MICROECON 2

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's explicit costs are

$150,000.

The table shows the total costs for a purely competitive firm. If the firm shuts down in the short run, the total cost will be output= 0 total=

$2,500

Refer to the profits-payoff table for a duopoly. If the firms are acting independently and firm X sets its price at $6, firm Y will achieve the largest profit by selecting

$4

At what price will the firm shown in the accompanying graph make just a normal profit? graph:between mc and atc =

$7

Answer the question on the basis of the following demand and cost data for a specific firm.If columns (1) and (3) of the demand data shown are this firm's demand schedule, the profit-maximizing price will be

$9

The first table shows cost data for a single firm. Now suppose that there are 600 identical firms in this industry, each with the same cost data. Suppose, too, that the demand curve for this industry is as shown in the second table.

$95

To maximize profits, the firm whose data is shown in the graph should produce the quantity

0C.

The accompanying table shows cost data for a firm that is selling in a purely competitive market. If the price of the product is $6, what output level will the firm produce? 14- marginal cost $6

14

The accompanying table applies to a purely competitive industry composed of 100 identical firms. If each of the 100 firms in the industry is maximizing its profit and earning only a normal profit, each must have a total cost of

18,000

If the four-firm concentration ratio in an oligopolistic industry is 100 percent and each firm has an equal percentage of sales, the Herfindahl index is

2,500.

Assume that the only variable resource used to produce output is labor. Refer to the provided table. With diminishing marginal returns, if the firm hires seven units of labor, which of the following numbers would most probably be the total product? Amount of labor - Total Product 1 6 2 16 3 24 4 30 5 34 6 36

37

Plant sizes get larger as you move from ATC-1 to ATC-4.

4,000 to 4,500

Refer to the diagram, where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If Alpha and Beta engage in collusion, the outcome of the game will be at cell

A

Which point in the accompanying graph is definitely not on the competitive firm's short-run supply curve?

A

Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct?

AP continues to rise so long as TP is rising.

According to the accompanying diagram, at the profit-maximizing output, total fixed cost is equal to

BCFG.

Refer to the above graphs. A short-run equilibrium that would result in losses for a monopolistically competitive firm would be represented by graph

D

Refer to the game theory matrix, where the numerical data show the profits resulting from alternative combinations of advertising strategies for Ajax and Acme. Ajax's profits are shown in the upper right part of each cell; Acme's profits are shown in the lower left. With collusion and no cheating, the outcome of the game is cell

D

Which of the following is not a major barrier to entry into an industry

Diminishing marginal returns

Refer to the accompanying graph for a purely competitive firm. When the firm is in equilibrium in the short run, the amount of economic profit per unit is

EH.

Which of the following definitions is correct?

Economic profit = accounting profit − implicit costs.

A firm in a cartel typically cheats on its collusive agreement by raising its price and restricting output more than it agreed to with other cartel members.

FALSE

In pure competition, a competitive firm's supply curve is that section of its marginal cost curve above ATC, and at any price below the average cost, the firm will produce nothing.

FALSE

Repeated games with reciprocity tend to reduce the payoffs for both players, as compared to a one-time game with a similar payoff matrix.

FALSE

When a profit-maximizing competitive firm decides to produce at a loss because its price is below average cost but above average variable cost, that is a long-run decision.

FALSE

When new firms enter a purely competitive industry, the market supply curve will shift to the left.

FALSE

LAST WORD Using Big Data to set personalized prices cannot be done with 100 percent precision. What would happen if personalized prices were set higher than customers' reservation prices? Would this possibility reduce the incentive to set the highest possible personalized prices? How can consumers protect themselves from personalized prices?

