Econ Midterm 2

If a firm's total fixed costs are $10, the firm's marginal cost of producing the first unit of output is $10, and the average total cost of producing two units of output is $14, the marginal cost of the second unit of output is

$8

A consumer maximizes her utility by

-letting the marginal utility of product A divided by the price of product A equal to the marginal utility of product B divided by the price of product B.

Barbara left a $25,000 job as an architect to run a catering business. She invested $100,000 of her own money to purchase a building for the business. The interest rate that Barbara typically earns on her investments is 10 percent, while real estate is not appreciating in Barbara's neighborhood. Barbara spends $150,000 per year on employee salaries, supplies, etc. What is the economic cost of Barbara's catering

185,000

Monopolistically competitive markets are like monopoly markets in that: a. in both markets firms have some control over price. b. in both markets firms face substantial barriers to entry. c. in both markets firms face a large number of competitors. d. in both markets firms have no control over price.

A

Bruce's marginal utilities of sweaters and t-shirts. Suppose that the price of sweaters is $40 and the price of a t-shirt is $20. Bruce has $300 to purchase sweaters and t-shirts. How many sweaters will Bruce purchase in equilibrium, assuming that he spends all of his money?

5

Suppose you are eating hot dogs. The marginal utility of the first hot dog is 15 utils, the marginal utility of the second hot dog is 12 utils and the third hot dog brings your total utility up to 35 utils. What was the marginal utility of the third hot dog?

8 utils (35-(15+12))

Firms price discriminate by offering customers with a _____ demand a lower price and customers with a ________ demand a higher price. a. less inelastic; more inelastic. b. more inelastic; less inelastic. c. inferior; normal. d. normal; inferior.

A

In general, the quantity of output in a monopoly market is: a. lower than an oligopoly. b. higher than an oligopoly. c. the same as an oligopoly. d. the answer depends on the shape of the average cost curve.

A

Long-run equilibrium for a perfectly competitive industry occurs when a. P = MC = ATC b. P = MC = AVC c. P = MC = AFC d. P > MC = ATC

A

The four-firm concentration ratio measures the: a. percentage of market output produced by the four largest firms. b. the elasticity of demand of the four largest firms in an industry. c. the average cost of the four largest firms in an industry. d. number of firms in an industry.

A

Which of the following statements is false? a. Cartels and price fixing are both legal under U.S. antitrust laws. b. Firms in a cartel often charge the same price for a particular good or service. c. If two firms form a cartel, they could charge the same price as a monopolist. d. A cartel could be made up of as few as two firms.

A

You notice that the price of butter rises and then falls. The best explanation for this is that a. demand for butter increased causing price to rise which attracted other firms to enter the market causing supply to increase which caused the price to go back down. b. demand for butter decreased causing price to rise which attracted other firms to enter the market causing supply to increase which caused the price to go back down. c. demand for butter increased causing price to rise which induced other firms to exit the market causing supply to decrease which caused the price to go back down. d. demand for butter increased causing price to rise which attracted other firms to enter the market causing supply to decrease which caused the price to go back down.

A

Which one of the following is the best example of an oligopolistic industry? a. automobiles b. wheat growers c. apple growers d. public utilities

A B and C are more like perfect competition and D is a monopoly.

If the market demand increases for a good sold in a perfectly competitive market, individual firms in the market: a. will be able to charge a higher price for their product. b. will need to lower price in order to remain competitive. c. will not be able to change their price. d. will begin earning economic losses.

A If the demand curve shifts out the new equilibrium price will be higher.

The demand curve that a monopolist faces is: a. the market demand curve. b. the same as the demand curve that faces a perfectly competitive firm. c. not affected by changes in the prices of other goods. d. generally flatter than the demand curve that faces a perfectly competitive firm.

A In perfect competition, the firm faced a horizontal demand curve because it had no control over the price.

At a price of $10, the marginal revenue of a monopolist is $6. If the marginal cost of production is $8, what should the monopolist do in order to maximize profits? a. Increase its price. b. Decrease its price. c. Keep its price at the same level. d. Not enough information to solve.

A MR < MC so this firm is producing to much to be a profit maximizer. To maximize profits we choose the quantity where MC = MR. Since the firm should produce less they should raise their price.

A perfectly competitive industry is in long-run equilibrium. If demand for the product increases, we can expect the price of the good to a. rise at first and then fall. b. fall at first and then rise. c. rise and remain at the higher price. d. fall and remain at the lower price.

