Quizzes
The cookie company in the mall hires workers to produce cookies. The workers are paid $75 per day, and the cost of renting the space in the mall is $250 per day. Number of workers Daily output (cookies) 1 200 2 400 3 600 4 700 If two workers are hired, the variable costs are $75. $100. $150. $200.
$150.FEEDBACK: The total variable costs of two workers are $75 × 2 workers = $150.
The cookie company in the mall hires workers to produce cookies. The workers are paid $75 per day, and the cost of renting the space in the mall is $250 per day. Number of workersDaily output (cookies)1200240036004700 The total costs when three workers are hired is $75. $100. $150. $475.
$475. FEEDBACK: The total costs when three workers are hired include the $75 × 3 workers = $225 paid to workers and $250 for renting the space in the mall, for a total of $475.
A pizza business has the cost structure described in the table. The firm's fixed costs are $20 per day. Output (pizzas per day) Total cost of output (fixed + variable) 0$20 5$80 10$120 15$150 20$175 25$195 30$210 35$230 40$255 What are the firm's average variable costs at an output of 25 pizzas? 0.80 $7.00 $7.80 $20.00
$7.00 To calculate the variable cost, subtract the fixed cost ($20) from the total cost ($195 - $20 = $175). To calculate average variable cost, divide variable cost by the output: $175 ÷ 25 = $7.
Which of the following is an example of perfect price discrimination? A cell phone carrier offers unlimited calling on the weekends for all of its customers. Tickets to the student section for all basketball games are $5. A restaurant offers a 20% discount for customers who order dinner between 4 and 6 p.m. A golf instructor charges each customer a fee equal to the customer's maximum willingness to pay for lessons.
A golf instructor charges each customer a fee equal to the customer's maximum willingness to pay for lessons. FEEDBACK: Perfect price discrimination exists when a supplier is able to know and charge each consumer an individualized price that is equivalent to the consumer's willingness to pay. The golf instructor has knowledge of each customer's willingness to pay, and charges that price. The instructor charges a different price to each individual and engages in perfect price discrimination.
Which of the following is true in regard to monopoly? There is no deadweight loss associated with a monopoly outcome. A monopolist charges a price where marginal cost is equal to marginal revenue. A monopolist would never engage in rent seeking. Government oversight of monopolies should never be encouraged.
A monopolist charges a price where marginal cost is equal to marginal revenue. FEEDBACK: There is a deadweight loss associated with the monopoly outcome, because monopolists produce where MR = MC and charge the corresponding price on the demand curve. Some monopolists do engage in rent seeking. Government oversight of monopolists can be helpful if the government is more efficient in its regulatory processes than the loss associated with the monopoly market, but this is not always the case.
Network externalities are important for gas stations serving a growing urban area. AARP, an organization that advocates for seniors. slot machines in a mall looking for additional revenue. You Answered music concerts in a venue that has long been popular.
AARP FEEDBACK: Network externalities occur when the number of customers who purchase or use a good influences the quantity demanded. Increasing membership in an organization such as AARP makes the organization more powerful and therefore makes a membership more valuable. By contrast, if the number of customers who use a gas station increases, this is of no benefit to those already using it. The same analysis can be applied to slot machines and music concerts.
In the long run, how is price related to marginal cost in both perfect competition and monopolistic competition? The long-run price is driven to marginal cost in both competitive markets and markets that are monopolistically competitive. Both markets can charge more than marginal cost in the long run because products are differentiated in both markets. Products are identical in perfectly competitive markets, so a firm must charge less than marginal cost in order to differentiate itself. This is not true in monopolistically competitive markets where firms can charge more than marginal cost. Because monopolistically competitive firms have market power, they set a price higher than marginal cost, while perfectly competitive firms cannot.
Because monopolistically competitive firms have market power, they set a price higher than marginal cost, while perfectly competitive firms cannot. FEEDBACK: Because firms in markets with monopolistic competition sell a differentiated product, they are able to charge a price marked up above marginal cost. Firms in competitive markets do not sell a differentiated product and therefore have no market power. In the long run, they must sell at marginal cost.
