ECO 165 Final Review
The Mr. Burns Power Plants provide all the electricity to Springfield. Mayor Quimby and the city council decide to break up Mr. Burn's monopoly and divide it among several industrialists. To the dismay of the city, the price of power actually increased. Explain.
Electricity generation often has economies of scale, meaning that the average cost falls with one producer. In fact, natural monopolies can sometimes produce the goods so much cheaper the benefits of the lower cost can outweigh the benefits of having more competition.
What are some of the drawbacks to a government takeover of the power plant?
Governments have political incentives instead of financial incentives. On the upside, the political incentives likely help keep the price for product low; however, on the downside, the government often has little to no incentive to keep costs down or innovate.
In a monopoly, the marginal revenue for an additional unit of production lies below the price while in perfection competition they are the same. Explain why each of these market structures differ in this regard. (Hint: Remember this is assuming that each customer pays the same price and that each firm in a pefectly competitive market is small.)
In a monopoly, MR < price because a firm must lower the price for all customers if it wants to sell an additional unit, causing the firm to earn less revenue from the additional customer than the purchase price of that customer. In perfectly competitive markets, firms are so small they can sell all their product at the market price, so the additional revenue is equal to the price.
Explain why a university has a strong incentive to price discriminate, how a university obtains the necessary information to price discriminate, and one of the methods it uses to charge students different prices. Furthermore, explain why many consumers (and socieity as a whole) may be better off by allowing universities to price discriminate.
Universities have a strong incentive to price discriminate since the marginal cost of admitting an additional student equates to almost zero dollars; thus, any revenue received from that student increases profit. Universities obtain the necessary information to price discriminate through the FAFSA (providing universities information such as family income). To price discriminate, universities charge a high tuition rate and give "scholarships" to students with a lower willingness to pay. Because more people, in particular low income people, attend college when universities price discriminate, society is better off as whole by allowing more access to education.
*58/59 in notes* After the failed break-up, the city allows Burns to buy back all the power plants in the city. Suppose Burns has the following cost curves. a. P1 b. P2 c. P3 d. P4
a. P1
At the current level of output for a perfectly competitive firm, the following data exist: Price = $20 Marginal cost = $6 Average variable cost = $10 Average total cost = $13 What should this firm do? a. The firm should increase output. b. The firm should stay at the same level of output. c. The firm should shut down. d. The firm should lower the price. e. The firm should decrease output.
a. The firm should increase output.
Which of the following is the best example of a monopolistic competitor? a. a nonslip yoga mat manufacturer b. the U.S. Postal Service c. a trash removal service d. a pharmacy e. a tomato farmer
a. a nonslip yoga mat manufacturer
As we move upward along a demand curve, the price elasticity of demand a. becomes more elastic. b. becomes infinite. c. moves closer to zero. d. becomes more inelastic. e. does not change.
a. becomes more elastic.
When talking about economic profits in a perfectly competitive market, the difference between the long run and the short run is that in the short run, firms in the market a. can earn positive or negative economic profits, but in the long run, firms have zero economic profits. b. can earn negative economic profits, but in the long run, firms have positive economic profits. c. always earn negative economic profits, but in the long run, firms have zero economic profits. d. can earn positive or negative economic profits, but in the long run, firms have negative economic profits. e. always earn positive economic profits, but in the long run, firms have zero economic profits.
a. can earn positive or negative economic profits, but in the long run, firms have zero economic profits.
Which rule would NOT protect fish populations? a. catching any fish except males b .limiting the length of the fishing season c. not allowing young fish to be caught d. limiting the number of fish that can be caught e. not allowing female fish to be caught
a. catching any fish except males
When a market model moves from that of a monopoly to one in which perfect price discrimination is practiced, the deadweight loss a. decreases. b. increases. c. becomes negative. d. fluctuates. e. remains unchanged.
a. decreases.
For a market to be competitive a. each buyer and seller is small relative to the whole market; no single decision maker has any influence over the market price. b. all you need are many buyers and many sellers. c. sellers should have substantial pricing power. d. sellers must produce goods and services that are different from their competitors. e. the price must be fair.
a. each buyer and seller is small relative to the whole market; no single decision maker has any influence over the market price.
Economists consider both explicit costs and implicit costs when measuring economic profit. The reason economists consider implicit costs is that a. implicit costs are relevant for firms deciding whether to stay in business. b. implicit costs are typically far larger than explicit costs. c. implicit costs include expenses like taxes and fees to the government. d. they are more conservative than accountants, who consider only accounting costs. e. most businesses forget to pay their implicit costs.
a. implicit costs are relevant for firms deciding whether to stay in business.
