Econ micro exam 3
A firm's average fixed cost is equal to the firm's:
fixed cost divided by its level of output
In exchange for a share of the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus. The beneficiaries of this deal is/are _______.
State U and CheapFizz
Commitment devices are necessary when:
following through on a threat or promise is not in a player's best interest.
A decision tree is used when modeling:
games in which timing matters.
The phrase "smart for one, but dumb for all" refers to the idea that the individual pursuit of self-interest:
doesn't always lead to an efficient outcome.
The essential feature that differentiates imperfectly competitive firms from perfectly competitive firms is that an imperfectly competitive firm:
faces a downward-sloping demand curve.
One difference between the long run and the short run in a perfectly competitive industry is that:
firms necessarily earn zero economic profit in the long run but may earn positive or negative economic profit in the short run.
In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that:
firms will earn zero economic profit in the long run.
Suppose a firm's total revenue is $100 when it sells 10 units, and $110 when it sells 11 units. The firm, therefore, is a(n):
perfect competitor.
The profit maximizing rule P = MC applies to:
perfectly competitive firms only.
The demand curve for a perfectly competitive firm is ______, while the demand curve for a monopolist is ______.
perfectly elastic; downward-sloping
Some people have argued that the government should provide medical care to everyone. Under this system:
prices will not ration medical care so some other rationing method will be used.
Because monopolists charge a price in excess of marginal cost, it must be the case that monopolists:
produce less than the socially optimal level of output.
Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by:
the actions of independent, self-interested buyers and sellers.
Economies of scale exist when:
the average cost of production falls as output rises.
Professor Plum, who earns $100,000 per year, read in the paper today that the university pays its basketball coach one million dollars per year in exchange for his agreement to remain at the university for at least three more years. The coach earns more than Professor Plum because:
the coach is able to earn economic rent due to his unique talents.
If the demand curve fails to capture all of the benefits of consumption, then the:
the equilibrium price will be inefficiently low.
If a firm faces a downward-sloping demand curve, then:
the firm's marginal revenue from selling an additional unit of output is less than price.
If the market demand curve does not capture all of the benefits to society of buying an additional unit of good, then:
the market equilibrium will not be efficient.
Suppose a monopolist faces the demand curve shown below. This demand curve can be used to determine:
the monopolist's total revenue at different price and quantity combinations.
The dilemma in a prisoner's dilemma is that:
the players would be better off if they both played a dominated strategy.
The three elements of a game are
the players, the strategies, and the payoffs.
The figure below shows the supply and demand curves for jeans in Smallville. The equilibrium price will NOT lead to the largest possible total economic surplus if:
the production of jeans generates air pollution.
The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. An industry spy comes to firm B and claims to know what firm A has decided. Given that each firm already knows the payoff matrix, how much would this information be worth to firm B?
$0
Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 1,000 t-shirts, your average total cost is ______.
$10.30
Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. If Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price, then what will be Mega's economic profit?
$100
Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. You may find it easier to answer the following questions if you fill in the payoff matrix below. If both players choose their dominated strategy they will each earn ______, and if both players choose their dominant strategy they will each earn ______.
$1000; $900
The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. If Column Cafe publishes coupons and Row Restaurant does not, then Row Restaurant will earn ______, and Column Cafe will earn ______.
$10; $200
Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. If Island Bikes charges a single price to all of its customers, then what price will it charge?
$12
Refer to the table below. An output level of 15 units, this firm's accounting profit is ______, and its economic profit is ______.
$12; $6.
Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 100 t-shirts, your average total cost is ______.
$13
Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. To OPEC, the payoff to abiding by the agreement is either:
$150 million or $200 million.
Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table below shows the reservation prices of the eight students enrolled in the class. If Campus Books is permitted to charge 2 prices, and the bookstore knows customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them, then what will be the bookstore's total economic profit?
