Econ Exam 3

The output in a market with market power is

inefficient because the marginal benefit to society of extra output exceeds the marginal cost.

The average income of actresses may not be indicative of an aspiring actress's expected earnings because:

a few superstars with extremely high earnings may skew the average income much higher than all but a few can hope to earn.

difference in wages required to offset the desirable or undesirable aspects of a job is

compensating differential

why do average variable costs eventually rise if a company's output increases enough

diminishing marginal product occurs, causing average variable costs to rise

A government may want to create barriers to sellers entering a given market for all of the following reasons EXCEPT:

increasing the market demand for a product so that all sellers enjoy higher demand.

which graph shows the scenario where the income effect dominates labor supply decisions only at high wages

the graph where the individual supply curve shifts like half an oval

When segmenting your market demand into groups, base them on _____ and _____ characteristics.

verifiable; difficult-to-change

Price discrimination through group pricing works when the basis for segmenting the consumers is _____, is _____, and separates consumers based on their _____.

verifiable; hard to change; reservation price for the product

What is the dominant factor determining market price in the long run (assuming the industry has unrestricted entry)? Correct!

average costs

if a player has a Grimm Trigger strategy in repeated games, that player

cooperates if other players have cooperated in all previous rounds but defects if any player ever defects

Which of the following statements is FALSE regarding a Nash equilibrium?

cooperation between the players could not improve the outcome

which of the following correctly summarizes the process of segmenting a marketing into groups? The decision-maker should ensure that

demand differs across groups and that consumers are separated based on easily verifiable and hard-to-change characteristics

Splenda is used as a sugar substitute. Which of the following graphs illustrates the impact of a fall in the price of Splenda on the demand for sugar?

demand shifts back

Payoff Matrix for Gehrig and Gabriel. The figure describes two people who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them in this repeated game: to produce 5,000 figurines each month or to produce 7,000 figurines each month. If both follow a tit-for-tat strategy to encourage cooperation, the optimal outcome is when Gehrig produces _____ figurines and Gabriel produces _____ figurines.

5,000 ; 5,000 (both gets 100,000)

Almira is a chocolatier with a small chocolate shop. There are three other chocolatiers in her city. Almira should be concerned that new companies will enter her city's chocolate market and take away some of her customers if the average chocolatier in her city:

is earning economic profits

when a seller has no market power, its demand curve

is horizontal

If a firm's marginal product is rising, what does that mean for marginal cost?

it is falling

What was the primary effect of "redlining"? in the US?

it prevented african americans from buying homes

how long does it take for a company to be in the long run

it takes as long as is needed for the number of sellers in the company's market to increase or decrease

Many public utilities burn oil to generate electricity. If the price of oil increases, we expect a shift to the _____ in the _____ curve for _____ and a _____ price for electricity.

left ; supply; electricity; higher

The negative outcomes of market power include all of the following EXCEPT

lower prices

A basic logic that applies to all strategic interactions is:

making a good choice requires that you anticipate what others will do.

Marginal revenue product

marginal product * price

Marginal revenue product is the

marginal revenue from hiring an additional worker.

An employer's labor demand curve is equal to the

marginal revenue product curve.

The socially optimal outcome occurs where the _____ benefit equals the _____ cost.

marginal social; marginal social

When a government program or benefit is based solely on need, we say it is

means tested

Compared to other high income countries, the U.S. has ______inequality.

more

In the United States, inequality in wealth is ______ inequality in income.

more than

when sellers in a market earn economic profit

new sellers will be attracted into the market

a Nash equilibrium is an equilibrium in which

the choice that each player makes is a best response to the choices other players are making

in which of the following situations would Max's Doughnut Shop have the greatest market power?

the closest doughnut shop or bakery is 25 miles from Max's shop

According to the figure, if there is international trade in this market and the world price of an engine is $1,000, how many engines does this country import or export? (each grid line is 100)

Exports 600. (where supploy and demand cross)

What will happen in the labor market for commercial truck drivers if the government raises the requirements needed to obtain a commercial driver's license?

