Econ 1201 Final

(Figure: Perfect Competition and Monopolistic Competition in the Long Run) Use Figure: Perfect Competition and Monopolistic Competition in the Long Run. Which statement is FALSE?

Firms in panel (a) cannot have profits in the long run, but those in panel (b) can.

When economists discuss profit, they mean economic profit. Economic profit is obtained by subtracting which measure of cost from total revenue?

accounting costs and the best opportunity foregone

Sunk costs:

affect economic profit.

Florists in the town of Minerva, Illinois, operate in a monopolistically competitive market. The price in long-run equilibrium for a flower shop is _____, and output is _____, than would be the case for a perfectly competitive firm with an identical production function and cost curves.

higher; lower

Spaghetti and lasagna are substitutes. Holding all other things constant, this means that if the price of spaghetti increases, the demand for:

lasagna will increase.

For a monopolistically competitive firm, marginal cost is _________ in long run equilibrium.

less than price

You run a business producing paintings. This month, your total cost of production is $10,000, your variable cost is $6,000, and you produce 3,000 paintings. It follows that your average _____ cost is _____.

variable; $2

(Figure: Shifts in Demand and Supply III) Use Figure: Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose a wet and sunny year increases the nation's strawberry crop by 20%. Which panel BEST illustrates how this event will affect the market for strawberries?

B

If a demand curve is downward sloping, a decrease in supply with no change in demand will lead to a(n) _____ in the equilibrium quantity and a(n) _____ in the equilibrium price.

decrease; increase

(Figure: Monopolistic Competition in the Market for Couture Clothing) Use Figure: Monopolistic Competition in the Market for Couture Clothing. If the firm shown in the figure maximizes its returns, it will:

earn a positive economic profit.

(Figure: Payoff Matrix for the United States and Canada) Use Figure: Payoff Matrix for the United States and Canada. Suppose that the United States and Canada both produce quinoa, and each country can earn more profit if output is limited and the price of quinoa is high. The dominant strategy for Canada is:

high output.

(Scenario: Jillian's Cupcake Shop) Use Scenario: Jillian's Cupcake Shop. Given the information provided, Jillian's should stop selling cupcakes if her: Scenario: Jillian's Cupcake Shop Jillian runs a cupcake shop where she sells cupcakes for $1 each. She employs five people, each of whom worked a total of 500 hours last year; she paid them $10 per hour. Her costs of equipment and raw materials add up to $75,000. Her business ability is legendary, and other companies have offered to pay Jillian $100,000 to come to work for them. She also knows she could sell her cupcake shop for $150,000. The bank in town pays an annual interest rate of 3% on all funds deposited with it.

implicit costs are greater than her accounting profits.

(Figure: Oligopoly Pricing Strategy in Wireless TV Market II) Use Figure: Oligopoly Pricing Strategy in Wireless TV Market II. The dominant strategy for Supreme Wireless:

is to charge a low price.

Lucille bought some stock 10 years ago that has hovered at half its purchase price over the last 5 years. However, Lucille refuses to sell the stock, thinking that if she waits long enough, she will recover her investment. What type of behavior does this represent?

loss aversion

(Figure: The Cost Curves for Charlie's Cookie Confections) Use Figure: The Cost Curves for Charlie's Cookie Confections. The curve labeled V represents the firm's _____ cost curve.

marginal

The _____ of a good or service is the additional benefit derived from producing one more unit of that good or service.

marginal benefit

(Figure: Monopolistic Competition in the Market for Designer Clothing) Use Figure: Monopolistic Competition in the Market for Designer Clothing. The figure illustrates a firm in the _____; in the _____, the demand and marginal revenue curves will shift to the _____.

short run; long run; left

The larger the output, the more output over which the fixed cost is distributed. Called the _____ effect, this leads to a _____ average fixed cost as output rises.

spreading; lower

A firm's ___________________ are costs that increase as quantity produced increases. These costs often show ___________________ illustrated by the increasingly steeper slope of the total cost curve. A firm's ___________________ are costs that are incurred even if there is no output. In the short run, these costs ___________________ as production increases.

variable costs; diminishing marginal returns fixed costs; do not change

(Figure: The Perfectly Competitive Firm) Use Figure: The Perfectly Competitive Firm. The figure shows a perfectly competitive firm that faces demand curve d and maximizes profit. Given a market price of $3, the firm's total revenue per day is:

$900.

