In which market structure is it not possible to practice price discrimination?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
Consider an industry that is made up of nine firms each with a market share (percent of
sales) as follows:
a. Firm A: 30%
b. Firm B: 20%
c. Firms C, D, and E: 10% each
d. Firms F, G, H, and J: 5% each
What is the value of the Herfindahl-Hirschman Index and how is the industry
categorized?
A) 1700; moderately concentrated
B) 1425; moderately concentrated
C) 1600; moderately concentrated
D) 2600; highly concentrated
In the long run, if price is less than average cost
A) there is an incentive for firms to exit the market.
B) there is profit incentive for firms to enter the market.
C) the market must be in long-run equilibrium.
D) there is no incentive for the number of firms in the market to change.
Figure 12-15
Refer to Figure 12-15. Assume that the medical screening industry is perfectly
competitive and that some firms are making short-run losses. Suppose the medical
screening industry runs an effective advertising campaign which convinces a large
number of people that yearly CT scans are critical for good health. Which of the
diagrams in the figure best describes what happens in the industry?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
Table 10-6
Table 10-6 lists Jay’s marginal utilities for burgers and Pepsi. Jay has $7 to spend on
these two goods. The price of a burger is $2 and the price of a can of Pepsi is $1.
Refer to Table 10-6. What is Jay’s optimal consumption bundle?
A) 1 burger and 2 Pepsis
B) 2 burgers and 3 Pepsis
C) 3 burgers and 1 Pepsi
D) 3 burgers and 2 Pepsis
Economists use the concept of ________ to measure how one economic variable, such
as quantity, responds to a change in another economic variable, such as price.
A) slope
B) efficiency
C) relativity
D) elasticity
Goods can be classified on the basis of whether their consumption is
A) internal and excludable.
B) rival and competitive.
C) includable and cooperative.
D) rival and excludable.
Differences in marginal revenue products are the most important factor in explaining
wage differences. Other factors that explain wage differences include all but one of the
following. Which factor does not help explain differences in wages?
A) cognitive differentials
B) compensating differentials
C) discrimination
D) labor unions
The law of diminishing marginal returns states
A) that at some point, adding more of a fixed input to a given amount of variable inputs
will cause the marginal product of the variable input to decline.
B) that at some point, adding more of a variable input to a given amount of a fixed input
will cause the marginal product of the variable input to decline.
C) that in the presence of a fixed factor, at some point average product of labor starts to
fall as more and more variable inputs are added.
D) average total costs of production initially fall and after some point starts to rise at a
decreasing rate as output increases.
The Gini coefficient for the United States in 1980 was 0.403. In 2014, the coefficient
was equal to 0.480. This means that
A) per capita income in the United States rose from 1980 to 2014.
B) there was a decrease in the amount of government transfer payments from 1980 to
2014.
C) cuts in federal income tax rates in the early 1980s and 2001 helped to reduce income
inequality.
D) income inequality increased from 1980 to 2014.
David Card and Alan Krueger conducted a study of fast-food restaurants in New Jersey
and Pennsylvania. The study found that
A) there was a large reduction in employment of low-skilled workers when the
minimum wage was raised in these states.
B) the earned income tax credit is more effective in raising the incomes of low-skilled
workers than increases in the minimum wage.
C) increases in the minimum wage had a very small impact on employment.
D) increases in the prices of food have a greater effect on wage increases in New Jersey
than in Pennsylvania.
Figure 12-7
Figure 12-7 illustrates the cost curves of a perfectly competitive firm.
Refer to Figure 12-7. If the market price is P1
A) The firm will experience a loss and raise its price to P2. The firm will then break
even.
B) The firm will break even by producing a quantity of Q2.
C) The firm will experience a loss since price is less than ATC.
D) The firm may make a profit if it can increase the demand for its product.
Figure 12-11
Refer to Figure 12-11. Suppose the prevailing price is $20 and the firm is currently
producing 1,350 units. In the long-run equilibrium, the firm represented in the diagram
A) will continue to produce the same quantity.
B) will reduce its output to 1,100 units.
C) will reduce its output to 750 units.
D) will cease to exist.
Assume that production from an electric utility caused acid rain. If the government
imposed a tax on the utility equal to the cost of the acid rain, the government’s action
would
A) externalize the externality.
