MICRO Exam 3

Refer to the accompanying figure. This firm's marginal revenue curve would intersect the vertical axis at ______. A. $70 B. $0 C. $20 D. $35

A. $70

Suppose the accompanying figure shows the demand curve, marginal revenue curve, and marginal cost curve for a monopolist. At this monopolist's profit-maximizing level of output, deadweight loss equals A. $1,000. B. $2,000. C. $4,000. D. $6,000.

A. $1,000.

The accompanying payoff matrix shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. If Column Cafe publishes coupons and Row Restaurant does not, then Row Restaurant will earn ______, and Column Cafe will earn ______. A. $10; $200 B. $25; $25 C. $200; $10 D. $120; $120

A. $10; $200

Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The accompanying table shows the reservation prices of the eight students enrolled in the class. If Campus Books is permitted to charge 2 prices, and the bookstore knows customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them, then what will be the bookstore's total economic profit? A. $158 B. $154 C. $150 D. $130

A. $158

Consider the accompanying payoff matrix. If Column Cruises keeps its rates high, and Row Resorts offers reduced rates, then Row Resorts will earn ______, and Column Cruises will earn ______. A. 500; 10 B. 300; 300 C. 50; 50 D. 10; 500

A. 500; 10

Which of the following is not an example of an activity with external benefits? A. Eating a sandwich in the dining hall B. Planting flowers in your front yard C. Installing smoke alarms in your house D. Having your car's faulty exhaust system repaired

A. Eating a sandwich in the dining hall

Carmen listens to opera music every evening when she gets home from work. Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul is the only person besides Carmen who can hear the music, then Carmen's music generates A. a negative externality. B. a positive externality. C. neither a positive nor a negative externality. D. both a positive and a negative externality.

A. a negative externality.

Game theory is not useful in understanding perfect competition because in a perfectly competitive market A. no single firm can influence the market price, so firms' decisions are not interdependent. B. each firm only cares about its own profit, so there is no interdependence. C. there are too many firms to be able to model their behavior accurately using game theory. D. the payoffs to firms' choices are unknown.

A. no single firm can influence the market price, so firms' decisions are not interdependent.

If a firm operates in an oligopoly, it is A. one of a small number of firms that produce goods that are either close or perfect substitutes. B. the only firm that produces a good with no close substitutes. C. one of a large number of firms that produce goods that are either close or perfect substitutes. D. one of a large number of firms that produce a good with no close substitute.

A. one of a small number of firms that produce goods that are either close or perfect substitutes.

When a perfectly competitive firm sells additional units of output, ______, and when a monopolist sells additional units of output, ______. A. total revenue always rises; total revenue could rise, fall, or remain unchanged B. total revenue does not change; total revenue rises C. marginal revenue stays the same; marginal revenue rises D. total revenue rises; total revenue falls

A. total revenue always rises; total revenue could rise, fall, or remain unchanged

Suppose the accompanying figure shows the demand curve, marginal revenue curve, and marginal cost curve for a monopolist. The profit-maximizing price for this monopolist to charge is A. A B. B C. C D. E

B. B

The insight that people can always arrive at efficient solutions to the problems caused by externalities if they can negotiate the purchase and sale of the right to perform activities that cause externalities is called the _______. A. Sherman Act B. Coase theorem C. tragedy of the commons D. prisoner's dilemma

B. Coase theorem

Kate and Ali can live together in a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together? A. Kate pays $150 per month and Ali pays $450 per month B. Kate pays $250 per month and Ali pays $350 per month C. Kate pays $375 per month and Ali pays $125 per month D. There is no way to split the rent to induce them to live together.

B. Kate pays $250 per month and Ali pays $350 per month

Suppose there are 10 people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay 50 cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If the cigar smoker paid each other occupant 50 cents for the right to smoke, the cigar smoker would be ______ and the other occupants would be _______. A. better off; worse off B. better off; just as well off as before the payment C. better off; better off D. worse off; just as well off as before the payment

B. better off; just as well off as before the payment

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, one can infer that the EPA determined that the external A. benefit of using diesel fuel is less than 10 cents. B. cost of using diesel fuel is greater than 10 cents. C. cost of using diesel fuel is less than 10 cents. D. cost of using diesel fuel is equal to 10 cents.

