Microeconomics Midterm 2

(Table: The Utility of Pecan Rolls) Look at the table The Utility of Pecan Rolls. The marginal utility for the second roll is:

15

A producer of a premium cereal brand can command a slightly higher price than that of a similar cereal from a competitor. This is because A. All the other answers B. the two products are differentiated. C. consumers have a perception that the premium brand is "better". D. the difference in prices is not significant.

A. All the other answers

Which of the following are characteristics of monopolistic competition? A. All the other answers B. firms produce non-identical products C. a certain level of customer loyalty to each brand D. a large number of firms in the industry

A. All the other answers

Jorge understands that he has maximized his total utility because he is on his budget constraint line and:

MU Cameras / P Cameras = MU Coffee / P Coffee.

Which of the following best defines game theory?

a branch of mathematics often used by economists that analyzes situations in which players must make decisions and then receive payoffs based on what decisions the other players make

In the framework of monopolistic competition, which of the following is not a possible outcome for a firm that runs a successful advertising campaign?

allocative efficiency

Which of the following is not a valid way in which a firm can differentiate its products from the products of other firms?

altering price

The marginal revenue curve for a monopolist _________ the market demand curve.

always lies beneath

The graph above illustrates the total cost function for GoodieCookie Co. How are the company's fixed costs represented in this graph?

as the point where the total cost curve touches the vertical axis

If the price that a firm charges is higher than its ___________ cost of production for that quantity produced, then the firm will earn profits.

average

______, also known as profit margin, is the profit divided by quantity produced, or average revenue minus average cost.

average profit

The marginal cost curve crosses the ________________ at its lowest point.

average total cost curve

(Figure: Short-Run Costs) Look at the figure Short-Run Costs. C is the _____ cost curve.

average variable

If a monopolistically competitive firm or a monopolist increases their prices, then

decline in quantity demanded will be larger for the monopolistic competitor.

The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.

diminishing marginal utility

When firms informally act together to reduce output and keep prices high, they are engaging in _____________.

collusion

Which of the following companies is most likely a monopoly?

company B was awarded a patent on its product

When economists attempt to predict the spending patterns of U.S. households, they will typically view the _____________________ as a primary determining factor that influences the individual consumption choices that each will make.

income level of each household

If prices fall below average variable cost some firms in this industry will ___________ causing prices to ___________.

exit, increase

How can parties who find themselves in a prisoner's dilemma situation avoid the undesired outcome and cooperate with each other?

find effective ways to penalize firms who do not cooperate

The principle of diminishing marginal utility means that when Sarah eats pizza, her satisfaction from the second slice of pizza is probably _____ that from the first.

less than

A natural monopoly occurs when the quantity demanded is ________ the minimum quantity it takes to be at the bottom of the long run ________.

less than, average cost curve

The step-by-step process of finding the choice with highest total utility involves a comparison of the:

marginal utility gained and lost from different choices along the budget constraint.

Assume that diminishing marginal utility applies to both dish soap and floor wax and that Minh is spending all of her income. If Minh purchases a combination of dish soap and floor wax such that MUDish soap/ / PDish soap = 50 and MUFloor wax/ / PFloor wax = 60, to maximize utility, Minh should buy _____ soap and _____ floor wax.

less; more

In a perfectly competitive market in long-run equilibrium, a decrease in demand creates economic ________ in the short run and _________________ in the long run.

losses, forces some firms to exit

When a natural monopoly exists in a given industry, the per-unit costs of production will be

lowest when a single firm generates the entire output of the industry.

A firms supply curve is equal to _________________ above the minimum point on the ________________curve.

marginal cost; average variable cost

In situations in which there are substantial economies of scale, the ___________ of adding an additional customer is very _________ once the fixed costs of the overall system are in place.

marginal cost; low

In a perfectly competitive market, a profit maximizing company will produce an output level where the market price equals to its

marginal costs

The term _________________ refers to the additional utility provided by one additional unit of consumption.

marginal utility

A firm that has economies of scale:

over the entire range of output demanded is a natural monopoly.

Which of the following gives the inventor the exclusive legal right to make, use, or sell his invention for a limited time?

patent

The purpose of behavioral economics is to determine why:

people make decisions that appear to be irrational.

Wood falls into which category of factors of production?

natural resources

As a general rule, utility-maximizing choices between consumption goods occur where the:

price ratio and marginal utilities ratio of two goods is equal.

