ECON 202 EXAM 3 Study Questions
In the long run, the entry of new firms in an industry
benefits consumers by forcing prices down to the level of average cost.
A duopolists' dilemma occurs when two firms in a market would be better off if
both choose the high price but instead each chooses the low price.
If two duopolists can collude successfully, then both will
earn greater profits than if they did not collude
Economic costs of production differ from accounting costs in that
economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.
A reason why a perfectly competitive firm's demand for labor curve slopes downward is that
in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns
If a firm shuts down in the short run,
its loss equals its fixed cost.
A public franchise
is a government designation that a private firm is the only legal producer of a good or service.
Which of the following is likely to cause a decrease in the wage rate and an increase in the employment level of a country?
A right shift in the supply curve for labor, without any change in the demand curve for labor
Which of the following is true of a Nash equilibrium?
No player can improve his payoff by changing his strategy once in Nash equilibrium.
Which of the following would cause an increase in the equilibrium wage?
The demand for labor increases faster than the supply of labor.
The substitution effect of a wage increase is observed when
leisure's higher opportunity cost causes workers to take less leisure and work more
If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the
marginal revenue of the sixth performance is $38,000.
Of the factors that are within the control of the firm's owners, the most important factors that make a firm successful are
the differentiation of its products and the production of products at a lower average cost than competing firms.
If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then
new firms are attracted to the industry.
A Nash equilibrium is
reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.
Which of the following is an implicit cost of production?
rent that could have been earned on a building owned and used by the firm
Governments grant patents to encourage
research and development on new products.
A dominant strategy ________.
results in a higher payoff irrespective of the strategy chosen by the other player
A player has a dominant strategy when:
she has only one best response to every possible strategy of the other player.
If an industry introduces a labor-saving technology in production, the demand curve for labor in that industry is likely to:
shift to the left
A best response is ________.
one player's optimal action choice taking the other player's action as given
One reason why adverse selection problems arise in health insurance markets is that
sick people are more likely to want health insurance than healthy people.
In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are
sunk costs
The firm's gain in profit from hiring another worker is
the difference between marginal revenue product and the wage of the worker.
Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy?
the individual who is applying for the health insurance policy
A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both
there are many other suppliers of similar goods or services.
One possible reason as to why consumers respond to sales is that by displaying a "high" regular price and a "low" sale price, sales provide consumers with a reference point to interpret the prices being offered.
true
The most important factor contributing to wage differences in the labor market is differences in the level of education and training among workers.
true
A monopolist's profit-maximizing price and output correspond to the point on a graph
where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.
If a worker can produce 20 units of output which can be sold for $4 per unit, what is the maximum wage that firm should pay to hire this worker?
$80
What is the difference between a public franchise and a public enterprise?
A public franchise grants a firm the right to be the sole legal provider of a good or service. A public enterprise refers to a service that is provided directly to consumers through the government.
In recent years, Amazon has lowered its profits by offering some of its customers free shipping on books and building more warehouses to hold its book inventories. Which of the following explains Amazons actions?
Amazon took these actions to compete more effectively with existing online booksellers.
Which of the following statements is true?
As output increases, average fixed cost becomes smaller and smaller.
Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?
Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.
What is the dominant strategy in the prisoner's dilemma?
Each prisoner confesses because this is the rational action to pursue.
Which of the following statements is false?
Economists consider all costs to be implicit costs
Which of the following correctly identifies a difference between taste-based discrimination and statistical discrimination?
Employers engaging in taste-based discrimination are willing to forego profits, whereas employers engaging in statistical discrimination are trying to enhance profits.
Rob Neyer is a baseball writer for sbnation.com. He has described attending a Red Sox game at Fenway Park in Boston and having a great seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." Source: Rob Neyer, Feeding the Green Monster, New York: iPublish.com, 2001, p.50. What should Rob do?
He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.
Which of the following is true of an extensive-form game?
It involves sequential decision making by the players.
Which of the following statements best describes the economic short run?