$158 (By using a coupon, the bookstore can divide the original market into two submarkets. The first submarket consists of students Q though U and the second submarket consists of students V though X. In the first submarket, the bookstore will sell 5 books at a price of $36 each, and in the second submarket, the bookstore will sell 2 books at a price of $24 each. The bookstore's economic profit in the first submarket will be $130 (= $180 - $50), and its economic profit in the second submarket will be $28 (= $48 - $20)
Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. Pat's explicit costs are ______, and Pat's implicit costs are ______.
$16,000; $35,000
Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. If Quick Buck and Pushy Sales decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price, then what will be Quick Buck's economic profit?
$2,000
Suppose the table below describes the relationship between price and quantity demanded for a monopolist. If the marginal cost of producing each unit of output is $5, then this monopolist maximizes its profit by charging ______ per unit.
$6
Suppose the table below describes the demand for a good produced by monopolist. The monopolist's total revenue from selling 3 units is ______, and the monopolist's marginal revenue from selling the 3rd unit is ______.
$24; 6
Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. Pat's accounting profit is _______, and Pat's economic profit is _______.
$34,000; -$1,000
Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. For Pat to earn normal profit, Pat's accounting profit would have to be ______.
$35,000
Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table below shows the reservation prices of the eight students enrolled in the class. What price will Campus Books charge if it must charge a single price to all of its customers?
$36
The figure below shows the supply and demand curves for oranges in Smallville. What is the marginal cost of producing the tenth pound of oranges?
$4
Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Christine's opportunity cost of working as a consultant last year was ______.
$40,000
Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's explicit costs were ______, and her implicit costs were ______.
$51,000; $40,000
Suppose the table below describes the relationship between price and quantity demanded for a monopolist. The marginal revenue of the third unit of output is:
$6.
This firm's marginal revenue curve would intersect the vertical axis at ______.
$70
Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 and Acme matches the price cut, then if consumers are evenly split between the two firms, Acme's economic profit will be ______.
$75
Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. To Mexico, the payoff to cheating is either:
$80 million or $110 million.
Suppose a monopolist faces the demand curve shown below. The marginal revenue of the 35th unit of output is:
0
Suppose a monopolist faces the demand curve shown below. If the monopolist were to sell 20 units of output, its total revenue would be:
1,000.
Which of the following describes a surplus-enhancing transaction?
A person pays $10.00 to buy a scoop of ice cream at a baseball game.
Refer to the table below. At what output level or levels are this firm's owners doing as well as or better than they could do with the next best use of their resources?
10, 15, and 20 units
Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. This monopolist maximizes its profit by producing ______ textbooks per week and charging a price of ______ per textbook.
100; $80 ( look at demand line)
Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 while Acme continues to comply with the collusive agreement, then Mega will then sell ______ units and Acme will sell ______ units.
150; 0
Suppose a monopolist faces the demand curve shown below. If the monopolist's marginal cost is constant and equal to $30, its profit-maximizing level of output is:
20 units.
Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. ______ residents of Miniville live west of point B, and _____ live east of point A.
200; 200
Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. If Island Bikes charges a single price to all of its customers, then how many bikes will it rent out each day?
3
Suppose the table below describes the relationship between price and quantity demanded for a monopolist. If the marginal cost of producing each unit of output is $5, then this monopolist's profit-maximizing level of output is ______.
3
Suppose the table below describes the relationship between price and quantity demanded for a monopolist. If the marginal cost of producing each unit of output is $5, the at the monopolist's profit-maximizing level of output, the monopolist produces ______ units of output than is socially optimal.
3 more
Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. If before Tracy chose, Amy could make a credible commitment to choose either the top or bottom branch when her turn came, then we would expect Tracy to get a payoff of ______ and Amy to get a payoff of ______.
300; 200
Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes charges different price in the morning and in the afternoon, then what will be its daily economic profit?
33
Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table below shows the reservation prices of the eight students enrolled in the class. How many books will Campus Books sell if it must charge a single price to all of its customers?
