Exam 3

What is difficult about using cost-benefit analysis to estimate the level of a public good that will maximize social welfare?

It is difficult to estimate the marginal social benefits of supplying a public good.

The source of inefficiency in the use of artificially scarce goods is similar to the source of inefficiencies created by:

a natural monopoly

Tony has a cell phone, and his service provider is Verizon. When he calls his wife, Meleah, who is also a Verizon customer, he does not have to pay for those minutes. The more Verizon customers there are in the market, the more benefit Tony receives. This is:

a network externality

Which good BEST fits the characteristics of a private good?

a pizza

Network externalities are often:

a reason for natural monopolies

To be called an oligopoly, an industry must have:

a small number of interdependent firms

To be called an oligopoly, an industry must have

a small number of interdependent firms.

A firm that is in an oligopoly knows that its _____ affect its _____ and that the _____ of its rivals will affect it.

actions; rivals; reactions

Which example is MOST likely to be observed when firms engage mainly in nonprice competition?

advertising and product differentiation

A dominant-strategy equilibrium occurs when:

all players' action of choice is always best for them, regardless of the action of the other players.

The BEST example of a private good is:

an automobile

A good is subject to a network externality when:

an increase in the number of other people using the good increases its value to an individual

In oligopoly, a firm must realize that:

another major firm may dominate choices in the industry, and it will have to behave accordingly

Positive externalities:

are difficult to measure since marginal social benefits are hard to observe.

positive externalities

are difficult to measure since marginal social benefits are hard to observe.

Producers of artificially scarce goods face _____ that are similar to those of natural monopolists; they decline over the relevant range of output.

average total costs

Excess capacity is a problem in monopolistic competition because, if there were fewer firms in the industry:

average total costs would be lower and the prices paid by consumers could be lower.

An external benefit is a:

benefit that individuals or firms confer on others without receiving compensation

In long-run equilibrium, a firm in monopolistic competition is similar to a monopoly because it:

charges a price greater than marginal cost

Because most communities have a large number of similar but not identical substitutes, the market for florists is BEST considered to be:

competitve

If your farm had the only known source of a rare cocoa bean needed to make chocolate-covered peanuts, your monopoly would result from:

control of a scarce resource or input.

When a monopolist practices price discrimination, compared with a single-price monopolist, deadweight loss will:

decrease

With tradable emissions permits, if the demand for goods that produce emissions shifts to the left, the equilibrium price of permits _____ and the equilibrium quantity _____.

decreases; stays the same

A monopoly responds to a decrease in marginal cost by _____ price and _____ output.

decreasing; increasing

Diamond rings are relatively scarce because:

diamond producers limit the quantity supplied to the market

Accordinng to the video, the Tragedy of the Commons refers to peasants overgrazing a common resource, but the "Tragedy"

did not occur

Monopolistic competition is similar to perfect competition because firms in both market structures:

do not face any barriers to entry to the industry in the long run.

A strategy that is the same, regardless of the action of the other player in a game, is a _____ strategy.

dominant

In game theory, when a player has an action that is always best for that player, regardless of the action taken by the other player(s) in a game, we say this player has a _____ strategy.

dominant

The wedding dress industry is monopolistically competitive. As a result:

dresses tend to be differentiated among the many sellers serving this market.

Whether or not they pay for them, people cannot be excluded from receiving the benefits of _____, but they can be excluded from the benefits of _____.

either public goods or common resources; private goods

For the same amount of pollution emitted, an emissions tax is said to be more efficient than is an environmental standard because all polluters:

emit pollution up to the point at which the marginal benefit of polluting is equal to the emissions tax.

De Beers became a monopoly by:

establishing control over diamond mines

The problem of wasteful duplication in monopolistic competition is due to:

excess capacity

An e-book is similar to a published book in that it is _____, but it is also similar to national defense in that it is _____.

excludable; nonrival in consumption

If the market produces an efficient level of a good, then we know that the good must be _____ and _____ in consumption.

excludable; rival

A coal-powered electrical generator that discharges smoke into the air and causes uncompensated costs and discomfort to residents of a town has a(n):

external cost

When a monopolistically competitive industry earns economic profit, the result of competition among sellers is usually that:

firms in the industry lose market share.

