ECON FINAL

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Firms that have several plants that produce the same or related products are said to be: A) horizontally integrated. B) vertically integrated. C) conglomerates. D) cooperatives.

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.3. What will be the price of this new drink in the long run if the industry is a Cournot duopoly? A) $3 B) $9 C) $12 D) $13.50 E) none of the above

A Nash equilibrium occurs when A) each firm is doing the best it can given its opponents' actions. B) each firm chooses the strategy that maximizes its minimum gain. C) a player can choose a strategy that is optimal regardless of its rivals' actions. D) there is no dominant firm in a market.

A local restaurant sells strawberry pie for $3.00 per slice. However, if you order the prime rib dinner, you can get a slice of pie for only a dollar. This is an example of A) bundling. B) second-degree price discrimination. C) a two-part tariff. D) tying. E) none of the above

A firm setting a two-part tariff with only one customer should set the entry fee equal to A) marginal cost. B) consumer surplus. C) marginal revenue. D) price.

Which of the following situations is likely to generate noncooperative behavior in repeated games? A) The game is repeated a finite number of times. B) There are many players in the game. C) The payoffs can change rapidly from one game period to the next. D) All of these situations can generate noncooperative behavior.

Third-degree price discrimination involves A) charging each consumer the same two part tariff. B) charging lower prices the greater the quantity purchased. C) the use of increasing block rate pricing. D) charging different prices to different groups based upon differences in elasticity of demand.

Bindy, an 18-year-old high school graduate, and Luciana, a 40-year-old college graduate, just purchased identical hot new sports cars. Acme Insurance charges a higher rate to insure Bindy than Luciana. This practice is an example of: A) collusion. B) price discrimination. C) two-part tariff. D) bundling. E) none of the above

You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. The florist's cost for the arrangement is $200. You finally settled on a price of $250. Refer to Scenario 13.1. Your negotiations are an example of: A) a noncooperative game. B) a cooperative game. C) a constant sum game. D) a competitive game. E) both B and C

A positive externality is shown by a marginal social benefit (MSB) curve that is A) above and to the right of the demand curve for the good that generates it. B) below and to the left of the demand curve for the good that generates it. C) above and to the left of the supply curve for the good that generates it. D) below and to the right of the supply curve for the good that generates it. E) positively related to both the supply curve and the demand curve for the good that generates it.

An electric power company uses block pricing for electricity sales. Block pricing is an example of A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) Block pricing is not a type of price discrimination.

Bundling is effective when the demands for the bundled products are ________ and ________ correlated. A) different; egatively B) different; positively C) similar; negatively D) similar; positively E) identical; perfectly

Externalities A) are not reflected in market prices, so they can be a source of economic inefficiency. B) do become reflected in market prices, so they can be a source of economic inefficiency. C) are not reflected in market prices, so they do not adversely affect economic efficiency. D) do become reflected in market prices, so they do not adversely affect economic efficiency. E) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event.

For a two-part tariff imposed on two consumers, the entry fee is based on the: A) consumer surplus of the customer with lower willingness-to-pay. B) consumer surplus of the customer with higher willingness-to-pay. C) simple average of the consumer surplus for the two buyers. D) none of the above

If grades are to be a successful signal to potential employers of a student's qualities, then higher grades must be A) easier for high-productivity students to earn than for low-productivity students to earn. B) easier for low-productivity students to earn than for high-productivity students to earn. C) easy for employers to check. D) used for all future promotions within the firm. E) often referred to in the hiring process.

In the ________, each firm treats the output of its competitor as fixed and then decides how much to produce. A) Cournot model B) model of monopolistic competition C) Stackelberg model D) kinked-demand model E) none of the above

Which of the following job market signals are less costly for high-quality workers to send than lowquality workers? A) Spending long hours at the office B) Sending emails to coworkers and supervisors at night and on weekends C) Leaving voice-mail message for colleagues before or after regular business hours D) all of the above

A firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS2 > CS1 > 0. If the firm sets the entry fee equal to CS2, then the number of customers that actually buy the product is equal to: A) zero. B) one. C) two. D) We don't have enough information to answer this question.

As you move rightward on a marginal cost of abatement curve, emissions are A) falling, and the cost of eliminating the marginal unit falls. B) rising, and the cost of eliminating the marginal unit falls. C) falling, and the cost of eliminating the marginal unit rises. D) rising, and the cost of eliminating the marginal unit rises. E) rising, and the cost of eliminating the marginal unit is constant.

Because air cargo as an industry involves the generation of pollutants in engine exhaust, the equilibrium price of air cargo services A) is above the optimal level, and quantity is below the optimal level. B) is below the optimal level, and quantity is above the optimal level. C) and quantity of trucking services are both above the optimal level. D) and quantity of trucking services are both below the optimal level. E) must fall in order for the market to reach equilibrium.

Corn flakes are A) a rival good because many firms produce them. B) a rival good because if another person wants some corn flakes society has to use additional resources to produce corn flakes for that person. C) a non-rival good because there are only a few firms in the industry. D) a non-rival good because even if another person wants some corn flakes so many corn flakes are produced that no additional resources are used to satisfy this new customer's needs. E) a public good.

Excess capacity in monopolistically competitive industries results because in equilibrium A) each firm's output level is too great to minimize average cost. B) each firm's output level is too small to minimize average cost. C) firms make positive economic profit. D) price equals marginal cost.

Second-degree price discrimination is the practice of charging A) the reservation price to each customer. B) different prices for different quantity blocks of the same good or service. C) different groups of customers different prices for the same products. D) each customer the maximum price that he or she is willing to pay.

Your firm needs a private investigator and the best private eye in Santa Teresa is Kinsey Milhone. Her services are worth $30,000 to your firm but you do not want to pay her more than $10,000. You tell Kinsey that you cannot pay her more than $10,000 unless you get prior approval from the Board of Directors of your company, and, unfortunately, they just met and won't meet again for 6 months. This strategic move on your part gives you ________ flexibility and ________ bargaining power. A) less, less B) less, more C) more, less D) more, more

A 10 percent decrease in advertising results in a 5 percent sales decrease. The advertising elasticity of demand is ________. A) -2.0 B) -0.5 C) 0.5 D) 2 E) none of the above

A doctor charges two different prices for medical services, and the price level depends on the patients' income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) pricing at each consumer's reservation price.

A dominant strategy can best be described as A) a strategy taken by a dominant firm. B) the strategy taken by a firm in order to dominate its rivals. C) a strategy that is optimal for a player no matter what an opponent does. D) a strategy that leaves every player in a game better off. E) all of the above

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits? A) PA = PB = MC. B) MRA = MRB. C) MRA = MRB = MC. D) (MRA - MRB) = (1 - MC).

A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics and the marginal external cost of the pollutants are both constant with respect to the quantity of plastics produced. If the demand for plastics is downward sloping, what happens to the socially optimal level of output and market price if the demand curve for plastics shifts rightward? A) Optimal price and quantity increase B) Optimal price increases, optimal quantity remains unchanged C) Optimal price remains unchanged, optimal quantity increases D) Optimal price and quantity remain unchanged

For a perfect first-degree price discriminator, incremental revenue is A) greater than price if the demand curve is downward sloping. B) the same as the marginal revenue curve if the firm is a non-discriminating monopolist. C) equal to the price paid for each unit of output. D) less than the marginal revenue for a non-discriminating monopolist.

