ECON 200 Exam 2

Which of the following is not an assumption of the theory of competition?
a. There are many sellers and many buyers, none of which is large in relation to total sales or
purchases.
b. Each firm produces and sells a differentiated product.
c. Buyers and sellers have all relevant information with respect to prices, product quality,
and sources of supply.
d. There is easy entry and exit.

In the theory of competition,
a. sellers of the product are not influenced by other sellers and therefore have virtually
complete control over the production and pricing of their product.
b. buyers of the product may have a preference as to whom they purchase from based on
brand loyalty.
c. buyers and sellers of the product know everything that there is to know about the product.
d. it can be quite expensive for a firm to enter this type of market, but once the firm is
established, it will be a profitable venture.

Competitive firms are price takers for all of the following reasons except that
a. each firm is quite small relative to the total market supply.
b. buyers and sellers have all the necessary information about prices, etc.
c. the product is homogeneous.
d. barriers to exit force firms to sell at the market price.

The demand curve for a competitive firm
a. is downward sloping.
b. is upward sloping.
c. is perfectly horizontal.
d. is perfectly vertical.
e. may be downward or upward sloping, depending upon the type of product offered for sale.

The market demand curve in a competitive market is
a. downward sloping.
b. upward sloping.
c. perfectly horizontal.
d. perfectly vertical.
e. downward or upward sloping depending upon the type of product offered for sale.

The competitive firm's short-run supply curve is the
a. upward-sloping portion of its average total cost curve.
b. horizontal portion of its marginal revenue curve.
c. portion of its average variable cost curve that lies above the average fixed cost curve.
d. upward-sloping portion of its marginal cost curve.
e. portion of its marginal cost curve that lies above its average variable cost curve

If firms are earning zero economic profits, they must be producing at an output level at which
a. price equals marginal cost.
b. price equals average total cost.
c. price equals average variable cost.
d. marginal revenue equals marginal cost.
e. none of the above

A natural monopoly exists when
a. a monopolist produces a product, the main component of which is a natural resource.
b. economies of scale are so large that only one firm can survive and achieve low unit costs.
c. a firm is the exclusive owner of a key resource necessary to produce the firm's product.
d. there are no close substitutes for a firm's product.

If a monopolist wishes to sell an additional unit of the good, then
a. it must raise its price to signal consumers that its product is now a more important part of
their budget, and they will purchase more.
b. like a competitive firm, it can simply make more output available and not lower price.
c. it must lower price.
d. it can raise price and not worry that sales will decrease.
e. a and d

Which of the following is characteristic of the monopoly firm?
a. It produces the quantity of output at which marginal revenue equals marginal cost, MR =
MC.
b. It charges a price per unit for its product that is equal to marginal cost.
c. It always earns a profit, because it is a single seller of a product.
d. a and b
e. a and c

The competitive firm charges a price equal to __________ while the monopolist charges a price
__________.
a. marginal revenue; equal to marginal cost
b. marginal cost; greater than marginal cost
c. marginal revenue; greater than marginal revenue
d. average total cost; greater than average total cost
e. b and c

Rent seeking occurs when the seller charges
a. different prices for the product it sells, and the price differences do not reflect cost
differences.
b. the highest price each consumer would be willing to pay for the product rather than go
without it.
c. a uniform price per unit for one specific quantity, a lower price for an additional quantity,
and so on.
d. a and c
e. none of the above

Probably, the most significant barrier to entry into an oligopolistic market is
a. patent rights.
b. exclusive ownership of essential resources.
c. legal barriers.
d. economies of scale.
e. copyrights.

The percentage of sales accounted for by X number of firms in the industry is called the
a. concentration ratio.
b. oligopoly rate.
c. interdependence rate.
d. market power index.

A cartel is an organization of firms
a. dominated by one firm, which is usually referred to as the price leader.
b. that attempts to increase total (or industry) demand for their product.
c. that reduces output and increases price in an effort to increase joint profits.
d. that deliberately attempts to disrupt the market for political reasons.

The "prisoner's dilemma" game illustrates a case in which
a. individually rational behavior leads to a collectively inefficient outcome.
b. what is irrational individual behavior turns out to be ultra-irrational group behavior.
c. the whole is greater than the sum of the parts.
d. none of the above

In the prisoner's dilemma, both prisoners end up __________, which turns out to be __________
confessed.
a. confessing; better for them than if they had both not
b. confessing; worse for them than if they had both not
c. not confessing; better for them than if they had both
d. not confessing; worse for them than if they had both

Antitrust law is legislation passed for the stated purpose of
a. reducing the profits of chain stores.
b. promoting U.S. banking practices in foreign countries.
c. controlling labor union practices in the states of New York, California, and Texas.
d. controlling monopoly power and preserving and promoting competition.
e. none of the above

The diamond-water paradox is the observation that
a. those things that have the greatest price often have little value in exchange and those
things that have the lowest price often have the greatest value in exchange.
b. those things that have the greatest value in use often have little value in exchange and
those things that have little value in use often have the greatest value in exchange.
c. those things that have the least value in use often have little value in exchange and those
things that have the greatest value in use often have the greatest value in exchange.
d. those things that have the least price often have little value in exchange and those things
that have the greatest price often have the greatest value in exchange.

