New Managerial Economics Final

Q: A tight oligopoly is when

the concentration ratio is above 60%, CR4 > 60

question

Which of the following is an example of moral hazard?

answer

...

question

Oligopoly

answer

a market dominated by a small number of firms, whose actions, directly affect one another's profits, making the fates of the firms interdependent

question

The four-firm concentration ratio

answer

the percentage of sales accounted for by the top four firms in a market or industry

question

The higher the concentration ratio

answer

the greater is the degree of market dominance by a small number of firms

question

An effective monopoly is said to exist when

answer

the single-firm concentration ratio is above 90%, CR1 > 90

question

A market is effectively competitive when

answer

the concentration ratio is below 40%, CR4 < 40

question

A loose oligopoly is when

answer

40% < CR < 60%

question

A tight oligopoly is when

answer

the concentration ratio is above 60%, CR4 > 60

question

The Herfindahl-Hirschman Index is defined as

answer

the sum of the squared market shares of all firms

question

The HHI's properties include

answer

the index counts the market shares of all firms, not merely the top 4 or 8; the more unequal the market shares of a collection of firms, the greater is the index because shares are squared; other things being equal, the more numerous the firms, the lower is the index

question

What is the difference between pure competition and pure monopoly?

answer

under pure competition, market price equals average cost, leaving all firms zero economic profits; under a pure monopoly, a single dominate firm earns maximum excess profit by optimally raising the market price

question

T/F: There is no single model of competition within oligopoly

answer

True; there are multiple

question

As the number of firms increases, the quantity equilibrium played by identical oligopolists

answer

approaches the purely competitive (zero-profit) outcome

question

Price rigidity can be explained by the existence of

answer

kinked demand curves for competing firms

question

What explains the demand curve's kink?

answer

demand is elastic for price increases

question

The kinked demand curve model presumes that

answer

the firm determines its price behavior based on a prediction about its rivals' reactions to potential price changes

question

Setting a low price is each firm's more

answer

profitable alternative, regardless of what action its rival takes

question

Market skimming

answer

strategy of price discriminating over time involves setting a high price to pioneer adopters (who have relatively inelastic demand), then later lowering the price to attract mass-market users (whose demand is more elastic)

question

The learning curve

answer

as a firm gains cumulative experience producing a new product, it can expect to reduce its cost per unit by reengineering and improving the production process

question

Strategic price cuts

answer

increased competition from competitors - whether in the form of advertising, quality improvements, or aggressive pricing - can be expected to have an adverse effect on the firm's demand and, therefore, might call for price cuts in response

question

Boosting sales of related products

answer

when a firm sells complementary products, cutting the price of one spurs the demand for another, and more importantly, is the path to maximizing the firm's total profit

question

Firms' actions are strategic substitutes when

answer

increasing one firm's action causes the other firm's optimal reaction to decrease

question

Firms' actions are strategic complements when

answer

a change in one firm's action causes the other firm's optimal response to move in the same direction

question

In a host of oligopoly models, competition involving prices (strategic complements)

answer

results in lower equilibrium profits than competition involving quantities (strategic substitutes)

question

The aim of a firm's advertising is to

answer

convince consumers that its product is different and better than competing goods

question

Increased product differentiation lessens

answer

the substitutability of other goods while reducing the cross-price elasticity of demand

question

The effect of informational advertising is

answer

to make consumers more aware of and sensitive to salient differences among competing products

question

The key presumption of game theory is that each decision maker (or player)

answer

acts rationally in pursuing his or her own interest and recognizes that competitors also act rationally

question

One-shot game

answer

a buyer and seller negotiating a house sale are unlikely to meet again

question

Repeated game

answer

competition among airlines

question

Monopolists raise

answer

prices, increasing the monopolist's profit at the expense of consumer welfare

question

Economists call the excess profits that monopolists earn rents and call the quest for these rents

answer

rent seeking

question

Externality

answer

a cost or benefit that is caused by one economic agent but borne by another (ex. pollution is a cost caused by a producer but experienced by others - local residents)

question

The efficiency of markets depends on

answer

consumers having good information

question

Which of the following is a key characteristic of an oligopoly?

answer

The firms in an oligopoly are mutually interdependent.

question

During the 1990s, the U. S. cigarette industry was dominated by four major firms that charged similar prices for the cigarettes they sold under a variety of brand names. When one firm raised its prices, the other firms generally followed. The cigarette industry is best characterized as:

answer

an oligopoly

question

The concentration ratio for an industry with four firms shows the:

answer

percentage of sales accounted for by the four firms.

question

The laundry machine industry has a four-firm concentration ratio of 98%. Based on this information, we can conclude that:

answer

the laundry machine industry is a tight oligopoly.

question

The Herfindahl-Hirschman Index _____.

answer

is equal to 10,000 for a market with an infinite number of small firms

question

Some years ago, the three leading aluminum producers in the U.S. changed prices nine times by exactly the same amount each time and usually within one to three days of the initial price increase. This is an example of _____.

answer

price leadership

question

Which of the following correctly explains the dominant firm model of an oligopoly?

answer

A single firm sets the price in the market, which is taken as given by the other smaller firms.

question

In an oligopoly, the kinked demand curve model explains:

answer

price rigidity among firms.

