ECON 528 Final Exam

12) Which of the following is an example of strategic behavior that we see in oligopoly?

- A firm builds excess capacity to discourage the entry of competitors. - A firm adopts the pricing behavior of a dominant firm under the assumption that other firms will do likewise. - Firms in an industry increase advertising expenditures to avoid losing market share.

15) Which of the following is an example of bundling?

A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides.

5) The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." Based on this quote, what must be true of the plant's average cost of production curve?

A) It is upward-sloping.

7) Which of the following would cause both the equilibrium price and equilibrium quantity of cotton (assume that cotton is a normal good) to increase?

A) an increase in consumer income

12) The price of a factor of production that is in fixed supply is called

A) economic rent.

10) If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set

A) equal to the marginal external cost at the economically efficient level of pollution.

11) The free rider problem refers to a situation in which

A) people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay.

6) Refer to the Article Summary. Higher home values which result from close proximity to public transportation are an example of a ________ due to the public transportation.

A) positive externality.

15) A four-firm concentration ratio measures

A) the fraction of an industry's sales accounted for by the four largest firms.

2) The long-run average cost curve shows

A) the lowest average cost of producing every level of output in the long run.

Which of the following is (are) examples of moral hazard? I. An unemployed worker reduced his effort to find a job after he became eligible for unemployment insurance. II. Banks make exceptionally risky investments because they expect government bailouts if their investments fail. III. After a university made the morning-after pill available on campus, more students became sexually promiscuous.

ALL

Which of the following practices mitigates moral hazard? I. A health insurance company's policy requires a $500 deductible and a 20% coinsurance rate. II. Progressive Insurance offers drivers a discount for using a black box that records miles driven and the number of sudden stops. III. Homeowner insurance does not cover claims arising from backyard trampolines.

ALL

13) Which of the following characteristics is common to monopolistic competition and perfect competition?

B) Entry barriers into the industry are low.

9) Which of the following characteristics is common to monopolistic competition and perfect competition?

B) Entry barriers into the industry are low.

2) Which of the following is the best example of a short run adjustment?

B) Your local Wal-Mart hires two more associates.

12) A member of a cartel like OPEC has an incentive to

B) agree to a low cartel production level and then produce more than its quota.

9) Which of the following would cause a decrease in the equilibrium price and an increase in the equilibrium quantity of salmon?

B) an increase in supply

1) If, when a firm double all its inputs, its average cost of production decreases, then production displays

B) economies of scale.

10) A reason why a perfectly competitive firm's demand for labor curve slopes downward is that

B) in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns.

6) A characteristic found only in oligopolies is

B) interdependence of firms.

4) Mandatory motorcycle helmet laws are designed to reduce the severity of injuries resulting from motorcycle involvement in traffic accidents. In this sense, these mandatory helmet laws are reducing ________ of risky behavior.

B) negative externalities

11) The term "derived demand" refers to

B) the demand for a factor of production that is derived from the demand for the good the factor produces.

4) At the minimum efficient scale

B) the firm has achieved the lowest possible average cost of production.

6) In 2004, hurricanes destroyed a large portion of Florida's orange and grapefruit crops. In the market for citrus fruit

B) the supply curve shifted to the left resulting in an increase in the equilibrium price.

8) What is the incentive for a firm to join a cartel?

B) to be able to earn larger profits than if it was not part of the cartel

11) In a monopolistically competitive market, a successful new restaurant

B) will earn zero economic profit in the long run because of free entry, but competition will lead restaurants to offer different versions of the same product.

5) Which of the following is a reason why a firm would experience diseconomies of scale?

C) As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing plants.

Assume the market for organic produce sold at farmers' markets is perfectly competitive. All else equal, as more farmers choose to produce and sell organic produce at farmers' markets, what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long run?

C) The equilibrium price is likely to decrease and profits are likely to decrease.

1) An externality is

C) a benefit or cost experienced by someone who is not a producer or consumer of a good or service.

7) A cartel is

C) a group of firms that enter into a formal agreement to fix prices to maximize joint profits.

21) In the city of Alvarez, with the exception of guide dogs for blind people, all dogs are banned from its three public parks, regardless of whether the animals are leashed. Many residents are pushing for a change in policy. Canine lover Sara Northridge observed, "There are 800 or more homes here. There are three parks within 10 minutes, and almost everyone has a dog, but we can't take our dogs there." Others fear that allowing dogs would detract from their enjoyment of the parks. Tim Cortis retorted, "We're not preventing dog lovers from enjoying the park, just come without your dog." Which of the following is a way of dealing with the problem by assigning property rights to a particular group?

