Questions:
1. There are a large number of firms in perfect competition. What is the significance of that?
a. Each firm has great deal of discretion in setting prices.
b. Whether there are 100 or 101 firms in the industry, the market price will be the same.
c. That automatically makes goods the same (homogenous).
d. That makes necessary a good deal of communication and coordination among firms. Therefore there tend to be strong trade associations in perfectly competitive industries.
2. In perfect competition, the marginal revenue line is the same as the _________, and is a _______ line.
a. price - negative
b. price - positive
c. average cost curve - vertical line
d. price - horizontal line
3. In short-run equilibrium, a perfectly competitive firm produces 150 pencils at an average cost of 12 cents each and receives $30 from selling them. Which of the following statements is INCORRECT?
a. The firm's average revenue equals 20 cents.
b. The firm's economic profit equals $12
c. The firm's price is greater than its average cost.
d. The firm's total cost equals $16.
4. Profits are maximized where MR = MC. However, sometimes MR = MC shows where losses are minimized.
a. true
b. false
5. A firm is still in the increasing returns portion of its short-run marginal cost curve. Therefore it has in this region
a. an increasing marginal cost curve.
b. a decreasing marginal cost curve.
c. a constant marginal cost curve.
d. an inverted average total cost curve.
6. In a pure monopoly, there are
a. many firms selling the same product.
b. barriers to entry.
c. always economic profits, even if no one wants the good.
d. all of the above.
e. both b) and c) are correct.
7. The marginal revenue curve in monopoly is __________. The implication of this is that ________.
a. constant -- there are the possibility of economic profits
b. constant - there are no economic profits, only normal profits
c. downward sloping -- there are the possibility of economic profits
d. downward sloping - the monopoly industry will produce less than the perfectly competitive industry
8. Imagine a monopoly firm is making economic profits to start with. Then the average total cost curve shifts upward, but the demand curve does not shift. The cost curve shifts so far up that now Price = Average Total Cost. Now the monopoly firm, which still has barriers to entry
a. is still making an economic profit since it is a monopoly.
b. is no longer making an economic profit but is now making a normal profit
c. is now a perfectly competitive firm.
d. both b) and c) are correct.
9. In a famous antitrust case, the government charged the DuPont Company with attempting to monopolize the cellophane industry. The company argues that, while it was the major producer of cellophane, it was competing in the broader market of "Flexible packaging", a very competitive industry. Waxed paper, glassine, and aluminum foil all had sizable shares of the flexible packaging market. To determine whether DuPont was, in fact, competing in the flexible wrap industry, one would be interested in determining
a. evidence of collusion between flexible wrap producers.
b. the per unit cost as a function of output for cellophane.
c. the price elasticity of demand for cellophane.
d. whether other potential flexible wraps were actually good substitutes for cellophane.
10. A monopoly
a. allocates resources in a socially optimal way.
b. encourages greater income equality.
c. adheres to the marginal cost equals price standard.
d. encourages greater efficiency.
e. produces less than if it adheres to the marginal cost equals price standard.
11. Firms shut down in the short-run when the price cannot cover
a. fixed costs.
b. average variable costs.
c. average total cost.
d. total cost.
12. Gasoline stations are generally considered to be monopolistic competitors rather than perfect competitors because
a. gasoline is a homogeneous good.
b. retail gasoline stations are typically very small businesses.
c. consumers seem to view stations as differentiated by the services they offer and by
the brands of gasoline they sell.
d. the gasoline station industry in most locations has little or no excess capacity.
13. Which of the following is NOT a characteristic of the monopolistic competition market structure?
a. many sellers, each small in size relative to the overall market.
b. few sellers.
c. differentiated product.
d. easy, low-cost entry and exit.
