AGEC 203 - Exam 2

Larry Krovitz is a salesman who works at a​ used-car showroom in​ Sydney, Australia.​ It's the last week of​ July, but he is yet to meet his sales target for the month. A​ customer, Harold​ Kumar, who wants to buy a Ford​ Fiesta, walks into the showroom. After taking one of the cars for a test​ drive, Harold decides to buy it. While ​$15,000 was the least that Larry would have been willing to accept for that​ car, he quotes a price of ​$15,000. After some​ bargaining, the car is sold for ​$12,000. In this​ case, the producer surplus is ​_____________ If the cost of the car to Larry is $15,000, his profit is __________

1. $-3000 2. $-3000

A monopolistic competitor maximizes profits by producing 180 hamburgers per day. At this quantity, his average total cost is $5 and his average variable cost is $2. He charges $4 per hamburger. The firm would generate an economic loss of _________. In this case the monopolistic competitor should _______________

1. $180 2. keep producing, generating an economic loss in the short run

In short-run equilibrium, Firm A sells 125 unites of output at $67 per unit and faces an average total cost of $45. Profits earned by Firm A at equilibrium are ___________. The opportunity cost of the time that Firm A's owner spends on running the company will be included in its _________ costs. Which of the following expressions correctly describes economic profits?

1. $2,750 2. implicit 3. total revenues - implicit costs - explicit costs

Imagine you are a buyer in a double oral auction with a reservation value of $14 and there is a seller asking for $9. If you accept this offer, you will gain ____ If you are the only buyer and you know that the lowest ask price is $3, should you accept this offer ?

1. $5 2. both a and c are correct (yes, since you will gain $11, Yes, accepting an offer from any other seller will reduce your surplus)

Consider a perfectly competitive market. Suppose the initial price of a product is $1.40 per unit. At this price, the marginal revenue curve faced by a firm is _________________. If the market price increases from $1.40 to $2.70 per unit, the firm would _________________ production from ______ to ______ units. If the market price decreases from $1.40 to $0.80 per unit, the firm would produce ____ units because at this price ___________

1. MR1 2. increase 3. 272 4. 350 5. 200 6. MR2=MC

Consider a market structure in which there are only a few firms. These firms face a downward sloping residual demand curve with some entry barriers in the long run. These conditions are satisfied by ________ market structure. In this market, if there are zero economic profits, then it reflects a situation of ___________________. If there are more than zero economic profits, then it depicts a case of ________________________.

1. an oligopolistic 2. homogenous products in the long run 3. differentiated products in the long run

While at Subway in your neighborhood, you notice that a single employee completes an order, right from helping you choose your bread, veggies, and meat to making your sub the way you want it. However, over at Pizza Hut, each task in a pizza order is completed by a different worker. Why do you think Subway and Pizza Hut have chosen these different ways to produce meals? Pizza production is mostly standardized, so Pizza Hut _____________ take advantage of specialization and the division of labor, while sandwich production is more customized so Subway _____________ take advantage of specialization and the division of labor.

1. can 2. cannot

In a perfectly competitive market, a seller _______ choose to raise the price of its goods since all the sellers in the market produce _______, so raising the price would result in _______.

1. cannot 2. identical goods 3. losing all its customers

A deadweight loss is the ___________ in social surplus that results from a market __________

1. decrease 2. distortion

If firms in a perfectly competitive market are earning profits or incurring losses in the short run, then in the long run these profits or losses with either cause new firms to enter or existing firms to leave the market. This will result in a shift in the ____________________ until profits are _____________

1. industry supply curve 2. zero

When a firm exercises its monopoly​ power, social surplus is _____ when compared to a perfectly competitive market.

1. lower

Compared to a perfectly competitive market, consumer surplus is _________, producer surplus is _____, and deadweight loss is ____________

1. lower 2. higher 3. higher

A monopoly has _________ and ____________. Price is set _______________ marginal cost.

