Econ final
Other things remaining the same, which of the following is likely to cause a decrease in both the wage rate and the number of workers hired in a glass factory?
The introduction of labor-saving technology in the factory
Signals are believable when the cost of sending a ________ is known to be ________.
false signal; high
A profit-maximizing monopoly's price is
greater than the price that would prevail if the industry was perfectly competitive.
If the price of labor increases, the typical perfectly competitive firm in the short run will
hire less labor.
The dominant strategy allows a firm to
obtain the highest benefit, regardless of its rivals' actions.
In order to identify their used cars as plums (high-quality), many used car dealers:
offer money-back guarantees.
Sequential games are used to analyze
situations in which one firm acts and other firms respond.
Marginal revenue product for a perfectly competitive seller is equal to
the change in total revenue that results from hiring another worker.
Moral hazard is
when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party.
Assume it takes 10 units of labor to produce 4 units of output. When the price of labor is $6 per unit and fixed costs equal $60, what is the total cost of those 4 units of output?
$120
Which is true about dominant strategies in the game in Scenario 13.15
$80 is dominant for Simple; $25 is dominant for Boring.
Suppose the market wage facing a firm in the perfectly competitive candle-making industry is $20 per hour, and the firm sells its candles for $2 each. Given this information, the firm should hire workers until the marginal product of labor equals ________.
10 candles per hour
Which one of the following about a monopoly is false?
A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.
Correct formulas
ATC = AFC + AVC AFC = TFC divided by Q TC = TFC + TVC
Suppose a perfectly competitive firm, which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees. In the short run, which of the following will occur?
ATC and MC will shift down, causing the firm to earn a positive economic profit.
Which of the following statements is true?
As output increases, average fixed cost becomes smaller and smaller.
Because of the income effect, the labor supply curve is
Because of the income effect, the labor supply curve is
Which branch of economics considers that economic agents do not always act rationally?
Behavioral economics
Why are decision trees useful to managers who plan business strategies?
Decision trees provide a systematic way of thinking through the implications of a strategy.
What is the dominant strategy in the prisoner's dilemma?
Each prisoner confesses because this is the rational action to pursue.
Which of the following statements is correct?
Economic profit takes into account all costs involved in producing a product
Which of the following statements is true?
Employers are willing to forego profits when engaging in taste-based discrimination.
If marginal cost is above the average variable cost, then average variable cost is decreasing.
False
Scenario: Two firms in a market must choose between two alternative strategies—X and Y. The figure below shows the game tree that these firms can use to make their decisions.Refer to the figure above. In equilibrium, ________.
Firm 1 will follow Strategy Y, and Firm 2 will follow Strategy X
Beth is a college student looking for summer employment. She has two options. Firm X is employing lifeguards to patrol the beaches at an exclusive resort in Cancun, Mexico, while Firm Y offers her a job working in an office filing paper work and assisting with the ordering of office supplies. Given this information,
Firm X may pay a wage that is lower than that of Firm Y because the job at Firm X has more desirable working conditions.
In long-run perfectly competitive equilibrium, which of the following is false?
Firms earn economic profit.
________ discourage low-risk individuals from seeking health insurance.
High premiums
A situation in which each firm chooses the best strategy given the strategies chosen by other firms is called a
Nash equilibrium.
What is allocative efficiency?
It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it.
What is adverse selection?
It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction
Which of the following statements is false?
Marginal cost will equal average total cost when marginal cost is at its lowest point.
True facts about profit maximization
Marginal revenue equals marginal cost. Price equals marginal cost. Total revenue minus total cost is maximized.
Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit-maximizing outputs?
Marginal revenue is less than price.
The average price of gasoline in your neighborhood is $2.15 per gallon. Your neighbor, Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $2.06 per gallon However, she cautions you that there are usually long lines at that station. Is her suggestion beneficial to you?
No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station.
in the above figure, a perfectly competitive market will have a price of ________, and a monopoly will have a price of ________.
P 2 and quantity of Q 2; P 1 and quantity of Q 1
A wheat farmer sells wheat in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of wheat is $2 a bushel, the wage rate is $10, the farmer employs five workers and the marginal product of the fifth worker is 3 bushels. What would you advise this farmer to do?
