Micro-econ Final Study Guide

The two basic approaches that a country can take as a means to achieve free trade are the...

unilateral approach and the multilateral approach -Unilateral approach is when a country removes its trade restrictions on its own. Multilateral approach which is when a country reduces its trade restrictions while other countries do the same

Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, total revenue will be

$2,400

Refer to the graph, when the price of the good is $175, the firm's maximum profit is...

$25,750 explanation: in this competitive market, price is $175, so the MR curve is horizontal at 175. At this price, the MC is 515. TR=175*515=90,125 ATC at P($175) is 125. 125=TC/515. TC=64375 Profit=TR-TC=90,125-64375= $25,750

Note that the lines labeled "Demand" and "Social Value"are parallel. Also, the slopes of the lines on the graph reflect the following facts: (1) Private value and social value decrease by $1.00 with each additional unit of the good that is consumed, and (2) private cost increases by $1.40 with each additional unit of the good that is produced. Thus, when the 59th unit of the good is produced and consumed, social well-being increases by

$33.60

Christine is an artist who creates custom cookie jars. Her annual revenue from selling the cookie jars is $90,000. The annual explicit costs of the materials used to make the cookie jars are $54,000. Christine used $5,000 from her personal savings account to buy pottery tools for her business. The savings account paid 1% annual interest. Christine could earn $6,000 per year as a tax preparer. What is the annual accounting profit of her cookie jar business?

$36,000 total rev.-explicit costs=90,0000-54,000=36,000

The numbers reveal the opportunity costs of providing 10 piano lessons of equal quality. Refer to Table 7-12. The equilibrium market price for 10 piano lessons is $400. What is the total producer surplus in the market?

$400 is the producer surplus because Marcia, Jan, and Cindy will all give lessens for under $400

If the price of the product is $122, then the total consumer surplus is...

$41 Explanation: 150+135=285-(2*122)=$41

Monopolistic competition is characterized by i) efficient scale ii) markup pricing over marginal cost iii) deadweight loss iv) excess capacity

ii), iii), and iv) only

Variable Costs (VC)

-costs that vary with the quantity of output produced

While shopping for soda, Eleanor is trying to determine whether to purchase the generic cola or the generic brand cola. Although she would not notice the difference between the two in a blind taste test, she buys the higher-priced Zcola because she has seen it advertised as being "the drink that's the life of the party!" This illustrates a common _____ of advertising.

-critique, by manipulation of people's tastes

Shen is initially unsure about which laundry detergent to buy: Stainz-Out or Ocean Fresh Thanks to advertising, he has learned that Ocean Fresh is a cheaper product with roughly the same quality as Stainz-Out. Therefore, he chooses to buy Ccean Fresh the next time he needs more laundry detergent. This illustrates a common _____ of advertising.

-defense, by fostering competition

Two firms are considering going out of business and selling their assets. Each considers what happens if the other goes out of business. The payoff matrix below shows the net gain or loss to each firm. Which firms have a dominant strategy? a. A but not B b. Neither A nor B c. A and B

a. A but not B

Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each. What are Wanda's implicit costs per glass?

$0.10

Larry's Lunchcart is a small street vendor business. If Larry makes 15 pretzels in his first hour of business and incurs a total cost of $16.50, his average total cost per pretzel is

$1.10 ATC=TC/Q 16.50/15=1.10

Caroline sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.95 per knife for as many knives as Caroline is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $2.00, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.50. Assume Caroline is rational in deciding how many knives to sharpen. Her producer surplus is...

$1.85 Explanation: .95 +.70 +.20 = 1.85

Suppose a firm operating in a competitive market has the following cost curves: If the market price is $10, what is the firm's short-run economic profit?

$15 explanation: Profit equals total rev. minus total costs at. 50-35=15

The following table shows the private value, private cost, and social value for a market with a positive externality. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output?

$7 Explanation: find equilibrium quantity, Private cost 22 - Private value 15 = 7

Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A bag of seeds costs $100, and the costs of seeds are his only costs. Which of the following statements is (are) true? (i)Farmer Jack experiences decreasing marginal product. (ii)Farmer Jack's production function is nonlinear. (iii)Farmer Jack's total cost curve is linear.

(i) and (ii) only

Marginal Revenue from one unit to another

(total revenue at Q1)-(total revenue at Q2)

Total Revenue (TR)

- price times qty -TR = P x Q -Proportional to the amount of output

Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost. How much additional profit can the restaurant earn by switching to the use of a tying strategy to price salads and steaks rather than pricing these goods separately?

-$6 explanation: With $20 steaks and $7 salads, they will sell one steak and 2 salads to the customers 20+7+7=34. If they tie the price to Ms.Leafygreen's willingness to pay, $20, they can get $20 from each customer 20+20=40. 40-34=$6 profit

Suppose market demand for a product is given by the equation P = 20 - Q. For this market demand curve, marginal revenue is MR = 20 - 2Q. If the marginal cost of producing this good is 4, how much total consumer surplus would consumers receive in this market?

-32 explanation: since MC is $4, we need to find the qty where MR=4. 4=20-2Q -16=-2Q Q=8. Since P=20-Q, P=12. P-MC(8) * Q(8)=64/2=32

Sunk cost

-A cost that has already been committed and cannot be recovered -In the short run, fixed costs are sunk costs and should be ignored when making decisions -"Don't cry over spilt milk"

Natural monopoly

-A single firm can supply a good or service to an entire market at a smaller cost than could two or more firms -Economies of scale over the relevant range of output -ex. Club goods which are excludable but not rival in consumption

U-shaped average total cost curve

-ATC = AVC + AFC -efficiency scale: the quantity that minimizes average total cost is the bottom of the U-shape

Which of the following is a reason advertising can be economically wasteful? -Advertising provide consumers with price and quality information about products. -Advertising manipulates people's tastes and can reduce competition. -The most effective advertising is very expensive and, therefore, wasteful.

-Advertising manipulates people's tastes and can reduce competition. They say ads are psychological, not very informational

Market power

-Alters the relationship between a firm's costs and the selling price

Which of the following statements about brand names is true? -Brand names give the sellers an incentive to provide consistently high-quality products and services in order to protect the reputation of the brand. -Brand names are always economically wasteful and they dupe consumers into buying more expensive goods and services that are no different from generic versions. -It is always rational to prefer brand names over generic substitutions.

-Brand names give the sellers an incentive to provide consistently high-quality products and services in order to protect the reputation of the brand.

Price discrimination

-Business practice -Sell the same good at different prices to different customers -Rational strategy to increase profit -Requires the ability to separate customers according to their willingness to pay -Can raise economic welfare -ex. movie tickets, airline prices, discount coupons, financial aid, quantity discounts

Perfect price discrimination

-Charge each customer a different price at exactly his or her willingness to pay -Monopoly firm gets the entire surplus (Profit) -No deadweight loss

Monopoly

-Charges a price that exceeds marginal cost -A high price reduces the quantity purchased -Outcome: often not the best for society -Firm that is the sole seller of a product without close substitutes -Price maker -Cause: barriers to entry -raise producer surplus, decrease consumer surplus -no entry in long run

Fixed Costs (FC)

-Costs that do not vary with the quantity of output produced

Marginal-cost curve

-Determines the quantity of the good the firm is willing to supply at any price -Is the supply curve

Profit maximization in Monopoly

-If MR > MC: increase production -If MC > MR: produce less -to maximize profit, produce quantity where MR=MC (iIntersection of the marginal-revenue curve and the marginal-cost curve), at price on the demand curve -Profit = TR - TC = (P - ATC) ˣ Q

Firm's cost of production

-Include all the opportunity costs of making its output of goods and services -Explicit costs -Implicit costs -explicit+implicit costs=total costs

The only dominant strategy in this game is for _____ to choose _____. The outcome reflecting the unique Nash equilibrium in this game is as follows: Felix chooses _____ and Janet chooses _____.

