# 11 Micro questions

I must receive a high B or an A on this assignment. Each question has three attempts, the same question is not used in the new attempts, you will send me your first round of answers, I will plug them in, make sure they are correct, if the grade is high enough you will not have to do any other attempts, if not, I will send you the second attempts etc.

I will send ALL graphs when a tutor is chosen.

1) Consider a store that produces bagels in a monopoly competitive market. The following graph shows its demand curve (Demand), marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Assume that the company is operating in the short run.

*Graph 1*

The profit-maximizing level of output is _____ (960, 800, 1080) bagels per day at a price of _______ (\$1.50, \$2.25, \$3, \$2.50, \$2.10) each.

At the profit- maximizing output and price, the store’s profit equals ________ (\$800, \$0, -\$600, -\$800, -\$200, \$600, \$200).

Given the profit-maximizing choice of output and price, the store is making _____ (negative, zero, positive) profit, which means that there are ________(an equal number of, fewer, more) stores in the industry relative to the long-run equilibrium.

2) Kitsch Bikes is a company that manufactures bikes in a nationalistically competitive market. Assume that Kitsch Bikes is operating in the short run.

Graph 2 shows Kitsch’s demand curve (Demand), marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC).

Place a grey point on the graph to indicate the profit maximizing price and quantity for the company. Then use red to shade the area representing the company’s profit or loss.

*Graph 2*

Now consider the long run, in which manufacturers are free to enter and exit the market. Show the possible effect of this free entry and exit by shifting the demand curve for a typical individual producer of bikes on Graph 3.

*Graph 3*

3) Suppose that a firm produces toy train engines in a monopolistically competitive market. Graph 4 shows its demand curve (Demand), marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Assume that all firms in the industry face the same cost structure.

Place a tan point on the graph to indicate the long run monpolistically competitive equilibrium price and quantity for this firm. Next, place a red point to indicate the point at which this firm would produce in the long run if it operated in a perfectly competitive market.

*Graph 4*

Because this market is a monopolistically competitive market, the firm’s average total cost in long run equilibrium is ______ (\$1 per engine more than, \$1 per engine less than, \$6 per engine more than, the same as, \$5 per engine less than) the average total cost it would achieve as a firm operating in a perfectly competitive market.

4) The following scenario describes a monopolistically competitive market. Decide which form(s) of product differentiation the firm uses to distinguish its product from those of its rivals. Check all that apply.

Consider two running shoe companies, Abebe and Haile, both of which produce a shoe made specifically for marathon racing. Abebe offers the shoe in one color scheme. Haile allows consumers to choose their own color combination from a menu of 10 colors. Haile also uses a lightweight gel system in the sole of the shoe to provide extra support during a rice.

Haile differentiates is racing shoe on the basis of:
-Quality
-Style
-Location

5) An oligopoly market structure is distinguished by several characteristics, one of which is market control by a few large firms. what are some other characteristics of this market structure. Check all that apply.
-Mutual interdependence
-Either standardized or differentiated products
-Standardized products only
-Neither mutual interdependence nor mutual dependence

6) Suppose David and Julia are playing a game in which both must simultaneously choose the strategy Heads or Tails. They payoff matrix that follows the shows the payoff each person will earn as a function of both of their choices (rather than the actual flipping of a coin).

*Table 1*
The only domincant stregy in the game is for ______(David, Julia) to choose ______ (Tails, Heads).

The unique Nash equilibrium in this game is as follows: David chooses ______(Tails, Heads) and Julia chooses _____(Tails, Heads).

7) Consider a many-person game of smokers and nonsmokers. Suppose that when there are no smokers in the population, they payoff to nonsmokers is 80 and the payoff to people who decide to start smoking is 40. As the proportion of smoking population increases, the payoffs of both smokers and nonsmokers decrease. In particular, the payoff to smokers reaches zero when 40% of the population smokes, and the payoff to nonsmokers reaches zero when 80% of the population smokes.

