Practice Exam 2 Questions
One characteristic of a perfectly competitive market is that there are _____ sellers of the good or service a) many b) a few c) usually fewer than 10 d) one or two
1) many
A monopoly's short-run supply curve is upward-sloping because of diminishing marginal returns True or false?
False
According to the optimal output rule, profits are maximized when firms produce where the difference between marginal revenue and marginal cost is the largest True or false?
False
Price discrimination can never occur in oligopoly: True or false?
False
Suppose the beef industry is perfectly competitive and the demand for beef rises. As long as the demand does not subsequently fall, beef producers can expect to earn economic profits in both the short and long run. True or false?
False
When a firm has to increase its output, average total costs will decrease in the short run and then increase in the long run after the firm has time to add physical capital True or false?
False
When regulating a natural monopoly, the government always sets a price ceiling where marginal cost intersects the demand curve True or false?
False
A concert is excludable if the manager of the concert hall can prevent people who do not have a ticket from entering True or false?
True
A low voter turnout can be explained by noting that political action is a public good and people who don't vote can free-ride on those who do True or false?
True
A natural monopoly has increasing returns to scale, so that a larger producer has a relatively low average total cost True or false?
True
In long-run equilibrium in a perfectly competitive market, all firms will be operating at the same level of marginal cost True or false?
True
The market for new drugs is not usually perfectly competitive, since the companies manufacturing these drugs are usually granted patents, and this restricts entry into the industry True or false?
True
The total product curve for the Wallmark Greeting Card Company shows how the quantity of output depends on the quantity of the variable input for a given amount of the fixed inputs. True or false?
True
Until 1890, trusts in which firms in an industry agreed to limit production and raise prices were legal in the United States. True or false?
True
Until recently most other advanced countries did not have policies that prohibited price fixing True or false?
True
When a monopolist practices price discrimination as opposed to setting a single price, deadweight loss decreases True or false?
True
When a natural monopoly is regulated to charge a price equal to average total cost, producer surplus decreases, but total surplus increase. True or false?
True
When the long-run average total cost curve is upward-sloping as output increases, the firm has diseconomies of scale True or false?
True
Gary's Gas and Frank's Fuel are the only two providers of gasoline in their town. Gary and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, "I'll cheat on the cartel because regardless of what Frank does, cheating gives me the best payoff." This is an example of: a) a dominant strategy b) an irrational strategy c) a tit-for-tat strategy d) product differentiation
a) a dominant strategy
There are two plants in an industry. To reduce pollution, the government has imposed environmental standards forcing each plant to cut emissions by 60%. At the emissions standard, the marginal social benefit of pollution for plant A is $500, and the marginal social benefit of pollution for plant B is $125. The same level of pollution can be achieved at a lower cost by: a) allowing plant A to pollute more and requiring plant B to pollute less b) forcing both plants to reduce emissions c) allowing both plants to pollute more d) forcing plant A to reduce emissions and allowing plant B to increase emissions
a) allowing plant A to produce more and requiring plant B to pollute less
A Pigouvian subsidy is: a) designed to encourage activities generating external benefits b) appropriate when the marginal social cost curve and the marginal social benefit curve intersect at an inefficient level c) appropriate when the marginal social cost curve is above the marginal cost of production curve d) designed to discourage activities generating externalities
a) designed to encourage activities generating external benefits
When a monopolist practices price discrimination, compared to a single-price monopolist, producer surplus will: a) increase b) increase initially, and then return to its original level c) decrease d) remain the same
a) increase
If a perfectly competitive firm is producing a quantity where P = MC, then profit: a) is maximized b) can be increased by increasing production c) can be increased by decreasing the price d) can be increased by decreasing the quantity
