Econ 202 Test 3 Meer
What type of protection does U.S. law grant the creator of a book, film or piece of music?
A copyright, which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 70 years after the author's death.
Which of the following is an example of adverse selection?
A customer buying a defective appliance from a used goods market
Which one of the following about a monopoly is false?
A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.
Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements comparing the conditions in the industry under both market structures is true?
A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good.
Which of the following is likely to cause a decrease in the wage rate and an increase in the employment level of a country?
A right shift in the supply curve for labor, without any change in the demand curve for labor
Scenario: The market for used cell phones is very popular in Barylia. However, several phones available in this market are of inferior quality and it is often impossible to differentiate between a good-quality phone and a poor-quality phone. Refer to the scenario above. Which of the following problems is likely to arise in the market for used cell phones in Barylia?
Adverse selection
________ occurs when one agent in a transaction knows about a hidden characteristic of a good.
Adverse selection
Which of the following correctly identifies a difference between taste-based discrimination and statistical discrimination?
Employers engaging in taste-based discrimination are willing to forego profits, whereas employers engaging in statistical discrimination are trying to enhance profits.
If average total cost is falling marginal cost must also be falling.
FALSE
If marginal cost is above the average variable cost, then average variable cost is decreasing.
FALSE
The marginal cost curve is U-shaped because of the law of increasing opportunity costs.
FALSE
If the demand for labor is unchanged, population growth will increase the supply of labor and increase the equilibrium wage.
False
Technological advancements that increase labor's productivity shift the labor supply curve to the right.
False
Which two factors make regulating mergers complicated?
First, it is not always clear what market firms are in. Second, the newly merged firm might be more efficient than the merging firms were individually.
Rob Neyer is a baseball writer for sbnation.com. He has described attending a Red Sox game at Fenway Park in Boston and having a great seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." Source: Rob Neyer, Feeding the Green Monster, New York: iPublish.com, 2001, p.50. What should Rob do?
He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.
________ discourage low-risk individuals from seeking health insurance.
High premiums
Which of the following helps in reducing the problem of adverse selection in health insurance markets?
Insurance mandates
Which of the following is true of an extensive-form game?
It involves sequential decision making by the players.
What is moral hazard?
It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off.
Which of the following is true of a payoff matrix?
It takes into account all relevant costs and benefits associated with each action of the players.
Sarah is a high school graduate and James is a college graduate. Which of the following statements is true?
James is likely to have more human capital than Sara.
Is Jill Johnson correct when she says the following: "I am currently producing 10,000 pizzas per month at a total cost of $80,000. If I produce 10,001 pizzas, my total cost will rise to $80,050. Therefore, my marginal cost of producing pizzas must be increasing."
Jill's average total cost of production is increasing, so her marginal cost of producing pizzas must be increasing.
Which of the following is true at the output level where average total cost is at its minimum?
Marginal cost equals average total cost.
Which of the following statements is false?
Marginal cost will equal average total cost when marginal cost is at its lowest point.
Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit maximizing outputs?
Marginal revenue is less than price.
A situation in which each firm chooses the best strategy given the strategies chosen by other firms is called a
Nash equilibrium.
Which of the following is likely to be used as a signal in the job market?
The degree obtained by the applicant
How will an increase in labor productivity affect equilibrium in the labor market?
The demand for labor will increase and the equilibrium wage and quantity of labor will increase.
What is likely to happen in a used-car market if the buyers feel that the best they can do is to buy a lemon?
The entire market shuts down.
What happens to the equilibrium wage and quantity of labor if output price rises?
The equilibrium wage and the equilibrium quantity of labor rise.
Consider the market for opticians. What is likely to happen to the equilibrium wage and quantity of opticians if more and more people turn to laser eye surgery instead of wearing glasses or contact lens?
The equilibrium wage and the equilibrium quantity of opticians fall.
Which of the following is likely to lead to a left shift in the supply curve for labor to a firm?
