ECON exam 3

The increase in total surplus resulting from trade is

$1,280, since consumer surplus increases by $3,520 and producer surplus falls by $2,240.

Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. As a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is

$120.

Jacklyn carves ice sculptures. She carves and sells 10 sculptures. Her average cost of production per sculpture is $50. She sells each sculpture for a price of $150. Jacklyn's total revenues are

$1500

Taking into account private and external benefits, the total surplus to society at the socially efficient quantity is

$18

If Ernesto cleans Erin's house for $90, Ernesto's producer surplus is

$20

Both the demand curve and the supply curve are straight lines. At equilibrium, consumer surplus is

$48.

Billie Jo values a stainless steel dishwasher for her new house at $500, but she succeeds in buying one for $425. Billie Jo's willingness to pay for the dishwasher is

$500

If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market?

$625

The slope of the curve between points A and B is

-5

Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70. Using the midpoint method, the cross-price elasticity of demand is about

1.2, and X and Y are substitutes.

If a 15% increase in price for a good results in a 20 percent decrease in quantity demanded, the price elasticity of demand is

1.33

In January, the price of dark chocolate candy bars was $2.00, and Willy's Chocolate Factory produced 80 pounds. In February, the price of dark chocolate candy bars was $2.50, and Willy's produced 110 pounds. In March, the price of dark chocolate candy bars was $3.00, and Willy's produced 140 pounds. Using the midpoint method, the price elasticity of supply of Willy's dark chocolate candy bars was about

1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from $2.50 to $3.00.

Assume that Aruba and Iceland each has 80 labor hours available. If each country divides its time equally between the production of coolers and radios, then total production is

60 coolers and 18 radios

Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15 percent, then the quantity supplied of cheese will increase by

9 percent in the short run and 21 percent in the long run

Which of the following is not a barrier to entry in a monopolized market?

A single firm is very large

Which of the following is not an argument put forth by economists in support of the use of advertising?

Advertising provides a creative outlet for artists and writers.

Which of the following statements is true?

All costs are variable in the long run

If scientists discover that steamed milk, which is used to make lattés, prevents heart attacks, what would happen to the equilibrium price and quantity of lattés?

Both the equilibrium price and quantity would increase

Which of the following would not be considered a private good?

Cable TV service

Which of the following is not a characteristic of a competitive market?

Firms generate small but positive economic profits in the long run.

Implicit or explicit cost? The rental income Paolo could receive if he chose to rent out his showroom

Implicit Cost

Implicit or explicit cost? The salary Paolo could earn if he worked as an accountant

Implicit Cost

Which of the following statements about price and marginal cost in competitive and monopolized markets is true?

In competitive markets, price equals marginal cost; in monopolized markets, price exceeds marginal cost

Which of the following explains why, from society's standpoint, cooperation among oligopolists is undesirable?

It leads to output levels that are too low and prices that are too high.

For which pairs of goods is the cross-price elasticity most likely to be positive?

Pens and pencils

Which of the following statements about price discrimination is not true?

Perfect price discrimination generates a deadweight loss

Which of the following movements would illustrate the effect in the market for golf balls of an increase in green fees?

Point C to Point B

If you have a ticket that you sell to the group in an auction, what will be the selling price?

Slightly more than $50

Which of the following is not a commonly-advanced argument for trade restrictions?

The efficiency argument

What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce them?

The equilibrium price would decrease, and the equilibrium quantity would increase.

Which of the following is true for a monopolistically competitive firm in the long run?

The firm earns zero economic profits and creates a deadweight loss.

Which of the following will cause an increase in producer surplus?

The price of a substitute increases

Suppose that Abigail and Betsy are the only two producers in a market, and Abigail is producing 30 units and Betsy is producing 40 units. When Abigail is producing 30 units, Betsy maximizes her profit by producing 50 units, and when Betsy produces 40 units, Abigail maximizes her profit by producing 40 units. When Abigail produces 30 units and Betsy produces 40 units.

They could be colluding, but they are not in a Nash equilibrium.

In a monopoly market, which of these occurs when marginal revenue equals zero?