Wallmart is accused of predatory pricing by Doormart. Wallmart could defend itself against this accusation. Which of the following would NOT be one of its arguments? Doormart signed an agreement with Wallmart allowing both firms to engage in predatory pricing. The courts have no simple rule that helps to determine when Wallmart has stepped over the line. The decisions by Wallmart can look and feel like spirited competition. Wallmart believes that raising prices once Doormart leaves the industry is a poor business decision.
Doormart signed an agreement with Wallmart allowing both firms to engage in predatory pricing. FEEDBACK: If there was proof that both firms signed an agreement to engage in certain illegal behavior, both firms could be prosecuted. Neither the court system nor economists have a simple rule that helps to determine when a firm steps over the line. Predatory pricing can look and feel like spirited competition. Moreover, the concern is not the competitive aspect or lower prices, but the effect on the market when all rivals fail. To prove that predatory pricing has occurred, the courts need evidence that the firm's prices increased significantly after its rivals failed.
Which of the following statements is true? You should never tip a host in a restaurant in order to avoid a long wait. Even though the pharmaceutical industry cannot stop other countries from selling lower-priced drugs to U.S. residents, the industry's efforts to price-discriminate are profitable. Prestigious theaters that can sell tickets for operas for $500 should never sell tickets at $20 prices. Perfect price discrimination can never lead to the most socially desirable level of output, since it involves monopoly power.
Even though the pharmaceutical industry cannot stop other countries from selling lower-priced drugs to U.S. residents, the industry's efforts to price-discriminate are profitable. FEEDBACK: Not everyone fills their prescriptions from foreign sources; only a small fraction of U.S. customers go to that much effort. Because most U.S. citizens still purchase the more expensive drugs available in the United States, pharmaceutical companies benefit from price discrimination, even though some consumers manage to navigate around the firms' efforts to price discriminate. The host has an incentive to let tippers in sooner; that is good for the host and it is also good for the business because tippers have much more inelastic demand, which translates into customers who spend more while dining. When shows don't sell out, they can lower prices in order to get potential viewers with higher price elasticities of demand, such as students or senior citizens, to buy tickets. Perfect price discrimination will lead to maximizing total surplus.
Which of the following is a firm in the MOST perfectly competitive market? a local independent corn farmer the Tennessee Valley Authority, a large electricity producer that serves areas of five states pizza delivery a grocery store
FEEDBACK: Local corn farmers participate in a competitive market, since the goods they sell are identical. However, no market has truly perfect competition.
As a waiter you earn $60,000 per year, including tips. Someone offers you a new job as an economic consultant, which pays $100,000 per year. In order to be a consultant, you'll need to rent an office and purchase supplies and new computer equipment. We can conclude which of the following? If the explicit cost for the consulting job is $30,000 per year, your accounting profit is equal to $30,000. If the explicit cost for the consulting job is $25,000 per year, your economic profit is equal to $15,000. If the explicit cost for the consulting job is $20,000 per year, your economic profit is equal to $80,000. If the explicit cost for the consulting job is $20,000 per year, your accounting profit is equal to $140,000.
If the explicit cost for the consulting job is $25,000 per year, your economic profit is equal to $15,000. FEEDBACK: Economic profits are calculated by subtracting implicit cost from accounting profit (Equation 8.5). With explicit costs of $25,000, the accounting profit is equal to $75,000. Because you're giving up your next best job, being a waiter, the implicit cost of being a consultant is $60,000. Therefore, your economic profit is equal to $15,000.
Which of the following statements is true? There is a deadweight loss associated with perfect price discrimination. There is no producer surplus associated with perfect price discrimination. For a monopoly, there is an increase in total welfare for society compared to perfect competition. In perfect price discrimination, the firm is able to convert the entire area of consumer surplus that existed under perfect competition into producer surplus.
In perfect price discrimination, the firm is able to convert the entire area of consumer surplus that existed under perfect competition into producer surplus. FEEDBACK: Under perfect price discrimination, the firm charges each consumer their maximum willingness to pay for the product. Every consumer with a price above the marginal cost of production is able to buy the good, so there is no deadweight loss. However, perfect price discrimination transfers the gains from trade from consumers to producers, because there is never a difference between the demand curve and the price of the product.
