Intermediate Micro Exam 2

What is the change in producer surplus (PS) when the price increase from $1 to $2?

$1,000

The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed

$10 (point where MC and AC meet)

A monopoly incurs a marginal cost of $1 for each unit produced. If the price elasticity of demand equals -2.0, the monopoly maximizes profit by charging a price of

$2.00

Use the above figure to answer this question. At the current price of $0.10, consumer surplus equals

$29

The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone). At the current price of $0.35 per minute, consumer surplus equals

$924.50 (area of triangle, 1/2bh)

A profit-maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to

-1/3

Suppose TC = 10 + (0.1 * q2). If p = 10, the firm's profit-maximizing level of output is

50

Lerner Index

A measure of the difference between price and marginal cost as a fraction of the product's price. (P-MC)/P

The above figure shows the market for steel ingots. If the market is competitive, then the deadweight loss to society is

C

The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called

Coase Theorem

Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive? A) Buyers and sellers know the prices. B) Firms freely enter and exit. C) Transaction costs are low. D) Consumers believe all firms sell identical products.

Consumers believe all firms sell identical products

Two firms sell 100% orange juice in 10 ounce bottles. The juice is only good for one week. The two firms have contracts for all the oranges produced in a large geographic area. Each firm decides how many bottles of juice to produce at the same time. This market is best described with a

Cournot model

Which graph in the above figure best represents a good that is an inferior good at some income levels, and a normal good at other income levels?

Graph A (curved inward)

Sally is shopping for textbooks at the beginning of the semester. What is one reason she might decide to not purchase a textbook?

Her expected consumer surplus is negative.

Effect of a Price Change on Consumer Surplus

If the supply curve shifts upward or a government imposes a new sales tax, the equilibrium price rises, reducing consumer surplus.

The above figure shows Larry's indifference map and budget lines for ham and pork. Which of the following statements is true?

Larry's Engel curve for pork will be upward sloping

marginal cost formula

MC = C'/Q

profit maximization (loss minimization) condition

MC = MR

marginal revenue formula

MR = R'/Q

Which of the following market structures is (are) capable of earning positive economic profits in the long run?

Monopoly and oligopoly

Consider a housing development built near an existing airport. After the houses are occupied, homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited. Is the airport a negative externality?

No, if the original property values reflect the costs imposed by the airport

The above figure shows the demand and marginal cost curves for a monopoly. Under a monopoly, consumer surplus equals

None of the above

Cournot Model

Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce.

Which of the following characterizes long-run equilibrium in perfect competition?

P=MC=ATC

Which of the following statements about private and social costs is true?

Social costs include externalities, private costs do not include externalities, and social costs are never smaller than private costs

Welfare loss

The excess of social cost over social benefit for a given output

Which of the following conditions can help prolong the life of a cartel?

There are only a few firms in the market and they all belong to the cartel

An increase in the price of a good causes

a change in the slope of the budget line

Engel Curve

a curve that shows the relationship between the quantity of a good consumed and a consumer's income

Negative externalities are created when

a driver drives recklessly on a busy highway

Cartel

a formal organization of producers that agree to coordinate prices and production

inferior good

a good that consumers demand less of when their incomes increase

normal good

a good that consumers demand more of when their incomes increase

subsidy

a government payment that supports a business or market

import quota

a limit on the number of products in certain categories that a nation can import

perfect competition

a market structure in which a large number of firms all produce the same product

monopolistic competition

a market structure in which many firms sell products that are similar but not identical

price ceiling

a maximum price that can be legally charged for a good or service

One difference between a monopoly and a competitive firm is that

a monopoly faces a downward sloping demand curve

Which of the following is not a common property? - city park - main street - public beach - a movie screening

a movie screening

Your new neighbor does not mow his lawn or prune the trees in his front yard. Your neighbor generated

a negative externality

postive externality

an externality that benefits people who were not involved in the original economic activity

Oligopoly differs from monopolistic competition in that an oligopoly includes

barriers to entry

The above figure shows the demand and marginal cost curves for a monopoly. The deadweight loss of this monopoly equals

c+f

If a firm makes zero economic profit in the short run, then the firm

can be earning positive business profit

The above figure shows the market for steel ingots. The optimal quantity of pollution

cannot be determined from the information provided

The Organization of Petroleum Exporting Countries (OPEC) is an example of a(n)

cartel

welfare effects of sales tax

causes price to rise for buyer (loss of consumer surplus); causes price to fall for firms (drop in producer surplus)

Even if two products have different characteristics, such as color, the products are only considered heterogeneous if consumers

consider the two products as imperfect substitutes

An individual's ________ surplus is the area ________ the ____________ curve and above the __________ up to the quantity _____________.

consumer; under; demand; market price; the consumer buys

Students who talk loudly with each other in class

create an externality because other students cannot follow the lecture as well

As other firms enter a monopoly's market, the monopoly's market power

declines

As the ratio of price to marginal cost decreases, the Lerner index

decreases

The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. As the price of snacks rises, Bobby's utility

descreases

In the long run, a monopolistically competitive firm

earns zero economic profit, produces at minimum average cost, and operates at full capacity

rent seeking

efforts and expenditures to gain a rent or a profit from government actions

The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon specific tax, the loss in social welfare will equal

f+g (supply to price, demand to price)