5
Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table below shows the reservation prices of the eight students enrolled in the class. If Campus Books is permitted to charge 2 prices, and the bookstore knows customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them, then how many in total books will the bookstore sell? 8
7
Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 and Acme matches the price cut, then if consumers are evenly split between the two firms, Acme's economic profit will be ______.
75
Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table below shows the reservation prices of the eight students enrolled in the class. What is the socially optimal number of books?
8
The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. The socially optimal level of output is:
8 units per day.
Refer to the figure below. What is the Nash equilibrium of this game?
A chooses Up, B chooses Left
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Acme Manufacturing: TC = 100 + 3Q. Generic Industries: TC = 500 + 3Q. Which of the following statements is true?
Acme and Generic have the same marginal cost
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Acme Manufacturing: TC = 100 + 3Q. Generic Industries: TC = 500 + 3Q. Which of the following statements is true?
Acme and Generic have the same marginal cost.
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Acme Manufacturing: TC = 100 + 3Q. Generic Industries: TC = 500 + 3Q. Suppose that Acme and Generic face the same demand curve. If each firm produces its profit-maximizing level of output and earns a positive economic profit, then which of the following statements is true?
Acme and Generic will produce the same quantity, but Acme will have higher profits.
Suppose two companies, Macrosoft and Apricot, and considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). Which of the following statements is correct?
Apricot does not have a dominant strategy.
The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. An industry spy comes to firm B and offers to pay B in exchange for B's certain and enforceable promise to not invest. How much must the spy pay B?
At least $15 million.
Suppose your economics professor has an extra copy of textbook that he or she would like to give to a student in the class. Which of the following schemes is the most likely to result in an efficient outcome?
Auctioning off the textbook to the highest bidder.
Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The profit-maximizing price for this monopolist to charge is:
B
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Mega Corp: TC = 5,000 + 100Q Big Inc: TC = 4,000 + 200Q When each firm produces 8 units, ______ has a lower total cost, and when each firm produces 12 units, ______ has a lower total cost.
Big Inc; Mega Corp
Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. At the extreme right end, all 100 voters lie to the left. If Candidate Y is running against Candidate Z:
Both candidates will have an incentive to move toward each other's position
Which of the following is NOT necessarily true in a market equilibrium?
Both rich and poor have adequate access to the good.
Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Which of the following statements is true?
Both the upper-left and lower-right cells are Nash equilibria.
Which of the following statements best expresses why economic efficiency should be society's first goal?
Efficiency maximizes total economic surplus and thereby allows other goals to be more easily achieved.
Which of the following industries does not fit the natural monopoly model?
Fast Food
Suppose Firm A and Firm B are considering whether to invest in a new production technology. For each firm, the payoff to investing (given in thousands of dollars per day) depends upon whether the other firm invests, as shown in the payoff matrix below. What is the Nash equilibrium of this game?
Firm A doesn't invest, and Firm B doesn't invest.
Which of the following is NOT a commitment device?
High fines for illegal parking on campus.
A consumer goes to purchase a TV advertised for $300. As he is checking out, the clerk informs him of a $20 rebate offer for the TV, which he fills out and receives in 3 months. What can one can infer about the consumer's reservation price?
It was at least $300.
Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Which of the following statements is true?
Lee does not have a dominant strategy.
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Mega Corp: TC = 5,000 + 100Q Big Inc: TC = 4,000 + 200Q If each firm is producing 15 units, you would expect:
Mega Corp to be able charge a lower price than Big Inc
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Mega Corp: TC = 5,000 + 100Q Big Inc: TC = 4,000 + 200Q ______ has a higher fixed cost and ______ has a higher marginal cost.
Mega Corp; Big Inc
Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. Which of the following statements is correct?
Mexico's dominant strategy is to cheat on the agreement.
