Microeconomics Final Exam

In perfectly competitive market, which of the following is correct? a. The market demand curve is downward sloping and the firm's demand curve is flat. b. The market demand curve is flat and the firm's demand curve is downward sloping. c. The firm's demand curve is downward sloping and the market demand curve is downward sloping.

A. The market demand curve is downward sloping and the firm's demand curve is flat.

In a perfectly competitive market, which of the following is correct? a. The firm's demand curve is perfectly elastic. b. The market demand curve is upward sloping. c. The firm's demand curve is downward sloping.

A. the firm's demand curve is perfectly elastic

What does internalizing the externality mean?

Altering incentives so that people take account of the external effects of their actions (taxing goods with negative externalities)

What is the Lorenz Curve?

A curve designed to limit poverty and reduce income inequality and it is based on families

Why do monopolists have market power?

A firm has the ability to influence the market price of the product it sells. Monopolies also have barriers to entry, so other firms cannot enter the market.

Describe the supply of labor curve

A graph representing the number of hours that employees are willing to work at certain wage levels Ex: Usually the higher the wage, the more hours the employee is willing to work

What is the tragedy of the commons?

A parable that illustrates why common resources get more used than others because of social desirability

What does excludable mean?

A person can be prevented from using it

What does non excludable mean?

A person cannot be prevented from using it

What does nonrival mean?

A person's use of the good does not diminish another's use of the good

Cut-throat competition happens when oligopolistic firms ________.

compete hard and end up acting very much like perfect competitors, driving down costs and leading to zero profits in the long run

In a prisoner's dilemma, what type of behavior provides the most benefit for each individual?

confess

When income is allocated among members of society and is seen as equitable or inequitable it is called ________.

income distribution

An extremely high degree of ________, with very high taxes on the rich, would be likely to discourage work and entrepreneurship.

redistribution

What are the characteristics of oligopoly?

- Few sellers - Identical or similar products - Barriers to entry - Price makers - No demand or MR curve - Long run profits because there are barriers to entry

What are the main causes of poverty in the United States

- Lack of education - Lack of proficiency in English - Racial/gender discrimination - Bad luck

What are the characteristics of monopolistic competition?

- Many sellers - Differentiated products - Price makers, no barriers to entry - A highly inelastic demand curve - Has a downward-sloping marginal revenue curve (MR < D) - No long run profits because there are no barriers to entry

What are the characteristics of perfect competition?

- Many sellers - Identical products - No barriers to entry - Price takers - A perfectly elastic demand curve - Marginal revenue is equal to the demand curve (perfectly elastic) - No long run profits because there are no barriers to entry

What are the characteristics of monopoly?

- One seller - Unique products - Barriers to entry - Price makers - A highly inelastic demand curve - Has a downward sloping marginal revenue curve (MR < D) - Long run profits because there are barriers to entry

What are the barriers to entry for monopoly?

1. A single firm owns a key resource 2. The government gives a single firm the exclusive right to produce the good 3. Natural monopoly -- a single firm can produce the entire market quantity at a lower cost than other firms

All of the following are characteristics of Perfect Competition except: a. Large number of buyers and sellers. b. Incomplete information about prices. c. Ease of entry and exit. d. Identical goods.

B. Incomplete information about prices

Which of the following is most likely to be a monopoly? a. local fast-food restaurant b. local television broadcaster c. local electricity distributor d. local bathroom fixtures shop

C. local electricity distributor

Marginal Cost Formula

Change in Total Cost / Change in Quantity

Marginal Revenue Formula

Change in Total Revenue / Change in Quantity

Name some goods sold in monopolistic competition

Clothing, car companies, soda, bottled water, music, books, restaurants

For firms with market power, they choose the number of workers where the market wage equals the firm's ________.

marginal revenue product

Name some goods sold in oligopoly

Electronics, cereals, airlines, streaming services, batteries, cell phones

Name examples of non excludable goods

FM radio stations, national defense

Name examples of goods sold in perfect competition

Fruit and vegetables, index cards, paper clips, ice, wheat, milk, postage stamps

Where does an earning gap continue to exist in the U.S.?

