ECON 101 Exam 3
What would be the cost of the pollution reduction if all firms were allowed to pollute as long as they had a legal permit? Assume that permits allowing a total of 150,000 tons were issued by the government and auctioned off to these firms.
$1.0 million
What would be the cost of a regulation that all firms reduce their pollution by one-third?
$1.6 million
Tony's Gas Station and Robert's Gas Station are the only two gas stations in a small town of Westville. If Tony and Robert collude to earn more profits, which of the following would be true?
Each limit the amount of gasoline available and raise prices
A natural monopolist will face which of the following?
Economies of scale
Given your answers to the previous questions, a monopolist will produce on the portion of the demand curve that is _______.
Elastic
Marginal revenue is only positive when demand is _______.
Elastic
Mergers can sometimes be socially beneficial if they do which of the following?
Enhance the quality of the products
If a monopoly is producing where price is greater than average cost (and thus making a profit), more firms will enter the market.
False
The monopoly and perfectly competitive firm are allocatively efficient.
False
Who is most likely to be involved in writing regulations for a particular industry and why?
Firms participating in the industry since the effect of the regulation is concentrated on a few who have a powerful incentive to shape it.
You have been charged with deciding on optimal fishing policies in order to both encourage growth in the salmon population in the Atlantic and allow fishermen to earn a living. You will need to allow some fishing, but not so much fishing that population counts are depleted for next year. Three proposals are on the table for you to choose from. Option 1: Institute a fishing "window" of 3 weeks wherein fishermen may fish as much as they wish, but after three weeks they must stop. Option 2: Institute a fishing "quota" that will limit the number of fish that any individual fisherman may harvest from the waters. Option 3: Sell a fixed number of licenses to harvest a certain number of fish.Which of these choices is most likely to produce the outcome you are interested in?
Option 3
Why do barriers to entry allow a monopolist to make positive economic profits?
Otherwise, firms would enter the market, resulting in a decrease in price and profits.
In which of the following markets do sellers act as price takers?
Perfect competition
Rank each type of market on their industry quantities from highest to lowest. Assume that there is a bit of competition among the oligopolies.
Perfect competition, monopolistic competition, oligopolies, monopolies
Assume that average costs are the same for all firm sizes and types of market structure. Assume that oligopolies compete a bit with one another. Which of the following represents the likely ranking of prices, from low to high, in the long run?
Perfect competition, monopolistic competition, oligopoly, monopoly.
Marginal cost is always positive; therefore, marginal revenue at the profit-maximizing output will have to be ________.
Positive
A monopolistic competitive firm will incur loss if which of the following is true?
Price is lower than average total cost
Which of the following descriptions best characterizes public goods?
Public goods are those where it is hard to keep non-payers from using the good, but their use of the good does not negatively impact others' ability to use it.
Which of the following are good examples of natural monopolies? Select all that apply.
Sewer treatment plant Residential data connection (coaxial cable or fiber optic) Electricity delivery
In efforts to increase economic efficiency, governments should ______________ goods with external benefits.
Subsidize
Which of these is an economically efficient manner of producing basic medical research?
Subsidize production of basic medical research by private producers Government production of basic medical research
Suppose you work for the FTC and have been asked to assess whether the FTC should build a case to block a proposed merger. Which of the following would be evidence in favor of blocking the merger? Select all that apply.
The HHI index will increase a great deal The combined company plans to shut down about half of its locations many of which are currently profitable. There are high barriers to entry in the industry Both companies have very high accounting profit compared to revenue
Consider a profit-maximizing firm with significant economies of scale that is subject to marginal cost pricing regulation. The regulation will produce ______________ production from the standpoint of economic efficiency and the firm will ______________ economic profits.
The correct amount; not earn
A monopoly facing a demand curve lower than the average cost curve over wide ranges of output will likely do what?