On Graph 5 use a blue line to plot the payoff of smokers. Then use a green line to plot the payoff of nonsmokers. For simplicity assume the payoff functions are linear.

*Graph 5*

-This game does not have a dominant strategy equilibrium but does have a Nash equilibrium (or Nash equilibria).
-This is an example of the prisoners’ dilemma.
-The dominant strategy equilibrium is that everyone chooses to smoke.
-The dominant strategy equilibrium is that everyone chooses not to smoke.

8) Consider a remote town in which two restaurants, All You Can Eat Cafe and GoodGrub Diner, operate in a duolopy. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning.

If neither restaurant cleans, each will earn \$9,000; alternatively, if they both hire workers to clean each will earn \$6,000. However, if one cleans and the other doesn’t, more customers will choose the cleaner restaurant; the cleaner restaurant will make \$10,000, and the other will only make \$4,000.

based on the information given fill in the payoff matrix that follows in Table 2.
All You Can Eat and Good Grub are both profit-maximizing firms.

*Table 2*
Options for all boxes:
\$9000,\$9000; \$4000,\$10000; \$10000,\$4000; \$6000,\$6000

If All You Can Eat and GoodGrub decide to collude, the outcome of this game is as follows:
All You Can Eat _____ (does not clean, cleans), and GoogGrub ______ (does not clean, cleans).

If both restaurants decide to cheat and behave uncooperative, the Nash equilibrium of this game is as follows:
All You Can Eat _____ (Does not clean, cleans), and GoodGrub _____ (does not clean, cleans).

9) Mays and McCovey are beer-brewing companies that operate in a duopoly (two firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and is \$0.60 per can. Assume that neither firm had any startup costs. That is, marginal costs equals average total cost (ATC) for each firm.

Suppose that Mays and McCovey from a cartel, and the firms divide the output evenly. (Note: This is only for convenience, because nothing in the model requires that the two companies must equally share the output.) Place a black point on Graph 6 that follows to indiciate the profix maximizing price and combined quanitiy of output if Mays and McCovey choose to work together.

*Graph 6*
When they act as a profit-maximzing cartel, each company will produce______ (160000, 40000, 120000, 80000) cans per day and charge ______ (\$0.80, \$0.20, \$0.60) per can. Given this information, each firm earns a daily profit of _______ (\$8000, \$64000, \$16000), so the total industry profit in the beer market is ______ (\$0, \$16000, \$64000, \$8000) per day.

Oligopolists often behave uncooperative and act in their own self interest, even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms agree to produce the same quantity. Consider the profit-maximizing level of output for each firm. Now, Suppose that Mays decides to break the collusion and increase its output by 50% of May’ portion of the collusive output, whereas McCovey continues to produce at the same amount as in the collusive agreement.

Mays’s deviation from the collusive agreement causes the price of a can of beer to _____ (increase, decrease) to _____ (\$.60, \$.75, \$.90, \$.50) per can. Mays’s profit is now _______ (\$45000, \$9000, \$9000, \$6000) per day, where as McCovery’s profit is now ________ (\$9000, \$30000, \$8000, \$6000). Therefore, you can conclude that the total industry profit ______ (decreases, increases) when Mays increases its output beyond the collusive quantity.

10) Suppose there are three manufacturers in the automotive industry, and the three firms have formed a cartel. One manufacturer concentrates on making mini cars. Another builds both mini and standard sized cars. The remaining firm builds all types of vans. This makes the cartel _______ (more, less) sustainable.

Suppose an electronics firm announces a 5% rebate on all its products for one month to increase sales. In addition, it guarantees all purchasers that, if it raises the rebate in six months, it will make up the difference to them. This is an example of _______ (mark up pricing, most favored customer) policy.

11) In which of the following market structers do firms produce at the socially optiamal level- that is, at the level of output that maximizes total surplus?
a) Monopolistic competition only
b) Perfect compition only
c) Monopoly and oligopoly only
d) Perfect competition, monopolistic competiton, monopoly, and oligopoly

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