Econ 1051 test 2

double the economy

70 / annual percentage rate

• Unemplyment rate

= # of unemployed / labor force x 100

o Nominal interest rate

= real interest rate + expected inflation rate (inflation premium)

Which is a reason why there is no advertising by individual firms under pure competition? A) Firms produce a homogeneous product. B) The quantity of the product demanded is very large. C) The market demand curve cannot be increased. D) Firms do not make long-run profits.

A) Firms produce a homogeneous product.

Which is included in the expenditures approach to GDP? A) Spending on meals by consumers at restaurants. B) Spending on used clothing by consumers at garage sales. C) The monetary value of stocks and bonds owned by investors. D) The monetary value of used trucks purchased by construction companies.

A) Spending on meals by consumers at restaurants.

Which is an example of a privately owned monopoly? A) The De Beers diamond syndicate B) State of Utah Liquor Commission Stores C) U.S. Postal Service D) New Jersey State Lottery

A) The De Beers diamond syndicate

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 1000 units is $2.50. The minimum possible average variable cost is $2.00. The market price of the product is $2.50. To maximize profit or minimize losses, the firm should: A) continue producing 1000 units. B) produce less than 1000 units. C) produce more than 1000 units. D) shut down.

A) continue producing 1000 units.

In the Microsoft antitrust case, a federal court ruled to break up the company on the basis of the: A) firm's market behavior. B) firm's large market share. C) size of the corporation. D) firm's effect on the stock market.

A) firm's market behavior.

Barriers to entry: A) usually result in pure competition. B) can result from government regulation. C) exist in economic theory but not in the real world. D) are typically the result of wrongdoing on the part of a firm.

B) can result from government regulation.

A purely competitive firm does not try to sell more of its product by lowering its price below the market price because: a) its competitors would not permit it. B) it can sell all it wants to at the market price. C) this would be considered unethical price chiseling. D) its demand curve is inelastic, so total revenue will decline.

B) it can sell all it wants to at the market price.

If firms are losing money in a purely competitive industry, then in the long run this situation will shift the industry: A) demand curve to the right, and the market price will increase. B) supply curve to the left, and the market price will increase. C) supply curve to the right, and the market price will decrease. D) demand curve to the left, and the market price will decrease.

B) supply curve to the left, and the market price will increase.

GDP in an economy is $11,130 billion. Consumer expenditures are $7735 billion, government purchases are $1989 billion, and gross investment is $1410 billion. Net exports are: A) +$53 billion. B) -$47 billion. C) -$4 billion. D) -$161 billion.

C) -$4 billion.

Which product is made by an industry that best illustrates the concept of homogeneous oligopoly? A) Home computers B) Cigarettes C) Copper D) Cars

C) Copper

Let us suppose Harry's, a local supplier of chili and pizza, has the following revenue and cost structure: TR: 3,000 TVC: 2,000 TFC: 2,000 A) Harry's should stay open in the long run B) Harry's should shut down in the short run C) Harry's should stay open in the short run D) Harry's should shut down in the short run but reopen in the long run

C) Harry's should stay open in the short run

In which industry is monopolistic competition most likely to be found? A) Utilities B) Agriculture C) Retail trade D) Mining

C) Retail trade

Which is included in GDP? A) Used autos purchased by consumers. B) Social Security payments. C) Telephone service for a home. D) Bread for a restaurant.

C) Telephone service for a home.

The Organization of Petroleum Exporting Countries (OPEC) behaves in many ways like an international cartel. If the cartel were to hire a consulting firm to monitor the production rates of member countries, the economic reason for this monitoring is to: A) make sure that each member country is producing at an output level at which price equals marginal cost. B) make sure all the member countries produce at least their quotas so that there will be no oil shortage. C) detect those member countries that are depressing prices by producing more than their assigned quotas. D) make sure that the marginal revenue for the last barrel of oil sold by each member country is less than its price.

C) detect those member countries that are depressing prices by producing more than their assigned quotas.

Candy Cane Corporation (CCC) produces 100,000 boxes of candy bars per year that sell for $3 a box. If variable costs are $2 per box and it has $125,000 in fixed operating costs, in the short run the CCC should: A) shut down as fixed costs are not being covered. B) keep producing as profits are $25,000. C) keep producing because variable costs are covered. D) reduce production until the break-even point is reached.

C) keep producing because variable costs are covered.

An example of a final good in national income accounts would be a new: A) automobile purchased by a travel agency. B) tractor purchased by a construction company. C) microcomputer purchased by an executive for personal use. D) microcomputer purchased by an executive for business use.

C) microcomputer purchased by an executive for personal use.

A monopolistically competitive industry is like a purely competitive industry in that: A) each industry produces a standardized product. B) nonprice competition is a feature in both industries. C) neither industry has significant barriers to entry. D) firms in both industries face a horizontal demand curve.

C) neither industry has significant barriers to entry.

Which would definitely not be an example of price discrimination? A) A theater charges children less than adults for a movie. B) Universities charge higher tuition for out-of-state residents. C) A doctor charges for services according to the income of patients. D) An electric power company charges less for electricity used during hours when production costs are lower.

D) An electric power company charges less for electricity used during hours when production costs are lower.

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output is $3.00 and the market price is $2.50. What should the firm do? A) Shut down if the minimum possible average variable cost is $2.00. B) Increase output if the minimum possible average variable cost is $2.00. C) Increase output if the minimum possible average variable cost is $2.50. D) Decrease output if the minimum possible average variable cost is $2.00.

D) Decrease output if the minimum possible average variable cost is $2.00.

Which would be most characteristic of oligopoly? A) Easy entry into the industry. B) Many large producers. C) Product standardization. D) Mutual interdependence.

