Exam 3 Review Questions

C

____ costs should be ignored in the short-run profit-maximizing decision. A. Only fixed B. Only sunk C. Sunk costs and fixed D. Variable

B

A community teaches children that hard work and doing your best at tasks are virtues. This is an example of A. reducing moral hazard through complements to actions you want. B. reducing moral hazard through social norms. C. resolving risk aversion through social norms. D. resolving risk aversion through complements to actions you want.

A

A dental insurance company charges premiums higher than average dental costs across a population and loses money. When it keeps raising the premiums on its policies, its losses keep rising. The dental insurance company is facing A. an adverse selection death spiral. B. the challenge of having private information not known by the buyers. C. sellers with diminishing market power. D. the challenge of high growth of demand.

C

A seller's signal to potential buyers can work well for the seller only when it is A. substantially costlier for sellers of high-quality products to send the signal than for sellers of low-quality goods to do so. B. focused on reinforcing the idea that there are no lemons for sale in the market. C. substantially costlier for sellers of low-quality products to send the signal than for sellers of high-quality goods to do so. D. focused on reinforcing the idea that there are lemons for sale in the market.

A

A strawberry farmer has 5,000 pounds of strawberries ready to harvest. The cost of picking and transporting the strawberries to the market is $3,500. If the market pays $0.60 per pound of strawberries, what should the strawberry farmer do? A. not pick and sell the strawberries, since doing so would reduce profits by $500 B. pick and sell the strawberries, since doing so would increase profits by $500 C. pick and sell the strawberries to recover the fixed costs of planting D. not make a decision until he knows something about average costs

D

At zero economic profits, a competitive firm: A. has an incentive to leave the industry to make higher profit elsewhere. B. is unable to pay its opportunity costs of production but will remain in business to minimize losses. C. will benefit, in the form of higher profits, by raising its prices above average cost. D. is making a normal profit; its revenues are just sufficient to cover all costs of production, including opportunity costs.

C

Customers would be less loyal and more price sensitive in which of the following situations? A. The market's companies sell differentiated products. B. There is only one seller in the market. C. The switching costs are low. D. Customers are aware of the prices of all sellers.

B

DVDs may be encoded with one of six region codes, preventing videos sold in one region of the world from being used in another region. Why might film distributors use region codes? A. to make it easier to charge the same price in different locations B. to prevent people from buying videos in a low-price region and then reselling them in a high-price region C. to minimize the menu costs of frequent price changes D. to reduce the cost of collecting sales taxes, especially in areas with different tax rates

A

Deadweight loss occurs because some consumers are willing to pay at least the marginal cost for the good, even if they are not willing to pay the monopolist's price. If monopolies were able to charge these consumers a lower price without lowering prices to consumers willing to pay more, deadweight loss would _____, some consumers would be _____ off, and the monopolist would be _____ off. A. decrease; better; better B. increase; worse; better C. increase; better; worse D. decrease; worse; better

A

Erika is the owner of a cherry orchard. The price of cherries is high enough that Erika is earning positive economic profits. In the long run, Erika should expect _____ cherry prices due to the _____ firms. A. lower; entry of new B. higher; exit of existing C. lower; exit of existing D. higher; entry of new

D

Fewer potential sellers make a firm-level demand curve _____ in the _____. A. steeper; long run B. flatter; short run C. flatter; long run D. steeper; short run

D

Firms are profitable when price is: A. less than average cost. B. equal to average cost. C. zero. D. greater than average cost.

D

Programs such as Steam distribute more and more video games. Purchasers buy a game and download it immediately to their computer. If the entire system is automated, estimate the marginal cost of producing and selling video games this way (ignore electricity costs). A. None of the answers is correct. B. the price of the game C. proportional to the cost to make the game D. zero

C

When Allstate sells fire insurance policies, it often include deductibles: A. because, when it comes to fire, most people are risk averse. B. because it is too expensive to fully insure something against fire. C. to minimize moral hazard. D. to minimize adverse selection.

B

When a firm maximizes profit in the short run, it should consider: A. only fixed costs. B. only variable costs. C. all costs, including sunk costs and fixed costs. D. sunk costs but not fixed costs.

D

When an industry becomes monopolized: A. the gains to the monopolist are typically greater than the losses to consumers. B. the gains to the monopolist are exactly the same amount as the losses to consumers. C. both the monopolist and consumers gain. D. the losses to consumers are typically greater than the gains to the monopolist.

