online mcc microecon test 4 (ch 26,27,31)
Suppose a polluting firm is faced with a pollution tax. The firm will choose to abate pollution so long as the
marginal benefit of avoiding the tax exceeds the marginal cost of abatement.
A pollution tax will increase the amount of pollution a firm generates if the tax is less than the ____________ of abatement
marginal cost
In the long-run equilibrium in a perfectly competitive market, price is equal to both _________ and _________
marginal cost, avg total cost
A long-run equilibrium in a monopolistically competitive market satisfies the following two conditions:
marginal rev equals marginal cost, avg cost equals price
A profit-maximizing firm picks the quantity of output at which ____________ equals _____________.
marginal rev, marginal cost
The strategy of reducing the price to deter entry is __________ pricing. The price that is just low enough to deter entry is the _____________ price.
limit, limit
In some monopolistically competitive markets, differentiation is simply a matter of
location
A contestable market has relatively __________ _________ costs,
low entry and exit
Buzz and Moe are duopolists in the lawn-care market. The game tree to the right shows the possible pricing outcomes and their payoffs. The outcome of the pricing game is that Buzz will pick the _______ price and Moe will pick the _________ price.
low, low
When products are differentiated by location, the entry of firms generates benefits for consumers in the form of ____________
lower travel costs
The phenomenon of "happy hour" pricing (_________prices when demand is relatively high) results from relatively ____________ demand.
lower,elastic
Changes in regulatory policy in the 1980s _________ the price of trucking services and _____________ the profits of trucking firms.
lowered, decreased
Lawn-Cutting Equilibrium. Consider the market for cutting lawns. Each firm has a fixed daily cost of $18 for equipment, and the marginal cost of cutting a lawn is $4. Suppose each firm can cut up to three lawns per day. The market demand curve for lawn cuts is linear, with a vertical intercept of $70 and a slope of −$1 per lawn. a. If each firm in the market cuts three lawns, what is the average cost per lawn? b. What is the equilibrium price under monopolistic competition? c. How many lawns will be cut in total, and how many firms will be in the market? ________ lawns and _______ firms
10,10,60,20
Equilibrium? In your city, there are currently three firms providing oil changes. For each firm, there is a fixed cost of $8080 per day and a marginal cost of $1010 per oil change. Each firm currently maximizes its profit by providing 2020 oil changes per day. a. For each firm, marginal revenue equals b. This is a long-run, monopolistically competitive equilibrium if ___________ equals _______.
10, price, 14.00
To internalize the external cost associated with traffic collisions, the appropriate VMT tax is about $_______ per mile
.04
If a CO2 washing machine can trap CO2 at a cost of $30 per ton, a gasoline tax of roughly _____________ per gallon of gasoline would cover the cost of capturing the CO2 it generates.
.25
To internalize the external cost associated with automobile emissions that cause urban smog, the appropriate gasoline tax is about
.40 per gallon
A market is considered unconcentrated if the Herfindahl-Hirschman Index (HHI) is below _________; it is considered highly concentrated if the Herfindahl-Hirschman Index (HHI) is above _________
1000,1800
Consider the demand for, and supply of, CO2 allowances in the European Union. Initially the supply of allowance is set at 10 thousand tons and the initial price is $20 per ton. Suppose the supply of allowances increases by 25 percent, and the price elasticity of demand for permits is 2.0. The new equilibrium quantity is ________ and the new equilibrium price is ______
12.50,17.50
Take the Pen Money and Run? Consider the example of Reynolds International Pen and the ballpoint pen. Suppose the unit cost of a ballpoint pen is $1.00. Reynolds has two options. 1. Passive. Pick the monopoly price of $14. In the first year, Reynolds will sell 100,000 pens. Over time as other firms enter the market with lower prices, the quantity sold by Reynolds will decrease by 20,000 per year, to 80,000 in the second year, and so on, down to zero in the sixth year. 2. Deterrence. Commit to produce 1 million pens per year, an amount large enough to deter entry. The limit price is $1.05. a. Under the passive strategy, the profit per year is _________ in the first year, ________ in the second year, and so on, down to zero in the sixth year. The total profit over the six-year period would be _________. b. Under the deterrence strategy, the profit per year is ___________ Over a 20-year period, total profit would be ________. c. Taking a 20-year perspective, the _________ strategy is more profitable. d.If the limit price were $2.50 rather than $1.05, then ______________ would be the most profitable strategy
1300000, 1040000, 3900000, 50,000 , 1mil, passive, deterrence
In the table above, the profit from repeat customers will equal the cost of the advertisement if there are ____ million repeat customers.
