Econ Final - Conceptual
If certification decreases supply and serves as a barrier to entry, it ________ the price and ________ market power of the suppliers already in the market.
increases; increases
Vertical integration can reduce transaction costs through all of the following ways except which one?
creating managerial diseconomies
Marginal cost equals: -TC/Q. -change in total cost/change in output .-TVC/Q. -TFC/Q.
-change in total cost/change in output.
what are a few examples of product differences?
-credit terms -sale services -delivery options
what are the three factors allowing price discrimination?
-different customers must be willing and able to pay different prices for a good -seller requires a way to tell who is willing to pay -it must be impossible for good purchased by one person to be resold to another for a higher amount
what are three characteristics of an oligopoly market?
-few sellers -hard to enter the market -sells identical/slightly different goods
what two factors determine how much competition a seller faces?
-how close to unique a sellers product is -how easy it is for new sellers to enter into the market
what are three legal barriers to entry in a monopolistic market?
-legal barriers -extremely low total costs (per unit) -exclusive ownership of a scarce resource
what are the four characteristics of a perfectly competitive market?
-many buyers and sellers -all firms sell identical goods -easy entry to market -relevant info on prices, quantity, source of supply etc.
What are the three characteristics of a monopolistic competitive market?
-many buyers and sellers -sell slightly differentiated products -easy entry/exit from firm
what are the three characteristics of a monopolistic market?
-one seller -the product has no close substitutes -barriers to entry and exit of the firm are high
what are three legal barriers to entry?
-public franchise -patents -copyrightswhat is a public franchise
where might price discrimination occur?
-restaurants (senior discounts) -movie theaters (child and adult ticket pricing)
what two points are true for every price taker?
-they cannot sell it at a higher price -they will not sell it at any lower price
An hypothesis test using 99 percent confidence has a significance level equal to ________.
0.01
Suppose there are only two companies in the whole world that manufacture and sell hoverboards: ABC Corp and XYZ Inc. Both companies have similar technology that allows them to make hoverboards for $20 each. Neither firm has any fixed costs. The worldwide demand for hoverboards is pretty low now that they are known to catch fire. It can be expressed by the inverse demand function below: P(Q)=200−Q If XYZ Inc. has announced that it will produce 100 hoverboards, what is the best response (production level) for ABC Corp? 0 Hoverboards 20 Hoverboards 40 Hoverboards 90 Hoverboards
40 Hoverboards
Which of the following is not an example of a commodity bundle?
A "Buy One Get Three Free" promotion or A 12 pack of buns
Which of the following is NOT true of a natural monopoly? It will typically have massive economies of scale A firm with a drug patent is an example of a natural monopoly They are usually regulated by the government Constantly decreasing average costs make a natural monopoly socially desirable relative to having multiple firms in the market
A firm with a drug patent is an example of a natural monopoly
What was the federal Trade Commission Act designed to prohibit?
Aggressive, price-cutting acts, sometimes referred to as cut-throat pricing
Big City Java is a local coffee bar. Using Excel, the manager of Big City Java estimates the weekly demand function for their grand mocha coffees to be Qd = 650 - (15.25 × P). The estimated regression equation suggests which of the following is true?
As the price of grand mocha coffees increases, the quantity demanded decreases.
At 100 units of a firm's output, average total cost is $10, average variable cost is $8, average fixed cost is $2, and marginal cost is $12. How will each of the following change as the firm's output further increases.
Average Total Cost (ATC) increase Average Variable Cost (AVC) increase Average Fixed Cost (AFC) decrease
At 100 units of a firm's output, average total cost is $10, average variable cost is $8, average fixed cost is $2, and marginal cost is $12. How will each of the following change as the firm's output further increases?
Average Total Cost (ATC) increaseAverage Variable Cost (AVC) increaseAverage Fixed Cost (AFC) decrease
Suppose the board of directors of Hyvee can either pay $400 or $200 per day for a manager. If the manager behaves well, Hyvee will earn $800 in profits per day, and if he does not behave well, Hyvee will only earn $400 in profits per day. Hyvee must offer a wage to the manager before observing his behavior. Behaving well costs the manager $200 per day, while exerting the effort to behave badly only costs the manager $100. What is the equilibrium outcome?
Board pays $200, manager behaves badly
Following up on the previous problem, now the board of directors monitors the behavior of the manager. If they pay the manager $400, but he still behaves badly, the manager will receive a fine of $300 for bad performance. At the same time, if the manager behaves well, but the board of directors only pays him $200, the manager will gain a bonus of $250. What is the equilibrium outcome under these new conditions?
Board pays $400, manager behaves well
Suppose the CEO of HyVee can either pay $400/day or $200/day for a store manager. If the manager behaves well, HyVee will earn $800/day, and if he/she does not behave well, HyVee will only earn $400/day. HyVee must offer a wage to the manager before observing his/her behavior. Behaving well costs the manager $200/day in effort, while exerting the effort to behave badly only costs the manager $100/day. What is the Nash equilibrium outcome of this game?
