Eco 146 Final
(22) About 100 million pounds of jelly beans are consumed in the United States each year, and the price has been about 50 cents per pound. However, jelly bean producers feel that their incomes are too low and have convinced the government that price supports are in order. The government will therefore buy up as many jelly beans as necessary to keep the price at $1 per pound. However, government economists are worried about the impact of this program because they have no estimates of the elasticities of jelly bean demand or supply. Given market data shown in the graph to the right, the price support costs the government $____ million. (Enter your response rounded to the nearest million dollars.)
50
(12) Refer to the figure at right. When the minimum imposed price is P2, area A is A. a transfer of consumer surplus to producer surplus. B. the revenue that producers lose as a result of the imposed price. C. a deadweight loss associated with the higher than equilibrium price. D. all of the above.
A
(13) Refer to the figure at right. When the minimum imposed price is P2, areas B + C are A. the deadweight loss to both producers and consumers as a result of the price control. B. the deadweight loss to producers as a result of the price control. C. gains transferred from consumers to producers. D. the deadweight loss to consumers as a result of the price control.
A
(16) Suppose the government raises the price of cheese above the market equilibrium level (P0) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure at right, what is the change in producer surplus after this policy is adopted? A. Producers gain area A+B+D. B. Producers lose area C but gain area A+B. C. Producers lose area C but gain area A. D. Producers gain area A.
A
(24) Refer to the figure at right. With no government interference, the country pictured will A. import 300 tons of sugar. B. import 200 tons of sugar. C. import no sugar. D. import 500 tons of sugar. E. export sugar.
A
(25B) Two firms, A and B, must each choose either a low price or a high price for their product. The payoff matrix shows the profit each firm would make with the various price combinations. Profits are in millions of dollars, and Firm A's profit is on the left and Firm B's profit is on the right side of each cell. If the firms could cooperate with each other, what price would they choose? A. Both firms would choose the high price. B. Firm A would choose the low price and Firm B would choose the high price. C. Both firms would choose the low price. D. Firm A would choose the high price and Firm B would choose the low price.
A
(30) Refer to the figure at right. At output Qm, and assuming that the monopoly has set its price to maximize profit, the consumer surplus is A. CDE. B. BDEF. C. 0DEQm. D. ADEG. E. none of the above.
A
(34) A specific tax will be imposed on a good. The supply and demand curves for the good are shown in the figure at right. Given this information, the burden of the tax A. falls mostly on consumers. B. is shared about evenly between consumers and producers. C. falls mostly on producers. D. cannot be determined without more information on the price elasticities of supply and demand.
A
(7) Refer to the figure at right. The competitive level of output in the industry is A. Q1 B. Q2 C. Q3 D. any level as long as price is P0.
A
(7)Refer to the figure at right. Which of the figures describes the long-run equilibrium in a monopolistically competitive market? A. The figure in panel (a) B. The figure in panel (b) C. Both figures D. Neither figure
A
A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing A. third-degree price discrimination. B. fourth-degree price discrimination. C. second-degree price discrimination. D. first-degree price discrimination. E. fifth-degree price discrimination.
A
An electric power company uses block pricing for electricity sales. Block pricing is an example of A. second-degree price discrimination. B. first-degree price discrimination. C. third-degree price discrimination. D. Block pricing is not a type of price discrimination.
A
Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole A. worse off than a comparable tariff. B. not as bad off as a comparable tariff. C. about the same as a comparable tariff. D. any of the above can be true.
A
Discrimination based upon the quantity consumed is referred to as __________ price discrimination. A. second-degree B. group C. first-degree D. third-degree`
A
For a perfect first-degree price discriminator, incremental revenue is A. equal to the price paid for each unit of output. B. less than the marginal revenue for a nondiscriminating monopolist. C. the same as the marginal revenue curve if the firm is a nondiscriminating monopolist. D. greater than price if the demand curve is downward sloping.
A
If a monopolist sets its output such that marginal revenue, marginal cost, and average total cost are equal, economic profit must be A. positive. B. zero. C. negative. D. indeterminate from the given information.
A
Suppose the government wants to limit imports of a certain good. Is it preferable to use an import quota or a tariff? Why? A. Although consumer and producer surplus changes are the same under quotas and tariffs, tariffs are preferable because the government can redistribute the tariff revenue to offset most of the deadweight loss. B. Quotas and tariffs are equivalent in their ability to limit imports and therefore are equally preferable. They cause the same changes in consumer and producer surplus and thus the same deadweight loss. C. A quota is preferable because it doesn't require imposing a tax on the good to limit imports. Consumers can still benefit from a lower price while domestic producers benefit from increased sales. D. A tariff is preferable because the producer surplus gain is larger than with a quota. Therefore, the tariff creates a smaller deadweight loss, which is preferable from society's standpoint.
A
The government provides public education because A. public education provides positive externalities. B. public education is a public good. C. public education combats the negative externalities of private education. D. public education is nonrival and nonexclusive. E. private education is rival and exclusive.
A
The market structure in which strategic considerations are most important is A. oligopoly. B. monopolistic competition. C. pure competition. D. pure monopoly.
A
The market structure in which there is interdependence among firms is A. oligopoly. B. monopolistic competition. C. monopoly. D. perfect competition.
A
The maximum price that a consumer is willing to pay for each unit bought is the _____________ price. A. reservation B. auction C. market D. consumer surplus E. choke
A
Under a transferable emissions permit system, A. the firms with the lowest marginal abatement cost curves will reduce emissions most. B. the firms with the highest marginal abatement cost curves will reduce emissions most. C. all firms will reduce emissions equally. D. the firms with the lowest marginal social cost curves will reduce emissions most. E. the firms with the highest marginal social cost curves will reduce emissions most.
A
Under perfect price discrimination, consumer surplus A. equals zero. B. is greater than zero. C. is maximized. D. is less than zero.
A
What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter? A. It shifts left. B. It shifts right. C. It becomes horizontal. D. New entrants will not affect an incumbent firm's demand curve.
