Econ Exam 3

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

20 units

Numerous studies have shown that breathing second-hand cigarette smoke is harmful to your health. This suggests that a tax on cigarettes will:

Increase total economic surplus

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. At this monopolist's profit-maximizing level of output, it:

Incurs an economic loss of $16 per day

Suppose the table below describes the demand for a good produced by monopolist. The total revenue from selling 6 units is ______, and the marginal revenue of selling the 6th unit is ______. $10 1 $9 2 $8 3 $7 4 $6 5 $5 6 $4 7

$30; 0

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Café would have to pay Quick Burger at least ______ per month to NOT operate a drive-through window. Operate VS Not Operate Quick Burger $24,000 $15,000 Sunshine Cafe $11,000 $23,000

$9,000

Price discrimination means charging:

Different prices to different buyers for essentially the same good or service

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the afternoon, it will rent out ______ bike(s) and charge ______ per bike. A $22 B $16 C $12 D $8 E $6 F $4

2; $6

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. If Island Bikes charges a single price to all of its customers, then how many bikes will it rent out each day? A $22 B $16 C $12 D $8 E $6 F $4

3

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the morning, it will rent out ______ bike(s) and charge ______ per bike. A $22 B $16 C $12 D $8 E $6 F $4

3, $12

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

4; $18

Carmen listens to opera music every evening when she gets home from work. Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul is the only person besides Carmen who can hear the music, then Carmen's music generates:

A negative externality

A cost of an activity that falls on people not engaged in the activity is called a(n):

Negative externality

If coal mining produces a negative externality because it leads to environmental damage, then the:

Cost of society of producing an additional ton of coal will be less than the cost of coal mining companies of producing an additional ton of coal

The Coase Theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cause externalities, then they:

Can always arrive at efficient solutions to the problems caused by externalities.

For perfectly competitive firms, marginal revenue ______ price; for monopolists marginal revenue ______ price.

Equals; is less than

If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should:

Increase output until marginal revenue equals marginal cost

Suppose the table below describes the demand for a good produced by monopolists. The monopolist's marginal revenue from selling the 4th unit of output is less than $7 because: $10 1 $9 2 $8 3 $7 4 $6 5 $5 6 $4 7

It has to charge $1 less for each of the first 3 units of output. When the firm goes from selling 3 to 4 units of output, is has to lower its price from $8 to $7. Thus, while it gains $7 from selling the 4th unit, it loses $3 because it has to charge $1 less for the first 3 units. Thus, marginal revenue is equal to $7 - $3 = $4.

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together?

Kate pays $250 per month and Ali pays $350 per month

An external benefit implies that private markets will provide ___ than the socially optimal quantity, and an external cost implies that private markets will provide ___ than the socially optimal quantity.

Less; More

For all firms, the additional revenue collected from the sale of one additional unit of output is termed:

Marginal revenue

If the demand curve facing a monopolist shifts, then the monopolist's:

Marginal revenue curve and profit-maximizing level of output will change

In many cities in the United States, a single firm provides electricity. Those firms are:

Monoplists

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

More than double

Relative to a single price monopolist, a price discriminating monopolist generates:

More total surplue

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Is it socially optimal for Quick Burger to operate a drive-through window? Operate VS Not Operate Quick Burger $24,000 $15,000 Sunshine Cafe $11,000 $23,000

No, because total payoffs are higher when Quick Burger does not operate a drive-through window

A monopolistically competitive firm is one:

Of many firms that sell products that are close but not perfect substitutes

If a firm functions in an oligopoly, it is:

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

The essential cause of the tragedy of the commons is the fact that:

One person's use of a commonly held resource imposes an external cost on others

The tragedy of the commons refers to the:

Overuse of resources that have no price

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ____ externality, and burning tires generates ___ externality.

Positive; Negative

The reason economists consider monopoly to be socially undesirable is that monopolists:

Produce less than the socially optimal level of output

If an activity generates a positive externality, the government can increase total economic surplus by ______ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity.

Subsidizing; taxing

In order to achieve a socially optimal level of output, goods that entail negative externalities should be:

Taxed

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Suppose Quick Burger has the legal right to operate a drive-through window, and Quick Burger and the Sunshine Café can negotiate with each other at no cost. Which of the following arrangements would lead to the socially optimal outcome? Operate VS Not Operate Quick Burger $24,000 $15,000 Sunshine Cafe $11,000 $23,000

The Sunshine Care pays Quick Burger $10,500 per month not to operate the drive-through window

Economies of scale exist when:

The average cost of production falls as output rises

If the marginal cost of reducing pollution is positive, then:

The optimal amount of pollution is greater than zero

If the market equilibrium quantity is greater than the socially optimal quantity, one can infer that:

There is a negative externality associated with this good

Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. The buffet in Jamie's dorm is an example of:

Tragedy of the Commons

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Café CANNOT negotiate with each other, then will Quick Burger operate a drive-though window? Operate VS Not Operate Quick Burger $24,000 $15,000 Sunshine Cafe $11,000 $23,000

Yes, because Quick Burger's payoff is higher when it operates a drive-through

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali play her music in the apartment?

Yes, because the benefit of Ali listening to her music is greater than the cost to Kate