Microeconomics Exam #3 (Chapters 6,7, and 8)

Economies of scale arise from:

increasing returns to scale.

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. At the socially optimal level of output, this monopolist would:

incur an economic loss of $64

Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, tickets cost $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. Suppose Steven was able to purchase a ticket at the box office for $60. Steven's reservation price for the ticket is $65. If Steven attends "Mamma Mia!" and Ingrid does not, then this situation is:

inefficient because Steven and Ingrid could have made a mutually beneficial trade

The demand curve for a perfectly competitive firm is ______, while the demand curve for a monopolist is ______.

perfectly elastic; downward-sloping

Which of the following is NOT an example of a specific cost?

the income the owner could have earned in his or her next best employment opportunity

Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested, and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. Suppose residents of each island often play prisoner's dilemma games, always matched with a person from the same island, but not a person who they know or will play with again. If the same number of games is played on each island, you would expect:

the residents of Altruism to have higher average payoffs than the residents of Avarice.

If all firms in a perfectly competitive industry are earning a normal profit, then:

there is no incentive for firms to enter or exit the industry

In the Nash equilibrium of a prisoner's dilemma:

there is unrealized opportunity for both to gain.

Which of the following statements about explicit costs is true?

they appear on the firm's balance sheet

Superstar professional athletes can sustain their economic rents because:

they have unique talents that they can sell to the highest bidder

When a perfectly competitive firm sells additional units of output, ______, and when a monopolist sells additional units of output, ______.

total revenue always rises; total revenue could rise, fall, or remain unchanged

Accounting profit is equal to

total revenue minus explicit costs

Accounting profit is equal to?

total revenue minus explicit costs

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space. $200 in monthly rent for equipment. $3,000 to your workers in wages for the month. $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:

your implicit costs are $1,000 per month

Refer to the table below. An output level of 25 units, this firm's accounting profit is ______, and its economic profit is ______.

zero; -$8

Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 1,000 t-shirts, your average total cost is ______.

$10.30, When Q = 1,000 total cost = 300 + 10 ?1,000 = 10,300. Average total cost is total cost divided by Q, here 10,300/100 = 10.30.

The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. If Column Cafe publishes coupons and Row Restaurant does not, then Row Restaurant will earn ______, and Column Cafe will earn ______.

$10; $200

Refer to the table below. An output level of 15 units, this firm's accounting profit is ______, and its economic profit is ______.

$12; $6, accounting profit equals total revenue minus explicit costs, so when Q=15, accounting profit is $12. Economic profit equals total revenue minus the sum of both explicit and implicit costs, so at Q=15, economic profit is $6.

Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 100 t-shirts, your average total cost is ______.

$13, when Q = 100, total cost = 300 + 10 ×100 = 1,300. Average total cost is total cost divided by Q, here 1,300/100 = 13.

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Quick Buck and Pushy Sales decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Quick Buck cheats by reducing its price to $1 while Pushy Sales continues to comply with the collusive agreement, then Quick Buck's economic profit will be ______.

$3,000

Suppose the figure below illustrates the demand curve facing a monopolist. At a price of $8 per unit, the total revenue for this monopolist is ______ per day, and the marginal revenue earned from the last unit sold is ______.

$3,200; $0

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. An industry spy from firm A comes to firm B and offers to pay B in exchange for B's certain and enforceable promise to not invest. What is the most that firm A will be willing to pay B to not invest?

$50 million, a expects to earn $20 million in the absence of the deal. A can earn $70 million by convincing B to not invest, so A will be willing to pay no more than $50 million to get B to agree to this deal.

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's explicit costs were ______, and her implicit costs were ______.

$51,000; $40,000 Christine's explicit costs are 12 months of rent and the administrative assistant's salary: $36,000 + $15,000. Her implicit costs are her foregone salary of $40,000.

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. At this monopolist's profit-maximizing level of output, its total revenue equals the area:

0FJB

Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. For a monopolist facing this demand curve, the profit-maximizing quantity is ______ and the profit-maximizing price is ______.

100; $2, For a monopolist facing this demand curve, the marginal revenue curve has a vertical intercept of $4 and a horizontal intercept of 100. Thus, marginal revenue equals marginal cost when quantity is 100. This corresponds to a price of $2 on the demand curve.

Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 while Acme continues to comply with the collusive agreement, then Mega will then sell ______ units and Acme will sell ______ units.

