ECON MIDTERMS 1 - 3

Monopolistic competition is considered inefficient because in equilibrium

price exceeds marginal cost

A firm in a competitive market has the following cost structure: If the market price is $5, this firm will

produce 3 units in the short run and in the long run.

Suppose that a firm in a competitive market faces the following revenues and costs: If the firm's marginal cost is $11, it should

reduce production to increase profit.

When the price of a good or service changes,

there is a movement along a given demand curve

The average fixed cost curve

always declines with increased levels of output.

If the demand for a product decreases, then we would expect equilibrium price

and equilibrium quantity to both decrease

A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,

average fixed cost is 50 cents

Profit-maximizing firms enter a competitive market when existing firms in that market have

average total costs less than market price

What is the monopoly price and quantity?

price = A; quantity = X

What is the socially efficient price and quantity?

price = B; quantity = Y

The tax burden to the buyer is ____ larger than the tax burden to the seller.

$1.00

Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below. When this game reaches a Nash equilibrium, the increase in annual profit will be

$1.5 million for HomeMax and $1.0 million for Lopes

How much of the $2 tax is paid by the buyer?

$1.50

What is the fixed cost of production for this firm?

$10

What is the variable cost of producing 5 units of output?

$100

Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an hour. She earns $10 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $30 each An economist would calculate the total cost for one photo frame to be

$15

The deadweight loss caused by a profit-maximizing monopoly amounts to

$225

The table shows the demand schedule for a particular product Suppose the market for this product is served by two firms that have formed a cartel. What profit will the cartel earn if the marginal and average cost of production is $2?

$24

What is the average total cost of producing 2 units of output? *wrong chart*

$24

The loss of producer surplus as a result of the tax is

$3

The consumer surplus at the monopolist's profit-maximizing price is

$450

The amount of tax revenue received by the government is

$5

Which of the following statements is true? (I) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price (iii) Average revenue is the same as the price for both competitive and monopoly firm

(ii) and (iii) only

A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?

- average revenue exceeds marginal revenue - price exceeds marginal cost - marginal revenue equals marginal cost

Taxes cause deadweight losses because they

- lead to losses in surplus for consumers and for producers that, when taken together, are more than the tax revenue collected by the government. - reduce the quantity that buyers and sellers trade with one another - move the market equilibrium away from the supply and demand equilibrium

Total surplus in a market will increase when the government

- reduces a tax on that market - removes a binding price ceiling from that market - removes a binding price floor from that market

Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposesa price ceiling of $150 per physical. As a result of the price ceiling

- there is shortage of physicals - the quantity of physicals demanded increases - the quantity of physicals supplied decreases.

In the prisoners' dilemma game, self-interest leads

- to an outcome that is not the best possible for either prisoner - to a breakdown of any agreement that the prisoners might have made before being questioned - each prisoner to confess

The opportunity cost of obtaining 20 additional dryers by moving point D to point A is

0 washers

Barb and Jim run a business that sets up and tests computers. Assume that Barb and Jim can switch between setting up and testing computers at a constant rate. The following table applies. Barb's opportunity cost of setting up one computer is testing

1/2 computer and Jim's opportunity cost of setting up one computer is testing 1/2 computer

If the price elasticity of demand for a good is 4.0, then a 3 percent decrease in price results in a

12.0 percent increase in the quantity demanded

If the price elasticity of supply is 2.0, and a price increase led to a 4% increase in quantity supplied, then the price increase is about

2.0%

Which worker is the first where the marginal product begins to diminish?

3

If Chile and Colombia switch from each country dividing its time equally between the production of coffee and soybeans to each country spending all of its time producing the good in which it has a comparative advantage, then total production of soybeans will increase by

3 pounds

Chile's opportunity cost of one pound of coffee is

3/4 pound of soybeans and Colombia's opportunity cost of one pound of coffee is 1/2 pound of soybeans

Suppose that a firm in a competitive market faces the following revenues and costs: In order to maximize profit, the firm will produce a level of output equal to

4

If the price elasticity of demand for a good is 0.5, then a 10 percent increase in price results in a

5 percent decrease in the quantity demanded

It is possible for this economy to produce

60 dryers and 50 washers

The table shows the demand schedule for a particular product If the marginal and average cost of production in this market is $2, what is the perfectly competitive quantity of output?

7 units

The marginal product of the second worker is

80 units

Producer surplus plus consumer surplus in this market after world trade is

A + B + C + D

This figure shows the market demand and market supply curves for good X Which of the following statements is not correct?

A price ceiling set at $3.50 would result in a surplus.

Which area represents the increase in producer surplus when the price rises from P1 to P2?

AHGB

Suppose that Amanda receives a pay decrease. We would expect

Amanda's demand for normal goods to decrease

Suppose the government imposes a $10 per unit tax on a good represented by the distance from 8 to 18 on the price axis. The tax causes consumer surplus to decrease by the area

B + C

Which area represents producer surplus when the price is P1?

