Q&A Hero

Q: Figure 14-7 Refer to Figure 14-7. Uniguest, Inc. is a company that provides PCs with internet access and touch-sensitive screens to hotels. Suppose the Hard Rock Hotel and Casino in Las Vegas informs Uniguest that it is considering installing these systems in its hotel rooms. The Hard Rock expects to be able to charge higher prices for these rooms if it installs Uniguest's systems in its rooms. The two companies begin bargaining over what price the Hard Rock will pay Uniguest for its systems, and the decision tree shown above illustrates this bargaining game. Note that the profit figures listed in the decision tree are additional profits for the Hard Rock and total profits for Uniguest. a. Suppose the Hard Rock offers Uniguest $1,200 per system. Will Uniguest accept or reject this offer? Why? b. Suppose the Hard Rock offers Uniguest $800 per system. Will Uniguest accept or reject this offer? Why? c. Suppose Uniguest attempts to obtain a favorable outcome from the bargaining by telling the Hard Rock it will reject an $800-per-system offer. If the Hard Rock does not believe the threat is credible, what will it do? Why? What will Uniguest do? Why? d. Is there a sub-game perfect equilibrium in this situation? Explain.

Q: Figure 14-6 Refer to Figure 14-6 Use the decision tree to determine whether Pizza Hut should deter Domino's from entering the market for pasta salad. Assume that each firm must earn a 25% return on investment to break even. Explain Pizza Hut's decision process.

Q: Explain why selling output at a price below that at which marginal revenue equals marginal cost (MR = MC) might serve to deter entry of a potential competitor.

Q: What is a sequential game? How are decision trees used to analyze sequential games?

Q: The prisoner's dilemma is used to analyze business situations in which one firm acts first and then other firms respond.

Q: A subgame-perfect equilibrium is a Nash equilibrium in which no player can make himself better off by changing his decision at any decision node.

Q: A subgame is a simultaneous game embedded in a sequential game.

Q: Decision trees can only be used to analyze sequential games.

Q: In a sequential game, one firm will act first and then other firms will respond.

Q: Why are decision trees useful to managers who plan business strategies? A) Decision trees explain the level of concentration in an industry. B) Decision trees can be used to increase the amount of product differentiation; this enables managers to charge higher prices for their products. C) Decision trees provide a systematic way of thinking through the implications of a strategy. D) Using a decision tree always leads to a dominant strategy.

Q: What is a subgame? A) It is one that begins at any node of the tree, including the game itself. B) It is one that begins at any decision node of the tree except the first decision node. C) It is one that starts at the final decision node of the tree. D) It is a simultaneous game embedded in a sequential game.

Q: Figure 14-5 A few years ago Netflix (N) pioneered an online DVD rental service. Blockbuster (B), a brick and mortar DVD/video rental company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this point, Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster's entry into the market. Figure 14-5 shows the decision tree for the Netflix-Blockbuster entry game. Refer to Figure 14-5. Does it make sense for Netflix to lower its price in order to deter Blockbuster's entry into the online DVD rental market? A) Yes, because Netflix stands to make a profit of $7 million by lowering its price and keeping Blockbuster out of the market. B) No, because Netflix will make a higher profit by keeping its subscription price unchanged, whether Blockbuster enters the market or not. C) Yes, because it is always profitable to remain a monopoly. D) No, because Blockbuster will enter the market regardless of Netflix's decision about its subscription price.

Q: Figure 14-5 A few years ago Netflix (N) pioneered an online DVD rental service. Blockbuster (B), a brick and mortar DVD/video rental company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this point, Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster's entry into the market. Figure 14-5 shows the decision tree for the Netflix-Blockbuster entry game. Refer to Figure 14-5. If Netflix lowers its price will this deter Blockbuster from setting up an online DVD rental service? A) Yes, because Blockbuster stands to lose $1 million if it competes with Netflix. B) Yes, because Blockbuster will make a smaller profit than Netflix if it chooses to compete. C) No, because Blockbuster will make a profit if it competes with Netflix. D) No, because Blockbuster will make a larger profit than Netflix if it chooses to compete.