The supply of truck drivers will decrease, resulting in a higher wage and lower quantity of labor.

Rising marginal costs imply

an upward-sloping supply curve

People gain consumer surplus when they purchase an item:

at a price below the value of the benefit they receive from the item.

When a company owner practices perfect price discrimination, the marginal revenue of an extra unit sold

equals its price.

If in a competitive market the quantity supplied exceeds the quantity demanded, we expect prices to:

fall

As output rises, average fixed costs:

fall.

A formal agreement to limit production and raise prices leads to:

a cartel

Disney Prime and Netflix are examples of..

a club or "natural monopoly" good

what is collusion

agreements between sellers to increase their market power

A binding price ceiling is:

always below the equilibrium price

When a player's best response is to choose a different (but complementary) action than the other player, then both participants are playing _____ game.

an anti-coordination

what is the profit margin for this firms if it produces a quantity of six

$7 - $4 = $3 (demand - average total cost = profit margin)

Which of the following conditions is present for all sellers in a perfectly competitive market?

All sellers are selling identical products.

How does marginal revenue compare to price for a seller with market power?

Beyond the first unit sold, marginal revenue is below price.

As the quantity sold rises for a seller in imperfect competition, what happens to the difference between price and marginal revenue?

It gets larger and larger

San Francisco decides to remove a binding price ceiling on rail fares. Which of the following is likely to happen in the market?

Overcrowding on trains will go down.

Which of the following would shift the labor supply curve?

The government increases its provision of childcare services.

an anti-coordination game is a game where

a player's best response is to take a different (but complementary) action to the other player

The market power of a firm is its

ability to raise its price without losing many of its customers to competing businesses.

The basic logic behind the Rational Rule for Sellers is that a company owner should increase output as long as the extra output

adds more to revenue than it adds to costs.

If supply is upward sloping, a decrease in demand with no change in supply will lead to a(n) _____ in equilibrium quantity and a(n) _____ in equilibrium price.

decrease; decrease

Market power determines the shape of a firm's

demand curve

Restaurants have to pay rent on their spaces regardless of whether or not they are open. Rent is an example of a...

fixed cost

The more elastic the demand curve for a product (holding the slope of supply constant), the _____ the economic burden of the tax on the seller.

greater

When market leaders produce on a mass scale, economies of scale mean that new entrants:

have a hard time competing.

To be efficient, a person (or country) should operate at a point _______its PPF?

on

when the hurdle method is used to price a product across buyers

only those who overcome the obstacle that the seller specifies will get a lower price

what price and output should the firm in the following example choose according to the Rational Rule for Sellers if MC = $4

output = four ; price = $5.00 (where the optimal for firms is)

in a perfectly competitive labor market, employers

pay the market wage

In an economy, a person with income of $50,000 pays $10,000 in taxes while a person with income of $100,000 pays $16,000 in taxes. Such a tax system can be referred to as...

regressive

The degree of a seller's market power has an impact on the

seller's demand curve

which of the following is a characteristic of a perfectly competitive market

sellers are price-takers

the labor demand curve in a labor market

slopes downward

The cost of working one more hour is

the hour of leisure that is given up

in an indefinitely repeated game, the players face

the same strategic interaction an unknown number of times

what happens to a seller's demand curve as the seller gains market power

the slope of the curve becomes steeper

one of the market failures caused by market power is

underproduction

When companies exercise market power, _____ occurs. _____ can partially solve this problem.

underproduction; price discrimination

when there are new entrants into a market, an existing seller will NOT face

upwardly shifting cost curves

Marla's opportunity cost of making chicken curry is _____, and Jason's opportunity cost of making curry is _____.

.75 of a lasagna; .33 of a lasagna (.75 is 3/4)

By the midpoint method, the price elasticity of demand between $6 and $8 is approximately:

2.33

Argentina and Chile both produce copper and timber. Chile produces copper much more efficiently than Argentina and timber slightly more efficiently than Argentina. In this case, with trade, who should produce what?

