Question

21. The “prisoner’s dilemma” facing a cartel is that

A) what is good for the cartel is bad for society as a whole

B) the production level that is best for a self-interested firm may not be what is best for the cartel as a whole

C) what is good for the cartel as a whole is to maximize production; the dilemma is that individual cartel members may not want to share technology secrets with other firms

D) the profit-maximizing production level for the cartel as a whole may not be allowed by the governments of the cartel members

22. In the case of a decreasing cost industry, an increase in consumer demand

A) causes the price to decrease in the short run

B) causes the price to increase in the long run

C) causes the price to increase in the short run, but fall back to its original level in the long run

D) causes the price to increase in the short run, but fall all the way below the original price in the long run

23. Which of the following is the best example of two-part pricing?            

A) a public golf course with different prices for adults and children

B) a price that varies with the quantity of output consumed

C) a price that varies with each individual consumer

D) a club with an initiation fee plus a monthly bill that is sent to each member

24. Monopolistic competition is characterized by which of the following:                            

(i) few or zero barriers to entry and exit, (ii) heterogeneous products, (iii) very few sellers

A) (i), (ii), and (iii)

B) (i) and (ii)

C) (i) and (iii)

D) (ii) only

25. The "monopolistic" element of monopolistic competition is due to the fact that

A) the firm has no rivals that produce close substitutes.

B) the firm is large relative to the market.

C) the firm produces on the inelastic portion of its demand curve.

D) the firm, facing a downward sloping demand curve, has some control over price.

26. In the long run, an industry under monopolistic competition is characterized by excess capacity because         

A) each firm tries to take customers away from other firms by offering discounts to sell more units.

B) firms are spending money on advertising and the extra costs must be recovered.

C) each firm overestimates the capacity it needs when it fails to take into consideration how other firms will respond to the output decisions it makes.

D) entry occurs until zero profits are made, which implies that each firm is producing to the left of the minimum point of its average cost curve.

27. A duopoly is an industry                                                                                                 

A) with two types of customers.

B) with two sellers.

C) with multiple product lines.

D) a homogeneous product.

28. “Deadweight” loss occurs if

A) consumers really want a product, but production costs turn out to be higher than expected, and profits turn out to be lower than expected

B) a monopolist charges a price that is equal to marginal cost

C) a monopolist engages in first degree price discrimination

D) none of the above

29. Economic efficiency involves

A) whatever will maximize profits for sellers

B) continuing production as long as consumers value the product at least much as the marginal cost of producing more units

C) stopping production if the demand curve becomes steeper than average fixed costs

D) none of the above

30. Under two-part pricing (but with no price discrimination) with customers who have demands of varying strength, a firm that wishes to maximize profits is advised to

A) establish a cover charge based on the consumer surplus otherwise available to the highest demanders

B) ignore the Golden Rule of cost minimization, but just in this particular case

C) impose a user charge that is somewhat higher than the level of marginal cost

D) none of the above

31. A monopoly will produce the efficient rate of output if it                        

A) engages in perfect price discrimination.

B) engages in no price discrimination

C) engages in third-degree price discrimination.

D) is regulated and average-cost pricing is enforced.

32. Third degree price discrimination                                                                       

A) causes consumer surplus to be eliminated

B) is called third-degree because it works best for firms if products can be resold later on

C) will maximize profits if a firm charges a price in each market segment that equals its marginal cost multiplied by the price elasticity of demand

D) is the most difficult form of price discrimination to implement.

33. Long-run supply is typically more elastic than short-run supply because

A) the law of diminishing returns does not apply to the short run

B) firms can enter or exit the market in the long run

C) capital is fixed in the long run

D) none of the above

34. According to the “Golden Rule” of cost minimization;

A) if one input has a lower marginal product than another, it should not be employed

B) if one input costs more per hour than another, it should not be employed

C) inputs should be employed such that the ratio of their respective prices equals the ratio of their respective marginal products

D) none of the above

35. Under two-part pricing

A) profits are maximized by setting a user charge at a monopoly level

B) profits are maximized by establishing a set-up charge to capture consumer surplus that would have otherwise remained

C) profits are maximized by having the sum of the user charge and the set-up charge be as high as possible

D) none of the above

36. Some consumer surplus remains under each of the following EXCEPT                       

A) two-part pricing with multiple consumers

B) third-degree price discrimination

C) first-degree price discrimination

D) block pricing

37. In the case of an increasing cost industry in which consumer demand has decreased

A) the final, long run price will be higher than the price at the very beginning

B) the final, long run price will be lower than the price that first emerges in the short run after the decrease in demand, but in the short-run the price will become higher than the price at the very beginning

C) cost curves shift downward in the long run as firms exit the industry

D) none of the above

38. Which of the following would contribute to the emergence of an industry characterized by oligopoly?

A) the level of production consistent with minimum efficient scale is very small in comparison to the size of the overall market

B) barriers to entry that most firms would have difficulty overcoming

C) anti-trust laws that prevent most mergers

D) none of the above

39. When a profit-maximizing monopolist sells output in two distinct markets, which of the following is true?

A) Price will be higher in the market in which demand is unit-elastic.

B) Price will be lower in the market with the more elastic demand

C) Price will be equal in each market, as long as there is a constant marginal cost.

D) Price will be lower in the market for which there are fewer substitute goods.

40. With intertemporal price discrimination                                                               

A) each consumer is charged his/her full willingness to pay.

B) groups are charged different prices in accordance with the principles of third-degree price discrimination

C) monopolists capture all the consumer surplus.

D) Both A and C are true.

Answer 1

21.B. The prisoner's dilemma facing a cartel member is that while it may comply with output restrictions the other members of the cartel may not do so.

22.A. Causes the price to increase in the short run. As demand increases, the decreasing cost industry will be able to get inputs at a cheaper price and this will lower the prices.

23. D. Two-part pricing comprises of a fixed sum, as well as, a monthly fee.

24. B. Monopolistic competition is a combination of monopoly and perfect competition. There is free entry and exit, large number of sellers and heterogenous products.