Exam 3 questions. (ch. 11, 12, 14, 15, 18)

Jerome's current job pays $X/yr and provides $Y in benefits like insurance. He can start a business using the $Z he has in the bank earning 1.4% interest. The start-up would have $A in revenue and cost $B/yr for rent, payroll, and materials. What would Jerome's economic profit be if he started this business?

A − B − ((X + Y) + (Z × 1.4%))

Princella's current job pays $X/yr and provides $Y in benefits like insurance. She can start a business using the $Z she has in the bank earning 1.4% interest. The start-up would have $A in revenue and cost $B/yr for rent, payroll, and materials. What would her accounting profit be if she started this business?

A-B

Which statement is NOT true about collusion? Collusion is legal because it helps firms survive. Collusion is an extreme example of cooperation. When rivals collude to raise prices, they increase their profits. Collusion is an example of a Prisoner's Dilemma.

Collusion is legal because it helps firms survive.

What will be the best response of businesses when households cut back on spending?

Cut back on production and reduce hiring

Which of the following statements is true regarding discrimination in labor markets?

Discrimination accounts for only part of the differences in wages across groups of workers.

Which of the following is NOT true about imperfect competition?

Greater product differentiation decreases market power.

In the TV streaming industry, Netflix and Hulu have cooperated in the past and agreed on the minimum fee for new movie releases. What will happen if Hulu defects and charges a lower fee and Netflix abides by the Grim Trigger strategy?

Hulu will earn a large profit today and lose the future cooperation with Netflix.

Which example is NOT an example of anti-coordination? In a traffic game, when other drivers take the highway, your best response is to take the back roads. In a political protest, if other activists protest, your best response is to protest. If your rival enters a new market, your best response is to avoid entering that market. In wage bargaining, if your boss is aggressive, your best response is to bargain passively.

In a political protest, if other activists protest, your best response is to protest.

When Mark Zuckerberg and his friends started Facebook, they had no employees and did everything themselves. As their website expanded, they were able to hire people to do some of the administrative tasks so they could focus on coding and growing the website. These first people hire exhibit:

Increasing marginal returns to labor

Which statement is NOT true about the first-mover advantage? To gain this advantage, you have to credibly commit to take concrete actions. The first-mover advantage is a strategic gain from an anticipatory action. It arises when your aggressive choice forces the other to respond less aggressively. It gives you flexibility to adapt your strategy based on choices made by others.

It gives you flexibility to adapt your strategy based on choices made by others.

What is one reason why teachers have lower salaries than people in jobs requiring similar skills?

It has desirable attributes.

How does a useful signal help employers?

It helps to figure out which workers are likely to be more productive.

Which statement is NOT true about a strategic plan in an indefinitely repeated game? It is a simple plan that tells you to cooperate if others have cooperated in all previous rounds. The strategic plan may depend on past choices made by other players. It is a list of instructions that can be quite complex. It may include a threat to your rivals if they defect from a collusive agreement.

It is a simple plan that tells you to cooperate if others have cooperated in all previous rounds.

In a business with some fixed costs, what do we expect the Average Total Cost Curve to look like?

Like a "U": Decreasing first and then increasing

Based on what we've learned in class, you should keep doing something until:

Marginal Benefit equals Marginal Cost

What is the relationship among marginal revenue, marginal cost, and price in a firm with market power?

Marginal cost = Marginal revenue < Price

_____ causes managers of drug companies to supply a small quantity of AIDS drugs because of the _____.

Market power; discount effect

When the owner of a sushi restaurant hires a second cook, customers increase their orders from 70 to 110 orders per week. He pays each cook $500 per week and charges $15 per order. If he adds one more cook, he might get 30 extra orders per week. Should he hire a third cook? Why?

No, he can hire only two cooks to get the maximum profit of $650.

The market for video game consoles would best be described as

Oligopoly

Your firm and your competitor see an opportunity to enter new markets. You both have the choice of entering the same market or not entering the same market. The possible outcomes can be as follows: fierce competition, either firm makes a profit and the other makes zero profit, and neither firm makes a profit from that new market. What will be the best outcome in this case?

One firm enters and earns a healthy profit, and the other doesn't enter.

Which of the following market structures has the flattest firm demand curve, all else equal?

