Econ Exam 3
Measuring profit in graph
Profit = TR-TC Profit = (Price - ATC) x Q -if ATC curve is below price, revenue is a gain -if ATC curve is above price, revenue is a loss (negative profit)
Critics of advertising argue that advertising a) creates desires that otherwise might not exist. b) enhances competition. c) benefits television viewers who enjoy TV commercials. d) All of the above are correct.
a) creates desires that otherwise might not exist.
When new firms enter a perfectly competitive market, a) existing firms may see their costs rise if more firms compete for limited resources. b) entering firms will earn zero economic profit upon entry into the market. c) prices will rise as existing firms raise prices to keep new firms out of the market. d) economic profits of existing firms will continue to be zero.
a) existing firms may see their costs rise if more firms compete for limited resources.
Which of the following is a characteristic of monopolistic competition? a) free entry b) ownership of a key resource by a single firm c) identical product d) patents
a) free entry
When firms are faced with making strategic choices to maximize profit, economists typically use a) game theory to model their behavior. b) cartel theory to model their behavior. c) the theory of aggressive competition to model their behavior. d) the theory of monopoly to model their behavior.
a) game theory to model their behavior.
Refer to Figure 20-3. In 1968, the percent of children under age 18 in poverty is a) higher than the percentage of adults aged 18 to 64 but is lower than the percentage of elderly aged 65 and over in poverty. b) lower than both the percentage of adults aged 18 to 64 and the percentage of elderly aged 65 and over in poverty. c) lower than the percentage of adults aged 18 to 64 but is higher than the percentage of elderly aged 65 and over in poverty. d) higher than both the percentage of adults aged 18 to 64 and the percentage of elderly aged 65 and over in poverty.
a) higher than the percentage of adults aged 18 to 64 but is lower than the percentage of elderly aged 65 and over in poverty.
Refer to Figure 16-7. The firm depicted in panel b faces a horizontal demand curve. If panel b depicts a profit-maximizing firm, a) it would not have excess capacity in its production as long as it is earning zero economic profit. b) it could be operating in either a perfectly competitive market or in a monopolistically competitive market. c) it is able to choose the price at which it sells its product. d) the firm can always raise its profit by increasing production since consumers will buy as much as the firm can produce.
a) it would not have excess capacity in its production as long as it is earning zero economic profit.
Which of the following goods are likely to be sold in a monopolistically competitive market? a) jeans b) breakfast cereal c) postage stamps d) electricity distribution in Chicago
a) jeans
Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers a) labor to be variable and capital to be fixed. b) capital to be variable and labor to be fixed. c) both labor and capital to be variable. d) both labor and capital to be fixed.
a) labor to be variable and capital to be fixed.
When a firm's only variable input is labor, then the slope of the production function measures the a) marginal product of labor. b) quantity of labor. c) quantity of output. d) total cost.
a) marginal product of labor.
average revenue of monopoly
amount of revenue a firm receives per unit sold total revenue / quantity of output equals the price of the good
collusion
an agreement among firms in a market about quantities to produce or prices to charge
equilibrium for an oligopoly
antitrust laws prohibit explicit agreements among oligopolists -if duopolists individually pursue their own self interests on how much to produce they produce more than monopoly quantity, charge a lower price than monopoly price, and earn a smaller total profit
natural monopolies
arises because a single firm can supply a good or service to an entire market at a lower cost than could 2 or more firms Ex: water distribution -as the market expands a natural monopoly can evolve into a more competitive market
Monopoly Drugs vs Generic Drugs
as market becomes more competitive the price should fall to equal MC -some consumers remain loyal to the brand name drugs - can continue to charge above the new price
U-shaped average total cost curve
average fixed cost always declines as output rises -average variable cost usually rises as output increases ATC reflects the shape of both average fixed and variable costs the tug of war between the two causes the U-Shape bottom of the U occurs at the quantity that minimizes average total cost (efficient scale)
As the number of sellers in an oligopoly becomes very large, a) the quantity of output approaches the socially efficient quantity. b) the price approaches marginal cost. c) the price effect is diminished. d) All of the above are correct.
d) All of the above are correct.
Refer to Figure 14-7. In the long run, the firm will exit the market if the price of the good is a) $75. b) $85. c) $95. d) All of the above are correct.
d) All of the above are correct.
Refer to Table 17-29. Which of the following statement(s) correctly characterizes the outcome of this game? a) There is a Nash equilibrium when both firms advertise. b) Both Firm W and Firm H have a dominant strategy to advertise. c) Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self-interest will cause each firm to break the agreement. d) All of the above are correct.
d) All of the above are correct.
Refer to Table 17-29 Does either Firm W or Firm H have a dominant strategy? a) Firm W does not have a dominant strategy, but Firm H does. b) Neither Firm W nor Firm H has a dominant strategy. c) Firm W has a dominant strategy, but Firm H does not. d) Both Firm W and Firm H have a dominant strategy.
d) Both Firm W and Firm H have a dominant strategy.
Refer to Figure 13-5. Which curve is most likely to represent marginal cost? a) A b) B c) C d) D
d) D
Refer to Table 16-1. Which industry has the lowest concentration ratio? a) Industry C b) Industry A c) Industry B d) Industry D
d) Industry D
monopoly curve
demand curve slopes downwards cant choose a point off of the demand curve
defense of resale price maintenance
deny its aim is to reduce competition -has a legitimate goal -customers could take advantage of good service at one store and go buy the good at another store for a lower price -avoids the free rider problem
doing nothing : public policy
determining the proper role of the gov't in the economy requires judgments about politics as well as economics
total cost curve
displays quantity of output and total cost
Refer to Table 13-7. What is the value of B? a) $50 b) $200 c) $100 d) $25
c) $100
Scenario 20-7Suppose the government implemented a negative income tax and used the following formula to compute a family's tax liability: Taxes owed = (1/6 of income) - $24,000 Refer to Scenario 20-7. A family earning $120,000 before taxes would have how much after-tax income? a) $96,000 b) $116,000 c) $124,000 d) -$4,000
c) $124,000
Refer to Table 15-7. What is the marginal revenue from selling the 2nd pair of shoes? a) $160 b) $150 c) $140 d) $170
c) $140
Refer to Figure 16-12. How much cost per unit could this firm save by producing the efficient level of output rather than the profit-maximizing level of output? a) $3 b) $1 c) $2 d) $0
c) $2
Refer to Table 20-14. Where would the government of Marketsville set the poverty line to have a poverty rate of 20 percent? a) $55,000 b) $35,000 c) $23,000 d) $44,000
c) $23,000
Refer to Table 15-8. What is the additional cost to the firm when the monopolist lowers the price from $18 to $12? a) $30 b) $15 c) $40 d) The firm saves $15.
