intermediate micro final review questions

assume that a firm's marginal cost is $10 and the elasticity of demand is -2.0 . we can conclude that the firm's profit maximizing price is approximately

$20

A monopolist has set her level of output to maximize profit. the firm's marginal revenue is $20, and the price elasticity of demand is -2.0 . the firms profit maximizing price is approximately

$40

A perfectly competitive hardware manufacturer has total revenue of $85 million, total variable costs of $45 million, and fixed costs of $10 million. What is the firm's producer surplus?

$40 million

Suppose that the price of labor (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100? :

100 = 10L + 20K

a tennis pro charges $15 per hour for tennis lessons for children and #30 per hour for adults. the tennis pro is practicing

3rd degree price descrimination

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 : (coices: in the foreign market will equal the marginal cost, in the domestic market will equal the marginal cost, in the domestic market will equal the marginal revenue in the domestic market.)

ANS- All of these

Which of the following is NOT true for monopoly? (choices- The profit maximizing output is the one at which marginal revenue and marginal cost are equal, The profit maximizing output is the one at which the difference between total revenue and total cost is largest, Average revenue equals price, The monopolist's demand curve is the same as the market demand curve, At the profit maximizing output, price equals marginal cost.)

ANS- At the profit maximizing output, price equals marginal cost.

Which oligopoly model(s) have the same results as the competitive model? :

Bertrand Model

in which oligopoly model do firms earn Zero Profits

Bertrand Model

Which of the following statements identifies a key difference between condominiums and cooperative housing? :

Co-op owners have more control over who can move into their building.

Why does cooperative behavior break down in games with finite endpoints? :

Each player has an incentive to deviate from a cooperative strategy during the last period.

Which of following is a key assumption of a perfectly competitive market?

Each seller has a very small share of the market

Why don't some firms in monopolistic competition earn losses in the long run? :

Free exit implies that any unprofitable firms leave the market in the long run.

Which of following is an example of a homogeneous product? (choices, copper, winter parka, gasoline, personal comps)

Gas and copper

Which statement most nearly describes a Nash equilibrium applied to price competition? :

Given the prices chosen by its competitors, no firm has an incentive to change their prices from the equilibrium level.

What happens to the profit-maximizing cartel price and quantity if the marginal cost of production declines? :

If demand is downward sloping, the optimal cartel price should decline and the market quantity should increase.

What is one difference between the Cournot and Stackelberg models?

In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm sets its output level first.

Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry? :

It does not produce at minimum average cost, and average cost is decreasing.

A firm sells and identical product to two groups of consumers, A and B. The firm has decided that 3rd 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?

MRa=MRb=MC

Which of the following would be LEAST likely to contribute to a moral hazard problem among drivers? :

Modify all cars to remove the driver's seatbelt and the steering wheel air bag.

Which of the following is NOT true regarding monopoly? :

Monopolist can charge as high a price as it likes.

a situation in which each firm selects its best action, given what its rivals are doing is called a

Nash Equilibrium

is there a first-mover advantage in the Bertrand duopoly model with homogeneous products?

No, the second mover would be able to set a slightly lower price and capture the full market share

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as

P = MC

What happens to the market outcome if cartel members cheat on the collusive agreement? :

Price declines and quantity increases toward the perfectly competitive equilibrium

Which of the following is TRUE about producers' willingness to offer warranties on products? :

Producers are more likely to offer warranties on high-quality goods, because the expected cost of repairs is lower for those goods.

in a cornet duopoly, we find that firm 1 reaction function is Q1=50 - .5Q2, firm 2 reaction function is Q2 = 75 - 0.75Q1, what is the Cornet equilibrium outcome in this market?

Q1= 20 and Q2=60

Which of the following is NOT associated with a high degree of monopoly power?

Significant price competition among firms in the market

Which of the following job market signals are less costly for high-quality workers to send than low-quality workers? :

Spending long hours at the office

Which of the following is true in long-run equilibrium for a firm in a monopolistic competitive industry? :

The demand curve is tangent to average cost curve

If two different fuel sources (e.g., coal and natural gas) are perfect substitutes in the long-run production of energy. How will a profit maximizing firm choose between these two inputs? :

The firm will only use the input with lower cost

Why are many oligopolistic market outcomes conveniently described by a Prisoners' Dilemma? :

The firms could do better than the Nash equilibrium if they collude.

Which of the following is true in the Stackelberg model? :

The first firm produces more than its rival.

An increasing-cost industry is so named because of the positive slope of which curve?

The industry's long-run supply curve

Why do workers tend to choose low effort levels when they are compensated with fixed wage payments? :

The net compensation after deducting the cost of effort is always higher when the worker provides low effort.

Suppose your firm develops a new pharmaceutical product that may be used to reduce blood cholesterol levels, so the firm is the monopoly seller of this drug. If the elasticity of demand for this new product is -4, what markup should your firm use to set the profit-maximizing price for the product?

The price-cost markup is 25% of the price 1/-(Ed) =

Which of the following is NOT conducive to the successful operation of a cartel?

The supply of non-cartel members is very price elastic. remember for cartels to work 2 conditions must hold, 1- must hold almost all worlds supply and if not supply of non cartel must not be price elastic 2- total demand must not be price elastic

Which of the following is true for both perfect and monopolistic competition?:

There is freedom of entry and exit in the long run.