Q: Sequential games are often used to analyze which two types of business strategies? A) whether to invest in research and development and whether to offer employees an early retirement package B) deciding to merge with another firm and deciding how much to spend on an advertising campaign C) deciding to end production of an unprofitable product and deciding to shut down temporarily D) deterring entry by another firm and bargaining between firms

Q: When Wal-Mart decides to build a new retail store in a town, it will decide to build a large store rather than a small store if the large store is expected to earn a greater economic profit. What other motive would Wal-Mart have for choosing to build a large store? A) A larger store will help Wal-Mart maintain its position as the leading retail company in the world more than a smaller store would. B) A larger store will give Wal-Mart greater political influence in the community. C) A larger store may deter entry into the town by a rival firm. D) Because of economies of scale, the average total cost of production is less for a larger store than a smaller store.

Q: Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms. A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes. What are these points called? A) option points B) decision nodes C) either-or terminals D) decision options

Q: A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision? A) a decision tree B) a decision matrix C) a sequential matrix D) an either-or graph

Q: Sequential games are used to analyze A) firms that are subject to the prisoner's dilemma. B) cartels. C) second-price auctions. D) situations in which one firm acts and other firms respond.

Q: All of the following are ways by which existing firms can deter the entry of new firms into an industry except A) continuously producing new and improved products. B) earning less than maximum profit. C) advertising products aggressively. D) threatening to raise prices.

Q: In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use A) retaliation games. B) follow-the-leader-games. C) sequential games. D) bargaining games.

Q: Figure 14-4 Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs, has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14-4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. Refer to Figure 14-4. In a real world situation involving Rainbow Writer and Odeon, what scenario below might permit Rainbow Writer to rationally refuse an offer from Odeon of $40 per copy of the software package? A) Odeon is also negotiating with Swift Colors, Rainbow Writer's chief rival. B) Odeon's competitors are also interested in bundling Rainbow Writer's software. C) Odeon hires a software developer to begin developing its own proprietary color labeling software. D) Odeon is considering new distribution outlets for its products.

Q: Figure 14-4 Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs, has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14-4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. Refer to Figure 14-4. What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium? A) In the equilibrium, neither offer is accepted as Rainbow Writer holds out for a better deal. The two rejection outcomes are subgame-perfect equilibria. B) In the equilibrium, Odeon offers $40 per copy of the software package and is accepted but this is not a subgame-perfect equilibrium. C) Either offer of $30 or $40 per copy of the software package is accepted and these two equilibria are subgame-perfect equilibria. D) Either offer of $30 or $40 per copy of the software package is accepted but these are not are subgame-perfect equilibria.

Q: Figure 14-4 Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs, has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14-4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. Refer to Figure 14-4. How will Rainbow Writer respond to Odeon's two possible offers? A) Rainbow Writer will reject either offer. B) Rainbow Writer will only accept an offer of $30 per copy of the software package. C) Rainbow Writer will only accept an offer of $40 per copy of the software package. D) Rainbow Writer will accept either offer.

Q: Figure 14-3 Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14.3 shows the decision tree for the Rainbow Writer-Odeon bargaining game. Refer to Figure 14-3. What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium? A) Odeon's offer of $40 per copy of the software package is accepted and this is a subgame-perfect equilibrium. B) In the equilibrium, Odeon offers $40 per copy of the software package and is accepted but this is not a subgame-perfect equilibrium. C) In the equilibrium, Odeon offers $30 per copy of the software package and is rejected, and this is a subgame-perfect equilibrium. D) There is no equilibrium in this game.

Q: Figure 14-3 Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14.3 shows the decision tree for the Rainbow Writer-Odeon bargaining game. Refer to Figure 14-3. How will Rainbow Writer respond to Odeon's two possible offers? A) Rainbow Writer will reject either offer. B) Rainbow Writer will only accept an offer of $30 per copy of the software package. C) Rainbow Writer will only accept an offer of $40 per copy of the software package. D) Rainbow Writer will accept either offer.