c) $40
An example of an explicit cost of production would be the a) cost of forgone labor earnings for an entrepreneur. b) lost opportunity to invest in capital markets when the money is invested in one's business. c) lease payments for the land on which a firm's factory stands. d) Both a and c are correct.
c) lease payments for the land on which a firm's factory stands.
The competitive firm's short-run supply curve is its a) marginal cost curve. b) marginal revenue curve, but only the portion where marginal revenue exceeds marginal cost. c) marginal cost curve, but only the portion above the minimum of average variable cost. d) marginal cost curve, but only the portion above the minimum of average total cost.
c) marginal cost curve, but only the portion above the minimum of average variable cost.
A family's ability to buy goods and services depends largely on its a) transitory income, which is the measure of income used by the government to analyze the distribution of income and the poverty rate. b) permanent income, which is the lowest annual income the family has received over a 10-year period. c) permanent income, which is its normal, or average, income. d) transitory income, which is its money income plus any in-kind transfers it receives.
c) permanent income, which is its normal, or average, income.
The primary purpose of antitrust legislation is to a) protect small businesses. b) ensure firms earn only a fair profit. c) protect the competitiveness of U.S. markets. d) protect the prices of American-made products.
c) protect the competitiveness of U.S. markets.
One theory of advertising suggests that a) regulations limiting advertising benefit consumers, but not producers. b) advertising is more effective for industrial products than consumer products. c) the content of advertising may be irrelevant to product success in the market. d) television advertising is more effective in reducing competition than ads on websites.
c) the content of advertising may be irrelevant to product success in the market.
marginal revenue of monopoly
changes in total revenue when output increases by 1 unit monopolists marginal revenue is less than the price of its good MR curve lies below its demand curve can be negative when the price effect on revenue outweighs the output effect
Movie tickets
cheaper for children and senior citizens -they have a lower willingness to pay for the ticket
Synergies
companies merging to lower costs through joint production
public ownership
gov't can run the monopoly itself Ex: postal service -if the gov't who runs the business does a bad job, the losers are the customers and the tax payers
competitive firms curve
horizontal demand curve perfectly elastic
average and marginal cost
how much does it cost to make 1 good? how much does it cost to sell one more good?
excess capacity with perfect competition
firm produce at minimum of ATC -produce at efficient scale
constant returns to scale
long run ATC stays the same as quantity of output changes
economies of scale
long-run ATC falls as quantity of output increases
diseconomies of scale
long-run ATC rises as the quantity of output increases
Economies and Diseconomies of Scale
long-run curve shows how costs vary with the scale and size of a firms operations
airline prices
lower price for round-trip ticket if they stay past Saturday night -separate business travelers (higher pay/ not weekend) from leisure travelers (lower pay/ weekend)
implicit costs
input costs that do not require an outlay of money by the firm
explicit costs
input costs that require an outlay of money by the firm
deadweight loss triangle
monopoly quantity, efficient quantity, and monopoly price -monopoly price generates profit for the firm
monopoly barriers to entry
monopoly resources, government regulation, production process
output effect
more output is sold, so Q is higher, which tends to increase total revenue
total revenue in monopoly
quantity sold x price
how advertising affects prices
reduced average prices by more than 20% -advertising fosters competition and leads to lower prices for consumers
discount coupons
not all customers are willing to spend time clipping coupons -rich- higher pay, don't cut coupons
long run equilibrium in monopolistic competition
once the market reaches equilibrium, new firms have no incentive to enter, and existing firms have no incentive to exit -ATC and demand curve are tangent (touch) at equilibrium without crossing where MR=MC
concentration ratio
percentage of total output in the market supplied by the four largest firms -measures a markets domination
average revenue
price of the good total revenue divided by the quantity sold
The Deadweight cost of monopolies
the benevolent social planner tries to maximize total surplus the value of goods to consumers minus the costs of making the good by the monopoly producer the socially efficient quantity is found where the demand curve and MC curve intersect
price discrimination
the business practice of selling the same good at different prices to different customers -have to have some market power
marginal revenue
the change in total revenue from an additional unit sold -for competitive firms marginal revenue is the price of the good
opportunity cost
the cost of something is what you give up to get it
tying
selling a company two products at one cost -tying can be used as a mechanism for expanding its market power if one product is in very high demand -if different companies value the two goods differently, tying may allow the business to profit by charging a combined price closer to buyers willingness to pay
Government created monopolies
the government gives a single firm the exclusive right to produce some good or service Ex: copyright or patent lead to higher prices and profits
marginal product
the increase in output that arises from an additional unit of input -slope
marginal cost
the increase in total cost that arises from an extra unit of production change in total cost/ change in quantity
profit-maximizing quantity of output
the intersection of MR curve and the MC curve P is greater than MR = MC
long-run supply curve
the portion of its marginal-cost curve that lies above average total cost
price effect
the price falls, so P is lower, which tends to decrease total revenue
long-run market with entry and exit
the process of entry and exit ends only when price and ATC are driven to equality -in long-run equilibrium of competitive market with free entry and exit, firms must be operating at their efficient scale
the production function
the relationship between quantity of inputs (workers) used to make a good and the quantity of output of that good
average total cost
total cost divided by the quantity of output
profit
total revenue minus total cost
economic profit
total revenue minus total cost, including both explicit and implicit costs
average variable cost
variable cost divided by the quantity of output
The cost of capital as an opportunity cost
what could have been earned or not earned (OC) economists put into implicit costs of business
regulation
what price should the gov't set for a natural monopoly? Should it be equal to MC? 2 problems: 1) logic of cost curves 2) Gives monopolists no incentive to reduce costs
Relationship between marginal and average total cost
when MC is less than ATC, ATC is falling when MC is greater than ATC, ATC is rising -the marginal cost curve crosses the ATC-curve at its minimum -because at point of intersection it is at the minimum of ATC
production costs
when they buy inputs to produce the goods or services that they plan to sell
vertical axis of cost curve
marginal and average costs
fixed cost
costs that don't vary with the quantity of the output produced Ex: rent, salary
rising marginal cost
marginal cost rises as quantity of output produced increases -upward slope (diminishing marginal product)
Refer to Table 13-7. What is total output when 1 worker is hired? a) 45 b) 85 c) 0 d) 40
d) 40
monopolistically competitive firm in the short-run
downward-sloping demand curve; produce the quantity at which marginal revenue equals marginal cost; uses its demand curve to find the price at which it can sell that quantity. [like Monopolist] If price exceeds average total cost, so the firm makes a profit If price is below average total cost, so the firm is at losses.
