Reference no: EM13123901

QuadPlex Cinema is the only movie theater in Idaho Falls. The nearest rival movie theater, the Cedar Bluff Twin, is 35 miles away in Pocatello. Thus QuadPlex Cinema possesses a degree of Market power. Despite having market power, QuadPlex Cinema is currently suffering losses. In a conversation with the owners of Quadplex, the manager of the movie theater made the following suggestions. " Since QuadPles is a local monopoly, we should just increase ticket prices until we make enough profit."

a. Comment on this strategy

b. How might the market power of Quad Plex Cinema be measured

c. What options should Quadplex consider in the long run?

Part I: Multiple Choices:

Fill in the blanks in the table below and answer the next 4 questions:

Units of Labor	Total Product	Average Product	Marginal Product
1 2 3 4 5 6 7	____ ____ 66 ____ ____ 78 ____	20 ____ ____ ____ 16 ____ 10	____ 30 ____ 10 ____ ____ ____

1 In the above table, the average product of labor when 4 units of labor are employed is

a. 22.

b. 20.

c. 19.

d. 16.

2 In the above table, the marginal product of the fifth unit of labor is

a. 16.

b. 10.

c. 4.

d. -2.

3 In the above table, diminishing returns begin with the

a. first unit of labor.

b. third unit of labor.

c. fourth unit of labor.

d. sixth unit of labor.

4 In the above table, marginal product is negative when _____ units of labor are employed.

a. 5 units of labor are employed.

b. 6 units of labor are employed.

c. 7 units of labor are employed.

d. both b and c.

5 A production function measures the relation between

a. input prices and output prices.

b. the quantity of inputs and the quantity of output.

c. input prices and the quantity of output.

d. the quantity of inputs and input prices.

e. none of the above

The next 4 questions refer to the following:

Output	Total Cost
0  50 100 150 200	$ 300   800  1050  1650  2400

6 What is total variable cost when 100 units of output are produced?

a. $5

b. $10.50

c. $105

d. $1050

e. none of the above

7 What is average fixed cost when 150 units of output are produced?

a. $2

b. $9

c. $11

d. $16.50

e. none of the above

8 The additional cost of producing the 170th unit of output is:

a. $10.50

b. $11.50

c. $13

d. $15

e. none of the above

9 What is average variable cost when output is 200?

a. $2.00

b. $12.00

c. $10.50

d. $240

e.    $210

10        Which of the following is FALSE?

a. A change in input prices shifts the isoquant map.

b. Convex isoquants mean that the marginal rate of technical substitution decreases as the firm substitutes labor for capital.

c. A change in cost shifts the isocost curve.

d.      At the optimal input choice, the rate at which the firm can substitute labor for capital in production is equal to the rate at which the firm can substitute labor for capital in the market.

e. none of the above.

11        The expansion path shows

a. how input prices change as the firm's output level changes.

b. how the marginal products change as the firm's output level changes.

c. how the cost-minimizing input choices change as the firm's output level changes.

d. how the profit-maximizing input choices change as the firm's output level changes.

e. how the cost-minimizing input prices change as the firm's output level changes.

12        In the long run

a. all inputs are fixed.

b. a firm is making the optimal input choice when the marginal rate of technical substitution is equal to the input price ratio.

c. the expansion path shows how the input marginal products change as the firm's output level changes.

d. both a and b

e. none of the above

13        Which of the following statements is true?

a. In the short run all inputs are fixed.

b. In the long run a firm is making the optimal input choice when the marginal rate of technical substitution is equal to the input price ratio.

c. Diminishing returns to labor means that adding one more worker will decrease output.

d. all of the above

e. none of the above

14        The marginal rate of technical substitution is

a. the market rate of exchange between labor and capital.

b. the rate at which the firm can substitute labor for capital while holding total cost constant.

c. the rate at which the firm can substitute labor for capital while holding output constant.

d. both a and b

e. both a and c

15        Which of the following is NOT a condition of a perfect competition:

a. products produced by rival firms are perfect substitutes

b. any individual firm cannot affect market supply

c. unrestricted entry and exit

d. industry sales are small

e. each firm has complete knowledge about production and prices

16 In a perfectly competitive market

a.   a firm must lower price to attract more customers.

b.   the additional revenue from selling one more unit of output is less than price.

c.    demand facing the industry is perfectly elastic.

d.   all of the above

e.   none of the above

17 For a price-taking firm, marginal revenue

a. is the addition to total revenue from producing one more unit of output.

b. decreases as the firm produces more output.

c. is equal to price at any level of output.

d. both a and b

e. both a and c

18        Which of the following is NOT a characteristic of an increasing cost competitive industry?  As the industry expands in the long run,

a. the price of product remains constant.

b. the prices of some inputs rise.

c. the cost of production increases.

d. the number of firms increase.

e. none of the above

19        Which of the following is NOT a characteristic of a constant cost competitive industry?  As the industry expands in the long run,

a. the price of the product remains constant.

