ECON 100B Final

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. What will be the price of this new drink in the long run if the firms in the industry collude with one another to maximize joint profit?

$16.50

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. What will be the price of this new drink in the long run if the industry is a Bertrand duopoly?

$3

You are the manager of a firm producing green chalk. The marginal product of labor is: MPL = 24L-1/2 Suppose that the firm is a competitor in the green chalk market. The price of green chalk is $1 per unit. Further suppose that the firm is a competitor in the labor market. The wage rate is $12.00 per hour. How much labor will be hired to maximize profit?

$4

The market for an industrial chemical has a single dominant firm and a competitive fringe comprised of many firms that behave as price takers. The dominant firm has recently begun behaving as a price leader, setting price while the competitive fringe follows. The market demand curve and competitive fringe supply curve are given below. Marginal cost for the dominant firm is $0.75 per gallon. QM = 140,000 - 32,000P QF = 60,000 + 8,000P, where QM = market quantity demanded, and QF = supply of competitive fringe. Quantities are measured in gallons per week, and price is measured as a price per gallon. The price that would prevail in the market under the conditions described above is

1.375 per gallon

The Acme Company is a perfect competitor in its input markets and its output market. Its average product of labor is at its maximum and equals 30. The marginal revenue product of labor is $300. The price of its output is $ .

10

Suppose labor and capital are variable inputs. The wage rate is $20 per hour, the marginal product of labor is 30 units, the rental rate of capital is $100 per machine hour, and the marginal product of capital is 150 units. If the wage rate declines to $15 per hour, the firm employs more labor and the marginal product of labor declines to 20 units. Assuming the rental rate of capital remains the same, what is the marginal product of capital at the new optimal level of input usage?

133

The market for an industrial chemical has a single dominant firm and a competitive fringe comprised of many firms that behave as price takers. The dominant firm has recently begun behaving as a price leader, setting price while the competitive fringe follows. The market demand curve and competitive fringe supply curve are given below. Marginal cost for the dominant firm is $0.75 per gallon. QM = 140,000 - 32,000P QF = 60,000 + 8,000P, where QM = market quantity demanded, and QF = supply of competitive fringe. Quantities are measured in gallons per week, and price is measured as a price per gallon. The output for the competitive fringe is

71000

In which oligopoly model(s) do firms earn zero profit?

Bertrand

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

Bertrand

Use the following statements to answer this question: I. Cartels are illegal in the United States. II. Once price and production levels are agreed upon, each member of a cartel has an incentive to "cheat" on the agreement.

Both 1 and 2 are true

A price taker is: A) a firm that accepts different prices from different customers. B) a consumer who accepts different prices from different firms. C) a perfectly competitive firm. D) a firm that cannot influence the market price. Correct!

C and D

This market situation is much like a pure monopoly except that its member firms tend to cheat on agreed upon price and output strategies. What is it?

Cartel

Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market is highly competitive, with boxes currently selling for $100 per thousand. Conigan's total and marginal cost curves are: TC = 3,000,000 + 0.001Q2, where Q is measured in thousand box bundles per year.

Conigan's profit maximizing quantity is Q = 50,000 and Conigan is losing $500,000 per year.

In the ________, each firm treats the output of its competitor as fixed and then decides how much to produce.

Cournot model

In the ________, one firm sets its output first, and then a second firm, after observing the first firm's output, makes its output decision.

Cournot model model of monopolistic competition Bertrand model Correct! none of the above

Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries. What happens to OPEC's share of the world oil market?

Decreases

Electric power utility companies use various fuel sources (e.g., coal, natural gas, nuclear) to generate electricity for their customers. What happens to the demand for natural gas used to generate electricity as we move from a short-run planning horizon to a long-run planning horizon? Why?

Demand becomes more elastic over time because the power companies have more options available and can adopt new generating technologies or substitutes for natural gas over the long run.

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.

Homer's Boat Manufacturing cost function is (75/128)*Q4+10,240. If Homer can sell all the boats he produces for $1,200, then

Homer will produce and make a loss of $3,040.

Use the following two statements about monopolistic competition to answer this question. I. In the long run, the price of the good will equal the minimum of the average cost. II. In the short run, firms may earn a profit.

I is false, and II is true

Use the following statements to answer this question: I. Under the dominant firm model, the dominant firm effectively acts like a monopolist who is facing the excess market demand that cannot be supplied by the fringe firms. II. Under the dominant firm model, the fringe firms also act like profit maximizing monopolists.

I is true and II is false

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.

In the Stackelberg model, suppose the first-mover has MR = 15 - Q1, the second firm has reaction function Q2 = 15 - Q1/2, and production occurs at zero marginal cost, where Q1 is quantity of firm 1 and Q2 is quantity of firm 2. Why doesn't the first-mover announce that its production is Q1 = 30 in order to exclude the second firm from the market (i.e., Q2 = 0 in this case)?

