ECON Must Know
The HHI of a national market is usually _______ that of a local market
Lower than
Cost complementary exists in a multiproduct cost function when
the MC cost of producing one output is reduced when the output of another product is increased
If firms expect prices to be lower in the future and the product is not perishable, then
the current supply curve shifts to the right
As a greater fraction of the population becomes elderly (think demand)
the demand for medical services will tend to increase
If a firm in a monopolistically competitive market successfully uses advertising to decrease elasticity of demand for its product,
the firm will be able to increase its markup over marginal cost
Both firms in a cournot duopoly would enjoy higher profits if
the firms simultaneously reduced output below the Nash equilibrium level
Other things held constant, the lower the price of a good
the greater the consumer surplus
The peak of the isoprofit curve is the point at which
the isoprofit curve crosses the best response function
As the population rises (think in terms of demand)
the market demand curve shifts to the right
Consumer surplus is
the value consumers get from a good but do not pay for
A natural monopoly occurs when
there are economies of scale over the relevant range of output
The idea of charging two different groups of consumers two different prices is practiced in
third degree pricing
If a firm halted current production, it would avoid this "cost" to remain in business
variable costs
A mixed strategy is a strategy
whereby a player randomizes over her available actions in order to keep rivals from being able to predict her action
A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $30. What will be the new price be should the three firms co-exist after the entry?
$30
Changes in the price of good A will lead to
A change in the quantity demanded of good A
Binge drinking on a college campus is often viewed as a highly social event. Even though individuals might not be prone to binge drinking if their cohort is not drinking, social pressure tends to push them towards group binge drinking. This game is most likely a representation of:
A coordination game with a "bad" equilibrium
Price ceiling
A government imposed price control or limit on how high a price of a good can be
Price floor
A government imposed price control or limit on how low a price of a good can be
If the absolute value of the own-rice elasticity of a steak is 0.4, a decrease in price will lead to
A reduction in total revenue
An increase in the price of steak will probably lead to
An increase in demand for chicken
If firms in a monopolistically competitive market are incurring economic losses, what would best describe the change existing firms would face as the market adjusts to long-run equilibrium
An increase in demand for each firm
Good A is an inferior good, a decrease in income leads to
An increase in the demand for good A
Consider a market is characterized by a HHI of 800. One of the firms in this market has a Lerner index of 0.15 and is considering a horizontal merger with a competing firm. Based on this information is it likely that the U.S Department of Justice will
Approve the merger since the industry is not concentrated and the firm proposing to merge has little marketing power
Out of level of technology, prices of inputs, weather, and average income level, which one is not a supply shifter?
Average income level (because this changes demand)
To engage in first-degree price discrimination a firm must
Be able to set P > MC, know each consumer's maximum willingness to pay, and prevent low-value consumers from reselling to high-value consumers
An electric company purchases a clothing company. This is an example of:
Conglomerate integration
Assume that price elasticity of demand is -3 for a certain firm's product. If the firm raises price, the firm's manager can expect total revenue to
Decrease (-3 is very elastic meaning a change in price will drastically change revenue)
A monopoly has produced a product with a patent for the last few years. The patent is going to expire. What will likely happen to the demand curve the monopolist firm faces when the patent runs out?
Demand will decline (the demand curve of the individual firm)
When an effective price ceiling is placed on a market previously in equilibrium
Equilibrium price decreases
Demand is more inelastic in the short term because consumers
Have no time to find available substitutes
As we move down along a linear demand curve, the price elasticity of demand becomes more
Inelastic
A negative side of a revenue sharing plan is that it
It gives no incentives for workers to minimize costs
What are critiques of the IESDS solution concept?
It implies that players are extremely intelligent, it implies players make no mistakes, and it oftentimes predicts many possible outcomes, giving it little explanatory power
Where will a profit maximizing monopoly produce on a linear demand when it has positive marginal costs?
It will produce output on the elastic portion of the demand curve
A new firm enters a market which is initially serviced by a cournot duopoly charging a price of $40. What will the new market price be should the three firms co-exist after the entry?