A
When a company introduces new audio products, it often initially sets the price high and lowers the price about a year later. This is an example of A. intertemporal price discrimination. B. a two-part tariff. C. first-degree price discrimination. D. second-degree price discrimination.
A
When the government imposes a specific tax per unit on a product, changes in consumer surplus are ___________ and changes in producer surplus are ____________. A. negative; negative B. positive; negative C. negative; positive D. positive; positive
A
Which of the following is a negative externality connected to automobile transportation? A. In an accident, a person who chooses not to wear a seat belt becomes an object moving around the inside of the car, possibly hitting other belted-in passengers with lethal force. B. Driving faster than the 65 mph speed limit is not allowed, even though individuals are able to do it, and many want to. C. Gasoline is imported, and thus increases the trade deficit. D. Gasoline is taxed on a per-gallon basis. E. While stuck in traffic, you have a chance to listen to your favorite CD, which you haven't had the time to do in other places.
A
Which of the following is an example of intertemporal price discrimination? A. Charging a high price for a hardback edition book and a lower price for the paperback version released a year later. B. Charging a high price for one light bulb and a lower price per bulb for a package of four light bulbs. C. Charging a high price for a round-trip flight without a Saturday night stay and a lower price for the same flight that includes a Saturday night stay. D. All of the above.
A
Which of the following is true in long-run equilibrium for a firm in monopolistic competition? A. MC < ATC B. MC > ATC C. MC = ATC D. Any of the above may be true.
A
Third-degree price discrimination involves A. charging different prices to different groups based upon differences in elasticity of demand. B. charging each consumer the same two-part tariff. C. the use of increasing block rate pricing. D. charging lower prices the greater the quantity purchased.
A
(11) Refer to the figure at right. Which monopoly charges a greater price markup? A. The monopoly in panel (a). B. The monopoly in panel (b). C. Both firms charge the same markup. D. The monopoly with more elastic demand.
B
(11) Refer to the figure at right. Which of the following best describes the reason for the shaded triangle in panel (b)? A. The triangle shows the gains in allocative efficiency under monopolistic competition compared to a perfectly competitive market. B. The triangle describes the deadweight loss associated with market power in monopolistic competition. C. The triangle shows the benefits of advertising and product differentiation, which do not exist in perfect competition. D. The triangle describes the improvement in efficiency in monopolistic competition.
B
(11) The change in producer surplus due to the price ceiling is represented by area A. H−F−G. B. −D−E. C. −D−E−F−G. D. −C−E. E. −D−E−H.
B
(17) Suppose the government raises the price of cheese above the market equilibrium level (P0) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure at right, what is the cost of this program to the government? A. Government expenditures are area E + F + G. B. Government expenditures are area B + C + D + E + F + G. C. Government expenditures are area D. D. Government expenditures are area B + C + D.
B
(18) The policy shown in the figure at right is a A. price floor of $50. B. quota of 2,000. C. quota of 4,000. D. price support of $50. E. price ceiling of $30.
B
(20) Refer to the figure at right. Which of the following areas represents the total abatement cost? A. The rectangle B. The triangle C. Both the rectangle and the triangle D. Neither the rectangle nor the triangle
B
(24) Refer to the figure at right. The producer net gains equal A. area A + C. B. area A−C. C. area A. D. area A−B.
B
(25) Refer to the figure at right. The loss of consumer surplus equals A. area A + B + C. B. area A + B. C. area A−B. D. area A.
B
(25A) Two firms, A and B, must each choose either a low price or a high price for their product. The payoff matrix shows the profit each firm would make with the various price combinations. Profits are in millions of dollars, and Firm A's profit is on the left and Firm B's profit is on the right side of each cell. If the firms cannot cooperate with each other and must choose simultaneously, what price will they choose? A. Both firms will choose the high price. B. Both firms will choose the low price. C. Firm A will choose the low price and Firm B will choose the high price. D. Firm A will choose the high price and Firm B will choose the low price.
B
(26) The revenue and cost curves in the figure at right are those of a natural monopoly. If the monopolist is not regulated, the price will be set at A. P3. B. P2. C. P1. D. P4. E. none of the above.
B
(4) Refer to the figure at right. If the firm chooses to charge the four prices shown on the figure instead of a single price, P0, the firm practices A. first-degree price discrimination. B. second-degree price discrimination. C. third-degree price discrimination. D. perfect price discrimination.
B
(6) Refer to the figure at right. Which of the following statements is correct? A. The marginal external cost (MEC) is the difference between marginal social cost (MSC) and marginal cost (MC). B. The marginal external cost (MEC) is the sum of marginal social cost (MSC) and marginal cost (MC). C. When MEC is subtracted from MC, we obtain MSC. D. When adding MSC and MC, we obtain MEC.
B
(6)Refer to the figure at right. At price 0H and quantity Upper Q 1Q1, consumer surplus is the area A. EDGF. B. HFGB. C. EFC. D. 0FGUpper Q 1Q1. E. none of the above.
B
(8) Refer to the figure at right. The efficient level of output is A. q1. B. q2. C. q3. D. a mix of q1 and q3.
B
A consumer or producer who does not pay for use of a nonexclusive good but expects others to pay is known as a A. price setter. B. free rider. C. fringe element. D. none of the above.
B
A doctor charges two different prices for medical services, and the price level depends on the patients' income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of A. pricing at each consumer's reservation price. B. third-degree price discrimination. C. second-degree price discrimination. D. first-degree price discrimination.
B
A market with few entry barriers and with many firms that sell differentiated products is A. a monopoly. B. monopolistically competitive. C. oligopolistic. D. purely competitive.
B
As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200. You should A. reduce output beyond the level where marginal revenue equals zero. B. reduce output until marginal revenue equals marginal cost. C. expand output. D. expand output until marginal revenue equals zero. E. do nothing without information about your fixed costs.
B
A McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of A. a two-part tariff. B. price discrimination. C. bundling. D. collusion. E. tying.
