Microeconomics final

Explain why member firms of a cartel like OPEC have incentives to agree to a low cartel production level and then produce more than its quota.

A low cartel production level results in a high market price for oil. Thereafter, each firm has an incentive to unilaterally cheat on the agreement by producing beyond its quota. Of course, ultimately if everyone cheats then the price of oil will fall, but at least for a while some members will earn higher profits than they would if they had adhered to their quotas.

Why do economists refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game?

A prisoners' dilemma is a game in which pursuing dominant strategies results in a noncooperative equilibrium that leaves everyone worse off than they would be if they could achieve the cooperative equilibrium. The outcome of noncooperative pricing (competition, in other words) will leave firms worse off than if they cooperated and set higher prices.

What is a production possibilities frontier? What do points along the frontier represent? What do points inside and outside the frontier represent?

A production possibility frontier is a curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology. The points are all the possible combinations. Points outside are unattainable. Points inside are combinations that are inefficient.

Refer to Figure 4-3. What is the value of producer surplus at a price of $18? A) $240 B) $300 C) $340 D) $720

A) $240

Refer to Figure 4-5. What is the value of the deadweight loss after the imposition of the ceiling? A) $50,000 B) $125,000 C) $175,000 D) $260,000

A) $50,000

Refer to Figure 2-2. What is the opportunity cost of one pound of vegetables? A) 3/4 pound of meat B) 1.2 pounds of meat C) 1 1/3 pounds of meat D) 12 pounds of meat

A) 3/4 pound of meat

Which of the following would explain why accounting profit might be greater than economic profit? A) A firm has implicit costs as well as explicit costs. B) A firm's net income is less than its accounting profit. C) A firm has only explicit costs. D) A firm's net income is greater than its accounting profit.

A) A firm has implicit costs as well as explicit costs.

________ is called an implicit cost, while ________ is called an explicit cost. A) A nonmonetary opportunity cost; a cost that involves spending money B) A production cost; a sales cost C) An accounting cost; an economic cost D) An actual cost; a hypothetical cost

A) A nonmonetary opportunity cost; a cost that involves spending money

Which of the following is not an advantage of starting a new business as a proprietorship? A) A proprietorship can easily attain additional funding. B) The owner has complete control over the business. C) Business profits are only taxed once, not twice. D) A proprietorship has few government rules and regulations to comply with.

A) A proprietorship can easily attain additional funding.

One of your classmates asserts that advertising, marketing research, and brand management are redundant expenditures because a firm can obtain the same information by simply looking at what customers are already buying. Which of the following is not a response you might offer her? A) Advertising and brand management allow a firm to create an entry barrier which will insulate the firm from competition and from undertaking further product innovations. B) Conducting market research is a good way for firms to keep abreast of changing consumer tastes and preferences. C) Marketing research could allow a firm to identify new market opportunities and at least, in the short run, a firm can make a profit supplying products to this market segment. D) If a firm successfully manages its brand, customers become less price sensitive as they perceive fewer substitutes for the firm's brand.

A) Advertising and brand management allow a firm to create an entry barrier which will insulate the firm from competition and from undertaking further product innovations.

Refer to Figure 2-9. Which country has a comparative advantage in the production of cotton? A) Indonesia B) Pakistan C) They have equal productive abilities. D) neither country

A) Indonesia

In economics, the term ________ refers to a group of buyers and sellers of a product and the arrangement by which they come together to trade. A) market B) collective C) cooperative D) trade-off

A) Market

Refer to Figure 13-7. Which of the following statements describes the best course of action for the firm depicted in the diagram? A) The firm should minimize its losses by producing Qy units and charging a price of P1. B) The firm should exit the industry because its price is less than its average total cost. C) The firm should minimize its losses by producing Qy units and charging a price of P2. D) The firm should minimize its losses by producing Qy units and charging a price of P0.

A) The firm should minimize its losses by producing Qy units and charging a price of P1.

Refer to Figure 14-1. Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market? A) Yes, it will drive BMW out of the market. B) In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters. C) No, because BMW will enter the market regardless of Lexus' decision about its price. D) No, it should keep the same price and work to capitalize on its brand loyalty.

A) Yes, it will drive BMW out of the market.

