Q1. Which of the following statements is true?

(a) Total industry output is not always increasing in the number of firms in the industry.

(b) A monopolist always produces on the inelastic section of the demand curve

(c) With strategic complements, when one firm increases its variable of choice, in the best response of the rival firm is to decrease its variable of choice.

(d) Perfect competition predicts that exiting firms will be smaller than the average firm size in the industry.

(e) None of the above statements are true

Q2. Two firms produce homogeneous goods and have constant marginal costs of production of $4 per unit. Market demand is given by P = 20 - 2Q, where P is price and Q is the total quantity sold. The firms simultaneous set prices. If both firms set the same price the market is divided 50:50. If one firm's price is lower, that firm gets the entire market demand and the other firm sells zero. Let Pa be firm a's price and qa be the quantity firm a sells in equilibrium. Similarly, let Pb be firm b's price and qb be the quantity firm b sells. Then, in the Nash equilibrium outcome of this game:

(a) qa = qb = 2, and profits are $16 for each firm

(b) qa = 4 and qb = 4, and the firms make zero profits

(c) qa = qb = 8, and profits are zero for each firm

(d) Pa = Pb = 4 and firm makes $48 profit.