B
Because of the kind of externalities that tend to be generated from general R&D resources bought by firms, the equilibrium price of R&D A. must fall in order for the market to reach equilibrium. B. and quantity of R&D are both below the optimal level. C. is below the optimal level, and quantity is above the optimal level. D. and quantity of R&D are both above the optimal level. E. is above the optimal level, and quantity is below the optimal level.
B
Consider the following statements when answering this question: I. When a competitive industry's supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are consumers. II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers. A. I is false, and II is true. B. I is true, and II is false. C. I and II are true. D. I and II are false.
B
Deadweight loss refers to A. losses due to the policies of labor unions. B. net losses in total surplus. C. situations where market prices fail to capture all of the costs and benefits of a policy. D. losses in consumer surplus associated with excess government regulations.
B
Excess capacity in monopolistically competitive industries results because in equilibrium A. price equals marginal cost. B. each firm's output level is too small to minimize average cost. C. firms make positive economic profit. D. each firm's output level is too great to minimize average cost.
B
In an unregulated, competitive market, consumer surplus exists because some A. sellers will only sell at prices above equilibrium price (or actual price). B. consumers are willing to pay more than the equilibrium price. C. sellers are willing to take a lower price than the equilibrium price. D. consumers are willing to make purchases only if the price is below the actual price.
B
In the kinked-demand curve model, if one firm reduces its price A. other firms will raise their price. B. other firms will also reduce their price. C. other firms will compete on a nonprice basis. D. both A and B are correct. E. both B and C are correct.
B
In general, the deadweight loss associated with an import tariff or quota becomes relatively larger when A. supply is elastic and demand is inelastic. B. supply and demand are elastic. C. supply and demand are inelastic. D. demand is elastic and supply is inelastic.
B
Public television is funded in part by private donations, even though anyone with a television set can watch for free. Can you explain this phenomenon in light of the free rider problem? A. When a good is nonrival, consumers do not have an incentive to reveal their true willingness to pay. Many will donate much more than their true value, knowing that others will not pay. Thus, it can be argued that public television is overfunded. B. When a good is nonexcludable, consumers do not have an incentive to reveal their true willingness to pay. Many will not pay, expecting that others will. Thus, it can be argued that public television is underfunded. C. When a good is nonexcludable, consumers do not have an incentive to reveal their true willingness to pay. Many will donate much more than their true value, knowing that others will not pay. Thus, it can be argued that public television is overfunded. D. When a good is nonrival, consumers do not have an incentive to reveal their true willingness to pay. Many will not pay, expecting that others will. Thus, it can be argued that public television is underfunded.
B
Some grocery stores are now offering customers coupons that entitle them to a discount on certain items on their next visit when they go through the check-out line. This practice is an example of A. a two-part tariff. B. third-degree price discrimination. C. intertemporal price discrimination. D. bundling. E. none of the above.
B
Suppose a competitive market is in equilibrium at price P' and quantity Q'. If the demand curve becomes less elastic but the same price-quantity equilibrium is maintained, what happens to consumer and producer surplus? A. Both PS and CS increase. B. CS increases and PS remains the same. C. CS increases and PS decreases. D. Both CS and PS decrease.
B
Suppose a firm can practice perfect, first-degree price discrimination. What is the lowest price it will charge, and what will its total output be? The lowest price and total output will occur at the point where A. the marginal cost curve intersects the marginal expenditure curve. B. the marginal cost curve intersects the demand curve. C. the average cost curve intersects the demand curve. D. the marginal revenue curve intersects the marginal cost curve. E. the demand curve intersects the supply curve.
B
Suppose a firm has market power and faces a downward-sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then A. consumer and producer surplus must increase. B. consumer surplus increases and producer surplus may increase or decrease. C. consumer surplus increases and producer surplus must decline. D. consumer surplus and producer surplus must decline.
B
Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change would be A. to decrease the price of rice to the Japanese people. B. to decrease the consumer surplus of Japanese rice consumers. C. a welfare gain for the Japanese people. D. increase the consumption of rice by the Japanese people. E. to decrease the producer surplus of Japanese rice producers.
B
The Lerner index measures A. a firm's potential profitability. B. the amount of monopoly power a firm chooses to exercises when maximizing profits. C. an industry's potential market power. D. a firm's potential monopoly power.
B
The monopolist that maximizes profit A. does not impose a cost on society because the selling price is above marginal cost. B. imposes a cost on society because the selling price is above marginal cost. C. imposes a cost on society because the selling price is equal to marginal cost. D. does not impose a cost on society because price is equal to marginal cost.
B
The ________ elastic a firm's demand curve, the greater its ________. A. more; monopoly power B. less; monopoly power C. more; costs D. less; output
B
Under perfect price discrimination, marginal profit at each level of output equals A. P−AR. B. P−MC. C. 0. D. P−AC.
B
Use the following two statements about monopolistic competition to answer this question: I. In the long run, the price of the good will equal the minimum of the average cost. II. In the short run, firms may earn a profit. A. I and II are false. B. I is false, and II is true. C. I and II are true. D. I is true, and II is false.
B
What characteristic of monopolistic competition may help to offset the inefficiency of this market structure? A. Free entry and exit imply that firms produce at minimum long-run average cost. B. Consumers may value the product diversity that allows them to choose from a wide variety of differentiated products. C. Consumers may prefer this outcome to monopoly or monopsony. D. Consumers may feel better about the inefficiency if they know that firms earn zero profits.
B
What condition may provide for a relatively small degree of inefficiency under monopolistic competition? A. The marginal cost of production is less than the market price. B. The demand curve is relatively elastic so that the price is near the long-run minimum average cost. C. There is only one buyer in the market. D. There is a single seller and no product differentiation.
B
What is the value of the Lerner index under perfect competition? A. Two times the price B. 0 C. 1 D. Infinity
B
What would a profit-maximizing monopoly do in the short run if its fixed costs increased? A. Raise its price by enough to cover the higher fixed costs. B. Keep price and output the same. C. Reduce its price so it would be able to sell more of its product. D. Shut down.
