ECO3101 Quiz 6-9
At the profit-maximizing level of output, marginal profit is also maximized. may be positive, negative or zero. is zero. is positive. is increasing.
is zero.
The ________ elastic a firm's demand curve, the greater its ________. less; output less; monopoly power more; monopoly power more; costs
less; monopoly power
A firm maximizes profit by operating at the level of output where: total costs are minimized. average revenue equals average cost. marginal revenue exceeds marginal cost by the greatest amount. marginal revenue equals marginal cost. average revenue equals average variable cost.
marginal revenue equals marginal cost.
Price ceilings: cause quantity to be higher than in the market equilibrium. always increase consumer surplus. may decrease consumer surplus if demand is sufficiently elastic. may decrease consumer surplus if demand is sufficiently inelastic. always decrease consumer surplus.
may decrease consumer surplus if demand is sufficiently inelastic.
When firms participate in group health insurance for all employees, it: prevents unhealthy people from "selecting out," to the detriment of healthy people. raises rates for unhealthy people. raises rates for everyone, because it brings unhealthy people into the pool. increases the amount of information available to insurers about the population. may lower rates for all people to the extent that it keeps healthy people in the pool.
may lower rates for all people to the extent that it keeps healthy people in the pool.
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. mitigate legalize enhance support
mitigate
When the government imposes a specific tax per unit on a product, changes in consumer surplus are ________ and changes in producer surplus are ________. negative; positive positive; negative positive; positive negative; negative
negative; negative
A firm never operates: at the minimum of its ATC curve. on its long-run marginal cost curve. at the minimum of its AVC curve. on the downward-sloping portion of its ATC curve. on the downward-sloping portion of its AVC curve.
on the downward-sloping portion of its AVC curve.
When the market price is held above the competitive level, the deadweight loss is composed of: consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged. producer surplus losses associated with units that used to be traded on the market but are no longer exchanged. There is no deadweight loss if the government uses a price floor policy to increase the price. producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
An effective price ceiling causes a loss of: neither producer nor consumer surplus. consumer surplus only. producer surplus for certain and possibly consumer surplus as well. consumer surplus for certain and possibly producer surplus as well. producer surplus only.
producer surplus for certain and possibly consumer surplus as well.
Julia is a 28-year-old non-smoking, non-drinking female of normal weight. Because of adverse selection in health insurance, when she gets health insurance, she will be less likely to take care of herself. 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. she must get health insurance early in life, and is likely to lose health insurance if she smokes, drinks to excess, or gains weight. she will be charged less for her premiums than people who are higher risks. she is more likely than the average person to buy health insurance, because she is more likely to be offered it.
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.
Consumer surplus measures: the extra amount that a consumer must pay to obtain a marginal unit of a good or service. the benefit that consumers receive from a good or service beyond what they pay. the excess demand that consumers have when a price ceiling holds prices below their equilibrium. gain or loss to consumers from price fixing.
the benefit that consumers receive from a good or service beyond what they pay.
The problem of adverse selection in insurance results in a situation in which: people choose too much coverage because they do not understand the complex information in the policies. people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies. 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. 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. people choose too little coverage because they do not understand the complex information in the policies.
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.
When there are externalities, economic efficiency can be achieved without government intervention: at no time. when the externality affects only a few parties and property rights are not well defined. when the externality affects only a few parties and property rights are well defined. when the externality affects many people and property rights are not well defined. when the externality affects many people and property rights are well defined.
when the externality affects only a few parties and property rights are well defined.
If current output is less than the profit-maximizing output, then the next unit produced will decrease profit. may or may not increase profit. will increase cost more than it increases revenue. will increase revenue more than it increases cost. will increase revenue without increasing cost.
will increase revenue more than it increases cost.
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: $10 This problem cannot be answered without knowing the marginal cost. $20 $0 $40
$40
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?
$5,400 -Do MR=MC -Find TR and TC -Max amount is TR-TC
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? -0.75 and -5/6, respectively Both equal -1.2. -1.33 and -2, respectively -1.33 and -1.2, respectively
-1.33 and -1.2, respectively
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? We do not have enough information to answer the question. -1.0 -1.5 -0.67
-1.5 (dont forget to use( P- MC / P) = -1 / Ed
Which of the following is NOT true for monopoly? The profit maximizing output is the one at which marginal revenue and marginal cost are equal. The profit maximizing output is the one at which the difference between total revenue and total cost is largest. At the profit maximizing output, price equals marginal cost. Average revenue equals price. The monopolist's demand curve is the same as the market demand curve.
At the profit maximizing output, price equals marginal cost.
Which of the following is not an advantage of the Earned Income Tax Credit (EITC) over a minimum wage? Does not generate unemployment More targeted to low-income households Does not incentivize employers to substitute capital for labor Benefits arrive once a year
Benefits arrive once a year
Which of the following is NOT a public good? Books in a public library National defense Clean air Public fireworks display
Books in a public library
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? No impact on the restaurant's decisions Cicero's will definitely shut down. 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. Cicero will remain in business but will definitely produce less pizza.
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.
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? Demand becomes more elastic, price increases. Demand becomes less elastic, price increases. Demand becomes less elastic, price declines. Demand becomes more elastic, price declines.
Demand becomes more elastic, price declines.
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: Ed/(Ed-Es). Ed/(Es-Ed). Es/(Ed-Es). Ed/Es. Es/(Es-Ed).
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? Firm produces more than optimal quantity and earns higher profits. Firm produces more than optimal quantity and earns lower profits. Firm produces less than optimal quantity and earns lower profits. Firm produces less than optimal quantity and earns higher profits.
Firm produces more than optimal quantity and earns lower profits.
