Microeconomics Test 2 (Ch.8-10)

An estimation technique that begins with an initial approximation, which is then modified in accordance with additional information, is known as:

anchoring and adjustment

Q P. TR 1. 10. - 2. 9. 18 3. 8. 24 4. 7. 28 5. 6. 30 6. 5. 30 7. 4 28 8. 3. 24 The marginal revenue of the 5th unit of output is:

$2

What is this monopolist's MR as it expands output from 3 to 4 units/week? Q P TR 3 7 21 4 6 24

$3

What's the horizontal intercept of this monopolist's MR curve? Hint: Always equals half of it up to 10 on the x and y axis

$5

Suppose a monopolist faces the market demand curve shown below. What's the highest price this monopolist can change if it wants to sell 4 units per week? (7,3) (6,4)

$6

Suppose the accompanying table describes the relationship between price and quantity demanded for a monopolist. The marginal revenue for the 3rd unit of output is: Quantity Price 1 $10 2 9 3 8 4 7 5 6 6 5 7 4 8 3

$6

Why might an appliance retailer hammer dents into the sides of its stores and refrigerators?

B/c doing so is an effective way of offering discounts to only the most highly price-sensitive customers

According to the textbook, the most important and enduring source of market power is:

Economies of scale

In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward sloping.

False

________ is the property of an entity whose individual units are interchangeable

Fungibility

Start-up costs

are the one-time costs incurred when beginning the production of a new product

The rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory is the:

availability heuristic

Psychological incentives:

can serve as commitment devices

Emotions like guilt and sympathy

can solve commitment problems

Suppose Paul just saw a care accident while driving home from work. According to the availability heuristic, this likely to make Paul think that:

car accidents are more common than they really are.

A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n):

cartel

OPEC is an example of a:

cartel

When players cannot achieve their goals b/c they are unable to make credible threats or promises, the situation is called a

commitment problem

A _______________ describe the possible moves in a game in sequence and lists the payoffs to each possible combination of moves.

decision tree

In tit-for-tat, if your partner _________ in your first interaction, then you will ______ in your next interaction

defects, defect

In the realm of public policy, loss aversion makes it:

difficult to enact policy changes

Impulse control problems can arise when people:

discount the future too heavily

In traditional economic models, people:

do not care about how their consumption compares to the consumption of others

In many cities in the U.S., a single firm provides electricity. Those firms are:

monopolists

When a marginal revenue is zero:

Total revenue is max

For a natural monopoly, avg. cost declines as the # of units produced increases over the relevant output range

True

Perfectly competitive firms have no control over the price they change for their product

True

A price setter is a firm that:

has some degree of control over its price.

Natural monopolies are most likely to arise when firms have:

high start-up costs and low marginal costs

In traditional economic models, which of the following does NOT describe homo economicus:

impulsive

A credible promis is:

in the promiser's interest to keep

A credible threat is:

in the threatener's interest to carry out

Government programs aimed at stimulating personal savings:

increase welfare if people discount the future too heavily

According to the representative heuristic, people's belief about the likelihood that something belongs to a given category _______ the extent to which it shares characteristics with the stereotypical members of that category.

increases with

If an entity is fungible, then its individual units are:

interchangeable

In traditional economic models, homo economicus refers to a decision maker who:

is narrowly self-interested, well informed, highly disciplined, and cognitively capable enough to solve optimization problems

If a natural monopoly decreases the quantity of output it produces, then

its average cost will increase

Rules of thumb that reduce computation costs are known as:

judgmental and decision heuristics

According to the Weber-Fechner law, when the change in a stimulus is large in proportion to the original stimulus, the perceived size of the change will be:

large

Suppose Big Dairy Inc. has a monopoly in the market for milk and currently sells 1,000 gallons of milk a day @ a price of $6/gallon. Big Dairy Inc.'s marginal revenue from producing its 1,000th gallon of milk is: Q. P. TR 1,000 6. 6,000

less than $6

The tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude is known as:

loss aversion

For all firms, the additional revenue collected from the sale of one additional unit of output is:

marginal revenue

The three elements of a game are:

players, strategies, payoffs

The reason economists consider monopoly to be socially undesirable is that monopolists:

produce less than the socially optimal level of output

"Market Power" refers to a firm's ability to:

raise its price without losing all of its sales

The phenomenon that unusual events are likely to be followed by more nearly normal is known as:

regression to the mean

The rule of thumb according to which people are more likely to assume something belongs to a given category if it shares many characteristics with the stereotypical members of that category is the:

representative heuristic

Judgmental and decision heuristics are:

rules of thumb that reduce computation costs

The decision-making strategy that aims for adequate results because optimal results may necessitate excessive expenditure of resources is known as:

satisficing

Why do price discrimination and the existence of slightly different variants of the same product tend to go hand in hand? By introduction slightly different variants of the product, firms that price discrimination are able to:

separate buyers based on their willingness to pay

Whats the vertical intercept of this monopolist's MR curve? Hint: Always the beginning up to 10 on the x and y axis

$10

Which of the following firms is most likely to be a pure monopolist?

The only gas station in a small, isolated town

A single-priced, profit max. monopolist:

Always charges a price above the marginal cost of production

Explain why price discrimination and the existence of slightly different variants of the same product tend to go hand in hand. Give an example from your own experience

Booking a flight (the cost of a ticket)

Which of the following is NOT an example of a good with network economies?

Computer printer

What pricing practice is explained by the same logic as the appliance seller's scratch n dent sale?

Discounts for product buyers who mail in rebate coupons

Which of the following is NOT a commitment device?

