(Complete) Exam #2

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the table. If Island Bikes charges a single price to all of its customers, then what will be its daily economic profit? $26 $27 $33 $36

$27

In which of the following markets do firms sell the same standardized product? Four-door cars 2% milk Desktop computers Sandwiches

2% milk

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, this firm's profit-maximizing level of output is ______. 30 60 80 100

80

A good is characterized by network economies if it: -can be used by more than one person at a time. -becomes cheaper to produce as more people buy it. -becomes more valuable as more people own it. -is widely advertised on television.

becomes more valuable as more people own it. Network economies exist when the value a consumer places on a good increases when other consumers have the same or compatible goods.

For all firms, the additional revenue collected from the sale of one additional unit of output is termed: price. average revenue. marginal profit. marginal revenue.

marginal revenue.

Economic theory assumes that a firm's goal is to: earn an accounting profit. earn an economic profit. maximize its accounting profit. maximize its economic profit.

maximize it's economic profit

The fact that price subsidies reduce economic surplus implies that: -we can find an alternative policy that will make both the rich and the poor better off. -price subsidies help the rich but not the poor. -price subsidies are not effective at lowering prices. -the quantity bought and sold in the market will fall.

we can find an alternative policy that will make both the rich and the poor better off.

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the table. If Island Bikes charges a single price to all of its customers, then what price will it charge? $4 $8 $12 $16

$12

The accompanying table shows a pizzeria's fixed cost and variable cost at different levels of output. Pizzas sell for $20 each. When the pizzeria makes 125 pizzas per day, its total revenue is _____. $2,500 $1,250 $125 $20

$2,500 Total revenue equals price × quantity, which in this case is $2,500 = $20 × 125.

The accompanying table shows a pizzeria's fixed cost and variable cost at different levels of output. Pizzas sell for $20 each. When the pizzeria makes 25 pizzas a day, its average fixed cost is ______. $5 $6 $10 $20

$20

Refer to the figure below. If a price ceiling were imposed at $4, total economic surplus would be ______, which is ______ less than when the market is unregulated market. $8; $24 $24; $8 $24; $16 $48; $8

$24; $8 Explanation: If this market were unregulated, total economic surplus would be $32. With the price ceiling of $4, consumer surplus would be $20, and producer surplus would be $4, so total economic surplus would be $24, which is $8 less than when the market is unregulated.

Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table shows the reservation prices of the eight students enrolled in the class. What price will Campus Books charge if it must charge a single price to all of its customers? $36 $18 $24 $10

$36

Refer to the figure below. In this game, how many dominant strategies does Player A have? 0 1 2 4

1

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. How many hours a day should John spend cleaning windows? 1 2 3 4

4 or 2

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit if output is $15, what is this firm's profit-maximizing level of output? 0 45 60 80

60

Suppose a profit-maximizing firm in a perfectly competitive market is collecting $1,999 in total revenues. If the total cost of its fixed factors of production falls from $500 to $400, the firm will: -expand its output. -lower its price. -earn greater profits or smaller losses. -earn smaller profits or larger losses.

Earn greater profits or smaller losses

Refer to the figure below. If a price ceiling were imposed at point G, the loss in total economic surplus would be represented by the area ______. FEC DAC GJEF JAE + DGF

FEC

A consumer goes to purchase a TV advertised for $300. As he is checking out, the clerk informs him of a $20 rebate offer for the TV, which he fills out and receives in 3 months. What can one can infer about the consumer's reservation price? It was at least $300. It was at most $280. It was exactly $300. It was at least $280 but less than $300.

It was at least $300.

Curly told Larry about his new business venture: Curly pays Acme International $1,000 per month for supplies, works out of his apartment on his own computer and earns a monthly revenue of $1,500. Should Larry quit his job and do what Curly is doing? -Yes, as long as Larry has at least $1,000 in savings to get started. -Not if Larry is earning more than $500 per month at his current job. -Not unless Larry can borrow the $1,000 monthly payment at no interest. -Yes, as long as Larry can work out if his apartment and owns a computer.

Not if Larry is earning more than $500 per month at his current job. If Larry is earning more than $500 per month at his current job, then if he did what Curly was doing, his economic profit would be negative.