C) dedicate some parks, or at least one park, exclusively for the use of visitors bringing dogs to the park

19) Which of the following is a source of market failure?

C) incomplete property rights or inability to enforce property rights

3) Which of the following is a source of market failure?

C) incomplete property rights or inability to enforce property rights

5) A perfectly competitive firm's supply curve is its

C) marginal cost curve above its minimum average variable cost.

14) A monopolistically competitive firm faces a downward-sloping demand curve because

C) of product differentiation.

7) Because producers do not bear the external cost of pollution

C) private production exceeds the economically efficient level.

2) A negative externality exists if

C) the marginal social cost of producing a good or service exceeds the private cost.

3) All of the following statements are true of the minimum efficient scale except one. Which one?

D) An increase in the output level will increase profit.

1) Which of the following is an example of a long run adjustment?

D) Wal-Mart builds another Supercenter.

14) Which of the following is not part of an oligopolist's business strategy?

D) independently setting a product's price without consideration of its rivals' pricing policies

8) If there is pollution in producing a product, then the market equilibrium price

D) is too low and equilibrium quantity is too high.

20) Which of the following activities create a negative externality?

D) keeping a junked car parked on your front lawn

22) In economics, the term "free rider" refers to

D) one who waits for others to produce a good and then enjoys its benefits without paying for it.

5) A positive externality results when

D) people who are not directly involved in producing or paying for a good or service benefit from it.

(T/F) Answer whether the following statement is true or false: Economic rent for an input is higher if the input is abundant is supply

False

(T/F) Answer whether the following statement is true or false: If the marginal revenue product of an input is less than the price of that input, the input is too expensive and the firm should stop using that input and try to find some alternate inputs.

False

Evaluate the Statement; Cost approach is the easier approach to achieve optimal production when the firm is at the start of their production plan (T/F)

False

Evaluate the Statement; Resource approach is the easier approach to achieve optimal production after the firm has already established a production plan and requires only incremental changes in their plan to achieve the maximum possible profit (T/F)

False

Which of the following statements is (are) TRUE? I. Public goods tend to be underprovided. II. One person's consumption of a public good diminishes its use to another person. III. The marginal cost of providing a public good to another consumer is infinite.

I

23) The Coase Theorem works best in places that transaction costs for contracts among people is low. Often in the world of torts and externalities both parties can claim that they have rights to impose on others. One case is that of a railroad that is noisy and scares the cattle and the rancher whose cattle sometimes wander in front of moving trains causing damage to them and the train. What does the Coase say would happen?

If transaction costs are low, the efficient activity will occur, either the rancher or railroad installing fences to protect from rampaging cattle and/or sound insulation with trees, or if it is cheaper, fewer train trips per day. The cheapest or most efficient solution will happen, regardless of who is assigned the original property right.

15) Mr. Leghorn lives next door to Mr. Fudd. During hunting season, Mr. Fudd likes to shoot rabbits in his backyard, which activity he values at $900. The noise from the shooting disturbs Mr. Leghorn and prevents him from taking afternoon naps, which he values at $500. If Mr. Leghorn has the legal right to stop Mr. Fudd from hunting, the socially optimal outcome is for:

Mr. Fudd to pay Mr. Leghorn between $500 and $900 to continue hunting.

12) Which of the following markets is most likely to have a free-rider problem?

PUBLIC restrooms

T/F 9) For the Coase theorem to work there must be clear assignment of property rights.

True

The antitrust laws regulate all of the following business decisions except ____.

WAGE LEVELS

Would you expect economies of scope to occur in the following situation; Producing two goods that use the same resource

Yes

Which of the following is not a reason why firms experience economies of scale?

a. As output increases, the managers can begin to have difficulty coordinating the operations of their firms.

Which of the following is a reason why a firm would experience diseconomies of scale?

a. As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing plants.

There are five firms in an industry with sales at $5 million, $10 million, $8 million, $12 million, and $10 million, respectively. What is the proper conclusion that we can draw from the calculated four-firm concentration ratio and HHI?

a. Both measures indicate that the industry is not perfectly competitive.

Oligopolists that have restrictions on productive capacity divide the market between themselves and charge prices greater than marginal costs. In this case they engage in:

a. Cournot competition.

Which of the following statements is true if a government decides that it must provide a public good, other things constant?

a. Governments should supply the efficient quantity where the marginal cost is equal to the marginal social benefit.

