ECON1002 Study Guide - Midterm Guide: Market Failure, Perfect Competition, Social Cost
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1).
A consumer spends more time searching for a good when her reservation price is:
increased.
reduced.
fixed.
None of the statements is correct.
2).
In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices.
Which of the following are Nash equilibrium payoffs in the one-shot game?
(0, 0)
(5, -5)
(-5, 5)
(10, 10)
3).
A risk-neutral individual would:
prefer $5 with certainty to a risky prospect with the expected value of $5.
prefer a risky prospect with an expected value of $5 to a certain amount of $5.
be indifferent between a risky prospect with an expect value of $5 to a certain amount of $5.
prefer a risky prospect with the expected value of $0.50 to $5 with certainty.
4).
Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits. Which pricing strategy is the management using?
Price discrimination
Two-part pricing
Commodity bundling
Cross-subsidization
5).
The short run is defined as the time frame:
in which there are no fixed factors of production.
in which there are fixed factors of production.
less than one year.
less than three years.
6).
Fixed costs exist only in:
the long run.
capital-intensive markets.
the short run.
labor-intensive markets.
7).
Top of Form
Non-fed ground beef is an inferior good. In economic booms, grocery managers should:
increase their orders of non-fed ground beef.
reduce their orders of non-fed ground beef.
not change their orders of non-fed ground beef.
neither increase, reduce, nor maintain their current orders for non-fed ground beef.
Bottom of Form
8).
Which of the following pricing strategies is NOT used in markets with special cost and demand structures?
Peak-load pricing
Cross-subsidization
Transfer pricing
Low-price guarantees
9).
A perfectly competitive firm faces a:
perfectly elastic demand function.
perfectly inelastic demand function.
demand function with unitary elasticity.
None of the answers is correct.
10).
The special demand structure that induces a firm to use a cross-subsidization strategy is:
perfect substitution among products.
imperfect substitution among products.
independent demand for products.
interdependent demand for products.
11).
Which of the following factors reduces the need for government involvement in the marketplace?
The presence of externalities
The incentive to rent-seek
The need for public goods
Incomplete information
12).
Which of the following statements is true?
A mineral rights auction is not the same as a common-value auction.
An auctioneer is always indifferent between different kinds of auctions.
The Dutch and first-price, sealed-bid auctions are strategically equivalent.
An English auction always yields lower expected revenues than a second-price, sealed-bid auction.
13).
Which of the following is true concerning negative externalities?
Firms tend to produce more than the efficient level of output.
Society gains because firms do not pay the external costs of production.
Perfect competition is better than monopoly from the viewpoint of society even in the presence of negative externalities.
With negative externalities, a monopoly will always produce an output level less than is socially efficient.
14).
Which of the following is true under monopoly?
P > ATC
P > MC
P = MR
P = ATC
15).
Differentiated goods are NOT a feature of a:
perfectly competitive market.
monopolistically competitive market.
monopolistic market.
perfectly competitive market and monopolistic market.
16).
Producer surplus is measured as the area
below the demand curve and above the market price.
above the demand curve and below the market price.
above the supply curve and below the market price.
below the supply curve and above the market price.
17).
Jaynet spends $25,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm â one offer was for $105,000 per year, and the other was for $85,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 30 paintings per year at a price of $9,000 each:
a. What are her accounting profits?
$
b. What are her economic profits?
$
18).
You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1âs elasticity of demand is -2, while group 2âs is -4. Your marginal cost of producing the product is $40.
a. Determine your optimal markups and prices under third-degree price discrimination.
Instruction: Round your answers to two decimal places.
Markup for group 1:
Price for group 1: $
Markup for group 2:
Price for group 2: $
b. Which of the following are necessary conditions for third-degree price discrimination to enhance profits.
