ECO 3101 final

Zinc Communications developed a new type of cellular telephone that has a three-dimensional (3-D) screen. The company holds a patent on this technology, so they are the only seller of the 3-D phone when it is introduced. Over time, other companies introduce phones that are similar but not identical (i.e., they do not violate the patent held by Zinc). What happens to the demand for 3-D phones facing Zinc and to the profit-maximizing price for the 3-D phone as these similar products enter the market? (a) Demand becomes more elastic, price declines. (b) Demand becomes less elastic, price declines. (c) Demand becomes less elastic, price increases. (d) Demand becomes more elastic, price increases.

(a) Demand becomes more elastic, price declines.

Which of the following statements about natural monopolies is true? (a) For natural monopolies, marginal cost is always below average cost. (b) Natural monopolies cannot be regulated. (c) Natural monopolies are only found in the markets for natural resources (like crude oil and coal). (d) For natural monopolies, average cost is always increasing.

(a) For natural monopolies, marginal cost is always below average cost.

Suppose your neighbor likes to repair motorcycles in his front yard during evenings and on weekends, and he earns $400 per week from this work. However, the sight of piles of greasy motorcycle parts and the additional noise and traffic caused by his customers reduces your value of living in this neighborhood by $300 per week. If you have a right to live in peace and quiet, how can you achieve the efficient outcome? (a) He pays you some value between $300 and $400 to allow his home business. (b) He pays you some value between $0 and $100 to allow his home business. (c) He cannot afford to pay you enough money to allow him to work on motorcycles. (d) He pays you at least $400 to allow his home business.

(a) He pays you some value between $300 and $400 to allow his home business.

Consider the following statements when answering this question: I. Employers are always hurt by minimum wage laws. II. Workers always benefit from minimum wage laws. (a) I is true, and II is false. (b) I and II are false. (c) I is false, and II is true. (d) I and II are true.

(a) I is true, and II is false.

A carbon tax is one policy proposal for addressing numerous health and environmental externalities. Which is not true? (a) If the carbon tax is set too low it could lead to increased environmental damage. (b) If the carbon tax is set too high it could shrink total surplus below the starting (inefficient) level. (c) A lump sum rebate or reduction in other taxes would help offset the distributional impact of a carbon tax. (d) It is a more general approach to addressing the negative externality of carbon production than a gas tax or cap-n-trade.

(a) If the carbon tax is set too low it could lead to increased environmental damage.

Marge's Beauty Salon sells shampoo and conditioner. Marge has two types of customers. Their willingness-to-pay for shampoo and conditioner are given in the table below. If Marge bundles the shampoo and conditioner, could she increase revenue? Shampoo Conditioner Type I: 8 5 Type II: 6 8 (a) Yes, she should charge $13 for the bundle. (b) No, she should charge $8 for each product. (c) No, she should charge $5 for each product. (d) Yes, she should charge $14 for the bundle.

(a) Yes, she should charge $13 for the bundle.

There were initially two satellite radio providers in the U.S. market, Sirius and XM Radio. The firms merged to form one firm, and the federal government did not challenge the merger. Although the merger created a single seller in this market, the existence of a monopoly may not have much impact on U.S. consumers. Which of the following statements are plausible reasons for the limited impact of the merger? (a) all of the above (b) There are very large fixed costs in providing satellite radio, and the industry may be a natural monopoly. One seller may be able to operate at lower cost than two sellers. (c) The merged firm will operate at higher capacity and may be able to reduce costs through economies of scale and perhaps learning-by-doing, which will benefit U.S. consumers. (d) Although there will only be one seller of satellite radio, there are other forms of radio broadcasts available to U.S. consumers and demand for satellite radio may be relatively elastic.

(a) all of the above

Rihanna's Diner, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Rihanna should: (a) continue producing in the short run, but plan to go out of business in the long run. (b) lower her output. (c) close her doors immediately. (d) continue producing in the short and long run. (e) raise her prices above the perfectly competitive level.

(a) continue producing in the short run, but plan to go out of business in the long run.