Reduce employment because the wage paid is more than the marginal revenue product.
Which of the following is an example of a barrier to entry?
The government grants licenses to taxicab drivers, without which it is illegal to operate a taxicab.
Adam spent $10,000 on new equipment for his small business, "Adam's Fitness Studio." Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true?
The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he'll need to continue operations is a variable cost
What is one of the most important benefits of the Internet?
The Internet has reduced asymmetric information.
Which of the following statements is FALSE?
The accounting profit earned by a firm will always be the same as its economic profit.
Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?
The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
Which of the following is likely to be used as a signal in the job market?
The degree obtained by the applicant
Assume that the 4K and OLED television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?
The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.
Which of the following would cause an increase in the equilibrium wage?
The demand for labor increases faster than the supply of labor.
Which of the following correctly identifies the difference between the demand for labor and the demand for final goods?
The demand for labor is derived from the demand for final goods, whereas the demand for final goods is independent of the demand for labor.
How will an increase in labor productivity affect equilibrium in the labor market?
The demand for labor will increase and the equilibrium wage and quantity of labor will increase.
What is likely to happen in a used-car market if the buyers feel that the best they can do is to buy a lemon?
The entire market shuts down.
Which of the following is likely to lead to a left shift in the supply curve for labor to a firm?
The establishment of a new firm nearby that offers higher wages
Which of the following will happen if a firm in a duopoly with homogeneous products increases its price above its marginal cost once a Nash equilibrium is reached?
The firm will lose all its customers to its rival.
What does it mean to say that a game is in "extensive form"?
The game is presented as a decision tree.
Firms use information on labor's marginal revenue product to determine
The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.
What is the difference between labor's marginal product and marginal revenue product?
The wage rate in the particular industry falls.
Which of the following would NOT shift an industry's supply of labor curve?
The wage rate in the particular industry falls.
Other things remaining the same, which of the following is likely to happen if there is a decrease in the price of flour products?
There will be a decrease in both the wage rate and the employment levels in the flour industry
An increase in the price of grape juice causes an increase in the marginal revenue product of labor used to produce grape juice.
True
Which of the following is the best example of a short-run adjustment?
Your local Walmart hires two more associates.
In the prisoners' dilemma game, when each player takes the best possible action given the action of the other player
a Nash equilibrium is reached.
One result of asymmetric information about people's ability to repay a loan is that:
a bank could make many loans to people who don't pay them back.
A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision?
a decision tree
A price maker is
a firm that has some control over the price of the product it sells.
Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it?
allocative efficiency
A dominant strategy is one that
always yields the highest benefit regardless of what the other players do.
The effect of higher wages on the individual supply of labor is ________ and the effect of higher wages on the market supply of labor is ________.
ambiguous; to increase the quantity supplied
An increase in the supply of capital, which is a complement to labor, will lead to
an increase in the demand for labor.
Assume goods X and Y are complements and are produced in perfectly competitive markets. All else constant, an increase in demand for good X would cause:
an increase in the number of firms that produce good Y.
Signaling takes place in markets with ________.
asymmetric information
The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is
asymmetric information.
Why does a monopoly cause a deadweight loss?
because it stops producing output at a point where price is above marginal cost
In the long run, the entry of new firms in an industry
benefits consumers by forcing prices down to the level of average cost.
The marginal product of labor is the:
change in output resulting from adding an additional unit of labor.
Which of the following will not cause the supply of labor curve to shift in the economics professor industry?
dollar value of the goods produced by that worker in one hour.
Both buyers and sellers are price takers in a perfectly competitive market because
each buyer and seller is too small relative to others to independently affect the market price.
A Nash equilibrium occurs if ________.
each player chooses strategies that are mutual best responses
Assume a perfectly competitive firm is producing 300 units of output, P = $10, ATC of the 300 th unit is $8, marginal cost of the 300 th unit = $10, and AVC of the 300 th unit = $6. Based on this information, the firm is:
earning an economic profit of $600.
Anchoring is relating a value to some other known value
even if the second value is irrelevant.
