ECON 102 - Exam 3 (Final) part 2

Which of the following are key results of price​ discrimination?

profits increase and consumer surplus decreases

Farmer​ Parker's profit-maximizing level of production is 6 bushels of wheat. At this level of production he produces following the rule Marginal Revenue​ = Marginal Cost and earns the maximum possible profit of ​$8.00. Farmer Parker's fixed costs are (see image 12)

$1.00

Farmer Brown grows blackberries. The average total​ cost, average variable​ cost, and marginal cost of growing blackberries for an individual farmer are illustrated in the graph to the right. Farmer Brown will incur losses if the market price falls below () per crate. ​ ​Furthermore, farmer Brown should shut down in the short run if the market price falls below ​() per crate. See image 14

$24, $20

Elijah's burgers (image 21)

(image 21)

In the graph on the​ right, the demand for hamburger buns has changed because the price of hamburgers has risen from ​$2.50 to ​$2.60 per package. The cross-price elasticity of demand between hamburgers and hamburger buns is

-10.20 (see image 18)

The graph to the right depicts the demand for cable subscriptions from a local cable company along with the average total cost and marginal cost of producing cable subscriptions. Suppose the local cable company is a monopoly. What is the​ profit-maximizing quantity of cable subscriptions​? (image 17

32

What is the corresponding profit-maximizing price (image 17)

32.00

Maria manages a​ bakery, that specializes in ciabatta​ bread, and has the following information on demand and​ costs: (see image 19)

5, 3.50, 1.50, 1.50, 1.50

Suppose that fixed costs increase by ​$0.50. Farmer​ Parker's new​ profit-maximizing level of production after the increase in fixed costs is () bushels of wheat.

6

The amount of profit that Farmer Parker will earn after the increase in fixed costs is ​

7.50

Calculate the local cable company's profits (image 17)

96 thousand per month

The marginal cost of production shows the change in a​ firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost​ curve? Part 2 ​Graphically, the marginal cost curve is

A U shape, initially falling when the marginal product of labor is rising then eventually rising when the marginal product of labor is falling

An example of technological change is

A firm rearranging the factory floor to increase production, workers going through a training program, and/or a hurricane damaging firm facilities

Unlike its​ competitors, GoGo had to spend substantial amounts to build a network of​ ground-based cellular towers. It has to abandon those towers as it switches to a​ satellite-based network. Is the cost of those towers a disadvantage to GoGo as it competes with the new firms entering the​ industry? Briefly explain. In economic​ decison-making, the cost of the original towers is

A sunk cost that is irrelevant

What is price​ discrimination? Part 2 Price discrimination is when

A. firms charge a higher price to customers whose demand is less elastic and a lower price to consumers whose demand is more elastic. B. firms charge a higher price for a product when it is first introduced and a lower price later. C. firms charge each consumer a different price equal to that​ consumer's willingness to pay. (all of the aboce)

With a​ downward-sloping demand​ curve, average revenue is equal to price

Actually, average revenue is always equal to price, whether demand is downwards sloping or not

The late Nobel Laureate James​ Buchanan, who is one of the key figures in developing the public choice​ model, wrote: ​"The relevant difference between markets and politics does not lie in the kinds of​ values/interests that persons​ pursue, but in the conditions under which they pursue their various​ interests." ​Source: James M.​ Buchanan, "The Constitution of Economic​ Policy," American Economic Review​,Vol. ​77,No. 3, June​ 1987, p.246. Do you agree with this​ statement? Are there significant ways in which the business marketplace differs from the political​ marketplace?

Agree. Although both marketplaces are driven by​ self-interested behavior, self interest​ (e.g., rent​ seeking) in the political marketplace benefits a few at the expense of​ many, while self interest in the business marketplace benefits society as a whole.

In the book publishing​ industry, how are firms able to price discriminate across​ time?

An author's most devoted book fans want to buy the author's books as soon as they are published

The public choice model

Applies economic analysis to government decision making

Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is ​$1.50 per​ kilogram, and his marginal cost of production is ​$1.55 per​ kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short​ run? Farmer Lane

Can increase his profit by producing less output

Charles has decided to open a​ lawn-mowing company. To do​ so, he purchases mowing equipment for ​$7,000​, buys gasoline ​($1.70 in gas is required to mow each​ yard), and pays a helper ​$15.00 per yard. Prior to opening the lawn​ company, Charles earned ​$5,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 2 percent per year in the bank and that the mowing equipment depreciates at 25 percent per year. Charles plans to mow 200 yards per year. What is​ Charles's implicit cost of​ production?