Anything of value owned by a person or a firm is A) an asset. B) wealth. C) owner's yield. D) a liability.

A) an asset

Which type of business has the most government rules and regulations affecting it? A) corporation B) partnership C) sole proprietorship D) They all have the same set of rules and regulations affecting them.

A) corporation

Dividing the dividend payment by the stock's closing market price determines the A) dividend yield. B) price-earnings ratio. C) selling price of the stock. D) coupon payment

A) dividend yield.

The production possibilities frontier shows the ________ combinations of two products that can be produced in a particular time period with available resources. A) maximum attainable B) minimum attainable C) only D) equitable

A) maximum attainable

To affect the market outcome, a price ceiling A) must be set below the equilibrium price. B) must be set below the black market price. C) must be set below the price floor. D) must be set below the legal price.

A) must be set below the equilibrium price.

In order to be binding, a price ceiling A) must lie below the free market equilibrium price. B) must coincide with the free market equilibrium price. C) must be high enough for firms to earn a profit. D) must lie above the free market equilibrium price.

A) must lie below the free market equilibrium price.

What is the Congressional act, enacted in 1933 and repealed in 1999, which prevented financial firms from being both commercial banks and investment banks? A) the Glass-Steagall Act B) the Sarbanes-Oxley Act C) the Cellar-Kefauver Act D) the Taft-Hartley Act

A) the Glass-Steagall Act

Consumer surplus in a market for a product would be equal to ________ if the market price was zero. A) the area under the demand curve B) the area above the supply curve C) the area between the supply curve and the demand curve D) zero

A) the area under the demand curve

Economic efficiency in a competitive market is achieved when A) the marginal benefit equals the marginal cost from the last unit sold. B) producer surplus equals the total amount firms receive from consumers minus the cost of production. C) economic surplus is equal to consumer surplus. D) consumers and producers are satisfied.

A) the marginal benefit equals the marginal cost from the last unit sold.

Consumers are willing to purchase a product up to the point where A) the marginal benefit of consuming a product is equal to its price. B) the consumer surplus is equal to the producer surplus. C) the marginal benefit of consuming the product equals the area below the supply curve and above the market price. D) the marginal benefit of consuming the product is equal to the marginal cost of consuming it.

A) the marginal benefit of consuming a product is equal to its price.

In a report made to the U.S. Congress in 2001, the National Academy of Sciences cautioned that if fuel economy encourages the production of smaller and lighter cars, "Some additional traffic fatalities would be expected." This statement suggests that A) there is a tradeoff between safety and fuel economy. B) society should value safety more highly than fuel economy. C) society should value fuel economy more highly than consumer safety because of the long-term environmental benefits generated by less gasoline use. D) U.S. auto manufacturers are more concerned about producing fuel efficient cars to compete with their Japanese and South Korean rivals than about consumer safety.

A) there is a tradeoff between safety and fuel economy.

Explain what potential conflict exists between shareholders in a corporation and the corporation's managers.

Agency related conflicts, risk assessments, returns for shareholders, control, capital and debt

Allison's Auto Art is a company that applies pinstripes to vehicles. Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service. For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package. What is the marginal cost of moving up from the 1-color application to the 3-color application? A) $35 B) $40 C) $80 D) $175

B) $40

Refer to Figure 4-6. What area represents consumer surplus after the imposition of the price floor? A) A + B + E + F B) A C) A + B + E D) A + B

B) A

Refer to Figure 2-11. One segment of the circular flow diagram in the figure shows the flow of labor services from market K to economic agents J. What is market K and who are economic agents J? A) K = product markets; J = households B) K = factor markets; J = firms C) K = factor markets; J = households D) K = product markets; J = firms

B) K = factor markets; J = firms

Refer to Table 13-2. What is the output (Q) that maximizes profit and what is the price (P) charged? A) P = $55; Q = 5 cases B) P = $50; Q = 6 cases C) P = $45; Q = 7 cases D) P = $40; Q = 8 cases

B) P = $50; Q = 6 cases

Refer to Figure 13-12. If the diagram represents a typical firm in the designer watch market, what is likely to happen in the long run? A) Inefficient firms will exit the market and new cost-efficient firms will enter the market B) Some firms will exit the market causing the demand to increase for firms remaining in the market. C) The firms that are making losses will be purchased by their more successful rivals. D) Firms will have to raise their prices to cover costs of production.

