Principle of Microeconomics Final Exam

question

How do you find the deadweight loss (if any) from a monopoly relative to its optimum quantity?

answer

Use the formula for area of a triangle (1/2bh).

To form triangle: Use the point where MR and MC intersect, as well as the point on the D curve above the previous point and use the point where D and MC intersect.

question

In a purely monopolized environment where each monopolist succeeds at raising its price, the result is:

answer

Higher prices spread throughout the economy.

question

In many places around the world, monopolies result from:

answer

government policies.

question

Suppose that the government decided to reduce pharmaceutical patent protection by requiring companies to sell their drugs at marginal cost. What are the likely consequences of such a policy?

answer

-There would be an increase in consumer surplus
-The deadweight loss in the market would decline
-The future supply of new drugs would decrease

question

If the Bill and Melinda Gates Foundation were to buy out and destroy the patent for Combivir, what would NOT be one of the effects?

answer

Drug companies would have no incentive to create new and better drugs

question

If the government sets the price of all pharmaceutical drugs equal to marginal cost, which of the following statements is TRUE?

answer

-Consumers will pay lower prices for drugs today
-In the future, there will be fewer new drugs

question

Natural Monopolies

answer

exist when one firm can produce the market output at a lower cost than two or more firms

question

The stated reason for resorting to regulation of public utilities rather than promoting competition through antitrust is that the industry in question is believed to be a

answer

natural monopoly

question

Economies of scale are

answer

the advantages of large-scale production that reduce average cost as quantity increases

question

The only company in the United States that can deliver small envelopes (for example, greeting cards and bank statements) is the U.S. Postal Service. What is the source of this monopoly?

answer

Laws preventing entry

question

Saudi Arabia has market power in the world's oil markets because

answer

it controls a significant fraction of the world's oil supply

question

The primary reason that AIDS drugs are priced well above cost is monopoly power. (T/F)

answer

True

question

A monopoly is a firm with market power, and market power may arise from economies of scale, patent protection, and innovation. (T/F)

answer

True

question

A monopolistic industry will have lower output and higher prices than a competitive industry. (T/F)

answer

True

question

When any firm charges a higher price, fewer of its goods are sold. (T/F)

answer

True

question

A profit-maximizing monopolist with a less elastic demand has more pricing power than a profit-maximizing monopolist with a more elastic demand. (T/F)

answer

True

question

All monopolies make economic profit, maintained by some sort of barrier to entry. (T/F)

answer

False

question

If pharmaceutical;rmaceutical patents are not enforced, the number of new drugs will decrease. (T/F)

answer

True

question

The trade-off for natural monopolies weighs the benefits of economies of scale against the costs of deadweight loss (T/F)

answer

True

question

The trade-off for natural monopolies weighs the benefits of economies of scale against the loss of consumer surplus. (T/F)

answer

True

question

A government can maximize efficiency in monopoly markets by setting prices equal to the monopolist's average cost of production albeit at the cost of reduced long term innovation. (T/F)

answer

True

question

To assuage the deadweight loss from a natural monopoly, governments could employ a price control. (T/F)

answer

True

question

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:

answer

Price Discrimination

question

What should a firm due to maximize profit?

answer

To maximize profit the firm should set a lower price in markets with more elastic demand.

question

A monopolist sells its output in two markets, each with different demand curves as shown in this figure. If the marginal cost is identical in both markets, the monopolist should charge a _____ price in the inelastic market, represented by the _____ demand curve.

answer

higher; steeper

question

Why is it harder to price discriminate with shampoo than with haircuts?

answer

Haircuts are harder to resell

question

What is NOT an easy way to split markets in order to practice price discrimination?

answer

Relying on the self-reported marital status of customers

question

A subtle form of price discrimination is for firms to offer:

answer

different versions of a product for the purpose of separating customers into different markets

question

What is perfect price discrimination?

answer

This occurs when a seller charges each separate consumer an amount that is exactly equal to his or her willingness to pay.

question

What conditions must be TRUE for perfect price discrimination?

answer

-The seller must have very good information about the buyer's willingness to pay
-The marginal revenue must equal demand

question

Charging each customer his or her maximum willingness to pay is:

answer

perfect price discrimination

question

Perfectly price-discrimination monopolists charge:

answer

each consumer his or her maximum willingness to pay, so consumer surplus is zero

question

Suppose that GSK sells one of its drugs for $25/pill in the United States and $13/pill in Canada. What are some true statements?

answer

-The price discrimination benefits the Canadians since the pay a lower price
-The price discrimination benefits the Americans since GSK's larger profits means more research and development of new drugs for Americans
-Price discrimination is beneficial in industries with large fixed costs, since price discrimination increases the size of the market, helping to spread large costs over a greater number of consumers

question

What is an example of tying?

answer

Restrictions that prohibit patrons from bringing their own wine to restaurants

question

What is an example of price discrimination through tying?

