Microeconomics Unit 3 Challenge 3 Sophia
An example of a market in the United States with a high concentration ratio is the
breakfast cereal market The U.S. ready-to-eat breakfast cereal market has one of the highest concentration ratios, with four firms controlling 95% of the market.
A tangible good like bottled water is considered a __________.
natural resource Bottled water is a natural resource, which are the resources found in nature that can be used in producing goods and services for the economy.
When important information is withheld in a market transaction by either the buyer or the seller, the price will be flawed, resulting in less than optimal decisions, and __________ occurs.
a market failure A market failure occurs because of the information asymmetry (important price information held by either the buyer or seller but not both).
The accumulated knowledge, skills, and experiences of labor that affect productivity are considered __________ resource.
a human capital Human capital refers to the accumulated knowledge, skills, and experiences of labor that affect productivity.
Consider the graph below. At a selling price of $5 per unit, this perfectly competitive firm is earning
a normal profit At the quantity where MR = MC, which is where profits are maximized, the price = ATC, which means the firm is earning zero economic profit or a normal profit.
How does information in a moral hazard problem, such as with auto insurance, affect market outcomes?
Market failure results. When an individual has the chance to take advantage of a financial or other situation knowing that the risks will fall to another party, this is a moral hazard problem. The party assuming the risks, such as an insurance company, finds that the price for the policy is improperly set, resulting in market failure.
A company town where one employer offers all of the jobs in a locale and no union exists for the workers is an example of a __________.
Monopsony A monopsony is a labor market in which a single firm exercises market power as the sole employer of labor in an area or industry.
How much influence over pricing do sellers in a monopolistically competitive market have compared to those in a perfectly competitive market?
More Sellers in a monopolistically competitive market have more influence over pricing compared to those in a perfectly competitive market because firms in monopolistic competition produce similar but not identical products, while firms in perfect competition produce identical products. The differentiation of their product from the competition allows for some degree of influence over price.
Consider the graph below. Suppose qO = 750, pO = $100, and ATC = $60 at 750 units.Is the profit-maximizing firm in an oligopoly market making a profit or loss, and by how much?
$30,000 profit The quantity produced is where MR = qO, or 750 units. Price is taken from the demand curve and given as $100. Since ATC is given as $60, profit or loss is (P − ATC) × quantity = ($100 − $60) × 750 = $40 × 750 = $30,000. The firm is earning a profit.
Consider the graph below. Suppose qO = 200, pO = $50, and ATC = $30 at 200 units. Is the profit-maximizing firm in an oligopoly market making a profit or loss, and by how much?
$4,000 profit The quantity produced is where MR = qO, or 200 units. Price is taken from the demand curve and given as $50. Since ATC is given as $30, profit or loss is (P − ATC) × quantity = ($50 − $30) × 200 = $20 × 200 = $4,000. The firm is earning a profit.
Consider the graph below. Suppose qO = 500, pO = $30, and ATC = $20 at 500 units.Is the profit-maximizing firm in an oligopoly market making a profit or loss, and by how much?
$5,000 profit The quantity produced is where MR = qO, or 500 units. Price is taken from the demand curve and given as $30. Since ATC is given as $20, profit or loss is (P − ATC) × quantity = ($30 − $20) × 500 = $10 × 500 = $5,000. The firm is earning a profit.
Consider the graph below. Suppose qMC = 350, pMC = $15, and ATC = $25 at 350 units. Is the profit-maximizing firm in monopolistic competition making a profit or loss, and by how much?
-$3500 loss The quantity produced is where MR = qMC or 350 units. Price is taken from the demand curve and given as $15. Since ATC is given as $25, profit or loss = (P − ATC) × quantity = ($15 − $25) × 350 = (−$10 × 350) = −$3,500. The firm has a loss.
A labor market with a union on the supply side and a monopsonist on the demand side is called a __________.
A bilateral monopoly A bilateral monopoly is a labor market with a union on the supply side and a monopsonist on the demand side.
Compared to the competitive market equilibrium, what effect does a monopsonist have on the quantity of labor supplied? Is there a surplus or a shortage?
A shortage of labor is created ( QE−QM ). The quantity of labor demanded and supplied in the competitive market is QE. The quantity supplied by the monopsonist is QM. Since the quantity demanded is greater than the quantity supplied when comparing the competitive market to the monopsonist, there is a shortage equivalent to QE− QM.
Consider the graph below. Assume that a labor union enters the labor market. What effect does the union have on the wage, and does it create a surplus or a shortage of workers?
