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QUIZ 3

lems in a separate Word file.

MULTIPLE CHOICE QUESTIONS (2 pts. EACH)

1.    Characteristics of a perfectly competitive market include

A. The absence of transaction costs

B. Differentiated products

C. Few sellers, some with a large market share

D. All of the above

2.    Suppose Julia and Zach are the only consumers of milk. Julia’s demand for milk is defined as

at prices below \$4 and zero for prices above \$4. Zach’s demand for milk is

defined as                             at prices below \$5 and zero for prices above \$5. If the market price

for milk is \$4.50, market demand is

A. Zero

B. 1.5

C. 1

D. 10

3.  Milky Moo and Mega Cow are the only sellers of milk. Milky Moo’s supply function is

at prices above \$0.50 and zero at prices below \$0.50. Mega Cow’s supply

function is                             at prices above \$0.33 and zero at prices below \$0.33. At a price of

\$0.45

A.  Milky Moo is the only supplier of milk

B.  Mega Cow is the only supplier of milk

C.  Both Milky Moo and Mega Cow supply milk

D.  Neither Milky Moo nor Mega Cow supply milk

4.  With free entry

A.  The long run market supply curve is horizontal at the market price

B.  The long run market supply curve is vertical at the market price

C.  The short and long run market supply curves are the same

D.  A and D

 5.  The market demand for milk is . Additionally, suppose that a dairy’s variable costs are (where Q is the number of gallons of milk produced each day), its marginal cost is and there is an avoidable fixed cost of \$50 per day. In the long run there is free

entry into the market. Suppose the demand for milk doubles. If in the short run the number of firms is fixed and their fixed costs are sunk, what is each of the active firms’ profit per unit in the short run equilibrium?

A. \$4

B. \$20

C. \$24

D. \$10

6.  A monopoly market is

A.  A market with many sellers

B.  A market with a single seller

C.  A market with a few sellers

D.  B and C

 7. Suppose Kate’s Great Crete (KGC) has annual variable costs of and marginal costs of , where Q is the number of cubic yards of concrete it

produces per year. In addition, it has an avoidable fixed cost of \$50,000 per year. KGC’s demand

 function is . What is the profit maximizing sales quantity? A. 20 B. 2,000 C. 8,000 D. 0

8.  A firm’s markup over its marginal cost is greater

A. The more elastic is the demand curve

B. The less elastic is the demand curve

C. The lower its fixed costs

D. The lower its average costs

9.  The Solo Coal Mine is the only employer in the small town of Way out there. The market

supply of coal miners is

and , where W is the annual wage of a coal miner and Q is the number of coal miners. What is the profit maximizing number of coal miners for the coal mine to hire?

A. 100

B. 150

C. 50

D. 233.34

10.  A market is a natural monopoly when

A. A good is produced most economically by several firms B. A good is produced most economically by one firm

C. The government grants a firm a patent on a good

D. The firm’s average cost function is everywhere upward sloping

11. Price discrimination is based on observable customer characteristics

A. When a firm can distinguish consumers with a high versus low willingness to pay

B. When a firm offers a menu of alternatives, designed so that different customers will make different choices based on their willingness to pay

C. A monopolist knows perfectly the customer’s willingness to pay for each unit its sells and can charge a different price for each unit

D. B and C

12.  A movie monopolist sells to students and adults. The demand function for students is

and the demand function for adults is . The marginal cost is \$2 per ticket. Suppose the movie theater can price discriminate. What is the monopolist’s profit from students?