question

The model of the kinked demand curve in price competition implies that:

answer

a firm's competitors will match any price cuts by the firm but not price hikes.

question

Which of the following is true of product differentiation?

answer

Product differentiation can be based on perceived differences among products.

question

Firms do not have the economic incentive to advertise when:

answer

products are standardized.

question

Game theory offers insight into:

answer

strategic behavior of firms in an oligopoly.

question

The key assumption used in game theory is that each player:

answer

pursues his own self-interest, taking into account its rival's behavior.

question

Unlike a one-shot game, in a repeated game:

answer

players have the opportunity to build trust and cooperation.

question

Market efficiency is typically achieved by:

answer

competitive firms that maximize benefits for consumers.

question

Which of the following is a source of market failure?

answer

monopoly power

question

Which of the following is true of a monopoly market versus a perfectly competitive one?

answer

The total consumer surplus is smaller in a monopoly than in a perfectly competitive market.

question

Rent-seeking is:

answer

comprises the activities that are directed towards securing a monopoly position.

question

The expected value of information (EVI)

answer

is the difference between the decision maker's expected value with the information and without it

question

A decision maker should acquire costly information if and only if

answer

the expected value of the information exceeds its cost

question

Bayes' theorem expresses

answer

the conditional probability needed for the decision in terms of the reverse conditional probability and the prior probability

question

Signaling is a common response to

answer

asymmetric information

question

High-productivity workers would like to ________ their true abilities to potential employers and thereby obtain higher-paying jobs.

answer

signal

question

The principal-agent problem occurs when

answer

a principal (with limited information) relies on a self-interested agent (who has better information) to take actions on the principal's behalf

question

Example of principal-agent problem

answer

a physician who has superior knowledge, acts on behalf of her patient

question

The problem of moral hazard occurs when

answer

an agent has incentives to act in its own interest, contrary to the interests of the principal

question

Adverse selection occurs when the agent

answer

holds unobservable or hidden information

question

Moral hazard occurs when an agent

answer

takes unobservable or hidden actions

question

Firms will be organized to

answer

minimize the total cost of production including transaction costs

question

The design of organizational structure involves three issues:

answer

determining the boundaries of the firm, dividing decision-making responsibilities within the firm, and crafting mechanisms for monitoring and rewarding managers

question

Factors favoring in-house production

answer

firm-specific good or service, outside risks: input quality, supply disruptions, and high degree of coordination required

question

Factors favoring outsourcing

answer

standardized good or service, competitive market available, low degree of coordination required

question

Factors favoring centralization

answer

high degree of coordination required, concentration of decision-relevant information, significant principal-agent problems

question

Factors favoring decentralization

answer

low degree of coordination required, dispersion of decision-relevant information, compatible interests and objectives

question

Teams are often used to

answer

combine the advantages of centralization and decentralization

question

A decision-maker should acquire new information:

answer

only if its expected value is greater than its cost.

question

Which of the following leads to adverse selection in a market?

answer

Asymmetric information

question

Adverse selection occurs in a market when:

answer

one party has better information about pertinent risks.

question

Which of the following is an example of asymmetric information leading to a "lemons" market?

answer

The seller of a used laptop knows more about its true condition than the buyer.

question

In a "lemons" market:

answer

asymmetric information leads to the sale of low-quality goods.

question

Which of the following is a method of signaling used by firms in the presence of asymmetric information?

answer

Building a reputation

question

Which of the following is a method often used to overcome the problem of asymmetric information?

answer

signaling

question

A used car salesperson offers a warranty on any car sold in the lot. This is known as:

answer

signaling

question

Moral hazard occurs when:

answer

an agent pursues his own interests to the detriment of the principal.

question

Some employers permit telecommuting where employees work from home and contact the office through electronic methods. Which of the following identifies a problem that the employer may face?

answer

The employer encounters new problems posed by moral hazard.

question

Which of the following is an example of signaling?

answer

A buyer who makes a large raise in bid at an auction to discourage other bidders.

question

Which of the following is an example of asymmetric information?

answer

A pitcher (about to sign with a new team. who is aware of a nagging elbow pain.

question

Which of the following is an example of self selection?

answer

An elderly couple who elect a generous medical insurance policy.

question

Which of the following is an example of moral hazard?

answer

A doctor who performs a large number of in-office tests and is paid per test.

question

Which of the following is an example of a principal-agent problem?

answer

A board of directors that is trying to refine the compensation system for its CEO.

question

Which of the following contributes to principal-agent problems in large modern firms?

answer

The dispersion of information among many decision makers

question

Which of the following must be true for a firm to efficiently employ centralized decision-making?

answer

There must be significant principal-agent problems.

question

Centralized decision making is favored over decentralized decision making:

answer

when coordinated decisions are essential.

question

The use of teams in an organization can be a problem because

answer

they can lead to difficulties in reaching a consensus

question

Other things equal, relatively poor countries tend to grow

answer

faster than relatively rich countries; this is called the catch-up effect.

question

Macroeconomics includes the study of topics such as

answer

national output, the inflation rate, and the trade deficit.

question

Which of the following would increase productivity?

answer

All of the above!!
an increase in the physical capital stock per worker
an increase in the human capital stock per worker
an increase in natural resources per worker

question

A decision-maker should acquire new information:

answer

only if its expected value is greater than its cost.