A The increase in demand causes price to rise.

If suppliers differentiate their products in a monopolistically competitive market by selling at a variety of locations, consumers must trade-off: a. lower travel costs for higher average costs of production. b. lower prices for higher travel costs. c. higher prices for higher travel costs. d. lower prices for lower average costs of production.

A This is one of the reasons that convenience stores generally charge more for goods than grocery stores.

A monopolist maximizes profits by setting:

A This is true for any profit maximizer -- the difference is that for the monopolist MR 6= P.

Which of the following statements are TRUE about an individual demand curve?

An individual demand curve is negatively sloped and shows the price of a good and the quantity that a single consumer is willing to buy during a particular time period.

Consumers benefit from monopolistically competitive markets because: a. they only have one good from which to choose. b. in this type of market, producers supply goods in a variety of locations or with a variety of characteristics. c. in this type of market, goods are sold at a price equal to the marginal cost of production. d. goods are sold at a price equal to marginal revenue.

B

If there is the legitimate threat of entry into a market, then the market is said to be: a. perfectly competitive. b. contestable. c. secure. d. reactive.

B

In Sioux Falls, South Dakota there are many pizza restaurants, each offering similar types of pizza but each restaurant located in a different place around the city. It is likely a pizza restaurant in Sioux Falls, South Dakota operates in a: a. perfectly competitive market. b. monopolistically competitive market. c. monopoly market. d. oligopoly market.

B

When a monopolist sells two units of output its total revenues are $80. When the monopolist sells three units of output, its price per unit is $30. The monopolist's marginal revenue from selling the third unit of output is: a. $5 b. $10 c. $22.50 d. $110

B Total revenue for the third unit is 3x30 = $90. Marginal revenue of the third unit is the increase in total revenues so 90 - 80 = $10

For a monopolist, marginal revenue ___________ for all units of output except the first unit. a. is greater than the price of output b. is less than the price of output c. is equal to the price of output d. may be either greater than or less than the price of output

B Because a monopolist loses customers as they raise price whereas a perfect competitor can sell as much as they like at the prevailing market price.

The supply curve for a perfectly competitive market: a. is the summation of all the average cost curves of each firm in a market. b. is the summation of all the marginal cost curves, above the minimum of the average variable cost curve, from all the individual firms in the market. c. is not related to the supply curves of individual firms. d. is independent of price.

B In order to get the market supply curve we simply add up all the individual supply curves.

As firms enter a monopolistically competitive market in the long run: a. price increases, the market quantity demanded increases, and the quantity supplied by an individual firm increases. b. price decreases, the market quantity demanded increases, and the quantity supplied by an individual firm decreases. c. price decreases, but firm profits increase as average costs decrease. d. price increases and firm profits increase.

B Notice it does not say that 'market demand increases' but that 'market quantity demanded increases'. There does not need to be a shift in the market demand curve but the lower prices will cause a movement along the curve.

Marginal cost is defined as

the change in total variable cost resulting from a one unit increase in the change in quantity

If the price in an oligopoly market is the same as that of a monopoly with identical cost and demand conditions then: a. the average cost curve must be downward sloping. b. there may be collusion between firms. c. market demand must be unit elastic. d. This could never happen.

B OPEC is a cartel. They restrict their supply in order to increase oil prices.

Which one of the following would not be true of an oligopolistic market structure? a. a few firms serve the market. b. each firm is a price-taker. c. economies of scale in production. d. a firm may carry out a big advertising campaign.

B Oligopolies have some control over price

Which of the following is an example of a monopolistically competitive firm? a. Farmer Smith's corn farm b. Tino's Italian eatery, a local restaurant c. TCI Cablevision, a supplier of cable television services d. Northwest Electricity, a supplier of electricity in the Northwest U.S.

B The latter two are monopolies and the first (it really should be feed corn not just corn) is more like perfect competition

If a firm perceived that the other firm in an implicit pricing agreement dropped its price in an attempt to gain market share, then its most likely response would be to: a. merge with the other firm. b. engage in a price war. c. raise price to punish the other firm. d. keep its price the same.

B They are cheating so you would have 110 choice butC to try to undercut their price - after all, that is exactly what they are doing to you.

Suppose you operate in a monopolistically competitive market. If you sell your good at a price of $10 and your average cost of production is $8: a. your market is in long-run equilibrium. b. we can expect firms to enter your market and sell a similar good in the long-run. c. there will be no incentive for competing firms to enter your market in the long-run. d. you cannot be in short-run equilibrium.

