micro exam 4
Splitting up a monopoly is often justified on the grounds that
competition is inherently efficient.
Which of the following costs of publishing a book is a fixed cost?
composition, typesetting, and jacket design for the book
If one firm left a duopoly market where the firms did not cooperate then
price would rise and quantity would fall.
The deadweight loss associated with a monopoly occurs because the monopolist
produces an output level less than the socially optimal level.
In the short run, a firm incurs fixed costs
whether it produces output or not.
Scenario 17-5Assume that a local bank sells two services, checking accounts and ATM card services. The bank's only two customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that the bank can provide each of these services at zero marginal cost.Refer to Scenario 17-5. How much additional profit can the bank earn by switching to the use of a tying strategy to price checking accounts and ATM service rather than pricing these services separately?
$1
Table 17-13Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below. Refer to Table 17-13. When this game reaches a Nash equilibrium, annual profit will grow by
$1.5 million for HomeMax and by $1.0 million for Lopes.
Suppose a firm in a competitive market earned $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold?
$10 and 100 units
Refer to Table 15-7. What is the average revenue when Sally sells 7 pairs of shoes?
$100
Refer to Table 14-12. What is Bill's economic profit at the profit-maximizing output level?
$115
Refer to Table 14-6. What is the average revenue when 4 units are sold?
$120
Refer to Table 14-6. What is the marginal revenue from selling the 3rd unit?
$120
Refer to Table 15-9. At the profit-maximizing price, how much profit will the monopoly earn?
$14
An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight, there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is $20,000, which includes the cost of the pilots, flight attendants, fuel, etc.Refer to Scenario 15-5. How much additional profit can the airline earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket?
$15,000
Scenario 13-1Calvin wants to start his own business making candles. He can purchase a candle factory that costs $400,000. Calvin currently has $500,000 in the bank earning 3 percent interest per year.Refer to Scenario 13-1. Suppose Calvin purchases the factory using $200,000 of his own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Calvin's annual opportunity cost of purchasing the factory?
$18,000
Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, total revenue will be
$2,400
Refer to Table 13-9. The average fixed cost of producing 5 posters is
$2.00.
Refer to Table 15-7. What is the marginal revenue from selling the 8th pair of shoes?
$20
Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run?
$3.
Scenario 15-5An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight, there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is $20,000, which includes the cost of the pilots, flight attendants, fuel, etc.Refer to Scenario 15-5. How much additional profit can the airline earn by charging each customer their willingness to pay relative to charging a flat price of $300 per ticket?
$30,000
Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced?
$35
Scenario 15-8Mega Media Cable TV is able to purchase an exclusive right to sell a premium sports channel in its market area. Let's assume that Mega Media pays $100,000 a year for the exclusive marketing rights to the sports channel. Since Mega Media has already installed cable to all of the homes in its market area, the marginal cost of delivering the sports channel to subscribers is zero. The manager of Mega Media needs to know what price to charge for the sports channel service to maximize her profit. Before setting price, she hires an economist to estimate demand for the sports channel. The economist discovers that there are two types of subscribers who value premium sporting channels. First are the 3,000 die-hard sports fans who will pay as much as $150 a year for the new channel. Second, the premium sports channel will appeal to 20,000 occasional sports viewers who will pay as much as $25 a year for a subscription to it.Refer to Scenario 15-8. How much profit will Mega Media Cable TV earn if it sets the price at $150?
$350,000
Refer to Table 14-2. For a firm operating in a competitive market, the marginal revenue from selling the 3rd unit is
$4.
Refer to Table 14-14. When Bob produces and sells the profit-maximizing quantity, how much profit does he earn?
$4.00
Scenario 17-5Assume that a local bank sells two services, checking accounts and ATM card services. The bank's only two customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that the bank can provide each of these services at zero marginal cost.Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to charge for a checking account?
$5
Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?
$5,000
Refer to Table 15-7. What is the marginal cost of the 6th pair of shoes?
$60
Refer to Table 14-3. For a firm operating in a competitive market, the price is
$7.
Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers it produces 90 units of output. Fixed cost of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the total cost of production when the firm hires 7 workers?