If the long-run supply curve in a perfectly competitive industry is upward sloping, this is because

firms are different or input prices rise as the industry expands

In a perfectly competitive market,

firms can freely enter and exit

A special license is required to operate a taxi in many cities. The number of licenses is restricted. More drivers want licenses than are issued. This describes a non-perfectly competitive market because

firms cannot freely enter and exit the market

The Cournot Model of Oligopoly assumes that

firms decide what quantity to produce, firms make their decisions simultaneously, and firms do no cooperate

In the long run, profits will equal zero in a competitive market because of

free entry and exit

A competitive market has a __________ demand curve

horizontal

market failure

inefficient production or consumption, often because a price exceeds marginal cost

The above figure shows the market for steel ingots. If the market is competitive, then to achieve the socially optimal level of pollution, the government can

institute a specific tax of $50

A profit-maximizing monopolist

is not guaranteed to make a positive profit

Increasing output beyond the competitive level does what?

it decreases welfare because the cost of producing this extra output exceeds the value consumers place on it

A monopoly might produce less than the socially optimal amount of pollution because

it sets price above marginal cost

The monopolist's marginal revenue curve

lies below the demand curve

The monopoly maximizes profit by setting

marginal revenue equal to marginal cost

Regardless of market structure, all firms

maximize profit by setting marginal revenue equal to marginal cost

The above figure shows the market for steel ingots. If the market is competitive, then

more than the socially optimal quantity of 50 units of steel is produced

The situation in which one firm can produce the total output of the market at a lower cost

natural monopoly

Perfect competition and monopolistic competition are similar in that both market structures include

no barriers to entry

In the case of a good that has no exclusion and no rivalry, private markets fail because

of free-ridership

CPI equation

old price x (CPI today/CPI old)

Stackelberg Model

oligopoly model in which one firm sets its output before other firms do

The Stackelberg model is more appropriate than the Cournot model in situations where

one firm makes its output decision before the other

If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be true?

p < AVC only for the level of output at which p = MC

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

p = MC; MR = MC; p is greater than or equal to AVC

profit formula

p = reveune - cost

The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend. Which of the following points are on Bobby's demand curve?

p=2, q=5

Defiency Payment

payment made by government to cover financial deficit

A student that asks interesting questions during the lecture generates

positive externalities

If a firm is a price taker, then its marginal revenue will always equal

price

why do competitive markets maximize welfare?

price equals marginal cost at the competitive equilibrium

The minimum wage is an example of

price floor

If a production process generates pollution, then a competitive market will

produce more of the good than is socially optimal

profit-maximizing quantity of output

reached when marginal cost and marginal revenue are equal

free-ridership

recognition by a rational consumer that the benefits of consumption are accessible without paying for them

In the long run, a monopolistic competitor

sets MR=MC, produces where P=AC, sets P>MC

If a production process creates pollution, a competitive market produces excessive pollution because

social marginal cost of pollution exceeds its private marginal cost

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if

someone is assigned property rights to the park

Suppose Lisa spends all of her money on books and coffee. When the price of coffee decreases, the

substitution effect on coffee is positive, and the income effect on coffee is ambiguous

Advocates of steel tariffs to protect U.S. steel firms realize that when imposing such tariffs, the gains of firms are outweighed by the losses to consumers.. This implies that

such advocates value producer surplus more than consumer surplus

In response to an increase in the wage rate, the income effect will usually cause a person to

supply fewer hours of labor

The welfare loss from an import quota is greater than that of an equivalent tariff because

tariff revenues can be used to society's benefit

economic rent

that part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

total producer surplus

the area above the supply curve and below the market price up to the quantity actually produced

income effect

the change in consumption resulting from a change in real income

price consumption curve

the connection or locus of all tangency points between budget lines and indifference curves. Each tangency identifies a point on the demand curve

If consumer income and prices increase by the same percentage,

the consumer's utility maximizing bundle stays the same

Producer Surplus (PS)

the difference between the amount for which a good sells and the minimum amount necessary for the seller to be willing to produce the good

In a market with positive externalities,

the efficient level of production is more than what competition will obtain

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

A horizontal demand curve for a firm implies

the firm is selling in a competitive market

For a monopoly, marginal revenue is less than price because

the firm must lower price if it wishes to sell more output

Minimum efficient scale refers to the lowest level of output at which

the firm will operate

negative externality

the harm, cost, or inconvenience suffered by a third party because of actions by others

Giffen good

the income effect more than offsets the substitution effect; a decrease in price causes Qd to fall

Deadweight loss occurs when

the maximum level of total welfare is not achieved

Suppose a farmer in a perfectly competitive agricultural industry rents land that is uniquely productive in the production of a certain crop. In the long run,

the owner of the land receives economic rent while the farmer earns zero economic profit

Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

common property

the rights to certain resources are held by large groups of individuals

A competitive market maximizes social welfare because in a competitive market,

there is free entry and exit

utility maximizing rule

to maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility

A firm will shut down in the short run if

total revenue from operating would not cover variable costs.

economic profit

total revenue minus total cost, including both explicit and implicit costs

A demand curve for a Giffen good would be

upward sloping

substitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

Positive externalities are created when

your neighbor plants beautiful trees and flowers in her yard