CEO pays $200/day, the store manager behaves badly
Suppose the CEO of HyVee can either pay $400/day or $200/day for a store manager. If the manager behaves well, HyVee will earn $800/day, and if he/she does not behave well, HyVee will only earn $400/day. HyVee must offer a wage to the manager before observing his/her behavior. Behaving well costs the manager $200/day in effort, while exerting the effort to behave badly only costs the manager $100/day. What is the Nash equilibrium outcome of this game? CEO pays $400/day, the store manager behaves well CEO pays $400/day, the store manager behaves badly CEO pays $200/day, the store manager behaves well CEO pays $200/day, the store manager behaves badly
CEO pays $200/day, the store manager behaves badly
Camp with Us and Happy Campers compete in the market for campers. Each firm must decide each season if they are going to offer special financing or not. The above payoff matrix shows each firm's net economic profit at each pair of strategies. Refer to the payoff matrix above. In reference to the Nash equilibrium/equilibria in this game, which of the following is true? Happy Campers Offer Fin. No Fin Offer Fin. 9\8 7\11 Camp with Us No Fin. 10\6 8\7
Camp with Us Offer Financing and Happy Campers Do Not Offer Financing is a Nash equilibrium.
Suppose that the U.S. Congress passes a two-pronged program to further enhance the U.S. computer industry's position in the global economy. The legislation provides increased funding for computer education in primary and secondary schools, in addition to tax breaks for firms that develop computer software. What impact will these changes have on the equilibrium price and quantity of computer software? Price will increase, quantity will decrease Change in price is ambiguous, quantity will increase Price will decrease, change in quantity is ambiguous Price will increase, quantity will increase
Change in price is ambiguous, quantity will increase
Identify whether each of the following transactions involves spot exchange, contract, or vertical integration Barnacle, Inc., has a legal obligation to purchase 2 tons of structural steel per week to manufacture conveyor frames.
Contract
When the total product function begins to increase at a decreasing rate ,A.marginal product is falling. B.the law of diminishing returns has set in. C.marginal cost is rising. D.All of the above.
D.All of the above.
Which of the following describes a Nash equilibrium?
Every competing firm in an industry chooses a strategy that is optimal given the choices of every other firm.
A firm in a perfectly competitive market can engage in price discrimination.
False
A linear regression with N<25 and R-squared<.5 cannot yield statistically significant results
False
A monopolist calculates that at the current sales price, consumers' elasticity of demand is equal to 1.2. To maximize total revenue, the monopolist should raise their sales price - True - False
False
According to the Law of Demand, holding everything else constant, increases in price of a product cause increases in the quantity of that product demanded by consumers.
False
If Best Lights and Bright Lights are competing in a duopoly, Best Lights' profit depends solely on the decisions of its managers.
False
Smokey's smoke detectors Inc operates in a perfectly competitive market for smoke alarms. Smokey is currently eating short-run positive economic profits. Which of the following statements best describes what Smokey will experience as the industry adjusts to the long-run equilibrium.
Firms will exit the industry, market price will increase, economic profits will increase
Supply/Demand Shifts: Consumers get news that a new iPhone prototype was found in a bar near Sunnyvale, CA. They expect this means a new iPhone model will be available soon. How does this impact the market for the current iPhone model
Graph should show a shift of the demand curve to the left. This will lead to both price and quantity declining at the new equilibrium.
Supply/Demand: A hurricane shuts down oil refineries on the gulf coast. It also floods the 4th largest city in America, making its roads impassable and driving impossible. What impact do these events have on the market for gasoline?
Graph should show shifts of both the supply and demand curves to the left. This will lead to a decrease in the equilibrium quantity, however because the supply shift will put upward pressure on price, and the demand shift will put downward pressure on price, it is not possible to say what will happen to the equilibrium price without knowing the magnitude of the supply/demand curve shifts.
Supply/Demand: Three new Cross Fit gyms open up in Vermillion, SD. At the same time, several news outlets run stories highlighting the increasing number of injuries associated with cross fit - while also alerting consumers to the availability of a new workout facility called Parallel Fit, which is like Cross Fit but much safer. How does this impact the market for Cross Fit memberships?
Graph should show the demand curve shifting to the left, while the supply curve should shift to the right. This will lead to a decrease in the equilibrium price, however because the supply shift will put upward pressure on quantity, and the demand shift will put downward pressure on quantity, it is not possible to say what will happen to the equilibrium quantity demanded without knowing the magnitude of the supply/demand curve shifts.
Supply/Demand Shift: The patent for Xerac, a drug that gives people x-ray vision, expires. This allows many firms to start manufacturing the same drug. What impact does this have on the market for Xerac?
Graph should show the supply curve shifting to the right. This will lead to a decrease in the equilibrium price, and an increase in the equilibrium quantity
Calculate the value of profits for a representative firm in the long run?
In a perfectly competitive market, long-run profits are always zero
Suppose a perfectly competitive market for hot-dog stands in New York City changes when gourmet, discount, and ethnic hot-dog retailers show up, making each cart slightly different. With the inclusion of the new vendors, hot-dog stand owners are now engaged in monopolistic competition. If hot dogs from different stands are imperfect substitutes and there are numerous carts in the city, compare the producer and consumer surplus and total social welfare before and after the change
In the short run, moving from perfect competition to a monopolistically competitive market will reduce social welfare because the monopolistically competitive firms will maximize profits by producing less than the efficient quantity. This will create a deadweight loss. Consumer surplus will decrease because the monopolistically competitive firms will be able to charge a higher price than the competitive firms could charge. Producer surplus should increase compared to perfect competition because vendors are selling versions of hot dogs for which other types are imperfect substitutes. Consumers will have preferences between types of hot dogs, which will allow for price differentials.
You are bidding in an auction for a certified, used tractor. You determine that the economic profit you can make from the tractor is $80,000. You do not care about any risk or uncertainty in your estimate of the economic profit. Other bidders have their own valuations of the tractor, which depend on their unique uses for it. If the auction is a sealed-bid first-price auction, is your bid more than, less than, or equal to $80,000? Explain your answer.
