AP Economics



Take Home Test, Modules 28 – 31 (turn in a hard copy at the beginning of class on 4/4) I have neither given nor received help on this test._____________________________________________Signature_____________________________________________DateMultiple ChoiceIdentify the choice that best completes the statement or answers the question.____1.The market structure characterized by a few interdependent firms and in which there are barriers to entry is called:a.monopolistic competition.b.perfect competition.c.oligopoly.d.monopoly.e.game theory.____2.Which of the following scenarios best describes an oligopolistic industry?a.A single cable company serves customers in a small town.b.Thousands of soybean farmers sell their output in a global commodities market.c.Coca-Cola and Pepsi sell most of the soft drinks consumed around the world.d.A college has one bookstore selling textbooks to students.e.Hundreds of firms produce similar, but differentiated, types of shoes.____3.An industry with two firms producing is generally called:a.a monopoly.b.monopolistic competition.c.a duopoly.d.perfect competition.e.monopsony.____4.An industry that consists of two firms is:a.a duopoly.b.a monopoly.c.a monopsony.d.monopolistic competition.e.perfect competition.____5.If the only two firms in an industry agree to fix the price at a given level, this is an example of:a.collusion.b.satisfying demand.c.price extortion.d.price leadership.e.price discrimination.QuantityPrice($/barrel)TotalRevenue ($) 0$160$ 0 10 1501,500 20 1402,800 30 1303,900 40 1204,800 50 1105,500 60 1006,000 70 906,300 80 806,400 90 706,300100 606,000110 505,500120 404,800130 303,900140 202,800150 101,500160 0 0Table 64-1: Demand for Crude Oil____6.(Table 64-1: Demand for Crude Oil) The table shows the demand schedule for crude oil. For simplicity, assume that the cost of producing crude oil is zero—the marginal cost of crude oil equals zero. If the crude oil industry is a monopoly, the price of crude oil will be ________, the total quantity of crude oil produced by the monopoly will be ________ barrels, and the monopoly will earn economic profits equal to ________.a.$80; 80; $6,400b.$80; 80; 0c.$160; 0; 0d.$60; 100; $6,000e.$120; 40; $4,800Price($ per stake)Quantity$1430 1335 1240 1145 1050 955 860 765Table 64-2: Demand for Wooden Stakes____7.(Table 64-2: Demand for Wooden Stakes) The table shows the demand for wooden stakes in the town of Sunnyvale. Suppose the marginal cost of producing stakes is zero. The only two firms producing wooden stakes, Spike Inc. and Buffy Co., agree to produce only 50 stakes, with each firm producing only 25. What is Buffy's price effect if she cheats on the agreement and produces 30 stakes?a.$10b.–$25c.$20d.$1e.-$45____8.The airline industry often engages in Bertrand behavior. This means that firms often ________ prices until profits ________.a.raise; are maximizedb.lower; are maximizedc.lower; approach zerod.raise; approach zeroe.lower; approach break-even levels____9.When oligopolistic firms face production capacity constraints they:a.are more likely to engage in price competition.b.are more likely to increase production and lower the price to increase sales.c.are likely to set price equal to marginal cost.d.will be unable to make positive economic profits.e.are more likely to engage in quantity competition.____10.Maximization of joint profits is most likely when firms are:a.perfect competitors.b.monopolistic competitors.c.duopolists who collude.d.natural monopolists.e.producing very different products in an industry with no barriers to entry.____11.In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium is for:a.both individuals to not confess.b.both individuals to confess.c.the first player to confess and the second player to not confess.d.This game does not have a Nash equilibrium.e.the first player to not confess and the second player to confess.Figure 65-2: Payoff Matrix I for Blue Spring and Purple Rain____12.(Figure 65-2: Payoff Matrix I for Blue Spring and Purple Rain) The figure shows the payoff matrix for two producers of bottled water, Blue Spring and Purple Rain. The Nash equilibrium in the figure is reached when:a.both firms charge a high price.b.both firms charge a low price.c.Blue Spring charges a high price and Purple Rain charges a low price.d.Purple Rain charges a high price and Blue Spring charges a low price.e.This game does not have a Nash equilibrium.____13.The figure shows the payoff matrix for two producers of bottled water, Blue Spring and Purple Rain. Each has two strategies available to it: a high price and a low price. The dominant strategy for Purple Rain is to:a.always charge a low price.b.always charge a high price.c.always adopt the same strategy as Blue Spring.d.always adopt the opposite strategy as Blue Spring.e.Purple Rain does not have a dominant strategy.Figure 65-3: Payoff Matrix for Gehrig and Gabriel____14.