Question 1

In an example of restaurant location on an island, if the number of people on the island doubled, the number of restaurants

Accepted Answer

The number of restaurants would increase by a factor of $\sqrt{2}$ because the relationship between population and the number of restaurants is typically sublinear, meaning the number of restaurants grows at a slower rate than the population.

Question 2

If the distance around the island is 50 miles and there are two restaurants equally spaced on the island and each of 100 people are equally spaced around the island and eat a meal a day at a restaurant, what will be the average distance traveled to and from restaurants in a day's time.

Accepted Answer

Each person will travel to the nearest restaurant, which is on average 12.5 miles away, as the restaurants are equally spaced and the total distance around the island is 50 miles.

Question 3

What will industry output be at equilibrium in this model?

Accepted Answer

The answer of What will industry output be at equilibrium...

Question 4

If the Bertrand model is assumed to be the appropriate one for analysis, what will the price of the product and the quantity sold be in this duopoly market?

Accepted Answer

The answer of If the Bertrand model is assumed to...

Question 5

In game theory, a dominant strategy is one

Accepted Answer

A dominant strategy is one that is the best choice for a player regardless of the actions taken by the other players. Therefore, the same strategy is chosen by one firm regardless of what the other firm chooses. Option B correctly describes this concept. The other options are unrelated or incorrect.

Question 6

Suppose that two firms are producers of spring water, which can be obtained at zero cost.The market demand curve for their combined output is p = 100 - Q where p is the price and Q is the amount of spring water sold by both together.If the two producers act in accord with the Cournot model, their combined output will be

Accepted Answer

In the Cournot model, each producer chooses their output level taking the output level of the other producer as given. The profit maximization condition for a single producer then becomes:

Π = (p - c)q - F

where Π is profit, q is the output of the producer, c is the marginal cost of producing an additional unit of output, and F is any fixed cost.

In this case, since the two firms have identical costs, each firm's profit maximization condition becomes:

Π = (100 - Q - q)*q - F

where Q is the total output of both firms and q is the output of the individual firm.

Taking the derivative of this expression with respect to q and setting it equal to zero, we obtain the each firm's best response function:

q = (100 - Q)/2

Solving for Q in terms of q and taking the sum of the two firms' output levels, we obtain the combined output:

Q = 100 - 2q

Q = 100 - 2*(100 - Q)/2

Q = 66.66

Therefore, the best choice for combined output under the Cournot model is 66.66 units of spring water.

Question 7

Suppose there are two firms in a market: firm A and firm B. Further, assume that they produce a homogenous product at a constant marginal cost of $10. In the Bertrand model solution, firm A will charge a price:

Accepted Answer

In the Bertrand model, both firms are assumed to simultaneously choose prices for their identical products, and consumers will buy only from the firm offering the product at the lower price. As both firms have the same marginal cost of production, they would have an incentive to undercut each other's prices to gain market share. In competitive settings, this would eventually drive the price down to the level of marginal cost.

Therefore, in the long run, the equilibrium price in a Bertrand model with homogenous products is equal to the marginal cost of production ($10 in this case). So both firms would charge $10 for their products.

Question 8

As the firm's fixed costs increase

Accepted Answer

As the fixed costs of firms increase, it becomes more expensive for new firms to enter the market. This makes it less likely for new firms to enter and compete with existing firms in the long run, leading to a decrease in the number of firms.

Question 9

In the graph above the dd curve is based on the assumption

Accepted Answer

The dd curve assumes that firms can gain market share by lowering their price below the competition, reflecting a competitive market behavior.

Question 10

In the long run, a monopolistically competitive firm acting according to the Chamberlin model

Accepted Answer

In the Chamberlin model, firms in monopolistic competition differentiate their products in some way to create a perceived difference in quality or features that allows them to charge a higher price and operate with a degree of market power. This means that they will not operate at the minimum point of the average cost curve, as they are not producing at the efficient scale. However, as they are not true monopolies, they will not earn positive economic profits in the long run as new firms can enter the market and compete away any excess profits. They will operate at the minimum point of the marginal cost curve in the short run, but in the long run, they will produce where price equals average total cost, which is above the minimum point of the average cost curve.

Question 11

In sequential games

Accepted Answer

In sequential games, the order of moves matters. Players make their moves in a specific order and the subsequent moves of one player depend on the move made by the previous player. This means that the order of moves can affect the outcome of the game and players need to anticipate each other's actions to make optimal decisions.

Question 12

As the number of customers increase

Accepted Answer

As the number of customers increases, the demand for goods and services will also increase. This will lead to an increase in the number of firms in the long run, as more firms will be able to enter the market and make a profit.

Question 13

If a monopolistically competitive firm is making positive economic profits we would expect

Accepted Answer

In a monopolistically competitive market structure, there are low barriers to entry, which means that new firms can easily enter the market to compete with the existing firm. If a firm is making positive economic profits, it indicates that it is earning more revenue than its total costs, including both explicit and implicit costs. This suggests that other firms may also be attracted to the industry and may try to capture a share of the positive profits. As a result, we would expect entry of other firms into the market, leading to increased competition and a decrease in the economic profits of the existing firm. Therefore, the best answer is A.

Question 14

Given the payoff table above, in Nash Equilibrium Player's 2 payoff is:

Accepted Answer

Player 2's payoff is 3 in Nash Equilibrium because if Player 1 chooses "Left", Player 2 will choose "Up" to get a payoff of 3. If Player 1 chooses "Right", Player 2 will choose "Down" to get a payoff of 3.

Question 15

Which of the following is an application of the Hoteling model of monopolistic competition.

Accepted Answer

The Hoteling model of monopolistic competition is often used to explain why stores of similar types tend to cluster together rather than being spread out equidistantly. This is because consumers prefer a greater variety of options in one convenient location rather than having to travel great distances to find what they need. Therefore, businesses will often locate near their competitors to attract customers who are already in the area.

Question 16

The variety that monopolistic competition provides is paid primarily by

Accepted Answer

In monopolistic competition, firms differentiate their products to cater to specific consumer preferences, and those consumers who desire and choose these differentiated products bear the cost of the variety.

Question 17

Derive the reaction curve for a Cournot duopolist where the industry demand curve is as stated above and the MC of production is zero.

Accepted Answer

The answer of Derive the reaction curve for a Cournot...

Question 18

As the firm's variable costs rise,

Accepted Answer

The answer of As the firm's variable costs rise,
...

Question 19

In the graph above one would expect the demand curve facing a monopolistically competitive firm to be

Accepted Answer

In monopolistic competition, firms produce products that are somewhat differentiated from their competitors. Therefore, consumers have some degree of choice between similar products, which means that the demand curve facing a monopolistically competitive firm is more elastic than a monopoly in the same industry. However, in a perfectly competitive market, firms produce homogenous products, and the demand curve facing each firm is perfectly elastic.

Question 20

As transportation costs on the island rise,

Accepted Answer

The answer of As transportation costs on the island rise,
...

Quiz 13: Imperfect Competition: a Game-Theoretic Approach