Under perfect price discrimination, consumer surplus: (a) equals zero. (b) is maximized. (c) is less than zero. (d) is greater than zero.

(a) equals zero.

The ________ elastic a firm's demand curve, the greater its ________. (a) less; monopoly power (b) more; costs (c) more; monopoly power (d) less; output

(a) less; monopoly power

When the market price is held above the competitive level, the deadweight loss is composed of: (a) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged. (b) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged. (c) there is no deadweight loss if the government uses a price floor policy to increase the price. (d) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

(a) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

When there are externalities, economic efficiency can be achieved without government intervention: (a) when the externality affects only a few parties and property rights are well defined. (b) when the externality affects only a few parties and property rights are not well defined. (c) when the externality affects many people and property rights are not well defined. (d) at no time. (e) when the externality affects many people and property rights are well defined.

(a) when the externality affects only a few parties and property rights are well defined.

A monopolist has set her level of output to maximize profit. The firm's marginal revenue is $20, and the price elasticity of demand is -2.0. The firm's profit maximizing price is approximately: (a) $20 (b) $40 (c) $10 (d) This problem cannot be answered without knowing the marginal cost. (e) $0

(b) $40

Blu-Rays can be produced at a constant marginal cost of $5 per disk, and Superhero Studios is releasing the Blu-Rays for its last two major films. The Blu-Ray for Obscure-Man is priced at $20 per disk, and the Blu-Ray for Team-Up Flick 17: The Final Chapter, Part 1 is priced at $30 per disk. What are the price elasticities of demand for these two movies? (a) Both equal -1.2. (b) -1.33 and -1.2, respectively (c) -1.33 and -2, respectively (d) -0.75 and -5/6, respectively

(b) -1.33 and -1.2, respectively

Where Es is the elasticity of supply and Ed is the own price elasticity of demand, the fraction of the tax passed on to consumers in the form of higher prices is: (a) Es/(Ed-Es). (b) Es/(Es-Ed). (c) Ed/(Es-Ed). (d) Ed/(Ed-Es). (e) Ed/Es.

(b) Es/(Es-Ed).

Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error? (a) Firm produces more than optimal quantity and earns higher profits. (b) Firm produces more than optimal quantity and earns lower profits. (c) Firm produces less than optimal quantity and earns lower profits. (d) Firm produces less than optimal quantity and earns higher profits.

(b) Firm produces more than optimal quantity and earns lower profits.

Eva's Taqueria operates in a perfectly competitive local taco market. If the price of taco cheese increases (ceteris paribus), what is the expected impact on Eva's profit-maximizing output decision? (a) Output decreases because the price of pizza must also increase. (b) Output decreases because the marginal cost curve shifts upward. (c) Output increases because the marginal cost curve shifts upward. (d) Output increases to cover the higher input cost.

(b) Output decreases because the marginal cost curve shifts upward.

Which is not an example of how innovation and technology can help address market failures? (a) EZpay tolls and dynamic pricing (b) Snapchat/Instagram filters (c) Product warranties/guarantees (d) Online customer reviews

(b) Snapchat/Instagram filters

The provision of an education in public school is: (a) exclusive and non-rival. (b) exclusive and rival. (c) nonexclusive and rival. (d) nonexclusive and non-rival. (e) a public good, regardless of exclusivity and rivalness.

(b) exclusive and rival.

The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because: (a) people will develop substitutes for dry cleaning that are wasteful. (b) firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price. (c) people will buy fewer clothes that need dry cleaning than they otherwise would have. (d) firms whose average private cost exceeds the price will exit (or fail to enter) the dry cleaning industry even though their average social cost is less than price. (e) firms will be induced to leave the industry because of artificially high costs.

(b) firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price.

The burden of a tax per unit of output will fall heavily on consumers when demand is relatively ________ and supply is relatively ________. (a) elastic; inelastic (b) inelastic; elastic (c) elastic; elastic (d) inelastic; inelastic

(b) inelastic; elastic

When firms participate in group health insurance for all employees, it: (a) increases the amount of information available to insurers about the population. (b) may lower rates for all people to the extent that it keeps healthy people in the pool. (c) raises rates for everyone, because it brings unhealthy people into the pool. (d) prevents unhealthy people from "selecting out," to the detriment of healthy people. (e) raises rates for unhealthy people.

