Econ Final based off of test 3

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Test 3 KEY

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...

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The marginal value that a consumer places on the last unit can be read off of the

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demand curve

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If the marginal value of a third soda is $1.50 to Jackie, then

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Jackie would pay no more than $1.50 for an additional soda when she has already consumed 2 sodas.

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The area beneath a consumer's demand curve of the quantity purchased represents

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the total value of the consumer's purchases.

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When a policy creates the most social gain possible, it is considered "best" by the

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efficiency criterion

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Policy B will be judged to be better than another by the Pareto criterion when

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Policy B is preferred unanimously

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Which of the following normative criteria rejects a policy whenever there exists an alternative policy that could unanimously defeat it?

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The potential Pareto criterion.

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The result of selling concert tickets cheaply, below the equilibrium price, will be

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the costs associated with competition among buyers for the limited number of tickets will create deadweight losses.

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When the supply curve is flat, a tariff on imported goods

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always decreases the welfare of American..

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Which of the following would not be an example of a nonproductive activity creating social losses?

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Lawyers hired to assist two parties in writing a contract.

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An explanation for how the price of water can be less than the price of diamonds, even though water is more valuable, is that

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price reflects marginal value, not total value.

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Suppose that the average football player earns $1 million per year and that there are 500 players. The average school teacher earns $25,000 per year and there are 1 million teachers. From this we can say that

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teachers as a group are more valuable than the group of football players.

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To fully analyze the effects of a tariff on imports of tomatoes, an economist needs

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to use general equilibrium analysis.

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Which of the following best summarizes the essence of the Invisible Hand Theorem?

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competitive markets, people who selfishly pursue their own interests end up achieving a socially desirable outcome.

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According to the Invisible Hand Theorem, when competitive markets are used to allocate resources

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no further gains from trade can be created.

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In an open economy in which only two goods are produced and possibly traded, we would find that

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production occurs where the production possibility curve is tangent to a line with the slope equal to the ratio of the world relative prices.

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If the autarkic and world relative prices are equal, then

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no gains from trade are possible.

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Why is a small country more likely to gain from international trade than a large country?

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Because autarkic relative prices in a small country are likely to be quite different from the world relative price

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All of the following statements about the free market equilibrium output are equivalent except:

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There is positive dead-weight loss.

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If demand is downward sloping and there is tax on the good, Consumer surplus equals

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Total surplus minus producer surplus, government tax revenue, and dead-weight loss.

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Consider a perfectly competitive market were demand is Q = 100 - P and Supply is Q = P - 10. In the absence of any government intervention (e.g. taxes or price controls), the market equilibrium is

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P = 55, Q = 45

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Consider a perfectly competitive market were demand is Q = 100 - P and Supply is Q = P - 10. f the government imposes a $10 per unit consumption tax, then the market will produce

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40 unit

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Consider a perfectly competitive market were demand is Q = 100 - P and Supply is Q = P - 10. The deadweight loss due to a $10 per unit consumption tax is

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Consider a perfectly competitive market were demand is Q = 100 - P and Supply is Q = P - 10. f the government imposes a $10 per unit consumption tax, then how much consumer surplus will there be after the tax.

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800

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Under competition, the price of a resource reveals

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how much the resource is worth in the most valuable of its alternative uses.

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According to Hayek, a social planner has no hope of matching the efficiency of a competitive pricing system because

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a social planner cannot have access to the specialized knowledge of individuals.

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Who wrote the book Progress and Poverty, in which the author argued that the payment of rent to landlords serves no economic purpose?

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Henry George.

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Payments to a factor of production in excess of the minimum payments necessary to call it into existence constitute

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rent

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When will consumers' surplus overstate the actual gains received by consumers?

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When allocation decisions are not made on the basis of price.

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A limited military draft is likely to be inefficient because

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there is no guarantee that young adults with the lowest opportunity costs will be drafted.

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Refer to Supply and Demand. Deadweight loss

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occurs only with a draft.

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When a factor of production is in fixed supply, the revenue it earns

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consists entirely of rent

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For a fixed resource like land to be allocated to its highest valued use

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it should be allocated to those who will pay the most.

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The Fabian socialists argued that there would be no social cost associated with

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the appropriation of rents by the government.

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An efficient market is one in which

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the price fully reflects all available information.

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Technical analysts in the financial markets are those who

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argue that a careful study of past prices of a given stock conveys useful information about future prices.

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Recent evidence supports the belief that new information is incorporated into the value of most stocks within

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about 30 seconds.

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The theory of efficient markets suggests that the steep decline the value of stocks traded on the NASDAQ was due to

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a response to new information about firms' expected future profitability..

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What is meant by a speculative bubble?

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A circumstance where everyone expects higher prices, which in turn causes higher prices.

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The volatility of stock prices, particularly in the short-run, may, according to Professor S. Grossman, be due to

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either or both of the above

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People tend to "dress up" for job interviews, even though their clothes do not make them more productive in their positions. This situation is an example of

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signaling

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The use of signals in a market economy

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lowers efficiency because the signals waste resources.

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Insurance companies are not permitted to require AIDS tests as a precondition for coverage, so they do not know whether or not the people they insure have already contracted HIV (the virus that causes AIDS). This situation is an example of

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adverse selection.

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The adverse selection process is prevalent in the used car market because

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sellers know more about the vehicles being sold than do potential buyers

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Firms rarely offer unlimited warranties on their products, because then their customers would be less careful with upkeep and maintenance. This situation is an example of

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moral hazard.

