ECO 201 Test 2
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Which of the following statements is most correct? A. The benefits that accrue to a monopoly's owners are equal to the expenditures of consumers on that firm's product. B. The deadweight loss that arises in monopoly stems from the fact that the profit maximizing monopoly produces a quantity that exceeds the socially efficient quantity. C. The deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax on a product. D. The primary social problem caused by monopoly is monopoly profit.
C. The deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax on a product.
Which of the following statements on the history of federal regulation and antitrust policy is true? A. The Clayton Act exempted railroads from antitrust policy. B. The Interstate Commerce Commission was established to standardize regulation of the first interstate industry, the banks. C. The first case against Microsoft revolved around anticompetitive practices that drove the competing operating system DR-DOS out of the market. D. The second case against Microsoft revolved around Microsoft's attempts to monopolize the software (e.g., MS Office) market.
C. The first case against Microsoft revolved around anticompetitive practices that drove the competing operating system DR-DOS out of the market.
The long-run average total cost curve A. is flatter than any one short-run average cost curve. B. is not U-shaped. C. is always decreasing as output increases. D. is always increasing as output increases.
A. is flatter than any one short-run average cost curve.
If market (inverse) demand for lollipops is P = 1000 - (1/5) Q and the market is served by a duopoly, then Firm A's marginal revenue expression is A. 1000 - (2/5) qA - (1/5) qB B. 1000 - (2/5) qA - (2/5) qB C. 1000 - (1/5) qA - (1/5) qB D. 1000 - (1/5) qA - (2/5) qB
A. 1000 - (2/5) qA - (1/5) qB
Collusion makes firms better off because if they act as a single entity (cartel), they can reduce output, increase prices and increase profits. Yet, legal cartels often fail or are too unstable to be effective. Which of the following is a reason why cartels break down? A. Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share (regardless of the other firms' actions), thereby increasing its profit. B. Cartels tend to fail because most cartels do not have a dominant strategy. C. When a cartel is powerful, it increases the extent of competition in an industry. D. Members of a cartel may resent having to share profits equally.
A. Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share (regardless of the other firms' actions), thereby increasing its profit.
A firm's long-run average cost curve A. is the "envelope" (or outline) of all of the firm's short-run average cost curves. B. necessarily includes the minimum of each of the firm's short-run average cost curves. C. is always decreasing in output (downward sloping). D. all of the above.
A. is the "envelope" (or outline) of all of the firm's short-run average cost curves.
The belief that a country's wealth could be measured by the extent of its metallic wealth (e.g., gold and silver) was held by the A. Mercantilists. B. Physiocrats. C. Classical Economists. D. The Farmer School of Business
A. Mercantilists.
Which of the following would NOT be an example of an effective commitment device? A. Replacing your old bike with a new, more expensive bike (to commit to exercising) B. Placing your alarm clock far from your bed (to commit to waking up) C. Building a factory that must produce a certain (high) level of output (to commit to high output) D. All of the above are examples of credible commitment.
A. Replacing your old bike with a new, more expensive bike (to commit to exercising)
Which of the following statements best reflect the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost? A. The firm will immediately stop production to minimize its losses. B. The firm will continue to produce in an attempt to pay at least part of its fixed costs. C. The firm will stop production as soon as it is able to pay its sunk costs. D. The firm will continue to produce in the short run, but it will likely exit the market in the long run.
A. The firm will immediately stop production to minimize its losses.
When indifference curves are bowed in toward the origin, A. a consumer is less inclined to trade away goods she is lacking. B. a consumer's willingness to trade away goods she has in abundance diminishes. C. an increase in income will shift the indifference curve away from the origin. D. a decrease in income will shift the indifference curve away from the origin.
A. a consumer is less inclined to trade away goods she is lacking.
A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue of $9 and average total cost of $7. It follows that the firm's... A. average variable cost curve intersects its marginal cost at an output less than 200 units. B. average total cost intersects its marginal cost at an output level of greater than 200 units. C. profit is $1800. D. All of the above are correct.