If personalized prices are set higher than a customer's reservation price, two things could happen. If the company is truly a monopoly, the customer may not purchase the product, due to the destruction of the customer surplus. If there is competition in the market, the high personalized price may push the consumer to shop around, and ultimately buy the product from a competing seller. This possibility does reduce the incentive to set the highest possible personalized price because the seller doesn't want to scare away the consumers. They want to preserve some consumer surplus and therefore give the consumer incentive to purchase the item from them and not bother shopping around. The more competitive the market, the bigger the consumer surplus. If the consumer doesn't shop around, she is creating a monopoly situation. The easiest way for consumers to protect themselves is to compare prices with multiple companies to ensure they aren't paying a monopoly-like price.

Which of the following companies was not fined in 2011 for attempting to run an international cartel and fix prices?

Intel

The socially optimal price (P = MC) is socially optimal because:

It achieves allocative efficiency.

If a firm wanted to know how much it would save by producing one less unit of output, it would look to

MC

Refer to the short-run production and cost data. In Figure B curve (3) is

MC and curve (4) is AVC.

How often do perfectly competitive firms engage in price discrimination?

Never

Which of the following is not true of covert collusion?

No case of it has been proven in the United States.

It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. Is this proposal as socially desirable as requiring monopolists to equate price with marginal cost or average total cost?

No, the proposal does not consider that the output of the natural monopolist would still be at the suboptimal level where P > MC. Too little would be produced and there would be an underallocation of resources. Theoretically, it would be more desirable to force the natural monopolist to charge a price equal to marginal cost and subsidize any losses. Even setting price equal to ATC would be an improvement over this proposal. This fair-return pricing would allow for a normal profit and ensure greater production than the proposal would.

Which of the following is not characteristic of long-run equilibrium under monopolistic competition?

Price equals minimum average total cost.

Which of the following is not an assumption that we make in analyzing pure competition in the long run?

Profits are not relevant to firm behavior anymore, because competitive firms earn zero profits in the long run.

Larry's Lizards and Ronaldo's Reptiles are competing pet store franchises. Both are considering opening a store in the small town of Turtleville. If Ronaldo's opens a profitable store in Turtleville and Larry's management determines that it is not profitable to also open a store, then

Ronaldo's had a first-mover advantage in this game.

(Consider This) Which of the following statements is most accurate about the difference between goods produced under the old central planning model of the Soviet Union versus those produced by American capitalism?

Soviet production put greater emphasis on efficiency, while American capitalism allowed for much more product differentiation.

An underallocation of resources is occurring in a purely competitive industry whenever the price of the product is greater than marginal cost.

TRUE

As firms exit from a monopolistically competitive industry in the long run, the remaining firms' profits will begin to rise.

TRUE

If this diagram represents a typical firm in the industry and the firm is producing at the profit-maximizing level of output in the short run, then in the long run we would expect more firms to enter the market.

TRUE

In the long run, pure competition forces firms to produce at the minimum possible average total cost and the firms will charge a product price equal to that cost.

TRUE

Monopolistic competition and oligopoly are more common in the real world than pure competition and monopoly.

TRUE

Product differentiation is what allows monopolistically competitive firms to have some market power.

TRUE

How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure monopolist's demand curve not perfectly inelastic?

The demand curve facing a pure monopolist is downward sloping; that facing the purely competitive firm is horizontal, or perfectly elastic. This is so for the pure competitor because the firm faces a multitude of competitors, all producing perfect substitutes. In these circumstances, the purely competitive firm may sell all that it wishes at the equilibrium price, but it can sell nothing for even so little as one cent higher. The individual firm's supply is so small a part of the total industry supply that it cannot affect the price. The monopolist, on the other hand, is the industry and therefore is faced by a normal downward-sloping industry demand curve. Being the entire industry, the monopolist's supply is big enough to affect prices. By decreasing output, the monopolist can force the price up. Increasing output will drive it down. The fact that the monopolist could sell the same amount at higher and higher prices that would ensure that the profit-maximizing monopolist would not, in fact, sell in this perfectly inelastic range of the demand curve. Indeed, the monopolist would not sell in even the still slightly inelastic range of the demand curve. The reason is that so long as the demand curve is inelastic, MR must be negative, but since the MC of any item can hardly be negative also, the monopolist's profit must decrease if it produces here. To equate a positive MR with MC, the monopolist must produce in the elastic range of its demand curve.