Go out of business
Think back to our discussions of changes in total revenue and price and how the concept of elasticity was used. When a firm decreases price and demand is elastic, the percentage change in quantity demanded will be A) ______________ (greater than / less than) the percentage change in price. Therefore, revenue will B) ______________ (increase / decrease). If the demand is inelastic, total revenue will C) ______________ (increase / decrease) when price decreases.
Greater than Increase Decrease
Markets of perfectly competitive firms and monopolies both _________.
Have downward sloping demand curves
In the long run, the monopolist's economic profits will be ______________ than the total of the competitive firms' profits.
Higher
In the long run, a monopolist facing the same cost curves as a perfectly competitive firm will charge a ______________ price than the competitive market and produce a ______________ output.
Higher; lower
Your local government is contemplating adding a new fireworks show to your town's Fourth of July festivities. They have calculated that the total cost of producing the show will be $3M, and your town has 300,000 residents. The show would be financed through an increase in taxes on each of these residents. Under what conditions is the provision of the fireworks show the efficient outcome?
If the total benefit of the show is greater than or equal to $3M, even if some individuals value the show at less than $10.
At the Fisherman's Wharf in San Francisco, there are a lot of seafood vendors. Suppose that there are twenty vendors selling steamed crab. If Tommy's crab shack sells 100 steamed crabs per day for $20 each, how much economic profit will Tommy earn in the long run? (Assume that the seafood vendors are operating in a monopolistically competitive market.)
In a monopolistically competitive industry long run profits are always zero.
A monopoly producing where marginal revenue equals marginal cost will do which of the following? Select all that apply.
It cannot increase quantity and make a greater profit It is producing at the highest profit possible in their market It is producing where the additional revenue is just equal to the additional cost for each output
An oligopolistic industry with the same costs as a monopoly will have prices:
Less than or equal to a monopoly price.
Compared to a perfectly competitive market, a natural monopoly will have a.) ______________ (higher / lower / either higher or lower) average costs and may charge a b.)______________ (higher / lower / either higher or lower) price.
Lower either higher or lower
Demand curves in competitive markets represent which of the following?
Marginal benefit to consumers
Which of the following taxes, imposed on polluters on the basis of how many tons of pollution they emit, would result in exactly 150,000 tons of pollution?
$21/ton
Regulators of a natural monopoly concerned most with economic efficiency will set prices equal to ________.
Marginal cost
Which of the following is true for a profit-maximizing monopolistic competitor?
Marginal cost = marginal revenue
All firms that are profit-maximizing, regardless of whether the demand curve is horizontal or downward-sloping, will produce where which of the following is true?
Marginal cost is equal to marginal revenue
If a monopoly is not producing at the profit-maximizing quantity, then it must be the case that which of the following is true?
Marginal cost is greater than marginal revenue Marginal revenue is greater than marginal cost Marginal revenue is negative
Supply curves in competitive markets represent which of the following?
Marginal costs of production
A profit-maximizing monopolist produces where marginal cost is equal to ________.
Marginal revenue
Suppose that Table 13.1 represents the pollution of three firms in your hometown and that the Environmental Protection Agency establishes that the benefits of reducing pollution in your hometown are $21/ton. What is the optimal level of pollution for the firms in this local economy?
150,000 tons
The firm should produce at what quantity so that marginal revenue is not less than marginal cost and profits are at their maximum point?
2
A profit-maximizing monopoly will produce where which of the following is true? Select all that apply.
Marginal revenue is less than the price Marginal revenue is equal to the marginal cost Marginal revenue is positive
If a monopoly increases the quantity above the profit-maximizing level which of the following will be true? Select all that apply.
Marginal revenue will be lower than before Marginal cost will be greater than marginal revenue Price would decrease
Which situation would be labeled a "natural monopoly"?
A firm has large economies of scale, and is thus able to sell the good for a lower price than would if there were many firms.
What is a reason that monopolies exist?
A firm owns a resource that no one else has A firm is given legal protection that prevents another firm from entering A firm naturally drives out competitors through lower prices.
