Sample Test Questions

Sample Test Questions - 3 -

Figure 1

As currently depicted the oligopolist depicted in Figure 1 has economic profits of:
1. $750 million.
2. $250 million.
3. $350 million.
4. $600 million.
5. $500 million.
Answer to Question 1
If the marginal cost curve shifts up by $10 at every level of output, the oligopolist depicted in Figure 1 will:
1. reduce output and increase price.
2. increase his price but leave output the same.
3. leave price the same but reduce output.
4. operate at a loss.
5. leave price and output levels unchanged.
Answer to Question 2
The reason for the shape of the demand curve depicted in Figure 1 is the firm's belief that:
1. if it increases or lowers price, all other firms will follow.
2. if it reduces price other firms will enter the industry, but if it increases price firms will exit.
3. if it increases price other firms will enter the industry, but if it reduces price firms will exit.
4. if it reduces price, all other firms will follow, but if it increases price no other firms will.
5. if it reduces price, no other firms will follow, but if it increases price all other firms will.
Answer to Question 3
If there are no externalities, the allocatively efficient level of output for the firm depicted in Figure 1 would be:
1. more than 12 million.
2. 10 million.
3. 5 million.
4. less than 5 million.
5. between 5 and 10 million.
Answer to Question 4
Publishing companies typically charge libraries higher subscription rates than individuals for technical journals. (By technical journals we mean publications where articles are written by experts in a field for other experts such as the New England Journal of Medicine or the Molecular Biology or the American Economic Review.) For example in 1990 a personal subscription to the Journal of Econometrics was about $160.00 per year while the library rate was around $650 per year. The best explanation for this is that:
1. it actually cost more to print journals for libraries than for individuals so the price difference reflects true cost differences.
2. libraries have more inelastic demands for technical journals that individuals so the publishers are able to engage in price discrimination.
3. libraries have more elastic demands for technical journals than individuals so the publishers are able to engage in price discrimination.
4. individuals need the journals more so the publishers gives them a break.
5. the publisher is charging a ''price per reader'' rather than a price per journal.
  Figure 2
Answer to Question 5
Suppose Madison Widget Inc., a monopolist in the Widget market, faces the demand curve shown in Figure 2. What equation gives Madison Widget Inc.'s marginal revenue?
1. $MR = 10 - Q$ .
2. $MR = 10 -2Q$ .
3. $MR = 20 - Q$ .
4. $MR = 20 -2Q$ .
5. $MR = 10 - .5Q$ .
Answer to Question 6
For Madison Widget the profit maximizing output and price choice is:
1. to produce 8 units and charge a price of $2.
2. to produce 8 units and charge a price of $6.
3. to produce 10 units and charge a price of $2.
4. to produce 10 units and charge a price of $5.
5. to produce 6 units and charge a price of $7.
Answer to Question 7
The monopolist's profit in the previous question:
1. is $2,000 per year.
2. is $3,000 per year.
3. is $4,000 per year.
4. is $8,000 per year.
5. can not be computed with the given information.
Answer to Question 8

Figure 3
The payoff matrix given in Figure 3 describes the situation faced by two firms in the same industry in deciding whether or not to advertise. The payoffs are profits. If the firms have to make a decision once and for all time about advertising you should predict that:
1. both firms 1 and 2 will play their dominant strategies and earn profits of 40 each.
2. both firms will flip a coin to decide what to do.
3. both firms 1 and 2 will play their dominant strategies and earn profits of 20 each.
4. our best prediction is that the outcome will be the Nash equilibirum where each earns profits of 40.
5. the firms will collude and both agree to advertise.
Answer to Question 9