short-run supply curve
is the portion of its marginal cost curve that lies above its average variable cost curve.
Monopoly
a firm that is the sole seller of a product without close substitutes -price makers -gov't's can sometimes improve market outcomes
A Monopoly's profit
a monopoly charges a price above MR and MC where the demand curve is at equilibrium Profit = (P - ATC) x Q height x width
shutdown
a short-run decision to not produce anything during a specific period because of current market conditions have to pay costs a firm shuts down if the revenue that it would earn from producing is less than its variable costs of production if TR is less than VC if the price of the good is less than the average variable cost of production
Nash Equilibrium
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen -would be better off cooperating and reaching the monopoly outcome
prisoners' dilemma tournament
a strategy that allows players to return to the cooperative outcome after a period of noncooperation may be preferable -tit-for-tat strategy (eye for an eye) was the most effective
dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
Refer to Figure 16-3. At the profit-maximizing level of output, what is this firm's total cost of production? a) $1,400 b) $1,600 c) $1,875 d) $1,200
a) $1,400
Refer to Table 14-3. For this firm, the marginal revenue is a) $13. b) $26. c) $0. d) $39.
a) $13.
Suppose marginal cost is constant at $8 per unit. Refer to Table 15-18. The monopolist's marginal revenue from selling the second unit of output is a) $14. b) $16. c) $8. d) $24.
a) $14.
If the poverty rate in Dismal is 50 percent, what is the poverty line in Dismal? a) $20,000. b) $40,000. c) $10,000. d) $30,000.
a) $20,000.
Refer to Table 13-16. What is the fixed cost of producing 0 units of output? a) $24 b) $0 c) $16 d) $12
a) $24
A tax provision that works much like a negative income tax is the a) Earned Income Tax Credit (EITC). b) Temporary Assistance for Needy Families (TANF). c) mortgage interest rate deduction. d) deduction for charitable contributions.
a) Earned Income Tax Credit (EITC).
Refer to Table 17-19. What is grocery store 2's dominant strategy? a) Grocery store 2 should always set a low price. b) Grocery store 2 does not have a dominant strategy. c) Grocery store 2 should set a low price when grocery store 1 sets a low price, and grocery store 2 should set a high price when grocery store 1 sets a high price. d) Grocery store 2 should always set a high price.
a) Grocery store 2 should always set a low price.
When designing public policies, which income group would philosopher John Rawls argue needs the most attention? a) Individuals located in the bottom fifth of the income distribution. b) Individuals located in the top fifth of the income distribution. c) Individuals located in the top five percent of the income distribution. d) Individuals located at the average income level.
a) Individuals located in the bottom fifth of the income distribution.
Which of the following statements is not correct? a) The economic life cycle theory explains why gifts of goods and services reduce poverty for the very young and the very old. b) Because people can borrow and save to smooth out changes in income, their standard of living in any one year depends more on lifetime income than on a particular year's income. c) Permanent income is a better measure of a family's ability to buy the necessities of life than is transitory income. d) The percentage of the population that suffers from long-term poverty is far smaller than the percentage of the population that suffers from short-term poverty because there is a high level of economic mobility in the United States.
a) The economic life cycle theory explains why gifts of goods and services reduce poverty for the very young and the very old.
Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $12,000 and the other will earn $2,000. In this version of the prisoners' dilemma, if the game is played only once, Laurel should a) advertise, but if the game is to be repeated many times she should probably not advertise. b) not advertise, and if the game is to be repeated many times she should still not advertise. c) advertise, and if the game is to be repeated many times she should still probably advertise. d) not advertise, but if the game is to be repeated many times she should probably advertise.
a) advertise, but if the game is to be repeated many times she should probably not advertise.
