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1. Which of the following equations best describes the relationship between economic and accounting profit?
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Economic profit = Accounting profit - Implicit costs
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Suppose that fixed costs are $200 and marginal costs are constant at $10 per unit. What is the average total cost to produce 5 units? It is closest to
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$50
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Marginal cost is calculated as
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The increase in total costs divided by the increase in the quantity
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A firm earns zero economic profit if the quantity produced is such that price equals
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Average total cost
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If the firm can make a profit, it makes the largest profit possible by following the marginal decision rule, i.e. choosing the quantity where marginal cost equals marginal revenue. If the firm cannot make a profit, it makes the smallest loss possible (in the short run) by choosing the quantity
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Where marginal cost equals marginal revenue
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A perfectly competitive firm does best to charge a price
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Equal to its competitors
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Which of the following is an example of monopoly power granted by government regulation?
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A patent on a new drug
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Monopolies reduce overall welfare in the economy when they
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Sell less output than would perfectly competitive firms
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Which of the following is NOT an example of price discrimination
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All of the above are examples of price discrimination
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Which of the following is true of monopolistically competitive firms?
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The price they charge is greater than marginal cost
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Firms can cooperate in "prisoner's dilemma" type situations if
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They expect to interact over and over again
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An advantage of the Herfindahl-Hirschman Index over the four-firm concentration ratio is that it
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Uses information from all firms in the industry
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Oligopolists are unique among firms because they
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Must pay close attention to their competitors' actions
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Economists usually assume that the goal of a firm is to:
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Maximize profits
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Susan used to be a telemarketer, earning $25,000 a year. She gave up that job to start a catering business. In calculating the economic profit of her catering business, the $25,000 income that she gave up is counted as part of the catering firm's:
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Opportunity costs
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With no price discrimination, a monopolist sells every unit at the same price. Assuming the monopolist faces a downward-sloping demand curve, we know:
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Price is greater than marginal revenue
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In an oligopoly situation, the logic of self-interest will usually lead to a total output level that:
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Exceeds the monopoly level of output, but falls short of the competitive level of output
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What term describes a game in which players want to choose the same option as other players in the game?
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Coordination game
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Which of the following measures the degree of market power in a market?
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Both concentration ratios and the Herfindahl-Hirschman index
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The market for golf balls is in long run equilibrium. Suddenly a large increase in demand for golf balls occurs. Which of theses is the series of steps that restores equilibrium?
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Price rises, so existing firms make a profit. This attracts new firms to the market, expanding supply and lowering price.
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Private information is the cause of:
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Both the adverse selection problem and the moral hazard problem.
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In the market for CBD oil, the quality of the oil is known to the seller but not the buyer. Higher quality oils are more expensive to produce, but cannot be sold for higher prices because the buyer has no way of telling high quality from low quality oils. This might lead to a death spiral in the market for CBD oil, because
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High-cost sellers will refuse to sell
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Quacklack offers unemployment insurance in a city of 2,000 people. 1,000 of them have a 1% chance of losing their job, while the other 1,000 have a 5% chance of losing their job. If someone loses their job, Quacklack pays them $4,000. Quacklack cannot tell which people have a higher or lower chance of losing their job. Assume Quacklack has no costs other than the insurance payouts. How much would Quacklack have to charge in order to break even (i.e. make no profit) on average?
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$40 or $120
((Depends if you assume everyone buys [$120] or if you assume the low-chance people won't buy if the price is above the expected benefit of 1% of $4000 [$40]))
((Depends if you assume everyone buys [$120] or if you assume the low-chance people won't buy if the price is above the expected benefit of 1% of $4000 [$40]))
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What problem related to private information would Quacklack find among its buyers of unemployment insurance?
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More high-cost buyers than low-cost buyers would choose to buy insurance.
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One solution to the moral hazard problem is to provide complements that go with the actions you want. An auto insurance company wanting people to drive safer could use this solution by:
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Teaching free safe-driving lessons in schools
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Which formula correctly describes marginal costs?
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MC = ΔTC/ ΔQ
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Which of the following is not a characteristic of perfectly competitive markets?
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Goods offered for sale are differentiated
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Suppose a monopolist's demand schedule is given by the table to the right. If it faces a constant marginal cost of $4.50 per unit, how much output should the firm produce?
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3 units
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Which of the following is usually improved when a monopolist practices price discrimination, compared with if it must charge a single price?
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producer surplus and social welfare
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Suppose that a firm is making zero (or normal) economic profit. Then which of the following must be true?
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Accounting profit = Implicit costs
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Jacob quit his job as a carpenter (earning $35,000 per year) to start his own firm, Jacob's Ladders. Each year, Jacob buys $15,000 worth of wood for his business. Assume these are his only costs. Which of the following statements is true?
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Jacob's Ladders has explicit costs of $35,000 and implicit costs of $15,000
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How much is variable cost, if you produce 20 units?
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1300
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What is the marginal cost associated with going from 20 to 30 units?
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80
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Suppose that a perfectly competitive firm maximizes profit by selling a quantity of 200 units at a price of $150 per unit. What can we say about the firm's marginal revenue and marginal cost at the optimal level of production?
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MR = $150, MC = $150
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Suppose that in a perfectly competitive market, firms are currently making a loss. According to the model of perfect competition, what would take place in order to return the firms to zero economic profit?
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Some firms would leave the market
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Which of the following was not described in class as a reason for monopolies to exist?
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New industry
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Which of the following equations describes profit and is the basis for showing profit as a rectangle on a graph of the firm's costs and revenues?
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Profit = Quantity x (Price - Average Total Cost)
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In monopolistically competitive markets, economic losses:
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Suggest that some existing firms will exit the market
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Monopolists and monopolistic competitors result in deadweight loss because they produce a quantity where
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Marginal cost is not equal to price
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Consider the following items:
i. Price discrimination
ii. Government price regulation
Which of the above can help to reduce the deadweight loss associated with monopoly production?
i. Price discrimination
ii. Government price regulation
Which of the above can help to reduce the deadweight loss associated with monopoly production?
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Both i. and ii.
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A monopolistically competitive firm in long run equilibrium will produce _____ than a perfectly competitive firm with the same cost structure at a _____ average cost of production.
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Less; higher
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Firms in which market structures would expect to gain the most from advertising?
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Oligopolistic and Monopolistic markets
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Which of the following descriptions best describes oligopolistic markets?
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A few firms in the market with barriers to entry by other firms
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Game theory is best described as the theory of :
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Strategic interaction
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Suppose that in a market with ten firms, the largest and second-largest firms merged. Which would rise, the four firm concentration ratio or the Herfindahl-Hirschman Index?
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Both would rise
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According to our models from class, firms in which market structure(s) make zero economic profit in the long run?
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Both perfect competition and monopolistic competition
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What term describes the situation where a market fails because the types of sellers with the highest valued goods progressively leave the market, because they cannot prove that they have the highest value good?
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Death Spiral
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College degrees can send a signal of applicant quality to employers. Why does a college degree work as a signal?
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Because low-potential workers find college too difficult to complete.
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Student evaluation ratings for professors help to reduce the moral hazard problem for universities, where professors might do a poor job teaching. This is an example of:
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Making hidden actions observable by monitoring
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The Tragedy of the Commons, where farmers will tend to over-use a patch of shared land, is an multi-player version of which game?
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Prisoner's dilemma
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