Consider the accompanying payoff matrix. Suppose both players make their choices simultaneously and independently. What is the Nash equilibrium of this game? -Player A chooses Down and player B chooses Left. -Player A chooses Up and player B chooses Right. -Player A chooses Up and player B chooses Left. -Player A chooses Down and player B chooses Right

Player A chooses up and Player B chooses left

When a pharmaceutical company introduces a new drug, its research and development costs are ______, and the cost of the chemicals used in manufacturing the drug are ______. start-up costs; fixed costs fixed costs; start-up costs start-up costs; variable costs marginal costs; variable costs

Start-up costs ;variable costs

Which of the following would not be included in the calculation of accounting profit? -The wages paid to the company's workers. -The salary the owner could have earned working elsewhere. -The rent paid by the owner for the use of a building. -The medical insurance coverage for the company's workers.

The salary the owner could have earned working elsewhere.

A strategy that limits defection in a repeated prisoner's dilemma game is: a Nash equilibrium. a tit-for-tat strategy. a cartel. an ultimatum bargaining game.

Tit-for-tat strategy.

A pure monopoly exists when: -many firms produce a good with no close substitutes. -a single firm produces a good with no close substitutes. -only a single firm is present in the market. -a single firm produces a good with many close substitutes.

a single firm produces a good with no close substitutes.

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. In the Nash equilibrium of this game: -both Mexico and OPEC abide by the agreement. -both Mexico and OPEC cheat on the agreement. -Mexico cheats on the agreement and OPEC abides by the agreement. -OPEC cheats on the agreement and Mexico abides by the agreement.

both Mexico and OPEC cheat on the agreement

A ______ describes the possible moves in a game in sequence and lists the payoffs to each possible combination of moves. decision tree payoff matrix game graph multi-period game

decision tree

Suppose that you have noticed that almost all of the car dealers in your city are located along a three-block stretch of the same street. A likely reason for this clustering of car dealers is that: -the dealers are better able to form a cartel. -each dealer is attempting to locate closest to the customers. -there is a social norm in that city that dealers follow in choosing location. -each dealer sells a different brand of car, so they are not competitors and do not have to be concerned about the other dealers' locations.

each dealer is attempting to locate closest to the customers.

In the long run, in a perfectly competitive industry: -economic profit tends to persist. -the number of firms in the industry will increase. -economic loss tends to persist. -economic profit and loss are driven to zero by entry and exit.

economic profit and loss are driven to zero by entry and exit

Relative to a monopolist charging a single price to all consumers, price discrimination ______ total economic surplus. has no effect on sometimes increases and sometimes decreases decreases increases

increases All else equal, a monopolist that price discriminates will produce closer to the socially optimal level of output than will a monopolist that charges a single price to all consumers.

Refer to the figure below. In this game, the dominated strategy for Player A: is to play up. is to cooperate with Player B. is to play down. will depend on Player B's move.

is to play down

If a natural monopoly increases the quantity of output it produces, then: its average cost will decrease. its average cost will increase. it will have to increase its price. its profit will increase.

its average cost will decrease.

Suppose the accompanying figure illustrates the demand curve facing a monopolist. Suppose this firm maximizes its profits by charging a price of $8 per unit. This implies that the firm's: marginal cost is $8. marginal cost is $0. average total cost is $8. marginal cost is less than $8.

marginal cost is $0.

Suppose 30 employees per day can produce 50 units of output. Assuming the law of diminishing marginal returns is present, to produce 100 units of output would require: -an additional 30 employees per day. -more than 30 additional employees per day. -a total of 60 or fewer employees per day. -fewer than 30 additional employees per day.

more than 30 additional employees per day

Suppose a monopolist produces two different products. If the marginal cost of producing one is lower than the marginal cost of producing the other, and the monopolist charges a different price for the two goods, then the monopolist is: -not price discriminating. -imperfectly price discriminating. -perfectly price discriminating. -not maximizing its profit.

not price discriminating.

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours per day, it earns a daily ______ of ______. -loss; $64 -profit; $64 -loss; $114 -profit; $114

profit; $64

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. If we plot John's opportunity cost per window on the vertical axis and the number of windows cleaned each day on the horizontal axis, we will have John's ______ curve for window-cleaning services. -production possibilities -supply -benefit -demand

supply

Once a firm has determined the quantity of output it wishes to sell, the maximum price it can charge for each unit is determined by: the average cost of making the product. the demand curve facing the firm. the marginal cost of making the product. the firm's marginal revenue curve.

the demand curve facing the firm

When the price of a perfectly competitive firm's output rises: -the firm will produce more. -the firm's marginal cost curve will shift to the right. -the firm will produce less. -the firm's marginal cost curve will shift to the left.

the firm will produce more.