regulating monopolistic competition
administrative burden would be overwhelming -would causes losses if price = MC
Oligopolies as a Prisoners' Dilemma
after an agreement is made, each must decide whether to cooperate and honor this agreement or to ignore it -each oligopolist has an incentive to cheat leading to lower profits in the long run
Why the Long-Run Supply Curve Might Slope Upward
- some resources used in production may be available only in limited quantities (land) - firms may have different costs (some people work faster, etc) -the price in the market reflects ATC of the marginal firm -that firm earns zero profit, but firms with lower costs can earn positive profits -because firms can enter and exit more easily in the long-run than in the short-run, the long-run supply curve is typically more elastic than the short-run supply curve
accounting profit
-Total revenue minus total explicit cost -Usually larger than economic profit
Long-run market with exit
-if firms in the market are making losses, then some existing firms will exit the market -reduce the number of firms, decrease QS, drive up prices and profits
critique of advertising
-manipulate peoples tastes - impedes competition -faces a less elastic demand curve, can increase its profits by charging a larger markup over marginal cost -creates a desire that otherwise might not exist
entry externalities
1) product-variety externality 2) business- stealing externality
brand name incentives
1) provide costumers with information about the quality of the product 2) incentive to maintain high quality Determines whether customers are rational in preferring brand names to generic substitutes
two main differences b/w monopolistic and perfect competition
1) excess capacity 2) the markup
Sherman Antitrust Act (1890)
Elevated agreements among oligopolists from an unenforceable contract to a criminal conspiracy -made it a criminal act (fine or jail)
Long-run decision to enter a market
Enter if P is greater than ATC
Advertising as a Signal of Quality
Kellogg signals the quality of its product by its willingness to spend money on advertising. A firm's willingness to spend huge amounts on advertising may signal the quality of its product to consumers, regardless of the content of ads. What the advertisements say is not as important as the fact that consumers know ads are expensive.
Typical Cost Curves
Marginal cost eventually rises with the quantity of output. The average-total-cost curve is U-shaped. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost. some firms marginal products don't start to fall immediately after the first worker is hired
Long run equilibrium price
Price is greater than MC because profit maximization requires MC to equal MC and because the downward sloping demand curves make MR less than the price -price equals ATC because free entry and exit drive economic profit to zero in the long run
Why do competitive firms stay in business if they make zero profit?
Profit= total revenue - total cost total cost includes all opportunity costs -in zero profit equilibrium, economic profit is zero but accounting profit is positive
defense of advertising
Provide information to customers (price, new products and location to purchase) Customers - make better choices Enhances the ability of markets to allocate resources efficiently Fosters competition Customers - take advantage of price differences Allows new firms to enter more easily each firm has less market power
Anti trust laws
Sherman Antitrust Act of 1890 Clayton Act of 1914
Arm Races
U.S. and Soviet Union fight for military power -each country prefers to have more arms than the other because a larger arsenal gives more influence over world affairs -however, also prefer to live in a world safe from other country's weapons -for each country, arming is the dominant strategy -self interests drive cheating on a agreement/negotiation
sunk cost
a cost that has already been committed and cannot be recovered
Long-run decision to exit market
a firms exits a market if the revenue it would get from producing is less than its total cost of production Exit if TR is less than TC Exit if P is less than ATC
Cartel
a group of firms acting in unison -agree on a monopoly outcome because that maximizes their total profit -must agree on amount produced by each member
monopoly resources
a key resource required for production is owned by a single firm
exit
a long-run decision to leave the market don't have to pay any cost
Oligopoly
a market structure in which only a few sellers offer similar or identical products
imperfect competition
a market structure that does not meet the conditions of perfect competition or a monopoly falls between the two
vertical merger
a merger between firms at different stages of production of a good
prisoners' dilemma and welfare of society
a non-cooperative equilibrium can cause countries to end up at risk or waste resources -society would be better off if they reached a cooperative outcome -when oligopolists fail to cooperate, the quantity they produce is closer to the optimal level
Prisoner's Dilemma
a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production. The consultant must have concluded that Mr. Roger's a) marginal revenue exceeds his marginal cost. b) marginal cost exceeds his marginal revenue. c) marginal revenue exceeds his total cost. d) total revenues equal his total economic costs.
a) marginal revenue exceeds his marginal cost.
The market for novels is a) monopolistically competitive. b) an oligopoly. c) perfectly competitive. d) a monopoly.
a) monopolistically competitive.
Relative to direct cash payments, in-kind transfers have the advantage of being a) more politically popular. b) more respectful of the poor. c) more efficient. d) of a higher dollar value than cash payments.
a) more politically popular.
Refer to Figure 16-7. Which of the graphs depicts the situation for a profit-maximizing firm in a monopolistically competitive market? a) panel a b) panel b c) panel d d) panel c
a) panel a
Refer to Figure 14-1. If the market price rises above $6.30, the firm will earn a) positive economic profits in the short run. b) negative economic profits in the short run but remain in business. c) negative economic profits and shut down. d) zero economic profits in the short run.
a) positive economic profits in the short run.
A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as a) price is above or below marginal cost. b) marginal cost is greater than average total cost. c) average revenue is greater than average total cost. d) average revenue is equal to marginal cost.
a) price is above or below marginal cost.
If Levi Strauss & Co. were to require every retailer that carried its clothing to charge customers $42 for each pair of jeans, Levi Strauss & Co. would be practicing a) resale price maintenance. b) tying. c) cost plus pricing. d) fixed retail pricing.
a) resale price maintenance.
The analysis of competitive firms sheds light on the decisions that lie behind the a) supply curve. b) way financial markets set interest rates. c) demand curve. d) way firms make pricing decisions in the not-for-profit sector of the economy.
a) supply curve.
Many movie theaters allow discount tickets to be sold to senior citizens because a) the theaters are profit maximizers. b) senior-citizen laws mandate such discounts. c) senior citizens lobby city councils for lower prices. d) goodwill efforts earn community respect and win loyal patrons.
a) the theaters are profit maximizers.
Profit is defined as a) total revenue minus total cost. b) average revenue minus average total cost. c) marginal revenue minus marginal cost. d) net revenue minus depreciation.
a) total revenue minus total cost.
The Smith family owns an apple orchard in Illinois. The Jones family owns an apple orchard in Wisconsin. A late frost destroys half of the Smith family's harvest for one year. For the Jones family, their a) transitory income for the year of the frost likely exceeds their permanent income. b) permanent income likely exceeds their transitory income for the year of the frost. c) permanent income will be more affected by the frost than their transitory income. d) Both a and c are correct.
a) transitory income for the year of the frost likely exceeds their permanent income.
The long-run market supply curve in a competitive market will a) typically be more elastic than the short-run supply curve. b) always be horizontal. c) be above the competitive firm's efficient scale. d) be the portion of the MC that lies above the minimum of AVC for the marginal firm.
a) typically be more elastic than the short-run supply curve.