In this case it is optimal to bid just below your valuation of $80,000 in a sealed-bid first-price auction. If you bid your value, you gain no surplus - which is just as good as not winning the auction. Offering a price just below your value will offer the promise that no one else will bid higher than you and you will get the item at a price below your value - locking in positive profits.
You are bidding in an auction for a certified, used tractor. You determine that the economic profit you can make from the tractor is $80,000. You do not care about any risk or uncertainty in your estimate of the economic profit. Other bidders have their own valuations of the tractor, which depend on their unique uses for it. If the auction is a Dutch auction, is your maximum bid more than, less than, or equal to $80,000? Explain your answer.
In this case it is optimal to bid just below your valuation of $80,000 in an dutch auction. If the item is still available and you immediately bid your value, you gain no surplus with certainty. Waiting until the price falls below your value will offer the promise that no one else will bid and you will get the item at a price below your value - locking in positive profits
You are bidding in an auction for a certified, used tractor. You determine that the economic profit you can make from the tractor is $80,000. You do not care about any risk or uncertainty in your estimate of the economic profit. Other bidders have their own valuations of the tractor, which depend on their unique uses for it. If the auction is a sealed-bid second-price auction, is your bid more than, less than, or equal to $80,000? Explain your answer.
In this case it is optimal to bid your valuation of $80,000 in a sealed-bid second-price auction. If you bid your value, you may win, but only pay what the next highest bidder offered - which guarantees a profit. Bidding above your value offers the possibility that someone else will bid below your bid but above your value, ensuring your earn negative profits. Because you only pay what the second highest bidder offers, there is no value in bids higher than your value because if doing so was necessary for you to win the auction, it would also ensure you earned negative profits.
A firm has increased all inputs used in the production of its product by 50%. As a result, the firm's output has doubled. From this information we can conclude that the firm's production function exhibits: Increasing Returns to Scale Constant Returns to Scale Decreasing Returns to Scale We cannot say anything about the returns to scale of the firm's production function given this information
Increasing Returns to Scale
An economic analyst for XYZ Inc. has estimated that company's demand function for their flagship product, the Widget: QWidgets=12,000−3PWidgets+P−M+2A In the demand function, P is the price of good Y, M is the income of consumers in the area, and A is the amount of money XYZ Inc. spends advertising Widgets. Given this information, are Widgets a normal or inferior good?
Inferior Good
All of the following are true for the minimum wage, except which one?
It creates a shortage of workers.
Which of the following is true regarding tacit collusion? A. It is more likely to occur when the price elasticity of demand is small. B. It is a formal agreement. C. It is more likely to occur when barriers to entry are low. D. It is illegal.
It is more likely to occur when the price elasticity of demand is small..
All of the following are true regarding an English auction except which one?
It is the most common type of auction in business settings.
The short-run supply curve for a firm in a perfectly competitive market is
Its marginal cost curve above the minimum point of its average variable cost curve
The optimal output rule for a monopoly firm is to produce that quantity where P = MR P = MC MR = MC ATC = MC
MR = MC
Refer to the figure above. At the 30th unit of action, which of the following is true? MC upward at 0,20 to 100,120 and MB downward at 0,100 to 100,0
Marginal benefit exceeds marginal cost.
Matt and Kendrick are DJs who each want to play a huge concert for their group of friends on New Year's Day. Matt knows that Kendrick wants to have his own concert, and Kendrick knows that Matt wants his own concert. The problem is that if they both have a concert at the same time, half their friends will go to each, and neither of them wants a half-full concert. The benefit to either Matt or Kendrick of not playing a concert is 0. If one DJ has a concert while the other does not, the DJ at the turntables gets a benefit of 10, while the DJ who is not playing gets a payoff of -5. If they both play at the same time, each gets a payoff of -10. What is the Nash equilibrium of this game? Matt DJs and Kendrick DJs Matt DJs and Kendrick does not DJ Kendrick DJs and Matt does not DJ Neither DJ plays
Matt DJs and Kendrick DJs
Explain the short-run and long-run difficulties that airlines would have in raising ticket prices when jet fuel prices rise.
Multiple responses are acceptable - could reference the fact that fuel prices fluctuate frequently, while a significant fraction of tickets are purchased weeks ahead of travel.
Airline industry experts generally believe that air travel is a very competitive market. As a result, it is assumed that it is difficult, if not impossible, for airlines to pass on higher jet fuel prices to passengers by raising ticket prices What attributes are present in the air travel market that are consistent with perfect competition?
Nationally there are a large number of buyers and sellers, however this may not be true locally. The product is highly regulated and thus a trip in coach on most airlines is very standardized (though it is branded). Firms are free to enter/exit and frequently do - there are no barriers to entry.