In which markets are network effects likely?

a. Hi-tech product markets b. Market for trendy products. c. Markets subject to increasing returns

Juicy Couture has been successful in selling women's clothing using an unusual strategy. According to an article in the Wall Street Journal, the key to the firm's strategy is to "limit distribution to maintain the brand's exclusive cachet, even if that means sacrificing sales, a brand-management technique once used only for high-end luxury brands." In 2006, Juicy clothes were sold in only four department stores: Neiman Marcus, Saks, Bloomingdale's, and Nordstrom. In 2006, its sales have more than quadrupled since 2002. Source: Rachel Dodes, "From Track Suits to Fast Track," Wall Street Journal, September 13, 2006. How does limiting the number of stores in which Juicy's products are sold contribute to its success?

a. It enables Juicy to price its products at a premium and differentiate them from lower priced products.

How could the expansion of property rights be used to address a problem with public goods or common resources?

a. Property rights could provide an incentive for individuals to better manage the public goods.

An increase in input costs in the production of electric automobiles caused the price of electric automobiles to rise. Holding everything else constant, how would this affect the market for gasoline-powered automobiles (a substitute for electric automobiles)?

a. The demand for gasoline-powered automobiles would increase and the equilibrium price of gasoline-powered automobiles would increase.

A perfectly competitive wheat farmer in a constant-cost industry produces 3,000 bushels of wheat at a total cost of $36,000. The prevailing market price is $15. What will happen to the market price of wheat in the long run?

a. The price falls to $12.

The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." This quote suggests that

a. as Toyota expanded its capacity, it experienced diseconomies of scale.

1) In the long run a company that produces and sells dog beds incurs total costs of $1,200 when output is 30 beds and $1,600 when output is 40 beds. Firm A exhibits

a. constant returns to scale because average total cost is constant as output rises.

Which of the following public policies has (have) the effect of restricting competition?

a. copyrights b. licensing c. patents

In the city of Alvarez, with the exception of guide dogs for blind people, all dogs are banned from its three public parks, regardless of whether the animals are leashed. Many residents are pushing for a change in policy. Canine lover Sara Northridge observed, "There are 800 or more homes here. There are three parks within 10 minutes, and almost everyone has a dog, but we can't take our dogs there." Others fear that allowing dogs would detract from their enjoyment of the parks. Tim Cortis retorted, "We're not preventing dog lovers from enjoying the park, just come without your dog." Which of the following is a way of dealing with the problem by assigning property rights to a particular group?

a. dedicate some parks, or at least one park, exclusively for the use of visitors bringing dogs to the park

1) When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing

a. diminishing marginal product.

7) Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves:

a. economies of scope.

1) Which of the following explains why long-run average cost at first decreases as output increases?

a. gains from specialization of inputs

A monopolistically competitive firm will

a. have some control over its price because its product is differentiated.

The minimum efficient scale is

a. level of operation where long-run average costs are lowest.

The reason that the Fisherman's Friend restaurant in Stonington, Maine had a monopoly on selling seafood dinners in that town is most likely due to

a. no competitors apparently found the profit level attractive enough to enter the market.

14) An industry has a 4-firm concentration ratio of 85. We would call this industry a:

a. oligopoly.

If a producer is not able to expand its plant capacity immediately, it is

a. operating in the short run.

11) If the 4-firm concentration ratio for industry A is 80:

a. the four largest firms account for 80 percent of total output.

Government encouragement of monopoly:

a. through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market.

The Bertrand model is a more plausible model of firm behavior than the Cournot model when:

a. when firms sell a differentiated product.

The marginal revenue product of labor for a firm

a. will decrease if the firm hires more labor. b. is the firm's demand curve for labor. c. will increase if the price of the firm's output increases.

8) The marginal revenue product of labor for a firm

a. will increase if the price of the firm's output increases. b. is the firm's demand curve for labor. c. will decrease if the firm hires more labor.

Which of the following are sources of market power? I. government-issued patents and copyrights II. a Minnesota law requiring all new funeral homes to have an embalming room, which costs upward of $30,000, whether or not it is functional or will be used III. a Portland, Oregon, law that makes it a crime for limousine companies to charge less than $50 per ride

all

Which of the following statements is true about advertising by a monopolistically competitive firm?

b. Advertising could make the monopolistic competitor's demand more inelastic, but advertising has no effect on a perfect competitor's demand.

Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?

b. Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.

