Econ Exam 3: Practice Problems

You have just been hired as the assistant manager at the local Dick's Sporting Goods store. Your first assignment is to determine the demand curve and the marginal revenue curve for the new Schwinn elliptical machine. You conduct a six-week price experiment and accumulate the following data: c. Suppose that marginal cost is constant and equal to $400. What price should your store charge for ellipticals?

$700 price should be charged

Sydney and Jose are the only two sellers of strawberry jam at the local farmer's market. They must each decide what price to charge for a jar of jam. The table below shows their revenue for various price combinations. b. What is Sydney's best response if Jose charges $8 per jar? $4 per jar?

$8-> Charge $4 per jar $4-> Charge $4 per jar Best Response: $4

Sydney and Jose are the only two sellers of strawberry jam at the local farmer's market. They must each decide what price to charge for a jar of jam. The table below shows their revenue for various price combinations. c. What is Jose's best response if Sydney charges $8 per jar? $4 per jar?

$8-> Charge $4 per jar $4-> Charge $4 per jar Best Response: $4

The Coase Theorem states that interested parties will bargain to correct externalities if two conditions are met. What are the two conditions?

1. If bargaining is costless and 2. Property rights are clearly established

Ahoy! Your ship sets out to sail the seas as traitorous, thieving pirates. You must first decide whether you will target ships carrying silver or ships carrying rum. The ships carrying silver are more heavily guarded. In a given month, you can rob at most 2 ships carrying silver or at most 4 ships carrying rum. a. The opportunity cost of robbing one ship carrying silver is robbing ____ ships carrying rum.

2 Ships of rum 2 silver: 4 rum 1 silver: 2 rums

Ahoy! Your ship sets out to sail the seas as traitorous, thieving pirates. You must first decide whether you will target ships carrying silver or ships carrying rum. The ships carrying silver are more heavily guarded. In a given month, you can rob at most 2 ships carrying silver or at most 4 ships carrying rum. d. The opportunity cost of robbing eight ships carrying rum is robbing ___ ships carrying silver.

4 silver ships 2 silver: 4 rums x 2 4 silver: 8 rums

Ahoy! Your ship sets out to sail the seas as traitorous, thieving pirates. You must first decide whether you will target ships carrying silver or ships carrying rum. The ships carrying silver are more heavily guarded. In a given month, you can rob at most 2 ships carrying silver or at most 4 ships carrying rum. c. Suppose that another competing pirate ship has the comparative advantage in robbing silver ships. This means that their opportunity cost of robbing 3 silver ships must be less than ____ rum ships.

6 rum ships 2 silver: 4 rums 1 silver: 2 rums x 2 3 silver: 6 rums

Explain why marginal revenue is less than price when a firm has market power.

A firm with market power faces a downward sloping demand. As a result, the firm cannot sell additional units unless it decreases price. Selling an additional unit increases revenue by the amount the additional unit was sold for (the price), however, selling this additional unit requires all previous units be sold for a lower price (change in price * Q1). The latter is known as the discount effect. MR = P - (Change in P)* Q1 This implies that MR < P.

Kareem owns a bike store. His total costs are $1.2 million per year and his variable costs are $750,000 per year. Last year, Kareem sold 1,200 bikes. Calculate each of the following: a. Average total cost

ATC = TC / Q = 1.2mil / 1200 = $1,000

Kareem owns a bike store. His total costs are $1.2 million per year and his variable costs are $750,000 per year. Last year, Kareem sold 1,200 bikes. Calculate each of the following: b. Average variable cost

AVC = VC / Q = 750k / 1200 = $625

You are considering opening a small flower store. You anticipate that you will earn $100,000 each year in revenue. It will cost you $30,000 each year to rent the space necessary to run your business. Additionally, you will need to spend $10,000 each year on flower seeds, utilities, and other expenses necessary to operate your flower shop. You have just graduated from college with a degree in economics and have received an offer to work for a firm with a yearly salary of $70,000. a. What is your accounting profit? What is your economic profit?

Accounting profit: TR - Explicit financial costs 100k= TR 30k+10k= Explicit Costs 100k - 40k = 60k Economic profit: TR- Explicit financial costs - Implicit costs 100k=TR 40k = Explicit Costs 70k = Implicit Costs 100k - 40k-70k 60k - 70k -10k

Reference the list in your textbook of supply-side strategies that firms use to deter new entrants. What is an example of a supply-side strategy used by the business you named in question 8? Explain.

Answers will vary. Example - Amazon Kindle and access to key inputs. Amazon also operates as a book publisher so they can have exclusive or early access to publish authors' books.

Reference the list in your textbook of demand-side strategies that firms use to deter new entrants. What is an example of a demand-side strategy used by the business you named in question 8? Explain.

Answers will vary. Example - Amazon Kindle and switching costs. Kindle eBooks only work on Kindle App or Kindle eReaders. Switching to another brand eReader would be very expensive since previously purchased Kindle eBooks would not work on the other brand eReader.

Provide a real-world example of a business that has market power and uses strategies to deter new entrants. Why do you think this firm has market power?

Answers will vary. Example - Amazon Kindle eBooks. Recent estimates (you can search your firm online to find estimates of their market share) suggest that Amazon has over 60% of the eBook market.

