Practice Exam 2

The free-rider problem refers to:

lack of incentive for consumers to pay for a nonexcludable good

Which of the following is a solution to externalities?

The government offers free childhood immunizations. The externality is that an immunized child cannot transmit disease to others.

Calculate the marginal cost, the individual marginal benefit for each resident, and the marginal social benefit. Based on your calculations, choose the correct statement.

The marginal social benefit decreases with each additional security guard hired.

Suppose that, initially, the two firms form a cartel and act as a monopoly. Determine the market price and quantity. Now suppose Perrier decides to increase production by 1 million liters. Evian doesn't change its production. What will the new market price and output be? What is Perrier's profit? What is Evian's profit?

The total produced now is 5 million liters and the price is €5; Perrier has profit of €8 million and Evian's profit is €5 million.

Suppose you are an economist working for the Antitrust Division of the Department of Justice. In the following case you are given the task of determining whether the behavior warrants an antitrust investigation for possible illegal acts or is just an example of undesirable, but not illegal, tacit collusion.The two major companies that dominate the market for herbal supplements have each created a subsidiary that sells the same product as the parent company in large quantities but with a generic name.

This is no collusion

Look at the figure The Unknown Curve. You are a cabinetmaker. You employ several workers to produce kitchen and bathroom cabinets. Your summer intern has drawn a graph showing a relationship between the number of cabinetmakers you employ and the number of cabinets produced. Unfortunately, your intern has failed to identify this curve. It is likely to be the _____ curve:

Total product

Cindy's Nails operates in the perfectly competitive pedicure industry. The city is considering requiring nail salons to be certified by a health inspector. The certification will cost $1,000 annually and is thus a fixed cost. The certification will affect Cindy's decision to operate in the long run but will not affect the number of pedicures she chooses to perform if she operates in the short run.

True

If the Kansas corn market is perfectly competitive, it means there is easy entry into this market.

True

In the short run, the average total cost curve always lies above the average variable cost curve.

True

Until recently most other advanced countries did not have policies that prohibited price fixing.

True

People in the eastern part of Beirut are prevented by border guards from traveling to the western part of Beirut to shop for or sell food. This situation violates the perfect competition assumption of:

ease of entry and exit

In perfect competition, a change in fixed cost will:

encourage entry or exit in the long run so that price will change enough to leave firms earning zero profits.

The slope of the total revenue curve is:

equal to marginal revenue and is constant under perfect competition.

For a public good, the marginal social benefit:

equals the sum of the individual marginal benefits of all consumers of that unit, or the sum of each consumer's willingness to pay for that unit, and it is greater than any individual marginal benefit.

De Beers became a monopoly by:

establishing control over diamond mines

Wenqin lives in a city that has a huge public rose garden. Residents can stroll through the rose garden, enjoy the scenic vistas, or have a picnic, all without paying a fee. The public rose garden is best described as:

nonrival and nonexcludable

As a big music fan, you want to attend a weekend blues festival in your town. The purchase of a wristband gives you and thousands of other fans access to the outdoor concert pavilion. The blues festival is a good that has the characteristics of being:

nontrivial and excludable

A trust:

occurs when shareholders of the major companies in an industry turn over their shares to a board of trustees who then control all of the companies.

When all of a firm's inputs are doubled, input prices do not change, and this results in the firm's level of production more than doubling, a firm is operating:

on the downward-sloping portion of its long-run average total cost curve

An industry with easy entry and exit of a large number of small firms producing a standardized product is:

perfect competition.

Look at the figure Water Works, which describes a small town's water works, a natural monopoly. If the water works is unregulated and maximizes profit, what price will it charge to each customer?

$13

Look at the table Cakes. Pat is opening a bakery to make and sell special birthday cakes. She is trying to decide how many mixers to purchase. Her estimated fixed and average variable costs if she purchases one, two, or three mixers are shown in the table. Assume that average variable costs do not vary with the quantity of output. If Pat purchases three mixers and bakes 400 cakes per day, what is her average fixed cost?

