Econ 323 Microeconomic Theory Practice Exam 2 with Solutions
Chapter 10, Question 1 Which of the following is not a condition for perfect competition? Firms a. take prices as given b. sell a standardized product c. are protected by barriers to entry d. have perfect information
Chapter 10, Question 2 If FC > 0, at the output where P = MC = AVC, the firm earns a. negative economic profit equal to FC b. zero economic profit c. positive economic profit equal to FC d. cannot tell from the information provided
Chapter 10, Question 3 At the output where P = MC = ATC, the firm earns a. negative economic profit b. zero economic profit c. positive economic profit d. cannot tell from the information provided
Chapter 10, Question 4 At the output where P = MC = ATC, the firm should a. shut down immediately and permanently b. produce in the short run but not in the long run c. keep producing d. shut down for now but enter again once can adjust fixed costs
Chapter 10, Question 5 Which is the largest? a. AFC b. ATC c. AVC d. cannot tell from the information provided
Chapter 10, Question 6 A firm in a competitive industry has a total cost function of, whose corresponding marginal cost curve is. If the firm faces a price of 7, what quantity should it sell? a. 5 b. 10 c. 20 d. 25 6a,,,.
Chapter 10, Question 7 And what profit does the firm make at this price? a. 75 b. 10 c. 25 d. 45 7d.
Chapter 10, Question 8 And should the firm shut down? a. yes, shut down right away b. not in the short run but yes shut down in the long run c. yes shut down in the short run but not in the long run d. no, should never shut down 8b Fixed costs are 50 (substitute 0into TC). Profits are negative but not as negative as FC. Best to produce in the short run and loose 45 instead of losing 50 if were to produce nothing. In the long run, all costs are variable, so will want to shut down and earn zero profit.
Chapter 10, Question 9 And if the firm instead faces a price of 15, what quantity should it sell? a. 5 b. 10 c. 20 d. 25 9d,,,.
Chapter 10, Question 10 And what profit does the firm make at the new higher price? a. 75 b. 10 c. 25 d. 45 10a.
Chapter 10, Questions 6 10 Price MC 15 AVC 7 5 P 5 25 Quantity
Chapter 11, Question 11 The marginal revenue curve of a single price monopolist a. lies above the demand curve b. lies below the demand curve c. lies along the demand curve d. is a horizontal line
Chapter 11, Question 12 Which statement is true for a profit maximizing monopolist? It a. faces a downward sloping demand curve b. can avoid diminishing returns to production c. will not produce where marginal cost equals marginal revenue d. can charge whatever price it wants
Chapter 11, Question 13 Which of the following would erode the monopoly pricing power of a firm that was controlling a market? a. new technology developed by the firm that lowered its long run average costs b. substitutes for its product that are developed by other firms c. a tax on corporate profits d. all of these would reduce the monopoly power of the firm
Chapter 11, Question 14 If a profit maximizing monopolist faces a linear demand curve and has zero marginal cost, it will produce at the quantity where a. marginal revenue equals zero b. price equals marginal cost c. price equals marginal revenue d. price equals average variable cost
Chapter 11, Question 15 A natural monopoly always has a. a downward sloping long run average cost curve b. an upward sloping marginal cost curve c. its profit maximization point where price = marginal cost d. extensive patent rights e. none the above
Chapter 11, Question 16 A monopolist has a demand curve given by 90 and a total cost curve given by 30. The associated marginal cost curve is 30. What is the monopolist's marginal revenue curve? a. 90 b. c. 90 3 d. 90 4 16b Marginal revenue has the same vertical intercept and twice the slope as the linear demand curve.
Chapter 11, Question 17 And what is the monopolist's profit maximizing quantity? 17c,,,.
Chapter 11, Question 18 And what price will the monopolist charge? a. P = 80 b. P = 70 c. P = 60 d. P = 50 18c.
Chapter 11, Question 19 And how much economic profit will the monopolist earn? a. 500 b. 800 c. 900 d. 1,200 19c
Chapter 11, Question 20 And what quantity would the monopolist pick if instead of charging a single price, it could perfectly discriminate? a. 10 b. 20 c. 30 d. 40 20e Sell all units valued above marginal cost 30 90, 60.