B
When a firm charges each customer the maximum price that the customer is willing to pay, the firm A. engages in second-degree price discrimination. B. engages in first-degree price discrimination. C. charges the average reservation price. D. engages in a discrete pricing strategy.
B
When emissions are measured on the horizontal axis, the marginal cost of abating emissions is A. horizontal because the technology to remove emissions is assumed constant. B. downward sloping because a high level of emissions is cheap to attain and a low level of emissions is expensive to attain. C. downward sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. D. upward sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. E. upward sloping because a high level of emissions is cheap to attain and a low level of emissions is expensive to attain.
B
Which of the following is NOT a negative externality for Natasha? A. Automobile exhaust from other people's cars makes it harder for Natasha to breathe. B. The hurricane that washes away Natasha's beach house. C. The new tall building that blocks the view from Natasha's mountain house. D. The late night noise made by people in the apartment right above Natasha's apartment that keeps her awake.
B
Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry? A. It produces at minimum average cost. B. It does not produce at minimum average cost, and average cost is decreasing. C. It does not produce at minimum average cost, and average cost is increasing. D. Either B or C could be true.
B
Which of the following markets is most likely to be oligopolistic? A. Market for corn B. Market for aluminum C. Market for colas D. Market for ground coffees
B
Why can't two firms in a prisoners' dilemma enforce a better outcome that has higher payoffs? A. Barriers to exit B. Under an outcome with higher payoffs, the outcome is not a Nash equilibrium and each firm has an incentive to change its actions. C. The Nash equilibrium in a prisoners' dilemma has the highest possible payoffs for both firms. D. Barriers to entry
B
Second-degree price discrimination is the practice of charging A. each customer the maximum price that he or she is willing to pay. B. different prices for different quantity blocks of the same good or service. C. the reservation price to each customer. D. different groups of customers different prices for the same products.
B
(1) For the monopolist shown in the figure at right, the profit-maximizing level of output is A. Q2. B. Q3. C. Q1. D. Q4.
C
(1) Refer to the figure at right. To capture the consumer surplus along the B range, the firm would ideally charge A. a range of random prices along the demand curve. B. the same higher price to all consumers. C. a higher price to consumers willing to pay more and a lower price to those willing to pay less. D. a higher price to consumers willing to pay less and a lower price to those willing to pay more.
C
(11) A perfectly competitive industry is in equilibrium with price P0 and quantity Q0. Then the government imposes a price ceiling of Pmax. Use the diagram to the right to answer the following questions. The change in consumer surplus due to the price ceiling is represented by area A. D + E + F + G. B. A + B + C. C. D−C. D. D + E + H E. D + E. F. A + B + D.
C
(15) Refer to the figure at right. In which of the following instances does the reduction in the level of emissions outweigh the harm done from emissions? A. When the level of emissions is 6 units B. When the level of emissions is 18 units C. When the level of emissions is 12 units D. In all of the cases above
C
(15) Suppose the government raises the price of cheese above the market equilibrium level (Upper P 0P0) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure at right, what is the change in consumer surplus after this policy is adopted? A. Consumers lose area A but gain area B B. Consumers lose area B C. Consumers lose area A + B D. Consumers gain area A + B
C
(16) Refer to the figure at right. In which of the following instances is the cost of reducing emissions less than the harm done from emissions? A. When the level of emissions is 6 units B. When the level of emissions is 12 units C. When the level of emissions is 18 units D. In all of the cases above
C
(26) Refer to the figure at right. Two firms operating in the same market must choose between a collude price and a cheat price. Firm A's profit is listed before the comma, B's outcome after the comma. If each firm tries to choose a price that is best for it, regardless of the other firm's price, which of these statements is correct? A. Firm A should charge the collude price; Firm B should charge a cheat price. B. Both firms should charge a collude price. C. Both firms should charge a cheat price. D. Firm A should charge a cheat price; Firm B should charge a collude price.
C
(30) Refer to the figure at right. When a firm charges prices above P*, its competitors in an oligopoly market will A. follow suit. B. play tit for tat. C. not follow. D. collude.
C
(31) Refer to the figure at right. In moving from the competitive level of output and price to the monopoly level of output and price, the monopolist is able to add to producer surplus A. the area BCEH less the area GFH. B. the area BCEH. C. the area BCEF less the area GFH. D. the area BCEF. E. none of the above.
C
(5) Refer to the figure at right. At price 0E and quantity Q*, consumer surplus is the area A. AEC. B. 0FCQ*. C. EFC. D. AFC. E. none of the above.
C
(5)Refer to the figure at right. In this case, the firm charges two different prices. This pricing scheme corresponds to A. first-degree price discrimination. B. second-degree price discrimination. C. third-degree price discrimination. D. perfect price discrimination.
C
A manufacturer of digital music players uses a proprietary file format that is not used by the other firms in the market. This action by the firm may be an example of using a __________ to reduce the number of firms in the market and to maintain a relatively inelastic demand for its products. A. subsidy B. positive externality C. barrier to entry D. natural monopoly
C
A small decrease in a production quota will have a large impact on the support price if A. demand is highly (but not completely) elastic. B. demand is completely elastic. C. demand is inelastic. D. The demand elasticity does not affect the price outcomes of a quota program.
C
Assume that a profit-maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the A. firm's output does not maximize profit, but we cannot conclude whether the output is too large or too small. B. firm is maximizing profit. C. firm's output is smaller than the profit-maximizing quantity. D. firm's output is larger than the profit-maximizing quantity.
C
Externalities A. do become reflected in market prices, so they do not adversely affect economic efficiency. B. may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event. C. are not reflected in market prices, so they can be a source of economic inefficiency. D. do become reflected in market prices, so they can be a source of economic inefficiency. E. are not reflected in market prices, so they do not adversely affect economic efficiency.
