Section 12 Online Practice Test

1.The market structure that is characterized by only a small number of producers is referred to as:

a. / oligopoly.
b. / perfect competition.
c. / monopoly.
d. / monopolistic competition.
e. / a Nash equilibrium.

2.Collusive agreements are typically difficult for cartels to maintain because each firm can increase profits by:

a. / secretly reporting the collusion to the federal government.
b. / producing less output than the quantity that maximizes joint cartel profits.
c. / increasing the price above the price that maximizes joint cartel profits.
d. / engaging in less advertising than the level of advertising that maximizes joint cartel profits.
e. / producing more output than the quantity that maximizes joint cartel profits.
Quantity / Price
($/barrel) / Total
Revenue ($)
0 / $160 / $ 0
10 / 150 / 1,500
20 / 140 / 2,800
30 / 130 / 3,900
40 / 120 / 4,800
50 / 110 / 5,500
60 / 100 / 6,000
70 / 90 / 6,300
80 / 80 / 6,400
90 / 70 / 6,300
100 / 60 / 6,000
110 / 50 / 5,500
120 / 40 / 4,800
130 / 30 / 3,900
140 / 20 / 2,800
150 / 10 / 1,500
160 / 0 / 0
Table 64-1: Demand for Crude Oil

3.(Table 64-1: Demand for Crude Oil) The table shows the demand schedule for crude oil. For simplicity, assume that the cost of producing crude oil is zero—the marginal cost of crude oil equals zero. Suppose the crude oil industry is a duopoly and the two firms collude to share the market equally. The two firms are owned by Laverne and Shirley. In this case, the price of crude oil will be ______, Laverne will produce ______barrels, Shirley will produce ______barrels, and both Laverne and Shirley will earn economic profits equal to ______.

a. / $80; 80; 80; $6,400
b. / $80; 40; 40; $3,200
c. / $60; 50; 50; $3,000
d. / $40; 60; 60; $2,400
e. / $60; 30; 30; $3,000

4.In general, oligopolists find it easier to engage in collusive behavior when the industry is characterized by ______behavior.

a. / Cournot
b. / Bertrand
c. / noncooperative
d. / independent
e. / price-taking

5.In the classic prisoners' dilemma with two accomplices in crime, the dominant strategy for each individual is to:

a. / never confess.
b. / always confess.
c. / confess only if the other confesses.
d. / This game does not have a dominant strategy.
e. / confess only if the other does not confess.

6.Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, “I'll cheat on the cartel because regardless of what Frank does, cheating gives me the best payoff.” This is an example of:

a. / a dominant strategy.
b. / a tit-for-tat strategy.
c. / an irrational strategy.
d. / product differentiation.
e. / price discrimination.

Figure 65-1: Payoff Matrix for Jake and Zoe

7.(Figure 65-1: Payoff Matrix for Jake and Zoe) Jake and Zoe are the only producers of slushies in Vacatown. Each week, each firm decides whether to price high or price low for the following week. The figure shows the profit per week earned by the two firms. What is the Nash equilibrium for Jake and Zoe?

a. / Jake prices high; Zoe prices high
b. / Jake prices high; Zoe prices low
c. / Jake prices low; Zoe prices high
d. / Jake prices low; Zoe prices low
e. / This game does not have a Nash equilibrium.

Figure 65-3: Payoff Matrix for Gehrig and Gabriel

8.(Figure 65-3: Payoff Matrix for Gehrig and Gabriel) The figure shows the payoff matrix for two producers, Gehrig and Gabriel, who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. If each wishes to maximize profits, the combined profits of the two are maximized if:

a. / they each produce 5,000 figurines.
b. / they each produce 7,000 figurines.
c. / Gehrig produces 7,000 figurines and Gabriel produces 5,000 figurines.
d. / Gehrig produces 5,000 figurines and Gabriel produces 7,000 figurines.
e. / they each produce the average of 6,000 figurines.

9.In which of the following situations does overt collusion exist?

a. / Smaller firms in an industry have an unspoken agreement to charge the same price as the largest firm.
b. / Firms in an industry agree openly on price, output, and other decisions aimed at achieving monopoly profits.
c. / Competition among a large number of small firms generates similar, but slightly different, prices.
d. / Competition among a large number of small firms generates a stable market price.
e. / A few large firms aggressively advertise the benefits of their products, attempting to take customers away from rival firms.

10.A major application of the Sherman Antitrust Act was in ______against ______.

a. / 1880; the Ford Motor Company
b. / 1984; AT & T
c. / 1911; Standard Oil
d. / 1948; Paramount Pictures
e. / 1990; Microsoft

11.Which of the following would make it difficult for oligopolists to collude?

a. / There are few firms in the market.
b. / There are few buyers in the market.
c. / The oligopolists have similar costs of production.
d. / Oligopolists usually produce a homogeneous product.
e. / There are substantial barriers to entry in the market.

12.Two rival firms vigorously compete by spending millions of dollars on product improvements and advertising to promote those improvements. This is an example of firms engaging in:

a. / tacit collusion.
b. / price leadership.
c. / Cournot competition.
d. / non-price competition.
e. / Bertrand competition.

13.An industry characterized by many firms, producing similar but differentiated products, in a market with easy entry and exit, is called:

a. / perfect competition.
b. / monopoly.
c. / monopolistic competition.
d. / oligopoly.
e. / duopoly.

14.Which of the following is not a characteristic of monopolistic competition?

a. / product differentiation
b. / lack of barriers to entry and exit in the long run
c. / many competing producers
d. / tacit collusion
e. / advertising

Figure 67-1: Monopolistic Competition I

15.(Figure 67-1: Monopolistic Competition I) Which of the panels in the figure shows a monopolistic competitor earning a loss in the short run?

a. / Panel a
b. / Panel b
c. / Panel c
d. / None of the panels show a loss in the short run.
e. / Both panels b and c.

Figure 67-8: Profits in Monopolistic Competition

16.(Figure 67-8: Profits in Monopolistic Competition) In panel A, the profit-maximizing quantity of output is generated by the intersection at point ______.

a. / I
b. / F
c. / H
d. / C
e. / G

17.The sources of product differentiation do not include:

a. / differences in location.
b. / differences in quality.
c. / the perception by consumers that products are different, even if they are physically identical.
d. / differences in product features.
e. / consumers' value in uniformity.

18.Budweiser is a brand name that many people recognize. During the Super Bowl each year, this beer company has many of the most successful ads. Which of the following is true about advertising for Budweiser?

a. / It is designed to increase the demand for Budweiser.
b. / It decreases the costs of supplying Budweiser.
c. / It guarantees customers that Budweiser tastes better than other beers.
d. / It is designed to increase excess capacity.
e. / It is designed to increase the price elasticity of demand for their beer.

19.A monopolistic competitor will engage in advertising in order to:

a. / reduce excess capacity.
b. / increase demand for its product.
c. / collude more effectively with other firms.
d. / produce on the upward-sloping portion of its ATC curve.
e. / decrease marginal costs of production.

20.Firms use _____ to provide information about their product or to convince consumers to buy it. And when a company does a good job of this, its product develops a ____ name.

a. / advertising; style
b. / product differentiation; generic
c. / non-price competition; tacitly collusive
d. / public relations; brand
e. / advertising; brand