B This is why there are zero profits for the monopolistically competitive firm in the long run. If ATC < P then the firm is making positive economic profits. This provides an incentive for others to enter the market. As the new firms enter the demand for each firm shifts back. This continues until no one is making economic profits and the incentive to enter the industry is gone.

Your firm is producing a good in a perfectly competitive market. If you know that when you produce 250 units per day, your total costs are $1000 and when you produce 251 units your total costs are $1010, then if the market price of your good is $5: a. there is not enough information to determine whether you should increase production or decrease production. b. you will be able to increase firm profits by decreasing output. c. you will be able to increase firm profits by increasing output d. your average costs are decreasing.

B Because MC > P

A natural monopoly occurs when: a. the government designates a single firm to sell a particular good. b. the government grants a firm a patent on a product. c. price exceeds average cost when a single firm is in the market, but is less than average cost when more than one firm is in the market. d. a single firm controls the entire quantity of a natural resource.

C

If a monopolistically competitive firm maximizes profit by producing 600 units per hour, it must be true that at 600 units per hour: a. marginal cost is decreasing. b. marginal revenue is increasing. c. marginal revenue equals marginal cost. d. marginal revenue equals average cost.

C

The rational outcome of a guaranteed price matching or "meet-the-competition" policy is that: a. both firms will sell at the low price. b. one firm will sell at a low price and the competitor will sell at a high price. c. both firms will sell at the high price. d. consumers will be better off.

C

Which of the following is NOT a characteristic of a perfectly competitive market? a. a large number of firms in a market. b. selling a standardized product. c. substantial barriers to entry. d. an individual firm has no control over price.

C

In a kinked demand model, that part of the demand curve below the kink is: a. unitary inelastic. b. more elastic than the region above the kink. c. more inelastic than the region above the kink. d. just as elastic as the part above the kink.

C This is the whole point of t,he kinked demand curve. If you undercut your competitors they have to follow, otherwise you would steal t,heir market share. So the quantity demanded from your individual fir% won't change much because all other firms match your price decrease - demand is inelastic. If you raise your price then you are just shooting yourself in the foot. You would lose market share to the other firms - why should they follow? They increase their profits by keeping their price low and stealing your customers. Therefore your quantity demanded falls significantly as your customers switch to the cheaper suppliers - demand is elastice above the kink. So the kink tends to perpetuate itself.

Suppose in the city of Blacksburg, music stores operate in a monopolistically competitive market. If the price of CDs in Blacksburg is currently equal to $20 per CD and the average cost of CDs is $15, in the long run we expect the price of CDs to: a. increase. b. stay the same. c. decrease, and the average cost of producing CDs to increase. d. decrease, and the average cost of producing CDs to decrease.

C Because they are making profits in this market, so as other firms enter, each firms' demand curves shift back

You are an economist working for the monopolist whose marginal cost curve and associated demand curve are depicted in Figure 10.1. Suppose that the monopolist is currently charging a price of $5 per unit of output and selling 15 units. What would you recommend to the firm? a. Keep the price at the same level. b. Lower the price to sell more units. c. Raise the price, but sell fewer units. d. Raise the price of output, but also raise your cost of production.

C Find the quantity where MR = MC, that is at Q = 8. The demand curve indicates that people would be willing to pay a price of $6 each to get 8. So the monopolist should restrict output and raise their price.

Which of the following is not a characteristic of a monopolistically competitive market? a. There are many firms. b. Firms sell products with similar characteristics. c. Firms must take the market price as given. d. There are no artificial barriers to entry.

C Strictly speaking they are still monopolist but customers will go elsewhere if prices rise too much

If two firms use a tit-for-tat scheme to maintain cartel pricing and one firm chooses a low price in the current time period then: a. that firm will also choose a low price in the next time period. b. that firm will also choose a high price in the next time period. c. the other firm will choose a low price in the next time period. d. the other firm will choose a high price in the next time period.

C Tit for tat means I chow next period whatever you chose this period.

Explain why perfectly competitive firms make zero economic profit in the long-run.

Firms earn zero profit because they must accept the market price with- out having any influence over it, and other firms may freely enter the market.

