ECON exam 3
The increase in total surplus resulting from trade is
$1,280, since consumer surplus increases by $3,520 and producer surplus falls by $2,240.
Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. As a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is
$120.
Jacklyn carves ice sculptures. She carves and sells 10 sculptures. Her average cost of production per sculpture is $50. She sells each sculpture for a price of $150. Jacklyn's total revenues are
$1500
Taking into account private and external benefits, the total surplus to society at the socially efficient quantity is
$18
If Ernesto cleans Erin's house for $90, Ernesto's producer surplus is
$20
Both the demand curve and the supply curve are straight lines. At equilibrium, consumer surplus is
$48.
Billie Jo values a stainless steel dishwasher for her new house at $500, but she succeeds in buying one for $425. Billie Jo's willingness to pay for the dishwasher is
$500
If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market?
$625
The slope of the curve between points A and B is
-5
Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70. Using the midpoint method, the cross-price elasticity of demand is about
1.2, and X and Y are substitutes.
If a 15% increase in price for a good results in a 20 percent decrease in quantity demanded, the price elasticity of demand is
1.33
In January, the price of dark chocolate candy bars was $2.00, and Willy's Chocolate Factory produced 80 pounds. In February, the price of dark chocolate candy bars was $2.50, and Willy's produced 110 pounds. In March, the price of dark chocolate candy bars was $3.00, and Willy's produced 140 pounds. Using the midpoint method, the price elasticity of supply of Willy's dark chocolate candy bars was about
1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from $2.50 to $3.00.
Assume that Aruba and Iceland each has 80 labor hours available. If each country divides its time equally between the production of coolers and radios, then total production is
60 coolers and 18 radios
Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15 percent, then the quantity supplied of cheese will increase by
9 percent in the short run and 21 percent in the long run
Which of the following is not a barrier to entry in a monopolized market?
A single firm is very large
Which of the following is not an argument put forth by economists in support of the use of advertising?
Advertising provides a creative outlet for artists and writers.
Which of the following statements is true?
All costs are variable in the long run
If scientists discover that steamed milk, which is used to make lattés, prevents heart attacks, what would happen to the equilibrium price and quantity of lattés?
Both the equilibrium price and quantity would increase
Which of the following would not be considered a private good?
Cable TV service
Which of the following is not a characteristic of a competitive market?
Firms generate small but positive economic profits in the long run.
Implicit or explicit cost? The rental income Paolo could receive if he chose to rent out his showroom
Implicit Cost
Implicit or explicit cost? The salary Paolo could earn if he worked as an accountant
Implicit Cost
Which of the following statements about price and marginal cost in competitive and monopolized markets is true?
In competitive markets, price equals marginal cost; in monopolized markets, price exceeds marginal cost
Which of the following explains why, from society's standpoint, cooperation among oligopolists is undesirable?
It leads to output levels that are too low and prices that are too high.
For which pairs of goods is the cross-price elasticity most likely to be positive?
Pens and pencils
Which of the following statements about price discrimination is not true?
Perfect price discrimination generates a deadweight loss
Which of the following movements would illustrate the effect in the market for golf balls of an increase in green fees?
Point C to Point B
If you have a ticket that you sell to the group in an auction, what will be the selling price?
Slightly more than $50
Which of the following is not a commonly-advanced argument for trade restrictions?
The efficiency argument
What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce them?
The equilibrium price would decrease, and the equilibrium quantity would increase.
Which of the following is true for a monopolistically competitive firm in the long run?
The firm earns zero economic profits and creates a deadweight loss.
Which of the following will cause an increase in producer surplus?
The price of a substitute increases
Suppose that Abigail and Betsy are the only two producers in a market, and Abigail is producing 30 units and Betsy is producing 40 units. When Abigail is producing 30 units, Betsy maximizes her profit by producing 50 units, and when Betsy produces 40 units, Abigail maximizes her profit by producing 40 units. When Abigail produces 30 units and Betsy produces 40 units.
They could be colluding, but they are not in a Nash equilibrium.
In a monopoly market, which of these occurs when marginal revenue equals zero?