Refer to the graph below. c. Beyond what level of output does the firm begin experiencing diminishing marginal product?

Beyond Q1, since this is when MC begins to increase. Increasing MC is a result of diminishing marginal product.

Two variables can be correlated, meaning they can have a positive or negative relationship, but correlation does not imply _____.

Causation

To increase economic surplus, two parties should specialize according to their ________ advantage and then trade.

Comparative

An increase in the price of airplanes will likely result in a(n) _________ in the labor demand for pilots.

Decrease K and L complements P(airplane) increase-> decrease in K-> decrease in demand for labor

In 2014, the Bridgestone tire corporation admitted guilt in a justice department price-fixing case that involved 26 suppliers of auto parts including Toyo Tires. Bridgestone, Toyo Tires, and other auto parts suppliers colluded in order to charge higher prices, and thus earn higher profits. Bridgestone alone was fined $425 million for their part in the price-fixing conspiracy. Consider the following payoff table. a. If Bridgestone and Toyo were going to conspire to set prices for one period only, the Nash equilibrium for this game would be that Bridgestone ______________ and Toyo _____________.

Defect; defect If B charge high prices-> Toyo charge low prices (defect) If B charge low prices-> Toyo charge low prices (defect) If T charge high-> B charge low (defect) If T charge low-> B charge low (defect)

An increase in the number of buyers will result in an increase in ______

Demand

A new competitor, Bee Tea, opens up on campus. Bee Tea plans to sell chai tea and cinnamon donuts. Both Spyder Cyder and Bee Tea must decide if they want to sell donuts or switch to bagels. If both sell bagels, they will each profit $500 a day. If both sell donuts, they will each profit $600 a day. If they each sell different things, then both will profit $800 a day. b. What is Spyder Cyder's best response if Bee Tea sells donuts? Bagels?

Donuts-> Sell bagels Bagels-? Sell donuts

A new competitor, Bee Tea, opens up on campus. Bee Tea plans to sell chai tea and cinnamon donuts. Both Spyder Cyder and Bee Tea must decide if they want to sell donuts or switch to bagels. If both sell bagels, they will each profit $500 a day. If both sell donuts, they will each profit $600 a day. If they each sell different things, then both will profit $800 a day. c. What is Bee Tea's best response if Spyder Cyder sells donuts? Bagels?

Donuts-> Sell bagels Bagels-? Sell donuts

Suppose you are driving home for winter break. If you speed throughout your trip home, you could cut one hour off your driving time, increasing your utility by 10 utils. However, there is a 10 percent chance you get caught and are issued a speeding ticket. A destination any faster. Suppose if you don't speed, your utility is 0 utils. c. What would be the minimum amount of utility decrease from the tick such that you would decide not to speed?

E(U) = U(sure thing) Pr(Bad)* U(Bad) +Pr(Good)* U(Good)=0 0.1 * x + 0.9(10)= 0 x = -90

For each of the following, determine if the statement is true or false. Both Kaelyn and Shea say they get 20 utils from consuming ice cream. This means they would be both be willing to pay the same amount of money for a scoop of ice cream.

False

For each of the following, determine if the statement is true or false. In creating a policy that makes firms internalize the cost of polluting, the government should aim to eliminate all pollution.

False

For each of the following, determine if the statement is true or false. Minimum wage laws will always cause unemployment.

False

Explain whether the following statements are true, false or uncertain. b. If average total cost is above marginal cost, then marginal cost is increasing.

False or uncertain. If average total cost is above marginal cost, marginal cost could be either increasing or decreasing.

HBO and Showtime are both considering producing a new television show. They could produce either a romantic comedy or a historical drama. The profits are illustrated in the accompanying payoff table. Explain whether the following statements are true, false, or uncertain. c. There are multiple equilibria in this strategic interaction.

False, there is one Nash Equilibrium in the above game - HBO produces a historical drama and Showtime produces a romantic comedy.

Explain whether the following statements are true, false or uncertain. a. A natural monopoly exists when costs are higher if the market has only one seller.

False. A natural monopoly exists when costs are LOWER if the market has only one seller.

Explain whether the following statements are true, false or uncertain. c. Marginal cost intersects average fixed cost at its minimum.

False. Average fixed cost is always decreasing. MC intersects ATC and AVC at their minimum.

Explain whether the following statements are true, false or uncertain. c. Average fixed costs increase as output increases.

False. Average fixed costs always decrease as output increases. AFC = TFC / Q. TFC is constant, so as Q increases, TFC declines.

Explain whether the following statements are true, false or uncertain. c. Economies of scale occur when a firm's average costs are increasing as output increases.

False. Economies of scale occur when a firm's average costs are DECREASING as output increases.

Explain whether the following statements are true, false or uncertain. b. Firms with market power profit maximize by setting price equal to marginal cost.

False. Monopolists profit maximize by setting marginal revenue equal to marginal cost. Under monopoly, marginal revenue does NOT equal price (In contrast, under perfect competition, price does equal marginal revenue).

Using a graph, explain whether the following statement is true, false, or uncertain: If a firm with market power is producing a quantity where marginal revenue is equal to $40 and the marginal cost is equal to $30, then the firm should produce less to maximize profits.

False. The firm should produce MORE to maximize profits. Profits are maximized where MR=MC. Currently, output is such that MR>MC. Increasing output will result in a lower MR and higher MC, thus getting closer to the profit maximizing condition or MR=MC. See graph below.