Many cellular phone rate plans are structured as a combination of ________ price discrimination. A) first-degree and second-degree B) first-degree and third-degree C) second-degree and third-degree D) peak-load pricing and third-degree

One Guy's Pizza advertising expenditures are $1,200 and sales are $30,000. When the advertising expenditure increases to $1,400, pizza sales increase to $32,000. The arc advertising elasticity of demand is approximately ________. A) 0 B) 0.1 C) 0.4 D) 2.5 E) 12.5

Over the past several decades, low-productivity and high-productivity workers in the US and other countries have tended to invest in their own human capital by completing more years of college than earlier generations. Which of the following reasons does NOT help to explain this trend? A) The cost of education for low-productivity workers has declined due to the emergence of online and other nontraditional programs. B) The earnings gap between workers with and without education has grown larger over time. C) The cost of education for high-productivity workers has increased over time. D) The benefit associated with increased education has increased over time.

The price elasticity of demand for nursery products is -10. The advertising elasticity of demand is 0.4. Using the "Rule of Thumb for Advertising," the profit maximizing level of advertising will be set at ________ of sales. A) 0.25 percent B) 0.4 percent C) 4 percent D) 40 percent

When firms participate in group health insurance for all employees, it A) raises rates for everyone, because it brings unhealthy people into the pool. B) raises rates for unhealthy people. C) may lower rates for all people to the extent that it keeps healthy people in the pool. D) prevents unhealthy people from "selecting out," to the detriment of healthy people. E) increases the amount of information available to insurers about the population.

Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry? A) It produces at minimum average cost. B) It does not produce at minimum average cost, and average cost is increasing. C) It does not produce at minimum average cost, and average cost is decreasing. D) Either B or C could be true.

A "Credible Threat" A) is also called a "tit-for-tat" strategy. B) always set a low price. C) minimizes the return of your opponent. D) is a strategy selection that is in your best interest. E) provides the best return for both players.

A "mixed strategy" equilibrium means that A) the strategies chosen by the players represent different behaviors. B) one player has a dominant strategy, and one does not. C) one player has a pure strategy, and one does not. D) the equilibrium strategy is an assignment of probabilities to pure strategies. E) the equilibrium strategy involves alternating between a dominant strategy and a Nash strategy.

A firm will avoid producing additional emissions whenever the fee is A) less than the MSB. B) greater than the MSB. C) less than the MCA. D) greater than the MCA. E) equal to the distance between MSB and MCA.

For Group K the cost of attaining an educational level y is CK(y) = $2,000y and for Group M the cost of attaining that level is CM(y) = $4,000y. Employees will be offered $30,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $90,000 if they have y > . Refer to Scenario 17.2. If the threshold educational level y* is set at 45, A) only individuals in Group K will attain it. B) only individuals in Group M will attain it. C) individuals in both groups will attain it. D) no individuals will attain it. E) some fraction of individuals in each group will attain it.

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms? A) Divisions that produce parts for other divisions have effective monopoly power, so the outcome for these division must be inefficient. B) This outcome is no longer possible in the U.S. after passage of the Sarbanes-Oxley law. C) Vertically integrated firms are often subject to antitrust investigations, so managers routinely limit the amount of information that flows between divisions. D) Managers in some divisions may not have information about production capacities or costs in related divisions.

If there are open first-class seats available on a particular flight, some airlines allow customers with coach (discount) tickets to upgrade to first-class tickets during the electronic check-in process. Suppose the regular price of a first-class ticket is $800, the total price of the upgrade ticket (original price plus the upgrade) is $400, the marginal cost of serving both types of customers (full-fare and upgrade firstclass flyers) is $100, and the airline maximizes profits. Which of the following statements is true? A) MR for the full-fare customers must be higher than the MR from upgrade customers. B) MR for the full-fare customers may be higher or lower than the MR from upgrades. C) MR = MC for the full-fare customers, but the airline is willing to collect any positive amount from the upgrade customers. D) MR must be the same for both full-fare and upgrade customers.

In a Nash equilibrium, A) each player has a dominant strategy. B) no players have a dominant strategy. C) at least one player has a dominant strategy. D) players may or may not have dominant strategies. E) the player with the dominant strategy will win.

In comparing the Cournot equilibrium with the competitive equilibrium, A) both profit and output level are higher in Cournot. B) both profit and output level are higher in the competitive equilibrium. C) profit is higher, and output level is lower in the competitive equilibrium. D) profit is higher, and output level is lower in Cournot.

In insurance markets, moral hazard creates economic inefficiency because: A) insurance companies are price setters rather than price takers. B) insurance products are not homogenous goods. C) there are many buyers but only a few sellers. D) insured individuals do not correctly perceive the costs or benefits of their actions.

When asymmetric information problems drive high quality products from a market, we refer to this situation as: A) adverse selection. B) moral hazard. C) a lemons problem. D) A and C are correct. E) B and C are correct.

Which of the following can be thought of as a barrier to entry? A) scale economies. B) patents. C) strategic actions by incumbent firms. D) all of the above

Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run? A) P = MC. B) MC = ATC. C) P > MR. D) Profit equals zero.

Which of the following statements is NOT compatible with explanations for why peak-load pricing is more profitable than charging a single price? A) Consumer willingness to pay for the product varies a lot across different time periods. B) Marginal cost of production is much higher under peak demand. C) Marginal revenue changes a lot across different time periods. D) Marginal revenue must be the same across different time periods.

For Group A the cost of attaining an educational level y is CA(y) = $6,000y and for Group B the cost of attaining that level is CB (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*. Refer to Scenario 17.1. If the threshold educational level y* is set at 10, A) only individuals in Group A will attain it. B) only individuals in Group B will attain it. C) individuals in both groups will attain it. D) no individuals will attain it. E) some fraction of individuals in each group will attain it.

For Group K the cost of attaining an educational level y is CK(y) = $2,000y and for Group M the cost of attaining that level is CM(y) = $4,000y. Employees will be offered $30,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $90,000 if they have y > . Refer to Scenario 17.2. If the threshold educational level y* is set at 20, A) only individuals in Group K will attain it. B) only individuals in Group M will attain it. C) individuals in both groups will attain it. D) no individuals will attain it. E) some fraction of individuals in each group will attain it.

In the spring of 1994, Northwest Airlines took the independent action of reducing fares on its flights. Other competing airlines quickly matched the fare cuts. These actions might be interpreted as: A) a noncooperative game. B) a cooperative game. C) a constant sum game. D) a competitive game.

Many business professionals constantly monitor their incoming email and text messages so they can appear to be alert and responsive, even at night and on weekends. Alternatively, some time management consultants recommend that business professionals should not constantly check for new messages because this practice distracts the worker from scheduled tasks that may have higher priority. The decision to check email or text messages less frequently may not harm the worker's salary if it is a: A) weak signal of worker ability. B) weak signal of cell phone strength. C) strong signal of worker ability. D) strong signal of ease of distraction.

Many communities use a mixed-flow recycling program in which various types of bottles, cans, and other containers are placed in a single recycling bin. Suppose a community alters its recycling program by mandating that the containers must be sorted by type of material (i.e., glass, aluminum, plastic). What is the expected impact of this change on the optimal quantity of unredeemed (scrapped) containers? A) Optimal quantity increases B) Optimal quantity decreases C) Optimal quantity remains unchanged D) We cannot determine the outcome of this policy change without having more information

Monopolistically competitive firms have monopoly power because they A) face downward sloping demand curves. B) are great in number. C) have freedom of entry. D) are free to advertise.

StowUrStuff Storage is located slightly below sea level in a coastal town. It could build and maintain a flood control system around its property at an annual cost of $1000, and if it did so, the probability of a flood's doing $1,000,000 in damage during the year would be .005. With no flood control system, the probability of such a flood would be .01. Refer to Scenario 17.4. Moral hazard arises in this situation because once the firm A) pays the premium that is based on the .005 probability, it has no incentive to spend the additional $1000 for the flood control system, so the true probability of loss is no longer .005. B) pays the premium that is based on the .01 probability, it has no incentive to spend the additional $1000 for the flood control system, so the true probability of loss is no longer .01. C) provides for flood control, it has less incentive to spend $5000 on premiums, leaving itself underinsured. D) provides for flood control, it has less incentive to spend $10,000 on premiums, leaving itself underinsured. E) provides for flood control, it will consider that a substitute for insurance and not be able to deal with the loss from a flood should it occur.

Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then: A) producer surplus increases due to new buyers, but the producer surplus from existing customers declines due to the lower price. B) the change in producer surplus is transferred to consumers. C) the increase in consumer surplus is only due to the increase in quantity demanded. D) the sum of producer and consumer surplus remains the same, but surplus value is transferred from the producer to consumers.

Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows: Q = 6000 - 5P MR = 1200 - 0.4Q Refer to Scenario 12.1. What will be the price in the long run if the industry is a Cournot duopoly? A) $400 B) $600 C) $800 D) $900 E) Competition will drive the price to zero.

Suppose the demand for labor shifts rightward due to economic growth, but the supply of labor remains unchanged. How does this affect the market outcome under an efficiency wage equilibrium? A) Efficiency wage and employment are higher B) Efficiency wage is lower, employment is higher C) Efficiency wage is higher, employment is lower D) Efficiency wage and employment are lower

Suppose the market demand curve is P = 40 - 2Q and the constant marginal cost of production is MC = 20. Which of the following is a valid expression for the collusion curve? A) Q = 5 B) Q1 = 5 - Q2 C) Q1 = Q2 = 5 D) Q1 = 40 - Q2

The "efficiency wage" is the wage at which A) employees have no incentive to shirk. B) employees have an incentive to do the optimal (positive) amount of shirking. C) the cost of looking for work is equal to the value of the leisure time for the unemployed individual. D) there is no unemployment. E) there is only frictional unemployment.

The authors explain that the marginal cost of production does not have to be constant in order to maximize profits under intemporal price discrimination. Which of the following is NOT an example of changing marginal costs under profit-maximizing intertemporal price discrimination? A) Marginal cost increases sharply after the initial marketing stages when the product is sold to the broader market of consumers. B) Marginal costs decline over time due to learning-by-doing. C) Marginal costs decline over time because the producer sells less expensive versions of the product in later stages of marketing (e.g., hard-cover versus paper-cover books). D) Marginal costs decline over time due to economies of scale.

The most important factor in determining the long-run profit potential in monopolistic competition is A) free entry and exit. B) the elasticity of the market demand curve. C) the elasticity of the firm's demand curve. D) the reaction of rival firms to a change in price.

The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run. Refer to Scenario 17.3. Moral hazard arises in this situation because once the firm A) pays the premium that is based on the 0.001 probability, it has no incentive to spend the additional $80 for the fire protection program, so the true probability of loss is no longer 0.001. B) pays the premium that is based on the 0.01 probability, it has no incentive to spend the additional $80 for the fire protection program, so the true probability of loss is no longer 0.01. C) puts the fire protection program in place, it has less incentive to spend $300 for a premium, leaving the firm underinsured. D) puts the fire protection program in place, it has less incentive to spend $6,000 for a premium, leaving the firm underinsured. E) puts the fire protection program in place, it will consider that a substitute for insurance and not be able to deal with the loss from a fire should it occur.

The provision of an education in public school is A) exclusive and rival. B) exclusive and non-rival. C) nonexclusive and non-rival. D) nonexclusive and rival. E) a public good, regardless of exclusivity and rivalness.

The relationship between a pure-strategy Nash equilibrium and a dominant-strategy equilibrium is that A) a dominant-strategy equilibrium is a special case of a pure-strategy Nash equilibrium. B) a pure-strategy Nash equilibrium is a special case of a dominant-strategy equilibrium. C) they are the same. D) there may not be a dominant-strategy equilibrium, but there always is a pure-strategy Nash equilibrium. E) they are mutually exclusive and exhaustive, in that a dominant-strategy equilibrium is the same thing as a mixed-strategy Nash equilibrium.

To enforce the optimum level of emissions a government could set an emissions standard at the quantity A) where the MSB curve crosses the MCA curve. B) located at the vertical intercept of the MSB curve. C) located at the horizontal intercept of the MSB curve. D) located at the vertical intercept of the MCA curve. E) located at the horizontal intercept of the MCA curve.

To enforce the optimum level of emissions, a government could set an emissions fee, which would be A) the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted. B) the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted above the standard. C) the vertical intercept of the MSB curve. D) the vertical intercept of the MCA curve. E) the vertical distance between the intercepts of the MSB curve and the MCA curve.

To find the social marginal benefit of public goods, one needs to A) sum the consumers' demand curves vertically. B) sum the consumers' demand curves horizontally. C) sum the marginal private benefit and the marginal external benefit for each unit. D) sum the marginal private cost and the marginal external cost for each unit. E) subtract the individual portion of the tax burden necessary for the government to provide the good from the demand curve of each consumer who desires the good.

What is one difference between the Cournot and Stackelberg models? A) In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm sets its output level first. B) In Stackelberg, both firms make output decisions simultaneously, and in Cournot, one firm sets its output level first. C) In Cournot, a firm has the opportunity to react to its rival. D) Profits are zero in Cournot and positive in Stackelberg.

When a moral hazard problem exists for automobile driving, the marginal cost of driving A) is lowered, and the amount of driving done is raised above the efficient level. B) is lowered, and the amount of driving done is lowered below the efficient level. C) is raised, and the amount of driving done is raised above the efficient level. D) is raised, and the amount of driving done is lowered below the efficient level. E) is raised above the efficient level, but market forces keep the total amount of driving is kept at the efficient level.

Which of the following are examples of cooperative games? A) The bargaining between a buyer and seller over the price of a car B) Independent action by two firms in a market regarding advertising strategies C) Independent pricing strategies by two firms in a market D) Independent pricing strategies by many firms in a market E) Team games (such as baseball or basketball)

Which of the following is NOT a potential objective of tying strategies used by firms? A) Reduce production costs and avoid problems associated with diseconomies of scale B) Protect brand image and ensure product quality C) Meter consumption across different buyers in order to collect a two-part tariff D) Extend a firm's market power from one product market into another market

Which of the following statements is NOT a reason that the cost of a college education is greater for the low-productivity group than for the high-productivity group? A) The wages they give up by going to college instead of working will tend to be higher for them. B) They may have to pay for tutoring services or other extra help to accomplish the same educational goal. C) They may have to take remedial classes, which would increase the length of time it takes to accomplish the same goal. D) Even if they take no remedial classes, they may have to spend more time studying for each class, and the value of their leisure time needs to be considered in the calculation. E) Based on previous signaling, such as from their high school grades or SATs, they may receive less merit-based financial assistance, and thus be under a greater financial strain during their college years.

Why can't two firms in a Prisoners' Dilemma enforce a better outcome that has higher payoffs? A) Under an outcome with higher payoffs, the outcome is not a Nash equilibrium and each firm has an incentive to change their actions. B) Barriers to entry C) Barriers to exit D) The Nash equilibrium in a Prisoners' Dilemma has the highest possible payoffs for both firms.

Why does cooperative behavior break down in games with finite endpoints? A) Each player has an incentive to deviate from a cooperative strategy during the last period. B) A Nash equilibrium in pure strategies is not possible in finite repeated games. C) Finite games have the same outcomes as one-period games, and cooperation is not possible in oneperiod games. D) A Nash equilibrium is only possible in mixed strategies in finite repeated games, but all of the probabilities assigned to particular strategies approach zero as the number of finite game periods becomes large. Thus, we cannot evaluate the expected payoffs in these games.

