ECON 201 Exam3

How does price discrimination help cover fixed costs?

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

What is the Invisible Hand Property 1?

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?

MR = MC

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

Panel B (MC, AC, MR intesect the same point)

What condition is necessary in a constant cost industry?

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

A private cost is:

a cost paid by the consumer or the producer trading in the market.

When a single firm can supply the entire market at lower cost than two or more firms, we say that the industry is:

a natural monopoly.

The elimination principle, a general feature of competitive markets, tells us that:

above-normal profits are temporary.

The elimination principle illustrates the idea that:

above-normal profits will be eliminated by the entry of new firms into the industry.

To maximize profits, a firm in a highly competitive industry should set its price:

at the market price

Total surplus increases with the practice of price discrimination only if:

output increases.

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:

perfect price discrimination.

In competitive markets, the demand curve faced by the individual firm is:

perfectly elastic

If an industry is highly profitable, it is an indication that:

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

Tying is:

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

If a firm has revenues of $100, explicit costs of $50, and implicit costs of $50, its economic profit is:

$0

If Tom sells 500 sandwiches for $7 and has an average cost of $5, what is his profit?

$1,000

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the maximum price that the consumer is willing to pay for 100 units?

$100

(Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate the change in consumer surplus from an unregulated monopoly to a regulated monopoly.

$2,800

(Table: Barrels of Oil 2) Refer to the table. The maximum profit available to the company is:

$224

(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. If consumers were taxed such that they only purchased the efficient quantity of the product, how much deadweight loss would be removed from this market?

$45

(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the external cost of the bathroom cleaner?

$6

(Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate consumer surplus when this monopoly is regulated.

$6,400

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

$75

(Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate the deadweight loss when this monopoly is unregulated.

$850

(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The efficient level of output is ________ vaccines, which is ________ than the market's output.

1,800; greater

(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?

10

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit-maximizing quantity for this monopolist?

110

(Table: Barrels of Oil 2) Refer to the table. What is the marginal cost of producing the seventh barrel of oil?

36

(Table: Barrels of Oil 2) Refer to the table. What is the marginal revenue of producing the fifth barrel of oil?

50

(Table: Competitive Firm) Refer to the table. The profit maximizing output for this firm is:

7

(Table: Barrels of Oil 2) Refer to the table. How many barrels of oil should the company produce to maximize profit?

8

(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the efficient quantity in this market?

85

In which of the following scenarios will automobile prices be the lowest?

A competitive automobile company buys its steel from a competitive steel producer.

Suppose Winston's loud music externalizes a cost onto his neighbor, Chloe. Suppose Winston and Chloe decide to solve this problem using the Coase theorem. If they are successful, what is a possible result of the execution of this theorem?

Chloe pays Winston weekly to refrain from playing music loudly.

The proposition that private parties with clearly defined property rights and low transaction costs can resolve externalities problems on their own is called the:

Coase theorem

Which of the following statements is TRUE?

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

Market solutions to externality problems work when: I. property rights are easily identifiable. II. transaction costs are relatively low. III. the market quantity is above the efficient quantity.

I and II only

Government solutions to externality problems include: I. Pigouvian taxes. II. tradable allowances. III. command and control.

I, II, and III

Which of the following statements is TRUE? I. A free market minimizes the total costs of producing output. II. In a free market, P = MC1 = MC2 = . . . MCN. III. Every firm faces the same price in a competitive market.

I, II, and III

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.

I, II, and IV only

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.

II and III only

Which of the following statements is TRUE?

Monopolies create incentives for additional research and development.

Competitive firms want to enter industries in which:

P > AC

In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in dem

P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0

Which of the following is always TRUE for monopolies?

P > MR

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?

She should spend more time studying economics and less time studying literature

Which of the following represents the nature of a monopolist's deadweight loss?

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

What happens in a competitive industry when more firms enter?

Supply increases and the price declines, which in turn lowers profits.

(Figure: Calculating Profits) Refer to the figure. How much profit is the firm making at the profit-maximizing quantity?

The firm is not making a profit—it is making a loss of $220.