Perfect Competition

If all customers are charged the same price, what does average revenue equal?

Price

Currently, Coca-Cola sells one million cans of Coke per year. Coca-Cola raises its price by one cent. If the market for cola is perfectly competitive, what happens to the number of Cokes sold?

Quantity goes to zero

_____ make(s) both cooperation and coordination difficult to achieve. This is why people need _____ to help them sustain cooperation and coordinate on good outcomes.

Self-interest; government policies

When you try to figure out what decision you would make if you faced the same incentives that others faced, to which step for making good strategic decisions does this refer?

Step four: put yourself in someone else's shoes

You choose the choice that yields the highest possible payoff for you, given the choices made by others. Which step for making good strategic decisions does this refer to?

Step three: play your best response

Which of these is NOT a way in which technological change contributes to inequality in some occupations?

Technology prevents the best from reaching millions of customers.

Which statement is NOT true about the Grim Trigger strategy? The Grim Trigger strategy involves only two instructions. The Grim Trigger strategy is relatively simple. The Grim Trigger strategy leads you to only one equilibrium. The Grim Trigger strategy punishes your rival for not cooperating.

The Grim Trigger strategy leads you to only one equilibrium.

After a formula for HIV medication had been developed, a daily dose for a person cost the manufacturer less than a dollar per day. Why was this medication priced at $10,000 per year per person?

The drug company is effectively a monopolist.

Which of the following represents a labor market in which a rising opportunity cost of work results in higher wages and fewer jobs? The labor market for stenographers when there are effective voice recognition software programs. The labor market for home health aides as baby-boomers are aging. The labor market for private teachers when there is a pay cut for public teachers. The labor market for young people who enjoy playing video games.

The labor market for young people who enjoy playing video games.

Which statement is NOT true about a monopoly? The monopolist is a price-taker. It is the only seller in the market. It only needs to sell one product. It can raise the price without losing customers to competitors.

The monopolist is a price-taker

Which statement is NOT true about oligopolistic businesses? They compete against few strategic competitors. They have market power very similar to a monopolist's. There is a small number of large sellers. The managers of oligopolistic businesses are locked in a strategic battle for market share.

They have market power very similar to a monopolist's.

As baby boomers age, more people seek in-home elder care for their aging parents. What happens to the labor market for home-health aids?

Wage will increase, and more jobs will be available.

Your corporate culture shapes interactions between your workers. Salespeople are more productive when they're working at the same time and in the same location as other highly productive salespeople. Why?

When you care about what your co-workers think of you, this changes your incentives to work hard.

Firms offer health insurance partially because they tend to get a better deal than their workers do on their own. Why do firms tend to get a better deal than workers?

You are less likely to already be sick if purchasing insurance through an employer.

Which statement is NOT true when you put yourself in someone else's shoes? You will face the incentives that lead to their choices. You'll find it easier to predict their choices. You'll see that other people are also thinking strategically. You will pick their choice such that you will maximize your own payoff.

You will pick their choice such that you will maximize your own payoff.

You will go to a party if your friend decides to go with you. This is an example of:

a strategic interaction.

Human capital is

accumulated knowledge and skills that make a worker more productive

The idea of putting yourself in someone else's shoes is critical to understanding how _____, so your best response usually is dependent upon _____.

any interaction will play out; thinking like your rivals

How you might box, play chess, or choose how much product to make are all decisions involving strategic interactions between actors that come from ______.

applying the interdependence principle

The Rational Rule for Exit implies that rivals will cease to leave a market when the price is _____ the average cost.

at least equal to

Which career best characterizes a "winner-take-all" market?

athelets

Because the possibility of profit will _____ rivals, free entry tends to _____ desirable opportunities over time.

attract; eliminate

The _____ is equal to total revenue divided by quantity sold.

average revenue

Mass production can lower the _____ cost of production, favoring _____ producers.

average; big

When it is difficult for a new firm to compete away economic profits from an economically profitable market, there must be:

barriers to free entry

Lines of people waiting at the post office tend to _____ because _____.

be the same length; people are free to move from one line to another

A Nash equilibrium occurs when:

both sides choose their best response

Which of the following economic conditions would result in a decrease in the demand for low skilled labor?

cheaper machinery

The Grim Trigger strategy tells you that if the punishment is strong enough to deter _____, both firms might _____ forever.

cheating; cooperate

Following the Grim Trigger strategy in regards to firms colluding under the Prisoner's Dilemma, your firm should _____ in this round and your best response will be _____.

cooperate; medium profit today and medium profit for future cooperation

The tragedy of the overuse of common resources is due to a failure to _____, which is considered an illustration of _____.

cooperate; the Prisoner's Dilemma

You hold a management role in an automotive firm. You analyze the automobile market and find that you have more competitors entering the market. This means that your company's market power will fall because:

customers have more alternatives to your product.