In competitive markets, a. market forces of demand and supply determine the prices. b. market forces set the quantity in the market but not the prices. c. firms set the prices for their products with little concern for the consumer. d. firms control the prices they charge. e. individual firms are much stronger than the market forces are.
a. market forces of demand and supply determine the prices.
Demand is almost always more price-elastic in the long run because a. people have time to adjust to market conditions. b. people's preferences change. c. newer versions of a good or service replace older ones. d. production of the good or service stops. e. government regulations increase.
a. people have time to adjust to market conditions.
According to the Coase theorem, positive externalities can be internalized if a. property rights are assigned to either party. b. the government takes action to solve the problem. c. property rights are assigned to the party who is doing the damage. d. the party causing the damage is forced out of business. e. property rights are assigned to the party who is benefiting.
a. property rights are assigned to either party.
Apple applies for hundreds of patents every year. These patents a. provide an incentive for Apple to innovate and develop new products. b. create more competition among Apple and other tech firms than would occur without government intervention. c. allow Apple to make additional revenue from the purchase of patents. d. make it easy for Apple to manufacture products on the same platform. e. allow Apple to produce goods with no risk of competition.
a. provide an incentive for Apple to innovate and develop new products.
Which of the following is an example of a natural barrier to entry? a. An inventor created a new method for accessing the internet but did not patent the idea. b. A single utility firm can deliver services to every home in an area more efficiently than a cluster of competing firms could. c. A new record label must purchase the copyrights before distributing any new music. d. A bar must be approved for a license before selling any alcohol. e. A patent gives a pharmaceutical firm the exclusive right to manufacture and sell a cancer-fighting drug.
b. A single utility firm can deliver services to every home in an area more efficiently than a cluster of competing firms could.
*24 in notes* If the firm depicted in the graph had to pay higher rent to its landlord, we would expect its ________ curve to shift ________. a. average total cost (ATC); down b. ATC up c. average variable cost (AVC); down d. AVC up e. marginal cost (MC); up
b. ATC up
Lanny's Gifts is a small business in a new industry. Which of the following scenarios demonstrates this industry is monopolistically competitive? a. Lanny's Gifts exhibits a horizontal demand curve. b. Lanny's Gifts is in an industry with easy entry and low markup. c. Lanny's Gifts has no control over price. d. Lanny's Gifts is in an industry with high barriers to entry and low markup. e. Lanny's Gifts is in an industry with high barriers to entry and high markup.
b. Lanny's Gifts is in an industry with easy entry and low markup.
In March 2012, the State of California started to require all packaging for food and drink with the additive 4-methylimidazole (4-MI) be clearly labeled with a cancer warning. Because of this, both Pepsi and Coke changed their formula to eliminate 4-MI as an ingredient. If Pepsi and Coke had NOT changed their formulas, holding all else constant, what would have happened to the demand for these goods, assuming Pepsi and Coke were in a competitive market? a. The demand curves for Pepsi and Coke would have decreased, but the prices and profits would not have changed. b. The demand curves for Pepsi and Coke would have shifted to the left, causing the price of both products to decrease and the profits for both companies to fall. c. The demand curves for both Pepsi and Coke would have shifted to the right, causing the price of both products to decrease and the profits for the companies to fall. d. The demand curve for only one of them would change because Pepsi and Coke are substitutes. e. The demand curves for Pepsi and Coke would have remained unchanged, but the price of both products would have decreased and the profits for the companies would have fallen.
b. The demand curves for Pepsi and Coke would have shifted to the left, causing the price of both products to decrease and the profits for both companies to fall.
*50 in notes* The following payoff matrix depicts the possible outcomes for two players involved in a game of rock-paper-scissors. If a player receives a payoff of 1, the player wins; if the player receives a payoff of -1, the player loses; if both players receive zero, the players tie. Edward and Meg are going to play repeatedly. If Edward is behaving rationally, he will a. always choose scissors because Meg's dominant strategy is to choose paper. b. There is no way to predict what Edward will do in any given round. c. always choose rock because Meg's dominant strategy is to choose scissors. d. play tit-for tat by always choosing whatever Meg did in the previous round. e. always choose paper because Meg's dominant strategy is to choose rock.
b. There is no way to predict what Edward will do in any given round.
Which of the following industries is most likely an oligopoly? a. furniture b. air travel c. corn d. clothing e. car repair
b. air travel
When two or more firms set prices or quantities in unison, economists refer to them as a a. predatory pricing unit. b. cartel. c. monopoly. d. perfectly competitive market. e. monopolistically competitive market.
b. cartel.