Explain whether the following statements are true, false or uncertain. a. The typical result of market power is higher prices and higher output than we find in a perfectly competitive market.

False. The typical result of market power is higher prices and LOWER output than we find in a competitive market.

Suppose the city of Richmond is considering opening a public fish pond so that anyone in the city can go fishing whenever they want. What might be the problem with this plan? Be sure to use the relevant economic terms in your answer.

Fish are a common resource good meaning they are nonexcludable and rival. Common resource goods are subject to the tragedy of the commons, which would result in the depletion of fish

You are analyzing two possible stock market investment strategies. Assume your initial wealth is $30,000. For each of the following, would a risk-averse person make either of these investments? Why or why not? a. One strategy is to invest in a blue chip stock like Microsoft that has a proven track record. There is a 25% chance that the company continues its steady growth and your wealth increases by $30,000. There is a 75% chance that the company becomes unprofitable and your wealth decreases by $10,000.

Gamble: 25% win 30k, 75% lose 10k Pr(Bad)*Bad + Pr(Good)*Good = 0.75(30k-10k) +0.25(30k+30k) = 0.75(20k) + 0.25(60k) = 15k + 15k = 30k No, b/c this is a fair bet.

You are analyzing two possible stock market investment strategies. Assume your initial wealth is $30,000. For each of the following, would a risk-averse person make either of these investments? Why or why not? b. Suppose instead that there is a 25% chance that the company continues its steady growth and your wealth increases by $34,000. There is a 75% chance that the company becomes unprofitable and your wealth decreases by $10,000.

Gamble: 25% win 34k, 75% lose 10k Pr(Bad)*Bad + Pr(Good)*Good = 0.75(30k-10k) + 0.25(30k+34k) = 0.75(20k) + 0.25(64k) = 15k + 16k = 31k Don't know if bet should be taken because we don't know the utility E(wealth)> sure thing

You are analyzing two possible stock market investment strategies. Assume your initial wealth is $30,000. For each of the following, would a risk-averse person make either of these investments? Why or why not? c. Another strategy is to invest in a start-up. There is a 10% chance that the company is a success and your wealth increases by $100,000. However, there is a 90% chance that the company fails and your wealth decreases by $20,000.

Gamble: 90% lose 20k, 10% win 100k Pr(Bad)*Bad + Pr(Good)*Good = 0.9(30k-20k) + 0.1(30k+100k) = 9k + 13k =22k No because E(wealth) < sure thing

Consider the case of penalty kicks in a game of soccer. Suppose the kicker can only aim the ball to the left or the right of the goal, and the goalie can dive to either the left or right (from the kicker's perspective) as well. The ball moves to the goal fast enough that the decisions of the kicker and goalie are effectively being made simultaneously; based on these decisions the kicker is likely to score or not. ( We simply ignore the possibility that the kicker can score even though the goalie dives to the side that the kicker aims). b. What is the kicker's best response? c. Is there a Nash Equilibrium?

Goalie dives left-> Kick right Goalie dives right-? Kick left Best response: Opposite direction There is no nash equilibrium and this is an example of zero-sum game.

In 2014, the Bridgestone tire corporation admitted guilt in a justice department price-fixing case that involved 26 suppliers of auto parts including Toyo Tires. Bridgestone, Toyo Tires, and other auto parts suppliers colluded in order to charge higher prices, and thus earn higher profits. Bridgestone alone was fined $425 million for their part in the price-fixing conspiracy. Consider the following payoff table. b. Explain what strategy Bridgestone and Toyo should use if this is an infinitely repeated game.

Grim trigger strategy - conspire as long as the other conspires, but as soon as the other defects, defect.

Explain why the following statement is true: "In the long run, economic profits tend towards zero."

If firms in an industry are earning a positive economic profit, this incentivizes new firms to enter the market. As new firms enter, each firm's demand curve shifts to the left as new entrants capture some of their customers. This continues until price equals to average cost and economic profits are zero - meaning new firms no longer have an incentive to enter the market. If firms in an industry are earning a negative economic profit, this is an incentive for some firms to exit the market. As some firms exit, the remaining firms' demand curves shift to the right as they capture the customers of the exiting firms. This continues until price equals to average cost and economic profits are zero - meaning firms no longer have an incentive to exit the market.

Suppose a market has only one seller and has a downward sloping demand curve. c. If there are no barriers to entry, what will happen to the monopolist's profit margin in the long run? Explain.

If there are no barriers to entry, firms will enter this market due to the potential to earn a positive economic profit. As more firms enter, the individual firm's demand curve will shift left and the profit margin will decrease.

Costs and benefits are the __________ that shape decisions.

Incentives

Suppose you are driving home for winter break. If you speed throughout your trip home, you could cut one hour off your driving time, increasing your utility by 10 utils. However, there is a 10 percent chance you get caught and are issued a speeding ticket. A destination any faster. Suppose if you don't speed, your utility is 0 utils. d. Consider your answers to parts c and d. What are two ways the government can disincentive speeding? DO you think one way is preferable?

Increase probability (increase monitoring) increase consequences Both are equally as good

If the demand for Broadway tickets increases, then the labor demand for Broadway performers will __________.

