Microeconomics Unit 2 HW Questions

Assess the validity of the following statements. 1. Cartels in which all the industry leaders went to the same schools and live in the same neighborhoods are easier to sustain that cartels in which the industry leaders really don't know each other. 2. It would be more difficult to sustain a cartel in an industry in which it's easy for a firm to sell a little extra product without anyone knowing than in an industry where all sales are public and visible.

both are true

In the process of creative destruction, what gets destroyed?

both firms and business plans

When a monopolist decreases the price of its good, consumers:

buy more

Arbitrage is ________ in one market and ________ in another market.

buying low; selling higher

In 2006, Medicare Part D was created to subsidize spending on prescription drugs. One would expect this expansion to _______pharmaceutical prices, because__________.

increase, fewer prescription expenses will be paid by those who consume the drugs

Usually, we think of cheating as a bad thing. But in this chapter, cheating turns out to be a very good thing in some important cases. Who gets the benefit when a cartel collapses through cheating: consumers or producers? In other words, does cheating increase consumer surplus, producer surplus, or both?

increases consumer surplus

Monopolist charge a higher markup when demand is highly _____ and when customers have _______ good substitutes for a product.

inelastic; few

Every year American television introduces many new shows, only about one-third of which survive past their first season. The few shows that last, however, prove to be very profitable. How does creative destruction explain why studios bother to make new shows if most of them will fail?

it allows for new ideas to be tested and to see what is going to work for greater future profit

According to the elimination principle, what happens to the short-run supply in Industry X when demand rises in Industry X? You can assume Industry X is a decreasing cost industry.

supply will increase

Governments do what to cartels?

support some cartels and try to break up others

For a small firm in an extremely competitive industry, marginal revenue is always equal to price because

the firm has no ability to influence the market price

In an oligopolistic market, prices will tend to be closer to the competitive price:

the greater number of firms in the industry

Economists call the time after all exit or entry has occurred:

the long run

If Tom sells 500 sandwiches for $7 and has an average cost of $5, what is his profit?

$1,000

Let's look at the market for Gala apples. Assume there are 300 producers and that MC=AC=$.40 per pound. In a competitive market, price will be driven down to marginal cost. Let's assume that when P=MC, each apple grower produces 2 million pounds of apples for a total market production of 600 million pounds. Now imagine that the apple growers form a cartel and each agrees to cut production to 1 million pound, which drives the price of apples up to $.70 per pound. If a single apple grower broke from the cartel and produced an extra million pounds of apples, how much additional profit (approximately) will this apple grower make?

$300,000

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $50,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

$50,000

Who first used the term, "invisible hand"?

Adam Smith

Let's suppose that the demand for allergists increases in California. How does the invisible hand respond to this demand?

All of the answers are correct Allergists from other states (or countries) could move to California Surgeons, hematologists, and other doctors in California could become allergists after some retraining More people could enter medical school, specialize in allergy, and move to California

Haircuts for men are often cheaper than haircuts for women, even when they are offered by the same stylist. Why might this be price discrimination?

Demand for haircuts for women might be more inelastic than demand for haircuts for men, and haircuts are impossible to arbitrage.

Which of the following best explains why cartel agreements are hard to maintain?

Each firm in the cartel has the incentive to increase production and earn larger profits.

A firm should exit an industry if

P- AC < 0

Paulette, Camille, and Hortense each own wineries in France. They produce inexpensive, mass-market wines. Over the last few years, such wines sold for 7 euros per bottle, but with a global recession, the price has fallen to 5 euros per bottle. Given the information below, calculate each winemaker's profit. Winemaker Fixed Costs Variable Costs Recession Revenues Profits Paulette 50,000 80,000 120,000 Camille 100,000 40,000 70,000 Hortense 200,000 250,000 200,000

Paulette = -10,000, Camille = -70,000, Hortense = -250,000

What does it mean when an OPEC member cheats?

The country produces more oil than it agreed to

In the competitive electrical motor industry, the workers at Galt, Inc. threaten to go on strike. To avoid the strike, Galt, Inc. agrees to pay its workers more. At all other factories, the wage remains the same. In this competitive market, what will the Galt, Inc. labor agreement do to the market price of motors?

The price of motors will remain the same.

Which of the following is an assumption of the theory of oligopoly?