D) Mutual interdependence.

What is the term that refers to increases in the value of a product to each user, including existing users, as the total number of users increases? A) Income transfer B) Price discrimination C) Simultaneous consumption D) Network effects

D) Network effects

In which market model is there mutual interdependence? A) Monopolistic competition B) Pure competition C) Pure monopoly D) Oligopoly

D) Oligopoly

Which is a characteristic of monopolistic competition? A) Standardized product. B) A relatively small number of firms. C) Absence of nonprice competition. D) Relatively easy entry.

D) Relatively easy entry.

One feature of pure monopoly is that the monopolist is: A) a producer of products with close substitutes. B) one of several producers of a product. C) a price taker. D) a price maker.

D) a price maker.

When firms in an industry reach an agreement to fix prices, divide up market share, or otherwise restrict competition, they are using the strategy of: A) interindustry competition. B) limit pricing. C) price leadership. D) collusion.

D) collusion.

Natural monopolies result from: A) patents. B) copyrights. C) control over an essential natural resource. D) extensive economies of scale in production.

D) extensive economies of scale in production.

In November 2008, General Motors produced a car that was delivered to a local dealership in December 2008. The auto was sold to Sharon Smith for personal use in February 2009. Following national income accounting practices, this car would be counted as: A) consumption in 2008 and consumption in 2009. B) consumption in 2008 and investment in 2009. C) disinvestment in 2008 and consumption in 2009. D) investment in 2008 and disinvestment in 2009.

D) investment in 2008 and disinvestment in 2009.

A major reason that firms form a cartel is to: A) reduce the elasticity of demand for the product. B) enlarge the market share for each producer. C) minimize the costs of production. D) maximize joint profits.

D) maximize joint profits.

Price discrimination is: A) always legal. B) always illegal. C) only illegal if it hurts consumers more than nondiscrimination. D) only illegal if used to lessen or eliminate competition.

D) only illegal if used to lessen or eliminate competition.

The steel and automobile industries would be examples of which market model?

Oligopoly

4 market models

Pure competition Monopolistic Competition Oligopoly Pure Monopoly

Under which market model are the conditions of entry the most difficult?

Pure monopoly

Which market model has the least number of firms?

Pure monopoly

Which piece of federal legislation aims to prevent monopolization and restraint of trade?

Sherman Act

Real GDP uses

a base year to calculate

Price taker

a competitive firm that cannot change the market price, but can only accept it as "given" and adjust to it.

Pure competition

a market structure in which a very large number of firms produce a standardized product and there are no restrictions on entry

Nominal GDP

is using the current price

• Cyclical unemployment

o Caused by the recession phase of the business cycle.

• Business cycle fluctuations

o Demand shocks o Supply shocks o Negative and positive shocks o Primary cause: changes in total spending

• Cost-push inflation

o Due to a rise in per-unit input costs o Supply shocks

• The antigrowth view:

o Environmental and resource issues o Does not solve sociological problems (poverty) o Changing technology means job insecurity, high stress

• Demand-pull inflation

o Excess spending relative to output o Central bank issues too much money

• In defense of economic growth

o Higher standard of living o Better services, more art and music o More resources of human development o Safer work environment o Less economic growth in developed countries limits growth in developing countries o Pollution is a problem of externalities o Resource issues (Thomas Malthus) Malthusian prediction

• Demand factors of Economic Growth

o Households, businesses, and government must purchase the economy's expanding output o Efficiency factor

• Supply factors of Economic growth

o Increases in quantity ad quality of natural resources o Increases in quality and quantity of human resources o Increases in the supply (or stock) of capital goods o Improvements in technology

• Frictional unemployment

o Individuals searching for jobs or waiting to take jobs soon.

• Structural unemployment

o Occurs due to changes in the structure of the demand for labor

• Phases of the business cycle

o Peak o Recession - two successive quarters of decline o Trough o expansion

GDP Excludes financial transactions

o Public transfer payments o Private transfer payments (willing money to you) o Stock (and bond) market transactions

Profits if

o TR > TC o P x Q > ATC x Q o P>ATC

Negative profits (loss if

o TR< TC o PxQ < ATCxQ o P<ATC

• Factors affecting productivity growth

o Technological advance (40 percent) o Quantity of capital (30 percent) o Education and Training (15 percent) o Economies of scale and resource allocation (15 percent)

There is no control over price by firms in:

pure competition.

The term "G" does not include

social security checks received by retirees

pure competition characteristics

very large numbers standardized product "Price takers" Free entry and exit

o Net exports (X sub n)

• Add exported goods and subtract imported goods

Monopoly and Antitrust Policy

• Antitrust laws (Sherman Act of 1890) • Regulate it (Microsoft) • Ignore it

Obstacles to collusion

• Demand and cost differences • Number of firms • Cheating • Recession • New entrants • Legal obstacles

o Personal consumption expenditures (C)

• Durable Consumer goods • Nondurable consumer goods • Consumer expenditures for services • Domestic plus foreign goods produced

o Government purchases (G)

• Expenditures for Goods and services Publicly owned capital Transfer payments

GDP equation

• GDP = C + I sub g + G + X sub n

what amount to produce?

• If P > MC, then produce more • If P < MC, then decrease production • Profit maximization output is where P=MC

o Gross Private domestic investment

• Machinery, equipment, and tools • All construction • Changes in inventories • Creation of new capital assets • Noninvestment transactions excluded

Real GDP

• Real GDP = Hours of work x labor productivity

Deciding whether or not to shut down

• Shut down = TR<TC p< AVC • Keep producing = TR>TVC P>AVC