When considering perfect competition the absence of entry barriers implies that
firms can enter and leave the industry without serious impediments.
The word "competition" in the label "monopolistic competition" refers to the fact that:
firms vie against each other to get customers to buy their version of the product.
Assume health insurance is provided universally by the government. This would
force every taxpayer to bear the costs of moral hazard.
Compensating differentials are associated most closely with which of the following?
hazardous jobs
In the short run, average total cost is
higher than average variable cost.
Compensating differentials are
higher wages that compensate workers for unpleasant aspects of a job.
The ________ effect means that, other things remaining the same, the higher the wage rate, the less time people will spend working and the more time people will spend at leisure.
income
A seller's verbal assurance that a used car is a plum (high-quality car):
is not effective at reducing the problems associated with asymmetric information.
The change in total variable cost which accompanies one extra unit of output is
marginal cost.
If total costs are $50,000 when 1000 units are produced, and total costs are $50,100 when 1001 units are produced, we can conclude that
marginal costs are $100.
The decision rule for a profit-maximizing firm operating in a competitive market to hire an additional worker is the value of the:
marginal product of the worker should be equal to or greater than the wage rate.
In the case of the perfectly competitive firm:
marginal revenue equals the market price
If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the
marginal revenue of the sixth performance is $38,000.
As the wage rate falls, other things constant, perfectly competitive firms will employ
more workers.
A best response is ________.
one player's optimal action choice taking the other player's action as given
Adverse selection in employment is more likely when:
people's abilities are difficult for potential employers to observe.
A warranty is an example of ________.
signaling
If a typical firm in a perfectly competitive industry is incurring losses, then
some firms will exit in the long run, causing market supply to decrease and market price to rise, increasing profits for the remaining firms.
Employers engaging in ________ try to enhance their profits.
statistical discrimination
A ________ is a complete plan describing how a player will act
strategy
In the long run, a perfectly competitive market will
supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.
The income effect of a wage increase is observed when
the higher wage income causes workers to take more leisure and work less.
Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy?
the individual who is applying for the health insurance policy
Implicit costs can be defined as
the non-monetary opportunity cost of using the firm's own resources.
Which is the best example of a firm's implicit costs?
the opportunity cost of owner-provided labor
An implicit cost is defined as:
the opportunity cost of using a resource that is not explicitly paid out by the firm.
If productive efficiency characterizes a market
the output is being produced at the lowest possible cost.
If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of
the principle-agent problem.
A monopoly is characterized by all of the following except
there are only a few sellers, each selling a unique product.
Marginal cost is defined as the change in ________ cost when output changes by one unit. In the short run, marginal cost can also be measured by the change in ________ cost when output changes by one unit.
total; variable
The Pet Emporium hires workers to bathe cats. The Emporium sells this service for $20. The marginal revenue product of this store's fifth worker is $100. The marginal product of the fifth worker is
5 bathed cats.
Which of the following statements is true?
Lower wages are normally offered for jobs with better amenities.
Which one of the following statements is FALSE?
MC = TC divided by Q
A firm could continue to operate for years without ever earning a profit as long as it is producing an output where
MR > AVC.
For a perfectly competitive firm, which of the following is not true at profit maximization?
Market price is greater than marginal cost.
Which of the following is TRUE for the game in Scenario 13.4?
Neither company has a dominant strategy.
Which of the following is true of a Nash equilibrium?
No player can improve his payoff by changing his strategy once in Nash equilibrium.
If a perfectly competitive firm's price is above its average total cost, the firm
is earning a profit.
A perfectly competitive firm's marginal revenue
is equal to its price.
The labor supply for an industry would decrease if
the percentage of the population from age 16 to 65 decreases.
Mr. Smith put his laptop up for sale. He is aware of the fact that the laptop malfunctions frequently. However, none of the potential customers who came to buy the laptop were able to discover the problem and one of them actually bought it at a remunerative price. This occurred due to ________.
the presence of asymmetric information
A key aspect of the principal-agent problem is that
the principal cannot perfectly monitor the agent's actions.
