Microeconomics Unit 2 HW Questions

In the competitive electrical motor industry, the workers at Galt, Inc. threaten to go on strike. To avoid the strike, Galt, Inc. agrees to pay its workers more. At all other factories, the wage remains the same. In this competitive market, what will the Galt, Inc. labor agreement do to the market price of motors?

In a constant cost industry, what happens to the price of the good in the long run when there is a rise in demand?

The length of the "long run" will vary from industry to industry. How long would you estimate the long run is in the market for electrical engineers? (Hint: Consider the length of time a student would spend in school to get an engineering degree before entering the market.)

Paulette, Camille, and Hortense each own wineries in France. They produce inexpensive, mass-market wines. Over the last few years, such wines sold for 7 euros per bottle, but with a global recession, the price has fallen to 5 euros per bottle. Given the information below, calculate each winemaker's profit.

Winemaker Fixed Costs Variable Costs Recession Revenues Profits

Paulette 50,000 80,000 120,000

Camille 100,000 40,000 70,000

Hortense 200,000 250,000 200,000

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $50,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

Economic profit differs from accounting profits because of its inclusion of:

If Tom sells 500 sandwiches for $7 and has an average cost of $5, what is his profit?

A firm pays a monthly lease of $10,000 and generates $8,000 of revenue a month. Which of the following is TRUE?

A firm should exit an industry if

Economists call the time after all exit or entry has occurred:

Firms in a perfectly competitive industry maximize profits by:

For a small firm in an extremely competitive industry, marginal revenue is always equal to price because

In a highly competitive industry, demand for a firm's product is

In their calculation of profit, accountants typically do not take into account

Profit is defined as

The short run is defined as

Suppose there are two industries: a high-profit industry, Industry H, and low-profit industry, Industry L. If the two industries have similar costs, what must be true about prices in the two industries?

According to the elimination principle, what initially happens to profits in Industry X when demand rises in Industry X?

According to the elimination principle, what happens to the number of firms, number of workers, and the quantity of capital in Industry X when demand rises in Industry X? You can assume that Industry X is a decrease cost industry.

According to the elimination principle, what happens to the short-run supply in Industry X when demand rises in Industry X? You can assume Industry X is a decreasing cost industry.

According to the elimination principle how would you characterize the long run profits in Industry X after demand rises in Industry X? You can assume Industry X is a decreasing cost industry?

How can the market mechanism guarantee that the marginal cost of production will be the same across all firms if those firms have different owners, are in different locations, and have unique cost functions known only to the firms themselves? Why don't these different firms need to have one shared owner or one shared manager to coordinate this "equal marginal cost" condition? Assume the market is perfectly competitive.

In the process of creative destruction, what gets destroyed?

Every year American television introduces many new shows, only about one-third of which survive past their first season. The few shows that last, however, prove to be very profitable. How does creative destruction explain why studios bother to make new shows if most of them will fail?

Let's suppose that the demand for allergists increases in California. How does the invisible hand respond to this demand?

Who first used the term, "invisible hand"?

In the textbook, The Applied Theory of Price, D.N. McCloskey refers to the equation MR=MC as the rule of rational life. What types of firms follow this rule?

Monopolist charge a higher markup when demand is highly _____ and when customers have _______ good substitutes for a product.

A producer of new, trendy shoes is ________ likely to charge a larger markup than someone selling ordinary tennis shoes because ______.

Which of the following is true when a monopoly is producing the profit-maximizing quantity of output?

Complete the following sentence; If a pharmaceutical company is trying to decide what kinds of drugs to research it will probably be lured toward inventing:

When a sports team hires an expensive new player or builds a new stadium, you often hear claims that ticket prices have to rise to cover the new, higher cost of the player or new stadium. Let's see what monopoly theory says about that. It is safe to treat these new expenses as fixed costs ---- something that doesn't change if the number of customers rises or falls. Treat the local sports team as a monopoly in this question and to keep it simple, let's assume there's only one ticket price. As long as the sports team is profitable, what affects will a rise in fixed costs have on the equilibrium ticket price?

In 2006, Medicare Part D was created to subsidize spending on prescription drugs. One would expect this expansion to _______pharmaceutical prices, because__________.

Which of the following is a source of market power?

Market power allows a firm to raise price:

A monopolist's price is:

A consumer is ________ likely to be sensitive to price if the purchase ________ covered by insurance.

Assuming the same cost structure, a competitive market produces ________ output at ________ prices than a monopoly market.

Deadweight loss occurs because some consumers are willing to pay at least the marginal cost for the good, even if they are not willing to pay the monopolist's price. If monopolies were able to charge these consumers a lower price without lowering prices to consumers willing to pay more, deadweight loss would ______, some consumers would be ______ off, and the monopolist would be ______ off.