Which statement about price discrimination is correct? It is only possible where there is a resale market. It tends to make goods less affordable. It generally benefits both sellers and buyers. It is generally illegal.
It generally benefits both sellers and buyers. FEEDBACK: Price discrimination requires that resale be preventable. Price discrimination makes goods more affordable, not less, by offering a lower price to price-sensitive buyers, when these can be distinguished from less price-sensitive buyers. Price discrimination is not illegal. Price discrimination generally benefits both sellers and buyers, by increasing voluntary market activity.
Which of the following statements is true? Firms in monopolistic competition should be regulated. Advertising can only benefit society. Monopolistically competitive firms produce less than those operating at the most efficient scale of production. The demand curve for monopolistic competition is horizontal because it resembles a competitive market.
Monopolistically competitive firms produce less than those operating at the most efficient scale of production. FEEDBACK: Even though monopolistic competition resembles a competitive market in many respects, the demand curve for each firm resembles that of a monopoly since each firm has some degree of market power, hence the downward slope of the demand curve for each firm.Monopolistically competitive firms act like monopolies, in the sense that they produce at a point where P > MC, which means that people are still willing to buy the unit for more than the cost of production. So the monopolistically competitive firm is producing too little in terms of efficiency.
Suppose a firm comes up with a new air freshener that produces its own smells. They operate in monopolistic competition and are making a profit. Which of the following would MOST likely occur? The firm faces lawsuits stating that they stole someone's patent. The government will investigate the firm for illegal pricing. Other firms are attracted by the profits and will want to produce a similar air freshener. Because of high barriers to entry, other firms cannot enter the market, and as a result the profit will increase.
Other firms are attracted by the profits and will want to produce a similar air freshener. FEEDBACK: If a firm is making an economic profit, that profit attracts new entrants to the business. The larger number of competing firms entering the market will cause the demand for an individual firm's product to decrease. Eventually, as more firms enter the market, it is no longer possible for existing firms to make an economic profit. When all firms earn zero economic profit, the market has reached a long-run equilibrium and new firms no longer enter the industry in order to achieve economic profits.
Which of the following statements is true? Compared to an oligopoly market, the monopoly output is higher. Prices are higher in an oligopoly market compared to monopoly prices. Prices are lower in an oligopoly market compared to competitive markets. Output will be higher in an oligopoly market than in a monopoly.
Output will be higher in an oligopoly market than in a monopoly. FEEDBACK: Oligopoly falls somewhere between the competitive market and monopoly outcomes. Output is likely to be higher than under monopoly and lower than within a competitive market. The higher output makes oligopoly prices generally LOWER than monopoly prices, but HIGHER than those found in competitive markets.
P ____ economic loss
P is below ATC P<ATC
Why does price discrimination improve the efficiency of the market compared to monopoly? It allows firms to produce goods at the minimum efficient scale. It forces firms who do not price-discriminate to leave the business. Price discrimination only occurs in a perfectly competitive environment. Perfect price discrimination allows a firm to operate at a point where MC = D.
Perfect price discrimination allows a firm to operate at a point where MC = D. FEEDBACK: The socially desirable output level is found where MC = D. This is the optimal quantity to produce. Perfect price discrimination gets a firm to the point where MC = D. Even though the firm captures all the consumer surplus, this is still the point where surplus is maximized.
Which of the following is true regarding regulating natural monopolies? Subsidies are never needed in order to encourage the regulated firm to produce the good. Price can be set equal to the average total cost. The government should never own and operate the regulated monopolist. The regulated monopolist should be taxed in order to get the firm to achieve the efficient outcome.
Price can be set equal to the average total cost. FEEDBACK: When the government is regulating natural monopolies, one of the possible solutions is for the price to be set equal to the average total cost, which will allow the firm to break even. Subsidies could be used to encourage the monopolist to produce more. The government will own a regulated monopolist only if the cost-benefit analysis proves it to be a good idea. Taxing a monopolist would not work here, because the monopolist is not creating an externality.