It is a period during which at least one of the firm's inputs is fixed.
What is adverse selection?
It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
Which of the following is true of a payoff matrix?
It takes into account all relevant costs and benefits associated with each action of the players.
A firm could continue to operate for years without ever earning a profit as long as it is producing an output where
MR>AVC
An example of a monopoly based on control of a key resource is
Major League Baseball
Which of the following statements is false?
Marginal cost will equal average total cost when marginal cost is at its lowest point
Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit-maximizing outputs?
Marginal revenue is less than price.
Suppose that a firm in a competitive market succeeds in producing a superior product and selling it at a price that generates a large demand. As a result, the firm's market share is almost 100 percent. Meanwhile, other firms are trying to regain their market shares through research and development. Is this firm a monopolist?
No, because it faces potential competition from other companies
Let MP = marginal product, P = output price, and W = wage, then the equation that represents the condition where a competitive firm would hire another worker is
P × MP > W.
Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms?
Restaurants do not sell identical products
Suppose you pre-ordered a non-refundable movie ticket to X-Men: Apocalypse. On the day of the movie you decide that you would rather not go to the movie. According to economists, what is the rational thing to do?
Since the cost of the movie ticket is a sunk cost, it should not influence your decision. Your decision should be based solely on whether you want to see the movie or not
Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?
The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
Which of the following correctly identifies the difference between the demand for labor and the demand for final goods?
The demand for labor is derived from the demand for final goods, whereas the demand for final goods is independent of the demand for labor.
In the legal sector, some practice areas have declined in recent years. For example, personal-injury and medical-malpractice cases have been undercut by state laws limiting class-action suits, out-of-state plaintiffs, and payouts on damages, and securities class-action litigation has declined in part because of a buoyant stock market. How does this affect the market for lawyers?
The demand for lawyers shifts to the left.
What happens to the equilibrium wage and quantity of labor if output price rises?
The equilibrium wage and the equilibrium quantity of labor rise.
Consider the market for opticians. What is likely to happen to the equilibrium wage and quantity of opticians if more and more people turn to laser eye surgery instead of wearing glasses or contact lens?
The equilibrium wage and the equilibrium quantity of opticians fall
Suppose the government grants child care subsidies to mothers entering the labor force. What is likely to happen to the equilibrium wage and quantity of labor?
The equilibrium wage falls and the equilibrium quantity of labor rises
What is always true at the quantity where a firm's average total cost equals average revenue?
The firm breaks even.
Which of the following will happen if a firm in a duopoly with homogeneous products increases its price above its marginal cost once a Nash equilibrium is reached?
The firm will lose all its customers to its rival.
Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen?
The firm will not sell any output
Other things remaining the same, which of the following is likely to cause a decrease in both the wage rate and the number of workers hired in a glass factory?
The introduction of labor-saving technology in the factory
In which of the following markets are buyers likely to have private information?
The market for health insurance
Which of the following is not a characteristic of a perfectly competitive market structure?
There are restrictions on exit of firms
Other things remaining the same, which of the following is likely to happen if there is a decrease in the price of flour products?
There will be a decrease in both the wage rate and the employment levels in the flour industry.
Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements regarding economic surplus in each market structure is true?
Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions, economic surplus is less than under perfect competition and there is a deadweight loss.
The total value to society of having garbage removed is greater than the value of baseball games. Why, then, are baseball players paid more than garbage collectors?
Wages do not depend on total values but marginal values. The marginal revenue product of baseball players exceeds the marginal revenue product of garbage collectors
A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run?
Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000.
Other things remaining the same, which of the following is likely to cause a left shift in the supply curve for labor?
a decrease in population
Which of the following is the best example of a short-run adjustment?
Your local Walmart hires two more associates.
Larry and Mike are equally skilled construction workers employed by the Brown and Root Company. Larry's job is riskier because he typically works on a scaffold 1,000 feet above ground. Larry's higher wage rate is the result of
a compensating differential.
