Economics 31965

The market demand curve facing a monopolist is more elastic than the market demand curve facing a monopolistic competitor.

A monopolistic competitor does not earn profits in the long run unless it can successfully differentiate its product in the minds of its consumers.

If marginal product is equal to average product, then total product is at a maximum.

Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.

In economics, technology only refers to the development of new products.

Chips and salsa are complements. If the price of salsa decreases, the demand for chips will increase.

Allocative efficiency is achieved in an industry when firms supply those goods and services that provide consumers with a marginal benefit equal to the marginal cost of producing those goods and services.

In the long run, all of a firm’s inputs are variable.

Marketing refers to all the activities necessary for a firm to sell a product to a consumer.

If a firm experiences positive technological change, it is able to produce more output using the same inputs.

If the market wage rate increases, a firm’s labor demand curve does not shift but the labor supply curve shifts to the right.

Maximizing average profit is equivalent to maximizing total profit.

One of the main sources of comparative advantage is internal economies.

In the highly competitive fast-food restaurant market, brand name restaurants have a strong profit incentive to maintain high sanitary conditions and avoid any negative consequences.

The substitution effect of a change in the price of cauliflower is the portion of the change in the quantity of cauliflower demanded that can be attributed to the change in the price of a substitute vegetable such as asparagus.

Marginal benefit is the total benefit to a consumer from consuming one more unit of a good or service.

A network externality causes firms to sacrifice profits in the short run in order to satisfy their customers and increase their long-run profits.

Competition from substitute goods is more of a threat when switching costs are high.

If marginal cost is above the average variable cost, then average variable cost is decreasing.

The barrier to entry that allowed Alcoa to make persistent economic profits was ownership of an essential input.

One reason why firms would choose a salary system rather than a commission compensation system is that their employees might become less concerned about the quality of their work.

If a firm’s total variable cost exceeds its total revenue, the firm should stop production by shutting down temporarily.

The market demand curve in a perfectly competitive market is downward sloping.

Collusion is common in oligopoly and monopolistically competitive industries.

Network externalities refer to the situation where the usefulness of a product increases with the number of consumers who use it.

Demand for staples such as dairy products and bread is likely to be both income and price inelastic.

Unlike a perfectly competitive firm, a monopolistic competitor does not have a short-run shut-down point.

Quantity supplied refers to the amount of a good or service that a firm is willing and able to supply at a given price.

Rapid economic growth tends to increase the degree of income mobility.

Necessities tend to have more inelastic demands than luxuries.

For a person to have a comparative advantage in producing a product, she must be able to produce that product at a lower opportunity cost than her competitors.

A two-part tariff refers to a pricing schedule under which a buyer must pay a fixed fee for the right to purchase the product, in addition to a per-unit price.

Figure 15-6

Figure 15-6 shows the cost and demand curves for a monopolist.
Refer to Figure 15-6. The monopolist earns a profit of
A) $0.
B) $170.
C) $248.
D) $372.

Suppose at the going wage rate of $20 per hour, firms can hire as many hours of janitorial services as they desire. If any firm tries to lower the wage rate to $19, it will not be able to hire any janitor. What does this indicate about the supply curve for janitorial services?
A) Supply is unit-elastic.
B) Supply is perfectly elastic.
C) Supply is perfectly inelastic.
D) Supply is relatively inelastic.

When groups of mortgages are bundled together by financial institutions and sold to investors, these institutions are said to be ________ mortgage loans.
A) securitizing
B) underwriting
C) liquidating
D) harvesting

Assume that two interior design companies, Alistair and Baine, are competing for customers and if they both advertise, they would each earn $30 million in profits. If neither advertises, they each earn $50 million in profits. If one advertises and the other doesn’t, the firm that advertises earns $40 million in profit while the other earns $20 million in profit.
a. Present the information above in the form of a payoff matrix. Let Baine be the row player and Alistair the column player.
b. Does each firm have a dominant strategy and if so what is it?
c. What is the Nash equilibrium?

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

Economics does not study correct or incorrect behaviors but rather it assumes that economic agents behave ________, meaning they make the best decisions given their knowledge of the costs and benefits.
A) equitably
B) rationally
C) emotionally
D) selfishly

Figure 15-2

Figure 15-2 above shows the demand and cost curves facing a monopolist.
Refer to Figure 15-2. The firm’s profit-maximizing price is
A) P₁.
B) P₂.
C) P₃.
D) P₄.