Instructions: You may select more than one answer. Click the box with a check mark for the correct answers and click twice to empty the box for the wrong answers. You must click to select or deselect each option in order to receive full credit.
| At least one group has elasticity of demand less than one in absolute value. | |
| There are two different groups with different (and identifiable) elasticities of demand. | |
| We are able to prevent resale between the groups. | |
| At least one group has elasticity of demand greater than 1 in absolute value. |
19).
You are the manager of a firm that receives revenues of $60,000 per year from product X and $80,000 per year from product Y. The own price elasticity of demand for product X is -1.5, and the cross-price elasticity of demand between productY and X is -1.4.
How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?
Instructions: Round your answer to the nearest dollar. Include a minus (-) sign if applicable.
$
1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
| $0.60 | ||
| $0.40 | ||
| $0.75 | ||
| $0.67 |
2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
| a tax of $5 in Market X and a subsidy of $10 in Market Y. | ||
| subsidizing both markets. | ||
| taxing Market Y and subsidizing Market X. | ||
| taxing both markets. |
3.Economic theory suggests that a natural monopoly should be:
| eliminated whenever it arises. | ||
| regulated to take advantage of economies of scale. | ||
| left alone to operate with excess capacity. | ||
| taken over by the government. |
4.When the size of the production is the most efficient:
| total cost is at the minimum. | ||
| average cost is at the minimum. | ||
| marginal cost is at the minimum. | ||
| fixed cost is at the minimum. |
5.A firm should exit the industry if which of the following conditions apply?
| TR > TC | ||
| P < AC | ||
| Lifetime expected profit is positive. | ||
| Prices are low now but expected to rise. |
6.Figure: Costs
Reference: Ref 11-6
(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:
| $75. | ||
| $300. | ||
| $225. | ||
| $0, because P = MC at P = $20. |
7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
| too low; too high | ||
| equal to the efficient price; too low | ||
| too high; too low | ||
| equal to the efficient price; too high |
8.Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.
III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
| I only | ||
| II and III only | ||
| I, II, and III | ||
| III only |
9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
| various options. | ||
| more quantity. | ||
| more discount. | ||
| higher quality. |
10.Figure: Government Price Controls
Reference: Ref 8-3
(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
| a shortage of 15 units. | ||
| a surplus of 15 units. | ||
| a supply of 20 units. | ||
| no effect on the market. |
11.In which of these instances does price function as a signal in the market?
| Suppliers invest more in exploration when the price of oil increases. | ||
| Consumers complain of price gouging as the price of oil skyrockets. | ||
| Government imposes price controls on the skyrocketing price of oil. | ||
| All of the answers are correct. |
12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.
| demand for; decrease; decrease | ||
| supply of; increase; increase | ||
| supply of; decrease; increase | ||
| demand for; increase; increase |
13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
| Cotton growers in California don't pay payroll taxes. | ||
| The water used to grow California cotton is highly subsidized by the government. | ||
| Cotton growers in California are mostly operated as nonprofit enterprises. | ||
| The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. |
14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:
| the equilibrium price will fall to $7.50. | ||
| competition among buyers will increase the current price. | ||
| the current price will fall below $7.50 as sellers compete for market share. | ||
| There is not enough information provided to answer the question. |
15.Which of the following would increase the demand for beef?
| lower pork prices | ||
| higher consumer income | ||
| higher prices of feed grains used to feed beef cattle | ||
| an increase in the price of beef |
16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.
True
False
17.Table: Production in the United States and Germany
| Labor units required to produce: |
| One Clock | One Sofa |
| United States | 2 | 5 | |
| Germany | 3 | 9 |
Reference: Ref 2-8
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.
| two clocks; three clocks | ||
| 10 clocks; 27 clocks | ||
| 0.4 clocks; 0.33 clocks | ||
| 2.5 clocks; three clocks |
18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.
| This trade makes Ella worse off by $200. | ||
| This trade makes Mark better off by $200. | ||
| Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. | ||
| This trade creates value by moving the guitar and drum set to people who value them more. |