Quiz Questions Econ 4351 Online

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. What will be the price of this new drink in the long run if the industry is a Bertrand duopoly? A) $3 B) $9 C) $12 D) $13.50 E) none of the above

A) $3 Firms will undercut each other's price until profit is zero.

Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows: Q = 6000 - 5P MR = 1200 - 0.4Q What will be the price in the long run if the industry is a Cournot duopoly? A) $400 B) $600 C) $800 D) $900 E) Competition will drive the price to zero.

A) $400 For Firm 1, the revenue is R1 = PQ1 = (1200-(Q1+Q2)/5)Q1. As cost is zero, the profit is R1. Take derivative with respect to Q1 and set it to zero to get 1200-2Q1/5- Q2/5=0. As firms are symmetric, Q1 = Q2. Solve to get Q1 = Q2 =2000. Plug it to the demand function to get P = $400.

Where Es is the elasticity of supply and Ed is the own price elasticity of demand, the fraction of the tax passed on to consumers in the form of higher prices is A) Es/(Es-Ed). B) Ed/(Es-Ed). C) Es/(Ed-Es). D) Ed/(Ed-Es). E) Ed/Es.

A) Es/(Es-Ed).

Suppose your firm has a U-shaped average variable cost curve and operates in a perfectly competitive market. If you produce where the product price (marginal revenue) equals average variable cost (on the upward sloping portion of the AVC curve), then your output will: A) exceed the profit-maximizing level of output. B) be smaller than the profit-maximizing level of output. C) equal the profit-maximizing level of output. D) generate zero economic profits.

A) exceed the profit-maximizing level of output. -When AVC is increasing, MC is above AVC. The intersection of P and MC is to the left of the intersection of P and AVC.

The marginal cost of a monopolist is constant and is $10. The demand curve and marginal revenue curves are given as follows: demand: Q = 100 - P marginal revenue: MR = 100 - 2Q The deadweight loss from monopoly power is ________. A) $1000.00 B) $1012.50 C) $1025.00 D) $1037.50 E) none of the above

B) $1012.50 In competitive equilibrium, Qc = 90 and Pc =10. In monopolist market, Qm = 45 and Pm = 55. The deadweight loss is the area surrounded by the demand, MC and Qm . In this question, since the demand curve is linear and MC is constant, the area is a triangle with base of Qc - Qm = 90 - 45 = 45 = 45 and the height of Pm - Pc = 55 - 10 = 45. The size of the area is 1012.5

The market supply curve for music downloads is Q = 135(P-1) where Q is millions of downloads and P is the price in dollars per track. If the current price is $1.20 per download, what is the change in producer surplus if the price increases by $0.20 per track? A) $5.4 million B) $8.1 million C) $10.8 million D) $27 million

B) $8.1 million At P=1.2, Q = 27. At P = 1.4, Q = 54. The change in CS is a trapezoid with bases of 27 and 54 and height of 0.2. The size of the area is (27+54)×0.2/2 = 8.1.

What is the value of the Lerner index under perfect competition A) 1 B) 0 C) infinity D) two times the price

B) 0

This market situation is much like a pure monopoly except that its member firms tend to cheat on agreed upon price and output strategies. What is it? A) Duopoly B) Cartel C) Market sharing monopoly D) Natural monopoly

B) Cartel

Use the following statements to answer this question: I. The long-run average cost (LAC) curve is the envelope of the short-run average cost (SAC) curves. II. The long-run marginal cost (LMC) curve is the envelope of the short-run marginal cost (SMC) curves. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

B) I is true and II is false.

Use the following statements to answer this question: I. When the market price is held above the competitive price level, it is possible for the loss in consumer surplus to be fully captured by producers. II. When the market price is held above the competitive level, there is no deadweight loss because producer gains exactly equal consumer losses. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

B) I is true and II is false.

Use the following statements to answer this question: I. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) also shifts the average variable cost curve upward. II. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) reduces firm output but may increase firm profits. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

B) I is true and II is false. -in II profits cannot be increasing

Use the following two statements to answer this question: I. For a monopolist, at every output level, average revenue is equal to price. II. For a monopolist, at every output level, marginal revenue is equal to price. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false. E) Statements I and II could either be true or false depending upon demand.

B) I is true, and II is false.

Consider the following statements when answering this question I. Increases in the demand for a good, which is produced by a competitive industry, will raise the short-run market price. II. Increases in the demand for a good, which is produced by a competitive industry, will raise the long-run market price. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false.