The establishment of a new firm nearby that offers higher wages
Increases in population shift the market supply curve for labor to the right.
True
Moral hazard refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.
True
One possible reason as to why consumers respond to sales is that by displaying a "high" regular price and a "low" sale price, sales provide consumers with a reference point to interpret the prices being offered.
True
One reason college students do not study enough to get high grades is that they are unrealistic about their future behavior.
True
The most important factor contributing to wage differences in the labor market is differences in the level of education and training among workers.
True
Women typically earn less than men, even in the same occupation. Which of the following is an explanation for this discrepancy?
Women have, on average, less workforce experience than men of the same age.
Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.
Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are confused whether or not to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than cooperating with you. Refer to the scenario above. Which of the following is likely to happen if the service center has a reputation of trustworthiness?
You will trust the mechanic and he will cooperate.
Larry and Mike are equally skilled construction workers employed by the Brown and Root Company. Larry's job is riskier because he typically works on a scaffold 1,000 feet above ground. Larry's higher wage rate is the result of
a compensating differential.
A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision?
a decision tree
A monopolist faces
a downward-sloping demand curve.
Relative to a perfectly competitive market, a monopoly results in
a gain in producer surplus less than the loss in consumer surplus.
What is a prisoner's dilemma?
a game in which players act in rational, self-interested ways that leave everyone worse off
Consider a used car market in which half the cars are good and half are bad (lemons). If buyers are rational, the prices being offered for used cars will result in
a larger proportion of lemons being sold and consequently, producer surplus is increased.
A dominant strategy is
a strategy that is the best for a firm no matter what strategies other firms use.
An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better that the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above?
adverse selection
Consider a used car market in which half the cars are good and half are bad (lemons). Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000. If rational buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly lemons at this price. What is the term used to describe this situation?
adverse selection
An increase in the supply of capital, which is a complement to labor, will lead to
an increase in the demand for labor.
An increase in the demand for orthodontic services leads to
an increase in the demand for orthodontists.
Which of the following will not cause the labor demand curve to shift to the right?
an increase in the market wage rate
The Clayton Act prohibited
any merger if its effect was to substantially lessen competition or create a monopoly.
At low wages, the labor supply curve for most people slopes upward because
as wages increase the opportunity cost of leisure increases.
Signaling takes place in markets with ________.
asymmetric information
The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is
asymmetric information.
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. A player should use ________ to play this game.
backward induction
The first mover in an extensive-form game should use ________ to win the game.
backward induction
As more output is produced, the marginal product of labor declines
because of the law of diminishing returns.
Which of the following explains why talented major league baseball players command much higher salaries than neurosurgeons?
because the supply of talented major league baseball players is low relative to its demand compared to the supply of neurosurgeons. Therefore, adding another player yields far greater marginal benefit than adding another neurosurgeon.
A new area of economics studies situations in which people appear to be making choices that do not appear to be economically rational. This area is called
behavioral economics.
In a market with asymmetric information, ________.
buyers and sellers have different information about the good being traded
Adverse selection arises in the health insurance market because ________.
buyers have private information
In the market for health insurance, asymmetric information problems arise because
buyers of health insurance policies always know more about the state of their health than do the insurance companies.
Suppose you have worked at a local sandwich shop for six months and now you plan to ask your manager for a raise. How can you convince your manager that you are worth more money than you are currently being paid?
by demonstrating to your manager the marginal revenue product your employment contributes to the sandwich shop
The Sherman Act prohibited
collusive price agreements among rival sellers.
The value of the marginal product of labor is the:
contribution of an additional unit of labor to a firm's revenue.
The International Nickel Company of Canada is often cited as an example of monopoly. What was the source of the barrier to entry that gave this firm monopoly power?
control of a key resource
Customer discrimination occurs when
customers refuse to buy products produced by a racially diverse workforce.
Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms. A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes. What are these points called?
decision nodes
In situations where new technologies are considered substitutes for workers, demand for these workers will ________, resulting in ________ in the equilibrium wage.
decrease; a decrease
In order to be useful as a signal in a market with information asymmetry, the signal must be ________.
difficult to obtain
A Nash equilibrium occurs if ________.
each player chooses strategies that are mutual best responses
In a simultaneous move game, ________.
each player has to make his choice without knowing his rival's choice
A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of
economies of scale.
Marginal revenue product of labor for a competitive seller is
equal to the marginal product of labor multiplied by the output price.
Anchoring is relating a value to some other known value
even if the second value is irrelevant.
Technological advancements that increase labor's productivity shift the labor supply curve to the right.
false
A ________ is an extensive -form representation of a game.
game tree
Most economists believe that a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Which of the following factors is not another factor that explains part of this gap?
geographic location
A patent
gives a firm the exclusive right to a new product for 20 years from the date the product is invented.
A profit maximizing monopoly's price is
greater than the price that would prevail if the industry was perfectly competitive.
Scenario: The market for used cell phones is very popular in Barylia. However, several phones available in this market are of inferior quality and it is often impossible to differentiate between a good-quality phone and a poor-quality phone.
has asymmetric information.
To be a natural monopoly a firm must
have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms.
Compensating differentials are associated most closely with which of the following?
hazardous jobs
In an extensive-form game, payoff to a player is usually higher if ________.
he is the first mover
The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because
it had control of almost all the available supply of bauxite.
The substitution effect of a wage increase is observed when
leisure's higher opportunity cost causes workers to take less leisure and work more.
The decision rule for a profit-maximizing firm operating in a competitive market to hire an additional worker is the value of the:
marginal product of the worker should be equal to or greater than the wage rate.
A firm's demand for labor curve is also called its
marginal revenue product of labor curve.
Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured. In other words, the automobile insurance market is subject to
moral hazard
Christine works as a receptionist in an office. She is not supposed to use the Wi-Fi connection provided by the company to access social-networking Web sites. However, she often uses the Wi-Fi to access these Web sites because her browsing activities are not monitored by her employer. This is an example of ________.
moral hazard
Joseph starts driving with much less care after buying car insurance. His behavior is an example of ________
moral hazard
Martha used to pay for her expenses with her own hard-earned money. She always tried to spend as little as she could. However, she started spending more when she received a scholarship. This behavior is an example of ________.
moral hazard
More people started building houses in earthquake-prone regions when the government of Polonia launched an insurance program for houses in this region. This is an example of ________.
moral hazard
State provision of free healthcare may encourage individuals to engage in unhealthy behavior, such as excessive smoking or consumption of alcohol. This is an example of ________.
moral hazard
A Nash equilibrium occurs when ________.
none of the players can increase their payoffs by choosing a different strategy
Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should
offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon.
A best response is ________.
one player's optimal action choice taking the other player's action as given
The highest-valued alternative that must be given up to engage in an activity is the definition of
opportunity cost.
Painters who paint water towers earn higher wages relative to painters who paint houses because
painting water towers is more risky than painting houses.
A game is called a simultaneous move game if ________.
players choose their actions at the same time
There are several types of barriers to entry that can create a monopoly. Which of the following barriers is the result of government action?
public franchise
A Nash equilibrium is
reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.
A dominant strategy ________.
results in a higher payoff irrespective of the strategy chosen by the other player
In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use
sequential games
A player has a dominant strategy when:
she has only one best response to every possible strategy of the other player.
If an industry introduces a labor-saving technology in production, the demand curve for labor in that industry is likely to:
shift to the left.
One reason why adverse selection problems arise in health insurance markets is that
sick people are more likely to want health insurance than healthy people.
You decide to carry a letter of recommendation from your college professor while going for your first interview. This is an example of ________.
signaling
Sequential games are used to analyze
situations in which one firm acts and other firms respond.
