Microeconomics Exam 3
When a monopolistically competitive firm is in a long-run equilibrium, the values of marginal cost, average total cost, and price are all the same.
False
Which firm has constant returns to scale over the entire range of output?
Firm 3
A monopolist produces where P > MC = MR.
True
Monopoly firms face
downward-sloping demand curves, so they can sell only the specific price-quantity combinations that lie on the demand curve.
In a prisoners' dilemma game,
if the players play the game repeatedly, the players can achieve a higher payoff, on average, than when they play the game only once.
Variable costs equal fixed costs when nothing is produced.
False
Refer to Figure 14-2. If the market price is $6, what is the firm's short-run economic profit?
$0.
Refer to Table 17-4. How much less do each of these firms earn in the Nash equilibrium than if they jointly maximize profits?
$10.00
Ziva is an organic brocolli farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva charges $40 an hour for her home-organization services. One spring day, Ziva spends 9 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of brocolli. Ziva's accounting profit from farming equals
$170.
Hassan operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Hassan's demand and cost values for sales per day are given in the following table. (Everyone who purchases Hassan's ice cream buys a double scoop cone because it's so delicious.) Refer to Scenario 16-1. What price should Hassan charge per double scoop ice cream cone to maximize his profit?
$4.40
A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $40, its average revenue is $80, and its average total cost is $44. At Q = 500, the firm's marginal cost is
$40
Refer to Table 17-4. ABC and MNO agree to maximize joint profits. However, while ABC produces the agreed-upon amount, MNO breaks the agreement and produces 5 more than agreed. How much profit does MNO make?
$70.00
Taylor sells 400 candy bars at $0.50 each. Her total costs are $125. Her profits are
$75.00
Refer to Figure 15-5. Based upon the information shown, what is total revenue for Bearclaws, given that it maximizes profits?
$980
Suppose a firm operating in a competitive market has the following cost curves: Refer to Figure 14-3. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area
(P7 − P5) × Q3.
Refer to Table 14-9. Consider a competitive market with 50 identical firms. Suppose the market demand is given by the equation QD = 200 − 10P and the market supply is given by the equation QS = 10P. How many units should a firm in this market produce to maximize profit?
2 units.
Refer to Figure 16-3. At the profit-maximizing, or loss-minimizing, output level, how many units of output will the firm in this figure produce?
30
What is the marginal product of the third worker?
60 units
Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Murphy can paint five houses per week. What is the maximum total output possible if Eldin hires Murphy?
8 houses
Hassan operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Hassan's demand and cost values for sales per day are given in the following table. (Everyone who purchases Hassan's ice cream buys a double scoop cone because it's so delicious.) Refer to Scenario 16-1. How many double scoop ice cream cones should Hassan sell per day to maximize his profit?
80
The marginal product of the second worker is
80 units
Which of the following examples illustrates an oligopoly market?
A city with two firms who are licensed to sell school uniforms for the local schools
Refer to Figure 16-6. If the firm were to produce 154.92 units of output,
ATC would be at its minimum value.
Refer to Table 14-1. Over which range of output is average revenue equal to price?
Average revenue is equal to price over the entire range of output.
Suppose that a firm in a competitive market faces the following revenues and costs: Refer to Table 14-5. If the firm is currently producing 14 units, what would you advise the owners?
Continue to operate at 14 units.
A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm's average total cost; otherwise, the firm will shut down.
False
An example of an explicit cost for the owner of a tattoo parlor would be the wages that she could earn if she worked as a graphic artist for an advertising agency
False
An example of an explicit cost for the owner of a tattoo parlor would be the wages that she could earn if she worked as a graphic artist for an advertising agency.
False
As the number of firms in a cartel increases, the easier it is to enforce the cartel agreement.
False
For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal.
False
For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.
False
It is always the case that players in a prisoner's dilemma situation will choose the Nash Equilibrium
False
Monopolistic competition is characterized by many buyers and sellers, product differentiation, and barriers to entry.
False
Monopolistic competition is the only market structure that features many sellers.
False
Oligopolies produce more when they collude then when they do not.
False
Suppose a firm is considering producing zero units of output. We call this exiting an industry in the short run and shutting down in the long run.
False
The marginal-cost curve intersects the average-total-cost curve at the output level where average fixed costs are zero.