Q: Figure 14-2 The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. Now suppose that the government delays Xenophone's entry and Gigacom moves first, what is the likely outcome in the market? A) Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million. B) Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million. C) Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million. D) Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.

Q: Figure 14-2 The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. If the government delays Gigacom's entry and Xenophone moves first, what is the likely outcome in the market? A) Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million. B) Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million. C) Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million. D) Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.

Q: Figure 14-2 The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. Refer to Figure 14-2. If the government delays Gigacom's entry and Xenophone moves first, is a threat by Gigacom that it will provide DSL service if Gigacom provides cable service a credible threat? A) No, because Gigacom will lose $4.5 million in profits if it carries out its threat. B) Yes, because Gigacom's DSL service will drive Xenophone out of business. C) No, because as a second mover, it has no choice but to abide by the choices of the first mover. D) Yes, Xenophone stands to lose $3 million in profit.

Q: In a subgame perfect equilibrium A) the first mover has an advantage over other players. B) the last mover has an advantage over other players. C) each player's strategy constitutes a Nash equilibrium at every subgame of the original game. D) each player has the same response as the others at every subgame of the tree.

Q: Figure 14-1 Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche. Refer to Figure 14-1. If Lexus lowers its price, will this deter BMW from entering the market? A) Yes, because BMW stands to lose $100 million if it competes with Lexus. B) Yes, because BMW will make a smaller profit than Lexus if it chooses to compete. C) No, because BMW will still make a profit of $120 if it competes with Lexus. D) No, because BMW will be able to break Lexus' first mover advantage.

Q: Figure 14-1 Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche. Refer to Figure 14-1. Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market? A) In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters. B) No, it should keep the same price and work to capitalize on its brand loyalty. C) Yes, it will drive BMW out of the market. D) No, because BMW will enter the market regardless of Lexus' decision about its price.

Q: In a decision tree, the difference between a decision node and a terminal node is that A) at a decision node all participants are free to make individual decisions but at a terminal node they must agree on a collective decision. B) at a decision node all participants make the same decision, while at a terminal node different players may make different decisions. C) at a decision node, a decision must be made while a terminal node shows the payoff. D) at a decision node a decision must be made, while at a terminal node the final decision must be made.

Q: Table 14-10 Refer to Table 14-10. Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Yemen for the production of oil. Saudi Arabia and Yemen must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world's largest and lowest cost producer, is able to influence market price; it has an incentive to keep output low. Yemen, on the other hand, is a relatively high cost producer with much smaller reserves. Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Yemen $25 million to produce a low output. a. Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Yemen $25 million to produce a low output. b. What is the dominant strategy for each country in this new game? c. What is the new Nash equilibrium?

Q: Consider two single-malt whiskey distillers, Laphroaig and Knockando. If they advertise, they can both sell more whiskey and increase their revenue. However, the cost of advertising more than offsets the increased revenue so that each distiller ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that distiller increases its market share and also its profit. a. Construct a payoff matrix using the following hypothetical information: If neither distiller advertises: each earns a profit of $35 million per year. If both advertise: each earns a profit of $20 million per year. If one advertises and the other does not: the distiller who advertises earns a profit of $50 million and the distiller who does not advertise earns a profit of $9 million. b. If the two distillers agree to coordinate their strategies, what is the outcome?

Q: Assume that two interior design companies, Alistair and Baine, are competing for customers and if they both advertise, they would each earn $30 million in profits. If neither advertises, they each earn $50 million in profits. If one advertises and the other doesn't, the firm that advertises earns $40 million in profit while the other earns $20 million in profit. a. Present the information above in the form of a payoff matrix. Let Baine be the row player and Alistair the column player. b. Does each firm have a dominant strategy and if so what is it? c. What is the Nash equilibrium?