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When do insurance companies encounter the problem of moral hazard?

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When simply having insurance causes people to take more risks than they would otherwise.

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When you hire a company to paint your house, you cannot be sure of the quality of paint that was used. This situation is an example of

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the principal-agent problem.

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The significant difference between adverse selection problems and moral hazard problems is

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that in adverse selection one group of people starts out at a higher risk, while in moral hazard problems, people incur additional risks.

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A principal-agent problem occurs when

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an employer cannot fully monitor the employee's work.

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Employers may choose to pay efficiency wages that are higher than the equilibrium wage because

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the threat of unemployment will help prevent workers from shirking

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The option to buy a company's stock at some future time at current prices is often given to CEOs

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as an incentive to take actions that will raise the share price.

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Why are corporate executives are often guaranteed "golden parachutes" if they should be fired?

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To give them the incentive to take the higher levels of risk desired by stockholders.

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One theory of unemployment argues that the unemployment rate will rise when

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people overestimate the rate of inflation.

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The fact that employees often take longer lunch breaks than they are supposed to is an example of

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the principal-agent problem.

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Which of the following are attempts to ease the principal-agent problem?

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Stock Options.Golden Parachutes.Efficiency Wages. All of the above

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A speculative bubble causes

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current prices to rise artificially high.

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Assume that the supply curve is horizontal because marginal cost is constant at $10. If John, Robert, and Jimmy each value one compact disc at $20 but only Jimmy values a second compact disc, then the total value in this market is $35 if

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immy's value for a second compact disc is $5.

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four.

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$35.

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Assume that the supply curve is horizontal because marginal cost is constant at $10. John, Robert, and Jimmy each value one compact disc at $20 but only Jimmy and John value a second compact disc (Jimmy at $5 and John at $15). If a social planner dictates that five compact discs be produced and distributed to John, Robert, and Jimmy, then even if the compact discs are allocated based on demand, this market will lose out on $___ of value.

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$5.

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Assume that the supply curve is horizontal because marginal cost is constant at $10. John, Robert, and Jimmy each value one compact disc at $20 but only Jimmy and John value a second compact disc (Jimmy at $5 and John at $15). If a social planner dictates that two compact discs be produced and distributed to John, Robert, and Jimmy, then even if the compact discs are allocated based on demand, this market will lose out on $___ of value.

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$15.

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A firm is a monopoly if

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it faces a demand curve for its product that equals market demand.

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A simple monopoly will maximize its profit by producing the quantity where

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marginal revenue equals marginal cost.

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A monopoly will set price

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so that it can sell the quantity at which marginal revenue is equal to marginal cost

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When a simple monopolist chooses to sell an additional unit of a good or service

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it will have to lower its price on the additional unit and on all other units.

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What can, in general, be said about a monopoly's supply curve

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The concept of a supply curve is meaningless in the context of the monopoly problem

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Using η to represent price elasticity of demand, a simple monopolist will find that its marginal revenue at any point along its demand curve is equal to price at that point multiplied by

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(1 - 1/η)

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A monopolist will always end up choosing to operate

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on the elastic portion of its demand curve.

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How does a per-unit subsidy affect the simple monopoly equilibrium?

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The subsidy causes both monopoly output and social gain to increase.

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An economic problem with using subsidies or price ceilings to move a monopoly toward the competitive equilibrium is that

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policy makers may not be able to determine what the competitive equilibrium is.

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Consider a price ceiling imposed on a monopoly. For what quantities will the monopoly's new marginal revenue curve be horizontal at the ceiling price

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For quantities where the demand curve lies above the ceiling price.

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Suppose regulators impose a price ceiling on a monopoly. If the price ceiling is set too high

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deadweight loss will be reduced.

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In rate-of-return regulation, a monopoly is required to have zero

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profit

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If regulators require a monopoly to earn zero economic profit, the monopoly will produce the quantity where

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the average cost curve crosses the demand curve.

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Rate of return regulation will

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result in a new equilibrium with either more or loss produced in comparison to a competitive market

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A natural monopoly exists when a firm

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has an average cost curve that is decreasing at the point where it crosses demand.

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If a natural monopolist were to sell at the price where marginal cost equals demand, then it would be earning

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negative profits and would not be able to survive.

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In order to practice any form of price discrimination, a monopoly must be able to

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prevent resale of its product.

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Legal restrictions on entry into an industry

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are promoted through lobbying efforts by those already in the industry, thereby further increasing the social costs of monopoly.

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Universities tend to set tuition high and then, through financial aid, effectively charge each student a different price for education. Financial aid statements allow the university to determine the student's financial status and set an appropriate price to charge the student. This situation is an example of

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first-degree price discrimination.

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When first-degree price discrimination is perfectly implemented

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social gain is maximized, with all gains going to the monopoly.

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Second-degree price discrimination generally takes the form of

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quantity discounts.

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Which of the following is the best example of second-degree price discrimination?

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A sub shop that gives you a half-price sandwich on every sixth visit.

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When a firm with market power practices third-degree price discrimination, it charges the highest price to the group that

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has the most inelastic demand.

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In third-degree price discrimination, the monopolist will choose quantities so that each market has the same

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marginal revenue.

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In order to practice third degree price discrimination all of the following conditions must hold except that the firm

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is willing to sell more to each customer at lower prices.