Which of the following is not a common mistake made by consumers?
A) the failure to take into account the implicit costs of an activity
B) the failure to ignore sunk costs
C) being overly optimistic about their future behavior
D) being overly pessimistic about their future behavior

Who operates and controls a corporation in its day-to-day activities?
A) the board of directors
B) stockholders
C) employees
D) management

Table 6-2

	Estimated Price Elasticity of Demand
Coca-Cola	-3.0
All carbonated soft drinks	-1.5
All soft drinks	-0.8

Refer to Table 6-2. Assume that an economist has estimated the price elasticity of demand values in the table above. Use the data in the table to select the correct statement.
A) The demand for Coca-Cola is inelastic.
B) The elasticity for “All soft drinks” is less than the elasticity for Coca-Cola because Coca-Cola is more of a luxury than a necessity; “All soft drinks” represent goods that are more necessity than luxury.
C) The difference in elasticity values is explained by the fact that the more narrowly we define a market the more elastic the demand will be.
D) There are fewer substitutes for “All carbonated soft drinks” than there are for “All soft drinks.”

Figure 2-13

Refer to Figure 2-13. One segment of the circular flow diagram in the figure shows the flow of funds from economic agents E to market F. Who are economic agents E and what is market F?
A) E = households; F = product markets
B) E = firms; F = product markets
C) E = households ; F = factor markets
D) none of the above

Payments by a corporation to its shareholders are known as
A) stocks.
B) bonds.
C) coupons.
D) dividends.

The “Discount Department Stores” industry is highly concentrated. What does this mean?
A) There are many large stores such as Walmart, Target, Kohl’s, in this industry.
B) A few large stores account for a significant portion of industry sales.
C) There is cut-throat competition in this industry because there are no entry barriers.
D) The sales volume in this industry is consistently high.

Figure 13-11

Refer to Figure 13-11. What is the productively efficient output for the firm represented in the diagram?
A) Q₁ units
B) Q₂ units
C) Q₃ units
D) Q₄ units

Even though it often does not result in profit maximization, some small firms use a cost-plus pricing strategy anyway because
A) it is easy to use.
B) they do not understand what marginal revenue and marginal cost mean.
C) it is expensive to hire an economist who can determine what the profit-maximizing price is.
D) they sell several products, each of which sells for a different price. The time and expense involved in finding the profit-maximizing price for each product are not worth the effort.

Two of the firms involved in the accounting scandals of the early 2000s were
A) Arthur Anderson and NBC.
B) Western Digital and General Motors.
C) WorldCom and Enron.
D) DuPont and Lehman Brothers.

Health clubs typically experience an increase in one-year memberships in January, but many new customers cancel their memberships before the end of the year. Which of the following is the best explanation for this behavior?
A) Some health club members suffer minor injuries that prevent them from working out.
B) Some people are overly optimistic about their future behavior.
C) Some people fail to treat their membership fees as sunk costs.
D) Some members receive utility from activities they believe are popular.

Adam spent $10,000 on new equipment for his small business, “Adam’s Fitness Studio.” Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true?
A) The fixed cost of running the studio is $22,000.
B) The variable cost of running the studio is $22,000.
C) The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he’ll need to continue operations is a variable cost.
D) The $10,000 Adam spent on equipment is the total cost of starting the business and the $12,000 he’ll need to continue operations is a marginal cost.

In most business situations where firms compete, often they can escape the prisoner’s dilemma and reach the most profitable outcome. Which of the following is a reason for this?
A) Firms engage in aggressive advertising to overcome the barriers to loyalty.
B) Most games are one-shot games so firms learn from their mistakes.
C) Most games are repeated games and firms can employ retaliation strategies against those who do not cooperate.
D) Firms are constantly improving their products and anticipating changing consumer tastes.

Which of the following is the best example of an oligopolistic industry?
A) the beef market
B) the pharmaceutical industry
C) public education
D) the beauty products industry

Since lower-income people spend a larger proportion of their incomes on groceries than do higher-income people, if grocery stores were required by law to charge a 10-cent fee for disposable bags, this fee could be considered a
A) proportional tax.
B) progressive tax.
C) regressive tax.
D) income tax.

Table 2-11

	One Motorcycle	One Guitar
Ireland	20 hours	4 hours
Scotland	8 hours	2 hours

Table 2-11 shows the number of labor hours required to produce a motorcycle and a guitar in Ireland and Scotland.
Refer to Table 2-11. Scotland has a comparative advantage in the production of
A) both products.
B) guitars.
C) motorcycles.
D) neither product.

Figure 3-8

Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D₁ and S₁ (point A). If there is a shortage of apples how will the equilibrium point change?
A) The equilibrium point will move from A to B.
B) The equilibrium point will move from A to C.
C) There will be no change in the equilibrium point.
D) The equilibrium point will move from A to E.

Which of the following is the best example of a voluntary export restraint?
A) a limit imposed by the U.S. government on the number of cell phones that the United States can import from Korea
B) a subsidy granted by the U.S. government to domestic cell phone manufacturers so they can compete more effectively with foreign cell phone manufacturers
C) a limit set by the Korean government on the number of cell phones that the United States can import from Korea.
D) a $50 per-cell phone fee imposed on all cell phones imported into the United States

Figure 13-11

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

Table 4-1

Consumer	Willingness to Pay
Tom	$40
Dick	30
Harriet	25

Refer to Table 4-1. The table above lists the highest prices three consumers, Tom, Dick, and Harriet, are willing to pay for a short-sleeved polo shirt. If the price of the shirts falls from $28 to $20
A) consumer surplus increases from $14 to $35.
B) Tom will buy two shirts; Dick and Harriet will each buy one shirt.
C) consumer surplus will increase from $70 to $95.
D) Harriet will receive more consumer surplus than Tom or Dick.

