Download Econ 101, Section 5, S00

Econ 101, Section 5, S00
Schroeter
Exam #4, Red
Choose the single best answer for each question.
1. Profit is defined as
a. price multiplied by the number of units sold.
b. average revenue minus average cost.
*. total revenue minus total cost.
d. marginal revenue multiplied by price.
2. Suppose that, for the year 1999, the firm "Dave's Dependable Doo-dads" earned positive
accounting profit but negative economic profit. Which of the following is the most accurate
interpretation of this outcome? In 1999, Dave's Dependable Doo-dads generated sales revenue
that was
a. greater than its implicit costs, but less than the sum of its implicit and explicit costs.
b. greater than its explicit costs, and greater than the sum of its implicit and explicit costs.
*. greater than its explicit costs, but less than the sum of its implicit and explicit costs.
d. none of the above.
3. Suppose you bought a used car one year ago, and you are now trying to decide whether to
continue driving it or to sell it. In the context of this decision, the price you paid for the car one
year ago is a/an _______ cost and the price at which you could sell it today is a/an _______ cost.
a. implicit, sunk.
b. opportunity, implicit.
c. opportunity, sunk.
*. sunk, opportunity.
4. "Wendy's Widgets" is a small manufacturing company with a production process that is
subject to diminishing, but positive, marginal product of labor. Holding fixed the employment
levels of all other inputs, Wendy's output is 120 widgets/day when she employs 5 workers, and
135 widgets/day when she employs 6 workers. If she were to employ 7 workers, her output
would be
a. less than 120 widgets per day.
b. between 120 and 135 widgets per day.
*. between 135 and 150 widgets per day.
d. none of the above.
5. Marginal cost is defined as the increase in
*. total cost when output is increased by one.
b. average cost when output is increased by one.
c. output when labor employment is increased by one.
d. none of the above.
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Questions 6, 7, and 8 refer to the following information. A firm has fixed inputs which we
collectively refer to as "factory." The firm uses a variable input, "labor," with the factory to
produce output. The opportunity cost of using its factory is $350/day. Labor is hired at a wage
of $100/worker/day. The following table shows how much output would be produced for
different labor employment levels.
Labor
(workers)
Output
(gizmos/day)
0
1
2
3
4
0
10
18
24
28
6. At an output level of 10 gizmos/day, the firm's total cost is
a. $100/day.
b. $350/day.
*. $450/day.
d. none of the above.
7. At an output level of 18 gizmos/day, the firm's average variable cost is
a. $5.56/gizmo.
*. $11.11/gizmo.
c. $19.44/gizmo.
d. $30.56/gizmo.
8. At an output level of 24 gizmos/day, the firm's average fixed cost is
a. $2.08/gizmo.
b. $4.17/gizmo.
c. $12.50/gizmo.
*. $14.58/gizmo.
9. Over the output range from 24 gizmos/day to 28 gizmos/day, the firm's marginal cost is
approximately
*. $25/gizmo.
b. $50/gizmo.
c. $75/gizmo.
d. $100/gizmo.
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10. A competitive firm is currently producing where ATC = $12/unit, and price = MC = $10/unit.
To maximize profit (or minimize loss) in the short run, the firm should
a. increase output.
b. maintain its current output.
c. shut down.
*. impossible to determine without more information.
11. Suppose that a firm is currently operating at an output level for which marginal revenue
exceeds marginal cost. Under these circumstances, we can conclude that
a. the firms must be making an economic profit.
b. the firm must be operating at its profit-maximizing (or loss-minimizing) output level.
*. a one unit increase in the firm's output would increase profit (or reduce loss).
d. None of the above. (The answer would depend on whether or not the firm is a price-taker.)
12. It makes sense for a competitive firm to "shut down" (cease production, at least temporarily)
in the short run if market conditions are such that price would be less than
a. average fixed cost.
*. average variable cost.
c. average total cost.
d. marginal cost.
13. Widgets are produced and sold in a "competitive market" (sometimes called a "perfectly
competitive market"). The current equilibrium price of widgets is $5. Any one individual firm
in the market
a. would lose all of its sales if it were to charge a price above $5.
b. has no incentive to reduce its price below the $5 level.
c. could increase or decrease its output without affecting the price of $5.
*. all of the above.
14. A competitive industry is in zero-profit equilibrium to begin. Then demand shifts
permanently to the left. In the short-run,
a. the output of the representative firm will remain unchanged.
b. industry output will increase due to the entry of firms.
*. price will decrease.
d. all of the above will occur.
15. A competitive industry is in zero-profit equilibrium to begin. Then demand shifts
permanently to the left. Which of the following will be a feature of the new zero-profit
equilibrium that will eventually be reached in the long-run?
a. There will be the same number of firms as in the original zero-profit equilibrium.
b. Price will be higher than in the original zero-profit equilibrium.
*. Market output will be lower than in the original zero-profit equilibrium.
d. None of the above.
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16. A "natural monopoly" arises because a single firm
a. has control over all known supplies of a scarce natural resource.
b. owns a patent right on a unique product or process.