2.5
For a market with four firms, each with a 25-percent market share, the Herfindahl-Hirschman Index (HHI) is equal to
2500
Bidding for Bookstore Licenses. Paige initially has the only license to operate a bookstore in Bookville. She charges a price of $1212 per book, has an average cost of $55 per book, and sells 501501 books per year. When Paige's license expires, the city decides to auction two bookstore licenses to the highest bidders. Suppose the relevant variables (price, average cost, and output per firm) take on only integer valueslong dash—no fraction or decimals. a. Suppose Paige is optimistic and imagines the best possible outcome with a two-firm market. What is the maximum amount she is willing to pay for one of the two licenses? Suppose Paige is pessimistic and imagines the worst possible outcome with a two-firm market. What is the maximum amount she is willing to pay for one of the two licenses?
2500,0
Word-of-Mouth Book Sales. Consider a publisher who earns a profit of $1 per book sold. An advertisement that costs $380,000 would sell 100,000 books directly. To make the advertisement worthwhile, how many of the original buyers must each persuade just one other person to buy the book?
280000
Suppose that Jack and Jill use a tit-for-tat scheme to encourage cartel pricing. Jill chooses the low price for two successive months, and then switches to the high price. The two firms will deviate from cartel pricing for a total of ________ months
3
The external accident cost per mile for the typical driver between the ages of 25 and 70 is about ________ cents compared to ________ cents for a young driver
3.4,11
How Many Bookstores? The city of Bookburg initially allows only one bookstore, which sells books at a price of $20 and an average cost of $11. Suppose the city eliminates its restrictions on bookstores, allowing additional stores to enter the market. According to an expert in the book market, "Each additional bookstore will decrease the price of books by $2 per book and increase the average cost of selling books by $1 per book." The equilibrium number of bookstores is _________ stores
4
Consider a market with an insecure monopolist. The zero-profit quantity is 50 units and the minimum entry quantity is 10 units. The entry-deterring quantity is _________ units. The zero-profit price is $90. The slope of the market demand curve is −$2 per unit of output. The limit price is _______
40,70
The lesson from the Dear Abby column is that
all of the above
Advertising for Loans. Consider the numbers provided on South African consumer loans in the Application. Suppose a lender initially charges an interest rate of 10 percent and uses male models in its advertisements. The firm wants to increase its uptake rate among male consumers. Suppose the firm switches to female models in its advertisements. The male uptake rate will increase by ______%
8
An outcome of a game in which each player is doing the best he or she can, given the action of the other players, is
A Nash EQUILLIBRIUM
Which of the following statements is false?
A vehicle identification system records the number of times a vehicle uses any roadway for more than twenty miles.
A graphical representation of the consequences of different actions in a strategic setting is a
game tree
Got Milk? Bessie and George are milk producers, and each must decide whether to spend $16 million on an advertising campaign. If neither advertises, each will earn $9 million in net revenue from sales (net revenue). If both advertise, each will earn $30 million in net revenue and $1414 million in profit ($30 million minus $16 million for advertising). If only one producer advertises, that firm will earn $20 in net revenue, and the other firm will earn $19 million in net revenue. This is depicted in the game tree to the right. What is the outcome of the game? Is there an advertiser's dilemma? Does this dilemma differ from the advertisers' dilemma discussed earlier in the chapter? How might the dairy industry solve this dilemma? (Think white mustaches.)
Bessie and George will both not advertise. Yes. The dilemma is that Bessie and George would be better off if both would advertise but neither do. Yes. Earlier, the dilemma was that firms would be better off if neither would advertise but both do. Collect funds from firms for industry-wide advertising.
Reforestation versus Abatement. Suppose your firm joins the Chicago Climate Exchange and commits to reducing greenhouse gases by 11 tons per year. You can pay for a reforestation project that offsets your emissions at a cost of $14 per ton of carbon offset. Or you can modify your production cost to abate pollution. Your marginal cost of abating the first ton is $6; the marginal cost increases by $2 for each additional ton, to $8 for the second ton, $10 for the third ton, and so on. a. Which of the following is the best combination of reforestation offsets and abatement? b. How much money does your firm save by using the offsets
Eliminate 4 tons of pollution and pay for 7 reforestation offsets 42
Automobile Advertising. Consider two automobile companies that are considering advertising campaigns. If neither firm advertises, each will earn net revenue of $9 million. If each spends $10 million on advertising, each firm's net revenue will be $17 million. If one advertises and the other does not, the firm that advertises will earn $23 million in net revenue, while the firm that does not will earn $1 million. This is depicted in the game tree to the right. What is the outcome of the game? From the industry perspective, do the benefits of advertising exceed the costs?