B) I is true, and II is false. -Notice in the long run, there is no economic profit. Firms produce at the minimum AC. The market price P = minimum AC

DVDs can be produced at a constant marginal cost, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. If the Lerner indices for Rambeau 17 divided by the Lerner index for Schreck 10 equals 0.5, what is the constant marginal cost of producing both DVDs? A) MC = $10 B) MC = $15 C) MC = $20 D) MC = $5

B) MC = $15 Lerner for Rambeau 7 = (20-MC)/20, Lerner for Schreck 10 = (30-MC)/30. Divide these two to get (20-MC)/(30-MC) = 1/3. Solve to get MC = 15

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). The expansion path for this business will: A) increase at a decreasing rate because we will substitute capital for labor as the business grow. B) follow the 45-degree line from the origin. C) not be defined. D) be a vertical line.

B) follow the 45-degree line from the origin.

The demand for tickets to the Katy Perry concert (Q) is given as follows: Q = 120,000 - 2,000P The marginal revenue is given as: MR = 60 - .001Q The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point. Refer to Scenario 10.4. Suppose that the municipal stadium authority imposes a tax of $10 per ticket on the concert promoters. Given the information above, the profit maximizing ticket price would A) increase by $10. B) increase by $5. C) not change. D) decrease by $5. E) decrease by $10.

B) increase by $5. Without tax, MR = MC = 0 solves Q = 60,000. Plug it to the demand function to get P = $30. With tax, MR = MC = 10. Solve to get Q = 50,000. Plug it to the demand function to get P = $35.

In peak-load pricing, A) marginal revenue is equal in both periods. B) marginal revenue in the peak period is greater than in the off-peak period. C) marginal revenue in the peak period is less than in the off-peak period. D) the sum of the marginal revenues is greater than the sum of the marginal costs.

B) marginal revenue in the peak period is greater than in the off-peak period.

Some grocery stores are now offering customers coupons which entitle them to a discount on certain items on their next visit when they go through the check-out line. This practice is an example of: A) intertemporal price discrimination. B) third-degree price discrimination. C) a two-part tariff. D) bundling. E) none of the above

B) third-degree price discrimination.

A perfectly competitive hardware manufacturer has total revenue of $85 million, total variable costs of $45 million, and fixed costs of $10 million. What is the firm's producer surplus? A) $85 million B) $70 million C) $40 million D) $30 million

C) $40 million -PS = TR - TVC = $40 million

The market supply function is P = 10 + Q and the market demand function is P = 70 - 2Q. What is the change in consumer surplus associated with a minimum floor price of $40? A) -$25 B) -$150 C) -$175 D) -$200

C) -$175 Without government intervention, Q = 20 and P = 30. At P = 40, Q demanded is 15. The decrease in CS is a trapezoid with base of 20 and 15 and the height of 10. The size is 175.

You are studying a market for which the kinked demand curve model applies. The kinked demand curve is as follows: Q = 1200 - 5P for 0 ≤ Q < 150 Q = 360 - P for 150 ≤ Q The marginal cost is given as: MC = Q Suppose that the marginal cost increases such that: MC = Q + 10 What is the profit maximizing level of output? A) 171.43 B) 120 C) 150 D) all of the above E) none of the above

C) 150 For 0 ≤ Q < 150, MR = 240 - 2Q/5. For 150 < Q, MR = 360 - 2Q. At Q = 150, 60 < MR < 180. At Q = 150, MC = 160, which is between 60 and 180. So MC intersects with MR at the vertical part

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the marginal cost? A) 200 B) 5Q C) 5 D) 5 + (200/Q) E) none of the above

C) 5

Use the following two statements about monopolistic competition to answer this question. I. In the long run, the price of the good will equal the minimum of the average cost. II. In the short run, firms may earn a profit. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false.

C) I is false, and II is true.

Which of the following is true in long-run equilibrium for a firm in monopolistic competition? A) MC = ATC. B) MC > ATC. C) MC < ATC. D) Any of the above may be true.

C) MC < ATC.

MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize profits? A) Price should be $0.50 in both markets B) Price should be $2.50 on the West Coast and $1.50 on the East Coast C) Price should be $1.50 on the West Coast and $2.50 on the East Coast D) Price should be $0.40 on the West Coast and $0.33 on the East Coast

C) Price should be $1.50 on the West Coast and $2.50 on the East Coast Use the formula MR = P(1+1/Ed) = MC to get P = MC/(1+1/Ed).