Total revenue is maximized.

Which of the following statements comparing monopoly with competition is correct?

With perfect price discrimination, the total surplus under monopoly can be the same as under competition.

Which of the following changes would not shift the supply curve for a good or service?

a change in the price of the good or service

As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more like

a competitive market

The movement from point A to point B on the graph is caused by

a decrease in price

The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that

a monopolistically competitive firm faces a downward-sloping demand curve for its differentiated product and so does a monopolist.

A firm has to be most concerned about the price effect when the market is

a monopoly

Using government regulations to force a natural monopoly to charge a price equal to its marginal cost will

cause the monopolist to exit the market

Which of the following represents a measure of the level of competition in an industry?

concentration ratio

Each unit of plastics that is produced results in an external

cost of $8.

Which of the following products is least likely to be sold in a monopolistically competitive market?

cotton

A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax decreases producer surplus by $600 per day, generates tax revenue of $1,220 per day, and decreases the equilibrium quantity of potato chips by 120 bags per day. The tax

creates a deadweight loss of $15 per day.

An increase in the price of a good will

decrease quantity demanded.

Suppose the government imposes a 50-cent tax on the sellers of packets of chewing gum. The tax would

discourage market activity.

For a competitive firm, marginal revenue is

equal to the price of the good sold.

The purpose of antitrust laws is to

increase competition in an industry by preventing mergers and breaking up large firms

If marginal revenue exceeds marginal cost, a monopolist should

increase output

If, holding the supply curve fixed, there were an increase in demand that caused the equilibrium price to increase from $6 to $7, then sellers' total revenue would

increase.

If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it

increased production.

The tariff

increases producer surplus by the area C and decreases consumer surplus by the area C + D + E + F.

When the price ceiling is enforced in this market, and the supply curve for gasoline shifts from S 1 to S 2 , the resulting quantity of gasoline that is bought and sold is

less than Q3.

When an oligopolist individually chooses its level of production to maximize its profits, it charges a price that is

less than the price charged by a monopoly and more than the price charged by a competitive market.

A monopolistically competitive firm

operates with a deadweight loss since price is greater than marginal cost.

A good is excludable if

people can be prevented from using it.

In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes

profits and firms enter the market.

Suppose the federal government doubles the gasoline tax. The deadweight loss associated with the tax

quadruples.

What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages?

quantity will fall, and the effect on price is ambiguous

Suppose an oligopolist individually maximizes its profits. When calculating profits, if the output effect exceeds the price effect on the marginal unit of production, then the oligopolist

should produce more units

One way a firm can indicate the quality of a good is by

spending large amounts on celebrity endorsements.

Cengage Learning is a monopolist in the production of your textbook because

the government has granted Cengage Learning exclusive rights to produce this textboo

Taxes on l abor taxes may distort labor markets greatly if

the number of hours many part-time workers want to work is very sensitive to the wage rate.

The inefficiency associated with monopoly is due to

underproduction of the good.

Jerome says that he will spend exactly $25 each month on new apps for his mobile device, regardless of the price of apps. Jerome's demand for apps is

unit elastic

If an input necessary for production is in limited supply so that an expansion of the industry raises costs for all existing firms in the market, then the long-run market supply curve for a good could be

upward sloping

A grocery store should close at night if the

variable costs of staying open are greater than the total revenue due to staying open

If a firm produces nothing, _____ costs are zero, and the firm will incur _____ costs.

variable; fixed

If regulators break up a natural monopoly into many smaller firms, the cost of production

will rise

Which of the following is true with regard to monopolistically competitive firms' scale of production and pricing decisions? Monopolistically competitive firms produce

with excess capacity and charge a price above marginal cost

The deadweight loss associated with this tax amounts to

$80, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades between buyers and sellers.

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is

0.67, and an increase in price will result in an increase in total revenue for good A.

Let QMARKET represent the equilibrium quantity of gasoline, and let QOPTIMUM represent the socially optimal quantity of gasoline. Which of the following inequalities is correct?