C
Externalities arise solely because individuals are unaware of the consequences of their actions. Do you agree or disagree? Explain. A. Agree. If people and firms were aware of the consequences of their actions, then they would consider those consequences when making decisions. Unfortunately, most decisions involve a complex set of variables whose relationships are not always clearly understood. B. Agree. Since externalities affect all parties, it is in everyone's best interest to eliminate them. Thus, if people were aware that their actions would result in an externality, they would make decisions that would eliminate them. C. Disagree. It is not that people and firms are unaware but, rather, that they are not forced to consider and account for all of the consequences of their actions. D. Disagree. Externalities arise as a natural consequence of market activity and do not depend on people being aware of the consequences of their actions or not. For example, the increase in the price of a good increases the demand for a related good.
C
For which of the following market structures is it assumed that there are barriers to entry? A. Perfect competition B. Monopolistic competition C. Monopoly D. All of the above E. B and C only
C
Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct? A. The Japanese firm will sell more steel in Japan than it will sell abroad. B. The Japanese firm will sell steel at a higher price abroad than it will charge domestic users. C. The Japanese firm will sell steel at a lower price abroad than it will charge domestic users. D. The Japanese firm will sell more steel abroad than it will sell in Japan. E. Insufficient information exists to determine whether the price or quantity will be higher or lower abroad.
C
Suppose Orange, Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers. As more types of MP3 players are introduced into the market, the demand facing Orange becomes __________ elastic and the Lerner index achieved by the firm in this market __________. A. less; declines B. more; increases C. more; declines D. less; increases
C
The kinked demand curve describes price rigidity. Explain how the model works. According to the kinked demand curve model, each firm faces a demand curve that is A. completely horizontal. B. completely inelastic above the prevailing price. C. less elastic for price decreases than price increases. D. highly inelastic for price increases. E. discontinuous at the prevailing price.
C
The most important factor in determining the long-run profit potential in monopolistic competition is A. the reaction of rival firms to a change in price. B. the elasticity of the firm's demand curve. C. free entry and exit. D. the elasticity of the market demand curve.
C
The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because A. people will buy fewer clothes that need dry cleaning than they otherwise would have. B. people will develop substitutes for dry cleaning that are wasteful. C. firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price. D. firms will be induced to leave the industry because of artificially high costs. E. firms whose average private cost exceeds the price will exit (or fail to enter) the dry cleaning industry even though their average social cost is less than price.
C
To enforce the optimum level of emissions, a government could set an emissions standard at the quantity A. located at the vertical intercept of the MCA curve. B. located at the horizontal intercept of the MSB curve. C. where the MSB curve crosses the MCA curve. D. located at the horizontal intercept of the MCA curve. E. located at the vertical intercept of the MSB curve.
C
Under a production quota policy, the government can maintain a particular support price by reducing the quantity supplied. To maintain a particular support price, how must the quota amount change if the demand curve becomes more elastic? A. The quota amount does not change. B. The quota amount depends on the supply curve. C. The quota amount decreases. D. The quota amount increases.
C
Using the Lerner Index of Monopoly Power, if Firm A has greater monopoly power than Firm B, then A. Firm A will earn greater profits than Firm B. B. Firm A faces a more elastic demand curve than Firm B. C. Firm A's markup ratio [as measured by (P−MC)/P] will be greater than Firm B's markup ratio. D. All of the above.
C
What type of good is clean air? A. Rival and nonexclusive B. Nonrival and exclusive C. Nonrival and nonexclusive D. Rival and exclusive
C
When government intervenes in a competitive market by imposing an effective price ceiling, we would expect the quantity supplied to ________ and the quantity demanded to ________. A. fall; fall B. rise; fall C. fall; rise D. rise; rise
C
Which of the following describes an externality and which does not? Explain the difference. a. A policy of restricted coffee exports in Brazil causes the U.S. price of coffee to rise—an increase which in turn also causes the price of tea to rise. b. An advertising blimp distracts a motorist who then hits a telephone pole. A. Choice (a) describes an externality. The restriction on coffee exports has an external effect; it causes an increase in the price of tea. The blimp distracting the motorist is a nonmarket issue and therefore doesn't count as an economic externality. B. Neither choice describes an externality. Choice (a) describes market effects and choice (b) describes nonmarket effects, neither of which creates an externality. C. Choice (b) describes an externality. The advertising blimp imposes a cost on the motorist that is not accounted for in the market price of advertising. The restriction on coffee exports has market effects, which are not externalities. D. Both choices describe an externality because both describe actions that affect a third party not directly involved in the initial transaction.
C
Which of the following is NOT regarded as a source of inefficiency in monopolistic competition? A. The fact that price exceeds marginal cost B. Excess capacity C. Product diversity D. The fact that long-run average cost is not minimized E. All of the above
C
Which of the following is NOT true regarding monopoly? A. The monopoly price is determined from the demand curve. B. A monopoly demand curve is downward sloping. C. A monopolist can charge as high a price as it likes. D. Monopoly is the sole producer in the market.
C
Which of the following is a negative externality connected to attending college? A. The fact that completion of a college degree acts as a signaling mechanism to employers B. The fact that you will get benefits from college that you don't currently anticipate C. The fact that the people in the next room play loud music at hours you want to sleep D. The fact that other costs, such as books and materials, are incurred in addition to tuition and fees E. The fact that your college has required that all individuals living in student housing either get or show they have already obtained vaccinations against all communicable diseases
C
Which of the following statements about natural monopolies is true? A. Natural monopolies cannot be regulated. B. Natural monopolies are only found in the markets for natural resources (like crude oil and coal). C. For natural monopolies, marginal cost is always below average cost. D. For natural monopolies, average cost is always increasing.
C
How does a car salesperson practice price discrimination? The salesperson practices A. first-degree price discrimination by trying to charge an entry fee and a per unit price. B. second-degree price discrimination by trying to determine each customer's marginal value. C. imperfect price discrimination by trying to determine each customer's reservation price. D. third-degree price discrimination by trying to determine each customer's demand. E. predatory price discrimination by trying to charge different prices to different groups of consumers. How does the ability to discriminate correctly affect his or her earnings? A. If the reservation price is higher or lower than the reservation price, revenue is gained. B. If the negotiated price is higher than the reservation price, a sale is lost, and if the negotiated price is lower than the reservation price, some profit is lost. C. If the negotiated price is higher than the reservation price, some profit is lost, and if the negotiated price is lower than the reservation price, a sale is lost. D. If the reservation price is higher or lower than the reservation price, a sale is lost. E. If the negotiated price equals the reservation price, profit equals zero.