If you had an official license for the exclusive right to sell breakfast bagels in your community, your monopoly would result from:

government-set barriers.

In a long-run equilibrium, firms in a monopolistically competitive industry sell at a price:

greater than marginal cost.

If the number of available tradable emissions permits is decreased, the equilibrium price of the permits _____ and the equilibrium quantity of emissions _____.

increases; decreases

A monopolist responds to an increase in demand by _____ price and _____ output.

increasing; increasing

A monopolist responds to an increase in marginal cost by _____ price and _____ output.

increasing; increasing

An externality is said to exist when:

individuals impose costs or benefits on others but have no incentive to take these costs and benefits into account.

Which example is a good or market activity that is associated with a positive externality?

innovation in the semiconductor industry

A negative externality:

is an uncompensated cost imposed by an individual or firm on others.

An industry with production that generates external costs produces a quantity of output that is:

larger than the socially optimal quantity.

Marginal revenue for a monopolist is:

less than price

Suppose a perfectly competitive industry is suddenly transformed into a monopoly industry. We can assume that monopoly output will be _____ than will the competitive output and that _____.

lower; deadweight loss will emerge

Suppose a monopolistically competitive firm is making a profit, but it can increase its profits by increasing output. At the current level of output:

marginal revenue is greater than marginal cost.

Because most communities have a large number of similar but not identical substitutes, the market for financial planners is BEST considered to be:

monopolistically competitive

An industry with a single producer that sells a single product with no substitutes is a:

monopoly

The city bus system charges lower fares to senior citizens than to other passengers. Assuming that this pricing strategy increases the profits of the bus system, we can conclude that senior citizens must have a _____ demand for bus service than do other passengers.

more elastic

Airlines are prone to price wars because:

most fliers choose airlines on the basis of schedule and price.

Suppose that each of the two firms in a duopoly has the independent choice of advertising or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million and the other gets profit of $2 million. According to game theory, if the firms collude to maximize joint profits:

neither will advertise

occurs if Coke hires Lebron James to make a commercial and Pepsi follows by hiring Peyton Manning for its commercial.

non-price competition

If a firm operating in monopolistic competition is producing a quantity at which _____, then the marginal decision rule tells us that profit _____.

nonexcludable; nonrival in consumption; rival in consumption

National defense and clean air are similar in that both are _____, but they differ in that clean air is _____, while national defense is not.

nonexcludable; rival in consumption

When Joe watches a movie on Netflix, his viewing is _____ in consumption because other people _____ able to watch the movie at the same time as Joe does.

nonrival; are

If an activity generates external costs, the decision makers generating the activity will:

not be faced with its full costs.

Suppose the Alaskan king crab harvest is unregulated, and any person with a boat can go offshore, lower a crab pot, and harvest king crab. This common resource will likely be _____ because the marginal social cost of harvesting crabs _____ the market price of crab.

overfished, exceeds

If the use of a common resource is determined in the private market, the resource will be _____ since the marginal social benefit will be equal to the marginal private cost of production, which is _____ than the marginal social cost.

overused less than

According to Arrow's Impossibility Theorem, when you are choosing from a menu of voting methods, you are really choosing from a menu of

paradoxes

Whenever human activity generates a concentration of a substance in the environment sufficient to cause harm to living things, it is called:

pollution

Many customers will walk right past a diner that serves coffee and go to Starbucks, where they pay more for a cup of java. For these customers, coffee is differentiated by:

quality

Suppose a perfectly competitive market is suddenly transformed into one that operates as a monopoly market. We would expect price to _____, output to _____, consumer surplus to _____, producer surplus to _____, and deadweight loss to _____.

rise; fall; fall; rise; rise

(Figure: Monopolistic Competition VI) Use Figure: Monopolistic Competition VI. The figure illustrates a firm in the _____; in the _____, the demand and marginal revenue curves will shift to the _____.

short run; long run; right

A monopoly is a market characterized by a:

single seller

An unwritten, unspoken agreement through which firms limit competition among themselves is called:

tacit collusion

Unwritten or unspoken understandings through which firms restrict competition are called

tacit collusion

When firms in a particular industry informally agree to charge the same price as the largest firm in that industry, it is called:

tacit collusion

Nonprice competition is more prevalent in an oligopoly when there is/are:

tacit collusion.