answer

Razors and blades

question

A mulligan faucet filter sells for $18, while other replacement filters (that void warranty) sell for $12. What strategy is Culligan using?

answer

Tying

question

The difference between tying and bundling is that:

answer

bundled goods are sold one to one, while tied goods are sold one to many

question

Karl values Word and $100 and Excel at $40, and Adam values Word at $20 and Excel at $90. If the programs are sold separately, what are the profit-maximizing prices?

answer

$100 for Word; $90 for Excel

question

Jonathan values Word at $100 and Excel at $90, and Ashley values Word at $80 and Excel at $60. If the programs are sold at a bundle, what is the profit-maximizing price?

answer

$140

question

Jonathan values word at $100 and Excel at $90, and Ashley values Word at $80 and Excel at $60. Why does bundling fail to raise the seller's profits in this case?

answer

Jonathan's and Ashley's values for Word and Excel are positively correlated.

question

Under perfect price discrimination, there is NEVER any deadweight loss. (T/F)

answer

True

question

Price discrimination is selling the same good to different customers at different prices. (T/F)

answer

True

question

In markets where consumers are price insensitive, price discriminators should charge higher prices than in markets where consumers are price sensitive. (T/F)

answer

True

question

Perfect price discrimination results in zero dollars of consumer surplus. (T/F)

answer

True

question

Although price discrimination may increase the profits of drug companies, it reduces the incentive for drug companies to develop new drugs. (T/F)

answer

False

question

Price discrimination is bad if total surplus increases with a decrease in output. (T/F)

answer

False

question

Why are cartel agreements hard to maintain?

answer

Each firm in the cartel has the incentive to increase production and earn larger profits.

question

If most cartel members keep their agreement to cut back production:

answer

it's profitable in the short run for another member to increase production

question

Within OPEC, cheating is associated with:

answer

producing oil beyond quota

question

When all members of a cartel cheat, the cartel:

answer

fails to earn monopoly profits

question

There was a dramatic increase in the price of oil in:

answer

the early 1970's

question

OPEC is a(n) _____ of oil-exporting countries

answer

cartel

question

Why do cartels collapse?

answer

-cheating by the cartel members
-new entrants and demand response
-government prosecution

NOT
-increasing production costs

question

Compared to a competitive market, firms operating in a cartel will charge a price that is:

answer

higher than the competitive price

question

When cartels are successful at driving up prices:

answer

new firms will begin to enter the market

question

What is a true statement regarding cartels?

answer

Oil and diamond cartels tend to be more successful than copper and plumbing cartels.

question

Bidding on asphalt jobs is a prisoner's _____ outcome

answer

dilemma

question

The prisoner's dilemma describes situations where the pursuit of:

answer

individual interest leads to a group outcome that is in the interest of no one

question

Cartel member strategy can be like a prisoner's _____ game

answer

dilemma

question

Most cartels are:

answer

illegal in the United States as a result of the Sherman Antitrust Act

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Governments:

answer

support some cartels and try to break up others

question

With price matching plus 10% of the difference the equilibrium will occur when:

answer

otherwise firms set the price at the high price

question

Loyalty programs, such as frequent flyer plans, tend to:

answer

increase prices

question

Cartels may tend to collapse and lose their power because of new entrants. (T/F)

answer

True

question

Major league sports are illegal cartels. (T/F)

answer

False

question

One sign of the cartel power of the NBA is the use of salary caps. (T/F)

answer

True

question

Cartels have lots of market power and rarely ever collapse because cartel members have no incentive to expand output beyond the limits set by the cartel. (T/F)

answer

False

question

Asphalt firms between 2005 and 2007 in Kentucky are an example of tactic collusion.(T/F)

answer

True

question

One way a cartel gets its power is by controlling a natural resource that is found in large quantities in a few places. (T/F)

answer

True

question

What is TRUE about monopolistic competition?

answer

-Free entry
-Product Differentiation

question

As more firms enter a monopolistically competitive market, the market demand curve:

answer

stays the same

question

An example of a monopolistic competitive industry is:

answer

sodas

question

In a monopolistically competitive market, new firms will enter the market as long as:

answer

P>AC

question

In a stable, monopolistically competitive market for restaurants there are:

answer

zero profits on average, and consumers have strong preferences about where they eat

question

Monopolistically competitive firms seem price:

answer

greater than marginal cost

question

If a firm has an average product that is not much better than what other firms produce they may wish to focus their advertising on:

answer

price

question

What is a TRUE statement about advertising?

answer

-Advertising brings businesses and customers together
-Advertising helps promote may useful goods and services
-Advertising improves the incentive to make low-cost, high-quality items

NOT:
-Advertising lowers the social surplus by costing businesses a lot of money with no corresponding benefit

question

Firms that expect their products to be successful:

answer

have more of an incentive to advertise

question

Sometimes advertising is simply about trying to change our minds. An example of this with respect to Coca-Cola include the following previous slogans:

answer

-The pause that refreshes
-Coca-Cola hits the spot, for only a nickel you get a lot
-Things go better with Coca-Cola

question

The movie "The Invention of Lying" takes place in a world where everyone can only tell the absolute truth. An advertisement for Coke admits there is nothing new about the product and that it's basically just brown sugar water. It ends with the tagline: "Coke. It's very famous." How is Coke using advertising in this fictional advertisement?