C , B
(11) The deadweight loss due to the price ceiling is represented by area A. F + G. B. A + H−C−E. C. B + C + D + E. D. C + E. E. A + H−B−D.
D
(14) Suppose the market in the figure at right is currently in equilibrium. If the government establishes a price floor of $50, how many widgets will be sold? A. 50 B. 60 C. 30 D. 20 E. 40
D
(23) Assume the foreign supply curve is horizontal at a world price of $6 per pound. The graph to the right shows the effect of a $3 per pound tariff on imported cotton. Which of the following correctly interprets areas B and C on the graph? A. B and C are part of the tariff revenue collected on imports. B + D + C is the total revenue collected. B. B is the gain in producer surplus and C is the loss of consumer surplus from the reduction of imports caused by the tariff. C. B and C represent the gain in producer surplus from the reduction of imports caused by the tariff. D. B is the extra cost of producing cotton domestically instead of importing it. C is a consumption distortion loss from consumers buying too little cotton.
D
(24) Refer to the figure at right. The price-discriminating firm earns a higher profit by A. charging a higher price as time goes by. B. charging a lower price to the consumers who acquire the good first. C. charging an average of a high price and a low price over time. D. charging a lower price as time goes by.
D
(27) The revenue and cost curves in the figure at right are those of a natural monopoly. Suppose that the government decides to limit monopoly power with price regulation. If the government sets the price at the competitive level, it will set the price at A. P2. B. P1. C. P3. D. P4. E. none of the above.
D
(7) Refer to the figure at right. At price 0H and quantity Q1, the deadweight loss is A. 0FGQ1. B. BDC. C. DGC. D. BGC. E. none of the above.
D
A few years ago, the city of Seattle, Washington, considered imposing a specific tax on all espresso-based coffee drinks sold in the city. The extra tax revenue generated would have been used to fund after-school programs for low-income children. The coffee-house owners (firms) agreed that this would be a good program to fund, but they argued that the tax would sharply reduce their sales volume and they would pay most of the tax burden. This claim is true if A. the demand for espresso-based coffee is more inelastic than supply. B. espresso-based coffee drinks can be produced at constant marginal cost. C. there are no close substitutes for espresso-based coffee drinks. D. the demand for espresso-based coffee is more elastic than supply.
D
A government can impose an import quota or an equivalent tariff that achieves the same impact on trade. What is the key difference in the welfare outcomes of these two policy options? A. The domestic price is lower under the tariff policy. B. The domestic quantity supplied is larger under the tariff policy. C. The domestic price is higher under the tariff policy. D. The government captures some of the profits from foreign suppliers through the tariff revenue.
D
A lighthouse is a public good A. because it doesn't cost any more to light the way for 105 ships than it does to light the way for 104 ships, but for no other reason. B. because there is no way to prevent those who haven't contributed to the lighthouse from seeing better because of it, but for no other reason. C. because the government produces it, and for no other reason. D. for the reasons in A and B together. E. for the reasons in A, B, and C together.
D
A monopolistically competitive firm in short-run equilibrium A. will make zero profit (break-even). B. will make a negative profit (lose money). C. will make a positive profit. D. Any of the above are possible.
D
A situation in which each firm selects its best action, given what its rivals are doing, is called a A. cooperative equilibrium. B. zero-sum game. C. Stackelberg equilibrium. D. Nash equilibrium.
D
Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ____________ price and sell a ___________ quantity. A. lower; larger B. higher; larger C. lower; smaller D. higher; smaller E. None of the above
D
Corn flakes are A. a public good. B. a nonrival good because there are only a few firms in the industry. C. a rival good because many firms produce them. D. a rival good because if another person wants some corn flakes society has to use additional resources to produce corn flakes for that person. E. a nonrival good because even if another person wants some corn flakes so many corn flakes are produced that no additional resources are used to satisfy this new customer's needs.
D
Electric utilities often practice second-degree price discrimination. Why might this improve consumer welfare? Second-degree price discrimination might improve consumer welfare because, compared with single-monopoly pricing, A. variety is greater. B. prices are lower. C. producer surplus is lower. D. output is higher. E. profit is higher.
D
For a monopolist, changes in demand will lead to changes in A. price with no change in output. B. both price and quantity. C. output with no change in price. D. any of the above can be true.
D
If demand in a perfectly competitive market is perfectly inelastic and supply is upward sloping, a specific tax placed on suppliers will A. be paid entirely by suppliers, and there will be no deadweight loss. B. be paid entirely by consumers, and there will be a deadweight loss. C. be paid partly by suppliers and partly by consumers, and there will be a deadweight loss. D. be paid entirely by consumers, and there will be no deadweight loss. E. be paid entirely by suppliers, and there will be a deadweight loss.
D
If error in setting the policy is possible, A. a standard generates smaller welfare losses than a fee when the MSC and MCA are both relatively flat. B. a standard generates smaller welfare losses than a fee when the MSC is relatively flat and the MCA is relatively steep. C. a standard generates smaller welfare losses than a fee when the MSC and MCA are both relatively steep. D. a standard generates smaller welfare losses than a fee when the MSC is relatively steep and the MCA is relatively flat. E. errors in standards and fees have equal welfare losses, so long as the errors are the same in percentage terms.
D
In an unregulated, competitive market, producer surplus exists because some A. consumers are willing to purchase, but only at prices below equilibrium price. B. consumers are willing to pay more than the equilibrium price. C. producers are willing to take more than the equilibrium price. D. producers are willing to sell at less than the equilibrium price.