A. average variable cost curve intersects its marginal cost at an output less than 200 units.
The marginal product of labor can be defined as A. change in output/change in labor. B. change in profit/change in labor. C. change in labor/change in output. D. change in labor/change in total cost.
A. change in output/change in labor.
A firm in a competitive market has the following cost structure: Output 0 1 2 3 4 5 Total Cost ($) 10 14 16 20 25 32 The firm will shut down A. if price falls below $3 and exit if it stays below $6.25. B. if price falls below $3.33 and exit if it stays below $5. C. if price falls below $2 and exit if it stays below $6. D. regardless and exit if price falls below $5.
A. if price falls below $3 and exit if it stays below $6.25.
If one were to compare a competitive market to a monopoly that engages in perfect price discrimination, one could say that A. in both cases, total social welfare is the same. B. total social welfare is higher in the competitive market than with the perfectly price discriminating monopolist. C. in both cases, some potentially mutually beneficial trades do not occur. D. consumer surplus is the same in both cases.
A. in both cases, total social welfare is the same.
Predatory pricing A. leads to immediate economic losses to the predatory firm. B. is only legal when a Republican is president. C. is never rational. D. all of the above.
A. leads to immediate economic losses to the predatory firm.
A producer's average total cost will fall as output expands if its marginal cost is A. less than average total cost, regardless of whether marginal cost is rising or falling. B. falling, regardless of whether marginal cost is greater or less than average total cost. C. less than average total cost and falling. D. greater than average total cost and falling.
A. less than average total cost, regardless of whether marginal cost is rising or falling.
Economists who think ads are good for society probably also believe that A. product quality is difficult for consumers to determine. B. consumer preferences are easily manipulated by advertising. C. consumers can costlessly learn everything they need to know from public sources of information. D. None of the above.
A. product quality is difficult for consumers to determine.
On Professor Moul's dream farm, he raises A. seahorses. B. llamas. C. hogs. D. chickens.
A. seahorses.
Beer and pretzels are normal goods. When the price of beer rises, the income effect causes a A. shift to a lower indifference curve and the consumer buys fewer pretzels. B. shift to a higher indifference curve and the consumer buys more pretzels. C. movement along the indifference curve and the consumer buys fewer pretzels. D. movement along the indifference curve and the consumer buys more pretzels.
A. shift to a lower indifference curve and the consumer buys fewer pretzels.
If a monopolist's marginal costs shift up by $1, then A. the monopoly price will rise by less than $1. B. the monopoly price will rise by more than $1. C. the monopoly price will rise by exactly $1. D. there is no change in the price, and the monopolist's profits fall
A. the monopoly price will rise by less than $1.
Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable outcome is that A. the players play the game not once but many times. B. each player tries to capture a large portion of market share. C. the game becomes more competitive. D. self-interest results in the Nash equilibrium which is the best outcome for the players.
A. the players play the game not once but many times.
Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable outcome is that A. the players play the game not once but many times. B. the game becomes more competitive. C. each player tries to capture a large portion of market share. D. self-interest results in the Nash equilibrium which is the best outcome for the players.
A. the players play the game not once but many times.
A central issue in the Netscape-vs-Microsoft antitrust lawsuit involved Microsoft's integration of its Internet browser into its Windows operating system, to be sold as one unit. This practice is known as A. tying. B. predation. C. wholesale price maintenance. D. retail price maintenance.
A. tying.
A Nash equilibrium is A. where each player chooses his best strategy, given strategies chosen by other players. B. an example of a cooperative equilibrium. C. where demand and supply intersect. D. a non-dominant strategy.
A. where each player chooses his best strategy, given strategies chosen by other players.
Which of the following would be best described as third degree price discrimination? A. Consumers get a discount on airfares if they stay over on Saturday night. B. Students get a discount at the zoo. C. A used car salesman grills you in an attempt to learn your willingness-to-pay. D. None of the above is an example of third degree price discrimination.
B. Students get a discount at the zoo.
Which of the characteristics of perfect competition assures that economic profit will be zero in the long run? A. Each firm's output is small relative to the total market output. B. There are no barriers to firms entering or exiting the market. C. Each firm is a price-taker. D. All of the above.