answer

as part of the product

question

In "No Logo," Naomi Klein criticizes companies that prioritize the brand name over quality of their product. What function of advertising is Klein concerned about?

answer

persuasion

question

Both perfectly competitive markets and monopolistically competitive markets feature product differentiation. (T/F)

answer

false

question

Monopolistically competitive firms face a downward-sloping demand curve. (T/F)

answer

True

question

Under monopolist competition, small inefficiencies are the price we pay to get greater variety and innovation. (T/F)

answer

True

question

Firms that are monopolistically competitive face a demand curve that is identical to one of a perfectly competitive firm. (T/F)

answer

False

question

A monopolistic competitive firm is able to charge P > MC because its product is slightly different from the product of other firms. (T/F)

answer

True

question

A monopolistically competitive firm produces where demand intersects with average costs. (T/F)

answer

True

question

Products are identical in the case of monopolistic competition. (T/F)

answer

False

question

On average, advertising makes consumers worse off by raising prices. (T/F)

answer

False

question

As of 2010, it was more common to see advertisements for the iPad in Silicon Valley than in Berlin. (T/F)

answer

False

question

Advertising can make potential customers more interested in buying, or at least sampling the product. (T/F)

answer

True

question

Advertising can help people enjoy more products. (T/F)

answer

True

question

Why does a monopolistic competitive industry experience zero economic profits in the long run?

answer

When there are profits to be had, in the short run, new firms will enter the market. This will decrease the demand to the individual firm and reduce the profits until there are zero economic profits when the firm is forced to price its product at the average cost.

question

What is an advantage of monopolistic competitive firms not producing at the minimum of the AC?

answer

There will remain incentives to innovate and create new products. If a firm has a new product that can interest more possible customers, it will shift the demand curve to the right, and increase in demand.

question

What is a good that best exemplifies a nonrival good?

answer

The Internet

question

Cellular phone service is an example of a good that is generally:

answer

Excludable and nonrival

question

Street lights are an example of a good that is:

answer

non excludable and nonrival

question

A good is nonexcludable if it is:

answer

difficult to prevent people from using the good at low cost

question

Private goods are both:

answer

rival and exculadable

question

People have little incentive to produce a public good because:

answer

of the free rider problem

question

What are some true statements about public goods?

answer

-It is harder for society to produce optimal amounts of public goods than it is for private goods
-The United States Postal Service is not a public good
-People value public goods differently

question

Private goods can be provided by competitive markets because they are:

answer

excludable, providing an incentive to pay for and thus to produce these goods

question

It is difficult to get people to pay for public goods voluntarily because these goods are:

answer

non excludable, and therefore markets tend to under provide them

question

Mosquito control must be provided by the government because if:

answer

a lot of people free ride, then the mosquito control would be under provided by the market

question

Why is it difficult to determine the optimal quantity of public goods that the government should produce?

answer

It is difficult to assess exactly how much each individual values a public good

question

What quantity of public goods should the government produce?

answer

the quantity that maximizes the sum of producer and consumer surplus

question

Protection provided by the ozone layer is a:

answer

common resource

question

In the case of broadcast, antenna television, the _____ is partly overcome through the use of advertising

answer

free rider problem

question

When a good is rival in consumption:

answer

one person's use of the good prevents another's ability to use it

question

Goods such as radio and television programs are _____ that are given away free because _____

answer

public goods; advertisers pay the cost of programming

question

What is a scenario that describes a tragedy of the commons problem?

answer

Neighborhood residents discover strawberry plants in the flower beds at the city park

question

The tragedy of the commons is the tendency for any good which is:

answer

rival and non excludable to be overused and undermaintained

question

What country created property rights to catching fish in 1986?

answer

New Zealand

question

Markets tend to underproduce public goods, even though they are highly valued goods. (T/F)

answer

True

question

The government can increase economic efficiency by using tax revenue to produce public goods. (T/F)

answer

True

question

The tragedy of the commons is that common resources tend to be overproduced by the government. (T/F)

answer

False

question

Common resources are not individually owned, which creates the incentive for their overuse and overconsumption. (T/F)

answer

True

question

Is there a free-rider problem with mosquito control and town parks? If so, how can it be addressed?

answer

both mosquito control and a town park are goods that may create a free rider problem. Nonpayers can benefit from using both of these goods without being charged. To address the issue of non payers, a city can tax the residents to pay for these goods. A city may also attempt to limit access to a park by charging an entrance fee, or limiting access to city residents (the people that pay the taxes for the park).

question

How could a free rider problem arise on a public good? What are the consequences of the free rider problem?

answer

Since public goods are non excludable, it is difficult to exclude people who do not pay for them from using them. And, since anyone can use public goods without paying for them, it is difficult to get people to pay for the public goods they use voluntarily. The result is that the costs of providing public goods are potentially higher than the voluntary payments for providing public goods. As a consequence, markets tend to under provide public goods. furthermore, public goods are also nonrival, which causes the losses from the failure to provide the public goods to become especially large.

question

Which of the following is the smaller part of the United States budge?

