Mock mid-term multiple choice test Industrial Organisation 2012

1) Which of these demand curves is iso-elastic?

a. 𝑄(𝑝) =1

√𝑝

b. 𝑄(𝑝) =1

𝑝

c. 𝑄(𝑝) = 𝑝−𝛼

d. All the above

2) What is the demand curve corresponding to the inverse demand curve: 𝑝(𝑄) =2

√𝑄?

a. 𝑄(𝑝) =4

𝑝2

b. 𝑄(𝑝) =2

𝑝2

c. 𝑄(𝑝) = √2

𝑝

d. 𝑄(𝑝) =2

√𝑝

3) In the graph below representing a monopolist’s decision, what does the shaded area represent?

a. Consumer surplus

b. Producer surplus

c. Dead weight loss

d. None of the above

4) After whom is the standard model of quantity competition named?

a. Heinrich Freiherr von Stackelberg

b. Antoine Augustin Cournot

c. Joseph Louis François Bertrand

d. Harold Hotelling

𝑝(𝑄)

𝑄

𝑝

MR(𝑄)

MC(𝑄)

5) A monopolist faces an inverse demand curve 𝑝(𝑄) and has total costs to produce a quantity of 𝑄 given

by 𝐶(𝑄). Which of these is the correct first order condition for its optimal choice of quantity, 𝑄∗?

a. 𝑝′(𝑄∗)𝑄∗ + 𝑝(𝑄∗) − 𝐶(𝑄∗) = 0

b. 𝑝′(𝑄∗)𝑄∗ + 𝑝(𝑄∗) − 𝐶′(𝑄∗) = 0

c. 𝑝(𝑄∗) − 𝐶′(𝑄∗) = 0

d. 𝑝′(𝑄∗)𝑄∗ − 𝐶(𝑄∗) = 0

6) A monopolist faces a linear demand curve, and has linear marginal costs. How is the quantity produced

under monopoly related to that produced under perfect competition?

a. The monopoly quantity is the same as the quantity produced under perfect competition.

b. The monopoly quantity is one less than the quantity produced under perfect competition.

c. The monopoly quantity is half the quantity produced under perfect competition.

d. The monopoly quantity is twice the quantity produced under perfect competition.

7) A monopolist faces the inverse demand curve 𝑝(𝑄) = 1 − 𝑄 and has a constant marginal cost equal

to 0. What quantity do they set?

a. 1

2

b. 1

3

c. 1

4

d. 2

3

8) A monopolist faces the inverse demand curve 𝑝(𝑄) = 1 − 𝑄 and has a constant marginal cost equal

to 0. At the optimal quantity, what are the monopolist’s profits?

a. 1

2

b. 1

3

c. 1

4

d. 1

8

9) A monopolist faces the inverse demand curve 𝑝(𝑄) = 10 − 3𝑄 and has constant marginal cost equal

to 1. What quantity do they set?

a. 1

2

b. 1

c. 3

2

d. 2

10) A monopolist faces the inverse demand curve 𝑝(𝑄) = 10 − 3𝑄 and has the total cost schedule

𝐶(𝑄) = 𝑄2. What quantity do they set?

a. 3

4

b. 1

c. 5

4

d. 3

2

11) A monopolist faces the inverse demand curve 𝑝(𝑄) =1

√𝑄 and has constant marginal costs. How does

its price relate to its marginal cost?

a. Its price is half its marginal cost.

b. Its price is equal to its marginal cost.

c. Its price is double its marginal cost.

d. Its price is four times its marginal cost.

12) A monopolist faces the inverse demand curve 𝑝(𝑄) = 27𝑄−2

3 and has constant marginal cost 𝑐. Which

of the below is the correct expression for its optimal quantity?

a. 3√3𝑐−2

3

b. 9𝑐−2

3

c. 9𝑐−3

2

d. 27𝑐−3

2

13) A monopolist faces the inverse demand curve 𝑝(𝑄) =1

𝑄2 and has constant marginal costs 𝑐. Which of

the below is the correct expression for its optimal price? (Hint: drawing a graph of firm profits as a

function of 𝑄 may help you here.)

a. −𝑐

b. 1

2𝑐

c. 2𝑐

d. ∞

14) Suppose that an industry has the demand curve 𝑄(𝑝) = 𝑘𝑝−𝛼. Recall that the price elasticity of

demand is given by 𝑝

𝑄

ⅆ𝑄

ⅆ𝑝 . What is the price elasticity of demand for this demand specification?

a. The answer depends on the value of 𝑝 and 𝑄.

b. – 𝛼

c. 𝛼

d. −1

𝛼

15) Suppose an industry with 𝑛 firms faces the inverse demand curve 𝑃(𝑄). Suppose further than the

firms are competing in quantities, and that for each 𝑖 ∈ {1, … , 𝑛}, firm 𝑖 has constant marginal cost 𝑐𝑖.