The MAIN reason a monopoly engages in price discrimination is:

to increase its profits.

Someone who you know to be honest and trustworthy comes to you with a business offer. The offer is; he asks you to invest $1,000,000 with him today and in return he will pay you $450,000 after one year, another $450,000 after the second year and another $450,000 after the third year. After three years he has paid you a total of $1,350,000. Which of the following statements would justify you saying yes to this proposition?

The present value of these three payments is greater than $1,000,000

If you are a business owner in a very highly competitive market what could you do to get yourself in a position to be able to increase the price of your product on your own?

Create a brand for your product

The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market.

Equilibrium price increases Equilibrium quantity decreases. Supply shifts left, demand stays same

Lumber and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of lumber increases due to new regulations for the logging industry. Shift one or both curves in the graph to illustrate the impact this change will have on the market for bricks.

Equilibrium price increases Equilibrium quantity increases. Demand shifts right 1, supply doesn't change

Assume that we are looking at a market that has 10 firms, 9 of these firms each have a 5% market share and the tenth firm has the remainder of the market. What is the HHI value and how would you classify this market?

HHI is 3250 and it is a very strong ologopoly situation.

(Figure: Fast Food Profits in Monopolistic Competition III) Use Figure: Fast Food Profits in Monopolistic Competition. The profit-maximizing quantity of output is determined by the intersection at point:

S.

A firm that has the market power to charge different prices to different groups of buyers based on how much they buy, is practicing what degree of price discrimination?

Second degree

One day, a local theme park charges $40 per person for admission, and 10,000 people visit the park. On another day, the park charges $60 per person, and 20,000 people pay to enter the park. Which explanation best describes why the park sees an increase in attendance when the price is higher?

The low-attendance day falls on an autumn Wednesday, while the high-attendance day falls on a summer Saturday.

Edward is tired of graduate school as well as his part-time bartending job. On the spur of the moment, he decides to take a weekend trip to the Cayman Islands for snorkeling. He pays for it with his credit card rather than money from his bank account. Which type of irrational behavior does this BEST describe?

mental accounting

(Figure: Supply and Demand in the Peach Market) Use Figure: Supply and Demand in the Peach Market. The market is in equilibrium at point C. Suppose most people drink peach juice in the afternoon with champagne. What will be the new equilibrium point in the peach juice market if a law banning alcohol passes?

D

Which type of cost does inflation not have an impact on in the long run?

Fixed cost

If there was a merger of Ford Motor Co and Toyota Motor Co this would be called a

Horrizontal Merger

Comparing firms in a perfectly competitive market with a monopoly, what basic differences are there in the long run?

Perfectly competitive firms make 0 economic profit and produce at minimum long run ATC and a monopoly can make economic profit and produce at some point other that minimum long run ATC.

In a perfectly competitive market, if we see a firm suffering an economic loss in the short run and not covering the average variable cost what would we see happen?

The firm would shut down in the short run

If there was a merger of Ford Motor Co and Goodyear Tire Co this would be considered a

Vertical Merger

The price of good X falls and the demand for good Y decreases. We can conclude that:

X and Y are substitutes.

(Figure: Long-Run Average cost for Leila's Light Store) Use Figure: Long-Run Average cost for Leila's Light Store. Leila has _____ in the output region from A to B.

constant returns to scale

A(n) ______ gives an inventor a temporary monopoly on the use or sale of an invention.

patent

Tools the government commonly uses to regulate activities that impact the environment include all the following EXCEPT:

the Environmental Protection Agency Action Plan.