question

A used car salesperson offers a warranty on any car sold in the lot. This is known as:
signaling.

answer

...

question

One way in a market economy provides information to consumers is through the use of brand names. One example of "brand value" was McDonald's. In 2015 the estimated "brand value" for McDonald's was around ___________ million.

answer

question

A decision-maker should acquire new information:

answer

only if its expected value is greater than its cost

question

Which of the following is an example of moral hazard?

answer

A doctor who performs a large number of in-office tests and is paid per test.

question

Which of the following leads to adverse selection in a market?

answer

Asymmetric information

question

Which of the following is an example of a principal-agent problem?

answer

A board of directors that is trying to refine the compensation system for its CEO.

question

Which of the following is an example of asymmetric information?

answer

A pitcher (about to sign with a new team. who is aware of a nagging elbow pain

question

Which of the following contributes to principal-agent problems in large modern firms?

answer

The dispersion of information among many decision makers

question

Correct

Which of the following is a method often used to overcome the problem of asymmetric information?

answer

signaling

question

In a "lemons" market:

answer

asymmetric information leads to the sale of low-quality goods.

question

Adverse selection occurs in a market when:

answer

one party has better information about pertinent risks.

question

Moral hazard occurs when:

answer

an agent pursues his own interests to the detriment of the principal.

question

The use of teams in an organization is:

answer

can lead to difficulties in reaching a consensus.

question

The simple circular-flow diagram, total income and total expenditures in an economy are

answer

equal because every transaction has a buyer and a seller.

question

Which of the following must be true for a firm to efficiently employ centralized decision-making?

answer

There must be significant principal-agent problems

question

Which of the following is an example of signaling?

answer

A buyer who makes a large raise in bid at an auction to discourage other bidders.

question

Which of the following is a method of signaling used by firms in the presence of asymmetric information?

answer

Building a reputation

question

Centralized decision making is favored over decentralized decision making

answer

when coordinated decisions are essential.

question

Start with the demand function P = 340 - 0.8 Q and the total cost function is C = 120 + 100 Q. Find the profit function

answer

120 - 240 Q - 0.8 Q^2

question

Which of the following is an example of self selection?

answer

An elderly couple who elect a generous medical insurance policy.

question

Some employers permit telecommuting where employees work from home and contact the office through electronic methods. Which of the following identifies a problem that the employer may face?

answer

The employer encounters new problems posed by moral hazard.

question

Which of the following is an example of asymmetric information leading to a "lemons" market?

answer

The seller of a used laptop knows more about its true condition than the buyer.

question

The concentration ratio for an industry with four firms shows the:

answer

percentage of sales accounted for by the four firms.

question

Firms do not have the economic incentive to advertise when:

answer

products are standardized.

question

When consumers possess imperfect information or misinformation:

answer

there is a role for the government to intervene and mandate better outcomes.

question

Firms do not have the economic incentive to advertise when

answer

products are standardized

question

The model of the kinked demand curve in price competition implies that:

answer

a firm's competitors will match any price cuts by the firm but not price hikes.

question

Which of the following is true of a monopoly market versus a perfectly competitive one?

answer

The total consumer surplus is smaller than in a perfectly competitive market.

question

Which of the following is true of product differentiation?

answer

Product differentiation can be based on perceived differences among products.

question

Unlike a one-shot game, in a repeated game:

answer

players have the opportunity to build trust and cooperation.

question

answer

price leadership

question

The key assumption used in game theory is that each player:

answer

pursues his own self-interest, taking into account its rival's behavior.

question

In an oligopoly, the kinked demand curve model explains:

answer

price rigidity among firms.

question

Market efficiency is typically achieved by:

answer

competitive firms that maximize benefits for consumers.

question

answer

an oligopoly

question

The laundry machine industry has a four-firm concentration ratio of 98%. Based on this information, we can conclude that:

answer

the laundry machine industry is a tight oligopoly.

question

When consumers possess imperfect information or misinformation:

answer

there is a role for the government to intervene and mandate better outcomes.

question

Game theory offers insight into:

answer

strategic behavior of firms in an oligopoly.

question

Unlike a one-shot game, in a repeated game:

answer

players have the opportunity to build trust and cooperation.

question

The Herfindahl-Hirschman Index _____.

answer

is equal to 10,000 for a market with an infinite number of small firms

question

Which of the following is a key characteristic of an oligopoly?

answer

The firms in an oligopoly are mutually interdependent.

question

In the absence of regulation, which of the following is true of a good or service that generates a positive externality?

answer

The supply of the good will be less than the socially optimal level of output.

question

Which of the following is a source of market failure?

answer

Monopoly power

question

Rent-seeking is:

answer

comprises the activities that are directed towards securing a monopoly position

question

Which of the following correctly explains the dominant firm model of an oligopoly?

answer

A single firm sets the price in the market, which is taken as given by the other smaller firms.

question

Compared to a perfectly competitive industry, a monopolist will generally produce:

answer

a smaller level of output at a higher price.

question

Unlike perfectly competitive markets, monopolistically competitive markets:

answer

produce differentiated products.

question

If the price of a product consistently exceeds its average total cost, one can definitely conclude that the firm

answer

is earning a positive economic profit.

question

If short-run average cost is increasing then:

answer

marginal cost must be greater than short-run average cost.

