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ECONOMICS 202 – EXAM 3A – SPRING 2010

ANSWER THE NEXT 9 QUESTIONS USING THESE OPTIONS:


1. Oligopoly; 2. Perfect Competition; 3. Monopoly; 4. Monopolistic Competition

1. In which market structure(s) are both producers and consumers price-searchers?


a. 1; b. 2; c. 3; d. 1 and 2; e. none above

2. The short-run shut-down rule is applicable in:


a. 1; b. 2; c. 3; d. 4; e. all above.

3. In this market structure there is a large number of sellers, the product of each seller has many good, but not
perfect substitutes and in the long-run economic profits = 0.
a. 1; b. 2; c. 3; d. 4; e. none above

4. In which market structure is it true that, “if TR > TC, then economic profits > 0, and normal profits > 0?
a. 1; b. 2; c. 3; d. 4; e. all above

5. In both the short-run and long-run in _____ , the firm produces a quantity at which P > MC.
a. 1; b. 3; c. 4; d. all above; e. none above

6. In this industry an important feature is mutual interdependence among firms.


a. 1; b. 2; c. 3; d. 4; e. none above

7. In this industry the firm’s demand curve is also the market demand curve.
a. 1; b. 2; c. 3; d. 4; e. 2 & 3.

8. In this industry, in the long-run economic profits = 0.


a. 1 & 2; b. 2 & 3; c. 3 & 4; d. 2 & 4; e. none above

9. In this industry, firms have some degree of monopoly power.


a. 1 & 2; b. 2 & 3; c. 1, 2 & 3; d. 1, 3 & 4; e. 1, 2, 3 & 4

10. If an airline is charging different fares to different customers who are flying to the same destination and
sitting in the same class, this is an example of:
a. a collusive cartel; b. price discrimination; c. a barrier to entry; d. covering variable costs; e. kinked demand.

11. Ignoring the shut-down option, in perfect comp. the loss minimizing rule is: produce the quantity where:
a. MC = ATC; b. MR = P; c. MC = MR; d. P = AVC; e. none above

ANSWER THE NEXT QUESTION BY IDENTIFYING THE APPROPRIATE SET FROM THESE EIGHT OPTIONS:
1. AVC = S; 2. P = ATCMIN ; 3. P = MC; 4. P > MR; 5. P = AVCMIN;
6. QS = QD; 7. Ec Profits > 0; 8. Ec Profits = 0;

12. The long-run equilibrium conditions in perfect competition are:


a. 2, 3, 5, 6; b. 1, 4, 6, 8; c. 2, 3, 6, 8; d. 2, 3, 5, 8; e. none above.

13. In all market structures (environments) it is assumed the objective of the firm is to:
a. maximize total revenue; b. minimize total costs; c. maximize marginal economic profits;
d. maximize total economic profits; e. a, b and d.

14 Which of the following is an example of a barrier to entry in monopoly:


a. patents; b. economies of scale; c. exclusive government franchise to sell; d. all above; e. none above.
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ANSWER THE NEXT 6 QUESTIONS WITH REFERENCE TO THE ADJACENT DIAGRAM OF A PERFECTLY
COMPETITIVE FIRM THAT BEHAVES CONSISTENT WITH THE PROFIT-MAXIMIZING RULE. ASSUME THIS IS
A CONSTANT-COST INDUSTRY.

15. If P = X, this firm will produce Q = :


a. zero; b. B; c. C; d. D; e. E

16. At which price will firms enter this industry in the long-run?
a. V; b. W; c. X; d. Y; e. none above.

17. At which price would economic profits = 0?


a. V; b. W; c. X; d. Y; e. Z

18. If P = Z and Q = G, marginal economic profits are:


a. = 0; b. > 0; c. < 0; d. not enough information to answer.

19. If P = X and Q = D, this must be a short-run equilibrium. After we have reached the new long-run
equilibrium, all of the following is correct except:
a. Price will have risen above X; b. there will be fewer firms in the industry; c. economic profits will have risen;
d. total market output will have decreased; e. none above, i.e., a - d are all correct.

20. Assume the market price = Y and firm is producing at E. If the firm raises its price to Z and increases its
production to F, the change in its economic profits will be:
a. = 0; b. < 0; c. > 0; d. could be equal to or greater than 0; e. none above.

21. Assume a perfectly competitive firm is producing where Q = 100, TR = 900, MC = 10, ATC = 11,
and AVC = 8. In the short-run, this firm should:
a. increase production; b. decrease production but not shut-down; c. not change the level of production;
d. shut-down; e. none above.

22. A cruise ship is departing tomorrow for five days in the south seas. It has five unsold cabins. The
average variable cost per cabin is $2,000, the average fixed cost is $3,000 per cabin. Prior to today the
price per cabin was $8,000. Not wanting to sail with empty cabins, it is clear that it must reduce its price
to attract more passengers. What is the lowest price it can charge for each cabin and be better off than
sailing with empty cabins. (Assume no other prices than the following are possible.)
a. $2,010; b. $1,990; c. $2,990; d. $3,010; e. $7,990.