If a firm collects $90 in revenue when it sells 4 units, $100 in revenue when it sells 5 units, and $105 in revenue when it sells 6 units, then one can infer the firm is a:
Monopolist
In many cities in the United States, a single firm provides electricity. Those firms are:
Monopolist
Curly told Larry about his new business venture: Curly pays Acme International $1,000 per month for supplies, works out of his apartment on his own computer and earns a monthly revenue of $1,500. Should Larry quit his job and do what Curly is doing?
Not if Larry is earning more than $500 per month at his current job.
Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. Which of the following statements is correct?
OPEC does not have dominant strategy.
Which of the following is NOT an example of the hurdle method of price discrimination?
Permanently reducing all prices by 10%.
Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. What is the equilibrium outcome of this game?
Player 1 chooses Down and Player 2 chooses Up.
Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. If Player 2 could make a credible commitment to choose either Up or Down when his or her turn came, then what would Player 2 do?
Player 2 would commit to choosing Down.
Suppose two companies, Macrosoft and Apricot, and considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). If Macrosoft and Apricot make their decision at the same time, then which of the following statements is correct?
The game has more than one Nash equilibrium.
Which of the following is NOT an example of an explicit cost?
The income the owner could have earned in his or her next best employment opportunity.
Refer to the figure below. Player B can infer that Player A will:
always choose Up.
Which of the following statements about implicit costs is true?
They measure the forgone opportunities of the firm's owners.
The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. Is this game a prisoner's dilemma?
Yes, because if both firms played their dominated strategy, they each would earn a higher payoff than when they both play their dominant strategy.
The table below shows how the payoffs to two political candidates depend on whether the candidates run a positive or negative campaign. The payoffs are given in terms of the percentage change in the number of votes received. Running a negative campaign is ______ for the ______ candidate.
a dominant strategy; Democratic
A strategy that limits defection in a repeated prisoner's dilemma game is:
a tit-for-tat strategy.
According to the theory of the invisible hand, if buyers and sellers are free to pursue their own self-interest, the result often will be:
an efficient allocation of resources.
Lee and Cody are playing a game in which Lee has the first move at A in the decision tree shown below. Once Lee has chosen either aggression or cooperation, Cody, who can see what Lee has chosen, must choose either aggression or cooperation at B or C. Both players know the payoffs at the end of each branch. In the equilibrium of this game, Lee chooses ______, and then Cody chooses ______.
aggression; cooperation
Duke is a highly skilled negotiator who could work for many law firms. The law firm that hires Duke is able to collect twice as much revenue per hour of Duke's time than it can for any other negotiator in town. The increased revenue will:
all go to Duke because, if it didn't, another firm could hire Duke away.
Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. If one store is located at A and the other store is located at B:
all of the people living between A and the mountains will shop at the store at A.
A market equilibrium is only efficient if:
all relevant costs and benefits are reflected in the market supply and demand curves.
The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. If Row Restaurant publishes coupons, Column Cafe would earn the highest profit if it:
also published coupons.
Adam Smiths theory of the invisible hand posits the actions of independent, self-interested buyers and sellers will ______ lead to the most efficient allocation of resources.
always
Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. Suppose Player 1 and Player 2 enter into a binding agreement in which Player 1 agrees to pay Player 2 a fixed amount of money to get Player 2 to play Up when it is Player 2's turn. How much will Player 1 have to pay Player 2 to get Player 2 to play Up?
at least $20.
A firm's fixed cost divided by its level of output is equal to its:
average fixed cost.
A good is characterized by network economies if it:
becomes more valuable as more people own it.
Before it became illegal, cigarette manufacturers once relied heavily on TV advertising. According to the textbook, when the government banned TV advertising, the cigarette manufacturers:
benefited because the decision about whether to advertise on TV was a prisoner's dilemma.
Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. You may find it easier to answer the following questions if you fill in the payoff matrix below. The clear outcome of this game is that:
both Joe and Sam will cut their price.
Relative to a world in which some people are motivated by nonmaterial incentives, if all people were motivated solely by financial incentives, then:
both business transactions and personal interactions would be different.