A surplus of labor is created, and the wage rises. A surplus of labor is created as the wage rises because of the power of the union. The higher wage causes the quantity supplied (workers) to increase, but the higher wage also causes employers to demand fewer workers. When the quantity supplied is greater than the quantity demanded at a price (wage) level, this is a surplus of labor.
Because there are no barriers to entry in a perfectly competitive market, sellers' economic profits are
Completely unprotected Firms can freely enter and exit the market in perfect competition, so when economic profits exist, firms will enter. This increases supply, which drives down the equilibrium price and thus drives down economic profits to zero economic profits. Those profits are completely unprotected.
Which of the following statements is correct?
Consumers pay P Consumers, while the seller receives P producers. (Supply 2 line higher than Supply line) After the shift of the supply curve by the amount of the tax imposed, consumers will pay P Consumers , while the seller receives P Producers, the price for the quantity produced on the original supply curve.
People engaged in organizing, operating, and risk-taking for a business are classed as what kind of resource?
Entrepreneurial resource Entrepreneurial resources are involved in the organizing and risk-taking activities of operating a business.
Which of the following is a true statement regarding perfectly competitive labor markets?
Equilibrium wage and quantity are determined by the intersection between the demand and supply curves. A perfectly competitive labor market is one where the interaction between the supply and demand curves determines the going wage rate for workers and the quantity of jobs for a particular job type.
If cigarette taxes are imposed to reduce the negative externality, but they do not reduce the demand for cigarettes, what is that an example of?
Government failure to correct a market failure This would be a government failure to correct a market failure because it is an unsuccessful attempt to correct the market failure using government policies.
The product produced by all firms in a perfectly competitive firm must be
Identical Products in a perfectly competitive market are identical and undifferentiated in any way.
Which of the following could be a reason for the type of market failure known as information failure?
Information asymmetry When one party to a transaction has more information about the product or price than another, this information failure can lead to failure in a market.
The seller of a new car is aware that some of the advertised features may not work as advertised because of known software issues, but the buyers are not aware of this. What kind of market failure is this, and what is the imbalance that arises as a result?
Information asymmetry; market power is created for the seller This is an example of information asymmetry, a situation in which the seller has more information about the product than the buyer does, so market power is created for the seller.
If we compare a bilateral monopoly to a competitive market, how does the bilateral monopoly change the equilibrium quantity of labor?
It decreases by QE− Q. Comparing the equilibrium quantity in a competitive market (QE) to the equilibrium quantity in a bilateral monopoly (Q), the equilibrium quantity falls from QE to Q, so it decreases by QE− Q.
Consider the graph, which shows the effect of a per-unit tax on a market. Why is an increase in business taxes an unfavorable event for producers?
It raises the cost of production The per-unit tax imposed is an additional cost of production, and so the increased cost is an unfavorable event for the producer.
Suppose that Jeffery decides to spend more of his time on a Saturday watching cartoons with his 8-year-old daughter. How will this choice affect Jeffery's supply of labor?
Jeffery's supply of labor will decrease. If you devote more time to the good we now call leisure, it comes with a cost—less time for work—which means that Jeffery's supply of labor will decrease.
Which of the following terms is used to describe a situation in which the government finances public goods that are underproduced because non-payers cannot be excluded from enjoying the goods?
Market failure This is simply a type of market failure, which the government is intervening in.
The market structure with the least amount of market power i
Perfect competition
The market structure with the highest level of competition is
Perfect competition Perfect competition has the highest level of competition among the market structures.
Because there is only one seller or dominant supplier in a monopoly market, firms are
Price setters Being the only seller or dominant supplier in the market gives the monopolist the most power over price. The monopolist is therefore referred to as a price setter.
Because there are a large number of buyers and sellers in the market, perfectly competitive firms are
Price taker Because of the large number of buyers and sellers in a perfectly competitive market, supply and demand in the market as a whole determines the price. Firms cannot influence the price, so they are known as price takers.
What quantity (Q) will the profit-maximizing monopolist below produce, what price (P) will they charge, and how much will their profit or loss be?
Q = 8 units P = $7,000 Loss = −$8,000 The quantity produced is where MR = MC, or 8 units. Price is taken from the demand curve at $7,000. Profit or loss is (P − ATC) × quantity = ($7,000 − $8,000) × 8 = (−$1,000) × 8 = −$8,000 loss.
