exam 2
Suppose a monopoly firm produces software and can sell 10 items per month at a price of $50 each. In order to increase sales by one item per month, the monopolist must lower the price of the software by $1 to $49. The marginal revenue of the 11th item is:
$39
Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her implicit costs?
$41,500
Wendy leaves her job as a dancer to start her own dance studio. As a dancer, she made $34,000 per year. During the studio's first year she paid $4,300 per year for insurance, $1,846 for music and licensing fees, $150 for a boom box, and $11,300 for rent and utilities. She received $60,480 in tuition payments. Wendy's economic profit was:
$8,884
What can be used to protect a monopoly from competition?
A patent
Calvin is a college student who has identified the need his fellow students have for transportation to and from a nearby store. He owns a van that can carry four people in addition to himself; he pays $50 insurance costs per month. He has calculated that his cost of transporting his fellow students will be $2.50 per student per round-trip ride, assuming he has a full van. Given this information, which statement is correct, assuming Calvin has a full van?
-Calvin's marginal cost is constant at $2.50. -Calvin's average variable cost is constant at $2.50
How do a sole proprietorship and a corporation differ?
-Corporations face more taxes than do proprietorships -Proprietorships have unlimited liability while corporations have limited liability -Corporations can issue stocks and bonds, while proprietorships cannot.
What is true for a monopoly?
-The demand curve for the monopoly and the market are the same -It can use market power to charge higher prices than a competitive firm -It has no direct competitors
What are characteristics of a perfectly competitive market structure?
-There are a very large number of firms that are small compared to the market. -All firms sell identical products. -There are no restrictions to entry by new firms.
All of these are examples of implicit costs
-depreciation expenses -earnings that an entrepreneur could have made in another job -opportunity cost of a firm's capital
What are examples of price discrimination
-soup companies sending coupons to select buyers -retirees getting a discount at a local movie theater -drug companies charging people living in wealthier countries higher prices for a drug than they charge people living in a poorer country for the same drug
What is a common mistake made by consumers?
-the failure to take into account the implicit costs of an activity -the failure to ignore sunk costs -being overly optimistic about their future behavior
Monopolistically competitive markets and perfectly competitive markets share what characteristics?
-zero economic profits in the long run -many firms in the market -ease of entry into the market
Assume an industry contains four firms and has a Herfindahl-Hirschman Index equal to 3,450. If three of the firms have market share of 50%, 25%, and 10%, respectively, what is the market share of the remaining firm?
15%
The top eight firms in an industry control, respectively, 15%, 10%, 9%, 8%, 7%, 6%, 5%, and 4% of the industry. What is the four-firm concentration ratio?
42
If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from consuming three candy bars, the marginal utility of the third candy bar is
5 utility units
In terms of overall domestic consumption, about how much petroleum did the U.S. produce within its own borders in 2015?
75%
A monopolist practicing first-degree price discrimination
Captures all consumer surplus
What is part of a competitive firm's short run decision?
Choosing a rate of output using existing plant and equipment
Suppose you have a fixed amount of income to spend on two goods, X and Y. The price of good X is Px = $10 and the price of good Y is Py = $5. The marginal utility of X is MUx = 60 utils and the marginal utility of Y is MUy = 15 utils. How should consumption of X and Y change, if at all, to increase utility?
Consumption of good X should increase, and consumption of good Y should decrease
A monopolist sets price at a point on the_____, corresponding to the rate of output determined by the intersection of _____.
Demand; marginal revenue and marginal cost
If a seafood restaurant can raise the price of its fried shrimp without losing all of its customers, then the restaurant definitely
Has market power
If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should
Increase its output.
What is not true for a monopoly?
It is a price taker
Jiro and his wife Mariko are both employed. When Jiro loses his job, what happens to the household's budget line?
It shifts inward to a new line that is parallel to the original budget line
Since a monopoly has market power,
Its marginal revenue curve is below its demand curve
Which of the following is a clear example of the law of diminishing marginal utility?
Julia eats three cookies. She takes 20 seconds to eat the first one, 1 minute to eat the second one, and 3 minutes to finish the third one
Knoxville Utilities Board (KUB) is responsible for electricity distribution in Knoxville then KUB:
KUB is a monopoly due to economies of scale.
