ECON2220 Ch. 15-18
QA. Which of the following policies is not consistent with the benefits-received principle? QB. Which of the following policies follows the ability-to-pay principle?
AA. A city creates a property tax to raise revenue for a new skate park. AB. The U.S. income tax has people with higher overall resources paying a larger amount of the overall income taxes.
QA. What is the relationship between a monopolist's demand curve and the market demand curve? QB. What is the relationship between a monopolist's demand curve and its marginal revenue curve?
AA. A monopolist's demand curve is the same as the market demand curve. AB. A monopolist's marginal revenue curve has twice the slope of its demand curve, because to sell more output, a monopoly must lower price.
QA. What is perfect price discrimination? QB. Perfect price discrimination is QC. Is perfect price discrimination economically efficient? Perfect price discrimination is
AA. Charging every consumer a different price equal to their willingness to pay. AB. unlikely to occur because firms typically do not know how much each consumer is willing to pay. AC. efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.
QA. Define economic discrimination QB. Is the fact that one group in the population has higher earnings than other groups evidence of economic discrimination?
AA. Economic discrimination is paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as gender AB. Both a and b (No. Differences in earnings between groups could be due to worker productivity; No. Differences in earnings between groups could be due to worker preferences.)
QA. Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal cost? QB. Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead?
AA. Economic efficiency requires the last unit of a good produced to provide an additional benefit to consumers equal to the additional cost of producing it. AB. Regulating price instead to equal marginal cost would result in the firm suffering a loss.
QA. What is the law of one price? QB. Arbitrage is
AA. Identical products should sell for the same price everywhere, assuming no transactions costs. AB. buying a product in one market at a low price and reselling it in another market at a higher price
QA. Which type of tax raises the most revenue for the federal government? QB. Which type of tax raises the most revenue for state and local governments?
AA. Individual income taxes AB. Sales tax
QA. What do statistics on income mobility in the United States show? QB. Which of the following statements about the effect of taxes and transfers on the income distribution is correct?
AA. Over time, there is significant income mobility AB. Income after taxes is more equally distributed than income before taxes.
Many supermarkets provide regular shoppers with "loyalty cards" that the shoppers swipe each time they checkout. By swiping the card, the shopper receives reduced prices on a few goods and the supermarket compiles information on all the shoppers' purchases. Recently, some supermarkets have switched from giving the same price reductions to all shoppers to giving shoppers differing price reductions depending on their shopping history. A manager at one company that uses this approach said: "It comes down to understanding elasticity at a household level." QA. Is the use of loyalty cards that provide the same price discounts for every shopper a form of price discrimination? QB. How can a retailer make more profit by understanding "elasticity at a household level"? QC. What information do retailers find most helpful that they collect from their loyalty card programs?
AA. Yes, because those customers who are willing to provide the requested information will receive a lower price. AB. charge higher prices to those consumers who demonstrate an inelastic demand AC. frequency and types of goods purchased by consumer and consumer characteristics (e.g. age, race, and gender)
QA. What is a public franchise? A public franchise is QB. Are all public franchises natural monopolies?
AA. a firm designated by the government as the only legal provider of a good or service. AB. All public franchises _______ natural monopolies, and all natural monopolies _______ public franchises ARE NOT; ARE NOT
An article in the Wall Street Journal about attempts by Congress to rewrite the tax code to make it more efficient noted that there were many provisions in the code intended to reduce the taxes paid by industries in districts of the members of Congress supporting the provisions. In total, these provisions result in tax losses of $1 trillion to the federal government. The article observed that eliminating these provisions is "virtually impossible ... [because] congressional sponsors engage in logrolling to make sure almost everything stays in year after year." QA. Logrolling refers to the situation where QB. Suppose that eliminating tax preferences for industries in districts of members of Congress supporting the provisions would increase the federal governments tax receipts by $1 trillion, which could then be used to lower the tax rates of the individual income tax. Such a change would likely QC. A change like this is more likely to be enacted if those that
AA. a member of Congress votes to approve a bill in exchange for favorable votes from other members on other bills. AB. benefit the economic interests of a larger group. AC. benefit have significant political influence
QA. A monopoly is a market structure that is characterized by QB. Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems?