There are barriers to entry and firms produce and sell either homogeneous or differentiated products

A firm pays a monthly lease of $10,000 and generates $8,000 of revenue a month. Which of the following is TRUE?

This firm will exit the industry in the long run.

In many college town, rumors abound that the nearby gas stations collude to keep prices high. Assess the validity of the following statements regarding where you might expect this conspiracy against the public to work best?

This type of plan will work best in towns where the city council has many environmental and zoning regulations that make it hard to open new gas stations.

The NBA and NCAA are examples of:

a buyer's cartel, keeping the salaries of players lower than they would be in a competitive market.

Market power allows a firm to raise price:

above marginal cost

In the textbook, The Applied Theory of Price, D.N. McCloskey refers to the equation MR=MC as the rule of rational life. What types of firms follow this rule?

all types of firms follow this rule

In the real world, which of these industries is most clearly an oligopoly?

cereal breakfast foods

In a cartel, the most profitable outcome is achieved by:

cheating when others cooperate

In the late 15th century, Europe consumed about 2 million pounds of pepper per year. At this time, Venice (ruled by a small, tightly knit group of merchants) was the major player in the pepper trade. But after Portuguese explorer de Gama blazed a path around Africa into the Indian Ocean in 1498, Venice found itself competing with Portugal's trade route. By the middle of the 16th century, Europeans consumed 6 to 7 million pounds of pepper, much of it obtained through Lisbon. After de Gama's success the price of pepper fell. Based on this information, which of the following best explains the decline of Venice's influence on the world pepper trade?

competition for new entrants to the market

Which of the following are examples of factors that increase the cost to new firms of entering an industry (serve as barriers to entry)?

control over a key resource or input, economies of scale, and government barriers

If the firms of an industry form a cartel, their goal is to:

cut back on output and raise the price of their product to earn higher profits

Deadweight loss occurs because some consumers are willing to pay at least the marginal cost for the good, even if they are not willing to pay the monopolist's price. If monopolies were able to charge these consumers a lower price without lowering prices to consumers willing to pay more, deadweight loss would ______, some consumers would be ______ off, and the monopolist would be ______ off.

decrease; better; better

Complete the following sentence; If a pharmaceutical company is trying to decide what kinds of drugs to research it will probably be lured toward inventing:

drugs with few good substitutes, because the demand for these drugs will be more inelastic

Under perfect price discrimination

each customer is charged his or her maximum willingness to pay

Two months after Apple introduced the iPhone in 2007, the company reduced the price from $600 to $400. How is this drop of price an example of price discrimination?

early adopters are less sensitive to price than late adopters

If every member of OPEC produces beyond quota, then cartel members

fail to earn monopoly profits

Monopolists are people, too. This means that:

gains to monopolists count just as much as losses to consumers.

Antitrust laws

give the government the power to prohibit or regulate anti-competitive business practices

The optimal price for a monopolist facing different demand curves in two separate markets will be:

higher in the market with less elastic demand

The more inelastic the demand curve for a product is, the:

higher is the monopolist's price markup

To maximize profit, the monopolist should set a:

higher price in markets with more inelastic demand.

In general, price discrimination exists because:

higher prices are charged because some customers are willing to pay more.

A monopolist's price is:

higher than a competitive firm's price.

Airlines try to differentiate their customers by willingness to pay based on

how long in advance a person books their flight.

Economic profit differs from accounting profits because of its inclusion of:

implicit costs

How can the market mechanism guarantee that the marginal cost of production will be the same across all firms if those firms have different owners, are in different locations, and have unique cost functions known only to the firms themselves? Why don't these different firms need to have one shared owner or one shared manager to coordinate this "equal marginal cost" condition? Assume the market is perfectly competitive.

in a free market, each firm owner has an incentive to choose the level of output such that price equals marginal cost

Barriers to entry are factors that:

increase costs to new firms entering the market

When a sports team hires an expensive new player or builds a new stadium, you often hear claims that ticket prices have to rise to cover the new, higher cost of the player or new stadium. Let's see what monopoly theory says about that. It is safe to treat these new expenses as fixed costs ---- something that doesn't change if the number of customers rises or falls. Treat the local sports team as a monopoly in this question and to keep it simple, let's assume there's only one ticket price. As long as the sports team is profitable, what affects will a rise in fixed costs have on the equilibrium ticket price?

it will not affect the ticket price

Oligopolies are:

large enough to change industry output and affect market prices

A consumer is ________ likely to be sensitive to price if the purchase ________ covered by insurance.

less; is

Tactic collusion occurs when firms:

limit competition with one another but they do so without explicit agreement or communication

The Sherman Antitrust Act of 1890:

limits cartel-like behavior in the United States.