Which of the following statements is true? The AFC curve can never rise. If a firm can't decide between the short and long run, it settles for the medium run. Accounting profit is smaller than economic profit. The short run is always somewhere between 6 and 12 months
The AFC curve can never rise. FEEDBACK: By definition, accounting profit cannot be smaller than economic profit, since economic profit takes implicit costs into account. The short run is not defined by a specific period of time but rather by how long a firm's contracts are. Firms are producing in either the short or long run--there is no middle run. The AFC, by definition, cannot rise as output increases; it is a fixed amount divided by increasing output.
In competitive markets, price is equal to marginal cost in the long run. In monopolistic competition, why is price greater than marginal cost in the long run? In competitive markets, in the long run there are no fixed costs, so price only has to cover marginal costs. In monopolistic competition, there are fixed costs even in the long run, so the price must cover both fixed and marginal costs. In competitive markets, firms follow the profit-maximizing rule MR = MC. In monopolistic competition, on the other hand, firms are free to set a higher price than the MR = MC rule would dictate. Products are identical in perfectly competitive markets, so a firm must charge less than marginal cost in order to differentiate itself. This is not true in monopolistically competitive markets, where firms can charge more than marginal cost. The demand curves for the two types of firms are different. Monopolistically competitive firms have market power and a downward sloping demand curve, so they set a price higher than marginal cost.
The demand curves for the two types of firms are different. Monopolistically competitive firms have market power and a downward sloping demand curve, so they set a price higher than marginal cost. FEEDBACK: All firms, regardless of the type of market, maximize profits by following the MR = MC rule. Also, in the long run there are no fixed costs, regardless of the type of market. But because firms in markets with monopolistic competition sell a differentiated product, they are able to charge a price marked up above marginal cost. Firms in competitive markets do not sell a differentiated price and thus have no market power. In the long run, they must sell at (not below) marginal cost.
Suppose a monopolist practices perfect price discrimination. It will have a greater total revenue and sell a greater output than if it were not practicing price discrimination. a smaller total revenue and sell a smaller output than if it were not practicing price discrimination. the same total revenue but sell a larger output than if it were not practicing price discrimination. the same total revenue, but a smaller output than if it were not practicing price discrimination .
a greater total revenue and sell a greater output than if it were not practicing price discrimination. FEEDBACK: As shown in the graph, if the firm charges one price, the most it can earn is the profit in the light green rectangle. However, if a firm is able to perfectly price-discriminate, it can pick up the additional profit represented by the darker green triangles.
A firm carries out price discrimination when it charges a higher price to consumers whose demand is more elastic. a higher price when its marginal cost is lower. a lower price to consumers whose demand is more elastic. the same price to all of its consumers.
a lower price to consumers whose demand is more elastic. FEEDBACK: To price-discriminate, the firm must be able to distinguish groups of buyers with different price elasticities of demand. Firms can generate additional revenues by charging more to customers with inelastic demand and less to customers with elastic demand.
Which of the following markets is oligopolistic? passenger airlines breakfast cereal fast food wheat
airlines
Which of the following is an example of price discrimination? airlines charging lower prices for those who book in advance Little Roman's pizza menu with the following prices: cheese pizza = $8, supreme = $11 $6 foot-long subs at Subway the $1 $2 $3 Dollar Menu at McDonald's
airlines charging lower prices for those who book in advance FEEDBACK: Price discrimination has two main requirements: (1) the identification of consumers willing to pay more or less, and (2) the producer's ability to prevent resell of items. Airlines charging lower fares for those who book in advance is an example of price discrimination, because the airlines identify the customers by those willing to commit to a particular time and destination in advance. Business travelers often book at the last minute and are price insensitive. The $6 price for a foot-long is available to anyone, anytime. Anyone can buy from the $1 $2 $3 Dollar Menu at any time. More toppings on a pizza demand higher prices, because the toppings add to the cost of producing the pizza.
A producer would decide to produce in a competitive market in which she will earn zero profit in the long run because in the short run her profit is positive. the zero profit in the long run is, in fact, zero accounting profit, and only matters on the books. the producer has a high cost of exiting this market and, counting that cost, it's better for her to continue operating at zero profit. at zero profit, her revenue will cover all her costs, both explicit and implicit (opportunity cost).
at zero profit, her revenue will cover all her costs, both explicit and implicit (opportunity cost). FEEDBACK: At zero profit, the revenue covers all the costs, including the implicit ones. The fact that her implicit costs are covered means that she does not have an outside option or opportunity that is superior to the zero economic profit option she has chosen.