B. There are no barriers to firms entering or exiting the market.
Activision produces and sells the various Skylanders series, in which a base videogame disc (~$30) is complemented by separately sold figures (~$15) that are then integrated into gameplay. I claim that this sales tactic is an example of _________________ price discrimination. A. 1st degree B. 2nd degree C. 3rd degree D. None of the above (all consumers face same prices for individual items, so this behavior is inconsistent with price discrimination)
B. 2nd degree
Which of the following cases in monopoly antitrust primarily involved accusations of a company using its vertical structure as a barrier to entry? A. Standard Oil (filed by DOJ in 1909, resolved in 1911) B. AT&T (filed by DOJ in 1974, resolved in 1982) C. Microsoft I (filed by DOJ in 1992, resolved in 1994) D. None of the above cases dealt with such a vertical argument.
B. AT&T (filed by DOJ in 1974, resolved in 1982)
Which of the following cases in monopoly antitrust primarily involved accusations of a company using its vertical structure as a barrier to entry? A. Standard Oil (filed by DOJ in 1909, resolved in 1911) B. AT&T (filed by DOJ in 1974, resolved in 1982) C. Microsoft I (filed by FTC in 1992, resolved in 1994) D. None of the above cases dealt with such a vertical argument.
B. AT&T (filed by DOJ in 1974, resolved in 1982)
In the Landsburg chapter "Who Cares if the Air is Clean?", the primary beneficiaries of Grimyville's clean air legislation is A. Cleanstown landlords. B. Grimyville landlords. C. Grimyville residents. D. No one benefits from the clean air legislation.
B. Grimyville landlords.
When an oligopoly market is in Nash equilibrium, A. market price will be different for each firm. B. a firm will choose its best action, given the strategies that other firms are taking. C. firms will not behave as profit-maximizers. D. a firm will not take into account the strategies of competing firms.
B. a firm will choose its best action, given the strategies that other firms are taking.
The substitution effect of an increase in the interest rate will result in an increase in A. consumption when young and increase in savings when young. B. consumption when old and increase in savings when young. C. consumption when young and an increase in savings when old. D. savings when young and in increase in savings when old.
B. consumption when old and increase in savings when young.
Compared to a monopolist charging a single price, perfect (i.e., 1st degree) price discrimination A. decreases the monopolist's profit. B. decreases the consumer surplus. C. increases deadweight loss. D. reduces the number of consumers who purchase the monopoly's product.
B. decreases the consumer surplus.
The paradox of the Bertrand model is that A. firms would rather collude than compete but find themselves competing anyway. B. despite seemingly reasonably assumptions, only two competing firms are required to reach the allocatively efficient outcome. C. firms competing in prices have inexhaustible capacities. D. consumers completely substitute to the lower priced goods, even though goods are not close substitutes.
B. despite seemingly reasonably assumptions, only two competing firms are required to reach the allocatively efficient outcome.
Economists are most concerned that _______ will increase market power and harm society. A. vertical mergers B. horizontal mergers C. predatory pricing D. Economists are concerned with none of the above increasing market power.
B. horizontal mergers
In a market with 100 identical firms, the market supply is equal to the A. average number of units supplied by each firm in the market. B. horizontal sum of the supply curves of each of the 100 individual firms. C. marginal cost curve for a representative firm in the market. D. product of the quantities supplied by all firms in the market.
B. horizontal sum of the supply curves of each of the 100 individual firms.
In the long run, A. inputs that were fixed in the short run remain fixed. B. inputs that were fixed in the short run become variable. C. inputs that were variable in the short run become fixed. D. variable inputs are rarely used.
B. inputs that were fixed in the short run become variable.
If marginal cost is below average total cost and rising, then average total cost A. is neither rising nor falling. B. is falling. C. is rising. D. may rise or fall depending on the size of fixed costs.
B. is falling.
The prisoners' dilemma is an important game to study because A. most games present zero-sum alternatives. B. it identifies the fundamental difficulty in maintaining cooperative agreements. C. strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive agreements. D. it represents the most difficult situation considered in game theory.