The supply curve in a perfectly competitive market is the sum of all of the individual firm's marginal cost curves. What is the supply curve for a monopoly?
A monopoly does not have a supply curve
Assume that a market is operating in equilibrium. What would happen if the monopoly increased quantity produced but the price did not change?
A surplus
Suppose the government chooses to provide a public good at a zero price, and the increased consumption makes it so that one person's use begins to interfere with others' use. Think of a crowded road or a crowded park. What should the government do now to keep this market efficient?
Add prices that reflect the costs of an individual's use of the good.
Which of the following individuals might be considered a free rider?
An individual who lives near an airport and chooses to watch the local air show from his own yard rather than pay the admission fee next door.
In which of the following markets do sellers have the highest profit level?
Monopoly
Rank each type of market on their prices from highest to lowest. Assume that there is a bit of competition among the oligopolies.
Monopoly, oligopolies, monopolistic competition, perfect competition
Given the following data, what price will a monopolist most likely charge? Average cost and marginal cost are equal to $10 at all levels of output.
More than $12
If a monopoly faces a demand curve that is downward-sloping, then marginal revenue will be which of the following?
Must be less than price
Suppose that the Peached Tortilla is one of ten food trucks in the town of Happyville, and every food truck is earning substantial economic profits. What is likely to happen in the long run?
New food trucks will enter the market and gradually all food trucks will earn zero economic profits.
The Coca-Cola Company is the only producer of Coca-Cola. Is it considered a monopoly?
No, because Coca-Cola has many close substitutes.
A quasi-public good shares all characteristics of a public good except that access to the good can be limited, at least somewhat, so that there are no free riders. Which of the following products best fits the definition of a quasi-public good?
An underused museum
Monopolies will price discriminate if which of the following is true?
At the current price, one group of consumers is elastic while another group is not as responsive (inelastic)
Suppose regulators of a natural monopoly want to regulate prices such that the monopoly will earn normal profits. The regulator should set prices equal to ________.
Average cost
Suppose that the graph below represents the cost function for the entire industry and that the demand curve and marginal revenue curve represent the entire market. If the oligopoly acted as a single decision maker, what quantity would it choose to maximize industry profit?
B
Consider the following monopoly where consumers are currently consuming where the marginal utility is 10 units of utility for the good. The price of the product is $5. The marginal cost of producing the good is $2.00. Consider the following perfectly competitive firms where consumers are currently consuming where the marginal utility is 20 units of utility for the perfectly competitive product. The price of the product is $10. At current production levels, the marginal cost of producing the good is $10.00. Is the marginal utility / marginal cost = marginal utility / price for the monopoly?
No, marginal utility / marginal cost for the monopoly is 5 while marginal utility / price is 2.
A monopoly will not necessarily be technically efficient because which of the following is true?
Barriers to entry will keep firms from entering
If a firm faces increasing returns to scale, average costs will do which of the following?
Be above marginal costs
Your local government is considering building a new highway bypass to circumvent your city. The bypass will traverse private property as it makes its way around the city and may even require some individuals to move residences. Which of the following is NOT a justifiable concern regarding the decision-making process or the construction of the bypass?
Because private contractors are often licensed and bonded, but the government is not, if the government builds the new bypass themselves, there is likely to be a greater number of safety violations.
A firm engaged in predatory pricing will set its price in which of the following ways?
Below the average cost to drive out competition and then increase price
A monopoly will engage in price discrimination, if it can, in order to increase profits by doing which of the following?
By continuing to produce the same amount
In the figure above, the quantity a monopoly would produce would be ___ (C / D). In the figure above, the price the monopoly would charge would be ___ (E / F). In the figure above, if a monopoly charged the price of F and produced the monopoly quantity, then there would be a(n) ________. In the figure above, the firm's profit would be ______.
C E Shortage Positive
What do you think would happen in a commercial neighborhood near your home if a restaurant in that neighborhood were making a great deal of profit (select all that apply)?
Chipotle will open a new store next door. Domino's Pizza will move to this neighborhood from a rundown area of the town. In-and-Out burger will open a new franchise.