1. one seller 2. many buyers 3. greater than

a perfectly competitive firm will choose to shut down when the _______ intersects the marginal cost curve below the __________

1. price (marginal revenue) 2. average variable cost curve

producer surplus is the difference between the ______ and the _________

1. price consumers pay 2. supply curve

Sofia, a political science​ student, thinks that the government should intervene to revive declining industries like video stores and print newspapers. The​ government, she​ reasons, can resolve the coordination problem of getting the agents in these markets to trade. Do you agree with​ her? Explain your answer.

No, these industries are declining not because of coordination problems but rather, because of failing demand

In a perfectly competitive market,________ a.) sellers produce identical goods b.) each seller charges a different price for its product c.) bargaining over prices is a common phenomenon d.) there are restrictions on the entry of new firms

a

The IRS rule implies that... a.) a nonprofit organization can use its profit only to further its mission b.) it is illegal for a nonprofit organization to maximize the profit c.) a nonprofit organization must make zero profit (break even) d.) it is illegal for a nonprofit organization to make a profit

a

Which of the following firms is most likely to have a constant marginal cost?

a firm that has extremely high fixed costs

An industry has the following characteristics... -the consumers are price takers -the price is set above marginal cost and marginal revenue -there are more than zero profits in the long run -the product has no close substitutes The market conditions of this industry are those of...

a monopoly

Which of the following statements regarding producer surplus are not true? a.) it is the area below the marginal cost curve b.) it is the difference between total cost and total revenue c.) it arises from selling units at a price that is higher than the marginal cost d.) it is not possible to calculate the total producer surplus in the market

a, b, and d

When existing firms leave a perfectly competitive market, it causes...

an increase in the profitability of existing firms

If the industry were perfectly competitive (marginal cost pricing) rather than a monopoly, social surplus would be...

areas a, b, c, and d

A firm is experiencing economies of scale when its ______ declines as more output is produced

average total cost

Which of the following is not a common characteristic between a monopoly and monopolistic competition? a.) the price set by the seller/producer will be above marginal revenue b.) the products sold have close substitutes c.) the slope of the demand curve is negative d.) there is deadweight loss in the market

b

A firm will maximize profit at the level of output where__________ a.) its marginal revenue equals its total cost b.) its average revenue equals its average cost c.) its marginal revenue equals its marginal cost d.) its total cost equals its total revenue

c

All of the following are factors in a firm's elasticity of supply except? a.) labor b.) time c.) market price d.) inventories

c

All of the following could cause an increase in producer surplus except... a.) a shift in the market demand curve b.) a higher equilibrium price c.) an upward shift in the marginal cost curve d.) a downward shift in the marginal cost curve

c

Which condition of a perfectly competitive market could most directly be hampered in the market for epinephrine autoinjectors? a.) each seller produces an identical good or service b.) there is free entry to and exit from the market c.) each seller produces a negligible fraction of the total market supply d.) None. the market price for the product satisfies all the condition for perfect competition

c

There are a few firms in the automobile industry in Zadmia. To prevent a price war, these firms have secretly agreed to charge a price 20 percent above the marginal cost of production. This is an example of...

collusion

A monopolist should continue to increase production until marginal...

cost is equal to marginal revenue

All of the following statements about market structure are true except? a.) monopolists sales revenues are constrained by market demand b.) oligopolists often practices game theory c.) perfect competitors can have short run economic profits d.) monopolistic competitors practice marginal cost pricing

d

For a market to be characterized as monopolistically competitive, there must be... a.) differentiated products b.) zero economic profits in the long run c.) many sellers d.) all of the above

d

Which of the following statements is not true? a.) a firm should continue operating in the short-run if the market price is between ATC and AVC b.) a firm should shut down if average variable cost is greater than the market price c.) sunk costs do not affect current and future production decisions d.) the short-run supply curve of a firm is the portion of its marginal cost curve that lies below AVC

d

When a firm exercises its monopoly​ power, the cost to society is the​ ____________.

