Principles of Microeconomics(Final Exam)

When OPEC raised the price of crude oil in the 1970s, it caused the United States'

nonbinding price ceiling on gasoline to become binding.

Total revenue

remains unchanged as price increases when demand is unit elastic.

Refer to Figure 4-15. At a price of $15, there would be a

shortage of 400 units.

Refer to Table 17-13. If both stores follow a dominant strategy, HomeMax's annual profit will grow by a. $0.6 million. b. $1.5 million. c. $2.5 million. d. $3.4 million.

b. $1.5 million.

Refer to Table 14-1. The price and quantity relationship in the table is most likely a demand curve faced by a firm in a

competitive market.

Critics of advertising argue that advertising

creates demand for products that people otherwise do not want or need.

Which of the following is not a characteristic of a perfectly competitive market?

Many firms have market power.

Refer to Table 13-4. What is the marginal product of the third worker?

15 students

Tommy's Tie Company, a monopolist, has the following cost and revenue information. Assume that Tommy's is able to engage in perfect price discrimination. Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what is the total revenue when 3 ties are sold?

$450

Table 15-6 A monopolist faces the following demand curve: Refer to Table 15-6. What is the marginal revenue from the sale of the 2nd unit?

$9

A binding price floor (i) causes a surplus. (ii) causes a shortage. (iii) is set at a price above the equilibrium price. (iv) is set at a price below the equilibrium price.

(i) and (iii) only

Monopolistic competition is characterized by which of the following attributes? (i) free entry (ii) product differentiation (iii) many sellers

(i), (ii), and (iii)

A binding price ceiling (i) causes a surplus. (ii) causes a shortage. (iii) is set at a price above the equilibrium price. (iv) is set at a price below the equilibrium price.

(ii) and (iv) only

Table 5-5 The following table shows a portion of the demand schedule for a particular good at various levels of income. Refer to Table 5-5. Using the midpoint method, at a price of $8, what is the income elasticity of demand when income rises from $7,500 to $10,000?

1.00

Refer to Figure 16-3. At the profit-maximizing, or loss-minimizing, output level, how many units of output will the firm in this figure produce?

15

If the price elasticity of supply is 0.2, and a price increase led to a 3% increase in quantity supplied, then the price increase is about

15%

Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back. What is the reason for this price discrepancy?

All of the above are correct. (Airlines are practicing imperfect price discrimination to raise their profits; airlines charge a different rate based on the different nature of peoples travel needs; airlines are attempting to charge people based on their willingness to pay.)

If consumers view cappuccinos and lattés as substitutes, what would happen to the equilibrium price and quantity of lattés if the price of cappuccinos falls?

Both the equilibrium price and quantity would decrease.

For cartels, as the number of firms (members of the cartel) increases, a. the more concerned each seller is about its own impact on the market price. b. the magnitude of the price effect decreases. c. the easier it becomes to observe members violating their agreements. d. the monopoly outcome becomes more likely.

Correctb. the magnitude of the price effect decreases.

In markets characterized by oligopoly, a. collective profits are always lower with cartel arrangements than they are without cartel arrangements. b. the oligopolists earn the highest profit when they cooperate and behave like a monopolist. c. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market. d. collusive agreements will always prevail.

Correctb. the oligopolists earn the highest profit when they cooperate and behave like a monopolist.

Scenario 17-5 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. Refer to Scenario 17-5. If the restaurant is unable to use tying, what is the profit-maximizing price to charge for a steak? a. $8 b. $16 c. $12 d. $20

Correctd. $20

Which of the following statements is true?

If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit.

Which of the following statements is correct?

If the monopolists marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit.

Refer to Figure 15-14. To maximize its profit, a monopolist would choose which of the following outcomes?

Q = 30 and P = 60

Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?

The firm will immediately stop production to minimize its losses.

A firm in a competitive market currently produces and sells 500 doorknobs for a price of $10 per doorknob. Which of the following events would decrease the firms average revenue?

The market price of doorknobs falls below $10.

A key determinant of the price elasticity of supply is the time period under consideration. Which of the following statements best explains this fact?

The number of firms in a market tends to be more variable over long periods of time than over short periods of time.