Firm 1 and firm 2 will both advertise. no
Which of the following does not describe a way in which a carbon tax would reduce greenhouse emissions?
Higher oil price would result in more imported oil.
Which of the following is not true of a pollution tax?
It is shifted backward to producers and results in less production of the polluting good.
The Cost of Celebrities. Consider a firm that hires an expensive celebrity to advertise its products. Does the firm have an incentive to prevent its customers from discovering how much it pays the celebrity?
No. Large spending for a celebrity endorsement signals that the producer expects the product to be popular.
Which of the following statements is false?
On average, the collision-related external cost of travel is about 10.4 cents per mile driven.
Uniform Trade-Offs. A prominent feature of Mao's Communist China in the 1940s through the 1970s was the blue uniform worn by all citizens. a. Which of the following statements best describe the trade-off associated with the use of uniforms? b. Suppose people had a choice among five uniform colors rather than being required to wear blue uniforms. Would you expect the benefits of requiring uniforms to decrease by a little or a lot?
The benefit of a lower average cost of production means less variety for consumers. a little
Which of the following statements is false?
The economic approach to air pollution is to externalize the internal cost with a pollution tax.
Which of the following statements is false?
The first program of marketable pollution permits was started in 1996 by the U.S. Environmental Protection Agency.
Which of the following statements is false?
The higher the abatement cost that can be avoided, the smaller the amount a firm is willing to pay for a permit.
Suppose firms in a monopolized market are earning economic profits and a second firm, producing a slightly different product, enters the market. Which of the following does not explain why the monopolist's profits fall?
The monopoly moves upward along its positively sloped average-cost curve.
Which of the following statements is false?
The uniform abatement policy achieves the same reduction in pollution as a pollution tax at a lower cost.
No Permits Exchanged? A state issued marketable permits for sulfur dioxide emissions to several electricity generators. Most of the permits were given to the utilities with the oldest generating facilities. One year later, none of the permits had been bought or sold. Which of the following most likely explains the absence of permit exchanges?
The utilities that received permits had the highest costs of pollution abatement.
The "command" part of a command-and-control pollution policy specifies
a certain volume of pollution and requires the abatement be done with a particular technology.
Under a price-leadership model, a sudden drop in price by the leader is unlikely to trigger a price war if other firms believe that the price cut was caused by
a change in consumer demand.
A gasoline tax will be shifted forward to ________ and backward to _________ such as the suppliers of __________
gas consumers, input suppliers, crude oil
We can predict the equilibrium of the price-fixing game by
a process of elimination.
Pollution taxes reduce pollution by
all of the above
For firms with a low-price guarantee, the promise of matching a lower price is ____________ promise, because all firms will charge the same ________ price
an empty, high
When two firms would be better off if neither spent money on advertising, but each firm advertises, the firms are suffering from
an advertisers' dilemma.
The trade-off with entry is that an increase in the number of firms leads to higher _____________, but greater _________
avg production costs, variety
The entry of a third firm into a market with two original firms __________ the market price, ____________ the average production cost, ____________ the quantity produced per firm, and ______________ the profit of each original firm.
decrease, increase, decrease, decrease
As the minimum entry quantity increasesincreases, the entry-deterring quantity _____________, , the limit price ____________ and the profit from the entry-deterrence strategy _______________
decrease, increase, increase
If two firms expect to be in the market together for a long time, the _____________ of underpricing will be large relative to the __________.
cost, benefit
The marginal __________ of abatement is a positively sloped curve and the marginal _____________ of abatement is a negatively sloped curve. The efficient outcome is where the marginal benefit of abatement ______________ the marginal cost. For any smaller quantity than the efficient outcome, the marginal benefit ____________ is less than the marginal cost, so ___________ abatement should occur.
cost, benefit, equals, exceeds, more
A switch from regular pollution permits to marketable permits ___________ the total cost of abatement
decreases
In the figure depicted to the right, it is not a Nash equilibrium for Jill to choose the low price and Jack to choose the high price (rectangle 2) because
if Jill picks a low price, the best response of Jack is to pick the low price.