-Janet; left -right; left, because Janet's only dominant strategy is to choose left, and Felix's best choice if she chooses left is right, so these two choices are a Nash equilibrium

Economies of scale

-Long-run average total cost falls as the quantity of output increases

Diseconomies of scale

-Long-run average total cost rises as the quantity of output increases -Increasing coordination problems

Constant returns to scale

-Long-run average total cost stays the same as the quantity of output changes

Exit in competitive market

-Long-run decision to leave the market -Firm doesn't have to pay any costs -exit if TR < TC (or P < ATC)

Diminishing marginal product

-Marginal product/production function of an input declines as the quantity of the input increases -Production function gets flatter as more inputs are being used -The slope of the production function decreases

Competitive market

-Market with many buyers and sellers -Trading identical products -Each buyer and seller is a price taker -Firms can freely enter or exit the market -firms aim to maximize profit

Monopoly vs Competetive Firm production and pricing

-Monopoly: price maker, sole producer, downward sloping market demand curve -competitive firm: price taker, one producer or many, demand/price is horizontal

Market in long run equilibrium

-P = MC = MR = ATC -Zero economic profit

Because this market is a monopolistically competitive market, you can tell that it is in long-run equilibrium by the fact that _____ at the optimal qty for each firm. Furthermore, the qty the firm produces in long-run equilibrium is _____ the efficient scale. T/F?: This indicates that there is excess capacity in the market for jackets.

-P=ATC; less than -true

Heat-Em-Up is the only firm producing grills. It costs $410 to produce a grill, and Heat-Em-Up sells each grill for $1k. After Well Done, a new firm with the same costs as Heat-Em-Up, enters the market for grills, Heat-Em-Up starts selling its grills for a price of $330. Tying, resale price maintenance or predatory pricing?

-Predatory Pricing because it is a price cut intended to drive the other firm out of the market

Profit Maximization

-Produce quantity where total revenue minus total cost is greatest -Compare marginal revenue with marginal cost -If MR > MC: increase production -If MR < MC: decrease production -Maximize profit where MR = MC -perfect competition: P=MR=MC -monopoly: P>MR=MC

The Robinson-Patman Act (1936)

-Prohibits any form of price discrimination that has the effect of reducing competition among wholesalers or retailers

Total-cost curve

-Relationship between quantity produced and total costs -Gets steeper as the amount produced rises bc of diminishing marginal production

A monopoly's marginal revenue

-Revenue per each additional unit of output -Change in total revenue when output increases by 1 unit -MR < P (or AR) (in other words, MR has to be less than the price/ average revenue) -Downward-sloping demand, and to increase the amount sold, a monopoly firm must lower the price it charges to all customers -Can be negative

Chrissy and Marvin are competitors in a local market and each is trying to decide if it is worthwhile to advertise. If both of them advertise, each will earn a profit of $10,000. If neither of them advertise, each will earn a profit of $20,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $30,000 and the other will earn $14,000. To earn the highest profit, Chrissy's dominant strategy is....

-She has no dominant strategy.

Short run: market supply with a fixed number of firms

-Short run: number of firms is fixed -Each firm supplies quantity where P = MC -For P > AVC: supply curve is MC curve -Market supply curve: horizontal sum of all the individual firms' supply curves!

Shutdown in competitive market

-Short-run decision not to produce anything -During a specific period of time -Because of current market conditions -Firm still has to pay fixed costs, but it's less than the loss they would incur by running -Shut down if TR < VC (or P < AVC)

Benevolent planner: maximize total surplus

-Socially efficient outcome -Produce quantity where Marginal cost curve intersects demand curve -Charge P=MC

Total cost (TC)

-TC = TFC + TVC

Suppose that the leaders of several oil corporations hold a secret meeting in the Cayman Islands where they agree to restrict fuel output in order to boost prices. As a result of the higher fuel prices, an airline company loses billions of dollars. This airline company could recover three times the damages it has sustained by suing the appropriate oil corporations under which of the following laws? -The Clayton Act of 1914 -The Sherman Antitrust Act of 1890 -The Robinson-Patman Act of 1936 -The Celler-Kefauver Act of 1950

-The Clayton Act of 1914 This act bolstered antitrust law by allowing the awarding of triple damages to entities harmed by anticompetitive practices. This aspect of the act was intended to encourage lawsuits against oligopolists who conspire.

Costs in short and long run

-costs are fixed in the short run and variable in the long run -Firms have greater flexibility in the long-run -Long-run cost curves are much flatter than short-run cost curves -Short-run cost curves lie on or above the long-run cost curves

Implicit Costs

-costs that do not require an outlay of money by the firm -ignored by accountants

Suppose that two American investment banks negotiate a merger agreement because a financial crisis threatens to bankrupt both firms. This merger could potentially be stopped by a lawsuit brought on by which of the following American Institutions? -The Defense Dept. -The Justice Dept. -The Commerce Dept. -The Interior Dept.

-The Justice Dept. This institution, as well as private parties, has the power to initiate lawsuits to prevent mergers that could result in a single firm having excess market power. The Commerce Dept. is responsible for promoting economic growth, the Defense Dept. maintains the military, and the Interior Dept. manages federal land and programs for indigenous people.

Suppose that the presidents of two auto manufacturing companies exchange text messages in which they discuss jointly raising prices on their new lines of hybrid SUVs. This illegal communication would violate which of the following laws? -The Clayton Act of 1914 -The Sherman Antitrust Act of 1890 -The Robinson-Patman Act of 1936 -The Celler-Kefauver Act of 1950

-The Sherman Antitrust Act of 1890 This act outlaws attempts to monopolize trade or commerce in the US.

Competitive firm's short-run supply curve

-The portion of its marginal-cost curve that lies above average variable cost

Deadweight loss

-Triangle between the demand curve and MC curve in a monopoly -social loss from inefficiently low quantity of output

Book Bound sells a wide variety of books to retail bookstores. Book Bound recently purchased two new books: a popular mystery novel and a much less popular history book. Book Bound requires bookstores to buy 15 copies of the history book for every 140 copies of the mystery novel ordered. Tying, resale price maintenance or predatory pricing?

-Tying: because two goods are tied together at a single price rather than separately

Relationship between MC and ATC

-When MC < ATC: average total cost is falling -When MC > ATC: average total cost is rising -The marginal-cost curve crosses the average-total-cost curve at its minimum

which of the following statements about expenditures on advertising is true? -When a firm spends a large amt of money on advertising, advertising can be construed as a signal of quality. -if a firm knows its product is of low quality, it will be willing to spend large amts of money on advertising. -When a firm spends a small amt of money on advertising, this signals that the quality of the good is high.

-When a firm spends a large amt of money on advertising, advertising can be construed as a signal of quality.

Musashi and Rina have cheated on their cartel agreement and increased production by 25 gallons more than the cartel amount. However, they both realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself consider me a profit when he produces 50 gallons more than the cartel amount compared to his profit when he produces 25 gallons more than the cartel amount. Profit@25 gallons more=225; profit@50 gallons more=225) Neither Musashi nor Rina has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an ex. of _____.

-a Nash equilibrium

Cartel model of oligopoly

-a model where oligopolies act as if they were monopolists that have assigned output quotas to individual firms of the cartel so that output qty is profit-maximizing -they work together like a monopolist to produce the exact Q where MR=MC, at the price on the demand curve -if someone deviates on their collusive agreement to produce more, the market price falls, profit for the partner falls, and total industry profit decreases.

Prisoner's Dilemma

-a particularly important game theory "game" defined by a certain payoff structure and inability of players to collude -provides insight into the difficulty of maintaining cooperation

Nash Equilibrium

-a situation in which each firm chooses the best strategy, given the strategies chosen by other firms

Dominant Strategy

-a strategy that is the best for a firm, regardless of what strategies are chosen other firms

Payoff Matrix

-a table that shows all elements of a game: all players, potential strategies, and possible payoffs each firm earns from every combination of strategies by the firms -examined via game theory techniques to help predict the outcome of the game

Barriers to Entry

-because other firms cannot enter the market and compete with monopolies, there are barriers to entry -Monopoly resources are owned by a single firm so there are higher prices -government regulation: gives a firm the right to produce one thing (patent and copyright laws, higher prices, and higher profits) -the production process

Why do competitive firms stay in business if they make zero profit?