B) Some firms will exit the market causing the demand to increase for firms remaining in the market.

Which of the following is a characteristic of stock? A) The face value or principal plus interest is repaid at a specified period of time. B) Stock represents ownership in a firm. C) Stock represents a promise to repay a fixed amount of funds D) The length of coupon payments is fixed by the stated maturity period.

B) Stock represents ownership in a firm.

Refer to Table 14-3. Which of the following statements is true? A) The Nash equilibrium is a cooperative equilibrium. B) The Nash equilibrium is a noncooperative, dominant strategy equilibrium. C) The Nash equilibrium is a collusive equilibrium. D) There is no Nash equilibrium in this game because each party pursues its dominant strategy.

B) The Nash equilibrium is a noncooperative, dominant strategy equilibrium.

Mr. Peabody chooses to invest in companies that produce goods and services based on consumer preferences. Mr. Peabody is investing in companies that are attempting to be A) productively efficient. B) allocatively efficient. C) guaranteed to make a profit. D) all of the above

B) allocatively efficient.

For a firm that can effectively price discriminate, who will be charged a lower price? A) buyers that are members of the largest market segment B) customers who have an elastic demand for the product C) buyers that are members of the smallest market segment D) customers who have an inelastic demand for the product

B) customers who have an elastic demand for the product

Microeconomics is the study of A) the global economy. B) how households and firms make choices. C) topics such as unemployment, inflation, and economic growth. D) the economy as a whole.

B) how households and firms make choices.

Refer to Table 2-2. Assume Billie's Bedroom Shop only produces pillows and blankets. A combination of 5 pillows and 21 blankets would appear A) along Billie's production possibilities frontier. B) inside Billie's production possibilities frontier. C) outside Billie's production possibilities frontier. D) at the vertical intercept of Billie's production possibilities frontier.

B) inside Billie's production possibilities frontier.

Today, Walt Disney World charges different customers different prices for admission. This pricing strategy is called A) arbitrage. B) cost-price pricing. C) price discrimination. D) odd pricing.

C) price discrimination.

Economic surplus A) is the difference between quantity demanded and quantity supplied when the market price for a product is greater than the equilibrium price. B) is equal to the sum of consumer surplus and producer surplus. C) is equal to the difference between consumer surplus and producer surplus. D) does not exist when a competitive market is in equilibrium.

B) is equal to the sum of consumer surplus and producer surplus.

In a city with rent-controlled apartments, all of the following are true except A) apartments usually rent for rates lower than the market rate. B) landlords have an incentive to rent more apartments than they would without rent control. C) it usually takes more time to find an apartment than it would without rent control. D) apartments are often in shorter supply than they would be without rent control.

B) landlords have an incentive to rent more apartments than they would without rent control.

Refer to Figure 13-11. The firm represented in the diagram A) makes zero accounting profit. B) makes zero economic profit. C) should exit the industry. D) should expand its output to take advantage of economies of scale.

B) makes zero economic profit.

In economics, all of the following is counted as "capital" except A) factory buildings. B) money. C) warehouses. D) machine tools.

B) money.

In an oligopoly market A) individual firms pay no attention to the behavior of other firms. B) one firm's pricing decision affects all the other firms. C) the pricing decisions of all other firms have no effect on an individual firm. D) advertising of one firm has no effect on all other firms.

B) one firm's pricing decision affects all the other firms.

A four-firm concentration ratio measures A) the price elasticity of demand among the four largest firms in an industry. B) the extent to which industry sales are concentrated among the four largest firms in the industry. C) the price elasticity of demand in an industry. D) the number of firms in an industry.

B) the extent to which industry sales are concentrated among the four largest firms in the industry.

Refer to Figure 4-4. The figure above represents the market for pecans. Assume that this is a competitive market. At a price of $9 A) producers should lower the price to $3 in order to sell the quantity demanded of 4,000. B) the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently high. C) the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently low. D) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low.

B) the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently high.

Successful price discrimination cannot take place if A) customers are not able to resell the product. B) the market is perfectly competitive. C) the demand curve facing the firm is downward sloping. D) the market can be segmented into different buyer groups.