According to the elimination principle how would you characterize the long run profits in Industry X after demand rises in Industry X? You can assume Industry X is a decreasing cost industry?

long run profits are 0

Oligopolies tend to set prices:

lower than monopolies but higher than competitive markets.

Other things being equal, the markup above marginal cost that a monopolist charges will be:

lower when there are more substitutes for the monopolist's product.

Airlines price discriminate by offering both business-class and economy-class service on flights (it's not just the cost of the service that varies; the markup is higher on business class). If they wanted to ensure that everyone who could afford to travel business class did so, what might they do?

make the seats in economy class extra small and cramped, and serve terrible food

Which of the following is true when a monopoly is producing the profit-maximizing quantity of output?

marginal revenue = marginal cost

When a good has relatively few substitutes:

monopolists will tend to increase their markup for the good

A cartel member has _____ incentive to increase quantity than a standard monopolist

more

Cartels for natural resources tend to be ______ than cartels for manufactured goods.

more successful

The length of the "long run" will vary from industry to industry. How long would you estimate the long run is in the market for electrical engineers? (Hint: Consider the length of time a student would spend in school to get an engineering degree before entering the market.)

more than 2-3 years

A producer of new, trendy shoes is ________ likely to charge a larger markup than someone selling ordinary tennis shoes because ______.

more, there are fewer substitutes for trendy shoes than for ordinary shoes

Assuming the same cost structure, a competitive market produces ________ output at ________ prices than a monopoly market.

more; lower

Which of the following is one of the characteristics a business must possess in order to practice price discrimination?

must be a price searcher and not price taker enabling the firm to have some control over price

In their calculation of profit, accountants typically do not take into account

opportunity costs

Which of the following is a source of market power?

patents, laws preventing entry of competitors, and economies of scale

A top performing used car salesman is able to sell his cars to each customer at their maximum willing to pay, a practice known as:

perfect price discrimination

In a highly competitive industry, demand for a firm's product is

perfectly elastic

Which of the following conditions would prevent a firm from setting different prices in different markets?

possibility of arbitrage for buyer between different markets

A museum in Russia has two entrances: one for locals (written in Russian) and one for tourists (written in English). People who enter through the entrance written in Russian will end up paying 81.93 Rubles ($3.00). English-speaking tourists will use the entrance written in English, but they will end up paying 409.67 Rubles ($15.00). This practice is an example of:

price discrimination

In a constant cost industry, what happens to the price of the good in the long run when there is a rise in demand?

price stays the same

Suppose there are two industries: a high-profit industry, Industry H, and low-profit industry, Industry L. If the two industries have similar costs, what must be true about prices in the two industries?

prices in industry H must be higher than industry L

According to the elimination principle, what initially happens to profits in Industry X when demand rises in Industry X?

profits rise

Segmenting a market allows monopolists to:

sell to different demand curves

Price discrimination can be defined as:

selling the same product at two different prices in two different markets

Which of the following is an example of price discrimination?

senior citizen discounts

Firms in a perfectly competitive industry maximize profits by:

setting a price equal to the market price

According to the elimination principle, what happens to the number of firms, number of workers, and the quantity of capital in Industry X when demand rises in Industry X? You can assume that Industry X is a decrease cost industry.

the number of firms and workers and the quantity of capital all increase

The short run is defined as

the period before entry or exit can occur

The prisoner's dilemma refers to a situation in which

the pursuit of individual interests leads to an outcome that is in the best interest of no one.

Profit is defined as

total revenue minus total cost

Hewlett Packard's pricing scheme is to sell printers at relatively low prices and ink cartridges at relatively high prices. This practice is known as:

tying

To maximize profit, the monopolist increases output:

until marginal cost is equal to marginal revenue.

The marginal revenue curve is a straight line beginning at the same point on the:

vertical axis as the demand curve but with twice the slope.

In the case of a perfectly price-discriminating monopoly, there is:

zero consumer surplus