B. cost of using diesel fuel is greater than 10 cents.

Impulse-control problems can arise when people A. discount the future too little. B. discount the future too heavily. C. place too much weight on future costs and benefits. D. place too little weight on current costs and benefits.

B. discount the future too heavily.

Early settlers in the town of Dry Gulch drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in Dry Gulch, the aquifer level fell and new wells had to be drilled deeper at higher cost. The town council has proposed putting a meter on each household's pump and charging residents for each gallon of water used. This would A. have no effect on water use. B. discourage residents from using too much water. C. convert private property to public property. D. reduce total economic surplus.

B. discourage residents from using too much water.

The Coase theorem implies that the initial allocation of property rights A. determines all aspects of the final outcome of the negotiated agreement. B. does not determine which person will be entitled to engage in the externality generating activity but does determine which person will receive compensation. C. determines which person will be entitled to engage in the externality generating activity but does not affect which person will receive compensation. D. must be assigned to the person with the greatest costs.

B. does not determine which person will be entitled to engage in the externality generating activity but does determine which person will receive compensation.

Natural monopolies are most likely to arise when firms have A. low start-up costs and low marginal costs. B. high start-up costs and low marginal costs. C. low start-up costs and high marginal costs. D. high start-up costs and high marginal costs.

B. high start-up costs and low marginal costs.

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. This game A. is a prisoner's dilemma. B. is not a prisoner's dilemma. C. is an ultimatum bargaining game. D. has no Nash equilibrium.

B. is not a prisoner's dilemma.

The tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude is known as A. the availability heuristic. B. loss aversion. C. the present-aim standard of rationality. D. regression to the mean.

B. loss aversion.

Airlines that charge higher prices for customers who purchase their tickets at the last minute are A. not price discriminating because the cost of the ticket is not the same. B. price discriminating by identifying passengers with higher reservation prices. C. perfect price discriminators. D. lowering total economic surplus.

B. price discriminating by identifying passengers with higher reservation prices.

Eric brews beer for a hobby. He has noticed that whenever he brews an unusually bad batch of beer, his next batch is much better. One explanation for this is that Eric learns from his past mistakes. Another explanation is A. status quo bias. B. regression to the mean. C. loss aversion. D. the representative heuristic.

B. regression to the mean.

According to the _______, if Enzokuhle has many of the characteristics of a stereotypical basketball player (for example, she is tall), then people will be more likely to assume she plays basketball. A. adaptive rationality standard B. representative heuristic C. availability heuristic D. Weber-Fechner law

B. representative heuristic

According to the textbook, the owners of restaurants encourage tipping in order to A. ensure that their servers earn enough money. B. solve a commitment problem with their servers. C. sustain cooperation in a repeated prisoner's dilemma. D. avoid playing a dominated strategy.

B. solve a commitment problem with their servers.

According to the availability heuristic, the more easily we can recall examples of an event A. the less likely we judge the event to be. B. the more likely we judge the event to be. C. the more we like the event. D. the less we like the event.

B. the more likely we judge the event to be.

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the accompanying table. If Island Bikes charges a single price to all of its customers, then what price will it charge? A. $4 B. $8 C. $12 D. $16

C. $12

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The accompanying table shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Café would be willing to pay Quick Burger as much as ______ per month to NOT operate a drive-through window. A. $9,000 B. $11,000 C. $12,000 D. $15,000

C. $12,000

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains for the three parties are listed in the accompanying table. When Erie Textiles operates with a filter, the total gain by all three parties is A. $985,000. B. $600,000. C. $510,000. D. $475,000.

C. $510,000.

Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. ______ residents of Miniville live west of point B, and _____ live east of point A. A. 100; 200 B. 150; 150 C. 200; 200 D. 200; 100

C. 200; 200

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, 550 voters lie to the left and 50 to the right. If Candidate Y is running against Candidate Z A. Candidate Y will have an incentive to move to the left, and Candidate Z will have an incentive to move to the right. B. Both candidates will have an incentive to move to the left. C. Both candidates will have an incentive to move toward each other's position. D. Neither candidate has any incentive to move.