B) the market is perfectly competitive.

When large firms in oligopoly markets cut their prices A) rival firms will not cut their prices because they fear that the federal government will accuse them of collusion. B) we don't know for sure how rival firms will respond. C) rival firms will also cut their prices to avoid losing sales. D) rival firms will not change their prices because most of their customers have signed contracts that commit them to doing business with the same firms for the life of their contracts.

B) we don't know for sure how rival firms will respond.

Society faces a trade-off in all of the following situations except A) when deciding how goods and services will be produced. B) when some previously unemployed workers find jobs. C) when deciding who will receive the goods and services produced. D) when deciding what goods and services will be produced.

B) when some previously unemployed workers find jobs.

If an industry is made up of five identical firms, the four-firm concentration ratio is A) 5%. B) 20%. C) 80%. D) 100%.

C) 80%

Refer to Table 14-8. If the firms act out of individual self-interest, which prices will they select? A) Both firms will select a high price. B) Brawny Juice will select a low price, Power Fuel will select a high price. C) Both firms will select a low price. D) Brawny Juice will select a high price, Power Fuel will select a low price.

C) Both firms will select a low price.

Refer to Figure 14-2. If the government delays Gigacom's entry and Xenophone moves first, what is the likely outcome in the market? A) Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million. B) Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million. C) Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million. D) Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million.

C) Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.

Refer to Table 4-3. The table above lists the marginal cost of cowboy hats by The Waco Kid, a firm that specializes in producing western wear. If the market price of The Waco Kid's cowboy hats is $40 A) there will be a surplus; as a result, the price will fall to $24. B) The Waco Kid will produce four hats. C) producer surplus will equal $28. D) producer surplus from the first hat is $40.

C) producer surplus will equal $28.

Pookie's Pinball Palace restores old Pinball machines. Pookie has just spent $300 purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once he is finished with the restoration. After having spent $300, Pookie discovers that he will need to rewire the entire machine at a cost of $1,100 in order to finish the restoration. Alternatively, he can sell the machine "as is" now for $1,000. What should he do? A) It does not matter what he does; he is going to take a loss on his project. B) He should rewire the machine, complete the task and then sell the machine. C) He should sell the machine now to make the most profit. D) He should have never purchased the machine because he has already spent too much time on it and has not been paid for that time.

C) He should sell the machine now to make the most profit.

Refer to Figure 16-1. What is the economically efficient output level? A) Q1 units B) Q2 units C) Q3 units D) Q4 units

C) Q3 units

Which of the following is a normative economic statement? A) The current low price of wheat is the result of increased worldwide supply. B) When the price of wheat falls, the cost of wheat-based products falls. C) The price of wheat is too low. D) When the price of wheat falls, the quantity of wheat purchased rises.

C) The price of wheat is too low.

Which of the following is a necessary condition for successful price discrimination? A) The buyer must possess market power. B) Buyers must have identical inelastic demands. C) The seller must possess market power. D) Transactions costs must be zero.

C) The seller must possess market power.

Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity cost of her decision? A) It depends on the "going rate" for home-care providers. B) the value she attributes to the satisfaction she receives from taking care of her parents C) at least $125,000 D) zero, since she will no longer be earning a salary

C) at least $125,000

Consumers benefit from monopolistic competition by A) being able to purchase high-quality products at low prices. B) paying the same price as everyone else. C) being able to choose from products more closely suited to their tastes. D) paying the lowest possible price for the product.

C) being able to choose from products more closely suited to their tastes.

Markets promote A) equity and equality. B) voluntary exchange and equality. C) competition and voluntary exchange. D) equity and competition.

C) competition and voluntary exchange.

By the 21st century few people purchased printed encyclopedias. Which of the following competitive forces best explains this? A) the bargaining power of suppliers B) the threat from potential entrants C) competition from substitutes D) the bargaining power of buyers

C) competition from substitutes

Buying at a low price in one market and reselling at a higher price in another market will1 A) eventually eliminate all of the price differences. B) not generate any profit because of transactions costs. C) eventually eliminate most, but not necessarily all, of the price differences. D) not generate any profit because of transportation costs.

C) eventually eliminate most, but not necessarily all, of the price differences.