It exists between both gender and race.

What does the demand curve look like for a monopoly?

It is downward sloping because any increase in price will cause the quantity demanded to decrease

What role does the U.S. government play with respect to market competition?

It policies anticompetitive behavior and prohibits contracts that restrict competition.

If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?

It would make innovation less lucrative, so the amount of research and development would likely decline.​

What is the formula for the demand for labor of imperfect competition?

Labor x Marginal Revenue = Marginal Revenue Product

What is the formula for the demand for labor of perfect competition?

Labor x Price = Value of the Market Price of Labor

​The profit-maximizing choice for a perfectly competitive firm will occur where marginal revenue is equal to ________.

Marginal cost

Firms in a perfectly competitive market are said to be "price takers"—that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?

No, you would not raise the price.

Name some goods sold in monopoly

Oil, gas, aviation industries, electricity, water service, trash services

What does rival mean?

One person's use of it diminishes another's use

Total Revenue Formula

Price x Quantity

What is the rule for profit maximization for monopoly and perfect competition?

Producing the quantity where marginal revenue equals marginal cost

How are public goods and common resources different?

Public goods are non-excludable and not rival (national defense) Common resources are rival but not excludable (fish in the ocean)

How is the total revenue calculated in a perfectly competitive firm?

Quantity of goods sold times the market price.

What is price discrimination? How do monopolies engage in price discrimination?

Selling the same good at different prices to different buyers Monopolies charge each buyer based on their willingness to pay

What is the first rule of markets related to the demand for labor

The first rule of a labor market is that if a firm wants to maximize profit, it will never pay more for a worker than the value of his or her marginal productivity of the firm

What is the free rider problem?

The idea that if a good is not excludable, people have an incentive to be free riders because firms cannot prevent non-payers from consuming a good

For perfect competition, what is the relationship between price and marginal revenue?

The marginal revenue is equal to the price

What is the short-run supply curve for a perfectly competitive firm?

The portion of its marginal cost curve above the average variable cost curve

What is game theory?

The study of how people behave in strategic situations; helps us understand oligopoly and other situations where "players" interact

What happens to the value of a firm's additional output sold when the firm has some market power?

The value of that additional output sold is its marginal revenue.

Why are perfectly competitive firms price-takers?

They must sell their goods at equilibrium price because of competing firms that sell identical products

Which of the following would be classified as a positive externality? a. The increase in neighborhood property values from converting a derelict empty lot to a public vegetable garden. b. A surcharge for ambulance service is shifted to property taxes. c. Removing government education subsidies for public schools. d. Reselling outdated textbooks to under-funded public schools.

a. The increase in neighborhood property values from converting a derelict empty lot to a public vegetable garden.

Profit Formula

Total Revenue - Total Cost

Average Revenue Formula

Total Revenue/Quantity

What is a negative externality?

When market quality is larger than socially desired; when market participants must pay social costs (air pollution from a factory)

What is a positive externality?

When market quality is smaller than socially desired; external benefits on bystanders (being vaccinated can help those around you)

Which of the following best describes the line of perfect income inequality in a Lorenz curve? a. The line of perfect income inequality is at 0 degrees, because one person has all the wealth. b. The line of perfect income inequality is at 30 degrees, because greater rewards are given to more productive people. c. The line of perfect income inequality is at 45 degrees, because all income is perfectly uniform.

a. The line of perfect income inequality is at 0 degrees, because one person has all the wealth.

Which of the following are ways in which the government promotes positive externalities? a. Spending on research and development. b. Protection of intellectual property. c. Incentives for increasing output.

a. Spending on research and development. b. Protection of intellectual property.

Which of the following are examples of negative externalities? a. Trash dumped upstream flows downstream right past your house. b. Construction of an airport to support commerce and travel in your community c. Your neighbor paints her house a hideous color.

a. Trash dumped upstream flows downstream right past your house. c. Your neighbor paints her house a hideous color.

