Exam 3 Review

• Neither company has a dominant strategy

• Both companies have an incentive to reduce production by %10

• Both companies have an incentive to reduce production by %20

• Only UA have an incentive to reduce production by %20

• Only UB have an incentive to reduce production by %20

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 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 has 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

Monopolistically competitive product markets are inefficient because

• price equals the marginal value to the buyer of the last item produced

• price is greater than marginal cost

• excessive competition prevents other firms from entering the market

• homogeneous goods are usually overpriced

• short-run economic profit-making opportunities exist

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

Which of the following must be true if a profit-maximizing monopolistically competitive firm continues to operate in the short run while incurring a loss?

• Marginal revenue equals marginal cost and price is greater than average total cost.

• Marginal revenue equals marginal cost and price is greater than average variable cost.

• Marginal revenue equals marginal cost and price is less than average variable cost.

• Price equals both marginal cost and marginal revenue.

• Price is less than marginal revenue, but greater than average variable cost.

What is the profit-maximizing price and quantity?

• P₁, Q₁

• P₂, Q₄

• P₃, Q₃

• P₄, Q₂

• P₅, Q₁

Is the firm in short-run or long-run equilibrium?

• Short run, because price is greater than marginal cost

• Short run, because the firm is earning a positive economic profit

• Long run, because price is greater than average total cost

• Long run, because marginal revenue is not equal to zero

• Either short run or long run, because the firm is producing where marginal revenue equals marginal cost

Which of the following is true of a monopolistically competitive firm in long-run equilibrium?

• It produces where price equals marginal cost, and it earns zero economic profits.

• It produces where marginal revenue exceeds marginal cost, and it earns positive economic profits.

• It produces where marginal cost equals marginal revenue, the price is equal to average total cost, and the price is greater than marginal cost.

• It produces at the minimum average total cost, and it utilizes all excess capacity.

• It produces more than the allocatively efficient quantity, and the price is greater than marginal cost.

Which of the following statements correctly identifies a difference between perfect competition and monopolistic competition? 

• In perfect competition there are no barriers to entry, but there are strong barriers in monopolistic competition. 
• In perfect competition there are many firms, but in monopolistic competition there are only a few firms. 
• In perfect competition the firms all sell products that are exactly the same, but in monopolistic competition each firm sells a slightly differentiated product. 
• In perfect competition there are few consumers, but in monopolistic competition there are many consumers.