Average Fixed Costs (𝑨𝑭𝑪)

decrease as quantity increases

Price ceilings _____ economic surplus in perfectly competitive markets and _____ economic surplus in imperfectly competitive markets.

decrease; increase

A decrease in demand for your product will cause a(n) _____ in your business's labor demand, and a _____ the labor demand curve.

decrease; leftward shift of

Comparing the benefits of cooperating and defecting in the Prisoner's Dilemma, _____ yields bigger benefits, causing cooperation to _____.

defecting; fail

Customer lock-in strategies, such as having prices so low that no rival can compete with them, is an example of a _____ strategy.

demand-side

Switching costs can be opportunity costs, such as having to set up direct deposit and automatic bill paying from a bank, and are a _____ strategy.

demand-side

Working to build and preserve a good reputation is a _____ strategy designed to both entice new customers and hold on to existing ones.

demand-side

Complex analyses compare wages between groups, taking into account these factors EXCLUDING: job characteristics the influence of institutions human capital differences disability.

disability

Once American Airlines credibly commits to following through on its aggressive choice of running three flights, United Airlines will understand that its best response is to schedule _____ flights. This means that American Airlines gains _____.

fewer; a first-mover advantage

Some firms offer stock options for incentive, which are:

financial instruments that can provide a big payoff for managers.

_____ is the science of making good decisions in situations involving strategic interactions.

game theory

Managers are often resistant to unions because the _____ bargaining power of workers can _____ profits.

greater; reduce

Pharmaceutical companies that develop and manufacture prescription drugs have _________ fixed costs and _________ variable costs

high; low

As long as some employers are prejudiced, some profit-minded employers can get ahead by:

hiring groups that are traditionally discriminated against.

The income effect measures

how people's choices change when they have more income.

Regarding the substitution effect, a higher wage _____ the returns to work relative to leisure, leading you to work _____.

increase: more

New education funding designed to make college more affordable will shift the labor supply curve to the left because it

increases the benefit of not working

Activist groups launched a successful campaign to end the patent protection for AIDS drugs. As a result, many competitors were able to supply these drugs. This situation affected the market price for AIDS drugs by _____ competition, lowering the drug price to the _____.

increasing; marginal cost

When demand is __________________, a big increase in price will cause a small decrease in quantity

inelastic

Proponents of a higher minimum wage believe that labor demand is very _____ and, as such, the minimum wage results in a _____ number of jobs being lost.

inelastic; small

The quantity demanded from a firm can be the same as the total quantity demanded by the entire market if it:

is the only seller serving the market.

In order for education to work as a signal for a company:

it must be less costly for highly productive workers to earn a college degree than it is for less productive workers.

All the following are examples of entry deterrence strategies EXCEPT: building excess capacity. brand proliferation. learning by doing. having large financial resources.

learning by doing

A business wanting to use regulatory barriers against new rivals entering its market might _____ or _____.

lobby elected officials; patent or copyright its intellectual property

The assumption of easy entry and exit implies that, in the _____ run, all firms in the industry will earn _____ economic profits.

long; zero

The price in perfect competition is _____ than the price under imperfect competition. The quantity in perfect competition is _____ than the quantity in under imperfect competition.

lower; higher

In a market with free entry and exit, existing firms often _____ prices when _____.

lower; just a threat of new rivals exists

The government grants patents for firms as an incentive for innovation. However, it also comes with a cost to society because patents create _____ for the firms granted them.

market power

In equilibrium, a business hires workers until the marginal revenue product is equal to the:

market wage

Which of the following has the most market power?

monopoly

Successful product differentiation is a key part of the marketing function in most businesses because it gives you:

more market power.