Waterworks Irrigation was a startup that was open for only one year of operation. During that year, it collected $175,000 in revenue and spent $50,000 on trucks, irrigation supplies, employees, and utilities. The owner of the firm, Cosmo, spent $100,000 of his own money to buy an office building and set up the office (instead of buying bonds and earning a 10% annual rate of return), which he later sold at the end of the year for $100,000. The firm's economic profit is:

$115,000.

In a pure Duopoly situation where each firm has equal share of the market, what would be the value of the HHI?

5,000

In a perfectly competitive market, if we see the average firm suffering an economic loss in the short run but covering the variable cost what would we see happen as we move into the long run?

A few firms would leave the market causing the market price to increase and causing the economic loss to decline.

James is one of two producers of doodads in the city of Hooville. Because the industry consists of two firms, he is operating in:

a duopoly.

A market in which there is one buyer is:

a monopsony.

A Pigouvian subsidy is:

designed to encourage activities that generate external benefits.

In which market type will a firm be able to make an economic profit in the long run?

Oligopoly

In the short run, a perfectly competitive firm produces output and earns ZERO economic profit if:

P = ATC.

Gabriella's company produces wet suits for scuba divers. The long-run average total cost of producing 250 wet suits is $56, while the long-run average total cost of producing 270 wet suits is $36. These numbers suggest that between output levels of 250 and 270 wet suits, Gabriella is experiencing:

economies of scale.

The demand for air travel in the tourism industry tends to be relatively ______. Thus, small _____ in air fares will result in relatively _____ in air travel.

elastic; reductions; large increases

Your college roommate has the right to practice her tuba during the day. You, however, find that studying during the day is most conducive to good grades, and her tuba-playing makes it difficult for you to concentrate. You make a deal with your roommate: you will clean the dorm room once a week if she will practice her tuba at other times or elsewhere. This is an example of

the Coase theorem.

When we compare the long run conditions of a Perfectly Competitive firm to the long run conditions of a Monopolistically Competitive firm we see that the Perfectly Competitive firm is

more productive and cost efficient than the Monopolistically Competitive firm

For a firm producing at a quantity of output below the profit-maximizing quantity of output, an increase in output adds:

more to total revenue than to total cost.

For the Texas beef industry to be considered perfectly competitive, each rancher in Texas must have _____ on prices, and beef must be a _____ product.

no noticeable effect; standardized

(Figure: The Market for Designer Boots in Monopolistic Competition II) Use Figure: The Market for Designer Boots in Monopolistic Competition II. Which panel(s) in the figure show(s) a monopolistic competitor in long-run equilibrium?

panel (c) only

The purpose of behavioral economics is to determine why:

people make decisions that appear to be irrational.

Generally, when preferences for a good rise, demand for the good rises. If a perfectly competitive market starts in long-run equilibrium, holding all else constant, this will result in a higher market price, which will lead to _____ in the industry and _____ the market. This causes price to _____.

positive economic profits; attracting new firms into; fall

To encourage consumption of a good that generates a positive externality, the BEST option for policymakers is to:

provide a subsidy to firms for each unit of the good consumed to achieve the socially optimal level of output.

When firms in a particular industry informally agree to charge the same price as the largest firm in that industry, it is called:

tacit collusion.

Each year, around Christmas, you decorate your home so elaborately that news crews come to film stories about your Christmas spirit. As a result, hundreds of people from all over the city drive by your house to see the "Christmas" home, creating noise and congestion that is a nuisance to your neighbors. As they have a right to not be bothered, you agree to pay your neighbors a modest sum to compensate them for the disturbance. This illustrates:

the Coase theorem.

Which market type is known to have many firms, a differentated product and will likely not make a profit in the long run?

Monopolistic Competition

A Pigouvian tax is designed to reduce:

external costs.