(Table: Oil Pumps) Refer to the table. Suppose that this market is producing six barrels of oil from Oil Pump One and two barrels of oil from Oil Pump Two. What happens to the total costs of production if we produce one less barrel of oil from Oil Pump One and one more barrel of oil from Oil Pump Two?

The total costs of production fall by $16.00.

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit that the monopolist is earning?

There is not enough information to answer the question.

Which of the following statements is TRUE?

To maximize profits, monopolists will always set a higher price in markets with more inelastic demand curves.

Refer to the figure. A monopolist who cannot price discriminate earns profit equal to area(s) ________, and a monopolist practicing perfect price discrimination earns profit equal to areas ________.

b; abc

(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The external ________ of vaccination is ________.

benefit; $5

The difference between tying and bundling is that:

bundled goods are sold one to one, while tied goods are sold one to many.

"[I]n capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization . . . competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives." This process is called:

creative destruction.

(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The market's outcome generates a(n):

deadweight loss of approximately $750.

Refer to the figure. Deadweight loss caused by monopoly pricing is represented by the area:

def.

Under perfect price discrimination:

each customer is charged his or her maximum willingness to pay

In a competitive industry, entry and exit decisions:

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

The oil industry is an increasing cost industry because:

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

The more inelastic the demand curve for a product is, the:

higher is the monopolist's price markup.

To maximize profit the monopolist should set a:

higher price in markets with more inelastic demand.

In general, price discrimination exists because:

higher prices are charged because some customers are willing to pay more.

Airlines try to differentiate their customers by willingness to pay based on:

how long in advance a person books their flight.

Apple's iPod provides an example that market power may arise from:

innovation.

An external cost:

is a cost paid by people other than the producer or consumer trading in the market.

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:

labor and capital will move from Industry X to Industry Y.

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:

less than the marginal cost of production on Farm 2.

Invisible Hand Property 1 says that without any single person in charge, free markets will result in equal ______ and price will be set to it.

marginal costs

The power to raise price above marginal cost without fear that other firms will enter the market is:

market power.

Which of the following conditions would prevent a firm from setting different prices in different markets?

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:

price of $16 in market A and $10 in market B.

Because there are external benefits from higher education:

private markets will undersupply college classes.

If the government were to limit the release of air pollution produced by a steel mill to 50 parts per million, the policy would be considered a:

regulation

Which of the following is an example of tying?

restrictions that prohibit patrons from bringing their own wine to restaurants

Which is an example of an external cost?

secondhand smoke

Price discrimination can be defined as:

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

Which of the following is an example of price discrimination?

senior citizen discounts

The paper industry and brewery industry each emit 60 tons of particulates into the air. It costs the paper industry $1,000 to remove 1 ton of particulates, and it costs the brewery industry $1,400 to remove 1 ton of particulates. In an effort to reduce particulate pollution, the government gives each industry tradable allowances worth 50 tons of particulates. We would expect that:

the brewery industry will buy tradable allowances from the paper industry at a cost between $1,000 and $1,400 per allowance.

In 2011, a tsunami along the Japanese coast damaged nuclear power plants that leaked dangerous radiation into the surrounding population. If this leakage could have been prevented, given a disaster of this level, which answer would be a Coasian solution to this externality?

the injured demanding compensation through a class-action lawsuit

If markets are not competitive:

the invisible hand does not work perfectly.

A free market can naturally allocate production across firms in an industry to minimize total costs due to:

the invisible hand.

In a monopoly market:

the lure of above-normal profits may give a firm an incentive to develop new products and technologies.

The Invisible Hand Property 2 maintains that:

the right mix of resources will be found in each industry, maximizing the total value of production.

Command and control methods do not always produce the most efficient outcomes because:

they lack the flexibility to allow buyers and sellers to choose the least costly methods to alter their behavior.

(Table: Oil Pumps) Refer to the table. Suppose that we want to produce seven barrels of oil. To minimize costs, we should produce:

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

Hewlett Packard's pricing scheme is to sell printers at a relatively low price and ink cartridges at a relatively high price. This practice is known as:

tying.

When comparing a monopoly with a competitive industry, monopoly quantity:

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

In a competitive equilibrium, firms earn ______ economic profits.

zero