AP Micro Unit 3 Review

Suppose that a monopoly computer chip maker increases production from 10 microchips to 11 microchips. If the market price declines from $30 per unit to $29 per unit, marginal revenue for the eleventh unit is:

$19

If Annie has sold 40 apples in a perfectly competitive market and her total revenue is $80, when she sells her 41st apple, her marginal revenue will be:

$2

All except one of the following are characteristics of perfect competition. Which is the exception?

There are many producers; one firm has a 25% market share, and all of the remaining firms have a market share of less than 2% each.

In the short run, for a perfectly competitive firm, the portion of the MC curve at or above the shut-down price is also its:

individual short-run supply curve.

Which of the following is usually associated with a positive externality?

innovation in the semiconductor industry

Game theory is commonly used to explain behavior in oligopolies, because oligopolies are characterized by:

interdependence

The monopolist's marginal revenue curve:

is always below the demand curve.

If a perfectly competitive firm is producing a quantity where MC = MR, then profit:

is maximized

If a perfectly competitive firm is producing a quantity where P = MC, then profit:

is maximized

In an oligopolistic market structure, collusion between firms usually leads to higher profits than noncooperative behavior. However, formal, overt collusion doesn't usually occur in the United States because:

it is illegal and because there is an incentive for each firm to cheat on a collusive agreement.

If a monopolist can engage in perfect price discrimination, then:

it produces at the socially efficient level.

OPEC is a(n) ________that includes ________.

legal cartel; includes 13 national governments

For a monopolist with a downward-sloping demand curve, the quantity effect dominates the price effect at:

lower levels of production

Suppose a perfectly competitive industry is suddenly transformed into a monopoly industry. We can assume that monopoly output will be ________ than the competitive output and that ________.

lower; deadweight loss will emerge

Price discrimination leads to a ________ price for consumers with a ________ demand.

lower; more elastic

Many furniture stores run "going out of business" sales but never go out of business. In order for the shut-down decision to be the appropriate one, the price of furniture must be ________ than the ________ average variable cost.

lower;minimum

Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary believes he faces a kinked demand curve. This means Gary thinks the demand curve above the kink is:

more elastic than the demand curve below the kink.

Airlines are prone to price wars because:

most fliers choose airlines on the basis of schedule and price.

Which of the following is an example of an artificially scarce good?

music that is downloadable from the Internet for a fee

The best example of a good whose consumption is not excludable is:

national defense

Most electric, gas, and water companies are examples of:

natural monopolies

If large fixed costs result in ATC falling as output increases, this industry is referred to as a:

natural monopoly

Suppose that each of two firms has the independent choice of advertising its product or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million while the other gets profit of $2 million. According to game theory, if the firms could collude to maximize profit:

neither will advertise

Microsoft and its operating system are often cited as an example of a company that grew into a monopolist through:

network externalities

An artificially scarce good is similar to a public good in that it is ________, but it is also similar to a private good in that it is ________.

nonrival in consumption; excludable

If there are two gas stations in the town of Smalltown, then the gasoline industry in Smalltown is probably best characterized as:

oligopolistic

When a firm produces at an output level at which MR = MC, it is operating at the:

optimal output level

The outcome of a strategic choice is a:

payoff

A private good is a good or service for which exclusion is:

possible and which is rival in consumption.

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

price discrimination

A price making firm is producing at the output level where average total cost equals $60, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, in order to maximize profits this firm should:

reduce output

Suppose that the market for haircuts in a community is perfectly competitive and that the market is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for haircuts. In the short run, we expect that the market price will ________ and the output of a typical firm will ________.

rise;rise

A deadweight loss arises in monopoly because:

some potentially beneficial transactions do not occur.

If economic profits exist in perfect competition, then firms will enter in the long run because of easy entry, the ________ curve will shift to the right, and ________ in the market will ________.

supply; output; increase

If the regulation of a monopoly results in a price equal to marginal cost but the price is below average total cost:

the firm will require subsidization or it will go out of business.

The resources needed for growing cucumbers are relatively abundant. Many new firms could enter this industry and not change costs. If that happens,

the long-run industry supply curve will be horizontal.

The short-run individual supply curve of a firm is:

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

Public policies toward monopoly in the United States often consist of:

the regulation of natural monopolies

Sadia wants to practice price discrimination in her bakery. Which of the following techniques should Sadia not use?

the same price for all consumers for freshly baked goods

A familiar example of a negative externality is traffic congestion. In principle, it should be possible to internalize this externality by permitting drivers to negotiate about rights to drive during particular time periods. The most likely reason that this does not happen is that:

the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.

A characteristic of public goods is that:

their benefits cannot be withheld from anyone, regardless of whether a person pays for them.

Because monopoly firms are price-setters:

they can sell more only by lowering price.