$76
Refer to Table 14-6. What is the total revenue from selling 7 units?
$840
Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output where marginal cost is equal to
$9.
Compared to the monopoly outcome with a single price, imperfect price discrimination (i) sometimes raises total surplus.(ii)sometimes lowers total surplus.(iii)always leads to a lower quantity of output.
(i) and (ii) only
Amanda inherited the only local cable TV company in town after her father passed away. The company is completely unregulated by the government and is therefore free to operate as it wishes. Assume that Amanda understands the true power of her new monopoly. Which of the following statements is (are) correct? (i) She will be able to set the price of cable TV service at whatever level she wishes.(ii)The customers will be forced to purchase cable TV service at whatever price she wants to set.(iii)She will be able to achieve any profit level that she desires.
(i) only
Which of the following is an example of an implicit cost? (i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm(ii)interest paid on the firm's debt(iii)rent paid by the firm to lease office spac
(i) only
Monopolies are inefficient because they (i) eliminate barriers to entry.(ii)price their product at a level where marginal revenue exceeds marginal cost.(iii)restrict output below the socially efficient level of production.
(iii) only
If a monopolist can sell 7 units when the price is $4 and 8 units when the price is $3, then marginal revenue of selling the eighth unit is equal to
-$4.
Refer to Table 13-3. The marginal product of the fourth worker is
10 units.
Refer to Table 14-10. At which level of output in the table is average variable cost equal to $6?
5 units
Refer to Table 15-7. Sally will maximize her profits by selling
6 pairs of shoes.
In the long-run equilibrium of a market with free entry and exit, marginal firms are operating
at their efficient scale.
Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000. Which of the following statements is correct?
Bev's economic profit is $4,700.
Which of the following is an example of a barrier to entry?
Dick obtains a copyright for the new computer game that he invented.
Refer to Figure 14-13. If the price is P3 in the short run, what will happen in the long run?
Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry.
Which of the following is an example of a barrier to entry?
Rhianna obtains a copyright for a short story that she wrote and published.
Table 17-12Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a mythical nation). Historically, legislators have made threats of not renewing MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland. The payoff table below shows the potential economic gains associated with a game in which Farland may impose trade sanctions against U.S. firms and the United States may not renew MFN status with Farland. The table contains the dollar value of all trade-flow benefits to the United States and Farland.
United States $130 b and Farland $275 b
Refer to Figure 14-14. Assume that the market starts in equilibrium at point A in panel (b). An increase in demand from D0 to D1 will result in
an eventual increase in the number of firms in the market and a new long-run equilibrium at point C.
The value of a business owner's time is an example of
an opportunity cost.
As a group, oligopolists would always be better off if they would act collectively
as a single monopolist.
A monopolist will choose to increase output when
at the present level of output, marginal revenue exceeds marginal cost.
Marginal cost is equal to average total cost when
average total cost is at its minimum.
When a firm is experiencing economies of scale, long-run
average total cost is greater than long-run marginal cost.
A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100,
average variable cost is $3.
The fundamental source of monopoly power is
barriers to entry.
Monopolies use their market power to
charge a price that is higher than marginal cost.
As a group, oligopolists would always earn the highest profit if they would
charge the same price that a monopolist would charge if the market were a monopoly.
An agreement among firms in a market about quantities to produce or prices to charge is called
collusion.
The social cost of a monopoly is equal to its
dead weight loss.
If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then
decreasing output would increase the firm's profit.
The fundamental reason that marginal cost eventually rises as output increases is because of
diminishing marginal product
In a market characterized by monopoly, the market demand curve is
downward sloping.
The oligopoly price will be greater than marginal cost but less than the monopoly price when
each oligopolist individually chooses a quantity to produce to maximize profit.
Table 17-12Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a mythical nation). Historically, legislators have made threats of not renewing MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland. The payoff table below shows the potential economic gains associated with a game in which Farland may impose trade sanctions against U.S. firms and the United States may not renew MFN status with Farland. The table contains the dollar value of all trade-flow benefits to the United States and Farland.
each should follow its dominant strategy.