(b) may lower rates for all people to the extent that it keeps healthy people in the pool.

If any of the assumptions of perfect competition are violated, (a) supply-and-demand analysis cannot be used to study the industry. (b) there may still be enough competition in the industry to make the model of perfect competition usable. (c) graphs with downward-sloping demand curves cannot be used to study the firm. (d) one must use the monopoly model instead. (e) graphs with flat demand curves cannot be used to study the firm.

(b) there may still be enough competition in the industry to make the model of perfect competition usable.

The problem of adverse selection in insurance results in a situation in which: (a) people choose too much coverage because they do not understand the complex information in the policies. (b) unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market. (c) healthy people become more likely to buy insurance than unhealthy people, which drives premiums up, which drives even more unhealthy people away from the market even though they are the ones who need it most. (d) people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies. (e) people choose too little coverage because they do not understand the complex information in the policies.

(b) unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market.

Which of the following is not an advantage of the Earned Income Tax Credit (EITC) over a minimum wage? (a) More targeted to low-income households (b) Does not incentivize employers to substitute capital for labor (c) Benefits arrive once a year (d) Does not generate unemployment

(c) Benefits arrive once a year

Which of the following is NOT a public good? (a) Public fireworks display. (b) National defense. (c) Books in a public library. (d) Clean air.

(c) Books in a public library.

Use the following statements to answer this question: I. Markets that have only a few sellers cannot be highly competitive. II. Markets with many sellers are always perfectly competitive. (a) I is true and II is false. (b) I and II are true. (c) I and II are false. (d) II is true and I is false.

(c) I and II are false.

Consider the following statements when answering this question: I. When a competitive industry's supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are consumers. II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers. (a) I and II are false. (b) I and II are true. (c) I is true, and II is false. (d) I is false, and II is true.

(c) I is true, and II is false.

Use the following two statements to answer this question: I. For a monopolist, at every output level, average revenue is equal to price. II. For a monopolist, at every output level, marginal revenue is equal to price. (a) Statements I and II could either be true or false depending upon demand. (b) Both I and II are false. (c) I is true, and II is false. (d) I is false, and II is true. (e) Both I and II are true.

(c) I is true, and II is false.

A monopolist has determined that at the current level of output the price elasticity of demand is -0.15. Which of the following statements is true? (a) This is typical for a monopolist; output should not be altered. (b) None of the above is necessarily correct. (c) The firm should cut output. (d) The firm should increase output.

(c) The firm should cut output.

Politicians have reintroduced a tax on yachts to help pay for government programs. Which of the following is true? (a) The profit of yacht manufacturers will increase. (b) The burden of this tax will fall entirely on yacht manufacturers. (c) The sales of yachts will decrease. (d) The burden of this tax will fall entirely on yacht consumers. (e) Employment of workers in the yacht industry will increase.

(c) The sales of yachts will decrease.

Given that MEC(q) = 2q^2, what can be inferred about the total cost of pollution as output increases? (Choose the best answer) (a) The total cost of pollution is changing. (b) The total cost of pollution is increasing. (c) The total cost of pollution is growing at an increasing rate. (d) The total cost of pollution is growing at a positive rate. (e) The total cost of pollution is positive.

(c) The total cost of pollution is growing at an increasing rate.

In a constant-cost industry, an increase in demand will be followed by: (a) an increase in supply that will bring price down below the level it was before the demand shift. (b) no increase in supply. (c) an increase in supply that will bring price down to the level it was before the demand shift. (d) a decrease in demand to keep price constant. (e) an increase in supply that will not change price from the higher level that occurs after the demand shift.

(c) an increase in supply that will bring price down to the level it was before the demand shift.

At the profit-maximizing level of output, demand is: (a) unit elastic. (b) infinitely elastic. (c) elastic, but not infinitely elastic. (d) inelastic, but not completely inelastic. (e) completely inelastic.