1,000 < QOPTIMUM < QMARKET

In the absence of trade, total surplus in the Guatemalan coffee market amounts to

1,650

For the economy as a whole, what percentage of firm revenue is spent on advertising?

2 percent

Suppose the cost to build the park is $24 per acre. How many acres should the park be to maximize total surplus from the park in Springfield?

3 acres

If the production possibilities frontier shown is for 24 hours of production, then how long does it take Brazil to make one pound of peanuts?

3 hours

If the production possibilities frontier shown is for two months of production, then which of the following combinations of peanuts and cashews could Brazil produce in two months?

3 pounds of peanuts and 150 pounds of cashews

The socially optimal quantity of output is

420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller of the 420th unit.

Which of the following statements about models is correct?

Models assume away irrelevant details

Which of the following is true regarding perfectly competitive firms and monopolistically competitive firms?

Monopolistically competitive firms operate where price is greater than marginal cost.

A situation in which oligopolists interacting with one another each choose their best strategy given the strategies that all the other oligopolists have chosen is known as a

Nash equilibrium

For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

The good is a luxury.

Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly?

The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run.

Marvin's Motors is a monopoly provider of automotive service in the small town of Nowhere. When Marvin reduces his price for oil changes from $25 to $20, he sells 10 additional oil changes per month and his total revenue increases by $40. Which of the following statements is correct?

The output effect is stronger than the price effect.

Which of the following events would cause a movement upward and to the right along the supply curve for mangos?

The price of mangos rises.

When regulators use a marginal-cost pricing strategy to regulate a natural monopoly,

The regulated monopoly will experience a loss. The regulated monopoly may rely on a government subsidy to remain in business. The regulated monopoly will experience a price below average total cost.

Which of the following is not a determinant of the price elasticity of demand for a good?

The steepness or flatness of the supply curve for the good

Which of the following scenarios is consistent with the Laffer curve?

The tax rate is 99 percent, and tax revenue is very high.

Suppose an economy produces two goods, food and machines. This economy always operates on its production possibilities frontier. Last year, it produced 1,000 units of food and 47 machines. This year it experienced a technological advance in its machine-making industry. As a result, this year the society wants to produce 1,050 units of food and 47 machines. Which of the following statements is correct?The technological advance reduced the amount of resources needed to produce 47 machines, so these resources could be used to produce more food.

The technological advance reduced the amount of resources needed to produce 47 machines, so these resources could be used to produce more food.

Assume that John and Jane each work 24 hours. What happens to total production if instead of each person spending 12 hours producing each good, Jane spends 21 hours producing wine and 3 hours producing bread and John spends 3 hours producing wine and 21 hours producing bread?

The total production of bread and wine each rise

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

They are equal.

Which of the following is not a typical solution to the "Tragedy of the Commons?"

Turning the common resource into a club good

Which of the following is an example of a normative, as opposed a to positive, statement?

Universal healthcare would be good for U.S. citizens

Which of the following is a variable cost in the short run?

Wages paid to factory labor

Which of the following firms has the least incentive to advertise?

a wholesaler of crude oil

If a surplus exists in a market, then we know that the actual price is

above the equilibrium price, and quantity supplied is greater than quantity demanded.

If there are implicit costs of production,

accounting profit will exceed economic profit

Which of the following is not put forth as a criticism of advertising and brand names?

advertising increases competition, which causes unnecessary bankruptcies and layoffs

If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause

an increase in the number of firms in the market but no increase in the price of the good

The market for hand tools (such as hammers and screwdrivers) is dominated by Black & Decker, Stanley, and Craftsman. This market is best described as

an oligopoly

If the demand for a product increases, then we would expect equilibrium price

and equilibrium quantity both to increase

When a tax is placed on the sellers of cell phones, the size of the cell phone market

and the effective price received by sellers both decrease.

Laws that make it illegal for firms to conspire to raise prices or reduce production are known as

antitrust laws.

Defenders of the use of brand names argue that brand names

are useful even in socialist economies such as the former Soviet Union give firms incentive to maintain high quality. provide information about the quality of the product.