Which of the following statements is correct?

The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.

Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. Which of the following is correct?

The diagrams portray short-run equilibrium but not long-run equilibrium

Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a text. Will the author and the publisher want to charge the same price for the text? Explain.

The publisher is a monopolist seeking to maximize profits. This will occur at the quantity of output where MC = MR. (See the graph below.)

"No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist." Do you agree? Explain. How might you use the concept of cross elasticity of demand to judge whether monopoly exists?

Though it is true that "all firms compete for consumer dollars," it is playing on words to hold that pure monopoly does not exist. If you wish to send a first-class letter, it is the postal service or nothing. Of course, if the postal service raises its rate to $10 to get a letter across town in two days, you will use a courier, the phone, or you will fax it. But within sensible limits, say a doubling of the postal rate, there is no alternative to the postal service or anything like it at a comparable price. The same case can be made concerning the pure monopoly enjoyed by the local electricity company in any town. If you want electric lights, you have to deal with a single company. It is a pure monopoly in that regard, even though you can switch to oil or natural gas for heating. Of course, you can use oil, natural gas, or kerosene for lighting too, but these are hardly convenient options. The concept of cross elasticity of demand can be used to measure the presence of close substitutes for the product of a monopoly firm. If the cross elasticity of demand is greater than one, then the demand that the monopoly faces is elastic with respect to substitute products, and the firm has less control over its product price than if the cross elasticity of demand were inelastic. In other words, the monopoly faces competition from producers of substitute products. Note that a negative cross price elasticity of demand indicates that two goods are complements rather than substitutes.

When total product is increasing at a decreasing rate, marginal product is positive, but falling.

True

U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. Explain why these companies, for profit reasons, oppose laws allowing reimportation of drugs to the United States.

U.S. pharmaceutical companies are price discriminating based in part on the different elasticities of demand in different nations. Reimportation allows reselling of the goods, making it more difficult to price discriminate. To the extent they could still charge different prices, the difference in prices would have to be small enough so that reimportation was not profitable. Prohibition of reimportation would allow pharmaceutical companies to charge the profit-maximizing price in each nation, without fear of being undercut back in the United States by those in nations where the drugs are cheaper.

Which of the following is a true statement?

Unfair competition is a barrier with no social justification

Assume that a pure monopolist and a purely competitive firm have the same unit costs. Contrast the two with respect to (a) price, (b) output, (c) profits, (d) allocation of resources, and (e) impact on income transfers. Since both monopolists and competitive firms follow the MC = MR rule in maximizing profits, how do you account for the different results? Why might the costs of a purely competitive firm and those of a monopolist be different? What are the implications of such a cost difference?

With the same costs, the pure monopolist will charge a higher price, have a smaller output, and have higher economic profits in both the short run and the long run than the pure competitor. As a matter of fact, the pure competitor will have no economic profits in the long run even though it might have some in the short run. Because the monopolist does not produce at the point of minimum ATC and does not equate price and MC, its allocation of resources is inferior to that of the pure competitor. Specifically, resources are underallocated to monopolistic industries. Since a pure monopolist is more likely than the pure competitor to make economic profits in the short run and is, moreover, the only one of the two able to make economic profits in the long run, the distribution of income is more unequal with monopoly than with pure competition. In pure competition, MR = P because the firm's supply is such an insignificant part of industry supply that its output has no effect on price. It can sell all that it wishes at the price established by demand and the total industry supply. The firm cannot force the price up by holding back part or all of its supply. The monopolist, on the other hand, is the industry. When it increases the quantity it produces, price drops. When it decreases the quantity it produces, price rises. In these circumstances, MR is always less than price for the monopolist; to sell more it must lower the price on all units, including those it could have sold at the higher price had it not put more on the market. When the monopolist equates MR and MC, it is not selling at that price: The monopolist's selling price is on the demand curve, vertically above the point of intersection of MR and MC. Thus, the monopolist's price will be higher than the pure competitor's. Economies of scale may be such as to ensure that one large firm can produce at lower cost than a multitude of small firms. This is certainly the case with most public utilities. And in such industries as basic steel-making and car manufacturing, pure competition would involve a very high cost. On the other hand, monopolies may suffer from X-inefficiency, the inefficiency that a lack of competition allows. Monopolies may also incur nonproductive costs through "rent-seeking" expenditures. For example, they may try to influence legislation that protects their monopoly powers.