B) result in a marginal social benefit greater than the marginal cost of the electricity.
C) be an example of supply-side economic policy.
D) internalize the externality.
For certain public projects such as building a dam on a river or a bridge to an island,
what procedure is a government likely to use to determine what quantity of a public
good should be supplied?
A) It conducts public surveys to determine if consumers want the product.
B) It hires economists to estimate the market demand for the product.
C) It takes a vote in Congress.
D) It evaluates the costs and benefits of producing the good.
An implicit cost is
A) a nonmonetary opportunity cost.
B) a cost unique to sole proprietorships.
C) a cost that involves spending money.
D) a cost unique to corporations.
The absolute value of the slope of an isocost line equals the ratio of
A) the marginal productivities of the two inputs.
B) the prices of the two inputs.
C) the marginal utilities of the two inputs.
D) the quantities of the two inputs.
Table 2-6
Table 2-6 shows the output per week of two jewelers, Serena and Haley. They can either
devote their time to making bracelets or making necklaces.
Refer to Table 2-6. What is Serena’s opportunity cost of making a necklace?
A) 2 necklaces
B) 1/2 of a bracelet
C) 1/2 of a necklace
D) 3/4 of a bracelet
What do Spotify and Apple have in common?
A) Each achieved a dominant position in its industry because it owned a key input in
the production of its product.
B) The industry in which each firm competes is an oligopoly because of
government-imposed barriers to entry.
C) Each company was founded in the same state.
D) The profitability of each firm depends on its interactions with other firms.
Figure 5-14
Figure 5-14 shows the market for aviation security. Aviation security generates a
positive externality because people who are not airline passengers benefit from aviation
security.
Refer to Figure 5-14 to answer the following questions.
a. In the absence of any government intervention what is the equilibrium level of
security that airlines will supply? Using the diagram, denote this level, Q*. Briefly
explain why this quantity is not the economically efficient level of aviation security.
b. In the diagram, illustrate the presence of positive externalities in the aviation security
market. Label any new curve that you draw.
c. On your diagram identify the economically efficient level of aviation security. Denote
this level Qe.
d. Explain how a government subsidy for the airlines can bring about the economically
efficient aviation security level. Be sure to identify the size of the subsidy.
One implication of compensating differentials is that laws passed to protect the health
and safety of workers may not make workers better off than they were prior to the
passages of the laws. Why is this so?
A) Workers may suffer from cognitive dissonance, which means that the perception
workers have that their jobs are hazardous is not true.
B) If the laws make the work environment safer, there is no reason to pay workers a
compensating differential for the risk associated with their jobs.
C) The principal-agent problem that exists in the workplace may cause workers to shirk
more after the work environment becomes safer.
D) In non-competitive markets, workers are unlikely to receive a compensating
differential to compensate for jobs with extra risk. As a result, after the laws are passed
their wages will not change.
Table 2-9
Table 2-9 shows the number of labor hours required to produce a canoe and a sailboat in
Guatemala and Honduras.
Refer to Table 2-9. What is Guatemala’s opportunity cost of producing one canoe?
A) 1/6 of a sailboat
B) 2/3 of a sailboat
C) 6 sailboats
D) 5 sailboats
Table 6-3
Refer to Table 6-3. Over what range of prices is the demand inelastic?
A) over the entire range of prices
B) between $12 and $16
C) between $8 and $16
D) between $2 and $8
Figure 4-1
Figure 4-1 shows Arnold’s demand curve for burritos.
Refer to Figure 4-1. If the market price is $1.50, what is the consumer surplus on the
second burrito?
A) $0.50
B) $1.00
C) $1.50
D) $3.50
Some economists have suggested that network externalities result in consumers being
locked into the use of products with inferior technologies. Economists Stan Leibowitz
and Stephen Margolis have studied cases that have been cited as examples of this and
found
A) there is no convincing evidence that the alternative technologies were superior.
B) consumers sometimes do become locked into the use of products with inferior
technologies.
C) that in all of these cases network externalities resulted in market failure.
D) that consumers use products with inferior technologies when their prices are lower
than products with superior technologies.