Employers engaging in ________ try to enhance their profits.
statistical discrimination
When expectations cause people to discriminate against a certain group, it is referred to as:
statistical discrimination.
Economically rational means that consumers and firms
take actions that are appropriate to reach goals given available information.
Discrimination that occurs when people's preferences cause them to discriminate against a certain group is referred to as:
taste-based discrimination.
The demand for labor depends primarily on the additional output produced as a result of hiring an additional worker and
the additional revenue received from selling the output produced as a result of hiring an additional worker.
Marginal revenue product for a perfectly competitive seller is equal to
the change in total revenue that results from hiring another worker.
The term "derived demand" refers to
the demand for a factor of production that is derived from the demand for the good the factor produces.
As output increases
the difference between average total cost and average variable cost decreases.
The firm's gain in profit from hiring another worker is
the difference between marginal revenue product and the wage of the worker.
A firm's primary interest when it hires an additional worker is
the extra revenue the firm realizes from hiring that worker.
If a natural monopoly regulatory commission sets a price where marginal cost is equal to demand
the firm would incur a loss.
The income effect of a wage increase is observed when
the higher wage income causes workers to take more leisure and work less.
If Alan Shaw reduces his work hours when his salary increases, then
the income effect of his salary increase dominates the substitution effect.
Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy?
the individual who is applying for the health insurance policy
The shape of the average total cost curve is determined by the shape of
the marginal cost curve.
In the world oil market, oil is supplied up to the point where
the marginal cost of the last barrel is just equal to the price buyers are willing to pay for that last barrel.
One reason why the average salary of Major League Baseball players is higher than the average salary of college professors is
the marginal revenue product of baseball players is greater than the marginal revenue product of college professors.
The demand curve for the monopoly's product is
the market demand for the product.
A possible advantage of a horizontal merger for the economy is that
the merged firm might reap economies of scale which could translate into lower prices.
If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce
the moral hazard problem.
The labor supply for an industry would decrease if
the percentage of the population from age 16 to 65 decreases.
If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of
the principle-agent problem.
A payoff matrix shows ________.
the return from each action that players can take in a game
What is behavioral economics?
the study of situations in which people act in ways that are not economically rational
If Molly Bee increases her work hours when her wage increases, then
the substitution effect of the wage increase outweighs the income effect.
Which of the following factors will not cause the labor demand curve to shift?
the wage rate
Average total cost is equal to
total cost divided by the level of output.
Which of the following costs will not change as output changes?
total fixed cost
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Scenario: Robert and Alice are participating in a reality show on television. Robert is offered an amount of $500 and told that he can keep the money provided he shares some of it with Alice. Robert can offer Alice as much or as little as he likes, but if Alice rejects his offer, neither of them will get to keep any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Because warranties are potentially ________, low-quality goods are ________ to have warranties.
very expensive; less likely
Explain why the marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum. The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because
when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the averge, it pulls the average up
A monopolist's profit maximizing price and output correspond to the point on a graph
where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.
A monopoly is a seller of a product
without a close substitute.
Worker discrimination occurs when
workers refuse to work with persons of a different race.
Higher wages that compensate workers for unpleasant aspects of a job are called compensating differentials.
True
If a state requires all drivers to buy auto insurance, the problem of adverse selection is eliminated.
True
Wendell can sell five motor homes per week at a price of $22,000. If he lowers the price of motor homes to $20,000 per week he will sell six motor homes. What is the marginal revenue of the sixth motor home?
$10,000
If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is
$700.
Which of the following is true of a simultaneous move game?
All relevant benefits and costs of each action are taken into account
Which of the following statements is true?
As output increases, average fixed cost becomes smaller and smaller.
Which branch of economics considers that economic agents do not always act rationally?
Behavioral economics
Which of the following is true for a monopolist?
Being the only seller in the market, the monopolist faces the market demand curve.
Which of the following is an example of signaling in a market with asymmetric information?