You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. You will charge the higher price in the market with the A) lower own price elasticity of demand (more inelastic demand). B) higher own price elasticity of demand (more elastic demand). C) larger teenage population. D) greater consumer incomes.

Your economics professor has decided that your class will not be graded on a curve but on an absolute scale. Therefore, it is possible for every student in the class to get an "A." Your grade will not depend in any way on your classmates' performance. Based on this information, you decide that you should study economics three hours each day, regardless of what your classmates do. In the language of game theory, your decision to study three hours each day is: A) a dominant strategy. B) a minimax strategy. C) a maximin strategy. D) a Prisoner's dilemma.

A warranty is most valuable as a signaling device when A) the buyer has much more information about the product than the seller does. B) the seller has much more information about the product than the buyer does. C) the buyer has much more information about his or her own preferences than the seller does. D) neither the buyer nor the seller has good information about the product. E) neither the buyer nor the seller has good information about consumer preferences.

Automobile manufacturers commonly sell new car models at the full suggested retail price during the first few years the car is on the market, and they do not offer rebates or discounts. After the initial sales period, the manufacturers typically offer rebates or discounts on these models. The marginal cost of manufacturing the cars is constant across time. Which of the following statements is true? A) The firms practice peak-load pricing by charging a higher price in the initial sales period. B) Early buyers have higher reservation prices for the new models, and the manufacturers maximize profits by charging these buyers a higher price. C) The marginal revenue from buyers who purchase these cars after the initial sales period must be lower that the marginal revenue from early buyers. D) To maximize profits, the firms equate the buyers' reservation prices across

Because trucking as an industry involves the generation of pollutants in engine exhaust, A) the supply curve of trucking services overstates the true cost of providing those services. B) the supply curve of trucking services understates the true cost of providing those services. C) the demand curve for trucking services overstates the true benefit of providing those services. D) the demand curve for trucking services understates the true benefit of providing those services. E) the market for trucking services will always be away from equilibrium by an amount equal to the value of the externality.

For Group A the cost of attaining an educational level y is CA(y) = $6,000y and for Group B the cost of attaining that level is CB (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*. Refer to Scenario 17.1. An employer who only wants to hire individuals who find learning less costly can do so by choosing y* to be anywhere between A) 7 and 14. B) 8 and 13 1/3. C) 10 and 16. D) 13 1/3 and 20. E) 14 and 20.

For Group A the cost of attaining an educational level y is CA(y) = $6,000y and for Group B the cost of attaining that level is CB (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*. Refer to Scenario 17.1. The highest level of y* that can be set and still have the high-productivity people choose to meet it is A) 16. B) 13 1/3. C) 13. D) 8. E) 0.

For Group K the cost of attaining an educational level y is CK(y) = $2,000y and for Group M the cost of attaining that level is CM(y) = $4,000y. Employees will be offered $30,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $90,000 if they have y > . Refer to Scenario 17.2. An employer who only wants to hire those people who find learning less costly can do so by choosing y* to be anywhere between A) 15 and 45. B) 15 and 30. C) 13 1/3 and 30. D) 8 and 20. E) none of the above

If individuals are paid the wage at which the supply of labor is equal to the demand for labor, A) no unemployment exists, and workers have no incentive to shirk. B) no unemployment exists, and workers have an incentive to shirk. C) some unemployment still exists, but workers have no incentive to shirk. D) some unemployment still exists, but managers can tell whether or not workers are shirking.

In the Stackelberg model, suppose the first-mover has MR = 15 - Q1, the second firm has reaction function Q2 = 15 - Q1/2, and production occurs at zero marginal cost. Why doesn't the first-mover announce that its production is Q1 = 30 in order to exclude the second firm from the market (i.e., Q2 = 0 in this case)? A) In this case, MR is negative and is less than MC, so the first-mover would be producing less than the optimal quantity. B) In this case, MR is negative and is less than MC, so the first-mover would be producing too much output. C) This is a possible outcome from the Stackelberg duopoly under these conditions. D) We do not have enough information to determine if this is an optimal outcome for this case.

It can be rational to play tit-for-tat in a repeated Prisoners' Dilemma game A) only if the game is played an infinite number of times. B) if the game is played an infinite number of times, or if it is uncertain how many times it will be played. C) only if the game is played a finite number of times, and that number is known by all the players in advance. D) for n-1 of the n periods it will be played, if n is known in advance. E) at no time; tit-for-tat is an irrational strategy in this situation.

John is a 55-year-old male smoker, about 50 pounds overweight, who has high blood sugar and drinks to excess a couple of times each month. Because of adverse selection in health insurance, A) John is less likely to buy health insurance than the average person, because the average person's policy premiums will be based on his risk, not the average risk. B) John is more likely to buy health insurance than the average person, because his policy premiums will be based on the average risk, not his personal risk. C) when John gets health insurance, he will be less likely to take care of himself. D) when John gets health insurance, he will be more likely to take care of himself. E) if John doesn't have health insurance already, he will not be able to get it.

Johnny's Shop-and-Pay is a regional grocery chain, and their marketing manager is trying to determine the profit-maximizing coupon program for the store's laundry detergent brand. Coupon users at the store have an elasticity of demand for this product that equals -3, and the elasticity of demand for non-users of the coupon for the store brand equals -1.5. If the full retail (undiscounted) price of the detergent is $10 per box, what is the optimal discount to provide for coupon users? A) 25% off B) 50% off C) 75% off D) The optimal strategy is to charge the same price to both groups

La Tortilla is the only producer of tortillas in Santa Teresa. The firm produces 10,000 tortillas each day and has the capacity to increase production to 100,000 tortillas each day. La Tortilla has made a large profit for years, but no other firm has chosen to compete in the Santa Teresa tortilla market. La Tortilla has been able to deter entry because if other firms were to enter the market it would greatly stepup production and reduce price. A) La Tortilla's behavior is inconsistent with economic theory. B) La Tortilla has been successful because of its credible threat. C) La Tortilla behaves like a Stackelberg firm. D) La Tortilla must have other barriers to entry to protect its monopoly power.

Louey's Greasy Spoon restaurant charges $15 for each dinner entree and $5 for each dessert selection, and they offer a dinner special that provide an entree and dessert for $18. If a diner at Louey's assigns zero value to dessert and $19 to an entree, what is their optimal decision? A) Buy the dinner special B) Buy only the entree C) Buy only the dessert selection D) We do not have enough information to determine the optimal decision

Many states use container redemption programs to encourage reuse of glass bottles and other recyclable containers. Suppose a state has a current redemption program that imposes a 10-cent per container fee, and then the state increases the fee to 15 cents per container. What is the expected impact of this change on the optimal quantity of unredeemed (scrapped) containers? A) Optimal quantity increases B) Optimal quantity decreases C) Optimal quantity remains unchanged D) We cannot determine the outcome of this policy change without having more information

Some grocery stores are now offering customers coupons which entitle them to a discount on certain items on their next visit when they go through the check-out line. This practice is an example of: A) intertemporal price discrimination. B) third-degree price discrimination. C) a two-part tariff. D) bundling. E) none of the above

Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then: A) consumer and producer surplus must increase. B) consumer surplus increases, producer surplus may increase or decrease. C) consumer surplus increases, producer surplus must decline. D) consumer and producer surplus must decline.

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.3. What price would this new drink sell for if it sold in a competitive market? A) 0 B) $3 C) $13.50 D) $16.50 E) $27

Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows: Q = 6000 - 5P MR = 1200 - 0.4Q Refer to Scenario 12.1. What is the profit maximizing price of a monopolist? A) $400 B) $600 C) $800 D) $900 E) none of the above

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens OPEC's share of the world oil market? A) Increases B) Decreases C) Remains the same D) We do not have enough information to answer this question.

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens to the price of oil on the world market? A) Increases B) Decreases C) Remains the same D) We do not have enough information to answer this question.