Which of the following changes will not affect the market supply or the market demand in a purely competitive industry?

a change in fixed costs

The accompanying graph shows the long-run supply and demand curves in a purely competitive market. The curves suggest that this industry is

a constant-cost industry.

Which would make it easier to maintain an effective collusive agreement in a cartel?

a decrease in the elasticity of demand for the cartel's product

If a more efficient technology was discovered by a firm, there would be

a downward shift in the MC curve.

One would expect that collusion among oligopolistic producers would be easiest to achieve in which of the following cases?

a very small number of firms producing a homogeneous product

In the short run, a profit-maximizing monopolistically competitive firm sets it price

above marginal cost.

If economic profits in an industry are zero and implicit costs are greater than zero, then

accounting profits are greater than zero.

Collusion refers to a situation where rival firms decide to

agree with each other to set prices and output.

In the long run,

all costs are variable costs.

(Consider This) In Wendy's 1987 commercial depicting a Soviet fashion show, one objective was to portray McDonald's and Burger King products as

all the same and not very appealing.

In the short run it is impossible for an expansion of output to increase

average fixed cost.

If you operated a small bakery, which of the following would be a variable cost in the short run?

baking supplies (flour, salt, etc.)

If an industry's long-run average total cost curve has an extended range of constant returns to scale, this implies that

both relatively small and relatively large firms can be viable in the industry.

(Last Word) "Patent trolls"

buy up patents in order to collect royalties and sue other companies.

In the short run, total output in an industry

can vary as the result of using a fixed amount of plant and equipment more or less intensively

Marginal cost is the

change in total cost that results from producing one more unit of output

The long-run supply curve under pure competition is derived by observing what happens to market price and quantity when market

demand changes and all consequent long-run adjustments have occurred.

The reason the marginal cost curve eventually increases as output increases for the typical firm is because of

diminishing marginal returns.

As the firm in the diagram expands from plant size #3 to plant size #5, it experiences

diseconomies of scale.

If all resources used in the production of a product are increased by 10 percent and output increases by less than 5 percent, then the firm is experiencing

diseconomies of scale.

The primary advantage of displaying a game in extensive form instead of strategic form is that extensive form allows one to

display the order in which decisions are made; strategic form does not.

It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. This proposal

does not consider that the output of natural monopolists would still be at the suboptimal level where P > MC

The demand curve faced by a purely monopolistic seller is

downward sloping, whereas that facing the purely competitive firm is perfectly elastic.

In long-run equilibrium, a purely competitive firm will operate where price is

equal to MR, MC, and minimum ATC.

If there is allocative efficiency in a purely competitive market for a product, the maximum price consumers are willing to pay is

equal to the minimum price producers are willing to accept.

Refer to the diagram for a monopolistically competitive producer. This firm is experiencing

excess capacity of DE.

3-D printers can reduce the cost of producing items because they

exploit huge economies of scale in production.

A natural monopoly's preemption of entry by other firms by exploiting its economies of scale is an example of

first-mover advantage.

(Last Word) Patents are most likely to infringe on innovation

for products that incorporate many different technologies into a single product.

A monopolistically competitive firm has a

highly elastic demand curve

In the United States cartels are

in violation of the antitrust laws.

One inherent factor that tends to destroy collusion among oligopolists is the

incentive to cheat.

Marginal product of labor refers to the

increase in output resulting from employing one more unit of labor.

Which statement is correct? The long-run supply curve for a purely competitive

increasing-cost industry will be upward-sloping.