Figure 4
The payoff matrix given in Figure 4 describes the situation faced by two firms in a different industry than in the previous question. The payoffs are profits. If the firms have to make a decision once and for all time about advertising you should predict that:
1. both firms 1 and 2 will play their dominant strategies and earn profits of 40 each.
2. both firms will flip a coin to decide what to do.
3. both firms 1 and 2 will play their dominant strategies and earn profits of 20 each.
4. our best prediction is that the outcome will be the Nash equilibirum where each earns profits of 40.
5. the firms will collude and both agree to advertise.
Answer to Question 10
Consider two industries, one in which the four firm concentration ratio is .95 and another in which the four firm concentration ratio is .12. From this information alone you might predict that:
1. tacit collusion will be easier in the industry with the concentration ratio of .12 and thus we expect profits in that industry to be lower.
2. tacit collusion will be easier in the industry with the concentration ratio of .95 and thus we expect profits in that industry to be higher.
3. tacit collusion will be easier in the industry with the concentration ratio of .12 and thus we expect profits in that industry to be higher.
4. explicit collusion will be easier in the industry with the concentration ratio of .12 and thus we expect profits in that industry to be higher.
5. tacit collusion is unrelated to the four firm concentration ratio and thus we can make no good prediction about profits in these two industries.
Answer to Question 11

Figure 5
Refer to the payoff matrix in Figure 5. If the game is played only once, the outcome we predict is that:
1. both firms will play their dominant strategies and each will earn profits of 10.
2. both firms will play their dominant strategies and each will earn profits of 6
3. Firm 1 will charge a low price and Firm 2 will charge a high price.
4. Since there is no dominant strategy we can't make a prediction.
5. Firm 2 will charge a low price and Firm 1 will charge a high price.
Answer to Question 12

Figure 6
Consider the payoff matrix shown in Figure 6. It describes a situation in which two firms are trying to decide what color to paint their products next year. From the payoffs we know that:
1. firm 1 likes green and firm 2 likes red.
2. neither firm cares about color, they just want to be different from each other.
3. firm 1 likes red and firm 2 likes green.
4. the firms don't care about color, but firm 1 wants to be different from firm 2 and firm 2 wants to be like firm 1.
5. the firms don't care about color, but firm 1 wants to be like firm 2 and firm 2 wants to be different from firm 1.
Answer to Question 13
Consider the payoff matrix shown in Figure 6. It describes a situation in which two firms are trying to decide what color to paint their products next year. When playing this game repeatedly the outcome we predict is:
1. each firm plays its dominant strategy and gets a payoff of 20.
2. each firm chooses its pure strategy Nash equilibrium play.
3. each firm pursues a mixed strategy.
4. firm one always plays green and firm two always plays red.
5. firm one always plays red and firm two always plays green.
Answer to Question 14

Figure 7
What is the smallest value for X in Figure 7 such that Firm 1 playing Low and Firm 2 playing High is a Nash equilibrium?
1. 8.
2. 7.
3. 5.
4. 4.
5. 3.
Answer to Question 15
What is the largest value for X in Figure 7 such that we can predict that if the game is played only once Firm 1 will play High and Firm 2 will play Low ?
1. 9.
2. 8.
3. 7.
4. 5.
5. 4.
Answer to Question 16
Suppose the DeBeers corporation has a virtual world--wide monopoly of the gem quality diamond trade. Suppose the jewelry and wedding industries combine their advertising dollars to successfully convince young lovers that diamonds are not only the best way to express affection, but that possession of diamonds is an important part of self--esteem and personal validation. (After all, the message inherent in the "shadow/silhouette diamond commercials is that diamonds, not people, matter). If this campaign is successful and the businesses behave as profit maximizing monopolists, we predict the following:
1. An increase in the average price of diamonds an increase in the quantity sold and an increase in profits.
2. An increase in the average price of diamonds a decrease in the quantity sold and an increase in profits.
3. No change in the average price of diamonds an increase in the quantity sold and an increase in profits.
4. A decrease in the average price of diamonds a decrease in the quantity sold and an increase in profits.
5. A decrease in the average price of diamonds an increase in the quantity sold and an increase in profits.
Answer to Question 17

