Econ 202 (03, 04, and 05) Spring 2003

Problem Set 13

(Dr. Tin-Chun Lin)

1.One characteristic of an oligopolistic market structure is

(A)Firms in the industry are typically characterized by very diverse product lines.

(B) Products typically sell at a price that reflects their marginal cost of production.

sellers.

(D) Since markets are typically large, the actions of one seller largely gounnoticed

by its competitors. (Answer: (C))

2.When an oligopoly market is in Nash equilibrium

(A) Market price will be different for each firm.

(B) Firms will not be behaving as profit maximizers.

other firms taking.

(D) A firm will not take into account the strategies of competing firms. (Answer: (C))

3.In markets characterized by oligopoly,

(A)Collusive agreements will always prevail.

(B) Collective profits are lower under cartel arrangements.

profits in the market.

(D) There is tension between cooperation and self interest. (Answer: (D))

4.As the number of firms in an oligopoly grows larger, an oligopolistic market look more and more like

(A) A monopoly.

(B)A duopoly.

(D) None of the above. (Answer: (C))

5.As the number of firms in an oligopoly grows larger, the price approaches ______, and thequantity

produced approaches the socially efficient level.

(A) The monopoly price

(B) Average cost

(D) Marginal cost (Answer: (D))

6.An oligopoly is more like a ______than a ______in that firms have somecontrol over the prices

they receive for their goods.

(A) Competitive market, monopoly

(B) Competitive market, duopoly

(D)Monopoly, competitive market. (Answer: (D))

Consider the following game. There are two players, each isolated from the other. They are asked a question. They can answer the question honestly, or they can lie. If both answer honestly, each receives a payoff of $100. If one answers honestly and the other lies, the liar gains at the expense of the honest player. In the event, the liar receives a profit of $500 and the honest player gets nothing. If both lies, then each receives a payoff of $50.

Describe this game in terms of its players, strategies, and payoffs. (Answer: The players are named “A” and “B”; the strategies are “lie” or “answer honestly”; the payoffs are: if both players answer honestly, each receives a payoff of $100; if both players lie, each receives a payoff of $50; and if one players lies and the other answers honestly, the liar receives $500 and the honest player receives nothing.)
Construct the payoff matrix. (Answer: you can construct it by yourself.)
What is the equilibrium for this game? (Answer: Each player has a dominant strategy to lie; hence the equilibrium is for each player to lie.)

A monopolistically competitive firm will:

(A)Maximize profits by producing where MR = MC.

(B)Not likely earn an economic profit in the long run.

(C)Shut down if price is less than average variable cost.

(D)All of the above. (Answer: (D))

In the long run, monopolistically competitive firms tend to:

(A)Have excess capacity.

(B)Earn positive profits.

(C)Produce at minimum average costs.

(D)Produce homogeneous production. (Answer: (A))

Which of the following statements best describes the price, output, and profit conditions of monopolistic competition?

(A)Price will equal marginal cost at the profit-maximizing level of output; profits will be positive in the long run.

(B)Price will always equal average variable cost in the short run and either profits or losses may result in the long run.

(C)Marginal revenue will equal marginal cost at the short run, profit-maximizing level of output; in the long run, economic profit will be zero.

(D)Marginal revenue will equal average total cost in the short run; long-run economic profits will be zero. (Answer: ( C ))

In monopolistic competition if there is profit, there is:

(A)A signal for new firms to enter.

(B)A motive for existing firms to increase prices.

(C)Proof that advertising works.

(D)A motive for existing firms to decrease prices. (Answer: (A))

The deadweight loss that is associated with monopolistically competitive markets is a result of

(A)Operating in a constant cost industry.

(B)Advertising costs.

(C)Pricing below marginal cost in order to increase market share.

(D)Pricing above marginal cost. (Answer: (D))

Entry of new firms will occur in a monopolistically competitive industry until:

(A)Marginal cost equals zero.

(B)Marginal revenue equals zero.

(C)Marginal revenue equals marginal cost.

(D)Economic profit equals zero.

(E)Economic profit is negative. (Answer: (D))

In the long run, both monopolistic competition and perfect competition result in

(A)A wide variety of brand-name choices for consumers.

(B)An efficient allocation of resources.

(C)Zero economic profit for firms.

(D)Excess capacity.

(E)Markup. (Answer: (C))