Refer to Figure 4-22. Panel (d) shows which of the following?

a decrease in quantity demanded and a decrease in supply

Suppose the government wants to encourage Americans to exercise more, so it imposes a binding price ceiling on the market for in-home treadmills. As a result,

a shortage of treadmills will develop.

Refer to Table 17-20. What is Nadia's dominant strategy? a. Nadia should always choose Don't Clean. b. Nadia has no dominant strategy. c. Nadia should always choose Clean. d. Nadia has two dominant strategies, Clean and Don't Clean, depending on the choice Maddie makes.

a. Nadia should always choose Don't Clean.

As the number of firms in an oligopoly increases, the price approaches a. marginal cost. b. infinity. c. the monopoly price. d. zero.

a. marginal cost.

In which of the following markets are strategic interactions among firms most likely to occur? a. the market for tennis balls b. the market for piano lessons c. markets to which patent and copyright laws apply d. the market for corn

a. the market for tennis balls

Refer to Figure 6-15. Suppose a tax of $2 per unit is imposed on this market. How much will sellers receive per unit after the tax is imposed?

between $3 and $5

Who is a price taker in a competitive market?

both buyers and sellers

When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for bubble gum is

elastic

Each firm in a monopolistically competitive market

faces a downward-sloping demand curve.

Refer to Figure 14-14. When the market is in long-run equilibrium at point A in panel (b), the firm represented in panel (a) will

have a zero economic profit.

If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost. Refer to Scenario 13-12. Farmer Brown's total-cost curve is

increasing at an increasing rate.

The average-fixed-cost curve

is always decreasing.

As the number of firms in an oligopoly increases, the price approaches

marginal cost.

Antitrust laws in general are used to

prevent oligopolists from acting in ways that make markets less competitive.

When a monopolist is able to sell its product at different prices, it is engaging in

price discrimination.

When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,

price exceeds marginal cost.

If a market is a duopoly and additional firms enter and do not cooperate, then

price falls and quantity rises.

Total revenue equals

price x quantity.

When externalities cause markets to be inefficient

private solutions can be developed to solve the problem

If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of

the availability of close substitutes in determining the price elasticity of demand.

Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all toothpastes increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of

the definition of a market in determining the price elasticity of demand.

Cartels are difficult to maintain because

there is always tension between cooperation and self-interest in a cartel.

Refer to Table 13-4. Charles's math tutoring company experiences diminishing marginal productivity with the addition of the

third worker.

Scenario 17-4. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million. Refer to Scenario 17-4. What will these two companies do if they behave as individual profit maximizers?

Both companies will advertise.

If consumers view cappuccinos and lattés as substitutes, what would happen to the equilibrium price and quantity of lattés if the price of cappuccinos rises?

Both the equilibrium price and quantity would increase.

In which of the following markets are strategic interactions among firms most likely to occur? a. the market for tennis balls b. the market for corn c. the market for piano lessons d. markets to which patent and copyright laws apply

Correcta. the market for tennis balls

In choosing among alternative courses of action, Raj must consider how others might respond to the action he takes. In the language of game theory, we say that Raj must think a. dominantly. b. openly. c. cooperatively. d. strategically.

Correctd. strategically.

Figure 4-19 The diagram below pertains to the demand for turkey in the United States. Refer to Figure 4-19. All else equal, an increase in the income of buyers who consider turkey to be an inferior good would cause a move from

Da to Db.

Scenario 17-2. ​ Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue. Refer to Scenario 17-2. If BQ and Exxoff are able to successfully collude to maximize their joint profits, BQ will earn a. $67 million and Exxoff will earn $67 million. b. $86 million and Exxoff will earn $43 million. c. $62 million and Exxoff will earn $62 million. d. $43 million and Exxoff will earn $86 million.

a. $67 million and Exxoff will earn $67 million.

Refer to Table 17-29. Which of the following statements does not correctly characterize the outcome of this game? a. Only one firm has a dominant strategy. b. Both firms collectively would earn the highest joint profits by maintaining the agreement not to advertise. c. There is a Nash equilibrium. d. The game is an example of the Prisoners' Dilemma.

a. Only one firm has a dominant strategy.