A monopolistically competitive firm will A) always produce at the minimum efficient scale of production. B) produce an output level that is productively and allocatively efficient. C) have some control over its price because its product is differentiated. D) charge the same price as its competitors do.

C) have some control over its price because its product is differentiated.

A monopolistically competitive firm that is profitable in the short run will face competition that will eventually eliminate the firm's profits in the long run. But the firm can stave off competition and continue to earn economic profits if A) it can successfully sue its competitors for copyright infringement. B) it can move to another country where there is less competition. C) it can find new ways to differentiate its product. D) it can lobby the government to establish a price floor for its product.

C) it can find new ways to differentiate its product.

If economies of scale are relatively important in an industry, the typical firm's A) marginal cost curve will decline continuously until it reaches minimum efficient scale. B) long-run average cost curve will reach a minimum at a level of output that leaves room for a large number of firms to enter the industry. C) long-run average cost curve will reach a minimum at a level of output that is a relatively large fraction of total industry sales. D) long-run average cost curve will begin rising before it reaches minimum efficient scale.

C) long-run average cost curve will reach a minimum at a level of output that is a relatively large fraction of total industry sales.

If price exceeds average variable cost but is less than average total cost, a firm A) is making some profit but less than maximum profit. B) should shut down. C) should stay in business for a while longer until its fixed costs expire D) should further differentiate its product.

C) should stay in business for a while longer until its fixed costs expire

Allocative efficiency is achieved when firms produce goods and services A) at a marginal cost of zero. B) at the lowest possible cost. C) that consumers value most D) at the lowest opportunity cost.

C) that consumers value most

The larger the number of firms in an industry A) the larger the potential number of market segments. B) the greater the need for a price enforcement mechanism. C) the more intense the rivalry among firms. D) the easier it is to implicitly collude to fix prices.

C) the more intense the rivalry among firms.

Refer to Table 14-2. Suppose Wal-Mart and Target both advertise that they will match the lowest price offered by any competitor. What is the purpose of such a strategy? A) to signal to each other that they will not hesitate to initiate a price war B) to signal to each other not to charge below the current low price C) to signal to each other that they intend to charge the high price D) to signal to each other to share the market equally

C) to signal to each other that they intend to charge the high price

Refer to Figure 2-5. If the economy is currently producing at point Y, what is the opportunity cost of moving to point W? A) 16 million tons of paper B) 9 million tons of paper C) zero D) 2 million tons of steel

C) zero

How do a sole proprietorship and a corporation differ? A) Corporations can issue stocks and bonds, while proprietorships cannot. B) Proprietorships have unlimited liability while corporations have limited liability. C) Corporations face more taxes than do proprietorships. D) All of these are differences between the two types of businesses.

D) All of these are differences between the two types of businesses.

The revenue received from the sale of ________ of a product is a marginal benefit to the firm. A) no units B) only profitable units C) the total number of units D) an additional unit

D) An additional unit

Refer to Table 2-9. If the two countries specialize and trade, who should export sailboats? A) There is no basis for trade between the two countries. B) They should both be importing sailboats. C) Guatemala D) Honduras

D) Honduras

Refer to Figure 13-11. What is the monopolistic competitor's profit maximizing price? A) P1 B) P2 C) P3 D) P4

D) P4

Refer to Figure 13-3. The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit. Based on the diagram in the figure, A) X represents the loss (price effect) and Y + Z the gain (output effect). B) X + Z represents the loss (output effect) and Y the gain (price effect). C) X represents the gain (price effect) and Y the loss (output effect). D) Y represents the gain (output effect) and X the loss (price effect).

D) Y represents the gain (output effect) and X the loss (price effect).

Refer to Figure 14-1. Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market? A) No, because BMW will enter the market regardless of Lexus' decision about its price. B) In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters. C) No, it should keep the same price and work to capitalize on its brand loyalty. D) Yes, it will drive BMW out of the market.

D) Yes, it will drive BMW out of the market.

Refer to Table 14-3. Is there a dominant strategy for Saudi Arabia and, if so, what is it? A) Yes, the dominant strategy is to produce a high output. B) Yes, it has a dominant strategy depending on what Nigeria does. C) No, there is no dominant strategy. D) Yes, the dominant strategy is to produce a low output.

D) Yes, the dominant strategy is to produce a low output.