Happy Feet wants to prevent Best Nails from entering the nail salon market. The above game tree illustrates the different strategies and corresponding payoffs for the two firms. Both Happy Feet and Best Nails have the same strategies of advertising (Ad) or not advertising (No Ad). The payoffs represent net profit in millions. The Nash equilibrium of this game is for Happy Feet to ________ and Best Nails to ________. Happy Feet Ad No Ad Best Nails Best Nails No Ad Ad No Ad Ad HR $5M HF $1M HR $4M HF $2M BN $1 BN $4M BN $1M BN $3M
No Ad; Ad
In the long-run equilibrium of a perfectly competitive market with identical firms, what are the relationships among price (P), marginal cost (MC), and average total cost (ATC)? P>MC and P>ATC P>MC and P=ATC P=MC and P>ATC P=MC & P=ATC
P=MC & P=ATC
A demand curve will shift due to changes in all of the following variables EXCEPT population: - expectations about the future - Correct Response - price - the prices of related goods
Price
Darren loves to go to the movies, and he just learned that he can buy a ticket at a discounted price using his student ID. Darren now attends movies even more often. Which of the following factors of demand caused the change in Darren's behavior? Income Price Preferences Number of buyers
Price
Managers of firms in oligopoly markets can employ any of the following business practices to increase the probability of generating tacit collusion, except
Price Fixing
Managers of firms in oligopoly markets can employ any of the following business practices to increase the probability of generating tacit collusion, except Price Visibility Price Fixing Precommitments Price Leadership
Price Fixing
Suppose that the U.S. Congress passes a program to further enhance the U.S. automotive industry's position in the global economy. The legislation provides increased funding for automotive engineering education in secondary schools. At the same time, in an effort to raise additional tax revenue, the government eliminates several tax breaks for consumers who buy electric cars. What impact will these changes have on the equilibrium price and quantity of new electric cars in the U.S.?
Price will decrease, change in quantity is ambiguous
Which of the following is not correct for a perfectly competitive firm in the long run?
Price=minimum average variable cost
Why does it make no sense for the managers of a perfectly competitive firm to spend money on advertising?
Products are by definition undifferentiated, there is no way to tell them apart. Put another way, if they could be identified, it would not be a perfectly competitive market
No matter how many soft drinks you buy, you have no effect on the price of soft drinks. Is this industry perfectly competitive? Explain why or why not.
Products are differentiated, so it is not perfectly competitive. Also, the fact that an individual consumer has no market power does not ensure that no producer has market power.
Refer to the payoff matrix above. If Best Lights and Bright Lights both know that the above game will be played exactly four times, which of the following will be the outcome of the game in each of the four periods? Bright Lights set high set low set high 9\8 7\11 Best Lights set low 10\6 8\7
Set Low Price/Set Low Price
Refer to the payoff matrix above. Which of the following is the dominant strategy equilibrium? Bright Lights set high set low set high 9\8 7\11 Best Lights set low 10\6 8\7
Set Low Price/Set Low Price
Identify whether each of the following transactions involves spot exchange, contract, or vertical integration Boat Lifts R Us purchases generic AC motors from a local distributor
Spot Exchange
Identify whether each of the following transactions involves spot exchange, contract, or vertical integration Kaspar Construction - a home-building contractor-purchases 50 pounds of nails from the local Home Depot.
Spot Exchange
If the cost to produce frozen chicken nuggets decreases at the same time as consumer tastes shift away from frozen chicken nuggets and the shift in demand is equal to the shift in supply, which of the following is true?
The equilibrium price will decrease and the equilibrium quantity will not change
A firm is more likely to produce its own input if all of the following are true except which one?
The firm experiences diseconomies of scale when producing the input.
If a perfectly competitive firm is producing 2,000 units and, at the 2,000th unit, the difference between marginal revenue and marginal cost (MR - MC) is zero, which of the following is true?
The firm is maximizing profit.
Why does the marginal product of labor eventually decline as more labor is used with another fixed input?
The labor will have, on average, fewer units of the other inputs to combine with and the increases to total output obtained from more labor will decrease.
Why is a winner's curse less likely in auctions for independent private value items than in auctions for common value or correlated value items?
The prospect of suffering the winner's curse increases if a firm has less information than its competitors and/or if there is significant uncertainty about the true value of the item being auctioned. With independent private values, a firm is less likely to under or overvalue an item because they have the best information about how they will use the item. With an item that has a common value, everyone bidding on the item gets the same value when they win - even if they don't know what that value is. As a result, when more people enter an auction for a good with a common value, the liklihood that some of them know more than you do about the true value of the item increases. Thus, it is less likely you will suffer the winner's curse in an auction for a good with an independent private value because it is more likely that you know the true value of the item relative to an auction where the good has a common value among all bidders.
Your firm produces ready-made guacamole and avocados are the primary ingredient. During a news report, weather forecasters just announced that there will be a freeze in the region in which your firm buys avocados. This freeze will likely damage many of the avocados that are almost ready for harvest. Which of the following is likely to occur as a result of the freeze?
The supply curve will shift to the left.
Using Excel, the manager of Quick Breaks Coffees has estimated the daily demand function for its regular coffees; the results are shown in the table above. Using 95 percent confidence, the P-value for the slope coefficient on price suggests which of the following is true? Multiple R0.98 R Square0.96 Adjusted R Square0.95 Standard Error3.3Observations35 Coef StError tStat P lower upper Intercept 170.03 3.19 53.16 0.00 163.53 176.54 Price -22.48 0.74 -30.11 0.00 -24.01 -20.96
The true slope coefficient is nonzero.
________ is an example of an implicit cost.
The wear and tear on a firm's machinery
If a per-unit tax is imposed on the production of what, which of the following shifts of cost curves is correct?
There will be an upward shift of the MC, ATC, and AVC curves
Explain why automobile manufacturers produce their own engines but purchase mirrors from independent suppliers.