Which of the following descriptions best characterizes common resources?
Common resources are those where it is hard to keep non-payers from using the good, and their use of the good negatively impacts others' ability to use it.
A monopolist deciding to engage in price discrimination wants to keep the quantity produced the same (or close to the same) because which of the following is true?
Costs will increase with an increase in quantity.
An increase in product differentiation created by advertising in a market with many firms will _______ the elasticity of demand facing the firm:
Decrease
An increase in fixed costs for a monopoly will do which of the following?
Decrease the economic profits
A decrease in variable costs will cause the monopoly to do what?
Decrease the price
In the figure below, the demand curve is represented by (1) ___ while the marginal revenue curve is represented by (2) ___ .
Demand Curve Line A Marginal revenue curve Line B
A rural county in the U.S. has no broadband internet providers. A broadband provider from a neighboring county makes a proposal to the county government about building the infrastructure needed to bring broadband to individual businesses and households. The city asks for donations from its residents to cover the costs of the infrastructure (users would still be charged a monthly rate for access) and comes up short of the total amount needed. Which of the following is true if the county is interested in achieving the efficient outcome?
The county should undertake a study of potential benefits from broadband access. If the benefits exceed the costs, the county should tax all its citizens to pay for the infrastructure. The county should undertake a study of potential benefits from broadband access. If the benefits exceed the costs, the county should tax only the eventual users of the broadband service, not all its citizens.
What can you say about the equilibrium quantity of production for a market with external costs?
The equilibrium market quantity is too high and the equilibrium market price is too low, relative to the efficient point.
What can you say about the equilibrium quantity of production and the equilibrium price for a market with external benefits?
The equilibrium market quantity is too low, and the equilibrium market price is too low, relative to the efficient level of production.
A U.S. company sends a lobbyist to Washington, D.C. to argue for increased tariffs on imported goods from China that compete with the company's own products. Which of the following represents an inefficiency in government due to misplaced incentives?
The lobbyist is successful at convincing legislators to pass the legislation, and American consumers pay higher prices.
Consider a good with external benefits. Which of the following best describes why the market does not produce an allocatively efficient amount?
The marginal private cost of production equals the marginal private benefit of production but is less than the marginal social benefit of production.
Consider a good with external costs. Which of the following best describes why the market does not produce an allocatively efficient amount?
The marginal social cost exceeds the marginal social benefit.
Imagine two firms with identical cost structures that do not exhibit economies of scale at high levels of production. One is competing in a perfectly competitive market and one is a monopoly. In the long run which of the following is true?
The monopoly will charge a higher price than the perfectly competitive firm
One market characterized by incomplete information for consumers is the used car market. In the used car market, consumers don't know the condition of the car being sold and therefore cannot accurately project their marginal benefit from consuming the car. Suppose that consumers distrust used car salesmen and expect the worst from the cars they sell. How will the quantity of used cars sold in the used car market compare to the efficient quantity and how will the price of used cars sold in the used car market compare to the price when the efficient quantity is sold?
The quantity in the used car market will be too low relative to the efficient quantity and the price will be too low.
What will happen in a competitive market if consumers are unable to estimate accurately the marginal utilities of goods?
There will be no change relative to a market where consumers know marginal utilities. Consumers may over-estimate benefits and consume too much of a good. Consumers may under-estimate benefits and consume too little of a good.
Consider a good with external costs. Which of the following descriptions characterizes quantities of goods between the market equilibrium quantity and the allocatively efficient quantity?
These quantities will be produced by the private market, but the government can eliminate these quantities from production using a tax, resulting in higher economic efficiency.
What can you say about the allocatively efficient level of output compared to the new equilibrium market quantity after the tax on producers described above is imposed?
They are the same.
The purpose of government regulation of natural monopolies is to do which of the following?
To allow monopolies to exist when they can produce at lower costs
What would be the cost of the pollution reduction if all firms were subject to the tax from Question 13.27?