Which of the following is the best example of a perfectly competitive firm?
a corn farmer in Illinois
A price maker is
a firm that has some control over the price of the product it sells.
What is a prisoner's dilemma?
a game in which players act in rational, self-interested ways that leave everyone worse off
An increase in the supply of capital, which is a complement to labor, will lead to
a increase in the demand for labor.
Consider a used car market in which half the cars are good and half are bad (lemons). If buyers are rational, the prices being offered for used cars will result in
a larger proportion of lemons being sold and consequently, producer surplus is increased.
Which of the following would be categorized as an opportunity cost? a. not being able to spend your $10,000 savings if you sink the money in your business b. the cost of purchasing supplies for your house-cleaning business c. the cost of purchasing auto insurance for your dry-cleaning delivery business
a only
A dominant strategy is
a strategy that is the best for a firm no matter what strategies other firms use.
Marginal cost is the
additional cost of producing an additional unit of output.
Which of the following is an example of a way in which an oligopolistic firm can escape the prisoner's dilemma?
advertising that it will match its rival's price
A characteristic of the long run is
all inputs can be varied
Which of the following describes a situation in which a good or service is produced at the lowest possible cost?
allocative efficiency
To maintain a monopoly, a firm must have
an insurmountable barrier to entry
If the demand for labor is unchanged, an increase in the supply of labor will lead to
an increase in the quantity of labor demanded and a decrease in the equilibrium wage.
A decrease in the wage rate causes
an increase in the quantity of labor demanded.
A natural monopoly is most likely to occur in which of the following industries?
an industry where fixed costs are very large relative to variable costs
Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not. Why is this so?
because Microsoft could potentially lose sales if it sets prices indiscriminately
As more output is produced, the marginal product of labor declines
because of the law of diminishing returns.
The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds?
because previously owned diamonds would be a close substitute to newly mined diamonds and would therefore reduce De Beers' market power
In a market with asymmetric information, ________.
buyers and sellers have different information about the good being traded
In the market for health insurance, asymmetric information problems arise because
buyers of health insurance policies always know more about the state of their health than do the insurance companies.
A game in which each player adopts its dominant strategy
could result in nash equilibrium
Customer discrimination occurs when
customers refuse to buy products produced by a racially diverse workforce.
Marginal cost is calculated for a particular increase in output by
dividing the change in total cost by the change in output.
In situations where new technologies are considered substitutes for workers, demand for these workers will ________, resulting in ________ in the equilibrium wage.
decrease; a decrease
Both buyers and sellers are price takers in a perfectly competitive market because
each buyer and seller is too small relative to others to independently affect the market price.
A Nash equilibrium occurs if ________.
each player chooses strategies that are mutual best responses
In a simultaneous move game, ________.
each player has to make his choice without knowing his rival's choice
The Brooks Appliance Store and the Lefingwell Appliance Store (both are located in the same city) each sell an identical washer-dryer pair. The owner of each store considered offering the washer-dryer pair for $700, but decided on a price of $500. If this is a Nash equilibrium we can conclude that
each store owner feared charging the higher price would result in being undercut by the other store charging the lower price.
A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of
economies of scale
If fixed costs do not change, then marginal cost
equals the change in variable cost divided by the change in output.
Anchoring is relating a value to some other known value
even if the second value is irrelevant.
If the demand for labor is unchanged, population growth will increase the supply of labor and increase the equilibrium wage.
false
Technological advancements that increase labor's productivity shift the labor supply curve to the right.
false
The substitution effect of a wage decrease examines the effect of the decrease in wage income on a worker's ability to consume goods and services.
false
In long-run perfectly competitive equilibrium, which of the following is false?
firms earn economic profit
Most economists believe that a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Which of the following factors is not another factor that explains part of this gap?
geographical location
A profit-maximizing monopoly's price is
greater than the price that would prevail if the industry was perfectly competitive.