D
Loud music from a neighbor's party is A. a negative externality if you like the music, and a positive externality if you don't. B. a positive externality whether or not you like it. C. not an externality. D. a positive externality if you like the music, and a negative externality if you don't. E. a negative externality whether or not you like it.
D
Monopolistically competitive firms have monopoly power because they A. are great in number. B. have freedom of entry. C. are free to advertise. D. face downward-sloping demand curves.
D
Price rigidity occurs in oligopolistic markets because A. firms cooperate to set price to maximize profits. B. government policies encourage price stability in most markets. C. firms prefer to maintain stable prices to avoid upsetting customers. D. firms want to avoid destructive price wars E. production costs change frequently.
D
Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm A. is engaging in an illegal activity that is prohibited by the Sherman Antitrust Act. B. is trying to reduce its costs and therefore increase its profit. C. is attempting to convert producer surplus into consumer surplus. D. is attempting to convert consumer surplus into producer surplus. E. both A and C are correct.
D
Suppose the government wants to increase farmers' incomes. Why do price supports or acreage-limitation programs cost society more than simply giving farmers money? A. A price support reduces the quantity demanded by consumers, which results in a loss of surplus that is not captured by farmers or consumers. Giving farmers money results in a smaller deadweight loss because it is merely a redistribution of surplus from one group to the other. B. A price support forces an increase in demand by consumers, which results in a loss of consumer surplus that is not captured by farmers (deadweight loss). Giving farmers money doesn't result in any deadweight loss but is merely a redistribution of surplus from one group to the other. C. A price support forces an increase in demand by consumers, which results in a loss of consumer surplus that is not captured by farmers (deadweight loss). Giving farmers money results in a smaller deadweight loss because it is merely a redistribution of surplus from one group to the other. D. A price support reduces the quantity demanded by consumers, which results in a loss of surplus that is not captured by farmers or consumers. Giving farmers money doesn't result in any deadweight loss but is merely a redistribution of surplus from one group to the other.
D
The burden of a tax per unit of output will fall heavily on consumers when demand is relatively _____________ and supply is relatively ____________. A. elastic; elastic B. inelastic; inelastic C. elastic; inelastic D. inelastic; elastic
D
The monopolist has no supply curve because A. although there is only a single seller at the current price, it is impossible to know how many sellers would be in the market at higher prices. B. the relationship between price and quantity depends on both marginal cost and average cost. C. there is a single seller in the market. D. the quantity supplied at any particular price depends on the monopolist's demand curve. E. the monopolist's marginal cost curve changes considerably over time.
D
The provision of an education in public school is A. a public good, regardless of exclusivity and rivalness. B. exclusive and nonrival. C. nonexclusive and nonrival. D. exclusive and rival. E. nonexclusive and rival.
D
To enforce the optimum level of emissions, a government could set an emissions fee, which would be A. the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted above the standard. B. the vertical distance between the intercepts of the MSB curve and the MCA curve. C. the vertical intercept of the MSB curve. D. the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted. E. the vertical intercept of the MCA curve.
D
Under a binding price ceiling, what does the change in consumer surplus represent? A. The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price. B. The gain in surplus for those buyers who can still purchase the product at the lower price. C. The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy. D. Both A and B are correct. E. Both A and C are correct.
D
Under which of the following scenarios is it most likely that monopoly power will be exhibited by firms? A. When there are few firms in the market and the demand curve faced by each firm is relatively elastic B. When there are many firms in the market and the demand curve faced by each firm is relatively elastic C. When there are many firms in the market and the demand curve faced by each firm is relatively inelastic D. When there are few firms in the market and the demand curve faced by each firm is relatively inelastic
D
Use the following two statements to answer this question: I. A firm can exert monopoly power if and only if it is the sole producer of a good. II. The degree of monopoly power a firm possesses can be measured using the Lerner Index: L = (P− AC)/AC. A. I is false, and II is true. B. Both I and II are true. C. I is true, and II is false. D. Both I and II are false.
D
What happens to the equilibrium price and quantity in such a market if one firm introduces a new, improved product? If a firm introduces a new, improved product, then A. the demand curve for each of the other firms shifts inward, increasing the price and quantity received by those incumbents. B. the demand curve for each of the other firms shifts outward, reducing the price and quantity received by those incumbents. C. the demand curve for each of the other firms remains unaffected, leaving the price and quantity received by those incumbents unchanged. D. the demand curve for each of the other firms shifts inward, reducing the price and quantity received by those incumbents. E. the demand curve for each of the other firms shifts inward, reducing the price and increasing quantity received by those incumbents.
D
Which of the following can be thought of as a barrier to entry? A. Scale economies B. Strategic actions by incumbent firms C. Patents D. All of the above
D
Which of the following is a public good? A. The Red Cross B. Telephone service C. A daily newspaper D. Broadcast TV E. All of the above
D
Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run? A. P = MC B. P > MR C. MC = ATC D. Profit equals zero.
D
Which of the following is true of the kinked demand model of oligopoly? A. Each firm believes that if it lowers its price the other firms will follow suit, but if it raises its price the other firms will not raise their prices. B. Each firm's marginal revenue curve is discontinuous at its current level of output. C. The model predicts price rigidity. For example, the firms may not change their prices when marginal costs change. D. All of the above are true.
D
Why are many oligopolistic market outcomes conveniently described by a prisoners' dilemma? A. The outcome of a prisoners' dilemma is always identical to the perfectly competitive outcome. B. The outcome of a prisoners' dilemma is always efficient. C. The firms can always achieve the outcome that maximizes joint outcomes. D. The firms could do better than the Nash equilibrium if they collude.
D
You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. If your firm practices third-degree price discrimination to maximize profits, the marginal revenue A. in the domestic market will equal the marginal cost. B. in the domestic market will equal the marginal revenue in the domestic market. C. in the foreign market will equal the marginal cost. D. all of the above. E. none of the above.
D
You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. You will charge the higher price in the market with the A. larger teenage population. B. greater consumer incomes. C. higher own price elasticity of demand (more elastic demand). D. lower own price elasticity of demand (more inelastic demand).