-because profit is TR minus TC and TC includes opportunity costs, the economic profit is zero but the accounting profit is positive

Competitive market vs. monopolistic competitive market

-both have many sellers -both have free entry -competitive market sells identical products -monopolistic competitive market sells differentiated products -P=ATC in long-run for both markets

Markup

-competitive firms have no mrkt power, so they set P=to mC or they will lose all customers. -Monopolistically competitive firms, have some mrkt power, leading to a markup of price above MC in L.-R, but they still earn zero economic profit b/c ATC=P -

In general, the price is lower under a _____ and the quantity is higher under a ______.

-competitive market; competitive market

The cost of financial capital as an opportunity cost

-considered implicit ex. interest income not earned on financial capital because it's in savings or invested

Explicit costs

-costs that require an outlay of money by the firm

Product-Variety externality

-entry of a new firm conveys a positive externality on consumers because they get some consumer surplus from the introduction of a new product -if there is too little entry into a monopolistically competitive market, the product variety externality is present.

By bundling the two soft drinks together, Chug-a-lug can force convenient stores to pay more than they would be willing to pay when purchasing the soft drinks separately. T/F?

-false, forcing convenience stores to accept worthless products as part of the deal will not increase their willingness to pay

All economists believe that predatory pricing is a profitable business strategy. T/F?

-false, some are doubtful because big losses are incurred during price wars

Only 3 airlines fly prom San Francisco to Oregon. No new airline will enter this market b/c there aren't enough customers to share among 4 or more airlines without higher costs. Consumers view all airlines as the same service and will shop for the lowest price. What is the number of firms, type of product, and market model for this scenario?

-few firms -identical products -oligopoly

Oligopoly

-few sellers in market -product similar or identical -not the perfectly competitive ideal

Which of the following statements are true about both monopolistic competition and monopolies? -firms are not price takers -price is above marginal cost -firms can earn positive profit in the long run -firms earn zero profit in the long run

-firms are not price takers and price is above marginal cost

Average Fixed Cost (AFC)

-fixed cost divided by the quantity of output -AFC = FC/Q

Monopolies with Single Price (no discrimination)

-have consumer surplus, profit, deadweight loss, and price is > MC

Measuring profit in competitive market

-if P>ATC, the profit is TR-TC or (P-ATC)*Q -If P < ATC, the loss is TC-TR or (ATC - P)ˣQ =negative profit

Monopolistic competitors in the Long-Run

-if firms are making profits, new firms enter, causing the demand curves to shift to the left -if firms are making losses, some firms exit, causing the demand curve to shift to the right -at long-run equilibrium, P=ATC (tangent) where MR=MC, and firms earn zero economic profit

In the prisoners' dilemma game with Bonnie and Clyde as the players, the likely outcome is one...

-in which both Bonnie and Clyde confess.

Public Policy Toward Monopolies

-increasing competition with antitrust laws -regulation: regulate price/behavior or monopolists, common with natural monopolies, marginal cost pricing -public ownership -do nothing: some suggest it's best to do nothing

business-stealing externality

-inefficiency. if there is too much entry into a monopolistically competitive market, the business-stealing externality is present. -entry of a new firm imposes a negative externality on existing firms because this causes other firms to lose customers and profit

In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel like its coffee tastes better than its competitors. What is the number of firms, type of product, and market model for this scenario?

-many firms -differentiated products -monopolistic competition

There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants nationwide. The restaurant owners buy from the cheapest pasta producer they can. While manufacturers must pay licensing fees to undergo regular food-safety inspections, anyone who passed inspections can acquire and maintain their license. What is the number of firms, type of product, and market model for this scenario?

-many producers -identical products -perfect competition

Monopolistic competition

-many sellers: competing for the same customers -product differentiation: products that are similar but not identical -in a monopolistically competitive market, there is free entry and exit until firms make zero economic profit in long-run -produce qty below efficient scale, so they're said to have excess capacity

Monopolistic competitors in the Short-Run

-maximize profit by producing the qty at which marginal revenue equals marginal cost -at this qty, price is greater than MR -if P>ATC where MR=MC, there is a profit -if P<ATC where MR=MC, there is a loss

Concentration Ratio

-measures a market's domination by an oligopoly -percentage of total output in the market is supplied by the four largest firms.

Given the profit-maximizing choice of output and price in a monopolistic competition, the shop is making a negative profit, which means there are _____ shops in the industry relative to long run equilibrium. When firms leave the market in long run, demand curve will shift _____.

-more -right

The Surgeon General's report saying turkey is good for you will cause consumers to demand _____ turkey at every price. In the short run, firms will respond by _____. In the longrun, some firms will respond by _____ until _____.

-more; producing more turkey and earning positive profit -entering the industry; each firm in the industry is once again earning 0 profit

An oligopolistic market structure is distinguished by several characteristics, one of which is either similar or identical products. Which of the following are other characteristics of this market structure? -Mutual dependence -mutual interdependence -difficult entry -markets controlled by a few large firms -market controlled by many small firms

-mutual interdependence -difficult entry -markets controlled by a few large firms

What term best describes "a set of strategies (one for each player) in which each player's strategy is the best option for that player, given the chosen strategy of the player's opponents"?

-nash equilibrium

When firms are neither entering nor exiting a perfectly competitive market,

economic profits must be zero

Long run

-new firms can enter and exit the market if firms make positive profit If firms make negative profit, firms exit the market -Process of entry and exit ends when firms make zero economic profit (P = ATC) Because MC = min. ATC: Efficient scale -Long run supply curve is perfectly elastic, and will need to equal the minimum ATC for profit to be 0

How is monopolistic competition different from monopoly?

-no free entry into monopoly, but there is in monopolistic competition -monopoly has one product with no close substitutes, and can earn positive economic profit even in the long run -in monopolistic competition, products are differentiated, and economic profits are zero

A publishing co. owns the US copyright to a popular series of books. It is the only company with the legal right to publish these books in the US. What is the number of firms, type of product, and market model for this scenario?

-one firm -unique product -monopoly market

When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive market with free entry and exit will be characterized by firms...

-operating at the efficient scale (where MC meets the minimum value of the ATC curve/costs are minimized)

The Celler-Kefauver Act of 1950

-prevents mergers or buying up assets of other companies when aimed at reducing competition or forming a monopoly

TalkieTime is a firm that produces smartphones. Suppose TalkieTime sells its smartphones to retail stores for $209 each and requires those retailers to charge customers at least $229 for each smartphone. Tying, resale price maintenance or predatory pricing? T/F?: The only reason for TalkieTime to require retailers to sell smartphones at a certain price is to reduce competition and extend market power to the retail market. Therefore, this practice is always economically inefficient.

-resale price maintenance because there is a contractual agreement that the retail store cannot sell for less than $229 -False, TalkieTime doesn't care about having power in the retail market. They would want to do it because sometimes resale price maintenance is used to promote economic efficiency such as when the sales go towards hiring educated employees with higher standards.

If the ATC<demand price where MC=MR, a monopolistically competitive market is operating in the _____ -run and earning a _____ economic profit.

-short; positive

Single-Price Monopoly or Perfect price discrimination? -there is a deadweight loss associated with the profit-maximizing output -firm produces qty less than efficient qty -total surplus is maximized -firm produces qty more than efficient

-single-price monopoly -single-price monopoly -perfect-price discrimination -neither

What separates few sellers from many sellers?

-the any is never clear cut, so it can be debatable

Marginal Revenue in a competitive market (MR)

-the change in total revenue from selling one more unit of a product -MR = Change in TR/ change in Q -MR=P

Collusion

-the event of an agreement among firms about which strategies to implement for a markets prices and output -a cartel is one possible outcome of collusion

A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that

-the firm is currently maximizing its profit. (b/c MR=MC<P)

Marginal Cost

-the increase in total cost that arises from an extra unit of production -MC = Change in TC/ Change in Q

Total Cost (TC)

-the market value of all the inputs that a firm uses in production -TC = FC + VC

Note that Edison and Hilary started by cooperating. However, one Edison cheated, Hilary decided to as well. In other words, Hilary's output decisions are based on Edison's decisions. This behavior is an ex. of _____.