-Defense
-Interest on the federal debt
-Social Security
-Welfare

answer

Welfare

question

In "The Distinguished Gentleman," Eddie Murphy plays a con man with a similar name as a long-running Congressman. When the politician dies, Murphy runs for office using the politician's name: Jeff Johnson. He's careful not to go on camera but uses taglines in commercials such as "Johnson: the name you trust." He eventually achieves a slim victory. How does Murphy's character use voter ignorance to win the election?

answer

He's expecting most voters to neither investigate him too much, or to know that their congressman died.

question

According to public choice theory, people do not always make informed choices because:

answer

the incentives to become informed are low as compared with the costs of being informed.

question

What is a statement a "rationally ignorant" person might say?

answer

"I am not sure which of the soups are more nutritious and I'm in a hurry, so I will opt for the one with more vegetables in it."

question

Studying politics doesn't pay because the outcome:

answer

of any election is mostly determined by what other people do, not by what you do

question

The United States federal government _____ the amount of sugar entering the country.

answer

reduces

question

Why is the sugar quota a winning policy for politicians?

answer

The people who are harmed by the quota are rationally ignorant

question

The acronym PAC stands for:

answer

political action committee

question

The self-interest of politicians _____ with the social interest

answer

sometimes aligns

question

Over the past 100 years the American voter has voted for the party of the _____ when the economy is doing _____

answer

incumbent; well

question

Economic conditions are a _____ predictor of United States presidential election outcomes

answer

good

question

What does the evidence from 60 years of United States data show regarding the growth rate in personal income in each quarter of a President's term in office?

answer

The growth rate increases in the quarters just before election

question

What theory works to explain which voters will get their way in a democratic election?

answer

the median voter theorem

question

Evidence from an important study of media ownership concludes that:

answer

government ownership of the press restricts information flows to the public, which reduces the quality of the government

question

In general, democracies are the:

answer

wealthiest countries around the world and have the highest levels of economic freedom

question

Mass starvation in Ukraine in the 1920s was the result of:

answer

Soviet leader Joseph Stalin's deliberate policies to eliminate potential political threats

question

Economists Besley and Burgess found that a government is more responsive to food crises when there is:

answer

both more political competition and more newspapers

question

If a policy transfers $100 to a special interest group at a cost of $4,000 to society, the group would lobby:

answer

for the policy if the group made up less than 1% of the population

question

When government makes it possible to push the costs of a good onto other people we get too much of the good. (T/F)

answer

True

question

According to the median voter theorem, the politician with a platform closest to the ideals of the median voter will win an election. (T/F)

answer

True

question

The greater the share of the population that is brought into political power, the more likely it is that policies will favor economic growth. (T/F)

answer

True

question

When more of the population has power, it's more likely that policies will offer something for virtually everybody. (T/F)

answer

True

question

Why do economists say that voters are rationally ignorant about politics?

answer

The incentive for voters to be informed are low because the payoff of being informed is low. That is, studying position papers, examining voting histories, and listening to political speeches is sometimes entertaining but it doesn't offer much concrete return. Even when studying changes your vote, your vote is very unlikely to change the outcome of the election. Accordingly, studying politics doesn't pay because the outcome of any election is mostly determined by what other people do, not by what you do.

question

Do "good politics" and "good economics" always coincide? Why or why not?

answer

We know that voters respond to economic conditions; however, we also know that they are myopic in that they tend to vote based on current economic conditions, not past or future economic conditions. therefore, politicians tend to focus on what is close at hand, namely economic conditions in the election year. Politicians who want toe be reelected will do whatever they can to increase household income in the current year, many times at the expense of good economic policies for the future.

question

According to Peter Wehner and Arthur C. Brooks' book "Wealth and Justice: the Morality of Democratic Capitalism," what are the three views of human nature?

answer

-Humans, while flawed, are perfectible
-Humans are flawed, and fatally so; we need to accept and build our society around this unpleasant reality
-Although human beings are flawed, we are capable of virtuous acts and self-government- that under the right circumstances, human nature can work to the advantage of the whole

question

What is a Nash equilibrium in Game Theory?

answer

-It occurs when, given what the other party is doing, you can't improve your own outcome by moving.