150; 0, At a price of $1, Mega will sell 150 units, and no consumers will be willing to pay $2

Suppose a monopolist faces the demand curve below. If the monopolist's marginal cost is constant and equal to $30, its profit-maximizing level of output

20 units

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. CustomerReservation Price($/Rental)A22B16C12D8E6F4 Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the afternoon, it will rent out ______ bike(s) and charge ______ per bike.

2; $6, Island Bikes can divide the original market into two submarkets: one in the morning and one in the afternoon. The first submarket consists of customers A through C and the second submarket consists of customers D through F. In the morning, Island Bikes will rent out 3 bikes and charge $12, and in the afternoon, Island Bikes will rent out 2 bikes and charge $6.

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. CustomerReservation Price($/Rental)A22B16C12D8E6F4 Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the morning, it will rent out ______ bike(s) and charge ______ per bike.

3; $12

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. This monopolist maximizes its profit by producing ______ units per day and charging a price of ______ per unit.

4; $18

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. The socially optimal level of output is:

8 units per day, the socially optimal level of output occurs where the marginal benefit of an additional unit of output equals the marginal cost of an additional unit of output. The marginal benefit of an additional unit of output is the amount people are willing to pay for it, which is given by the demand curve.

Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Acme Manufacturing: TC = 100 + 3Q. Generic Industries: TC = 500 + 3Q. Which of the following statements is true?

Acme and Generic have the same marginal cost.

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Which of the following statements is true?

Both the upper-left and lower-right cells are Nash equilibria

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's accounting profit was ______ and her economic profit was _____ a) $36,000; $140,000 b) $15,000; $43,000 c) $18,000; $40,000 d) $51,000; $40,000

C ($18,000; $40,000)

Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Mega Corp: TC=5,000+100Q Big Inc: TC=4,000+200Q_____________ has a higher fixed cost and_____________has a higher marginal cost.

Mega Corp; Big Inc

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. Which of the following statements is correct?

OPEC does not have dominant strategy, if Mexico cheats, OPEC is better off cheating, but if Mexico abides by the agreement OPEC is better off abiding by the agreement as well.

Which of the following is NOT an example of the hurdle method of price discrimination?

Permanently reducing all prices by 10%

Which of the following statements about implicit costs is true?

They measure the forgone opportunities of the firm?s owners

A government-issued license to braid hair is an example of:

a barrier of entry

Which of the following is NOT an example of a good with network economies?

a computer printer

The dating app Tinder becomes more valuable to when there are more people using it. This is an example of

a network economy

A strategy that limits defection in a repeated prisoner's dilemma game is:

a tit-for-tat strategy

Which of the following statements is true?

accounting profit is greater than or equal to economic profit

Which of the following statements is true?

accounting profit is greater than or equal to economic profit,

The profit maximizing rule MR = MC applies to:

all firms

A market equilibrium is only efficient if:

all relevant costs and benefits are reflected in the market supply and demand curves

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. You may find it easier to answer the following questions if you fill in the payoff matrix below.

both Joe and Sam will cut their price, for each player, the dominant strategy is to cut the price

The table below shows how the payoffs to two political candidates depend on whether the candidates run a positive or negative campaign. The payoffs are given in terms of the percentage change in the number of votes received. Suppose that the Republican candidate tells the Democratic candidate that he intends to run a positive campaign. The likely result is that:

both candidates will run a negative campaign, running a negative campaigning is a dominant strategy for both candidates, so the Republican candidate's statement will not influence what the Democratic candidate does, and it is in the Republican candidate's interest to run a negative campaign too

The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. The payoffs of this game are such that:

both firms would benefit from a law that made publishing coupons illegal, publishing coupons is a dominant strategy for both firms, but both would be better off if they both did not publish coupons. So they would benefit from a law that made it illegal to publish coupons.

If resources are misallocated in a perfectly competitive market, then, in the long run, profit opportunities will:

bring about a more efficient allocation of resources

Suppose a monopolist offers a $20 mail-in rebate on an item with a list price of $100. In order for the rebate to be a perfect hurdle, it must be the case that:

buyers use the rebate if and only if they have a reservation price between $80 and $100

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. For Bagels 'R' Us, ______ is a ______.

cheating on the agreement; dominant strategy

A price setter is a firm that

has some degree of control over its price.

