Econ test 2

If marginal cost is less than average cost, average cost is rising. T/F

False

Which of the following is the main principle of price discrimination?

I. It is more profitable to set different prices in markets with different demand curves than charge the same price in all markets.II. To maximize profits, firms should charge lower prices in markets with more elastic demands.

Karl values Word at $100 and Excel at $40, and Adam values Word at $20 and Excel at $90. If the programs are sold separately, what are the profit-maximizing prices?

a. $100 for Word; $90 for Excel

Price discriminators will set a higher price in a more elastic market. T/F

a. False

Which of the following laws makes cartel behavior illegal?

a. Sherman Antitrust Act of 1890

The government can create monopolies by legally requiring its citizens to buy from a particular seller. T/F

a. True

In a constant cost industry, the market price and average cost are equal to $23. Therefore, which of the following is correct?

a. all answers correct

After a severe hurricane in South Carolina, the price of electric generators quadrupled. People living outside of South Carolina purchased electric generators in their home states and drove them to South Carolina to sell at a much higher price. What is this an example of?

a. arbitrage

The National Basketball Association is a:

a. buyer's cartel

Which of the following makes a cartel short-lived?

a. cheating

Which of the following is NOT a source of monopoly power?

a. decreasing marginal costs

A perfectly price-discriminating monopolist charges consumers the average of their maximum willingness to pay.T/F

a. false

The copper cartel (the International Council of Copper Exporting Countries) has been very successful. T/F

a. false

Describe the supply curve of a constant cost industry.

a. flat

Monopolists are people, too. This means that:

a. gains to monopolists count just as much as losses to consumers.

Major league basketball, the NBA, is cartelized to:

a. keep down players' salaries.

napoleon

a. monopoly

In competitive markets, the demand curve faced by the individual firm is:

a. perfectly elastic

Rohm and Haas was considering:

a. putting arsenic in its plastics to prevent them from being resold to dentists.

Which of the following is NOT an easy way to split markets in order to practice price discrimination?

a. relying on the self-reported marital status of customers

If the price of the AIDS drug Combivir was driven down to marginal cost by competition:

a. there would be less incentive to invest in creating the next improved AIDS drug.

A firm should exit an industry if price is less than average cost. T/F.

a. true

GlaxoSmithKline attempts to prevent arbitrage of its drug Combivir by selling different colored pills in special bar-coded packages, to identify and track distributors in different markets. T/F

a. true

In markets with different demand curves for the same good, different prices generate more profit than a single price. T/F

a. true

Monopolies and competitive firms pursuing profit maximization both choose to produce at the quantity where marginal revenue equals marginal cost, but the optimal output level of the two will differ.

a. true

OPEC is a cartel T/F

a. true

Price discrimination is selling the same good to different customers at different prices. T/F

a. true

The prisoner's dilemma describes a scenario in which each player, acting out of self-interest, will make a decision that results in all players being worse off. T/F

a. true

Without government support, cartels tend to break down over time. T/F

a. true

GlaxoSmithKline prices Combivir, its AIDS drug:

b. 25 times higher than the price of equivalent drugs in countries in which its patent is not recognized.

How did IBM price discriminate its laser printers?

b. IBM offered two different printers: a fast printer and a slow printer.

Which of the following statements is TRUE?

b. Monopolies create incentives for additional research and development.

Stating that TR = TC is equivalent to stating that:

b. P=AC

Which of the following firms most likely possesses the most monopoly power?

b. Rolex

Disneyland sells goods that are largely:

b. bundled.

Arbitrage is ________ in one market and ________ in another market.

b. buying low, selling higher

A(n) ________ is a group of suppliers who try to act together to reduce supply.

b. cartel

A subtle form of price discrimination is for firms to offer:

b. different versions of a product for the purpose of separating customers into different markets.

Bidding on asphalt jobs is a prisoner's ______ outcome.

b. dilemma

Perfectly price-discriminating monopolists charge:

b. each consumer his or her maximum willingness to pay, so consumer surplus is zero.

Deadweight loss is present in both competitive and monopoly markets.

b. false

There are three reasons why HIV drugs are priced above cost: (1) monopoly power, (2) the "people before profits" effect, and (3) the "use it or lose it" effect. T/F

b. false

Apple enjoys an extensive monopoly power in the market for MP3 players since Apple's iPhone:

b. is hard to duplicate.

Universities practice price discrimination by:

b. offering students different levels of scholarship support.