-When this happens, firms might collude OR firms will look for game changers (something that "blows up" the old game)

question

What is the Prisoner's Dilemma in Game Theory?

answer

It is a paradox in which two rational individuals pursue a course of action that does not result in the ideal outcome. Both players find themselves in a worse state than if they would've both cooperated.

question

What is a cartel?

answer

A group of firms colluding to raise prices

question

What happens in a cartel?

answer

-The group of firms look at the MC to find the optimum industry level of Q & P.
-From there, they decide how much share of the market each firm gets. Each firm agrees % to output in order to keep price where it is desired.
-But, there is a temptation to make more than what they were supposed to have. If one group makes a lot and sells higher, the rest of the group in the cartel loses out.

-Oligopolies face permanent temptation to form a cartel as well as an enduring temptation to cheat or break their promise on them.

(In most countries, cartels are illegal)

question

What are the four types of markets?

answer

-Competitive
-Monopoly
-Oligopoly
-Monopolistic Competition

question

What does Monopolistic Power and economic profit look like on a graph?

answer

-Monopolistic power occurs when Price>MC

-Economic profit occurs when Profit>0

(When Price=AC.. Profit=0... Not a monopolistic outcome- normal rate of return)

question

What is Price Discrimination? What conditions must be met for this to occur?

answer

-selling the same product, at different prices, to different buyers

-the product must be non-arbitrageable (arbitrage = buying low, selling high)
-the 2 prices must distinguish between 2 types of buyers
-they must be individualized prices

question

Are the following rival/nonrival, excludable/nonexcludable goods?

-Pure Private Goods
-Club Goods
-Common Pool Resource
-Pure Public Good

answer

-Rival; excludable (burgers)
-Nonrival; excludable (software)
-Rival; nonexcludable (aquifer)
-Nonrival; nonexcludable (mosquito control)

-Rival good: one person's use means less is available for others
-Excludability: producer of product can exclude people who have not paid

question

Public Choice

answer

-The discipline within economics that applies micro theory to behavior of voters and politicians

question

Median Voter Theory:

answer

people will vote for the candidate who is closest to their position. Typically, the candidate closest to the median will get 50% +1 of the vote

question

Rational Ignorance

answer

Choosing to ignore information because the cost of knowing it outweighs the benefit

question

Friedman Article

answer

-Businesses trying to be responsible can backfire
-Money spent on social contributions could be spent on other things such as higher wages, dividends for stock holders, and innovation
-He basically states that you can and should make as much money as possible without breaking the law. That is how firms can do good

question

Wendell Berry Article

answer

-Economic life has proceeded as if the natural world could be taken for granted

question

William T. Cavanaugh Article

answer

-He is in favor of the "gift economy." ie goods are not traded or sold, they are given without an explicit agreement for immediate or future rewards (opposite of a market economy)

1 of 158

question

How do you find the deadweight loss (if any) from a monopoly relative to its optimum quantity?

answer

question

In a purely monopolized environment where each monopolist succeeds at raising its price, the result is:

answer

Higher prices spread throughout the economy.

question

In many places around the world, monopolies result from:

answer

government policies.

question

Suppose that the government decided to reduce pharmaceutical patent protection by requiring companies to sell their drugs at marginal cost. What are the likely consequences of such a policy?

answer

-There would be an increase in consumer surplus
-The deadweight loss in the market would decline
-The future supply of new drugs would decrease

question

If the Bill and Melinda Gates Foundation were to buy out and destroy the patent for Combivir, what would NOT be one of the effects?

answer

Drug companies would have no incentive to create new and better drugs

question

If the government sets the price of all pharmaceutical drugs equal to marginal cost, which of the following statements is TRUE?

answer

-Consumers will pay lower prices for drugs today
-In the future, there will be fewer new drugs

question

Natural Monopolies

answer

exist when one firm can produce the market output at a lower cost than two or more firms

question

The stated reason for resorting to regulation of public utilities rather than promoting competition through antitrust is that the industry in question is believed to be a

answer

natural monopoly

question

Economies of scale are

answer

the advantages of large-scale production that reduce average cost as quantity increases

question

The only company in the United States that can deliver small envelopes (for example, greeting cards and bank statements) is the U.S. Postal Service. What is the source of this monopoly?

answer

Laws preventing entry

question

Saudi Arabia has market power in the world's oil markets because

answer

it controls a significant fraction of the world's oil supply

question

The primary reason that AIDS drugs are priced well above cost is monopoly power. (T/F)

answer

True

question

A monopoly is a firm with market power, and market power may arise from economies of scale, patent protection, and innovation. (T/F)

answer

True

question

A monopolistic industry will have lower output and higher prices than a competitive industry. (T/F)

answer

True

question

When any firm charges a higher price, fewer of its goods are sold. (T/F)

answer

True

question

A profit-maximizing monopolist with a less elastic demand has more pricing power than a profit-maximizing monopolist with a more elastic demand. (T/F)

answer

True

question

All monopolies make economic profit, maintained by some sort of barrier to entry. (T/F)

answer

False

question

If pharmaceutical;rmaceutical patents are not enforced, the number of new drugs will decrease. (T/F)

answer

True

question

The trade-off for natural monopolies weighs the benefits of economies of scale against the costs of deadweight loss (T/F)

answer

True

question

The trade-off for natural monopolies weighs the benefits of economies of scale against the loss of consumer surplus. (T/F)

answer

True

question

A government can maximize efficiency in monopoly markets by setting prices equal to the monopolist's average cost of production albeit at the cost of reduced long term innovation. (T/F)

answer

True

question

To assuage the deadweight loss from a natural monopoly, governments could employ a price control. (T/F)

answer

True

question

answer

Price Discrimination

question

What should a firm due to maximize profit?

