AAEC 2305 Exam 2

If Tom sells 500 sandwiches for $7 and has an average cost of $5, what is his profit? A) $500 B) $1,000 C) $2,500 D) $3,500

B) $1,000

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit-maximizing quantity for this monopolist? A) 125 B) 110 C) 100 D) 75

B) 110

(Table: Barrels of Oil 2) Refer to the table. What is the marginal revenue of producing the fifth barrel of oil? A) 61 B) 50 C) 200 D) 250

B) 50

Which of the following best explains why cartel agreements are hard to maintain? A) Each firm in the cartel has the incentive to raise prices and earn larger profits. B) Each firm in the cartel has the incentive to increase production and earn larger profits. C) Cartels are typically very profitable for firms in the short run, but not in the long run. D) It is hard for each firm in the cartel to maintain a level of production equal to that of the other firms.

B) Each firm in the cartel has the incentive to increase production and earn larger profits.

What is the Invisible Hand Property 1? A) Central planners can achieve lower costs of production than self-interested profit-seeking firms. B) In a free market, the total costs of producing output are minimized because each firm produces up to the point where P = MC. C) Firms enter industries whenever P > AC. D) Firms shut down whenever revenues are insufficient to cover variable costs.

B) In a free market, the total costs of producing output are minimized because each firm produces up to the point where P = MC.

What is the profit maximization condition for a monopolist? A) MR > MC B) MR = MC C) AR = MC D) AR = D

B) MR = MC

Which of the following is always TRUE for monopolies? A) MR > D B) P > MR C) P > AC D) TR < TC

B) P > MR

(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making zero economic profits? A) Panel A B) Panel B C) Panel C D) Panel D

B) Panel B

When a single firm can supply the entire market at lower cost than two or more firms, we say that the industry is: A) profit maximizing. B) a natural monopoly. C) a bilateral monopoly. D) a natural competitor.

B) a natural monopoly.

A perfectly competitive industry exists under which of the following conditions? I. The product sold is similar across firms. II. There are many sellers, each small relative to the total market. III. There are many sellers, each with total assets less than $2 million. IV. The threat of competition exists from potential sellers that have not yet entered the market A) I and II only B) I, II, and III only C) I, III, and IV only D) I, II, and IV only

D) I, II, and IV only

A student trying to maximize her semester GPA already studies as many hours as possible but can perhaps use that time more efficiently. A marginal hour spent studying economics will raise her GPA by 0.05. A marginal hour spent studying literature will raise her GPA by 0.02. Should she reallocate her time? A) She should not reallocate her study time at all. B) With the given information, it is impossible to determine whether she should reallocate her time. C) She should spend more time studying literature and less time studying economics. D) She should spend more time studying economics and less time studying literature.

D) She should spend more time studying economics and less time studying literature.

Refer to the figure. Deadweight loss caused by monopoly pricing is represented by the area: A) abd B) acdf. C) bcdf D) def

D) def

To maximize profit the monopolist should set a: A) lower price in markets with less elastic demand. B) lower price in markets with more inelastic demand. C) higher price in markets with more elastic demand. D) higher price in markets with more inelastic demand.

D) higher price in markets with more inelastic demand.

Economic profit differs from accounting profits because of its inclusion of: A) explicit costs. B) incidental costs. C) potential costs. D) implicit costs.

D) implicit costs.

If a firm has revenues of $100, explicit costs of $50, and implicit costs of $50, its economic profit is: A) $0 B) $50 C) $100 D) $500

A) $0

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the maximum price that the consumer is willing to pay for 100 units? A) $100 B) $80 C) $75 D) $90

A) $100

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of: A) $75 B) $300 C) $225 D) $0, because P = MC at P = $20.

A) $75

(Table: Barrels of Oil 2) Refer to the table. What is the marginal cost of producing the seventh barrel of oil? A) 36 B) 50 C) 90 D) 126

A) 36

How does price discrimination help cover fixed costs? A) If price discrimination expands the size of the market, the fixed costs can be spread over a much larger output level. B) If price discrimination lowers profits, firms will produce less and have lower fixed costs. C) Consumers with inelastic demand are less costly to serve, lowering the fixed costs of production. D) Consumers with elastic demand are less costly to serve, lowering the fixed costs of production.

A) If price discrimination expands the size of the market, the fixed costs can be spread over a much larger output level.