Argentina should produce timber and Chile should produce copper.

The Market for iPhones. Assume that PA is the autarky price, PW is the world price, and D and S represent domestic demand and supply, respectively. The loss of producer surplus when the market moves from autarky to free trade equals the area:

B (the price between Pa and Pw)

How is the economic surplus generated by a decision calculated?

It is the total benefits minus total costs arising from the decision.

Better management increases worker productivity in the labor market for factory production line workers. What will happen in the labor market for production line workers?

Labor demand will increase, resulting in higher wages and more hours of employment for the workers.

What is the impact of higher wages on labor supply according to the income effect?

Leisure is more attractive.

Oz can make 20 snowballs per minute. Levi can make 10 snowballs per minute. Oz can throw 30 snowballs per minute. Levi can throw 20 snowballs per minute. Which statement is correct?

Oz has absolute advantage in making snowballs and Levi has comparative advantage in throwing snowballs.

Shifts in Demand and Supply IV. The figure shows how supply and demand might shift in response to specific events. Suppose oil becomes more expensive. Which panel BEST describes how this will affect the market for gasoline, which is made from oil?

Panel D: Supply curve shifts up so S2 is above S1 and demand is below both

If both players play the "maximin" strategy, what is the outcome of this one-shot game? (higher numbers are better)

Player 1 plays A and Player 2 plays A (P2 gets 7, P2 gets 8_

What is the Nash Equilibrium for this one-shot game? (higher numbers are better)

Player 1 plays B and Player 2 plays B (p1 gets 4, p2 gets 10)

As a part of a market research project, you survey six random people to see how much gas per week they would buy at various prices. The data you collect is in the accompanying table. What is the change in the total demand for gasoline in your survey when the price changes from $2 per gallon to $2.50 per gallon?

The total quantity demanded in the market falls by 14 gallons.

If a new company enters a product market, what will happen to the existing companies in the market?

Their demand curves will shift to the left.

The main difference between an Oligopoly and a Monopolistically Competitive industry is what?

There are many firms in monopolistic competition but only a few in an oligopoly.

What happens in the labor market for biologists when wages in other, similar occupations fall?

There is a rightward shift of the supply curve.

For the Coase Theorem to work, we need what two things?

Well-defined property rights and low bargaining costs.

In which of the following situations would Maria's Doughnut Shop have the LEAST market power?

Within three miles, there are five other doughnut shops and three bakeries that sell breakfast pastries.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their town. Gary and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, "I'll cheat on the cartel because, regardless of what Frank does, cheating gives me the best payoff." This is an example of:

a dominant strategy.

which of the following is an example of statistical discrimination

an employer relies on stereotypes in making hiring decisions

The income elasticity of demand for pizza is positive. If students' incomes at Virginia Tech increase, the effect on pizza will be:

an increase (shift) in the demand.

Which of the following is correct about the discount effect facing companies in perfectly and imperfectly competitive markets? Companies in perfect competition _____ it. Companies in imperfect competition _____ it.

do not face ; face

If demand is ______. a _______ in price will increase total revenue.

elastic ; drop

free entry and exit means that in the long run, price will

equal average cost

The more inelastic the demand curve for a product (holding the slope of supply constant), the _____ the economic burden of the tax on the buyer.

greater

The more inelastic the supply curve for a product (holding the slope of demand constant), the greater the economic burden of the tax on the seller.

greater

When setting prices for different groups of customers, a manager should charge higher prices for groups that

have more inelastic demand.

an efficiency wage is a

higher wage paid to encourage greater worker productivity

A perfectly elastic supply curve is:

horizontal

When a retailer varies price on items in ways that require buyers to spend extra time or effort to get a lower price, the retailer is using which of the following strategies to price discriminate?

hurdle method

Sellers who are in _____ markets face a less extreme trade-off between higher prices and higher quantity than sellers in perfect competition. As a result of this, they can _____.

imperfectly competitive ; earn higher profits

The graph shows the marginal social benefit, demand, and supply curves in the toothbrush market. Market forces would yield a quantity of _____, whereas the socially optimal quantity is _____.