Total revenue is maximized.
Which of the following statements comparing monopoly with competition is correct?
With perfect price discrimination, the total surplus under monopoly can be the same as under competition.
Which of the following changes would not shift the supply curve for a good or service?
a change in the price of the good or service
As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more like
a competitive market
The movement from point A to point B on the graph is caused by
a decrease in price
The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that
a monopolistically competitive firm faces a downward-sloping demand curve for its differentiated product and so does a monopolist.
A firm has to be most concerned about the price effect when the market is
a monopoly
Using government regulations to force a natural monopoly to charge a price equal to its marginal cost will
cause the monopolist to exit the market
Which of the following represents a measure of the level of competition in an industry?
concentration ratio
Each unit of plastics that is produced results in an external
cost of $8.
Which of the following products is least likely to be sold in a monopolistically competitive market?
cotton
A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax decreases producer surplus by $600 per day, generates tax revenue of $1,220 per day, and decreases the equilibrium quantity of potato chips by 120 bags per day. The tax
creates a deadweight loss of $15 per day.
An increase in the price of a good will
decrease quantity demanded.
Suppose the government imposes a 50-cent tax on the sellers of packets of chewing gum. The tax would
discourage market activity.
For a competitive firm, marginal revenue is
equal to the price of the good sold.
The purpose of antitrust laws is to
increase competition in an industry by preventing mergers and breaking up large firms
If marginal revenue exceeds marginal cost, a monopolist should
increase output
If, holding the supply curve fixed, there were an increase in demand that caused the equilibrium price to increase from $6 to $7, then sellers' total revenue would
increase.
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it
increased production.
The tariff
increases producer surplus by the area C and decreases consumer surplus by the area C + D + E + F.
When the price ceiling is enforced in this market, and the supply curve for gasoline shifts from S 1 to S 2 , the resulting quantity of gasoline that is bought and sold is
less than Q3.
When an oligopolist individually chooses its level of production to maximize its profits, it charges a price that is
less than the price charged by a monopoly and more than the price charged by a competitive market.
A monopolistically competitive firm
operates with a deadweight loss since price is greater than marginal cost.
A good is excludable if
people can be prevented from using it.
In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes
profits and firms enter the market.
Suppose the federal government doubles the gasoline tax. The deadweight loss associated with the tax
quadruples.
What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages?
quantity will fall, and the effect on price is ambiguous
Suppose an oligopolist individually maximizes its profits. When calculating profits, if the output effect exceeds the price effect on the marginal unit of production, then the oligopolist
should produce more units
One way a firm can indicate the quality of a good is by
spending large amounts on celebrity endorsements.
Cengage Learning is a monopolist in the production of your textbook because
the government has granted Cengage Learning exclusive rights to produce this textboo
Taxes on l abor taxes may distort labor markets greatly if
the number of hours many part-time workers want to work is very sensitive to the wage rate.
The inefficiency associated with monopoly is due to
underproduction of the good.
Jerome says that he will spend exactly $25 each month on new apps for his mobile device, regardless of the price of apps. Jerome's demand for apps is
unit elastic
If an input necessary for production is in limited supply so that an expansion of the industry raises costs for all existing firms in the market, then the long-run market supply curve for a good could be
upward sloping
A grocery store should close at night if the
variable costs of staying open are greater than the total revenue due to staying open
If a firm produces nothing, _____ costs are zero, and the firm will incur _____ costs.
variable; fixed
If regulators break up a natural monopoly into many smaller firms, the cost of production
will rise
Which of the following is true with regard to monopolistically competitive firms' scale of production and pricing decisions? Monopolistically competitive firms produce
with excess capacity and charge a price above marginal cost
The deadweight loss associated with this tax amounts to
$80, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades between buyers and sellers.
When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is
0.67, and an increase in price will result in an increase in total revenue for good A.
Let QMARKET represent the equilibrium quantity of gasoline, and let QOPTIMUM represent the socially optimal quantity of gasoline. Which of the following inequalities is correct?