deadweight loss

Oligopolistic firms that sell differentiated products determine their prices when prices are...

determined simultaneously by the firms as best responses given other firm prices

In a perfectly competitive market, a firm with multiple production plants will minimize total costs of production when...

each plant produces where marginal revenue equals marginal cost

In an oligopoly with differentiated products...

economic profit will exist

In a perfectly competitive market, all of the following are true except...

false: the market supply cannot affect the retail price true: sellers are price takers, the products sold are basically homogeneous, entry into the market is unrestricted

An example of a monopolistically competitive market is the __________________

fast food industry

Which of the following is not one of the three conditions that characterizes a perfectly competitive market?

firms have pricing power and can set their prices freely

Which of the following is a difference between a monopolistically competitive market and a monopoly in the long run?

firms in a monopolistically competitive market earn zero economic profits in the long run, while a monopolist usually earns positive economic profits in the long run

In a perfectly competitive market, an individual seller sells only a negligible fraction of the total amount of the good produced. This is why _____________

his individual choices do not affect market price

The long run supply curve for a firm in a perfectly competitive industry is...

horizontal

The long run supply curve in a perfectly competitive market is...

horizontal

Given the long-run adjustment process that takes place after a supply or demand shock, we know that the industry supply curve must be...

horizontal, since the supply curve shifts until price is back to its original level and profits are back to zero

Some people might argue that the luxury tax in baseball is not an important determinant of major league salaries. As evidence, they show that team payrolls rarely exceed the threshold level and so teams rarely pay the tax. Your answer to this question suggests the logic of the luxury tax is________________

important, because it promotes low salaries

Which of the following is a key difference between perfect competition and monopoly?

in perfect competition, no one firm can influence price, but with monopoly, a single seller sets the price

Why is city drinking water better off as a natural monopoly?

industries like city drinking water experience economies of scale since they have high fixed costs. Thus it is cheaper to have a single firm provide a larger quantity.

Markets in which the Herfindahl-Hirschman Index __________ are considered not concentrated.

is less than 1,000

In a perfectly competitive market, when firms enter and exit competitive markets...

it is a good sign that market is working

Seller A increases the price of its good by​ 20% and still enjoys a high market demand. Due to the high​ demand, there is an increase in the number of similar sellers in the​ long-run. This is an example of ____________________

monopolistic competition

You observe a market where in the long run firms earn zero economic profit, consumer and producer surplus is not maximized, and when a new firm enters the market, the price of similar products decrease. You are most likely observing a ____________________

monopolistically competitive market

The department of justice filed a lawsuit against Microsoft claiming it was engaging in unfair practices by ___________

monopolizing the market by bundling its operating system with its Internet Explorer browser

Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost curves, would you expect prices to be higher in a monopoly or a monopolistically competitive market?

monopoly, because its demand is more inelastic

Suppose Louis Corporation could increase its profits considerably if it decided to shift from the clothing industry to the IT industry. In this​ case, the economic profits of Louis Corporation in the clothing industry are:

negative

Some economists believe the threat of unfair monopolies is greater today than when the Sherman Act was first enacted. They argue that modern software can gain monopoly status and establish a barrier to entry through ________________

network externalities

Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive market?

no, because firms restrict output to raise price

Suppose that a firm in a competitive market succeeds in producing a superior product and selling it at a price that generates a large demand. As a result, the firm's market share is almost 100 percent. Meanwhile, other firms are trying to regain their market shares through research and development. Is this firm a monopolist?

no, because it faces potential competition from other companies

Suppose the refrigerator industry has an HHI of 2,500 while the aluminum industry's HHI is 6,850. Is this information sufficient to conclude that the aluminum market is less competitive than the market for refrigerators?

not necessarily, although the HHI indicates a smaller number of firms, those firms may compete intensely