In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she a) will earn zero economic profits but positive accounting profits. b) should exit the industry unless her economic profits are positive. c) will earn zero accounting profits but positive economic profits. d) should ignore opportunity costs because they are a type of sunk cost that disappears in the long run.
a) will earn zero economic profits but positive accounting profits.
Scenario 13-4Suppose that Abdul opens a coffee shop. He receives a loan from a bank for $100,000. He withdraws $50,000 from his personal savings account. The interest rate on the loan is 8%, and the interest rate on his savings account is 2%. Refer to Scenario 13-4. Abdul's annual implicit cost of capital is a) $4,000. b) $1,000. c) $8,000. d) $2,000.
b) $1,000.
The poverty rate in Inequalia is a) 16.7 percent. b) 27.8 percent. c) 55.5 percent. d) 11.1 percent.
b) 27.8 percent.
In the United States, a typical worker's income peaks around age a) 60. b) 50. c) 70. d) 40.
b) 50.
Refer to Table 14-13. In order to maximize profits, how many units should Diana's Dress Emporium produce? a) 7 b) 8 c) 6 d) 5
b) 8
Refer to Figure 14-9. The firm will exit the market for any price on the line segment a) ABCD. b) AB. c) CD. d) None of the above is correct.
b) AB.
Deadweight losses are associated with monopolistic competition: a) In neither the short run nor the long run b) In both the short and long run c) In the long run, but not the short run d) In the short run, but not the long run
b) In both the short and long run
Refer to Table 16-2. Which industry has the highest concentration ratio? a) Industry K b) Industry L c) Industry M d) Industry J
b) Industry L
Scenario 20-1The government is proposing switching from a progressive tax system in which families pay 15% of the first $50,000 earned, 25% of the next $50,000 earned, and 35% of any income over $100,000 to a tax system in which every family pays 20% of their income less $20,000. Refer to Scenario 20-1. Which group would be most in favor of the switch from the current progressive tax policy to the new policy? a) Utilitarians, because they want to maximize the utility to the worst-off person in society b) Liberals, because of the maximin criterion c) Libertarians, because they believe in diminishing marginal utility d) All three groups would be equally in favor of the switch.
b) Liberals, because of the maximin criterion
Refer to Table 20-4. In 2011, the bottom 60% of families have a) about 51% of total income in the U.S. b) about 28% of total income in the U.S. c) about 74% of total income in the U.S. d) about 13% of total income in the U.S.
b) about 28% of total income in the U.S.
Refer to Figure 16-10. At what quantity of output does average revenue exceed marginal revenue by $66.66? a) at 154.92 units of output b) at 133.33 units of output c) somewhere between 100 and 133.33 units of output d) at 100 units of output
b) at 133.33 units of output
The entry of new firms into a monopolistically competitive market is accompanied by a) only negative externalities. b) both positive and negative externalities. c) only positive externalities. d) only private profit opportunities (no externalities).
b) both positive and negative externalities.
The product-variety externality is associated with the a) opportunity cost of firms exiting a monopolistically competitive industry. b) consumer surplus that is generated from the introduction of a new product. c) producer surplus that accrues to incumbent firms in a monopolistically competitive industry. d) loss of consumer surplus from exposure to additional advertising.
b) consumer surplus that is generated from the introduction of a new product.
When new firms have an incentive to enter a competitive market, their entry will a) increase demand for the product. b) drive down profits of existing firms in the market. c) shift the market supply curve to the left. d) increase the price of the product.
b) drive down profits of existing firms in the market.
Suppose the average value of in-kind transfers increases by $2,000 from 2013 to 2014. The poverty rate a) is more likely to understate the true level of poverty. b) is more likely to overstate the true level of poverty. c) will increase by $2,000 divided by the poverty level. d) Both b and c are correct.
b) is more likely to overstate the true level of poverty.
The rule for redistribution proposed by John Rawls in his book A Theory of Justice is called the a) egalitarian criterion. b) maximin criterion. c) "optimal ignorance" rule. d) libertarian justice rule.
b) maximin criterion.
Select the type of market that is described by the following attributes: many firms, differentiated products, and free entry. a) monopoly b) monopolistic competition c) perfectly competition d) natural monopoly
b) monopolistic competition
Economists who study economic mobility have found that the income of a grandfather and his grandson's income are a) equal. b) not closely related. c) directly related. d) negatively related.
b) not closely related.
Pietro is 40 years old and is laid off from his job at the paper plant and borrows from his savings for 8 months until he finds a new job. Pietro's a) economic mobility during this year is highly unusual, as US workers tend to stay in a particular income class. b) permanent income is largely unaffected by this one time change to his income. c) transitory income likely exceeds his permanent income for that year. d) borrowing is representative of a normal economic life cycle.
b) permanent income is largely unaffected by this one time change to his income.
A monopolistically competitive firm chooses its a) quantity but faces a horizontal demand curve just as a competitive firm does. b) price and quantity just as a monopoly does. c) price and quantity based on the decisions of the other firms in the industry just as an oligopoly does. d) price but can sell any quantity at the market price just as an oligopoly does.
b) price and quantity just as a monopoly does.
Total revenue equals a) (price x quantity) - total cost. b) price x quantity. c) price/quantity. d) output - input.
b) price x quantity.
