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Table 9-8 Table 9-8 Firm A (Alistair's) and Firm B (Baine's) are the only firms selling luggage in the upscale city of Adelaide. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 9-8 shows the payoff matrix for this advertising game. -Refer to Table 9-8.If Alistair assumes that Baine would increase its advertising budget,what should it do? A) Alistair should keep its own budget the same and allow Baine to incur the higher cost. B) Alistair should also increase its advertising spending. C) Alistair should reduce its advertising spending. D) Being a duopolist, Alistair is not affected by Baine's choices because it has a secure 50 per cent market share. Firm A (Alistair's) and Firm B (Baine's) are the only firms selling luggage in the upscale city of Adelaide. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 9-8 shows the payoff matrix for this advertising game. -Refer to Table 9-8.If Alistair assumes that Baine would increase its advertising budget,what should it do?


A) Alistair should keep its own budget the same and allow Baine to incur the higher cost.
B) Alistair should also increase its advertising spending.
C) Alistair should reduce its advertising spending.
D) Being a duopolist, Alistair is not affected by Baine's choices because it has a secure 50 per cent market share.

E) All of the above
F) A) and D)

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Table 9-7 Table 9-7 Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 9-7 shows the profits earned per day by each country. 'Low output' corresponds to producing the OPEC-assigned quota and 'high output' corresponds to producing the maximum capacity beyond the assigned quota. -Refer to Table 9-7.Is there a dominant strategy for Nigeria and,if so,what is it? A) Yes, it has a dominant strategy depending on what Saudi Arabia does. B) No, there is no dominant strategy. C) Yes, the dominant strategy is to produce a low output. D) Yes, the dominant strategy is to produce a high output. Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 9-7 shows the profits earned per day by each country. 'Low output' corresponds to producing the OPEC-assigned quota and 'high output' corresponds to producing the maximum capacity beyond the assigned quota. -Refer to Table 9-7.Is there a dominant strategy for Nigeria and,if so,what is it?


A) Yes, it has a dominant strategy depending on what Saudi Arabia does.
B) No, there is no dominant strategy.
C) Yes, the dominant strategy is to produce a low output.
D) Yes, the dominant strategy is to produce a high output.

E) None of the above
F) A) and D)

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Collusion between two firms occurs when


A) the firms independently pursue strategies that could hurt each other.
B) the firms explicitly or implicitly agree to adopt a uniform business strategy.
C) the firms announce that each will match its rival's market price.
D) the firms act altruistically to bring about the economically efficient outcome.

E) None of the above
F) A) and B)

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What is the dominant strategy in the prisoner's dilemma?


A) Each prisoner confesses because this is the rational action to pursue.
B) Do nothing in the hope that the other prisoner will also do nothing.
C) Do not confess because the other prisoner will most likely confess.
D) There is no dominant strategy.

E) B) and C)
F) C) and D)

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When large firms in oligopoly markets cut their prices,


A) rival firms will also cut their prices to avoid losing sales.
B) rival firms will not change their prices because most of their customers have signed contracts that commit them to doing business with the same firms for the life of their contracts.
C) we don't know for sure how rival firms will respond.
D) rival firms will not cut their prices because they fear that the federal government will accuse them of collusion.

E) None of the above
F) All of the above

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A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until


A) the original firm is driven into bankruptcy.
B) the firm's demand curve is perfectly elastic.
C) the firm's demand curve is tangent to its average total cost curve.
D) the firm exits the market.

E) B) and D)
F) B) and C)

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Which of the following characteristics is not common to monopolistic competition and perfect competition?


A) Firms act to maximise profit.
B) Entry barriers into the industry are low.
C) The market demand curve is downward sloping.
D) Firms take market prices as given.

E) A) and C)
F) None of the above

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Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?

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No.Although monopolistically competitive...

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Economists believe that consumers would be better off if markets were perfectly competitive rather than monopolistically competitive.

A) True
B) False

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If firms are protected by substantial barriers to entry,short-run profits can turn into long-run profits.

A) True
B) False

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Figure 9-12 Figure 9-12 -Refer to Figure 9-12.What is the allocatively efficient output for the firm represented in the diagram? A) Q<sub>1</sub> units B) Q<sub>2</sub> units C) Q<sub>3</sub> units D) Q<sub>4</sub> units -Refer to Figure 9-12.What is the allocatively efficient output for the firm represented in the diagram?


A) Q1 units
B) Q2 units
C) Q3 units
D) Q4 units

E) B) and C)
F) All of the above

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The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run.However,it is possible for a firm to continue to earn economic profits if the firm


A) expands its marketing budget.
B) adopts new technologies that enable it to lower its cost of production.
C) expands its product offerings to appeal to a wider range of consumers.
D) reduces its price to expand its market.

E) All of the above
F) A) and D)

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The justification for occupational licensing laws is that they protect the public from incompetent practitioners (for example,lawyers and medical doctors) ,but the laws also result in


A) higher prices and restrictions on the number of people who can enter the professions affected by the laws.
B) economies of scale.
C) ownership of a key input.
D) an increase in the amount of output required to achieve minimum efficient scale.

E) A) and B)
F) All of the above

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Firms in monopolistic competition compete by selling similar,but not identical,products.

A) True
B) False

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An oligopolistic industry is characterised by a few large firms acting independently.

A) True
B) False

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Which of the following would not occur as a result of a monopolistically competitive firm suffering a short-run economic loss?


A) The firm could exit the industry in the long run.
B) If the firm does not exit the industry in the long run, its demand curve will shift to the left.
C) If the firm does not exit the industry in the long run, its demand curve will shift to the right.
D) If the firm remains in the industry in the long run, it will break even.

E) A) and C)
F) B) and D)

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

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Collusion makes firms better off because...

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A major difference between monopolistic competition and perfect competition is


A) the number of sellers in the market.
B) the degree by which the market demand curve slopes downwards.
C) that products are not standardised in monopolistic competition, unlike in perfect competition.
D) the barriers to entry in the two markets.

E) A) and D)
F) A) and B)

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Firms in an oligopoly are said to be interdependent.What does this mean?

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Interdependence among firms means that t...

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A patent is a government-imposed entry barrier because


A) it allows a firm to achieve economies of scale.
B) it is a key input owned by the firm that is granted the patent.
C) it limits the quantity of a good that can be imported into a country.
D) it gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented.

E) A) and B)
F) C) and D)

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