(Table: The Utility of Pecan Rolls) Look at the table The Utility of Pecan Rolls. Marginal utility begins to diminish at the _____ roll.

second

Which of the following will present the least amount of concern to a firm that has a monopoly over a particular industry?

the competitive actions of other business firms

If a firm's revenues do not cover its average variable costs, then that firm has reached its _______ .

shutdown point

While advocates of a market-oriented economy tend to argue that consumers benefit substantially when firms seek short-term profits by providing differentiated products, critics of market-oriented economies may argue that product differentiation (along with marketing and advertising) is _______________.

socially wasteful

What effect is at play when faced with a change in price of a good, a consumer has an incentive to consume less of the good with a higher price and more of the good with a lower price?

substitution effect

Economists are able to determine total utility by:

summing up the marginal utilities of each unit consumed.

Which of the following should typically be ignored because spending has already been made and cannot be changed?

sunk costs

Which of the following is not a form of product differentiation?

supplier's costs

Choosing the best process or method to produce a good falls under which category of the factors of production?

technology

Behavioral economists seek to enrich our understanding of decision-making by integrating _____________________ into economics.

the insights of psychology

Which of the following accurately explains why firms in perfectly competitive markets are price takers?

the pressure of competition forces all firms to accept the prevailing equilibrium price in the market.

If price equals marginal cost and average cost, then _________.

the firm breaks even

If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then,

the firm should keep expanding production.

Ryan is a student at a community college. Which of the following is NOT an explicit cost of Ryan attending community college?

the salary that she could have earned working full-time

Refer to the diagram above. Based on the information illustrated in the graph, which of the following is correct?

the transition point between where MC is pulling down and pulling up AC always occurs at the minimum point of the AC curve

The result of a prisoner's dilemma in a duopoly is often that even though Firm A and Firm B could make the highest combined profits by cooperating, _______________________.

the two firms may well end up in a situation where they each end up with lower profits

The sum of the fixed plus variable costs is known as _________.

total cost

The typical pattern revealed in a budget constraint model shows that as the quantity consumed rises,

total utility rises, but marginal utility falls.

A ______ cost is the cost of inputs that increase or decrease with production.

variable

If a monopolistic competitor raises its price, it ____________ customers than a perfectly competitive firm, but ____________ customers compared to the number that a monopoly that raised its prices would.

will lose fewer; it will lose more

If a firm's total revenue is equal to $1,050 and its total costs are equal to $2,000, then what are its profits (or losses)?

-950

A monopolistically competitive industry displays productive and allocative efficiency in the short run and long run.

False

____________________________ occur when the marginal gain in output diminishes as each additional unit of input is added.

Diminishing marginal returns

Which of the following best defines imperfect competition?

a market type which falls between the extremes of monopoly and perfect competition; firms have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly would

When a $1 loss of money pains an individual 2.25 times more than a $1 gain in money, we refer to this as _______________________.

loss aversion

When __________________ exist, doubling of all inputs will result in more than doubling output, which means __________________________________________.

economies of scale; a larger factory can produce at a lower average cost than a smaller company.

Which of the following goods does not have a high level of product differentiation?

electricity

If Veronica is producing where she is facing diminishing marginal returns, then the marginal costs will be:

increasing.

Variable inputs refer to __________ that can easily be increase or decreased in a __________ period.

inputs, short

Productive efficiency occurs when _______.

price equals minimum of the long-run average cost curve.

A monopolistically competitive industry does not display ____________ in either the short-run, when firms are making ____________, nor in the long-run, when firms are earning ____________.

productive and allocative efficiency; profits and losses; zero profits

______ is the total revenue minus total costs.

profit

Which of the following denotes the typical shape of the monopolist's total cost curve?

total costs rise and grow steeper as output rises

In a free market economy, firms operating in a perfectly competitive industry are said to have only one major choice to make. Which of the following correctly sets out that choice?

what quantity to produce

In economics, the term "shutdown point" refers to the point where the

marginal cost curve crosses the average variable cost curve.

A firm sells peanuts in a perfectly competitive market. Upon increasing production output from 60 packages to 75 packages, the total revenue increased from $300to $375. What was the marginal revenue of this increase in production?

$5

In the U.S. a drug company's patent remains in force for:

20 years.

In a perfectly competitive industry the market is in long-run equilibrium, when:

P=MR=MC=AC

In the prisoners' dilemma scenario, what is the dominant strategy?

both prisoners confess to the crime

The demand curve facing a monopolist is:

downward-sloping, like the industry demand curve in perfect competition.