"An extra dollar of income gives more additional satisfaction to a poor person than to a rich person." This is an important assumption of which political philosophy? a) republicanism b) utilitarianism c) libertarianism d) liberalism
b) utilitarianism
If a firm produces nothing, which of the following costs will be zero? a) opportunity cost b) variable cost c) total cost d) fixed cost
b) variable cost
Diseconomies of scale arises
because of coordination problems that often occur in large organizations -more goods, less time for management, less effective at keeping costs down
business-stealing externality
because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externality on existing firms -arises because firms post price above MC therefore are more eager to sell additional units
output effect in oligopoly
because price is above marginal cost like monopoly, selling one more unit at going price will raise profit
product-variety externality
because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a positive externality on consumers
Economies of Scale Arises
because higher production levels allow specialization among workers which allows each worker to become better at specific tasks
Arbitrage
buying a good in one market at a lower price and selling in another at a higher price to profit from the difference
financial aid
by charging high tuition and selectively offering financial aid -schools charge based on the value they place on going to that school
Which of the following statements is not correct? a) Effective minimum wage laws create a surplus of labor. b) A disadvantage of in-kind transfer programs such as food stamps is that they force recipients to purchase from a restricted set of items which may not include things that the poor need the most such as diapers or cleaning supplies. c) A disadvantage of minimum wage laws is that they are expensive for state and local governments to fund. d) An advantage of the Earned Income Tax Credit (EITC) is that it targets the working poor better than the minimum wage because it does not benefit teenagers from middle-class families who work summer jobs at the minimum wage.
c) A disadvantage of minimum wage laws is that they are expensive for state and local governments to fund.
Which of the following statements about costs is correct? a) When marginal cost is less than average total cost, average total cost is rising. b) The total cost curve is U-shaped. c) As the quantity of output increases, marginal cost eventually rises. d) All of the above are correct
c) As the quantity of output increases, marginal cost eventually rises.
Which of the following must always be true as the quantity of output increases? a) Marginal cost must rise. b) Average total cost must rise. c) Average fixed cost must fall. d) Average variable cost must rise.
c) Average fixed cost must fall.
Which of the following statements is not correct? a) Both monopolistic competition and oligopoly fall in between the more extreme market structures of competition and monopoly. b) Monopolistic competition is different from oligopoly because each seller in monopolistic competition is small relative to the market, whereas each seller can affect the actions of other sellers in an oligopoly. c) Both monopolistic competition and perfect competition are characterized by product differentiation. d) Monopolistic competition is different from monopoly because monopolistic competition is characterized by free entry, whereas monopoly is characterized by barriers to entry.
c) Both monopolistic competition and perfect competition are characterized by product differentiation.
When individuals are damaged by an illegal arrangement to restrain trade, which law allows them to pursue civil action and recover up to three times the damages sustained? a) Trade Damage Act b) Sherman Act c) Clayton Act d) No law allows individuals to pursue civil action and recover up to three times the damages sustained.
c) Clayton Act
Assume that the government proposes a negative income tax that calculates the taxes owed as follows: Taxes Owed = (1/3 Income) - 10,000. If a family doesn't earn any income, how does the negative income tax affect it? a) It will receive an income subsidy of $1,000. b) It will receive an income subsidy of $3,000. c) It will receive an income subsidy of $10,000. d) It will not be affected at all, since the negative income tax requires a family to earn income.
c) It will receive an income subsidy of $10,000.
Refer to Figure 13-3. Assuming that the firm depicted produces cookies, which of the statements below is most consistent with the shape of the total cost curve? a) Total production of cookies decreases with additional units of input. b) Producing additional cookies becomes increasingly costly only when the number of cookies already being produced is large. c) Producing an additional cookie is always more costly than producing the previous cookie. d) Producing additional cookies is equally costly, regardless of how many cookies are already being produced.
c) Producing an additional cookie is always more costly than producing the previous cookie.
Which of the following statements is correct? a) The demand curve facing a competitive firm is horizontal, as is the demand curve facing a monopolist. b) The demand curve facing a competitive firm is downward sloping, as is the demand curve facing a monopolist. c) The demand curve facing a competitive firm is horizontal, whereas the demand curve facing a monopolist is downward sloping. d) The demand curve facing a competitive firm is downward sloping, whereas the demand curve facing a monopolist is horizontal.
c) The demand curve facing a competitive firm is horizontal, whereas the demand curve facing a monopolist is downward sloping.
In the transition from the short run to the long run, the number of firms in a competitive industry is a) increasing at a constant rate. b) fixed. c) able to adjust to market conditions. d) decreasing.
c) able to adjust to market conditions.
Refer to Scenario 17-4. PM Inc.'s dominant strategy is to a) advertise only if Brown Inc. advertises. b) advertise only if Brown Inc. does not advertise. c) advertise regardless of whether Brown Inc. advertises. d) refrain from advertising regardless of whether Brown Inc. advertises.
c) advertise regardless of whether Brown Inc. advertises.
Suppose that the DeBeers company faces very little competition from other firms in the wholesale diamond market. Why isn't the price of wholesale diamonds $10,000 per carat? a) because the government would not allow such a high price b) because stockholders would not allow such a high price c) because the company would sell so few diamonds that it would earn higher profits by selling at a lower price d) All of the above are correct.
c) because the company would sell so few diamonds that it would earn higher profits by selling at a lower price
Scenario 16-6Ike's Ice Cream has decided to open a new ice cream parlor in Mayville, MS. The market for ice cream parlors is monopolistically competitive. Refer to Scenario 16-6. As a result of the new Ike's Ice Cream parlor, existing ice cream shops located in Mayville are likely to experience a a) business-stealing externality, which benefits producers. b) product-variety externality, which harms consumers. c) business-stealing externality, which harms producers. d) product-variety externality, which benefits consumers.
c) business-stealing externality, which harms producers.
Refer to Figure 20-3. In 2011, the percent of adults between ages 18 and 64 in poverty is a) higher than both the percentage of children under age 18 and the percentage of elderly aged 65 and over in poverty. b) is lower than the percentage of children under age 18 and is equal to the percentage of elderly aged 65 and over in poverty. c) is lower than the percentage of children under age 18 but is higher than the percentage of elderly aged 65 and over in poverty. d) higher than the percentage of children under age 18 but is lower than the percentage of elderly aged 65 and over in poverty.
c) is lower than the percentage of children under age 18 but is higher than the percentage of elderly aged 65 and over in poverty.