With regard to social welfare, oligopolists forming a cooperative alliance is good because it leads to less disagreement and lower prices and more variety. good because forming a cooperative alliance closely resembles a perfectly competitive outcome. bad because prices will then be too high and output will be too low. bad because output will then be too high and prices will be too high.
bad because prices will then be too high and output will be too low. FEEDBACK: When oligopolists in an industry form a cooperative alliance, they function like a monopoly. Competition disappears, which is not good for society. This means that prices will be higher and output will be lower when compared to a competitive outcome. One way to improve the social welfare of society is to restore competition and limit monopoly practices through legislation.
Suppose an unregulated natural monopoly becomes regulated using marginal cost pricing. As a result, the firm's profits would increase substantially. decrease substantially, but remain positive. be brought down to zero. become negative.
become negative. FEEDBACK: A natural monopolist loses money using marginal cost pricing because the average total costs under the marginal cost pricing solution are higher than the price allowed by regulators. This outcome is problematic because a firm that suffers losses will go out of business. That outcome is not desirable from society's standpoint, because the consumers of the product will be left without it. Consequently, governments will often subsidize regulated natural monopolies to achieve the socially efficient level of production.
When a company spends money for television commercials, it intends to shift the demand curve to the right and make demand more elastic. supply curve to the right and make supply more elastic. demand curve to the right and make demand less elastic. supply curve to the right and make supply less elastic.
demand curve to the right and make demand less elastic. FEEDBACK: A successful advertising campaign will change the demand curve in two ways: it will shift the demand curve to the right and alter its slope. First, the demand curve shifts to the right in response to the additional demand created by the advertising. Second, the demand curve becomes more inelastic, or slightly more vertical. This change in shape happens because advertising has highlighted features that make the product attractive and unique to specific customers who are now more likely to want it over competing products.
Based on the following graph it is experiencing a loss, if the situation persists in the long run, the firm would stay in business, but produce at a loss . break even . make a profit . exit the industry .
exit the industry . FEEDBACK: The firm shown in the graph is losing money. In the short run, depending on variable costs, the firm could produce at a loss or shut down. However , if the firm has been unable to correct its losses in the long run, it will exit the industry .
The markup the firm charges in a monopolistically competitive market is __________ the markup charged by a firm in a perfectly competitive market, and the excess capacity in a monopolistically competitive market is __________ the firm's excess capacity in a perfectly competitive market. greater than; less than greater than; greater than less than; less than greater than; equal to
greater than; greater than FEEDBACK: A monopolistic competitor will charge a higher markup than a firm in a perfectly competitive market because the monopolistic competitor faces a downward-sloping demand curve and has P > MC. A perfectly competitive firm will have no excess capacity, because it produces at its minimum average total cost (ATC). A monopolistic competitor will have excess capacity because it does not produce at its minimum ATC.
Which of the following can be considered a competitive market? international market for coffee beans market for U.S. Treasury bonds market for fast food market for cars
international market for coffee beans FEEDBACK: There are many sellers and buyers in the coffee bean market, and they are all price takers because coffee beans are a commodity that is not highly differentiated. In the other three markets, either there are few sellers or buyers, or some players have the ability to influence the market price.
The marginal cost curve intersects the ATC at its minimum point. intersects the AFC at its minimum point. always declines. is always S-shaped.
intersects the ATC at its minimum point. FEEDBACK: The AFC curve will fall with increased output. The marginal cost curve does not always decline; it depends whether the returns are diminishing or increasing. The marginal cost numbers will dictate the shape of the curve. When marginal cost is equal to average cost, it is shown as where both curves meet. This happens at the lowest point on the ATC curve.
A firm in monopolistic competition tends to have more control over price when it is less successful at differentiating its product. more successful at differentiating its product. able to use predatory pricing. able to tie in the selling of its products.
more successful at differentiating its product. FEEDBACK: Product differentiation is the process firms use to make a product less substitutable with competing products in the minds of potential customers. Firms use product differentiation to contrast their product's unique qualities with competing products. If the firm can convince its customers that its product is sufficiently different and superior, it can increase its prices because it has increased its market power.