This could be the result of multiple factors, the two most likely being THE HOLDUP PROBLEM and an increase in information and control. Engines are a central and essential component to an automobile, while a mirror is an accessory. If there are problems with the delivery of the engines to the automobile assembly line, it can be very costly. Engines that are not powerful enough can make a car useless, engines that vibrate 2 too much can cause other parts to loosen or break, and engines of the wrong shape may not fit well within the frame. Furthermore, a failure for this part to be delivered on time will prevent the assembly line from proceeding because it would be impossible to drive a car off the line without an engine. Mirrors, on the other hand, are not essential for moving the vehicle down the assembly line and can easily be affixed to the body at a later date. There is no potential holdup if mirrors do not arrive, and because they are not a specialized technology they can easily be sourced from multiple vendors - preventing trading partners up the supply chain from leveraging better terms from the automakers. While it may be helpful for the car designers and engine designers to work collaboratively, it is likely that the design for the mirror can be easily arrived at by a single team since it is unlikely to impact any other car components.
You are bidding in an auction for a certified, used tractor. You determine that the economic profit you can make from the tractor is $80,000. You do not care about any risk or uncertainty in your estimate of the economic profit. Other bidders have their own valuations of the tractor, which depend on their unique uses for it. If the auction is an English auction, is your maximum bid more than, less than, or equal to $80,000? Explain your answer.
This prompt suggests that the tractor is valued independently by the bidders who have different uses for the farm implement. In this case it is optimal to bid up to the valuation of $80,000 in an english auction. You know your value, so you only need to bid until all the other competitors drop out of the auction. If you drop out earlier you miss a chance to possibly profit from a winning bid of less than your value. If the bidding arrives at your valuation of $80,000, you can stop and know that if you continued to bid you would might win, but any bid above your value would bring you negative surplus
what is a public franchise?
a right granted to a firm by the government that permits the firm to provide a particular good or service and excludes others from doing so
A monopolist can earn negative marginal revenue.
True
A monopoly firm's marginal revenue is always less than the market price for their product, no matter what level of output they choose. True False
True
According to the Law of Supply, holding everything else constant, increases in price cause increases in the quantity supplied. True False
True
In general, if managers are able to make a job more appealing to an employee, this helps managers as it reduces labor turnover.
True
In the long-run, firms engaged in monopolistic competition earn zero economic profits True False
True
Price discrimination occurs when a firm charges different customers different prices that are not based on differences in marginal costs.
True
Regardless of market structure, all firms maximize profits by setting marginal revenue equal to marginal cost. True False
True
The relationship between the number of hours spent studying for a Managerial Economics midterm exam (x) and student achievement on that exam (y) - measured in the portion of questions answered correctly - was studied in 25 online students using ordinary least squares regression. The data yielded the following equation estimating the relationship: Y^=.15+0.084x It can be concluded from this equation that, on average, an additional hour of study is associated with 8.4 point grade improvement.
True
he relationship between the number of hours spent studying for a Managerial Economics midterm exam (x) and student achievement on that exam (y) - measured in the portion of questions answered correctly - was studied in 25 online students using ordinary least squares regression. The data yielded the following equation estimating the relationship: ŷ =.15+.084x It can be concluded from this equation that, on average, an additional hour of study is associated with 8.4 point grade improvement. True False
True
A normal good is one for which a rise in income will cause a leftward shift (decrease) in demand a rise in the price of a related good will cause a leftward shift (decrease) in demand a rise in the price of a related good will cause a rightward shift (increase) in demand a rise in income will cause a rightward shift (increase) in demand
a rise in income will cause a rightward shift (increase) in demand
price taker
a seller who can only sell their goods at the equilibrium price
Perhaps the most popular feature of the Affordable Care and Patient Protection Act is a provision that prohibits insurance companies from denying coverage or raising premiums based on a preexisting condition. Among health-care wonks, this is known as "guaranteed issue." Another popular feature of that law are the subsidies offered by the government that help make insurance premiums affordable to Americans of every income bracket. Those popular provisions of the law commonly referred to as 'Obamacare' are paired with another much less popular provision: that every American is required to maintain qualified health insurance coverage. Many legislators have signaled their desire to do away with this unpopular provision, while maintaining the well-liked guaranteed issue provision and assuring voters that premiums will remain reasonably priced. Using what you have learned about adverse selection in this module, explain why this approach is unlikely to succeed.
Two words: death spiral. If firms have to offer policies to everyone, they need to price those policies to cover all of the possible losses they will suffer as a result of insuring everyone. Because the premium each person pays reflects the average loss among all insured persons, necessarily some people will pay more for insurance than they are likely to use and others will pay less than they are likely to use. Naturally, some of the healthy people who are paying for more health insurance than they are using, they might opt out and elect to just come back and get insurance once they are sick - and firms would have to let them. As a result, the pool of people currently insured would only contain people using high levels of healthcare services. This will force insurance companies to raise prices, which will cause more of the relatively healthier insurance plan participants to cancel coverage, which will further raise premiums...and so on. If this plan were to be taken to the logical conclusion, health insurance would be incredibly expensive eventually nobody would be able to afford it.
Identify whether each of the following transactions involves spot exchange, contract, or vertical integration Exxon-Mobile uses the oil extracted from its wells to produce raw polypropylene, a type of plastic
Vertical Integration
Give three examples of products or firms protected by barriers to entry. Describe the barrier to entry for each example.
Viagra - protected by intellectual property laws Your local power utility - it is a government sanctioned monopoly that enjoys immense economies of scale XM radio - large fixed costs currently prevent entry into the market
In the class discussion forum I posted a thread titled "Who wants to be a trillionaire?" It was about hyperinflation and economic mismanagement by leaders in several countries. Shortly after that post appeared, the head of state who had led one of those nations for its entire existence was deposed. Coincidence? Which country/leader combination am I referencing?
