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```					____   1. Unique Creations has a monopoly position in magnometers. If the marginal cost for a magnometer is \$50 and
the price elasticity for magnometers is 4, what is the optimal monopoly price?
HINT: P (1 +1/E) = MC.
a. \$37.50
b. \$41.25
c. \$66.67
d. \$75.00
e. \$82.50

____   2. Land's End estimates a demand curve for turtleneck sweaters to be:

Log Q = .41 + 2.3 Log Y  3 Log P

where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of imported
turtleneck sweaters is \$9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price would be:
a. P = \$13.50
b. P = \$26.50
c. P = \$27.50
d. P = \$34.50
e. P = \$56.22

____   3. A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62  3Q. The
fixed cost is \$10 and the variable cost per unit is \$2. What is the maximizing QUANTITY for this monopoly?
HINT: MR = 62  6 Q. (Pick closest answer)
a. Q = 10
b. Q = 15
c. Q = 22
d. Q = 37
e. Q = 41

____   4. In the case of pure monopoly:
a. one firm is the sole producer of a good or service which has no close substitutes
b. the firm's profit is maximized at the price and output combination where marginal cost
equals marginal revenue
c. the demand curve is always elastic
d. a and b only
e. a, b, and c

____   5. The demand curve facing the firm in ____ is the same as the industry demand curve.
a. pure competition
b. monopolistic competition
c. oligopoly
d. pure monopoly
e. none of the above

____
6. Regulatory agencies engage in all of the following activities except ____.
a.       controlling entry into the regulated industries
b.       overseeing the quality of service provided by the firms
c.        setting federal and state income tax rates on regulated firms
d.        setting prices that consumers will pay
e.        none of the above

____    7. "Conscious parallelism of action" among oligopolistic firms is an example of ____.
a. intense rivalry
b. a formal collusive agreement
c. informal, or tacit, cooperation
d. a cartel
e. none of the above

____    8. The kinked demand curve model was developed to help explain:
a. fluctuations of prices in pure competition
b. rigidities observed in prices in oligopolistic industries
c. fluctuations observed in prices in oligopolistic industries
d. all of the above
e. none of the above

____    9. Which of the following is an example of an oligopolistic market structure?
a. public utilities
b. air transport industry
c. liquor retailers
d. wheat farmers
e. none of the above

____ 10. In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-output level,
assumes that the other firm's ____ will not change.
a. price
b. output
c. marketing strategy
d. inventory
e. none of the above

____ 11. Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.
a. true
b. False

____ 12. Even ideal cartels tend to be unstable because
a. firms typically prefer competition to collusion as competition, because it leads to more
profits.
b. collusion leads to lowest possible overall profits in the industry.
c. oligopolistic managers are extremely risk loving.
d. firms can benefit by secretly selling more than they promised the other firms
e. all of the above

____ 13. Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units. Suppose
that the monopoly output is 5,000. For a 2-firm Cournot Oligopoly (N =2) known as a duopoly, what is a
likely Cournot QUANTITY for the industry?
a.   3,000 units
b.   5,000 units
c.   6,667 units
d.   10,000 units
e.   15,000 units

____ 14. A cartel is a situation where firms in the industry
a. have an agreement to restrict output.
b. agree to produce identical products.
c. obey the rules of dominant firm price leadership.
d. experience the pain of a kinked demand curve.
e. have a barometric price leader

____ 15. Barometric price leadership exists when
a. one firm in the industry initiates a price change and the others follow it as a signal of
changes in cost or demand in the industry.
b. one firm imposes its best price on the rest of the industry.
c. all firms agree to change prices simultaneously.
d. one company forms a price umbrella for all others.
e. the firms are all colluding.

____ 16. In a zero-sum game
a. all players receive a \$0 payoff
b. all players can simultaneously win
c. the gains to the winners equal the losses of the losers
d. none of the above

____ 17. In a game, a dominate strategy is one where:
a. It is always the best strategy
b. It is always the worst strategy
c. It is the strategy that is the best among the group of worst possible strategies.
d. Is sometimes the best and sometimes the worst strategy

____ 18. An illustration of a non-credible commitment is the promise
a. to not increase capacity in a declining industry
b. to match a new entrant's discount price
c. to enter a profitable industry
d. to restrain output to the quota assigned by a cartel
e. to exit in the face of projected losses.