What condition is necessary in a constant cost industry? A) Prices of the industry's inputs do not change as the industry expands. B) Prices of the industry's inputs decline as the industry expands. C) Prices of the industry's inputs rise as the industry expands. D) There are barriers that prevent new firms from entering such an industry.

A) Prices of the industry's inputs do not change as the industry expands.

The oil industry is an increasing cost industry because: A) expanding output requires firms to use more expensive production methods to find and extract oil from less desirable locations. B) people buy more oil at lower prices. C) because oil is a necessity good. D) All of these statements are correct.

A) expanding output requires firms to use more expensive production methods to find and extract oil from less desirable locations.

A cartel is a: A) group of suppliers that tries to act as if they were a monopoly. B) market that is dominated by a small number of firms. C) market with a large number of firms selling similar but not identical products. D) group of suppliers that tries to act as if they were a perfectly competitive market.

A) group of suppliers that tries to act as if they were a monopoly.

The more inelastic the demand curve for a product is, the: A) higher is the monopolist's price markup. B) smaller is the monopolist's price markup. C) more responsive buyers are to a change in the price. D) less chance monopolists will have to earn above-normal profits.

A) higher is the monopolist's price markup.

Airlines try to differentiate their customers by willingness to pay based on: A) how long in advance a person books their flight. B) a person's weight. C) the ethnicity of a person's last name. D) All of the answers are correct.

A) how long in advance a person books their flight.

The power to raise price above marginal cost without fear that other firms will enter the market is: A) market power. B) firm power. C) marginal power. D) cost power.

A) market power.

Which of the following conditions would prevent a firm from setting different prices in different markets? A) possibility of arbitrage for buyers between different markets B) law enforcement preventing smuggling from occurring C) government intervention forcing the firm to reduce the level of output D) government imposition of a price ceiling

A) possibility of arbitrage for buyers between different markets

(Figure: Price-Discriminating Monopolist) Refer to the figure. In order to maximize profits, the monopolist should charge a: A) price of $16 in Market A and $10 in Market B. B) uniform price of $6 in both markets. C) price of $14 in Market A and $9 in Market B. D) price of $16 in Market A and $6 in Market B.

A) price of $16 in Market A and $10 in Market B.

If an industry is highly profitable, it is an indication that: A) the marginal value of resources is high, and more resources need to flow into the industry. B) the marginal value of resources is low, and resources need to flow out of the industry. C) labor and, to a limited extent, capital are being exploited. D) firms are using high-value inputs to create low-value outputs.

A) the marginal value of resources is high, and more resources need to flow into the industry.

Tying is: A) the practice of a firm selling one product that requires the consumer to purchase another of the firm's products. B) the practice of buying one unit at full price and the second unit at half off. C) the same thing as buy one get one free. D) the practice of a firm's paying the sales tax in exchange for a consumer's purchase of an extended warranty.

A) the practice of a firm selling one product that requires the consumer to purchase another of the firm's products.

In a competitive industry, entry and exit decisions: A) allow some firms to earn above-normal profits in the long run. B) ensure that labor and capital move across industries to optimally balance production. C) rely on demand signals, not price signals. D) move capital and labor away from profitable industries in order to maximize the total value of production.

B) ensure that labor and capital move across industries to optimally balance production.

Suppose that you own two farms on which to grow corn. In order to lower the cost of production, you determine to increase production on Farm 1 and reduce it on Farm 2. This implies that the marginal cost of production on Farm 1 is: A) greater than the marginal cost of production on Farm 2. B) less than the marginal cost of production on Farm 2. C) equal to the marginal cost of production on Farm 2. D) The difference of the marginal costs between the two farms cannot be determined.

B) less than the marginal cost of production on Farm 2

In competitive markets, the demand curve faced by the individual firm is: A) equal to the market demand curve. B) perfectly elastic. C) perfectly inelastic. D) downward sloping.

B) perfectly elastic.

(Table: Oil Pumps) Refer to the table. Suppose that we want to produce seven barrels of oil. To minimize costs, we should produce: A) all seven barrels of oil from Oil Pump Two. B) three barrels of oil from Oil Pump One and four barrels of oil from Oil Pump Two. C) one barrel of oil from Oil Pump One and six barrels of oil from Oil Pump Two. D) all seven barrels of oil from Oil Pump One.