AA. a single seller of a good or service that does not have a close substitute. AB. If Apple's computer operating system and the Linux operating system were not considered close substitutes for Windows.
QA. What is price discrimination? Price discrimination is when QB. Under what circumstances can a firm successfully practice price discrimination? To successfully practice price discrimination,
AA. all of the above (firms charge a higher price for a product when it is first introduced and a lower price later. firms charge a higher price to customers whose demand is less elastic and a lower price to consumers whose demand is more elastic. firms charge each consumer a different price equal to that consumer's willingness to pay.) AB. some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.
QA. What is the difference between a horizontal merger and a vertical merger? A horizontal merger is a merger QB. Which type of merger is more likely to increase the market power of a newly merged firm? _________ mergers are more likely to increase market power.
AA. between firms in the same industry, while a vertical merger is a merger between firms at different stages of the production of a good. AB. Horizontal
Which of the following best describes the process of regulatory capture?
Bank of America encourages the FDIC-Federal Deposit Insurance Corporation- to make banks with less than $50 million of deposits pay a higher percentage into the insurance fund "for the protection of consumers."
Income inequality can be explained by all of the following except:
Changes in tax laws and rates between different periods of time create great disparity among workers.
A company is offering Product X, a new generation media device, in a foreign market for the first time. The company's CEO favors the adoption of a pricing strategy that adds a 30 percent markup to costs. However, the company's CFO believes that the firm should charge lower prices similar to what they charge in the domestic market. Which of the following, if true, would weaken the case for charging the same price in both markets?
Consumer preferences are markedly different in the two markets.
When there is a firm with a monopsony in the labor market, which of the following occurs?
Fewer workers will be hired at lower wages.
Which of the following is not an advantage cost−plus pricing?
It leads to profit maximization
Suppose the government imposes an 8 percent sales tax on clothing items and the tax is levied on sellers. Who pays for the tax in this situation? (Assume that the demand curve is downward sloping and that the supply curve is upward sloping.)
The tax will be borne by partly by consumers and partly by sellers.
What is a monopoly? A monopoly is
a firm that is the only seller of a good or service that does not have a close substitute
What is a monopoly? A monopoly is
a firm that is the only seller of a good or service that does not have a close substitute.
One method of setting price using the cost−plus method is to add
a given percentage of average total cost to average total cost.
Give an example of a firm using a two-part tariff as part of its pricing strategy. An example of a two-part tariff is
both a and b (golf club requiring the purchase of an annual membership in addition to a fee each time members use the golf course; Sam's club requiring consumers to pay a membership fee before shopping at its stores) (a cellular phone company charging a monthly usage fee and then a per-minute; a tennis club requiring the purchase of an annual membership in addition to a fee each time members use the tennis courts)
What is personnel economics? Personnel economics is
both a and b (the application of economic analysis to human resource issues such as the link between differences among jobs and differences in the way workers are paid; the application of economic analysis to human resource issues such as pensionspensions.)
Which of the following are necessary conditions for successful price discrimination? a. zero transactions cost b. a perfectly competitive market structure c. an imperfectly competitive market structure d. at least two different markets with different price elasticities of demand e. at least two different markets with different price elasticities of supply
c and d only
Suppose a firm may choose between paying workers based on straight-time pay or by commission. Why might a firm choose to compensate its workers by commission? A firm might choose to pay its workers commissions instead of straight-time pay because
commissions help to retain the most productive employeeshelp to retain the most productive employees.
Briefly discuss the effect of price elasticity of supply and demand on tax incidence. When the demand for a product is more elastic than supply, _________ pay the majority of the tax on a product; when supply for a product is more elastic than the demand, ________ pay the majority of the tax on the product. (Or: When the demand for a product is less elastic thn supply, CONSUMERS pay the majority of the tax on a product; when the supply for a product is less elastic than the demand, FIRMS pay the majority of the tax on the product)
firms; consumers
How accurate are measures of poverty? Measures of poverty, such as the poverty rate, are
inaccurate in that they do not take into account income mobility
What is the marginal productivity theory of income distribution? The marginal productivity theory of income distribution suggests that
income is determined by the marginal productivity of the factors of production that individuals own.
