Deck 6: Market Structure

Question 1

Always Round Tire is the only producer of tires for the new British import, the Maxi Copper. Demand for a set of four tires is P = 800 - 5Q while the costs to Always Round are: MC = 15Q. What would be the monopoly price and quantity? What would happen to price and quantity if the market were perfectly competitive (assuming the same costs)?

Answer 1

A monopoly would maximize its profits by equating marginal revenue and marginal cost. For this linear demand curve MR=800-10Q. Setting MR=800-10Q=15Q=MC, we can solve for Q. Q=800/25=32. The price, P=800-5Q=800-160=640 for a set of four tires. If this was a perfectly competitive market then price would equal marginal cost 800-5Q=15Q so 20Q=800 or Q=40, and P=15.

Question 2

In a purely competitive market, a company selling in the market views its demand curve as:

A) completely price insensitive.
B) horizontal (flat).
C) vertical.
D) convex.

Answer 2

B

Question 3

For any company operating in a marketplace, the firm attempts to maximize the value of company's worth by setting output where:

A) costs are lowest.
B) P < AVC.
C) MR = MC.
D) AR = MC.

Answer 3

C

Question 4

For the perfectly or purely competitive firm, profit maximization occurs at an output level where:

A) P = MC.
B) MC = ATC.
C) P = AVC.
D) P < AVC.

Question 5

If a firm is earning a large economic profit and the firm operates in a fairly competitive market, then, over time:

A) old firms will exit and prices will rise.
B) old firms will exit and prices will fall.
C) new firms will enter and prices will rise.
D) new firms will enter and prices will fall.

Question 6

The market environment heavily influences corporate decision-making ability. Discuss the differences in executive decisions concerning pricing, product design, and advertising between a company that exists in a perfectly competitive market and a company that lives a monopolistically competitive market.

Question 7

Manifold Manufacturing, a large producer of motorcycle parts, is accused of monopolizing the market for a particular motorcycle part. Why would its legal defense team be so interested in a statistical estimate that the price elasticity of demand for its part was 0.62?

Question 8

The key to the importance of the marginal cost curve of a company is that it is its:

A) supply curve of product to the marketplace.
B) demand curve for its product to the marketplace.
C) average cost of product in both the short and long run.
D) fixed cost.

Question 9

Why would precommitment contracts, licenses, learning curve effects, and brand advantages protect an established corporation from new competitors?

Question 10

Economists tend to focus on one structural aspect of market organization that is more important than the others. It is:

A) the number of buyers and sellers.
B) product homogeneity or differentiation.
C) the quality of market information.
D) entry and exit conditions.

Question 11

Recently American Airlines started charging $15 for each checked baggage. Why did the company simply not charge $15 to $20 more per ticket, and quietly avoid this publicity?

Question 12

In a perfectly competitive market, the price that the firm faces from supply and demand is also equal to:

A) average variable cost.
B) marginal revenue and average revenue.
C) average revenue but never marginal revenue.
D) long run average cost in the short run.

Question 13

In this chapter, the discussion on competitive markets tells us that each firm's demand curve is horizontal. Is this not inconsistent with the industry's demand curve which slopes downwards?

Question 14

The market for micro-computers (PCs) is fairly competitive, the products are somewhat homogeneous, and, over time, firms have entered looking to make profits on new configurations of the micro-computer. Over time, profits:

A) have risen dramatically.
B) have stayed about the same for most firms.
C) have become razor thin for many producers.
D) are not important since this industry is in the nonprofit sector.

Question 15

Explain why OPEC cannot always maintain the high price of oil by restricting production?

Question 16

There are four structural components to a perfectly competitive market. Which one of the four is the most important to market operation and why?

Question 17

While very few markets are 'purely competitive' according to the strict economics definition, market analysts often use competition as the:

A) benchmark from which to judge other market settings.
B) standard of an inefficient market structure.
C) market with poor entry and exit conditions.
D) one market with typical asymmetry in information.

Question 18

The shut down condition - the point where the company finds it is no longer viable to produce and sell a product - for a competitive firm is where price is:

A) less than marginal revenue.
B) less than short run average total cost.
C) greater than marginal revenue.
D) less than average variable cost.

Question 19

A monopoly's demand curve is P = 200 - 3 Q. It MC = $20. How many customers should be serviced by this company? What is the price paid by each customer? What will the company's gross revenue be in this venture?

Question 20

Under duopoly are two firms 1 and 2 which face an industry demand curve P = 69 - Q, where Q = Q₁ + Q₂. MC for each firm is 0. How many units should each firm produce? How much money will each firm make?

Question 21

In a monopolistically competitive market, the seller maximizes profits by:

A) maximizing price.
B) setting MC = ATC.
C) setting price where MR = MC.
D) setting price where P = MC.

Question 22

A market where a few firms produce most of the output or sales is called:

A) oligopolistic.
B) monopolistically competitive.
C) perfectly competitive.
D) monopolistic.

Question 23

Sometimes an old company in an industry can build a larger plant that has lower costs per unit than a potential entrant (newcomer) can duplicate. That is market:

A) weakness based on cost.
B) power based on scale economies.
C) power based on specific assets.
D) weakness based on reputation deficiency.

Question 24

In the Cournot equilibrium, the price that each firm accepts is:

A) slightly higher than a monopoly price.
B) the same as the monopoly price.
C) lower than a monopoly price, but higher than a competitive price.
D) the same as a competitive price.

Question 25

Duds is a new laundry detergent trying to break into the market. What might be its big problem?