Why people sometimes cooperate
cooperation is easier to enforce in repeated games -if one party produces more, the other has a reason to do the same -the threat of this penalty may be all that is needed to maintain cooperation
variable cost
costs that vary with the quantity of output produced Ex: cups, milk, sugar, hiring more workers
predatory pricing
cutting prices to increase business if another company joined the market -the predator suffers more than the prey
Refer to Table 16-6. If the government required Beatrice's to produce at the efficient scale of output, how many cakes would Beatrice's sell? a) 4 b) 5 c) 6 d) 7
d) 7
Refer to Table 17-26. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be a) $-60 and $-40, respectively. b) $-100 and $-12, respectively. c) $-12 and $-100, respectively. d) $-24 and $-24, respectively.
d) $-24 and $-24, respectively.
Refer to Table 17-12. If the market for gasoline in Driveaway is perfectly competitive, then the equilibrium price of gasoline is a) $1 and the equilibrium quantity is 350 gallons. b) $4 and the equilibrium quantity is 200 gallons. c) $0 and the equilibrium quantity is 400 gallons. d) $2 and the equilibrium quantity is 300 gallons.
d) $2 and the equilibrium quantity is 300 gallons.
In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8. How much economic profit is the firm earning in the short run? a) $0 per unit b) $1 per unit c) $3 per unit d) $2 per unit
d) $2 per unit
Refer to Table 15-6. Suppose the monopolist has total fixed costs equal to $5 and a variable cost equal to $4 per unit for all units produced. What would the total profit be if she charged $6 per unit for her product? a) $15 b) $8 c) $1 d) $3
d) $3
Refer to Table 17-2. Suppose that Abby and Brad work together to operate as a profit-maximizing monopolist. What price will they charge for water? a) $4 b) $7 c) $8 d) $6
d) $6
Scenario 13-18Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A bag of seeds costs $100, and the costs of seeds are his only costs. Refer to Scenario 13-18. Which of the following statements is (are) true? (i) Farmer Jack experiences decreasing marginal product. (ii) Farmer Jack's production function is nonlinear. (iii) Farmer Jack's total cost curve is linear. a) (i) and (iii) only b) (i) only c) (ii) only d) (i) and (ii) only
d) (i) and (ii) only
Refer to Table 17-18. If these two firms play this game repeatedly, the likely outcome will be a) 10 units of output for Firm A and 12 units of output for Firm B. b) 12 units of output for Firm A and 12 units of output for Firm B. c) 12 units of output for Firm A and 10 units of output for Firm B. d) 10 units of output for Firm A and 10 units of output for Firm B.
d) 10 units of output for Firm A and 10 units of output for Firm B.
Refer to Table 17-12. Suppose we observe that the price of a gallon of gasoline in Driveaway is $2. Given this observation, which of the following scenarios is most likely? a) There are two sellers of gasoline in Driveaway. b) There are a few sellers of gasoline in Driveaway, but the number of sellers exceeds two. c) There is one seller of gasoline in Driveaway. d) There are many sellers of gasoline in Driveaway.
d) There are many sellers of gasoline in Driveaway.
When the government redistributes income to achieve greater equality, it a) focuses on middle income brackets. b) relies on foreign aid to help balance the budget. c) improves efficiency. d) distorts incentives.
d) distorts incentives.
Binding minimum-wage laws a) do not affect segments of the population who are not poor. b) are costly for the government to impose. c) have the potential to provide benefits to all poor people, whereas a negative tax can only benefit some poor people. d) force a market imbalance between the supply and demand for labor.
d) force a market imbalance between the supply and demand for labor
Competitive markets are characterized by a) unique products. b) a small number of buyers and sellers. c) the interdependence of firms. d) free entry and exit by firms.
d) free entry and exit by firms.
Regulation of a firm in a monopolistically competitive market a) usually implies a very small administrative burden. b) is commonly used to enhance market efficiency. c) will lower the firm's costs. d) is unlikely to improve market efficiency.
d) is unlikely to improve market efficiency.
Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on television. If cigarette companies are profit maximizers, it is likely that a) Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation. b) both companies sued the federal government on grounds that the ban constitutes a civil rights violation. c) both companies retaliated with black-market operations. d) neither company opposed the ban on advertising.
d) neither company opposed the ban on advertising.
When a local grocery store offers discount coupons in the Sunday paper it is most likely trying to a) reduce prices for all customers. b) encourage arbitrage. c) encourage literacy. d) price discriminate.
d) price discriminate.
With respect to monopolistic competition, a) both the business-stealing externality and the product-variety externality are positive externalities. b) the business-stealing externality is a positive externality, while the product-variety externality is a negative externality. c) both the business-stealing externality and the product-variety externality are negative externalities. d) the business-stealing externality is a negative externality, while the product-variety externality is a positive externality.
d) the business-stealing externality is a negative externality, while the product-variety externality is a positive externality.
