Final Exam Review

When firms have an incentive to exit a competitive market, their exit will

raise the profits of the firms that remain in the market.

Monopolies are inefficient because they

restrict output below the socially efficient level of production.

If the cross-price elasticity of two goods is positive, then the goods are

substitutes

When a $1 per liter sales tax is placed on lemonade, more government revenue is raised when

supply and demand are both less elastic

In a game, a dominant strategy is

the best strategy for a player to follow, regardless of the strategies followed by other players.

There is no shortage of scarce resources in a market economy because

prices adjust to eliminate shortages

When a country that imported a particular good abandons a free trade policy and adopts a no trade policy

producer surplus increases and total surplus decreases in the market for that good

The deadweight loss associated with a monopoly occurs because the monopolist

produces an output level less than the socially optimal level.

Which of the following is not correct?

A monopolist can charge any price and sell any quantity that it chooses.

Who wrote, "People of the same trade seldom meet together, but the conversation ends in a conspiracy against the public, or in some diversion to raise prices."?

Adam Smith

Which of the following is not an example of price discrimination?

An ice cream parlor charges a higher price for ice cream than for sherbet.

Which of the following is a characteristic of a competitive market?

Buyers and sellers are price takers.

Economists assume that monopolists behave as

profit maximizers.

A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm's average total cost; otherwise, the firm will shut down.

False

A monopolist maximizes profit by producing an output level where marginal cost equals price.

False

A patent gives a single person or firm the exclusive right to sell some good or service forever.

False

All buyers benefit from a binding price ceiling

False

For a monopoly, marginal revenue is often greater than the price it charges for its good.

False

Monopolists can achieve any level of profit they desire because they have unlimited market power.

False

Oligopolies produce more when they collude then when they do not.

False

A benefit of a monopoly is that

profit that can be invested in research and development

Which of the following is a positive statement?

Law X will reduce national income

Which of the following can eliminate the inefficiency inherent in monopoly pricing?

Price discrimination

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If government offer subsidies for MBAs, then which of the following statements is correct?

The equilibrium quantity of MBAs will be greater than the socially optimal quality of MBAs

Suppose that the demand for a good decreases at the same time that the supply of that good decreases. What effect will this have on the price?

The price could increase or decrease

Average revenue for a monopoly is the total revenue divided by the quantity produced.

True

Copyrights and patents are examples of barriers to entry that give firms monopoly pricing powers.

True

During the life of a drug patent, the monopoly pharmaceutical firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost.

True

For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal.

True

If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal to what it would be if the market were a monopoly.

True

Like competitive firms, monopolies choose to produce a quantity in which marginal revenue equals marginal cost.

True

The amount of power that a monopoly has depends on whether there are close substitutes for its product.

True

The essence of an oligopolistic market is that there are only a few sellers.

True

When a tax is imposed on buyers, consumer surplus and producer surplus both decrease.

True

When all firms choose their best strategy given the strategies that all the other firms have chosen, the result is a Nash equilibrium.

True

Which of the following statements about oligopolies is not correct?

Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues

The likely outcome of the standard prisoners' dilemma game is that

both prisoners confess

When a monopolist decreases the price of its good, consumers

buy more

Which of the following changes would not shift the demand curve for a good or service?

a change in the price of a good or service

A special kind of imperfectly competitive market that has only two firms is called

a duopoly

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

a one-unit increase in output will increase the firm's profit.

Producer surplus equals the

amount received by sellers minus the cost to sellers

A competitive market is one in which there

are so many buyers and sellers that each has a negligible impact on the price of the product

In the long run, a firm will exit a competitive industry if

average total cost exceeds the price.

The fundamental source of monopoly power is

barriers to entry.

Some costs do not vary with the quantity of output produced. Those costs are called

fixed costs.

Price discrimination

can maximize profits if the seller can prevent the resale of goods between customers.

Any point on a country's production possibilities frontier represents a combination of two goods that an economy

can produce using all available resources and technology

A legal maximum on the price at which a good can be sold is called a price

ceiling

Monopolies use their market power to

charge a price that is higher than marginal cost.

An agreement among firms in a market about quantities to produce or prices to charge is called

collusion

To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to

compete rather than cooperate with each other.

If the government increases taxes on a good, then the quantity of the good sold will

decrease

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

The prisoners' dilemma provides insights into the

difficulty of maintaining cooperation

Which of the following is not a reason for the existence of a monopoly?

diseconomies of scale

The market demand curve for a monopolist is typically

downward sloping.

When new firms have an incentive to enter a competitive market, their entry will

drive down profits of existing firms in the market

A benefit of a monopoly is

greater creativity by authors who can copyright their novels.

Demand is elastic if the price elasticity of demand is

greater than 1

Which of the following is not likely a result of rent control?

higher quality housing

A monopolist's profits with price discrimination will be

higher than if the firm charged just one price because the firm will capture more consumer surplus

Economics is best defined as the study of

how society manages its scarce resources

Price discrimination adds to social welfare in the form of

increased total surplus

A dominant strategy is one that

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

One problem with regulating a monopolist on the basis of cost is that

it does not provide an incentive for the monopolist to reduce its cost.

For a firm to price discriminate,

it must have some market power.

If a competitive firm is selling 900 units of its product at a price of $10 per unit and earning a positive profit, then

its average total cost is less than $10.

Economies of scale occur when

long-run average total costs fall as output increases.

A monopoly firm is a price

maker and has no supply curve

In the short-run, a firm's supply curve is equal to the

marginal cost curve above its average variable cost curve.

The minimum points of the average variable cost and average total cost curves occur where the

marginal cost curve intersects those curves.

A perfectly competitive firm produces where

marginal cost equals price, while a monopolist produces where price exceeds marginal cost

Economists normally assume that the goal of a firm is to

maximize its profit.

Deadweight loss

measures monopoly inefficiency.

The efficient scale of the firm is the quantity of output that

minimizes average total cost.

Willie's Wading Adventures sells hip waders for fishing and duck hunting in a perfectly competitive market. If hip waders sell for $100 each and average total cost per unit is $95 at the profit-maximizing output level, then in the long run

more firms will enter the market

If the demand for a good falls when income falls, then the good is called a

normal good

The story of the prisoners' dilemma shows why

oligopolies can fail to cooperate, even when cooperation is in their best interest.

What you give up to obtain something is called your

opportunity cost

Financial aid to college students, quantity discounts, and senior citizen discounts are all examples of

price discrimination

One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run,

the size of the factory is fixed.

A key determinant of the price elasticity of supply is the

time horizon

From society's standpoint, cooperation among oligopolists is

undesirable, because it leads to output levels that are too low and prices that are too high.

Consider a firm that operates in a perfectly competitive market. The firm is producing at its profit maximizing output level. If this is true, then

​price must be equal to marginal cost.