Econ Final Review
A dominant strategy exists ifA) a player has a strategy that yields the highest payoff regardless of the other player's choice.B) both players have the highest payoff when they make the same choice.C) both players make the same choice.D) one strategy yields the highest possible payoff.
A A dominant strategy is one that yields a higher payoff no matter what the other players choose
If a firm operates in an oligopoly, it isA) one of a small number of firms that produce goods that are either close or perfect substitutes.B) the only firm that produces a good with no close substitutes.C) one of a large number of firms that produce goods that are either close or perfect substitutes.D) one of a large number of firms that produce a good with no close substitute.
A An oligopoly is an industry in which a small number of large firms produce products that are either closeor perfect substitutes
Cartel agreements are difficult to sustain becauseA) it's a dominant strategy for each cartel member to cheat on the cartel agreement.B) the collective payoff to all the cartel members is lower when they all abide by the cartel agreement.C) cartel members do not face the economic incentives inherent in a prisoner's dilemma.D) it's usually easy to discover if one of the members has cheated.
A Cartels are inherently unstable because each member has an incentive to cheat on the cartelagreement
Generally, ______ motivates firms to enter an industry, while ______ motivates firms to exit anindustry.A) economic profit; economic lossB) accounting profit; accounting lossC) accounting profit; economic lossD) economic profit; accounting loss
A Firms have an incentive to seek economic profit and to avoid economic loss.
A credible promise isA) in the promiser's interest to keep.B) legally enforceable.C) made by an honest person.D) possible to keep.
A For a promise to be credible, it must be in the promiser's interest to carry out the promise.
Game theory is not useful in understanding perfect competition because in a perfectly competitivemarketA) no single firm can influence the market price, so firms' decisions are not interdependent.B) each firm only cares about its own profit, so there is no interdependence.C) there are too many firms to be able to model their behavior accurately using game theory.D) the payoffs to firms' choices are unknown
A Perfectly competitive firms do not behave interdependently because no single firm can affect themarket price.
The cumulative difference between the price producers actually receive for a good and the lowestprice for which they would have been willing to sell it is calledA) producer surplus.B) lost surplus.C) total economics surplus.D) consumer surplus
A Producer surplus is amount by which the price exceeds the seller's reservation price
A pure monopoly exists whenA) many firms produce a good with no close substitutes.B) a single firm produces a good with no close substitutes.C) only a single firm is present in the market.D) a single firm produces a good with many close substitutes
B A monopoly is the only supplier of a unique product with no close substitutes
Accounting profit is equal toA) total revenue minus implicit costs.B) total revenue minus explicit costs.C) total revenue minus explicit and implicit costs.D) economic profit minus implicit costs
B Accounting profit equals total revenue minus explicit costs.
Adam Smith coined the term "invisible hand" to describe the process by which the actions ofindependent, self-interested buyers and sellers willA) always lead an economy to ruin.B) often lead to the most efficient allocation of resources.C) always lead to the most efficient allocation of resources.D) often lead to increasing inequality.
B Adam Smith's theory of the invisible hand posits that the actions of independent, self-interested buyersand sellers will often (but not always) result in the most efficient allocation of resources.
Consumer surplus is the cumulative difference betweenA) consumers' incomes and consumers' expenditures.B) the amount consumers are willing to pay and the price they actually pay.C) the suggested retail price and the price consumers actually pay.D) consumers' savings and consumers' expenditures.
B Consumer surplus measures the cumulative difference between the price consumers are willing to payand the price they actually pay.
Free entry and exit of firms is a characteristic ofA) all industries in the U.S. economy.B) perfectly competitive industries.C) centralized economies.D) industries in which firms are earning positive economic profit.
B In perfectly competitive markets, productive resources are mobile, meaning that firms can easily enterand exit a market
A monopolistically competitive firm is oneA) that behaves like a monopolist.B) of many firms that sell products that are close but not perfect substitutes.C) of many firms that all sell the exact same product.D) of a small number of firms that sell products that are close but not perfect substitutes
B Monopolistic competition is an industry structure in which a large number of firms produce slightlydifferentiated products that are all reasonably close substitutes for one another.
The three elements of a game areA) the firm, the consumers, and the profit.B) the players, the strategies, and the payoffs.C) the model, the graph, and the costs.D) the costs, the revenue, and the profit.