Charlie's implicit cost of production is $6,890 per year (depreciated value, lost interest, and lost wages)

Farmer Brown grows cotton. The average total cost and marginal cost of growing cotton for an individual farmer are illustrated in the graph to the right. Assume the market for cotton is perfectly competitive and that the market price is ​$28 per bushel. Also assume that farmer Brown is producing the amount of cotton that maximizes profits. Use the rectangle drawing tool to shade in farmer​ Brown's profit. Properly label this shaded area.

DxMC, vert. meeting ATC, back to 0 (see image 13)

In​ 2008, GoGo became the first company to offer​ Wi-Fi service on commercial aircraft. It provides the service primarily through​ ground-based cellular towers. Many air travelers find the​ $30 price GoGo charges on a​ cross-country flight to be very high because the speeds offered are too slow to stream movies or other content. GoGo faces competition from newer services that use satellites rather than​ ground-based towers, which enables them to offer much higher speeds at half the price GoGo charges. According to an article in the Wall Street Journal​, in late​ 2016, GoGo was​ "rolling out an advanced​ satellite-based network" that would allow it to offer higher speeds at a lower price. A number of​ airlines, though, were considering switching to competing services. ​Source: Thomas Gryta and Andy​ Pasztor, "Gogo Plans to Speed Up​ In-Flight Internet Service...in​ 2018," Wall Street Journal​, September​ 28, 2016. Will copying its competitors by offering a​ faster, lower-priced service likely allow GoGo to recapture its market​ share?

GoGo may be able to recapture some of its market share by offering a better product.

Using the admission fees as a​ guide, rank these groups based on their elasticities of demand from most to least elastic.

Higher fees = less elastic

Consider the production of pizza. The average total cost and average variable cost of producing pizza are illustrated in the graph to the right. Use the ​ four-point curve drawing tool to graph the marginal cost of producing pizza. Properly label this curve.

Image 11

Describe a​ monopoly's demand curve. A​ monopoly's demand curve

Is the same as the demand curve for the product

The​ monopoly's profit-maximizing quantity is that quantity where

MR = MC

To maximize​ profit, a monopolistically competitive firm produces output up to the point where

MR=MC

If a market is a​ monopoly, will a negative externality in production always lead to production beyond the level of economic​ efficiency?

No, a monopoly may produce an inefficiently high or low level of output in the presence of a negative externaility.

​"In a perfectly competitive​ market, in the long run consumers benefit from reductions in​ costs, but firms​ don't." ​Don't firms also benefit from cost reductions because they are able to earn greater​ profits?

No, because short run profits encourage entry, firms earn zero economic profit in the long run

briefly discuss the difference between these two concepts

Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.

1.) Use the point drawing tool to Indicate the​ profit-maximizing level of output and price. Label this point​ 'Point A'. ​2.) Use the rectangle drawing tool to shade in economic profitsLabel this shaded area​ 'Profit'.

See image 16

The figure illustrates the market for apples in which the government has imposed a price floorLOADING... of ​$10 per crate.

See image 19

The production possibilities frontiers in the figure to the right show how many bananas and coconuts you​ (Y) and your neighbor​ (N) can consume without trade. Suppose you are initially consuming 15 bananas and 2 coconuts and your neighbor is initially consuming 6 bananas and 8 coconuts.

See image 23

Xavier is an accountant who provides tax services through his own firm. To provide these services he must rent an office for ​$14,000 per​ year, hire a secretary for ​$26,000​, and spend ​$7,000 per year in advertising. ​Xavier's total revenue from his tax services is ​$79,000 per year. Suppose​ Xavier's firm is in a perfectly competitive industry and that he could otherwise earn ​$32,000 per year working as an accountant in another firm. Assuming​ Xavier's profits are representative of the​ industry, describe what will likely happen to​ Xavier's profits in the long run.

Xavier is breaking even and should continue to produce to continue breaking even in the long run

What is the difference between zero accounting profit and zero economic​ profit?

Zero economic profit includes a​ firm's opportunity costs but zero accounting profit does not.

Logrolling refers to the situation where

a member of Congress votes to approve a bill in exchange for favorable votes from other members on other bills.

Which of the following industries uses sophisticated methods to calculate the price of each unit sold each​ day?

airlines

With a​ downward-sloping demand​ curve, marginal revenue is below price

because the firm must lower its price to sell additional units.