Zimbabwe - Robert Mugabe
A decrease in the price of Pepsi is likely to cause:
a decrease in the demand for Coca-Cola due to a change in the price of a substitute good.
A decrease in the price of Pepsi is likely to cause: a decrease in the demand for Coca-Cola due to a change in the price of a complementary good. a decrease in the demand for Coca-Cola due to a change in the price of a substitute good. an increase in the demand for Coca-Cola due to a change in the price of a complementary good. an increase in the demand for Coca-Cola due to a change in the price of a substitute good.
a decrease in the demand for Coca-Cola due to a change in the price of a substitute good.
Knowing the price elasticity of demand is important in business because it allows a manager to determine whether:
a price increase will cause total revenue to rise or fall
Knowing the price elasticity of demand is important in business because it allows a manager to determine whether: a price increase will cause total revenue to rise or fall an increase in supply will cause total profit to rise or fall a price increase will cause the quantity demanded to rise or fall a price increase will cause the demand to rise or fall
a price increase will cause total revenue to rise or fall
how is a price searcher different from a price taker
a price searcher can sell some of its products at various prices, while a price taker can only sell it at the equilibrium price
Compared to the socially efficient level, a monopoly firm maximizing profits will choose
a quantity that is too low and a price that is too high
Mario's Pizza and Bella's Pizza are in tacit collusion to cooperate and each charge a high price for their pizzas. If Mario's Pizza initially cooperates with Bella's Pizza, but then switches and charges a low price and Bella's Pizza responds by forever charging a low price, this is an example of ________.
a trigger strategy
At a particular output level, if a firm's long-run marginal cost is $12 and its long-run average cost is $8, the firm is likely to be experiencing ________.
diseconomies of scale
Which of the following is an example of a homogeneous good?
green cabbage
what is a cartel agreement?
an agreement that specifies that they will act in a certain way to reduce competition and to raise their profits--illegal in the united states
why do sellers charge a lower price to some customers than to others?
because they believe that they might sell more at a lower price, increasing profit
why are oligopolistic firms price searchers?
because they have some control over the price they charge for their product
why are monopolistic competitive firms price searchers?
because they sell slightly differentiated products
why would a monopolistic competitive firm rather be monopolistic?
because they would have less competition
Which of the following is not a factor that affects the value of a demand forecast?
adverse selection
A natural monopoly: profit maximizes when it produces the quantity where MR = MC experiences decreasing costs throughout the relevant region of output. is a monopoly whose ATC curve declines over the output levels at which price is greater than or equal to average total cost all of the above statements are true
all of the above statements are true
The law of demand states that:
all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease
The law of demand states that: - all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease - all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will increase - all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will not change - all other factors being equal, as the price of a good or service decreases, consumer demand for the good or service will decrease
all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease
how does the profit act as a signal in a perfectly competitive market?
as new firms gravitate towrd the profit they increase the supply of the good, lowering the price
Production is profitable in the short run whenever price is greater than average total cost marginal cost average variable cost average fixed cost
average total cost
In the long run, a monopolistically competitive firm produces where its ________ is tangent to its ________. A. marginal cost; marginal revenue curve B. average total cost; demand curve C. average total cost; marginal revenue curve D. marginal cost; demand curve
average total cost; demand curve
The market for birthday clowns is hit-and/or-miss. 50% of clowns will just scare the kids - but hey, at least they are occupied doing something? On the other hand, good clowns are awesome and the kids will make memories for a lifetime. A parent would pay $100 for a bad (scary) clown to work their child's birthday party and a bad clown really has no better employment options, and so will accept anything more than $50. Parents would happily pay up to $200 for a good clown, but good clowns know they have a special talent and will not work for anything less than $100. If parents pay clowns up front and cannot tell a good clown from a bad clown until after it is too late, which answer below describes a possible equilibrium in the market for birthday clowns?
both good and bad clowns are hired and they are paid $100 no matter which type they are
In a linear regression, if the explanatory variable is measured in dollars, the response variable
can be in any unit of measurement
In a linear regression, if the explanatory variable is measured in miles per hour, the response variable must also be measured in miles per hour must be some measure of time or distance cannot be measured in miles per hour can be in any unit of measurement
can be in any unit of measurement
Firms engaged in monopolistic competition can increase profits through the use of all of the following EXCEPT marketing innovation creating barriers to entry collusion
collusion
When a monopolist switches from charging a single price to practicing perfect price discrimination, it reduces
consumer surplus
A perfectly competitive firm is producing the profit-maximizing output level when their variable cost increases. If the market price does not change, to maximize profit, the firm will need to ________.
decrease production
What did the Robinson-Patman Act attempt to do?
decrease the failure rate of small businesses by protecting them from competition of larger businesses
As the number of firms in a Cournot oligopoly ________, the equilibrium quantity gets closer to the ________ equilibrium quantity.
decreases; perfectly competitive
A firm is a natural monopoly if it exhibits the following as its output increases
decreasing average total cost
A firm is a natural monopoly if it exhibits the following as its output increases decreasing marginal revenue increasing marginal cost decreasing average revenue decreasing average total cost
decreasing average total cost
A merger of two firms may increase economic efficiency by
decreasing average total cost through an increase in economies of scale
The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.
downsloping, perfectly elastic
The demand curve in a purely competitive industry is ____, while the demand curve to a single firm in that industry is ____.
downsloping; perfectly elastic
An ascending-bid auction is also known as a(n)
dutch auction
what did the wheeler-lea act do?