TABLE 1

Data For Firm A

Price Units Sold

10 100

9.95 101

9.90 102

9.85 103

9.80 104

9.75 105

9.70 106

9.65 107

9.60 108
Suppose you are hired as a manager for a firm that has an effective monopoly in a some market. At your request the marketing research group in your firm generates the information in Table 1 for you. Current sales are 100 units (per minute) and your firm is selling its output at $10.00 per unit. The cost analysis group estimates that your firm's current marginal cost of producing its product is $4.82 per unit. Hoping to look good in your next review you propose that your firm do the following to increase profits.
1. Raise price by a lot. Since marginal cost is less than half the price, it will be profitable to increase prices by a great deal.
2. Reduce price by almost $5.20 so that price will be close to marginal cost, which will maximize the monopoly profit.
3. Reduce price to $9.95 because that is just barely lower than current and will split the marginal cost versus marginal benefit difference.
4. Reduce price to $9.90 since that will set the added revenue just slightly above the additional costs of production.
5. Reduce price to $9.60 since that will set the added revenue just slightly above the additional costs of production.
Answer to Question 18
Suppose after you make your suggestion based on the information in the last question you are told that the firm legal department just sent a fax indicating that the annual non-refundable retainer they pay to a Wall Street legal firm which handles much of your firm's legal work has been increased by an extra $100,000 per year. Based on this information you change your recommendation in the following way.
1. You recommend that prices be increased more than before in the hopes of passing the costs of the retainer along to your customers.
2. You recommend that prices be lowered more than before so the extra sales will make up for the extra costs.
3. You recommend the same price you recommended before since this extra cost is not related to the number of units your firm produces.
4. You recommend that the firm find a new demand curve so that prices and quantities can be recomputed.
5. You recommend that price be the same but that output be doubled in the hope of earning extra revenue.
Answer to Question 19

Figure 8
For the monopolistically competitive firm depicted in Figure 8 the profit maximizing quantity and price are:
1. Q=10, P = 23
2. Q = 15, P = 27
3. Q = 15, P = 20
4. Q = 25, P = 15
5. Q = 25, P = 18
Answer to Question 20
As depicted, this firm in Figure 8 is earning an economic profit of:
1. 105
2. 75
3. -105
4. -255
5. -75
Answer to Question 21
Compared with the results in the diagram above, in the long run, in a market with free entry, the firm in Figure 8 will:
1. Charge a higher price and produce a larger quantity
2. Charge a higher price and produce a smaller quantity
3. Charge a lower price and produce a smaller quantity
4. Charge a lower price and produce a larger quantity
5. The long run result is the same as original result
Answer to Question 22