ANSWER THE NEXT 4 QUESTIONS WITH REFERENCE TO THE


ADJACENT DIAGRAM OF A PERFECTLY COMPETITIVE INDUSTRY.

23. If there are no price controls, the gains from trading received
by all participants in this market is represented by the area:
a. OAMZ; b. CAM; c. FEK; d. FCM; e. FAM

24. If a price floor is set at B, Total Producer Surplus = :


a. OCHL; b. OAGL; c. FBGK; d. CAGH; e. none above.

25. If a price ceiling were set at E, what part of the dead-weight


loss was lost by producers?
a. KGM; b. LGMZ; c. KHM; d. HGM; e. LHMZ

26. Assume this market was in equilibrium without any price controls
and then a price ceiling was set at E. Then the area that represents
a wealth transfer from consumers to producers is:
a. ECHK; b. CBGH; c. EBGK; d. FAGK; e. none above.
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27. Assume neither demand nor supply is perfectly elastic or perfectly inelastic and the perfectly competitive
market is initially in equilibrium with no price controls. Then an effective price floor:
a. may or may not enlarge TCS, but it will always diminish TPS.
b. may or may not enlarge TPS, but will always enlarge TCS.
c. may or may not enlarge TPS, but will always diminish TCS and TMS
d. may or may not diminish TPS or TCS, but will always diminish TMS
e. none above.

ANSWER THE NEXT 5 QUESTIONS WITH REFERENCE TO THE FOLLOWING DIAGRAM OF A SINGLE-PRICE
MONOPOLIST THAT BEHAVES CONSISTENT WITH THE PROFIT-MAXIMIZING RULE.

28. The profit-maximizing price and quantity are, respectively:


a. X, T; b. Y, K; c. Z, K; d. W, G; e. none above.

29. If P = X, total economic profits > zero, but the marginal


economic profit on unit T is negative.

30. If the salary of this monopoly’s CEO is 10 percent of it’s


total revenues, and if this CEO wanted to maximize her salary,
she would set price =:
a. Y; b. X; c. W; d. Z; e. V.

31. If this monopoly were at Q = T, it could raise its


its price to W, and the result would be an increase in
both total revenue and economic profits.

32. The price that would maximize the total gains to trading is:
a. Y; b. X; c. W; d. Z; e. V.

33. The “Classic Case Against Monopoly” concludes that as compared to perfect competition the monopolist
produces a larger quantity and charges a higher price.

34. To be a successful multi-price monopolist, the firm must satisfy all of the following conditions EXCEPT:
a. it must have a negatively sloping demand function.
b. must have some degree of monopoly power
c. it must be able to identify differences in willingness to pay among its customers.
d. it must discourage and minimize the resale of its product.
e. none above, that is, there is no exception; a - d are all necessary conditions.

35. If a firm is a multi-price monopolist, c.p., it will charge a lower price to customers whose demand is more
elastic and a higher price to customers whose demand is less elastic.

36. Assume two firms, X and Y, engage in advertising programs with the same cost. For firm X the program
caused its |ED| to change from 3.3 to 4.7 while for Firm Y its |ED| changed from 6.4 to 5.1. Ceteris paribus,
we conclude that X’s program was more successful than Y’s.

37. Assume industries G and H have four-firm concentration ratios of 83 percent and 21 percent,
respectively. If the only information we have about these industries is that one is Oligopoly and the other
is Monopolistic Competition, we conclude that H is Oligopoly and G is Monopolistic Competition.

38. ”The capability of a product sold by one firm to function together with another firm’s complementary
product” is the definition of:
a. the network effect; b. product compatibility; c. positive market feed back;
d. a cooperative game; e. a positive sum game.
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39. ”Actions that focus on short-run gains because long-run benefits of cooperation are perceived to be
smaller,” is the definition of:
a. cooperative behavior; b. opportunistic behavior; c. a collusive cartel;
d. tit-for-tat behavior; e. none above.

Using the procedure we discussed in class when we studied the “prisoner’s dilemma” type of game,
consider the following matrix of profit payoffs. Assume the game is played only once and the participants
are unable to communicate with each other. ANSWER THE NEXT QUESTION BASED UPON THIS TABLE

FIRM A
Strategy 1 Strategy 2

A: 20 A: 40
Strategy 1
B: 60 B: 30
FIRM B

A: 10 A: 30
Strategy 2
B: 50 B: 40

40. The best (dominant) strategy for Firms A and B are, respectively:
a. 1 and 1
b. 2 and 2
c. 1 and 2;
d. 2 and 1;
e. 2, there is no single best strategy for B because the best is different with each strategy followed by A.
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ECONOMICS 202, SPRING 2010


OFFICIAL KEY TO EXAM 3

WHITE ANS
1 E
2 E
3 D
4 E
5 D
6 A
7 C
8 D
9 D
10 B
11 C
12 C
13 D
14 D
15 D
16 E
17 D
18 C
19 E
20 B
21 B
22 A
23 E
24 C
25 C
26 E
27 C
28 C
29 A
30 C
31 A
32 B
33 B
34 E
35 A
36 B
37 B
38 B
39 B
40 E

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