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A country club charges a membership fee. Members pay competitive prices for the club's recreation and restaurant services. This situation is an example of

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a two-part tariff.

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What price does a monopoly charge when it perfectly implements a two-part tariff?

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The competitive price.

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When will setting a relatively high entry fee and a low competitive price be the best strategy for a two-part tariff monopolist?

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When the customers are nearly identical.

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At a fast food restaurant, a large drink is twice as big as a small drink, but the restaurant charges 79¢ for the small drink and only 99¢ for the large drink. This situation is probably not a case of price discrimination because

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the cost of serving a large drink is not twice the cost of serving a small drink

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All natural monopolies are characterized by

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decreasing average costs at the point where their average cost curve crosses their demand curve.

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Senior citizen and student discounts on tickets at movies theaters are examples

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hird-degree price discrimination.

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A monopoly's marginal revenue curve is always

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is always above the demand curve.
identical to that of a perfectly competitive firm.
twice as steep as the demand curve.
none of the above.

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Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly's product have demand of Q = 100 - 2P.
41. Refer to Monopoly Problem. This monopoly will produce

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30 units.

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The equation for this monopolist's marginal revenue is

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MR = 50 - Q

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Third-degree price discrimination occurs when a monopoly

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separates its customers into distinct markets, charging a different price to each group.

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Chapter 5

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Behavior of firms

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A firm is defined in Economics as

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an entity that produces and sells goods that individuals demand.

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Economists generally assume that the firm's goal is to

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maximize its profit.

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Marginal benefit is defined as

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the additional benefit gained from the last unit of an activity.

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As more of an activity is undertaken, it is reasonable to assume that

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the marginal benefits will decline.

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Marginal cost is defined as

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the additional cost attributable to the last unit produced.

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Costs that are independent of the firm's level of output are called

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fixed costs.

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As increasing amounts of a good are produced, the marginal cost of production tends to

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rise.

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If an activity is worth pursuing at all, then the only information the decision maker needs to make a choice is

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marginal benefits and marginal costs.

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If an activity is worth pursuing at all, then it should be pursued up to the point where

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marginal cost equals marginal benefit.

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When should a firm increase its production?

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When its marginal revenue exceeds its marginal cost.

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If a firm's marginal cost exceeds its marginal revenue, then

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cutting back production will increase the firm's profit.

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Mike, of Mike's Machines has hired a consultant who informs Mike that since the total revenue from current operations exceeds total cost, he should consider increasing production of machines. Mike would be best off if he

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maintains his current level of production so long as marginal revenue is equal to marginal cost.

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A firm would find it profitable to increase its production when

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its marginal revenue exceeds its marginal cost.

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A sunk cost is one that

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can no longer be avoided.

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What do economists mean by the phrase "sunk costs are sunk"?

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Sunk costs cannot be recovered and are irrelevant to future decision making.

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Economists use the term variable costs to refer to

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costs that vary with the quantity of output produced.

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An increase in fixed costs will lower a firm's

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profit

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Consider a firm that produces peanut butter. An increase in the price of peanuts will cause the firm to lower its output because

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marginal cost will rise.

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Suppose the government increases the annual cost of the liquor permit that a tavern needs to serve alcohol. What effect will this increased cost have on the tavern's production and pricing decisions

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None-the tavern will maintain its current prices.

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Suppose that the price of labor, the only variable input needed to produce cotton, increases from $100 day to $120 day. The effect on costs will be

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a shift in total cost by different amounts for different quantities.

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You are deciding whether or not to take your car on a 1,500 mile highway trip. Which of the following is the least likely to affect your decision?

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Your annual insurance payment.

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Which of the following would not increase the price of books

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A $10,000 permission fee paid for the right to reprint an author's work.

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A firm will increase its production when

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its marginal revenue rises.

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A firm is currently producing at a level where its MC = 10 and its MR = 5. We can conclude that this firm is

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over-producing.

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CHAPTER 6

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PRODUTION AND COSTS

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If a firm can adjust its employment of all inputs, then it is

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in the long run.

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Which of the following is not classified as a capital input?

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500 shares of General Motors stock.

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The association of each quantity of a variable input, like labor, to its total product is the

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short-run production function.

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The marginal product of labor is defined to be

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the additional output attributable to the last unit of labor employed

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The shapes of the total product and marginal product curves are related because

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marginal product gives the slope of total product.

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Which of the following is most likely to be a variable cost in the short run?

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The energy costs of running a factory

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In the short run, a firm's marginal cost tends to rise as more is produced because of

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diminishing marginal returns.

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Diminishing marginal returns to labor imply that

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the firm's short-run marginal cost curve will be upward sloping.

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Refer to Variable Cost of Production. The marginal cost of the fourth unit of output is

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20 per unit

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Refer to Variable Cost of Production. If the total cost of producing the sixth unit of output is $190, fixed costs must be

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Refer to Variable Cost of Production. If the firm actually has $20 in fixed costs, the average cost of the second unit of output is

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Refer to Variable Cost of Production. For what levels of output does the firm experience diminishing marginal returns?

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Beyond the third unit of output.

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f information about the total cost is not given for every possible 1 unit change in quantity, marginal cost can still be computed as

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the price of labor divided by the marginal product of labor.

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If the average cost curve is downward sloping, then

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marginal cost is smaller than average cost.

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The marginal cost curve crosses

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both the average cost curve and the average variable cost curve at their bottoms.