question

Which of the following is true in the long-run?

answer

A firm can vary all the inputs used in production.

question

In the short run, if the marginal product of labor is decreasing, then:

answer

marginal cost must be increasing.

question

In order to maximize profits, a perfectly competitive firm will continue producing until

answer

the marginal cost equals the market price.

question

Which of the following is true of a pure monopoly?

answer

A pure monopoly restricts output below the competitive level.

question

The economic profit on an investment is zero when:

answer

the investment earns a normal rate of return.

question

The following figure shows the domestic demand and supply curves for a good. With free trade case (or open trade case), the price of the good in the domestic market is P3.
Figure 7-1

Refer to Figure 7-1. When trade is not restricted, also called free/open trade, the level of imports to the domestic market is _____.

answer

question

Which of the following correctly defines the marginal product of labor?

answer

It is the additional output produced by an additional unit of labor, all other factors held constant.

question

Suppose a severe freeze damages the Florida orange crop. Everything else remaining unchanged, which of the following is most likely to be true?

answer

The output of oranges will fall and the price will increase.

question

Suppose a demand faced by a cartel is P = 140 - 2Q. Each cartel member faces a cost of production of $20 (ATC = MC = $20). What is the total profit of the entire cartel when the cartel follows the profit-maximizing output and price?

answer

$2000

question

Output elasticity is the percentage change in output that results from a 1 percent increase _____.

answer

all the inputs

question

If a firm were to stop production of its only product, the firm's total cost will be equal to

answer

its total fixed cost

question

Refer to Figure 6-1. The production function of the firm displays constant returns to scale when output is increased from _____.

answer

C to D

question

Which of the following is a statement of the law of diminishing marginal returns?

answer

When one input is increased, with all other inputs unchanged, the marginal product of the input will eventually decline.

question

Demand for a good is given by: QD = 100 - 2P and supply by QS = .5P - 20, where P is the market price of the good. In equilibrium, price and output under perfect competition will be:

answer

$48 and 4 units respectively.

question

Suppose a demand faced by a cartel is P = 140 - 2Q. Each cartel member faces a cost of production of $20 (ATC = MC = $20). The cartel's profit-maximizing output is ________ and price is ________.

answer

30, $80

question

With free trade, the market for a particular good or service is in equilibrium when:

answer

the price in the world market is equal to the price in the domestic market.

question

In order to maximize profits, a perfectly competitive firm will continue producing until:

answer

the marginal cost equals the market price.

question

A monopolist maximizes profit by producing

answer

at the output level where marginal revenue equals marginal cost

question

One measure of monopoly power (market power) is the Lerner Index (LI), defined as LI = (Pm -MC) / Pm, where Pm is monopoly price and MC is marginal cost. For a profit-maximizing monopolist, as the elasticity value get larger (in absolute value), what happens to monopoly power?

answer

Monopoly power get weaker

question

What is meant by consumer surplus?

answer

It is the net gain that buyers obtain from purchasing a good.

question

A monopolist produces and sells 500 units at a price of $40 per unit. The monopolist's average total cost is equal to $27. The monopolist's profit is:.

answer

6500

question

A monopoly earns positive economic profits in the long run because:

answer

there are barriers to entry in the market.

question

The demand curve faced by individual firms under monopolistic competition is

answer

downward-sloping.

question

The following figure shows the domestic demand and supply curves for a good. With free trade, the price of the good in the domestic market is P3. The government introduces a 5% tariff in the market which raises the domestic price to P2.
Figure 7-1

Refer to Figure 7-1. With the imposition of the tariff of 5%, the deadweight loss (DWL) in the market is equal to

answer

the area of JGL + HMK.

question

Refer to Table 5-1. What is the marginal product of the 6th worker?

answer

6 units

question

Assume that demand for a service depends upon price and income, where the price elasticity of demand is Ep = -0.6 and income elasticity is Ey = 1.2.

If price falls by 4% and income rises by 2%, the quantity demanded of the service will _____.

answer

increase by 4.8%

question

The following table shows the total output produced in a factory at various levels of employment of labor. The firm sells each unit of output at $2 and each worker is paid a wage of $32.
Table 5-1

Refer to Table 5-1. Diminishing returns to labor occurs when we hire the worker number ________.

answer

question

The supply curve of a perfectly competitive firm is

answer

the portion of the marginal cost curve above the minimum point of the average variable cost curve.

question

The money that a firm has already spent on research and development for a project should be categorized as _____ when the firm is deciding whether to make an additional investment in the project.

answer

a sunk cost

question

Which of the following is true of a firm's fixed costs?

answer

Fixed costs are incurred regardless of the firm's level of output.

question

Dana, who is a trained yoga instructor, spends 4 hours on Monday baking and packing 10 boxes of cookies. She sells the cookies for $10 a box. Given that she can also teach yoga for $80 an hour, what is her opportunity cost of baking cookies?

answer

320

question

The price of fresh fish rose and the quantity sold fell. Other things remaining the same, which of the following is consistent with this observation?

answer

The cost of fishing increased.

question

Accounting profit differs from economic profit because:

answer

economic cost includes all relevant opportunity costs.

question

The basic objective of a cartel is to:

answer

successfully practice price discrimination in the market.

question

The price of fresh fish rose and the quantity bought (and sold) also rose.