$6.25

(Table: Lunch) Look at the figure Lunch. Joe makes and sells picnic lunches to people taking all-day rafting trips on the river. The marginal cost and average cost of each lunch are a constant $4. If Joe is one of many firms in a competitive industry, how many lunches will he produce in the long run?

60

In the short run, a firm will produce as long as the price is greater than its:

AVC

For which levels of output does WW experience decreasing returns to scale?

Between 6 and 8 cars

Which of the following is NOT an activity that generates an externality?

Bob's Service Station donates a car to charity.

Look at the figure The Profit-Maximizing Output and Price. Assume that there are no fixed costs and AC = MC = $200. At the profit-maximizing output and price for a perfectly competitive industry, deadweight loss is:

$0

An input whose quantity can be changed in the short run is a(n) _____ input.

variable

Look at the figure Lunch. Joe makes and sells picnic lunches to people taking all-day rafting trips on the river. The marginal cost and average cost of each lunch are a constant $4. If Joe is one of many firms in a competitive industry, what price will he charge for a lunch in the long run?

$4

Look at the table Demand for Solar Water Heaters. The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them. Suppose they agree to produce only 25 water heaters each. . If Rheem cheats on the agreement and produces 30 water heaters, what is the quantity effect for Rheem?

$4,500

Look at the table Demand for Crude Oil. The marginal cost of producing crude oil is zero. If the crude oil industry is a monopoly, the price of crude oil will be _____, the total quantity of crude oil produced by the monopoly will be _____ barrels, and the monopoly will earn revenue equal to _____

$80; 80; $6,400

(Figure: PPV) Figure: PPVLook at the figure PPV, which shows the demand and marginal revenue for a pay-per-view football game on cable TV. Assume that the marginal cost and average cost are a constant $40. If the cable company is a single-price monopoly and maximizes profit, producer surplus will be:

$90

Look at the table Total Cost and Output, which describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $35, how much is Sergei's profit at the optimal short-run output?

-$5

Look at the table Variable Costs for Lots. During the winter, Alexa runs a snow-clearing service in a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of clearing anywhere from 1 through 10 lots is $200. Her only fixed cost is $1,000 for a snowplow. Her variable costs include fuel, her time, and hot coffee. If the price per cleared lot is $14, how many lots should Alexa clear?

0

Look at the figure Water Works, which describes a small town's water works, a natural monopoly. If the water works is unregulated and maximizes profit, how many customers will it serve?

200

Look at the table Total Cost and Output, which describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $35, how many tubs of ice cream will Sergei produce in the short run?

3

Look at the figure The Monopolist III. If this monopolist profit-maximizes, it will produce _____ units and charge a price equal to _____. Its producer surplus will be _____, its consumer surplus will be _____, and the deadweight loss is _____.

35; $65; $1,225; $612.50; $612.50

Look at the table Variable Costs for Lots. During the winter, Alexa runs a snow-clearing service in a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of clearing anywhere from 1 through 10 lots is $200. Her only fixed cost is $1,000 for a snowplow. Her variable costs include fuel, her time, and hot coffee. If the price to clear a lot is $60, how many lots should Alexa clear?

50

Which of the following is NOT an example of price discrimination?

A Fourth of July sale

Philip Morris and R.J. Reynolds spend huge sums of money each year to advertise their tobacco products in an attempt to steal customers from each other. Suppose each year Philip Morris and R.J. Reynolds have to decide whether or not they want to spend money on advertising. If neither firm advertises, each will earn a profit of $2 million. If they both advertise, each will earn a profit of $1.5 million. If one firm advertises and the other does not, the firm that advertises will earn a profit of $2.8 million and the other firm will earn $1 million.What is the Nash equilibrium without an enforceable contract?

Each firm will advertise

A monopoly's short-run supply curve is upward-sloping because of diminishing marginal returns

False

According to the Coase theorem, only when transaction costs are extremely high can two parties internalize a negative externality.