(c) elastic, but not infinitely elastic.

Suppose the private marginal cost of pumping water from an aquifer remains constant as the quantity of water pumped increases, and the marginal social cost is upward sloping. If the demand for water shifts to the right as population increases, then the amount of water pumped based only on private costs ________ and the social cost of the common property resource ________. (a) decreases; increases. (b) decreases; decreases. (c) increases; increases. (d) increases; decreases.

(c) increases; increases.

If a monopolist's profits were taxed away and redistributed to its consumers, (a) inefficiency would remain, but not because output would be lower than under competitive conditions. (b) efficiency would be obtained because output would be increased to the competitive level. (c) inefficiency would remain because output would be lower than under competitive conditions. (d) efficiency would be obtained because output would be increased and profits removed.

(c) inefficiency would remain because output would be lower than under competitive conditions.

Price ceilings: (a) cause quantity to be higher than in the market equilibrium. (b) always increase consumer surplus. (c) may decrease consumer surplus if demand is sufficiently inelastic. (d) always decrease consumer surplus. (e) may decrease consumer surplus if demand is sufficiently elastic.

(c) may decrease consumer surplus if demand is sufficiently inelastic.

Traditionally, the federal government provides disaster relief funds to flood victims so that they can rebuild their homes after a major flood. However, the government has recently denied requests to rebuild some homes that were situated in flood-prone areas. This action represents an attempt to ________ the moral hazard problem associated with building private homes in risky areas. (a) enhance (b) support (c) mitigate (d) legalize

(c) mitigate

An effective price ceiling causes a loss of: (a) consumer surplus for certain and possibly producer surplus as well. (b) neither producer nor consumer surplus. (c) producer surplus for certain and possibly consumer surplus as well. (d) consumer surplus only. (e) producer surplus only.

(c) producer surplus for certain and possibly consumer surplus as well.

It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result. Factory Fisherman No filter or treatment plant $10,000 $2,000 Filter; no treatment plant $6,000 $10,000 No filter; treatment plant $10,000 $4,000 Filter; treatment plant $6,000 $6,000 If the fishermen are given the right to clean water, (a) the factory will be forced to shut down. (b) the efficient outcome will occur no matter who is given which property right, and the individual gains will be the same in each case. (c) the efficient outcome will occur no matter who is given which property right, but how that maximum gain is split will be determined during bargaining. (d) the outcome will be more efficient than if the factory is given the right to use the water as it sees fit. (e) the outcome will be less efficient than if the factory is given the right to use the water as it sees fit.

(c) the efficient outcome will occur no matter who is given which property right, but how that maximum gain is split will be determined during bargaining.

When new technologies make cleaner production possible, (a) the price of transferable permits rises. (b) the quantity of transferable permits falls (c) the price of transferable permits falls. (d) emissions fees fall. (e) emissions fees rise.

(c) the price of transferable permits falls.

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q What is the maximum amount that Maui Macadamia would be willing to spend in order to maintain its monopoly through rent seeking? (To keep it simple, assume zero fixed costs and consider only one period.) (a) $10,800 (b) $0 (c) $1,800 (d) $5,400

(d) $5,400

Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users? (a) -0.67 (b) -1.0 (c) We do not have enough information to answer the question. (d) -1.5

(d) -1.5

Which of the following is NOT true for monopoly? (a) The profit maximizing output is the one at which marginal revenue and marginal cost are equal. (b) The profit maximizing output is the one at which the difference between total revenue and total cost is largest. (c) The monopolist's demand curve is the same as the market demand curve. (d) At the profit maximizing output, price equals marginal cost. (e) Average revenue equals price.

(d) At the profit maximizing output, price equals marginal cost.

Cicero's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Cicero's profit maximizing decisions in the long run? (a) Cicero will remain in business but will definitely produce less pizza. (b) Cicero's will definitely shut down. (c) No impact on the restaurant's decisions. (d) Cicero's decision depends on the circumstances—if their profits are larger than $250 per year, then the tax does not impact output; otherwise, the restaurant will shut down.