Other things remaining the same, which of the following is consistent with this observation?

answer

The price of meat, which is a substitute for fish, rose.

question

Oil is an input in the production of gasoline. Suppose that over the last month, the price of gasoline has increased and the quantity sold of gasoline has fallen. Other things remaining the same, which of the following is most likely to be true?

answer

Oil field workers received large wage increases.

question

Everything else remaining unchanged, an increase in demand will lead to:

answer

a fall in price and an increase in output and an increase in price.

question

A profit-maximizing firm will hire the variable input, labor, until the point where

answer

marginal revenue product of labor is equal to the marginal cost of labor.

question

A firm produces 100 units of output at an average variable cost of $5 and incurs a total fixed cost of $700. Which of the following is true?

answer

The firm's average total cost is $12.

question

The demand curve faced by an individual firm in a competitive market, implies that the firm:

answer

takes the market price as given.

question

Other factors being unchanged, the supply curve for eggs will shift downward and to the right if:

answer

the price of chicken feed falls.

question

When the marginal product of a variable input is zero, it implies that the firm is at the point where the total product is:

answer

at its maximum

question

When a firm faces constant returns to scale, a proportionate increase in all inputs:

answer

will increase output by the same proportion as the increase in inputs.

question

A firm's production function shows:

answer

the maximum level of output the firm can produce for any combination of inputs.

question

When average total cost is at its minimum point:

answer

average total cost is equal to marginal cost

question

The basic objective of a cartel is to:

answer

secure monopoly profits for its members.

question

The short-run is best defined as the time period in which:

answer

one or more inputs to production are fixed

1 of 188

question

Which of the following is an example of moral hazard?

answer

...

question

Oligopoly

answer

a market dominated by a small number of firms, whose actions, directly affect one another's profits, making the fates of the firms interdependent

question

The four-firm concentration ratio

answer

the percentage of sales accounted for by the top four firms in a market or industry

question

The higher the concentration ratio

answer

the greater is the degree of market dominance by a small number of firms

question

An effective monopoly is said to exist when

answer

the single-firm concentration ratio is above 90%, CR1 > 90

question

A market is effectively competitive when

answer

the concentration ratio is below 40%, CR4 < 40

question

A loose oligopoly is when

answer

40% < CR < 60%

question

A tight oligopoly is when

answer

the concentration ratio is above 60%, CR4 > 60

question

The Herfindahl-Hirschman Index is defined as

answer

the sum of the squared market shares of all firms

question

The HHI's properties include

answer

question

What is the difference between pure competition and pure monopoly?

answer

question

T/F: There is no single model of competition within oligopoly

answer

True; there are multiple

question

As the number of firms increases, the quantity equilibrium played by identical oligopolists

answer

approaches the purely competitive (zero-profit) outcome

question

Price rigidity can be explained by the existence of

answer

kinked demand curves for competing firms

question

What explains the demand curve's kink?

answer

demand is elastic for price increases

question

The kinked demand curve model presumes that

answer

the firm determines its price behavior based on a prediction about its rivals' reactions to potential price changes

question

Setting a low price is each firm's more

answer

profitable alternative, regardless of what action its rival takes

question

Market skimming

answer

question

The learning curve

answer

as a firm gains cumulative experience producing a new product, it can expect to reduce its cost per unit by reengineering and improving the production process

question

Strategic price cuts

answer

question

Boosting sales of related products

answer

when a firm sells complementary products, cutting the price of one spurs the demand for another, and more importantly, is the path to maximizing the firm's total profit

question

Firms' actions are strategic substitutes when

answer

increasing one firm's action causes the other firm's optimal reaction to decrease

question

Firms' actions are strategic complements when

answer

a change in one firm's action causes the other firm's optimal response to move in the same direction

question

In a host of oligopoly models, competition involving prices (strategic complements)

answer

results in lower equilibrium profits than competition involving quantities (strategic substitutes)

question

The aim of a firm's advertising is to

answer

convince consumers that its product is different and better than competing goods

question

Increased product differentiation lessens

answer

the substitutability of other goods while reducing the cross-price elasticity of demand

question

The effect of informational advertising is

answer

to make consumers more aware of and sensitive to salient differences among competing products

question

The key presumption of game theory is that each decision maker (or player)

answer

acts rationally in pursuing his or her own interest and recognizes that competitors also act rationally

question

One-shot game

answer

a buyer and seller negotiating a house sale are unlikely to meet again

question

Repeated game

answer

competition among airlines

question

Monopolists raise

answer

prices, increasing the monopolist's profit at the expense of consumer welfare

question

Economists call the excess profits that monopolists earn rents and call the quest for these rents

answer

rent seeking

question

Externality

answer

a cost or benefit that is caused by one economic agent but borne by another (ex. pollution is a cost caused by a producer but experienced by others - local residents)

question

The efficiency of markets depends on

answer

consumers having good information

question

Which of the following is a key characteristic of an oligopoly?

answer

The firms in an oligopoly are mutually interdependent.

question

answer

an oligopoly

question

The concentration ratio for an industry with four firms shows the:

answer

percentage of sales accounted for by the four firms.

question

The laundry machine industry has a four-firm concentration ratio of 98%. Based on this information, we can conclude that:

answer

the laundry machine industry is a tight oligopoly.