Less than $40
A firm might choose to produce its own inputs if
Long term contracts are costly to write
What kind of market does not have a supply curve?
Monopolistically competitive and monopolistic markets
Spot checks
Must be performed at non-regular intervals
Given another player's strategy stipulated in this type of game, a player cannot improve his welfare by changing his strategy
Nash Equilibrium for a two player game
How does the equilibrium price/output change when: education reform is enacted that increases the number of students graduating college by 10% and the retirement age is dropped to 55 (market is skilled labor)
Only changes made to supply. P and Q ambiguous
In the short run, a monopoly will shut down if
P < AVC
In the long run, perfectly competitive firms produce a level of output such that
P = MC and P = minimum of ATC
In the long run, monopolistically competitive firms produce a level of output such that
P > MC, P = ATC, ATC > minimum of average costs
How does the equilibrium price/output change when: a clever programmer figures out a way to add telephone functionality to an iPad (so now you can use your iPad to make phone calls) [market is iPads]
P increases, Quantity increases
In a competitive industry with identical firms, long run equilibrium is characterized by
P=AC, P=MC, MR=MC
Which type of industry structure would you expect to have the lowest Lerner index score?
Perfect competition
If ground beef is an inferior good, what do you suppose wold happen to price and quantity during an economic recession
Price and quantity would both increase
How does the equilibrium price/output change when: a law passes requiring auto companies to pay higher taxes (the market is automobiles)
Price increases, Quantity decreases
How does the equilibrium price/output change when: ink prices used in traditional book publishing increases (the market is kindle)
Price increases, Quantity increases
How does the equilibrium price/output change when: a cheap modification is developed that allows traditional gasoline engines to run on ethanol and a severe drought hits midwestern states (market is corn)
Price increases, Quantity remains ambiguous
Out of price of an input, time, available substitutes, and expenditure share, which factor would not affect the own price elasticity of a good?
Price of an input
Suppose that supply increases and demand increases. What effect will this have on price and quantity?
Price will remain ambiguous and quantity will increase
Two hot dog vendors have agreed to split a section of the beach into two "regions". Each vendor has agreed to only sell to in her region at a price of $2.00 per hot dog. It costs each vendor $.15 per hotdog to produce. On the first day of their new agreement, both vendors encroached on their neighbor's region, selling hotdogs for $1.50 each. This game is a representation of
Prisoner's dilemma
Suppose the long run average cost curve is U shaped. When LRAC is in the decreasing stage, there exists
an economies of scale
You are a manager for a monopolistically competitive firm. From experience, the profit maximizing level of output for your firm is 100 units. However, it is expected that prices of other close substitutes will fall in the near future. How should you adjust your level of production in response to this change?
Produce less than 100 units
Which type of compensation method works by performance bonus?
Profit sharing, revenue sharing, and piece rate
To ensure quality, piece rate plans must usually be accompanied by
Quality control mechanisms
In order for spot checks to be effective, they must be
Random in nature
Lemonade, a good with many close substitutes, should have an own price elasticity that is
Relatively elastic
Cinemas sometimes give senior citizen discounts. What is the possible privately motivated purpose for them to do so?
Senior citizens have a more elastic demand for movies than ordinary citizens
Graphically, an increase in advertising will cause the demand curve to
Shift rightward
For a steel factory, an increase in the cost of water to the plant will cause the supply curve to
Shift to the left
Technological advances will cause the supply curve to
Shift to the right
When an effective price ceiling is in place
Some consumers want the good but are unable to obtain it (there is a shortage)
When a producer minimizes the cost of producing a given level of output
The MRTS is equal to the ration of input prices and the marginal product per dollar spent on all inputs is equal
If A and B are substitutes, an increase in the price of Good A will lead to
an increase in demand for B
When the price of sugar was "low", consumers in the US spent a total of $3 billion annually on sugar consumption. When the price doubled, consumer expenditures increase to $5 billion annually. This data indicates that
The demand for sugar is inelastic
Long term contracts would likely become shorter when
The exchange environment is less complex due to reduced government regulation
When quantity demanded exceeds quantity supplied
The price is below the equilibrium price
A student figured out that the HHI for an industry was 11,000. What is the proper conclusion?