The government of Eduland provided generous unemployment benefits to all the unemployed workers. However, the new government that came into power reduced the amount of unemployment insurance paid to each worker. This increased the average number of hours spent daily by unemployed workers in looking for jobs. This suggests that ________ exists in the labor market in Eduland.
the problem of moral hazard
If the marginal productivity of labor decreases, then
the quantity of labor demanded at every possible wage rate will be less.
An individual's labor supply curve shows
the relationship between wages and the quantity of labor that she is willing to supply.
A payoff matrix shows ________.
the return from each action that players can take in a game
In some markets for used goods:
the seller has more information than the buyer about the quality of the good
The minimum point on the average variable cost curve is called
the shutdown point.
Which of the following is NOT a characteristic of a perfectly competitive industry?
Sellers have better information about the product than consumers.
You have been hired by the No Hassle Collection Agency to provide economic advice. The owner of the agency tells you that No Hassle's only variable input is the number of collection agents. The hourly wage for collection agents is $40.00. The marginal revenue product curve for collection agents reaches its maximum at five workers with a marginal revenue product of $34.00. What advice would you give this firm?
Shut down immediately, as the firm is not able to cover all of its variable costs.
Relative to a perfectly competitive market, a monopoly results in
a gain in producer surplus less than the loss in consumer surplus.
What is a prisoner's dilemma?
a game in which players act in rational, self-interested ways that leave everyone worse off
A firm can use anchoring to influence consumer choices so as to increase sales by marking
a high "regular price" on a product, which makes the discounted "sale price" appear to be a bargain.
Consider a used car market in which half the cars are good and half are bad (lemons). If buyers are rational, the prices being offered for used cars will result in
a larger proportion of lemons being sold and consequently, producer surplus is increased.
Information asymmetry in a market can lead to ________.
a market failure
A dominant strategy is
a strategy that is the best for a firm no matter what strategies other firms use.
Suppose you and your roommate are trying to decide how to divide up the remaining slice of pizza left over from the night before. Your roommate has the following proposal. You get to divide the remaining slice of pizza, but he gets to choose which of the two pieces of pizza to consume. As a result, you decide to cut the remaining slice of pizza into equal portions. This is an example of ________.
backward induction
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. A player should use ________ to play this game.
backward induction
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money.Refer to the scenario above. A player should use ________ to play this game.
backward induction
Scenario: You walk onto a used-car lot to buy a car. You are willing to pay up to $15,000 for a car of good quality but you value a lemon at $0.You are now wondering whether you should trust the car dealer regarding the quality of the car. If you choose to trust him, he can choose to cooperate or defect. If you do not trust him, neither will he earn money nor will you be able to buy a car and use it. If you trust him and he cooperates, both of you will gain because the dealer values a good-quality car at $13,000. However, if he defects, he will earn $15,000 while you will not derive any satisfaction. Refer to the scenario above. You should use ________ to arrive at a decision.
backward induction
The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds?
because previously owned diamonds would be a close substitute to newly mined diamonds and would therefore reduce De Beers' market power
Which of the following explains why talented major league baseball players command much higher salaries than neurosurgeons?
because the supply of talented major league baseball players is low relative to its demand compared to the supply of neurosurgeons. Therefore, adding another player yields far greater marginal benefit than adding another neurosurgeon.
Firm A R&DNo R&D R & DA: $25B: $15A: -$3B: $60Firm B No R&DA: $60B: -$3A: $50B: $35 Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. The Nash equilibrium occurs when
both A and B conduct R&D.
Adverse selection arises in the health insurance market because ________.
buyers have private information
Suppose you have worked at a local sandwich shop for six months and now you plan to ask your manager for a raise. How can you convince your manager that you are worth more money than you are currently being paid?
by demonstrating to your manager the marginal revenue product your employment contributes to the sandwich shop
A truck driver getting paid more than a school teacher is due to ________.
compensating wage differentials
Firm A R&DNo R&D R & DA: $25B: $15A: -$3B: $60Firm B No R&DA: $60B: -$3A: $50B: $35 Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. A's best strategy is to
conduct R&D regardless of what B does.