Table 11-8

Quantity (sets)	Long-Run Average Cost
100	$40
200	35
300	30
400	30
500	35

Elegant Settings manufactures stainless steel cutlery. Table 11-8 shows the company’s cost data.
Refer to Table 11-8. Elegant Settings experiences
A) economies of scale up to an output level of 400.
B) diminishing returns up to an output level of 400.
C) increasing returns beyond an output level of 400.
D) economies of scale at an output of 300 or less and diseconomies of scale at an output level above 400.

In the 1970s and 1980s, the United States lost its comparative advantage in consumer electronics goods to Japan. What factor was most responsible for the development of Japan’s comparative advantage in consumer electronics goods?
A) Japanese firms benefited from external economies.
B) Japan has abundant supplies of labor.
C) Japanese firms excelled in process technology.
D) Japan has abundant supplies of natural resources needed to produce electronics goods.

One important difference between the political process and the market process is that
A) the political process results in collective actions in which not everyone is required to participate, while in the market process individuals are obliged to participate.
B) the political process results in collective actions in which everyone is obliged to participate, while in the market process individuals are free to participate or not.
C) the political process results in collective actions that maximize economic surplus, while the market process may lead to efficiency losses.
D) the political process results in collective actions in which everyone is made better off, while the market process results in actions that favor some groups only.

If the best surgeon in town is also the best at cleaning swimming pools, then according to economic reasoning, this person should
A) pursue the activity he enjoys more.
B) specialize in cleaning swimming pools because it is more labor-intensive.
C) split his time evenly between being a surgeon and cleaning swimming pools.
D) specialize in being a surgeon because its opportunity cost is lower.

Who won a Nobel Prize in economics for his work in the development of game theory?
A) John von Neuman
B) Oskar Morgenstern
C) John Nash
D) Howard Schultz

Table 12-1

Quantity	Total Cost (dollars)	Variable Cost (dollars)
0	$1,000	$0
100	1,360	360
200	1,560	560
300	1,960	960
400	2,760	1,760
500	4,000	3,000
600	5,800	4,800

Table 12-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that output can only be increased in batches of 100 units.
Refer to Table 12-1. What is the fixed cost of production?
A) $0
B) $500
C) $1,000
D) It cannot be determined.

Why might an amusement park switch from charging admission to the park and charging for the rides to charging for admission but not charging for the rides?

What is a sequential game? How are decision trees used to analyze sequential games?

What is a mixed economy?

In 2004, hurricanes destroyed a large portion of Florida’s grapefruit crop. How did this affect the market price and market quantity of grapefruit?

In Michael Porter’s five competitive forces model, what do the competitive forces determine?

Use the general relationship between marginal and average values to explain why a marginal cost curve must intersect an average total cost curve and an average variable cost curve at their minimum points.

Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market, but by separate curves for a firm in a monopolistically competitive market?

Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.

Assume that a florist can earn an additional $20,000 of revenue each year from advertising once a week on a local television station. What must the additional cost of this once-a-week advertising be to make this advertising economically rational?

Using two graphs, illustrate how a positive technological change in the market for notebook computers could eliminate short-run economic profit for a firm in that market. On the first graph, use a supply and demand graph to illustrate the positive technological change. On the second graph, use demand, ATC, MC, and MR curves to illustrate the elimination of economic profit resulting from the positive technological change. Explain what is taking place in each graph.

For a given demand curve, will there be a greater loss of economic efficiency from a binding price floor when supply is elastic or inelastic? Illustrate your answer with a demand and supply graph. In your graph you must show two supply curves, one elastic and the other inelastic.

What is the difference between total cost and variable cost in the long run?

The following table contains the actual prices charged by four Web sites for a 3D Collector’s Edition Blu-ray disc of the movie Marvel’s Avengers: Age of Ultron in November 2015.

Amazon	$24.99
Walmart	25.48
Best Buy	29.99
Disney Store	29.99

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

Explain whether it is possible for a country to have an absolute advantage in the production of a product without having a comparative advantage in the production of that product.

The graph below represents the market for lychee nuts. The equilibrium price is $7.00 per bushel, but the market price is $5.00 per bushel. Identify the areas representing consumer surplus, producer surplus, and deadweight loss at the equilibrium price of $7.00 and at the market price of $5.00.

Who decides who controls a corporation?

What is the difference between ‘straight-time pay,” “commission pay,” and “piece-rate pay”?