ECON 102 - Exam 3 (Final) part 2
Which of the following are key results of price discrimination?
profits increase and consumer surplus decreases
Farmer Parker's profit-maximizing level of production is 6 bushels of wheat. At this level of production he produces following the rule Marginal Revenue = Marginal Cost and earns the maximum possible profit of $8.00. Farmer Parker's fixed costs are (see image 12)
$1.00
Farmer Brown grows blackberries. The average total cost, average variable cost, and marginal cost of growing blackberries for an individual farmer are illustrated in the graph to the right. Farmer Brown will incur losses if the market price falls below () per crate. Furthermore, farmer Brown should shut down in the short run if the market price falls below () per crate. See image 14
$24, $20
Elijah's burgers (image 21)
(image 21)
In the graph on the right, the demand for hamburger buns has changed because the price of hamburgers has risen from $2.50 to $2.60 per package. The cross-price elasticity of demand between hamburgers and hamburger buns is
-10.20 (see image 18)
The graph to the right depicts the demand for cable subscriptions from a local cable company along with the average total cost and marginal cost of producing cable subscriptions. Suppose the local cable company is a monopoly. What is the profit-maximizing quantity of cable subscriptions? (image 17
32
What is the corresponding profit-maximizing price (image 17)
32.00
Maria manages a bakery, that specializes in ciabatta bread, and has the following information on demand and costs: (see image 19)
5, 3.50, 1.50, 1.50, 1.50
Suppose that fixed costs increase by $0.50. Farmer Parker's new profit-maximizing level of production after the increase in fixed costs is () bushels of wheat.
6
The amount of profit that Farmer Parker will earn after the increase in fixed costs is
7.50
Calculate the local cable company's profits (image 17)
96 thousand per month
The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Part 2 Graphically, the marginal cost curve is
A U shape, initially falling when the marginal product of labor is rising then eventually rising when the marginal product of labor is falling
An example of technological change is
A firm rearranging the factory floor to increase production, workers going through a training program, and/or a hurricane damaging firm facilities
Unlike its competitors, GoGo had to spend substantial amounts to build a network of ground-based cellular towers. It has to abandon those towers as it switches to a satellite-based network. Is the cost of those towers a disadvantage to GoGo as it competes with the new firms entering the industry? Briefly explain. In economic decison-making, the cost of the original towers is
A sunk cost that is irrelevant
What is price discrimination? Part 2 Price discrimination is when
A. firms charge a higher price to customers whose demand is less elastic and a lower price to consumers whose demand is more elastic. B. firms charge a higher price for a product when it is first introduced and a lower price later. C. firms charge each consumer a different price equal to that consumer's willingness to pay. (all of the aboce)
With a downward-sloping demand curve, average revenue is equal to price
Actually, average revenue is always equal to price, whether demand is downwards sloping or not
The late Nobel Laureate James Buchanan, who is one of the key figures in developing the public choice model, wrote: "The relevant difference between markets and politics does not lie in the kinds of values/interests that persons pursue, but in the conditions under which they pursue their various interests." Source: James M. Buchanan, "The Constitution of Economic Policy," American Economic Review,Vol. 77,No. 3, June 1987, p.246. Do you agree with this statement? Are there significant ways in which the business marketplace differs from the political marketplace?
Agree. Although both marketplaces are driven by self-interested behavior, self interest (e.g., rent seeking) in the political marketplace benefits a few at the expense of many, while self interest in the business marketplace benefits society as a whole.
In the book publishing industry, how are firms able to price discriminate across time?
An author's most devoted book fans want to buy the author's books as soon as they are published
The public choice model
Applies economic analysis to government decision making
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.50 per kilogram, and his marginal cost of production is $1.55 per kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short run? Farmer Lane
Can increase his profit by producing less output
Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $7,000, buys gasoline ($1.70 in gas is required to mow each yard), and pays a helper $15.00 per yard. Prior to opening the lawn company, Charles earned $5,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 2 percent per year in the bank and that the mowing equipment depreciates at 25 percent per year. Charles plans to mow 200 yards per year. What is Charles's implicit cost of production?