What is the welfare impact of a subsidy policy? A) Producer surplus increases, consumer surplus declines, and total welfare declines. B) Producer and consumer surplus increase, and these gains are larger than the government cost. C) Producer and consumer surplus increase, and these gains are smaller than the government cost. D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm A) is producing its current output level at the minimum cost. B) could reduce the cost of producing its current output level by employing more capital and less labor. C) could reduce the cost of producing its current output level by employing more labor and less capital. D) could increase its output at no extra cost by employing more capital and less labor. E) Both B and D are true.

C) could reduce the cost of producing its current output level by employing more labor and less capital. Notice MPL/MPK > PL/PK. So employing more L by reducing K can restore the equality.

Marginal profit is negative when: A) marginal revenue is negative. B) total cost exceeds total revenue. C) output exceeds the profit-maximizing level. D) profit is negative.

C) output exceeds the profit-maximizing level.

A form of implicit collusion in which one firm consistently follows the actions of another firm is: A) predatory pricing. B) a Webb-Pomerene association. C) parallel conduct. D) only illegal in Europe.

C) parallel conduct.

The manager of a firm is attempting to practice third degree price discrimination. She has equated the marginal revenue in each of her markets. By doing this her A) profits are maximized. B) costs are minimized given her level of output. C) revenues are maximized given her level of output. D) all of the above

C) revenues are maximized given her level of output. For profit maximization, we need a second condition that MC = MRi for any market i.

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) fourth-degree price discrimination. E) fifth-degree price discrimination.

C) third-degree price discrimination.

Refer to Scenario 12.3. What will be the price of this new drink in the long run if the firms in the industry collude with one another to maximize joint profit? A) $3 B) $9 C) $12 D) $16.50 E) none of the above

D) $16.50 Firms behave like a big monopoly firm. MR from the demand curve is 30- 2Q. Set MR = MC to get Q = 27/2. Plug it into demand function to get P = $33/2.

Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q^2 MR = 40 - 0.5Q TC = 4Q MC = 4 Refer to Scenario 10.1. How much output will Barbara produce? A) 0 B) 22 C) 56 D) 72 E) none of the above

D) 72 Set MR = MC and solve for Q = 72

Which of the following statements is true regarding the differences between economic and accounting costs? A) Accounting costs include all implicit and explicit costs. B) Economic costs include implied costs only. C) Accountants consider only implicit costs when calculating costs. D) Accounting costs include only explicit costs.

D) Accounting costs include only explicit costs.

Use the following two statements to answer this question: I. The average cost curve and the average variable cost curve reach their minima at the same level of output. II. The average cost curve and the marginal cost curve reach their minima at the same level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

D) Both I and II are false.

Use the following two statements to answer this question: I. Increasing returns to scale cause economies of scale. II. Economies of scale cause increasing returns to scale. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

D) Both I and II are false.

Suppose the marginal value curve for a monopsonist is MV = 70 - Q, and the marginal expenditure curve is ME = 10 + 2Q. What is the optimal price paid by the monopsonist? A) P = 20 B) P = 50 C) P = 60 D) We need to know the AE curve in order to determine the optimal price

D) We need to know the AE curve in order to determine the optimal price

Deadweight loss from monopoly power is expressed on a graph as the area between the A) competitive price and the average revenue curve bounded by the quantities produced by the competitive and monopoly markets. B) competitive price line and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets. C) competitive price line and the monopoly price line bounded by zero output and the output chosen by the monopolist. D) average revenue curve and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets.

D) average revenue curve and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets.

Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm: A) is trying to reduce its costs and therefore increase its profit. B) is engaging in an illegal activity that is prohibited by the Sherman Antitrust Act. C) is attempting to convert producer surplus into consumer surplus. D) is attempting to convert consumer surplus into producer surplus. E) Both A and C are correct.

D) is attempting to convert consumer surplus into producer surplus.

Three hundred firms supply the market for paint. For fifty of the firms, their short- run average variable costs are minimized at $10 and short-run total costs are minimized at $15. For the remaining firms, the short-run average variable costs and short-run average total costs are minimized at $20 and $25, respectively. If each firm has a U-shaped marginal cost curve then the short-run market supply curve is A) U-shaped too B) kinked at $10 C) kinked at $15 D) kinked at $20 E) kinked at $25

D) kinked at $20 -firms produce at MC=P. If P<10, no firm produces. If P>20, all firms produce. Aggregate production starts at P=10 and is kinked at $20 when the number of producing firms changes

The oligopoly model that predicts that oligopoly prices will tend to be very rigid is the ________ model. A) Cournot B) Stackelberg C) dominant firm D) kinked demand

D) kinked demand

In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus, A) average fixed cost is constant. B) marginal cost is above average variable cost. C) marginal cost is below average fixed cost. D) marginal cost is below average variable cost.