False
To maximize total surplus with a monopoly firm, a benevolent social planner would choose the level of output where
MC intersects the demand
Refer to Figure 15-2. Profit can always be increased by increasing the level of output by one unit if the monopolist is currently operating at
Q1 or Q2 only
Advertising during the Super Bowl is an example of information about quality contained primarily in the existence and expense of the advertising.
True
Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy.
True
By selling hardcover books to die-hard fans and paperback books to less enthusiastic readers, the publisher is able to price discriminate and raise its profits.
True
Firms in a competitive market are said to be price takers because there are many sellers in the market, and the goods offered by the firms are very similar if not identical.
True
If the ABC company owns the exclusive rights to mine land in Afghanistan for Lapis Lazuli, a rare stone used in jewelry which is found only in Afghanistan, the company benefits from a barrier to entry.
True
If the output effect from increased production is larger than the price effect, then an oligopolist would increase production.
True
Several related measures of cost can be derived from a firm's total cost.
True
The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing power due to product differentiation.
True
The government may choose to do nothing to reduce monopoly inefficiency because the "fix" may be worse than the problem.
True
University financial aid can be viewed as a type of price discrimination.
True
In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two players and bad for society?
Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a "high" airfare or a "low" airfare on flights between those two cities.
Matthew and Tyler are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The following table shows the payoffs for this situation, where the higher a player's payoff number, the better off that player is.
Tyler should always choose Don't Clean.
Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect
a decrease in market output and an increase in the price of the product.
Monopolies are socially inefficient because the price they charge is
above marginal cost.
The average fixed cost curve
always declines with increased levels of output.
Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies. Refer to Table 17-7. If this game is played only once, then the most likely outcome is that
both firms produce a good quality product.
Haidy consumes Pepsi exclusively. She claims that there is a clear taste difference and that competing brands of cola leave an unsavory taste in her mouth. In a blind taste test, Haidy is found to prefer Pepsi to store-brand cola nine out of ten times. The results of Haidy's taste test would refute claims by critics of brand names that
brand names cause consumers to perceive differences that do not really exist.
Delish, a moderately priced restaurant, has recently announced intentions to open a restaurant in Boston, MA. Assume that the restaurant market in Boston is characterized by monopolistic competition. Refer to Scenario 16-2. As a result of the new restaurant, existing restaurant owners in Boston are likely to experience a
business-stealing externality, which is a negative externality.
When a monopolist increases the amount of output that it produces and sells, average revenue
decreases, and marginal revenue decreases.
One characteristic of an oligopoly market structure is
firms in the industry have some degree of market power.
Robin owns a horse stable and riding academy and gives riding lessons for children at "pony camp." His business operates in a competitive industry. Robin gives riding lessons to 20 children per month. His monthly total revenue is $4,000. The marginal cost of pony camp is $250 per child. In order to maximize profits, Robin should
give riding lessons to fewer than 20 children per month.
A monopolist's profits with price discrimination will be
higher than if the firm charged just one price because the firm will capture more consumer surplus.
A firm that produces and sells furniture gets to choose
how many workers to hire in both the short run and the long run.
Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will
increase price in the short run but not in the long run.
Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year, for a total of 18 million units. Refer to Scenario 16-3. If YumYum decides to advertise its product it can expect to
incur a loss of $1.5 million.
When marginal revenue equals marginal cost, the firm
may be minimizing its losses rather than maximizing its profit.
Refer to Figure 16-6. In response to the situation represented by the figure, we would expect
some of the firms that are currently in the market to exit.
The most likely explanation for economies of scale is
specialization of labor.
For a long while, electricity producers were thought to be a classic example of a natural monopoly. People held this view because
the average cost of producing units of electricity by one producer in a specific region was lower than if the same quantity were produced by two or more producers in the same region.
A monopolistically competitive firm is currently producing 21 units of output. At this level of output the firm is charging the highest price it can at $33, has marginal revenue equal to $23, has marginal cost equal to $23, and has average total cost equal to $27. From this information we can infer that
the firm is currently maximizing it's profit.
For a monopolist, an increase in output sold causes marginal revenue to be negative when
the price effect is greater than the output effect.
As the number of sellers in an oligopoly becomes very large,
the quantity of output approaches the socially efficient quantity.
Refer to Figure 17-1. Suppose this market is served by two firms who each face the marginal cost curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown. If the firms are able to collude successfully,
the total output will be 2 units and the price will be $8.00 per unit.
The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average
total cost.
Refer to Figure 14-1. If the market price is exactly $6.5, the firm will earn
zero economic profits in the short run.
Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is
−$39,000