All of the following are potential effects of advertising for a firm except _______.

a more elastic demand curve

The term monopoly best fits which of the following descriptions?

a situation in which one firm produces all of the output in a market

A fruit stand buys oranges for $0.50 a piece. They sell 45 oranges at $2.00 a piece. How much profit did the fruit stand make?

67.50

The market price for tennis balls is currently $2 At this price, a firm is willing and able to produce 80 tennis balls. However, at this level of production, the firm experiences an average total cost of $0.50 per tennis ball. What is the profit for this firm?

$120

Given the data provided in the table below, what will the marginal cost equal for production at quantity (Q) level 5?

$5.00

In order for a firm producing and selling kitchen tables to be operating at allocative efficiency, when price equals $800, marginal cost must equal _____.

$800

Kim has $22 per week in her entertainment budget. She splits her time between going to the movies and yoga classes. Each movie costs $10 while each yoga class costs $6. The total utility from each of these activities is set out in the table below. What is Kim's total utility maximizing point?

1 movie, 2 yoga classes

Look at the figure Budget Lines for Tea and Scones. For months now, Agnes has had $20 per month to spend on tea and scones. The price of each cup of tea and each scone is $1. Which of the charts shows what will happen to her budget line if her income increases to $25?

A

The table below sets out cost information for the production of volley balls. Some values are missing. Which of the following statements is correct?

A = 42, F = 13

_____________________ help to explain why every economy, as it develops, has an increasing proportion of its population living in urban areas.

Agglomeration factors

Which of the following scenarios does not represent characteristics of a monopoly?

An individual firm has very little market power.

Look at the figure Budget Lines for Tea and Scones. For months now, Agnes has had $20 per month to spend on tea and scones. The price of each cup of tea and each scone has been $1. Which of the charts shows what will happen to her budget line if the price of a cup of tea falls to $0.50?

D

Which of the following is true about firms exiting a perfectly competitive market?

Exiting the market occurs in response to a sustained pattern of losses.

A monopoly is a firm that sells all or nearly all of the goods and services in a given market. What determines if a firm is a monopoly producer?

If a firm produces a product without close substitutes, then we can consider the firm a monopoly producer in a single market.

Suppose that ATC curve represents your Grade Point Average in college. Let MC curve represent your marginal grade. Which of the following is true?

If your GPA=3.00, and the grade in your next course is B+ (3.33), your GPA will increase.

Which of the following is not a condition that leads to a natural monopoly?

Marginal cost of adding an additional customer is high.

_______ refers to the additional revenue gained from selling one more unit.

Marginal revenue

Economics concerns itself with efficiency and equity. When considering the case of a monopoly, why might we consider the market to be inefficient?

Monopolies charge higher prices and produce less than firms in competitive markets.

In 1935, economics Nobel Prize winner John Hicks made a comment about the allocative inefficiency of monopolies. What did he mean when he said, "The best of all monopoly profits is a quiet life"?

Monopolies may bank their profits and slack off on trying to please their customers. The problem of inefficiency for monopolies often runs even deeper and involves inefficiency over a longer period of time.

________________________ arises where many firms are competing in a market to sell similar but differentiated products.

Monopolistic competition

What is the comparison between the elasticity of demand for a monopolist and the elasticity of demand for a monopolistic competitor?

Monopolists face a more inelastic elasticity of demand than monopolistic competitors.

In perfect competition, the firm produces the output such that _____, and in monopoly, the firm produces the output such that _____.

P = MR = MC; P > MR = MC

What best describes the income effect?

The idea that a higher price means the buying power of income has been reduced.

Suppose that a member firm in an oligopoly cartel faces a kinked demand curve. What will happen if the firm decides to raise its price?

The other oligopolists will not raise their prices.

Which of the following best describes the prisoner's dilemma?

a game in which the gains from cooperation are larger than the rewards from pursuing self-interes

Which of the following is not a characteristic of oligopoly?

a large number of competing firms selling non-identical products

Which of the following is an example of a fixed input?

a leased store front for a sandwich shop

If monopolists are able to produce fewer goods and sell them at a higher price than they could under perfect competition, the result will be

abnormally high sustained profits.

