ALLIED ECN150 module 6 Check Your Understanding

Question Points
1. For
cartels, as the number of firms (members of the cartel) increases:
a. the monopoly
outcome becomes more likely.
b. the magnitude of
the price effect decreases.
c. the more
concerned each seller is about its own impact on the market price.
d. the easier it
becomes to observe members violating their agreements.
2. An
agreement among firms in a market about quantities to produce or prices to
charge is called:
a. collusion.
b. a strategic
situation.
c. excess capacity.
d. tying.
3. According
to one theory, advertising sends a signal to consumers about the quality of the
product being offered. An implication of this theory is that:
a. the actual
quality of the product is irrelevant.
b. the content of
the advertisement is irrelevant.
c. advertising is
not in the best interest of society.
d. it is irrational
for firms to pay famous people large amounts of money to appear in their
advertisements.
4. When a
new firm enters a monopolistically competitive market, the individual demand
curves faced by all existing firms in that market will:
a. shift to the
left.
b. shift to the
right.
c. shift in a
direction that is unpredictable without further information.
d. remain unchanged.
It is the supply curve that will shift.
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5. A benefit
of a monopoly is:
a. efficient
production.
b. decreasing long
run marginal costs.
c. profit that can
be invested in research and development.
d. All of the
choices apply.
6. In the
prisoners’ dilemma game, confessing is a dominant strategy for each of the two
prisoners.
a. True
b. False
7. Which of
the following statements is correct?
a. When duopoly
firms reach a Nash equilibrium, their combined level of output is the monopoly
level of output.
b. When oligopoly
firms collude, they are behaving as a cartel.
c. In an oligopoly,
self-interest drives the market to the competitive outcome.
d. An oligopoly is
an example of monopolistic competition.
8. In the
long run, monopolistically competitive firms produce where demand equals
average total cost.
a. True
b. False
9. The
“competition” in monopolistically competitive markets is most likely
a result of having many sellers in the market.
a. True
b. False
10. Brand
names are rarely used to convey information about product quality.
a. True
b. False
11. Considering
the graphs below, which of the following statements is correct?

a. Panel C
represents the typical demand curve for a perfectly competitive industry.
b. Panel B
represents the typical demand curve for a monopoly.
c. Panel B
represents the typical demand curve for a perfectly competitive firm.
d. All of the
choices apply.
12. In the
case of oligopolistic markets, self-interest makes cooperation difficult and it
often leads to an undesirable outcome for the firms that are involved.
a. True
b. False
13. The social
cost of a monopoly is equal to its:
a. economic profit.
b. fixed cost.
c. dead weight loss.
d. variable cost.
14. The best
solution to the problem of welfare loss from monopoly is public ownership.
a. True
b. False
15. As the
number of firms in an oligopoly market:
a. decreases, the
price charged by firms likely decreases.
b. decreases, the
market approaches the competitive market outcome.
c. increases, the
market approaches the competitive market outcome.
d. increases, the
market approaches the monopoly outcome.
16. If the
output effect from increased production is larger than the price effect, then
an oligopolist would increase production.
a. True
b. False
17. In a
market that is characterized by imperfect competition:
a. firms are price
takers.
b. there are always
a large number of firms.
c. there are at
least a few firms that compete with one another.
d. the actions of
one firm in the market never have any impact on the other firms’ profits.
18. Economists
John Kenneth Galbraith and Friedrich Hayek disagreed about the roles of
advertising and government. Which of the following is correct?
a. Galbraith thought
advertising artificially enhanced consumers’ desires for private goods, while
Hayek thought no producer could “determine” consumers’ tastes though
advertising.
b. Galbraith
believed in enhancing personal freedoms, while Hayek advocated larger
government.
c. Galbraith thought
advertising was a waste of resources because it did not influence consumers,
while Hayek thought advertising was powerful enough to “determine”
consumers’ tastes.
d. Galbraith
believed that the government should not interfere in markets, while Hayek
believed that there was insufficient government regulation of marketing.
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19.
Imagine a small town in which only two residents, Rochelle
and Alec, own wells that produce safe drinking water. Each week Rochelle and
Alec work together to decide how many gallons of water to pump. They bring the
water to town and sell it at whatever price the market will bear. To keep
things simple, suppose that Rochelle and Alec can pump as much water as they
want without cost so that the marginal cost of water equals zero. The weekly
town demand schedule and total revenue schedule for water is shown in the table
below. If Rochelle and Alec operate as a profit-maximizing monopoly in the
market for water, what price will they charge?

a. $25
b. $30
c. $35
d. $40
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20. A
profit-maximizing firm in a monopolistically competitive market can earn
positive, negative, or zero profits in the short run.
a. True
b. False