A) Its health care costs
B) Entry costs in terms of getting shelf space in the retail stores
C) Its employment policy
D) Its outsourcing policy

Question 26

The Prisoner's Dilemma and the problem of the cartel are very similar. In both cases:

A) cooperation would improve the outcome, but it rarely happens.
B) cooperation is the only solution.
C) non-cooperation would improve the outcome, but it rarely happens.
D) non-cooperation is an instable solution.

Question 27

If a firm with monopoly pricing power in the market faces a demand curve of P = 2,000 - 2Q and marginal costs of MC = 1,100 + 2Q, then the firm will produce:

A) 542 units.
B) 150 units.
C) 200 units.
D) 900 units.

Question 28

Under monopoly, there are:

A) unexploited gains from trade.
B) many competitors.
C) the advantages of heterogeneous products.
D) problems of easy entry.

Question 29

A necessary condition for market power to exist for a particular company in a market is that:

A) information must be understood by both buyers and sellers.
B) effective barriers to entry must exist.
C) the number of firms is over 150.
D) consumers perceive all products as homogeneous.

Question 30

If the competitive firm can sell its product at $16 per unit and the marginal costs of the firm are MC = 1,100 + 2Q, then the firm will produce:

A) 1,084 units.
B) 542 units.
C) 16 units.
D) 1,100 units.

Question 31

The problem of the cartel points out that:

A) the interests of consumers and duopolists are the same.
B) the interests of consumers and duopolists conflict.
C) the interests of consumers and duopolists are the same in pricing, but conflict in output management.
D) the interests of consumers and duopolists are the same in output management, but conflict in pricing.

Question 32

Always Round Tire has been in the tire business since 1963. They have several plants with different levels of technology. They are organized by the United Rubber Workers union. Over the years, the company has worked with its employees to figure out how to produce a tire for less. This incumbent advantage over potential newcomers is the:

A) result of scale economies.
B) impact of licenses and patents.
C) clear threat of using its excess capacity.
D) effect of its learning curve.

Question 33

Elmer's Glue has captured the market for school glue. It is preferred by both students and parents alike. It takes very little capitalization to enter the market but nobody successfully does. The glue clearly needs no patents or secret formulas. This type of market is called:

A) pure or perfect competition.
B) oligopoly.
C) monopolistic competition.
D) monopoly.

Question 34

In a Nash equilibrium, firms are clearly strategically interdependent and:

A) they cooperate with each other to determine market outcomes.
B) they determine price in a closed auction bid system.
C) they are dependent on differentiated goods.
D) they are non-cooperative in determining market outcomes.

Question 35

Two firms agree to set a single high price for their products, and reap high profits. What is the problem here?

A) One firm is afraid that its profit might fall drastically since it might secretly cut price.
B) One firm is afraid that its profit might fall drastically since the other might secretly cut price.
C) One firm is afraid that its profit might fall drastically since the other might raise price.
D) One firm is afraid that its profit might fall drastically since oil prices may go up.

Question 36

If a firm with monopoly pricing power in the market faces a demand curve of P = 2,000 - 2Q and marginal costs of MC = 1,100 + 2Q, then the firm will produce at a price of:

A) $16.
B) $1,400.
C) $1,700.
D) $1,600.

Question 37

Under monopoly we have "unexploited gains from trade" because:

A) if the firm were competitive it would have increased output in the long run
B) if the firm were competitive it would have decreased output in the long run
C) if the firm were competitive it would have not changed output in the long run
D) FCC is always trying to regulate it

Question 38

In a monopolistically competitive market, the advantage that a seller has over competitors or newcomers is:

A) consumer preference for its brand.
B) low costs from the learning curve effect.
C) economies of scale.
D) the license or patent.

Question 39

In the Cournot equilibrium, each firm assumes that the other's ______ is/are being held constant.

A) price
B) costs
C) output or sales
D) marketing strategy

Question 40

As a source of market power, a precommitment contract is:

A) newcomer advantage.
B) incumbent advantage.
C) incumbent reaction.
D) newcomer reaction.

Question 41

A monopolist's demand curve is P = 10 - 2 Q. So its MR is

A) 5 - 2 Q
B) 10 - Q
C) 10 - 4 Q
D) 5 - Q

Question 42

Under what market structure is a firm's MR curve horizontal?

A) Perfect Competition
B) Monopoly
C) Monopolistic Competition
D) Oligopoly

Question 43

Under what market structure do we have only 1 firm?

A) Perfect Competition
B) Monopoly
C) Monopolistic Competition
D) Oligopoly

Question 44

Currently a monopolist's MR = $5 and its MC = $10 and it services 10 consumers. An 11^th consumer walks in. Should the company service her?

A) Yes, MR > MC, so it should service her.
B) Yes, MR < MC, so it should service her.
C) No, MR > MC, so it should not service her.
D) No, MR < MC, so it should not service her.

Question 45

Currently a monopolist's MR = $10 and its MC = $5 and it services 10 consumers. An 11^th consumer walks in. Should the company service her?

A) Yes, MR > MC, so it should service her.
B) Yes, MR < MC, so it should service her.
C) No, MR > MC, so it should not service her.
D) No, MR < MC, so it should not service her.

Question 46

Under what market structure do we have strategic play?

A) Perfect Competition
B) Monopoly
C) Monopolistic Competition
D) Oligopoly

Question 47

Under what market structure do we have products like toothpaste, airlines, fast food, shampoos?

A) Perfect Competition
B) Monopoly
C) Monopolistic Competition
D) Oligopoly