a) is maximized
Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, that the price of each candy cane is $0.10, and that the market demand curve is downward-sloping. The price of sugar rises, increasing the marginal and average total costs of producing candy canes by $0.05. In the short run a typical producer of candy canes will be making: a) negative economic profit b) zero economic profit c) the answer is impossible to determine from the information given d) an economic profit
a) negative economic profit
A monopoly: a) produces a product with no close substitutes b) is composed of a single buyer and several sellers c) is composed of a large number of small firms d) is composed of a small number of large firms
a) produces a product with no close substitutes
A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the same and the firm does not shut down. Compared to the condition before the increase in marginal costs, the monopolist will _____ its price and _____ its level of production a) raise; decrease b) raise; increase c) not change; decrease d) lower; increase
a) raise; decrease
Suppose a perfectly competitive market is suddenly transformed into one that operates as a monopoly market. We would expect price to _____, output to _____, consumer surplus to _____, producer surplus to _____, and deadweight loss to _____. a) rise; fall; fall; rise; rise b) fall; rise; rise; fall; c) fall rise; fall; fall; fall; rise d) rise; fall; rise; rise; fall
a) rise; fall; fall; rise; rise
In the short run: a) some inputs are fixed and some inputs are variable b) all inputs are variable c) all costs are variable d) all inputs are fixed
a) some inputs are fixed and some inputs are variable
When innovations by one firm are quickly emulated and improved on by rival firms in the same industry or in other industries, this is: a) technology spillover b) illegal under most patents c) industrial espionage d) technology takeover.
a) technology spillover
The first sushi restaurant opens in town. Initially people are very cautious about eating tiny portions of raw fish, as this is a town where large portions of grilled meat have always been popular. Soon, however, an influential health report warns consumers against grilled meat and suggests that they increase their consumption of fish, especially raw fish. The sushi restaurant becomes very popular and its profit increases. What will happen to the short-run profit of the sushi restaurant? What will happen to the number of sushi restaurants in town in the long run? Will the first sushi restaurant be able to sustain its short-run profit over the long run? Choose the statement that is incorrect. a) the number of sushi restaurants in town will increase, causing the equilibrium price to increase b) entry will occur causing the price to fall and lowering the short-run profit of the original sushi restaurant c) the profit of the original sushi restaurant will likely be lower in the long run than in the short run d) the short-run profit of the sushi restaurant will fall over time
a) the number of sushi restaurants in town will increase, causing the equilibrium to increase
A monopolist responds to an increase in marginal cost by _____ price and _____ output a) decreasing; increasing b) decreasing; decreasing c) increasing; decreasing d) increasing; increasing
c) increasing; decreasing
In a perfectly competitive market: a) the price will change to reflect any change in production cost b) the existence of profits leads firms to exit the industry, while losses lead firms to enter the industry c) perfect competition generates prices greater than marginal costs d) in the long run, economic profits are positive
a) the price will change to reflect any change in production cost
The license that are exchangeable and that enable the holder to pollute up to a specified amount during a given period are called: a) tradable emissions permits b) Pigouvian taxes c) environmental standards d) emissions taxes
a) tradable emissions permits
An input whose quantity can be changed in the short run is a(n) _____ input a) variable b) fixed c) incremental d) marginal
a) variable
Buford Bus Manufacturing installs a new assembly line. As a result, the output produced per worker increases. The marginal cost of output at Buford: a) will decrease (the MC curve will shift down b) will be unchanged c) is at its maximum d) will increase (the MC curve will shift up)
a) will decrease (the MC curve will shift down)
A perfectly competitive firm maximizes profit in the short run by producing the quantity at which: a) Q * (P-ATC) = 0 b) MR=MC c) P <AVC d) TR=Tc
b) MR=MC