empowered the federal trade commission to deal with false and deceptive acts or practices by businesses
A regression analysis estimated using Ordinary Least Squares (OLS) does all of the following except which one?
estimates a regression equation that has zero residuals
how much competition do oligopoly markets face?
fairly intense competition
When a firm produces zero output, its total cost is equal to its ________.
fixed cost
A firm making its short-run decision about whether or not to produce should ignore its fixed costs variable costs average costs marginal costs
fixed costs
why would a seller want price to discriminate?
if it ends up increasing total revenue
Which of the following is an example of a objective probability?
if you make a ransom draw from a standard deck of playing cards there is a 1 in 52 chance of picking the ace of spades
Which of the following firms compete in a perfectly competitive market or a market that closely approximates perfect competition? i. Verizon Wireless ii. Swaz Potato Farms iii. Alcoa Aluminum iv. Gucci
ii. Swaz Potato Farms
To maximize total profit, managers want to produce the quantity in which marginal benefit ________ marginal cost.
is equal to
what is the problem for the monopolist?
it doesnt know what the best price is in order to sell all of their quantity , so it must be done through trail and error
What are antitrust laws
laws meant to control monopoly power and to preserve and promote competition
Larger values of R-squared imply that the observations are more closely grouped about the
least squares regression line
Larger values of R-squared imply that the observations are more closely grouped about the average value of the independent variables average value of the dependent variable least squares regression line origin
least squares regression line
A firm in a perfectly competitive industry maximizes profit by choosing the quantity at which
marginal cost equals the price
A firm in a perfectly competitive industry maximizes profit by choosing the quantity at which average total cost is at its minimum marginal cost equals the price average total cost equals the price marginal cost equals average total cost
marginal cost equals the price
A firm in a perfectly competitive industry maximizes profit in the SHORT RUN by choosing the quantity at which
marginal cost equals the price
If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost, the difference between the wholesale demand curve and the consumer retail demand curve is the ________.
marginal cost of distribution
assume that a firm uses only one variable input. If a firm is experiencing diminishing returns, which of the following is true as more of the variable input is used
marginal cost will increase
The wage rate divided by marginal product equals A.average total cost. B.average product. C.average variable cost. D.marginal cost.
marginal cost.
If a firm hires an additional worker and discovers that its total output has fallen, then it must be true that A.average total cost is negative. B.marginal cost is negative. C.marginal product is minimized and marginal cost is maximized. D.marginal product is negative.
marginal product is negative.
When marginal cost is falling A.marginal product is at a maximum. B.marginal product must be falling. C.marginal product is at a minimum. D.marginal product must be rising.
marginal product must be rising.
In a successive monopoly structure, the profit-maximizing wholesale price is equal to the difference between the ________ and the ________ of distribution.
marginal revenue; marginal cost
In a perfectly competitive market, an increase in the market demand will shift the perfectly competitive firm's ________ curve ________.
marginal revenue; upward
A regression line
may be used to predict a value of the dependent variable if the corresponding value of the independent variable is given
A regression line only works if a strong linear relationship exists between the dependent and independent variables establishes a cause-effect relationship between variable may be used to predict a value of the dependent variable if the corresponding value of the independent variable is given none of the other options listed are correct
may be used to predict a value of the dependent variable if the corresponding value of the independent variable is given
Government monopoly
monopolies that are legally protected from competition
The use of a deductible by insurance companies helps to reduce the problem of
moral hazard
If the cost of capital is $32 per hour, the wage paid to employees is $15 per hour, the marginal product of capital is 16 units per hour, and the marginal product of labor is 7.5 units per hour, to minimize its costs, the firm should ________.
not change the amount of labor or capital
market monopoly
not legally protected by the government from competition
how unique is a product in an oligopoly market?
not unique at all
in what ways does an oligopoly differ from other markets?
number of sellers
Which of the following is a common issue that one might run in to when attempting to model the relationship between a dependent variable and several explanatory variables:
omitted variable bias
Which of the following is a common issue that one might run in to when attempting to model the relationship between a dependent variable and several explanatory variables: racial bias radial bias omitted variable bias fixed bias
omitted variable bias
The relationship between number of donuts consumed per day (D) and body fat percentage (F) was studied in 360 college students using ordinary least squares (OLS) regression. The following regression equation was obtained from this study: F= 0.012+.025D The above equation implies that each donut consumed increases body fat percentage by 2.5% on average it takes 2.5 donuts to increase body fat percentage by 1% on average each unit of daily donut consumption is associated with a 2.5% increase in body fat percentage each unit of daily donut consumption decreases body fat percentage by an average amount of 1.2%
on average each unit of daily donut consumption is associated with a 2.5% increase in body fat percentage
under what conditions is price discrimination illegal in the united states?
only if injuries occur to other competition or if the seller cant prove why they are charging a lower price
Assume that, for a perfectly competitive firm, marginal cost equals average variable cost at $10, marginal cost equals average total cost at $15, and marginal revenue = marginal cost at $12. On the basis of this information, the firm should
operate in the short run, even though it will sustain a loss
All of the following can affect a firm's total revenue except which one?
opportunity costs
The cycle of increased market demand that leads to ________ and then a(n) ________ in market price has caused many firms bankruptcy.
overexpansion; decrease
For a profit-maximizing monopoly that charges the same price to all consumers, what is the relationship between price , marginal revenue , and marginal cost ?