Increase. M More tickers-> derived demand More workers needed

As wages decrease, the quantity of labor demanded _______.

Increases

The unobservable market-forces that guide resources to their highest-valued use is known as _______.

Invisible Hand

Consider the case of penalty kicks in a game of soccer. Suppose the kicker can only aim the ball to the left or the right of the goal, and the goalie can dive to either the left or right (from the kicker's perspective) as well. The ball moves to the goal fast enough that the decisions of the kicker and goalie are effectively being made simultaneously; based on these decisions the kicker is likely to score or not. ( We simply ignore the possibility that the kicker can score even though the goalie dives to the side that the kicker aims). a. What is the goalie's best response?

Kicker kicks left-> Dive left Kicker kicks right-? Dive right Best response: Same direction

The graph below shows the perfectly competitive market for wheat. b. What is the firm's marginal revenue for each additional unit of wheat sold?

MR = P since perfectly competitive. MR = $20.

Consider a bakery that makes cupcakes. There is one worker employed by the bakery whose daily wage is $100. The worker's marginal revenue product is $125 per day. b. Should the coffee shop hire more workers?

MRP ≥ Wage 125 ≥ 100 Yes, because the MRP is greater than the wage

Consider a bakery that makes cupcakes. There is one worker employed by the bakery whose daily wage is $100. The worker's marginal revenue product is $125 per day. a. If the price of cupcakes is $5 each, what is the worker's marginal product?

MRP+ MP x P 125 = 5x MP = 25

Economic theory tells us that decision-makers should make decisions by weighing the benefits versus the costs of one more unit. This is known as _____.

Marginal Thinking

Ahoy! Your ship sets out to sail the seas as traitorous, thieving pirates. You must first decide whether you will target ships carrying silver or ships carrying rum. The ships carrying silver are more heavily guarded. In a given month, you can rob at most 2 ships carrying silver or at most 4 ships carrying rum. b. Suppose that a competing pirate ship has the absolute advantage in robbing rum ships. This means they must be able to rob more than ___ ships in a month

More than 4 ships of rum 2 silver: 4 rums

You are considering opening a small flower store. You anticipate that you will earn $100,000 each year in revenue. It will cost you $30,000 each year to rent the space necessary to run your business. Additionally, you will need to spend $10,000 each year on flower seeds, utilities, and other expenses necessary to operate your flower shop. You have just graduated from college with a degree in economics and have received an offer to work for a firm with a yearly salary of $70,000. b. Should you open the flower store? Explain why or why not.

No, because economic profit is negative

Sydney and Jose are the only two sellers of strawberry jam at the local farmer's market. They must each decide what price to charge for a jar of jam. The table below shows their revenue for various price combinations. a. What kind of market structure best describes the market for strawberry jam at the farmer's market.

Oligopoly

For each firm below, find the profit-maximizing price and quantity and calculate the firm's profit margin. PART A

P = $26 ATC = $34 Profit Margin = P-ATC = 26- 34 = -8

For each firm below, find the profit-maximizing price and quantity and calculate the firm's profit margin. PART C

P = $50 ATC = $50 Profit Margin = P-ATC = 50-50 = 0

Refer to the graph below. At what price and quantity will the firm maximize profits?

P = $60 Q = 15

For each firm below, find the profit-maximizing price and quantity and calculate the firm's profit margin. PART B

P = $70 ATC = $50 Profit Margin = P-ATC = 70- 50 = 20

The table below describes the demand for Spyder Cyder's cinnamon donuts. Spyder Cyder is the only seller of cinnamon donuts on UR's campus. b. Plot the demand curve, the marginal revenue curve, and the marginal cost curve. c. What is the profit maximizing price and quantity? Indicate these on your graph. d. Confirm using the table— is profit maximized at this quantity and price? Why or why not?

P= 10 Q= 2 Yes, profit is maximized.

On the graph below, indicate the firm's profit maximizing price and quanitity.

P= 7 Q= 4

Hiring formerly incarcerated people can decrease rates of criminal recidivism and create external benefits for society. Illustrate the labor market for formerly incarcerated people. Be sure to indicate the competitive equilibrium, the socially optimal quantity, and the deadweight loss.

Positive externality

Suppose you are driving home for winter break. If you speed throughout your trip home, you could cut one hour off your driving time, increasing your utility by 10 utils. However, there is a 10 percent chance you get caught and are issued a speeding ticket. A destination any faster. Suppose if you don't speed, your utility is 0 utils. b. What would be the minimum probability of getting caught such that you would decide not to speed.

Pr(Good)*U(Good) + Pr(Bad)*U(Bad) = 0 (1-x) * 10 + x *(-80) = 0 10-10x = 80x 10 =90x x = 1/9

The graph below shows the perfectly competitive market for wheat. c. Suppose that the global demand for wheat increases. Show the effect of this change on both the market and the individual firm's demand curve.

Price increases

Suppose a market has only one seller and has a downward sloping demand curve. b. Re-draw your graph from part (a). Suppose the monopolist is earning a positive economic profit. Draw an average total cost curve and show the monopolist's profit margin on your graph.

Profit Margin: P-ATC P>ATC

You run a small but profitable accounting business with many local clients. When you opened your business, there were very few competitors in your area, but you've recently learned that several new businesses providing similar services will be entering the market soon. b. What do you anticipate will happen to your profits as rival businesses enter the market? Explain.