C. Both candidates will have an incentive to move toward each other's position.

According to the availability heuristic, which of the following will make Anke more likely believe that she will win a lot of money if she buys a lottery ticket? A. Her boss hinting that she will soon receive a raise at work B. The fact that it has been several years since she purchased a lottery ticket C. Watching a news report about someone winning $2 million playing the lottery D. The fact that is has been several years since anyone has won the lottery

C. Watching a news report about someone winning $2 million playing the lottery

Traditional economic models assume that people care about A. neither absolute nor relative consumption. B. both absolute and relative consumption. C. absolute consumption. D. relative consumption.

C. absolute consumption.

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. Suppose Player 1 and Player 2 enter into a binding agreement in which Player 1 agrees to pay Player 2 a fixed amount of money to get Player 2 to play Up when it is Player 2's turn. How much will Player 1 have to pay Player 2 to get Player 2 to play Up? A. $0. B. at least $10. C. at least $20. D. at least $50.

C. at least $20.

A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n) A. pure monopoly. B. oligopoly. C. cartel. D. duopoly.

C. cartel.

Imagine that you are an entrepreneur making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. As you increase your production of t-shirts, your average fixed cost ______ and your marginal cost ______. A. decreases; increases B. increases; decreases C. decreases; stays the same D. stays the same; increases

C. decreases; stays the same

Savannah is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Savannah cuts her price to $2.90 and Sam continues to charge $3, then Savannah's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts her price to $2.90 and Savannah continues to charge $3, then Sam's profit will be $1,350, and Savannah's profit will be $500. If Sam and Savannah both cut their price to $2.90, then they will each earn a profit of $900. For Savannah, keeping her price at $3 per gallon is a: A. revenue-maximizing strategy. B. dominant strategy. C. dominated strategy. D. profit-maximizing strategy.

C. dominated strategy.

Given the demand curve it faces, if an imperfectly competitive firm wants to sell another unit of output, it must A. increase its advertising. B. increase the value of its product. C. lower its price. D. lower its quality.

C. lower its price.

A monopolistically competitive firm A. sells products that are perfect substitutes for its competitors' products, so must compete on the basis of location. B. sells products that are close substitutes for its competitors' products, so will locate as far away from its competitors as possible. C. sometimes distinguishes its output from that of its competitors by locating in a more convenient place. D. will be more successful the more similar its output is to its competitors' output.

C. sometimes distinguishes its output from that of its competitors by locating in a more convenient place.

Refer to the figure below. The deadweight loss at the market equilibrium quantity is equal to the area ______. A. ½ × EF × AC B. ½ × FG × BD C. ½ × FG × AC D. ½ × GH × BD

C. ½ × FG × AC

Suppose there are three power-generating plants, each of which has access to 5 different production processes. The accompanying table summarizes the cost of each production process and the corresponding number of tons of smoke emitted each. Suppose the government requires each firm to reduce pollution to 2 tons of smoke per day, so that total daily smoke emission is 6 tons. The total cost to society of this policy will be ______ per day. A. $59 B. $42 C. $230 D. $135

D. $135

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the accompanying table. If Island Bikes charges a single price to all of its customers, then how many bikes will it rent out each day? A. 6 B. 5 C. 4 D. 3

D. 3

Refer to the accompanying figure. What is the Nash equilibrium of this game? A. A chooses Up, B chooses Right B. A chooses Down, B chooses Right C. A chooses Down, B chooses Left D. A chooses Up, B chooses Left

D. A chooses Up, B chooses Left

_______ is the tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude. A. The availability heuristic B. Fungibility C. The present-aim standard of rationality D. Loss aversion

D. Loss aversion

_______ is the phenomenon that unusual events are likely to be followed by more nearly normal ones. A. The present aim standard of rationality B. Loss aversion C. Anchoring and adjustment D. Regression to the mean

D. Regression to the mean

Suppose Evan and Robert are each filling out a separate survey about parking on campus. On Evan's survey, the first question asks about whether he thinks the fine for parking illegally on campus should be $50, and on Robert's survey the first question asks about whether he thinks the fine should be $100. For both Evan and Robert, the second question asks how much each thinks the fine currently is. If Evan and Robert know nothing about the parking fines on campus, but each uses anchoring and adjustment to form his assessment, then, all else equal, you would expect A. Evan's estimate of the current fine to be higher than Robert's. B. both of them to guess a number between $50 and $100. C. their estimates to be identical. D. Robert's estimate of the current fine to be higher than Evan's.