Suppose we advertise up to the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one). If the full marginal cost of advertising is greater than one, then we will generate: A) less output than the profit maximizing level. B) more output than the profit maximizing level. C) the profit maximizing level of output. D) We don't have enough information to answer this question.

The Prisoners' Dilemma is a particular type of game in which negotiation and enforcement of binding contracts is not possible, and such games are known as: A) cooperative games. B) noncooperative games. C) collusive games. D) Cournot games.

The efficiency wage is A) a wage at which there is no unemployment, and shirking workers are not counted in the pool of total labor. B) a wage at which there is a positive amount of unemployment. Individuals who are fired for shirking will be penalized with a period of unemployment. C) a wage at which there is a shortage of labor. Firms who fire a worker for shirking will be able to hire another one easily. D) the wage that is paid to high-quality, non-shirking workers. Other workers are paid the marketclearing wage. E) the wage that subtracts the cost of shirking from the market-clearing wage to determine that which is really paid.

The market structure in which strategic considerations are most important is A) monopolistic competition. B) oligopoly. C) pure competition. D) pure monopoly.

The oligopoly model that is most appropriate when one large firm usually takes the lead in setting price is the ________ model. A) Cournot B) Stackelberg C) game theory D) prisoner's dilemma

Traditionally, the federal government provides disaster relief funds to flood victims so that they can rebuild their homes after a major flood. However, the government has recently denied requests to rebuild some homes that were situated in flood-prone areas. This action represents an attempt to ________ the moral hazard problem associated with building private homes in risky areas. A) enhance B) mitigate C) legalize D) support

What characteristic of monopolistic competition may help to offset the inefficiency of this market structure? A) Free entry and exit imply that firms produce at minimum long-run average cost. B) Consumers may value the product diversity that allows them to choose from a wide variety of differentiated products. C) Consumers may feel better about the inefficiency if they know that firms earn zero profits. D) Consumers may prefer this outcome to monopoly or monopsony.

What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter? A) It shifts right. B) It shifts left. C) It becomes horizontal. D) New entrants will not affect an incumbent firm's demand curve.

What happens to the profit-maximizing cartel price and quantity if the marginal cost of production declines? A) The sellers are no longer price takers, so the change in marginal cost has no impact on the cartel outcome. B) If demand is downward sloping, the optimal cartel price should decline and the market quantity should increase. C) The sellers retain the same pricing strategy and capture higher per-unit profits. D) The cartel price increases and market quantity declines.

When a monopolist engages in perfect price discrimination, A) the marginal revenue curve lies below the demand curve. B) the demand curve and the marginal revenue curve are identical. C) marginal cost becomes zero. D) the marginal revenue curve becomes horizontal.

When cost and demand are stable over time in an industry, repetition of Prisoners' Dilemma situations A) can yield cooperative outcomes because firms can explicitly collude to set prices. B) can yield cooperative outcomes even when firms do not explicitly collude to set prices. C) cooperative or noncooperative outcomes may occur, but cooperation is harder than when the market is unstable. D) will tend to yield noncooperative outcomes. E) will always yield noncooperative outcomes.

When emissions are measured on the horizontal axis, the marginal cost of abating emissions is A) downward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. B) downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. C) upward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. D) upward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. E) horizontal because the technology to remove emissions is assumed constant.

Which of the following is true in long-run equilibrium for a firm in a monopolistic competitive industry? A) The demand curve is tangent to marginal cost curve. B) The demand curve is tangent to average cost curve. C) The marginal cost curve is tangent to average cost curve. D) The demand curve is tangent to marginal revenue curve.

Which of the following is true in the Stackelberg model? A) The first firm produces less than its rival. B) The first firm produces more than its rival. C) Both firms produce the same quantity. D) Both firms have a reaction curve.

Which of the following markets is most likely to be oligopolistic? A) The market for corn B) The market for aluminum C) The market for colas D) The market for ground coffees

Why are many oligopolistic market outcomes conveniently described by a Prisoners' Dilemma? A) The firms can always achieve the outcome that maximizes joint outcomes. B) The firms could do better than the Nash equilibrium if they collude. C) The outcome of a Prisoners' Dilemma is always efficient. D) The outcome of a Prisoners' Dilemma is always identical to the perfectly competitive outcome.

You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. The florist's cost for the arrangement is $200. You finally settled on a price of $250. Refer to Scenario 13.1. If your negotiated price had been $350 instead of $250, the sum of consumer surplus and producer surplus would be: A) less than what would have accrued at the $250 price. B) the same as what would have accrued at the $250 price. C) more than what would have accrued at the $250 price. D) None of the above is necessarily correct.

You are playing a game in which a dollar bill is auctioned. The highest bidder receives the dollar in return for the amount bid. However, the second-highest bidder must pay the amount that he or she bids, and gets nothing in return. The optimal strategy is: A) to bid the smallest allowable increment below $1. B) to bid nothing. C) to bid $0.99. D) to bid more than a dollar.

A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plasticis, and the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward? A) Optimal price and quantity decrease B) Optimal price increases, optimal quantity remains unchanged C) Optimal price increases, optimal quantity decreases D) Optimal price and quantity decline

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) fourth-degree price discrimination. E) fifth-degree price discrimination.

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should A) have sold more output in the local market and less at the internet auction site. B) do nothing until it acquires more information on costs. C) have sold less output in the local market and more on the internet auction site. D) sell less in both markets until marginal revenue is zero. E) sell more in both markets until marginal cost is zero.

Andre Agassi, a star tennis player, is playing the number one player in the world, Roger Federer. Before the match, Agassi decided that he would serve 20 percent of his serves to Federer's backhand, 30 percent of his serves to Federer's forehand, and 50 percent of his serves straight at Federer. In the language of game theory, this is known as: A) a pure strategy. B) a dominant strategy. C) a mixed strategy. D) a maximin strategy.

Assume that both high and low quality appliances are sold in the used appliance market. If we assume asymmetric information with sellers having more information regarding quality than buyers, which of the following is necessarily true? The A) fraction of high quality appliances will be greater than under perfect knowledge. B) fractions of high and low quality appliances will be the same as with perfect information. C) fraction of high quality appliances will be less than with perfect information. D) none of the above

Asymmetric information problems arise A) in horizontally integrated firms, but not vertically integrated firms. B) in vertically integrated firms, but not horizontally integrated firms. C) in both vertically and horizontally integrated firms. D) only in firms that do not have the advantage of either horizontal or vertical integration. E) only when a single firm is both horizontally and vertically integrated.

Bundling raises higher revenues than selling the goods separately when A) demands for two goods are highly positively correlated. B) demands for two products are mildly positively correlated. C) demands for two products are negatively correlated. D) there is a perfect positive correlation between the demands for two goods. E) the goods are complementary in nature.

Consider a market in which high-quality and low-quality television sets are sold. Before consumers make a purchase, they do not know the quality of the sets, but the sellers do know. As compared to a situation where both consumers and sellers know the quality of the sets, this situation would A) cause no change in the ratio of low to high-quality sets sold. B) increase the fraction of high-quality sets sold. C) increase the fraction of low-quality sets sold. D) cause the average price of goods sold to rise.

Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers, A) the marginal social cost curve is above and to the right of the demand curve. B) the marginal social cost curve is below and to the left of the demand curve. C) the marginal social cost curve is above and to the left of the supply curve. D) the marginal social cost curve is below and to the right of the supply curve. E) there is a gap between quantity supplied and quantity demanded in equilibrium.

Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, the equilibrium price A) and output are too low to be optimal. B) and output are too high to be optimal. C) is too low to be optimal, and equilibrium quantity is too high. D) is too high to be optimal, and equilibrium quantity is too low. E) is optimal, but there is an excess supply.