Figure 5-9
Companies producing toilet paper bleach the paper to make it white. The bleach is
discharged into rivers and lakes and causes substantial environmental damage. Figure
5-9 illustrates the situation in the toilet paper market.
Refer to Figure 5-9. Suppose the government wants to use a Pigovian tax to bring
about the efficient level of production. What should the value of the tax be?
A) (P2– P1) per unit of output
B) (P2– P0) per unit of output
C) (P1– P0) per unit of output
D) P1 per unit of output
Consider two single-malt whiskey distillers, Laphroaig and Knockando. If they
advertise, they can both sell more whiskey and increase their revenue. However, the
cost of advertising more than offsets the increased revenue so that each distiller ends up
with a lower profit than if they do not advertise. On the other hand, if only one
advertises, that distiller increases its market share and also its profit.
a. Construct a payoff matrix using the following hypothetical information: If neither
distiller advertises: each earns a profit of $35 million per year. If both advertise: each
earns a profit of $20 million per year. If one advertises and the other does not: the
distiller who advertises earns a profit of $50 million and the distiller who does not
advertise earns a profit of $9 million.
b. If the two distillers agree to coordinate their strategies, what is the outcome?
Which of the following are examples of a firm experiencing a positive technological
change?
a. A firm is able to reduce its inputs by 15 percent and still produce the same level of
output.
b. A seminar attended by the firm’s workers makes them more productive.
c. A firm adds 5 percent to its workforce and is able to maintain its initial level of
output.
d. A firm restructures its distribution system and is able to save on its shipping times.
e. A firm rearranges its warehouse and finds that it can use fewer workers to maintain
its productivity level.
All of the following occur whenever a government taxes a product except
A) the quantity consumed of that product falls.
B) the price of that product rises.
C) the marginal benefit of the last unit sold exceeds the marginal cost of producing it.
D) there will be no excess burden if the government’s tax revenue is sufficiently large to
offset the deadweight loss.
Figure 14-4
Rainbow Writer (RW) is a small online company selling a highly rated software
package for engraving words onto objects produced by 3D printers. The firm currently
earns a profit of $2 million per year selling its package exclusively on its Website.
Odeon, the producer of the most popular 3D printers has expressed interest in bundling
Rainbow Writer’s product with its printers. Odeon expects that bundling would further
boost its sales and allow it to sell its printers at a higher price, thus raising its profits
beyond its current profit of $12 million. Figure 14.4 shows the decision tree for the
Rainbow Writer-Odeon bargaining game.
Refer to Figure 14-4. In a real world situation involving Rainbow Writer and Odeon,
what scenario below might permit Rainbow Writer to rationally refuse an offer from
Odeon of $40 per copy of the software package?
A) Odeon is also negotiating with FastWrite, Rainbow Writer’s chief rival.
B) Odeon’s competitors are also interested in bundling Rainbow Writer’s software.
C) Odeon hires a software developer to begin developing its own proprietary engraving
software.
D) Odeon is considering new distribution outlets for its products.
Figure 14-5
Netflix (N) was one of the first companies to offer streaming video services and is still
considered a leader in the industry. Spotify (S) offers a music streaming service and is
considering entering the video streaming business. At this point, Netflix has to decide
whether or not to lower its subscription price in order to deter Spotify’s entry into the
market. Figure 14-5 shows the decision tree for the Netflix-Spotify entry game.
Refer to Figure 14-5. Does it make sense for Netflix to lower its price in order to deter
Spotify’s entry into the streaming video market?
A) Yes, because Netflix stands to make a profit of $7 million by lowering its price and
keeping Spotify out of the market.
B) No, because Netflix will make a higher profit by keeping its subscription price
unchanged, whether Spotify enters the market or not.
C) Yes, because it is always profitable to remain a monopoly.
D) No, because Spotify will enter the market regardless of Netflix’s decision about its
subscription price.
A constant-cost industry is an industry in which
A) average costs fall as the industry expands output.
B) average costs rise as the industry expands output.
C) average costs remain constant as the industry expands output.
D) input prices rise at a constant rate as firms in the industry use more inputs.
When a firm produces more output using the same inputs or the same output using
fewer inputs we say that the firm
A) experiences an increase in demand.
B) experiences positive technological change.
C) will hire more workers in order to produce more output.
D) is operating in the short run.