The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could

auction off a limited number of sheep-grazing permits

In the long run, some firms will exit the market if the price of the good offered for sale is less than

average total cost

The efficient scale of production is the quantity of output that minimizes

average total cost

When marginal costs are below average total costs,

average total costs are falling

If marginal costs equal average total costs,

average total costs are minimized

A firm produces 500 units of output at a total cost of $1,500. If total variable costs are $500, then

average variable cost is $1

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will

be U-shaped

Collusion is difficult for an oligopoly to maintain

because antitrust laws make collusion illegal. because, in the case of oligopoly, self-interest is in conflict with cooperation. if additional firms enter of the oligopoly.

One source of inefficiency in monopolistic competition is that

because price is above marginal cost, some units are not produced that buyers value in excess of the cost of production and this causes a deadweight loss.

If a production function exhibits diminishing marginal product, its slope

becomes flatter as the quantity of the input increases

If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve

becomes steeper as the quantity of output increases.

A monopolistically competitive firm operates

below the efficient scale creating excess capacity in the long run.

When a monopolist produces an additional unit, the marginal revenue generated by that unit must be

below the price because the price effect outweighs the output effect

George Stigler expressed concern about the trade-offs between market failure and political failure in the American economy. This concern supports which of the following solutions that policymakers can take to respond to the problem of a monopoly?

do nothing

The monopolist's supply curve

does not exist.

If a competitive firm doubles its output, its total revenue

doubles

Total output in an economy increases when each person specializes because

each person spends more time producing that product in which he or she has a comparative advantage.

In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience

economies of scale

When small changes in price lead to infinite changes in quantity demanded, demand is perfectly

elastic, and the demand curve will be horizontal.

Implicit or explicit cost? The wages and utility bills that Paolo pays

explicit cost

Implicit or explicit cost? The wholesale cost for the boats that Paolo pays the manufacturer

explicit cost

Accounting profit is equal to total revenue minus

explicit costs.

t or F: In the long run in a monopolistically competitive market firms can earn positive economic profits.

false

t or f: An example of an explicit cost is forgone interest payments when the money is invested in one's business.

false

t or f: Economists believe that retail price maintenance is detrimental to society, whereas predatory pricing may in fact be beneficial.

false

t or f : In 1983, Robert Crandall, president of American Airlines, and Howard Putnam, president of Braniff Airways, successfully colluded to raise air fare by 20%.

false because of the sherman antitrust act of 1890

Examples of an Oligopoly

few firms price setting power similar or nearly identical product

Which of the following markets would most closely satisfy the requirements for a competitive market?

gold bullion

If the Korean steel industry subsidizes the steel that it sells to the United States, the

harm done to U.S. steel producers is less than the benefit that accrues to U.S. consumers of steel.

Many economists argue that resale price maintenance

has a legitimate purpose of stopping discount retailers from free riding on the services provided by full-service retailers.

Compared to a perfectly competitive market, a monopoly market will usually generate

higher prices and lower output

The x-coordinate of an ordered pair specifies the

horizontal location of the point.

Economists include both explicit and implicit costs when measuring a firm's cost. Accountants often

ignore implicit costs.

The world price of a ton of steel is $650. Before Russia allowed trade in steel, the price of a ton of steel there was $1,000. Once Russia allowed trade in steel with other countries, Russia began

importing steel and the price per ton in Russia decreased to $650.

Goods produced abroad and sold domestically are called

imports

The shift from S to S' could be caused by an

improvement in production technology

Warrensburg is a small college town in Missouri. At the end of August each year, the market demand for fast food in Warrensburg

increases.

A monopolistically competitive firm is

inefficient because price is greater than marginal cost.

Absolute advantage is found by comparing different producers'

input requirements per unit of output

If the government wanted to tax or subsidize this good to achieve the socially optimal level of output, it would

introduce a subsidy of $4 per unit.

Farmer Brown sells sweet corn in a competitive market. When Farmer Brown sells 10 dozen ears of sweet corn, his total revenue is $30. When Farmer Brown sells 20 dozen ears of sweet corn, his total revenue is $60. Farmer Brown's average revenue is ____________ per dozen and his marginal revenue from selling the 20th dozen _________________.

is $3; is also $3

The long-run market supply curve

is more elastic than the short-run market supply curve

In the circular-flow diagram,

labor flows from households to firms.

