Week 12 Quiz

In the course's illustrative pricing game (Dataset O), two coffee shops each choose a high or a low price, with monthly profit in thousands of dollars written (first shop, second shop): (10, 10) if both price high, (4, 14) if the first prices high and the second low, (14, 4) if the first prices low and the second high, and (6, 6) if both price low. If the second shop prices high, which price pays the first shop more, and why?

Select one.

• High, because both shops earn 10 when both price high
• Low, because the first shop earns 14 instead of 10
• High, because 10 is more than the 4 it earns at the low price
• Low, because 6 is more than 4

In the course's illustrative pricing game (Dataset O), two coffee shops each choose a high or a low price, with monthly profit in thousands of dollars written (first shop, second shop): (10, 10) if both price high, (4, 14) if the first prices high and the second low, (14, 4) if the first prices low and the second high, and (6, 6) if both price low. What is each shop's dominant strategy?

Select one.

• High for both shops, since (high, high) gives each the most
• Low for the first shop only, since 14 is the biggest payoff in the table
• Low for both shops, since low pays more whichever price the rival picks
• Neither shop has one, since each one's best price depends on its rival

In the course's illustrative pricing game (Dataset O), two coffee shops each choose a high or a low price, with monthly profit in thousands of dollars written (first shop, second shop): (10, 10) if both price high, (4, 14) if the first prices high and the second low, (14, 4) if the first prices low and the second high, and (6, 6) if both price low. Which outcome is the Nash equilibrium?

Select one.

• (low, low), with 6 each
• (high, high), with 10 each
• First shop low and second shop high, with (14, 4)
• There is no Nash equilibrium in this game

In the course's illustrative pricing game (Dataset O), two coffee shops each choose a high or a low price, with monthly profit in thousands of dollars written (first shop, second shop): (10, 10) if both price high, (4, 14) if the first prices high and the second low, (14, 4) if the first prices low and the second high, and (6, 6) if both price low. Why is this game a prisoner's dilemma?

Select one.

• Because one shop always ends up earning less than the other shop
• Because price-fixing agreements between the shops are illegal
• Because the shops cannot earn the same profit in any outcome
• Because each shop's dominant strategy leaves both worse off than if both had cooperated

In the course's illustrative pricing game (Dataset O), two coffee shops each choose a high or a low price, with monthly profit in thousands of dollars written (first shop, second shop): (10, 10) if both price high, (4, 14) if the first prices high and the second low, (14, 4) if the first prices low and the second high, and (6, 6) if both price low. Suppose the two shops secretly agree that both will price high. If the second shop keeps the deal, how much more a month does the first shop earn by cheating with the low price?

Select one.

• 8 thousand dollars
• 4 thousand dollars
• 10 thousand dollars
• 6 thousand dollars

True or false: because its product is differentiated, a firm in monopolistic competition keeps earning a positive economic profit in the long run.

True or false.

• True
• False

A phone-repair shop is one of many in a city; its repairs differ a little from its rivals' in location and speed, so its own demand curve slopes down. How does it choose how many repairs to do and what to charge?

Select one.

• It sets its price equal to marginal cost, like a price taker
• It charges the lowest point of its average total cost in the short run
• It does repairs until marginal revenue reaches zero
• It produces where MR = MC and reads a price above MC from its demand curve

Repair shops on one street are earning economic profit, and new shops can open freely. Picture one existing shop's graph, with repairs per week on the horizontal axis and dollars on the vertical axis, showing its downward-sloping demand curve and its bowl-shaped average-total-cost curve. What happens over time?

Select one.

• Its demand curve shifts left until P = ATC
• Its demand curve shifts right as the market grows, and profit rises
• Its average-total-cost curve shifts down until P = MC
• Nothing moves, because a differentiated product blocks new rivals

This course has used four firms as examples: the chair workshop of Week 10, one of many sellers of identical chairs; a phone-repair shop with many differentiated rivals; one of two coffee shops on a corner; and the town's only ferry. Which of them produces where price equals marginal cost?

Select one.

• The town's only ferry
• One of the two coffee shops
• The chair workshop
• The phone-repair shop

Select every market structure in which free entry drives long-run economic profit to zero.

Select every option that applies.

• Perfect competition
• Monopolistic competition
• Oligopoly
• Monopoly