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An isoquant shows the various combinations of labor and capital that

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can produce some fixed level of output.

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The marginal rate of technical substitution of labor for capital (MRTSLK) measures

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the amount of capital that can replace a unit of labor without affecting the firm's output.

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The marginal rate of technical substitution of labor for capital (MRTSLK) tends to be highe

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the larger the quantity of capital already employed.

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If the marginal rate of technical substitution of labor for capital (MRTSLK) exceeds the relative price of labor in terms of capital (PL/PK), then

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the firm needs to use less capital and more labor to reach its expansion path

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The set of all baskets of inputs that can be employed at a given cost defines a(n)

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isocost curve.

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A firm is currently producing 200 units of output using 60 hours of labor and 80 hours of capital. The marginal product of labor is 12 units of output per hour, and the marginal product of capital is 15 units of output per hour. If the wage rate is $6 per hour and the rental rate is $3 per hour, then

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the firm should use more capital and less labor.

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All points on the firm's expansion path

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minimize the firm's cost of producing some level of output.

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The set of tangencies between isoquants and isocosts is the firm's

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expansion path.

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Suppose a firm doubles its employment of all inputs in the long run. If this action more than doubles the amount of output produced, then this firm is experiencing

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increasing returns to scale.

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When input prices are fixed, decreasing returns to scale implies that the long-run average cost curve is

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upward sloping.

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How are a firm's short-run and long-run average cost curves related?

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The SRAC curve is tangent to and lies above the LRAC curve

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Marginal cost can be expressed as the ration of the
price of labor and the Marginal Product of Labor

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only when labor is the only variable input.

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If the wage rate is $10 per hour and the rental rate is $5 per hour, then the vertical intercept of the isocost line

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can not be determined without more information.

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The MRTS is currently -2. The wage rate is $15 per hour and the rental rate is $30 per hour. It follows that

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the marginal product of capital is twice that of labor.

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Chapter 11

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Market power collusion and oligopoly

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BP and Exxon both produce petroleum products and sell them at the wholesale and retail levels. One of them is also in the coal business. The merger of the two firms is an example of

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both horizontal and vertical integration.

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An example of a horizontal integration would be a merger between

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a newspaper and a television station.

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Advocates of limiting anti-trust action to cases which would promote economic efficiency believe that

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preventing mergers that would benefit consumers constitutes a misapplication of the law.

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A vertical merger, like the merger of Seagate and Dell, would be attractive

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to Seagate, Dell and consumers, all of whom would stand to benefit in some way.

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When a monopolist integrates vertically with another monopolist the result

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does not have any effect on consumers

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The practice of a firm setting a price so low that all firms incur losses is called

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predatory pricing.

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Before Walmart's entry into the retail pharmacy business which drove down prices, existing pharmacies

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were not operating as efficiently as afterwards, so this is not a case of predatory pricing.

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Elite Astin-Martin Cars offers its customers a fancy showroom and a knowledgeable sales force. If Astin-Martins Are Us opens an outlet nearby, offering cut rate prices and little service, then Elite Astin-Martin Cars will likely find

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more customers visiting its showroom, but lower sales

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When a supplier imposes resale price maintenance on its dealers, social gain will increase as long as

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the value consumers receive from dealer services outweighs their cost.

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Economists are skeptical about the degree to which predatory pricing is used because

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firms can easily counter predation by "laying low" or borrowing funds.

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History and Adam Smith both point out that people of the same trade

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often face the temptation to engage in collusion.

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A cartel member has the incentive to cheat on the cartel agreement because

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undercutting the cartel price will increase the cartel member's profit

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Being a member of a cartel is similar to being in a Prisoner's Dilemma situation

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to obtain the best possible outcome for all, an enforcement mechanism is needed.

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Industries often lobby against the removal of regulations because

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the regulations often enforce a de facto cartel agreement.

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Why has the cartel in diary farming not been broken up?

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The dairy industry is exempt from anti-trust laws.

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Which of the following is an example of regulating quality standards

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Professional licensing requirements.

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The Benham study suggests that professional societies may prefer to restrict advertising by their members because

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limiting information for consumers makes it easier for their members to charge higher prices

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The Peltzman study suggests that minimum standards of quality

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overall hurt consumers by limiting entry and raising prices.

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An individual firm desiring to obey the letter of the law while avoiding the effects of regulation may use

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creative response

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he key defining feature of oligopoly, in addition to firms' market power, is

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firms take rivals' actions into account.

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The market for airplane service on a particular route is a commonly cited example of

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a contestable market.

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In the absence of natural monopoly conditions, firms in a contestable market will

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choose their price and output competitively

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n the Cournot model of oligopoly, firms produce

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more than the monopoly quantity, but less than the competitive quantity.

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In the Bertrand model of oligopoly, each firm chooses its output assuming that its rivals

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do not change their price

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Which oligopoly model results in firms successively undercutting their rivals' prices until the competitive outcome is reached

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The Bertrand model of oligopoly

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Which model highlights the effects of market power obtained from product differentiation?

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The monopolistic competition model

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Firms in monopolistic competition resemble monopolies in that both types of firms

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charge prices higher than their marginal costs.

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In what way is monopolistic competition superior to perfect competition?

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Consumers benefit from having differentiated products instead of identical products

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The term prisoners' dilemma

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can be applied to show why cartels are difficult to maintain.

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Cournot Problem. Consider a Cournot oligopoly with two identical firms. These firms each have constant marginal costs of $10. The market for these firms' product has demand Q = 100 - P.
37. Refer to Cournot Problem. Each firm will produce.