Suppose you and your friends decide to go to the beach during spring break. You need to fly from Kansas City to Miami, but only two airlines provide the service. This market is best characterized as ____________________

oligopoly

In the long run, the supply curve for a perfectly competitive firm is represented by ___________

the portion of the marginal cost curve above average total cost

Therefore the short-run supply curve for a perfectly competitive firm is represented by _____________

the portion of the marginal cost curve above average variable cost

Which of the following is not a common characteristic between a monopoly and monopolistic competition?

the products sold have close substitutes

Total revenue for a monopolist is maximized...

only if marginal revenue is zero

Greenaqua Corp. was given the exclusive right to produce and sell its newly introduced water purifier for 20 years. The right granted to Greenaqua is an example of a:

patent

A market structure in which identical goods are produced by several different firms and sold at the market - determined price is referred to as ...

perfect competition

Homogeneous products are found in ______________

perfect competition and oligopoly market structures

When firms charge different prices to different consumers for the same good or service, it is referred to as...

price discrimination

Which of the following is true of the price of elasticity supply?

price elasticity of supply = percentage of change in quantity supplied/percentage change in price

All firms in a perfectly competitive market are said to be...

price takers

In a monopolistically competitive market, a firm earning negative economic profit in the short run will?

produce only if price is greater than average variable cost

Which of the following would maximize social surplus?

trade at the competitive market equilibrium

A change in the wage rate paid to the variable factor (labor) will shift the ...

ATC, AVC, and MC curves

$100 is to be divided among two individuals--Mary and Jenna. Which of the following allocations is Pareto efficient?

Mary receives $1, Jenna receives $99

Which of the following statements about price, P is correct?

P=MR=MC can only be true in perfect competiton

Is producer surplus always equal to profit?

Producer surplus equals profit when marginal cost and average total cost can be represented with the same curve

Would a profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short run?

Yes, but only if price stayed above average variable cost

An example of an industry or service that is a natural monopoly is...

a natural gas pipeline

The long-run supply curve is the portion of the MC curve...

above the ATC curve

When a monopolist sells positive levels of output, its demand curve...

lies above its marginal revenue curve

Consider four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Firms install four market structures maximize profits by producing the quantity where _______________

marginal revenue equals marginal cost

The Law of Diminishing Return states that _____________________

successive increase in inputs eventually lead to less additional output when one of the inputs is fixed

What is Nash Equilibrium?

the Nash equilibrium is for both teams to pick low

What happens in a monopolistically competitive market when new firms enter the market?

the existing firm's demand curve shifts in and becomes flatter

Perfect price discrimination implies that...

the firm produces a larger output than it would as a single - price monopolist

The long-run supply curve in a perfectly competitive market states that...

the long-run quantity can vary while the equilibrium price returns to the price at the minimum of the average total cost

Suppose Good A belongs to a market where the firms earn zero economic profits in the long run and entry of new firms will result in price changes that operate through shifts in the market supply curve for Good A. What market structure does Good A belong to?

the perfectly competitive market

Suppose you had to organize a double oral auction for a good that has perfectly elastic demand. Do you expect prices to approach the competitive equilibrium?

yes, there is no reason why price in a double oral auction for a good with perfectly elastic demand would not be expected to approach the equilibrium price

Are there real-world markets that resemble double oral auctions?

yes, trading on the New York Stock Exchange is very similar to a double oral auction

In contrast, suppose Louis Corporation wouldn't be able to increase its profits if it decided to shift from the clothing industry to the IT industry. In this case, the economic profits of Louis Corporation in the clothing industry are...

zero

Economies of scale in production act as a source of _______________ market power

natural

Which of the following is likely to happen if the government imposes a price control at $60, when the demand curve shifts to D2?

there will be a shortage of 15 units of the good in the market

The aggregate difference between the average total costs and average variable cost for all units of production is the?

total fixed cost

The problem of superbugs, which are bacteria that resist all available forms of antibiotics, is becoming a serious challenge for doctors. Developing new antibiotics is very costly. Can a monopoly be good for the society in this regard?

yes, because innovation is more likely in a monopoly