Profits will decrease because the market power of existing firms will decrease resulting in a quantity and price decrease, which ultimately leads to a decrease in economic profits

Refer to the graph below. b. At what level of output is the average total cost of production minimized?

Q4, since this is where ATC reaches its minimum.

Refer to the graph below. a. If the firm depicted in the graph had to pay higher rent to its landlord, which curve(s) would shift and how?

Rent is a fixed cost. ATC would increase (shift upward). MC and AVC are unchanged.

When Devon experiences an increase in wealth, her total utility increases as depicted in the accompanying table. c. Is she risk averse, risk neutral, or risk loving? Explain your reasoning.

Risk averse because of diminishing marginal utility

Using observations about group averages to make inferences about an individual is known as _____________________.

Statistical Discrimination

An increase in the number of sellers will result in an increase in _____.

Supply

Suppose you are driving home for winter break. If you speed throughout your trip home, you could cut one hour off your driving time, increasing your utility by 10 utils. However, there is a 10 percent chance you get caught and are issued a speeding ticket. A destination any faster. Suppose if you don't speed, your utility is 0 utils. a. Will you decide to speed? Why or why not?

Sure thing: 0 utils Gamble: Bad outcome 10% -80 utils, Good outcome 90% 10 utils E(U(Risk))= Pr(Bad)*U(Bad) + Pr(Good)*U(Good) = 0.1(-80) + 0.9 (10) = 9 - 8 = 1 Yes, take risk because expected utility risk is greater than sure thing utility

What factors affect the government's decision of whether to use antitrust laws to limit a firm's market power?

The government should determine whether a firm engaged in anticompetitive behavior - illegal collusion, or exclusionary or predatory practices. Market power on its own is not illegal, but is illegal to take anticompetitive actions to monopolize a market.

Suppose the University of Richmond is considering increasing the number of hours the dining hall is open each day. What is the university's opportunity cost for increasing the dining hall house? Be sure to explain your answer

The universities opportunity cost is the next best alternative their time could be spent on if they weren't open such as cleaning or preparing food for the following day

You have just been hired as the assistant manager at the local Dick's Sporting Goods store. Your first assignment is to determine the demand curve and the marginal revenue curve for the new Schwinn elliptical machine. You conduct a six-week price experiment and accumulate the following data: b. Calculate the total revenue and marginal revenue for each quantity of output, then graph the marginal revenue curve on your demand graph above.

Total Revenue: P x Q 1000 1800 2400 2800 3000 3000 Marginal Revenue: 1000 800 600 400 200 0

_____ benefits both buyers and sellers.

Trade

For each of the following, determine if the statement is true or false. An increase in immigration to the United States would increase both labor supply and labor demand in the U.S.

True

For each of the following, determine if the statement is true or false. Labor demand is downward sloping due to diminishing marginal product.

True

For each of the following, determine if the statement is true or false. The principle of diminishing marginal utility states that marginal utility is decreasing as more of a good is consumed.

True

For each of the following, determine if the statement is true or false. Vaccination creates a positive externality.

True

HBO and Showtime are both considering producing a new television show. They could produce either a romantic comedy or a historical drama. The profits are illustrated in the accompanying payoff table. Explain whether the following statements are true, false, or uncertain. b. Showtime's best response is always to produce a romantic comedy.

True. If HBO produces romantic comedy-> Showtime produces romantic comedy If HBO produces historical drama-> Showtime produces romantic comedy

HBO and Showtime are both considering producing a new television show. They could produce either a romantic comedy or a historical drama. The profits are illustrated in the accompanying payoff table. Explain whether the following statements are true, false, or uncertain. a. HBO's best response is always to produce a historical drama.

True. If Showtime produces romantic comedy-> HBO produces historical drama If Showtime produces historical drama-> HBO produces historical drama

Explain whether the following statements are true, false or uncertain. b. The distance between the average variable cost curve and the average total cost curve is equal to average fixed costs.

True. ATC = AVC + AFC, or equivalently, ATC - AVC = AFC. This equation implies that the vertical distance between ATC and AVC is equal to AFC.

Explain whether the following statements are true, false or uncertain. a. If marginal cost is above average total cost, then average total cost is increasing.

True. If marginal cost is above average total cost, then each additional unit increases average total cost.

Explain whether the following statements are true, false or uncertain. a. If marginal product of an input is falling, then marginal cost must be rising.

True. If marginal product of an input is diminishing while the per unit cost of that input remains constant, then marginal cost will increase. This is because costs are continuing to increase at a constant rate while output increases at a slower rate. Since MC = change in TC / change in Q, this means MC increases.

Explain whether the following statements are true, false or uncertain. c. Firms in a perfectly competitive market profit maximize by setting price equal to marginal cost.

True. In a perfectly competitive market, firm's face a perfectly elastic demand for their product. The firm's marginal revenue is equal to price, so profits are maximized where MR = MC, which is equivalent to P = MC in this case.

Explain whether the following statements are true, false or uncertain. b. A firm operating in a monopolistically competitive market will profit maximize by choosing the quantity where marginal revenue is equal to marginal cost.