D) marginal cost is below average variable cost.

Price ceilings A) cause quantity to be higher than in the market equilibrium. B) always increase consumer surplus. C) may decrease consumer surplus if demand is sufficiently elastic. D) may decrease consumer surplus if demand is sufficiently inelastic. E) always decrease consumer surplus.

D) may decrease consumer surplus if demand is sufficiently

In a bilateral monopoly, equilibrium price will A) favor the seller. B) favor the buyer. C) approximate the competitive equilibrium price. D) not be determined by a simple rule.

D) not be determined by a simple rule.

In comparing the Cournot equilibrium with the competitive equilibrium, A) both profit and output level are higher in Cournot. B) both profit and output level are higher in the competitive equilibrium. C) profit is higher, and output level is lower in the competitive equilibrium. D) profit is higher, and output level is lower in Cournot.

D) profit is higher, and output level is lower in Cournot.

Which one of the following statements is a common criticism of the original Bertrand duopoly model? A) Firms never choose optimal prices as strategic variables. B) Firms would more naturally choose quantities if goods are homogenous. C) The assumption that market share is split evenly between the firms is unrealistic. D) A and B are correct. E) B and C are correct.

E) B and C are correct.

An increasing-cost industry is so named because of the positive slope of which curve? A) Each firm's short-run average cost curve B) Each firm's short-run marginal cost curve C) Each firm's long-run average cost curve D) Each firm's long-run marginal cost curve E) The industry's long-run supply curve

E) The industry's long-run supply curve

The U.S. government currently imposes a $0.54 per gallon tariff on all ethanol imported into the country. If this tariff were removed, then: A) the domestic ethanol price falls. B) the domestic quantity of ethanol supplied declines. C) domestic consumer surplus increases. D) domestic producer surplus decreases. E) all of the above

E) all of the above

In a supply-and-demand graph, producer surplus can be pictured as the A) vertical intercept of the supply curve. B) area between the demand curve and the supply curve to the left of equilibrium output. C) area under the supply curve to the left of equilibrium output. D) area under the demand curve to the left of equilibrium output. E) area between the equilibrium price line and the supply curve to the left of equilibrium output.

E) area between the equilibrium price line and the supply curve to the left of equilibrium output.

The cost-output elasticity is used to measure A) input substitution flexibility. B) the slope of the firm's expansion path. C) the slope of long-run average cost. D) the slope of long-run marginal cost. E) economies of scale.

E) economies of scale.

The kinked demand curve model is based on the assumption that each firm A) considers its rival's output to be fixed. B) considers its rival's price to be fixed. C) believes rivals will match all price changes. D) believes rivals will never match price changes. E) none of the above

E) none of the above

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 - Q The marginal cost to produce this new drink is $3. What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly? A) $3 B) $9 C) $12 D) $13.50 E) none of the above

E) none of the above Let firm 2 be the follower and firm 1 be the leader. π2 = (P-MC)Q2 = (30-Q1 - Q2 - 3)Q2. Take derivative wrt Q2 and set it to 0 to get 27-Q1-2Q2 = 0 or Q2 = (27- Q1)/2. Firm 1 takes firm 2's decision into account. π1 = (P-MC)Q1 = (30-Q1 - (27-Q1)/2 - 3)Q1. Take derivative wrt Q1 and set it to 0 to get Q1 = 27/2. Plug it to firm 2's reaction curve to get Q2 = 27/4. Plug Q1 and Q2 into the demand curve to get P = 39/4

Suppose a firm produces identical goods for two separate markets and practices third- degree price discrimination. In the first market the firm charges $30 per unit, and it charges $22 per unit in the second market. Which of the following represents the ratio of price elasticities of demand in the two markets? A) E2 = (21/29)E1 B) E2 = (29/21)E1 C) E2 = E1 D) E2 = (22/30)E1 E) none of these

E) none of these As MR=MC in each market, P1/P2 = (1+1/E2)/(1+1/E1). That is, E2 = 11E1/(15+4 E1)