Econ Midterm 2
someone is risk adverse when
0<a<1
Anna's marginal utility of income function is MU(I) = I, while Elsa's marginal utility of income function is MU(I) = I 1.5 . Therefore, Anna is _____ and Elsa is _____ .
Anna is risk loving, and Elsa is risk loving
Anna's utility of income function is U(I) = I, while Elsa's utility of income function is U(I) = I 1.5 . Therefore, Anna is _____ and Elsa is _____ .
Anna is risk neutral, and Elsa is risk loving
Consider the following statements: I - A good is non-rival when the marginal cost of its provision to an additional consumer is zero. II - A good is nonexclusive when people cannot be excluded from consuming, so that it is difficult or impossible to charge for its use.
I and II are true
Good X is nonexclusive and non-rival. Therefore, we can conclude that I - Consumers do not value good X; II - Consumers are willing to pay a high price for good X; III - In this market, voluntary private arrangements are usually inefficient.
III is true, I and II are false - this market is usually inefficient because of the free rider problem - consumer may value the good but because of the free rider problem, they are not willing to pay for a good that they can get for free, since it is nonexclusive and non-rival
A monopolist currently sells its product at a price P = 10. The firm has a constant marginal cost MC = 2. The Lerner index of market power of this firm is ________. If new competitors start entering the market and selling products that are similar to the product sold by the monopolist, then we should expect this index to _______ .
L = 0.8, index would decrease - if buyers start to have increased access to other products that are similar to the product sold by the monopolist, then this decreases the monopolist's market power - demand becomes more elastic - monopolist must then lower its price to maximize profit, decreasing lerner index
in a perfectly competitive market, the Lerner index of market power is
L=0
equilibrium on a graph is when
MB = MC
socially optimal quantity on a graph is when
MB = MSC
when a demand curve is downward sloping, we know that the marginal revenue is
MR < p
risk premium
Maximum amount of money that a risk-averse person will pay to avoid taking a risk
someone is risk neutral if
a=1
Someone is risk loving if
a>1
a negative externality results in a marginal social cost curve that is
above and to the left of the supply curve for the good that generates it
A positive externality results in a marginal social benefit (MSB) curve that is
above and to the right of the demand curve for the good that generates it
Mike has a constant marginal utility of income. We know that Mike's income I is greater than $10, but we do not know his exact income. Adam offers Mike the following bet: Adam will throw a fair coin (that is, heads and tails have equal probability). If it is heads, Mike pays Adam $10. If it is tails, Adam pays Mike $10. Mike will
always be indifferent between accepting and rejecting the bet - the consumers marginal utility of income is constant, therefore he is risk neutral - a risk neutral consumer is indifferent between accepting and rejecting a fair bet
if demand is inelastic, then
an increase in price will increase sales revenues, while a decrease in prices will decrease sales revenue
Suppose that the production of energy by Coal Power Plants produces pollution, and this market is regulated by a system of transferable permits. If consumers increase their demand for energy, then we should expect
an increase in the price of transferable permits
two-part tariff
consumers pay an entry fee for the right to buy the product. once this is paid, consumers pay a constant price for each unit of the product, called usage fee
A third-degree price discriminating monopolist can sell its product to market A and market B. The marginal cost to sell to either market is the same. The firm's CEO would like to know if the firm can further increase its profit. The CEO discovers that the price in market A is $10 while the price in market B is $15. To increase profits the firm can
do nothing until it acquires more information about marginal revenue - knowing the prices in each market is not enough
second-degree price discrimination
each consumer effectively pays different prices for different quantities of output - example of block ricing: the firm creates blocks, which are intervals of units, and sets a price for the units within each interval
first-degree price discrimination
each unit of a product is sold at the unit's reservation price - consumers with different reservation prices pay different prices
when costly new technologies make cleaner production possible
emissions are more likely to fall under a system of fees, than under a system of transferable emissions permits unless the government bought back some of the permits
A monopsonist will buy ______ units of output when compared to a perfectly competitive market, and will pay ______price per unit.
fewer units of output, lower price per unit
a monopolist will sell _____ units of output when compared to a perfectly competitive market, and will charge ____ price per unit
fewer units, higher price per unit
What is the technical term for a consumer who does not pay for the use of a nonexclusive good because he expects others to pay for it?
free rider
A movie theater charges $12 for a ticket when the movie is a new release, and charges $3 for a ticket when the movie was released at least 3 months ago. This is an example of
intertemporal price discrimination
In California, consumers pay the California Redemption Value (CRV) when they purchase beverages from a retailer, and receive CRV refunds when they redeem the containers at a recycling center. CRV is 5 cents for each small beverage container. If the CRV was optimally designed to maximize social welfare, then in this market 5 cents correspond to the
marginal external cost
A movie theater charges $12 for a ticket when the movie is shown after 6pm, and charges $8 for a ticket when the movie is shown before 6pm. This is an example of
peak-load price
A website called SuperDuperRoses.com sells roses. During February, Valentine's month, the website sells one dozen of red roses for $29.99. During all other months of the year, the website sells the same one dozen of roses for $19.99. This website is engaging in
peak-load price
Firm Sigma is a natural monopolist. The government decides to limit Sigma's monopoly power with price regulation. In order to find the minimum feasible price, the government must find the point where
price equals average cost - at the price such that price equals average cost, profit is zero
Having a refundable deposit for recyclable material A) raises the marginal private cost of disposal. B) raises the marginal social cost of disposal. C) lowers the marginal private cost of disposal. D) lowers the marginal social cost of disposal. E) does not affect disposal costs.
