ECON Final
Which of the following industries is best characterized as monopolistically competitive?
Toothpaste
A firm might choose to produce its own inputs if:
long-term contracts are costly to write.
High transaction costs:
may be a result of buyer opportunism.
Differentiated goods are a feature of a:
monopolistically competitive market.
Firms have market power in:
monopolistically competitive markets and monopolistic markets.
A Herfindahl index of 10,000 suggests:
monopoly
After a person buys insurance for his car, he will generally not care for his car as much as he otherwise would. This is an example of:
moral hazard
When managers of firms are given fixed salaries, which are not tied to the firm's profits, they generally put forth less effort than they otherwise would. This is an example of:
moral hazard
_______ occurs when people smoke more after buying life insurance.
moral hazard
Holding the mean constant, the larger the standard deviation, the ____________ the gamble will be.
more risky
Spot exchange can be inefficient in the presence of:
opportunism
You are the manager of a gas station and your goal is to maximize profits. Based on your past experience, the elasticity of demand by Texans for a car wash is −4, while the elasticity of demand by non-Texans for a car wash is −6. If you charge Texans $20 for a car wash, how much should you charge a man with Oklahoma license plates for a car wash?
$18.00
A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. The monopoly price is:
$30
You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 78 − 15Q, where Q = Q 1 + Q 2. The marginal costs associated with producing in the two plants are MC 1 = 3Q 1 and MC 2 = 2Q 2. What price should be charged to maximize profits?
$40.50
Suppose that there are two types of cars, good and bad. The qualities of cars are not observable but are known to the sellers. Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:
$4000
You are the manager of a monopoly that faces a demand curve described by P = 230 − 20Q. Your costs are C = 5 + 30Q. Your firm's maximum profits are:
$495
Suppose that initially the price is $50 in a perfectly competitive market. Firms are making zero economic profits. Then the market demand shrinks permanently, some firms leave the industry, and the industry returns to a long-run equilibrium. What will be the new equilibrium price, assuming cost conditions in the industry remain constant?
$50
If a firm manager has a base salary of $50,000 and also gets 2 percent of all profits, how much will his/her income be if revenues are $8,000,000 and profits are $2,000,000?
$90,000
A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. The demand elasticity of a widget at the monopoly price and quantity is:
-1.5
A local telephone company charges $.10/min. based on a $.08/min. marginal cost of operation. What is the Lerner index?
0.2
A firm has a marginal cost of $18 and charges a price of $27. The Lerner index for this firm is:
0.33
The industry elasticity of demand for telephone service is −2, while the elasticity of demand for a specific phone company is −5. What is the Rothschild index?
0.4
Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The four-firm concentration ratio for the state of New York, based on the state data, is:
1.0.
You are a manager in a perfectly competitive market. The price is $14. Your total cost curve is C(Q)= 10+4Q+0.5Q^2 What level of output should you produce in the short run?
10
There are five firms in an industry. You know sales of the four largest firms are $800,000, $700,000, $440,000, and $230,000. If the C 4 ratio is 80 percent, then the HHI is:
2,271
You are the manager of a firm that sells its product in a competitive market at a price of $60. Your firm's cost function is C=50+3Q^2. Your firm's maximum profits are:
250
Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry B is:
2500
You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C=40+5Q^2 . The profit-maximizing output for your firm is
5
You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 120 − 6Q, where Q = Q 1 + Q 2. The marginal costs associated with producing in the two plants are MC 1 = 2Q 1 and MC 2 = 4Q 2. How much output should be produced in plant 1 in order to maximize profits?
6
If a manager adopted both project A and project B simultaneously, the expected value of this joint project would be:
7.50
Suppose compensation is given by W = 512,000 + 217π + 10.08S, where W = total compensation of the CEO, π = company profits (in millions) = $200, and S = sales (in millions) = $400. What percentage of the CEO's total earnings are tied to profits of the firm?
7.8 percent
When a buyer does not observe the quality, based on the following table, what is the highest price she will offer for a used car if she ignores adverse selection?
7500
Which of the following statements concerning monopoly is NOT true?
A monopoly is always undesirable.
Jane wants to buy a beautiful doll as a gift for her sister's birthday. She knows that the same product is offered in different shops with prices of $120, $100, and $80 with odds of one-third of finding each price. She just stopped at a shop and knows that the price is $100. If the search cost is $8 per time, what should she do?
Accept the offer in hand.
An example of a job that usually involves a revenue-sharing plan would be:
All of the statements associated with this question are correct.
In a competitive industry with identical firms, long-run equilibrium is characterized by:
All of the statements associated with this question are correct.
In order to reduce the undesirable effects of moral hazard, an insurance company can:
All of the statements associated with this question are correct.
One of the conditions under which price discrimination is profitable is:
All of the statements associated with this question are correct.
The source(s) of monopoly power for a monopoly may be:
All of the statements associated with this question are correct.
What contributes to the existence of multiproduct firms?
Economies of scope and cost complementarity
Which of the following may transform an industry from oligopoly to monopolistic competition?
Entry
Which of the following forms of payment is NOT an incentive plan?