Charlie's implicit cost of production is $6,890 per year (depreciated value, lost interest, and lost wages)
Farmer Brown grows cotton. The average total cost and marginal cost of growing cotton for an individual farmer are illustrated in the graph to the right. Assume the market for cotton is perfectly competitive and that the market price is $28 per bushel. Also assume that farmer Brown is producing the amount of cotton that maximizes profits. Use the rectangle drawing tool to shade in farmer Brown's profit. Properly label this shaded area.
DxMC, vert. meeting ATC, back to 0 (see image 13)
In 2008, GoGo became the first company to offer Wi-Fi service on commercial aircraft. It provides the service primarily through ground-based cellular towers. Many air travelers find the $30 price GoGo charges on a cross-country flight to be very high because the speeds offered are too slow to stream movies or other content. GoGo faces competition from newer services that use satellites rather than ground-based towers, which enables them to offer much higher speeds at half the price GoGo charges. According to an article in the Wall Street Journal, in late 2016, GoGo was "rolling out an advanced satellite-based network" that would allow it to offer higher speeds at a lower price. A number of airlines, though, were considering switching to competing services. Source: Thomas Gryta and Andy Pasztor, "Gogo Plans to Speed Up In-Flight Internet Service...in 2018," Wall Street Journal, September 28, 2016. Will copying its competitors by offering a faster, lower-priced service likely allow GoGo to recapture its market share?
GoGo may be able to recapture some of its market share by offering a better product.
Using the admission fees as a guide, rank these groups based on their elasticities of demand from most to least elastic.
Higher fees = less elastic
Consider the production of pizza. The average total cost and average variable cost of producing pizza are illustrated in the graph to the right. Use the four-point curve drawing tool to graph the marginal cost of producing pizza. Properly label this curve.
Image 11
Describe a monopoly's demand curve. A monopoly's demand curve
Is the same as the demand curve for the product
The monopoly's profit-maximizing quantity is that quantity where
MR = MC
To maximize profit, a monopolistically competitive firm produces output up to the point where
MR=MC
If a market is a monopoly, will a negative externality in production always lead to production beyond the level of economic efficiency?
No, a monopoly may produce an inefficiently high or low level of output in the presence of a negative externaility.
"In a perfectly competitive market, in the long run consumers benefit from reductions in costs, but firms don't." Don't firms also benefit from cost reductions because they are able to earn greater profits?
No, because short run profits encourage entry, firms earn zero economic profit in the long run
briefly discuss the difference between these two concepts
Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
1.) Use the point drawing tool to Indicate the profit-maximizing level of output and price. Label this point 'Point A'. 2.) Use the rectangle drawing tool to shade in economic profitsLabel this shaded area 'Profit'.
See image 16
The figure illustrates the market for apples in which the government has imposed a price floorLOADING... of $10 per crate.
See image 19
The production possibilities frontiers in the figure to the right show how many bananas and coconuts you (Y) and your neighbor (N) can consume without trade. Suppose you are initially consuming 15 bananas and 2 coconuts and your neighbor is initially consuming 6 bananas and 8 coconuts.
See image 23
Xavier is an accountant who provides tax services through his own firm. To provide these services he must rent an office for $14,000 per year, hire a secretary for $26,000, and spend $7,000 per year in advertising. Xavier's total revenue from his tax services is $79,000 per year. Suppose Xavier's firm is in a perfectly competitive industry and that he could otherwise earn $32,000 per year working as an accountant in another firm. Assuming Xavier's profits are representative of the industry, describe what will likely happen to Xavier's profits in the long run.
Xavier is breaking even and should continue to produce to continue breaking even in the long run
What is the difference between zero accounting profit and zero economic profit?
Zero economic profit includes a firm's opportunity costs but zero accounting profit does not.
Logrolling refers to the situation where
a member of Congress votes to approve a bill in exchange for favorable votes from other members on other bills.
Which of the following industries uses sophisticated methods to calculate the price of each unit sold each day?
airlines
With a downward-sloping demand curve, marginal revenue is below price
because the firm must lower its price to sell additional units.