raises the marginal private cost of disposal
The NFL determines that at current prices, the demand for football tickets has a price elasticity of -0.5. If the NFL decides to raise the price of the tickets by 1%, what will happen to sales revenues?
sales revenue will go up since demand is inelastic
GameStop sells videogames. If you are a member of their reward program, then whenever you buy a videogame you receive 10 points for each $1 in purchases that you make. Once you reach 1,000 points, you receive a $10 discount on your next purchase. This is an example of
second degree price discrimination - the consumer pays full price for the first games that she buys, then she receives a discount on a later game
A third-degree price discriminating monopolist can sell its product to market A and market B. The marginal cost to sell to either market is the same. The firm's CEO would like to know if the firm can further increase its profit. The CEO discovers that the marginal revenue earned in market A is $10 while the marginal revenue earned in market B is $15. To increase profits the firm can
sells more units to market B and fewer units to market A MRB>MRA, the firm can move some units from market A to B - keeps total constant the same, and increases revenue, therefore profit goes up
expected utility
sum of the utilities associated with all possible outcomes, weighted by the probability that each outcome will occur
A monopolist hires a consulting company to verify if the current quantity produced is maximizing the monopolist's profit. The consulting company finds that at the current quantity the marginal revenue is greater than the marginal cost. What should the consulting company tell the monopolist?
the current quantity does not maximize profit - a marginal increase in the quantity produced would increase profits since MR>MC, a marginal increase in the quantity produced will increase revenue by more than the increase in costs, hence this will increase costs
A monopolist hires a consulting company to verify if the current quantity produced is maximizing the monopolist's profit. The consulting company finds that at the current quantity the marginal cost is greater than the marginal revenue. What should the consulting company tell the monopolist?
the current quantity does not maximize profit - a marginal decrease in the quantity produced would increase profits - since MR<MC, a marginal decrease in the quantity produced will decrease revenue by less than the decrease in costs
peak-load pricing
the firm charges a higher price during period of peak demand, and a lower price when the demand is lower
intertemporal price discrimination
the firm releases a new product or service at a higher price, and only later the firm lowers the price
third-degree price discrimination
the firm separates consumers in different groups and charges a different price in each market - chooses profit maximizing prices according to the price elasticity of demand
A monopolist has determined that at the current level of output the price elasticity of demand is -0.95. Which of the following statements is true?
the firm should cut output - a monopolist will never operate at an inelastic segment of the demand curve when demand is inelastic, the monopolist must decrease quantity, and increase price
reservation price
the maximum price a consumer is willing to pay for a product or serviec
Last year, a monopolist had a Lerner index L=0.4. This year, the index changed to L=0.6. The monopolist had a constant marginal cost of $3 in both years. What can we conclude about this monopolist?
the monopolists market power increased and it is charging a higher price - the increase in L must come from a price increase, which is likely the result of an increase in the monopolist's market power
The demand for new books is given by Q = a − bP, where: Q is quantity; P is price; a is a strictly positive number; b is a strictly positive number. Along this demand curve, as we increase the price P:
the price elasticity varies, but the slope is constant - when demand is linear, the slope is constant - as you move along the line increasing Q and decreasing P, we change the price elasticity
A third-degree price discriminating monopolist can sell its product to market A and market B. The marginal cost to sell to either market is the same. The firm's CEO would like to know if the firm can further increase its profit. The CEO discovers that the price elasticity of demand in market A is great (more elastic) than the price elasticity of demand in market B. To maximize profits, we know that the firm chooses prices and quantities such that
the price in market B will be greater than the price in market A - the firm optimally charges a higher price on the more inelastic market B
when new technologies make cleaner production possible
the price of transferable permit falls
if demand is elastic
then an increase in price will decrease sales revenues, while decrease in prices will increase sales revenues
GameStop sells videogames. If you buy GameStop's Membership Card for $25, you are entitled to a 10% discount on all in-store purchases for one year. This is an example o
two-part tariff
In order to purchase products at the supermarket Costco, consumers need to pay a membership price of $60. This is an example of
two-part tariff
A monopolist hired a consulting company to research the market demand for its product. The research results indicate that demand is linear in prices, and that at the current level of output the price elasticity of demand is -1.4. Therefore, in order to increase its profits, the monopolist should:
we need more information to answer this question - since we do not have information on the marginal cost, we cannot verify if the current output is optimal or not (MR=MC)
Where do you introduce a government imposed tax
when MEC = Qsoc on the graph - you plug in the value of Qsoc into the original MEC equation