B

When economic profits in an industry are zero: A. firms are at the shut-down price. B. firms are doing as well as they could do in other markets. C. firms should exit so they can make an economic profit in some other market. D. the industry is not in long-run equilibrium.

A

When marginal cost is rising, the average total costs: A. could be rising or falling. B. must be falling. C. must be constant. D. must be rising.

D

When price is less than a firm's average cost: A. additional firms will enter the market to steal profits from the struggling firm. B. the firm will shut down immediately. C. the firm may continue to operate in the short run if it can at least cover its fixed costs. D. it may be more profitable to continue to operate if revenues at least cover the firm's variable costs.

A

Which of the following does NOT occur in a market when one or more sellers exits the market? A. The market demand rises. B. The remaining sellers have more market power. C. The market price rises. D. The remaining sellers' demand curves shift to the right.

B

Which of the following is NOT a strategy used by a company to "lock-in" customers to ensure demand for its product? A. Generating positive network effects. B. Pressuring the government to require a license for entry into the market C. Building goodwill and loyalty among customers. D. Increasing switching costs.

B

Which of the following is NOT an easy way to split markets in order to practice price discrimination? A. releasing different versions of a product over time B. relying on the self-reported marital status of customers C. using age of customers D. using characteristics that are correlated with a consumer's willingness to pay

C

Which of the following is a negative outcome of markets where sellers have market power? A. An inefficiently large output B. Lower costs C. Higher prices D. Smaller economic profits

C

Which statement is TRUE? A. Monopolies produce too much and charge too much, from the standpoint of efficiency. B. Monopolies are usually economically efficient because they have economic profits with which to work. C. Monopolies produce too little and charge too much, from the standpoint of efficiency. D. Monopolies are characterized by inefficiency but not by deadweight loss.

C

Which statement is TRUE? A. Profit-maximizing behavior occurs only in perfectly competitive markets. B. As long as MR < MC, a firm should increase output. C. If MR = MC, then the firm is at the profit-maximizing level of output. D. The profit-maximizing solution occurs where MR > MC.

A

Who is least likely to buy health insurance when individuals have private information about their health and health insurance is optional? A. A young adult in good health B. An obese person C. A person who is 60 years old and in good health D. A person who has a family history of cancer

C

Why can't marginal cost decrease forever? A. Demand is not infinite. B. Marginal cost can't increase forever either, and there must be symmetry. C. At some point, firms encounter physical limits of production. D. Marginal cost is always constant.

D

Why is a "Nash equilibrium" called an equilibrium? A. Costs are minimized, and profits are maximized. B. The market is at maximum profits, with quantity demanded equal to supply. C. It overcomes market failure to provide the optimum social welfare outcome. D. No players can do better by changing his or her own choice alone, so the situation is relatively stable.

B

The monopoly firm's profit-maximizing price is: A. given by the point on the ATC curve for the profit-maximizing quantity. B. given by the point on the demand curve for the profit-maximizing quantity. C. determined for the quantity of output at which MR > MC by the greatest amount. D. found where MR > MC at the monopolist's profit-maximizing quantity of output.

D

The typical average cost curve in a competitive market is: A. downward sloping until fixed costs are eliminated and then it becomes a horizontal line. B. U-shaped because increasing quantities of output cause a decrease in fixed costs but an offsetting increase in variable costs. C. an upward-sloping straight line because fixed costs are constant and variable costs are increasing with the level of output. D. U-shaped because the firm's fixed costs are first spread over greater quantities, but then increasingly greater quantities will create production capacity constraints.

C

To maximize profit, firms should keep producing as long as marginal revenue is: A. greater than total cost. B. less than marginal cost. C. greater than marginal cost. D. equal to marginal cost.

B

To maximize profits, a firm in a highly competitive industry should set its price: A. lower than the market price. B. at the market price. C. higher than the market price. D. sometimes at the market price but sometimes higher or lower.

A

Used-car dealers will often advertise how long they have been in business as a means of _____ their long-term _____. A. signaling; reputation B. screening; customers C. insuring; capital at risk D. revealing; moral hazard

C

Using a strategy of price discrimination, a firm can increase its profits by offering lower prices to its customers who are willing to pay above the firm's: A. average costs. B. total costs. C. marginal costs. D. fixed costs.

C

Politicians have more information than voters and may not use that information in the interest of the public. This is: A. adverse selection. B. a mutually beneficial trade. C. the principal-agent problem. D. moral hazard.