Your company incurs a cost for store rent, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of
becomes a variable cost
A change like this is more likely to be enacted if those that
benefit have a significant political influence
Suppose that eliminating tax preferences for industries in districts of members of Congress supporting the provisions would increase the federal governments tax receipts by $1 trillion, which could then be used to lower the tax rates of the individual income tax. Such a change would likely
benefit the economic interests of a larger group
There are about 400 wineries in California's Napa Valley. Suppose the owner of one of the wineries—Jerry's Wine Emporium—raises the price of his wine by $5.00 per bottle. Part 2 If the industry is perfectly competitive, the reaction of consumers would be to
buy wine from another winery
Rent seeking can be useful in understanding why government policies
sometimes produce results that are inefficient and harmful to the people.
if the industry is monopolistically competitive, the reaction of consumers
could be to remain loyal to Jerry's and pay the higher price
The profit-maximizing price for the profit-maximizing quantity is determined by the curve.
demand
What is "natural" about a natural monopoly? A natural monopoly
develops automatically due to economies of scale
The firm's profit can be represented by a rectangle with a base equal to the quantity produced and a height equal to the
difference in price and average total cost
If consumers cannot resell products, which of the following is true?
firms can practice price discrimination
The generation of electric power would not be a natural monopoly because
generation can be done in various ways and in various locations, so there are no inefficiencies associated with multiple providers.
What is meant by allocative efficiency? Allocative efficiency is when every good or service
is produced up to the point where price equals marginal cost
Suppose Farmer Smith grows apples. The entire market for apples is shown in the figure below. Assume the market for apples is perfectly competitive draw a demand curve for farmer Smith's apples
horizontal line at equilibrium price
What characterizes perfectly competitive markets? Perfectly competitive markets have
identical products sold by all firms
The points Smith raises—most farm subsidies go to a small percentage of high income farmers—are
inconsistent with the stated purpose of the agricultural programs because the programs are not supporting most farm families.
One possible effect of advertising is to
increase profits by making the demand curve for the product more inelastic.
As of 2019, the U.S. Department of Agriculture (USDA) did not have detailed guidelines for egg farmers to follow before they could claim that the eggs they sell were laid by cage-free chickens. Some animal rights activists were pushing for the USDA to enact stricter guidelines than many egg farmers were following voluntarily. Such guidelines would be likely to significantly raise the cost of producing cage-free eggs. Suppose that the USDA begins to require these stricter guidelines. What effect will this increase in cost have on the long-run price of cage-free eggs? In the long run, will the quantity of cage-free eggs be larger, smaller, or the same as it would have been without the USDA adopting the guidelines? Briefly explain. With the stricter guidelines, other things equal, the market price of cage-free eggs would () as the minimum long-run average cost (). At the new market price, the long-run equilibrium quantity will be ().
increase, increases, smaller
When the price of a product changes
it changes the relative price of the product causing a substitution effect and at the same time it changes the purchasing power of the buyer causing an income effect as well.
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... [is] that it is unrealistic." Source: George Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy, Vol. 55, No. 1, (February 1957), pp. 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
When lettuce prices doubled, from about $1.65 per head to about $3.30, the reaction of one consumer was quoted in a newspaper article: "I will not buy [lettuce] when it's $3.30 a head," she said, adding that other green vegetables can fill in for lettuce. "If bread were $5 a loaf we'd still have to buy it. But lettuce is not that important in our family." Source: Justin Bachman, "Sorry, Romaine Only," Associated Press, March 29, 2002. For this consumer's household, which product has the higher price elasticity of demand bread or lettuce?
lettuce
The same article notes that: "Rent-seeking is a very useful concept to have around when thinking about policy." Rent seeking is
lobbying or bribing poiticians to gain favorable legislation or regulations.
According to your graph, when producing at lower cost, the profit-maximizing price is
lower
The programs persist because farmers receiving subsidies are the
most politically active
The following questions are about long-run equilibrium in the market for cage-free eggs. Source: Rachel Krantz, "'Wild-Caught,' 'Organic,' 'Grass-Fed': What Do All These Animal Welfare Labels Actually Mean?" vox.com, January 30, 2019. As described in the chapter opener, the market for cage-free eggs in 2019 was
moving toward long-run equilibrium where cage-free chicken farmers would break even because the profitability of selling cage-free eggs was declining, but it was not yet at this point.
Public choice theory helps us to understand how government could fail systematically because it recognizes that policymakers are
no different than consumers or managers of firms and are likely to pursue their own self-interest, even if their self-interest conflicts with the public interest.