-tit-for-tat strategy

Average Total Cost

-total cost divided by the quantity of output -ATC = TC/Q

Average Revenue (AR)

-total revenue divided by qty sold -AR=TR/Q -AR=P

Profit

-total revenue minus total cost

Economic profit

-total revenue minus total cost, including both explicit and implicit costs - TR-TC = TR -(implicit costs+explicit costs) -**will never exceed accounting profit

Accounting profit

-total revenue minus total explicit cost -usually larger than economic profit

Based on the fact that both Edison and Hilary increased production from the initial cartel qty, you know that the output effect was larger than the price effect at this qty. T/F?

-true b/c the output effect increases TR when qty increases, but price effect decreases TR as qty increases. The output effect was larger because they both could individually increase revenue with higher production than cartel qty.

Average Variable Cost

-variable cost divided by the quantity of output -AVC = VC/Q

Output Effect

-when a higher quantity output increases total revenue

Output effect

-when a higher quantity output increases total revenue

Price Effect

-when a lower price decreases total revenue

price effect

-when a lower price decreases total revenue

Price discrimination yes/no? -Urban gas stations charge $3.60 per gallon, while suburban ones charge $3.05 a gallon -Horizon Wireless offers various features than a customer may add to their package

-yes -no

The Occupational Safety and Health Administration (OSHA) has determined that 100 workers are exposed to a hazardous chemical used in the production of diet soft drinks. The cost of imposing a regulation that would ban the chemical is $10 million. OSHA has calculated that each person saved by this regulation has a value equal to $10 million. If the benefits are exactly equal to the costs, what probability is OSHA using to assess the likelihood of a fatality from exposure to this chemical?

0.01 explanation: 100 workers x 10 million each = 1,000,000,000. divide the value 10 million by 1 billion = .01

Which of the following is not a characteristic of a public good?

Because it is a free good, there is no opportunity cost. there is always an opportunity cost

Consider a small town with only three families, the Greene family, the Brown family, and the Black family. The town does not currently have any streetlights so it is very dark at night. The three families are considering putting in streetlights on Main Street and are trying to determine how many lights to install. The table below shows each family's willingness to pay for each streetlight. Suppose the cost to install each streetlight is $900 and the families have agreed to split the cost of installing the streetlights equally. To maximize their own surplus, how many streetlights would the Black's like the town to install?

2 because they are splitting it evenly, and while the Greene family is not willing to pay $300 for the second light, they have $40 extra in surplus from the first oneRefer to

Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are ( L = 12, Q = 122) and ( L = 13, Q = 130). Then the marginal product of the 13th worker is..

8 units of output.

The following table shows the percentage of output supplied by the top eight firms in four different industries. What is the concentration ratio in Industry A?

92%

In recent years, the Canadian province of British Columbia has increased its carbon tax. Which of the following statements is correct?

Along with the increase in the carbon tax, British Columbia has decreased income-tax rates on individuals and corporations.

How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

An amount equal to the external cost.

Which of the following statements is not correct?

An industry with many brand name products will be more competitive than one with many generic products.

Suppose the cost to erect a tornado siren in a small town is $15,000. In addition, suppose the value of a human life is $10 million. By what percentage would the siren need to reduce the risk of a fatality for the benefits of the siren to exceed the costs of the siren?

By at least 0.15 percentage points. explanation: 15,000/10,000,000=.0015 = .15%

Which of the following is an approach used by economists to calculate the value of a human life?

Calculating how much a person will make and for how many years to find the value of statistical life

​ Which of the following goods is most likely to be associated with monopolistic competition? -gasoline -cookies -milk -wheat

Cookies

You want to hire a professional photographer to take pictures of your family. The table shows the costs of the four potential sellers in the local photography market. Which of the following graphs represents the market supply curve?

Explanation: make sure the first price of 400 starts at 0 on the x-axis and not at 1.

Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns a negative accounting profit. T/F?

False

To an economist, the field of industrial organization answers which question?

How does the number of firms affect prices and the efficiency of market outcomes?

Suppose the following are the sales for all of the firms in two different industries. What are the concentration ratios for these industries?

Industry A: 68%, Industry B: 79%

How did the farm population in the United States change between 1950 and today?

It dropped from 10 million to fewer than 3 million people.

In a monopoly, because MR < P...

Marginal-revenue curve is below the demand curve

Which of the Ten Principles of Economics does welfare economics explain more fully?

Markets are usually a good way to organize economic activity.

Comparing your total revenue graph to you marginal revenue graph, you can see that total revenue is _____ at the output at which marginal revenue is zero.

Maximized

Which of the following statements is not correct?

Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.

Long-run supply curve

More elastic than short-run supply curve

The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the external cost of antibiotic overuse is represented by

P3a - P3b.

Adam Smith suggested that an invisible had guides market economies. In this analogy, what is the baton that the invisible hand uses to conduct the economic orchestra?

Prices

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then

a one-unit increase in output will increase the firm's profit.

An alternative label for the quantity of Q2 would be...

Q optimum

If all external costs were internalized, then the market's equilibrium output would be

Q2

Two CEOs from different firms in the same market collude to fix the price in the market. This action violates the

Sherman Antitrust Act of 1890.

Assume the nation of Teeveeland does not trade with the rest of the world. By comparing the world price of televisions to the price of televisions in Teeveeland, we can determine whether

Teeveeland has a comparative advantage in producing televisions.

Which of the following best describes the idea of excess capacity in monopolistic competition?

The output produced by a typical firm is less than what would occur at the minimum point on its ATC curve.

Competitive firm's long-run supply curve

The portion of its marginal-cost curve that lies above average total cost

Under the average-cost pricing policy, companies have no incentive to cut costs. T/F?

True

Suppose that a government that is skeptical of efforts to regulate prices charged by private companies is concerned the utility company is taking advantage of consumers with unfair pricing policies. How can they most effectively achieve their objectives in this situation?

Turn the company into a public enterprise

What will cause an increase in consumer surplus?

a technological improvement in the production of the good

If the price elasticity of supply is 0.4, and a price increase led to a 5% increase in quantity supplied, then the price increase is about a. 12.5%. b. 1.2%. c. 0.25%. d. 2%.

a. 12.5%.

Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits: Does either Firm W or Firm H have a dominant strategy? a. Both Firm W and Firm H have a dominant strategy. b. Firm W has one, but Firm H does not. c. neither have a dominant strategy.

a. Both Firm W and Firm H have a dominant strategy.

Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. The change in equilibrium price will be... a. greater in the milk market than in the beef market. b. greater in the beef market than in the milk market. c. the same in the milk and beef markets. d. Any of the above could be correct.

a. greater in the milk market than in the beef market.

Other things the same, in which case is the quantity produced the highest? a. There are a very large number of firms. b. few firms c. one firm

a. There are a very large number of firms.

Which of the following is an example of a positive, as opposed to normative, statement? a. When the minimum wage is increased, unemployment is a predictable consequence. b. The income tax rate should be increased to offset the budget deficit. c. Increasing government spending is the best way to help the economy move out of a recession. d. More than one of the above are positive statements.

a. When the minimum wage is increased, unemployment is a predictable consequence.

In the market for oil in the short run, demand a. and supply are both inelastic. b. is inelastic and supply is elastic. c. is elastic and supply is inelastic. d. and supply are both elastic.

a. and supply are both inelastic.

Natural monopolies differ from other forms of monopoly because they are a. are generally not worried about competition eroding their monopoly position in the market b. not regulated by gov't c. not subject to barriers of entry

a. are generally not worried about competition eroding their monopoly position in the market

In an oligopoly, each firm knows that its profits... a. depend on how much output its rivals produce b. will be zero in the long run b/c of free entry c. depend on both how much output it produces and how much output its rival firms produce.

c. depend on both how much output it produces and how much output its rival firms produce.

Joan grows pumpkins. If Joan plants no seeds on her farm, she gets no harvest. If she plants 1 bag of seeds, she gets 500 pumpkins. If she plants 2 bags, she gets 800 pumpkins. If she plants 3 bags, she gets 900 pumpkins. A bag of seeds costs $100, and seeds are her only cost. Joan's total-cost curve is... a. increasing at an increasing rate b.increasing at a decreasing rate c.increasing at a constant rate

a. increasing at an increasing rate

While in college, John and Bethany each buy five packages of mac-n-cheese per week. After they graduate and have full-time jobs, John buys six packages per week, but Bethany buys only two packages per week. When looking at income elasticity of demand for mac-n-cheese, John's... a. is positive, and Bethany's is negative. b. approaches infinity, and Bethany's is zero. c. is negative, and Bethany's is positive. d. is zero, and Bethany's approaches infinity.

a. is positive, and Bethany's is negative.