(Figure 65-3: Payoff Matrix for Gehrig and Gabriel) The figure shows the payoff matrix for two producers, Gehrig and Gabriel, who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. If both follow a tit-for-tat strategy, equilibrium will be reached when:a.they each produce 5,000 figurines.b.they each produce 7,000 figurines.c.Gehrig produces 7,000 figurines and Gabriel produces 5,000 figurines.d.Gehrig produces 5,000 figurines and Gabriel produces 7,000 figurines.e.No tit-for-tat equilibrium exists in this game.____15.If rival gas stations in Reno limit production and ________ prices in a way that increases their profits, without meeting with one another in a formal way, this is known as ________ collusion.a.lower; tacitb.raise; overtc.lower; explicitd.raise; explicite.raise; tacit____16.Tacit collusion in practice is made more difficult to achieve:a.the larger the number of firms in the industry.b.the fewer the number of products being sold.c.the more similar the marginal costs of each firm.d.if customers have little or no bargaining power.e.the less differentiated the products being sold.Figure 65-4: Payoff Matrix for Ajinomoto and ADM____17.(Figure 65-4: Payoff Matrix for Ajinomoto and ADM) Given the payoff matrix in the figure, the optimal combination for maximum combined profit is for:a.each firm to produce 30 million pounds.b.each firm to produce 40 million pounds.c.ADM to produce 30 million pounds and for Ajinomoto to produce 40 million pounds.d.ADM to produce 40 million pounds and for Ajinomoto to produce 30 million pounds.e.Each firm to produce the average of 35 million pounds.Figure 65-7: Pricing Strategy in Cable TV Market I____18.(Figure 65-7: Pricing Strategy in Cable TV Market I) In the figure, the dominant strategy for CableSouth:a.is to advertise.b.is to not advertise.c.is to do whatever CableNorth does.d.does not exist.e.is to do the opposite of whatever CableNorth does.Figure 65-8: Pricing Strategy in Cable TV Market II____19.(Figure 65-8: Pricing Strategy in Cable TV Market II) The dominant strategy for CableNorth:a.is to charge a high price.b.is to always charge a low price.c.is to always charge what CableSouth does.d.does not exist.e.is to charge the opposite of what CableSouth does.____20.Suppose that each of two prisoners, Mel and Max, has the independent choice of confessing to a crime or not confessing. If neither confesses, they spend 2 years in jail; if both confess, they spend 3 years in jail. If one confesses while the other does not, the confessor gets off with 1 year in jail while the other gets 6 years in jail. According to game theory, the likely strategy by the prisoners is that:a.both will confess.b.neither will confess.c.Mel will confess and Max will not.d.both may or may not confess.e.Max will confess and Mel will not.____21.Suppose that each of two firms has the independent choice of advertising its product or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million while the other gets profit of $2 million. According to game theory, if the firms could collude to maximize profit:a.both may or may not advertise.b.firm 1 will advertise and firm 2 will not advertise.c.both will advertise.d.neither will advertise.e.firm 1 will not advertise and firm 2 will advertise.____22.Unwritten or unspoken understandings through which firms collude to restrict competition are called:a.cartelization.b.oligopolization.c.overt collusion.d.tacit collusion.e.prisoners’ dilemmas.____23.An unwritten, unspoken agreement through which firms limit competition among themselves is also known as:a.a non-cooperative Nash equilibrium.b.tacit collusion.c.overt collusion.d.a cartel.e.a price war.____24.Firms in a particular industry that informally learn to charge the same price as the largest firm in that industry are an example of:a.a non-cooperative Nash equilibrium.b.price extortion.c.overt collusion.d.tacit collusion.e.product differentiation.____25.The study of behavior in situations of interdependence is called:a.benefit-cost analysis.b.econometric theory.c.game theory.d.strategic theory.e.price theory.____26.Which of the following factors increases the likelihood that oligopolists collude?a.There are a large number of firms in the industry.b.A firm and its rivals are currently operating at maximum productive capacity.c.One firm has a significant cost advantage over its rivals.d.Barriers to entry in the industry are low.e.Firms sell products that significantly differ from rival products.____27.Two firms have tacitly colluded on price-setting for several years. If this tacit agreement breaks down, it is likely to trigger a(n):a.Justice Department investigation.b.antitrust prosecution.c.price war.d.elimination of advertising expenditures.e.increase in combined profits.____28.When most cars sold in the United States were produced by the Big Three auto companies, General Motors would announce its prices for the new model year first and then the other companies would match it. This practice was an example of:a.price leadership.b.non-cooperative behavior.c.a kinked demand model.d.a cartel.e.a tit-for-tat strategy.