A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The price of each good is $10. Calculate the firm's short-run profit or loss.
Loss of $6,000
If Bob is consuming his utility maximizing bundle and the price of one good rises, what happens to the marginal utility per dollar spent on this good (MU/P), and what should Bob do?
MU/P has decreased and Bob should buy less of this good
The price of a seller's product in perfect competition is determined by:
Market demand and market supply.
Is a monopolistically competitive firm allocatively efficient?
No, because price is greater than marginal cost
Ian owned his own dry cleaning shop, but he later sold it to his cousin Norman. Norman incorporated the business and is the only stockholder. Which of these is the MOST likely reason for the incorporation?
Norman wanted to have limited liability
What is true for a monopolist?
Profit is maximized where marginal cost equals marginal revenue.
Suppose a perfectly competitive firm increases its output. In order to sell this additional output, the firm:
Should price it at the market price
What is a characteristic of stock?
Stock represents ownership in a firm
Assume there is a budget line with bagels on the vertical y-axis and bananas on the horizontal x-axis. What happens to the budget line when the price of bagels rises and the price of bananas falls?
The budget line rotates to have a flatter slope
Which of these is NOT true about the demand curve of a monopolist?
The demand curve is perfectly elastic
Assume the market for organic produce sold at farmers' markets is perfectly competitive. All else equal, as more farmers choose to produce and sell organic produce at farmers' markets, what is likely to the equilibrium price of the produce and profits of the organic farmers in the long run?
The equilibrium price is likely to decrease and profits are likely to decrease
Suppose a perfectly competitive firm is in the following situation: P = $8 output = 4,000 ATC = $8 AVC = $6 MC = $8 What accurately describes the firm's and the market's situation?
The firm incurs a normal profit; the market is in a long-run equilibrium
Suppose a perfectly competitive firm faces the following situation: P = $8 output = 2,000 ATC = $6.50 MC = $8 What is an accurate description of the firm's situation?
The firm is maximizing profits
Assume that a monopolistically competitive firm faces the following situation: P = $16 output = 9,000 units MC = $11 ATC = $10 AVC = $7 MR = $14 What is correct regarding profit maximization?
The firm would earn more profits by increasing output
A very large number of small sellers who sell identical products imply:
The inability of one seller to influence price.
Red Stone Creamery currently hires 5 workers. When it added a 6th worker, its output actually fell. Which of the following statements is true?
The marginal product of the sixth worker must be negative
Competition in a market results in
The optimal mix of goods and services being produced
What is not a characteristic of a perfectly competitive market structure?
There are restrictions on exit of firms.
If a perfectly competitive firm produces and sells more output, what will increase?
Total revenue
If marginal utility is negative, what must be true about total utility?
Total utility decreases with additional consumption
A merger between two large airlines, such as American Airlines and U.S. Airways would:
Would not be allowed by the Federal Trade Commission if the merger reduced competition
What is NOT an example of price discrimination?
a novel printed in paperback that sells for more than the same book in an electronic format
If average total cost is rising, then marginal cost must be __________ average total cost and marginal cost must be __________:
above; rising
The explicit cost of production is also called
accounting cost
What is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma?
advertising that it will match its rival's price
What is the BEST example of a natural monopoly? an electric utility company a tobacco products company a coffee shop an airline
an electric utility company
If a market has twenty competing firms and 20% of those firms produce 80% of the sales, then the market structure would be described as:
an oligopoly
An asset is
anything of value owned by a person or a firm
Gerhard weighed 275 pounds, with 45% body fat. Marta weighed 135 pounds, with 30% body fat. Gerhard and Marta each set a New Year's goal to lose 20% of their body weight by June. They both bought 6-month memberships to a gym and kept going to the gym. Marta lost only 10% of her body weight. However, Gerhard lost 25% of his body weight in the first four months, but he kept working out at the gym since he had paid for 6 months of membership. Gerhard is an example of:
attention to sunk costs because he kept going to the gym even after he reached his goal because he had paid for the membership
Marginal cost (MC) will equal average total cost (ATC) at the point where the:
average total cost is the lowest
What is not a common mistake made by consumers?