When innovations by one firm are quickly emulated and improved on by rival firms in the same industry or in other industries, it is:

technology spillover.

The excess capacity in monopolistic competition may be viewed as:

the cost of product diversity.

Automobile emissions generate pollution, have health costs for pedestrians, and cause discomfort to residents of a city. In this case:

the externality can be internalized by imposing a specific tax on drivers.

Suppose that government officials have set an emissions tax to reduce pollution. Assume that the optimal tax would be $500, but government officials have set the tax at $900. At the equilibrium with the $900 tax:

the marginal social benefit of pollution will be $900.

Market structures are categorized by:

the number of firms and whether products are differentiated

When farmers raise hogs, there are a number of external costs. In particular, hogs generate methane gas. Without government regulation:

the price will be less than the marginal social cost

Which example illustrates a negative externality?

the risks to nonsmokers from second-hand smoke

Suppose that government officials have set an emissions tax to reduce pollution. Assume that the optimal tax would be $1,500, but government officials have set the tax at $500. At the equilibrium with the $500 tax:

there will be too much pollution.

If the several companies in the tobacco industry produce similar products but have very different marginal costs:

they are less likely to engage in tacit collusion than firms with similar costs.

(Figure: Prisoners' Dilemma for Thelma and Louise) Use Figure: Prisoners' Dilemma for Thelma and Louise. Thelma and Louise are arrested and jailed for murder. Given the payoff matrix in the figure, the Nash equilibrium behavior is for Thelma _____ and Louise _____.

to confess, to confess

The marginal cost of producing an artificially scarce good is usually equal to:

zero

Table: Two Rival Gas Stations) Use Table: Two Rival Gas Stations. The table shows a payoff matrix for two gas stations in a small town. Each firm can set either a high price or a low price, and customers view these two firms as nearly perfect substitutes. Profits in each cell of the payoff matrix are given as (Swifty's profit, Speedy's profit). If each firm sets the price independently, the Nash equilibrium outcome will be:

$50, $50.

The largest Herfindahl-Hirschman index possible is _____, and the industry is a(n) _____.

10,000; monopoly

Which Herfindahl-Hirschman index is MOST likely to indicate a perfectly competitive market?

100

The Herfindahl-Hirschman index equals _____ when _____ have/has _____% of the market.

5,000; two firms each; 50

Which statement concerning monopoly is TRUE?

A monopoly has no rivals.

As the number of firms in an oligopoly decreases:

As the number of firms in an oligopoly decreases:

Which statement BEST describes a negative externality?

Your neighbor has an ornamental pond that breeds mosquitoes.

Suppose that a monopoly computer chip maker increases production from 10 microchips to 11 microchips. If the market price declines from $30 per unit to $29 per unit, marginal revenue for the eleventh unit is:

$19

(Figure: Demand, Revenue, and Cost Curves) Use Figure: Demand, Revenue, and Cost Curves. Figglenuts-R-Us is a monopolist in the figglenut market. If the government wanted to regulate Figglenuts-R-Us such that it would minimize the deadweight loss while allowing the firm to break even, it would impose a price ceiling of:

$50

Which statement about the differences between monopoly and perfect competition is INCORRECT?

Monopoly profits can continue in the long run because the monopoly produces more and charges a higher price than does a comparable perfectly competitive industry.

In the long run, if a monopolistically competitive firm produces the optimal level of output:

P = ATC > MR = MC.

_ occurs if Ford offers rebates on its most popular truck and Chevrolet follows.

Price leadership