True. Rational Rule for Sellers state that the market should keep selling if Marginal Revenue is greater than or equal to Marginal Cost. All firms: MR = MC

Kareem owns a bike store. His total costs are $1.2 million per year and his variable costs are $750,000 per year. Last year, Kareem sold 1,200 bikes. Calculate each of the following: c. Average fixed cost

Two-step problem. Step one: TC = TFC + TVC , so TFC = TC - TVC TFC = 1.2mil - 750k = 450k Step two: AFC = TFC / Q AFC = 450k / 1,200 = $375

When Devon experiences an increase in wealth, her total utility increases as depicted in the accompanying table. b. Her wealth is currently $60,000. How much would her total utility change if her wealth increased by $20,000? What if, instead, it fell by $20,000?

U(sure thing)= U(60k)= 5.4 Pr(Bad)*U(Bad) + Pr(Good)*U(Good) = 0.5*U(60k-20k) +0.5*U(60k+20k) =0.5(40k) +0.5(80k) = 0.5(3.8) + 0.5(6.8) = 5.3 No, don't take risk

A new competitor, Bee Tea, opens up on campus. Bee Tea plans to sell chai tea and cinnamon donuts. Both Spyder Cyder and Bee Tea must decide if they want to sell donuts or switch to bagels. If both sell bagels, they will each profit $500 a day. If both sell donuts, they will each profit $600 a day. If they each sell different things, then both will profit $800 a day. d. Is there a Nash equilibrium? If so, what is it?

Yes there are multiple equilibria when Bee Tea sells donuts and Spyder Cyder sells bagels and when Bee Tea sells bagels and Spyder Cyder sells donuts. This is also an example of anti-coordination game.

Suppose you are thinking about funding a Kickstarter campaign for a hybrid mechanical/digital calendar for which you are willing to pay $125. To receive a calendar, the company requires you to pledge $100. You think there is about an 80% chance of the company succeeding. If the company fails, you will not receive a refund. a. Is this a fair bet? Why or why not?

Yes, because in the end we expect to earn the same amount as if we were to take or not take the bet. WTP: $125 Cost: $100 Prob: 80% Pr(Bad) *Bad + Pr(Good)*Good = 0.2(-100) + 0.8(125-100) = -20 + 0.8(25) = -20+20 = 0 Risk averse would not take this bet.

Sydney and Jose are the only two sellers of strawberry jam at the local farmer's market. They must each decide what price to charge for a jar of jam. The table below shows their revenue for various price combinations. d. Is there a Nash equilibrium? If so, what is it?

Yes, to charge $4 per jar.

When Devon experiences an increase in wealth, her total utility increases as depicted in the accompanying table. a. Graph Devon's utility function. Does it exhibit diminishing marginal utility?

Yes.

While studying for final exams, you decide to order food from Lou's. You can order cups of Red Pepper Gouda soup for $4 each or Lou's Brownies for $3 each. The graph below shows your budget constraint and optimal consumption bundle. a. What is your total budget? b. Suppose in your optimal bundle, you order 3 cups of soup. How many brownies are in your optimal bundle? c. Suppose the cost of soup increases to $6. On the graph above, show your new budget constraint and the new optimal bundle (add additional indifference curves as needed)

a. $24 b. 4 brownies c. 2 soup

The table below shows Spyder Cyder's production costs for dozens of donuts. Complete the table. a. Diminishing marginal product begins after the _____ worker. b. Marginal cost begins increasing after the _____ worker. c. What causes marginal cost to begin increasing?

a. 2nd worker b. 2nd worker c. Diminishing marginal product

Consider the production of a private good, such as a car, and a common-resource good, such as lumber in a forest. What do these two goods have in common? a. Both goods are rival in consumption b. Both goods are non-rival in consumption c. Both goods are excludable d. Both goods are non-excludable e. Both goods are excludable and rival

a. Both goods are rival in consumption

Suppose the cross-price elastic between rum and beer is 0.5. What will happen to consumption of beer? a. Consumption of beer will increase because the price of rum has increased, and beer and rum are substitutes. b. Consumption of beer will increase because the price of rum has increased, and beer and rum are complements. c. Consumption of beer will decrease because the price of rum has increased, and beer and rum are complements. d. Consumption of beer will decrease because the price of rum has increased, and beer and rum are substitutes. e. We cannot say what will happen to consumption of beer.

a. Consumption of beer will increase because the price of rum has increased, and beer and rum are substitutes.

Which graph shows a scenario where the substitution effect dominates the income effect. a. Graph A b. Graph B c. Graph C d. Graph D

a. Graph A

The graph below shows a market with an externality. a. What kind of externality is shown in the graph above? b. One the graph above, shade the area representing the deadweight loss that arises from the externality. c. What is the amount of the Pigouvian tax that would resolve the externality?

a. Negative externality c. $6 Pigouvian tax

Provide an example of each of the following market structures in which you have participated as a buyer or a seller. Explain why your example meets the requirements for the given market structure. a. Perfect competition b. Monopolistic competition c. Oligopoly d. Monopoly

a. Perfect competition ex: Gas (identical good) b. Monopolistic competition ex: Clothing stores (many small businesses competing and selling differentiated products) c. Oligopoly ex: Car Brands (market with a handful of large sellers) d. Monopoly ex: Ykk zippers (only one seller in the market)