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30 units.

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Refer to Cournot Problem. Total industry output will be

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60 units

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Refer to Cournot Problem. The market price for this good will be

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$40

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Refer to Cournot Problem. In the Nash Equilibrium, each firm will receive producer surplus of

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$900

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Refer to Cournot Problem. In the Nash Equilibrium, consumer surplus will be

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$1800

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Under the Bertrand Model of oligopoly

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output will be equal to competitive output

1 of 187

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Test 3 KEY

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...

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The marginal value that a consumer places on the last unit can be read off of the

answer

demand curve

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If the marginal value of a third soda is $1.50 to Jackie, then

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Jackie would pay no more than $1.50 for an additional soda when she has already consumed 2 sodas.

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The area beneath a consumer's demand curve of the quantity purchased represents

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the total value of the consumer's purchases.

question

When a policy creates the most social gain possible, it is considered "best" by the

answer

efficiency criterion

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Policy B will be judged to be better than another by the Pareto criterion when

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Policy B is preferred unanimously

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Which of the following normative criteria rejects a policy whenever there exists an alternative policy that could unanimously defeat it?

answer

The potential Pareto criterion.

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The result of selling concert tickets cheaply, below the equilibrium price, will be

answer

the costs associated with competition among buyers for the limited number of tickets will create deadweight losses.

question

When the supply curve is flat, a tariff on imported goods

answer

always decreases the welfare of American..

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Which of the following would not be an example of a nonproductive activity creating social losses?

answer

Lawyers hired to assist two parties in writing a contract.

question

An explanation for how the price of water can be less than the price of diamonds, even though water is more valuable, is that

answer

price reflects marginal value, not total value.

question

answer

teachers as a group are more valuable than the group of football players.

question

To fully analyze the effects of a tariff on imports of tomatoes, an economist needs

answer

to use general equilibrium analysis.

question

Which of the following best summarizes the essence of the Invisible Hand Theorem?

answer

competitive markets, people who selfishly pursue their own interests end up achieving a socially desirable outcome.

question

According to the Invisible Hand Theorem, when competitive markets are used to allocate resources

answer

no further gains from trade can be created.

question

In an open economy in which only two goods are produced and possibly traded, we would find that

answer

production occurs where the production possibility curve is tangent to a line with the slope equal to the ratio of the world relative prices.

question

If the autarkic and world relative prices are equal, then

answer

no gains from trade are possible.

question

Why is a small country more likely to gain from international trade than a large country?

answer

Because autarkic relative prices in a small country are likely to be quite different from the world relative price

question

All of the following statements about the free market equilibrium output are equivalent except:

answer

There is positive dead-weight loss.

question

If demand is downward sloping and there is tax on the good, Consumer surplus equals

answer

Total surplus minus producer surplus, government tax revenue, and dead-weight loss.

question

Consider a perfectly competitive market were demand is Q = 100 - P and Supply is Q = P - 10. In the absence of any government intervention (e.g. taxes or price controls), the market equilibrium is

answer

P = 55, Q = 45

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Consider a perfectly competitive market were demand is Q = 100 - P and Supply is Q = P - 10. f the government imposes a $10 per unit consumption tax, then the market will produce

answer

40 unit

question

Consider a perfectly competitive market were demand is Q = 100 - P and Supply is Q = P - 10. The deadweight loss due to a $10 per unit consumption tax is

answer

question

answer

800

question

Under competition, the price of a resource reveals

answer

how much the resource is worth in the most valuable of its alternative uses.

question

According to Hayek, a social planner has no hope of matching the efficiency of a competitive pricing system because

answer

a social planner cannot have access to the specialized knowledge of individuals.

question

Who wrote the book Progress and Poverty, in which the author argued that the payment of rent to landlords serves no economic purpose?

answer

Henry George.

question

Payments to a factor of production in excess of the minimum payments necessary to call it into existence constitute

answer

rent

question

When will consumers' surplus overstate the actual gains received by consumers?

answer

When allocation decisions are not made on the basis of price.

question

A limited military draft is likely to be inefficient because

answer

there is no guarantee that young adults with the lowest opportunity costs will be drafted.

question

Refer to Supply and Demand. Deadweight loss

answer

occurs only with a draft.

question

When a factor of production is in fixed supply, the revenue it earns

answer

consists entirely of rent

question

For a fixed resource like land to be allocated to its highest valued use

answer

it should be allocated to those who will pay the most.

question

The Fabian socialists argued that there would be no social cost associated with

answer

the appropriation of rents by the government.

question

An efficient market is one in which

answer

the price fully reflects all available information.

question

Technical analysts in the financial markets are those who

answer

argue that a careful study of past prices of a given stock conveys useful information about future prices.

question

Recent evidence supports the belief that new information is incorporated into the value of most stocks within

answer

about 30 seconds.

question

The theory of efficient markets suggests that the steep decline the value of stocks traded on the NASDAQ was due to

answer

a response to new information about firms' expected future profitability..

question

What is meant by a speculative bubble?

answer

A circumstance where everyone expects higher prices, which in turn causes higher prices.

question

The volatility of stock prices, particularly in the short-run, may, according to Professor S. Grossman, be due to

answer

either or both of the above

question

People tend to "dress up" for job interviews, even though their clothes do not make them more productive in their positions. This situation is an example of

answer

signaling

question

The use of signals in a market economy

answer

lowers efficiency because the signals waste resources.

