Question

Answer these multiple choice questions:

1) The break-even price in a market is where - A) p=minimum{AC} B) p=minimum{MC} C) p=minimum{AVC} D) p=FC

2) The difficulty in sustaining a cartel is that if one firm produces the cartel output, the other firm will A) Also produce the cartel output B) Produce more than the cartel output C) Produce less than the cartel output D) Exit the market

3) Consider a market with demand: P = 40 - Q. For two firms producing with identical marginal costs of 10, the Bertrand-Nash equilibrium quantities will be: A) 20 units per firm. B) 5 units per firm. C) 15 units per firm. D) 15 units in total.

4) In the model of entry deterrence, the higher the fixed cost for the entrant, A) the larger the output of the leader to deter entry B) the less likely the leader will deter entry C) the smaller the output of the leader to deter entry D) the more profit the entrant will earn

5) If firms selling complementary goods collude in setting output, then A) Profits are higher B) Prices are lower C) Both a. and b. D) None of the above

Answer 1

1) The break-even price in a competitive market is where A) p=minimum AC. This is because profit is P - AC for each unit and when price is equal to break even price there is no economic profit so that P = minimum AC in long run.

2) The difficulty in sustaining a cartel is that if one firm produces the cartel output, the other firm will B) Produce more than the cartel output because it has an incentive to produce more and earn more.

3) Consider a market with demand: P = 40 - Q. For two firms producing with identical marginal costs of 10, the Bertrand-Nash equilibrium quantities will be C) 15 units per firm because price will be equal to MC = 10 and so Q = 40 - 10 = 30 units in total.

4) In the model of entry deterrence, the higher the fixed cost for the entrant, C) the smaller the output of the leader to deter entry because it would then be easy to block entry so leader will produce less and charge more.

5) If firms selling complementary goods collude in setting output, then A) Profits are higher because in separate markets cost is high and price is lower but now the opposite can happen.