The dollar value of the marginal product of labor is the:
contribution of an additional unit of labor to a firm's revenue.
Fixed costs are
costs that a firm incurs even when output is zero.
A game in which each player adopts its dominant strategy
could result in a Nash equilibrium.
All of the following are characteristics of a perfectly competitive industry EXCEPT
there are a large number of buyers and sellers with only a few being able to influence the market price.
A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both
there are many other suppliers of similar goods or services.
Consider the following game: In the game in Scenario 13.5,
there are two equilibria: either can expand in the West, and the other expands in the South.
In the market for automobile insurance, moral hazard implies that
those who are insured might take greater risks.
All of the following are ways by which existing firms can deter the entry of new firms into an industry except
threatening to raise prices.
The function of the agent in the principal-agent relationship is
to perform tasks for the principal.
Health insurance companies impose deductibles on policies and co-payments on claims
to reduce moral hazard problems.
The basic activity of a firm is
to use inputs to produce outputs of goods and services.
After learning about behavioral economics, it is clear that:
traditional theory does not explain all consumer decisions, but it sheds light on many of them.
A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.
true
If a firm shuts down in the short run, it avoids its variable cost but not its fixed cost.
true
Moral hazard refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.
true
The following figure depicts four sequential games. Player A is the first to move and Player B is the second to move. Refer to the figure above. In which game does Player A win money while Player B loses money in equilibrium?
3
Suppose that Figure 10.4 shows a monopolist's demand curve, marginal revenue, and its costs. The monopolist would maximize its profit by charging a price of:
35
Which of the following is an example of adverse selection?
A customer buying a defective appliance from a used goods market
Which of the following is a problem that arises in a health insurance market?
A disproportionate number of high-risk individuals are attracted to buy insurance.
Which of the following is true of a simultaneous move game?
All relevant benefits and costs of each action are taken into account
Scenario: Elly owns a small coffee shop. She has only one employee. One weekend, she decides to take a break from work. She is wondering whether she should trust her employee to run the shop in her absence. If she does not trust him, she would have to keep the shop closed, in which case neither she nor her employee will be able to make money. In contrast, if she trusts him, he can either cooperate and run the shop or he can defect and steal from the shop. If he cooperates, both of them will earn money. If he steals from the shop, he will make more money while she will lose. Refer to the scenario above. Which of the following is likely to happen if Elly is known to be vengeful?
Both Elly and her employee will earn money
Scenario: Elly owns a small coffee shop. She has only one employee. One weekend, she decides to take a break from work. She is wondering whether she should trust her employee to run the shop in her absence. If she does not trust him, she would have to keep the shop closed, in which case neither she nor her employee will be able to make money. In contrast, if she trusts him, he can either cooperate and run the shop or he can defect and steal from the shop. If he cooperates, both of them will earn money. If he steals from the shop, he will make more money while she will lose. Refer to the scenario above. Which of the following is likely to happen if Elly is known to be vengeful?
Both Elly and her employee will earn money.
Sears Lower pricesDon't lower prices Lower pricesS: $5 millionW: $5 millionS: $1 millionW: $30 millionWal-Mart Don't lower pricesS: $30 millionW: $1 millionS: $20 millionW: $20 million Sears and Wal-Mart must decide whether to lower their prices, based on the economic profits shown in the table above. Which of the following is TRUE?
Both Sears and Wal-Mart would jointly be better off if they could each keep their prices high.
In the United States, the bulk of health care spending is paid by health insurance companies. Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider. Why might such a system lead to an inefficient outcome?
Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.
A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean?
Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.
Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?
Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost
Most economists believe that only a small gap between the wages of white males and the wages of other groups is due to education. Most of the gap is explained by discrimination.
False
Technological advancements that increase labor's productivity shift the labor supply curve to the right.
False
Sarah is a high school graduate and James is a college graduate. Which of the following statements is true?
James is likely to have more human capital than Sara
Sarah is a high school graduate and James is a college graduate. Which of the following statements is true?
James is likely to have more human capital than Sara.