question

answer

adverse selection.

question

The adverse selection process is prevalent in the used car market because

answer

sellers know more about the vehicles being sold than do potential buyers

question

Firms rarely offer unlimited warranties on their products, because then their customers would be less careful with upkeep and maintenance. This situation is an example of

answer

moral hazard.

question

When do insurance companies encounter the problem of moral hazard?

answer

When simply having insurance causes people to take more risks than they would otherwise.

question

When you hire a company to paint your house, you cannot be sure of the quality of paint that was used. This situation is an example of

answer

the principal-agent problem.

question

The significant difference between adverse selection problems and moral hazard problems is

answer

that in adverse selection one group of people starts out at a higher risk, while in moral hazard problems, people incur additional risks.

question

A principal-agent problem occurs when

answer

an employer cannot fully monitor the employee's work.

question

Employers may choose to pay efficiency wages that are higher than the equilibrium wage because

answer

the threat of unemployment will help prevent workers from shirking

question

The option to buy a company's stock at some future time at current prices is often given to CEOs

answer

as an incentive to take actions that will raise the share price.

question

Why are corporate executives are often guaranteed "golden parachutes" if they should be fired?

answer

To give them the incentive to take the higher levels of risk desired by stockholders.

question

One theory of unemployment argues that the unemployment rate will rise when

answer

people overestimate the rate of inflation.

question

The fact that employees often take longer lunch breaks than they are supposed to is an example of

answer

the principal-agent problem.

question

Which of the following are attempts to ease the principal-agent problem?

answer

Stock Options.Golden Parachutes.Efficiency Wages. All of the above

question

A speculative bubble causes

answer

current prices to rise artificially high.

question

answer

immy's value for a second compact disc is $5.

question

answer

four.

question

answer

$35.

question

answer

$5.

question

Assume that the supply curve is horizontal because marginal cost is constant at $10. John, Robert, and Jimmy each value one compact disc at $20 but only Jimmy and John value a second compact disc (Jimmy at $5 and John at $15). If a social planner dictates that two compact discs be produced and distributed to John, Robert, and Jimmy, then even if the compact discs are allocated based on demand, this market will lose out on $___ of value.

answer

$15.

question

A firm is a monopoly if

answer

it faces a demand curve for its product that equals market demand.

question

A simple monopoly will maximize its profit by producing the quantity where

answer

marginal revenue equals marginal cost.

question

A monopoly will set price

answer

so that it can sell the quantity at which marginal revenue is equal to marginal cost

question

When a simple monopolist chooses to sell an additional unit of a good or service

answer

it will have to lower its price on the additional unit and on all other units.

question

What can, in general, be said about a monopoly's supply curve

answer

The concept of a supply curve is meaningless in the context of the monopoly problem

question

Using η to represent price elasticity of demand, a simple monopolist will find that its marginal revenue at any point along its demand curve is equal to price at that point multiplied by

answer

(1 - 1/η)

question

A monopolist will always end up choosing to operate

answer

on the elastic portion of its demand curve.

question

How does a per-unit subsidy affect the simple monopoly equilibrium?

answer

The subsidy causes both monopoly output and social gain to increase.

question

An economic problem with using subsidies or price ceilings to move a monopoly toward the competitive equilibrium is that

answer

policy makers may not be able to determine what the competitive equilibrium is.

question

Consider a price ceiling imposed on a monopoly. For what quantities will the monopoly's new marginal revenue curve be horizontal at the ceiling price

answer

For quantities where the demand curve lies above the ceiling price.

question

Suppose regulators impose a price ceiling on a monopoly. If the price ceiling is set too high

answer

deadweight loss will be reduced.

question

In rate-of-return regulation, a monopoly is required to have zero

answer

profit

question

If regulators require a monopoly to earn zero economic profit, the monopoly will produce the quantity where

answer

the average cost curve crosses the demand curve.

question

Rate of return regulation will

answer

result in a new equilibrium with either more or loss produced in comparison to a competitive market

question

A natural monopoly exists when a firm

answer

has an average cost curve that is decreasing at the point where it crosses demand.

question

If a natural monopolist were to sell at the price where marginal cost equals demand, then it would be earning

answer

negative profits and would not be able to survive.

question

In order to practice any form of price discrimination, a monopoly must be able to

answer

prevent resale of its product.

question

Legal restrictions on entry into an industry

answer

are promoted through lobbying efforts by those already in the industry, thereby further increasing the social costs of monopoly.

question

answer

first-degree price discrimination.

question

When first-degree price discrimination is perfectly implemented

answer

social gain is maximized, with all gains going to the monopoly.

question

Second-degree price discrimination generally takes the form of

answer

quantity discounts.

question

Which of the following is the best example of second-degree price discrimination?

answer

A sub shop that gives you a half-price sandwich on every sixth visit.

question

When a firm with market power practices third-degree price discrimination, it charges the highest price to the group that

answer

has the most inelastic demand.

question

In third-degree price discrimination, the monopolist will choose quantities so that each market has the same

answer

marginal revenue.

question

In order to practice third degree price discrimination all of the following conditions must hold except that the firm

answer

is willing to sell more to each customer at lower prices.

question

A country club charges a membership fee. Members pay competitive prices for the club's recreation and restaurant services. This situation is an example of

answer

a two-part tariff.