A bond is a financial security that represents A) the interest rate paid on a share of stock. B) the portion of profits paid to shareholders. C) ownership in a corporation. D) a promise to repay a fixed amount of funds.

D) a promise to repay a fixed amount of funds.

A bond is a financial security that represents A) the interest rate paid on a share of stock. B) ownership in a corporation. C) the portion of profits paid to shareholders. D) a promise to repay a fixed amount of funds.

D) a promise to repay a fixed amount of funds.

In a modern mixed economy, who decides what goods and services will be produced? A) only the producers B) only the government C) only consumers D) all of the above

D) all of the above

When Ferrari sells stock to the public in its IPO, it will do so through the New York Stock Exchange. This is an example of Ferrari using ________ to raise funds. A) bonds B) indirect finance C) corporate governance D) direct finance

D) direct finance

When Ferrari sells stock to the public in its IPO, it will do so through the New York Stock Exchange. This is an example of Ferrari using ________ to raise funds. A) corporate governance B) indirect finance C) bonds D) direct finance

D) direct finance

Refer to Figure 2-4. A movement from Y to Z A) represents an increase in the demand for plastic products. B) is the result of advancements in food production technology. C) is the result of a decrease in preference for food products. D) is the result of advancements in plastic production technology.

D) is the result of advancements in plastic production technology.

If a firm has excess capacity, it means A) that the firm's long-run average cost of producing a given quantity exceeds its short-run cost of producing that same quantity. B) that the firm's quantity supplied exceeds its quantity demanded. C) that the firm expends too much of its resources on advertising its product without seeing an appreciable increase in sales. D) that the firm is not producing its minimum efficient scale of output.

D) that the firm is not producing its minimum efficient scale of output.

A large majority of the personal computers (PCs) in the United States use an operating system purchased from Microsoft. Microsoft's relationship with PC manufacturers is an example of which of Porter's competitive forces? A) the bargaining power of buyers B) competition from substitute goods or services C) the threat from new entrants D) the bargaining power of suppliers

D) the bargaining power of suppliers

Adam Smith's "invisible hand" refers to A) property ownership laws and the rule of the court system. B) the government's unobtrusive role in ensuring that the economy functions efficiently. C) the laws of nature that influence economics decisions. D) the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a whole.

D) the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a whole.

What is meant by "excess capacity"? How does it relate to consumer utility?

Excess capacity refers to a situation where a firm does not produce at the lowest possible average cost. In other words, economies of scale have not been exhausted. Excess capacity is an inevitable consequence of product differentiation. Firms differentiate their products in order to appeal to consumers' varied tastes. Consumers are, therefore, better off - they have greater utility - than they would be if companies did not differentiate their products. Consumers are willing to pay for the higher costs that result from product differentiation.

The Sarbanes-Oxley Act of 2002 requires that each member of the board of directors personally certify the accuracy of financial reports. (T/F)

False

28) What is meant by the term "free market"?

Free market is a market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.

What is meant by the term "government-imposed barrier to entry"? Why would a government be willing to impose barriers to entering an industry?

Government-imposed barriers to entry are government-issued restrictions which keep new firms from entering an industry. One reason governments are willing to erect barriers to entering an industry is that these barriers may improve the standard of living in the long run; for example, granting patents encourages the development of new products and technologies. Another reason is that firms do favors for politicians who enact such provisions (for example, contributing to campaigns).

Explain why OPEC is caught in a prisoner's dilemma?

If every member of OPEC cooperates and produces the low output level dictated by its quota, prices will be high, and the cartel will earn large profits. Once the price has been driven up, however, each member has an incentive to stop cooperating and to earn even higher profits by increasing output beyond its quota. Thus, it is rational for an individual member to unilaterally increase output to maximize its earnings. But if no country sticks to its quota, total oil output will increase, and collective profits will decline.

The breakfast cereal industry has a four-firm concentration ratio of 80 percent. Is this enough information to classify the industry as an oligopoly? Is a high concentration ratio evidence that an industry is not competitive?

It would be considered an oligopoly. If they were to account for 40% or less it would be monopolistic

The breakfast cereal industry has a four-firm concentration ratio of 80 percent. Is this enough information to classify the industry as an oligopoly? Is a high concentration ratio evidence that an industry is not competitive?