Refer to Table 17-8. If there were only one supplier of water, what would be the price and quantity? a. The price would be $7 per gallon and the quantity would be 600 gallons. b. The price would be $4 per gallon and the quantity would be 1200 gallons. c. The price would be $5 per gallon and the quantity would be 1000 gallons. d. The price would be $6 per gallon and the quantity would be 800 gallons.

a. The price would be $7 per gallon and the quantity would be 600 gallons.

Refer to Table 17-21. If Paul chooses Drive Straight, what will John choose to do and what will John's payoff equal? a. Turn, 5 b. Drive Straight, 5 c. Drive Straight, 0 d. Turn, 20

a. Turn, 5

Refer to Table 17-23. Suppose that the two firms, A and B, make an agreement to withhold any advertising for one month to lower each firm's costs and raise each firm's profits. If the firms reach the Nash equilibrium, a. both firms will break the agreement and choose to advertise. b. firm B will choose not to advertise, but firm A will break the agreement and choose to advertise. c. both firms will choose not to advertise. d. firm A will choose not to advertise, but firm B will break the agreement and choose to advertise.

a. both firms will break the agreement and choose to advertise.

In the prisoners' dilemma game with Bonnie and Clyde as the players, the likely outcome is one a. in which both Bonnie and Clyde confess. b. that involves neither Bonnie nor Clyde pursuing a dominant strategy. c. in which neither Bonnie nor Clyde confesses. d. that is ideal in terms of Bonnie's self-interest and in terms of Clyde's self-interest.

a. in which both Bonnie and Clyde confess.

The story of the prisoners' dilemma shows why a. oligopolies can fail to cooperate, even when cooperation is in their best interest. b. economists are unanimous in condemning resale price maintenance, since it inevitably reduces competition. c. oligopolies can fail to act independently, even when independent decision-making is in their best interest. d. predatory pricing is clearly not in society's best interes

a. oligopolies can fail to cooperate, even when cooperation is in their best interest.

The story of the prisoners' dilemma shows why a. oligopolies can fail to cooperate, even when cooperation is in their best interest. b. oligopolies can fail to act independently, even when independent decision-making is in their best interest. c. predatory pricing is clearly not in society's best interest. d. economists are unanimous in condemning resale price maintenance, since it inevitably reduces competition.

a. oligopolies can fail to cooperate, even when cooperation is in their best interest.

The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to a. sue for up to three times the damages they incurred. b. sue for up to two times the damages they incurred. c. sue for damages, but only for the actual amount of damages they incurred. d. sue for up to four times the damages they incurred.

a. sue for up to three times the damages they incurred.

If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios would best describe the change remaining firms would face as the market adjusts to the long-run equilibrium?

an increase in demand for each firm

Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge? a. $35 b. $30 c. $25 d. $40

b. $30

able 17-28 Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order 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 product, 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: Firm A Breaks agreement Maintains agreement and advertises and does not advertise Firm B Breaks agreement and advertises Firm A's profit = $16,000 Firm B's profit = $6,000 Firm A's profit = $14,000 Firm B's profit = $10,000 Maintains agreement and does not advertise Firm A's profit = $24,000 Firm B's profit = $5,000 Firm A's profit = $22,000 Firm B's profit = $9,000 Refer to Table 17-28. Does either Firm A or Firm B have a dominant strategy? a. Neither Firm A nor Firm B has a dominant strategy. b. Both Firm A and Firm B have a dominant strategy. c. Firm A does not have a dominant strategy, but Firm B does. d. Firm A has a dominant strategy, but Firm B does not.

b. Both Firm A and Firm B have a dominant strategy.

efer to Figure 13-1(quiz 1). Which of the following could explain why the total product curve would shift from TP2 to TP1? a. The firm is now receiving a higher price for its product. b. Labor skills have become rusty and outdated in the firm. c. The firm has developed improved production technology. d. There is additional capital equipment available to the firm.

b. Labor skills have become rusty and outdated in the firm.

Refer to Table 17-12. 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 two sellers of gasoline in Driveaway. b. There are many sellers of gasoline in Driveaway. c. There is one seller of gasoline in Driveaway. d. There are a few sellers of gasoline in Driveaway, but the number of sellers exceeds two.

b. There are many sellers of gasoline in Driveaway.