Your company incurs a cost for store rent​, ​which, in the short​ run, is fixed. What happens to this cost in the long​ run? In the long​ run, the cost of

becomes a variable cost

A change like this is more likely to be enacted if those that

benefit have a significant political influence

Suppose that eliminating tax preferences for industries in districts of members of Congress supporting the provisions would increase the federal governments tax receipts by​ $1 trillion, which could then be used to lower the tax rates of the individual income tax. Such a change would likely

benefit the economic interests of a larger group

There are about 400 wineries in​ California's Napa Valley. Suppose the owner of one of the wineries—​Jerry's Wine Emporium—raises the price of his wine by​ $5.00 per bottle. Part 2 If the industry is perfectly​ competitive, the reaction of consumers would be to

buy wine from another winery

Rent seeking can be useful in understanding why government policies

sometimes produce results that are inefficient and harmful to the people.

if the industry is monopolistically competitive, the reaction of consumers

could be to remain loyal to Jerry's and pay the higher price

The​ profit-maximizing price for the​ profit-maximizing quantity is determined by the curve.

demand

What is​ "natural" about a natural​ monopoly? A natural monopoly

develops automatically due to economies of scale

The​ firm's profit can be represented by a rectangle with a base equal to the quantity produced and a height equal to the

difference in price and average total cost

If consumers cannot resell​ products, which of the following is​ true?

firms can practice price discrimination

The generation of electric power would not be a natural monopoly because

generation can be done in various ways and in various​ locations, so there are no inefficiencies associated with multiple providers.

What is meant by allocative​ efficiency? Allocative efficiency is when every good or service

is produced up to the point where price equals marginal cost

Suppose Farmer Smith grows apples. The entire market for apples is shown in the figure below. Assume the market for apples is perfectly competitive draw a demand curve for farmer Smith's apples

horizontal line at equilibrium price

What characterizes perfectly competitive​ markets? Perfectly competitive markets have

identical products sold by all firms

The points Smith raises—most farm subsidies go to a small percentage of high income farmers—are

inconsistent with the stated purpose of the agricultural programs because the programs are not supporting most farm families.

One possible effect of advertising is to

increase profits by making the demand curve for the product more inelastic.

As of​ 2019, the U.S. Department of Agriculture​ (USDA) did not have detailed guidelines for egg farmers to follow before they could claim that the eggs they sell were laid by​ cage-free chickens. Some animal rights activists were pushing for the USDA to enact stricter guidelines than many egg farmers were following voluntarily. Such guidelines would be likely to significantly raise the cost of producing​ cage-free eggs. Suppose that the USDA begins to require these stricter guidelines. What effect will this increase in cost have on the​ long-run price of​ cage-free eggs? In the long​ run, will the quantity of​ cage-free eggs be​ larger, smaller, or the same as it would have been without the USDA adopting the​ guidelines? Briefly explain. With the stricter​ guidelines, other things​ equal, the market price of​ cage-free eggs would () as the minimum​ long-run average cost (). At the new market​ price, the​ long-run equilibrium quantity will be ().

increase, increases, smaller

When the price of a product changes

it changes the relative price of the product causing a substitution effect and at the same time it changes the purchasing power of the buyer causing an income effect as well.

The late Nobel​ Prize-winning economist George Stigler once​ wrote, "the most common and most important criticism of perfect competition...​ [is] that it is​ unrealistic." ​Source: George​ Stigler, "Perfect​ Competition, Historically​ Contemplated," Journal of Political Economy​, Vol.​ 55, No.​ 1, (February​ 1957), pp.​ 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to​ entry, economists believe that the model of perfect competition is important because

it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.

When lettuce prices​ doubled, from about ​$1.65 per head to about ​$3.30​, the reaction of one consumer was quoted in a newspaper​ article: ​"I will not buy​ [lettuce] when​ it's ​$3.30 a​ head," she​ said, adding that other green vegetables can fill in for lettuce.​ "If bread were​ $5 a loaf​ we'd still have to buy it. But lettuce is not that important in our​ family." ​Source: Justin​ Bachman, "Sorry, Romaine​ Only," Associated​ Press, March​ 29, 2002. For this​ consumer's household, which product has the higher price elasticity of demand bread or​ lettuce?

lettuce

The same article notes​ that: ​"Rent-seeking is a very useful concept to have around when thinking about​ policy." Rent seeking is

lobbying or bribing poiticians to gain favorable legislation or regulations.

According to your​ graph, when producing at lower​ cost, the​ profit-maximizing price is

lower

The programs persist because farmers receiving subsidies are the

most politically active

The following questions are about​ long-run equilibrium in the market for​ cage-free eggs. ​Source: Rachel​ Krantz, "'Wild-Caught,'​ 'Organic,' 'Grass-Fed': What Do All These Animal Welfare Labels Actually​ Mean?" vox.com, January​ 30, 2019. As described in the chapter​ opener, the market for cage​-free eggs in 2019 was

moving toward​ long-run equilibrium where​ cage-free chicken farmers would break even because the profitability of selling​ cage-free eggs was​ declining, but it was not yet at this point.