For Group A the cost of attaining an educational level y is CA(y) = $6,000y and for Group B the cost of attaining that level is CB (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*. Refer to Scenario 17.1. If the threshold educational level y* is set at 7, A) only individuals in Group A will attain it. B) only individuals in Group B will attain it. C) individuals in both groups will attain it. D) no individuals will attain it. E) some fraction of individuals in each group will attain it.

For Group K the cost of attaining an educational level y is CK(y) = $2,000y and for Group M the cost of attaining that level is CM(y) = $4,000y. Employees will be offered $30,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $90,000 if they have y > . Refer to Scenario 17.2. If the threshold educational level y* is set at 13 1/3, A) only individuals in Group K will attain it. B) only individuals in Group M will attain it. C) individuals in both groups will attain it. D) no individuals will attain it. E) some fraction of individuals in each group will attain it.

For Group K the cost of attaining an educational level y is CK(y) = $2,000y and for Group M the cost of attaining that level is CM(y) = $4,000y. Employees will be offered $30,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $90,000 if they have y > . Refer to Scenario 17.2. The highest level of y* that can be set and still have the high-productivity people choose to meet it is A) 90. B) 60. C) 30. D) 22.5. E) 15.

How does the federal government avoid the asymmetric information problem associated with providing health care to people over 65 years of age? A) Health care is standardized and is the same for all people over 65 years of age. B) Health insurers rely on the reputation of the covered individuals. C) Participation in the Medicare program is mandatory for all people over 65 years of age. D) Health information about people enrolled in the Medicare program is publically available.

If the moral hazard problem in automobile driving were to be eliminated, the marginal cost of driving would be A) lowered enough to pull the amount of driving back down to the efficient level. B) lowered enough to raise the amount of driving back up to the efficient level. C) raised enough to pull the amount of driving back down to the efficient level. D) raised enough to raise the amount of driving back up to the efficient level. E) lowered back down to the efficient level, relieving the stress on market forces.

In the arena of asymmetric information, standardization (for example, menus at McDonald's restaurants) is a substitute for A) quality. B) government regulation. C) reputation of individual sellers. D) firms' distinguishing among buyers. E) firms' segregation of buyers.

MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize profits? A) Price should be $0.50 in both markets B) Price should be $2.50 on the West Coast and $1.50 on the East Coast C) Price should be $1.50 on the West Coast and $2.50 on the East Coast D) Price should be $0.40 on the West Coast and $0.33 on the East Coast

Mixed bundling is more profitable than pure bundling when A) the marginal cost of each good being sold is positive. B) the consumers' reservation values of each good being sold are not perfectly negatively correlated with one or another. C) Both A and B are correct. D) the marginal cost of one good is zero.

Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet). What is the source of the asymmetric information problem in this case? A) The bank has more information about the true cost of the corporate jet than the firm. B) The bank has more information about the opportunity cost of the loaned funds. C) The firm has more information about the actual use of the funds than the bank. D) The firm has more information about the interest rate on the loan than the bank.

Suppose a player in a game has a dominant strategy, but they threaten to take another action. Can this threat be credible? A) No, such threats are never credible to other rational players. B) No, if the player has a dominant strategy, they must take this action. C) Yes, if they can link the current game to another bargaining problem in which their joint strategy for the combined games is rational. D) Yes, dominant strategies may not always yield the highest payoffs.

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct? A) The Japanese firm will sell more steel abroad than they will sell in Japan. B) The Japanese firm will sell more steel in Japan than they will sell abroad. C) The Japanese firm will sell steel at a lower price abroad than they will charge domestic users. D) The Japanese firm will sell steel at a higher price abroad than they will charge domestic users. E) Insufficient information exists to determine whether the price or quantity will be higher or lower abroad.

Suppose two firms with differentiated products are competing on price. The reaction curve for Firm 1 is P1 = 4 + 0.5 P2, and the reaction curve for Firm 2 is P2 = 4 + 0.5P1. What is the equilibrium price outcome in this market? A) P1 = P2 = 4 B) P1 = P2 = 6 C) P1 = P2 = 8 D) P1 = 6 and P2 = 8

The authors explain that the international copper cartel (CIPEC) has been largely ineffective in raising the price of copper in world markets, and the reason is mainly due to the relatively elastic demand for copper. Suppose the cartel recognized that there are multiple uses for copper, and some of the uses have few substitute products (e.g., copper electrical wire) while others have several close substitutes (e.g., copper water pipes). To increase profits, the cartel could raise the price of copper in the sub-markets with relatively inelastic demand. What else would the cartel have to do in order to make the cartel's action effective? A) The cartel would have to seek permission from the U.S. Department of Justice. B) The cartel would have to get the cooperation of all other copper producers in order to raise the price by some positive amount. C) The cartel would have to find a way to keep the buyers in the low-price market from reselling the copper to buyers in the high-price market. D) none of the above

The manager of a firm is attempting to practice third degree price discrimination. She has equated the marginal revenue in each of her markets. By doing this her A) profits are maximized. B) costs are minimized given her level of output. C) revenues are maximized given her level of output. D) all of the above

The marginal benefit and marginal private cost curves for aphrodisiacs are given as follows: MB = 200 - Q MPC = Q In addition to private costs, there is a marginal external cost of $10 per unit of output. What is the efficient level of output? A) 0 B) 55 C) 95 D) 100 E) none of the above

The presence of pollution in the trucking industry leads in the long run to dynamic inefficiencies because A) marginal external cost rises over time. B) marginal external cost is constant over time. C) average private cost in trucking is lower than average social cost, so that some trucking firms remain in the industry (or are induced to enter) when efficiency calls for them to leave (or stay out). D) average private cost in trucking is higher than average social cost, so that some firms trucking firms exit the industry when efficiency calls for them to stay (or for more firms to enter). E) fewer resources are devoted to transportation than the economy really needs.

There are two independent dealers for Sporto automobiles in a large city. The dealers decide to run a cooperative advertising campaign in which both dealers are listed in local newspapers ads, and they can purchase larger ads that are more likely to attract attention and generate more auto sales if the dealers commit more funds to the joint advertising budget. Is this an example of a cooperative constantsum game? A) Yes, each firm can contribute zero to 100 percent of the advertising budget, so this is a constant-sum game. B) Yes, all negotiated outcomes between two firms are cooperative and constant-sum situations. C) No, the outcome of the advertising campaign depends on how much money the firms contribute to the campaign, so it is not constant sum. D) No, the firms are independent, so their interaction cannot be cooperative.

What condition may provide for a relatively small degree of inefficiency under monopolistic competition? A) There is a single seller and no product differentiation. B) The marginal cost of production is less than the market price. C) The demand curve is relatively elastic so that the price is near the long-run minimum average cost. D) There is only one buyer in the market.

What is the key characteristic of profit maximizing price discrimination that distinguishes intertemporal price discrimination from peak-load pricing? A) Peak-load pricing does not require MC = MR. B) Marginal revenue may be different across different groups of buyers under intertemporal price discrimination. C) Marginal costs are independent across time periods under peak-load pricing. D) Marginal revenue must be constant under both pricing schemes.

Which of the following conditions, if present, is sufficient to make a game cooperative? A) Individual payoffs are greater if all players choose the same strategy. B) Players can communicate with each other. C) Players can negotiate binding contracts committing them to particular strategies. D) Players must agree unanimously on any set of strategies. E) The payoff that is highest for all individuals together is also highest for each individual player.