*. can supply the entire market at lower cost than two or more firms.
d. has enough political clout to avoid antitrust prosecution.
17. In the current federal antitrust case against Microsoft Inc., the judge has recently ruled that
Microsoft
*. is guilty of most of the violations of antitrust law alleged by the government.
b. should be broken up into several smaller companies in order to promote competition in the
personal computer software industry.
c. neither a nor b.
d. both a and b.
Figure 1 depicts demand, marginal revenue, and marginal cost curves for a monopoly. Use it to
answer questions 18 and 19.
18. Producer surplus in monopoly equilibrium is given by the area of region
a. GCE.
*. HBDE.
c. GCDF.
d. FDE.
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19. The "deadweight loss" of monopoly is represented by the area of region
a. HBDF.
b. ACG.
*. BCD.
d. none of the above.
20. A monopoly seller of widgets sells 8 widgets/hour when it charges $3.50/widget. In order to
increase sales to 9 widgets/hour, it must reduce price to $3.25/widget. The widget monopolist's
marginal revenue is approximately
a. -$3.25/widget.
b. -$0.25/widget.
*. $1.25/widget.
d. halfway between $3.25/widget and $3.50/widget.
21. A monopoly seller of gizmos is currently producing 50 gizmos/day. At this output level,
price = $5/gizmo, MR = $4/gizmo, ATC = $3/gizmo, and MC = $2/gizmo. To maximize profit
(or minimize loss) in the short-run, the monopoly should
a. shut down; that is, produce 0 gizmos/day.
b. maintain its current output level of 50 gizmos/day.
c. produce fewer than 50 gizmos/day, but not shut down.
*. produce more than 50 gizmos/day.
Questions 22 and 23 refer to the following figure showing a payoff matrix for a game that is
played by players Al and Bob. Al's possible strategies are "Up" and "Down." Bob's possible
strategies are "Left" and "Right." The entries in the cells of the table show the payoffs to both
players for any combination of strategies. (Of course, a higher payoff is better than a lower one.)
In each case, the payoff to Al is listed first and the payoff to Bob is listed second.
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22. Which of the following is true?
a. "Up" is a dominant strategy for Al.
b. "Left" is a dominant strategy for Bob.
c. "Right" is a dominant strategy for Bob.
*. Neither player has a dominant strategy.
23. Which of the following is true?
a. ("Up", "Left") is a Nash equilibrium.
b. ("Up", "Right") is a Nash equilibrium.
c. ("Down", "Left") is a Nash equilibrium.
*. Both b and c.
Questions 24 and 25 refer to the following information. A gizmo monopolist faces two groups of
potential customers. There are 200 customers with a willingness to pay of $4 for the first gizmo
and $0 for additional gizmos. Also, there are 200 customers with a willingness to pay of $3 for
the first gizmo and $0 for additional gizmos. Gizmos can be made at zero fixed cost and a
constant marginal cost = $1/gizmo.
24. If the gizmo monopolist were required to charge a uniform price, the maximum profit it could
earn would be
*. $800.
b. $1000.
c. $1200.
d. None of the above.
25. If the gizmo monopolist were allowed to engage in price discrimination, the maximum profit
it could earn would be
a. $800.
*. $1000.
c. $1200.
d. None of the above.
26. In the (non-repeated) Prisoners' Dilemma game (like lecture's NYPD Blue version)
a. each player has a dominant strategy.
b. there is a conflict between individual and collective incentives.
c. the players find it difficult (if not impossible) to cooperate even though cooperation would
make both better off.
*. All of the above.
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27. Imagine an oligopoly producing an identical product. Suppose that the joint output level of
the oligopoly is currently somewhere between the monopoly and the competitive levels. The
collective interests of the oligopoly as a whole would best be served by producing _____ output;
each individual oligopolist has a private interest in producing _____ output.
a. less; less.
*. less; more.
c. more; less.
d. more; more.
28. When an oligopoly industry is in Nash equilibrium
a. the combined profit of the oligopolists is at its highest level
*. each firm is choosing the strategy that is best for it, given the strategies chosen by the other
firms.
c. the outcome is the same as if the firms had formed a perfectly-functioning cartel.
d. consumers of the industry's product are better off than they would be if the market were in
competitive equilibrium.
29. From society's point of view, what is the advantage of giving patent rights to the inventor of a
new product?
a. It creates a temporary monopoly in the new product, and monopoly results in efficient pricing
and output decisions.
b. It insures that the profits associated with new products will be earned by domestic inventors
and not their foreign competitors.
c. It makes it easy for the inventor's competitors to produce and sell copies of the new product as
soon as it hits the market.
*. It creates incentives for new product development with a guarantee that the successful inventor
will enjoy temporary monopoly profit.
30. When we say that firms in an oligopoly are "interdependent," we mean
a. they are participating in a collusive agreement on the determination of price or output.
b. they have reached the industry's Nash equilibrium.
c. the price charged by any one firm is determined, beyond the control of that firm, by the forces
of supply and demand.
*. the profit earned by any one firm depends on its own actions and on its rivals' actions.