b. inputs prices remain constant.

c. the cost of production remains constant.

d. the number of firms remain constant.

e. none of the above

20        An industry is in long-run competitive equilibrium.  The price of a substitute good increases.

a. The product price will rise.

b. New firms will enter the market.

c. Firms will begin earning economic profit.

d. a and b

e. all of the above

21 Which of the following is a characteristic of a monopoly market?

a.   one firm is the only supplier of a product for which there are no close substitutes

b.   entry into the market is blocked

c.    the firm can influence market price

d.   all of the above

22 In a monopoly market,

a. other firms have no incentive to enter the market.

b. profits will always be positive because the firm is the only supplier in the market.

c. the demand facing the firm is downward-sloping because it is the market demand.

d. a and b

e. none of the above

23 A monopolist

a.  can raise its price without losing any sales because it is the only supplier in the market.

b.  can earn a greater than normal rate of return in the long run.

c.  always charges a price that is higher than marginal revenue.

d.  both a and b

e.  both b and c

24 A firm with market power

a.  can increase price without losing all sales.

b.  faces a downward-sloping demand curve.

c.  is the only seller in a market.

d.  both a and b

e.  all of the above

25 One method of measuring the extent of a firm's market power is

a.  the Lerner index.

b.  price elasticity of demand for the firm's product.

c.  income elasticity of demand for the firm's product.

d.  both a and b

e.  all of the above

26 In a monopolistically competitive market,

a.  firms are small relative to the total market.

b.  no firm has any market power.

c.  there is easy entry and exit in the market.

d.  a and b

e.  a and c

27 Which of the following would indicate a relatively large amount of market power?

a.  Highly price elasticity demand

b.  Low cross-price elasticity with other products

c.  Low Lerner index

d.  all of the above

e.  none of the above

28  A monopolistic competitor is similar to a monopolist in that

a.  both have market power.

b.  both earn positive economic profit in the long run.

c.  both produce the output at which long-run average cost is at a minimum.

d.  a and b

e.  all of the above

29 In a monopolistically competitive market,

a. a firm has market power because it produces a differentiated product.

b. a firm earns economic profits in the long run because it has market power.

c. there are a large number of firms.

d. both a and b

e. both a and c

30 Monopolistic competition is similar to perfect competition in that:

a.  there are a large number of firms

b.  firms earn economic profits in the long run

c.  firms face downward-sloping demand curves

d.  both a and b

e.  all of the above

31 A monopolist which suffers losses in the short run will

a. continue to operate as long as total revenue covers fixed cost.

b. raise price in order to eliminate losses.

c. exit in the long run if there is no plant size that will result in economic profit that is greater than or equal to zero.

d. both a and b

e. both a and c

32 Suppose that a profit-maximizing monopolist has a plant of the optimal size and is producing a level of output at which price is $30, average total cost is $55, and average fixed cost is $40.  The firm should

a. operate in the short run.

b. shut down in the short run.

c. exit the market in the long run.

d. continue to operate in the long run.

e. both a and c

33  What is the most important characteristic of oligopoly?

a. firms have market power

b. product differentiation

c. barriers to entry

d. interdependence of profits

e. none of the above

34 In an oligopoly market,

a. a firm must lower price in order to sell more output.

b. each firm faces a demand curve that depends on how the firm's rivals behave.

c. a few firms account for a large portion of industry sales.

d. both a and b

e. all of the above

35 Oligopolists face interdependent profits because

a. there are few firms in the market.

b. the product is differentiated.

c. industry sales are large.

d. all of the above

36  Actions taken by oligopolists to plan for and react to actions of rival firms represent

a. strategic behavior.

b. interdependence.

c. cooperative behavior.

d. game theory.

e. all of the above.

37  In game theory, a dominant strategy is

a. a strategy used by a large firm to compete against smaller firms.

b. a strategy followed by the price leader.

c. a strategy involving a high risk but also a high return.

d. a strategy that leads to the best outcome no matter what a rival does.

e. none of the above

38 In simultaneous decision making situations, common knowledge means that

a. at least one of the decision makers knows what is going to happen.

b. all of the decision makers know what the outcome of the decision will be.

c. even people not involved in making the decision will be able predict the outcome.

d. the managers of the firms failed to keep all of the information about their decision plans secret.

e. none of the above

39 In the U.S., firms that engage in cooperative efforts to coordinate pricing

a. are always in violation of antitrust laws.

b. may face federal charges of illegal collusion if they cannot provide evidence that the coordination of prices was in the best interest of consumers.

c. are simply trying to reach a Nash equilibrium and are not viewed by courts as necessarily breaking any laws.

d. both b and c.

40 Punishment for cheating on pricing agreements usually takes the form of

a. a retaliatory advertising campaign.

b. a retaliatory price cut.

c. a legal suit.

d. a monetary fine.