Suppose that a merchant ship initially has $150 worth of silver. If they surrender, they lose all $150, but the ship (valued at $300) remains afloat. If they take the risk of fighting the pirates, there is a 50% chance they lose all $150 plus the ship, but there is a 50% chance they fight off the pirates and lose only $50 worth of silver and the ship remains intact. Assume the ship's captain is risk averse. a. Find the expected wealth of the risk. What is the expected wealth of the risk divided by 100? b. Will the ship take the risk and fight the pirates? c. Find the expected utility of the risk if the utility function of the ship's captain is given by: U = (wealth)^1/2, what is the expected utility of the risk?

a. Pr(Bad) *Bad + Pr(Good) *Good =0.5(150-150) + 0.5(150+300-50) = 0 +0.5(400) = 200 200/100= 2 b. No will not take risk because expected wealth is less than sure thing c. U=(wealth)^1/2 U = 400^1/2, U=20 Pr(Bad)*U(Bad) + Pr(Good)*U(Good) =0.5(0) + 0.5(20) =0 + 10 =10

Which of the following statements regarding Prisoner's Dilemma games are true? Select all that apply. a. The optimal outcome is achieved when both players cooperate b. The Nash equilibrium is not the optimal outcome c. The Nash equilibrium is unchanged if the game is infinitely repeated d. None of the above

a. The optimal outcome is achieved when both players cooperate b. The Nash equilibrium is not the optimal outcome

The Old Familiar and The Beehive are the only two bistros in town. Each is trying to decide whether or not it should advertise in the local newspaper. The accompanying payoff table gives their weekly profits under each possible outcome. Use the payoff table for questions 3 - 6. Which combination or combinations of X and Y would cause this game to have multiple Nash equilibria? a. X = $1,200; Y = $1,500 b. X = $1,500; Y = $2,500 c. X = $2,500; Y = $2,000 d. X = $3,300; Y = $1,250

a. X = $1,200; Y = $1,500 Test each choice

The Old Familiar and The Beehive are the only two bistros in town. Each is trying to decide whether or not it should advertise in the local newspaper. The accompanying payoff table gives their weekly profits under each possible outcome. Use the payoff table for questions 3 - 6. Which combination or combinations of X and Y would make a situation in which The Old Familiar does not advertise and The Beehive advertises a Nash equilibrium? a. X = $1,500; Y = $2,500 b. X = $1,200; Y = $1,500 c. X = $2,500; Y = $2,000 d. X = $3,300; Y = $1,250

a. X = $1,500; Y = $2,500 Test each choice

A(n) _____ game occurs when players want to take a different action than another player

anti-coordination game

Marginal cost intersects average variable cost _____.

at its minimum

The graph below shows the labor demand for waitresses. Use this graph for questions 19 and 20. a. $4 b. $3 c. $1.50 d. $2 e. More information is needed to answer this question

b. $3

The graph below shows the labor demand for waitresses. Use this graph for questions 19 and 20. How many workers will be hired if there is a binding minimum wage of $4? a. 3 workers b. 6 workers c. 9 workers d. 12 workers e. More information is needed to answer this question

b. 6 workers

The Old Familiar and The Beehive are the only two bistros in town. Each is trying to decide whether or not it should advertise in the local newspaper. The accompanying payoff table gives their weekly profits under each possible outcome. Use the payoff table for questions 3 - 6. Based on your answer in question 4, when this game has multiple Nash equilibria, the game will be: a. A coordination game b. An anti-coordination game c. A prisoners' dilemma game d. A zero-sum game

b. An anti-coordination game

Suppose you are initially maximizing your utility by consuming two sandwiches at $2 apiece and three ice cream cones at $1 apiece. What will happen to the number of ice cream cones consumed when the price of ice cream increases to $2 apiece? a. Consumption of ice cream cones will increase because of both the substitution effect and the income effect b. Consumption of ice cream cones will decrease because of both the substitution effect and the income effect. c. Consumption of ice cream cones will increase because the substitution effect is larger than the income effect. d. Consumption of ice cream cones will decrease because the substitution effect is smaller than the income effect

b. Consumption of ice cream cones will decrease because of both the substitution effect and the income effect.

Economists have studied online crime such as the illegal collection of bank passwords. They found that each step in the collection of bank passwords is a service being sold by different people online. This is an example of: a. A positive externality b. Specialization c. Absolute advantage d. A decrease in labor demand

b. Specialization

On the last ship raid, one of your crewmates decided to shirk their duties during the battle. Despite this, they still got an even share of the loot. This is an example of: a. The Tragedy of the Commons b. The Free-Rider problem c. A Positive Externality d. A Club Good

b. The Free-Rider problem

Facing the threat of more competition, your ship decides to engage in anticompetitive behavior (specifically by attacking potential new pirate ships and sending all the competition straight to Davy Jones' locker). Overtime, the result of this strategy is that your ship is the only pirate ship in the area. What will happen to the equilibrium price in the market as a result? a. The price will decrease because there are fewer competitors. b. The price will increase because your ship has more market power. c. The price will decrease because you are actually very nice pirates and feel bad charging people so much for your swashbuckling services. d. The price will remain unchanged.

b. The price will increase because your ship has more market power.