Which of the following examples illustrates an oligopoly market? a. a city whose electrical service is provided by one electric co-operative b. a city with two firms who are licensed to sell school uniforms for the local schools c. a city with many independently-owned hair styling salons d. a farmers' market with many individuals selling sweet corn and tomatoes

b. a city with two firms who are licensed to sell school uniforms for the local schools

According to the Clayton Act, a. private lawsuits are discouraged. b. individuals can sue to recover damages from illegal cooperative agreements. c. the government was able to incarcerate the CEO of a firm for illegal pricing arrangements. d. lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.

b. individuals can sue to recover damages from illegal cooperative agreements.

Refer to Figure 17-5. Suppose we observe that the outcome of the game is one in which each company earns a profit of $10 million. This outcome a. is the result of cooperation between the two companies, and we know that a cooperative outcome is easy in a game such as this one. b. is the result of cooperation between the two companies, and we know that a cooperative outcome is difficult in a game such as this one. c. is the most likely outcome of the game, regardless of whether the two companies cooperate. d. is the result of each company pursuing its dominant strategy.

b. is the result of cooperation between the two companies, and we know that a cooperative outcome is difficult in a game such as this one.

The story of the prisoners' dilemma shows why a. oligopolies can fail to act independently, even when independent decision-making is in their best interest. b. oligopolies can fail to cooperate, even when cooperation is in their best interest. c. predatory pricing is clearly not in society's best interest. d. economists are unanimous in condemning resale price maintenance, since it inevitably reduces competition.

b. oligopolies can fail to cooperate, even when cooperation is in their best interest.

The practice of tying is used to a. control the retail price of a collection of related products. b. package products to sell at a combined price closer to a buyer's total willingness to pay. c. encourage the enforcement of collusive agreements. d. enhance the enforcement of antitrust laws.

b. package products to sell at a combined price closer to a buyer's total willingness to pay.

As a group, oligopolists earn the highest profit when they a. charge a price that falls short of the Nash-equilibrium price. b. produce a total quantity of output that falls short of the Nash-equilibrium total quantity. c. produce a total quantity of output that exceeds the Nash-equilibrium total quantity. d. achieve a Nash equilibrium

b. produce a total quantity of output that falls short of the Nash-equilibrium total quantity.

Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to charge customers $500 for the computers, then it is engaging in a. monopolistic competition. b. resale price maintenance. c. predatory pricing. d. tying.

b. resale price maintenance.

Since almost all forms of transportation produce some type of pollution a. the government should ban all transportation. b. society has to weigh the cost and benefits and decide how much pollution to allow. c. corporations should voluntarily reduce pollution levels with new car models. d. the government should tax the types of transportation that pollute most to eliminate it altogether.

b. society has to weigh the cost and benefits and decide how much pollution to allow.

Scenario 17-3. Consider two countries, Muria and Zenya, that are engaged in an arms race. Each country must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other countrys weapons. The following table shows the possible outcomes for each decision combination. The numbers in each cell represent the country's ranking of the outcome (4 = best outcome, 1 = worst outcome). Refer to Scenario 17-3. If Zenya chooses to build new weapons, then Muria will

build new weapons in order to prevent the loss of influence in world affairs.

When firms are faced with making strategic choices to maximize profit, economists typically use a. the theory of monopoly to model their behavior. b. cartel theory to model their behavior. c. the theory of aggressive competition to model their behavior. d. game theory to model their behavior.

d. game theory to model their behavior.

Refer to Figure 6-24. Suppose D1 represents the demand curve for paperback novels, D2 represents the demand curve for gasoline, and S1 represents the supply curve for paperback novels and gasoline. After the imposition of the $2 on paperback novels and on gasoline, the

buyers of gasoline bear a higher burden of the $2 tax than buyers of paperback novels.

What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly market? (i) The firms may well reach the monopoly outcome. (ii) The firms may well reach the competitive outcome. (iii) Buyers of the oligopolists' product will likely be worse off as a result.\ a. (i), (ii), and (iii) b. (ii) and (iii) c. (i) and (iii) d. (i) and (ii)

c. (i) and (iii)

Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? a. 0 gallons b. 900 gallons c. 1,200 gallons d. 600 gallons

c. 1,200 gallons

Scenario 17-1. ​ Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping. Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level, both Irun and Urun have the individual incentive to a. increase price. b. hold production constant. c. increase production. d. decrease production.

c. increase production.