If 𝑄∗ is the total amount produced by the industry in equilibrium and 𝑞𝑖∗ is the amount produced by

firm 𝑖 in equilibrium, which of the below is the correct first order condition for firm 𝑖?

a. 1

𝑛𝑃′(𝑄∗)𝑄∗ + 𝑃(𝑄∗) −

1

𝑛∑ 𝑐𝑖

𝑛𝑖=1 = 0

b. 𝑃′(𝑄∗)𝑞𝑖∗ + 𝑃(𝑄∗) − 𝑐𝑖 = 0

c. 𝑃′(𝑄∗)𝑄∗ + 𝑃(𝑄∗) − 𝑐𝑖 = 0

d. 𝑃′(𝑞𝑖∗)𝑞𝑖

∗ + 𝑃(𝑄∗) − 𝑐𝑖 = 0

16) Suppose 𝑛 firms compete under Cournot competition, where each firm has a constant marginal cost.

If the variance of marginal costs across the industry increases, but the average marginal cost stays the

same, what happens to the total quantity produced?

a. More information is needed.

b. It falls.

c. It stays the same.

d. It increases.

17) Under Cournot competition, what happens to the price as the number of firms goes to infinity?

a. It converges to zero.

b. It converges to infinity.

c. It converges to the price under perfect competition.

d. It converges to twice the price under perfect competition.

18) Suppose an industry with 𝑛 firms faces the inverse demand curve 𝑃(𝑄) =1

𝑄, and suppose that each

firm in the industry has constant marginal cost equal to 1. Under Cournot competition, it may be

shown that the total quantity produced by the industry will be equal to 𝑛−1

𝑛. Now suppose that each

firm must pay an overhead cost of 1

10 in order to enter. How many firms will choose to do this?

a. 1

b. 2

c. 3

d. 4

19) Bresnahan and Reiss (1991) find some empirical support for Cournot competition. What do they find,

and how does it fit or not fit with the Cournot story?

a. The data suggests mark-ups continue to fall as the number of firms increases. Cournot predicts

mark-ups should shop falling once the number of firms passes a critical level.

b. The data suggests mark-ups continue to fall as the number of firms increases. Cournot predicts

the same thing.

c. The data suggests mark-ups stop falling once the number of firms passes a critical level.

Cournot predicts the same thing.

d. The data suggests mark-ups stop falling once the number of firms passes a critical level.

Cournot predicts mark-ups should continue to fall.

20) Two firms compete in Cournot competition, both with constant marginal cost equal to 1. They face

the inverse demand curve 𝑝(𝑄) =1

𝑄. What will the total quantity produced be?

a. 1

4

b. 1

2

c. 3

4

d. 1

21) Two firms compete in Cournot competition. One firm has constant marginal cost equal to 1 and the

other firm has constant marginal costs equal to 2. They face the inverse demand curve 𝑝(𝑄) =1

𝑄.

What quantity will be produced by the firm with the lower marginal costs?

a. 1

9

b. 2

9

c. 1

3

d. 4

9

22) Three firms all have constant marginal costs of £200, and compete in pure strategy Bertrand

competition, subject to the constraint that prices must be whole numbers of pounds. Which of these

price combinations could not be an equilibrium?

a. 𝑝1 = £200, 𝑝2 = £200, 𝑝3 = £200

b. 𝑝1 = £201, 𝑝2 = £201, 𝑝3 = £201

c. 𝑝1 = £300, 𝑝2 = £201, 𝑝3 = £200

d. 𝑝1 = £300, 𝑝2 = £200, 𝑝3 = £200

23) Three firms compete in pure strategy Bertrand competition, subject to the constraint that prices must

be whole numbers of pounds. The first firm has constant marginal cost equal to £100, the second firm

has constant marginal cost equal to £200 and the third firm has constant marginal cost equal to £300.

Which of these price combinations could not be an equilibrium?

a. 𝑝1 = £100, 𝑝2 = £101, 𝑝3 = £300

b. 𝑝1 = £101, 𝑝2 = £102, 𝑝3 = £300

c. 𝑝1 = £199, 𝑝2 = £200, 𝑝3 = £201

d. All of the above.

24) GlaxoSmithKline (GSK) holds the patent to a new drug, but decides to license it out to other firms

rather than producing the drug itself. It charges firms a fixed fee 𝐹 > 0 in order to license the patent.

Once a firm has licensed the patent, it can produce the drug at a marginal cost of 𝑐. Assuming those

firms that do license the drug compete in prices in pure strategies and assuming that monopoly profits

from selling the drug would be 𝜋𝑀 ≥ 𝐹, how many firms will choose to license the patent?

a. 0

b. 1

c. 2

d. The answer depends on the value of 𝐹 and/or 𝑐 and/or the demand curve.