Which of the following statements about natural monopolies is true? Natural monopolies cannot be regulated. For natural monopolies, marginal cost is always below average cost. Natural monopolies are only found in the markets for natural resources (like crude oil and coal). For natural monopolies, average cost is always increasing.
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? He cannot afford to pay you enough money to allow him to work on motorcycles. He pays you at least $400 to allow his home business. He pays you some value between $0 and $100 to allow his home business. He pays you some value between $300 and $400 to allow his home business.
He pays you some value between $300 and $400 to allow his home business.
What slope does a price taker have?
Horizontal demand curve
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. I is true and II is false. II is true and I is false. I and II are true. I and II are false.
I and II are false.
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. I is false, and II is true. I is true, and II is false. I and II are false. I and II are true.
I is true, and II is false.
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. I and II are false. I is true, and II is false. I is false, and II is true. I and II are true.
I is true, and II is 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. I and II are true. I is true, and II is false. I is false, and II is true. I and II are false.
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. Both I and II are true. Both I and II are false. I is false, and II is true. I is true, and II is false. Statements I and II could either be true or false depending upon demand.
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? It is a more general approach to addressing the negative externality of carbon production than a gas tax or cap-n-trade. A lump sum rebate or reduction in other taxes would help offset the distributional impact of a carbon tax. If the carbon tax is set too high it could shrink total surplus below the starting (inefficient) level. If the carbon tax is set too low it could lead to increased environmental damage.
If the carbon tax is set too low it could lead to increased environmental damage.
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? Optimal price and quantity decrease. Optimal price and quantity decline. Optimal price increases, optimal quantity remains unchanged. Optimal price increases, optimal quantity decreases.
Optimal price increases, optimal quantity decreases.
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? Output increases because the marginal cost curve shifts upward. Output increases to cover the higher input cost. Output decreases because the marginal cost curve shifts upward. Output decreases because the price of pizza must also increase.
Output decreases because the marginal cost curve shifts upward.
Why is there a deadweight loss associated with subsidy payments? Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced. Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them. There is no deadweight loss from a subsidy. The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.
Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
Which is not an example of how innovation and technology can help address market failures? Product warranties/guarantees EZpay tolls and dynamic pricing Online customer reviews Snapchat/Instagram filters
Snapchat/Instagram filters
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? None of the above is necessarily correct. The firm should increase output. This is typical for a monopolist; output should not be altered. The firm should cut output.
The firm should cut output.
When new technologies make cleaner production possible, the quantity of transferable permits falls. the price of transferable permits falls. emissions fees fall. the price of transferable permits rises. emissions fees rise.
The price of transferable permits falls
Politicians have reintroduced a tax on yachts to help pay for government programs. Which of the following is true? Employment of workers in the yacht industry will increase. The sales of yachts will decrease. The profit of yacht manufacturers will increase. The burden of this tax will fall entirely on yacht manufacturers. The burden of this tax will fall entirely on yacht consumers.
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) The total cost of pollution is positive. The total cost of pollution is growing at a positive rate. The total cost of pollution is increasing. The total cost of pollution is growing at an increasing rate. The total cost of pollution is changing.
The total cost of pollution is growing at an increasing rate.
Import tariffs generally result in: less consumer surplus. higher domestic prices. more producer surplus for domestic producers. all of the above a deadweight loss.
all of the above
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? all of the above 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. 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. 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.
all of the above
Refer to Figure 8.4.3 above. When the firm produces the loss-minimizing level of output, it can recover: all of the variable cost and part of the fixed cost. all of the fixed cost and part of the variable cost. all of the variable cost, but none of the fixed cost. neither the fixed nor the variable cost in their totality.
all of the variable cost and part of the fixed cost.
Firms often use patent rights as a: none of the above way to achieve perfect competition. barrier to entry. barrier to exit.
barrier to entry.
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: -close her doors immediately. - continue producing in the short and long run. -continue producing in the short run, but plan to go out of business in the long run. -raise her prices above the perfectly competitive level. -lower her output.
continue producing in the short run, but plan to go out of business in the long run.
At the profit-maximizing level of output, demand is: completely inelastic. elastic, but not infinitely elastic. infinitely elastic. unit elastic. inelastic, but not completely inelastic.
elastic, but not infinitely elastic.
Under perfect price discrimination, consumer surplus: is maximized. equals zero. is less than zero. is greater than zero.
equals zero.
The provision of an education in public school is: nonexclusive and rival. a public good, regardless of exclusivity and rivalness. nonexclusive and non-rival. exclusive and non-rival. exclusive and rival.
exclusive and rival.
The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because: firms will be induced to leave the industry because of artificially high costs. people will buy fewer clothes that need dry cleaning than they otherwise would have. people will develop substitutes for dry cleaning that are wasteful. 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. 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.
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.
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 ________. increases; decreases increases; increases decreases; increases decreases; decreases.
increases; increases
If a monopolist's profits were taxed away and redistributed to its consumers, inefficiency would remain, but not because output would be lower than under competitive conditions. efficiency would be obtained because output would be increased and profits removed. efficiency would be obtained because output would be increased to the competitive level. inefficiency would remain because output would be lower than under competitive conditions.
inefficiency would remain because output would be lower than under competitive conditions.
The burden of a tax per unit of output will fall heavily on consumers when demand is relatively ________ and supply is relatively ________. inelastic; inelastic elastic; elastic inelastic; elastic elastic; inelastic
inelastic; elastic
If any of the assumptions of perfect competition are violated, -graphs with downward-sloping demand curves cannot be used to study the firm. -supply-and-demand analysis cannot be used to study the industry. -graphs with flat demand curves cannot be used to study the firm. - one must use the monopoly model instead.
there may still be enough competition in the industry to make the model of perfect competition usable.
