ECON 351 Final USC Camara

What is the unique Nash equilibrium of the Matching Pennies game?

50/50

Which oligopoly model(s) have the same results as the competitive model?

Bertrand

True or False: A player must have at least one dominant strategy in a game

False

True or False: If neither player has a dominant strategy, then the Nash equilibrium must be in mixed strategies.

False

True or False: If neither player in a game has a dominant strategy in a game, then there is no equilibrium outcome for the game

False

True or False: If the Nash equilibrium has pure strategies, then at least one player must have a dominant strategy

False

True or false: Externalities are reflected in market prices

False, they become a source of economic inefficiency

To find the profit maximizing level of output, a firm finds the output level where

MR = MC

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits?

MR_A = MR_B = MC

Over the past several years, the federal government has rescued a few financially distressed banks and other large private companies, and the key reasons for these actions is to stabilize financial markets and to prevent additional business failures that may arise from the original problem. However, critics of these interventions argue that these actions generate a moral hazard problem. Why?

Managers may be more likely to invest in risky projects if they believe the government will save the firm in case of failure

In California, Consumers pay California Redemption Value (CRV) when they purchase beverages from a retailer and receive CRV refunds when they redeem the containers at a recycling center. CRV is 5 cents for each small beverage container. If the CRV was optimally designed to maximize social welfare, then in this market 5 cents correspond to the:

Marginal External Cost

How is a natural monopoly defined?

Marginal cost is always below average cost

Is there a first-mover advantage in the Bertrand duopoly model with homogeneous products?

No, the second-mover would be able to set a slightly lower price and capture the full market share

Although firms earn zero profits in the long run, why is the outcome from monopolistic competition considered to be inefficient?

Price exceeds marginal cost AND Quantity is lower than the perfectly competitive outcome

What is true for both perfectly competitive and monopolistically competitive firms in the long run?

Profit equals zero

What is true for the monopolist at the output level where P=MC?

The monopolist is not maximizing profit and should decrease output

What is true for both perfect and monopolistic competition?

There is freedom of entry and exit in the long run

True or False: A dominant strategy is a strategy that is optimal for a player no matter what an opponent does

True

True or False: A monopolist will never operate at an inelastic segment of the demand curve

True

True or False: the efficiency wage is higher than the market-clearing wage, to penalize shirking

True

Which of the following represent examples of adverse selection?

Unhealthy people are more likely to want health insurance AND Unskilled drivers purchasing extra auto insurance NOT Risk averse individuals choosing to buy extra insurance

What is the value of the Lerner index under perfect competition?

Zero

A dominant strategy can best be described as

a strategy that is optimal for a player no matter what an opponent does

A positive externality is shown by a marginal social benefit (MSB) curve that is _______ and to the _______ of the _______ curve for the good that generates it

above and to the right of the demand curve for the good that generates it

When asymmetric information problems drive high quality products from a market, we refer to this situation as:

adverse selection AND a lemons problem

In the economic literature on principal-agent problems, the is the person who takes some action, and the is the person whom the action affects

agent, principal

Suppose that the production of energy by Coal Power Plants produces pollution, and this market is regulated by a system of transferable permits. If consumers increase their demand for energy, then we should expect:

an increase in the price of transferable permits

Firm Sigma is a natural monopolist. The government decides to limit Sigma's monopoly power with price regulation. In order to find the minimum feasible price, the government must find the point where:

average cost equals average revenue

Third-degree price discrimination involves

charging different prices to different groups based upon differences in elasticity of demand

A firm setting a two-part tariff with only one customer should set the entry fee equal to

consumer surplus

Assume that a particular state has decided to outlaw the sharing of individuals' credit histories as an illegal invasion of privacy. As a result of this action we would expect the

cost of borrowing money to rise AND number of loans to unworthy credit risks to rise AND problems of asymmetric information to become more severe

Second-degree price discrimination is the practice of charging

different prices for different quantity blocks of the same good or service

When costly new technologies make cleaner production possible,

emissions are more likely to fall under a system of fees, than under a system of transferable emissions permits unless the government bought back some of the permits.

The "efficiency wage" is the wage at which

employees have no incentive to shirk

When a firm charges each customer the maximum price that the customer is willing to pay, the firm

engages in first-degree price discrimination

The provision of an education in public school is

exclusive and rival

Monopolistically competitive firms have monopoly power because they

face downward sloping demand curves

A monopsonist will buy units of input than a competitor, and will pay per unit.

fewer; less

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the

firm's output is smaller than the profit maximizing quantity

The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because

firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price

The most important factor in determining the long-run profit potential in monopolistic competition is

free entry and exit

A consumer or producer who does not pay for use of a nonexclusive good but expects others to pay is known as a:

free rider

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a price and sell a quantity.

higher; smaller

In the insurance market, moral hazard refers to the problem that

individuals may change their behavior after the insurance is bought, so that they behave in a more high-risk manner than they did before

When a company introduces new audio products, it often initially sets the price high and lowers the price about a year later. This is an example of

intertemporal price discrimination

Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, the equilibrium price P paid by consumers is too _______ to be optimal, and equilibrium quantity is too _______

is too low to be optimal, and equilibrium quantity is too high

When the demand curve is downward sloping, marginal revenue is

less than price

When sellers have more information about products than buyers do, we would expect

low-quality goods to drive high-quality goods out of the market

You will charge the higher price in the market with the ______ price elasticity of demand

lower

The Cournot duopoly equilibrium has _________ price, _________ total output, and _________ consumer surplus than those of a market with a monopolist.

lower ; higher ; higher

When firms participate in group health insurance for all employees, it

may lower rates for all people to the extent that it keeps healthy people in the pool

The principal-agent problem in corporations exists because the managers of a firm

may pursue their own goals even when the result is lower profit for owners

A market with few entry barriers and with many firms that sell differentiated products is

monopolistically competitive

If individuals are paid the wage at which the supply of labor is equal to the demand for labor, how much employment exists?

no unemployment exists, and workers have an incentive to shirk.

The efficiency wage is a wage at which there is a ________ amount of unemployment

positive

In comparing the Cournot equilibrium with the competitive equilibrium,

profit is higher, and output level is lower in Cournot

Having a refundable deposit for recyclable material _______ the marginal _______ cost of disposal

raises the marginal private cost of disposal

The maximum price that a consumer is willing to pay for each unit bought is the price

reservation

Hulk's marginal utility of income function is given as MU(I)= I, while Dante's marginal utility of income function is given as MU(I)= I^2. Therefore, Hulk is _____ and Dante is _______.

risk loving, risk loving

Discrimination based upon the quantity consumed is referred to as price discrimination

second-degree

Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers, the marginal social cost curve is ______ and to the ______ of the ______ curve

the marginal social cost curve is above and to the left of the supply curve

Common property resources like fish stocks in open waters tend to be overutilized because: the marginal social cost is _______ than the private marginal cost

the marginal social cost is greater than the private marginal cost

When new technologies make cleaner production possible,

the price of transferable permits falls

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing

third-degree price discrimination

The problem of adverse selection in insurance results in a situation in which

unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market

A monopolistically competitive firm in short-run equilibrium

will make negative, zero, or positive profit

A monopolistically competitive firm in long-run equilibrium

will make zero profit