answer

To maximize profit the firm should set a lower price in markets with more elastic demand.

question

answer

higher; steeper

question

Why is it harder to price discriminate with shampoo than with haircuts?

answer

Haircuts are harder to resell

question

What is NOT an easy way to split markets in order to practice price discrimination?

answer

Relying on the self-reported marital status of customers

question

A subtle form of price discrimination is for firms to offer:

answer

different versions of a product for the purpose of separating customers into different markets

question

What is perfect price discrimination?

answer

This occurs when a seller charges each separate consumer an amount that is exactly equal to his or her willingness to pay.

question

What conditions must be TRUE for perfect price discrimination?

answer

-The seller must have very good information about the buyer's willingness to pay
-The marginal revenue must equal demand

question

Charging each customer his or her maximum willingness to pay is:

answer

perfect price discrimination

question

Perfectly price-discrimination monopolists charge:

answer

each consumer his or her maximum willingness to pay, so consumer surplus is zero

question

Suppose that GSK sells one of its drugs for $25/pill in the United States and $13/pill in Canada. What are some true statements?

answer

question

What is an example of tying?

answer

Restrictions that prohibit patrons from bringing their own wine to restaurants

question

What is an example of price discrimination through tying?

answer

Razors and blades

question

A mulligan faucet filter sells for $18, while other replacement filters (that void warranty) sell for $12. What strategy is Culligan using?

answer

Tying

question

The difference between tying and bundling is that:

answer

bundled goods are sold one to one, while tied goods are sold one to many

question

Karl values Word and $100 and Excel at $40, and Adam values Word at $20 and Excel at $90. If the programs are sold separately, what are the profit-maximizing prices?

answer

$100 for Word; $90 for Excel

question

Jonathan values Word at $100 and Excel at $90, and Ashley values Word at $80 and Excel at $60. If the programs are sold at a bundle, what is the profit-maximizing price?

answer

$140

question

Jonathan values word at $100 and Excel at $90, and Ashley values Word at $80 and Excel at $60. Why does bundling fail to raise the seller's profits in this case?

answer

Jonathan's and Ashley's values for Word and Excel are positively correlated.

question

Under perfect price discrimination, there is NEVER any deadweight loss. (T/F)

answer

True

question

Price discrimination is selling the same good to different customers at different prices. (T/F)

answer

True

question

In markets where consumers are price insensitive, price discriminators should charge higher prices than in markets where consumers are price sensitive. (T/F)

answer

True

question

Perfect price discrimination results in zero dollars of consumer surplus. (T/F)

answer

True

question

Although price discrimination may increase the profits of drug companies, it reduces the incentive for drug companies to develop new drugs. (T/F)

answer

False

question

Price discrimination is bad if total surplus increases with a decrease in output. (T/F)

answer

False

question

Why are cartel agreements hard to maintain?

answer

Each firm in the cartel has the incentive to increase production and earn larger profits.

question

If most cartel members keep their agreement to cut back production:

answer

it's profitable in the short run for another member to increase production

question

Within OPEC, cheating is associated with:

answer

producing oil beyond quota

question

When all members of a cartel cheat, the cartel:

answer

fails to earn monopoly profits

question

There was a dramatic increase in the price of oil in:

answer

the early 1970's

question

OPEC is a(n) _____ of oil-exporting countries

answer

cartel

question

Why do cartels collapse?

answer

-cheating by the cartel members
-new entrants and demand response
-government prosecution

NOT
-increasing production costs

question

Compared to a competitive market, firms operating in a cartel will charge a price that is:

answer

higher than the competitive price

question

When cartels are successful at driving up prices:

answer

new firms will begin to enter the market

question

What is a true statement regarding cartels?

answer

Oil and diamond cartels tend to be more successful than copper and plumbing cartels.

question

Bidding on asphalt jobs is a prisoner's _____ outcome

answer

dilemma

question

The prisoner's dilemma describes situations where the pursuit of:

answer

individual interest leads to a group outcome that is in the interest of no one

question

Cartel member strategy can be like a prisoner's _____ game

answer

dilemma

question

Most cartels are:

answer

illegal in the United States as a result of the Sherman Antitrust Act

question

Governments:

answer

support some cartels and try to break up others

question

With price matching plus 10% of the difference the equilibrium will occur when:

answer

otherwise firms set the price at the high price

question

Loyalty programs, such as frequent flyer plans, tend to:

answer

increase prices

question

Cartels may tend to collapse and lose their power because of new entrants. (T/F)

answer

True

question

Major league sports are illegal cartels. (T/F)

answer

False

question

One sign of the cartel power of the NBA is the use of salary caps. (T/F)

answer

True

question

Cartels have lots of market power and rarely ever collapse because cartel members have no incentive to expand output beyond the limits set by the cartel. (T/F)

answer

False

question

Asphalt firms between 2005 and 2007 in Kentucky are an example of tactic collusion.(T/F)

answer

True

question

One way a cartel gets its power is by controlling a natural resource that is found in large quantities in a few places. (T/F)

answer

True

question

What is TRUE about monopolistic competition?