In this case, MR is negative and is less than MC, so the first-mover would be producing too much output.

Under what circumstances will the economic rent earned by a factor of production always be zero?

Infinitely elastic supply curve

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.

What happens to the marginal revenue product curve of a factor as more of a complementary factor is hired?

It shifts to the right, because its marginal product increases.

The marginal revenue product of labor is equal to:

MPL∗MR

If the market for labor is perfectly competitive, the profit maximizing level of labor occurs where (W wage and P output price):

MRPL= W.

For which of the following market structures is it assumed that there are barriers to entry?

Monopoly

In general, does the demand for labor become more or less elastic as we increase the number of other variable inputs used in a production process?

More elastic

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 homogenous products?

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

The market structure of the local pizza industry is best characterized by monopolistic competition. One Guy's Pizza is one of the producers in the local market. The demand for One Guy's Pizza is Q = 225-10P. One Guy's cost function is TC=0.15Q2.

One Guy's is not operating in a long-run equilibrium because it is earning positive profits.

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

Suppose two firms with differentiated products are competing on price. The reaction curve for Firm 1 is P1 = 4 + 0.5 P2, and the reaction curve for Firm 2 is P2 = 4 + 0.5P1. What is the equilibrium price outcome in this market?

P1= P2= 8

Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run?

Profit equals zero.

In a Cournot duopoly, we find that Firm 1's reaction function is Q1 = 50 - 0.5Q2, and Firm 2's reaction function is Q2 = 75 - 0.75Q1. What is the Cournot equilibrium outcome in this market?

Q1= 20 and Q2= 60

Suppose the downward sloping labor demand curve shifts rightward in a labor market with a single employer (monopsony). What happens to the marginal expenditure curve?

Remains the same

Ronny's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Ronny's profit maximizing decisions?

Ronny's decision depends on the circumstances—if their profits are larger than $250 per year, then the tax does not impact output; otherwise, Ronny's Pizza House will shut down.

The oligopoly model that is most appropriate when one large firm usually takes the lead in setting price is the ________ model.

Stackelberg

Collusion can earn higher prices and higher profits under the Bertrand model, but why is this an unlikely outcome in practice?

The collusive firms have an incentive to gain market share at the expense of the other firms by cutting prices.

What condition may provide for a relatively small degree of inefficiency under monopolistic competition?

The demand curve is relatively elastic so that the price is near the long-run minimum average cost.

Which of the following is TRUE concerning equilibrium in a monopsonistic factor market?

The firm maximizes profit but does not use the efficient level of the input.

Which of the following is true in the Stackelberg model?

The first firm produces more than its rival.

Which of the following markets is most likely to be oligopolistic?

The market for aluminum

Which of the following statements is TRUE when comparing monopsony and competitive labor markets?

The monopsonist's wage and quantity of labor are lower than would prevail under perfect competition.

A firm operating in a monopolistically competitive market faces demand given by P = 10 - 0.1Q and a total cost of TC= -10Q+0.0333Q3 + 130, where P is in dollars per unit, output rate Q is in units per time period, and total cost C is in dollars.

The price and output that will allow the firm to maximize profit are Q = 13.17 and P = 8.68. The Lerner index is 0.154.

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

The supply of non-cartel members is very 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.

Suppose the downward sloping labor demand curve shifts rightward in a labor market with a single employer (monopsony). What happens to the equilibrium wage and level of employment in the market?

Wage and level of employment increase.

Suppose a labor market has perfectly inelastic supply that is composed of union and non-union workers, and both groups of workers initially earn the perfectly competitive wage. What happens to the equilibrium employment level and wage for union workers if the union exercises its bargaining power?

Wage increases and employment declines.

Suppose the upward sloping labor supply curve shifts leftward in a labor market with a single employer (monopsony). What happens to the equilibrium wage and level of employment in the market?

Wage increases and level of employment declines.

For a market with a linear demand curve and constant marginal cost of production, why are the reaction functions for the Cournot duopoly sellers also straight lines?

We know that the marginal revenue curves for linear demand curves are also straight lines.

Under a Cournot duopoly, the collusion curve represents:

all possible allocations of the pure monopoly quantity among the two firms in the duopoly.

The marginal expenditure curve for labor is based on the assumption that:

all workers are paid the same wage rate.

An increase in technology that enhances labor productivity will likely result in:

an increase in labor employment and an increase in the wage rate.

All of the payment to a factor of production will be economic rent when the factor of production has:

an infinitely inelastic supply curve.

In the dominant firm model, the fringe firms:

are price takers.