(Figure: The Optimal Quantity of Pollution in the Market for Benzene Waste) Use Figure: The Optimal Quantity of Pollution in the Market for Benzene Waste. The figure shows the marginal social cost (MSC) and marginal social benefit (MSB) for firms that pollute the air with benzene fumes. Using the figure, the optimal Pigouvian tax per unit of pollution is:

$167.

(Figure: Monopoly Model in the Market for Electricity) Use Figure: Monopoly Model in the Market for Electricity. When the firm is in equilibrium—maximizing economic profit—its total cost is represented by:

0SBJ.

Janelle loves sashimi. Her first piece of sashimi normally gives her a marginal benefit of $5. Each additional piece yields a marginal benefit that declines by $0.25 per piece. If her favorite sushi bar charges $2.75 per piece of sashimi, how many pieces should she eat?

10

(Figure: Short-Run Costs for Wallets) Use Figure: Short-Run Costs for Wallets. Curve 1 crosses the average variable cost curve at:

3 units of output.

In the cereal market advertising can account for about how much of the retail price of a box of cereal?

30%

(Figure: Marginal Product of Labor for Quinoa Production) Use Figure: Marginal Product of Labor for Quinoa Production. The total product, given six workers, is _____ bushels.

84

(Figure: Profit-Maximization for Fabulous Finn's Flower Firm in the Short Run) Use Figure: Profit-Maximization for Fabulous Finn's Flower Firm in the Short Run. Which statement is TRUE?

AFC is represented by the vertical distance between curve N and curve O at any level of output.

(Figure: Supply of Bananas) Use Figure: Supply of Bananas. A rise in the prices of inputs (e.g., labor, fertilizer, and fuel) used to produce and transport bananas could be represented in the figure as a movement from:

C to A.

Which Antitrust Act toughened restrictions on mergers by prohibiting mergers that would reduce competition?

Cellar-Kefauver Act

In which situation does overt collusion occur?

Coke and Pepsi openly agree on production and price in an effort to achieve monopoly profits.

The efficient rate of emissions occurs when:

MSB = MSC.

(Figure: Pollution and Efficiency in the Market for Coal Fired Electricity) Use Figure: Pollution and Efficiency in the Market for Coal Fired Electricity. In this market, in which carbon dioxide emissions result from production, at a price of $10, ______. In this situation, price will ______ the socially optimal amount of pollution is reached.

MSB > MSC; increase until

(Figure: Short Run and Long Run Profit in Monopolistic Competition) Use Figure: Short Run and Long Run Profit in Monopolistic Competition. In monopolistic competition, long-run equilibrium is characterized by:

P > MR.

(Figure: Computing Monopoly Profits for Exxon Mobile Gas) Use Figure: Computing Monopoly Profits for Exxon Mobile Gas. At the profit-maximizing output, total cost is:

P20QF.

(Figure: Joshua's Lawn Mowing Business) Use Figure: Joshua's Lawn Mowing Business. If Joshua's lawn mowing firm's MR curve is MR2, then the firm's optimal output is _____ units of output, and its economic profit will be _____.

Q2; negative

A firm that has the market power to split their customer base according unique demographics such as students and or senior citizens and is able to prevent arbitrage is practicing which degree of price discrimination?

Third Degree

In a perfectly competitive market, if we see the average firm making an economic profit in the short run what would we see happen as we move into the long run?

We would see new firms enter the market causing the market price and short run economic profits to decrease.

If a perfectly competitive firm is producing a quantity where MC > MR, then profit:

can be increased by decreasing production.

The marginal social benefit of pollution:

is the benefit to society of one more unit of pollution.

Suppose Ben has a part-time business mowing lawns. He has mowed nine lawns on a given day; the marginal benefit of the tenth lawn is $20, and the marginal cost is $12. Bob should:

mow the tenth lawn.