A monopoly is defined as an industry where a firm is: a. one of a small number of firms and there is a barrier to entry. b. one of a large number of firms and there is a barrier to entry. c. one of a large number of firms and there are no barriers to entry. d. the single seller of a good and there is a barrier to entry.

D

A natural monopoly occurs when: a. a firm has a government license to produce a produce. b. the government sanctions the firm to be the only producer of a product. c. a firm has sole ownership of a natural resource. d. there is only one firm in a market and the entry of a second firm would make price less than average cost.

D

All of the following are examples of possible barriers to entry, except: a. patents to produce a particular product. b. the American Bar Association's rule that lawyers must pass an exam before practicing law. c. average cost in the industry decreases as a firm's output increases. d. All of the above are barriers to entry.

D

If a regulatory agency mandates that a natural monopoly charge a price equal to its average cost: a. the firm will eventually exit the industry. b. the firm will earn economic profits greater than zero. c. other firms will find it profitable to enter this industry. d. the firm will earn economic profits equal to zero.

D

In the long run, monopolistically competitive firms produce where: a. P = AC b. P > MC c. AC > minimum of AC curve d. All of the above are true

D

In which of the following ways is a monopolistically competitive firm like a perfectly competitive firm? a. Short-run economic profits are always positive. b. Long-run economic profits are negative. c. Long-run economic profits are positive. d. Long-run economic profits are equal to zero.

D

Monopolistically competitive firms do not differentiate their products by: a. changing the products' physical characteristics. b. selling products at different locations. c. offering different levels of service that come with a product. d. charging different prices to different groups of consumers.

D

Oligopoly differs from monopoly and perfect competition in that: a. firms consider each others actions when choosing price and quantity. b. there a few firms in the industry. c. firms act strategically. d. All of the above.

D

When a second firm enters a monopolist's market: a. market price will drop. b. the quantity produced by the first firm will decrease. c. the first firm's average cost will increase. d. All of the above will occur.

D Demand shifts back for the first firm since they now have to share the market

What makes a grim trigger strategy "grim" is: a. If one player overprices, then the other overprices to the point of zero quantity demanded. b. If one player underprices, then the other player notifies the Federal Trade Commission. c. If one player underprices, then the other player is driven out of the market. d. If one player underprices, then the other player drops the price so far that profits for both firms are zero forever.

D If your opponent cheats then we simply revert to the perfectly competitive outcome - zero economic profits.

How do monopoly prices and quantities produced differ from perfectly competitive outcomes? a. Monopoly prices and quantities are both lower than competitive outcomes. b. Monopoly prices and quantities are both higher than competitive outcomes. c. Monopoly prices are lower than competitive prices but monopoly quantities are higher than competitive quantities. d. Monopoly prices are higher than competitive prices but monopoly quantities are lower than competitive quantities.

D In a nutshell, this is why monopolies are often considered inefficient.

A firm announces that it will refund the difference between its price and any price of a competitor that is lower. This is an example of: a. predatory pricing. b. tying contracting. c. marginal cost pricing. d. guaranteed price matching.

D Ironically this is likely to reinforce the higher price since no one has an incentive to undercut their competitor's price. Basically, instead of making an explicit agreement, you are announcing a kind of tit for tat strategy - I'll choose whatever price my competitor charges.

Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most correct? a. The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent. b. The government should grant a patent to the firm, because it does not have the resources to determine on a case-by-case basis exactly which inventions merit award of the patent. c. The government should grant a patent to the firm, because the firm is entitled to make large profits for all the work it put into research and development of the drug. d. The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent.

D The firm would earn profits of 12 million (4 x 3) during the years it takes the other firms to develop their versions of the drug. Since this is more than the research and development costs associated with the drug the granting a monopoly would be inefficient { the firm already has an incentive to innovate.

In general, firms in a cartel: a. agree to set price equal to marginal cost. b. do not consider the actions of the other firms in the cartel when making output decisions. c. produce levels of output exceeding the monopoly output level. d. agree to charge the price the monopolist would charge.

D The whole point of a cartel is to band together and act like one monopolist.

Which of the following statements about a consumer's budget line is CORRECT? I. The budget line shows all the combinations of two goods that exhaust the consumer's budget. II. The slope of the budget line shows the market tradeoff between two goods. III. The budget line represents the consumer's preferences or tastes.

I and II only

A consumer should increase her consumption of good Y relative to good X if

MUx/MUy < Px/Py

A change in the relative prices of two goods is represented graphically by:

a change in the slope of the budget line

Suppose a firm experiences lower average costs whenever output increases in the long-run. Then we would expect the firm to have

a long-run average cost curve that always decreases.