A soybean farmer sells soybeans in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of soybeans is $6 a bushel, the wage rate is $30, the farmer employs eight workers and the marginal product of the eighth worker is 7 bushels. What would you advise this farmer to do?
Increase employment because the wage paid is less than the marginal revenue product.
Which of the following helps in reducing the problem of adverse selection in health insurance markets?
Insurance mandates
What is adverse selection?
It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
Which of the following is true of a payoff matrix?
It takes into account all relevant costs and benefits associated with each action of the players.
Suppose you pre-ordered a non-refundable movie ticket to X-Men: Apocalypse. On the day of the movie you decide that you would rather not go to the movie. According to economists, what is the rational thing to do?
Since the cost of the movie ticket is a sunk cost, it should not influence your decision. Your decision should be based solely on whether you want to see the movie or not.
The difference between the salaries paid to movie stars and to actors who play supporting roles is much greater today than it was in the 1930s and 1940s. What factor explains this increase in relative salaries over time?
Technological advances in the entertainment industry increase the revenue that successful movies can earn. This has increased the movie studios' willingness to pay high salaries to movie stars.
Some superstar athletes in the sports industry earn very high levels of income relative to other occupations, and over time the wage differential has been increasing. What could have caused this?
Technological advances such as cable television has increased the demand for sports entertainment.
In the legal sector, some practice areas have declined in recent years. For example, personal-injury and medical-malpractice cases have been undercut by state laws limiting class-action suits, out-of-state plaintiffs, and payouts on damages, and securities class-action litigation has declined in part because of a buoyant stock market. How does this affect the market for lawyers?
The demand for lawyers shifts to the left.
What is the difference between labor's marginal product and marginal revenue product?
The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.
Which of the following statements about the perfect competitor is INCORRECT?
The products made by a perfectly competitive firm have no close substitutes.
Assume that a comparable worth law is passed that determines that kindergarten teachers and bricklayers have comparable jobs; therefore, workers in both of these occupations should be paid the same wages. Assume that prior to the law, bricklayers were paid a higher wage than kindergarten teachers. Which of the following is the most likely result of the comparable worth law?
There will be a shortage in the market for bricklayers and a surplus in the market for kindergarten teachers.
For a natural monopoly, the marginal cost of producing an additional unit of its product is relatively small.
True
One possible reason as to why consumers respond to sales is that by displaying a "high" regular price and a "low" sale price, sales provide consumers with a reference point to interpret the prices being offered.
True
When firms exit a perfectly competitive industry, the market supply curve shifts to the left.
True
Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements regarding economic surplus in each market structure is true?
Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions, economic surplus is less than under perfect competition and there is a deadweight loss.
Which of the following will not cause the supply of labor curve to shift in the economics professor industry?
Universities have discovered a way to make professors more productive.
Women typically earn less than men, even in the same occupation. Which of the following is an explanation for this discrepancy?
Women have, on average, less workforce experience than men of the same age.
A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run?
Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000.
Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are confused whether or not to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than cooperating with you. Refer to the scenario above. Which of the following is likely to happen if the service center has a reputation of trustworthiness?
You will trust the mechanic and he will cooperate.
The relationship between a pure-strategy Nash equilibrium and a dominant-strategy equilibrium is that:
a dominant-strategy equilibrium is a special case of a pure-strategy Nash equilibrium.
Explicit costs are
actual expenditures that a firm must make.
A person who practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance is an example of
adverse selection
An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better than the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above?
adverse selection
A person who practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance is an example of
adverse selection.
Without warranties, used car buyers can assume that all used cars are "lemons" because of
adverse selection.
If the demand for labor is unchanged, an increase in the supply of labor will lead to
an increase in the quantity of labor demanded and a decrease in the equilibrium wage.
A natural monopoly is most likely to occur in which of the following industries?
an industry where fixed costs are very large relative to variable costs
To maintain a monopoly, a firm must have
an insurmountable barrier to entry.
Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms. A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes. What are these points called?
decision nodes
Suppose that a perfectly competitive firm's marginal revenue equals $12 when it sells 10 units of output. If the marginal cost of producing the 10th unit is $14, to maximize its profit the firm should
decrease its production.