When a firm moves from straight-time pay to commission or piece-rate pay, the productivity of a firm's employees may
increase as less productive employees leave and those who remain have an incentive to sell more.
Suppose that a monopoly becomes a perfectly competitive industry. As a result, consumer surplus will _______, producer purplus will ______, and deadweight loss will ______.
increase; decrease; decrease
A firm that has the ability to control to some degree the price of the product it sells
is a price maker
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a monopoly? Economists could find that a firm is a monopoly if
it earns profits in the long run.
Government failure is
market failure due to government intervention rather than to externalities.
Many economists have attempted to measure the effects of economic discrimination on wages. What have they concluded? One of their conclusions is that
most of the differences in wages are due to factors other than discrimination.
In most jobs, the harder you work, the more you earn. Some workers would rather work harder and earn more; others would rather work less hard, even though as a result they earn less. Suppose, though, that all workers at a company fall into the "work harder and earn more" group. Suppose also that the workers all have the same abilities. In these circumstances, would output per worker be the same under an hourly wage compensation system as under a piece-rate system? Briefly explain. Compared to an hourly wage compensation system, under a piece-rate system
output would be higher because workers will have incentive to produce more.
According to the public choice model, how do policymakers arrive at their decisions? (note: a model that applies economic analysis to government decision making.) The public choice model suggests that
policymakers will pursue their own self-interest OR the actions that are likely to result in their being re-elected
Suppose a firm, like Comcast Cable, spends a great deal of money to convince a local governement that it should be the only cable provider of a region. Or a union, like the UAW, spends a great deal of money lobbying the government to create legislation granting unions special bargaining rights. These examples are created by
rent seeking
Tax incidence is
the division of the tax burden between buyers and sellers in a market.
What are the four most important ways a firm becomes a monopoly? The four main reasons a firm becomes a monopoly are:
the government blocks entry, control of a key resource, network externalities, and economies of scale.
Why are major league baseball players on average paid substantially more than college professors? Explain. Major league baseball players are paid more than college professors because
the marginal revenue product of major league baseball players is high relative to college professors.
What is a monopsony? A monopsony is
the only buyer of a factor of production
median voter theorem
the proposition that the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle
Some firms practice odd pricing because
they believe that customers will buy a larger quantity with an odd price.
If patents reduce competition, why does the federal government grant them? The federal government grants patents
to encourage firms to spend money on research to create new products.
Firms price discriminate
to increase profits
Arbitrage would be prevented from ensuring that identical products sell for the same price everywhere if
transaction costs are high
When does the law of one price not hold? The law of one price will not hold when
transactions costs are high OR products cannot be resold
Rent seeking is an attempt to
use the government for individual benefit at the expense of others. Regulatory capture is an example of this, where a regulatory agency makes decisions benefiting the firm being regulated.
A monopolist is a price maker because
when a monopolist raises its prices, it loses some but not all customers
What is a compensating differential? Give an example. A compensating differential is
when higher wages are paid to compensate a worker for unpleasant aspects of a job, such as when workers are paid higher wages for dirty work
Prices for many goods are higher in the city of Shenzhen on the mainland of China than in the city of Hong Kong. An article in the Economist notes that "individuals can arbitrage these differences through what effectively amounts to smuggling." QA. The article means that individuals can QB. Ultimately, you would expect the result of individuals engaging in this arbitrage to be similar QC. Consider the fact that the government of China requires a visa for Shenzhen residents to visit Hong Kong and regulates the number of trips that can be made between the two cities in a given year. Given this information, you can expect the result of individuals engaging in this arbitrage to be
AA. buy the product in Hong Kong and sell it in Shenzhen so eventually the price in Shenzhen will decrease and the price in Hong Kong will increase. AB. prices in Shenzhen and Hong Kong. AC. prices that will be closer, but not the same due to transactions costs.
QA. Arbitrage means QB. What term refers to the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods and services?
AA. buying a product at a low price and reselling it at a high price AB. transaction costs
QA. Explain why market power leads to deadweight loss. Firms with market power create deadweight loss because they QB. The total deadweight loss from market power for the economy is ________.