Refer to Table 13-6. The Wooden Chair Factory experiences diminishing marginal product of labor with the addition of which worker? a) the fifth worker b) the fourth worker c) the third worker d) the sixth worker
d) the sixth worker
a parable about pricing
deadweight loss of not selling to the group of people who would pay less -deadweight loss is the inefficiency that arises when a monopolist charges a price above MC -based on who will pay what for the good they charge different prices (location helps)
invisible hand and entry externalities
does not ensure that total surplus is maximized under monopolistic competition
Monopoly's Profit: A social cost
doesn't affect total surplus -not a social problem -produces and sells at quantity of output below the level that maximizes total surplus - the inefficiency causes the monopolies high price which is the low quantity of output
profit maximization
don't produce past maximum profit -if marginal revenue is greater than MC than they should increase production -rational people think at the margin
Advertising
each firm has an incentive to advertise to attract more buyer to its particular product -about 2% of total firm revenue is spent on advertising
levels of production DOS and EOS
falling at low levels of production because of increasing specialization -rising at high levels of production because of growing coordination problems
excess capacity in monopolistic competition
firms produce on the downward-sloping portion of their ATC curve -produce below the efficient scale -more profitable for a monopolistic firm to produce with excess capacity
Brand names
firms with brand names spend more on advertisements and charge a higher price -causes consumers to perceive differences that don't really exist between the products -a consumers willingness to pay more for brand name good is a form or irrationality fostered by ads
average fixed cost
fixed cost divided by the quantity of output
anti-trust laws
groups of statutes aimed at curbing monopoly power -aimed at preserving free and unfettered competition as the rule of trade -prevent companies from making the market less competitive
monopolistic competition and welfare of society
has the normal deadweight losses of monopoly pricing because of the markup
Clayton Act of 1914
if a person was damaged by an illegal agreement to restrain trade, they could sue and recover 3 times the damage sustained
long-run market with entry
if firms already in the market are profitable then new firms will have an incentive to enter -entry will increase QS and drive down prices and profits
marginal cost curve and supply decision
if marginal revenue is greater than MC, the firm should increase its output if marginal cost is greater than marginal revenue, the firm should decrease its output -at the profit-maximizing level of output marginal revenues equal marginal cost -P and Q-max intersect is where the firm's profit-maximizing quantity of output is found -MC curve is the supply curve
Gives monopolists no incentive to reduce costs
if regulators reduce prices whenever costs fall, they wont benefit
relationship between short-run and long-run ATC
in short-run, firms can't adjust the number or size of its factories it can only hire more workers cost of factories a fixed cost in short-run cost of factories a variable cost in long-run short-run curves are more U-Shaped and above long-run curve while long-run curve is a stretched out U-shape w/ greater flexibility
a shift in demand in short and long run
in the short-run, the price of a good exceeds ATC, so firm is making a positive profit -new firms enter, QS increases, short-run supply curve shifts right, prices decrease -in the long-run, price goes back down to minimum of ATC, profits are zero, and firms stop entering
Microsoft case
involved tying between Internet Explorer and Windows Operating System -putting new features into old producers is a natural part of the tech progress -gov't argued Microsoft had substantial monopoly power and trying to expand it more -Microsoft accepted restrictions -Gov't accepted that a Browser would remain a part of Windows System
rational people think at the margin
key to understanding the decisions a firm makes about how many workers to hire and how much output to produce
perfectly competitive market
many buyers and sellers essentially sell the same goods price takers can freely enter/exit the market
Quantity discounts
many firms offer lower prices to customers who buy large quantities - a customers willingness to pay for an additional unit declines as she buys more units
monopolistic competition
many firms sell products that are similar but not identical -compete for the same group of customers Ex: novels and movies
near-empty restaurants and off season gold
many of a restaurants costs are fixed like silverware, tables, plates, etc. -the owner shuts down the restaurant if the revenue from a few lunch customers would fail to cover the restaurants variable costs -should stay open for business only when its revenue exceeds its variable costs
Monopolistic Competition Characteristics
many sellers, product differentiation, and free entry and exit
horizontal merger
merger between two firms in the same market
perfect price discrimination
monopolist knows exactly each customer's willingness to pay and can charge each customer a different price -no deadweight loss occurs -each customer who values the good at more than MC buys the good and is charged her willingness to pay -no consumer surplus entire surplus goes to producer in the form of profit
logic of cost curves
natural monopolies have declining ATC -MC is less than ATC the firm would lose money the gov't could subsidize the monopolist regulators can allow them to charge above MC -average cost pricing is like a tax on the good the monopolist is selling
OPEC and World Oil Market
oil industry is an oligopoly -formed a cartel called Organization of Petroleum Exporting Countries (OPEC) -tries to raise price of its product by a coordinated reduction in quantity produced -each member is tempted to increase its production to get a larger share of profit
common resources
oil is a common resource -companies could get more than planned with a lower profit and higher costs -drilling two wells is a dominant strategy
Duopoly example
oligopoly with only two members
public policy toward oligopolies
policy makers should try to influence firms in an oligopoly to compete rather than cooperate
Moral of the Story
price discrimination is a rational strategy for a profit-maximizing monopolist -charging each customer a price closer to her willingness to pay than is possible with a single price -requires the ability to separate customers according to their willingness to pay -can raise economic welfare because all people get the good and the outcome is efficient
Revenue of a Competitive Market
price doesn't change based on quantity sold to consumers
horizontal axis of cost curve
quantity a firm produces
price effect in oligopoly
raising production will increase the total amount sold, which will lower the price of the good and lower the profit on all the other goods sold
Profit Maximization of monopoly
rational people think at the margin -when MC is greater than MR, the firm can raise profit by producing fewer units -adjust until MR = MC
How the Size of an Oligopoly Affects the Market Outcome
reaching and enforcing an agreement becomes more difficult as the size of the group increases -as the number of sellers in an oligopoly grows the oligopolistic market resembles a competitive market -price approaches MC and quantity produced approaches the socially efficient level
resale price maintenance
requiring a retailer to sell a good at a certain price determined by the wholesaler -prevents retailers from competing on price
An illegal phone call
the Sherman antitrust act prohibits competing executives from even talking about fixing prices -American airlines and Braniff Airways talked about prices Adam Smith -"ends in a conspiracy against the public or diversion to raise prices"
total revenue
the amount a firm receives for the sale of its output quantity of output x price sold
total cost
the market value of the inputs a firm uses in the production the sum of implicit and explicit costs sum of fixed and variable costs
The Deadweight cost of monopolies part 2
the monopolist chooses to produce and sell at the quantity of output at which MR and MC intersect -the social planner chooses the quantity at which demand and MC intersect -the monopolist produces less than the socially efficient quantity of output -monopoly pricing prevents some mutually beneficial trades from taking place
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
Industrial Organization
the study of how firms' decisions about prices and quantities depend on the market conditions they face
game theory
the study of how people behave in strategic situations -each firm in an oligopoly must consider how its decisions might affect the production decision of other firms in the market
short-run market with fixed number of firms
to derive the MS curve, add quantity supplied by each firm in the market -quantity of one firm x firms in the market
markup over marginal cost
under monopolistic competition, P > MC; an extra unit sold means more profit under perfect competition, P = MC.