(Figure: CO2 Emissions, MSB and MSC of Pollution) Use Figure: CO2 Emissions, MSB and MSC of Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. If the current level of pollution is Q1, _____ pollution is being emitted because _____.

not enough; MSB > MSC

Janelle owns a small hotel in San Francisco near Fisherman's Wharf. She pays $30,000 per year in insurance, $418,000 in wages, and $43,000 in supplies. She forgoes $30,000 per year she could make as a police officer. Her total revenue last year equaled $560,000. That means her economic _____ equaled _____.

profit; $39,000

The effect of product differentiation is to:

reduce the intensity of competition among firms in an oligopoly.

Super Snacking Services is a typical monopolistically competitive firm. Initially, the market is in long-run equilibrium, and then there is an increase in the market demand for snacks. In the short run, the price of snacks will _____, and the market output of snacks will _____.

rise; rise

(Figure: Demand for Bananas) Use Figure: Demand for Bananas. If bananas are a normal good, an increase in the incomes of consumers could be represented as a:

shift from D1 to D2.

In economic analysis, at the optimal quantity of an activity:

the total benefit exceeds the total cost by the greatest amount, and marginal benefit equals marginal cost.

(Figure: Demand and Supply of Sugar) Use Figure: Demand and Supply of Sugar. Given the initial equilibrium of S1 and D, any price below _____ will exert pressure for the price to _____.

$25; rise

(Figure: Pay Per View Movies on Xfinity Cable) Use Figure: Pay Per View Movies on Xfinity Cable. The figure shows the demand and marginal revenue curves for on-demand movie rentals on Xfinity. Assume that marginal cost and average cost are constant at $20. If the cable company is a monopoly, how much total surplus is there when the monopolist maximizes profit?

$270

Which of the following Antitrust laws dealt with price discrimination that resulted in reducing competition?

The Robinson Patman Act

In relation to the Kinked Demand Curve theory, why would an oligopoly be reluctant to increase the price of it's product on it's own?

The price then would move into the elastic part of the demand curve and revenue would likely fall.

In relation to the Kinked Demand Curve theory, why would an oligopoly be reluctant to decrease the price of it's product on it's own?

The price would then move into the inelastic portion of the demand curve and revenue will likely decrease

Which factor is MOST likely to shift the supply curve for milk to the left?

a tax on each gallon of milk produced

A firm that has the market power to charge each customer their maximum reservation price is practicing what degree of price discrimination?

First degree

In a pure Monopoly situation what would be the value of the HHI?

10,000

Which of the following is not a reason why firms who have market power choose to price discriminate?

All of these 3 other listed options here are reasons why firms choose to price discriminate.

The graph represents the market for soft drinks. Suppose that one of the industry's major suppliers of soft drinks has decided to exit the market to focus on its snack foods. At the same time, the average price of soft drinks has increased and the total amount of soft drink sales has increased. Manipulate the graph to demonstrate these changes in the market for soft drinks.

Increase demand x 2, Decrease supply x 1

Coors is a widely recognized brand name. During the World Series each year, this beer company has many of the most successful ads. Which statement is TRUE about advertising for Coors?

It is designed to increase the demand for Coors.

Which market type is known to have a few firms, high barriers to entry and firms in this market are able to make an economic profit in the long run?

Oligopoly

Ashley Furniture expects its marginal cost curve to eventually slope upward because, as with most production processes, furniture manufacturing has:

diminishing marginal returns.

The eventual increase in AVC as output increases is the _____ effect.

diminishing returns

(Figure: Payoff Matrix for Alex and Sybil) Use Figure: Payoff Matrix for Alex and Sybil. Alex and Sybil are the only producers of frozen yogurt in their town. Every week, each decides how much frozen yogurt to produce for the week. The figure shows the profit per week earned by their two firms. In the game's Nash equilibrium, Alex produces a _____ level of output, and Sybil produces a _____level of output.

high; high

The marginal cost curve intersects the average variable cost curve at:

its lowest point.

Which one of the following sets of circumstances could the existance of economies of scale cause in a market?

