e 1"4 times marginal cost, or (1"40 per gallon"

8-164


108" Fo% are the manager o# a gas station in a small to$n, and yo%r goal is to ma:imie pro#its" .ased on yo%r e:perience, the elasticity o# demand o# 9e:ans #or a car $ash is -2, $hile that o# non-9e:ans is -1"5" Fo%r marginal cost is (6" a" re the conditions necessary #or price discrimination to *e an e##ective means o# enhancing pro#its *eing met7 =:plain" *" hat is the pro#it-ma:imiing price to charge a 9e:an #or a car $ash7 c" hat is the pro#it-ma:imiing price to charge a Cali#ornian #or a car $ash7 a" Brice discrimination can *e implemented *eca%se yo% can identi#y the nat%re o# the driver *y noticing the iss%ing state o# the vehicle plate" *" Brice #or 9e:ans&

c" Brice #or Cali#ornians&

10!" n ind%stry prod%ces 10,000 %nits o# o%tp%t at a price o# (100" t the e%ili*ri%m price and %antity, the mar;et elasticity o# demand is -0"5" /oes this ind%stry consist o# a pro#itma:imiing monopolist7 =:plain" 9he ind%stry cannot *e comprised o# a price-setting pro#it-ma:imiing monopolist *eca%se s%ch a #irm $ill not prod%ce in the inelastic part o# the demand c%rve" 't can increase its pro#it *y lo$ering o%tp%t $henever demand is inelastic"

110"  monopolist is pro#it ma:imiing $here the elasticity o# demand is -2 and price is (4" hat is the monopolistEs marginal cost7 @sing the relation B K V=H1 W =XMC, it #ollo$s that MC K (2"

8-165


111" Most $holesalers post a s%ggested retail price on pac;ages, $hich in t%rn are sold *y retailers" 's there an economic *asis #or the s%ggested retail price7 s the manager o# a retailing o%tlet, $hat #actors $ill determine $hether yo% sho%ld charge the s%ggested retail price or some higher or lo$er price7 9he s%ggested retail price is the price that ma:imies the $holesalerEs pro#it in the national mar;et *ased on the national elasticity o# demand #or the prod%ct"  local #irm sho%ld charge a lo$er price i# the local demand is more elastic than the national average and a higher price i# the local demand is more inelastic than the national average"

112" .e#ore the *rea;%p o# 9Z9, the #irm charged a price #or local telephone services that $as ro%ghly one-hal# o# its cost o# providing the services" 'n contrast, it charged almost t$o times it cost #or long distance services" hy do yo% thin; 9Z9 adopted this pricing strategy7 Cross s%*sidiation" irst, there are some economies o# scope in providing telephone services, $hich means that it is cheaper to prod%ce local and long-distance services together than separately" Moreover, there is interdependence in demand" 'n order to place a long-distance call, one needs local access to a phone line" .y charging a lo$ price #or local services, more people p%rchase phones than $o%ld have other$ise *een the case" 9his led to an increase in the n%m*er o# people that co%ld *e called $ith 9Z9Es long-distance services since more phones $ere %sed across the nation, and greater long-distance %sage than $o%ld other$ise have *een the case" 9h%s, *y cross s%*sidiing local services $ith long distance services, 9Z9 $as a*le to earn higher pro#its than it other$ise $o%ld have earned"

113" 9hree cons%mers $ho $ant to *%y a ne$ car have the #ollo$ing val%ations #or dealer options&

ss%ming costs are ero, ho$ m%ch $o%ld the dealer ma;e i# it priced po$er *ra;es at (800, priced air conditioners at (200, and sold the *%ndle #or (1,3007 +o cons%mer $ill *%y a *%ndle at this price, since it $o%ld *e cheaper to p%rchase the items separately" 9he #irm $o%ld sell cons%mer 3 a set o# po$er *ra;es #or (800, and an air conditioner to cons%mers 1 and 2 at (200 each" 9otal #irm pro#its are th%s (1,200"

8-166


114" Fo% are the C=< o# Comchip, a #irm that sells specialied comp%ters" =ach o# the #irmEs comp%ters contain a %ni%e chip that is prod%ced at ComchipEs $est coast plant at a cost o# "
115" Fo% are the manager o# e 9r%st-the only *an; in a small to$n" Fo%r *oss has *een st%dying a report on transaction vol%me and has noticed a tro%*ling trend& e 9r%st does not have eno%gh tellers to handle the *an;Es ma:im%m capacity, $hich occ%rs d%ring the l%nch ho%r" Fo%r *oss has as;ed #or a short report that s%mmaries alternative plans #or solving this pro*lem, the pros and cons o# each plan, and yo%r recommended co%rse o# action" Brovide this report"
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116" %ppose that YQC is trying to decide ho$ to price a ne$ stereo system composed o# a receiver, C/ player, and spea;ers" 9he companyEs economists have estimated that t$o di##erent gro%ps $ill p%rchase these prod%cts& st%dents and cl%* o$ners" 9he economistsE analysis s%ggests that the total mar;et #or its *rand o# stereos consists o# 10,000 st%dents and 50,000 cl%* o$ners" 'n addition, it is estimated that the ma:im%m amo%nt each gro%p $ill pay #or each stereo component is as #ollo$s&

YQCEs o*ective is to ma:imie reven%es, and it is considering three strategies to price its stereo components& 1 a standard strategy $here*y it prices each stereo component separatelyL 2 per#ect price discriminationL or 3 *%ndling the three components together and selling only *%ndles containing the receiver, C/ player, and spea;ers" a" '# YQC %ses a standard pricing strategy, $hat price sho%ld it charge #or the receiver, #or the C/ player, and #or the spea;ers to ma:imie reven%es7 hat are the reven%es they $ill earn thro%gh this strategy7 *" %ppose YQC adopts a #irst-degree price discrimination policy" hat prices sho%ld it charge to ma:imie reven%es7 hat are YQCEs reven%es %sing this strategy7 c" %ppose that YQC mar;ets the receiver, C/ player, and spea;ers together" 9hat is, it %ses a commodity-*%ndle strategy s%ch that the prod%cts are sold as one item" hat price sho%ld YQC charge to ma:imie reven%es7 )o$ m%ch $ill it earn7 a" Brice receivers at (200, C/ players at (5, and spea;ers at (250" Aeven%es #rom receiver sales $ill th%s *e (20060,000 K (12 million, reven%es #rom C/ player sales $ill *e (50,000 K (4"5 million, and spea;er sales $ill *e (25050,000 K (12"5 million" *" Charge each gro%p the ma:im%m price they $ill pay #or each item" t%dents $ill pay (250, (150, and (100 #or a receiver, C/ player, and pea;ers, respectively" Cl%* o$ners $ill pay (200, (5, and (250, respectively" 9otal reven%es #rom this strategy are& (5 million W (26"25 million K (31"25 million" c"@sing a commodity *%ndling strategy, YQC $o%ld ma:imie reven%es $hen it charges (500 #or a *%ndle containing all three components" 'tsE reven%e $o%ld *e (30 million 60,000 × (500"

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