Public choice theory helps us to understand how government could fail systematically because it recognizes that policymakers are

no different than consumers or managers of firms and are likely to pursue their own​ self-interest, even if their​ self-interest conflicts with the public interest.

In a magazine​ article, a writer explained that the provision of electric power in the United States consists of two​ processes: the generation of electricity and the distribution of electricity. The writer argued​ that, "power distribution is a natural​ monopoly...But...there's...no reason why the people who generate the electricity...should be the same people who own the power​ lines." ​Source: Tim​ Worstall, "Which Should We​ Have: Public Utilities or Regulated Private​ Monopolies?" Forbes​, March​ 24, 2013. The distribution of electric power might be a natural monopoly because

only one distribution network is needed to transmit the power.

An article in the Economist on the work of the late Nobel Laureate James Buchanan made the following​ observation: ​"It was important... to understand the ways that government could fail​ systematically." ​Source: "Don't Hate the​ Player, Hate the​ Game," Economist​, January​ 17, 2013. In this​ context, government failure means

politicians making bad decisions for their own selfish reasons

For this​ consumer's household, is the cross-price elasticity of demandLOADING... between lettuce and other green vegetables positive or​ negative:

positive

Why would Foot​ Locker's CEO emphasize that the store will have​ "definitive brands and​ experiences?" Wouldn't trying to be​ "everything to​ everybody" be a better strategy because the store might attract a larger number of​ customers? Briefly explain. For a monopolistically competitive​ firm, such as Foot​ Locker, the best strategy to earn economic profits is

product differentiation because that results in a​ downward-sloping demand curve.

Karls firm illustrates (image 15)

productive efficiency because price equals ATC and allocative efficiency because MR=MC

In arguing that the costs of the federal​ government's agricultural programs exceed their​ benefits, economist Vincent H. Smith​ stated, "The​ 10% to​ 15% of farm families that receive more than​ 85% of all farm subsidies—amounting to millions of dollars a year in a few cases—have annual household incomes many times as large as those of the average U.S.​ taxpayer." According to the U.S. Government Accountability Office these programs cost taxpayers about​ $20 billion annually. ​Source: Vincent H.​ Smith, "Should Washington End Agriculture​ Subsidies?" Wall Street Journal​, July​ 12, 2015. The stated purpose of the federal​ government's agricultural programs is to

provide income security for farmers so they can continue to produce

Suppose a​ firm, like Comcast​ Cable, spends a great deal of money to convince a local government that it should be the only cable provider of a region. Or a​ union, like the​ UAW, spends a great deal of money lobbying the government to create legislation granting unions special bargaining rights. These examples are created by

rent seeking

After the exit of Sports​ Authority, what happens to Foot​ Locker's demand and marginal revenue​ curves? The demand and marginal revenue curves shift

right

A student​ argues, "If a monopolist finds a way of producing a good at lower​ cost, he will not lower his price. Because he is a​ monopolist, he will keep the price and the quantity the same and just increase his​ profit." Do you​ agree? P Use the line drawing tool to graph a new marginal cost curve reflecting the lower cost of production. Label this line ​'MC2​'.

same slope but lower than MC1

Suppose the figure to the right represents the market for a particular brand of soap such as​ Zest, Dove, or Ivory. see image 20

see image 20

See image 22 Suppose Angelica opens a small store near​ campus, selling beef brisket sandwiches. Use the graph to the​ right, which shows the demand and cost for​ Angelica's beef brisket​ sandwiches, to answer the questions that follow.

see image 22

Under what circumstances can a firm successfully practice price​ discrimination? Part 5 To successfully practice price​ discrimination,

some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.

The economic profit is equal to

the difference in price and​ long-run average cost multiplied by the quantity produced.

In the long run in the market for cage​-free ​eggs, we would expect

the equilbrium price to decrease and the equilibrium quantity to​ increase, as more firms enter.

How are prices determined in perfectly competitive markets In perfectly competitive​ markets, prices are determined by

the interaction of market demand and supply because firms and consumers are price takers.

Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic​ well-being to society in these​ markets? Part 2 Though monopolistically competitive markets are not allocatively or productively​ efficient, consumers benefit in that

they are able to purchase a differentiated product that more closely suits their tastes

productive efficiency is

when a good or service is produced at the lowest possible cost

Suppose that last semester your semester GPA was 1.60 and your resulting cumulative GPA was 2.63. ​Next, suppose that this semester your semester GPA will be 2.10. If​ so, then your cumulative GPA

will decrease because your​ "marginal" GPA will be below your cumulative GPA.

Which of the following is a result of perfect price​ discrimination?

zero consumer surplus

The graph at right represents the situation of Karl​ Kumquats, a kumquat grower. Karl is earning (image 15)

zero economic profit but could have a positive accounting profit