Firms merging with and buying out other firms in their markets, thus leading to a reduction in market competition

(Figure: Short-Run Monopoly in the Market for Electricity) Use Figure: Short-Run Monopoly in the Market for Electricity. The profit-maximizing rule is satisfied by the intersection at point:

R.

After three years at the Massachusetts Institute of Technology, Renaud realizes that he doesn't want to finish school but really wants to be a chef. When Renaud mentions that he is considering leaving university for culinary school, his parents insist that he stay for one more year to get his degree. Which statement is TRUE?

Renaud's parents are wrong: the marginal benefit to Renaud of another year of university is less than the marginal cost of university.

Markets for the right to pollute are:

established by governments when they issue tradable pollution permits.

(Figure: The Quantity of Pollution in Coal Production) Use Figure: The Quantity of Pollution in Coal Production. When this economy produces 50 tons of emissions:

it is producing below the socially optimal level of output.

Facebook is subject to network externalities because:

its value to an individual increases when the number of other people using it increases.

(Figure: The Market for Designer Boots in Monopolistic Competition IV) Use Figure: The Market for Designer Boots in Monopolistic Competition. A positive economic profit will be earned if the profit-maximizing price is _____ in panel _____.

F; (A)

(Figure: Efficiency and Pollution in the Market for Vehicle Emissions) Use Figure: Efficiency and Pollution in the Market for Vehicle Emissions. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. If the government imposed an environmental standard that did not allow the quantity of pollution to exceed 20 tons, there would be:

too little pollution because the marginal social benefit would exceed the marginal social cost.

Which of the following Antitrust laws prohibited firms from buying the stock of it's rivals and prohibited directors from serving on the boards of competing firms?

The Clayton Act

Suppose the GoLogos logo monopoly is broken up. and the logo industry becomes perfectly competitive. We would expect _____ surplus to increase and _____ surplus to decrease after the breakup.

consumer and total; producer

(Figure: Shifts in Demand and Supply II) Use Figure: Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose excessive rainfall destroys one-third of the nation's radish crop. Which panel BEST illustrates how this will affect the market for radishes?

C

During the Obama administration, the development of low‑cost batteries for electric cars received large amounts of federal funding via subsidies. Meanwhile, American households gave a higher priority towards minimizing their environmental impact. Consider the market for zero‑emissions electric vehicles, where there is an upward‑sloping supply curve and a downward‑sloping demand curve. In which direction will demand and supply shift? What will happen to the equilibrium price?

Both curves will shift right The price will change ambiguously

(Figure: The Existential Monopolist) Use Figure: The Existential Monopolist. If this market became perfectly competitive, total market output in the long run would be _____ units, and the market price would be _____.

Q3; P3

Which one of the following statements about recent oil prices is true?

Since the beginning of 2021 the world price of oil has more that doubled

Classify each of the scenarios as an "either-or" decision or a "how much" decision.

a. After graduation from law school, Frank is offered one job in Chicago and another in New York. Where should Frank work? Either-or decision b. Jake needs to stay awake while he studies for his midterm tomorrow. What quantity of coffee should Jake drink? How much decision c. Bella is accepted to four graduate school programs. Where should she go to school? Either-or decision d. Marvin arrives at his favorite buffet to eat Chinese food. Sometimes, he overeats and leaves the buffet with a stomach ache. How much decision

Everything Looks Like a Nail, Inc. is a manufacturing company that produces hammers. The company faces various fixed and variable costs in the short run. Determine which of Everything Looks Like a Nail's costs are fixed costs and which are variable costs. Assume the company cannot easily adjust the amount of capital that it uses and that salaries are negotiated only once per year.

a. Postage and packaging costs: variable cost. b. Lease on building: fixed cost. c. Cost of wood used in manufacturing: variable cost. d. Industrial equipment costs: fixed cost. e. Interest on current debt: fixed cost. f. Liability insurance costs: fixed cost. g. Cost of metal used in manufacturing: variable cost. h. Annual salaries of top management: fixed cost.