The student made some computational errors
The concentration and HHI reported in the US Bureau of Census must be interpreted with caution since:
They are calculated by exluding foreign imports hence bias upward the degree of concentration, they are based on figures for the entire national market, and the definition of product classes used to define an industry affects the results
Which pricing principle does not attempt to extract the entire consumer surplus from the market?
Third degree price discrimination
A price elasticity of zero corresponds to a demand curve that is
Vertical
A cereal manufacturer takes over one of its original grain suppliers in a merger. This is an example of:
Vertical Integration
Tommy Hilfiger purchasing a company that produces a denim fabric is an example of what kind of merger?
Vertical Integration
When relationship-specific exchange occurs in complex contractual environments, the best way to purchase inputs is likely though
Vertical Integration
Which type of integration aims at reducing transaction costs?
Vertical integration
Perfect first-degree price discrimination occurs when
a firm charges each consumer the maximized price he or she would be willing to pay for each unit of the good purchased and results in the firm extracting all surplus from consumers
The minimum wage is an example of
a price floor
Producer surplus is the the area
above the supply curve but below the market price of the good
The long-run average cost curve defines the minimum average cost of producing alternative levels of output for optimal selection of
all factors of production
A firm's isoprofit curve is defined as the combination of outputs produced by
all firms that yield the firm the same level of profit
When there are economies of scopes between two products which are separately produced by two firms, merging into a single firm can
can reduce costs
Suppose that the duopolists competing in cournot fashion agree to produce the collusive output. Given that firm two comits to this collusive output, it pays firm one to
cheat by producing a higher level of output
Transaction costs refer to
costs of exchange unrelated to production costs
Average fixed cost
declines continuously as output is expanded
Economies of scale exist whenever long-run average costs
decrease as output is increased
If the cross price elasticity between ketchup and hamburgers is -.8, a 4% increase in the price of ketchup will lead to a 3.2%
drop in quantity demanded of hamburgers
Larger firms producing a single product can produce a product at lower average cost than small firms producing the same product when
economies of scale exist
It is profitable to hire units of labor as long as the value of marginal product
exceeds wage
In the long run, monopolistically competitive firms
have excess capacity
As the usage of an input increases, marginal product
initially increases then begins to decline
Second-Degree price discrimination
is the practice of posting a discrete schedule of declining prices for different ranges of quantities
Collusion in oligopoly is difficult to achieve because
it is prohibited by law and every firm has an incentive to cheat given that others follow the agreement
In order to minimize the cost of producing a given level of output, a firm manager should use more inputs when
its price falls
Monopolistically competitive firms have excess capacity. To maximize profits, firms will
maintain the excess capacity
When economies of scale are large, firms can most reasonably reduce their average total cost by
merging into an even larger firm
If the price of labor decreases, in order to minimize teh costs of producing a given level of output, the firm manager should use
more of labor and less of capital
A coordination problem usually occurs in situations where there is
more than one nash equilibrium
If firms compete in a cournot fashion, then each firm selects their
output
The spirit of equating MC with MR is held by
perfectly competitive firms and oligopolistic firms
Bertrand model of oligopoly reveals that
perfectly competitive prices can arise in markets with only a few firms
A perfectly competitive firm faces a
perfectly elastic demand function
A broadway theater sells weekday show tickets at a lower price than for a weekend show. This is an example of:
price discrimination and peak-load pricing
If a surplus exists in a market, the natural tendency is for
price to decrease (decrease price so you can sell more and get rid of the surplus)
If a monopolistically competitive firm's MC increases, then in order to maximize profits, the firm will
reduce output and increase price
As firms leave an industry, the market supply curve
shifts to the left (supply decreases)
Changes int he price of an input causes
slope changes in the isocost line
If the cross price elasticity between good A and B is positive, we know the goods are
substitutes
When government imposes a price floor above the market price, the result will be that
surpluses occur