Kaila wants her employer to pay her 20% more for making night deliveries in a high-crime neighborhood than the day delivery people receive. Most of the delivery people are willing to make night deliveries in the neighborhood for only a 10% differential. Kaila is seeking:

more than a compensating differential because she has greater concerns than most workers.

According to what we learned in class, what is the marginal cost of working for one hour if your hourly wage is $12 per hour?

one hour of leisure

Two competing approaches to free markets are _____, which ensure that customers enjoy the benefits of competition, and _____, which ensure the stability of existing market participants.

pro-market policies; pro-business policies

To create barriers to free entry in a market, existing firms can employ any of the following strategies EXCEPT:

respond passively to new entrants in the market (deterrence strategies)

Examples of fringe benefits EXCLUDE: sales commission. medical insurance. use of a company car. free meals.

sales commission

Under perfect competition, all businesses in an industry:

sell an identical good.

If a market is trading at prices below the average cost, it is likely that _____.

sellers will leave the market

When a restaurant is so popular that there are long waits for reservations and high prices, people will _____.

settle for lower-quality options

Modifying production levels is an example of a _____ decision, and responding to new competitors entering a market is a _____ decision.

short run; long run

Workers and managers can identify and address inefficiencies to allow for cheaper production. This is a _____ strategy to generate additional profits.

supply side

Streamlining supply and logistics can reduce costs and allow a firm to exploit a _____ advantage over other firms.

supply-side

Neither player can credibly commit to cooperating, and neither expects the other to cooperate. This example shows why:

the Prisoner's Dilemma leads to the failure of cooperation.

A price ceiling limits:

the abuse of market power

The difference between the firm demand curve and the marginal revenue curve is due to:

the discount effect.

A paper company experimented by charging different prices for a ream at different locations. The first store set a price of $3.99 and sold 547 units. The other two stores sold 438 units at a price of $4.99, and 219 units at a price of $5.99. The results of this experiment can be depicted in a graph that reveals:

the firm demand curve.

The more market power you have:

the higher the price you can charge.

If you own one of four gas stations at a busy intersection, what gas price can you set so that you will not lose your customers to the other three rivals?

the market price

An abundance of spare parts being available for popular models of cars, as opposed to rare and expensive replacements for foreign sports cars, is an example of _____.

the network effect

Wages reflect the characteristics of workers and the characteristics of the job. Relevant characteristics EXCLUDE: human capital. the production possibilities frontier. compensating differentials. the influence of institutions.

the production possibilities frontier

A century ago, it was common for children to work and many people worked until they died. Overtime as wages have risen and the length of the typical workweek has declined, people consume a lot more leisure today. What does this evidence suggest?

the supply curve is downward sloping

A Nash equilibrium is the result of each player selecting _______.

their best response

Coordination is difficult because:

there's more than one equilibrium

Pharmaceutical companies can charge high prices for a life-saving drug, or raise the price of the drug without losing a lot of customers, because:

they have a lot of market power.

During job interviews, why do potential employers often ask what you like to do in your free time?

to signal otherwise unobservable traits about you

How to find price from total revenue and quantity?

total revenue / quantity

If the income and substitution effects offset each other, then the individual supply curve is _____.

vertical

When you have multiple equilibria, communications help you coordinate with the other player on a specific equilibrium because:

you both want a better outcome.

The game tree is helpful in games that play out over time because figuring out your best response requires that:

you look forward and reason backward.

A first-mover advantage arises because:

your aggressive choice forces the other to respond less aggressively.

You own a barbershop. Hiring a worker will increase the number of haircuts your shop can give from 30 per day to 35. Haircuts cost $20each. What is the marginal revenue product of that worker?

$100

Parker owns a car wash. She currently has four employees and is able to wash 18 cars per day. If she hires a fifth employee, she will be able to wash 21 cars per day. Car washes cost $10 each. What is the marginal revenue product of the fifth employee?

$30

You own a barber shop. Hiring a worker will increase the number of haircuts your shop can give from 30 per day to 35. What is the marginal product of labor of that worker?

5 haircuts

Tori is running for a government office in an election. Merced and many others want Tori to win and are deciding whether to campaign for Tori. The amount of campaigning will have a significant impact on the outcome of the election. What type of game is being played?

A coordination game with multiple equilibria