Econ Exam 2 practice questions

Game theory is not useful in understanding perfect competition because in a perfectly competitive market:

no single firm can influence the market price, so firms' decisions are not interdependent.

A situation is efficient if it is:

not possible to find a transaction that will make at least one person better off without harming others.

Suppose that at a firm's profit-maximizing level of output, its total revenue is $1,250, the total cost of its variable factors of production is $1,000, and its total fixed cost is $500. This firm will ______ in the short run, and will ______ in the long run.

not shut down; exit the industry

Subsidies are most likely to:

reduce total economic surplus.

OPEC is an example of a:

cartel

Even when a firm produces the level of output at which price equals marginal cost, it should shut down if its total revenue is less than its:

fixed costs

A decision tree is used when modeling:

games in which timing matters

If a natural monopoly increases the quantity of output it produces, then:

its average cost will decrease.

Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______.

rise; fall

Monopolists use the hurdle method of price discrimination in order to:

separate consumers on the basis of their reservation prices.

Game theory provides tools that are used to model:

strategic interdependencies.

If the firms in a market are earning an economic profit, then, in the long run, the market ______ curve will shift to the ______.

supply; right

Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by:

the actions of independent, self-interested buyers and sellers.

Professor Plum, who earns $100,000 per year, read in the paper today that the university pays its basketball coach one million dollars per year in exchange for his agreement to remain at the university for at least three more years. The coach earns more than Professor Plum because:

the coach is able to earn economic rent due to his unique talents.

If a firm is earning zero economic profit, then:

the firm's accounting profit is equal to the firm's implicit costs.

When more firms enter and industry:

the industry supply curve will shift right

The dilemma in a prisoner's dilemma is that:

the players would be better off if they both played a dominated strategy.

Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 100 t-shirts, your average total cost is ______.

$13

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. Pat's explicit costs are ______, and Pat's implicit costs are ______.

$16,000; $35,000

What is NOT an example of a good with network economies

A computer printer

What will cause an increase market supply?

A technological innovation that lowers the marginal cost of producing the good.

Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Acme Manufacturing: TC = 100 + 3Q. Generic Industries: TC = 500 + 3Q. Which of the following statements is true?

Acme and Generic have the same marginal cost.

The price equals marginal cost rule for profit maximization is a specific example of which core principle?

The Cost-Benefit Principle

Suppose a firm produces the level of output at which the marginal cost of the last unit produced equals the price of the good, what should the firm do?

The firm should shutdown if its total revenue is less than its variable cost.

Which of the following is the most likely to be a fixed factor of production at a pizza restaurant?

The size of the seating area

Which of the following statements about explicit costs is true?

They appear on the firm's balance sheet.

As price increases, firms in a perfectly competitive market find that it is:

beneficial to produce more units of output.

he accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive.

curve A above curve C.

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. For both Joe and Sam, ______ is a ______.

cutting the price to $2.90; dominant strategy

Price discrimination means charging:

different prices to different buyers for essentially the same good or service.

The phrase "smart for one, but dumb for all" refers to the idea that the individual pursuit of self-interest:

doesn't always lead to an efficient outcome.

An imperfectly competitive firm faces a demand curve that is:

downward sloping

If a firm shuts down in the short run, then its:

economic loss will equal its fixed costs.

A cost-saving innovation in a perfectly competitive industry will lead to:

economic profits for a few firms for a short time.

A natural monopoly is a monopoly that arises from:

economies of scale.

A price taker faces a demand curve that is:

horizontal at the market price

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

if the firm increases its price above the market price, it will earn zero revenue.

A variable factor of production is variable:

in both the long and short run

If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should:

increase output until marginal revenue equals marginal cost.

Suppose a perfectly competitive firm is producing 37 units output, and the marginal cost of the 37th unit is $3. If the firm can sell each unit of output for $5 and the firm's revenue is sufficient to cover its variable cost, the firm should:

increase production

Economies of scale arise from:

increasing returns to scale

If a production process exhibits diminishing returns, then as output rises:

marginal cost will eventually increase.

he monopolist will maximize profits at the output level for which:

marginal revenue equals marginal cost.

The primary objective of an imperfectly competitive firm is to:

maximize profit

Explicit costs:

measure the payments made to the firm's factors of production.

In exchange for a share of the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus. Prior to the deal, a 12-ounce can of CheapFizz sold for 75 cents. After the deal you would expect a 12-ounce can of CheapFizz to sell for:

more than 75 cents because CheapFizz is the only company that can sell soda on campus.

If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____.

more than double.

Adam Smith's theory of the invisible hand posits the actions of independent, self-interested buyers and sellers will ______ lead to the most efficient allocation of resources.

often

The use of psychological incentives to solve commitment problems would be least effective in games played:

once between strangers.

A fixed factor of production is fixed:

only in the short

An example of an implicit cost is:

the value of a spare bedroom turned into a home office.

Efficiency is an important goal because when markets are efficient:

there are more resources available to achieve other goals.

One reason that variable factors of production tend to show diminishing returns in the short run is that:

there is only so much that can be produced using additional variable inputs when some factors of production are fixed.

In the Nash equilibrium of a prisoner's dilemma:

there is unrealized opportunity for both to gain.

Economic profit is equal to:

total revenue minus the sum of explicit and implicit costs