The level of inputs a firm employs will determine a firm's: a) stock price b) ability to produce output c) elasticity of demand d) location of production
b) ability to produce output
An external benefit is a: a) negative externality b) benefit that individuals or firms confer on others without receiving compensation c) benefit that accrues to domestic firms as a result of the actions of foreign (external) firms d) benefit that accrues to foreign (external) firms as a result of the actions of domestic firms
b) benefit that individuals or firms confer on others without receiving compensation
Labor costs represent a large percentage of total costs for many firms. According to data from the Bureau of Labor Statistics, U.S. labor costs were up 0.8% in 2013, compared to 2012.An increase in labor productivity means each worker can produce more output. Recent data on productivity show that labor productivity in the U.S. non-farm business sector grew by 1.7% between 1970 and 1999, by 2.6% between 2000 and 2009, and by 1.1% between 2010 and 2013.When productivity growth is positive, what happens to the marginal cost curve and the average total cost curve? a) the marginal cost curve shifts upward and the average total cost curve shifts downward b) both curves shift downward c) both curves shift upward d) the marginal cost curve shifts downward and the average total cost curve shifts upward
b) both curves shifts downward explanation: labor costs per unit decrease, so each unit costs less to produce than before
Which of the following scenarios best describes an oligopolistic industry? a) thousands of soybean farmers sell their output in a global commodities market b) coca-cola and pepsi sell most of the soft drinks consumed around the world c) a college has one bookstore selling textbooks to students d) a single cable company serves customers in a small town
b) coca-cola and pepsi sell most of the soft drinks around the world
Monopolistic competition describes an industry characterized by a _____ number of firms producing _____ with _____ entry a) large; identical; relatively easy b) large; similar; relatively easy c) small; identical; barriers to d) small; similar; relatively easy
b) large; similar; relatively easy
When a fine caterer produces 30 catered meals, its marginal cost and average variable cost each equal $10. Therefore, assuming normally shaped cost curves, at 29 meals its marginal cost is _____ $10 and its average variable cost is _____ $10 a) more than; more than b) less than; more than c) more than; less than d) equal to; equal to
b) less than; more than
Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, that the price of each candy cane is $0.10, and that the market demand curve is downward-sloping. The price of sugar rises, increasing the marginal and average total costs of producing candy canes by $0.05. In the short run a typical producer of candy canes will be making: a) zero economic profit b) negative economic profit c) an economic profit d) the answer is impossible to determine from the information given
b) negative economic profit
The government is involved in providing many goods and services. For the good or service listed, determine whether it is rival or non-rival in consumption and whether it is excludable or non-excludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high? A lighthouse on the coast a) rival; excludable; this is a private good. without government intervention the quantity produced would be efficient. b) non-rival; non-excludable; this is a public good and without government intervention the quantity produced would be inefficiently low. c) non-rival; excludable; this is an artificially scarce good and without government intervention the quantity produced would be inefficiently low. d) rival; non-excludable; this is a common resource and without government intervention the privately provided quantity of highways would be inefficiently low.
b) non-rival, non-excludable; this is a public good and without government intervention the quantity produced would be inefficiently low explaination: every boat can see the light, and one ship's captain viewing the light does not make it harder for another ship's captain to view the light. Unless the lighthouse can find a way to charge every ship that views it, there will be too few lighthouses constructed
Collusive agreements are typically difficult for cartels to maintain because each firm can increase profits by: a) advertising less than will maximize joint cartel profits b) producing more than the quantity that maximizes joint profits c) charging more than the price that maximizes joint cartel profits d) producing less than the quantity that maximizes joint profits.