Buyers in the market for used guitars are getting more pessimistic about the possibility of getting a good guitar. This will cause the price of used guitars to ________ and the percentage of good used guitars to ________.
decrease; decrease
In order to be useful as a signal in a market with information asymmetry, the signal must be ________.
difficult to obtain
In a perfectly competitive market, a(n) ________ occurs because ________.
efficient outcome; total surplus is maximized
Assume health insurance is provided universally by the government. This would
eliminate the problems of adverse selection.
Marginal revenue product of labor for a competitive seller is
equal to the marginal product of labor multiplied by the output price.
In behavioral economics, we assert that: people sometimes do things because they think it is the fair thing to do,
even if there is no financial or other material benefit.
The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs.
explicit; accounting
When economists say a market has "barriers to entry," they refer to:
factors that prevent other firms from challenging a firm with market power.
If marginal cost is above the average variable cost, then average variable cost is decreasing.
false
You cause a fire insurance company to face a moral hazard problem when you take ________ you buy fire insurance from the company.
fewer precautions to prevent fires after
The perfectly competitive market structure benefits consumers because
firms are forced by competitive pressure to be as efficient as possible.
A ________ is an extensive -form representation of a game.
game tree
Most economists believe that a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Which of the following factors is not another factor that explains part of this gap?
geographic location
A perfectly competitive industry achieves allocative efficiency when
goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
A patent or copyright is a barrier to entry based on
government action to protect a producer.
A perfectly competitive firm will maximize profits (or minimize losses) so long as price (marginal revenue) is:
greater than average variable cost.
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers fairness to money, ________.
he will accept the offer if offered an equal share of the money
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund.Refer to the scenario above. If Joseph prefers money to fairness, ________.
he will always accept any offer made to him
When a firm hires a worker for one hour, the marginal benefit to that firm equals the:
how many workers to hire at each wage rate.
A person's stock of skills to produce economic value is referred to as:
human capital.
Peyton is a personal trainer and works at several gyms in her neighborhood. Peyton's labor supply curve is shown above. Which of the following statements is true regarding Peyton's labor supply? i. Peyton is willing to supply more labor and give up leisure at wages between $50 and $75 per hour. ii. Peyton will not work for less than $30 per hour. iii. If the wage increases higher than $75 per hour, Peyton will choose to take more leisure.
i, ii and iii
The difference between an extensive-form game and a simultaneous-move game is that ________.
in extensive-form games the player can observe the other player's action before deciding, but in simultaneous-move they can't
The main difference between the short run and the long run is that:
in the short run, at least one of the firm's input levels is fixed.
All else constant, as the amount of a firm's implicit costs increases, the difference between economic profit and accounting profit will:
increase
If the demand for hamburgers increases, it is likely that the demand for fast-food employees will
increase.
In situations where new technologies are considered complementary to workers, demand for these workers will ________, resulting in ________ in the equilibrium wage.
increase; an increase
A decrease in the supply of labor could be caused by
increased wage rates in another industry
An increase in the supply of musicians ________ the number of musicians employed, and ________ the wages paid to musicians.
increases; decreases
The demand for labor is described as a derived demand because
it is derived from the demand for products that use labor in the production process.
A strategy is dominant if
it yields a payoff at least as large as that from any other strategy, regardless of the actions of other players.
If a firm shuts down in the short run,
its loss equals its fixed cost.
Assume that as the wage rate rises a worker's substitution effect for leisure is larger than the income effect. We can conclude that in this region, the worker's:
labor supply curve will have the usual upward slope.
Ajax Corporation has just decided to let managers work from home one day a week. This decision will make working conditions better and will
lead to an increase in the supply curve of labor for managers.
The substitution effect of a wage increase is observed when
leisure's higher opportunity cost causes workers to take less leisure and work more
For the past year, Teddy has had a part-time job at which he is willing to work 30 hours each week. During Teddy's annual review, his boss grants him an 8 percent increase in his wage. As a result of the wage increase, Teddy is now willing to work 25 hours each week. Teddy's opportunity cost of ________ has risen and because for Teddy the substitution effect of the wage hike is ________ than the income effect.
leisure; less
The monopolist's marginal revenue curve
lies below the demand curve.