False

According to the optimal output rule, profits are maximized when firms produce where the difference between marginal revenue and marginal cost is the largest.

False

An oligopoly that engages in price discrimination will charge higher prices to customers with the most elastic demand.

False

If average total cost is declining, marginal cost cannot be increasing.

False

Producer surplus in monopoly is smaller than in perfect competition.

False

When marginal cost is above average total cost, average total cost must be falling.

False

Consider the optimal number of street cleanings. The last street cleaning of that number costs $9. Is Tanisha willing to pay for that last cleaning on her own? Is Ari willing to pay for that last cleaning on his own?

Neither would be individually willing to pay for the last cleaning.

The government is involved in providing many goods and services. For the good or service listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high?A lighthouse on the coast

Nonrival; nonexcludable; this is a public good and without government intervention the quantity produced would be inefficiently low

Look at the figure MSB and MSC of Pollution. What level of pollution would be emitted in a market economy without government regulation?

Q4

Look at the figure Traffic Lights in Plymouth. Plymouth has 1,000 residents. Each of the residents has the same individual marginal benefit per traffic light. If the town's population doubles and the new residents share the identical individual marginal benefit of the existing residents, the socially efficient quantity of traffic lights will:

Rise

Suppose government officials have set an emissions tax to reduce pollution. Further suppose that with the emissions tax, the marginal social cost of pollution exceeds the marginal social benefit of pollution. The emissions tax is:

Too low

An industry with a firm that is the only producer of a good or service for which there are no close substitutes and for which entry by potential rivals is prohibitively difficult is

a monopoly

The marginal social benefit from pollution _____ as the quantity of pollution emissions _____

decreases; increases

Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly, and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, Margaret's quantity effect will be a(n) _____ in profit of _____

increase; $300

Look at the table Cost Data. When the purse factory produces 5 units of output (purses):

marginal cost is above average total cost, and average total cost is rising.

A monopoly:

produces a product with no close substitutes.

Look at the figure Change in the Total Product. As indicated by the change in a production function from TP1 to TP2, the marginal product of labor curve has:

shifted upward.

In the short run, a firm will continue to sell its product as long as:

the price is greater than average variable costs.

In a perfectly competitive market:

the price will change to reflect any change in production cost.

If two firms are identical in all respects except that one has more of the fixed input capital than another, the total product curve for the firm with more capital:

will lie above the total product curve for the firm with less capital

Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Raquel's willingness to pay is $400; Jackie's, $300; Joan's, $200; Mia's, $100; and Sophia's, $0. De Beers' marginal cost per diamond is $100.The demand schedule for diamonds is as follows. The marginal cost of producing diamonds is constant at $100. There is no fixed cost.How large is the deadweight loss associated with monopoly in this case?

$100

Use this information to answer the following question.Bob's break-even price is ____ and his shut-down price is _____

$13.83; $3 (find both minimum values of ATC and AVC)

Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. If industry output is 350 gadgets produced by Margaret and 250 gadgets produced by Ray and if Ray decides to increase output by 100, industry price will be:

$3

Mr. Porter sells 10 bottles of champagne per week at $50 per bottle. He can sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity and the price effects on total revenue would be, respectively, an increase of _____ and a decrease of _____

$45; $50

Look at the table Total Cost Data. What is the total fixed cost for this bicycle firm?

$50

Suppose Cyd knows the average total cost of producing 9 scones is $5, while the average total cost of producing 10 scones is $5.20. What is the marginal cost of the tenth scone?

$7

Look at the table Output and Costs. When output increases from 1 to 2, marginal cost equals:

$8

Look at the table Cherry Farm. If all cherry farms are the same size, how much will each farm produce in long-run equilibrium?

4 pounds

Look at the figure Water Works, which describes a small town's water works, a natural monopoly. If regulators require the water works to charge the price that eliminates deadweight loss, the water works will serve _____ customers.

400

The figure Payoff Matrix for Gehrig and Gabriel describes two people who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. The combined profits of the two are maximized if Gehrig produces _____ figurines and Gabriel produces _____ figurines.

