ECN 212 Midterm 3

A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of output for $9.90 per unit. The marginal revenue of the 151st unit of output is a) -$5.10 b) -$0.10 c) $2.45 d) $5.10

a

As a result of a labeling mistake at the chemical factory, a farmer accidentally sprays weedkiller rather than fertilizer on half her land. As a result, she loses half of her productive farmland. If the property of diminishing returns applies to all factors of production, she should expect to see the marginal productivity of her remaining land a) increase. b) remain unchanged. c) decrease but remain positive. d) decrease and become negative.

a

Consider the market for medical doctors. Suppose the opportunity cost of going to medical school decreases for many individuals. Suppose it generally takes about ten years to become a practicing doctor. Holding all else constant, in ten years the equilibrium wage for doctors will a) decrease. b) increase. c) not change. d) It is not possible to determine what will happen to the equilibrium wage.

a

Lori and Maya are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $10,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $16,000 and the other will earn $6,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $30,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Lori will a) advertise on TV and earn $10,000. b) advertise on radio and earn $14,000. c) not advertise at all and earn $20,000. d) None of the above is correct. Lori and Maya do not have dominant strategies.

a

When a production function exhibits a diminishing, but positive, marginal product of labor, a) output increases, but at a decreasing rate, as more workers are employed. b) output increases, but at an increasing rate, as more workers are employed. c) output declines as more workers are employed. d) the effects on marginal product are ambiguous.

a

Which statement best describes the effect(s) that occur when a monopoly firm increases the price of its product? a) The "price effect" causes total revenue to rise. b) The "output effect" causes total revenue to rise. c) The "revenue effect" causes total revenue to remain constant. d) Both a and b are correct

a

Chuckie's Pizza Palace produces gourmet pizzas that sell for $20 each. Assume that labor is the only input that varies for the firm. If Chuckie hires 10 workers, he can produce and sell 600 pizzas per week. If he hires 11 workers, he can produce and sell 650 pizzas per week. Chuckie pays each of his workers $400 per week. Which of the following is correct? a) For the 11th worker, the marginal profit is $1,000. b) For the 11th worker, the marginal revenue product is $1,000. c) The firm is maximizing its profit. d) If the firm is employing 11 workers, then its profit would increase if it cut back to 10 workers

b

Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing price charged for goods produced is $12.The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6. The socially efficient level of production is 12 units. The demand curve and marginal cost curves are linear. What is the value of the deadweight loss created by the monopolist? a) $4 b) $6 c) $12 d) $16

b

Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the table below: Quantity (in gallons) Price Total Revenue (and Total Profit) 0 $60 $0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 1,200 0 0 Table 2 If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn, assuming that the two producers split the market equally? a) $8,750 b) $9,000 c) $12,000 d) $18,000

b

Phil sells duck calls in a perfectly competitive market. If duck calls sell for $10 each and average total cost per unit is $11 at the profit-maximizing output level, then in the long run a) more firms will enter the market. b) some firms will exit from the market. c) the equilibrium price per duck call will fall. d) average total costs will fall.

b

Refer to Table 2. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. What will be the price of water once Rochelle and Alec reach a Nash equilibrium? a) $15 b) $20 c) $25 d) $30

b

Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost. How much additional profit can the restaurant earn by switching to the use of a tying strategy to price salads and steaks rather than pricing these goods separately? a) $20 b) 12 c) $6 d) $4

c

Robin owns a horse stables and riding academy and gives riding lessons for children at "pony camp." Her business operates in a competitive industry. Robin gives riding lessons to 20 children per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $200 per child. In order to maximize profits, Robin should a) give riding lessons to more than 20 children per month. b) give riding lessons to fewer than 20 children per month. c) continue to give riding lessons to 20 children per month. d) We do not have enough information to answer the question.