being overly pessimistic about their future behavior
The prices per pound of apples, pears, and grapes are $1.50, $2, and $2.50, respectively. Clara's marginal utils for the last pound bought of each is: 30 MU for apples, 35 MU for pears, and 60 MU for grapes. If Clara wants to maximize utility out of her limited budget for fruit, she should:
buy more grapes and fewer pears
If total utility increases at a decreasing rate as a consumer consumes more coffee, then marginal utility must
decrease
When the producer of Doritos tortilla chips spends money for television commercials, it intends to shift the:
demand curve to the right and make demand less elastic
Monopolistically competitive markets and perfectly competitive markets do NOT share what?
differentiated products
The average total cost of production
equals total cost of production divided by the level of output
Marginal utility is the
extra satisfaction received from consuming one more unit of a product
Productive efficiency is achieved when
firms produce goods and services at the lowest cost
Academic book publishers hire editors, designers, and production and marketing managers who help prepare books for publication. Because these employees work on several books simultaneously, the number of people the company hires will not go up and down with the quantity of books the company publishes during any particular year. The salaries and benefits of people in these job categories will be included in:
fixed cost and total cost but not variable cost
Although the owners of a theme park want to sell tickets for $80, they announce a general admission price of $100 per day. However, the owners of the theme park make available tickets that have a $20 discount on tickets available online, in grocery stores, and in banks. Thus very few people pay the full general admission price. The field of behavioral economics would call this pricing an effort to sell more due to:
framing bias
If a cartel member is considering cheating in order to earn profits, it should:
increase the quantity it sells at the quota price
Two different markets each have many buyers and many sellers, none of which have market power. What would be MOST helpful in determining whether each market is monopolistically competitive or perfectly competitive?
information on the degree of product differentiation in each market
A characteristic found only in oligopolies is
interdependence of firms
If a firm faces a downward-sloping demand curve,
it must reduce its price to sell more units.
The price of a mango is $2 and a farmer sells 2,000 mangoes. However, the costs to the farmer are $400 for labor, $1,600 for rent, and $2,000 for advertising. Based on the above information, the farmer:
makes $4,000 in total revenue
Firms in _____ markets have a more difficult time applying the profit-maximization rule than firms in other markets because _____.
oligopoly; the firm's demand curve depends on the decisions of rival firms
If a producer is not able to expand its plant capacity immediately, it is
operating in the short run
What is the least common type of business?
partnership
What is an example of a fixed cost?
payment to hire a security worker to guard the gate to the factory around the clock
The machines workers have to work with are considered
physical capital.
companies that do not sell stock in financial markets
private firms
firms that sell stock in financial markets
public firms
If a competitive firm can sell steel for $500 a ton, has an average variable cost of $400 a ton, and a marginal cost of $600 a ton, the firm should:
reduce output
What is an example of an implicit cost of production?
rent that could have been earned on a building owned and used by the firm
A corporation is owned by its
stockholders
The marginal product of labor is defined as
the additional output that results when one more worker is hired, holding all other resources constant
If a consumer always buys goods rationally, then
the marginal utility per dollar spent on all goods will be equal
Who controls a partnership?
the owners
Marta takes her 72-year-old mother and her 11-year-old son to the local water park. Marta pays $12 for her ticket, $8 for her mother's senior citizen ticket, and $6 for her son's children's ticket. This is an example of:
third-degree price discrimination
Which of these shows characteristics of a perfectly competitive firm?
Bob cannot tell which farm the peaches he purchased came from because all the peaches look alike.
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.
What 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
If an increase in the size of a factory results in reductions in minimum average total costs, this is known as:
Economies of scale
T or F: Office rent expenses are an example of an implicit cost
FALSE
Hannah owns an auto repair shop. She has incurred over $100,000 in startup costs (sunk costs) and currently faces fixed costs of $5,000 per month. She also has labor costs equal to $3,000 per month. Hannah earns revenue of $10,000 per month. Given this information, Hannah should:
continue to run her business since she is making a profit of $2,000