Price discrimination is:

b. sometimes better and sometimes worse than single pricing.

Game theory is the study of:

b. strategic decision making.

When an industry becomes monopolized:

b. the losses to consumers are typically greater than the gains to the monopolist.

The short run is defined as:

b. the period before entry or exit can occur.

Price equals marginal revenue for a competitive firm because:

b. the price does not change when the firm changes output.

Cartels tend to lose their power due to cheating by the cartel members. T/F

b. true

Marginal revenue is always equal to the price of the product for a competitive firm. T/F

b. true

One sign of the cartel power of the NBA is the use of salary caps. T/F

b. true

To succeed at price discrimination the monopolist must prevent arbitrage. T/F

b. true

Economists call the time after all exit or entry has occurred:

b.the long run

The marginal revenue ( MR) for a firm is a constant $45, and the firm's marginal cost ( MC) is given by MC = 1.5 Q (where Q is quantity of output). What is the firm's profit-maximizing level of output?

c. 30

A firm should exit an industry if:

c. P-AC < 0

Which of the following is NOT a principle of price discrimination?

c. To maximize profit the firm should set a higher price in markets with more elastic demand.

OPEC is a(n) ________ of oil-exporting countries.

c. cartel

Cartel member strategy can be like a prisoner's ______ game.

c. dilemma

Overfishing in oceans is a prisoner's ______ outcome.

c. dilemma

Corresponding to the practice of price discrimination, Williams College offers different levels of financial aid to students based on students':

c. family income.

One of the great lessons of economics is that:

c. good institutions channel self-interest toward social prosperity, whereas poor institutions channel self-interest toward social destruction.

A dominant strategy is a strategy that:

c. has a higher payoff than any other strategy, no matter what the other player does.

If most cartel members keep their agreement to cut back production:

c. it's profitable in the short run for another member to increase production.

The only company in the United States that can deliver small envelopes (for example, greeting cards and bank statements) is the U.S. Postal Service. What is the source of this monopoly?

c. laws preventing entry

To maximize profit, a monopolist will produce the level of output where:

c. marginal revenue is equal to marginal cost.

If demand curves are different in two markets, it is ______ to set different prices in each market than to set a single price.

c. more profitable

Do monopolies always reduce social benefits?

c. no, because monopolies can incentivize innovation

A firm receives the largest profit from cheating on a cartel agreement when:

c. none of the other cartel members cheats.

Cheating in cartels is most likely to occur if members are:

c. not friendly

An example of an implicit cost is:

c. salary that could have been earned working for someone else.

Price discrimination can be defined as:

c. selling the same product at two different prices in two different markets.

Economies of scale are:

c. the advantages of large-scale production that reduce average cost as quantity increases.

Printers and color printer ink are typically:

c. tied

The _____ industry in Dalton, Georgia, provides an example of a decreasing cost industry.

carpet

What are some reasons why cartels could fail?

cheating by the cartel members, new entrants and demand response, government prosecution and regulation

When a firm expands output from 10 to 11 units and total revenue increases from $100 to $110, marginal revenue of the eleventh unit is:

d. $10.

In which of the following scenarios will automobile prices be the lowest?

d. A competitive automobile company buys its steel from a competitive steel producer.

The textbook for your economics class is available in an American version and in a much cheaper Indian version that has the same text but no colors for the graphs (the difference in prices is much higher than the difference in costs). Why is this the case?

d. Demand in the United States is much more inelastic than demand in India.

Which of the following statements about monopoly power is correct?

d. Monopoly power is the power to raise prices above average cost without facing new entry of firms.

Software development has high fixed costs and marginal costs that are close to zero. What would happen if software firms sold their product for marginal cost?

d. They would not be able to afford their fixed costs and would go out of business.

Total profit for a given quantity of output can be calculated as:

d. Total Revenue - Total Costs.

A strategy that has a higher payoff than any other strategy no matter what the other player does is called a:

d. dominant strategy.

Compared to a competitive market, firms operating in a cartel will charge a price that is:

d. higher than the competitive price.

The power to raise price above marginal cost without fear that other firms will enter the market is:

d. market power.

Economists call a single firm that can supply the entire market at a lower cost than two or more firms a __________ monopoly.

d. natural

Which of the following is NOT an example of a decreasing cost industry?

d. the retail clothing industry

Gillette's practice of selling razors at a relatively low cost but marking up the price significantly on its blades when Gillette razors will work only with Gillette blades is an example of:

d. tying.