B. it identifies the fundamental difficulty in maintaining cooperative agreements.
The paradox of the Bertrand model of oligopoly is that A. firms would rather collude than compete but find themselves competing anyway. B. only two competing firms are required to reach the allocatively efficient outcome. C. firms competing in prices have inexhaustible capacities. D. consumers completely substitute to the lower priced goods, even though goods are not close substitutes.
B. only two competing firms are required to reach the allocatively efficient outcome.
Economists generally agree the Consumer Price Index (CPI) overstates inflation because A. such an index emphasizes the introduction of new products, and these products tend to be more expensive. B. pricing a fixed basket of goods ignores the substitution effect of price changes. C. the income effect of price changes tends to be small. D. All of the above
B. pricing a fixed basket of goods ignores the substitution effect of price changes.
Economic predation is generally described as A. taking economic losses but not exiting. B. taking economic losses with the goal of forcing rivals to exit. C. undercutting a rival's price. D. pricing below a rival's costs.
B. taking economic losses with the goal of forcing rivals to exit.
The Cournot and Bertrand models of duopoly differ in that A. Cournot duopolists choose prices but Bertrand duopolists choose quantities. B. the Cournot equilibrium yields a price between monopoly and competition, but the Bertrand equilibrium yields the competitive price. C. Bertrand duopolists easily maintain collusion, while Cournot duopolists have trouble maintaining collusion. D. All of the above.
B. the Cournot equilibrium yields a price between monopoly and competition, but the Bertrand equilibrium yields the competitive price.
Suppose that a price-taking firm is maximizing profits, but that its industry is not necessarily in long-run equilibrium. At its current quantity, its average total cost is rising. From this, one can infer that A. the firm's marginal cost lies below its average total cost. B. the firm is earning economic profits. C. the firm is bearing economic losses. D. the firm is earning zero economic profits (i.e., the industry is in long-run equilibrium).
B. the firm is earning economic profits.
If leisure were an inferior good, then labor supply curves A. would all be negatively sloped. B. would all be positively sloped. C. would all be vertical. D. could be positively or negatively sloped.
B. would all be positively sloped.
In the long run there are no barriers to new firms entering a perfectly competitive market. Suppose that firms already in the market are making economic profits. Which of the following sequences of events best describes the change in market price and output as a result of free entry? A. The market demand curve rotates to the right, causing price to rise and market output to rise. B. The market demand curve rotates to the left, causing price to fall and market output to decrease. C. The short-run industry supply curve rotates to the right, causing price to fall and market output to increase. D. The short-run industry supply curve rotates to the left, causing price to rise and market output to decrease.
C. The short-run industry supply curve rotates to the right, causing price to fall and market output to increase.
In the long run there are no barriers to new firms entering a perfectly competitive market. Suppose that firms already in the market are making economic profits. Which of the following sequences of events best describes the expected change in market price and output? A. The market demand curve rotates to the right, causing price to rise and market output to rise. B. The market demand curve rotates to the left, causing price to fall and market output to decrease. C. The short-run industry supply curve rotates to the right, causing price to fall and market output to increase. D. The short-run industry supply curve rotates to the left, causing price to rise and market output to decrease.
C. The short-run industry supply curve rotates to the right, causing price to fall and market output to increase.
If Adam's Ant Farm (a competitive firm) is currently producing a level of output at which marginal cost exceeds marginal revenue, then A. Adam's average revenue exceeds his marginal cost. B. the firm is definitely earning an economic loss. C. a one-unit decrease in output would increase the firm's profit. D. All of the above are correct.
C. a one-unit decrease in output would increase the firm's profit.
The amount of profit that a wheat farmer could have earned if he had planted barley instead of wheat is A. an explicit cost. B. an accounting cost. C. an implicit cost. D. foregone accounting profit.
C. an implicit cost.
As a group, oligopolists would always earn the highest profit if they would A. produce the perfectly competitive quantity of output. B. produce more than the perfectly competitive quantity of output. C. charge the same price that a monopolist would charge if the market were a monopoly. D. operate according to their own individual self-interests.