B The basic elements of a game are the players, their available strategies, and the payoffs that result fromall possible combinations of strategies.
Once a firm has determined the quantity of output it wishes to sell, the maximum price it cancharge for each unit is determined byA) the average cost of making the product.B) the demand curve facing the firm.C) the marginal cost of making the product.D) the firm's marginal revenue curve.
B The demand curve dictates the maximum price a firm for each quantity produced.
Suppose that you have noticed that almost all of the car dealers in your city are located along athree-block stretch of the same street. A likely reason for this clustering of car dealers is thatA) the dealers are better able to form a cartel.B) each dealer is attempting to locate closest to the customers.C) there is a social norm in that city that dealers follow in choosing location.D) each dealer sells a different brand of car, so they are not competitors and do not have to beconcerned about the other dealers' locations.
B When monopolistically competitive firms compete on location, the result is that competitors will"cluster" together.
A coalition of firms who agree to restrict output for the purpose of earning an economic profit iscalled a(n)A) pure monopoly.B) oligopoly.C) cartel.D) duopoly
C A cartel is a coalition of firms that agree to restrict output in order to earn an economic profit
A price setter is a firm thatA) attempts but fails to be perfectly competitive.B) has the ability to set price at any level it wishes.C) has some degree of control over its price.D) faces perfectly inelastic demand.
C A price setter has at least some latitude to set the price of its output.
A prisoner's dilemma is a game in which:A) neither player has a dominant strategy.B) one player has a dominant strategy, and the other does not.C) the players' payoffs are smaller when both play their dominant strategy compared to when bothplay a dominated strategy.D) the players' payoffs are larger when both play their dominant strategy compared to when both playa dominated strategy.
C A prisoner's dilemma is a game in which each player has a dominant strategy, and when each plays it,the resulting payoffs are smaller than if both had played a dominated strategy.
Economic profit is equal toA) accounting profit plus implicit costs.B) total revenue minus accounting profit.C) total revenue minus the sum of explicit and implicit costs.D) accounting profit minus explicit costs.
C Economic profit is the difference between a firm's total revenue and the sum of its explicit and implicit
Explicit costsA) measure the opportunity costs of the resources supplied by the firm's owners.B) are fixed in the short run.C) measure the payments made to the firm's factors of production.D) are variable in the short run
C Explicit costs are the actual payments a firm makes to its factors of production and other suppliers
A credible threat isA) possible to carry out.B) legally enforceable.C) in the threatener's interest to carry out.D) not in the threatener's interest to carry out
C For a threat to be credible, it must be in the threatener's interest to carry out the threat.
If all firms in a perfectly competitive industry are earning a normal profit, thenA) new firms will enter the industry.B) existing firms will exit the industry.C) there is no incentive for firms to enter or exit the industry.D) the market supply curve will shift to the left.
C If a firm is earning a normal profit, then its accounting profit is equal to the opportunity cost of theresources provided by the firm's owners, so there is no incentive for entry or exit.
One difference between the long run and the short run in a perfectly competitive industry is thatA) economic profit in the long run is always greater than it is in the short run.B) economic profit in the short run is always greater than it is in the long run.C) firms necessarily earn zero economic profit in the long run but may earn positive or negativeeconomic profit in the short run.D) firms necessarily earn positive economic profit in the long run but may earn positive or negativeeconomic profit in the short run
C In the short run, firms can earn a loss, earn a profit or break even. In the long run, the incentive to earnprofit and avoid loss causes firms to enter profitable markets and exit unprofitable ones until the marketsettles in to a zero-profit equilibrium.
"Market power" refers to a firm's ability toA) undercut its competitors' prices.B) force consumers to buy high-priced products.C) raise its price without losing all of its sales.D) influence the price its competitors charge.
C Market power is defined as a firm's ability to raise price and not lose all of its sales
Start-up costsA) have no impact on the number of firms in an industry because they are sunk costs.B) are inversely related to variable costs.C) are the one-time costs incurred when beginning the production of a new product.D) are always greater than marginal costs.