Refer to Table 17-20. If Maddie chooses to clean, then Nadia will a. clean and Maddie's payoff will be 50. b. clean and Maddie's payoff will be 30. c. not clean and Maddie's payoff will be 7. d. not clean and Maddie's payoff will be 10.

c. not clean and Maddie's payoff will be 7.

We must be knowledgeable of how people behave in strategic situations if we are to understand a. perfectly competitive markets. b. monopolistically competitive markets. c. oligopolistic markets. d. All of the above are correct.

c. oligopolistic markets.

The Clayton Act a. was specifically designed to reduce the ability of cartels to organize. b. replaced the Sherman Act. c. strengthened the Sherman Act. d. preceded the Sherman Act.

c. strengthened the Sherman Act.

Monopolies use their market power to

charge a price that is higher than marginal cost.

Refer to Table 17-10. If this market is perfectly competitive and the marginal cost is constant at $40 per unit, then how much output will be produced? a. 1,200 b. 1,500 c. 900 d. 1,800

d. 1,800

Refer to Table 17-28. Which of the following statement(s) correctly characterizes the outcome of this game? a. Both Firm A and Firm B have a dominant strategy to advertise. b. There is a Nash equilibrium when both firms advertise. c. Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self-interest will cause each firm to break the agreement. d. All of the above are correct.

d. All of the above are correct.

Refer to Table 17-17. Which of the following outcomes represent the Nash equilibrium in this game? a. Q=2 for Firm A and Q=3 for Firm B. b. Q=3 for Firm A and Q=2 for Firm B. c. There is no Nash equilibrium in this game since neither player has a dominant strategy. d. Both a and b are correct.

d. Both a and b are correct.

Because oligopoly markets have only a few sellers, the actions of any one seller a. do not affect other sellers in the market. b. can have a large impact on the profits of other sellers in the market. c. will affect how other firms behave in the market. d. Both b and c are correc

d. Both b and c are correc

Refer to Table 17-12. If there are exactly five sellers of gasoline in Driveaway and if they collude, then which of the following outcomes is most likely? a. Each seller will sell 40 gallons and charge a price of $4. b. Each seller will sell 30 gallons and charge a price of $4. c. Each seller will sell 50 gallons and charge a price of $3. d. Each seller will sell 30 gallons and charge a price of $5.

d. Each seller will sell 30 gallons and charge a price of $5.

Refer to Table 17-20. What is Maddie's dominant strategy? a. Maddie should always choose Clean. b. Maddie has two dominant strategies, Clean and Don't Clean, depending on the choice Nadia makes. c. Maddie has no dominant strategy. d. Maddie should always choose Don't Clean.

d. Maddie should always choose Don't Clean.

Two CEOs from different firms in the same market collude to fix the price in the market. This action violates the a. Crandall-Putnam ruling of 1983. b. Clayton Act of 1914. c. Jackson-Microsoft ruling of 2000. d. Sherman Antitrust Act of 1890.

d. Sherman Antitrust Act of 1890.

Suppose that Thierry and Abdul are duopolists. Thierry is producing 700 units of output, and Abdul is producing 500 units of output. When Abdul produces 500 units, Thierry maximizes profit by producing 700 units. When Thierry produces 700 units of output, Abdul maximizes profit by producing 500 units. Thierry and Abdul are a. pricing at the minimum of marginal cost. b. in a competitive market. c. engaging in mark-up pricing. d. at a Nash equilibrium

d. at a Nash equilibrium

Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result, Firm A lowers its price to try to drive Firm B out of the market. This practice is known as a. tying. b. resale price maintenance. c. predatory tying. d. predatory pricing.

d. predatory pricing.

Resale price maintenance involves a firm a. selling two individual products together for a single price rather than selling each product individually at separate prices. b. colluding with another firm to restrict output and raise prices. c. temporarily cutting the price of its product to drive a competitor out of the market. d. requiring that the firm reselling its product do so at a specified price.

d. requiring that the firm reselling its product do so at a specified price.

An early frost in the vineyards of Napa Valley would cause a(n)

decrease in the supply of wine, increasing price.

Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

shut down in the short run and exit in the long run.

If sellers expect higher basket prices in the near future, the current

supply of baskets will decrease.