AP Micro Unit IV Exam: Imperfect Competition

Game Theory is used to explain:

• Why firms price discriminate

• How monopolies evolve into oligopolies

• Strategic behavior of firms in oligopoly

• Profit maximization in monopoly

• Price leadership of monopolistic competition

Assume a profit maximizing monopoly was subject to a lump sum tax. Which of the following will occur?

• Price and quantity will stay the same

• Price will increase and quantity will decrease

• Price will increase but quantity will stay the same

• The consumer surplus would get smaller

• The monopoly would produce the socially optimal quantity

Assume that Prescott Pharmaceuticals, which holds patents on Vaxadrin, Vaxadrine, and Vaxadrone is an unregulated monopolist. Its profit-maximizing quantity will always be somewhere...

• where marginal revenue equals price

• where price equals marginal cost

• where the marginal cost curve intersects the demand curve

• in the region of the demand curve where marginal revenue is negative

• in the region of the demand curve where marginal revenue is positive

rice (Demand) exceeds marginal revenue for the pure monopolist because:

• the law of diminishing returns doesn’t apply

• the demand curve lies below the marginal revenue curve

• the monopolist produces a smaller output than would a purely competitive firm

• the demand curve is inelastic

• to sell more the monopolist must lower its price

The two firms in an industry are deciding whether to advertise. The profit to each firm depends on the other firm’s decision. The first entries in the matrix below indicate the profit earned, in millions of dollars, by Firm A; and the second entries indicate the profits earned, in millions of dollars, by Firm B.

Based on the payoff matrix, which of the following is correct?

• Firm A always gets a smaller share of the industry profits

• Firm A’s dominant strategy is to advertise

• Firm B’s dominant strategy is not to advertise

• The dominant strategy for both firms is not to advertise

• Neither firm has a dominant strategy

The two firms in an industry are deciding whether to advertise. The profit to each firm depends on the other firm’s decision. The first entries in the matrix below indicate the profit earned, in millions of dollars, by Firm A; and the second entries indicate the profits earned, in millions of dollars, by Firm B.

The combination where Firm A advertises and Firm B does not advertise is Nash Equilibrium because:

• It is best for each firm given what the other firm as chosen

• The total industry profits are maximized

• Firm A has an incentive to change its strategy and chooses not to advertise

• It is the best outcome for Firm B regardless of what Firm A does

• Advertising is always the best strategy for Firm A

One difference between oligopolies and monopolistically competitive markets is that

• There is no deadweight loss in monopolistically competitive markets, but there is in oligopolies

• The products sold in monopolistically competitive markets are identical

• Oligopolies have fewer barriers to entry

• Firms maximize profits in monopolistically competitive markets but not in oligopolies

• There are fewer firms in oligopolistic markets than in monopolistically competitive ones

Pure monopolists may obtain economic profits in the long run because:

• they advertise extensively

• marginal revenue is constant as sales increase

• barriers to entry keep other firms from entering the market

• diseconomies of scale keep costs low

• the demand for their products are inelastic

What is the profit-maximizing price and quantity?

• P1 Q1

• P2 Q4

• P3 Q3

• P4 Q2

• P5 Q1

If the government were to regulate the monopoly pictured in the graph so that they must produce at the "socially optimal" amount, what would be the price and quantity?

• Q1 P5

• Q2 P4

• Q3 P3

• Q4 P2

• None of these