Flat salary for a plant manager
Which of the following are measures of industry concentration?
Four-firm concentration ratio and HHI index
Which of the following pricing policies enhances profits by creating brand-loyal consumers?
Frequent flyer programs
Risk-averse persons sometimes prefer to play some gambles even if they know that those gambles are not fair, i.e., on average people lose by playing them. One plausible explanation for this seemingly paradoxical phenomenon is that:
Gambling has entertaining effects which are not treated explicitly as part of the payoffs.
Which of the following is true?
In the short run, a monopoly will shut down if P < AVC.
Which of the following is an example of monopoly?
Local utility industry in a small town
A monopoly has two production plants with cost functions C 1 = 50 + 0.1Q 1 2 and C 2 = 30 + 0.05Q2^2 The demand it faces is Q = 500 − 10P. What is the condition for profit maximization?
MC1(Q1) = MC2(Q2) = MR(Q1 + Q2).
Which of the following is a correct representation of the profit maximization condition for a monopoly?
MC=MR
Which of the following market structures would you expect to yield the greatest product variety?
Monopolistic competition
The primary difference between monopolistic competition and perfect competition is:
None of the answers is correct.
Which of the following is true under monopoly?
None of the answers is correct.
Let the demand function for a product be Q = 100 − 2P. The inverse demand function of this demand function is:
P = 50 − 0.5Q.
Which of the following is true for perfect competition but not true for monopolistic competition and monopoly?
P = MC
In the long run, perfectly competitive firms produce a level of output such that:
P = MC and P = minimum of AC.
Which of the following is true under monopoly?
P > MC.
Which of the following is a possible critique of the decision theory under uncertainty presented in the text?
People do not always know the "true" probability of complicated events.
Cinemas sometimes give senior citizens discounts. What is the possible privately motivated purpose for them to do so?
Senior citizens have a more elastic demand for movies than ordinary citizens.
You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost 2 curve is C(Q) = 10 + 4Q + 0.5Q demand curve? . What will happen in the long run if there is no change in the
Some firms will enter the market eventually.
Which of the following is NOT a condition for a firm to engage in price discrimination?
The consumers are sincere in revealing their true natures.
Which of the following statements is true?
The more elastic the demand, the lower the profit-maximizing markup.
The ranking of industries by the four-firm concentration ratio usually, but not always, reveals the same pattern as ranking by HHI. When a discrepancy is found it is usually due to the following:
The ranking of industries by the four-firm concentration ratio usually, but not always, reveals the same pattern as ranking by HHI. When a discrepancy is found it is usually due to the following:
A student figured out that the HHI for an industry was 15,000. What is the proper conclusion?
The student made some computational errors.
Which of the following features is common to both perfectly competitive markets and monopolistically competitive markets?
There is free entry and long-run profits are zero.
Brand loyalty can be enhanced through:
an advertising campaign.
An unregulated industry has a Lerner index of zero. These numbers:
are consistent with the industry being perfectly competitive.
In the presence of ______, the market mechanism can break down.
asymmetric information
Economies of scale exist whenever:
average total costs decline as output increases.
When the relevant markets are local, the concentration and HHI based on figures for the entire United States tend to:
be biased downward.
Joe's search costs are $5 per search. He wants to buy a video player for his wife for Christmas, and the lowest price he's found so far is $300. Joe thinks 80 percent of the stores charge $300 for video players and 20 percent charge $200. Joe's optimal decision is to:
continue to search for a lower price since the expected benefit of an additional search is $20, which exceeds his per-unit search costs.
Monopolistic competition is characterized by:
differentiated products.
Chris raises cows and produces cheese and milk because he enjoys:
economies of scope.
A long-term contract:
exists when a firm is legally bound to purchase inputs from a particular supplier.
To maximize profit in the face of uncertainty, firms should produce the output where:
expected marginal revenue equals marginal cost.
Price-matching strategies may fail to enhance profits when:
firms cannot prevent customers from making deceptive claims or firms have different marginal costs.
In the long run, monopolistically competitive firms:
have excess capacity.
Monopolistic competition is characterized by:
heterogeneous products.
The HHI of a local market is usually ________ that of national markets.
higher than
A frozen food company buys a fresh food company. This takeover is an example of:
horizontal integration
Consumers spend a lot more time searching for good bargains during recessions because:
in recessions, many individuals are out of work, which lowers their opportunity cost of time.
A consumer spends less time searching for a good when her reservation price is:
increased
A risk-loving individual would:
prefer a risky prospect with an expected value of $5 to a certain amount of $5.
A campus auditorium sells tickets at half price to students during the last 30 minutes before a concert starts. This is an example of:
price discrimination or peak-load pricing.
The idea of charging two different groups of consumers two different prices is practiced in:
price discrimination.
In order for spot checks to be effective, they must be:
random in nature.
If a monopolistically competitive firm's marginal cost increases, then in order to maximize profits, the firm will:
reduce output and increase price.
Specialized investments:
result in relationship-specific exchange.
A relationship-specific exchange occurs when:
specialized investments are important.
Franchising mitigates:
the principal-agent problem.
One way of alleviating opportunism is:
vertical integration.