b) producing more than the quantity that maximizes joint cartel profits
Good that are non-rival in consumption and non-excludable are _____ goods a) common resource b) public c) normal d) private
b) public
When marginal cost is ABOVE average variable cost, average variable cost must be: a) falling b) rising c) at its minimum d) at its maximum
b) rising
When firms in a particular industry informally agree to charge the same price as the largest firm in that industry, it is called: a) price extortion b) tacit collusion c) satisfying d) overt collusion
b) tacit collusion
Perfect competition is characterized by: a) widely recognized brands b) the inability of any one firm to influence price c) fierce quality competition d) rivalry in advertising
b) the inability of any one firm to influence price
Suppose that the market for haircuts in a community is perfectly competitive and that the market is initially in long-run equilibrium. Subsequently, a decrease in population decreases the demand for haircuts. In the short run, we expect that the market price will _____ and the output of a typical firm will _____. a) rise; fall b) rise; rise c) fall; fall d) fall; rise
c) fall; fall
An analytical approach through which strategic choices can be assessed is called: a) monopolistic competition b) cost-benefit analysis c) game theory d) econometric theory
c) game theory
Which of the following is true? a) every point on a long-run industry supply curve shows a price and quantity supplied at which firms in the industry are earning positive economic profit b) the long-run industry supply curve relates the price of a good or service to the quantity produced after all adjustments to a price change have been made c) for establishing the long-run industry supply curve, factor costs and the number of firms are held constant d) in perfectly competitive industries, the long-run supply curve is always horizontal
b) the long-run industry supply curve relates the price of a good or service to the quantity produced after all adjustments to a price change have been made
Diminishing returns are a reason: a) the average fixed cost curve is downward-sloping b) the marginal cost curve is downward-sloping c) the marginal cost curve is upward-sloping d) fixed costs remain constant
b) the marginal cost curve is upward-sloping
A firm's total output times the price at which it sells that output is _____ revenue a) average b) total c) marginal d) net
b) total
Average variable cost is: a) variable cost per unit multiplied by quantity b) total variable cost divided by quantity c) the difference between total cost and total fixed cost d) the difference between average total cost and total cost
b) total variable cost divided by quantity
The licenses that can be bought and sold by polluters and that enable the holder to pollute up to a specified amount during a given period are called: a) environmental standards b) tradable emissions permits c) pigouvian taxes d) emissions taxes
b) tradable emissions permits
Firms in monopolistic competition can acquire some market power by: a) increasing their output to the perfectly competitive level b) using price competition c) engaging in tacit collusion d) differentiating the product.
b) using price competition
Alexander and Vanessa benefit from scientific research. Alexander's marginal private benefit from such research is given by the equation P = 200 - Q, where Q refers to the amount of research undertaken and P is the price Alexander is willing to pay for such research. Vanessa's marginal private benefit from such research is given by the equation P = 100 - Q. The marginal social cost of engaging in such research is constant at $100.Refer to the scenario Alexander and Vanessa. If the socially optimal level of scientific research is produced and if both Vanessa and Alexander are truthful in disclosing the marginal private benefits they expect to receive from this research, what is the price per unit of research that Vanessa is willing to pay? a) $300 b) $50 c) $0 d) $100
c) $0
Suppose that the fisheries initially have a collusive agreement, but this agreement breaks down so that the fleets behave non-cooperatively. Assume that the United States and the EU each can send out either one or two fleets. The more fleets in the area, the more fish they catch in total, but the lower the catch of each fleet. The accompanying matrix shows the profit (in dollars) per week earned by the two sides. Suppose that the fish stocks are being depleted. Each region considers the future and comes to a tit-for-tat agreement whereby each side will send only one fleet out as long as the other does the same. If either of them breaks the agreement and sends out a second fleet, the other will also send out two and will continue to do so until its competitor sends out only one fleet. If both play this tit-for-tat strategy, how much profit will each make every week? a) $12,000 b) $7,500 c) $10,000 d) $4,000 **comes with graph**
c) $10,000 explaination: each country only sends out one fleet, since if they send out a second fleet to gain $2,000 in profit, the other country will send out a second fleet the following week, reducing their second-week profits by $2,500 (from $10,000 to $7,500). Thus, this punishment strategy can help enforce the one-fleet outcome for both regions.
