EC 201 Exam 3 Practice Problems

Francine owns a restaurant and is considering expanding her restaurant and hiring more workers. However, she knows that if she does this, she will have to offer daily happy hour specials in order to get extra customers to come. This is an example of:

Declining output prices

Which of the following is NOT true about imperfect competition?

Greater product differentiation decreases market power.

Vandelay Industries is polluting into a local lake; doing so benefits them $10,000 per year. People who enjoy swimming in the lake are made worse off. They would value swimming in a clean lake at $15,000 per year. Currently, Vandelay Industries has the rights to use the lake however they want. Which of the following is an optimal solution according to the Coase theorem?

Vandelay Industries pays the swimmers $5,000 and continues to pollute.

Consider a good with positive externalities. Relative to the outcome of an unregulated market, a market which accounts for these positive externalities would have ______ prices and _______ quantities.

higher; higher

The government grants patents for firms as an incentive for innovation. However, it also comes with a cost to society because patents create _____ for the firms granted them.

market power

Parker owns a car wash. She currently has four employees and is able to wash 18 carsper day. If she hires a fifth employee, she will be able to wash 21 cars per day. Carwashes cost $10 each. What is the marginal revenue product of the fifth employee?

$30

Neville is a lawyer at a large law firm where he earns a salary of $170,000 per year. He is thinking of leaving the firm to set up his own law office. To do this, he would need to invest $140,000 of his savings, which currently earns 5% in interest each year. He estimates that if he starts a law office, his annual revenue will be $510,000, and his explicit financial costs will be $300,000. How much would Neville earn in economic profits or losses if he starts his own law office?

$33,000

Greg owns a company which manufactures dishwashers. He employs forklift drivers to move refrigerators around his factory and warehouse. Which of the following will increase the demand for forklift drivers?

Better management results in forklift drivers being more productive.

All of the following are examples of barriers to entry, which is an example of an entry deterrence strategy used by firms.

Brand Proliferation

Which of the following conditions is present for all sellers in a perfectly competitive market?

All sellers are selling identical products.

Two individuals are planning to open a restaurant on Grand River Avenue. Each is deciding what type of restaurant to open, and each has narrowed down their decision and will open either an ice cream parlor or a pretzel shop. The market is such that there is room for one ice cream parlor to be profitable and earn $1,000 per week, but if there are two, both will lose money. Similarly, there is room for one pretzel shop to be profitable and earn $1,000, but if there are two, both will lose money. Both individuals are equally competent managers and neither is "better" at running a specific type of restaurant. This is an example of:

An anti-coordination game

Which of the following is a good example of a positive externality?

Ryan is the first person to go through the buffet line at a wedding and he takes all of the shrimp.

Suppose lawn mowers create negative externalities because they pollute and are noisy. Which of the following is true?

The social supply curve is to the left of the private supply curve.

In which of the following situations would Maria's Doughnut Shop have the LEAST market power?

Within three miles, there are five other doughnut shops and three bakeries that sell breakfast pastries.

Why can a company with monopsony power in its labor market succeed in paying low wages?

Workers don't have other employment options.

Human capital is:

accumulated knowledge and skills that make a worker more productive.

A coordination game exists when:

all players have a common interest in coordinating their choices.

A characteristic of monopolistic competition that is not present in any other market structure is that there

are many sellers and each produces its own version of the product.

What is the dominant factor determining market price in the long run with free entry and exit?

average total costs

When a seller has a high level of market power, the seller

can raise its price without losing many customers.

Which of the following is NOT among the main factors affecting wages?

complements

When an individual's best choice may depend on what other people choose and other people's best choices may depend on what the individual chooses, then _____ is the science that is useful to help the decision makers analyze their options.

game theory

If you have _____, you can raise your price without losing many customers. This means your firm's specific demand curve is _____.

market power; downward sloping

Kaila wants her employer to pay her 20% more for making night deliveries in a high-crime neighborhoodthan the day delivery people receive. Most of the delivery people are willing to make night deliveries in theneighborhood for only a 10% differential. Kaila is seeking:

more than a compensating differential because she has greater concerns than most workers.