Which of the following statements is (are) TRUE? I. In the face of a positive externality, a perfectly competitive market produces less than the socially optimal quantity of output. II. If vaccinations generate an external marginal benefit, their marginal social benefit will always exceed their private marginal benefit. III. In unregulated markets, the presence of negative externalities—but not positive externalities—causes deadweight losses.

b. I and II

Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Sylvia Sidney. The lease has five years remaining and requires a monthly payment of $4,000. Max's explicit cost amounts to $3,000 per month more than his revenue. Should Max continue operating his business?

b. Max should continue to run the tattoo parlor until his lease runs out.

Mr. Leghorn lives next door to Mr. Fudd. During hunting season, Mr. Fudd likes to shoot rabbits in his backyard, which activity he values at $900. The noise from the shooting disturbs Mr. Leghorn and prevents him from taking afternoon naps, which he values at $500. If Mr. Leghorn has the legal right to stop Mr. Fudd from hunting, the socially optimal outcome is for:

b. Mr. Fudd to pay Mr. Leghorn between $500 and $900 to continue hunting

A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run?

b. Yes, it should continue to produce because it is minimizing its loss.

When a credit card company offers different services with its card, like travel insurance for air travel tickets purchased with the credit card or product insurance for items purchased with the card, the credit card company is trying to

b. convince customers that its card has greater value than those offered by rival firms.

An oligopolistic industry is characterized by all of the following except

b. firms pursuing aggressive business strategies, independent of rivals' strategies.

Which of the following is a source of market failure?

b. incomplete property rights or inability to enforce property rights

The demand for labor is described as a derived demand because

b. it is derived from the demand for products that use labor in the production process.

Which of the following activities create a negative externality?

b. keeping a junked car parked on your front lawn

Excess capacity and high advertising expenditures are encountered in

b. monopolistic competition

If the marginal product of capital is six times as large as the marginal product of labor and the price of capital is three times as large as the price of labor, for costs to be minimized:

b. more capital should be used and less labor.

Interdependence of firms is most common in

b. oligopolistic industries.

Mobile phone portability allows consumers to retain their phone number if they change to a different phone network, which will tend to:

b. reduce market power in the phone industry.

Economic rent is defined as

b. the price of a factor of production that is fixed in supply.

9) Sue and Jane own two local petrol stations. They have identical constant marginal costs, but earn zero economic profits. Sue and Jane constitute

c) a Bertrand oligopoly.

Which of the following is an example of bundling?

c. A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides

What is the difference between "diminishing marginal returns" and "diseconomies of scale"?

c. Diminishing marginal returns, which applies only in the short run when at least one factor is fixed, explains why marginal cost increases, while diseconomies of scale, which applies in the long run when all factors are variable, explains why average cost increases.

A firm that is threatened by the potential entry of competitors into a market builds excess production capacity. This is an example of

c. Entry Barriers to prevent potential entrants

Which of the following criteria should be used to evaluate if government intervention in a market for the purpose of environmental protection is justified?

c. Is the intervention program economically efficient?

Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

c. The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.

When the free-rider problem occurs in a market for a good, what is true of the quantity of the good supplied relative to the efficient quantity of the good?

c. The good is typically under supplied in a market where the free-rider problem occurs

Which type of workers is most likely to enjoy substantial economic rent?

c. Those with high wages which result from them possessing the innate ability to develop some skill to a very high level

"Tom and Jack are two local petrol stations. Although they have different constant marginal costs, they both survive continued competition." Tom and Jack do not constitute:

c. a Bertrand oligopoly.

Relative to a perfectly competitive market, a monopoly results in

c. a gain in producer surplus less than the loss in consumer surplus.

Which of the following would cause an increase in the equilibrium price and an increase in the equilibrium quantity of watermelons?

c. an increase in supply and an increase in demand greater than the increase in supply

Learning curves represent the relationship between

c. average variable cost and the cumulative number of units produced

If identical firms sell an undifferentiated product, advertising is likely to be

c. collectively undertaken by the industry group.

Over the past twenty years, the number of small family farms has fallen significantly and in their place there are fewer, but larger, farms owned by corporations. Which of the following best explains this trend?

c. economies of scale in farming

A company's competitive strategy deals with

c. how to compete successfully-its plans for positioning the company in the marketplace, its specific efforts to please customers and improve its competitive strength, and the type of competitive advantage it intends to establish.

According to the Bertrand model, a firm will assume that rival firms will

c. keep their prices constant

In the quantity leadership model:

c. one firm plays a leadership role and its competitor's simply react to the leader's quantity

In economics, the term "free rider" refers to

c. one who waits for others to produce a good and then enjoys its benefits without paying for it.