Which of the following statements is true? a. A firm with accounting profits will also have economic profits. b. A firm with economic losses will also have accounting losses. c. A firm with economic profits will also have accounting profits. d. A firm with accounting losses can also have economic profits.

c. A firm with economic profits will also have accounting profits. Economic profit includes opportunity cost. If it is positive then accounting profit will also be positive.

Following a recent mutiny on your pirate ship, the pirates have demanded that they receive a fixed minimum payment each month for their work. This is an example of: a. Monopolistic competition in the pirating industry b. A price ceiling in the market for pirate labor c. A price floor in the market for pirate labor d. An increase in the demand for pirate labor

c. A price floor in the market for pirate labor

Suppose Italy and Spain both produce cars and airplanes. If Italy uses all its resources on cars, it can make 250 cars. If it uses all its resources on airplanes, it can make 500 airplanes, it can make 400 cars. If it uses all its resources on airplanes, it can make 400 airplanes. Suppose the two countries specialize and trade. Which of the following exchanges would be beneficial to both countries? a. Italy gives Spain 300 airplanes and in exchange receives 400 cars. b. Spain gives Italy 400 airplanes and in exchange receives 300 cars c. Italy gives Spain 300 airplanes and in exchange receives 200 cars d. Spain gives Italy 300 airplanes and in exchange receives 200 cars

c. Italy gives Spain 300 airplanes and in exchange receives 200 cars

Which of the following will happen when more ships enter the market for pirating? a. New ships will enter the market, such that, in the long run, all pirate ships make negative economic profit b. Some ships will exit the market, such that, in the long run, all pirate ships make zero economic profit. c. New ships will enter the market, such that, in the long run, all pirate ships make zero economic profit. d. New ships will enter the market, such that, in the long run, all pirate ships make positive economic profit.

c. New ships will enter the market, such that, in the long run, all pirate ships make zero economic profit.

Which of the following statements regarding a Nash equilibrium is true? a. Cooperation between players could not improve the outcome. b. All players choose their overall best response without regard to the other player's likely choice. c. No player can do better by unilaterally changing their choice. d. Each player's expectation of the other player's choice is often incorrect.

c. No player can do better by unilaterally changing their choice.

What is the effect of your pirating on the market for rum? a. Supply decreases because you robbed the rum ships. Because demand is more elastic than supply, the result is a change in equilibrium price that is smaller in relative magnitude than the change in equilibrium quantity. b. Demand decreases because people will want to buy less rum if rum ships are being robbed by pirates. Because demand is less elastic than supply, the result is a change in equilibrium price that is smaller in relative magnitude than the change in equilibrium quantity. c. Supply decreases because you robbed the rum ships. Because demand is less elastic than supply, the result is a change in equilibrium price that is larger in relative magnitude than the change in equilibrium quantity. d. Demand decreases because people will want to buy less rum if rum ships are being robbed by pirates. Because demand is more elastic than supply, the result is a change in equilibrium price that is smaller in relative magnitude than the change in equilibrium quantity.

c. Supply decreases because you robbed the rum ships. Because demand is less elastic than supply, the result is a change in equilibrium price that is larger in relative magnitude than the change in equilibrium quantity.

During the Golden Age of Piracy, there were few non-criminal jobs available to young people that paid as much as piracy. As a result, we would expect that: a. There was a low labor supply of people willing to work as pirates, since the opportunity cost of piracy was low. b. There was a low labor demand for people willing to work as pirates, since the wages needed to hire a pirate were high. c. There was a higher labor supply of people willing to work as pirates, since the opportunity cost of piracy was low. d. There was a high labor demand for people willing to work as pirates, since the wages needed to hire a pirate were high

c. There was a higher labor supply of people willing to work as pirates, since the opportunity cost of piracy was low.

Firms in every market structure: a. Have differentiated products b. Are in competition with many other firms c. Will produce a quantity at which marginal revenue equals marginal cost to maximize profits d. Face a horizontal demand curve

c. Will produce a quantity at which marginal revenue equals marginal cost to maximize profits Rational rule for sellers: MR≥MC

Willow Park is a community in Texas with only one gas station. The price of gasoline in Willow Park most likely __________. a. never changes. b. is lower than in the big cities in Texas. c. is higher than in the big cities in Texas. d. produces a surplus of gasoline.

c. is higher than in the big cities in Texas. One seller = monopoly less competition--> higher prices

When the cross-price elasticity of demand is negative, two goods are _____

complements

A(n) ______ game occurs when players have a common interest in coordinating their choice.

coordination game

Average fixed cost is always _____

decreasing

A subsidy will result in sellers receiving a ____ price.

higher

Marginal cost is greater than average cost when average cost is _____.

increasing

The incidence of a tax falls on the more ____ side of the market

inelastic

A good that is more of a necessity will be ____ elastic than a good that is a luxury.

less

A tax will result in sellers receiving a _____ price.

lower

A good with ____ substitutes will be more elastic than another good.

more

Club goods are excludable and ____.

nonrival

When the income elasticity is positive, a good is ______

normal

Demand is unitary elastic if the price elasticity of demand is equal to ________

one

An increase in price will result in an increase in ______.

quantity demanded

An increase in price will result in a decrease in _________.

quantity supplied

Common resource goods are nonexcludable and ____

rival

Demand is perfectly inelastic if the price elasticity of demand is equal to _____

zero