ECON Exam #3

Both a competitive industry and a monopoly

Face downward-sloping market demand curves.

Which of the following is true for a monopolist?

It must lower its price on all of its units in order to sell any additional units.

If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked demand model

It will lose market share to the firms that do not follow the price increase.

A competitive firm should continue to hire workers until the MRP is equal to: The determinants of the market supply of labor include all of the following except:

The market wage rate.

The wage rate is

The payment for labor.

When firms are interdependent,

The profit of one firm depends on how its rivals respond to its strategic decisions.

Kip will work fewer hours if his salary increases. For Kip, the ___________ effect must outweigh the __________ effect.

income; substitution

Expected Payoff

(Probability of Rivals Matching x Size of Loss from Price Cuts) + (Probability of Rivals Not Matching x Gain from Lone Price Cut) Probability of Rivals Matching = 1 - k Probability of Rivals Not Matching = k

Suppose a monopoly concrete contractor builds 20 driveways per month for $10,000 each. In order to increase sales to 21 driveways, the contractor must lower the price of driveways to $9,500. The marginal revenue of the 21st driveway is

-$500.

Which of the following is likely to be a monopolist?

A drug firm that has a patent granting it the exclusive right to produce a drug.

Which of the following is not a determinant of market power?

Age of the industry.

As marginal physical product diminishes, marginal revenue product

Also diminishes.

It is most difficult for new firms to enter

An oligopolistic market.

The marginal revenue product establishes

An upper limit to the wage rate an employer is willing and able to pay.

If wages are relatively high, the individual labor supply curve may

Bend backward.

Market power is the ability of a firm to

Control the price and quantity supplied.

Monopolists are price

Makers, but competitive firms are price takers.

As an individual earns additional income, the marginal utility of income tends to

Decrease.

The marginal revenue product of labor curve is the firm's

Demand curve for labor.

If the price of the output produced by a particular type of labor decreases, which of the following shifts should occur in the labor market for the particular type of labor?

Demand for labor should shift to the left.

At equilibrium in a monopoly, economic profits will most likely be

Greater than zero.

Campbell loves to work. He does not receive any enjoyment from leisure time. The last dollar that he earns each year means just as much to him as the first dollar. Which of the following best describes the shape of Campbell's labor supply curve?

Horizontal.

The marginal revenue curve is below the demand curve

If a firm must lower its price to sell additional output.

The labor supply curve starts to bend backward once the

Income effect exceeds the substitution effect.

Higher wage rates allow a person to reduce the hours worked without losing income. This is known as the

Income effect.

As more hours are worked, the marginal utility of leisure time tends to

Increase.

If we move to the right along the upward-sloping labor supply curve, we observe that the cost of labor

Increases due to the increasing opportunity cost.

A monopolist that does not practice price discrimination should never produce in the

Inelastic portion of its demand curve because it can increase total revenue and reduce total costs by increasing the price.

The willingness to work a certain amount of time at a given wage rate is known as

Labor supply.

A firm should hire an additional worker as long as the wage rate is

Less than or equal to the MRP.

If a firm in an oligopoly expands its market share at prevailing prices, its competitors

Lose market share.

A monopolist will not use marginal cost pricing because at that output

MC is greater than MR.

The law of diminishing returns states that, ceteris paribus, the

MPP of labor declines as more labor is employed.

Which of the following rules is satisfied when a monopoly maximizes profits?

MR = MC.

In competitive markets, the marginal revenue product curve and marginal physical product curve have similar shapes because

MRP = P x MPP.

The change in total revenue associated with one additional unit of input measures

MRP.

The determinants of labor demand include

Marginal physical productivity.

If you have an increasing marginal utility for leisure, then as you work more to make greater income, your

Marginal utility for income decreases.

The number of hours that a worker is willing to work is determined by the trade-off between the increasing

Marginal utility of leisure and the decreasing marginal utility of income.

If an oligopoly market is contestable and new firms enter, the

Market power of the former oligopolists will be reduced.

The correct ranking of degree of market power (from highest to lowest) is

Monopoly, oligopoly, monopolistic competition, perfect competition.

In which of the following market structures are entry barriers the highest?

Monopoly.

Which market structure is characterized by a few interdependent firms? The soft drink market is dominated by Coke, Pepsi, and very few other firms. The firms often start price wars. The market can best be classified as:

Oligopoly.

Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output

Only for domestic production when the true market boundaries are international for some markets.

E =

Percentage change in quantity demanded / Percentage change in price

There are many corn farmers, each of whom produces the same product. The corn market can best be classified as

Perfect competition.

It is easiest for new firms to enter a

Perfectly competitive market.

Which of the following may characterize a monopoly?

Substantial market power.

If the MPP of an additional unit of labor is 4 units per hour, product price is constant at $5 per unit, and the wage rate is $19 per hour, then

The additional unit of labor should be employed.

If the MPP of an additional unit of labor is 3 units per hour, product price is constant at $8 per unit, and the wage rate is $26 per hour, then

The additional unit of labor should not be employed because it costs more than it is worth.

The market supply of labor is

The amount of labor all workers supply at different wage rates.

The marginal physical product of labor is equal to

The change in total output divided by the change in quantity of labor.

The marginal revenue product of labor is equal to

The marginal physical product multiplied by the price.

If a chair can be sold for $20 and it takes a worker two hours to make a chair, the marginal revenue product of this worker is

$10 per hour.

Which of the following is true about the kink in the demand curve?

It is the result of different rival responses to price increases and reductions.

Which of the following may not characterize an oligopoly?

Many firms.

If oligopolists start cutting prices to capture a larger market share, the result will be a

Movement down the market demand curve.

When the MPP of labor is zero, ceteris paribus,

No further increases in output can be achieved by using additional units of labor.

The kinked demand curve explains the observation that in oligopoly markets

Prices may not change even in the face of cost increases.

A monopoly

Produces less output than a competitive industry, ceteris paribus.

The concentration ratio measures the

Proportion of total output produced by the four largest producers in a specific market.

Because of the law of diminishing returns, as additional workers are hired, total output

Rises at a diminishing rate initially and eventually falls.

Which of the following is the critical determinant of market power?

The extent of barriers to entry.

Price discrimination is best defined as

The selling of an identical good at different prices to different consumers by a single seller.

The demand for labor is downward-sloping because of

Diminishing returns to labor.

Marginal physical product diminishes as additional workers are hired because

Each worker has an increasingly smaller amount of other factors with which to work.

The substitution effect of wages states that a decreased wage rate

Encourages people to work less hours.