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. Suppose Mexico chooses first, and then OPEC, after seeing Mexico's choice, chooses second. Before Mexico chooses, OPEC tells Mexico that if Mexico cheats on the agreement, then OPEC will also cheat, and if Mexico abides by the agreement, then OPEC will also abide. This is an example of a ______, and the outcome is that ______.

credible threat; neither will cheat

In tit-for-tat, if your partner ______ in your first interaction, then you will ______ in your next interaction.

defects; defect

A firm whose production process exhibits constant returns to scale would find that if it doubled all of its inputs, its output would ______.

double

Suppose that you have noticed that almost all of the car dealers in your city are located along a three-block stretch of the same street. A likely reason for this clustering of car dealers is that:

each dealer is attempting to locate closest to the customers

A game involving two players with two possible strategies is a prisoner's dilemma if each player has a dominant strategy and:

each player's payoff is higher when both play their dominated strategy than when both play their dominant strategy.

P-TV and QRS-TV are trying to decide whether to air a sit-com or a reality show in a given time slot. Viewers like both sit-coms and reality shows, but sit-coms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. Given the information in this decision tree, if QRS-TV announces that it will air a reality show, it can expect to:

earn $10 million.

In the long run, in a perfectly competitive industry:

economic profit and loss are driven to zero by entry and exit

A cost-saving innovation in a perfectly competitive industry will lead to:

economic profits for a few firms for a short time

The essential feature that differentiates imperfectly competitive firms from perfectly competitive firms is that an imperfectly competitive firm:

faces a downward sloping demand curve

One difference between the long run and the short run in a perfectly competitive industry is that:

firms necessarily earn zero economic profit in the long run but may earn positive or negative economic profit in the short run.

If it is possible to make a change that will help some people without harming others, then the situation is:

inefficient, a situation is efficient if no change is possible that will help some people without harming others.

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice.

is not a prisoner's dilemma.

Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. If the first store to open in Miniville is located at A, to maximize the number of customers it attracts, the next store to open should locate:

just east of A

Suppose famers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. In the long run, this increase in the demand for corn is likely to ______ the price of soy beans.

lead to an increase in

A firm is most likely to experience economies of scale if its start up costs are high and its marginal costs are

low

The primary objective of an imperfectly competitive firm is to

maximize profit

The primary objective of an imperfectly competitive firm is to:

maximize profit, all firms seek to maximize profit.

If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____.

more than double

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. At the extreme right end, all 100 voters lie to the left. Suppose Candidate X is running against Candidate Y. If Candidate Z enters the race:

most of the voters who were going to vote for Y will now vote for Z, Candidate Z will pick up all votes to his or her right, votes that Candidate Y would have received

A monopoly that results from economies of scale is called a(n):

natural monopoly

Suppose a monopolist produces two different products. If the marginal cost of producing one is lower than the marginal cost of producing the other, and the monopolist charges a different price for the two goods, then the monopolist is:

not price discriminating

A monopolistically competitive firm is one

of many firms that sell products that are close but not perfect substitutes.

If Row Resorts offers reduced rates, then Column Cruises would receive the highest payoff if it:

offered reduced its rates

Adam Smith coined the term "invisible hand" to describe the process by which the actions of independent, self-interested buyers and sellers will:

often lead to the most efficient allocation of resources

If a firm functions in an oligopoly, it is:

one of a small number of firms that produce goods that are either close or perfect substitutes

If a firm collects $80 in revenue when it sells 4 units, $100 in revenue when it sells 5 units, and $120 in revenue when it sells 6 units, then one can infer the firm is a(n):

perfectly competitor, marginal revenue is a constant $20 for this firm, so it must face a horizontal demand curve.

Airlines that charge higher prices for customers who purchase their tickets at the last minute are

price discriminating by identifying passengers with higher reservation prices, passengers who are willing to purchase their tickets in advance typically have lower reservation prices than those who purchase their tickets at the last-minute.

Some people have argued that the government should provide medical care to everyone. Under this system:

prices will not ration medical care so some other rationing method will be used.

Suppose a monopolist faces the demand curve shown below. The monopolist maximizes its profits by:

producing the level of output at which marginal revenue equals marginal cost.

When a pharmaceutical company introduces a new drug, its research and development costs are___________, and the cost of the chemicals used in manufacturing the drug are____________.

start-up costs; variable costs

Suppose farmers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. All else equal, an increase in the price of corn creates an incentive for farmers to:

switch away from growing soy beans and into growing corn

Economies of scale exist when

the average cost of production falls as output rises

Once a firm has determined the quantity of output it wishes to sell, the maximum price it can charge for each unit is determined by:

the demand curve facing the firm

If a firm is earning zero economic profit then:

the firm's accounting profit is equal to the firm's implicit costs