High fines for illegal parking on campus

Both the perfectly competitive firm and the monopolist find that:

It is best to expand production until the benefit and the cost of the last unit produced are equal

A firm is most likely to experience economies of scale if its start-up costs are high and its marginal cost is ____________

Low

Given the demand curve it faces, if an imperfectly competitive firm wants to sell another unit of output, it must:

Lowers its price

A monopolist will maximize profits at the output level for which:

MR=MC

The primary objective of an imperfectly competitive firm is to:

Max. profit

A purely self-interested diner is more likely to tip:

Only when dining in a restaurant @ which he often eats

___________ is the phenomenon that unusual events are likely to be followed by more nearly norma ones

Regression to the mean

Suppose Evan and Robert are each filling out a separate survey about parking on campus. On Evan's survey, the first question asks about whether he thinks the fine for parking illegally on campus should be $50, and on Robert's survey the first question asks about whether he thinks the fine should be $100. For both Evan and Robert, the second question asks how much each thinks the fine currently is. If Evan and Robert know nothing about the parking fines on campus, but each uses anchoring and adjustment to form his assessment, then, all else equal, you would expect:

Robert's estimate of the current fine to be higher than Evan's

If a monopolist could perfectly price discriminate:

The marginal revenue curve and the demand curve would coincide

If a firm's total revenue is $112 when it sells 16 units, $119 when it sells 17 units and $126 when it sells 18 units,

a perfectly competitive firm

A dominant strategy exists if:

a player has a strategy that yields the highest payoff regardless of the other player's choice

A pure monopoly exists when:

a single firm produces a good with no close substitutes

A strategy that limits deflection in a repeated prisoner's dilemma game is:

a tit- for - tat strategy

Traditional economic models assume that people care about:

absolute consumption

In traditional economic models, homo economicus is assumed to be all of the following EXCEPT

altruistic

According to the representative heuristic, if Roger has many of the characteristics of a millionaire, then people will:

be more likely to think that he is a millionaire

Evidence suggests that as the importance of what's at stake grows, loss aversion

becomes even more pronounced

A good is characterized by network economies if it:

becomes more valuable as more people own it

The present aim standard of rationality accommodates a much _______ range of observed behavior than traditional economic models, but has been criticized because the model is too _______.

broader; flexible

One criticism of the present-aim standard of rationality is that it:

can be used to "explain: virtually any bizarre behavior

A natural monopoly is a monopoly that arises from:

economies of scale

Patents, which confer market power, are intended to

encourage innovation by helping firms recoup the cost of research and development

Suppose the market for milk is perfectly competitive, and the equilibrium price of milk $6/gallon. If a firm that produces milk increases its output by 1 gallon, then its marginal revenue will be: Q. P. TR 1. 6. 6 2 6. 12

equal to 6

The essential feature that differentiates imperfectly competitive firms from perfectly competitive firms is that an imperfectly competitive firm:

faces a downward-sloping demand curve

Which of the following industries does not fit the natural monopoly model?

fast food restaurants

A decision tree is used when modeling:

games in which timing matters

Status quo bias is the

general resistance to change, often stemming from to loss aversion

A monopoly that results from economies of a scale is called a(n):

natural monopoly

A monopolistically competitive firm is one:

of many firms that sell products that are close but not perfect substitutes

Most cartels cease to be effective b/c:

of the incentive to cheat on the cartel agreement

The use of psychological incentives to solve commitment problems would be least effective in games played:

once between strangers

If a firm functions in an oligopoly, it is:

one of a small # of firms that produce goods that are either close or perfect substitutes.

Industries in which firms have high fixed costs and low marginal costs are likely to have a:

small number of large firms

According to the textbook, the owners of restaurants encourage tipping in order to:

solve a commitment problem with their wait staff

A monopolistically competitive firm:

sometimes distinguishes its output from that of its competitors by locating in a more convenient place

In sequential games, the player who moves first.

sometimes has an advantage and sometimes has a disadvantage

When a pharmaceutical company introduces a new drug, its research & development costs are ________, and the cost of the chemicals used in manufacturing the drug are ______.

start-up costs; variable costs

The general resistance to change, often stemming from loss aversion, is known as:

status quo bias

Game theory provides tools that are used to model:

strategic interdependencies

The relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus is known as:

the Weber-Fechner law

Typically, when people use anchoring and adjustment to estimate something, the importance of ____________ in influencing their assessment is too large

the anchor

Suppose a perfectly competitive firm and a monopolist are both charging $5 for their respective products. From this, one can infer that:

the marginal benefit from selling an additional unit of output is $5 for the competitive firm and less than $5 for the monopolist

According to the availability heuristic, the more easily we can recall example of an event:

the more likely we judge the event to be.

A payoff matrix shows:

the payoffs for each possible combination of strategies

In the Nash equilibrium of a prisoner's dilemma

there is unrealized opportunity for both to gain

When people use anchoring and adjustment to estimate something, the adjustment they make when they receive new information is typically:

too small

When a perfectly competitive firms additional units of output, ___________, and when a monopolist sells additional units of output, _________.

total revenue always rises: total revenue could increase, decrease or remain unchanged

The ______ is a game in which the first. player has the power to confront the second player with a take-it-or-leave-it offer

ultimatum bargaining game

The Weber-Fechner law is the relationship according to which the perceived change in any stimulus

varies according to the size of the change measured as a proportion of the original stimulus

Loss aversion is the tendency to:

weigh losses more heavily than gains

In situations where people make decisions with perfectly predictable consequences, traditional economic models cannot explain:

why people experience regret