The firms in a market have decided not to compete with one another and have agreed to limit output and raise price.

This practice is known as collusion and is illegal in the United States.

Why can't two firms in a Prisoners' Dilemma enforce a better outcome that has higher payoffs? :

Under an outcome with higher payoffs, the outcome is not a Nash equilibrium and each firm has an incentive to change their actions.

Which of the following represent examples of adverse selection? :

Unhealthy people are more likely to want health insurance and Careless drivers purchasing extra auto insurance only

When asymmetric information problems drive high quality products from a market, we refer to this situation as :

adverse selection and a lemons problem are correct

Which of the following can be thought of as a barrier to entry? (choices: scale economies, patents, strategic actions by incumbent firms)

all of these

Which of the following cases are examples of industries that have potentially increasing costs due to scarce inputs? (Choices: petroleum factory, legal services, medical care)

all of these

To find the profit maximizing level of output, a firm finds the output level where: (choices :price equals marginal cost, marginal revenue and average total cost, price equals marginal revenue)

ans- none of these

The marginal cost of a monopolist is constant and is $10. The demand curve and marginal revenue curves are given as follows: Dem : Q= 100 - p MR: 100-2Q The deadweight loss from monopoly power is ________.

ans: $1012.50

Repetition of a game :

can result in behavior that is different from what it would be if the game were played only once.

a firm setting a two-part tariff with only one customer should set the entry fee equal to

consumer surplus

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:

consumer surplus increases, producer surplus may increase or decrease.

An association of businesses that are jointly owned and operated by members for mutual benefit is a

cooperative.

Second-degree price discrimination is the practice of charging

different prices for different quantity blocks of the same good or service.

An improvement in technology would result in

downward shifts of MC and increases in output.

Economic rents are typically counted as:

economic costs but not accounting costs.

compared to the equilibrium price and the quantity sold in a competitive market, a monopolist will charge a _______ price and sell a __________ quantity

higher; smaller

The monopolist that maximizes profit:

imposes a cost on society because the selling price is above marginal cost.

At the profit-maximizing level of output, marginal profit

is zero

The supply curve for a competitive firm is:

its MC curve above the minimum point of the AVC curve.

When the demand curve is downward sloping, marginal revenue is

less than price

The ________ elastic a firm's demand curve, the greater its ________. :

less; monopoly power

A decreasing-cost industry has a downward-sloping

long-run industry supply curve

When sellers have more information about products than buyers do, we would expect :

low-quality goods to drive high-quality goods out of the market.

Consider the following diagram where a perfectly competitive firm faces a price of $40.

maximized and positive.

When states make car insurance mandatory for all drivers, it :

may lower rates for all drivers to the extent that it keeps low-risk drivers in the pool.

a market with few entry barriers and with many firms that sell differentiated products is

monopolistically Competetive

confer which of the following are there assumed to be barriers to entry, monopoly, monopolistic comp. , perfect competition, monopolistic and monopoly only, or all of these

monopoly

in the _____, one firm sets its output first, and then the second firm after observing the first firm's output makes its design, (choices- cornet model, model of mono comp. , Bertrand Model, Kinked Demand Model, none of these

none of these, that model is the Stackelberg model

the market structure in which there is interdependence among firms is

oligopoly

When an isocost line is just tangent to an isoquant, we know that:

output is being produced at minimum cost.

A form of implicit collusion in which one firm consistently follows the actions of others is:

parallel conduct

When a drug company develops a new drug it is granted a ________ making it illegal for other firms to enter the market until the ________ expires.

patent, patent

a local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30. this is an example of

peak load pricing

McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of:

price descrimination

as the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $100, you should....

reduce output beyond the level where marginal revenue equal zero

The cartel of oil-producing nations (OPEC) once controlled about 80% of the world petroleum market, but OPEC's market share has declined to about half of its former level. This outcome is a good example of how firms may have:

relatively high short-run monopoly power that declines in the long run.

You work as a marketing analyst for a pharmaceutical firm, and you are trying to gather information about the marginal cost of production for a competing firm. You know that they have a patent on a popular medication that sells for $20 per dose, and you believe the elasticity of demand for this product is roughly -4. Assuming the competing firm acts as a profit-maximizing monopolist, what is the competing firm's approximate marginal cost of production? :

remember p=mc/1+(1/Ed) ..... $15 per dose

You want to add a new room on your house, but you are not familiar with the local building contractors and are not sure who to consider for the job. If you ask your friends for referrals, you are using their past experience as a way to evaluate the ________ of the builders. :

reputation

The Lerner index measures

the amount of monopoly power a firm chooses to exercises when maximizing profits.

The more elastic the demand facing a firm:

the lower the value of the Lerner index

When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that:

the minimum value of the firm's average variable cost lies between $5 and $10.

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:

third-degree price discrimination

Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change would be:

to decrease the consumer surplus of Japanese rice consumers

A national chain of bookstores has initiated a frequent buyer program. if you buy a frequent buyer card for $10, you are entitled to a 10% discount on all purchases for 1 year. This practice is an example of

two-part tariff b/c they are paying and "entry fee" then have to pay for items as well

a monopolistically competitive from in the long run

will make zero profit