25) What level of 𝐹 should GSK charge in the set-up of the previous question?

a. 0

b. 𝜋𝑀

2

c. 𝜋𝑀

d. ∞

26) Once GSK has fixed 𝐹, under what circumstances should the government (that cares about total

surplus) offer to pay the license fee for two firms to produce the drug, under the set-up of question

24.

a. When the deadweight loss due to monopoly is greater than 𝐹.

b. When the deadweight loss due to monopoly is greater than 2𝐹.

c. When the monopoly quantity is less than the efficient quantity.

d. Never.

27) Two firms sell the same product at different prices. Assuming they both have only finite supplies of

the good, we will observe efficient rationing when:

a. Consumers arrive at the shops in a random order.

b. The probability a consumer arrives at the cheapest firm before it runs out of stock is

proportional to the consumer’s valuation of the good.

c. The consumers who value the good most arrive first.

d. The consumers who value the good least arrive first.

28) Cournot competition may be thought of as capacity choice, then rationed Bertrand. Under what

rationing rule do we get the exact Cournot outcome? What happens for other rationing rules?

a. Capacity choice then efficiently rationed price competition delivers Cournot. Other rationing

rules lead to outcomes closer to perfect competition.

b. Capacity choice then efficiently rationed price competition delivers Cournot. Other rationing

rules lead to outcomes closer to the monopoly output level.

c. Capacity choice then proportionally rationed price competition delivers Cournot. Other

rationing rules lead to outcomes closer to perfect competition.

d. Capacity choice then proportionally rationed price competition delivers Cournot. Other

rationing rules lead to outcomes closer to the monopoly output level.

29) When there is free entry into an industry, do we get too much or too little entry (relative to the welfare

optimum)?

a. Under price competition we get too much. Under quantity competition we also get too much.

b. Under price competition we get too much. Under quantity competition we get too little.

c. Under price competition we get too little. Under quantity competition we also get too little.

d. Under price competition we get too little. Under quantity competition we get too much.

30) Which of the following conditions are not necessary for a firm to perform price discrimination?

a. The firm can observe consumer characteristics.

b. The firm has some market power.

c. Consumers have different demand curves.

d. The good cannot be resold.

31) Second degree price discrimination is:

a. Getting consumers to self-select into different tariffs.

b. Selling each unit at a different take it or leave it price.

c. Pricing units based on the consumers’ observable characteristics.

d. Charging a fixed fee to buy any units at all, plus an additional price per unit.

32) Examine the table below. Which of the given options is the optimal pricing strategy, assuming Word

and Excel can both be produced at zero marginal cost?

User Type Number Valuation

of Word

Valuation

of Excel

Total

Valuation

Writer 20 50 30 80

Accountant 20 30 50 80

Generalist 40 41 41 82

a. Word and Excel are both 41.

b. Word and Excel are sold in a bundle at a price of 80.

c. Word and Excel are sold in a bundle at a price of 82.

d. Word and Excel are sold in a bundle at a price of 82, and individually at a price of 50.

33) Consider repeated Bertrand competition between two firms when both firms have zero marginal

costs, and seek to maximise ∑ 𝜌𝑠𝜋𝑖,𝑡+𝑠∞𝑠=0 where 𝜋𝑖,𝑡 is firm 𝑖’s profits in period 𝑡. Suppose both firms

are playing a grim trigger strategy where they set the monopoly price until they see their rival set any

other price, after which they set price to zero. Which of the below is the necessary and sufficient

condition for this to be an SPNE?

a. 𝜌 ≥1

3

b. 𝜌 ≥1

2

c. 𝜌 ≤1

2

d. 𝜌 ≤ 1

34) Consider repeated Cournot competition between two firms, with constant, symmetric marginal costs,

when both firms seek to maximise ∑ 𝜌𝑠𝜋𝑖,𝑡+𝑠∞𝑠=0 where 𝜋𝑖,𝑡 is firm 𝑖’s profits in period 𝑡. In a sub-game

perfect, Nash equilibrium, what is the lowest average profits that firms could make?

a. Zero.

b. The Cournot level.

c. The monopoly level.

d. The total surplus under perfect competition.

35) How does the growth rate of demand effect the likelihood of observing collusion?

a. It always increases it.

b. It always decreases it.

c. It increases it if and only if there is no firm entry.

d. It decreases it if and only if there is no firm entry.

36) Suppose all consumers in a market have the inverse demand curve 𝑝(𝑄) = 1 − 𝑄. The market is

served by a monopolist who sets a two part tariff. Assuming the monopolist has marginal costs equal

to 1

2, calculate the two part tariff the monopolist will choose? You can assume that resale is impossible.

(You may find it helpful to draw the demand curve.)

a. 𝑇(𝑄) =1

2+ 2𝑄

b. 𝑇(𝑄) =1

2+

𝑄

2

c. 𝑇(𝑄) =1

4+

𝑄

2

d. 𝑇(𝑄) =1

8+

𝑄

2