On which of the following concepts do economists focus their studies when explaining how humans behave? a. emotions b. incentives c. fairness d. justice e. money
b. incentives
A carbon tax would be an efficient method of addressing the problem of global warming because a. firms are likely to prefer the carbon tax over the cap-and-trade policy. b. it forces firms to internalize the external cost of emissions. c. carbon taxes are an external cost. d. it is less likely than the cap-and-trade policy to result in rising prices. e. it eliminates the positive externalities associated with global warming.
b. it forces firms to internalize the external cost of emissions.
A larger beer distributor sets a price below cost to prevent smaller firms from making a large amount of sales. This is an example of which of the following? a. dumping b. predatory pricing c. collusion d. lobbying
b. predatory pricing
In economics, decisions are necessary because ________ are scarce, while ________ are practically unlimited. a. opportunities; costs b. resources; wants and needs c. producers; consumers d. luxuries; necessities e. cooperative efforts; selfish activities
b. resources; wants and needs
Evening show times are more popular with moviegoers. Movie theaters discount afternoon ticket prices in order to sell more tickets during the daytime hours. Unlike the customers who go to the movies in the evenings, the afternoon customers tend to be a. stay-at-home parents who have relatively inelastic demand compared to the rest of the movie-going population. b. retirees, people on vacation, and those who do not work during the day and who tend to have more price-elastic demands. c. people who work or attend school and must be presented with a low price to offset their high opportunity cost of calling in sick for work or school. d. retirees who have already paid for many movies over their lifetimes. e. movie theater employees who could sneak in and see the movie for free; the low price deters such deceptive behavior.
b. retirees, people on vacation, and those who do not work during the day and who tend to have more price-elastic demands.
In most cases, taxes reduce economic efficiency because a. they lower prices for consumers and cause firms to suffer. b. they reduce consumer surplus and producer surplus by more than the tax revenue amount. c. they increase firms' profits at the expense of consumers. d. taxes are perceived as unfair by some taxpayers. e. the government often spends tax revenues on programs that some voters don't like.
b. they reduce consumer surplus and producer surplus by more than the tax revenue amount.
The incidence of a tax reflects a. government efficiency in providing goods and services. b. who bears the burden of the tax. c. who pays the tax out of pocket. d. how the tax revenue from the tax is spent. e. how much tax revenue the tax generates.
b. who bears the burden of the tax.
*graph in notes* Given current resources and technology, the attainable range is best described as a. only Area I: points inside the PPF. b. Area O: points outside the PPF and points on the PPF. c. Area I: points inside the PPF and points on the PPF. d. only points on the PPF. e. only Area O: points outside the production possibilities frontier (PPF).
c. Area I: points inside the PPF and points on the PPF.
*graphs in notes* Which of these graphs shows the price elasticity of demand for the following situation: Lin's Boots can sell out its entire stock of shoe polish at $2.50 but can sell none if it raises the price to $2.55? a. Graph A b. Graph D c. Graph B d. Graph E e. Graph C
c. Graph B
One strategy someone might use to be elected mayor of a university town is to place a binding price ceiling on rent for student apartments. What will happen if he or she gets elected and is able to pass such a law? a. The price ceiling will cause the supply curve to shift to the left. b. The price ceiling will increase the number of apartments available for rent. c. The price ceiling will cause students to sleep in their cars or to move in with their friends because they won't be able to find places to live. d. The price ceiling will decrease the number of students who want to rent an apartment. e. The price ceiling will cause the demand curve to shift to the right.
c. The price ceiling will cause students to sleep in their cars or to move in with their friends because they won't be able to find places to live.
Wedding Creations specializes in unique, handmade wedding dresses. Each dress offered for sale is made after an extensive customer consultation that results in a one-of-a-kind wedding dress. To maximize profits, the firm owner should charge a. a price that will cover the business's fixed costs. b. the market price. c. a price that is close to each customer's willingness to pay. d. the same price to all customers. e. the break-even price.
c. a price that is close to each customer's willingness to pay.
The main reason firms CANNOT price discriminate under perfect competition is because a. all firms share the same production technology. b. there is a lot of heterogeneity among consumers' tastes. c. firms are price takers and cannot set prices for their goods. d. firms cannot identify different kinds of consumers perfectly. e. some goods are being resold in the market.
c. firms are price takers and cannot set prices for their goods.