5,000; 5,000

Look at the table Prices and Demand. Professor Dumbledore has a monopoly on magic hats. The marginal cost of producing a hat is $18. Suppose Dumbledore can perfectly price-discriminate. How many hats will he produce?

6

The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. The market-determined quantity of pollution is _____ tons

8

Prior to the late 1990s, the same company that generated your electricity also distributed it to you over high voltage lines. Since then, 16 states and the District of Columbia have begun separating the generation from the distribution of electricity, allowing competition between electricity generators and between electricity distributors.Assume that the market for electricity distribution was and remains a natural monopoly. Which of the following is a correct statement?

If the government sets the price equal to average total cost, the monopolist will make zero economic profit.

As defined in the text, the long run is a planning period:

In which a firm can adjust all resources

A manufacturing company that benefits from lower costs per unit as it grows is an example of a firm exhibiting:

Increasing returns to scale

The marginal revenue received by a firm in a perfectly competitive market:

Is equal to its average revenue

The figure Monopoly Profits in Duopoly shows how an industry consisting of two firms that face identical demand curves (D1) can collude to increase profits. If the firms collude to share the market demand equally, then each firm will act as if its marginal revenue curve is given by:

MR1.

Provided that there are no external benefits or costs, resources are efficiently allocated when:

P=MC

Suppose the production of roses generates a positive externality in that travelers enjoy the scenic beauty of the garden. An appropriate government policy yielding the efficient outcome would be a:

Pigouvian subsidy.

The practice of selling the same product at different prices to different consumers, without corresponding differences in costs, is:

Price discrimination

If a monopoly has a linear demand curve and is producing at the profit-maximizing level of output, at that level of output, demand is:

Price-elastic

The figure Payoff Matrix I for Blue Spring and Purple Rain refers to two producers of bottled water. Each has two strategies available to it: a high price and a low price. The dominant strategy for Purple Rain is to:

Purple Rain does not have a dominant strategy.

In the United States, the Federal Trade Commission (FTC) is charged with promoting competition and challenging mergers that would likely lead to higher prices. In 1996, Staples and Office Depot, two of the largest office supply superstores, announced their agreement to merge. Critics of the merger argued that, in many parts of the country, a merger between the two companies would create a monopoly in the office supply superstore market. Based on the FTC's mission to challenge mergers that would likely lead to higher prices, do you think it allowed the merger?

The FTC would not allow this merger because it would likely lead to higher prices

Changes in the prices of key commodities can have a significant impact on a company's bottom line. Energy is an input into virtually all types of production; corn is an input into the production of beef, chicken, high-fructose corn syrup, and ethanol (the gasoline substitute fuel).Suppose energy is a fixed cost and energy prices rise. What happens to the company's average total cost curve? What happens to its marginal cost curve?

The average total cost curve will shift upward but the marginal cost curve remains at its initial position.

Observing profits in the Goleta area, another dry cleaning service, Diamond Cleaners, enters the market. It charges $1.95 per shirt. Which of the following correctly describes the effect on the market?

The entry of a new firm shifts the supply curve to the right and the average Goleta price falls.

What is the equilibrium market price, and how much profit will each firm make?

The market price is $10 and each firm makes a profit of $16. At a price of $10, each firm produces 5 units of output, for total output supplied of 500, which is equal to the quantity demanded. At this level of output, each firm has revenues of $50 and costs of $34, so profit is $16

A low voter turnout can be explained by noting that political action is a public good and people who don't vote can free-ride on those who do.

True

If output increases, a firm will move along its short-run average total cost curve in the short run until it has time to adjust its fixed cost

True

Oligopoly first became an issue in the United States in the second half of the nineteenth century, when the growth of railroads allowed for a national market for goods.

True

Tacit collusion is NOT feasible in monopolistic competition because of the large number of competing firms.

True

The European Union enforces antitrust policies similar to those in the United States for its member countries.