Which of the following is NOT a condition for third degree price discrimination? A) Monopoly power B) Different own price elasticities of demand C) Economies of scale D) Separate markets

Which of the following is NOT regarded as a source of inefficiency in monopolistic competition? A) The fact that price exceeds marginal cost B) Excess capacity C) Product diversity D) The fact that long-run average cost is not minimized E) all of the above

Which of the following is TRUE about a college education as a signaling device? A) It is a useful signal only if individuals choose majors related to their ultimate field of employment. B) It is a useful signal only if a college education is open to all individuals, no matter what their previous level of educational accomplishment was. C) It is a useful signal whether or not people actually learn anything in college. D) It is a useful signal only if the job in question cannot be done without the preparatory coursework the college degree required. E) It is less and less a useful signal in the post-industrial economy, where the skill sets employers need change so rapidly.

Which of the following is true in long-run equilibrium for a firm in monopolistic competition? A) MC = ATC. B) MC > ATC. C) MC < ATC. D) Any of the above may be true.

Which of the following product pairs would NOT be good candidates for price discrimination through tying? A) Razors and razor blades B) Ink-jet printers and ink cartridges C) Pencils and paper D) Cellular telephones and cell phone service

Which of the following statements is true? A) If marginal costs are constant, then it is optimal to advertise until the last dollar spent on advertising generates one additional dollar of sales. B) If the demand curve shifts leftward as the advertising expenditure increases, then the advertising elasticity of demand is positive. C) If the advertising elasticity of demand declines and consumer demand becomes more price elastic, then the optimal advertising-to-sales ratio declines. D) If the advertising elasticity of demand is positive, then the demand curve must be upward sloping.

Which of the following statements represents a key point about strategic decision making? A) Strategy is less important in nonconstant sum games than in constant sum games. B) The payoffs in cooperative games will always be higher than in noncooperative games. C) It is essential to understand your opponent's point of view and to deduce his or her likely responses to your actions. D) Optimal strategies in cooperative games always lead to economically efficient outcomes.

Which of the following would be LEAST likely to contribute to a moral hazard problem among drivers? A) Provide medical coverage to all drivers, their passengers, and any and all individuals involved in the accident, no matter who was at fault. B) Provide medical coverage and car repair/replacement coverage to drivers, their passengers, and any and all individuals involved in the accident, no matter who was at fault. C) Modify all cars to remove the driver's seatbelt and the steering wheel air bag. D) Pass a law limiting the amount of damages that juries may award in accident cases. E) Make automobile insurance mandatory for all drivers.

Which statement most nearly describes a Nash equilibrium applied to price competition? A) Two firms cooperate and set the price that maximizes joint profits. B) Each firm automatically moves to the purely competitive equilibrium because it knows the other firm will eventually move to that price anyway. C) Given the prices chosen by its competitors, no firm has an incentive to change their prices from the equilibrium level. D) One dominant firm sets the price, and the other firms take that price as if it were given by the market.

You interview with an athletic footwear manufacturer that has annual advertising expenditures of $32 million and total sales revenue of $100 million, and the firm selects the profit maximizing level of advertising expenditures. If the advertising elasticity of demand is 0.4, then you know that "Rule of Thumb for Advertising" implies that the demand for the firm's products is: A) inelastic. B) unit elastic. C) elastic. D) zero.

Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users? A) -0.67 B) -1.0 C) -1.5 D) We do not have enough information to answer the question.

A lighthouse is a public good A) because it doesn't cost any more to light the way for 105 ships than it does to light the way for 104 ships, but for no other reason. B) because there is no way to prevent those who haven't contributed to the lighthouse from seeing better because of it, but for no other reason. C) because the government produces it, and for no other reason. D) for the reasons in A and B together. E) for the reasons in A, B, and C together.

A monopolistically competitive firm in short-run equilibrium: A) will make negative profit (lose money). B) will make zero profit (break-even). C) will make positive profit. D) Any of the above are possible.

Albatross Software has two main products: WindSong is a program that can be used to edit audio files and SunBurst is a program that can be used to edit digital photos. The two major types of customers are small businesses and home users. The small business customers have a reservation price of $300 for WindSong and $450 for SunBurst. The home users have a reservation price of $100 for WindSong and $125 for SunBurst. Which of the following statements is true? A) Bundling the two software products is not likely to be profitable because the marginal cost of producing software is positive by very small. B) Bundling the two software products is not likely to be profitable because the consumer demands are homogeneous. C) Bundling the two software products is likely to be profitable because the demands are negatively correlated. D) Bundling the two software products is not likely to be profitable because the demands are positively correlated.

Although firms earn zero profits in the long run, why is the outcome from monopolistic competition considered to be inefficient? A) Price exceeds marginal cost. B) Quantity is lower than the perfectly competitive outcome. C) Goods are not identical. D) A and B are correct. E) B and C are correct.

As defined by Thomas Schelling, a "strategic move" is A) any strategy choice in a game. B) any strategy choice consistent with Nash equilibrium. C) any strategy choice in a sequential game. D) a strategy choice that influences the subsequent strategy choice of another player. E) a strategy choice that restricts the set of outcomes available to another player.

Cartels can more easily detect cheating by cartel members if the products sold by each member are largely homogeneous. As product quality varies, the observed prices charged by cartel members may be due to differences in the products, or they may be due to cheating. Which of the following goods would more difficult to monitor for potential cheating? A) Aluminum ingots B) Industrial concrete C) Steel beams D) Luxury yachts

Due to externalities generated by home landscaping, its price A) is above the optimal level, and quantity that is below the optimal level. B) is below the optimal level, and quantity that is above the optimal level. C) and quantity traded are both above the optimal level. D) and quantity traded are both below the optimal level. E) must fall in order for the market to reach equilibrium.

For Group A the cost of attaining an educational level y is CA(y) = $6,000y and for Group B the cost of attaining that level is CB (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*. Refer to Scenario 17.1. If the threshold educational level y* is set at 14, A) only individuals in Group A will attain it. B) only individuals in Group B will attain it. C) individuals in both groups will attain it. D) no individuals will attain it. E) some fraction of individuals in each group will attain it.

For Group A the cost of attaining an educational level y is CA(y) = $6,000y and for Group B the cost of attaining that level is CB (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*. Refer to Scenario 17.1. The lowest level of y* that can be set and still have only the highproductivity people meet it is A) 16. B) 13 1/3. C) 13. D) 8. E) 0.

For a market with a linear demand curve and constant marginal cost of production, why are the reaction functions for the Cournot duopoly sellers also straight lines? A) The reaction functions do not have to be straight lines, and they are only drawn this way in the book to keep the figures simple. B) Cournot thought the lines would be straight, but this was proven wrong by other economists. C) Marginal revenue is always linear when marginal costs are constant. D) We know that the marginal revenue curves for linear demand curves are also straight lines.

For infinitely repeated games in which the players follow a tit-for-tat strategy, which one of the following outcomes is NOT possible? A) The players cooperate with one another until someone decides to not cooperate, and then the other players will not cooperate for some period of time. B) There can be dominant strategies. C) If the information about another player's action is limited, then some cooperative actions may be incorrectly interpretted as "not cooperate." D) All of the above are possible outcomes.

If all producers in a market are cartel members, then the demand curve facing the cartel is A) the market demand curve. B) horizontal. C) identical to the demand curve in the dominant firm model. D) identical to the monopolist's demand curve.

In the Cournot duopoly model, each firm assumes that A) rivals will match price cuts but will not match price increases. B) rivals will match all reasonable price changes. C) the price of its rival is fixed. D) the output level of its rival is fixed.

Over the past several years, the federal government has rescued a few financially distressed banks and other large private companies, and the key reasons for these actions is to stabilize financial markets and to prevent additional business failures that may arise from the original problem. However, critics of these interventions argue that these actions generate a moral hazard problem. Why? A) Government oversight of rescued firms is typically based on limited information, so the outcome is economically inefficient. B) Rescued firms will have a difficult time buying insurance in private markets, so the government will also have to insure the firm against losses from fire, theft, etc. C) Managers have more information about the financial strength of their firm than government officials, so the rescue attempts may be unnecessary. D) Managers may be more likely to invest in risky projects if they believe the government will save the firm in case of failure.

Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm: A) is trying to reduce its costs and therefore increase its profit. B) is engaging in an illegal activity that is prohibited by the Sherman Antitrust Act. C) is attempting to convert producer surplus into consumer surplus. D) is attempting to convert consumer surplus into producer surplus.

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.3. What is the monopoly price of this new drink? A) 0 B) $3 C) $13.50 D) $16.50 E) $27

The authors explain that the international copper cartel (CIPEC) has been largely ineffective in raising the price of copper in world markets, and the reason is mainly due to the relatively elastic demand for copper. Suppose the cartel recognized that there are multiple uses for copper, and some of the uses have few substitute products (e.g., copper electrical wire) while others have several close substitutes (e.g., copper water pipes). If cartel attempted to raise the price of copper in one of these submarkets, which market should the cartel choose? A) Market with several close substitutes because demand is more elastic. B) Market with several close substitutes because demand is more inelastic. C) Market with few close substitutes because demand is more elastic. D) Market with few close substitutes because demand is more inelastic.

The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because A) people will buy fewer clothes that need dry cleaning than they otherwise would have. B) people will develop substitutes for dry cleaning that are wasteful. C) firms will be induced to leave the industry because of artificially high costs. D) firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price. E) firms whose average private cost exceeds the price will exit (or fail to enter) the dry cleaning industry even though their average social cost is less than price.

The problem of adverse selection in insurance results in a situation in which A) people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies. B) people choose too much coverage because they do not understand the complex information in the policies. C) people choose too little coverage because they do not understand the complex information in the policies. D) unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market. E) healthy people become more likely to buy insurance than unhealthy people, which drives premiums up, which drives even more unhealthy people away from the market even though they are the ones who need it most.

To deter a potential entrant, an existing firm in a market may threaten to sharply increase production so that the entrant will be left with a small share of the market. The firm can make this threat credible by limiting its own options, and possible actions of this type include: A) signing long-term sales contracts that commit the firm to high levels of output. B) building a very large factory that could potentially produce enough output to meet most of the market demand. C) signing long-term purchase contracts for large amounts of production inputs. D) all of the above

To deter a potential entrant, an existing firm in a market may threaten to sharply increase production so that the entrant will be left with a small share of the market. This may be a credible threat if: A) production exhibits economies of scale. B) production exhibits diseconomies of scale. C) production costs may fall due to learning-by-doing. D) A and C are correct. E) B and C are correct.

What happens to the market outcome if cartel members cheat on the collusive agreement? A) Price declines, but firm-level quantities remain the same because the firms act like price takers B) Price and quantity revert to the single-seller monopoly equilibrium outcome C) Other firms raise prices so that the average market price remains unchanged D) Price declines and quantity increases toward the perfectly competitive equilibrium

Which of the following is NOT an example of moral hazard in business? A) A bank buys risky mortgage securities because they believe the government will provide a bail-out if the investment performs badly. B) A firm uses venture capital to speculate in the commodity futures market. C) A firm does not hire adequate security protection for its warehouse after it pays for insurance on the property. D) Firms with the large debt problems are more likely to apply for bank loans than financially stable firms.

Which of the following is NOT conducive to the successful operation of a cartel? A) Market demand for the good is relatively inelastic. B) The cartel supplies all of the world's output of the good. C) Cartel members have substantial cost advantages over non-member producers. D) The supply of non-cartel members is very price elastic.

Which of the following is true for both perfect and monopolistic competition? A) Firms produce a differentiated product. B) Firms face a downward sloping demand curve. C) Firms produce a homogeneous product. D) There is freedom of entry and exit in the long run.

You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. If your firm practices third-degree price discrimination to maximize profits, the marginal revenue A) in the foreign market will equal the marginal cost. B) in the domestic market will equal the marginal cost. C) in the domestic market will equal the marginal revenue in the domestic market. D) all of the above E) none of the above

Club Med, which operates a number of vacation resorts, offers vacation packages at a lower price in the winter (i.e., the "off season") than in the summer. This practice is an example of: A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) bundling. E) Both A and B are correct.

For Group K the cost of attaining an educational level y is CK(y) = $2,000y and for Group M the cost of attaining that level is CM(y) = $4,000y. Employees will be offered $30,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $90,000 if they have y > . Refer to Scenario 17.2. The lowest level of y* that can be set and still have only the highproductivity people meet it is A) 90. B) 60. C) 30. D) 22.5. E) 15.

If households could be charged differently for different types of garbage, A) the total amount of garbage would be reduced. B) recycling would be more difficult. C) costs of collecting garbage could be kept much lower. D) billing for garbage collection would be much easier. E) there would be a change in the types of items that are disposed of as garbage.

In a two-person bargaining situation it is A) always in the best interests of both players for each player to be as flexible as possible, and to have as many options as possible. B) always in the best interest of the player that moves first to be as flexible as possible, and to have as many options as possible. C) often in the best interest of players to pretend a game is noncooperative when it is not, and vice versa. D) often in the best interest of players to cut off some of their own options in order to make the other player's threats not credible. E) often in the best interest of players to cut off some of their own options in order to make their own threats credible.

In the insurance market, "moral hazard" refers to the problem that A) insurers can't tell high-risk customers from low-risk customers. B) high-risk customers have an incentive to give false signals to make themselves look like low-risk customers. C) companies may unfairly lump individuals together by race, sex, age or other characteristics in an attempt to use demographic data to pinpoint high-risk populations. D) individuals are willing and able to pay different amounts for insurance, but must all be charged the same amount. E) individuals may change their behavior after the insurance is bought, so that they behave in a more high-risk manner than they did before.

Left alone, with no government interference, a profit-maximizing firm will produce emissions A) where the MSB curve crosses the MCA curve. B) at the vertical intercept of the MSB curve. C) at the horizontal intercept of the MSB curve. D) at the vertical intercept of the MCA curve. E) at the horizontal intercept of the MCA curve.

Nash equilibria are stable because A) they involve dominant strategies. B) they involve constant-sum games. C) they occur in noncooperative games. D) once the strategies are chosen, no players have an incentive to negotiate jointly to change them. E) once the strategies are chosen, no player has an incentive to deviate unilaterally from them.

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.3. What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly? A) $3 B) $9 C) $12 D)$13.50 E) none of the above

The completion of a degree or course of study is a good labor market signal A) only if what is learned in that educational process relates directly to the job the individual is being considered for. B) only if there is a positive correlation between academic success and wage income. C) primarily because individuals develop good habits in college that serve them well in other areas later on. D) because all individuals have the opportunity (in the United States) to pursue higher education. E) because people who possess the traits that make them more productive in the workplace have an easier time completing an education than those who don't.

The government provides public education because A) public education is a public good. B) public education is non-rival and nonexclusive. C) private education is rival and exclusive. D) public education combats the negative externalities of private education. E) public education provides positive externalities.

The problem of adverse selection in health insurance leads to a situation in which A) health insurance covers inappropriate items for the population it serves. B) overinsurance of the premium-paying population occurs. C) underinsurance of the premium-paying population occurs. D) the percentage of the premium-paying population that is healthy rises, squeezing unhealthy individuals out of the market. E) the percentage of the premium-paying population that is unhealthy rises, squeezing healthy individuals out of the market.

Which of the following represent examples of adverse selection? A) Unhealthy people are more likely to want health insurance. B) Careless drivers purchasing extra auto insurance. C) Risk averse individuals choosing to buy extra insurance. D) all of the above E) A and B only

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