C Start-up costs are one-time costs incurred when a new product is developed
When a pharmaceutical company introduces a new drug, its research and development costs are______, and the cost of the chemicals used in manufacturing the drug are ______.A) start-up costs; fixed costsB) fixed costs; start-up costsC) start-up costs; variable costsD) marginal costs; variable costs
C Start-up costs are one-time costs incurred when a new product is developed. Variable costs are coststhat vary as output varies
Subsidies are most likely toA) reduce consumer surplus.B) increase total economic surplus.C) reduce total economic surplus.D) leave total economic surplus unchanged, but transfer surplus from producers to consumers.
C Subsidies cause total surplus to fall
One problem with government ownership of natural monopolies is thatA) the government has no reason to set price equal to marginal cost.B) the government could violate its own antitrust laws.C) government-owned firms have weaker incentives to cut costs than do privately-owned firms.D) it forces the government to either raise taxes or lower spending.
C Unlike a private monopoly, a government-owned monopoly is not motivated to cut its cost in order toincrease its profit.
Economies of scale exist whenA) firms become larger.B) input prices are falling.C) the average cost of production falls as output rises.D) doubling all the inputs leads to less than double the output.
C When production is subject to economies of scale, the average cost of production declines as thenumber of units produced increases.
A decision tree is used when modelingA) any type of game.B) simultaneous decisions.C) a prisoner's dilemma.D) games in which timing matters.
D A decision tree diagrams the sequence of moves and the payoffs in a game that unfolds over time.
Taylor used to work as a yoga instructor at the local gym earning $41,000 a year. Taylor quit that joband started working as a personal trainer. Taylor makes $55,000 in total annual revenue. Taylor's onlyout-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and$2,500 per year for equipment.Taylor's accounting profit is _______, and Taylor's economic profit is _______.A) $−1,500; $39,500B) $29,500; $34,500C) $34,500; $29,500D) $39,500; $−1,500
D Accounting profit equals total revenue minus explicit costs. Here, $55,000 − $12,000 − $1,000 − $2,500 =$39,500. Economic profit equals total revenue minus the sum of both explicit and implicit costs. Here,$55,000 − $12,000 − $1,000 − $2,500 − $41,000 = −$1,500.
If a firm is earning zero economic profit, thenA) the firm's revenues are sufficient to pay its explicit costs, but not its implicit costs.B) the owner will not be able to pay himself or herself a salary.C) the firm will shut down in the long run, but will continue to operate in the short run.D) the firm's accounting profit is equal to the firm's implicit costs.
D Economic profit equals accounting profit minus implicit costs, so if a firm's accounting profit is equal toits implicit costs, then economic profit will equal zero
In the long run, in a perfectly competitive industryA) economic profit tends to persist.B) the number of firms in the industry will increase.C) economic loss tends to persist.D) economic profit and loss are driven to zero by entry and exit
D Economic profit leads to entry by new firms, and economic loss leads to exit by existing firms. In the longrun, this entry and exit drive both economic profit and economic loss to zero
Economic theory assumes that a firm's goal is toA) earn an accounting profit.B) earn an economic profit.C) maximize its accounting profit.D) maximize its economic profit
D Firms attempt to maximize economic profit, which accounts for both explicit and implicit costs.
The profit maximizing rule P = MC applies toA) all firms.B) monopolists only.C) both perfectly competitive firms and imperfectly competitive firms.D) perfectly competitive firms only.
D Following the Cost-Benefit Principle, all firms maximize their profit by choosing the level of output atwhich marginal revenue equals marginal cost. Perfectly competitive firms are the only firms for whichprice equals marginal revenue.
Game theory provides tools that are used to modelA) the behavior of perfectly competitive firms.B) the cost functions faced by firms.C) consumer demand.D) strategic interdependencies
D Game theory is used to model situations in which the payoffs to the players depend on the actions theother players take.
The essential feature that differentiates imperfectly competitive firms from perfectly competitivefirms is that an imperfectly competitive firmA) produces a good with no close substitutes.B) faces high barriers to entry.C) coordinates their output decisions with other firms.D) faces a downward-sloping demand curve.
D The essential difference between perfectly competitive firms and imperfectly competitive firms is that aperfectly competitive firm faces a horizontal demand curve while an imperfectly competitive firm facesa downward-sloping demand curve
According to the textbook, the most important and enduring sources of market power areA) government franchises.B) patents.C) copyrights.D) economies of scale
D The most important and enduring sources of market power are economies of scale