Antitrust laws:

c. restrict firms from engaging in behaviors that make markets less competitive.

Economies of scope exist between book publishing and magazine publishing if

c. the cost of publishing a magazine is lower for book publishers than for other firms.

Assume the market for organically-grown produce is perfectly competitive. All else equal, as farmers find it less profitable to produce and sell organic produce in this market

c. the supply curve will shift to the left and the equilibrium price will increase.

15) Selling tickets in the orchestra region of the Metropolitan Opera for $55 and selling tickets in the upper balcony for $28 to listen to Luciano Pavoratti describes which type of price discrimination?

c. third-degree price discrimination

10) If firms are in Cournot equilibrium:

d) Firms could increase profits by jointly reducing output.

13) If firms are in Cournot equilibrium:

d) Firms could increase profits by jointly reducing output.

One of your classmates asserts that advertising, marketing research, and brand management are redundant expenditures because a firm can obtain the same information by simply looking at what customers are already buying. Which of the following is not a response you might offer her?

d. Advertising and brand management allow a firm to create an entry barrier which will insulate the firm from competition and from undertaking further product innovations.

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive. Which of the following offers the best reason why some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being?

d. Although consumers may pay a price greater than marginal cost and the product is not produced at minimum average total cost, they benefit from being able to buy a differentiated product more closely suited to their tastes.

Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often break down?

d. Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.

The Coase Theorem works best in places that transaction costs for contracts among people is low. Often in the world of torts and externalities both parties can claim that they have rights to impose on others. One case is that of a railroad that is noisy and scares the cattle and the rancher whose cattle sometimes wander in front of moving trains causing damage to them and the train. What does the Coase say would happen?

d. If transaction costs are low, the efficient activity will occur, either the rancher or railroad installing fences to protect from rampaging cattle and/or sound insulation with trees, or if it is cheaper, fewer train trips per day. The cheapest or most efficient solution will happen, regardless of who is assigned the original property right

Would you expect economies of scope to occur in the following situation; Producing two goods that are complementary to each for the buyer such as coffee and sugar.

d. No

If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is $3, the rental price of capital is $6, and the price of output is $1.50, then the firm should

d. None of the above is correct

Which of the following best describes the free-rider problem?

d. People can sometimes enjoy common goods without contributing to them

A member of a cartel like OPEC has an incentive to

d. agree to a low cartel production level and then produce more than its quota.

Economies of scale exist as a firm increases its size in the long run because of all of the following except

d. as a firm expands its production, its profit margin per-unit of output increases.

Assume that both the demand curve and the supply curve for MP3 players shift to the right but the demand curve shifts more than the supply curve. As a result

d. both the equilibrium price and quantity of MP3 players will increase.

A competitive strategy of striving to be the low-cost provider is particularly attractive when

d. buyers are large, have significant power to bargain down prices, use the product in much the same ways, and have common user requirements.

Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm two commits to this collusive output, it pays firm one to

d. cheat by producing a higher level of output.

If a typical firm in a perfectly competitive industry is earning profits, then

d. new firms will enter in the long run causing market supply to increase, market price to fall and profits to decrease.

A firm's demand curve for labor slopes downwards because

d. of the law of diminishing marginal returns.

An industry has a 4-firm concentration ratio of 85. We would call this industry a:

d. oligopoly

The reason that the coffeehouse market is monopolistically competitive rather than perfectly competitive is because

d. products are differentiated.

A perfectly competitive firm's short-run supply curve is

d. upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve.

To be successful with a differentiation strategy, a company has to

e. study buyers" needs and behavior very carefully to learn what they consider important, what they think has value, and what they are willing to pay for

T/F a. Over time, more experienced workers will demand higher wage and therefore, will lead to an increased in the cost of production for the producers.

false

T/F a. When you produce more, average cost of production increases.

false

17) Successful differentiation allows a firm to

gain buyer loyalty to its brand (because some buyers prefer the differentiating features and are thus brand loyal). and command a premium price for its product and/or increase unit sales (because additional buyers are won over by the differentiating features), and/or.

15) A company achieves competitive advantage whenever

it has a product offering that is differentiated from the product offerings of rivals.

1) If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is $3, the rental price of capital is $6, and the price of output is $1.50, then the firm should

none of the above

6) Economies of scope refers to the decrease in average total cost that can occur when a firm

produces more than one product

16) A low-cost leader's basis for competitive advantage is:

using an everyday low pricing strategy to gain the biggest market share.