In an oligopoly market, collusion between firms usually leads to higher profits than noncooperative behavior. However, collusion doesn't usually occur in the United States because:I. it is illegal.II. there is an incentive for each firm to cheat on a collusive agreement.III. an oligopolistic firm will typically prefer lower profits if the only way to make higher profits is to improve the profit position of its rivals. a) II and III b) II only c) I and II d) I only
c) I and II
Two identical firms make up an industry in which the market demand curve is represented by Q = 5,000 - 4P, where Q is the quantity demanded and P is price per unit. The marginal cost of producing the good in this industry is constant and equal to $650. Fixed cost is zero.Suppose the two firms in the scenario Two Identical Firms decide to cooperate and collude, resulting in the same amount of production for each firm. What is the profit-maximizing price and output for the industry? a) P = $300; Q = 2,000 b) P = $400; Q = 5,000 c) P = $950; Q = 1,200 d) P = $600; Q = 1,500
c) P = $950; Q = 1,200
The first law designed to curb monopoly power in the United States was the ______ Act a) Robinson-Patman b) Federal Trade Commission c) Sherman Antitrust d) Clayton
c) Sherman Antitrust
When Caroline's dress factory hires two workers, the total product is 50 dresses. When she hires three workers, total product is 60, and when she hires four workers, total product is 65. The slope of the marginal product curve when two to four workers are hired is: a) vertical b) horizontal c) downward d) upward
c) downward
A perfectly competitive firm will maximize profits when the: a) price is lower than marginal cost b) price is higher than marginal cost c) marginal revenue equals marginal cost d) marginal revenue is lower than average variable cost
c) marginal revenue equals marginal cost
Suppose that each of the two firms in a duopoly has the independent choice of advertising or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million and the other gets profit of $2 million. According to game theory, if the firms collude to maximize joint profits: a) both may or may not advertise b) one will advertise and the other will not c) neither will advertise d) both will advertise
c) neither will advertise
Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond; only if the price is just equal to, or lower than, her willingness to pay. Raquel's willingness to pay is $400; Jackie's, $300; Joan's, $200; Mia's, $100; and Sophia's, $0. De Beers' marginal cost per diamond is $100. This leads to the demand schedule for diamonds shown in the accompanying table. Think about why De Beers faces a downward-sloping demand curve, then choose the statement that is INCORRECT. a) in order to sell more, De Beers must lower the price b) De Beers' curve is the market demand curve c) since De Beers is a monopoly, its demand curve is actually vertical
c) since De Beers is a monopoly, its demand curve is actually vertical explaination: the demand is a downward-sloping based on the information provided in the table
If the regulation of a monopoly results in a price equal to marginal cost but the price is below average total cost: a) the firm will earn only a zero economic profit b) the firm can still make an economic profit c) the firm will need subsidies to stay in business d) efficiency in allocation will be less
c) the firm will need subsidies to stay in business
Network externalities exist when a good's value to the consumer rises as: a) the number of people who use the good remains constant b) technology improves c) the number of people who use the good increases d) the number of people who use the good decreases
c) the number of people who use the good increases
An oligopoly is characterized as an industry in which: a) only one firm produces a very differentiated product b) there are many firms, each producing a similar product c) there are few firms, each producing a differentiated or similar product d) all market participants are price takers
c) there are few firms, each producing a differentiated or similar product
An advantage of tradable emissions permits is that: a) non-degradable pollutants can be more easily controlled than degradable pollutants b) pollution costs are easier to measure than emissions taxes c) they provide incentives for firms to develop technologies that are less polluting d) the value that future generations place on pollution damages can be determined
c) they provide incentives for firms to develop technologies that are less polluting
Suppose you are an economist working for the Antitrust Division of the Department of Justice. In the following case you are given the task of determining whether the behavior warrants an antitrust investigation for possible illegal acts or is just an example of undesirable, but not illegal, tacit collusion.Two companies dominate the industry for industrial lasers. Several people sit on the boards of directors of both companies a) this is not collusion b) this is just an example of undesirable, but not illegal, tacit collusion c) this warrants an antitrust investigation