question

The Herfindahl-Hirschman Index _____.

answer

is equal to 10,000 for a market with an infinite number of small firms

question

answer

price leadership

question

Which of the following correctly explains the dominant firm model of an oligopoly?

answer

A single firm sets the price in the market, which is taken as given by the other smaller firms.

question

In an oligopoly, the kinked demand curve model explains:

answer

price rigidity among firms.

question

The model of the kinked demand curve in price competition implies that:

answer

a firm's competitors will match any price cuts by the firm but not price hikes.

question

Which of the following is true of product differentiation?

answer

Product differentiation can be based on perceived differences among products.

question

Firms do not have the economic incentive to advertise when:

answer

products are standardized.

question

Game theory offers insight into:

answer

strategic behavior of firms in an oligopoly.

question

The key assumption used in game theory is that each player:

answer

pursues his own self-interest, taking into account its rival's behavior.

question

Unlike a one-shot game, in a repeated game:

answer

players have the opportunity to build trust and cooperation.

question

Market efficiency is typically achieved by:

answer

competitive firms that maximize benefits for consumers.

question

Which of the following is a source of market failure?

answer

monopoly power

question

Which of the following is true of a monopoly market versus a perfectly competitive one?

answer

The total consumer surplus is smaller in a monopoly than in a perfectly competitive market.

question

Rent-seeking is:

answer

comprises the activities that are directed towards securing a monopoly position.

question

The expected value of information (EVI)

answer

is the difference between the decision maker's expected value with the information and without it

question

A decision maker should acquire costly information if and only if

answer

the expected value of the information exceeds its cost

question

Bayes' theorem expresses

answer

the conditional probability needed for the decision in terms of the reverse conditional probability and the prior probability

question

Signaling is a common response to

answer

asymmetric information

question

High-productivity workers would like to ________ their true abilities to potential employers and thereby obtain higher-paying jobs.

answer

signal

question

The principal-agent problem occurs when

answer

a principal (with limited information) relies on a self-interested agent (who has better information) to take actions on the principal's behalf

question

Example of principal-agent problem

answer

a physician who has superior knowledge, acts on behalf of her patient

question

The problem of moral hazard occurs when

answer

an agent has incentives to act in its own interest, contrary to the interests of the principal

question

Adverse selection occurs when the agent

answer

holds unobservable or hidden information

question

Moral hazard occurs when an agent

answer

takes unobservable or hidden actions

question

Firms will be organized to

answer

minimize the total cost of production including transaction costs

question

The design of organizational structure involves three issues:

answer

determining the boundaries of the firm, dividing decision-making responsibilities within the firm, and crafting mechanisms for monitoring and rewarding managers

question

Factors favoring in-house production

answer

firm-specific good or service, outside risks: input quality, supply disruptions, and high degree of coordination required

question

Factors favoring outsourcing

answer

standardized good or service, competitive market available, low degree of coordination required

question

Factors favoring centralization

answer

high degree of coordination required, concentration of decision-relevant information, significant principal-agent problems

question

Factors favoring decentralization

answer

low degree of coordination required, dispersion of decision-relevant information, compatible interests and objectives

question

Teams are often used to

answer

combine the advantages of centralization and decentralization

question

A decision-maker should acquire new information:

answer

only if its expected value is greater than its cost.

question

Which of the following leads to adverse selection in a market?

answer

Asymmetric information

question

Adverse selection occurs in a market when:

answer

one party has better information about pertinent risks.

question

Which of the following is an example of asymmetric information leading to a "lemons" market?

answer

The seller of a used laptop knows more about its true condition than the buyer.

question

In a "lemons" market:

answer

asymmetric information leads to the sale of low-quality goods.

question

Which of the following is a method of signaling used by firms in the presence of asymmetric information?

answer

Building a reputation

question

Which of the following is a method often used to overcome the problem of asymmetric information?

answer

signaling

question

A used car salesperson offers a warranty on any car sold in the lot. This is known as:

answer

signaling

question

Moral hazard occurs when:

answer

an agent pursues his own interests to the detriment of the principal.

question

Some employers permit telecommuting where employees work from home and contact the office through electronic methods. Which of the following identifies a problem that the employer may face?

answer

The employer encounters new problems posed by moral hazard.

question

Which of the following is an example of signaling?

answer

A buyer who makes a large raise in bid at an auction to discourage other bidders.

question

Which of the following is an example of asymmetric information?

answer

A pitcher (about to sign with a new team. who is aware of a nagging elbow pain.

question

Which of the following is an example of self selection?

answer

An elderly couple who elect a generous medical insurance policy.

question

Which of the following is an example of moral hazard?

answer

A doctor who performs a large number of in-office tests and is paid per test.

question

Which of the following is an example of a principal-agent problem?

answer

A board of directors that is trying to refine the compensation system for its CEO.

question

Which of the following contributes to principal-agent problems in large modern firms?

answer

The dispersion of information among many decision makers

question

Which of the following must be true for a firm to efficiently employ centralized decision-making?

answer

There must be significant principal-agent problems.

question

Centralized decision making is favored over decentralized decision making:

answer

when coordinated decisions are essential.