The table below shows how the payoffs to two political candidates depend on whether the candidates run a positive or negative campaign. The payoffs are given in terms of the percentage change in the number of votes received. In the Nash equilibrium of this game:
both candidates run negative campaigns
The table below shows how the payoffs to two political candidates depend on whether the candidates run a positive or negative campaign. The payoffs are given in terms of the percentage change in the number of votes received. Suppose that the Republican candidate tells the Democratic candidate that he intends to run a positive campaign. The likely result is that:
both candidates will run a negative campaign.
The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. The payoffs of this game are such that:
both firms would benefit from a law that made publishing coupons illegal.
If resources are misallocated in a perfectly competitive market, then, in the long run, profit opportunities will:
bring about a more efficient allocation of resources.
In a repeated prisoner's dilemma, players:
can sustain cooperation by employing a tit-for-tat strategy.
In an industry with free entry and exit, positive economic profit:
cannot be sustained indefinitely.
OPEC is an example of a:
cartel
The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. For Bagel World, ______ is a ______.
cheating on the agreement; dominant strategy
The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. For Bagels 'R' Us, ______ is a ______.
cheating on the agreement; dominant strategy
When players cannot achieve their goals because they are unable to make credible threats or promises, the situation is called a
commitment problem
When players cannot achieve their goals because they are unable to make credible threats or promises, the situation is called a:
commitment problem.
Lee and Cody are playing a game in which Lee has the first move at A in the decision tree shown below. Once Lee has chosen either aggression or cooperation, Cody, who can see what Lee has chosen, must choose either aggression or cooperation at B or C. Both players know the payoffs at the end of each branch. If Lee chooses aggression, Cody will respond with ______, and if Lee chooses cooperation, Cody will respond with ______.
cooperation; aggression
Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. Suppose Mexico chooses first, and then OPEC, after seeing Mexico's choice, chooses second. Before Mexico chooses, OPEC tells Mexico that if Mexico cheats on the agreement, then OPEC will also cheat, and if Mexico abides by the agreement, then OPEC will also abide. This is an example of a ______, and the outcome is that ______.
credible threat; neither will cheat
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Mega Corp: TC = 5,000 + 100Q Big Inc: TC = 4,000 + 200Q For both firms, average total cost:
declines as quantity increases
Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. As you increase your production of t-shirts, your average fixed cost ______ and your marginal cost ______.
decreases; stays the same
In tit-for-tat, if your partner ______ in your first interaction, then you will ______ in your next interaction.
defects; defect
Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. You may find it easier to answer the following questions if you fill in the payoff matrix below. For Joe, keeping his price at $3 per gallon is a:
dominated strategy.
A firm whose production process exhibits constant returns to scale would find that if it doubled all of its inputs, its output would ______.
double
An imperfectly competitive firm faces a demand curve that is:
downward sloping.
Suppose that you have noticed that almost all of the car dealers in your city are located along a three-block stretch of the same street. A likely reason for this clustering of car dealers is that:
each dealer is attempting to locate closest to the customers.
The reason that the prisoner's dilemma presents a dilemma is that:
each player has an incentive to play his or her dominant strategy, but when both choose the dominant strategy each player has a lower payoff than if they both had chosen the dominated strategy.
P-TV and QRS-TV are trying to decide whether to air a sit-com or a reality show in a given time slot. Viewers like both sit-coms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. Given the information in this decision tree, if QRS-TV announces that it will air a sit-com, it can expect to:
earn $5 million.
If the owners of a business are receiving total revenues just sufficient to cover all of their explicit and implicit costs, then they are:
earning a normal profit.`
In the long run, in a perfectly competitive industry:
economic profit and loss are driven to zero by entry and exit.
Accounting profit minus implicit costs equals:
economic profit.
Generally, ______ motivates firms to enter an industry, while ______ motivates firms to exit an industry.
economic profit; economic loss
A cost-saving innovation in a perfectly competitive industry will lead to:
economic profits for a few firms for a short time.
