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Baruch College
Econ 1001 Microeconomics (#3)

Summer 2002

1. Any activity designed to transfer income or wealth to a particular individual or firm at society's expense is called:
A) patent protection B) X-inefficiency C) price discrimination D)rent-seeking.

2. The economic incentive for price discrimination depends on:


A) prejudices of business managers.
B) differences among sellers' costs.
C) a desire to evade antitrust legislation.
D) differences among buyers' demand elasticities.

3. Which of the following would be evidence of price discrimination at a local bar called the Stabilizer?
A) charging higher prices than under perfect competition.
B) charging higher prices for imported than for domestic beer.
C) charging lower prices to customers wearing Stabilizer T-shirts.
D) charging lower prices to people who bring their own glasses and pitchers.

4. To practice long-run price discrimination, a monopolist must:


A) be a natural monopoly.
B) charge one price to all buyers.
C) permit the resale of the product by the original buyers.
D) be able to separate buyers into different markets with different price elasticities.

5. Which would definitely not be an example of price discrimination?


A) A theater charges children less than adults for a movie.
B) Universities charge higher tuition for out-of-state residents.
C) A doctor charges for services according to the income of patients.
D) An electric power company charges less for electricity used during off-peak hours when production costs are lower.

6. A perfect price-discriminating monopolist produces a quantity of output that is considered:


A) efficient because profits are larger than for nonprice discriminators.
B) inefficient because profits are larger than for nonprice discriminators.
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C) efficient because marginal benefits are equal to marginal costs for the last unit sold.
D) inefficient because marginal benefits are greater than marginal costs for the last unit sold.

7. Price discrimination is more common in service industries because:


A) low price buyers will find it virtually impossible to resell the products of such industries to high price buyers.
B) the costs of providing such industries' products to different groups of buyers varies dramatically.
C) the price elasticity of demand is the same for all groups of buyers in these industries.
D) all firms in these industries have significant monopoly power over price.

8. Electric utilities generally charge higher prices for electricity used for illumination and lower prices for electricity
used for heat. These lower prices for electric heat result primarily from:
A) the existence of good heating substitutes.
B) economies of scale in electric heat generation.
C) prices for electric heat being set at the socially optimal level.
D) strict government regulation of the price charged for electric heat.

9. If a monopolist is able to engage in price discrimination and sell each unit of the product at a price equal to the
maximum price the buyer of that unit of the product would be willing to pay, then the marginal revenue that the price-
discriminating monopolist obtains from the sale of an additional unit is equal to:
A) price B) unit cost
C) average cost D) total revenue

Use the following to answer questions:10-13.

MC
P1
ATC
P5

P2 AVC
P3

P4 D

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MR

O Q1 Q2 Q3

10. Refer to the above cost and demand data for a pure monopolist. In equilibrium the firm will produce:
A) Q1 and charge price P 2 B) Q2 and charge price P 1
C) Q2 and charge price P3 D) Q3 and charge price P2

11. Refer to the above cost and demand data for a pure monopolist. In equilibrium the firm will realize a per unit:
A) profit of P1P3 B) profit of P1P4
C) loss of P3P4 D) loss of P1P2

12. Refer to the above cost and demand data for a pure monopolist. Suppose this firm is deemed a natural monopoly
and is subjected to a regulatory commission. If the commission seeks to achieve the most efficient allocation of
resources for this firm, it should set its price at:
A) P1 B) P2 C) P4 D) P5

13. One argument for requiring the government to regulate natural monopolies is that:
A) these monopolies usually produce things which are potentially harmful to our health.
B) without regulation these monopolies produce at a level where marginal benefit is greater than marginal cost.
C) without regulation these monopolies produce at a level where marginal benefit is less than marginal cost.
D) without regulation the industry would become competitive and there would be too many firms in the market to
produce efficiently.

14. What is the meaning of the phrase "dilemma of regulation"?


A) natural monopolies achieve economies of scale, but charge high prices when there is no government regulation;
government regulation reduces prices, but results in diseconomies of scale
B) natural monopolies are profitable, but only if the government permits price discrimination; government regulation
to restrict price discrimination reduces monopoly prices, but the regulation also reduces monopoly output
C) the fair return price achieves allocative efficiency, but may produce economic losses; the socially optimal price
yields a normal profit but may not be allocatively efficient
D) the socially optimal price achieves allocative efficiency, but may produce economic losses; the fair return price
yields a normal profit but may not be allocatively efficient

15. What type of barrier to entry is used by De Beers to maintain its monopoly position?
A) patent protection B) government regulation
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C) economies of scale D) ownership of an essential resource

16. Which of the following is a characteristic of monopolistic competition?


A) standardized product B) a relatively small number of firms
C) absence of nonprice competition D) relatively easy entry

17. Which is not a form of product differentiation for the monopolistically competitive firm?
A) brand names and trademarks B) promotion and packaging
C) location and accessibility D) standard hours and procedures

18. A monopolistically competitive industry is like a purely competitive industry in that:


A) each industry produces a standardized product.
B) nonprice competition is a feature in both industries.
C) neither industry has significant barriers to entry.
D) firms in both industries face a horizontal demand curve.