D. Robert's estimate of the current fine to be higher than Evan's.

Refer to the accompanying figure. The socially optimal quantity in this market is ______ units per day. A. T B. U C. V D. W

D. W

The rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory is the A. adjustment heuristic. B. anchoring heuristic. C. representative heuristic. D. availability heuristic.

D. availability heuristic.

Relative to a world in which some people are motivated by nonmaterial incentives, if all people were motivated solely by financial incentives, then A. transactions in the business world would be the same, but personal interactions would not. B. economic efficiency would be achieved more often. C. there would be no commitment problems. D. both business transactions and personal interactions would be different.

D. both business transactions and personal interactions would be different.

Savannah is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Savannah cuts her price to $2.90 and Sam continues to charge $3, then Savannah's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts her price to $2.90 and Savannah continues to charge $3, then Sam's profit will be $1,350, and Savannah's profit will be $500. If Sam and Savannah both cut their price to $2.90, then they will each earn a profit of $900. For both Savannah and Sam, ______ is a ______. A. cutting the price to $2.90; dominated strategy B. leaving the price at $3; Nash equilibrium C. leaving the price at $3; dominant strategy D. cutting the price to $2.90; dominant strategy

D. cutting the price to $2.90; dominant strategy

If a monopolist calculates its marginal revenue to be $15 and marginal cost to be $16, then the monopolist should A. lower its price. B. increase its output. C. leave its output and price unchanged. D. decrease its output.

D. decrease its output.

If people care about relative consumption rather than absolute consumption, then A. their behavior will be consistent with traditional economic models. B. there is little need for government intervention in markets. C. their choices will lead to an efficient allocation of resources. D. individuals' decisions need not lead to socially optimal outcomes.

D. individuals' decisions need not lead to socially optimal outcomes.

The tit-for-tat strategy only works for a prisoner's dilemma that A. has only one Nash equilibrium. B. is played only one time. C. does not have a Nash equilibrium. D. is repeated.

D. is repeated.

The primary objective of an imperfectly competitive firm is to A. charge the highest possible price. B. maximize total revenue. C. minimize total cost. D. maximize profit.

D. maximize profit.

According to the adaptive rationality standard, individuals A. are irrational if they choose to have preferences that are not self-interested. B. always behave according to their own narrow self-interest. C. are unable to choose what kind of preferences to have. D. might rationally choose to have preferences that are not self-interested.

D. might rationally choose to have preferences that are not self-interested.

Suppose a monopolist faces the following demand curve. The monopolist maximizes its profits by A. charging $70 for each unit. B. producing 35 units, since this is where total revenue is maximized. C. producing the level of output at which marginal revenue minus marginal cost is greatest. D. producing the level of output at which marginal revenue equals marginal cost.

D. producing the level of output at which marginal revenue equals marginal cost.

Refer to the accompanying figure. The socially optimal quantity in this market could be achieved by imposing a ______ equal to the vertical distance ______. A. tax; LN B. subsidy; LN C. tax; LM D. subsidy; LM

D. subsidy; LM

When it comes to enacting policy changes, loss aversion often leads to status quo bias because A. people's estimates of their gains from the policy are often too large. B. people's estimate of their losses from the policy are often too small. C. the support from those who stand to gain from the policy often overwhelms the resistance from those who stand to lose. D. the resistance from those who stand to lose from the policy often overwhelms the support from those who stand to gain.

D. the resistance from those who stand to lose from the policy often overwhelms the support from those who stand to gain.

Suppose Bobby just watched a documentary about the massive decline in house prices during the Great Recession. According to the availability heuristic, this is likely to make Bobby A. believe that he is wealthier than other people. B. think the movie is biased towards the status quo. C. believe that house prices will be more stable in the future. D. worry that the price of his own house might fall.

D. worry that the price of his own house might fall.

Refer to the accompanying figure. Private incentives in this market generate deadweight loss equal to _______. A. ½ × UW × LM B. ½ × UV × LN C. ½ × VW × LN D. ½ × VW × KM

D. ½ × VW × KM