question

The use of teams in an organization can be a problem because

answer

they can lead to difficulties in reaching a consensus

question

Other things equal, relatively poor countries tend to grow

answer

faster than relatively rich countries; this is called the catch-up effect.

question

Macroeconomics includes the study of topics such as

answer

national output, the inflation rate, and the trade deficit.

question

Which of the following would increase productivity?

answer

All of the above!!
an increase in the physical capital stock per worker
an increase in the human capital stock per worker
an increase in natural resources per worker

question

A decision-maker should acquire new information:

answer

only if its expected value is greater than its cost.

question

A used car salesperson offers a warranty on any car sold in the lot. This is known as:
signaling.

answer

...

question

answer

question

A decision-maker should acquire new information:

answer

only if its expected value is greater than its cost

question

Which of the following is an example of moral hazard?

answer

A doctor who performs a large number of in-office tests and is paid per test.

question

Which of the following leads to adverse selection in a market?

answer

Asymmetric information

question

Which of the following is an example of a principal-agent problem?

answer

A board of directors that is trying to refine the compensation system for its CEO.

question

Which of the following is an example of asymmetric information?

answer

A pitcher (about to sign with a new team. who is aware of a nagging elbow pain

question

Which of the following contributes to principal-agent problems in large modern firms?

answer

The dispersion of information among many decision makers

question

Correct

Which of the following is a method often used to overcome the problem of asymmetric information?

answer

signaling

question

In a "lemons" market:

answer

asymmetric information leads to the sale of low-quality goods.

question

Adverse selection occurs in a market when:

answer

one party has better information about pertinent risks.

question

Moral hazard occurs when:

answer

an agent pursues his own interests to the detriment of the principal.

question

The use of teams in an organization is:

answer

can lead to difficulties in reaching a consensus.

question

The simple circular-flow diagram, total income and total expenditures in an economy are

answer

equal because every transaction has a buyer and a seller.

question

Which of the following must be true for a firm to efficiently employ centralized decision-making?

answer

There must be significant principal-agent problems

question

Which of the following is an example of signaling?

answer

A buyer who makes a large raise in bid at an auction to discourage other bidders.

question

Which of the following is a method of signaling used by firms in the presence of asymmetric information?

answer

Building a reputation

question

Centralized decision making is favored over decentralized decision making

answer

when coordinated decisions are essential.

question

Start with the demand function P = 340 - 0.8 Q and the total cost function is C = 120 + 100 Q. Find the profit function

answer

120 - 240 Q - 0.8 Q^2

question

Which of the following is an example of self selection?

answer

An elderly couple who elect a generous medical insurance policy.

question

Some employers permit telecommuting where employees work from home and contact the office through electronic methods. Which of the following identifies a problem that the employer may face?

answer

The employer encounters new problems posed by moral hazard.

question

Which of the following is an example of asymmetric information leading to a "lemons" market?

answer

The seller of a used laptop knows more about its true condition than the buyer.

question

The concentration ratio for an industry with four firms shows the:

answer

percentage of sales accounted for by the four firms.

question

Firms do not have the economic incentive to advertise when:

answer

products are standardized.

question

When consumers possess imperfect information or misinformation:

answer

there is a role for the government to intervene and mandate better outcomes.

question

Firms do not have the economic incentive to advertise when

answer

products are standardized

question

The model of the kinked demand curve in price competition implies that:

answer

a firm's competitors will match any price cuts by the firm but not price hikes.

question

Which of the following is true of a monopoly market versus a perfectly competitive one?

answer

The total consumer surplus is smaller than in a perfectly competitive market.

question

Which of the following is true of product differentiation?

answer

Product differentiation can be based on perceived differences among products.

question

Unlike a one-shot game, in a repeated game:

answer

players have the opportunity to build trust and cooperation.

question

answer

price leadership

question

The key assumption used in game theory is that each player:

answer

pursues his own self-interest, taking into account its rival's behavior.

question

In an oligopoly, the kinked demand curve model explains:

answer

price rigidity among firms.

question

Market efficiency is typically achieved by:

answer

competitive firms that maximize benefits for consumers.

question

answer

an oligopoly

question

The laundry machine industry has a four-firm concentration ratio of 98%. Based on this information, we can conclude that:

answer

the laundry machine industry is a tight oligopoly.

question

When consumers possess imperfect information or misinformation:

answer

there is a role for the government to intervene and mandate better outcomes.

question

Game theory offers insight into:

answer

strategic behavior of firms in an oligopoly.

question

Unlike a one-shot game, in a repeated game:

answer

players have the opportunity to build trust and cooperation.

question

The Herfindahl-Hirschman Index _____.

answer

is equal to 10,000 for a market with an infinite number of small firms

question

Which of the following is a key characteristic of an oligopoly?

answer

The firms in an oligopoly are mutually interdependent.

question

In the absence of regulation, which of the following is true of a good or service that generates a positive externality?

answer

The supply of the good will be less than the socially optimal level of output.

question

Which of the following is a source of market failure?

answer

Monopoly power

question

Rent-seeking is:

answer

comprises the activities that are directed towards securing a monopoly position

question

Which of the following correctly explains the dominant firm model of an oligopoly?

answer

A single firm sets the price in the market, which is taken as given by the other smaller firms.

question

Compared to a perfectly competitive industry, a monopolist will generally produce:

answer

a smaller level of output at a higher price.