A. \$400

B. \$2400

C. \$2500 D. \$0

13.  Mixed bundling

A. Is the practice of selling several products together as a package

B. Is the practice of selling the same good to different types of consumers at different prices

C. Is the practice of selling several products together as a package while also offering those products for sale individually

D. Is the practice of selling goods in bulk at a reduced per unit price

14. With a two-part tariff

A. Consumers simply pay a fixed fee if they buy anything at all

B. Consumers pay a fixed fee if they buy anything at all, plus a separate per-unit price for each unit they buy

C. Consumers pay a fixed fee if they buy anything at all, plus an annual fee for the right to purchase anything

D. Consumers simply pay a fee for the right to buy anything 15. At the Nash equilibrium of an oligopoly market

A.  Only one firm is able to earn profits

B.  Each firm is making a profit-maximizing choice, regardless of the choices of its rivals

C.  Each firm is making a profit-maximizing choice given the choices of its rivals

D.  Each firm produces the same quantity

16.  A residual demand curve

A. Shows the relationship between the market price and the quantity demanded by consumers at each price

B. Shows the relationship between a firm’s output and the market price given the prices charged by the firm’s rivals

C. Shows the relationship between a firm’s output and the market price given the outputs of the firm’s rivals

D. Shows the remaining demand for a good after a firm’s rivals have sold their output

17. Kate and Alice are small-town ready-mix concrete duopolists. The market demand function is

where P is the price of a cubic yard of concrete and Qd  is the number of

cubic yards demanded per year. Marginal cost is \$80 per cubic yard. The Cournot model

describes the competition in this market. What is Alice’s inverse residual demand function?

A.                                                      , Where the term in parentheses is constant

B.                                                     , Where the term in parentheses is constant

C.                                                      , Where the term in parentheses is constant

D.                                                      , Where the term in parentheses is constant

18.  Kate and Alice are small-town ready-mix concrete duopolists. The market demand function

 Is where P is the price of a cubic yard of concrete and Qd  is the number of cubic yards demanded per year. Marginal cost is \$80 per cubic yard. The Cournot model describes the competition in this market. How much does Alice produce in the Nash equilibrium? A. 2,000 B. 1,333.33 C. 800 D. 4,000 19.  Suppose the daily demand for Coke and Pepsi in a small city are given by And where QC and QP  are the number of cans Coke and Pepsi sell, respectively, in thousands per day. PC and PP are the

prices of a can of Coke and Pepsi, respectively, measured in dollars. The marginal cost is \$0.45 per can. If PC = \$0.60, what is Pepsi’s demand function?

A.

B.

C.

D.

20.  Firms engage in tacit collusion when

A.  They predict what the other will do and attempt to undercut them

B.  They collude without communicating, sustaining a price above the noncooperative price that would arise in a single competitive interaction

C.  They communicate to reach an agreement about the prices they will charge

D.  They communicate what type of good they will produce

1. (10 points) Suppose the wiz-pop market is in long-run equilibrium. Suddenly, fixed costs decrease, although variable costs remain unchanged. Discuss the short-run and long-run changes in market equilibrium.

2. (10 points) After Apple introduced its new iPhone, the price of standard cell phones rose. A consumer advocacy group that has long claimed that standard cell phone producers are colluding like a monopolist asserts that this is further evidence of that fact. You’ve noticed that the elasticity of demand for standard cell phones increased after Apple’s entry. Does this shed any light on the group’s claim?

3. (20 pts.) Suppose Always There Wireless serves 100 high-high demand wireless consumers,

each of whose monthly demand curve for minutes of wireless service is

and 300 low-demand consumers, each of whose monthly demand curve for minutes of wireless is

, where P is the per-minute price in dollars. Its marginal cost is \$0.25 per minute. Suppose Always There Wireless charges \$0.25 per minute.

1. How many minutes will high-demand consumers purchase?

2. How many minutes will low-demand consumers purchase?

3. How much can Always There Wireless charge as a fixed fee without losing the low-demand consumers?

4. What are the profits from sales to each of the low-demand consumers?

4. (20 pts.) a. Define the Bertrand model and its assumptions. Explain why the model predicts the perfectly competitive outcome despite the number of sellers. Discuss the limitations of the model.

b. Compare and contrast the Bertrand and Cournot models of oligopoly. Your discussion should include assumptions made, goals of the firms and the resulting outcomes.

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