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers fairness to money, ________.
he will accept the offer if offered an equal share of the money
Compensating differentials are
higher wages that compensate workers for unpleasant aspects of a job
The combined effect (both income and substitution) of a wage increase is that
if the substitution effect outweighs the income effect, the labor supply curve slopes upward, but if the income effect outweighs the substitution effect, the labor supply curve is backward bending.
Which of the following is not part of an oligopolist's business strategy?
independently setting a product's price without consideration of its rivals' pricing policies
Which of the following helps in reducing the problem of adverse selection in health insurance markets?
insurance mandates
A perfectly competitive firm's marginal revenue
is equal to price
Compared to perfect competition, the consumer surplus in a monopoly
is lower because price is higher and output is lower.
The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because
it had control of almost all the available supply of bauxite.
A supplier of an input is unlikely to have bargaining power if
many firms can supply the input
In a natural monopoly, throughout the range of market demand
marginal cost is below average total cost and pulls average total cost downward
A firm's demand for labor curve is also called its
marginal revenue product of labor curve.
The price of a seller's product in perfect competition is determined by
market demand and market supply.
When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell
nothing at all; the firm shuts down.
The basic idea behind moral hazard is that ________.
people tend to take more risks if they do not have to bear the costs of their behavior
A game is called a simultaneous move game if ________.
players choose their actions at the same time
If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of
principal- agent problem
Which of the following describes a situation in which a good or service is produced at the lowest possible cost?
productive efficiency
Sequential games are used to analyze
situations in which one firm acts and other firms respond.
If a typical firm in a perfectly competitive industry is incurring losses, then
some firms will exit in the long run, causing market supply to decrease and market price to rise, increasing profits for the remaining firms.
When expectations cause people to discriminate against a certain group, it is referred to as:
statistical discrimination
In the long run, a perfectly competitive market will
supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.
Discrimination that occurs when people's preferences cause them to discriminate against a certain group is referred to as:
taste based discrimination
The processes a firm uses to turn inputs into outputs of goods and services is called
technology
Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful?
the ability to produce the product at a lower cost
One reason patent protection is vitally important to pharmaceutical firms is
the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly. Patents enable firms to recover costs incurred during this process.
The term "derived demand" refers to
the demand for a factor of production that is derived from the demand for the good the factor produces.
A firm's primary interest when it hires an additional worker is
the extra revenue the firm realizes from hiring that worker.
The income effect of a wage increase is observed when
the higher wage income causes workers to take more leisure and work less.
In perfect competition _________.
the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.
If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce
the moral hazard problem
The labor supply for an industry would decrease if
the percentage of the population from age 16 to 65 decreases.
An individual's labor supply curve shows
the relationship between wages and the quantity of labor that she is willing to supply.
A payoff matrix shows ________.
the return from each action that players can take in a game
The minimum point on the average variable cost curve is called
the shutdown point
If Molly Bee increases her work hours when her wage increases, then
the substitution effect of the wage increase outweighs the income effect
Which of the following factors will not cause the labor demand curve to shift?
the wage rate
In the long run which of the following is true?
there are no fixed costs
If a monopolist's marginal revenue is $35 per unit and its marginal cost is $25, then
to maximize profit the firm should increase output
The basic activity of a firm is
to use inputs to produce outputs of goods and services
Which of the following costs will not change as output changes?
total fixed cost
A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.
true
An increase in the price of grape juice causes an increase in the marginal revenue product of labor used to produce grape juice.
true
Economic costs include implicit costs but not explicit costs.
true
If a firm shuts down in the short run, it avoids its variable cost but not its fixed cost.
true
Scenario: Robert and Alice are participating in a reality show on television. Robert is offered an amount of $500 and told that he can keep the money provided he shares some of it with Alice. Robert can offer Alice as much or as little as he likes, but if Alice rejects his offer, neither of them will get to keep any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Game theory is applicable to oligopoly behavior because oligopolists
use strategic behavior.
The prisoner's dilemma illustrates
why firms will not cooperate if they behave strategically
Women typically earn less than men, even in the same occupation. Which of the following is an explanation for this discrepancy?
women on average have less workforce experience