p is less than MR, MR = MC
This is a method of determining capacity, price, and quantity for a firm that faces a high-demand period followed by a low-demand period
peak-load pricing
What are the four types of markets?
perfectly competitive, monopolistic, monopolistic competitive, and oligopolistic
A demand curve will shift due to changes in all of the following variables EXCEPT
price
what two prices were prohibited by the Clayton Act
price discrimination and tying contracts
Demand tends to be more elastic when:
price is high and more inelastic when price is low
Demand tends to be more elastic when: price is high and more inelastic when price is low price is low and more inelastic when price is high demand is perfectly inelastic the quantity demanded is larger
price is high and more inelastic when price is low
On a coordinate system diagram for a supply curve: quantity goes on the horizontal axis and income goes on the horizontal axis there is no convention as to which axis price and quantity are placed on quantity goes on the vertical axis and price goes on the horizontal axis quantity goes on the horizontal axis and price goes on the vertical axis
quantity goes on the horizontal axis and price goes on the vertical axis
When a person purchases an insurance policy they are
reducing their risk
Fluffy Inc. makes pillows it sells through perfectly competitive retail outlets. The wholesale demand curve Fluffy faces is the ____ for pillows _____ the marginal cost of distributing the pillows
retail demand curve ; minus
If producers incorrectly set the price of their product too low a: shortage will result and consumers will bid the price down to equilibrium surplus will result and excess goods in inventory will signal the producers to lower their prices shortage will result and consumers will bid the price up to equilibrium surplus will result and excess goods in inventory will signal the producers to restrict output until sales increase
shortage will result and consumers will bid the price up to equilibrium
what is an oligopolistic market?
similar to monopoly except there are few sellers instead of only one
When profits occur in the future, the ________ the profit occurs, the ________ it is discounted and the ________ positive effect it has on the net present value.
sooner; less; larger
The four important characteristics that define a perfectly competitive market are :standardized good, full information, no transactions costs, participants are price takers. standardized information, finished good, no transactions costs, participants are price makers. standardized good, same information for buyer and seller, low transactions costs, participants are price takers. standardized good, full information, no transactions costs, participants are price makers.
standardized good, full information, no transactions costs, participants are price takers.
If a monopoly firm's fixed costs increase, its price will ________ and its profit will ________
stay the same, decrease
At any price higher than the equilibrium price, a ________ in quantity will be created and at any price lower than the equilibrium price, a ________ in quantity will be created.
surplus; shortage
Which factor of supply would the introduction of e-mail into places of businesses be? technology price of input number of sellers expectation of the future
technology
what is a classic example of a monopolist that exclusively owns a scarce resource?
the Aluminum Company of America
For a firm to profit maximize, it must also be true that the firm is cost minimizing the market price is greater than the shut-down price the market price is equal to the break-even price the firm is earning a positive accounting profit
the firm is cost minimizing
what is the limit on price for monopolists?
the height of the demand curve
The prices of related goods matters when determining supply because it affects:
the opportunity cost of production
The prices of related goods matters when determining supply because it affects: the opportunity cost of production whether or not your good will sell the competition in the market the availability of substitute goods
the opportunity cost of production
All of the following are necessary conditions for successful price discrimination, EXCEPT:
the product is an undifferentiated good
Adverse selection can be reduced by
the use of screening, where potential purchasers of a product collect information about the product prior to purchasing it; the use of signaling by suppliers of a product, where the signal acts to provide the potential purchasers with information about the quality of the product; the seller developing a reputation for a high-quality product
how do economists determine whether a market is oligopolistic
they look at the percentage of sales accounted for by the top 4 firms in the industry
how much do monopolistic competitive firms produce
they produce the quantity of output at which marginal revenue=marginal costs
how much do monopolistic competitive firms charge?
they sell their products by setting it at the highest possible cost they can sell all of their output at
A hotel that charges Dave and Carol $100 each for a standard queen sized bedroom on Thursday night when he books it on Tuesday, but on Wednesday (the next day) charges Tim and Pam $120 each to book the same room for the same night is most likely engaging in Hint: None of these people are staying in the same room.
third degree price discrimination
_______ is the practice of charging different groups of customers different prices for the same product
third-degree price discrimination
Jane is offered two jobs. Job A pays $30,000 per year and offers 4 weeks of vacation. Job B offers $32,000 per year along with 2 weeks of vacation. What is the opportunity cost of choosing Job B?
two weeks of vacation per year
If the price of corn, an input to corn chips, increases, this will cause the short-run average total cost curves to shift ________ and the long-run average cost curve to shift ________.
upward; upward
In the long-run, all factors of production are
variable
In the long-run, all factors of production are variable fixed rented refundable
variable
The vertical distance between the average ________ cost curve and the average total cost curve becomes ________ as the quantity increases.
variable; smaller
Which of the following is NOT an attribute consistent with a perfectly competitive market? firms are free to enter and free to exit the industry there are many sellers in the industry all firms in the industry sell identical products very low transaction costs
very low transaction costs
when does price discrimination exist?
when a seller charges different prices to different buyers and price does not reflect cost differences (movie tickets)
will a seller act differently if it is only one of a few sellers than if it is one of many?
when a seller is one of a few, it is more likely to base its behaviors on what the other sellers do
what is a natural monopoly
when there is only one seller of a good because of its low average total cost
If a monopolist's demand curve is linear, its marginal revenue curve is ________ and has a slope that is ________ as the demand curve. A. upward sloping; the same B. upward sloping; twice as steep C. linear; the same D. linear; twice as steep
linear; twice as steep