Q: There are two firms in the residential paint industry, Cool Shades (C) and Warm Hues (W). They collude to share the market equally. They jointly set a monopoly price and split the quantity demanded at that price. Here are their options: i. They continue to collude (no cheating) and make $12 million each in profits. ii. One firm cheats and the other does not. The firm that cheats makes a profit of $14 million whereas the firm that doesn't makes a profit of $9 million. iii. They both cheat and each firm makes a profit of $7 million. a. Construct a payoff matrix for these two firms. b. How does this situation relate to the prisoner's dilemma? c. If each firm acted noncooperatively, how much profit would each make? d. Are the firms better off colluding (with no cheating) or competing? Explain.

Q: Table 14-9 Refer to Table 14-9. Saudi Arabia and Yemen must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world's largest and lowest cost producer, is able to influence market price; it has an incentive to keep output low. Yemen, on the other hand, is a relatively high cost producer with much smaller reserves. Use the payoff matrix in Table 14-9 to answer the following questions. a. What is the dominant strategy for Saudi Arabia? b. What is the dominant strategy for Yemen? c. What is the Nash equilibrium?

Q: Consider two single-malt whiskey distillers, Laphroaig and Knockando. If they advertise, they can both sell more whiskey and increase their revenue. However, the cost of advertising more than offsets the increased revenue so that each distiller ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that distiller increases its market share and also its profit. a. Construct a payoff matrix using the following hypothetical information: If neither distiller advertises, each earns a profit of $35 million per year. If both advertise, each earns a profit of $20 million per year. If one advertises and the other does not, the distiller who advertises earns a profit of $50 million and the distiller who does not advertise earns a profit of $9 million. b. If Laphroaig wants to maximize profit, will it advertise? Briefly explain. c. If Knockando wants to maximize profit, will it advertise? Briefly explain. d. Is there a dominant strategy for each distiller? Briefly explain.

Q: On January 2, 1971, all cigarette advertising was banned on U.S. television and radio stations. Did this ban likely increase or decrease the profits of cigarette companies in 1971? Briefly explain.

Q: Explain why member firms of a cartel like OPEC have incentives to agree to a low cartel production level and then produce more than its quota.

Q: Why do economists refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game?

Q: What is the difference between explicit collusion and implicit collusion?

Q: Explain how collusion makes firms better off. Given the incentives to collude, briefly explain why every industry does not become a cartel.

Q: Explain why OPEC is caught in a prisoner's dilemma?

Q: On November 7, 1996, the Distilled Spirits Council of the United States decided to end its voluntary ban on television and radio liquor advertisement. The ban on hard liquor advertising had been in effect since 1936 for radio and 1948 for television. Did the lifting of this ban likely increase or decrease the profits of hard liquor companies? Briefly explain.

Q: Explain the difference between a cooperative equilibrium and a noncooperative equilibrium in game theory.

Q: Price leadership is a form of explicit collusion where one firm in an oligopoly announces a price change and expects all other firms to follow suit.

Q: In a Nash equilibrium, all players select non-dominant strategies.

Q: A fundamental assumption in game theory is that players do not interact with each other.

Q: Firms are more likely to find themselves in a prisoner's dilemma in sequential games as opposed to simultaneous games.

Q: Figure 13-18 Refer to Figure 13-18. The diagram demonstrates that A) in the short run, the monopolistic competitor produces an output Qb but in the long run after it adjusts its capacity, it will produce the allocatively efficient output, Qa. B) it is not possible for a monopolistic competitor to produce the productively efficient output level, Qa, because of product differentiation. C) it is possible for a monopolistic competitor to produce the productively efficient output level, Qa, if it is willing to lower its price from Pbto Pa. D) in the long run, the monopolistic competitor produces the minimum-cost output level, Qa, but in the short run its output of Qbis not cost minimizing.

Q: Figure 13-18 Refer to Figure 13-18. Which of the following statements is true? A) Da represents the long-run demand curve facing a monopolistic competitor in a constant-cost industry while Dbdepicts the demand curve in the short run. B) Darepresents the long-run demand curve facing a monopolistic competitor in a constant-cost industry while Dbdepicts the long-run demand curve in an increasing-cost industry. C) Darepresents the long-run demand curve facing a perfect competitor while Dbdepicts the long-run demand curve facing a monopolistic competitor. D) Darepresents the long-run supply curve in a perfectly competitive, constant-cost industry while Dbdepicts the long-run demand curve facing a monopolistic competitor in a decreasing-cost industry.