Refer to Figure 15-1. The shape of the average total cost curve in the figure suggests an opportunity for a profit-maximizing monopolist to take advantage of
economies of scale
Drug companies are allowed to be monopolists in the drugs they discover in order to
encourage research.
In the long-run equilibrium of a market with free entry and exit, if all firms have the same cost structure, then
firms are operating at their efficient scale.
Total cost can be divided into two types of costs:
fixed costs and variable costs.
The long-run average total cost curve is always
flatter than the short-run average total cost curve, but not necessarily horizontal.
Competitive markets are characterized by
free entry and exit by firms.
David's firm experiences diminishing marginal product for all ranges of inputs. The total cost curve associated with David's firm
gets steeper as output increases.
Reduced competition through merging of companies will raise social welfare
if the benefit from the synergies exceeds the social cost of increased market power.
The difference between accounting profit and economic profit is
implicit costs.
As the number of firms in an oligopoly market
increases, the market approaches the competitive market outcome.
A dominant strategy is one that
is best for the player, regardless of what strategies other players follow.
Refer to Table 14-8. The firm will produce a quantity greater than 4 because at 4 units of output, marginal cost
is less than marginal revenue.
If a competitive firm is selling 1,000 units of its product at a price of $8 per unit and earning a positive profit, then
its total cost is less than $8,000.
Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers
labor to be variable and capital to be fixed.
Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal cost curve for this firm must
lie entirely below the average total cost curve.
Deadweight loss
measures monopoly inefficiency.
Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal cost curve for this firm
must lie entirely below the average total cost curve.
Policymakers are discussing various proposals regarding how to deal with natural monopolies. Senator Huff wants to regulate natural monopolies by equating price with average total cost. Huff contends that such a policy will ensure that monopolies make every effort to reduce costs. Senator Puff wants the government to own natural monopolies. Puff argues that government-owned monopolies usually do a better job of holding down costs than privately owned monopolies. Which senator's argument is correct?
neither senator
Free entry means that
no legal barriers prevent a firm from entering an industry
Scenario 15-8Mega Media Cable TV is able to purchase an exclusive right to sell a premium sports channel in its market area. Let's assume that Mega Media pays $100,000 a year for the exclusive marketing rights to the sports channel. Since Mega Media has already installed cable to all of the homes in its market area, the marginal cost of delivering the sports channel to subscribers is zero. The manager of Mega Media needs to know what price to charge for the sports channel service to maximize her profit. Before setting price, she hires an economist to estimate demand for the sports channel. The economist discovers that there are two types of subscribers who value premium sporting channels. First are the 3,000 die-hard sports fans who will pay as much as $150 a year for the new channel. Second, the premium sports channel will appeal to 20,000 occasional sports viewers who will pay as much as $25 a year for a subscription to it.Refer to Scenario 15-8. If Mega Media Cable TV is unable to price discriminate, what price will it choose to maximize its profit, and what is the amount of the profit?
price = $25; profit = $475,000
In imperfectly competitive markets, increasing production will decrease the price of all units sold. This concept is known as the
price effect.
When buyers in a competitive market take the selling price as given, they are said to be
price takers.
Refer to Figure 13-1. Suppose the production function shifts from TP1 to TP2. Such a shift in the total product curve is most likely due to an increase in the firm's
productivity.
Refer to Figure 13-1. Suppose the production function shifts from TP2 to TP1. Such a shift in the total product curve is most likely due to a decrease in the firm's
productivity.
Economists assume that monopolists behave as
profit maximizers.
The marginal product of an input in the production process is the increase in
quantity of output obtained from an additional unit of that input.
A seller in a competitive market can
sell all he wants at the going price, so he has little reason to charge less.
In a market with 1,000 identical firms, the short-run market supply is the
sum of the quantities supplied by each of the 1,000 individual firms at each price.
When new firms enter a perfectly competitive market,
the short-run market supply curve shifts right.
One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run,
the size of the factory is fixed.
A natural monopoly occurs when
there are economies of scale over the relevant range of output.
Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together,
they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
The nature of a firm's cost (fixed or variable) depends on the
time horizon under consideration.
For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which
total revenue is maximized.
From society's standpoint, cooperation among oligopolists is
undesirable, because it leads to output levels that are too low and prices that are too high.