Certification of used cars by third parties
In the United States, the bulk of health care spending is paid by health insurance companies. Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider. Why might such a system lead to an inefficient outcome?
Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.
Which of the following is a reason why it is difficult to estimate the extent of economic discrimination in the labor market?
Differences in wages can be attributed to many other factors as well, such as differences in productivity and preferences.
What is the dominant strategy in the prisoner's dilemma?
Each prisoner confesses because this is the rational action to pursue.
Scenario: Tom and Harry are participating in a game in which the participants are divided into groups of two. Tom and Harry have been put in the same group. At each round of the game, Tom will be given an item. Tom can either give it to Harry or pass it on to the next team. If he decides to pass it on to the next team, neither of them will get the prize. If he gives it to Harry, Harry can either pass it on to the next team or sell it himself. If he passes it on to the next team, each of them will get $100. However, if he decides to sell it, he will get an amount higher than $100 and Tom will get nothing. Refer to the scenario above. Which of the following will happen in equilibrium if the game is played only once?
Neither of them will make any money.
Which of the following is true of a Nash equilibrium?
No player can improve his payoff by changing his strategy once in Nash equilibrium.
The average price of gasoline in your neighborhood is $2.15 per gallon. Your neighbor, Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $2.06 per gallon However, she cautions you that there are usually long lines at that station. Is her suggestion beneficial to you?
No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station.
If a monopolist's price is $50 per unit and its marginal cost is $25, then
Not enough information is given to say what the firm should do to maximize profit.
The first important federal law passed to regulate monopolies in the United States was the
Sherman Act.
Which of the following is a market-based solution to the problem of adverse selection?
Signaling
The formula for total fixed cost is
TFC = TC - TVC.
The difference between the salaries paid to movie stars and to actors who play supporting roles is much greater today than it was in the 1930s and 1940s. What factor explains this increase in relative salaries over time?
Technological advances in the entertainment industry increase the revenue that successful movies can earn. This has increased the movie studios' willingness to pay high salaries to movie stars.
What is the difference between labor's marginal product and marginal revenue product?
The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.
In which of the following markets are buyers likely to have private information?
The market for health insurance
Prisoner's dilemma games imply that cooperative behavior between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma games fail to predict real-world results?
The prisoner's dilemma does not apply to most business situations that are repeated over and over.
Other things remaining the same, which of the following is likely to happen if there is a decrease in the price of flour products?
There will be a decrease in both the wage rate and the employment levels in the flour industry.
The typical labor supply curve is upward sloping but it is possible for the curve to be backward bending — negatively sloped — at very high wage levels. Which of the following would cause a backward-bending supply curve?
This would occur when the income effect from an increase in the wage becomes larger than the substitution effect.
A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.
True
An increase in the price of grape juice causes an increase in the marginal revenue product of labor used to produce grape juice.
True
An increase in wages raises the opportunity cost of leisure and leads to an increase in the quantity of labor supplied.
True
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers fairness to money, ________.
he will accept the offer if offered an equal share of the money
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers more money to less, ________.
he will always accept any offer made to him
Compensating differentials are
higher wages that compensate workers for unpleasant aspects of a job.
A merger between the Ford Motor Company and General Motors would be an example of a
horizontal merger.
Firms use information on labor's marginal revenue product to determine
how many workers to hire at each wage rate.
A market economy benefits from market power
if firms with market power do research and development with the profits earned.
The combined effect (both income and substitution) of a wage increase is that
if the substitution effect outweighs the income effect, the labor supply curve slopes upward, but if the income effect outweighs the substitution effect, the labor supply curve is backward bending.
A reason why a perfectly competitive firm's demand for labor curve slopes downward is that
in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns.
In situations where new technologies are considered complementary to workers, demand for these workers will ________, resulting in ________ in the equilibrium wage.
increase; an increase
A horizontal merger
is a merger between firms in the same industry.