What quantity (Q) will the profit-maximizing monopolist below produce, what price (P) will they charge, and how much will their profit or loss be?
Q = 8 units P = $7,000 Profit = $24,000 The quantity produced is where MR = MC, or 8 units. Price is taken from the demand curve at $7,000. Profit or loss = (P − ATC) × quantity = ($7,000 − $4,000) × 8 = $3,000 × 8 = $24,000 profit.
What quantity (Q) will the profit-maximizing monopolist below produce, what price (P) will they charge, and how much will their profit or loss be?
Q = 8 units P = $7,000 Profit = zero economic profit, or normal profit The quantity produced is where MR = MC, or 8 units. Price is taken from the demand curve at $7,000. Profit or loss is (P − ATC) × quantity = ($7,000 − $7,000) × 8 = $0 × 8 = $0 = zero economic profit, or normal profit.
Which of the following could be a reason for the type of market failure known as government failure?
Restricted markets Restricted markets are markets in which the government intervenes to set price or quantity restrictions. Restricted markets are associated with government failure.
Consider the graph below. Suppose a higher number of scientists and engineers are allowed to immigrate from Europe to the United States. What is the resulting effect on the supply curve, wage, and quantity of scientists and engineers?
Supply shifts to the right, the quantity of workers increases, and the wage falls. The immigration of additional scientists and engineers will increase the labor supply, so the supply curve will shift to the right, Q (quantity) will increase, and W (wage) will decrease.
The price of retail self-service checkout machines falls. What happens to the demand for cashiers and the wage for cashiers?
The demand for cashiers will decrease, and the wage will fall as well. The price of a substitute good has fallen, which will cause the demand for cashiers to fall. When the demand falls, the price (wage) will fall as well.
The demand for printed newspapers decreases. What happens to the demand for printing press operators and their wage?
The demand for printing press operators will decrease, and the wage will fall. When the demand for printed newspapers decreases, the demand and wage for the printing press operators who create the newspapers will fall as well.
The demand for restaurant meals increases. What happens to the demand for waitstaff and the wage for waitstaff?
The demand for waitstaff will increase, and the wage will rise. Restaurant meals and the waitstaff that serve them are factors of production used together; that is, they are complements. When the demand for one complement rises, the demand and wage for the other complement will rise as well.
If we compare the bilateral monopoly to the competitive market, how would the equilibrium quantity change if this labor market went from a competitive market to a bilateral monopoly?
The equilibrium quantity of labor will decrease. Comparing the equilibrium quantity in a competitive market (QE) to the equilibrium quantity in a bilateral monopoly (Q), the equilibrium quantity falls from QE to Q, so it decreases.
Consider the negative externality graph. If the firms are able to ignore the harm to society, which of the following statements is correct?
The market overproduces the good or service. If firms ignore the harm to society of the negative externality shown by this graph, the quantity produced will be QPrivate, where SPrivate intersects MSB (the social demand curve that illustrates product price and quantity demanded at the various prices, taking into account both private benefits and social benefits). The quantity produced if firms take into account the harm to society is Q*, so an overproduction occurs when firms ignore the harm to society.
Consider the positive externality graph. If firms ignore the benefit to society, which of the following statements is correct?
The market price is set too low. If firms ignore the benefits to society of the positive externality as shown in this graph, the market price will be PPrivate, where DPrivate intersects MSC (the social supply curve, that illustrates product price and quantity supplied at the various prices, taking into account both private benefits and social benefits). The market price, if firms take into account the benefit to society, is P*, so the market price is set too low when firms ignore the benefit to society.
Consider the positive externality graph. If firms are able to ignore the benefit to society, which of the following statements is correct?
The market underproduces the good or service. If firms ignore the benefit to society of the positive externality shown by this graph, the quantity produced will be QPrivate, where SPrivate intersects MSC (the social supply curve that illustrates product price and quantity supplied at the various prices, taking into account both private benefits and social benefits). The quantity produced if firms take into account the benefits to society is Q*, so an underproduction occurs when firms ignore the benefits to society.
Select the example that is a government failure and not simply a market failure.
The unsuccessful use of tax or subsidy policies This would be government failure because it is an unsuccessful attempt to correct a market failure using government policies.
How much has the monopsonist wage changed when we compare it to the competitive market wage?
The monopsonist wage has decreased by WE −WM. The competitive market equilibrium wage is WE. The monopsonist wage is WM. Since the monopsonist wage is lower than the competitive market wage, the monopsonist wage has decreased by WE−WM.