1,000 < QOPTIMUM < QMARKET
In the absence of trade, total surplus in the Guatemalan coffee market amounts to
1,650
For the economy as a whole, what percentage of firm revenue is spent on advertising?
2 percent
Suppose the cost to build the park is $24 per acre. How many acres should the park be to maximize total surplus from the park in Springfield?
3 acres
If the production possibilities frontier shown is for 24 hours of production, then how long does it take Brazil to make one pound of peanuts?
3 hours
If the production possibilities frontier shown is for two months of production, then which of the following combinations of peanuts and cashews could Brazil produce in two months?
3 pounds of peanuts and 150 pounds of cashews
The socially optimal quantity of output is
420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller of the 420th unit.
Which of the following statements about models is correct?
Models assume away irrelevant details
Which of the following is true regarding perfectly competitive firms and monopolistically competitive firms?
Monopolistically competitive firms operate where price is greater than marginal cost.
A situation in which oligopolists interacting with one another each choose their best strategy given the strategies that all the other oligopolists have chosen is known as a
Nash equilibrium
For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
The good is a luxury.
Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly?
The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run.
Marvin's Motors is a monopoly provider of automotive service in the small town of Nowhere. When Marvin reduces his price for oil changes from $25 to $20, he sells 10 additional oil changes per month and his total revenue increases by $40. Which of the following statements is correct?
The output effect is stronger than the price effect.
Which of the following events would cause a movement upward and to the right along the supply curve for mangos?
The price of mangos rises.
When regulators use a marginal-cost pricing strategy to regulate a natural monopoly,
The regulated monopoly will experience a loss. The regulated monopoly may rely on a government subsidy to remain in business. The regulated monopoly will experience a price below average total cost.
Which of the following is not a determinant of the price elasticity of demand for a good?
The steepness or flatness of the supply curve for the good
Which of the following scenarios is consistent with the Laffer curve?
The tax rate is 99 percent, and tax revenue is very high.
Suppose an economy produces two goods, food and machines. This economy always operates on its production possibilities frontier. Last year, it produced 1,000 units of food and 47 machines. This year it experienced a technological advance in its machine-making industry. As a result, this year the society wants to produce 1,050 units of food and 47 machines. Which of the following statements is correct?The technological advance reduced the amount of resources needed to produce 47 machines, so these resources could be used to produce more food.
The technological advance reduced the amount of resources needed to produce 47 machines, so these resources could be used to produce more food.
Assume that John and Jane each work 24 hours. What happens to total production if instead of each person spending 12 hours producing each good, Jane spends 21 hours producing wine and 3 hours producing bread and John spends 3 hours producing wine and 21 hours producing bread?
The total production of bread and wine each rise
Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?
They are equal.
Which of the following is not a typical solution to the "Tragedy of the Commons?"
Turning the common resource into a club good
Which of the following is an example of a normative, as opposed a to positive, statement?
Universal healthcare would be good for U.S. citizens
Which of the following is a variable cost in the short run?
Wages paid to factory labor
Which of the following firms has the least incentive to advertise?
a wholesaler of crude oil
If a surplus exists in a market, then we know that the actual price is
above the equilibrium price, and quantity supplied is greater than quantity demanded.
If there are implicit costs of production,
accounting profit will exceed economic profit
Which of the following is not put forth as a criticism of advertising and brand names?
advertising increases competition, which causes unnecessary bankruptcies and layoffs
If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause
an increase in the number of firms in the market but no increase in the price of the good
The market for hand tools (such as hammers and screwdrivers) is dominated by Black & Decker, Stanley, and Craftsman. This market is best described as
an oligopoly
If the demand for a product increases, then we would expect equilibrium price
and equilibrium quantity both to increase
When a tax is placed on the sellers of cell phones, the size of the cell phone market
and the effective price received by sellers both decrease.
Laws that make it illegal for firms to conspire to raise prices or reduce production are known as
antitrust laws.
Defenders of the use of brand names argue that brand names
are useful even in socialist economies such as the former Soviet Union give firms incentive to maintain high quality. provide information about the quality of the product.