For perfectly competitive firms, marginal revenue ______ price; for monopolists marginal revenue ______ price.
equals; is less than
A price setter is a firm that:
has some degree of control over its price.
A perfectly price discriminating monopolist's profit is ______ the profit of a monopolist who charges the same price to all of its customers.
higher than
In order to effectively price discriminate, one requirement is that a seller must be able to:
identify customers with different reservation prices.
Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. If three stores were to open sequentially, you would expect that those stores would be located:
in a cluster, near the location chosen by the first store to locate.
Suppose the figure below illustrates the demand curve facing a monopolist. If the monopolist decreases its price from $12 to $10, its total revenue will ______.
increase by $600
If a monopolist's marginal revenue is $25 and its marginal cost is $19, then the monopolist should:
increase its output.
If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should:
increase output until marginal revenue equals marginal cost. (cost-benefit)
To sell an extra unit of output, a perfectly competitive firm ______, and an imperfectly competitive firm ______.
need not alter its price; must lower its price
Economies of scale arise from:
increasing returns to scale.
The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. At the socially optimal level of output, this monopolist would:
incur an economic loss of $64.
Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, tickets cost $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. Suppose Steven was able to purchase a ticket at the box office for $60. Steven's reservation price for the ticket is $65. If Steven attends "Mamma Mia!" and Ingrid does not, then this situation is:
inefficient because Steven and Ingrid could have made a mutually beneficial trade.
If it is possible to make a change that will help some people without harming others, then the situation is:
inefficient.
The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. Firm A's dominant strategy is to ______, and Firm B's dominant strategy is to ______.
invest; invest
Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. This game:
is not a prisoner's dilemma.
Suppose the table below describes the demand for a good produced by monopolist. The monopolist's marginal revenue from selling the 4th unit of output is less than $7 because:
it has to charge $1 less for each of the first 3 units of output.
Both a perfectly competitive firm and a monopolist find that:
it is best to expand production until the benefit and the cost of the last unit produced are equal.
If a natural monopoly increases the quantity of output it produces, then:
its average cost will decrease.
If a natural monopoly decreases the quantity of output it produces, then:
its average cost will increase.
In exchange for a share of the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus. CheapFizz now has market power due to:
its exclusive license to sell soda.
Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. If the first store to open in Miniville is located at A, to maximize the number of customers it attracts, the next store to open should locate:
just east of A.
Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested, and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. Commitment problems will be:
largely avoided in Altruism, but prevalent in Avarice.
Suppose famers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. In the long run, this increase in the demand for corn is likely to ______ the price of soy beans.
lead to an increase in
A firm is most likely to experience economies of scale if its start-up costs are high and its marginal cost is ______.
low
Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. You may find it easier to answer the following questions if you fill in the payoff matrix below. In this situation, the Nash equilibrium yields a:
lower payoff than each would receive if each played his dominated strategy.
Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. The equilibrium to the game results in ______ for Amy and Tracy relative to what they could get if they could solve their ______.
lower payoffs; commitment problem
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Acme Manufacturing: TC = 100 + 3Q. Generic Industries: TC = 500 + 3Q. When each firm is producing the same quantity, Acme's average total cost is:
lower than Generic's average total cost.
If the demand curve facing a monopolist shifts, then the monopolist's:
marginal revenue curve and profit-maximizing level of output will change.
For all firms, the additional revenue collected from the sale of one additional unit of output is termed:
marginal revenue.
Economic theory assumes that a firm's goal is to:
maximize its economic profit.
Unlike economic profit, economic rent:
may not be driven to zero by competition.
In exchange for a share of the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus. Prior to the deal, a 12-ounce can of CheapFizz sold for 75 cents. After the deal you would expect a 12-ounce can of CheapFizz to sell for:
more than 75 cents because CheapFizz is the only company that can sell soda on campus.