Consider the graph below. Assume that a labor union enters the labor market. What effect does the union have on the quantity of labor demanded and supplied?
The quantity demanded falls, and the quantity supplied rises. The higher wage negotiated by the union causes the quantity supplied (workers) to increase, but the higher wage causes employers to demand fewer workers.
Consider the graph below. Assume that a union enters the labor market and increases the wage. How does this affect the quantity demanded of labor? Will this result in a shift in the demand curve?
The quantity demanded falls. There is no shift in the demand curve. The higher wage negotiated by the union causes the quantity of labor demanded by employers to fall. When only the wage changes, this will be a movement along the demand curve, not a shift in the curve.
Consider the graph of a labor market before and after an influx of immigrant workers. What effect does the influx have on the quantity demanded of workers in the short run?
The quantity demanded increases from Q E1 to Q E2. When the wage falls from W E1 to W E2, the quantity demanded of workers rises from Q E1 to Q E2. This is the law of demand, which says that a lower price of anything increases the quantity demanded.
Which of the following statements is correct?
The subsidy shifts the supply curve to the right. (Supply line on top of Supply 2 line) The subsidy will decrease the price to the buyer from P1 to P Consumers and will also decrease the cost of production from P1 to P Consumers for sellers as the supply curve shifts to the right.
A nation decides to close its border to further immigration of high-tech workers. What will happen to the supply of labor and the wage in this market?
The supply of labor will decrease, and the wage will increase. The supply of labor decreases, which shifts the supply curve to the left, causing the wage to rise.
Consider the graph below. Compared to the competitive market equilibrium, what effect does a monopsonist have on the wage and quantity of labor supplied?
The wage falls, and the quantity supplied falls. In a monopsony, the wage will fall from WE to WM, and the quantity supplied will fall from QE to QM.
Consider the graph below. Suppose there is an excess supply of workers in a perfectly competitive labor market. Which answer best describes the resulting effect on wage?
The wage rate will fall toward equilibrium (W E). When a situation of excess supply or a surplus of workers arises, employers discouraged by the above-equilibrium wage rate want to hire fewer workers, The wage rate will fall toward equilibrium (W E).
Consider the graph below. Suppose there is an excess demand for workers in a perfectly competitive labor market. Which answer best describes the resulting effect on wage?
The wage rate will rise toward equilibrium (W E). When a situation of excess demand or a shortage of workers arises, employers encouraged by the below-equilibrium wage rate want to hire more workers. The wage rate will rise toward equilibrium (W E).
If we compare a bilateral monopoly to a competitive market, how would the wage change if this labor market went from a competitive market to a bilateral monopoly?
The wage will be indeterminate. The wage is indeterminate, between W Union and , depending on the power of the union versus the power of the monopsonist.
In a monopolistically competitive market, how are sellers affected by free entry and exit?
Their profits are less protected than in a monopoly market. Sellers' profits are less protected than in a monopoly market because entry does not occur in a monopoly market. Free entry and exit allows market supply to change, which changes the market price and affects firms' profits.
In an oligopoly market versus a monopolistically competitive market, how are sellers' profits affected by entry?
They are more protected in an oligopoly market than in a monopolistically competitive market. Sellers' profits are more protected in an oligopoly than in monopolistic competition because of the significant barriers to entry in an oligopoly. Entry in monopolistic competition is easy, so when economic profits exist, new firms enter, supply increases, prices fall, and economic profits disappear.
How does the nature of the product in a monopolistically competitive market affect sellers?
They can compete through product differentiation. The fact that they produce similar but not identical products allows them to compete through product differentiation by advertising how their product is different from and better than the competitors' products.
How do barriers to entry affect firms in a monopoly market structure?
They protect the profits of the established firm. Barriers to entry protect the profits of a monopoly firm because they keep the market in a state of monopoly. By preventing entry into the market, they also prevent competition
onsider the graph of a labor market before and after an influx of immigrant workers. What is the effect of the influx on wages in the short run?
Wages decrease from W E1 to W E2. The influx of immigrant workers shifts the supply curve from S before immigration to S after immigration, which causes the equilibrium wage to fall from W E1 to W E2.
Consider the graph of a labor market before and after an influx of immigrant workers. What is the effect of the influx on wages in the long run?
Wages increase to We3 When wages fall in the short run due to the increased supply of workers, businesses' costs decrease and they can become more profitable. In the long run, the demand for workers increases, which causes the long-run wage to increase to W E3.