The law of diminishing marginal utility states that

as a consumer consumes more of a product, the consumer gets progressively less satisfaction out of each incremental unit of the good.

Robert's demand curve for pizza

assumes that the only variables that change are the price of pizza and the quantity of pizza demanded by Robert.

Average variable cost equals

average total cost minus average fixed cost

The marginal cost curve intersects the short-run average total cost curve where

average total costs are minimized in the short-run

Tim's marginal utility of beer is 12 utils and his marginal utility of pretzels is 5 utils. The price of beer is $4 and the price of pretzels is $1, and Tim is spending all of his money. Tim can increase his utility by

buying less beer and more pretzels.

The change in the quantity consumed that is caused by a change in the relative price of a good, with real income held constant, refers to the:

substitution effect.

Average fixed costs in the short-run

decrease as the quantity produced increases FC/Q

The short-run average total cost curve is U-shaped because average fixed costs _______ and average variable costs _________ eventually as quantity produced increases.

decrease; increase

Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, coordination of work teams is becoming more difficult because of increased bureaucracy. It is likely that continued growth will result in:

diseconomies of scale

Farmer Brown sells her wheat in a perfectly competitive market. Suppose the current market price of wheat is $2.50 per bushel. If farmer Brown charges $2.51 for her wheat,

farmer Brown will sell no bushels of wheat (demand is perfectly elastic in perfect competition)

The change in the quantity consumed that is caused by a change in real income, with the relative prices held constant, refers to the:

income effect

An increase in the price of a good

increase the opportunity cost of consuming the good

A consumers budget set

is the set of all affordable combinations of two goods.

To minimize average total costs, a firm should always increase output when

marginal cost is less than average total costs

Diminishing marginal returns imply that

marginal costs are increasing

Marginal product in the short-run

may initially increase, then eventually decrease.

Under which conditions might diseconomies of scale result?

none of the above

A firm will not shut down in the short-run as long as:

price exceeds average variable cost at the level of output where marginal revenue equals marginal cost.

Because individual firms cannot affect the market price of their good, for each firm in a competitive market:

price is equal to marginal revenue

Claudia spends her income on two goods, DVD rentals and chewing gum. She considers both goods to be normal goods. If Claudia's income stays constant and the relative price of DVD rentals increases, she will:

rent fewer DVDs and purchase more chewing gum

Claudia spends her income on two goods, DVD rentals and chewing gum. She considers both goods to be normal goods. If Claudia's income increases and the prices of the two goods remain constant, she will:

rent more DVDs and purchase more chewing gum

Diminishing marginal returns imply that firms

require more and more workers to produce each additional unit of output.

A perfectly competitive firm can:

sell as much as it can produce at the market price.

Firms in a perfectly competitive market

sell homogeneous products, like wheat or corn.

In the short-run, ______ factors of production are fixed, while in the long-run, _____ of them are.

some, none

Suppose Tim's Cowboy boot factory produces in a perfectly competitive market. Suppose the average total cost of cowboy boots is $65, the average variable cost of cowboy boots is $60, and the price of cowboy boots is $62. If the firm is producing the level of output where marginal cost equals price, then in the short-run:

the firm should continue to produce since total revenue exceeds total variable cost.

Which of the following is a long-run adjustment?

the number of professional baseball teams increases by two

Suppose Jackie can buy either video games or DVDs. If the prices of both goods double, and Jackie's income also doubles, what will happen to Jackie's budget line?

the price of the good on the vertical axis increases

For normal goods, the substitution effect and the income effect work in ________, generating a ________ sloped demand curve

the same direction; downward

The Utility generated by consuming a good is

the satisfaction or pleasure the consumer experiences when he or she consumes the good

In the long-run, total fixed costs

there are no fixed costs in the long-run.

Average total cost is defined as

total cost divided by quantity

The long-run average cost of production is defined as

total cost divided by the quantity of output the firm chooses when it can choose a production facility of any size

Average fixed cost is defined as

total fixed cost divided by quantity

Average variable cost is defined as

total variable cost divided by quantity.

Your firm is producing a good in a perfectly competitive market. If you know that when you produce 300 units per day, your total costs are $7000 and when you produce 301 units your total costs are $7001, then:

you will be able to increase firm profits by increasing output if the market price of your good is $5.