What would be the cost of the pollution reduction if all firms were subject to the tax from Question 13.27?
The economically efficient amount of pollution will be zero when which of the following is true?
When costs of pollution are greater than the marginal costs of pollution reduction at all levels of pollution.
The reason to regulate a natural monopoly is that a natural monopoly ______________ produce an economically efficient amount of output, ______________ charge a higher price than the perfectly competitive industry, and ______________ have lower average costs than a perfectly competitive industry.
Will not; may; will
Consider the following monopoly where consumers are currently consuming where the marginal utility is 10 units of utility for the good. The price of the product is $5. The marginal cost of producing the good is $2.00. Consider the following perfectly competitive firms where consumers are currently consuming where the marginal utility is 20 units of utility for the perfectly competitive product. The price of the product is $10. At current production levels, the marginal cost of producing the good is $10.00. Is the marginal utility / marginal cost = marginal utility / price for the perfectly competitive firms?
Yes
A merger that increases the four firm HHI index should be ______________.
analyzed further to see if it will reduce competition in such a way that hurts consumers.
OPEC is an example of _______.
cartel
If a monopoly faces a demand curve that is entirely above the average cost function, in the long run they will likely do what?
continue to operate
Common resources involve externalities. The consumption of common resources results in external ______________ and the free market quantity produced and consumed is ______________.
costs; too high
If a monopoly is currently selling 20 goods at a price of $10 each and it wants to sell 30 units, it needs to ______________ (increase / decrease / hold constant) the price for all goods it sells.
decrease
Which of the following might explain the pattern of marginal benefits of pollution reduction you calculated in EOC 13.12? The marginal benefits to pollution:
decrease with the amount of pollution reduction because a little bit of pollution doesn't have many negative side effects, whereas a lot of pollution can be harmful for health, productivity, and the environment.
A monopoly produces a level of output where demand is ______________ (elastic / inelastic / unit elastic).
elastic
A movie theater price discriminates by charging children and seniors lower prices than adults. The theater is assuming that children and seniors have a more ______________(elastic / inelastic) demand than adults.
elastic
In the long run, a monopolistically competitive firm will produce where price ___________.
equals average cost and is greater than the marginal cost
In the aftermath of the financial crisis of 2008, several banking practices came into sharp focus for contributing to the crisis. One of those practices was the issuance of "subprime" mortgages - mortgages made to borrowers who were unlikely to be able to repay in the case of a recession or a decline in housing values. Banks defended their choice by arguing that if the mortgage holders defaulted on the payments, the banks themselves would be the ones taking a loss in profits. In the end, however, the default rate on these loans was so high that the country's entire financial system was at risk of collapse, and taxpayer dollars were used to keep banks solvent. This information indicates that subprime mortgages are _________.
goods with additional social costs
A monopoly will always charge a price that is ______________ (greater than / less than / equal to) marginal cost.
greater than
Predatory pricing is:
hard to distinguish from an industry in which firms are competing intensely and are discovering ways to lower average total cost.
Copyrights on movies, books, and music act as a barrier to entry in order to give people what?
incentives to create
The long-run result of that advertising will be a(n) _______ in the price of the good.
increase
Suppose that a local cable company, the only provider of service, is maximizing profits at a price of $15 per month for local cable service. Assume that some of its customers have quite elastic demands and others have inelastic demands. A price change of $5 per month would cause a change in quantity demanded of 1,000 individual customers. There are 100,000 current individual customers. Businesses are more sensitive to price changes because they often have connections and can easily add or subtract a cable connection. An additional charge of $1 will mean a 100 fewer customers. There are 1,000 business connections in the town. In the above situation, is individual demand is elastic or inelastic? In the above situation, is business demand is elastic or inelastic? As a result of the answers to the previous two questions, the cable company should a.) (increase / decrease) prices for individual customers and b.) (increase / decrease) prices for businesses in order to increase revenues.
inelastic elastic increase decrease
The earth's environment is an example of a common resource because:
it is provided for all to use without a cost, but one person's use (or abuse) of it affects the ability of others to use it.