The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could
auction off a limited number of sheep-grazing permits
In the long run, some firms will exit the market if the price of the good offered for sale is less than
average total cost
The efficient scale of production is the quantity of output that minimizes
average total cost
When marginal costs are below average total costs,
average total costs are falling
If marginal costs equal average total costs,
average total costs are minimized
A firm produces 500 units of output at a total cost of $1,500. If total variable costs are $500, then
average variable cost is $1
If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will
be U-shaped
Collusion is difficult for an oligopoly to maintain
because antitrust laws make collusion illegal. because, in the case of oligopoly, self-interest is in conflict with cooperation. if additional firms enter of the oligopoly.
One source of inefficiency in monopolistic competition is that
because price is above marginal cost, some units are not produced that buyers value in excess of the cost of production and this causes a deadweight loss.
If a production function exhibits diminishing marginal product, its slope
becomes flatter as the quantity of the input increases
If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve
becomes steeper as the quantity of output increases.
A monopolistically competitive firm operates
below the efficient scale creating excess capacity in the long run.
When a monopolist produces an additional unit, the marginal revenue generated by that unit must be
below the price because the price effect outweighs the output effect
George Stigler expressed concern about the trade-offs between market failure and political failure in the American economy. This concern supports which of the following solutions that policymakers can take to respond to the problem of a monopoly?
do nothing
The monopolist's supply curve
does not exist.
If a competitive firm doubles its output, its total revenue
doubles
Total output in an economy increases when each person specializes because
each person spends more time producing that product in which he or she has a comparative advantage.
In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience
economies of scale
When small changes in price lead to infinite changes in quantity demanded, demand is perfectly
elastic, and the demand curve will be horizontal.
Implicit or explicit cost? The wages and utility bills that Paolo pays
explicit cost
Implicit or explicit cost? The wholesale cost for the boats that Paolo pays the manufacturer
explicit cost
Accounting profit is equal to total revenue minus
explicit costs.
t or F: In the long run in a monopolistically competitive market firms can earn positive economic profits.
false
t or f: An example of an explicit cost is forgone interest payments when the money is invested in one's business.
false
t or f: Economists believe that retail price maintenance is detrimental to society, whereas predatory pricing may in fact be beneficial.
false
t or f : In 1983, Robert Crandall, president of American Airlines, and Howard Putnam, president of Braniff Airways, successfully colluded to raise air fare by 20%.
false because of the sherman antitrust act of 1890
Examples of an Oligopoly
few firms price setting power similar or nearly identical product
Which of the following markets would most closely satisfy the requirements for a competitive market?
gold bullion
If the Korean steel industry subsidizes the steel that it sells to the United States, the
harm done to U.S. steel producers is less than the benefit that accrues to U.S. consumers of steel.
Many economists argue that resale price maintenance
has a legitimate purpose of stopping discount retailers from free riding on the services provided by full-service retailers.
Compared to a perfectly competitive market, a monopoly market will usually generate
higher prices and lower output
The x-coordinate of an ordered pair specifies the
horizontal location of the point.
Economists include both explicit and implicit costs when measuring a firm's cost. Accountants often
ignore implicit costs.
The world price of a ton of steel is $650. Before Russia allowed trade in steel, the price of a ton of steel there was $1,000. Once Russia allowed trade in steel with other countries, Russia began
importing steel and the price per ton in Russia decreased to $650.
Goods produced abroad and sold domestically are called
imports
The shift from S to S' could be caused by an
improvement in production technology
Warrensburg is a small college town in Missouri. At the end of August each year, the market demand for fast food in Warrensburg
increases.
A monopolistically competitive firm is
inefficient because price is greater than marginal cost.
Absolute advantage is found by comparing different producers'
input requirements per unit of output
If the government wanted to tax or subsidize this good to achieve the socially optimal level of output, it would
introduce a subsidy of $4 per unit.
Farmer Brown sells sweet corn in a competitive market. When Farmer Brown sells 10 dozen ears of sweet corn, his total revenue is $30. When Farmer Brown sells 20 dozen ears of sweet corn, his total revenue is $60. Farmer Brown's average revenue is ____________ per dozen and his marginal revenue from selling the 20th dozen _________________.
is $3; is also $3
The long-run market supply curve
is more elastic than the short-run market supply curve
In the circular-flow diagram,
labor flows from households to firms.
