1) What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?

A) It shifts right.

B) It shifts left.

C) It becomes horizontal.

D) New entrants will not affect an incumbent firm's demand curve.

2) In comparing the Cournot equilibrium with the competitive equilibrium,

A) both profit and output level are higher in Cournot.

B) both profit and output level are higher in the competitive equilibrium.

C) profit is higher, and output level is lower in the competitive equilibrium.

D) profit is higher, and output level is lower in Cournot.

3) In the Stackelberg model, suppose the first-mover has MR = 15 - Q 1, the second firm has      reaction function Q2 = 15 - Q 1/2, and production occurs at zero marginal cost.  Why doesn't the first-mover announce that its production is Q 1 = 30 in order to exclude the second firm from the market (i.e., Q2 = 0 in this case)?

A) In this case, MR is negative and is less than MC, so the first-mover would be producing less than the optimal quantity.

B) In this case, MR is negative and is less than MC, so the first-mover would be producing too much output.

C) This is a possible outcome from the Stackelberg duopoly under these conditions.

D) We do not have enough information to determine if this is an optimal outcome for this case.

4) What is one difference between the Cournot and Stackelberg models?

A) In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm sets its output level first.

B) In Stackelberg, both firms make output decisions simultaneously, and in Cournot, one firm sets its output level first.

C) In Cournot, a firm has the opportunity to react to its rival.

D) Profits are zero in Cournot and positive in Stackelberg.

5) In a Cournot duopoly, we find that Firm 1's reaction function is Q 1 = 50 - 0.5Q2, and Firm 2's reaction function is Q2 = 75 - 0.75Q 1.  What is the Cournot equilibrium outcome in this market?

A) Q 1 = 20 and Q2 = 60

B) Q 1 = 20 and Q2 = 20

C) Q 1 = 60 and Q2 = 60

D) Q 1 = 60 and Q2 = 20

6) Collusion can earn higher prices and higher profits under the Bertrand model, but why is this an unlikely outcome in practice?

A) Firms prefer to remain independent of other firms so that their pricing plans can be more flexible over time.

B) The collusive firms have an incentive to gain market share at the expense of the other firms by cutting prices.

C) The federal antitrust authorities have an easier time catching firms that collude on price rather than quantity.

D) none of the above

7) Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogeneous products

A) results in the same output but a higher price.

B) results in the same output but a lower price.

C) results in a larger output at a lower price.

D) results in a smaller output at a higher price.

E) any of the above may result.

8) Consider the following payoffmatrix for a game in which two firms attempt to collude under the Bertrand model:

Here, the possible options are to retain the collusive price (collude) or to lower the price in       attempt to increase the firm's market share (cut).  The payoffs are stated in terms of millions of dollars of profits earned per year.  What is the Nash equilibrium for this game?

A) Both firms cut prices.

B) A cuts and B colludes.

C) B cuts and A colludes.

D) Both firms collude.

9) Why can't two firms in a Prisoners' Dilemma enforce a better outcome that has higher payoffs?

A) Under an outcome with higher payoffs, the outcome is not a Nash equilibrium and each firm

has an incentive to change their actions.

B) Barriers to entry

C) Barriers to exit

D) The Nash equilibrium in a Prisoners' Dilemma has the highest possible payoffs for both firms.

10) In the dominant firm model, the fringe firms

A) are price takers.

B) maximize profit by equating average revenue and average cost.

C) determine their price and output before the dominant firm determines its price and output.

D) all of the above

E) none of the above

11) What happens to the market outcome if cartel members cheat on the collusive agreement?

A) Price declines, but firm-level quantities remain the same because the firms act like price takers

B) Price and quantity revert to the single-seller monopoly equilibrium outcome

C) Other firms raise prices so that the average market price remains unchanged

D) Price declines and quantity increases toward the perfectly competitive equilibrium

Scenario 12.3:

Suppose a stream is discovered whose water has remarkable healing powers.  You decide to bottle the liquid and sell it.  The market demand curve is linear and is given as follows:

P = 30 - Q

The marginal cost to produce this new drink is $3.

12) Refer to Scenario 12.3.  What price would this new drink sell for if it sold in a competitive market?

A) 0

B) $3

C) $13.50

D) $16.50

E) $27

13) Refer to Scenario 12.3.  What is the monopoly price of this new drink?

A) 0

B) $3

C) $13.50

D) $16.50

E) $27

14) Refer to Scenario 12.3.  What will be the price of this new drink in the long run if the industry is a Cournot duopoly?

A) $3

B) $9

C) $12

D) $13.50

E) none of the above

15) Refer to Scenario 12.3.  What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly?

A) $3

B) $9

C) $12

D) $13.50

E) none of the above

16.  (Textbook Chap 12, Q6) Suppose that two identical firms produce widgets and that they are the only firms in the market.  Their costs are given by C1 = 60Q1 and C2 = 60Q2, where Q1 is the output of Firm 1 and Q2 the output of Firm 2. Price is determined by the following demand curve:

P = 300 - Q

where Q = Q1 + Q2 .

a.         Find the Cournot-Nash equilibrium.  Calculate the profit of each firm at this equilibrium.

b.         Suppose the two firms form a cartel to maximize joint profits.  How many widgets will be produced?  Calculate each firm’s profit.

c.         Suppose Firm 1 were the only firm in the industry.  How would the market output and Firm 1’s profit differ from that found in part (b) above?

d.         Returning to the duopoly of part (b), suppose Firm 1 abides by the agreement, but Firm 2 cheats by increasing production.  How many widgets will Firm 2 produce?  What will be each firm’s profits?

17.     (Textbook  Chap  12,  Q7)  Suppose  that  two  competing  firms,  A  and  B,  produce  a homogeneous good.  Both firms have a marginal cost of MC=$50.  Describe what would happen to output and price in each of the following situations if the firms are at (i) Cournot equilibrium, (ii) collusive equilibrium, and (iii) Bertrand equilibrium.

a.         Firm A must increase wages and its MC increases to $80.

b.         The marginal cost of both firms increases.

c.         The demand curve shifts to the right.