If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____.
more than double
Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. At the extreme right end, all 100 voters lie to the left. To an economic naturalist, this model helps explain why political candidates:
move toward more centrist positions during campaign season.
Refer to the figure below. In the matrix above:
neither Cory nor Jess has a dominant strategy.
P-TV and QRS-TV are trying to decide whether to air a sit-com or a reality show in a given time slot. Viewers like both sit-coms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. Suppose QRS-TV enters into an agreement with P-TV that gives QRS-TV the exclusive right to air a reality show during this time slot. QRS-TV would be willing to pay P-TV _______ in order to persuade P-TV to enter into this agreement.
no more than $10 million
Suppose a monopolist produces two different products. If the marginal cost of producing one is lower than the marginal cost of producing the other, and the monopolist charges a different price for the two goods, then the monopolist is:
not price discriminating.
If Row Resorts offers reduced rates, then Column Cruises would receive the highest payoff if it:
offered reduced its rates.
Adam Smith believed that the individual pursuit of self-interest:
often promotes the broader interests of society.
The use of psychological incentives to solve commitment problems would be least effective in games played:
once between strangers.
If a firm functions in an oligopoly, it is:
one of a small number of firms that produce goods that are either close or perfect substitutes.
If you were to start your own business, your implicit costs would include the:
opportunity cost of the time you spend working at the business.
Suppose several United States software design companies compete with each other in a perfectly competitive environment. If one company decides to move some of its offices to a low-wage country in order to reduce operating costs, then:
other companies will have an incentive move to the low-wage country in order to remain competitive.
Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, tickets cost $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. Ingrid decides to try to buy a ticket from a scalper (a person who purchased extra tickets at the box office with the intent to resell them at a higher price). If Ingrid finds someone who is willing to sell her a ticket for $70, she should:
purchase the ticket because doing so will make her $5 better off.
The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ______ function of price.
rationing
Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. Economists would consider the environmental damage that results from the production of cotton to be a(n):
relevant cost of production.
Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______.
rise; fall
According to the text, everyone shouts at a party in order to be heard. If instead everyone spoke at a normal volume people would still be heard, but people continue to shout because:
shouting is a dominant strategy.
According to the textbook, the owners of restaurants encourage tipping in order to:
solve a commitment problem with their wait staff.
If all firms in a perfectly competitive industry are experiencing economic losses, then:
some firms will exit the industry, until economic profits equal zero.
A monopolistically competitive firm:
sometimes distinguishes its output from that of its competitors by locating in a more convenient place.
In sequential games, the player who moves first:
sometimes has an advantage and sometimes has a disadvantage.
When a pharmaceutical company introduces a new drug, its research and development costs are ______, and the cost of the chemicals used in manufacturing the drug are ______.
start-up costs; variable costs
Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested, and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. Suppose residents of each island often play prisoner's dilemma games, always matched with a person from the same island, but not a person who they know or will play with again. If the same number of games is played on each island, you would expect:
the residents of Altruism to have higher average payoffs than the residents of Avarice.
Suppose the market for bottled water is served by two oligopolists. If they reach an agreement to restrict production and charge a price above marginal cost, then:
their agreement is likely to eventually collapse.
In the Nash equilibrium of a prisoner's dilemma:
there is unrealized opportunity for both to gain.
A commitment problem exists when people cannot achieve their goals because:
they cannot make credible threats or promises.
Superstar professional athletes can sustain their economic rents because:
they have unique talents that they can sell to the highest bidder.
Refer to the figure below. If Cory chooses A, then Jess's best response is:
to choose B.
When marginal revenue is zero:
total revenue is maximized.
The fact that price subsidies reduce economic surplus implies that:
we can find an alternative policy that will make both the rich and the poor better off.
Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space. $200 in monthly rent for equipment. $3,000 to your workers in wages for the month. $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:
your implicit costs are $1,000 per month.
Refer to the table below. An output level of 25 units, this firm's accounting profit is ______, and its economic profit is ______.
zero; -$8