D
(22) Which of the following would increase the cost of the program? A. The demand curve becomes relatively more elastic. B. The supply curve becomes relatively more elastic. C. The supply curve becomes relatively more inelastic. D. Both A and C. E. Both A and B.
E
(25) Refer to the figure at right. In order to eliminate international trade in sugar altogether, this country would have to impose a tariff of A. $150. B. $175. C. $50. D. $25. E. $75.
E
A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens, it makes economic sense to charge a monopoly price for electricity. True or false? Explain. A. True. Since the monopoly price is higher than marginal cost, the firm earns positive economic profits. And since these profits are given back to the citizens, they are better off. B. True. Since electric utilities are natural monopolies, monopoly pricing is most efficient. And since any profits are given back to the citizens, they are better off. C. False. Since the monopoly price is higher than marginal cost, the firm earns negative economic profits. So, there are no profits to give back to the citizens. D. False. Since the monopoly price is higher than marginal cost, more than the efficient quantity is produced resulting in a deadweight loss. E. False. Since the monopoly price is higher than marginal cost, less than the competitive quantity is produced, so there is still a deadweight loss even if all the profits are given back to the citizens.
E
A firm is charging a different price for each unit purchased by a consumer. This is called A. fourth-degree price discrimination. B. third-degree price discrimination. C. second-degree price discrimination. D. fifth-degree price discrimination. E. first-degree price discrimination.
E
Access to the movie "Casablanca," showing in a half-empty theater, is A. a public good only if the theater is run by the government. B. not a public good because it is a rival good. C. not a public good because it is both a rival good and an exclusive good. D. a public good because individuals watch movies together. E. not a public good because it is an exclusive good.
E
Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers, A. there is a gap between quantity supplied and quantity demanded in equilibrium. B. the marginal social cost curve is below and to the right of the supply curve. C. the marginal social cost curve is below and to the left of the demand curve. D. the marginal social cost curve is above and to the right of the demand curve. E. the marginal social cost curve is above and to the left of the supply curve.
E
Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, the equilibrium price A. is too high to be optimal, and equilibrium quantity is too low. B. is optimal, but there is an excess supply. C. and output are too high to be optimal. D. and output are too low to be optimal. E. is too low to be optimal, and equilibrium quantity is too high.
E
If X transferable emissions permits are issued and there are n potential polluters, A. emissions will be the same whether or not the permits are split equally, so long as none of the permits are issued outside the group. B. the government must assign X/n permits to each potential polluter and check periodically that those permits have not moved. C. the government must initially assign each of the potential polluters X/n permits. D. emissions will be less if the permits are given initially to firms with lower abatement costs. E. emissions will be the same no matter who receives them first, so long as the recipient is willing and able to participate in the permit market.
E
Import tariffs generally result in A. more producer surplus for domestic producers. B. higher domestic prices. C. less consumer surplus. D. a deadweight loss. E. all of the above.
E
In a prisoners' dilemma, A. both players break the law. B. both players would do better than the Nash equilibrium if they could cooperate. C. it is difficult to cooperate because each player has an incentive to cheat. D. All of the above are true. E. Only B and C are true.
E
Rent seeking is A. one firm consistently following the actions of another. B. charging the maximum price allowed by a regulatory agency based on a firm's expected rate of return. C. a seller affecting the price of a good. D. gaining additional benefit derived from purchasing one more unit of a good. E. spending money in socially unproductive efforts to acquire, maintain, or exercise monopoly.
E
The U.S. government currently imposes a $0.54 per gallon tariff on all ethanol imported into the country. If this tariff were removed, then A. the domestic quantity of ethanol supplied declines. B. domestic producer surplus decreases. C. the domestic ethanol price falls. D. domestic consumer surplus increases. E. all of the above.
E
The kinked demand curve model A. can only explain pricing for oligopolies. B. cannot describe why price rigidities occur. C. can only explain why firms don't choose certain prices. D. can only explain how the prevailing price is determined. E. cannot explain how the kinked price is determined.
E
Which of the following does not create a barrier to entry? A. A government license required to practice law. B. A patent for a new drug. C. A copyright on a new computer program. D. Economies of scale in production. E. All of the above create barriers to entry.
E
Which of the following is least likely to affect the amount of monopoly power a firm is likely to have? A. The number of firms in the market. B. The extent to which related firms compete. C. The price elasticity of demand. D. The availability of close substitutes. E. The shape of the market supply curve.
E
What are the characteristics of a monopolistically competitive market? 1) Degree of substitution among products: 2) Entry and exit: 3) Type of product:
High, Free, Differentiated
Price discrimination requires the ability to sort customers and the ability to prevent arbitrage. Explain how the following can function as price discrimination schemes and discuss both sorting and arbitrage: a. Requiring airline travelers to spend at least one Saturday night away from home to qualify for a low fare. Customers are sorted based on Arbitrage is prevented by b. Insisting on delivering cement to buyers and basing prices on buyers' locations. Customers are sorted based on Arbitrage is prevented by c. Selling food processors along with coupons that can be sent to the manufacturer for a $10 rebate. Customers are sorted based on Arbitrage is prevented by d. Offering temporary price cuts on bathroom tissue. Customers are sorted based on Arbitrage is prevented by e. Charging high-income patients more than low-income patients for plastic surgery. Customers are sorted based on Arbitrage is prevented by
a. preferences. requiring an ID. b. geography. resales not being profitable. c. sensitivity to price. limiting the number a person can buy. d. sensitivity to price. resales not being profitable. e. demographic information. the product being non transferable.
Classify each of the following as a rival or nonrival good and as an exclusive or nonexclusive good. a. A pizza. b. Cable television c. Fishing grounds c. A lighthouse
a. rival, excludable b. nonrival, excludable c. rival, nonexcludable d. nonrival, nonexcludable
(22) Using the line drawing tool, draw a new supply or demand curve in such a way the price support causes the greatest loss in consumer surplus.
see (22) for explanation