True

The market for new drugs is not usually perfectly competitive, since the companies manufacturing these drugs are usually granted patents, and this restricts entry into the industry.

True

The term imperfect competition is used to refer to both oligopoly and monopolistic competition.

True

The total product curve for the Wallmark Greeting Card Company shows how the quantity of output depends on the quantity of the variable input for a given amount of the fixed inputs.

True

Until 1890, trusts in which firms in an industry agreed to limit production and raise prices were legal in the United States.

True

In perfect competition, _____ are _____, and _____ are price takers

all goods; standardized; all market participants

Which of the following is an environmental policy based on tradable pollution permits?

allowing automobile drivers to buy and sell the right to a certain level of automobile emissions

OPEC is:

an international cartel made up of oil-producing countries; the cartel that was responsible for the large increases in crude oil prices in the 1970s; the Organization of Petroleum Exporting Countries

The field of law that attempts to limit the ability of oligopolists to collude and restrict competition is called:

antitrust policy

Suppose that Coke and Pepsi are the only two producers of cola drinks, making them duopolists. Both companies have zero marginal cost and a fixed cost of $100,000.Assume first that consumers regard Coke and Pepsi as perfect substitutes. Currently both are sold for $0.20 per can, and at that price each company sells 4 million cans per day. Now suppose that each company advertises to differentiate its product from the other company's. As a result of advertising, Pepsi realizes that if it raises or lowers its price, it will sell less or more of its product, as shown by the demand schedule in the accompanying table.What is the maximum amount Pepsi would be willing to spend on advertising?

at most $100,000 -- Advertising allows it to differentiate its product enough to earn an additional $100,000, so that is the most Pepsi would be willing to pay for advertising.

The marginal social benefit of pollution:

can be measured as the additional gain to society from one additional unit of pollution.

Suppose a monopoly is producing output so that marginal revenue equals marginal cost. If the monopolist reduces output, it:

can charge a higher price.

For a public good, nonpayers _____ excluded from obtaining the benefits of the good.

cannot

An extreme case of oligopoly in which firms collude to raise joint profits is known as a

cartel

Look at the table Cakes. Pat is opening a bakery to make and sell special birthday cakes. She is trying to decide how many mixers to purchase. Her estimated fixed and average variable costs if she purchases one, two, or three mixers are shown in the table. Assume that average variable costs do not vary with the quantity of output. If Pat purchases three mixers, her average total cost _____ in the range of output between 100 and 400 cakes.

decreases

If the number of available tradable emissions permits increases, the equilibrium price of the permits _____ and the equilibrium quantity _____.

decreases; increases

Look at the table Coke and Pepsi Advertising Game. The soft-drink industry is dominated by Coca-Cola and Pepsi, and each firm spends a lot of money on advertising. Suppose each firm is considering a costly television commercial during halftime of the Super Bowl. The table shows the payoff matrix of profits that each firm would receive from their advertising decision, given the advertising decision of their rival. Profits in each cell of the payoff matrix are given as (Coke, Pepsi). If both firms expect to play this game every year for the foreseeable future, in the outcome Coke _____ and Pepsi _____.

does not advertise; does not advertise

The socially optimal amount of pollution occurs where the marginal social benefit of pollution is _____ the marginal social cost of pollution.

equal to

In 1999, a judge declared that Microsoft was a monopolist. Assuming that Microsoft has a linear demand curve and that it is maximizing its profits at its current level of output, we may conclude that if Microsoft were to increase its price, its total revenue would:

fall

The study of behavior in situations of interdependence is known as:

game theory

All of the following are examples of price discrimination EXCEPT:

generally lower prices at Walmart than at Target.

Look at the table Tonya's Production Function for Apples. Tonya is operating:

in the short run

When a monopolist practices price discrimination, compared to a single-price monopolist, producer surplus will:

increase

A monopolist or an imperfectly competitive firm practices price discrimination primarily to:

increase profits

If marginal cost is greater than average total cost, then average total cost is:

increasing

For a monopolist, the market demand curve:

is also the demand for the monopolist's product.