AA. charge a price that is greater than marginal cost to maximize profits. AB. small
QA. What is cost-plus pricing? Cost-plus pricing is QB. Cost-plus pricing is QC. The percentage markup
AA. charging consumers a price by adding a percentage markup to average cost. AB. not consistent with a firm maximizing profits because it ignores demand. AC. is higher on products that have inelastic demand and is lower on products that have elastic demand.
QA. What is yield management? Give an example of a firm using yield management to increase profits. Yield management is the practice of QB. An example of yield management is
AA. continually adjusting prices to take into account fluctuations in demand. AB. all of the above (a ship adjusting cruise prices according to the number of days remaining before departure. a book company adjusting the price of a novel according to time since introduction. a college adjusting the cost of tuition with financial aid according to whether the student came for an on minus campus visitcame for an on−campus visit. an airline adjusting plane ticket prices each day according to destination locationdestination location.)
QA. Do airlines practice price discrimination? Explain. Airlines QB. For example, business travelers have a more _____ demand than leisure travelers, so airlines charge business travelers _____ price.
AA. engage in price discrimination by charging business travelers and leisure travelers different prices OR engage in price discrimination by charging lower prices for tickets purchased well in advance of the flight (multiple answers, look at next card) AB. inelastic, a higher
QA. In equilibrium, what determines the price of capital? The price of capital is determined by QB. What determines the price of natural resources? The economic rent or pure rent of natural resources is determined by QC. What is economic rent? Economic rent is
AA. equilibrium in the market for capital, where the marginal revenue product of capital equals the marginal cost of capital. AB. the demand for the natural resource, which is the marginal revenue product of the natural resource. AC. the price of a factor of production that is in fixed supply.
QA. Will a monopoly that maximizes profit also be maximizing revenue? Briefly explain. A monopoly that maximizes profit QB. Will it be maximizing production? Briefly explain. A monopoly that maximizes profit
AA. is not also maximizing revenue because revenue is highest when marginal revenue equals zero. AB. is not also maximizing production because price must be reduced to sell additional output.
The U.S. Postal Service (USPS) is a monopoly because the federal government has blocked entry into the market for delivering first-class mail. Is it also a natural monopoly? How can we tell? (Note: Public franchise A designation by the government that a firm is the only legal provider of a good or service) QA. The USPS QB. What would happen if the law preventing competition in this market were removed? If the law preventing competition were removed, then
AA. is probably not a natural monopoly because if it were, then a law blocking competition would not be necessary AB. new firms would likely enter the market
QA. The poverty line is the QB. How has the poverty rate changed in the United States since 1960? The poverty rate has _______ from _________ in the 1960 to _________ for the past 40 years.
AA. level of annual income equal to three times the amount of money necessary to purchase the minimal quantity of food required for adequate nutrition, while the poverty rate is the percentage of the population that is poor according to the poverty line. AB. decreased; between 20 and 25 percent; between 11 and 15 percent
What is the purpose of the antitrust laws? QA. Antitrust laws are intended to QB. Who is in charge of enforcing them?
AA. make illegal any attempts to form a monopoly or to collude. AB. both a and b (The Federal Trade Commission, The Antitrust Division of the U.S. Department of Justice)
QA. A Lorenz curve is a curve that shows QB. If a country had a Gini coefficient of 0.31 in 1960 and 0.44 in 2018, income inequality in the country would have ________.
AA. the cumulative fraction of income earned by each fraction of households, while a Gini coefficient is equal to the area between the line of perfect income equality and the Lorenz curve. AB. increased
QA. A marginal tax rate is QB. Which is more important in determining the impact of the tax system on economic behavior? The _______ tax rate.
AA. the fraction of each additional dollar of income that must be paid in taxes, while the average tax rate is the total tax paid divided by total income. AB. marginal
QA. How can we measure the opportunity cost of leisure? The opportunity cost of leisure is QB. The substitution effect of a wage increase QC. Why is the supply curve of labor usually upward sloping?