The strong incentive of sellers to deter the entry of new sellers is a major reason that:

most markets are imperfectly competitive.

Unions try to _____ union members by _____.

raise wages of; shifting the labor supply curve to the left

Social safety nets, social insurance programs, and progressive tax systems are all types of income _____programs that have the impact of moving income distribution _____ equality.

redistribution; closer to

In a monopoly, there is one _____; in a monopsony, there is one _____.

seller; buyer

The marginal social cost of a unit of pollution is:

the marginal private cost plus marginal external cost from one extra unit of pollution.

Third-degree price discrimination for concessions at ball parks is not applied to adults andchildren because_____.

there could be exchange of the products from children, who could buy them at a lower price, to adults

Social insurance programs do NOT:

use a means test to qualify people for benefits.

In a long-run equilibrium, with free entry and exit, economic profits are:

zero.

Which of the following statements is true regarding discrimination in labor markets?

Discrimination accounts for only part of the differences in wages across groups of workers.

Based on the rational rule for sellers, how does a manager set price and quantity? If the company has no market power, the marginal cost____ price. If the company has market power, the marginal cost is _____ than price.

Equals; less

Which of the following statements is true regarding views of what is "fair"?

Everyone tends to agree that things should be fair, but everyone does not agree on exactly what is fair.

Chad loves playing Valorant on his computer. He will work as much as necessary to afford his apartment, food, and other necessities, but he prefers to spend as much time as possible playing Valorant. If Chad gets a raise, we expect him to choose towork___________

Fewer hours because for Chad, the income effect is very important

According to what we learned in class, what is the main reason that perfect (first-degree)price discrimination is so rare?

Finding everyone's willingness to pay is costly and difficult.

Which of the following is consistent with a model of perfect competition?

Firms are "price takers".

Which of these industries would be the closest to "monopolistic competition"?

Frozen pizzas.

Relative to traditional monopoly pricing, price discrimination leads to

Increased quantities

How can a company's research and development expenditures create a barrier to entry into its market?

It can result in new production technologies that reduce the cost of production.

Ari owns a hair salon in a small city. Which of the following is NOT an effect that the opening of new hair salons in her city will have on her salon?

Its cost curves will shift upward.

Which of the following statements about market power is TRUE:

Market power is the ability to increase your prices without losing all of your customers.

Which of the following is an example of a nonrival good?

Microsoft Excel

Which of the following is NOT an example of price discrimination?

A jewelry store charges a higher price for a gold ring than it charges for a silver ring

Two friends each got Bs on an exam, but they cheated. The Professor requested to meet with both friends simultaneously. In the meeting the Professor tells the two friends that they can write one of two things on a piece of paper: "Cheated" or "Did not cheat" and hand the piece of paper over to the Professor. The Professor goes on to tell them that if both friends write "Did not cheat" then their grades remain the same. Further, if one friend writes "Cheated" while the other friend writes "Did not cheat" then the friend who wrote "Cheated" gets an A and the other gets a D. Finally, if both write "Cheated" then they each get a C. This is an example of:

A prisoners' dilemma

According to what we learned in class about solving negative externalities, which of the following is not a method that could be used to deal with the negative externality of second-hand smoke:

A subsidy on cigarette lighters.

According to what we learned in class, what is the marginal cost of working for one hour if your hourly wage is $12 per hour?

One hour of leisure

Based on the Rational Rule for Sellers, how does a manager set price and quantity? If the company has no market power, the marginal cost _____ price. If the company has market power, the marginal cost is _____ than price.

equals; less

Consumers who clip and redeem discount coupons ________.

exhibit a relatively higher price elasticity of demand for a given product thanconsumers who do not clip and redeem coupons