B. Firms produce differentiated products.

EXAM IN MICROECONOMICS

(January, 2010)

VARIANT 1

SOLUTIONS

Section 1. Multiple choice questions

You have 60 minutes to do this part of the exam.

Marking scheme: 1 point for a correct answer, -0.25 for a wrong answer, 0 if the answer has not been given.

1. Dead weight loss occurs in

A. Monopolistic competition

B. Monopoly

C. Oligopoly

D. All of the above

E. Only some (but not all) of the above

2. In the table above if these firms do not collude, the outcome will be:

A. Both firms maintain the status quo

B. Both firms advertise

C. Firm X advertises and Firm Y maintains the status quo

D. Firm Y advertises and Firm X maintains the status quo

E. It’s impossible to determine outcome in this situation

3. The kinked demand model demonstrates that

I. Oligopoly prices tend to be sticky

II. Each firm believes its rivals will not respond when it increases its price

III. The demand curve for a firm becomes less elastic when price decreases

A. I only

B. I and II only

C. I and III only

D. II and III only

E. I, II and III

4. Consider two rival producers of camera film, Kodak and Fuji. Each firm can undertake one of two strategies, Research or No Research. The film producers have the following matrix of profits, depending on each firm's actions. Profits are given in $millions. The first entry in each box corresponds to Fuji’s profits while the second entry corresponds to Kodak’s profits.

Which of the following is TRUE?

A. In Nash equilibrium both Fuji and Kodak choose “No Research”.

B. Fuji will choose “No Research” regardless of what Kodak does.

C. Kodak will choose “No Research” regardless of what Fuji does.

D. None of the above is true.

E. All of the above are true.

5. The main difference between perfect competition and monopolistic competition is the following:

A. In monopolistic competition, each firm faces a horizontal demand curve.

B. In perfect competition, the number of producers is very small. In monopolistic competition, it is large.

C. In perfect competition, the product/service is very homogeneous among producers while it is not in monopolistic competition.

D. In monopolistic competition, monopolies own the firms.

E. The total demand that perfectly competitive industries face is very small.

6. Which of the following is a feature of long-run equilibrium in a monopolistically competitive market?

A. The industry output level is efficient.

B. Firms produce differentiated products.

C. Each firm makes negative accounting profits.

D. Each firm produces at the minimum of its average cost curve.

E. Each firm makes positive economic profits.

Questions 7 and 8 refer to the graph below (note that AR denotes the demand curve).

7. Which graph shows the long-run profit maximizing position for a monopolistic competitor?

A. A

B. B

C. C

D. D

E. E

8. Which graph in Figure 3 shows a profit maximizing natural monopoly?

A. A

B. B

C. C

D. D

E. E

9. A credible threat in strategic interactions is best defined as:

A. A threat of legal action

B. A threat that has been brought to action at least once before

C. A threat that, if brought to action, significantly affects the well-being of the punished agent

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