When an economist talks about utility, she is talking about
a. a company that provides electricity, water, gas, etc.
b. the satisfaction, in terms of price, that a producer receives from selling his product.
c. the satisfaction that results from the consumption of a good.
d. the amount of one good that a person is willing to give up in order to get a unit of another
good.
e. the satisfaction that results from the consumption of a good minus the price that must be
paid to get the good.

The law of diminishing marginal utility can be stated as follows:
a. As the amount of a good consumed increases, the sum of satisfaction received tends to
decrease.
b. As the amount of a good consumed increases, the additional satisfaction gained from
consuming additional units tends to decrease.
c. As the amount of a good consumed decreases, the additional satisfaction gained from
consuming additional units tends to increase.
d. As the amount of a good consumed increases, the sum of satisfaction received tends to
increase but at a diminishing rate.
e. b and d

Suppose the government provides peanut butter to everyone free of charge and everyone consumes it to
the point at which he receives no additional satisfaction from another spoonful. Is this necessarily good?
a. Yes, because everyone is satisfied.
b. No, because there might be some cases where the resources used to produce peanut butter
could have been better used to produce more of other products.
c. Yes, because the law of diminishing marginal utility indicates that in order to get the
greatest amount of satisfaction from the use of resources, people should consume as much
of every good as they can.
d. none of the above

As the price of a good falls, a person has
a. less money to spend.
b. more money to spend.
c. less real income.
d. more real income.
e. b and d

When negative externalities are connected with the production of a good,
a. market output will be greater than the socially optimal output.
b. private costs and social costs are equal.
c. the government should subsidize the production of the good.
d. there will be a shortage of the good.

A consequence of a negative externality is that social costs __________ private costs, and the socially
optimal level of output __________.
a. equal; is not equal to social costs or private costs
b. do not equal; is obtained
c. do not equal; is not obtained
d. equal; is obtained
e. equal; is not obtained

An externality is internalized if
a. the person(s) or group that generated the externality incorporate into their own private
cost-benefit calculations the external benefits (in the case of a positive externality) or the
external costs (in the case of a negative externality) that third parties bear.
b. people are made aware of it and realize that social benefits are less than private benefits
(in the case of a positive externality) and that social costs are less than private costs (in the
case of a negative externality).
c. the person(s) or group that generated the externality do not incorporate into their own
private cost-benefit calculations the external benefits (in the case of a positive externality)
or the external costs (in the case of a negative externality) that third parties bear.
d. b and c
e. none of the above

The Coase theorem states that
a. positive externalities are directly related to the weather-the better the weather, the more
positive externalities.
b. in the case of trivial or zero transaction costs, negative externalities are more likely to
appear.
c. when transaction costs are high, positive externalities will be minimized.
d. in the case of trivial or zero transaction costs, the property rights assignment does not
matter to the resource-allocative outcome.

Generally, positive externalities result in
a. too much of a good being produced.
b. the socially optimal output of a good being produced.
c. too little of a good being produced.
d. either a or c
e. any of the above

If the government does not provide it, the quantity of a nonexcludable good that private firms will choose
to produce is
a. zero.
b. more than the optimal amount.
c. the optimal amount.
d. optimal only if property rights are assigned.
e. optimal only if the industry is competitive.

A subsidy may be used as a corrective device in the case of a positive externality because it will
__________ marginal private benefits and __________ demand.
a. increase; decrease
b. increase; increase
c. decrease; decrease
d. decrease; increase

A good is not rival in consumption if
a. its consumption by one person does not reduce its consumption by others.
b. its consumption by one person reduces its consumption by others.
c. it is possible, or not prohibitively costly, to exclude someone from receiving the benefits
of the good once it has been produced.
d. it is impossible, or prohibitively costly, to exclude someone from receiving the benefits of
the good once it has been produced.
e. a and d

Economic profit is the difference between total revenue and
a. explicit costs.
b. implicit costs.
c. sunk costs.
d. the sum of explicit and implicit costs.

If a firm earns normal profit, then it has generated revenues
a. equal to the sum of implicit and explicit costs.
b. greater than total opportunity costs.
c. sufficient to cover explicit costs, but not implicit costs.
d. sufficient to cover implicit costs, but not explicit costs.

An unrecoverable cost that should be disregarded in any current or future decision is also called a(n)
__________ cost.
a. sunk
b. explicit
c. implicit
d. variable

In the long run,
a. all costs are variable costs.
b. all costs are fixed costs.
c. there are no variable costs.
d. b and c

Economies of scale are said to exist when inputs are increased by some percentage and output increases
by a(n) __________ percentage, causing unit costs to __________.
a. greater; fall
b. smaller; fall
c. greater; rise
d. smaller; rise
e. equal; fall

The long-run average total cost (LRATC) curve shows the
a. lowest average variable cost at which the firm can produce any given level of output.
b. lowest unit cost at which the firm can produce any given level of output.
c. highest average fixed cost at which the firm can produce any given level of output.
d. lowest marginal cost at which the firm can produce any given level of output.
e. none of the above

The vertical distance between the AVC and ATC curves is equal to
a. marginal cost.
b. average fixed cost.
c. accounting profit.
d. economic profit.
e. none of the above

AFC Formula

AVC Formula

TC Formula

ATC Formula

MC Formula