Q: Figure 13-17 Refer to Figure 13-17. In the long run, why will the firm produce Qfunits and not Qgunits, which has a lower its average cost of production? A) Although its average cost of production is lower when the firm produces Qgunits, to be able to sell its output the firm will have to charge a price below average cost, resulting in a loss. B) At Qg, average cost exceeds marginal cost so the firm will actually make a loss. C) At Qg, marginal revenue is less than average revenue which will result in a loss for the firm. D) The firm's goal is to charge a high price and make a small profit rather than a low price and no profit.

Q: Figure 13-17 Refer to Figure 13-17. Suppose the firm is currently producing Qf units. What happens if it increases its output to Qgunits? A) Its average cost of production will fall and its profit will rise. B) It will be taking advantage of economies of scale and will be able to lower the price of its product. C) It will move from a zero profit situation to a profit situation D) It will move from a zero profit situation to a loss situation

Q: Figure 13-17 Refer to Figure 13-17. What is the amount of excess capacity? A) Qh - Qf units B) Qj - Qf units C) Qj - Qh units D) Qh - Qg units

Q: Figure 13-17 Refer to Figure 13-17. What is the allocatively efficient output for the firm represented in the diagram? A) Qf units B) Qg units C) Qh units D) Qj units

Q: Figure 13-17 Refer to Figure 13-17. What is the productively efficient output for the firm represented in the diagram? A) Qf units B) Qg units C) Qh units D) Qj units

Q: Suppose electronic cigarette manufacturer NJOY is successful in establishing a profitable market for e-cigarettes in what is a monopolistically competitive industry. In the long run, NJOY will most likely find it ________ to remain profitable as they face ________ competition in the e-cigarette market. A) harder; more B) harder; less C) easier; more D) easier; less

Q: Consumers benefit from monopolistic competition by A) being able to choose from products more closely suited to their tastes. B) paying the lowest possible price for the product. C) paying the same price as everyone else. D) being able to purchase high-quality products at low prices.

Q: Economists agree that a monopolistically competitive market structure A) lowers consumer utility because consumers pay a price higher than the marginal cost of production. B) is detrimental to society because it leads to a waste of scarce resources. C) benefits consumers because firms produce products that appeal to a wide range of consumer tastes. D) can eliminate any excess capacity if all firms in the industry devote more funds to differentiating their products.

Q: If a firm has excess capacity, it means A) that the firm expends too much of its resources on advertising its product without seeing an appreciable increase in sales. B) that the firm is not producing its minimum efficient scale of output. C) that the firm's long-run average cost of producing a given quantity exceeds its short-run cost of producing that same quantity. D) that the firm's quantity supplied exceeds its quantity demanded.

Q: Is a monopolistically competitive firm allocatively efficient? A) No, because it does not produce at minimum average total cost. B) Yes, because it produces where marginal cost equals marginal revenue. C) No, because price is greater than marginal cost. D) Yes, because price equals average total cost.

Q: Is a monopolistically competitive firm productively efficient? A) No, because it does not produce at minimum average total cost. B) Yes, because it produces where marginal cost equals marginal revenue. C) No, because price is greater than marginal cost. D) Yes, because price equals average total cost.

Q: For allocative efficiency to hold A) price must equal marginal revenue of the last unit sold. B) price must equal the marginal cost of the last unit produced. C) average variable cost is minimized in production. D) average total cost is minimized in production.

Q: For productive efficiency to hold A) price must equal the marginal cost of the last unit produced. B) price must equal marginal revenue of the last unit sold. C) average variable cost is minimized in production. D) average total cost is minimized in production.

Q: Which of the following is not a characteristic of long-run equilibrium in a monopolistically competitive market? A) Selling price equals average total cost. B) Production is at minimum average total cost. C) Marginal revenue equals marginal cost. D) Selling price is greater than marginal cost.