19. One difference between monopolistic competition and pure competition is that:
A) products can be standardized or differentiated in pure competition.
B) there is some control over price in monopolistic competition.
C) monopolistic competition has significant barriers to entry.
D) firms differentiate their products in pure competition.

20. The goal of product differentiation and advertising in monopolistic competition is to make:
A) the firm allocatively efficient even if it is not productively efficient.
B) the firm productively efficient even if it is not allocatively efficient.
C) price less of a factor and product differences more of a factor in consumer purchases.
D) price more of a factor and product differences less of a factor in consumer purchases.

21. The downward-sloping demand curve of a monopolistic competitor:


A) reflects product differentiation.
B) becomes horizontal in the long run.
C) indicates collusion among the members of the product group.
D) ensures that the firm will produce at minimum average cost in the long run.

22. A major difference between pure competition and monopolistic competition is that under pure competition:
A) individual firms have more elastic demand curves.
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B) the market demand curve is less elastic.


C) there is a smaller number of producers.
D) there are barriers to entry.

23. In monopolistic competition, a firm has a limited degree of "price-making" ability. This means that the firm will:
A) always earn an economic profit B) set price equal to marginal cost
C) set price above marginal cost D) produce at minimum average total cost

24. Assume that in a monopolistically competitive industry, firms are earning economic profit. This situation will:
A) reduce the excess capacity in the industry as firms expand production.
B) attract other firms to enter the industry because the barriers to entry are low.
C) cause firms to standardize their product to limit the degree of competition.
D) make the industry allocatively efficient as each firm seeks to maintain its profits.

Use the following to answer questions: 25-28


$ (1)

(2)

(4) (3)

Output

25. Refer to the above graph of a representative firm in monopolistic competition. What does line 1 represent?
A) demand B) marginal cost C) marginal revenue D) average total cost

26. Refer to the above graph of a representative firm in monopolistic competition. What does line 2 represent?
A) demand B) marginal cost C) marginal revenue D) average total cost
27. Refer to the above graph of a representative firm in monopolistic competition. What does line 3 represent?
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A) demand B) marginal cost C) marginal revenue D) average total cost

28. Refer to the above graph of a representative firm in monopolistic competition. What does line 4 represent?
A) demand B) marginal cost C) marginal revenue D) average total cost

29. Suppose some firms exit an industry characterized by monopolistic competition. We would expect the demand
curve of a firm already in the industry to:
A) shift to the left.
B) shift to the right.
C) become more elastic.
D) remain the same since entering firms serve other customers in the market.

30. The long-run equilibrium position of the monopolistically competitive firm is where average costs are:
A) constant B) increasing C) decreasing D)at their minimum point.

Use the following to answer questions: 31-36

$ (1) (2)

b
P4 d
P3
P2
P1 c
a

(3)

(4)
Q1 Q2 Q3 Output

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31. Refer to the above graph of the representative firm in monopolistic competition. The intersection of marginal cost
and average total cost is represented by point:
A) a B) b C) c D) d

32. Refer to the above graph of the representative firm in monopolistic competition. Marginal revenue and marginal
cost intersect at point:
A) a B) b C) c D) d

33. Refer to the above graph of the representative firm in monopolistic competition. Point c is the intersection of the:
A) marginal cost and marginal revenue curves B) marginal cost and average total cost curves
C) marginal cost and demand curves D) average total cost and demand curves

34. Refer to the above graph of the representative firm in monopolistic competition. Demand is tangent to average
total cost at point:
A) a B) b C) c D) d

35. Refer to the above graph of the representative firm in monopolistic competition. Excess capacity for this firm
would be illustrated by:
A) Q2 - Q1 B) Q3 - Q2 C) Q3 - Q1 D) Q1 + Q3

36. Refer to the above graph of the representative firm in monopolistic competition. The long-run equilibrium price
and output for this firm will be:
A) P1 and Q1 B) P2 and Q2 C) P3 and Q3 D) P4 and Q1.

37. Monopolistic competition is characterized by excess capacity because:


A) firms are always profitable in the long run.
B) firms charge a price that is less than marginal cost.
C) firms produce at an output level less than the least-cost output.
D) the demand for a product is perfectly elastic in this type of industry.

38. In monopolistic competition there is an underallocation of resources at the profit-maximizing level of output,
which means that:
A) minimum ATC is less than MC B) minimum ATC is less than MR
C) price is greater than minimum ATC D) price is greater than MC

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39. The stronger the product differentiation in monopolistic competition, the:


A) less elastic the demand curve, and production will take place further to the left of minimum average costs.
B) less elastic the demand curve, and production will take place further to the right of minimum average costs.
C) more elastic the demand curve, and production will take place further to the left of minimum average costs.
D) more elastic the demand curve, and production will take place further to the right of minimum average costs.

40. A major distinction between a monopolistically competitive firm and an oligopolistic firm is that:
A) one is a price taker and the other is a price maker.
B) a recognized interdependence exists between firms in one industry but not in the other.
C) one always produces differentiated products and the other always produces a homogeneous product.
D) one necessarily faces a downward-sloping demand curve and the other a horizontal demand curve.