When demand is perfectly inelastic, the price elasticity of demand... a. is zero, and the demand curve is vertical. b. is zero, and the demand curve is horizontal. c. approaches infinity, and the demand curve is vertical. d. approaches infinity, and the demand curve is horizontal.

a. is zero, and the demand curve is vertical.

Under which of the following market structures would consumers likely receive the most product variety? a. monopolistic competition b. oligopoly c. monopoly d. perfect competition

a. monopolistic competition, (this is a positive externality of monopolistic competitions)

If a tax is levied on the buyers of a product, then there will be a(n) a. movement down and to the left along the supply curve. b. movement up and to the right along the supply curve. c. upward shift of the supply curve. d. downward shift of the supply curve.

a. movement down and to the left along the supply curve.

A movement along the supply curve might be caused by a change in a. the price of the good or service that is being supplied. b. production technology. c. input prices. d. expectations about future prices.

a. the price of the good or service that is being supplied.

As the number of firms in an oligopoly increases... a. the total quantity of output produced by firms in the market gets closer to the socially efficient quantity. b. the output effect decreases c. the oligopoly has more market power and firms can earn more profit

a. the total quantity of output produced by firms in the market gets closer to the socially efficient quantity. explanation: b/c more firms increase competition.

Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together... a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist. b. society is worse off as a result b. each firm's profits always end up being zero

a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.

Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the firm's a. total revenue b. MR c. AR

a. total revenue

Market power refers to the...

ability of market participants to influence price.

When a firm operates with excess capacity,

additional production would lower the average total cost.

In the study done by Lee Benham on advertising for eyeglasses,

advertising decreased the average price

The process of buying a good in one market at a low price and selling the good in another market for a higher price in order to profit from the price difference is known as

arbitrage.

When a firm is operating at an efficient scale...

average total cost is minimized.

The Wacky Widget company has total fixed costs of $100,000 per year. The firm's average variable cost is $5 for 10,000 widgets. At that level of output, the firm's average total costs equal.. a. 10 b. 15 c. 150

b. 15 explanation: AVC=5 AVC=VC/Q 5=VC/10,000 VC=50,000 FC=100,000 VC+FC=TC=150,000 TC/Q=ATC=15

The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. The socially efficient level of output supplied to this market is a. 8,000 b. 6,000 c. 4,000

b. 6,000

Between 1950 and today there was a... a. 30 percent drop in the number of farmers, but farm output more than tripled. b. 70 percent drop in the number of farmers, but farm output increased by about five times. c. 20 percent drop in the number of farmers, but farm output increased by more than ten times. d. 40 percent drop in the number of farmers, but farm output more than doubled.

b. 70 percent drop in the number of farmers, but farm output increased by about five times.

The federal government is concerned about the negative effects of cigarette smoking in the United States. Suppose Congress is considering two plans. One plan would limit the production of cigarettes. The other would require manufacturers to include graphic photos on cigarette packages of people suffering cancer's effects. Which of the following statements is true? a. Both programs would increase the price of cigarettes. b. Both programs would reduce the quantity of cigarettes sold. c. Both programs would decrease revenues for cigarette manufacturers. d. All of the above are correct.

b. Both programs would reduce the quantity of cigarettes sold.

Assume that Bart's Batteries has entered into a resale price maintenance agreement with Radio Shanty but not with Prime Purchase. In this case... a.Radio Shanty will sell Bart's Battery's at a lower price than Prime Purchase. b. Prime Purchase might benefit from customers who go to Radio Shanty for information about different batteries. c. the wholesale price of Bart's Battery's will be different for Radio Shanty than it is for Prime Purchase.

b. Prime Purchase might benefit from customers who go to Radio Shanty for information about different batteries.

Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat would tend to... a. increase the total revenue of wheat farmers. b. decrease the total revenue of wheat farmers. c. decrease the demand for wheat. d. decrease the supply of wheat.

b. decrease the total revenue of wheat farmers.

Equilibrium quantity must decrease when demand... a. increases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease. b. decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease. c. increases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease. d. decreases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease.

b. decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.

If the market starts in equilibrium at point Z in panel (b), a decrease in demand will ultimately lead to... a. lower prices once the new long-run equilibrium is reached. b. fewer firms in the market c. more firms in the industry, but lower levels of output for each

b. fewer firms in the market explanation: price will drop, so total rev. will be less than TC, so firms will leave the market in the long-run

Most firms have... a. no monopoly pricing power b. some monopoly pricing power c. the ability to earn monopoly profits

b. some monopoly pricing power

The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. Suppose we observe that the price of a gallon of gasoline in Driveaway is $2. Given this observation, which of the following scenarios is most likely? a. There are a few sellers of gasoline in Driveaway, but the number of sellers exceeds two. b. there are many sellers c. there is one seller d. there are two sellers

b. there are many sellers explanation: there are many sellers because the price is two and the MC is also $2 per gallon, so MC=P=Competitive market. Had this town been a monopoly or cartel, the price would've been greater than the MC.

Two prescription drug manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with side-effects from its drugs. Each drug manufacturer has evidence that indicates that taking its prescription drug causes liver failure. State prosecutors do not have access to the same data used by drug manufacturers and thus will have difficulty recovering full costs without the help of at least one of the drug manufacturer's studies. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. If both firms follow a dominant strategy, Firm B's profits (losses) will be... a. $-40m b. $-12m c. $-24m

c. $-24m ***these are negative so the dominant strategy is whichever profit is the least negative

Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below: Suppose that Maria and Miguel work together in order to operate as a profit-maximizing monopolist. What price will they charge for milk? c. $12

c. $12

Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. If this market were perfectly competitive instead of oligopolistic, what quantity would be produced? a. 70 b. 25 c. 50

c. 50

Which of the following statements about agriculture in the U.S. is not correct? a. Technological improvements typically increase supply and decrease revenue for farmers. b. From the 1950s to today, agricultural output has increased about five times. c. Because technological improvements increase the supply of a product for which demand is inelastic, an individual farmer would be better off not adopting the new technology. d. Increasing the supply of agricultural products typically benefits consumers but harms farmers.

c. Because technological improvements increase the supply of a product for which demand is inelastic, an individual farmer would be better off not adopting the new technology.

When demand is elastic, an increase in price will cause... a. no change in total revenue but an increase in quantity demanded. b. an increase in total revenue. c. a decrease in total revenue. d. no change in total revenue but a decrease in quantity demanded.

c. a decrease in total revenue.

If the demand for a product decreases, then we would expect equilibrium price a. to decrease and equilibrium quantity to increase. b. to increase and equilibrium quantity to decrease. c. and equilibrium quantity to both decrease. d. and equilibrium quantity to both increase.

c. and equilibrium quantity to both decrease.

As a group, oligopolists would always earn the highest profit if they would a. operate according to self-interest b. produce the perfectly competitive qty of output c. charge the same price that a monopolist would charge if the market were a monopoly.

c. charge the same price that a monopolist would charge if the market were a monopoly.

Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has just learned that its leading competitor, Toysorama, is mass-producing an excellent copy and plans to flood the market with their $5 doll in six weeks. Funsters should a. natural advantage. b. trading advantage. c. comparative advantage. d. absolute advantage.

c. comparative advantage.

In a two-person repeated game, a tit-for-tat strategy starts with... a. cooperation and then each player is unresponsive to the strategic moves of the other player. b. noncooperation and then each player pursues his or her own self-interest. c. cooperation and then each player mimics the other player's last move.

c. cooperation and then each player mimics the other player's last move.

The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero. Assume there are two digital cable TV companies operating in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that a. each firm will charge a price of $90 and each firm will sell 9,000 subscriptions. b. each firm will charge a price of $120 and each firm will sell 4,500 subscriptions. c. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.

c. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.

Holding all other forces constant, if decreasing the price of a good leads to an increase in total revenue, then the demand for the good must be a. unit elastic. b. inelastic. c. elastic. d. None of the above is correct because a price decrease never leads to an increase in total revenue

c. elastic.