B) three barrels of oil from Oil Pump One and four barrels of oil from Oil Pump Two.

(Table: Barrels of Oil 2) Refer to the table. The maximum profit available to the company is: A) $184 B) $210 C) $224 D) $266

C) $224

(Table: Oil Pumps) Refer to the table. An oil producer owns two pumps: Oil Pump One and Oil Pump Two. If the market price of oil is $20 per barrel, how many barrels of oil get produced? A) 4 B) 14 C) 10 D) 6

C) 10

(Table: Barrels of Oil 2) Refer to the table. How many barrels of oil should the company produce to maximize profit? A) 6 B) 7 C) 8 D) 9

C) 8

Which of the following statements is TRUE? A) Entry and exit from an industry depend on the firm's market share. B) Fixed costs fall as firms produce more output, the so-called "spreading of the costs." C) High profits in an industry give entrepreneurs an incentive to enter that industry. D) A firm should enter an industry if average costs are less than producer surplus.

C) High profits in an industry give entrepreneurs an incentive to enter that industry.

Bundling is expected to provide greater profits when the two bundled goods are: I. substitutes. II. goods that have high fixed costs and low marginal costs. III. very close complements. A) I only B) II only C) II and III only D) I, II, and III

C) II and III only

Competitive firms want to enter industries in which: A) P = MC. B) P < AC. C) P > AC. D) P < MC.

C) P > AC.

Which of the following represents the nature of a monopolist's deadweight loss? A) It is not possible to equate price with marginal cost when demand is inelastic. B) It is a fact that people are willing to spend a lot of money for small improvements in quality. C) Some consumers are willing to pay more than the monopolist's marginal cost of production, but the monopolist does not produce these units. D) Unlike competitive markets, there are consumers with unsatisfied wants.

C) Some consumers are willing to pay more than the monopolist's marginal cost of production, but the monopolist does not produce these units.

The United States uses ______ to prevent businesses from engaging in anticompetitive practices. A) fiduciary regulations B) blue laws C) antitrust laws D) monetary and fiscal policy

C) antitrust laws

To maximize profits, a firm in a highly competitive industry should set its price: A)higher than the market price. B)lower than the market price. C) at the market price. D) it depends: sometimes at the market price but sometimes higher or lower.

C) at the market price.

Which of the following makes a cartel short-lived? A) stable market demand B) few firms in the cartel C) cheating D) contracting

C) cheating

Consider industries X and Y. Industry X has total revenue of $100 million and total costs of $77 million. Industry Y has total revenue of $80 million and total costs of $40 million. We should expect that: A) prices are higher in Industry X. B) resources will move from Industry Y to Industry X. C) labor and capital will move from Industry X to Industry Y. D) firms in both industries will shut down operations.

C) labor and capital will move from Industry X to Industry Y

A top-performing used-car salesman is able to sell his cars to each customer at their maximum willingness to pay, a practice known as: A) insightful pricing. B) pricing market-to-market. C) perfect price discrimination. D) price tying.

C) perfect price discrimination.

Price discrimination can be defined as: A) selling different products to the same consumers in the same market. B) selling the same product in two different markets. C) selling the same product at two different prices in two different markets. D) exporting goods to foreign countries.

C) selling the same product at two different prices in two different markets.

When comparing a monopoly with a competitive industry, monopoly quantity: A) and monopoly price will be lower than that of a competitive firm. B) will be higher, and monopoly price will be lower, than that of a competitive firm. C) will be lower, and monopoly price will be higher, than that of a competitive firm. D) and monopoly price will be higher than that of a competitive firm.

C) will be lower, and monopoly price will be higher, than that of a competitive firm.

In a competitive equilibrium, firms earn ______ economic profits. A) positive B) negative C) zero D) abnormal

C) zero

(Table: Christie' and Sotheby's) Each cell of this table presents the revenues earned by the auction houses, Christie's and Sotheby's. Revenues are based on the type of commission each firm charges its clients, as well as what commission the other charges. Christie's revenues are listed first in each cell, then Sotheby's. Christie's dominant strategy is ______ commission and Sotheby's dominant strategy is ______ commission. A) high; high B) high; low C) low; high D) low; low

D) low; low

Hewlett Packard's pricing scheme is to sell printers at relatively low price and ink cartridges at relatively high price. This practice is known as: A) leverage. B) predation C) retail maintenance. D) tying

D) tying