Chapter 11, Question 16 20 90 Price 60 30 MC D 0 MR 0 30 45 60 Quantity 90 2015 McGraw Hill Education. All Rights Reserved. 23
Chapter 12, Question 21 A dominated strategy is one that yields no matter what the other player chooses. a. a higher payoff b. a lower payoff c. the largest possible minimum payoff d. the smallest possible maximum payoff
Chapter 12, Question 22 When the timing of players choices matter, typically set up the series of decisions as a game. a. normal form b. extensive form or sequential c. abnormal form d. intensive form
Chapter 12, Question 23 A strategy can elicit cooperation in a repeated Prisoner s Dilemma game a. tat for tit b. tit for tat c. Dominant d. Maximin
Chapter 12, Question 24 In a Nash equilibrium, each player s choice is optimal a. no matter what the other player chooses b. given the other player s choice c. if the payer gets to pick first d. under the assumption of bounded rationality
Chapter 12, Question 25 The basic elements of a game in which people s choices affect one another are a. the players b. the set of possible strategies c. the payoff matrix d. all of the above
Chapter 12, Questions 26 30 Car Game Firm 1 SUV Firm 2 SUV 400 for Firm 1, 400 for Firm 2 Sedan 1000 for Firm 1, 800 for Firm 2 Sedan 800 for Firm 1, 1000 for Firm 2 500 for Firm 1, 500 for Firm 2
Chapter 12, Question 26 In the Car Game above, does Firm 1 have a dominant strategy? a. Yes, SUV b. Yes, Sedan c. No, Firm 1 does not have a dominant strategy in this game. d. Yes, to randomize between SUV and Sedan e. None of the above 26c No, Firm 1 does not have a dominant strategy in this game. If Firm 2 picks SUV, Firm 1 picks Sedan (800 > 400). If Firm 2 picks Sedan, Firm 1 picks SUV.
Chapter 12, Question 27 And does Firm 2 have a dominant strategy? a. Yes, SUV b. Yes, Sedan c. No, Firm 2 does not have a dominant strategy in this game. d. Yes, to randomize between SUV and Sedan e. None of the above 27c No, Firm 2 does not have a dominant strategy in this game for that same reasons as for Firm 1 (the game is symmetric). If Firm 1 picks SUV, Firm 2 picks Sedan (800 > 400). If Firm 1 picks Sedan, Firm 2 picks SUV.
Chapter 12, Question 28 And is there a Nash equilibrium fo this game? a. Both firms pick SUVs. b. Both firms pick Sedans. c. Both a. and b. are Nash equilibria. d. There is no Nash equilibrium. e. None of the above
Chapter 12, Question 28 28e A Nash equilibrium is the combination of strategies in a game such that neither player has any incentive to change strategies given the strategy of his opponent. There are two Nash equilibria: 1) Firm 1 picks SUV and Firm 2 picks Sedan, and 2) Firm 1 picks Sedan and Firm 2 picks SUV. The firms need to coordinate to pick different strategies from each other. If Firm 2 picks Sedan, Firm 1 does not want to change from its SUV (1000 > 500), and if Firm 1 picks SUV, Firm 2 does not want to change from its Sedan (800 > 400). Similarly if Firm 2 picks SUV, Firm 1 does not want to change from its Sedan (800 > 400), and if Firm 1 picks Sedan, Firm 2 does not want to change from its SUV (1000 > 500).
Chapter 12, Question 29 And the maximin strategies for each firm are a. Each firm picks SUV. b. Each firm picks Sedan. c. Firm 1 picks SUV and Firm 2 picks Sedan. d. Firm 2 picks SUV and Firm 1 picks Sedan. e. None of the above 29b Each firm picks Sedan. A maximin strategy chooses the option that makes the lowest payoff one can receive as large as possible. If Firm 1 picks Sedan, the worst payoff it can get is 500 but could get a lower payoff of 400 if picked SUV. Similarly for Firm 2.
Chapter 12, Question 30 If Firm 1 picks first, then Firm 2, the equilibrium will be a. Both firms pick SUVs. b. Both firms pick Sedans. c. Firm 1 picks SUV and Firm 2 picks Sedan. d. Firm 2 picks SUV and Firm 1 picks Sedan. e. None of the above
Chapter 12, Question 30 30c If Firm 1 picks first, then Firm 2, the equilibrium will be Firm 1 picks SUV and Firm 2 picks Sedan. Firm 1 will anticipate that Firm 2's best strategy will be to pick the opposite of whatever it picked: If Firm 1 picks SUV, Firm 2 will pick Sedan and if Firm 1 picks Sedan, Firm 2 will pick SUV. Firm 1 gets a larger payoff of $1000 vs $800 when it is the firm making the SUV and Firm 2 makes the Sedan versus if the roles were reversed. So Firm 1 will pick SUV and Firm 2 will respond by picking Sedan.