c

Suppose that the wage paid to workers who detassel corn rises. What happens in the market for workers who weed soybean fields, given that workers who detassel corn can easily work weeding soybean fields? a) The demand curve for soybean workers increases. b) The demand curve for soybean workers decreases. c) The supply curve for soybean workers decreases. d) The supply curve for soybean workers increases.

c

Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do? a) Confess only if the partner confesses b) Don't confess regardless of the partner's decision c) Confess regardless of the partner's decision d) Don't confess only if the partner doesn't confess

c

Which of the following is true about a monopolistically competitive firm? a) It can earn an economic profit in the short run and the long run b) It can earn an economic profit in the long run, but not the short run c) It can earn an economic profit in the short run, but not the long run d) It cannot earn an economic profit in either the short or long run

c

Juanita is trying to convince the owner of a jewelry store to hire her. She argues that she could help the shop sell an additional three rings per day for a profit of $20 each. If the facts are not in dispute, but the owner does not hire her, then a) the wage rate must be less than $60 per day. b) hiring Juanita would involve a negative marginal product. c) the wage rate must be less than $20 per day. d) the wage rate must be more than $60 per day

d

Kate is a professional opera singer who gives voice lessons. The vocal-music industry is competitive. Kate hires a business consultant to analyze her financial records. The consultant recommends that Kate give fewer voice lessons. The consultant must have concluded that Kate's a) total revenues exceed her total accounting costs. b) marginal revenue exceeds her total cost. c) marginal revenue exceeds her marginal cost. d) marginal cost exceeds her marginal revenue.

d

Refer to Figure 1. A profit-maximizing monopolist would earn profits of a) $96. b) $117. c) $126. d) $120.

d

Refer to Table 1. Quantity Price Marginal Cost Average Total Cost 0 $50 -- -- 1 $45 $30 $40 2 $40 $24 $32 3 $35 $17 $26 4 $30 $15 $22 5 $25 $12 $20 6 $20 $32 $22 7 $15 $50 $26 8 $10 $74 $32 Which of the following is likely to happen in the long run in this market? a) The market is currently in a long-run equilibrium. b) The market price is likely to rise. c) Firms are likely to leave the market since firms are earning a negative economic profit. d) Firms are likely to enter the market since firms are earning a positive economic profit

d

Refer to Table 2. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? a) 0 gallons b) 600 gallons c) 900 gallons d) 1,200 gallons

d

Suppose that a firm in a competitive market faces the following revenues and costs: Quantity Total Revenue Total Cost 0 $0 $5 1 $8 $9 2 $16 $14 3 $24 $20 4 $32 $27 5 $40 $35 If the firm produces 3 units of output, a) marginal cost is $4. b) marginal revenue is less than marginal cost. c) the firm is maximizing profit. d) None of the above

d

Suppose that the market for labor is initially in equilibrium. Suppose that workers' tastes change so that they choose to retire at age 70 rather than age 67. Then the equilibrium wage a) and the equilibrium quantity of labor will rise. b) and the equilibrium quantity of labor will fall. c) will rise, and the equilibrium quantity of labor will fall. d) will fall, and the equilibrium quantity of labor will rise.

d

Suppose that the organic-produce industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will a) shift the demand curve outward so that price will rise to the level of production cost. b) cause the remaining firms to collude so that they can produce more efficiently. c) cause firms in the organic-produce industry to suffer long-run economic losses. d) cause the market supply to decline and the price of organic produce to rise.

d

Table 1 shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Quantity Price Marginal Cost Average Total Cost 0 $50 -- -- 1 $45 $30 $40 2 $40 $24 $32 3 $35 $17 $26 4 $30 $15 $22 5 $25 $12 $20 6 $20 $32 $22 7 $15 $50 $26 8 $10 $74 $32 Table 1 What is this firm's profit-maximizing level of output? a) 1 units of output b) 2 units of output c) 3 units of output d) 4 units of output

d

Which of the following would be most likely to have monopoly power? a) an online bookstore b) a local restaurant c) a grocery store d) a municipal water company

d