A technological advance that decreases abatement costs will ____________ the demand for marketable pollution permits and __________ the equilibrium price of permits.
decrease, decrease
Advertising for eyeglasses ___________the price of eyeglasses because advertising promotes _____________
decreases,price competition
A pollution tax on automobiles provides an incentive to
do all of the above
The prisoners' dilemma is that each prisoner would be better off if both prisoners ____________ but both end up _________
do no confess, confessing
The cheaters' dilemma is that all three cheaters would be better off if each ___________ but each cheater has an incentive to ______________.
do not confess, confess
A dominant strategy is the strategy that allows one firm to dominate the market.
false
Monopolistic competition refers to a market in which old boys act naturally as they transport tight slacks in the back of Dodge Ram pickup trucks.
false
To deter entry, a monopolist can simply threaten that if a second firm enters, the monopolist will cut its price to the average cost.
false
The advertisers' dilemma is that
firms would be better off not advertising but each firm will advertise
Beware the Too-Easy Answer. Your city initially restricts the number of pizzerias to one. The existing monopolist sells 4,000 pizzas per day. A pizzeria reaches the horizontal portion of its long-run average cost curve at an output of about 2,000 pizzas per day. Suppose the city eliminates the entry restrictions. In equilibrium, the number of firms will be ___________ two.
greater than
The duopolists' dilemma is that each firm would make more profit if both picked the __________ price, but both firms pick the __________ price
high, low
Under a system of marketable pollution permits, a firm with ___________ abatement costs will buy permits frombuy permits from a firm with ___________ abatement costs
high, low
If a seller promises to refund any difference between its price and the price of its competitors, this practice will lead to __________ prices.
higher
With monopolistic competition, the average cost of production is
higher than the minimum, but there is more product variety
Perfectly competitive firms produce _________ products, while monopolistically competitive firms produce ___________ products
homogeneous, differentiated
Perfectly competitive firms sell ________ products, while monopolistically competitive firms sell __________ products
homogeneous, differentiated
A perfectly competitive firm has a ________ demand curve, whereas a monopolistic competitive firm has a ________ demand curve.
horizontal, downward sloping
A careful study of the retail tire market suggests that low-price guarantees __________ prices by about _________%
increase, 10
If we move from the duopolyduopoly outcome to the cartelcartel outcome, the price _______ the quantity per firm ____________ and the profit per firm ________________
increase, decrease, increase
Dry weather in the Nordic countries will __________ the demand for CO2 allowances and _________ the equilibrium price.
increase, increase
As product differentiation diminishes, the price elasticity of demand for the product of a monopolistically competitive firm _____________ and the average cost of production _________
increase,decrease
In the application on consumer loans in South Africa, the loan uptake rate __________ as the interest rate decreased and ___________ when the model on the offer was switched from a man to a woman.
increased, increased
The marginal cost of abatement typically __________ with the level of abatement
increases
The marginal cost of abating methane_______________ If the marginal benefit of methane abatement is $150 per metric ton, the optimal level of abatement is about _________ million metric tons
increases at an increasing rate. 69
The entry of a satellite TV firm ____________ consumer surplus, in part because the the cable company ___________ the quality of service while ______________ price by a relatively small amount.
increases, improve, either increase or decrease
Microsoft is __________ monopolist, and the limit price is roughly _________ percent of the pure monopoly price.
insecure, 40
A market with low entry and exit costs
is a contestable market.
A policy of uniform abatement
is inefficient because it does not take advantage of the differences in abatement costs.
A command-and-control policy of pollution abatement
is inefficient because it requires that each polluter use the same technology to abate pollution.
The entry of a second firm shifts the firm-specific demand curve of the first firm to the
left
Compared to a pollution tax, a uniform-abatement policy is ________ efficient efficient because it does not exploit differences in
less, abatement costs across firms.
In a cartel, the price that will be charged to consumers is the
monopoly price.
When the government eliminated entry restrictions on the trucking industry with the Motor Carrier Act of 1980,
new firms entered the trucking market, and freight prices dropped by about 22 percent.
When a duopolists' dilemma occurs, to eliminate the possibility of underpricing, one firm can
offer a low-price guarantee.