A firm is experiencing a loss of $5,000 per year when operating. The firm has fixed costs of $8,000 per year. The firm should __________ in the short run and should __________ in the long run. operate; shut down shut down; operate operate; operate shut down; shut down
operate; shut down FEEDBACK: The firm should operate in the short run, since its losses are less if it operates (-$5,000) than if it shuts down (-$8,000). If this situation persists, the firm would go out of business in the long run. In the long run, all costs would be variable, and the firm's revenues would NOT cover all of its costs, therefore it should shut down.
At many amusement parks, customers who enter the park after 4 p.m. receive a steep discount on the price they pay. This is a type of price discrimination because the amusement park charges a higher price to families with young children who aren't in school. people who have a more inelastic demand for amusement parks. people who have a more elastic demand for amusement parks. people who are rich enough to visit the amusement park for an entire day.
people who have a more inelastic demand for amusement parks. FEEDBACK: This is a form of price discrimination, because it separates those who are price sensitive and who might not otherwise visit an amusement park from those who have an inelastic demand for amusement parks. Those who love amusement parks are willing to pay a higher entry price, and they are the same people who would like to get to the park early and would not be willing to spend only an hour or two there.
In 1911, the U.S. government sued Standard Oil, a U.S. company, for violation of antitrust laws. The company broke up into 34 smaller companies. This is an example of promoting competition. reducing trade barriers. regulating currency markets. government failure.
promoting competition FEEDBACK: The government took legal action that led to the breakup of one large firm into 34 smaller firms. It hoped that these smaller firms would compete with each another, thereby placing a downward pressure on price and an upward pressure on output, and lead to an increase in total surplus for society.
The Water and Electric Board in Eugene, Oregon, is a monopolist in the supply of electricity. The city government must approve the rates the company charges for its electricity. This is an example of promoting competition. reducing trade barriers. regulating markets. government failure.
regulating markets. FEEDBACK: When a firm must seek government approval for the rates it charges, the government is regulating the firm in the market.
The local ice cream shop is trying to figure out how many workers to hire, and part of the decision will be based on the marginal product of labor. The following table shows a short-run production function for quantity of ice cream tubs produced. Diminishing marginal returns begins after hiring which worker? Workers hired Quantity of ice cream tubs produced 1 110 2 200 3 270 4 300 5 320 6 330 7 300 first second third fourth
second Because the first worker adds 110 tubs of ice cream and the second worker adds only 90 additional tubs, diminishing returns begins with the second worker.
where at the intersection of the price and MC curves, P = ATC. At this point P = MR = MC = ATC. this means
the firm breaking even
If the average total costs is falling, the marginal cost curve must be above the average total cost curve. the marginal cost curve must be below the average total cost curve. the MC curve is rising. the MC curve is horizontal (neither rising nor falling).
the marginal cost curve must be below the average total cost curve. FEEDBACK: When looking at the relationship between average cost and marginal cost, think of average cost as a college GPA. If a student has a 4.0 average (i.e., straight As) coming into the new semester, and then the average starts to go down, it means the latest grades, which are like marginal costs, are lower than the average grade.
The year is 2278, and the starship Enterprise is running low on dilithium crystals, which are used to control the matter-antimatter reactions to propel the ship across the universe. Without the crystals, space-time travel is not possible. If the crystals are government owned or regulated, and the government wants to create the greatest welfare for society, the government should set the price using the marginal cost pricing rule. at the monopoly price. at the break-even price. at the profit-maximizing price.
using the marginal cost pricing rule. FEEDBACK: If there is only one source of dilithium crystals, the necessary conditions are met for a monopoly. If the crystals are government owned or regulated, and the government wants to create the greatest welfare for society, the price should be set at the efficient price, using the marginal cost pricing rule, where P = MC. This pricing guarantees that the good will be produced as long as the willingness to pay exceeds the cost of production. However, if the dilithium crystals are being produced by a private firm, the government will probably need to subsidize that firm to cover its fixed costs and keep it in business long-term.