41. "Mutual interdependence" means that:


A) product differentiation exists, that is, firms produce close substitutes, but not identical products.
B) each seller faces a completely inelastic demand curve.
C) each firm must consider the possible reactions of rivals when establishing price policy.
D) when a pure monopolist chooses a price, it also necessarily chooses some specific level of output.

42. A low concentration ratio means that:


A) there is a low probability of entering the industry.
B) there is a low probability of success in the industry.
C) each firm accounts for a small market share of the industry.
D) each firm accounts for a large market share of the industry.

43. The Herfindahl index is a measure of:


A) profitability in an industry B) the price level in an industry
C) kinked demand in an industry D) market power in an industry

44. In a duopoly, if one firm increases its price, then the other firm can:
A) keep its price constant and thus increase its market share.
B) keep its price constant and thus decrease its market share.
C) increase its price and thus increase its market share.
D) decrease its price and thus decrease its market share.

Use the following to answer questions:45-47


Answer the next question(s) based on the following payoff matrix for a duopoly in which the numbers indicate the
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profit in thousands of dollars for a high-price or a low-price strategy.


Firm X
High-price Low-price
High-price X = $625 X = $725
Y = $625 Y = $475
Firm Y
Low-price X = $475 X = $400
Y = $725 Y = $400

45. Refer to the above payoff matrix. If both firms collude to maximize joint profits, the total profits for the two firms
will be:
A) $1,200,000 B) $1,250,000 C) $1,400,000 D) $1,500,000

46. Refer to the above payoff matrix. Assume that firm Y adopts a low-price strategy while firm X maintains a high-
price strategy. Compared to the results from a high-price strategy for both firms, firm Y will now:
A) gain $100,000 in profit and firm X will lose $150,000 in profit.
B) gain $150,000 in profit and firm X will lose $100,000 in profit.
C) gain $525,000 in profit and firm X will lose $275,000 in profit.
D) lose $150,000 in profit and firm X will gain $150,000 in profit.

47. Refer to the above payoff matrix. If both firms operate independently and do not collude, the most likely profit is:
A) $400,000 for firm X and $400,000 for firm Y.
B) $725,000 for firm X and $475,000 for firm Y.
C) $475,000 for firm X and $725,000 for firm Y.
D) $625,000 for firm X and $625,000 for firm Y.

48. If an oligopolist's demand curve has a "kink" in it, then:


A) the oligopolist's marginal cost curve has a break in it.
B) the oligopolist need not fear entry into the industry by new firms.
C) the oligopolist's competitors will not react to its price changes, either up or down.
D) over some interval, a change in the oligopolist's marginal cost will not cause a change in the oligopolist's profit-
maximizing price.

49. The principle underlying the kinked demand curve model of oligopoly is that the demand curve facing one firm is
more elastic when other firms in the industry:
A) match the firm's price changes.
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B) hold price constant when the firm changes its prices.


C) hold quantities constant when the firm changes its prices.
D) change prices in the opposite direction when the firm changes its prices.

50. In the kinked demand model, there will be a vertical break in the firm's:
A) demand curve B) marginal cost curve
C) marginal revenue curve D) average total cost curve

51. Collusive control over price may permit oligopolists to:


A) use new technology, achieve economies of scale, and get government subsidies.
B) achieve economies of scale, reduce costs, and prevent price cheating.
C) increase product demand, increase product supply, and lower cost.
D) reduce uncertainty, increase profits, and possibly limit entry of new firms.

52. A major reason that firms form a cartel is to:


A) reduce the elasticity of demand for the product.
B) enlarge the market share for each producer.
C) minimize the costs of production.
D) maximize joint profits.

53. The incentive to cheat is strong in a cartel because:


A) each firm can increase its output and thus its profits by cutting price.
B) the marginal revenue is greater than marginal cost at the profit-maximizing price set by the cartel.
C) there is a significant lack of government regulation of cartels, especially those in worldwide production.
D) the costs of production are the same for each firm, but the product demand differs.

54. Other things being equal, a firm in a cartel will most likely cheat on a price-fixing agreement by:
A) increasing price and restricting its output.
B) organizing promotions of the product.
C) secretly increasing sales to a large number of small customers.
D) secretly lowering price and increasing sales to a few customers.

55. If a particular bank regularly announces changes in its interest rate schedules before its competitors, which then set
rates very close to those announced by that bank, this could be described as:
A) markup pricing B) predatory pricing C) price leadership D) explicit price collusion

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56. Allocative and productive efficiency is achieved under the market structure of:
A) oligopoly B) pure competition C) pure monopoly D) monopolistic competition

57. In what way is monopolistic competition more like competition, and in what way is it more like monopoly?

58. What are the advantages and disadvantages of resource allocation under monopolistic competition compared to
perfect competition?

59. Is it likely that oligopolistic firms will be in both a kinked demand curve situation and also engage in price
leadership? Why or why not?

60. When an airline reduces its fares, other airlines typically match the action. But when an airline increases its fare,
other airlines do not follow suit. Which oligopoly model cartel, price leadership, or kinked demand best fits the airline
industry as described? Justify your choice and explain why the other models are less appropriate.

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