answer

-Free entry
-Product Differentiation

question

As more firms enter a monopolistically competitive market, the market demand curve:

answer

stays the same

question

An example of a monopolistic competitive industry is:

answer

sodas

question

In a monopolistically competitive market, new firms will enter the market as long as:

answer

P>AC

question

In a stable, monopolistically competitive market for restaurants there are:

answer

zero profits on average, and consumers have strong preferences about where they eat

question

Monopolistically competitive firms seem price:

answer

greater than marginal cost

question

If a firm has an average product that is not much better than what other firms produce they may wish to focus their advertising on:

answer

price

question

What is a TRUE statement about advertising?

answer

question

Firms that expect their products to be successful:

answer

have more of an incentive to advertise

question

Sometimes advertising is simply about trying to change our minds. An example of this with respect to Coca-Cola include the following previous slogans:

answer

-The pause that refreshes
-Coca-Cola hits the spot, for only a nickel you get a lot
-Things go better with Coca-Cola

question

answer

as part of the product

question

In "No Logo," Naomi Klein criticizes companies that prioritize the brand name over quality of their product. What function of advertising is Klein concerned about?

answer

persuasion

question

Both perfectly competitive markets and monopolistically competitive markets feature product differentiation. (T/F)

answer

false

question

Monopolistically competitive firms face a downward-sloping demand curve. (T/F)

answer

True

question

Under monopolist competition, small inefficiencies are the price we pay to get greater variety and innovation. (T/F)

answer

True

question

Firms that are monopolistically competitive face a demand curve that is identical to one of a perfectly competitive firm. (T/F)

answer

False

question

A monopolistic competitive firm is able to charge P > MC because its product is slightly different from the product of other firms. (T/F)

answer

True

question

A monopolistically competitive firm produces where demand intersects with average costs. (T/F)

answer

True

question

Products are identical in the case of monopolistic competition. (T/F)

answer

False

question

On average, advertising makes consumers worse off by raising prices. (T/F)

answer

False

question

As of 2010, it was more common to see advertisements for the iPad in Silicon Valley than in Berlin. (T/F)

answer

False

question

Advertising can make potential customers more interested in buying, or at least sampling the product. (T/F)

answer

True

question

Advertising can help people enjoy more products. (T/F)

answer

True

question

Why does a monopolistic competitive industry experience zero economic profits in the long run?

answer

question

What is an advantage of monopolistic competitive firms not producing at the minimum of the AC?

answer

question

What is a good that best exemplifies a nonrival good?

answer

The Internet

question

Cellular phone service is an example of a good that is generally:

answer

Excludable and nonrival

question

Street lights are an example of a good that is:

answer

non excludable and nonrival

question

A good is nonexcludable if it is:

answer

difficult to prevent people from using the good at low cost

question

Private goods are both:

answer

rival and exculadable

question

People have little incentive to produce a public good because:

answer

of the free rider problem

question

What are some true statements about public goods?

answer

-It is harder for society to produce optimal amounts of public goods than it is for private goods
-The United States Postal Service is not a public good
-People value public goods differently

question

Private goods can be provided by competitive markets because they are:

answer

excludable, providing an incentive to pay for and thus to produce these goods

question

It is difficult to get people to pay for public goods voluntarily because these goods are:

answer

non excludable, and therefore markets tend to under provide them

question

Mosquito control must be provided by the government because if:

answer

a lot of people free ride, then the mosquito control would be under provided by the market

question

Why is it difficult to determine the optimal quantity of public goods that the government should produce?

answer

It is difficult to assess exactly how much each individual values a public good

question

What quantity of public goods should the government produce?

answer

the quantity that maximizes the sum of producer and consumer surplus

question

Protection provided by the ozone layer is a:

answer

common resource

question

In the case of broadcast, antenna television, the _____ is partly overcome through the use of advertising

answer

free rider problem

question

When a good is rival in consumption:

answer

one person's use of the good prevents another's ability to use it

question

Goods such as radio and television programs are _____ that are given away free because _____

answer

public goods; advertisers pay the cost of programming

question

What is a scenario that describes a tragedy of the commons problem?

answer

Neighborhood residents discover strawberry plants in the flower beds at the city park

question

The tragedy of the commons is the tendency for any good which is:

answer

rival and non excludable to be overused and undermaintained

question

What country created property rights to catching fish in 1986?

answer

New Zealand

question

Markets tend to underproduce public goods, even though they are highly valued goods. (T/F)

answer

True

question

The government can increase economic efficiency by using tax revenue to produce public goods. (T/F)

answer

True

question

The tragedy of the commons is that common resources tend to be overproduced by the government. (T/F)

answer

False

question

Common resources are not individually owned, which creates the incentive for their overuse and overconsumption. (T/F)

answer

True

question

Is there a free-rider problem with mosquito control and town parks? If so, how can it be addressed?

answer

question

How could a free rider problem arise on a public good? What are the consequences of the free rider problem?

answer

question

Which of the following is the smaller part of the United States budge?