Figure 9
Suppose the firm depicted in Figure 9 is a firm in a monopolistically competitive industry. At the profit maximizing level of price and output for this firm:
1. consumers will be willing to pay $6 for one more unit of the good while it would cost the firm $4.50 to product another unit.
2. consumers will be willing to pay $5 for one more unit of the good while it would cost the firm $5.00 to product another unit.
3. consumers will be willing to pay $5 for one more unit of the good while it would cost the firm $4.50 to product another unit.
4. consumers will be willing to pay $10 for one more unit of the good while it would cost the firm $5.00 to product another unit.
5. consumers will be willing to pay $10 for one more unit of the good while it would cost the firm $3.00 to product another unit.
Answer to Question 23
At the profit maximizing level of price and output the firm for which we are given the data in Figure 9 is:
1. incurring economic losses of $20.
2. earning economic profits of $50.
3. earning economic profits of $70.
4. earning economic profits of $15.
5. earning exactly 0 economic profit.
Answer to Question 24
If entry is free in the industry to which the firm in Figure 9 belongs, how will long run equilibrium for this firm differ from the situation shown in the graph?
1. It will charge a higher price and produce a larger output.
2. It will charge a higher price and produce a smaller output.
3. It will charge a lower price and produce a smaller output.
4. It will charge a lower price and produce a larger output.
5. The firm is in long run equilibrium.
Answer to Question 25
Suppose the restaurant industry Gotham City is monopolistically competitive. In order to run a successful restaurant in Gotham City it is necessary to have a liquor license. Suppose successful restaurants can expect to earn economic profits of $10,000 per year, forever. Suppose that once you have a liquor license in Gotham city you can keep it for ever, bequeath it to your heirs, or sell it. If you believe that there is no risk associated with the restaurant business in Gotham and if you think the interest rate will remain at 5% forever, approximately what is a liquor license worth?
1. $10,000
2. $500
3. its value is infinite since it's good forever.
4. $200,000
5. $50,000
Answer to Question 26
A profit maximizing monopolist finds that its annual liability insurance premium will be increased by a significant amount. The most likely response is that:
1. the firm will not change its production behavior.
2. the firm will lower its marginal and average costs to increase profits.
3. the firm will advertise to increase demand thus restoring its profits.
4. the firm reduce price and increase output.
5. the firm increase price and reduce output.
Answer to Question 27
Figure 10
In Figure 10 an industry is depicted that was initially perfectly competitive with industry demand curve D and industry supply curve S_pc . The firms in the industry all merge to convert the industry to a monopoly, with MC_m as the single firm's marginal cost curve. What area is the total producer's surplus for the monopoly?
1. 0 H P_O
2. P₂ F H P_O
3. P₁ G F P₂
4. P₂ F G 0
5. P₁ G 0
Answer to Question 28
What area in Figure 10 represents the deadweight loss that results from monopolization of this industry?
1. F H I
2. G H F
3. P_O H G P₁
4. P₂ F H P₀$\
5. I H G
Answer to Question 29
Which of the following would not be a source of inefficient market outcomes?
1. monopoly power.
2. externalities.
3. imperfect information.
4. profits.
5. collusion to reduce output.
Answer to Question 30
One of the primary arguments for allowing natural monopolies to exist rather than forcing an industry to be competitive with many small firms is that:
1. it is generally believe that monopolies produce higher quality products than would many small firms.
2. consumers prefer not having to decide which firm is best.
3. total costs of producing the same amount of output would be much higher if produced by many small firms.
4. its easier to regulate one large firm than many small ones.
5. collusion is easily prevented in monopoly.
Answer to Question 31
Suppose the airlines industry has been accused of price fixing by sending coded communications to each other about whether they want prices to go up, down or stay the same. If true, the airlines:
1. would be tacitly colluding.
2. would be explicitly colluding.
3. would be operating in the best interest of the consumer.
4. would be effectively merged.
5. would be practicing predatory pricing.
Answer to Question 32
Which of the following is an important loophole in The Clayton Antitrust Act of 1914?
1. It did not prevent anticompetitive or monopolizing mergers through stock or share purchases.
2. It did not prevent anticompetitive price discrimination.
3. It did not prevent anticompetitive tying contracts
4. It did not prevent anticompetitive or monopolizing mergers through assets purchases.
5. It did not prevent directors of one company from being directors of another company in the same industry.
Answer to Question 33
Suppose that an industry faces a constant long run average total cost of $10 per unit. Under perfect competition, total industry sales will be 500 units per year. Under monopoly, the industry sells 100 units of output at a price of $30 for each unit. The cost of monopolization in this industry is: (Hint: the answer is the area of a triangle)
1. $2,000 per year
2. $3,000 per year
3. $4,000 per year
4. $8,000 per year
5. cannot be computed with the given information.
Answer to Question 34
A monopolist will produce a socially efficient level of output if it:
1. sets marginal revenue equal to marginal cost.
2. produces where price equals average fixed cost.
3. practices perfect price discrimination.
4. produces where marginal revenue is negative.
5. produces where price equals average total cost.
Answer to Question 35
Suppose you own a furniture store. You place an order for tables with BigTime furniture, but are told that you cannot carry the tables unless you also carry their line of sofas. BigTime would be in violation of the:
1. Sherman Anti-Trust Act for attempting to monopolize the furniture industry.
2. Sherman Anti-Trust Act for price discrimination.
3. Clayton Act for attempting to establish an exclusive dealing contract.
4. Clayton Act for attempting to establish a tying contract.
5. Clayton Act for attempting to establish a requirements contract.
Answer to Question 36
Figure 11
If the firm for which we have the data depicted in Figure 11 is a monopoly and the government decides to regulate the price and output of the firm, the price quantity pair that will be closest to the allocatively efficient level but which will not require that the firm be subsidized will be:
1. a price of $12 and a quantity of 40.
2. a price of $35 and a quantity of 18.
3. a price of $18 and a quantity of 18.
4. a price of $30 and a quantity of 20.
5. a price of $6 and a quantity of 50.
Answer to Question 37

TABLE 1
Data For Firm A
Price	Units Sold
10	100
9.95	101
9.90	102
9.85	103
9.80	104
9.75	105
9.70	106
9.65	107
9.60	108

Sample Test Questions - 3 -

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Figure 6

Figure 7

Figure 8

Figure 9

Figure 10

Figure 11