Suppose each person in a community had to pay for his or her own education from kindergarten through high school. One would expect that

less education would be acquired, since society has not considered the positive external benefits of education.

Look at the figure Payoff Matrix for the United States and the European Union. Suppose that the United States and the European Union both produce corn, and each region can make more profit if output is limited and the price of corn is high. The joint profit-maximizing combination is for the United States to produce a _____ output and the European Union to produce a _____ output

low; low

One characteristic of a perfectly competitive market is that there are _____ sellers of the good or service.

many

An assumption of the model of perfect competition is:

many buyers and sellers.

Monopolistic competition describes an industry characterized by:

many firms, each with some market power.

Suppose a perfectly competitive firm can increase its profits by increasing its output. Then it must be true that the firm's _____ exceeds its _____.

marginal revenue; marginal cost

For a firm in a perfectly competitive market _____ revenue equals _____.

marginal; market price

The demand curve for a perfectly competitive firm is:

perfectly elastic

If the price is consistently below the average variable cost, then in the short run a perfectly competitive firm should:

shut down

Perfect competition is characterized by:

the inability of any one firm to influence price.

Suppose government officials have set an emissions tax to reduce pollution. Assume the optimal tax would be $500 but government officials have set the tax at $900. At the equilibrium with the $900 tax:

the marginal social benefit of pollution will be $900

Market structures are categorized by:

the number of firms and whether products are differentiated.

Network externalities exist when a good's value to the consumer rises as:

the number of people who use the good increases.

In economics, the short run is defined as:

the period in which some inputs are considered to be fixed in quantity

Look at the table Long-Run Total Cost. This soybean grower receives constant returns to scale over the _____ and _____ bushels.

third; fourth

Look at the Figure Prisoners' Dilemma for Thelma and Louise. Thelma and Louise are arrested and jailed for murder. Given the payoff matrix in the figure, the Nash equilibrium behavior is for Thelma _____ and Louise _____

to confess; to confess

A copper mining operation discharges waste products into a river and causes higher costs and discomfort to downstream users of the water for which they are not compensated. In this case:

too much of society's resources is being used to produce copper.

Marginal cost is the change in:

total cost divided by the change in output

Total revenue is a firm's:

total output times the price at which it sells that output.

The total cost curve for a snowmobile dealership shows how _____ cost depends on the quantity of _____.

total; output

The licenses that are exchangeable and that enable the holder to pollute up to a specified amount during a given period are called:

tradable emissions permits.

An increase in fixed cost increases the minimum-cost output.

true -- Higher fixed costs require those fixed costs to be spread out over even more units.

Firms in monopolistic competition can acquire some market power by

using price competition

Average variable cost equals all of the following EXCEPT:

variable cost times output.

In many cities you can stay at a Holiday Inn in the downtown area, in a suburban community, or near the airport. These Holiday Inn establishments are examples of product differentiation by

Location

Look at the figure Marginal Private Benefits and Marginal Social Benefits. If government does intervene and encourages the market to produce and price at the socially optimal level, what will be the output and price?

Q2; P1

Which of the following statements is FALSE?

When the marginal product of labor is upward-sloping, the marginal cost curve is upward-sloping

An economist gives the following advice to a museum director: "You should introduce 'peak pricing': at times when the museum has few visitors, you should admit visitors for free. And at times when the museum has many visitors, you should charge a higher admission fee."When the museum is quiet, is it rival or nonrival in consumption? Is it excludable or nonexcludable? Use the answers to those questions to determine what type of good is the museum at those times, and what the efficient price to charge would be.

When the museum is quiet, it is an artificially scarce good and the efficient admission fee would be zero.

The city of Falls Church, Virginia, subsidizes the planting of trees in homeowners' front yards when they are within 15 feet of the street.Which of the following best explains why a municipality would subsidize trees planted on private property, but near the street?

Without the subsidy, the market equilibrium quantity would be below the socially optimal quantity.

For the following, is the industry perfectly competitive?Aspirin

Yes