BCG

The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul) . What is (are) the Nash equilibrium (equilibria) in this Chicken game?

Both b and c are Nash equilibria

What would happen to the equilibrium price and quantity of lattés if consumers' incomes rise and lattés are a normal good?

Both the equilibrium price and quantity would increase.

Producer surplus in this market after world trade is

C

Suppose the government imposes a $10 per unit tax on a good represented by the distance from 8 to 18 on the price axis. The decrease in consumer and producer surpluses that is not offset by tax revenue is the area

C + F

Which area represents the profit earned by the monopoly?

C + F

if the supply of oak cabinets is reduced because of an increase in the price of oak lumber, what happens to consumer surplus in the market for oak cabinets?

Consumer surplus decreases

The change in total surplus in this market when world trade is allowed is

D, and this area represents a gain in total surplus.

This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoffto B). If player B chooses Right, player A should choose

Down and earn a payoff of 4.

Suppose the income of buyers in a market for an inferior good increases and a technological advancement occurs also. What would we expect to happen in the market?

Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.

Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market?

Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.

What price will the monopolist charge?

K

This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoffto B). Which of the following outcomes represents a Nash equilibrium in the game?

Middle-Left

This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoffto B). Which of the following statements regarding this game is true?

Neither player has a dominant strategy.

Which of the following trade-offs does the production possibilities frontier illustrate?

Once an economy has reached the efficient points on its production possibilities frontier, the only way of getting more of one good is to get less of the other

Katie is planning to sell her house, and she is considering making two upgrades to the house before listing it for sale. Replacing the carpeting will cost her $2,500 and replacing the roof will cost her $8,000. Katie expects the new carpeting to increase the value of her house by $3,000 and the new roof to increase the value of her house by $7,000.

She should replace the carpeting but not replace the roof

Which of the following is not correct?

The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs.. Given this, we know that

Traci has an absolute advantage in chairs

What quantity will the monopolist produce?

W

Barb and Jim run a business that sets up and tests computers. Assume that Barb and Jim can switch between setting up and testing computers at a constant rate. The following table applies. Barb has an absolute advantage in

both setting up and testing computers and neither person has a comparative advantage in setting up computers.

Demand is said to be price elastic if

buyers respond substantially to changes in the price of the good

The defining characteristic of a natural monopoly is

decreasing average cost over the relevant range of output

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

decreasing output would increase the firm's profit.

Which of the following events must cause equilibrium price to fall?

demand decreases and supply increases

Suppose that 50 ice cream cones are demanded at a particular price. If the price of ice cream cones rises from that price by 10 percent, the number of ice cream cones demanded falls to 48. It follows that the

demand for ice cream cones in this price range is inelastic.

The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an increase in total revenue if the

demand for wheat is elastic

When a country allows trade and becomes an importer of a good,

domestic producers lose and domestic consumers gain

If textbooks and study guides are complements, then an increase in the price of textbooks will result in

fewer study guides being sold

For any country, if the world price of copper is lower than the domestic price of copper without trade, that country would gain if it decided to

import copper

Pursuing its own best interest, Lopes will

increase the size of its store and parking lot regardless of the decision made by HomeMax.

Suppose the long-run industry supply curve for a good is upward-sloping. The upward slope could be explained by

increases in production costs resulting from more firms coming into the market.

A dominant strategy is one that

is best for the player, regardless of what strategies other players follow.

This economy cannot currently produce 70 washers and 70 dryers because

it does not have the resources and technology to produce that level of output.

A competitive market is a market in which

no individual buyer or seller has any significant impact on the market price

Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that

people face tradeoffs

When a binding price ceiling is imposed on a market to benefit buyers

some buyers benefit and some buyers are harmed.

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $145,000. Because of this information, in the short run, the Brookside Racquet Club should

stay open because shutting down would be more expensive.

Suppose consumer income increases. If grass seed is a normal good and the supply of grass seed is perfectly elastic, the equilibrium price of grass seed will

stay the same, and the quantity sold will increase

Suppose that a tax is placed on books. If the sellers pay the majority of the tax, then we know that the

supply is more inelastic than the demand

Consumer surplus is

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

You have driven 800 miles on a vacation and then you notice that you are only 15 miles from an attraction you hadn't known about, but would really like to see. In computing the opportunity cost of visiting this attraction you had not planned to visit, you should include

the cost of driving the next 15 miles, but not the cost of driving the first 800 miles.

The term tax incidence refers to

the distribution of the tax burden between buyers and sellers

Each firm in a monopolistically competitive industry faces a downward-sloping demand curve because

the firm's product is different from those offered by other firms in the market

You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends decreasing the price of a day pass. You realize that

the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

Farmer McDonald sells wheat in a competitive market in Kansas City, Missouri. Farmer McDonald maximizes his profit by choosing

the quantity at which market price is equal to Farmer McDonald's marginal cost of production.