Answer the question based on the payoff matrices for a repeated game involving two firms that are considering introducing new products to the market. The numbers indicate the profit from following either a strategy to introduce a new product or a strategy to not introduce a new product. First game.

introducing a new product is the dominant strategy for both firms.

The diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's total revenue

is $400.

The marginal revenue curve of a purely competitive firm

is horizontal at the market price.

The demand curve faced by a monopolistically competitive firm

is more elastic than the monopolist's demand curve.

Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation

is realizing an economic profit of $40

A firm should continue to operate even at a loss in the short run if

it can cover its variable costs and some of its fixed costs.

Round Things, Inc.'s production process exhibits economies of scale. Currently their long-run average cost is $12/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be

less than $12/unit.

In a decreasing-cost industry,

lower demand leads to higher long-run equilibrium prices.

U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. U.S. pharmaceutical companies, for profit reasons, oppose laws allowing reimportation of drugs to the United States because reimportation would

make it much more difficult to maintain the differing prices.

Communist central planners didn't care about product differentiation, opting instead for a uniform design of products in order to achieve

mass production and lower costs.

Refer to the diagram. If labor is the only variable input, the average product of labor is at a

maximum at point b.

The larger the number of firms and the smaller the degree of product differentiation, the

more elastic is the monopolistically competitive firm's demand curve.

In long-run equilibrium, a monopolistically competitive producer achieves

neither productive efficiency nor allocative efficiency.

The graphs are for a purely competitive market in the short run. The graphs suggest that in the long run, assuming no changes in the given information,

new firms will be attracted into the industry.

Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because

of product differentiation and consequent product promotion activities.

Diseconomies of scale occur mainly because

of the inherent difficulties involved in managing and coordinating a large business enterprise.

The pure (profit maximizing) monopolist's demand curve is not

perfectly inelastic, because MR is negative when demand is inelastic, so MR = MC < 0

Refer to the provided graph. At which point does marginal product (MP) equal average product (AP) at a specific level of output?

point B

At P2 in the accompanying diagram, this firm will

produce 44 units and earn only a normal profit.

The accompanying table gives cost data for a firm that is selling in a purely competitive market. If product price is $60, the firm will

produce 6 units and realize a $100 economic profit.

The provided graph gives short-run data for a firm. If the product price is P2, the firm will

produce Q2 units and suffer a loss.

A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should

produce because the resulting loss is less than its TFC.

A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is

producing less output than allocative efficiency requires.

In which of the following market models do demand and marginal revenue diverge?

pure monopoly, oligopoly, and monopolistic competition

The demand curve facing a

purely competitive firm is perfectly elastic, because the purely competitive firm may sell all that it wishes at the equilibrium price.

In the provided diagram, the short-run supply curve for this firm is the

segment of the MC curve lying to the right of output level h.

The so-called first-mover advantage may be observed in

sequential games

The following pairs of products illustrate product differentiation, except

tank tops and denim shorts.

Limit pricing by a price leader in an oligopoly refers to the strategy of setting a price

that blocks the entry of new firms.

In game theory, a repeated game is one

that recurs more than once between two players.

The diagram portrays

the equilibrium position of a competitive firm in the long run.

If a variable input is added to some fixed input, beyond some point the resulting extra output will decline. This statement describes

the law of diminishing returns.

Daily newspapers have been rising in price in recent years because

the overhead costs have recently been spread over a shrinking number of buyers.

The term productive efficiency refers to

the production of a good at the lowest average total cost.

In the long run, the economic profits for a monopolistically competitive firm will be

the same as the profits for a purely competitive firm.

Economic costs are equal to

the sum of all explicit costs and implicit costs.

Firms in an industry will not earn long-run economic profits if

there is free entry and exit of firms in the industry.

The question is based on the following table, which provides information on the production of a product that requires one variable input. Diminishing marginal returns sets in with the addition of the

third unit of input

A natural monopoly exists when

unit costs are minimized by having one firm produce an industry's entire output.