question

What price does a monopoly charge when it perfectly implements a two-part tariff?

answer

The competitive price.

question

When will setting a relatively high entry fee and a low competitive price be the best strategy for a two-part tariff monopolist?

answer

When the customers are nearly identical.

question

answer

the cost of serving a large drink is not twice the cost of serving a small drink

question

All natural monopolies are characterized by

answer

decreasing average costs at the point where their average cost curve crosses their demand curve.

question

Senior citizen and student discounts on tickets at movies theaters are examples

answer

hird-degree price discrimination.

question

A monopoly's marginal revenue curve is always

answer

is always above the demand curve.
identical to that of a perfectly competitive firm.
twice as steep as the demand curve.
none of the above.

question

answer

30 units.

question

The equation for this monopolist's marginal revenue is

answer

MR = 50 - Q

question

Third-degree price discrimination occurs when a monopoly

answer

separates its customers into distinct markets, charging a different price to each group.

question

Chapter 5

answer

Behavior of firms

question

A firm is defined in Economics as

answer

an entity that produces and sells goods that individuals demand.

question

Economists generally assume that the firm's goal is to

answer

maximize its profit.

question

Marginal benefit is defined as

answer

the additional benefit gained from the last unit of an activity.

question

As more of an activity is undertaken, it is reasonable to assume that

answer

the marginal benefits will decline.

question

Marginal cost is defined as

answer

the additional cost attributable to the last unit produced.

question

Costs that are independent of the firm's level of output are called

answer

fixed costs.

question

As increasing amounts of a good are produced, the marginal cost of production tends to

answer

rise.

question

If an activity is worth pursuing at all, then the only information the decision maker needs to make a choice is

answer

marginal benefits and marginal costs.

question

If an activity is worth pursuing at all, then it should be pursued up to the point where

answer

marginal cost equals marginal benefit.

question

When should a firm increase its production?

answer

When its marginal revenue exceeds its marginal cost.

question

If a firm's marginal cost exceeds its marginal revenue, then

answer

cutting back production will increase the firm's profit.

question

answer

maintains his current level of production so long as marginal revenue is equal to marginal cost.

question

A firm would find it profitable to increase its production when

answer

its marginal revenue exceeds its marginal cost.

question

A sunk cost is one that

answer

can no longer be avoided.

question

What do economists mean by the phrase "sunk costs are sunk"?

answer

Sunk costs cannot be recovered and are irrelevant to future decision making.

question

Economists use the term variable costs to refer to

answer

costs that vary with the quantity of output produced.

question

An increase in fixed costs will lower a firm's

answer

profit

question

Consider a firm that produces peanut butter. An increase in the price of peanuts will cause the firm to lower its output because

answer

marginal cost will rise.

question

Suppose the government increases the annual cost of the liquor permit that a tavern needs to serve alcohol. What effect will this increased cost have on the tavern's production and pricing decisions

answer

None-the tavern will maintain its current prices.

question

Suppose that the price of labor, the only variable input needed to produce cotton, increases from $100 day to $120 day. The effect on costs will be

answer

a shift in total cost by different amounts for different quantities.

question

You are deciding whether or not to take your car on a 1,500 mile highway trip. Which of the following is the least likely to affect your decision?

answer

Your annual insurance payment.

question

Which of the following would not increase the price of books

answer

A $10,000 permission fee paid for the right to reprint an author's work.

question

A firm will increase its production when

answer

its marginal revenue rises.

question

A firm is currently producing at a level where its MC = 10 and its MR = 5. We can conclude that this firm is

answer

over-producing.

question

CHAPTER 6

answer

PRODUTION AND COSTS

question

If a firm can adjust its employment of all inputs, then it is

answer

in the long run.

question

Which of the following is not classified as a capital input?

answer

500 shares of General Motors stock.

question

The association of each quantity of a variable input, like labor, to its total product is the

answer

short-run production function.

question

The marginal product of labor is defined to be

answer

the additional output attributable to the last unit of labor employed

question

The shapes of the total product and marginal product curves are related because

answer

marginal product gives the slope of total product.

question

Which of the following is most likely to be a variable cost in the short run?

answer

The energy costs of running a factory

question

In the short run, a firm's marginal cost tends to rise as more is produced because of

answer

diminishing marginal returns.

question

Diminishing marginal returns to labor imply that

answer

the firm's short-run marginal cost curve will be upward sloping.

question

Refer to Variable Cost of Production. The marginal cost of the fourth unit of output is

answer

20 per unit

question

Refer to Variable Cost of Production. If the total cost of producing the sixth unit of output is $190, fixed costs must be

answer

question

Refer to Variable Cost of Production. If the firm actually has $20 in fixed costs, the average cost of the second unit of output is

answer

question

Refer to Variable Cost of Production. For what levels of output does the firm experience diminishing marginal returns?

answer

Beyond the third unit of output.

question

f information about the total cost is not given for every possible 1 unit change in quantity, marginal cost can still be computed as

answer

the price of labor divided by the marginal product of labor.

question

If the average cost curve is downward sloping, then

answer

marginal cost is smaller than average cost.

question

The marginal cost curve crosses

answer

both the average cost curve and the average variable cost curve at their bottoms.

question

An isoquant shows the various combinations of labor and capital that

answer

can produce some fixed level of output.

question

The marginal rate of technical substitution of labor for capital (MRTSLK) measures

answer

the amount of capital that can replace a unit of labor without affecting the firm's output.