A strategy in which players play cooperatively initially, but then mimic what the other players do, is referred to as:

tit-for-tat strategy

For a nonexcludable good like national defense, the private market will lead to:

too little production of the good.

The licenses that can be bought and sold by polluters and that enable the holder to pollute up to a specified amount during a given period are called:

tradable emissions permits

A duopoly is an industry that consists of:

two firms

Oligopoly is a market structure characterized by:

uncertainty about the behavior of rival firms.

The Sherman Antitrust Act:

was aimed at preventing the creation of more monopolies and was the beginning of antitrust policy.

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

decreases;increases

A monopolist responds to a decrease in demand by ________ price and ________ output.

decreasing;decreasing

The demand curve facing a monopolist is:

downward sloping

If firms are experiencing economic losses in the short run, firms will leave the industry, industry output will ________, and economic losses will ________ in the long run.

fall;fall

Perfectly competitive industries are characterized by:

goods that are standardized

In order to maximize profits, an airline will offer ________ prices to customers with ________ demand.

higher;inelastic

For a perfectly competitive firm in the short run:

if the firm produces the quantity at which P > ATC, then the firm is profitable.

A competitive firm operating in the short run is producing at the output level at which ATC is at a minimum. If ATC = $8 and MR = $9, in order to maximize profits (or minimize losses), this firm should:

increase output

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

increase profits

The government has adopted an emissions tax if it:

charges automobile drivers 10 cents for each unit of automobile emissions.

Price discrimination is the practice of:

charging different prices to buyers of the same good.

Industry Z is made up of five firms. Three of the firms make up 20% of the total market sales, one firm makes up 25% of the total market sales, and the remaining firm makes up 15% of the total market sales. What is the HHI for this industry?

2,050

Which of the following is a barrier to entry?

control of scarce resources, economies of scale, and government-created barriers (i.e., patents and copyrights)

In general, oligopolists find it easier to engage in collusive behavior when the industry is characterized by ________ behavior.

cournot

Which of the following would make it difficult for Georgia peach suppliers to collude?

Buyers of peaches have a great deal of bargaining power, since peaches are homogeneous.

A self-enforcing agreement

Describes the strategy that makes up a Nash equilibrium

In the short run, a monopoly will stop producing if:

P<AVC

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

Pigouvian subsidy.

Which of the following is an example of a positive externality?

Sam buys a dilapidated house, renovates it, and increases the property values of all houses in the neighborhood.

Farmer Ted sells winter wheat in a perfectly competitive market. The market price for a bushel of winter wheat is $9. Ted has 270 bushels of wheat to sell. If his total variable cost is $2000 and his total fixed cost is $500, then

Ted is minimizing his losses

A firm operates in a perfectly competitive industry. At the current level of output, the marginal cost is $26 and the average cost is $23. If the firm can sell its product for $25,

The firm should decrease its output

Which of the following is an example of a government solution to externalities?

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

Which of the following is an example of an activity generating a negative externality?

Your next-door neighbor mows the lawn at 6 A.M.

The best example of a good whose consumption is excludable in consumption is:

a bicycle

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

In order to engage in price discrimination a firm must be:

a price-setter, and it must be able to identify consumers whose elasticities differ.

The free-rider problem refers to:

a situation in which consumers have no incentive to pay for a nonexcludable good.

Which of the following is most likely to be observed when firms engage mainly in non-price competition?

advertising and product differentiation

In perfectly competitive long-run equilibrium:

all firms produce at the minimum point of their average total cost curves.

Josh has an iPhone and frequently downloads songs from the iTunes website. He pays a small fee for each download, but downloading a song does not remove it from the iTunes inventory. Other consumers can also pay the fee and download a song that Josh might have already accessed. The iTunes service is best described as:

an artificially scarce good

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

antitrust policy

Control of a scarce resource or input, economies of scale, technological superiority, and government-created barriers are forms of:

barriers to entry

A monopoly is an industry structure characterized by:

barriers to entry and exit

Suppose that each of two firms has the independent choice of advertising its product or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million while the other gets profit of $2 million. According to game theory, the Nash equilibrium is:

both will advertise

Suppose that each of two prisoners has the independent choice of confessing to a crime or not confessing. Note that they cannot communicate with each other. If neither confesses, they spend 4 years in jail; if both confess, they spend 6 years in jail; and if one confesses while the other does not, the confessor gets off with 2 years in jail while the other gets 10 years in jail. According to game theory, the likely strategy by the prisoners is:

both will confess

If a perfectly competitive firm is producing a quantity where P < MC, then profit:

can be increased by decreasing production

Suppose a monopoly is producing at the level of output where marginal revenue equals marginal cost. If the monopolist reduces output, it:

can charge a higher price

Compared to a perfectly competitive industry, a monopolist:

charges a higher price

If an industry initially has an HHI of 1,250, a merger between two of the largest firms in the industry:

would not likely be allowed since it most likely would reduce the competitive nature of the industry.