____ 19. The segmenting of customers into several small groups such as household, institutional, commercial, and
industrial users, and establishing a different rate schedule for each group is known as:
a. first-degree price discrimination
b. market penetration
c. third-degree price discrimination
d. second-degree price discrimination
e. none of the above
____ 20. In ____ price discrimination, the monopolist charges each consumer the highest price that purchaser is willing
to pay for each unit purchased (provided that this price exceeds the marginal cost of production).
a. first-degree
b. second-degree
c. third-degree
d. a and b
e. none of the above

____ 21. ____ is a new product pricing strategy which results in a high initial product price. This price is reduced over
time as demand at the higher price is satisfied.
a. Prestige pricing
b. Price lining
c. Skimming
d. Incremental pricing
e. None of the above

____ 22. For a monopolist that engages in price discrimination, when the price elasticity in market 1 is less (in absolute
value) than in market 2, the optimal price in market 1 will exceed the optimal price in market 2.
a. true
b. False

____ 23. To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as
to make identical the ____ in all markets.
a. ratio of price to marginal cost
b. ratio of marginal cost to marginal utility
c. ratio of price to elasticity
d. marginal revenue
e. none of the above

____ 24. The following are possible examples of price discrimination, EXCEPT:
a. prices in export markets are lower than for identical products in the domestic market.
b. senior citizens pay lower fares on public transportation than younger people at the same
time.
c. a product sells at a higher price at location A than at location B, because transportation
costs are higher from the factory to A.
d. subscription prices for a professional journal are higher when bought by a library than
when bought by an individual.

____ 25. Firms that have a cover charge for their customers and charge for each item they purchase as well are
exhibiting:
a. universal access price discrimination
b. declining block price discrimination.
c. mixed bundling price discrimination.
d. two-part price discrimination.
e. uniform pricing

____ 26. The optimal mark-up is: m = 1/ (E + 1). When the mark-up on cookware equals 50%, then demand elasticity
(E) for cookware is:
a. 1
b. 1.5
c. 2
d. 3

____ 27. Non-redeployable durable assets that are dependent upon unique complementary and perfectly redeployable
assets to achieve substantial value-added will typically be organized as:
b. a spot market contract
c. a vertically integrated firm
d. an on-going relational contract
e. a joint stock company.

____ 28. Vertical integration may be motivated by all of the following except:
a. Upstream market power
b. Economies of ever wider spans of managerial control
c. Technological interdependencies
d. Reduced search and bargaining cost
e. The hold-up problem.

____ 29. Contracts are distinguished from tactical alliances by which of the following characteristics:
a. involve sequential responses
b. require third-party enforcement
c. raise shareholder value
d. elicit diminished reactions from competitors

____ 30. When someone contracts to do a task but fails to put full effort into the performance of an agreement, yet the
lack of effort is not independently verifiable, this lack of effort constitutes a:
a. breach of contractual obligations
b. denial of good guarantee
c. loss of reputation
d. moral hazard

____ 31. Which of the following are not approaches to resolving the principal-agent problem?
a. ex ante incentive alignment
b. deferred stock options
c. ex post governance mechanism
d. straight salary contracts
e. monitoring by independent outside directors

____ 32. Governance mechanisms are designed:
a. to increase contracting costs
b. to resolve post-contractual opportunism
c. to enhance the flexibility of restrictive covenants
d. to replace insurance
e. none of the above
____ 33. Each of the following is an example of moral hazard in which people modify their behavior in an
opportunistic way, often frustrating the intent of governmental or management policies. Which is NOT an
example of moral hazard?
a. After a firm gets a loan from a bank to purchase inventory, the borrower instead decides to
use it to invest in call options on stocks.
b. Based on motorcycle accident data, a state passes a law requiring motorcyclists to wear
helmet, but then the motorcyclist wearing helmets start to drive faster and more recklessly.
c. Bank and nonbank mortgage lenders make money granting loans. But the Government
through Freddie Mac and Fannie Mae decides to purchase these loans. The mortgage
lenders find that they earn a fee for each mortgage that they grant and then sell to Freddie
Mac or Fannie Mae. Since they never intended on holding on to the mortgage, the
mortgage granters are not too particular on whether the customer can really pay it back.
The lowest quality loans are sold to the Government.
d. A fellow buys a \$1 million life insurance policy and then travels to Nepal to climb Mount
Everest.
e. A student learns that if he or she reads the chapter and studies lecture notes, the student
does better on the next test.