question

The marginal rate of technical substitution of labor for capital (MRTSLK) tends to be highe

answer

the larger the quantity of capital already employed.

question

If the marginal rate of technical substitution of labor for capital (MRTSLK) exceeds the relative price of labor in terms of capital (PL/PK), then

answer

the firm needs to use less capital and more labor to reach its expansion path

question

The set of all baskets of inputs that can be employed at a given cost defines a(n)

answer

isocost curve.

question

answer

the firm should use more capital and less labor.

question

All points on the firm's expansion path

answer

minimize the firm's cost of producing some level of output.

question

The set of tangencies between isoquants and isocosts is the firm's

answer

expansion path.

question

Suppose a firm doubles its employment of all inputs in the long run. If this action more than doubles the amount of output produced, then this firm is experiencing

answer

increasing returns to scale.

question

When input prices are fixed, decreasing returns to scale implies that the long-run average cost curve is

answer

upward sloping.

question

How are a firm's short-run and long-run average cost curves related?

answer

The SRAC curve is tangent to and lies above the LRAC curve

question

Marginal cost can be expressed as the ration of the
price of labor and the Marginal Product of Labor

answer

only when labor is the only variable input.

question

If the wage rate is $10 per hour and the rental rate is $5 per hour, then the vertical intercept of the isocost line

answer

can not be determined without more information.

question

The MRTS is currently -2. The wage rate is $15 per hour and the rental rate is $30 per hour. It follows that

answer

the marginal product of capital is twice that of labor.

question

Chapter 11

answer

Market power collusion and oligopoly

question

BP and Exxon both produce petroleum products and sell them at the wholesale and retail levels. One of them is also in the coal business. The merger of the two firms is an example of

answer

both horizontal and vertical integration.

question

An example of a horizontal integration would be a merger between

answer

a newspaper and a television station.

question

Advocates of limiting anti-trust action to cases which would promote economic efficiency believe that

answer

preventing mergers that would benefit consumers constitutes a misapplication of the law.

question

A vertical merger, like the merger of Seagate and Dell, would be attractive

answer

to Seagate, Dell and consumers, all of whom would stand to benefit in some way.

question

When a monopolist integrates vertically with another monopolist the result

answer

does not have any effect on consumers

question

The practice of a firm setting a price so low that all firms incur losses is called

answer

predatory pricing.

question

Before Walmart's entry into the retail pharmacy business which drove down prices, existing pharmacies

answer

were not operating as efficiently as afterwards, so this is not a case of predatory pricing.

question

answer

more customers visiting its showroom, but lower sales

question

When a supplier imposes resale price maintenance on its dealers, social gain will increase as long as

answer

the value consumers receive from dealer services outweighs their cost.

question

Economists are skeptical about the degree to which predatory pricing is used because

answer

firms can easily counter predation by "laying low" or borrowing funds.

question

History and Adam Smith both point out that people of the same trade

answer

often face the temptation to engage in collusion.

question

A cartel member has the incentive to cheat on the cartel agreement because

answer

undercutting the cartel price will increase the cartel member's profit

question

Being a member of a cartel is similar to being in a Prisoner's Dilemma situation

answer

to obtain the best possible outcome for all, an enforcement mechanism is needed.

question

Industries often lobby against the removal of regulations because

answer

the regulations often enforce a de facto cartel agreement.

question

Why has the cartel in diary farming not been broken up?

answer

The dairy industry is exempt from anti-trust laws.

question

Which of the following is an example of regulating quality standards

answer

Professional licensing requirements.

question

The Benham study suggests that professional societies may prefer to restrict advertising by their members because

answer

limiting information for consumers makes it easier for their members to charge higher prices

question

The Peltzman study suggests that minimum standards of quality

answer

overall hurt consumers by limiting entry and raising prices.

question

An individual firm desiring to obey the letter of the law while avoiding the effects of regulation may use

answer

creative response

question

he key defining feature of oligopoly, in addition to firms' market power, is

answer

firms take rivals' actions into account.

question

The market for airplane service on a particular route is a commonly cited example of

answer

a contestable market.

question

In the absence of natural monopoly conditions, firms in a contestable market will

answer

choose their price and output competitively

question

n the Cournot model of oligopoly, firms produce

answer

more than the monopoly quantity, but less than the competitive quantity.

question

In the Bertrand model of oligopoly, each firm chooses its output assuming that its rivals

answer

do not change their price

question

Which oligopoly model results in firms successively undercutting their rivals' prices until the competitive outcome is reached

answer

The Bertrand model of oligopoly

question

Which model highlights the effects of market power obtained from product differentiation?

answer

The monopolistic competition model

question

Firms in monopolistic competition resemble monopolies in that both types of firms

answer

charge prices higher than their marginal costs.

question

In what way is monopolistic competition superior to perfect competition?

answer

Consumers benefit from having differentiated products instead of identical products

question

The term prisoners' dilemma

answer

can be applied to show why cartels are difficult to maintain.

question

answer

30 units.

question

Refer to Cournot Problem. Total industry output will be

answer

60 units

question

Refer to Cournot Problem. The market price for this good will be

answer

$40

question

Refer to Cournot Problem. In the Nash Equilibrium, each firm will receive producer surplus of

answer

$900

question

Refer to Cournot Problem. In the Nash Equilibrium, consumer surplus will be

answer

$1800

question

Under the Bertrand Model of oligopoly

answer

output will be equal to competitive output

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