Which of the following monopolies do economists generally dislike most? a. monopolies from a patent for a new product b. natural monopolies c. government created monopolies (i.e. the government only allows one firm a license in an industry and makes all others illegal) d. local monopolies simply caused by a lack of demand (e.g. a local movie theater in a small town)
c. government created monopolies (i.e. the government only allows one firm a license in an industry and makes all others illegal)
Economists use game theory to study which of the following? a. perfectly competitive markets as each firm has a negligible impact on the market b. monopolies as one firm controls the entire market c. oligopolies as there is a strategic interaction between the few firms.
c. oligopolies as there is a strategic interaction between the few firms.
*44/45 in notes* The short-run profit-maximizing output for this firm is ________ units per week. a. Point a b. 60 c. Point b d. 50 e. 0 (zero)
d. 50
Being part of a cartel is generally good for a firm because it can reduce output while increasing prices and profits. Yet most cartels have failed. Why is this the case? a. Cartel members eventually go out of business. b. As the cartel becomes more profitable, competition increases. c. Cartel members dislike having to share profits equally. d. Each member of the cartel faces an incentive to cheat and produce more, whereas rival members honor the agreement. e. Cartels lack a dominant strategy.
d. Each member of the cartel faces an incentive to cheat and produce more, whereas rival members honor the agreement.
Which firm has the most market power of the following? a. Mexican Villa (a local Mexican restaurant) b. A farmer selling onions a farmer's market c. Honda d. Facebook
d. Facebook
*58/59 in notes* After more complaints, the city decides to have a government takeover of the monopoly. a. P1 b. P2 c. P3 d. P4
d. P4
How would an economist explain a teenager's continued unemployment where there exists a minimum wage? a. The quantity of labor willing to work at that wage was less than the quantity of labor demanded at that wage. b. The minimum wage law was nonbinding. c. The market had reached equilibrium. d. The quantity of labor willing to work at that wage was greater than the quantity of labor demanded at that wage. e. The minimum wage law made it illegal to hire teenagers because they likely would have been unable to work a minimum number of hours.
d. The quantity of labor willing to work at that wage was greater than the quantity of labor demanded at that wage.
*25 in notes* A firm expands its scale of production and finds that its long-run average total cost curve looks like LRATC3. It might look this way because the firm a. is able to reduce its tax burden. b. is able to pay its employees less. c. is able to sell more output. d. adds several additional layers of management, which increase its costs. e. is able to produce output more efficiently.
d. adds several additional layers of management, which increase its costs.
In the long run, both supply and demand tend to become more elastic. This suggests that, in the long run, the a. good will have zero demand. b. government will likely reduce tax rates. c. good will have zero supply. d. deadweight loss from a tax will be more than it is in the short run. e. tax revenue will be higher than it is in the short run.
d. deadweight loss from a tax will be more than it is in the short run.
If Tamsin's Tank Tops is a perfectly competitive firm and is currently making a positive economic profit of $1,000, a. firms will exit the market. b. the market supply curve will shift to the left. c. individuals will demand fewer tank tops. d. firms will enter the market. e. individuals will demand more tank tops.
d. firms will enter the market.
*49 in notes* Refer to the following table. Confessing is Eddie's dominant strategy because a. his decision does not depend on Sharon's decision. b. he spends more time in jail if he confesses, regardless of whether Sharon confesses or keeps quiet. c. he spends the same amount of time in jail by confessing as he would by not confessing. d. he spends less time in jail if he confesses, regardless of whether Sharon confesses or keeps quiet. e. Sharon's dominant strategy is to keep quiet.
d. he spends less time in jail if he confesses, regardless of whether Sharon confesses or keeps quiet.
Government officials who impose price controls a. understand and acknowledge the many unintended consequences of price controls. b. understand that their actions will induce a better achievement of the gains from trade. c. understand that their actions are supported by most economists and therefore are best for society. d. might not understand that their actions cause confusion in the price signaling mechanism that directs the allocation of resources. e. understand that their actions cause a trade-off: giving up fairness to get efficiency.
d. might not understand that their actions cause confusion in the price signaling mechanism that directs the allocation of resources.
The point of the 1890 Sherman Act was to a. nationalize industries where economies of scale were especially important. b. make rent seeking through lobbying of public officials illegal. c. forbid states from imposing import tariffs on other states. d. prevent monopoly practices and promote commercial competition. e. establish patents and copyrights as ways to protect creative activity.
d. prevent monopoly practices and promote commercial competition.
Lobbying the government to place harsh tariffs on imports is a form of a. beneficial competition. b. natural monopoly. c. market failure. d. rent seeking. e. deregulation.
d. rent seeking.