-Defense
-Interest on the federal debt
-Social Security
-Welfare

answer

Welfare

question

answer

He's expecting most voters to neither investigate him too much, or to know that their congressman died.

question

According to public choice theory, people do not always make informed choices because:

answer

the incentives to become informed are low as compared with the costs of being informed.

question

What is a statement a "rationally ignorant" person might say?

answer

"I am not sure which of the soups are more nutritious and I'm in a hurry, so I will opt for the one with more vegetables in it."

question

Studying politics doesn't pay because the outcome:

answer

of any election is mostly determined by what other people do, not by what you do

question

The United States federal government _____ the amount of sugar entering the country.

answer

reduces

question

Why is the sugar quota a winning policy for politicians?

answer

The people who are harmed by the quota are rationally ignorant

question

The acronym PAC stands for:

answer

political action committee

question

The self-interest of politicians _____ with the social interest

answer

sometimes aligns

question

Over the past 100 years the American voter has voted for the party of the _____ when the economy is doing _____

answer

incumbent; well

question

Economic conditions are a _____ predictor of United States presidential election outcomes

answer

good

question

What does the evidence from 60 years of United States data show regarding the growth rate in personal income in each quarter of a President's term in office?

answer

The growth rate increases in the quarters just before election

question

What theory works to explain which voters will get their way in a democratic election?

answer

the median voter theorem

question

Evidence from an important study of media ownership concludes that:

answer

government ownership of the press restricts information flows to the public, which reduces the quality of the government

question

In general, democracies are the:

answer

wealthiest countries around the world and have the highest levels of economic freedom

question

Mass starvation in Ukraine in the 1920s was the result of:

answer

Soviet leader Joseph Stalin's deliberate policies to eliminate potential political threats

question

Economists Besley and Burgess found that a government is more responsive to food crises when there is:

answer

both more political competition and more newspapers

question

If a policy transfers $100 to a special interest group at a cost of $4,000 to society, the group would lobby:

answer

for the policy if the group made up less than 1% of the population

question

When government makes it possible to push the costs of a good onto other people we get too much of the good. (T/F)

answer

True

question

According to the median voter theorem, the politician with a platform closest to the ideals of the median voter will win an election. (T/F)

answer

True

question

The greater the share of the population that is brought into political power, the more likely it is that policies will favor economic growth. (T/F)

answer

True

question

When more of the population has power, it's more likely that policies will offer something for virtually everybody. (T/F)

answer

True

question

Why do economists say that voters are rationally ignorant about politics?

answer

question

Do "good politics" and "good economics" always coincide? Why or why not?

answer

question

According to Peter Wehner and Arthur C. Brooks' book "Wealth and Justice: the Morality of Democratic Capitalism," what are the three views of human nature?

answer

question

What is a Nash equilibrium in Game Theory?

answer

question

What is the Prisoner's Dilemma in Game Theory?

answer

question

What is a cartel?

answer

A group of firms colluding to raise prices

question

What happens in a cartel?

answer

question

What are the four types of markets?

answer

-Competitive
-Monopoly
-Oligopoly
-Monopolistic Competition

question

What does Monopolistic Power and economic profit look like on a graph?

answer

-Monopolistic power occurs when Price>MC

-Economic profit occurs when Profit>0

(When Price=AC.. Profit=0... Not a monopolistic outcome- normal rate of return)

question

What is Price Discrimination? What conditions must be met for this to occur?

answer

question

Are the following rival/nonrival, excludable/nonexcludable goods?

-Pure Private Goods
-Club Goods
-Common Pool Resource
-Pure Public Good

answer

question

Public Choice

answer

-The discipline within economics that applies micro theory to behavior of voters and politicians

question

Median Voter Theory:

answer

people will vote for the candidate who is closest to their position. Typically, the candidate closest to the median will get 50% +1 of the vote

question

Rational Ignorance

answer

Choosing to ignore information because the cost of knowing it outweighs the benefit

question

Friedman Article

answer

question

Wendell Berry Article

answer

-Economic life has proceeded as if the natural world could be taken for granted

question

William T. Cavanaugh Article

answer

-He is in favor of the "gift economy." ie goods are not traded or sold, they are given without an explicit agreement for immediate or future rewards (opposite of a market economy)

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