The marginal product of labor for Acme, Inc. is 15. The average product of labor is 25, and the price of labor is $10. Assuming that Acme, Inc. is a competitor in its output and input markets, the marginal revenue product of labor:

cannot be determined with the information provided.

In the dominant firm model, the smaller fringe firms behave like:

competitive firms

Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should:

continue producing in the short run, but plan to go out of business in the long run.

If a monopolistically competitive seller can convince buyers that its product is of better quality and value than products sold by rival firms,

demand increases. the firm gains more control over its price. demand becomes more inelastic.

Suppose the labor market and all output markets are perfectly competitive. When the labor market is in equilibrium, the wage rate will:

equal the marginal revenue product of labor.

In a competitive labor market, with one variable factor, the supply of labor to the firm is:

equal to the marginal expenditure curve.

A firm should hire more labor when the marginal revenue product of labor:

exceeds the wage rate.

The most important factor in determining the long-run profit potential in monopolistic competition is:

free entry and exit.

The industry demand curve for labor is the:

horizontal sum of individual firm labor demand curves.

If all producers in a market are cartel members, then the demand curve facing the cartel is:

identical to the monopolist's demand curve.

Under an upward sloping supply curve for land, the economic rents to land ________ as the demand for land shifts rightward.

increase

The marginal revenue product can be expressed as the:

increment to revenue received from one additional unit of input hired.

Monopolistic Competitive firms use advertising to

influence a consumer's buying decision. convince customers that their product is worth its price. persuade buyers that their product is superior to others.

The Acme Company is a perfect competitor in its input markets and its output market. Its average product of labor is 30, the marginal product of labor is 20, the price of labor is $20, and the price of the output is $5. For Acme Company, the marginal revenue product of labor:

is $100.

In the short run, a perfectly competitive profit maximizing firm that has not shut down:

is operating on the upward-sloping portion of its AVC curve.

If a competitive firm's marginal cost curve is U-shaped, then:

its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average variable cost curve

For a monopsony buyer of an input, the marginal expenditure curve:

lies above the average expenditure curve.

A firm maximizes profit by operating at the level of output where:

marginal revenue equals marginal cost.

Consider the following scenario: Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly. According to the described scenario, Fizzle and Sizzle:

may or may not be perfect competitors, but their position on the river has nothing to do with it.

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly?

none of the above

The market structure in which strategic considerations are most important is:

oligopoly

In the short run, a perfectly competitive firm earning negative economic profit is:

on the downward-sloping portion of its ATC curve.

A ________ shows how much a firm will produce as a function of how much it thinks its competitors will produce.

reaction curve

Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogeneous products

results in a larger output at a lower price.

Which of the following can be thought of as a barrier to entry?

scale economies. patents. strategic actions by incumbent firms.

If the firms in an industry could take advantage of a reduced wage, how would one best describe the firms' demand for labor? The MRPL:

schedule would remain unchanged, and the firms would hire more labor at the lower wage.

In monopolistic competition, the products of different sellers are assumed to be

similar but slightly different.

A market structure in which there is one large firm that has a major share of the market and many smaller firms supplying the remainder of the market is called:

the dominant firm model.

If a graph of a perfectly competitive firm shows that the point occurs where MR is above AVC but below ATC,

the firm is earning negative profit, but will continue to produce where in the short run.

In the Bertrand model with homogeneous products,

the firm that sets the lower price will capture all of the market. the Nash equilibrium is the competitive outcome. both firms set price equal to marginal cost. Correct Answer all of the above

If an individual's labor supply curve is backward bending, then:

the income effect associated with a higher wage is greater than the substitution effect.

In the Cournot duopoly model, each firm assumes that:

the output level of its rival is fixed.

Consider the following scenario: Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly. Refer to the information in the previous scenario. If Fizzle and Sizzle sell the same output at the same price and are otherwise identical, Fizzle's profit will be:

the same as Sizzle's because Fizzle must be assigned an implicit cost of $500,000 yearly for economic rent.

The demand curve facing a perfectly competitive firm is:

the same as its average revenue curve and its marginal revenue curve.

In monopolistic competition, each firm supplies a small part of the market. This occurs because

there are a large number of firms.

In the Stackelberg model, there is an advantage:

to being the first competitor to commit to an output level.

A monopolistically competitive firm in short-run equilibrium:

will make negative profit (lose money). will make zero profit (break-even). will make positive profit.

A monopolistically competitive firm in long-run equilibrium:

will make zero profit.

If only one firm in an industry could take advantage of a reduced wage and all other firms continue paying the old wage, how would one best describe the one firm's reaction to this reduced wage assuming labor is the only variable input? The marginal revenue product of labor curve:

would remain unchanged, and the firm would hire more labor at the lower wage.