(d) Cicero's decision depends on the circumstances—if their profits are larger than $250 per year, then the tax does not impact output; otherwise, the restaurant will shut down.

Consider the following statements when answering this question: I. Increases in the demand for a good, which is produced by a competitive industry, will raise the short-run market price. II. Increases in the demand for a good, which is produced by a competitive industry, will raise the long-run market price. (a) I and II are true. (b) I is false, and II is true. (c) I and II are false. (d) I is true, and II is false.

(d) I is true, and II is false.

A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plastics, and the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward? (a) Optimal price and quantity decrease. (b) Optimal price and quantity decline. (c) Optimal price increases, optimal quantity remains unchanged. (d) Optimal price increases, optimal quantity decreases.

(d) Optimal price increases, optimal quantity decreases.

Why is there a deadweight loss associated with subsidy payments? (a) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded. (b) There is no deadweight loss from a subsidy. (c) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced. (d) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.

(d) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.

Loud music from a neighbor's party is: (a) a positive externality whether or not you like it. (b) a negative externality whether or not you like it. (c) not an externality. (d) a positive externality if you like the music, and a negative externality if you don't. (e) a negative externality if you like the music, and a positive externality if you don't.

(d) a positive externality if you like the music, and a negative externality if you don't.

Import tariffs generally result in: (a) less consumer surplus. (b) a deadweight loss. (c) higher domestic prices. (d) all of the above. (e) more producer surplus for domestic producers.

(d) all of the above.

Firms often use patent rights as a: (a) barrier to exit. (b) way to achieve perfect competition. (c) none of the above (d) barrier to entry.

(d) barrier to entry.

When the government imposes a specific tax per unit on a product, changes in consumer surplus are ________ and changes in producer surplus are ________. (a) negative; positive (b) positive; positive (c) positive; negative (d) negative; negative

(d) negative; negative

Consumer surplus measures: (a) the excess demand that consumers have when a price ceiling holds prices below their equilibrium. (b) the extra amount that a consumer must pay to obtain a marginal unit of a good or service. (c) gain or loss to consumers from price fixing. (d) the benefit that consumers receive from a good or service beyond what they pay.

(d) the benefit that consumers receive from a good or service beyond what they pay.

If current output is less than the profit-maximizing output, then the next unit produced (a) may or may not increase profit. (b) will increase revenue without increasing cost. (c) will increase cost more than it increases revenue. (d) will increase revenue more than it increases cost. (e) will decrease profit.

(d) will increase revenue more than it increases cost.

At the profit-maximizing level of output, marginal profit (a) is also maximized. (b) is positive. (c) may be positive, negative or zero. (d) is increasing. (e) is zero.

(e) is zero.

A firm maximizes profit by operating at the level of output where: (a) average revenue equals average variable cost. (b) marginal revenue exceeds marginal cost by the greatest amount. (c) total costs are minimized. (d) average revenue equals average cost. (e) marginal revenue equals marginal cost.

(e) marginal revenue equals marginal cost.

A firm never operates: (a) at the minimum of its ATC curve. (b) at the minimum of its AVC curve. (c) on its long-run marginal cost curve. (d) on the downward-sloping portion of its ATC curve. (e) on the downward-sloping portion of its AVC curve.

(e) on the downward-sloping portion of its AVC curve.

Julia is a 28-year-old non-smoking, non-drinking female of normal weight. Because of adverse selection in health insurance, (a) she will be charged less for her premiums than people who are higher risks. (b) when she gets health insurance, she will be less likely to take care of herself. (c) she is more likely than the average person to buy health insurance, because she is more likely to be offered it. (d) she must get health insurance early in life, and is likely to lose health insurance if she smokes, drinks to excess, or gains weight. (e) she is less likely to buy health insurance than the average person, because policy premiums are based on expected medical expenditures of people who are less healthy than she is.

(e) she is less likely to buy health insurance than the average person, because policy premiums are based on expected medical expenditures of people who are less healthy than she is.