Suppose that the job of a lineman, a worker who maintains overhead and underground powerlines, becomes a highly attractive job because of its outdoorsy nature. What will happen to the wage in this particular market?
Wages will fall because of the increase in the supply of workers. The supply of labor increases, which shifts the supply curve to the right, causing wages to fall.
Consider the graph below. Suppose qMC = 500, pMC = $20, and ATC = $20 at 500 units. Is the profit-maximizing firm in monopolistic competition making a profit or loss, and by how much?
Zero economic profit, or normal profit The quantity produced is where MR = qMC, or 500 units. Price is taken from the demand curve and given as $20. Since ATC is also $20, profit or loss = (P − ATC) × quantity = ($20 − $20) × 500 = $0 × 500 = $0. The firm is earning zero economic profit, or normal profit.
This industry is characterized as
a constant cost industry (Long-run industry supply curve staying the same) Note the horizontal long-run industry supply curve. The long-run average cost of production did not change as the scale of operation changed, so it is a constant cost industry.
This industry is characterized as
a decreasing cost of industry (Long-run industry supply curve going down) The long-run industry supply curve is downward sloping, indicating that this is a decreasing cost industry.
Consider the diagram below. At a selling price of $12 per unit, how much profit or loss is this perfectly competitive firm experiencing, and should they continue to produce or shut down temporarily?
a.) Economic profit of $1,100; continue to produce At a quantity where MR = MC, which is where profits are maximized, the quantity is 550 units, price = $12, and ATC = $10. This means the firm is earning a positive economic profit of 550 × ($12 − $10) = 550 × $2 = $1,100.
Consider the diagram below. How much profit or loss is this perfectly competitive firm experiencing, and should they continue to produce or shut down temporarily?
a.) Loss of −$800; continue to produce Because the point at which MR = MC falls below the ATC curve, the firm is experiencing economic loss. The loss = 400 × ($8 − $10) = 400 × (−$2) = −$800. The firm should continue to produce because, although there is a loss, it does not warrant shutting down as the price is still above the AVC.
This industry is characterized as
an increasing cost industry (Long-run industry supply curve going up) The long-run industry supply curve is upward sloping, indicating that this is an increasing cost industry.
Internet service is an example of a club good, which an economist would categorize as __________ and __________.
non-rivalrous; excludable Club goods, like internet service, are goods wherein the use of the good by one individual does not reduce the availability of the good to other individuals (non-rivalrous), and which require payment or the granting of special access to enjoy their benefits (excludable).
Food and clothing are examples of private goods, which an economist would categorize as __________ and __________.
rivalrous; excludable Private goods, like food and clothing, exhibit the characteristic that the use of the good by one individual reduces its availability to other individuals (rivalrous), and that the payment or the granting of special access is required to enjoy its benefits (excludable).
Fish in international waters is an example of a common good, which an economist would categorize as __________ and __________.
rivalrous; non-excludable The use of a common good, like fish in international waters, by an individual reduces its availability to other individuals (rivalrous), and it does not require payment or the granting of special access to enjoy its benefits (non-excludable).
Firms in an oligopoly market are price setters because
significant barriers to entry exist Firms in an oligopoly market are price setters because significant barriers to entry exist, which can allow economic profits to persist and firms to have significant power over the setting of prices.
In an oligopoly market, firms make pricing and output decisions that are
strategically interdependent Since there are only a small number of firms in an oligopoly that control most of that market, an oligopoly firm needs to consider what the competition may do in reaction to pricing and output decisions before it makes a decision. Possible reactions to its decisions could have negative effects on its own firm. Correct
When an adverse selection problem occurs, __________.
the buyer may end up with what is sometimes called a lemon An adverse selection problem is when information withheld by the seller results in a poor selection or decision by the buyer. As a result, the buyer may end up with what is sometimes called a lemon.
In a monopoly market, there is just one seller or one dominant supplier, which means that
the firm is the market With a single supplier, the firm having monopoly is the market.
Consider the graph below. Suppose qMC = 450, pMC = $17, and ATC = $22 at 450 units. Is the profit-maximizing firm in monopolistic competition making a profit or loss, and by how much?
−$2,250 loss The quantity produced is where MR = qMC or 450 units. Price is taken from the demand curve and given as $17. Since ATC is given as $22, profit or loss = (P − ATC) × quantity = ($17 − $22) × 450 = (−$5 × 450) = −$2,250. The firm has a loss.