Most economists classify an industry with a four-firm concentration ratio greater than 40 percent as an oligopoly; therefore, the breakfast cereal industry would be considered an oligopoly. But the concentration ratio is a flawed measure of the extent of competition in the breakfast cereal industry. For example, concentration ratios do not include sales in the United States by foreign firms, so to the extent that foreign firms sell breakfast cereal in the United States, the concentration ratio understates the degree of competition in this industry. Also, since concentration ratios are calculated for the national market, regional or local competition is ignored. Concentration ratios are useful for providing a general idea of the extent of competition in an industry.

What is opportunity cost?

Opportunity cost refers to the highest-valued alternative that must be given up to engage in an activity. For example, the opportunity cost of taking this economics class is what you are giving up to take the class, which may be taking another class such as accounting or psychology, working extra hours at your job, or extra sleep (whichever is your highest-valued alternative).

Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain.

Productivity efficiency is a situation in which a good or service is produced at the lowest possible cost. Yes, allocative efficiency is a state of the economy in which production is in accordance with consumer preferences; every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

What is meant by the statement that "optimal decisions are made at the margin"?

The idea of margin is related to making decisions while thinking about the benefits and costs of small changes in behavior.

Deadweight loss refers to the reduction in economic surplus resulting from a market not being in competitive equilibrium. (T/F)

True

In an oligopoly, minimum efficient scale is likely to occur at a level of output that is a large fraction of industry sales. (T/F)

True

The Sarbanes-Oxley Act of 2002 requires that CEOs personally certify the accuracy of financial reports. (T/F)

True

When voluntary exchange takes place, both parties gain from the exchange. (T/F)

True

Explain whether the information in this table contradicts the law of one price.

Unless there are big differences in the quality of the retailers in terms of shipping, delivery, or ease of use of their Web sites, these data would seem to contradict the law of one price.

Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case.

Unlike the perfectly competitive firm, the monopolistically competitive firm faces a downward sloping demand curve which means that the firm must lower its price to sell additional units of output. As a result, price will always be greater than marginal revenue (P > MR). By contrast, the perfectly competitive firm faces a horizontal demand curve and P = MR. The profit-maximizing rule, MR = MC, applies to all firms but because in perfect competition P = MR the rule can be written as P = MC. A firm achieves allocative efficiency if it charges a price equals to the MC of producing the last unit. This condition is satisfied at the profit-maximizing output for the perfectly competitive firm (since P = MC = MR) but will not hold for the profit maximizing output of monopolistically competitive firm for which P > MR = MC.

Are restaurant coupons a form of price discrimination? Why or why not?

Yes, coupons are a form of price discrimination. People who are willing to take the time to clip coupons have a higher price elasticity of demand than people who are not. Coupons are a way for firms to cut the price paid by higher price elasticity consumers — without having to cut the price for everyone else.

What is yield management? How is yield management being used in the airline industry?

Yield management is the use of sophisticated models of demand and pricing strategies to maximize revenue and profits. Yield management is used in the airline industry when airlines vary ticket prices based on the season, length of route, day of the week, time of day, and type of passengers on the flight.

Refer to Figure 13-10. to answer the following questions. a.What is the profit-maximizing output level?b.What is the profit-maximizing price? c.At the profit-maximizing output level, how much profit will be realized?d.Does this graph most likely represent the long run or the short run? Why?

a. 22 b. 16 c. 88 d. Short-run

Refer to Table 2-16. This table shows the number of labor hours required to produce a motorcycle and a guitar in Ireland and Scotland. a. Which country has an absolute advantage in the production of motorcycles?b. Which country has an absolute advantage in the production of guitars? c. What is Ireland's opportunity cost of producing one motorcycle?d. What is Scotland's opportunity cost of producing one motorcycle?e. What is Ireland's opportunity cost of producing one guitar? f. What is Scotland's opportunity cost of producing one guitar? g. If each country specializes in the production of the product in which it has a comparative advantage, which country should produce motorcycles? h. If each country specializes in the production of the product in which it has a comparative advantage, which country should produce guitars?

a. Scotland b. Scotland c. 4 guitars d. 4.5 guitars e. .25 motorcycles f. 2/9 motorcycles g. Ireland h. Scotland