C. charge the same price that a monopolist would charge if the market were a monopoly.
The Sherman Act prohibited A. pricing at marginal cost. B. setting price above marginal cost. C. collusive price agreements among rival sellers. D. selling below average total cost.
C. collusive price agreements among rival sellers.
When a firm operates under conditions of monopoly, its price is A. not constrained. B. constrained by marginal cost. C. constrained by demand. D. constrained only by its own social agenda.
C. constrained by demand.
Suppose that Annette gets a permanent increase in her wage and decides to maintain her hours worked. For her, the substitution effect of the wage change is A. only partially offset by the income effect. B. more than offset by the income effect. C. exactly offset by the income effect. D. indeterminate, as we don't know if consumption and leisure are normal goods for Annette.
C. exactly offset by the income effect.
If marginal cost is above average total cost and rising, then average total cost A. is constant. B. is falling. C. is rising. D. may rise or fall depending on the size of fixed costs.
C. is rising.
A reduction in a monopolist's fixed costs would A. decrease the profit-maximizing price and increase the profit-maximizing quantity produced. B. increase the profit-maximizing price and decrease the profit-maximizing quantity produced. C. not affect the profit-maximizing price or quantity. D. possibly increase, decrease, or not affect profit-maximizing price and quantity, depending on the elasticity of demand.
C. not affect the profit-maximizing price or quantity.
A price-discriminating firm charges the highest price to A. the group with the largest demand. B. the group with the most elastic demand. C. the group with the least elastic demand. D. the group with demand of unit elasticity.
C. the group with the least elastic demand.
If a monopolist's marginal costs shift up by $1 and demand is linear, then A. the monopoly price will rise by $1. B. the monopoly price will rise by more than $1. C. the monopoly price will rise by less than $1. D. there is no change in the monopoly price and profits fall.
C. the monopoly price will rise by less than $1.
As the number of firms in an oligopoly increases, A. each seller becomes more concerned about its impact on the market price. B. the oligopoly has more market power and firms earn a greater profit. C. the total quantity of output produced by firms in the market gets closer to the socially efficient quantity. D. All of the above occur.
C. the total quantity of output produced by firms in the market gets closer to the socially efficient quantity.
In the Landsburg chapter "Why Popcorn Costs More at the Movies," the theoretically plausible reason for offering relatively cheap tickets and relatively expensive popcorn is A. to capture more money from all consumers. B. to reflect the fact that popcorn is relatively cheap. C. to extract different amounts of money from consumers with different valuations. D. All of the above are theoretically plausible.
C. to extract different amounts of money from consumers with different valuations.
A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue of $9 and average total cost of $7. It follows that the firm's A. average total cost intersects the marginal cost curve at an output level of less than 200 units. B. average variable cost curve intersects the marginal cost curve at an output level of less than 200 units. C. profit is $400. D. All of the above are correct.
D. All of the above are correct.
A price-taking and profit-maximizing firm should shut down in the short run if A. there exists a quantity where average variable cost exceeds marginal cost. B. average total cost exceeds price at the profit-maximizing quantity. C. price exceeds average variable cost at the profit-maximizing quantity. D. None of the above are true.
D. None of the above are true.
A fall in the price of widgets leads consumers to buy more widgets. From this information, we can conclude that widgets A. are normal goods. B. are inferior goods. C. have relatively elastic demand. D. None of the above is necessarily correct.
D. None of the above is necessarily correct.
Economic theory predicts that an increase in the interest rate received by savers A. will cause an individual to save more for the future and consume less today. B. will cause an individual to save less for the future and consume more today. C. will cause an individual to consume less in the future D. None of the above.
D. None of the above.
In the long run there are no barriers to new firms entering a perfectly competitive market. Suppose that firms already in the market are making economic profits. Which of the following sequences of events best describes the change in market price and output as a result of free entry? A. Short-run industry supply curve rotates to left, price falls, and market output increases. B. Short-run industry supply curve rotates to right, price rises, and market output decreases. C. Short-run industry supply curve rotates to left, price rises, and market output decreases. D. Short-run industry supply curve rotates to right, price falls, and market output increases.