Which of the following is not a characteristic of a monopoly? a. the seller has market power b. a product w/o close substitutes c.free entry and exit

c. free entry and exit

In a competitive market, the actions of any single buyer or seller will a.affect marginal revenue and average revenue but not price b.have little effect on market equilibrium qty but effect market equilibrium price c. have a negligible impact on the market price

c. have a negligible impact on the market price

When supply is perfectly elastic, the value of the price elasticity of supply is a. greater than 0 and less than 1. b. 1. c. infinity. d. 0.

c. infinity.

Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production. The consultant must have concluded that Mr. Roger's a. total rev. equals total economic cost b. marginal cost exceeds marginal revenue c. marginal revenue exceeds his marginal cost.

c. marginal revenue exceeds his marginal cost.

Select the type of market that is described by the following attributes: many firms, differentiated products, and free entry. a. oligopoly b. monopoly c. monopolistic competition

c. monopolistic competition

Game theory is necessary to understand which kinds of markets? a. competitive b. monopoly c. oligopoly

c. oligopoly

Which of the following describes an imperfectly competitive firm? a. identical products b. horizontal demand curves c. some price setting ability d. many small firms

c. some price setting ability

When quantity demanded has increased at every price, it might be because a. income has increased, and the good is an inferior good. b. the number of buyers in the market has decreased. c. the price of a complementary good has decreased. d. the costs incurred by sellers producing the good have decreased.

c. the price of a complementary good has decreased.

We know that people tend to overuse common resources. This problem can be viewed as an example of... a. a situation in which game theory does not apply b. a game in which the players succeed in reaching the cooperative outcome c. the prisoners' dilemma.

c. the prisoners' dilemma.

If the price of a good is low, a. firms would increase profit by increasing output. b. firms can and should raise the price of the product. c. the quantity supplied of the good could be zero. d. the supply curve for the good will shift to the left.

c. the quantity supplied of the good could be zero.

In a market that is characterized by imperfect competition, a. firms are price takers. b. there are always a large number of firms. c. there are at least a few firms that compete with one another. d. the actions of one firm in the market never have any impact on the other firms' profits.

c. there are at least a few firms that compete with one another.

The dog food industry spends a substantial amount of revenue on advertising. It is likely that a. the consumers in this industry are not well-informed. b. the dog food industry is perfectly competitive. c. there is a large variety of dog foods available in the market. d. advertising in this market does little to change consumer preferences.

c. there is a large variety of dog foods available in the market. More advertising suggests a large variety, and the ads are meant to attract customers to this specific product.

The Coase theorem suggests that private markets may not be able to solve the problem of externalities a. if the firm in the market is a monopoly. b. if some people benefit from the externality. c. when the number of interested parties is large and bargaining costs are high. d. if the government does not become involved in the process.

c. when the number of interested parties is large and bargaining costs are high.

Lawmakers designed the burden of the FICA payroll tax to be split evenly between workers and firms. Labor economists believe that a. firms bear most of the burden of the tax b. the burden is equally divided c. workers bear most of the burden of the tax.

c. workers bear most of the burden of the tax.

​Assume a monopolistically competitive firm encounters a decrease in average variable cost at all output levels.We would expect: a. ​The price to fall and output to fall b. ​The price to rise and output to fall c. ​The price to fall and output to rise d. ​The price to rise and output to rise

c. ​The price to fall and output to rise

If four firms comprise the entire golf club industry, the market would be

characterized by interdependence of firms.

A monopolist maximizes profits by

charging a price that is greater than marginal rev. and producing an output level where marginal revenue equals marginal cost

Two types of private solutions to the problem of externalities are

charities and the Golden Rule.

Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML does not

choose the price at which it sells its butter

Goods that are not rival in consumption include both

club goods and public goods.

Economists view the fact that Florida grows oranges, Texas pumps oil, and California makes wine as...

confirmation of the virtues of free trade.

The product-variety externality is associated with the

consumer surplus that is generated from the introduction of a new product.

Defenders of advertising

contend that firms use advertising to provide useful information to consumers.

The higher the concentration ratio, the a. more control an individual firm has to set prices b. more competitive the market c. less competitive the market d. Both a and c are correct.

d. Both a and c are correct. ***so the most competitive industry has the lowest concentration ration***

What happens to consumer surplus in the iPod market if iPods are normal goods and buyers of iPods experience an increase in income?a.Consumer surplus increases. b. Consumer surplus decreases. c. Consumer surplus remains unchanged. d. Consumer surplus may increase, decrease, or remain unchanged.

d. Consumer surplus may decrease, increase, or remain unchanged

The following table shows the percentage of output supplied by the top eight firms in four different industries. Which industry has the lowest concentration ratio? a. Industry D b. Industry C c. Industry A d. Industry B

d. Industry B explanation: the percentages are already given so just add up the percents of the first 4 firms in each industry to find the concentration ration. Industry B= 23+16+10+9= 58% which is the lowest of the 4 industries.

Refer to Table 5-9. Along which of the supply curves does quantity supplied move proportionately more than the price? a. along supply curve B only b. along supply curves B and C c. along all three supply curves d. None. Quantity supplied moves proportionately less than the price along all of the three supply curves.

d. None. Quantity supplied moves proportionately less than the price along all of the three supply curves.

Which of these statements best represents the law of supply? When production technology improves, sellers produce less of the good. b. When sellers' supplies of a good increase, the price of the good increases. c. When input prices increase, sellers produce less of the good. d. When the price of a good decreases, sellers produce less of the good.

d. When the price of a good decreases, sellers produce less of the good.

Perfect price discrimination a. increases profits b. increases total surplus c. decreases consumer surplus d. all of the above

d. all of the above

When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly a. will experience a loss b. will experience a price below ATC c. may rely on govt subsidy d. all of the above

d. all of the above

Which of the panels shown could illustrate the short-run situation for a monopolistically competitive firm? a. panel a b. panel b c. panel c d. all of the above are correct.

d. all of the above are correct.

The defining characteristic of a natural monopoly is a. constant returns to scale over the relevant range of output b. constant marginal cost over the relevant range of output c. diseconomies of scale over the relevant range of output d. economies of scale over the relevant range of output

d. economies of scale over the relevant range of output explanation: in natural monopolies, the ATC falls as the QTY of output increases, this is called economies of scale

Which of the following industries has the lowest concentration ratio? b. breakfast cereal c. household industrial appliance d. electric lamp bulbs

d. electric lamp bulbs

A key determinant of the price elasticity of supply is the... a. extent to which buyers alter their quantities demanded in response to changes in their incomes. b. extent to which buyers alter their quantities demanded in response to changes in prices. c. number of close substitutes for the good in question. d. length of the time period.

d. length of the time period (or "time horizon")

When quantity demanded increases at every possible price, the demand curve has a. not shifted; rather, the demand curve has become steeper. b. not shifted; rather, we have moved along the demand curve to a new point on the same curve. c. shifted to the left. d. shifted to the right.

d. shifted to the right.

Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country? Drug interdiction... a. shifts the supply curve of drugs to the left. b. can increase drug-related crime. c. raises prices and total revenue in the drug market. d. shifts the demand curve for drugs to the left.

d. shifts the demand curve for drugs to the left.

The analysis of competitive firms sheds light on the decisions that lie behind the a. demand curve b.way financial markets set interest rates c.way firms make pricing decisions in the not-for-profit sector d.supply curve

d. supply curve

In a game, a dominant strategy is

d. the best strategy for a player to follow, regardless of the strategies followed by other players.

Which of the following is not held constant in a supply schedule? a. the prices of inputs b. expectations c. production technology d. the price of the good

d. the price of the good

If a person can prove that she was damaged by an illegal arrangement to restrain trade, that person can sue and recover

d. three times the damages she sustained, as provided for in the Clayton Act.

​In which of the following market structures can a firm earn an economic profit in the short run? a. competition b. monopoly c. competitive monopoly d. ​All of these market structures can earn an economic profit in the short run

d. ​All of these market structures can earn an economic profit in the short run

The social cost of a monopoly is equal to its... The economic inefficiency of a monopolist can be measured by the...

deadweight loss.

The tax burden will fall most heavily on the sellers of the good when the demand curve...

demand curve is relatively flat, and the supply curve is relatively steep.