How does a pollution tax decrease the volume of pollution?
only a and b
Oligopolies occur for three reasons: (1) the government may limit the number of firms in a market by granting ___________ or limiting the number of _________ (2) large economies of _________; and (3) to get a foothold in the market, large expenditures on ___________ are required.
patents, business licenses, scale in production, advertising
An example of implicit pricing agreements is
price leadership
abatement techniques for international shipping is arranged in order of increasing MAC (marginal abatement cost)?
propeller maintenance; switch to gas-powered engines; reduce speed; tap wind power with sails and wings
An advertisement that succeeds in getting consumers to try the product will be sensible only if the number of ___________ customers is large
repeat
An increase in the supply of marketable pollution permits will shift the supply curve for permits to the ________ and _________ the equilibrium price of permits.l
right, decrease
Entry deterrence won't be the best strategy for all insecure monopolists. The use of an entry deterrence strategy is more successful when
scale economies are relatively large.
Although there are relatively small ______________ in the production of breakfast cereal, the market is an oligopoly because of the substantial investment in _____________ required to enter the market.
scale economies, advertising
The salt cartels of the 19th Century were ___________ lived, in part because individual firms ______________ the cartel
short, cheated on
The advertisers' dilemma occurs when advertising causes a relatively _______ increase in total sales of an industry.
small
The Coase bargaining solution requires a
small number of affected parties and small transactions costs.
The external cost of production is the cost incurred by
someone other than the producer.
Which of the following is not a way that monopolistically competitive firms use advertising?
test the market for new products
When there is a prisoners' dilemma,
the Nash equilibrium is that each of two prisoners would be better off if neither confessed, but both people confess.
In a Nash equilibrium, each player is doing the best he or she can, given
the action of the other players
The optimal level of pollution abatement is
the level at which the marginal benefit equals the marginal cost.
The optimal level of pollution abatement is the level at which
the marginal benefit of abatement equals the marginal cost of abatement.
The social cost of production equals
the private cost plus the external cost.
Going Out of Business Sales? Many firms have going-out-of-business sales with remarkable bargains. What insights does the material in the chapter provide about such sales? Firms going out of business underprice their rivals because
there is limited time for retaliation.
with a ..... __________ strategy, starting in the second month, firm A chooses whatever price firm B chose the preceding month. _____________ strategy, when firm B underprices firm A, firm A responds by dropping the price to a level at which each firm will make zero economic profit.
tit for tat, grim trigger
A command-and-control policy is likely to be inefficient because it causes firms
to use inefficient abatement technologies.
A pollution tax encourages firms to develop more efficient abatement technology.
true
It is illegal for firms to discuss pricing strategies or methods of punishing a firm that underprices other firms.
true
Suppose firms in a monopolistically competitive market are earning economic profits. Entry will occur until the
typical firm makes zero economic profit.
A gasoline tax will shift the supply curve for gasoline _______ causing the equilibrium price to ____________ and the equilibrium quantity to ___________
up increase, decrease
At a firm's current level of output, marginal revenue exceeds the marginal cost. The firm should _________ its output and ________________ it's price.
up, down
A carbon tax will shift the supply curve for home heating oil _______ causing the equilibrium price to ________ and the equilibrium quantity to ____________
up, increase, decrease
A switch from a pollution-tax policy to a uniform-reduction policy will shift the supply curve of the polluting product _______ and ________ the equilibrium price
upward, increase
Between 1893 and 1940, Alcoa had a monopoly on aluminum production in the United States. During this period, Alcoa kept other firms out of the market by
using limit pricing
Split the Difference for a Pollution Permit. Consider two firms, each of which is issued 3 marketable pollution permits. For firm H, the marginal cost of abatement is $190. For firm L, the marginal cost of abatement is $130. a. Is there room for a mutually beneficial exchange of one permit? If so, which firm will buy a permit and which firm will sell a permit? b. If the two firms split the difference, what's the price of a permit? $ c. Suppose that after the exchange of one permit, the marginal cost of abatement for the firm that sold the permit is $170 and the marginal cost of the firm that bought the permit is $150. Will the firms exchange another permit, or are they done trading? d. What is the savings in abatement cost from allowing firms to buy and sell two permits?
yes, firm h buys and firm L sells, 160, they'll trade one more permit, 80
To enter the motel market as the operator of a Motel 6, you'll pay a franchise fee of
$35,000 and royalties of 5 percent of sales.
When a person with the moniker "Dreading Winter" sought advice from the "Dear Abby" column about how to deal with the burning eyes, a stuffy nose, and painful sinuses caused when her neighbors heated their home with a wood-burning stove,
Abby's readers came up with many suggestions.
In the figure depicted to the right, suppose Jack promises Jill that if she picks the high price, he will too. Is this promise credible?
No, because by instead picking the low price, Jack's profit will increase.
The private cost of production includes the amount a firm pays for
labor, capital, and materials.