market forces: where supply and demand meet; socially optimal quantity is the marginal social benefit where it meets supply

a firm's ability to raise its product price without losing many customers to competing businesses is known as

market power

A seller's demand curve summarizes its _____, and its marginal revenue curve measures its _____.

market power; incentive to increase production

An employer who discriminates in hiring based on prejudice may end up _____.

paying a higher wage for a less productive employee

The market structure of _____ is rare because _____ and _____.

perfect competition; most goods are not identical; most markets have some dominant firms

A preconceived bias against a group that's not based on reason or experience is known as:

prejudice

The producer surplus on a single unit sold equals:

price minus marginal cost.

a natural monopoly exists when

producing a large output has significantly lower marginal cost than producing a small output

the marginal revenue product is equal to the marginal

product of labor x the price of that product

Employers use educational background and degrees obtained to indicate an applicant's

productivity and certain traits

Many old apartment buildings in Blacksburg have been torn down (and it will be a while before new ones replace them). At the same time, COVID has reduced the number of students moving to Blacksburg for the year. Without knowing anything else, what do you think happens to the current equilibrium price and quantity for apartments in Blacksburg?

quantity falls, the effect on price is uncertain

A seller in a perfectly competitive market cannot

raise the market price of a product

A Tariff on Oranges in South Africa. When the government imposes a tariff on imported oranges, the price of oranges in South Africa rises from PW to PT and there's a net _____ to total surplus of _____.

reduction ; I + K (the two points in the middle of DWL)

For which decision would marginal analysis be MOST relevant?

should i eat another doughnut?

The more elastic the supply curve for a product (holding the slope of demand constant), the ____ the economic burden of the tax on the seller.

smaller

When the hurdle method is used to price discriminate, buyers

sort themselves into reservation price groups based on their willingness to overcome the hurdle.

Goods are _____ when the cross-price elasticity of demand is positive and _____ when the cross-price elasticity of demand is negative.

substitutes ; complements

When making a decision, you should ignore _____ costs and focus on ______costs.

sunk ; marginal

imperfect competition stems from _____ and whether or not the product is ______

the number of sellers ; differentiated

For a market to be "efficient," we need....

the price consumers are willing to pay for the last unit produced to be equal to the price sellers are willing to sell it for.

In "non-Covid" times, increases in gas prices normally lead to a rise in air travel. This is an example of what?

the substitution effect.

the government increases the training requirements to obtain an electrician's license. What impact will this have in the labor market for electricians?

the supply of electricians will decrease, resulting in a higher wage and lower quantity of labor

The opportunity cost of something is:

the value of the next best option

to maximize social benefits from markets, governments regulate markets using what two basic approaches

they encourage competition and minimize harm from market power

Tradeable pollution permits are arguably the most efficient way to correct for externalities because..

they minimize the cost of reducing pollution by letting the market determine who does the cutting.

according to the rational rule for sellers, this company should produce ______ of output and charge a price of ________

three units; $200 (where marginal revenue = marginal cost)

Average cost equals:

total cost divided by output.

When economic efficiency rises, the _____, and the benefits _____ be spread across all the people.

total gains exceed the costs; may or may not

When an employer makes decisions based on statistical discrimination, it is:

using observations about the average characteristics of a group to make inferences about an individual.

Which of the following is FALSE?

when sellers exit an industry, market power will fall for remaining sellers

When there is free entry and exit of sellers in an industry, in the long run, sellers will have, on average:

zero economic profits.

A tax (or price control) would create the most deadweight loss if

both supply and demand are very elastic.

if a company engages in perfect price discrimination, it is attempting to

charge each customer their reservation price

If a company engages in perfect price discrimination, it is attempting to

charge each customers their reservation price

price discrimination occurs when a company

charges different prices to different customers who are all buying the same product

What scenario best describes the initial effect of COVID-19 on the market for streaming services (like Disney plus or Netflix)?

an increase in demand

A decrease in the price of a good will result in:

an increase in quantity demanded

Which factor would cause a LEFTWARD shift in the supply curve for a good?:

an increase in the cost of an input

A company's profit margin is calculated as:

average revenue minus average cost.