As Bubba's Bubble Gum Company adds workers while using the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Bubba's Bubble Gum Company encounters

diminishing marginal product.

Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transition from this initial situation to a long-run equilibrium,

each existing firm experiences a decrease in demand for its product.

For a firm in a perfectly competitive market, the price of the good is always...

equal to marginal revenue and average revenue

With free trade, this country will...

export 100 calculators

If Kevin's Fire engines were a competitive firm instead and $100,000 were the market price for an engine, decreasing its price from 100k to 50k would result in the same change in production qty and TR. T/F?

false

Which of the following is not a characteristic of monopolistic competition?

firms are price takers

Critics of free trade sometimes argue that allowing imports from foreign countries causes a reduction in the number of domestic jobs. An economist would argue that

foreign competition may cause unemployment in import-competing industries, but the increase in the variety of products due to free trade is more valuable than the lost jobs.

Public goods are difficult for a private market to provide due to

free rider problem

Consider a good for which the number of people who benefit from the good is large and the exclusion of any one those people is impossible. In this case, the market for this good will likely

free-rider problem

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

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

In an oligopoly, the total output produced in the market is

higher than the total output that would be produced if the market were a monopoly but lower than the total output that would be produced if the market were perfectly competitive.

Tomato sauce and spaghetti noodles are complementary goods. A decrease in the price of tomatoes will...

increase consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles.

If the government removes a binding price ceiling from a market, then the price received by sellers will....

increase, and the quantity sold in the market will increase

Suppose the long-run supply curve for a good is upward-sloping. The upward slope could be explained by

increases in production costs resulting from more firms coming into the market

The Surgeon General announces that eating apples promotes healthy teeth. As a result, the equilibrium price of apples

increases, and producer surplus increases.

"Owners of firms in young industries should be willing to incur temporary losses if they believe that those firms will be profitable in the long run." This observation helps to explain why many economists are skeptical about the...

infant-industry argument.

The administrative burden of regulating price in a monopolistically competitive market is

large because of the large number of firms that produce differentiated products.

Firms that are involved in more than one type of business could be evidence of an attempt to

internalize some forms of positive externalities.

One problem with regulating a monopolist on the basis of cost is that

it does not provide an incentive for the monopolist to reduce its cost

In some cases, selling pollution permits is a better method for reducing pollution than imposing a corrective tax because

it is hard to estimate the market demand curve and thus charge the "right" corrective tax.

The amount that producers receive for a good minus their costs of producing it equals

producer surplus.

For quantities greater than equilibrium qty, the value to the marginal buyer is

less than the cost to the marginal seller, so decreasing the quantity increases total surplus

The minimum points of the average variable cost and average total cost curves occur where the

marginal cost curve intersects those curves

A market structure in which there are many firms selling products that are similar but not identical is known as

monopolistic competition

President Bush imposed temporary tariffs on imported steel in 2002. The reasons for this trade restriction is most consistent with the

national defense argument because it's critical for national security

Comparing your total revenue graph to you marginal revenue graph, you can see that when total revenue is decreasing, marginal revenue is _____.

negative

For a monopolist, when does marginal revenue exceed average revenue?

never

Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect...

new firms to enter the market

What effect will the imposition of a nonbinding price ceiling in the market have on producer surplus?

no change in producer surplus

A congested side street in your neighborhood is

not excludable and rival in consumption.

In a long-run equilibrium, a firm in a monopolistically competitive market operates

on the declining portion of its average total cost curve.

A firm cannot price discriminate if it

operates in a competitive market

Results of the study done by Lee Benham on advertising for eyeglasses would suggest that

optometrists would enthusiastically endorse advertising restrictions.

The relationship between advertising and product differentiation is

positive; the more differentiated the product, the more a firm is likely to spend on advertising.

For a monopoly firm,

price always exceeds marginal revenue.

Financial aid to college students, quantity discounts, and senior citizen discounts are all examples of

price discrimination.

A cheeseburger is a ______ good, fire protection is a ______ good

private; club

The laws governing patents and copyrights

promote monopolies

Since restored historic buildings convey a positive externality, local governments may choose to

provide tax breaks to people who restore them, and increase property taxes in historic areas

Moving production from a high-cost producer to a low-cost producer will...

raise total surplus.

The old lyric "the best things in life are free"

refers to goods provided by nature or the government.

Professional organizations and producer groups have an incentive to

restrict advertising in order to reduce competition on the basis of price.

Positive externalities

result in an efficient equilibrium quantity.

At all levels of production higher than the point where the marginal cost curve crosses the average variable cost curve, average variable cost

rises

Suppose that in a particular market, the supply curve is relatively inelastic and the demand curve is relatively elastic. If a tax is imposed in this market, then the...

sellers will bear a greater burden of the tax than the buyers because the burden of tax falls more heavily on the side of the market that is more inelastic

Tying involves a firm...

selling two individual products together for a single price rather than selling each product individually at separate prices.

OPEC is able to raise the price of its product by

setting production levels for each of its members

A benevolent social planner would prefer that the output of good x be decreased from its current level if, at the current level of output of good x,

social value = private value = private cost < social cost.

Elephant populations in some African countries have started to rise because

some elephants have been made a private good, and people are allowed to kill elephants on their own property.

Much of the research on game theory in recent decades was driven by attempts to analyze actions of players during

the Cold War between the United States and the Soviet Union.

Welfare economics is the study of how...

the allocation of resources affects economic well-being.

Other than OPEC, the shortage of gasoline in the US in the 1970s could also be blamed on...

the lack of substitutes for crude oil

Monopolistically competitive markets may be socially inefficient because

the market may have too much or too little entry by new firms.

If a firm uses labor to produce output, the firm's production function depicts the relationship between

the number of workers and the quantity of output.

One of the least regulated common resources today is

the ocean

In the prisoners' dilemma...

when each player chooses his dominant strategy the players reach a Nash equilibrium.

The marginal seller is the seller who...

would leave the market first if the price were any lower.

The following diagram shows the domestic demand and supply in a market. Assume that the world price in this market is $10 per unit. Suppose the government imposes a tariff of $5 per unit. The amount of revenue collected by the government from the tariff is...

$200 Explanation: World Price ($10), tariff ($5), price with tariff ($15), 100-60 = 40, 40 * 5 = 200

Take into account private and external costs and assume the quantity of output is always a whole number (that is, fractional units of output are not possible). The maximum total surplus that can be achieved in this market is

$46

Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?

$8

What causes the Tragedy of the Commons? (i)Social and private incentives differ. (ii)Common resources are not rival in consumption and are not excludable. (iii) Common resources are not excludable but are rival in consumption.

(i) and (iii) only

Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. If Firm A produces a monitor that Cassie buys but David does not, then the market outcome illustrates which of the following principles? (i)Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. (ii)Free markets allocate the demand for goods to the sellers who can produce them at the least cost.

(ii) only

If a 15% change in price results in the 20% change in quantity supplied, then the price elasticity of supply is about...

-1.33, and the supply is elastic -explanation: Price Elasticity of Supply = % change in quantity supplied / % change in price (20/15=1.33)

Price Elasticity of Demand (PED)

-Formula: % change in qty demanded/% change in price -Perfectly elastic if horizontal, PED=1 -Perfectly inelastic if PED=0, vertical -Elastic demand curve if PED>1 -Inelastic demand curve if PED<1

Price Elasticity of Supply (PES)

-Formula: % change in qty supplied/% change in price -Perfectly elastic if PES=1 (Infinity) -Perfectly inelastic if PES=0, vertical -Elastic supply curve if PES>1 -Inelastic supply curve if PES<1

Corrective tax vs Regulation

-a corrective tax is more efficient than a regulation because it encourages firms to further reduce pollution whereas a regulation provides no incentive to reduce pollution below the target

The unfair competition argument

-companies think that the market is unfair if all markets are not equally regulated -ex. if France subsidizes wheat production and Germany does not, German producers will feel that this is unfair because their price is higher

Free markets

-increase variety of goods -lower costs through economy of scale (more production=lower price) -increased competition -enhanced flow of ideas

Efficient Allocation...