The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a
lower price, economic losses by rutabaga farmers, and exit from the market.
Christine works as a receptionist in an office. She is not supposed to use the Wi-Fi connection provided by the company to access social-networking Web sites. However, she often uses the Wi-Fi to access these Web sites because her browsing activities are not monitored by her employer. This is an example of ________.
moral hazard
Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured. In other words, the automobile insurance market is subject to
moral hazard.
If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then
new firms are attracted to the industry.
If a typical firm in a perfectly competitive industry is earning profits, then
new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.
If perfectly competitive firms are making an economic profit, then
new firms will enter the market.
One interesting feature of a prisoner's dilemma game is that
non-cooperative behavior leads to lower payoffs than cooperative behavior.
A Nash equilibrium occurs when ________.
none of the players can increase their payoffs by choosing a different strategy
Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should
not produce this additional batch.
Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should
offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon.
Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they enter the market, the minimum average total cost for a bundle of rubber bands, for the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then
only Alice will enter the market.
The demand curve faced by the individual perfectly competitive firm is:
perfectly elastic.
The demand curve for a perfectly competitive firm is
perfectly elastic.
A game is called a simultaneous move game if ________.
players choose their actions at the same time
In a Nash equilibrium,
players may or may not have dominant strategies
In a Nash equilibrium,
players may or may not have dominant strategies.
In a perfectly competitive market, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from?
price
Adverse selection is created by
private information.
A Nash equilibrium is
reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.
A dominant strategy ________.
results in a higher payoff irrespective of the strategy chosen by the other playe
A dominant strategy ________.
results in a higher payoff irrespective of the strategy chosen by the other player
You observe that more labor is employed and the wage rate increases. This set of events could have been the result of a
rightward shift of the labor demand curve.
In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use
sequential games.
A player has a dominant strategy when:
she has only one best response to every possible strategy of the other player
Arnold Kim began blogging about Apple products during his fourth year of medical school. Kim's Website, MacRumors.com, became so successful that he decided to give up his medical career and work full time on his Website, despite the nearly $200,000 he had invested in his education. In making his decision, the $200,000 he spent on his education
should be ignored since it represents a sunk cost.
One reason why adverse selection problems arise in health insurance markets is that
sick people are more likely to want health insurance than healthy people.
If a firm offers higher starting salaries to Asian job candidates than to white job candidates because Asians as a group have higher SAT scores, this is an example of ________.
statistical discrimination
When expectations cause people to discriminate against a certain group, it is referred to as ________.
statistical discrimination
When expectations cause people to discriminate against a certain group, it is referred to as:
statistical discrimination.
In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are
sunk costs.
Suppose the wage rate in a certain industry rises, and firms hire fewer workers. The best explanation of this is that labor:
supply fell
Economically rational means that consumers and firms
take actions that are appropriate to reach goals given available information.
Discrimination that occurs because the discriminator dislikes another person's gender, race, or some other personal characteristic is known as
taste-based discrimination.
Discrimination that occurs when people's preferences cause them to discriminate against a certain group is referred to as:
taste-based discrimination.
A natural barrier to entry is defined as a barrier that arises because of
technology that allows one firm to meet the entire market demand at lower average total cost than could two or more firms.
Economists generally define the short run as being
that period of time in which at least one of the firm's inputs, usually plant size, is fixed.
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Scenario: Robert and Alice are participating in a reality show on television. Robert is offered an amount of $500 and told that he can keep the money provided he shares some of it with Alice. Robert can offer Alice as much or as little as he likes, but if Alice rejects his offer, neither of them will get to keep any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Game theory is applicable to oligopoly behavior because oligopolists
use strategic behavior.
Because warranties are potentially ________, low-quality goods are ________ to have warranties.
very expensive; less likely
The prisoner's dilemma illustrates
why firms will not cooperate if they behave strategically.
Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are uncertain about whether to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than by cooperating with you. Refer to the scenario above. Which of the following will be true if the service center has a reputation for trustworthiness?
you will pay the mechanic $500, and he will cooperate.