c) this warrants an antitrust investigation
In a long-run equilibrium, economic profits in a perfectly competitive industry are: a) positive b) indeterminate c) zero d) negative
c) zero
Both monopolists and cartel members will find that a drop in price leads to: a) Neither a price nor a quantity effect b) a quantity effect that has no effect on total revenue c) a quantity effect that reduces total revenue d) a price effect that reduces total revenue
d) a price effect that reduces total revenue
Control of a scarce resource or input, economies of scale, technological superiority, and government-set rules and regulations are forms of: a) market structure b) public policy c) pricing behavior d) barriers to entry
d) barriers to entry
Pollution has _____ and _____ a) short-term effects; very little long-term effect b) no opposition; only advocates c) no benefits; only costs d) benefits; costs
d) benefits; costs
When marginal cost is rising: a) average total cost must be rising b) average variable cost and average total cost must be falling c) average variable cost must be rising d) both average variable cost and average total cost may be rising or falling
d) both average variable cost and average total cost may be rising or falling
The proposition that if transaction costs are low enough and property rights are well-defined, the private market can achieve an efficient outcome regardless of which of the affected parties hold the property rights is known as the: a) property rights paradigm b) market rights theorem c) green environment paradigm d) coase theorem
d) coase theorem
The sources of product differentiation do NOT include: a) differences in location b) the perception by consumers that products are different, even if they are physically identical c) differences in quality d) consumers' value in uniformity
d) consumers' value in uniformity
Which of the following is (are) barrier(s) to entry? a) economies of scale b) control of scarce resources c) patents and copyrights d) control of scarce resources, economies of scale, and patents and copyrights
d) control of scarce resources, economies of scale, and patents and copyrights
Monopolistic competition is similar to perfect competition because firms in both market structures: a) are price takers b) produce goods that are perfect substitutes c) find it beneficial to advertise d) do not face any barriers to entry to the industry in the long run
d) do not face any barriers to entry to the industry in the long run
Activities that generate external costs will likely be carried out at levels _____ those that would be efficient a) are equal to b) compete with c) are less than d) exceed
d) exceed
With tradable emissions permits, if the demand for goods that produce emissions shift to the left, the equilibrium price of permits _____ and the equilibrium quantity _____. a) falls; increases b) increases; increases c) increases; stays the same d) falls; stays the same
d) falls; stays the same
With tradable emissions permits, if the demand for goods that produce emissions shifts to the left, the equilibrium price of permits _____ and the equilibrium quantity _____ a) increases; increases b) increases; stays the same c) falls; increases d) falls; stays the same
d) falls; stays the same
A common example of monopolistic competition is the market for: a) oranges b) automobiles c) 1-inch nails d) gas stations
d) gas stations
In perfect competition, the assumption of easy entry and exit implies that in the _____ run all firms in the industry will earn _____ economic profits. a) long; zero b) short; positive c) short; zero d) long; positive
d) long; positive
A firm that faces a downward-sloping demand curve is a: a) quantity taker b) price taker c) quantity minimizer d) price setter
d) price setter
Collusive agreements are typically difficult cartels to maintain because each firm can increase profits by: a) producing more than the quantity that maximizes joint profits b) advertising less than will maximize joint cartel profits c) charging more than the price that maximizes joint cartel profits d) producing less than the quantity that maximizes joint profits
d) producing less than the quantity that maximizes joint profits
The supply curve found by taking the horizontal summation of the short-run supply curves of all of the firms in a perfectly competitive industry is called the _____ curve a) marginal cost b) interim market supply c) competitive d) short-run market supply
d) short-run market supply
When farmers raise hogs, there are a number of external costs. In particular, hogs generate methane gas. Without government regulation, the equilibrium price and quantity of pigs raised means that: a) too few hogs will be raised b) the price will be less than the marginal benefit c) the price will be less than the marginal cost to hog farmers d) the price will be less than the marginal social cost
d) the price will be less than the marginal social cost