Suppose a firm has a monopoly on the sale of boomerangs and faces a downward-sloping demand curve. When selling the 20th boomerang, the firm will always receive ________ on the 20th boomerang then it received on the 19th boomerang.

less marginal revenue

Which of the following is not a characteristic of a monopolistically competitive market?

long-run economic profits

In order to maximize profits, the monopolist should

look at where the marginal-revenue curve and the marginal-cost curve intersect

When the tariff is imposed, domestic consumers

lose surplus of $450.

The competitive firm maximizes profit when it produces output up to the point where

marginal cost equals marginal revenue

Which of the following is true regarding the production and pricing decisions of monopolistically competitive firms? Monopolistically competitive firms choose the quantity at which marginal cost equals

marginal revenue and then use the demand curve to determine the price consistent with this quantity.

A monopolist maximizes profit by producing the quantity at which

marginal revenue equals marginal cost

When property rights are not well established,

markets fail to allocate resources efficiently.

Expensive television commercials that appear to provide no specific information about the product being advertised

may be useful because they provide a signal to the consumer about the quality of the product

When an oligopolist individually chooses its level of production to maximize its profits, it produces an output that is

more than the level produced by a monopoly and less than the level produced by a competitive market

A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a

natural monopoly

Both public goods and common resources are

nonexcludable.

If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be

perfectly elastic

In the LONG run, the competitive firm's supply curve is the

portion of the marginal-cost curve that lies above the average-total-cost curve

In the SHORT run, the competitive firm's supply curve is the

portion of the marginal-cost curve that lies above the average-variable-cost curve

Which of the following correctly describes when a firm in a competitive market should shut down in the short run?

price is less than average variable cost

A professor spends 10 hours per day giving lectures and writing papers. For the professor, a graph that shows his various possible mixes of output (lectures given per day and papers written per day) is called his

production possibilities frontier.

Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the

supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20.

The government's benefit from a tax can be measured by

tax revenue.

Public ownership of natural monopolies

tends to be inefficient

Signaling theory suggests consumers can indirectly measure quality from an advertisement

that is expensive and provides little information.

With trade and without a tariff,

the domestic price is equal to the world price.

In the standard prisoners' dilemma game, if one prisoner remains silent

the other prisoner will confess

Assume the price of gasoline is $2.00 per gallon, and the equilibrium quantity of gasoline is 10 million gallons per day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the largest deadweight loss?

the price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.30 per gallon

As the number of sellers in an oligopoly increases,

the price in the market moves closer to marginal cost.

Which of the following firms is most likely to spend a large percentage of their revenue on advertising?

the producer of a highly differentiated consumer product

Cross-price elasticity of demand measures how

the quantity demanded of one good changes in response to a change in the price of another good.

If oligopolists engage in collusion and successfully form a cartel, the market outcome is

the same as if it were served by a monopoly

Economic profit is equal to total revenue minus

the sum of implicit and explicit costs

Game theory can be best applied to situations where

there are a few firms

The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that

there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market

In the long run,

there are no fixed costs.

When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product-variety externality, then

there are too many firms in the market and market efficiency could be increased if firms exited the market

in the short run

there is at least one fixed cost

A monopoly is able to continue to generate economic profits in the long run because

there is some barrier to entry to that market

Suppose there are only two people in the world. Each person's production possibilities frontier also represents his or her consumption possibilities when

they choose not to trade with one another.

What is economic welfare generally measured by?

total surplus

T or F : If a firm in a competitive market doubles the quantity of units sold, total revenue will exactly double.

true

Under rent control, landlords can cease to be responsive to tenants' concerns about the quality of the housing because

with shortages and waiting lists, they have no incentive to maintain and improve their property.

In long-run equilibrium in a competitive market, firms are operating at

zero economic profit their efficient scale. the intersection of marginal cost and marginal revenue. the minimum of their average-total-cost curves