In the framework of an oligopoly, what strategy can work like a silent form of cooperation?

always match other cartel firms' price cuts, but don't match price increases

Which of the following are examples of positive externalities? a. Your roommate is a smoker, but you are a nonsmoker. b. Investments in private education raise your country's standard of living. c. You are a bird watcher, and your neighbor puts up birdhouses and gardens to attract birds.

b. Investments in private education raise your country's standard of living. c. You are a bird watcher, and your neighbor puts up birdhouses and gardens to attract birds.

Which scenario below is an example of an Oligopoly? a. A new medicine that cures cancer has just been created and only one company creates and sell it b. A strawberry farmer that sells a similar product as everyone else and is a price taker c. The soda industry with very few large firms that have a lot of control over the market, such as Pepsi and Coke d. Many firms that sell different style clothing; restaurants and grocery stores that sell different food.

c. The soda industry with very few large firms that have a lot of control over the market, such as Pepsi and Coke

Which of the following is not true about oligopolies? a. There tends to only be room for a few oligopolists in a particular industry due to competition and barriers to entry being significantly high. b. The decisions of one oligopoly affect the operations of another oligopoly. c. They exist as a large number of firms that have all or most of the market share.

c. They exist as a large number of firms that have all or most of the market share.

Which of the following is a potential source of income inequality? a. Increased influence of unions. b. Decreased demand for high-skilled workers. c. Wage disparity

c. Wage disparity

If immigration consists of mainly high-skilled workers, then a(n) ________ in immigration will ________ the wages of high-skilled workers.

decrease; increase

The concept of derived demand of labor means that

demand for labor is created from a demand for a good or service

Which one of the following is the most accurate description of a monopolist? a. A firm that is very large relative to all its competitors within a narrow product class. b. A large, multinational firm that produces a single product in a narrow product class. c. A sole producer of a narrowly defined product class, such as brown, Grade d. A eggs produced in Eagle County, Colorado. e. A sole producer of a product for which good substitutes are lacking in a market with high barriers to entry.

e. A sole producer of a product for which good substitutes are lacking in a market with high barriers to entry.

Price discrimination occurs when a:

firm charges different prices to different customers based on their willingness to pay.

An individual who wants others to pay for public goods, but plans to use those goods without paying, is often referred to as a ________.

free rider

The earnings gap in the U.S. labor market between black and white workers ________.

has diminished since 1960, but a gap still remains

A Lorenz curve refers to a graphic illustration of the cumulative share of population on the ________ and the cumulative percentage of total income received on the ________ .

horizontal axis : vertical axis

Employment will be lower in a(n) ________ competitive industry than in a ________ competitive industry.

imperfectly; perfectly

Over the past half of a century in the United States, ethnic diversity and racial diversity is ________.

increasing

The effects of a poverty trap can be reduced by ________.

initially decreasing the government payments by smaller amounts

The demand for labor is a derived demand because

it is dependent on the demand for output.

Firms in an oligopoly often:

make decisions based on the behavior or expected behavior of their competitors.

A monopolist is a price:

maker

By agreeing to work together, either formally or informally, oligopolies in a market can ________ profits by reducing output and charging a ________ price which is much like a monopoly.

maximize; higher

A public good is a good that is ________, and thus is difficult for market producers to sell to individual consumers.

nonexcludable and nonrivalrous

In order for a good to be classified as ________ , when one person uses the good, others are also able to use it.

nonrivalrous

A monopolist is able to maximize its profits by:

producing output where MR = MC and charging a price along the demand curve.

The poverty line is determined by ________.

the level of income needed to cover basic needs

If large numbers of individuals choose to behave as free riders, ________.

the public good may never be provided

A pollution charge is a form of tax imposed on

the quantity of pollution that a firm emits.

If incomes rise for both low-income and high-income workers, but rise less for the high- income workers,

then poverty will fall and inequality will fall.

Oligopolists are allocatively and productively inefficient in the markets because

they typically operate at a level of output where price is greater than marginal cost and do not produce at the minimum point on their average cost curves.

If U.S. immigration consists of mainly low-skilled workers, then an increase in immigration ________ the wages of low-skilled workers.

will reduce