An entrepreneur decided to leave a job that pays $50,000 a year to start a business. These lost wages would be considered ______________ .

an implicit cost

In the case of Snack Corp, when the price they sell their product at is _______ average cost of production, profits are ______ due to ________ average profit.

below; negative; negative

(Figure: Long-Run and Short-Run Average Cost Curves) Look at the figure Long-Run and Short-Run Average Cost Curves. If a firm is producing at point C on the ATC2 but anticipates increasing output to 225,000 units in the long run, the firm will build a _____ plant and have _____ of scale.

bigger; diseconomies

If a perfectly competitive firm is producing a quantity where P < MC, then profit:

can be increased by decreasing production.

The perceived demand curve for a monopoly is downward sloping because a monopoly ____________.

can decide the market price.

A group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price is called a _______

cartel

Which of the following could be considered barriers to entry that would prevent potential competitors from entering a monopoly market?

control of critical a scarce physical resource

A firm was producing 20,000 units of output at the total cost of $40,000. It now produces 30,000 units and the corresponding total cost is $50,000. This firm is experiencing ____________________.

economies of scale

Which of the following is a not characteristic of a perfectly competitive market? Select all that apply.

firms produce similar, but not identical products.

An inferior good is a good:

for which demand decreases as income increases.

The Law of Diminishing Marginal Product says that in the short-run, the marginal product __________ at first, but sooner or later additional workers will have a __________ marginal product.

increases, decreasing effect on

A perfectly competitive firm perceives demand to be a horizontal line because _______.

it can choose to sell any quantity at the given price

When a firm shuts down,

it continues to pay fixed costs

In general, firms will maximize profits when the:

marginal revenue equals marginal cost.

If a monopolist increases quantity by one unit, but sells the increased output at a slightly lower price,

marginal revenue is affected by adding one additional unit sold at the new price.

A monopolist's perceived demand curve is the same as the market demand curve. The price the monopolist firm charges is constrained by what?

market demand

A decrease in consumer preference for a product, other things being equal, will cause:

market demand to shift to the left.

Suppose you earn $50 working at the ice cream shop for 5 hours. On your way home, you find $50 next to a garbage can. You are excited for the extra money and decide to spend it on new shoes as soon as you can, whereas you are saving your paychecks to pay off your credit card debt. This scenario of viewing money differently is an example of ________________________.

mental accounting

At the current level of output, Becca Furniture's marginal cost curve is above the average total cost curve. This means Becca Furniture's average total cost curve:

must be rising.

What type of market occurs when a company has control of a scarce physical resource? Examples include ALCOA—the Aluminum Company of America and DeBeers.

natural monopoly

In a perfectly competitive market when economic profit, that firms are experiencing, is greater than zero?

new firms may enter the industry and all of the above

In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC, which means

price is higher than marginal revenue.

One example of the pressures oligopolies can exert on one another is the kinked demand curve, in which competing oligopoly firms commit to ___________, but not ___________.

price cuts; price increases

In perfect competition, a firm's short-run profits are zero when:

price intersects marginal cost at a level equal to the average cost

A monopolistic company has the ability to maximize its profits by

producing output where MR = MC and charging a price along the demand curve.

Monopolistic competitors can make a ____________ in the short-run, but in the long run, ____________ will drive these firms toward ____________.

profit or loss; entry and exit; a zero-profit outcome

According to the substitution effect, a decrease in the price of a product leads to an increase in the quantity of the product demanded because buyers:

purchase more of the now less expensive good.

The total revenue curve for a monopolist will

start low, rise, and then decline.

All of the following are reasons that barriers to entry create oligopolies except:

the desire for product efficiency at the price of the purchase of one additional unit equal to marginal cost

Which of the following is considered to be a tell-tale signal that the point with the highest total utility has been found?

the marginal utility per dollar is the same for both goods

During the summer, Alex runs a mowing service, and lawn mowing is a perfectly competitive industry. In the short run, Alex will shut down if:

the total revenues can't cover variable costs.

Monopolistically competitive firms are not productively efficient because

they produce below the quantity level at which average total cost is minimum.

If monopolistically competitive firms face conditions, where there are free entry and exit similar to perfectly competitive firms, then

they will be unable to earn higher-than-normal profits in the long run.

When a company follows a predatory pricing tactic, it behaves this way

to maximize profits in the long run.

Where diseconomies of scale are present, the long run average cost curve will be

upward sloping

The marginal cost curve is generally ______________, because diminishing marginal returns implies that additional units are ________________________.

upward-sloping; more costly to produce