____29.Suppose that several small colleges in Indiana, have over time, learned to charge very similar tuition rates to their students. This is an example of ______. However the colleges have each engaged in costly construction of high-tech science labs, modern dormitories and exotic foreign study opportunities for students. These endeavors are example of ______.a.tacit collusion; Bertrand competitionb.price leadership; non-price competitionc.Cournot competition; tacit collusiond.non-price competition; overt collusione.tacit collusion; non-price competition____30.A market structure characterized by many competitors, each producing differentiated products, with free entry and exit into the industry, is described as:a.monopolistic competition.b.oligopoly.c.perfect competition.d.monopoly.e.duopoly.____31.Which of the following is not a characteristic of monopolistic competition?a.product differentiationb.lack of barriers to entry and exit in the long runc.many competing producersd.tacit collusione.advertisingFigure 67-1: Monopolistic Competition I____32.(Figure 67-1: Monopolistic Competition I) Which of the panels in the figure shows a monopolistic competitor earning a loss in the short run?a.Panel ab.Panel bc.Panel cd.None of the panels show a loss in the short run.e.Both panels b and c.____33.Toby operates a small deli downtown. The deli industry is monopolistically competitive. Toby tells you that his and every other deli in town is producing the quantity that minimizes their average total cost. Assuming the delis are maximizing profits, you know that the:a.number of delis will soon decrease.b.number of delis will soon increase.c.delis' prices equal their average total costs.d.delis have excess capacity.e.delis’ prices will eventually begin to rise.____34.If monopolistically competitive firms are earning positive economic profits in the short run, then in the long run:a.firms will leave the industry.b.the demand curves faced by existing firms will move to the right.c.economic profits will increase.d.economic profits will be reduced to zero.e.the average total cost curve will shift upward.____35.The demand curve for a firm under monopolistic competition is:a.U-shaped.b.upward-sloping.c.downward-sloping.d.vertical.e.horizontal.Figure 67-5: Profit Maximization in Monopolistic Competition____36.(Figure 67-5: Profit Maximization in Monopolistic Competition) In panel A, the firm in monopolistic competition may experience short-run economic profits as shown by:a.P - S.b.(P - S) times the quantity M.c.(P - S) times the quantity Q.d.(P*T) times the quantity Q.e.P*M.____37.(Figure 67-5: Profit Maximization in Monopolistic Competition) If other firms see economic profits in the industry, they will enter it, and the demand curve for firms already in the industry will shift to the ________; in the long run, this will result in economic profit ________ and price ________.a.right; = 0; = ATCb.right; > 0; > ATCc.left; < 0; < ATCd.left; = 0; = ATCe.left; = 0; > ATC____38.Product differentiation under monopolistic competition means that each firm:a.charges the same price.b.maximizes profit where MC = P.c.faces a downward-sloping demand curve.d.receives economic profits.e.has no incentive to engage in advertising.Figure 67-10: The Market for Gas Stations____39.(Figure 67-10: The Market for Gas Stations) Assume that the market for gas stations is characterized by many firms, differentiated products, easy entry, and easy exit. For the typical gas station shown in the figure, the profit-maximizing price would be:a.P1.b.P2.c.P3.d.Q3.e.0.____40.(Figure 67-10: The Market for Gas Stations) The figure shows curves facing a typical gas station in a large town. Assume that the market is characterized by many firms, differentiated products, easy entry, and easy exit. If the gas station shown here were to raise its price above the profit-maximizing price, it would experience:a.an increase in per-unit profit.b.an increase in total revenue.c.no change in total revenue.d.an increase in marginal cost.e.a reduction in total revenue.____41.A monopolistically competitive firm is operating in the short run at the optimal level of output and is earning negative economic profits. Which of the following must be true?a.ATC > P > MR = MCb.ATC = P > MR = MCc.ATC > P = MR = MCd.ATC > P > MR > MCe.P > ATC > MR = MC____42.The demand curve for a firm under monopolistic competition is best described as which of the following?a.U-shapedb.upward-slopingc.verticald.horizontale.downward-sloping____43.In order to maximize profits, a firm in monopolistic competition will produce:a.at the level at which marginal cost equals average total cost.b.at the level at which marginal cost is greater than marginal revenue.c.at the level at which marginal cost equals marginal revenue.d.at the level at which marginal cost equals price.e.at the level at which marginal revenue equals price.____44.Firm X is a typical firm in a market characterized by the model of monopolistic competition. If the market is in long-run equilibrium, then the price Firm X charges for its services would:a.equal average total cost.b.exceed average total cost.c.be less than average total cost.d.equal marginal cost.e.equal average variable cost.