Monopolists are people, too. This means that:

Other things being equal, the markup above marginal cost that a monopolist charges will be:

The marginal revenue curve is a straight line beginning at the same point on the:

The more inelastic the demand curve for a product is, the:

To maximize profit, the monopolist increases output:

When a good has relatively few substitutes:

When a monopolist decreases the price of its good, consumers:

Price discrimination can be defined as:

Which of the following is an example of price discrimination?

In general, price discrimination exists because:

To maximize profit, the monopolist should set a:

Which of the following conditions would prevent a firm from setting different prices in different markets?

Under perfect price discrimination

A top performing used car salesman is able to sell his cars to each customer at their maximum willing to pay, a practice known as:

Which of the following is one of the characteristics a business must possess in order to practice price discrimination?

Hewlett Packard's pricing scheme is to sell printers at relatively low prices and ink cartridges at relatively high prices. This practice is known as:

Airlines try to differentiate their customers by willingness to pay based on

A museum in Russia has two entrances: one for locals (written in Russian) and one for tourists (written in English). People who enter through the entrance written in Russian will end up paying 81.93 Rubles ($3.00). English-speaking tourists will use the entrance written in English, but they will end up paying 409.67 Rubles ($15.00). This practice is an example of:

Airlines price discriminate by offering both business-class and economy-class service on flights (it's not just the cost of the service that varies; the markup is higher on business class). If they wanted to ensure that everyone who could afford to travel business class did so, what might they do?

Arbitrage is ________ in one market and ________ in another market.

Haircuts for men are often cheaper than haircuts for women, even when they are offered by the same stylist. Why might this be price discrimination?

In the case of a perfectly price-discriminating monopoly, there is:

Segmenting a market allows monopolists to:

The optimal price for a monopolist facing different demand curves in two separate markets will be:

Two months after Apple introduced the iPhone in 2007, the company reduced the price from $600 to $400. How is this drop of price an example of price discrimination?

Which of the following is an assumption of the theory of oligopoly?

In the real world, which of these industries is most clearly an oligopoly?

If the firms of an industry form a cartel, their goal is to:

Let's look at the market for Gala apples. Assume there are 300 producers and that MC=AC=$.40 per pound. In a competitive market, price will be driven down to marginal cost. Let's assume that when P=MC, each apple grower produces 2 million pounds of apples for a total market production of 600 million pounds. Now imagine that the apple growers form a cartel and each agrees to cut production to 1 million pound, which drives the price of apples up to $.70 per pound. If a single apple grower broke from the cartel and produced an extra million pounds of apples, how much additional profit (approximately) will this apple grower make?

Usually, we think of cheating as a bad thing. But in this chapter, cheating turns out to be a very good thing in some important cases. Who gets the benefit when a cartel collapses through cheating: consumers or producers? In other words, does cheating increase consumer surplus, producer surplus, or both?

In the late 15th century, Europe consumed about 2 million pounds of pepper per year. At this time, Venice (ruled by a small, tightly knit group of merchants) was the major player in the pepper trade. But after Portuguese explorer de Gama blazed a path around Africa into the Indian Ocean in 1498, Venice found itself competing with Portugal's trade route. By the middle of the 16th century, Europeans consumed 6 to 7 million pounds of pepper, much of it obtained through Lisbon. After de Gama's success the price of pepper fell. Based on this information, which of the following best explains the decline of Venice's influence on the world pepper trade?

In many college town, rumors abound that the nearby gas stations collude to keep prices high. Assess the validity of the following statements regarding where you might expect this conspiracy against the public to work best?

Assess the validity of the following statements.

1. Cartels in which all the industry leaders went to the same schools and live in the same neighborhoods are easier to sustain that cartels in which the industry leaders really don't know each other.

2. It would be more difficult to sustain a cartel in an industry in which it's easy for a firm to sell a little extra product without anyone knowing than in an industry where all sales are public and visible.

Which of the following are examples of factors that increase the cost to new firms of entering an industry (serve as barriers to entry)?

A cartel member has _____ incentive to increase quantity than a standard monopolist

Antitrust laws

Barriers to entry are factors that:

Cartels for natural resources tend to be ______ than cartels for manufactured goods.

Governments do what to cartels?

If every member of OPEC produces beyond quota, then cartel members

In a cartel, the most profitable outcome is achieved by:

In an oligopolistic market, prices will tend to be closer to the competitive price:

Oligopolies are:

Oligopolies tend to set prices:

Tactic collusion occurs when firms:

The NBA and NCAA are examples of:

The Sherman Antitrust Act of 1890:

The prisoner's dilemma refers to a situation in which

What does it mean when an OPEC member cheats?

Which of the following best explains why cartel agreements are hard to maintain?