Q: Long-run equilibrium under monopolistic competition is similar to that under perfect competition in that A) firms produce at the minimum point of their average cost curves. B) price equals marginal cost. C) firms earn normal profits. D) price equals marginal revenue.

Q: How does the long run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry? A) A firm in monopolistic competition will earn economic profits but a firm in perfect competition earns zero profit. B) A firm in monopolistic competition will charge a price higher than the average cost of production but a firm in perfect competition charges a price equal to the average cost of production. C) A firm in monopolistic competition does not take full advantage of its economies of scale but a firm in perfect competition produces at the lowest average cost possible. D) A firm in monopolistic competition produces an allocatively efficient output level while a firm in perfect competition produces a productively efficient output level.

Q: The table below shows the demand and cost data facing "Velvet Touches," a monopolistically competitive producer of velvet throw pillows.QuantityPriceTotal RevenueMarginal RevenueTotal CostMarginal Cost1$30$322284332653424645227662090718106816126Use the data to answer the following questions.a. Complete the Total Revenue (TR), Marginal Revenue (MR) and Marginal Cost (MC) columns above.b. What are the profit-maximizing price and quantity for Velvet Touches?c. Is the firm making a profit or a loss? How much is the profit or loss? Show your work.d. Is this firm operating in the long run or in the short run? Explain your answer.e. If the firm's profit or loss is typical of all firms in the market for throw pillows, what is likely to happen in the future? Will there be more firms or will some existing firms leave the industry? Explain your answer.f. What will happen to the typical firm's profit or loss after all entry/exit adjustments?

Q: Sparkle, one of many firms in the market for toothpaste, is in long-run equilibrium. Sparkle has a small market share and has been in business for a long time. a. Identify the market structure in which Sparkle operates. Explain your answer. b. What is Sparkle's profit or loss? Explain your answer. If you cannot determine the profit or loss, explain what information is missing. c. Draw a diagram showing Sparkle's demand curve, marginal revenue curve, average total cost curve and marginal cost curve. Label your diagram.

Q: Figure 13-16 Refer to Figure 13-16. Figure 13-16 depicts a monopolistically competitive barber shop. Use the diagram to answer the following questions. a. Suppose the average variable cost of production is $15 when output equals 110 haircuts and $15.25 when output equals 140 haircuts. If the firm wants to maximize its profit or minimize its losses, how many haircuts will it produce and what price should it charge? Explain your answer. b. Calculate the firm's profit or loss. c. What is likely to happen in this industry over time as it moves to its new long-run equilibrium? d. Suppose the barber shop depicted in the diagram remains in the industry. Is this barber shop likely to produce this same quantity of haircuts as in part (a) in the long run?

Q: Figure 13-15 Refer to Figure 13-15 to answer the following questions. a. What is the profit-maximizing output level? b. What is the profit-maximizing price? c. What is the average total cost at the profit-maximizing output level? d. What area represents the firm's profit? e. At which output level are economies of scale exhausted? f. Does this graph most likely represent the long run or the short run? Why?

Q: What effect does the entry of new firms in a monopolistically competitive market have on the economic profits of existing firms in the market? How might existing firms attempt to counteract this effect?

Q: What is the difference between zero accounting profit and zero economic profit?

Q: If some monopolistically competitive firms exit their market after suffering short-run losses, the demand curves of remaining firms will shift to the right.

Q: A monopolistically competitive firm can increase its profits beyond the long-run equilibrium break-even level by deliberately lowering its price to force some of its competitors out of the market.

Q: When a monopolistically competitive firm breaks even in the long run, this is equivalent to earning a zero accounting profit.

Q: A monopolistically competitive industry that earns economic profits in the short run will face a more elastic demand curve in the long run.

Q: A monopolistically competitive industry that earns economic profits in the short run will be able to expand its market share even if the market size remains constant.

Q: If a monopolistically competitive firm breaks even, the firm is earning as much in this industry as it could in any other comparable industry.