question
Real estate agents in the U.S. typically charge a 6 percent commission, regardless of the price of the house sold. Therefore, profits/wages in this industry will be higher in cities where average house prices are higher.
answer
False/Ambiguous. If barriers to entry are low, then profits will be driven to the normal level in the long-run. The barriers to entry in real estate are pretty low, and empirical studies suggest that profits are roughly equal across areas.
question
Dave wants to learn Latin but every time he clicks on his "Latin Made Easy" app, he gets bored and ends up playing online poker instead. This less-than-optimal outcome is an example of the principal-agent problem.
answer
False - The principal-agent problem arises when a principal selects an agent to do a job and a conflict of interest arises. Dave hasn't selected an agent.
question
Firms in perfectly competitive industries will earn zero economic profits in the long run.
answer
True - Because there are no barriers to entry, firms will enter if profits are above zero and exit when profits are below zero. Entry and exit will occur until economic profits are driven to the normal (zero) level.
question
Firms in perfectly competitive industries will earn zero economic profits in the short run
answer
Ambiguous - Sometimes profits will be above zero (which will trigger entry), other times they'll be below zero (which will trigger exit).
question
If price falls below the minimum average total cost, a profit-maximizing firm will shut down in the short run.
answer
False/Ambiguous - if the price falls below the minimum average variable cost, the firm will lose less by shutting down. However, if the price is between the minimum AVC and the minimum ATC, the firm will lose more by shutting down. Remember the shut-down price is minimum AVC, not minimum ATC.
question
The demand curve facing one firm in a perfectly competitive industry is horizontal.
answer
True - Firms in perfectly competitive industries are price takers because there are lots of other firms, all selling identical stuff, with buyers and sellers fully informed about prices. If they try to
charge more than the going rate, no one will buy from them. Once they charge the going price they can sell as much as they can make. Thus, the demand curve facing them is horizontal.
charge more than the going rate, no one will buy from them. Once they charge the going price they can sell as much as they can make. Thus, the demand curve facing them is horizontal.
question
A profit-maximizing monopoly will produce output at the level where marginal cost is equal to marginal revenue. A profit-maximizing firm in a perfectly competitive industry will not.
answer
False - both types of firms will follow Rule 2 - assuming that they are trying to maximize profits.
question
"Monopoly" a good name for the game Monopoly
answer
True - Think about what the demand curve looks like when you land on someone's property. The owner is monopoly - one seller, no close substitutes, barriers to entry
question
A monopoly will produce the efficient amount of its product.
answer
Ambiguous/False - This is true if the firm is a perfect price discriminator, because in that case the demand curve equals the MR curve. However, this is extremely unlikely to actually occur. See Figure 13.6 from the Parkin textbook, which shows that for a single-price monopolist, Qmonopolist < Qefficient, so a deadweight loss arises.
question
Biggie Inc. is a single-price monopoly. If its demand rises while its cost curves remain unchanged, then it will produce more and raise its price
answer
True - See the Monopoly Graphs.pdf file, which shows the higher demand and MR curves generating a higher Qm and Pm
question
Biggie Inc. is a single-price monopoly. If its inputs costs fall while its demand remains unchanged, then it will produce more and raise its price.
answer
False - See the Monopoly Graphs.pdf file, which shows that lower input costs shift the marginal cost curve down so that it intersects the marginal revenue curve at a higher quantity. The firm will CUT its price to sell Qm'.
question
Biggie Inc. is a single-price monopoly. If its fixed costs fall while its demand remains unchanged, then it will produce more and raise its price.
answer
False - Its marginal cost curve hasn't changed, so it produces the same amount for the same price (although its profits rise).
question
The law of diminishing marginal returns explains why the long-run average cost curve eventually slopes upward.
answer
False - The law of diminishing returns says that the marginal product of a variable input (like labor) will eventually fall if another input (like capital) is fixed (essentially because the amount of tools per worker will begin to fall). Thus, the law of diminishing returns holds strictly in the SHORT-RUN, when one input is held constant.
question
If firms earn only a small economic profit, they will exit from the industry in the long-run
answer
False - An economic profit of zero means that a firm is earning the "going rate" of profit. Therefore a "small" economic profit means you're doing a bit better than you can do elsewhere.
question
The long-run supply curve in a constant-cost perfectly competitive industry will slope upward.
answer
False: The long-run supply curve will be perfectly elastic (i.e. a horizontal line) in this case (this is the top panel of graphs from the handout with 9 graphs).
question
Most markets in the U.S. are perfectly competitive.
answer
False: Products are not identical in most markets -- there's lots of product differentiation.
question
The products for which demand is the greatest will also be the products that are most profitable to produce.
answer
Ambiguous - Profits depend not just on demand but on the degree of competition. If there are barriers to entry, high demand can yield high profits, but if barriers to entry are low, competitors will enter, driving profits down.
question
If two firms form a cartel they are likely to earn above-normal profits.
answer
Ambiguous - To earn above-normal profits, the firms must erect some barriers to entry, which is difficult. In addition, cartels often break down because the dominant strategy is to cheat. In addition, cartels are illegal, so they may get caught, fined, etc.
question
Bison Airlines is the only airline flying directly from Buffalo to Cleveland. Because it has a monopoly, it is likely to earn high profits.
answer
False: Air planes are easy to move around, so this is likely to be a contestible market. Potential entrants will make it hard for the firm to charge monopoly prices and earn above-normal profits.
question
Bison Airlines' market share is 50%, Majestic Air's market share is 30%, and Techno Airways' market share is 20%. The antitrust authorities are likely to block a merger between Techno and Majestic.
answer
True: Calculate the HHI before and after the merger. The initial HHI is 50x50 + 30x30 + 20x20 = 3800. The final HHI is 50x50 + 50x50 = 5000. The guidelines are to block mergers that raise the HHI by 200 or more in "concentrated" markets whose initial HHI exceeds 2500.
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