-maximizes total surplus (well-being -measured via producer and consumer surplus

Protection as a Bargaining Chip Argument

-this involves the threat of a trade restriction to remove an already implemented trade restriction by another government -if successful, it can free up trade, but if unsuccessful, further restriction reduces economic welfare or backing down makes the country look bad to other governments

Suppose a hog farm creates a negative externality equal to $2 per hog. Further suppose that the government imposes a $2 per hog tax on the hog farmers. What's the ideal corrective tax?

The current tax is the ideal corrective tax because the ideal corrective tax equals the external cost ($2 per hog)

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

The equilibrium quantity is greater than the socially optimal quantity.

On the Fourth of July, there is no fireworks display in the small town of Yankeeville, even though it would be efficient for such a display to be produced. Which of the following statements is correct?

The lack of a fireworks display in Yankeeville arises because of an externality.

Suppose that a $3 tax per pack is imposed on cigarettes. Which of the following is consistent with the demand being relatively inelastic and the supply being relatively elastic?

The price buyers pay increases more than $1.50 and the price sellers receive decreases by less than $1.50.

Suppose that a negative externality is created by the production of good X. Which of the following statements is correct?

The social cost of producing good X includes the private cost plus the cost to bystanders of the externality.

A tax on fur coats, a luxury good is not likely to redistribute income from the rich to the poor because demand is more elastic than supply. T/F?

True explanation: When a tax is imposed on a good with demand more elastic than supply, as is the case with luxury goods, the burden of the tax falls more heavily on the sellers and the buyers, so the tax cannot successfully redistribute income to the poor.

Which of the following statements is correct? a. gasoline taxes are an EPA Regulation b. Gasoline taxes are higher in many European countries than in the United States. c. gasoline taxes are a command-and-control policy

b. Gasoline taxes are higher in many European countries than in the United States. explanation: command and control policies are not taxes but instead caps and minimums, and the EPA doesn't do taxes, congress does

In the US, before OPEC increased the price of crude oil in 1973, the was... a.a binding price ceiling on gasoline b. a nonbinding price ceiling on gasoline c. a nonbinding price floor on gasoline d. no price ceiling on gasoline

b. a nonbinding price ceiling on gasoline

Suppose a tax of $2 per unit is imposed on this market. How much will sellers receive per unit after the tax is imposed? a. $3 b. between $3 and $5 c. between $5 and $7 d. $7

b. between $3 and $5

For each of three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. If the market price of an orange increases from $0.70 to $1.40, then consumer surplus... a. increases by $2.60 b. decreases by $2.50 c. decreases by $2.60

b. decreases by $2.50 Explanation: CS(0.70)=3.3 CS(1.40)=0.8 3.3-0.8=2.50

A $5 tax levied on the buyers of pants will cause the... a. demand curve for pants to shift up by $5 b. demand curve for pants to shift down by $5. c. supply curve by pants to shift down by $5

b. demand curve for pants to shift down by $5.

Assume that Zimbabwe and Portugal can switch between producing toothbrushes and producing hairbrushes at a constant rate. Portugal has an absolute advantage in the production of... a. toothbrushes and a comparative advantage in the production of toothbrushes. b. hairbrushes and a comparative advantage in the production of hairbrushes. c. hairbrushes and a comparative advantage in the production of toothbrushes. d. toothbrushes and a comparative advantage in the production of hairbrushes.

b. hairbrushes and a comparative advantage in the production of hairbrushes. explanation: Portugal has the absolute advantage in producing hairbrushes because it can make more of those than toothbrushes in the same amount of time. Portugal has the comparative advantage in producing hairbrushes because the opportunity cost of producing one is 1.2 toothbrushes, and the opp. cost of Zimbabwe producing one is 3.33 toothbrushes.

Today's supply curve for gasoline could shift in response to a change in a. today's price of gasoline b. the expected future price of gasoline c. the number of buyers of gasoline d. all of the above

b. the expected future price of gasoline

On a graph, consumer surplus is represented by the area...

below the demand curve and above market price.

A decrease in supply will cause the largest increase in price when...

both supply and demand are inelastic

If total surplus is $240 and consumer surplus is... a. $100, price is $130 b. $130, price is $120 c. $160, price is $100 d. $120, price is $90

c. $160, price is $100 explanation: Total surplus ($240) - Consumer surplus ($160) = Producer surplus ($80). The first area is 60, the next is 60 also, but we must divide that by 3 to get an area of 20. 60 + 20 = 80 (our producer surplus) at the price of $100

What is not an important question for economic policy raised by the experience of the textile industry? a. How do the gains from trade compare to the losses? b. Who gains and who loses from free trade among countries? c. Which argument for restricting free trade is politically feasible? d. How does international trade affect consumer well-being?

c. Which argument for restricting free trade is politically feasible?

Tax incidence... a. is random b. depends on the legislated burden c. depends on the elasticities of supply and demand. d. falls on buyers or entirely on sellers

c. depends on the elasticities of supply and demand

In the circular-flow diagram, a. resources flow from firms to households, and goods and services flow from households to firms. b. inputs and outputs flow in the same direction as the flow of dollars, from firms to households. c. income payments flow from firms to households, and sales revenue flows from households to firms. d. taxes flow from households to firms, and transfer payments flow from firms to households.

c. income payments flow from firms to households, and sales revenue flows from households to firms.

Which of the following is an example of a normative, as opposed to positive, statement? a. The growth rate of the economy last year was higher than any other year in the last decade. b. The Federal Reserve Bank adjusted interest rates in response to the lower-than-expected growth rate of the economy. c. The federal government reduced spending in the last quarter of the fiscal year. d. The federal government should decrease unemployment benefits to stimulate the economy out of the recession.

d. The federal government should decrease unemployment benefits to stimulate the economy out of the recession.

An ideal corrective subsidy equals the external _______ from an activity with a _______. a. cost; positive externality b. benefit; negative externality c. cost; negative externality d. benefit; positive externality

d. benefit; positive externality Explanation: An ideal corrective subsidy would equal the external benefit from an activity with a positive externality. An ideal corrective tax would equal the external cost from an activity with a negative externality.

If a increase in income decreases the demand for a good, then the good is a(n) a. substitute good. b. complementary good. c. normal good. d. inferior good.

d. inferior good.

Assume that England and Spain can switch between producing cheese and producing bread at a constant rate. We could use the information in the table to draw a production possibilities frontier for England and a second production possibilities frontier for Spain. If we were to do this, measuring cheese along the horizontal axis, then... a. the slope of England's production possibilities frontier would be -2 and the slope of Spain's production possibilities frontier would be -.5. b. the slope of England's production possibilities frontier would be -.75 and the slope of Spain's production possibilities frontier would be -1. c. the slope of England's production possibilities frontier would be -1.5 and the slope of Spain's production possibilities frontier would be -2. d. the slope of England's production possibilities frontier would be -0.67 and the slope of Spain's production possibilities frontier would be -0.5.

d. the slope of England's production possibilities frontier would be -0.67 and the slope of Spain's production possibilities frontier would be -0.5. Explanation: to find the slope of the production possibilities frontier, we will use the change in Y/the change in X. In this case, cheese is on the horizontal axis so this is X, and bread is Y. The possibilities for 24 hrs are shown in the table: England=8/-12=-0.67, Spain=4/-8=-0.5

In a market with no externalities, supply is also called...

private cost and demand is also called private benefit

When a country that imports a particular good imposes an import quota on that good...

producer surplus increases and total surplus decreases -Explanation: an import quota is a restriction on imports which restricts free trade, this is beneficial for the producers, but total surplus decreases because free trade is always optimal

The figure below illustrates a tariff. On the graph, Q represents quantity and P represents price. The area C + D + E + F represents...

the decrease in consumer surplus caused by the tariff.

Suppose that elementary education creates a positive externality. If the government subsidizes education by an amount equal to the per-unit externality it creates, then..

the equilibrium quantity of education will equal the socially optimal quantity of education.

Efficiency in a market is achieved when...

the sum of producer surplus and consumer surplus is maximized

Governments can grant private property rights over resources that were previously viewed as public, such as fish or elephants. Why would governments want to do so?

to prevent overuse

Which of the following is an example of government intervention to solve a Tragedy of the Commons problem?

toll charges on congested roads