question

Unlike perfectly competitive markets, monopolistically competitive markets:

answer

produce differentiated products.

question

If the price of a product consistently exceeds its average total cost, one can definitely conclude that the firm

answer

is earning a positive economic profit.

question

If short-run average cost is increasing then:

answer

marginal cost must be greater than short-run average cost.

question

Which of the following is true in the long-run?

answer

A firm can vary all the inputs used in production.

question

In the short run, if the marginal product of labor is decreasing, then:

answer

marginal cost must be increasing.

question

In order to maximize profits, a perfectly competitive firm will continue producing until

answer

the marginal cost equals the market price.

question

Which of the following is true of a pure monopoly?

answer

A pure monopoly restricts output below the competitive level.

question

The economic profit on an investment is zero when:

answer

the investment earns a normal rate of return.

question

answer

question

Which of the following correctly defines the marginal product of labor?

answer

It is the additional output produced by an additional unit of labor, all other factors held constant.

question

Suppose a severe freeze damages the Florida orange crop. Everything else remaining unchanged, which of the following is most likely to be true?

answer

The output of oranges will fall and the price will increase.

question

answer

$2000

question

Output elasticity is the percentage change in output that results from a 1 percent increase _____.

answer

all the inputs

question

If a firm were to stop production of its only product, the firm's total cost will be equal to

answer

its total fixed cost

question

Refer to Figure 6-1. The production function of the firm displays constant returns to scale when output is increased from _____.

answer

C to D

question

Which of the following is a statement of the law of diminishing marginal returns?

answer

When one input is increased, with all other inputs unchanged, the marginal product of the input will eventually decline.

question

Demand for a good is given by: QD = 100 - 2P and supply by QS = .5P - 20, where P is the market price of the good. In equilibrium, price and output under perfect competition will be:

answer

$48 and 4 units respectively.

question

Suppose a demand faced by a cartel is P = 140 - 2Q. Each cartel member faces a cost of production of $20 (ATC = MC = $20). The cartel's profit-maximizing output is ________ and price is ________.

answer

30, $80

question

With free trade, the market for a particular good or service is in equilibrium when:

answer

the price in the world market is equal to the price in the domestic market.

question

In order to maximize profits, a perfectly competitive firm will continue producing until:

answer

the marginal cost equals the market price.

question

A monopolist maximizes profit by producing

answer

at the output level where marginal revenue equals marginal cost

question

answer

Monopoly power get weaker

question

What is meant by consumer surplus?

answer

It is the net gain that buyers obtain from purchasing a good.

question

A monopolist produces and sells 500 units at a price of $40 per unit. The monopolist's average total cost is equal to $27. The monopolist's profit is:.

answer

6500

question

A monopoly earns positive economic profits in the long run because:

answer

there are barriers to entry in the market.

question

The demand curve faced by individual firms under monopolistic competition is

answer

downward-sloping.

question

answer

the area of JGL + HMK.

question

Refer to Table 5-1. What is the marginal product of the 6th worker?

answer

6 units

question

answer

increase by 4.8%

question

answer

question

The supply curve of a perfectly competitive firm is

answer

the portion of the marginal cost curve above the minimum point of the average variable cost curve.

question

The money that a firm has already spent on research and development for a project should be categorized as _____ when the firm is deciding whether to make an additional investment in the project.

answer

a sunk cost

question

Which of the following is true of a firm's fixed costs?

answer

Fixed costs are incurred regardless of the firm's level of output.

question

answer

320

question

The price of fresh fish rose and the quantity sold fell. Other things remaining the same, which of the following is consistent with this observation?

answer

The cost of fishing increased.

question

Accounting profit differs from economic profit because:

answer

economic cost includes all relevant opportunity costs.

question

The basic objective of a cartel is to:

answer

successfully practice price discrimination in the market.

question

The price of fresh fish rose and the quantity bought (and sold) also rose.

Other things remaining the same, which of the following is consistent with this observation?

answer

The price of meat, which is a substitute for fish, rose.

question

answer

Oil field workers received large wage increases.

question

Everything else remaining unchanged, an increase in demand will lead to:

answer

a fall in price and an increase in output and an increase in price.

question

A profit-maximizing firm will hire the variable input, labor, until the point where

answer

marginal revenue product of labor is equal to the marginal cost of labor.

question

A firm produces 100 units of output at an average variable cost of $5 and incurs a total fixed cost of $700. Which of the following is true?

answer

The firm's average total cost is $12.

question

The demand curve faced by an individual firm in a competitive market, implies that the firm:

answer

takes the market price as given.

question

Other factors being unchanged, the supply curve for eggs will shift downward and to the right if:

answer

the price of chicken feed falls.

question

When the marginal product of a variable input is zero, it implies that the firm is at the point where the total product is:

answer

at its maximum

question

When a firm faces constant returns to scale, a proportionate increase in all inputs:

answer

will increase output by the same proportion as the increase in inputs.

question

A firm's production function shows:

answer

the maximum level of output the firm can produce for any combination of inputs.

question

When average total cost is at its minimum point:

answer

average total cost is equal to marginal cost

question

The basic objective of a cartel is to:

answer

secure monopoly profits for its members.

question

The short-run is best defined as the time period in which:

answer

one or more inputs to production are fixed

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