Sarah gives up a salary of $80,000 per year to start her company. She invests $50,000 of her savings in her company, savings that had been earning her $4,000 per year in interest. During Sarah's first year in business, total revenue is $300,000, and her explicit financial costs are $225,000. What is Sarah's economic profit from her first year in business?

-$9,000

If the price of a good increases by 20% and quantity demanded changes by 15%, then the price elasticity of demand is equal to:

0.75.

If Larry uses the Rational Rule for Employers, how many workers will he hire?

2 (where weekly wage equals marginal revenue product)

An industry is made up of five firms. Three of the firms make up 20% of the total market sales each, one firm makes up 25%, and the remaining firm makes up 15%. What is the HHI for this industry?

2,050

Neville is a lawyer at a large law firm where he earns a salary of $170,000 per year. He is thinking of leaving the firm to set up his own law office. To do this, he would need to invest $140,000 of his savings, which currently earns 5% in interest each year. He estimates that if he starts a law office, his annual revenue will be $510,000, and his explicit financial costs will be $300,000. How much would Neville earn in economic profits or losses if he starts his own law office?

33,000

Luana gives up a salary of $80,000 per year to start her company. She invests $50,000 of her savings in her company, savings that had been earning her $4,000 per year in interest. During Luana's first year in business, total revenue is $300,000, and her explicit financial costs are $225,000. What is Luana's accounting profit from her first year in business?

75,000

Corinne is offered a job with a salary of $70,000, which she turns down to start her own business. She uses $20,000 of her own savings to help start the business, savings that had been providing her a return of $1,000 per year. Over her first year in business, Corinne collects total revenue of $180,000 and must cover explicit costs of $105,000. During her first year in business, Corinne's accounting profit is _____, and her economic profit is _____.

75,000 ; 4,000

Your landscaping company uses labor and shovels. The price of shovels falls, and this _____ your demand for labor because labor and shovels are _____.

raises; complements

When the government requires that a person have a license to work in a particular occupation, then in the labor market for that occupation:

supply decreases

The price of an extra hour of leisure is:

the hourly wage rate.

The Rational Rule for Sellers is that sellers should choose the quantity _____ and choose the price _____.

where marginal revenue equals marginal cost; that is on the seller's demand curve for that quantity

The graph shows the marginal social cost, demand, and supply curves in the toothpaste market. What is the socially optimal quantity and price in this market?

where the demand and marginal social cost meet

Which of the following businesses do you think will do well during a recession?

discount clothing stores

In a perfectly competitive labor market, the manager's hiring decision is about

how many workers to hire

A tariff on an imported product will..

increase producer surplus, decrease consumer surplus, and decrease total surplus.

Assume that corn is an input in the production of beef but not in the production of pork. Further, beef and pork are substitutes in consumption. A decrease in the price of corn will _____ the supply of beef and _____ the demand for pork

increase; decrease

higher education tends to lead to higher salaries because education

increases productivity

The more _____ is the demand for low-skilled workers, the _____ is the impact of minimum wage laws on the number of jobs available for low-skilled workers.

inelastic; smaller

What is the difference between accounting profit and economic profit?

implicit opportunity costs

what is the difference between accounting profit and economic profit

implicit opportunity costs

Free entry into a market tends to cause _____ to disappear.

desirable opportunities

The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, all other things unchanged, demand will:

increase by less than 5.7%

Which of the following is a downside for country that reduces its barriers to trade?

Unemployment in the sectors in which the country does not have a comparative advantage will likely increase.

Damon's wage falls. The substitution effect would cause him to _____ his work hours, and the income effect would cause him to _____ his work hours.

decrease; increase

A subsidy for buyers of a product shifts the:

demand curve to the right.

the output in a market with market power is

inefficient because the marginal benefit to society of extra output exceeds the marginal cost