AA. the wage rate. AB. causes a worker to supply a larger quantity of labor, and the income effect causes a worker to supply a smaller quantity of labor. AC. As the wage increases, the opportunity cost of leisure increases, causing individuals to devote more time to working.
Give an example of an antitrust law and give a brief description of how that law affects the government's antitrust policy.
Antitrust laws Laws aimed at eliminating collusion and promoting competition among firms. For example, ≻The Sherman Act prohibited "restraint of trade," including price fixing and collusion. ≻The Clayton Act prohibited firms from buying stock in competitors and from having directors serve on the boards of competing firms. ≻The Federal Trade Commission Act established the Federal Trade Commission (FTC) to help administer antitrust laws. ≻The Robinson-Patman Act prohibited charging buyers different prices if the result would reduce competition. ≻The Cellar-Kefauver Act toughened restrictions on mergers by prohibiting any mergers that would reduce competition.
In the book publishing industry, how are firms able to price discriminate across time?
An author's most devoted book fans want to buy the author's books as soon as they are published.
Price discrimination The practice of charging different prices to different customers for the same product when the price differences are not due to differences in cost. Airlines practice price discrimination because: 1. Airlines seats are a perishable product. 2. The marginal cost of flying one additional passenger is low. For example, airlines: 1. Charge business travelers and leisure travelers different prices. 2. Charge lower prices for tickets purchased well in advance of the flight. 3. Reduce the price on seats that they expect will not be sold. 4. Charge lower prices to passengers who will stay at their destination over a Saturday night.
Business travelers: ≻Often have inflexible schedules. ≻Can't commit until the last minute to traveling on a particular day ≻Are not very sensitive to changes in price. Leisure travelers: ≻Are flexible about when they travel ≻Are willing to buy their tickets well in advance ≻Are sensitive to changes in price Therefore, demand for business travelers is more inelastic, and airlines consequently charge them higher prices.
Is price discrimination illegal? In recent years, the courts have interpreted the
Robinson-Patman Act such that price discrimination is illegal if it reduces competition
Suppose the government eliminates the income tax and replaces it with a consumption tax. With a consumption tax, individuals pay a tax on only the part of the income they spend rather than save. Think about the effect of this change on the market for automobiles. Can you necessarily tell what will happen to the price and quantity of automobiles?
The equilibrium quantity will be lower and the equilibrium price will be higher.
Suppose the government grants child care subsidies to mothers entering the labor force. What is likely to happen to the equilibrium wage and quantity of labor?
The equilibrium wage falls and the equilibrium quantity of labor rises
What is the difference between the marginal product of labor and the marginal revenue product of labor for a firm in a perfectly competitive market?
The marginal revenue product of labor is equal to the marginal product of labor multiplied by the product price.
Many political observers have noted that Republican presidential candidates tend to emphasize their conservative positions on policy issues while running for their party's nomination, and Democratic presidential candidates tend to emphasize their liberal positions on policy issues while running for their party's nomination. In the general election, though, Republican candidates tend to downplay their conservative positions and Democratic candidates tend to downplay their liberal positions. Can the median voter theorem help explain this pattern?
Yes because the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle.
Is it possible to price discriminate across time? Briefly explain.
Yes. Firms can charge higher prices at times when consumer demand is less elastic and lower prices at times when consumer demand is more elastic
Suppose a firm practices price discrimination to increase its profits. What potentially limits price discrimination? A firm's ability to practice price discrimination will be limited if
consumers who can buy a good at a low price resell it to consumers who would otherwise have to pay high prices.
A firm that can effectively price discriminate will charge a higher price to
customers who have the more inelastic demand for the product
Suppose that a perfectly competitive industry becomes a monopoly. As a result, consumer surplus will ______, producer surplus will _____, and deadweight loss will ______.
decrease; increase increase
The demand for labor is called a derived demand, because
demand for labor is derived from the firm's output choice
What is "natural" about a natural monopoly? A natural monopoly
develops automatically due to economies of scale.
Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 and consider whether this applies to a monopolist.) A monopolist
does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination.
Why is the demand curve for labor downward sloping? The demand curve is downward sloping
due to the law of diminishing returns
What is odd pricing? Odd pricing is
when prices end in "5" or "9"