A monopolistically competitive firm in the long run will produce an amount that is _______ the quantity where average cost is at a minimum and charge a price that is _______ marginal cost.
less than, greater than
Consider a good produced in a competitive market, but one with external benefits. The market price will result in too ______________ of the good for economic efficiency. The market price will be ______________ than the price that would convince producers to produce the efficient amount.
little, lower
When comparing a monopoly and a perfectly competitive market where the costs are the same, the monopoly will produce a ______________ (greater / lower / same) quantity.
lower
Once a government has introduced a proper (that is, economically efficient) policy to address the market failure, the price of a good that has external benefits will be ______________ than its free market price and the price of a good that has external costs will be ______________than its free market price.
lower, higher
A single oligopolistic firm charging a price where industry marginal revenue is equal to marginal cost will be tempted to _______ prices, because it faces a more ______ demand if it alone changes its price.
lower; elastic
A monopoly would never produce where marginal revenue is negative because which of the following is true?
marginal cost is always positive
Monopolistically competitive firms _________ earn economic profits in the _________.
may, short run only
A large number of firms in Biergarten sell flavored beer. However, each firm faces a downward-sloping demand curve. The market for flavored beer is ________.
monopolistically competitive
Consider a good produced in a competitive market that has external costs. Too ______________ of the good will be produced for economic efficiency and the price will be ______________ than the price that will convince consumers to purchase the efficient amount.
much, lower
How would you classify television broadcasts?
public good
The Green River runs through Wyoming and is used free of charge by farmers for irrigation. When there is plenty of rain, the river is a ______________. But in low-rain years, the downstream farmers can experience water levels too low for irrigation and the river is a ______________.
public good; common resource
Common resources are used too ______________ for economic efficiency because the marginal cost of using the resource is ______________ than if the resources were private goods.
quickly, lower
If a monopoly increased the price above the profit maximizing level __________.
revenue would decrease
Suppose that a local Italian restaurant is operating in a monopolistically competitive environment and is maximizing its profit. The price of spaghetti with meat sauce is $10 and the average total cost is $7. Based on this information, the firm is operating in the _______ and we can expect _______.
short-run; firms to enter the market
An industry trade group whose purpose is to increase the profitability of industry members ____________.
should probably be investigated by the FTC to makes sure members aren't colluding to fix prices
In efforts to increase economic efficiency, governments should ______________ common resources.
tax
The market demand in a monopoly market differs (or not) from the demand the monopoly itself faces by _________.
the monopoly is the only firm in the market, so it does not differ.
In Section 13.5, we saw that farm subsidies generally lack an economic justification. What are the unintended consequences of these subsidies? The quantity of goods produced with the subsidy is ______________ and efficiency is ______________ than the market without a subsidy.
too high, lower
A profit-maximizing firm facing economies of scale that is subject to average cost pricing regulation will produce ______________ from the standpoint of economic efficiency and ______________ economic profits.
too little, not earn
In the long run, the monopolist ______________ (will/will not) produce a quantity where average cost is at a minimum, whereas the perfectly competitive firm ______________ (will/will not) produce that quantity.
will not, will
Match each type of market with whether or not they can have economic profits in the short run.
yes to all
Match each type of market with whether or not they achieve economic efficiency.
yes to perfect competition
Compare the levels of economic profits in a long-run equilibrium for a perfectly competitive firm, a monopoly, a monopolistically competitive firm, and an oligopoly. Economic profits will most likely be:
zero in perfect competition and monopolistic competition, perhaps positive in a monopoly and perhaps positive in oligopoly
Which of the following represents the efficient amount of pollution reduction given the marginal benefits (in EOC 13.12) and the marginal costs (in EOC 13.13) of pollution reduction? You may need to generate a graph that includes both marginal costs and marginal benefits to answer this question.
~150,000 tons of pollution reduction