In a magazine article, a writer explained that the provision of electric power in the United States consists of two processes: the generation of electricity and the distribution of electricity. The writer argued that, "power distribution is a natural monopoly...But...there's...no reason why the people who generate the electricity...should be the same people who own the power lines." Source: Tim Worstall, "Which Should We Have: Public Utilities or Regulated Private Monopolies?" Forbes, March 24, 2013. The distribution of electric power might be a natural monopoly because
only one distribution network is needed to transmit the power.
An article in the Economist on the work of the late Nobel Laureate James Buchanan made the following observation: "It was important... to understand the ways that government could fail systematically." Source: "Don't Hate the Player, Hate the Game," Economist, January 17, 2013. In this context, government failure means
politicians making bad decisions for their own selfish reasons
For this consumer's household, is the cross-price elasticity of demandLOADING... between lettuce and other green vegetables positive or negative:
positive
Why would Foot Locker's CEO emphasize that the store will have "definitive brands and experiences?" Wouldn't trying to be "everything to everybody" be a better strategy because the store might attract a larger number of customers? Briefly explain. For a monopolistically competitive firm, such as Foot Locker, the best strategy to earn economic profits is
product differentiation because that results in a downward-sloping demand curve.
Karls firm illustrates (image 15)
productive efficiency because price equals ATC and allocative efficiency because MR=MC
In arguing that the costs of the federal government's agricultural programs exceed their benefits, economist Vincent H. Smith stated, "The 10% to 15% of farm families that receive more than 85% of all farm subsidies—amounting to millions of dollars a year in a few cases—have annual household incomes many times as large as those of the average U.S. taxpayer." According to the U.S. Government Accountability Office these programs cost taxpayers about $20 billion annually. Source: Vincent H. Smith, "Should Washington End Agriculture Subsidies?" Wall Street Journal, July 12, 2015. The stated purpose of the federal government's agricultural programs is to
provide income security for farmers so they can continue to produce
Suppose a firm, like Comcast Cable, spends a great deal of money to convince a local government that it should be the only cable provider of a region. Or a union, like the UAW, spends a great deal of money lobbying the government to create legislation granting unions special bargaining rights. These examples are created by
rent seeking
After the exit of Sports Authority, what happens to Foot Locker's demand and marginal revenue curves? The demand and marginal revenue curves shift
right
A student argues, "If a monopolist finds a way of producing a good at lower cost, he will not lower his price. Because he is a monopolist, he will keep the price and the quantity the same and just increase his profit." Do you agree? P Use the line drawing tool to graph a new marginal cost curve reflecting the lower cost of production. Label this line 'MC2'.
same slope but lower than MC1
Suppose the figure to the right represents the market for a particular brand of soap such as Zest, Dove, or Ivory. see image 20
see image 20
See image 22 Suppose Angelica opens a small store near campus, selling beef brisket sandwiches. Use the graph to the right, which shows the demand and cost for Angelica's beef brisket sandwiches, to answer the questions that follow.
see image 22
Under what circumstances can a firm successfully practice price discrimination? Part 5 To successfully practice price discrimination,
some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.
The economic profit is equal to
the difference in price and long-run average cost multiplied by the quantity produced.
In the long run in the market for cage-free eggs, we would expect
the equilbrium price to decrease and the equilibrium quantity to increase, as more firms enter.
How are prices determined in perfectly competitive markets In perfectly competitive markets, prices are determined by
the interaction of market demand and supply because firms and consumers are price takers.
Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic well-being to society in these markets? Part 2 Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that
they are able to purchase a differentiated product that more closely suits their tastes
productive efficiency is
when a good or service is produced at the lowest possible cost
Suppose that last semester your semester GPA was 1.60 and your resulting cumulative GPA was 2.63. Next, suppose that this semester your semester GPA will be 2.10. If so, then your cumulative GPA
will decrease because your "marginal" GPA will be below your cumulative GPA.
Which of the following is a result of perfect price discrimination?
zero consumer surplus
The graph at right represents the situation of Karl Kumquats, a kumquat grower. Karl is earning (image 15)
zero economic profit but could have a positive accounting profit