The production possibilities frontier (PPF) shows a. how a firm should price a new product. b. the difference between normative and positive analysis. c. how price and quantity are related for a single good. d. the trade-off between the efficient production of two different goods. e. the difference between microanalysis and macroanalysis.
d. the trade-off between the efficient production of two different goods.
Airlines require every passenger with a ticket to have a matching, government-issued photo identification. Price discrimination is made easier because a. this practice allows airlines to determine the different personal characteristics of their buyers at a zero cost. b. this type of price discrimination is mandated and supported by the federal government. c. customers acknowledge that they are exchanging higher ticket prices for decreased safety regulations. d. this practice prevents a passenger who purchased a discounted fare from reselling that ticket to another customer who is willing to pay more. e. customers are then willing to divulge relevant information to the airline about their reservation price.
d. this practice prevents a passenger who purchased a discounted fare from reselling that ticket to another customer who is willing to pay more.
*33 in notes* The profit-maximizing price and quantity are ________, respectively. a. $25 and 150 b. $13 and 150 c. $10 and 100 d. $13 and 100 e. $25 and 100
e. $25 and 100
Why do economists use models? a. Models allow us to control for endogenous factors. b. Models allow us to control exogenous factors. c. Models are used to add complexity to a simple world. d. Models never include endogenous factors. e. Models allow us to simplify the complex world.
e. Models allow us to simplify the complex world.
The government recently imposed a number of regulations on companies that will make it more expensive for companies to hire workers. What consequence will this have on the labor market? a. These regulations will raise the cost of labor and cause a rightward movement along the supply curve. b. These regulations will raise the cost of labor and shift supply to the right. c. These regulations will not affect the supply curve. d. These regulations will raise the cost of labor and cause a leftward movement along the supply curve. e. These regulations will raise the cost of labor and shift supply to the left.
e. These regulations will raise the cost of labor and shift supply to the left.
What is the indirect incentive in the unemployment insurance program? a. Workers get paid when they are laid off. b. Workers on unemployment insurance are given training opportunities. c. Workers are paid all of their wages by the unemployment insurance program. d. Workers have an incentive to find a new job as quickly as possible. e. Workers have a reduced incentive to find a new job until the insurance runs out.
e. Workers have a reduced incentive to find a new job until the insurance runs out.
As a firm hires more workers, its marginal product of labor increases only if a. all workers are paid the same wage. b. the firm produces commodities. c. all workers are paid different wages. d. each worker does the same tasks as all others. e. employees are assigned specialized tasks.
e. employees are assigned specialized tasks.
Calvin's Campgrounds is a firm conducting business in a competitive market. Calvin realizes he's losing money and is trying to decide whether to shut down or stay open. He should stay open a. regardless of the price being charged. b. if his revenues do not cover his variable costs. c. as long as he is making revenue. d. if the price being charged is less than his minimum average variable cost. e. if his revenues cover his variable costs.
e. if his revenues cover his variable costs.
A monopolistically competitive firm usually charges less than a monopoly firm because a. producing homogenous output is more expensive than producing differentiated output. b. it has a monopoly, but potential entrants exist in the form of contestable markets. c. its primary goal is to reap monopoly profits by replacing competition with cooperation. d. it is part of a group of firms that has formally agreed to control the price and the output of a product. e. it faces some degree of competition due to low barriers to entry.
e. it faces some degree of competition due to low barriers to entry.
*44/45 in notes* If all firms in a monopolistically competitive industry have demand and cost curves like those shown, we would expect, in the long run, that a. average total cost will intersect with marginal cost at multiple points. b. firms in the industry will be forced to shut down. c. firms will lower the price to absorb extra profits. d. demand will intersect with marginal revenue at multiple points. e. new firms will enter the industry.
e. new firms will enter the industry.
Economist support patents because they keep drug prices high and give firms monopoly power. Generally, economists favor a monopoly market structure over perfectly competitive markets. true or false
false
Firms in a market structure with monopolistic competition are productively efficient. true or false
false
Games usually have a unique Nash equilibrium. true or false
false
Members of OPEC often produce beyond their quota (each country has a quota to try to maintain high prices) because OPEC's behavior is illegal and international courts may punish them for collusive behavior. true or false
false
Oligopoly markets always have differentiated products. true or false
false
Producer surplus is generally higher for an oligopoly than for a monopoly. true or false
false
A monopoly can theoretically acheive as much surplus as a competitive market if it perfectly price discriminates. true or false
true
Rewards for innovation work better than patents as they allow competitive markets, but a downside to rewards is that they require funding, which often comes at the expense of taxpayers. true or false
true