____45.The broccoli market is perfectly competitive. This means that the price of broccoli is ________ than the price would be if the market was monopolistically competitive, and broccoli output is ________ than if it was monopolistically competitive.a.lower; greaterb.lower; lessc.greater; lessd.greater; greatere.lower; no differentFigure 67-11: Comparing Long-Run Equilibriums____46.(Figure 67-11: Comparing Long-Run Equilibriums) In the figure, which of the following statements is true?a.Firms in the market structure shown in panel (a) cannot have excess profits in the long run, but the firms in the market structure shown in panel (b) can have excess profits in the long run.b.Panel (a) and panel (b) show markets that have few interdependent firms.c.Panel (a) and panel (b) show markets that produce identical products.d.Panel (a) and panel (b) show markets that have many firms.e.Panel (a) is a market with barriers to entry and panel (b) is a market with no barriers to entry.____47.The excess capacity in monopolistic competition may be viewed as:a.the reason perfect competition is always preferred to monopolistic competition.b.efficient.c.the reason P = MR = MC in monopolistic competition.d.the disadvantage of monopolistic competition over monopoly.e.the cost of product diversity.____48.Monopolistic competition is different from perfect competition due to the fact that within monopolistic competition:a.firms experience easy entry and exit.b.there are many firms.c.products are differentiated.d.to maximize profits, a firm will produce where MR = MC.e.normal profits are earned in the long run.____49.Monopolistic competitors sell products that are ________ and as a result, each firm has a ________ demand curve.a.imperfect substitutes; upward-slopingb.perfect substitutes; horizontalc.imperfect substitutes; horizontald.perfect substitutes; downward-slopinge.imperfect substitutes; downward-sloping____50.Monopolistically competitive firms:a.engage in collusive activity in order to maximize profit.b.are very similar to perfect competitors in producing at the minimum ATC.c.are regulated by the government to keep long-run economic profits equal to zero.d.will set price where MC > MR.e.earn a positive economic profit if price is greater than ATC.Short Answer Module 281. Explain whether each of the following characteristics will increase or decrease the likelihood that a firm will collude withother firms in an oligopoly to restrict output.a. The firm’s initial market share is small. (Hint: Think aboutthe price effect.)b. The firm has a cost advantage over its rivals.c. The firm’s customers face additional costs when they switchfrom one firm’s product to another firm’s product.d. The firm and its rivals are currently operating at maximumproduction capacity, which cannot be altered in the short run.Module 29Module 301. For each of the following industry practices, explain whetherthe practice supports the conclusion that there is tacit collusionin this industry.a. For many years the price in the industry has changedinfrequently, and all the firms in the industry charge thesame price. The largest firm publishes a catalog containing a“suggested” retail price. Changes in price coincide withchanges in the catalog.b. There has been considerable variation in the marketshares of the firms in the industry over time.c. Firms in the industry build into their productsunnecessary features that make it hard for consumersto switch from one company’s products to another’s.d. Firms meet yearly to discuss their annual sales forecasts.e. Firms tend to adjust their prices upward at the sametimes.Module 311. Suppose a monopolistically competitive industry composed offirms with U-shaped average total cost curves is in long-runequilibrium. For each of the following changes, explain how theindustry is affected in the short run and how it adjusts to a newlong-run equilibrium.a. a technological change that increases fixed cost for everyfirm in the industryb. a technological change that decreases marginal cost for everyfirm in the industry2. Why is it impossible for firms in a monopolistically competitiveindustry to join together to form a monopoly that is capable ofmaintaining positive economic profit in the long run?3. Indicate whether the following statements are true or false, andexplain your answers.a. Like a firm in a perfectly competitive industry, a firm in amonopolistically competitive industry is willing to sell agood at any price that equals or exceeds marginal cost.b. Suppose there is a monopolistically competitive industry inlong-run equilibrium that possesses excess capacity. All thefirms in the industry would be better off if they merged intoa single firm and produced a single product, but whetherconsumers would be made better off by this is ambiguous.c. Fads and fashions are more likely to arise in industriescharacterized by monopolistic competition or oligopolythan in those characterized by perfect competition ormonopoly. ................
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