34. Cooperative agreements between manufacturers and retailers concerning retail promotion and manufacturer
advertising are often the key to the success of new products. Analyze the following sequential product
promotion game below, and then predict 1) whether the product will be updated by the manufacturer (Man),
2) whether the retail distributor (RET) will promote the product, and 3) whether the manufacturer will
a. (1) update, (2) not promote, and (3) not advertise
b. (1) update, (2) promote, and (3) not advertise
c. (1) update, (2) not promote, and (3) advertise
d. (1) not update, (2) not promote, and (3) advertise
e. (1) not update, (2) not promote, and (3) not advertise

35. The Sherman Act prohibits:
a. contracts in restraint of commerce
b. monopolization of an industry
c. price discrimination
d. a and b
e. a, b, and c

____   36 Which of the following public policies has (have) the effect of restricting competition?
a. licensing
b. patents
c. import quotas
d. a and b only
e. a, b, and c

____ 37. The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.
a. monopolistic competition
b. perfectly contestable
c. oligopoly
d. monopoly
e. none of the above

____ 38. The Herfindahl-Hirschman index (also shortened to just the Herfindahl index or HHI) is a measure of ____.
a. market concentration
b. income distribution
c. technological progressiveness
d. price discrimination
e. none of the above

____ 39. Industry A has market shares of 50, 30, and 20. Industry B has market shares of 45, 40, and 15. Which answer
below is true?
a. The Herfindahl index for A is 100.
b. The Herfindahl index for A is 3,800.
c. The Herfindahl index for B is 3,600
d. The Herfindahl index for A is greater than for B.
e. The Herfindahl index is for B is 4,000.

____ 40. ____ occurs whenever a third party receives or bears costs arising from an economic transaction in which the
individual (or group) is not a direct participant.
a. Pecuniary benefits and costs
b. Externalities
c. Intangibles
d. Monopoly costs and benefits
e. none of the above

____ 41. The Coase Theorem works best in places that transaction costs for contracts among people is low. Often in
the world of torts and externalities both parties can claim that they have rights to impose on others. One case
is that of a railroad that is noisy and scares the cattle and the rancher whose cattle sometimes wander in front
of moving trains causing damage to them and the train. What does the Coase say would happen?
a. The train should have property right to be safe from wandering cattle, and the rancher
should be liable for train damage of rampaging cattle.
b. The rancher should have the property right to be safe from noisy trains, and the railroad
should be liable for weight loss of cattle from train whistles and rumbling noise.
c. If transaction costs are low, the efficient activity will occur, either the rancher or railroad
installing fences to protect from rampaging cattle and/or sound insulation with trees, or if
it is cheaper, fewer train trips per day. The cheapest or most efficient solution will happen,
regardless of who is assigned the original property right.

       42. By staying ahead of the competition while other firms try to catch up, a monopolist without patent protection
still has an incentive to innovation.
a. True
b. False

43. Suppose an industry is composed of eight firms with the following market shares:
Firm Share                      Firm Share
A        30%                    E        8%
B        25%                    F        5%
C        15%                    G        4%
D        10%                    H        3%
      Based on the (revised 1997) merger guidelines, would the Antitrust Division likely challenge a proposed
merger between Firms C and D?
a. Yes
b. No

        Based on the (revised 1997) merger guidelines, would the Antitrust Division likely challenge a proposed
merger between Firms F and G?
a. Yes
b. No
Problem – 1

Exhibit 13-1
Consider the information below when answering the following question(s):

PIZZA SPINNERS' CHOICE
SIX              SEVEN
Harry's                                       \$550             \$750
SIX                              \$700                 \$100

Harry's                                       \$120                       \$370
SEVEN                            \$640                       \$350

(Note: Payoffs in the upper right corner go to Pizza Spinners and payoffs in the lower left go to Harry's).

a. In choosing whether to deliver to six or seven neighborhoods, Pizza Spinners has to take into account not only
its own costs, but also the delivery area response of its competitor Harry's Pizzeria. If the payoffs per week
from delivering in six and seven neighborhoods are as displayed in Exhibit 13-1, what will Pizza Spinner's
choose and why?
b. In choosing whether to deliver to six or seven neighborhoods, Harry's Pizzeria has to take into account not
only its own costs but the delivery area response of its competitor Pizza Spinners. If the payoffs per week
from delivering in six and seven neighborhoods are as displayed in Exhibit 13-1, what will Harry's Pizzeria
choose and why?

Problem 2
1. Consolidated Salt Company sells table salt to both retail grocery chains and commercial users (e.g., bakeries,
snack food makers, etc.). The demand function for each of these markets is:

Retail grocery chains:           P1 = 180  8Q1
Commercial users:                P2 = 100  4Q2

where P1 and P2 are the prices charged and Q1 and Q2 are the quantities sold in the respective markets.
Consolidated's total cost function (which includes a "normal" return to the owners) for salt is:

TC = 50 + 20(Q1 + Q2)

(a)   Determine Consolidated's total profit function.

(b)   Assuming that Consolidated is effectively able to charge different prices in the two
markets, what are the profit-maximizing price and output levels for the product in the
two markets? What is Consolidated's total profit under this condition?

(c)   Assuming that Consolidated is required to charge the same price in each market, what
are the profit-maximizing price and output levels? What is Consolidated's total profit
under this condition?

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