If a firm is earning zero economic profit, then: -the firm's revenues are sufficient to pay its explicit costs, but not its implicit costs. -the owner will not be able to pay himself or herself a salary. -the firm will shut down in the long run, but will continue to operate in the short run. -the firm's accounting profit is equal to the firm's implicit costs.

the firm's accounting profit is equal to the firm's implicit costs

When more firms enter an industry: -the amount produced by each of the new firms will be greater than the amount produced by each of the original firms. -the industry supply curve will shift left. -the amount produced by each of the new firms will be less than the amount produced by each of the original firms. -the industry supply curve will shift right.

the industry supply curve will shift right

The dilemma in a prisoner's dilemma is that: -the outcome is random, so players are uncertain about which strategy to play. -only one player has a dominant strategy, but the other player is uncertain about what to do. -the players would be better off if they both played a dominated strategy. -the players may be trapped in a game they don't know how to play.

the players would be better off if they both played a dominated strategy.

The figure below shows the supply and demand curves for jeans in Smallville. The equilibrium price will NOT lead to the largest possible total economic surplus if: -jeans are purchased by consumers with reservation prices greater than $40. -the market for jeans is perfectly competitive. -the production of jeans generates air pollution. -there are diminishing returns in the production of jeans.

the production of jeans generates air pollution

If there is excess demand in a market, then this suggests that: -there is no way to help some people without harming others. -there is an opportunity for mutually beneficial trades. -the market price is above the equilibrium price. -the market is in equilibrium.

there is an opportunity for mutually beneficial trades

Economic profit is equal to: -accounting profit plus implicit costs. -total revenue minus accounting profit. -total revenue minus the sum of explicit and implicit costs. -accounting profit minus explicit costs.

total revenue minus the sum of explicit and implicit costs.

Suppose two companies, Macrosoft and Apricot, are considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). Suppose Apricot makes its decision first, and then Macrosoft makes its decision after seeing Apricot's choice. What will be the equilibrium outcome of this game? -Apricot will develop a touch-screen t-shirt, and Macrosoft will not. -Macrosoft will develop a touch-screen t-shirt, and Apricot will not. -Both Apricot and Macrosoft will develop a touch-screen t-shirt. -Neither Apricot nor Macrosoft will develop a touch-screen t-shirt.

Apricot will develop a touch-screen t-shirt, and Macrosoft will not

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Suppose a timing element is added to the game, and that Jordan buys a ticket first. Then, after seeing Jordon's choice, Lee buys a ticket. What will be the equilibrium outcome? -Both Jordan and Lee will buy a ticket to the comedy. -Both Jordan and Lee will buy a ticket to the documentary -Jordan will buy a ticket to the comedy and Lee will buy a ticket to the documentary. -Jordan will buy a ticket to the documentary and Lee will buy a ticket to the comedy.

Both Jordan and Lee will buy a ticket to the comedy.

Before it became illegal, cigarette manufacturers once relied heavily on TV advertising. According to the textbook, when the government banned TV advertising, the cigarette manufacturers: -supported the ban due to their concern over health effects of smoking. -thought their First Amendment rights were being violated. -were made worse off because the ban significantly reduced cigarette sales. -benefited because the decision about whether to advertise on TV was a prisoner's dilemma.

benefited because the decision about whether to advertise on TV was a prisoner's dilemma.

Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, tickets cost $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. Suppose Steven was able to purchase a ticket at the box office for $60. Steven's reservation price for the ticket is $65. If Steven attends "Mamma Mia!" and Ingrid does not, then this situation is: -inefficient because Steven and Ingrid could have made a mutually beneficial trade. -efficient because Steven paid less for the ticket than his reservation price. -efficient because Steven arrived at the ticket counter before the show was sold out. -inefficient because Ingrid would have enjoyed the show too.

inefficient because Steven and Ingrid could have made a mutually beneficial trade.

The No-Cash-on-the-Table Principle states that there are: -never unexploited opportunities available to individuals. -never unexploited opportunities available to individuals in equilibrium. -sometimes unexploited opportunities available to individuals in equilibrium. -always unexploited opportunities available to individuals.

never unexploited opportunities available to individuals in equilibrium.

Game theory is not useful in understanding perfect competition because in a perfectly competitive market: -no single firm can influence the market price, so firms' decisions are not interdependent. -each firm only cares about its own profit, so there is no interdependence. -there are too many firms to be able to model their behavior accurately using game theory. -the payoffs to firms' choices are unknown.

no single firm can influence the market price, so firms' decisions are not interdependent