Suppose a firm has a monopoly on the sale of boomerangs and faces a downward-sloping demand curve. When selling the 20th boomerang, the firm will always receive ________ on the 20th boomerang then it received on the 19th boomerang.
less marginal revenue
Which of the following is not a characteristic of a monopolistically competitive market?
long-run economic profits
In order to maximize profits, the monopolist should
look at where the marginal-revenue curve and the marginal-cost curve intersect
When the tariff is imposed, domestic consumers
lose surplus of $450.
The competitive firm maximizes profit when it produces output up to the point where
marginal cost equals marginal revenue
Which of the following is true regarding the production and pricing decisions of monopolistically competitive firms? Monopolistically competitive firms choose the quantity at which marginal cost equals
marginal revenue and then use the demand curve to determine the price consistent with this quantity.
A monopolist maximizes profit by producing the quantity at which
marginal revenue equals marginal cost
When property rights are not well established,
markets fail to allocate resources efficiently.
Expensive television commercials that appear to provide no specific information about the product being advertised
may be useful because they provide a signal to the consumer about the quality of the product
When an oligopolist individually chooses its level of production to maximize its profits, it produces an output that is
more than the level produced by a monopoly and less than the level produced by a competitive market
A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a
natural monopoly
Both public goods and common resources are
nonexcludable.
If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be
perfectly elastic
In the LONG run, the competitive firm's supply curve is the
portion of the marginal-cost curve that lies above the average-total-cost curve
In the SHORT run, the competitive firm's supply curve is the
portion of the marginal-cost curve that lies above the average-variable-cost curve
Which of the following correctly describes when a firm in a competitive market should shut down in the short run?
price is less than average variable cost
A professor spends 10 hours per day giving lectures and writing papers. For the professor, a graph that shows his various possible mixes of output (lectures given per day and papers written per day) is called his
production possibilities frontier.
Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the
supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20.
The government's benefit from a tax can be measured by
tax revenue.
Public ownership of natural monopolies
tends to be inefficient
Signaling theory suggests consumers can indirectly measure quality from an advertisement
that is expensive and provides little information.
With trade and without a tariff,
the domestic price is equal to the world price.
In the standard prisoners' dilemma game, if one prisoner remains silent
the other prisoner will confess
Assume the price of gasoline is $2.00 per gallon, and the equilibrium quantity of gasoline is 10 million gallons per day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the largest deadweight loss?
the price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.30 per gallon
As the number of sellers in an oligopoly increases,
the price in the market moves closer to marginal cost.
Which of the following firms is most likely to spend a large percentage of their revenue on advertising?
the producer of a highly differentiated consumer product
Cross-price elasticity of demand measures how
the quantity demanded of one good changes in response to a change in the price of another good.
If oligopolists engage in collusion and successfully form a cartel, the market outcome is
the same as if it were served by a monopoly
Economic profit is equal to total revenue minus
the sum of implicit and explicit costs
Game theory can be best applied to situations where
there are a few firms
The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that
there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market
In the long run,
there are no fixed costs.
When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product-variety externality, then
there are too many firms in the market and market efficiency could be increased if firms exited the market
in the short run
there is at least one fixed cost
A monopoly is able to continue to generate economic profits in the long run because
there is some barrier to entry to that market
Suppose there are only two people in the world. Each person's production possibilities frontier also represents his or her consumption possibilities when
they choose not to trade with one another.
What is economic welfare generally measured by?
total surplus
T or F : If a firm in a competitive market doubles the quantity of units sold, total revenue will exactly double.
true
Under rent control, landlords can cease to be responsive to tenants' concerns about the quality of the housing because
with shortages and waiting lists, they have no incentive to maintain and improve their property.
In long-run equilibrium in a competitive market, firms are operating at
zero economic profit their efficient scale. the intersection of marginal cost and marginal revenue. the minimum of their average-total-cost curves