D. Short-run industry supply curve rotates to right, price falls, and market output increases.
Assume a perfectly competitive industry for which there are no barriers to new firms entering or exiting. Suppose that firms already in the market are making economic losses. Which sequence of events best describes the change in market price and output as a result of free entry/exit? A. The market demand curve rotates to the right, causing price to rise and market output to rise. B. The market demand curve rotates to the left, causing price to fall and market output to decrease. C. The short-run industry supply curve rotates to the right, causing price to fall and market output to increase. D. The short-run industry supply curve rotates to the left, causing price to rise and market output to decrease.
D. The short-run industry supply curve rotates to the left, causing price to rise and market output to decrease
The executive who spoke to our class was from the Ohio-based company A. Big Lots. B. AK Steel. C. Cardinal Health. D. Victoria's Secret.
D. Victoria's Secret.
When an industry is a natural monopoly, A. a larger number of firms may lead to a lower average cost. B. it is characterized by diseconomies of scale. C. it is characterized by constant returns to scale. D. a larger number of firms will lead to a higher average cost.
D. a larger number of firms will lead to a higher average cost.
When an industry is a natural monopoly, A. it is characterized by constant returns to scale. B. it is characterized by diseconomies of scale. C. a larger number of firms may lead to a lower average cost. D. a larger number of firms will lead to a higher average cost.
D. a larger number of firms will lead to a higher average cost.
Price discrimination requires the firm to A. not be a price-taker. B. prevent arbitrage. C. have at least general information about consumers' willingness-to-pay values & elasticities of demand. D. all of the above.
D. all of the above.
Ashley spends her income on workout DVDs and fashion magazines, and the price of a DVD is three times the price of a magazine. When Ashley maximizes total utility, she will buy A. three times as many DVDs as magazines. B. three times as many magazines as DVDs. C. both goods until the marginal utility of a magazine is three times the marginal utility of a DVD. D. both goods until the marginal utility of a DVD is three times the marginal utility of a fashion magazine.
D. both goods until the marginal utility of a DVD is three times the marginal utility of a fashion magazine.
Adam Smith established the convention that economists measure an economy's wealth A. by its agricultural production. B. by its financial assets (e.g., gold, silver, US Treasuries, etc.). C. by its exports. D. by the consumption of its people.
D. by the consumption of its people.
When the price of a good decreases, ceteris paribus, the lower price A. generally encourages the consumption of inferior goods. B. leads to a parallel shift of the linear budget constraint. C. will necessarily lead to a decrease in the consumption of goods whose prices did not change. D. expands the consumer's set of buying opportunities.
D. expands the consumer's set of buying opportunities.
In order to sell more of its product, a monopolist recognizes she must A. sell to the government. B. sell in international markets. C. use her market power to force up the price of complementary products. D. lower her price.
D. lower her price.
The substitution effect of a price change is depicted by a A. movement along the budget constraint holding satisfaction constant. B. shift in the budget constraint at the old prices. C. movement along the consumer's new indifference curve at the new prices. D. movement along the original indifference curve to the point where the marginal rate of substitution equals the price ratio for the new set of prices.
D. movement along the original indifference curve to the point where the marginal rate of substitution equals the price ratio for the new set of prices.
The minimum point on the average variable cost curve is called the A. break even point. B. loss minimizing point. C. point of diminishing marginal returns. D. shut down point.
D. shut down point.
The short-run supply curve for a firm in a perfectly competitive market is A. horizontal. B. always the same as the firm's entire marginal cost curve. C. determined by forces external to the firm. D. the portion of its marginal cost curve that lies above its average variable cost.
D. the portion of its marginal cost curve that lies above its average variable cost.
If the market own-price elasticity of demand for potatoes is -0.3 in a perfectly competitive market, the individual farmer's residual own-price elasticity of demand A. will also be -0.3. B. depends upon how large a crop the farmer produces. C. will range between -0.3 and -1.0. D. will be (negatively) infinite.
D. will be (negatively) infinite.