A

(Scenario: The Market for Experienced Vehicles) Use Scenario: The Market for Experienced Vehicles. If buyers cannot distinguish between lemons and plums, the used-car market will eventually: Scenario: The Market for Experienced Vehicles In the used-car market, cars of poor quality are called lemons, while cars of good quality are called plums. Suppose that the probability of obtaining a lemon is 60%, and the probability of obtaining a plum is 40%. Also, assume that a plum is worth $15,000 and that a lemon is worth $3,000. A. consist mostly of lemons. B. have buyers who will have a 50% chance of choosing a plum. C. consist mostly of plums. D. be split 50-50 between plums and lemons.

C

An industry is said to be perfectly competitive when: A. supply in the industry is highly elastic. B. demand in the industry is high. C. each firm has virtually no influence over the price of its product. D. there are many buyers and sellers, and each is large relative to the total market.

A

An inefficiency in obtaining education to signal IQ or work ethic is: A. that there may be a cheaper way to signal these. B. that education is relatively inexpensive. C. reduced time to work. D. that too much work is needed.

D

Bundle pricing makes sense for cable operators because: A. customers are more satisfied with more channels being offered. B. the cost of operation decreases with bundle pricing. C. the marginal costs of adding additional channels are high. D. customers have a high willingness to pay for some channels and a low willingness to pay for others.

C

Companies with market power face a trade-off between A. reducing costs and increasing profit. B. gaining market share and reducing costs. C. having a higher profit margin and selling a larger quantity. D. having a higher marginal cost and a reduction in output.

C

If Tom sells 500 sandwiches for $7 and has an average cost of $5, what is his total revenue? A. $2,500 B. $1,000 C. $3,500 D. $500

C

In the case of a perfectly price-discriminating monopolist, the demand curve lies: A. tangent to the marginal revenue curve at the equilibrium point. B. below the marginal revenue curve. C. with the marginal revenue curve. D. above the marginal revenue curve.

D

Michelle owns the largest florist shop in her town. Each week, she orders a truckload of flowers from the flower wholesaler. The other two florists in town order only one-third as many flowers. Because Michelle's order fills the delivery truck, the wholesaler sells flowers to her at a lower price than the other florists must pay. How will this situation impact potential new entrants? A. The cost differential can easily be offset by creating a demand differential, so it will have little impact. B. New florists will not be affected because input prices are minor factors in markets. C. New florists will be encouraged to enter because they will be energized by the challenge to succeed. D. New florists will be discouraged from entering the market because of the difficulty of competing on cost.

B

Monopolists earn ______ profits in the long run. A. normal B. above-normal C. below-normal D. abnormal

B

Offering a warranty is an example of: A. the principal-agent problem. B. signaling. C. moral hazard. D. adverse selection.

A

Pamela sells 10 bottles of olive oil per week at $5 per bottle. She can sell 11 bottles per week if she lowers the price to $4.50 per bottle. The quantity effect would be: A. $4.50. B. $4.95. C. $50. D. $45.

C

Suppose that Intel (a monopoly computer chip maker) increases production from 10 microchips to 11 microchips, causing the market price to fall from $30 per unit to $29 per unit. Marginal revenue from the 11th unit is: A. $1. B. $9. C. $19. D. $29.

B

Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the long run, cab drivers will _____ the market, driving the price of cab rides _____ and the profits of individual drivers _____. A. enter; up; back to zero B. enter; down; back to zero C. leave; up; up D. leave; up; back to zero

C

Paying a lawyer on a contingency fee—the lawyer is paid only if the case is won—solves moral hazard by: A. creating more information. B. reducing the free-rider problem. C. aligning the incentives of the buyer and sellers. D. providing the service free.

B

Solutions to moral hazard include: A. offering salespeople in stores a straight salary rather than a commission on sales. B. setting up franchises that are part of a national chain, with franchise owners undertaking most of the risk. C. allowing property owners to overinsure their buildings. D. asset diversification to reduce risk.

A

Suppose the Boston Red Sox could rent out Fenway Park (the field they play on) to local youth leagues for $11,000 per month. The $11,000 per month is the _____ cost of capital. A. implicit opportunity B. explicit financial C. direct D. total

D

Suppose you were the only firm that has an official license to sell corn dogs in your community. Your monopoly would result from: A. control of a scarce resource or input. B. technological superiority. C. excess capacity. D. government-created barriers.

D

Taren earns a certificate in a software program that is used by professionals in the field in which Taren wants to start a career. Obtaining the certificate: A. eliminates the principal-agent problem between Taren and her employer. B. increases the moral hazard of hiring Taren. C. indicates that Taren is less qualified than other candidates. D. signals that Taren is a good candidate for the job.