14. The firm with external costs will produce ________ goods for allocative efficiency in an unfettered market. Once the externalities are internalized, the firm will produce _______ goods at a ________ price.
a. too many - less - lower
b. too few-less- higher
c. too many - less-higher
d. too many - more - higher
15. Which of the following is the best example of an external cost?
a. flu vaccines
b. public schools
c. noise from your next door neighbor
d. a privacy fence built by your neighbor
16. John Stossel, the commentator of the health care video said the delivery of health care will be improved by ________ market based solutions.
a. more
b. less
c. about the same as now
17. If insurance pays for medical care, it creates an illusion to the consumer. Which of the following describes the illusion?
a. Insurance hides the fact that medical care, like any other good, is scarce.
b. Insurance only works in the private sector, not the public sector.
c. Insurance only works if there is a perfectly inelastic demand for medical care.
d. Both a) and b) are correct.
18. The current employer provided health insurance may be inefficient but two events help explain the history. Which two?
a. the U.S. tax code and a misguided paper written about the benefits of it by two economists in the 1950s
b. an AMA resolution to make health care delivery more efficient and a statement by the President to make health care delivery more equitable
c. the U.S. tax code and the need for getting around WWII wage controls
d. a resolution by economists to make the U.S. system more like the Canadian system and the determination made by economists that health care has a perfectly inelastic demand
19. A plan is offered through your employer for $200 year which guarantees two checkups a year by a dentist and one by an M.D. It does not pay for anything other than the checkups. Is this a good example of insurance in the sense of socializing risk?
a. yes
b. no
20. 20. A monopolist faces the following demand curve:
Price Quantity
$51 1
$47 2
$42 3
$36 4
$29 5
$21 6
$12 7
The monopolist has total fixed costs of $60 and has a CONSTANT marginal cost of $15. What is the profit-maximizing level of production?
a. 2 units
b. 3 units
c. 4 units
d. 5 units
.
21. Which of the two conditions combined would imply that the firm is producing the allocatively efficient amount of a good where price equals marginal cost?
a. no externalities and imperfect competition
b. external benefits and perfect competition
c. external costs and pure monopoly
d. no externalities and perfect competition
22. If externalities are internalized, then
a. more of the good will be produced.
b. less of the good will be produced since externalities imply market failure.
c. the optimal portion of the good will be produced where marginal private costs equals the price under conditions of perfect competition.
d. a greater or lower quantity of the good will be produced depending on whether the externalities are respectively external benefits or external costs.
For the following three questions, consider the following: John quits his job as a teacher, which paid $40,000 a year, in order to start the XYZ firm. The firm has sales of $100,000 for the 1st year and rent on a building of $20,000. John also puts 100,000 of his own savings into inventory and forgoes 3 percent annual interest. He also borrows 100,000 from his uncle and pays him 3 percent annual interest on the money.
23. What is his economic profit?
a. $80,000
b. $77,000
c. $37,000
d. $34,000
24. What is his accounting profit?
a. $80,000
b. $77,000
c. $37,000
d. $34,000
25. John _______ be financially better off by staying in business. This is determined by looking at his _______ profit.
a. will - economic
b. will not - economic
c. will - accounting
d. will not - accounting
Go to https://www.youtube.com/watch?v=cqGRIqFDo2w for the next 3 questions:
26. Comparative advantage is the ability of a country to produce a good at a ____________ opportunity cost relative to other countries. It ____ possible to have a comparative advantage even if the country does not have an absolute advantage in producing anything.
a. higher // is
b. lower // is
c. equivalent // is not
d. higher // is not
Use the following information for the next two questions: the U.S. can produce 4 tons of potatoes per day or 2 tons of wheat per day. Ireland can produce 3 tons of potatoes per day or one ton of wheat.
27. The U.S. has an absolute advantage in producing
a. potatoes.
b. wheat.
c. both.
d. neither.
28. The U.S. has a comparative advantage on producing
a. potatoes.
b. wheat.
c. both.
d. neither.
The next four questions are based on https://www.youtube.com/watch?v=rCq52IxGkBw (This is the You Tube video on oligopoly behavior)
29. The kinked demand curve, which is associated with ________ shows that prices ______.
a. oligopoly - change very little
b. oligopoly - are constantly changing to meet the competitor's price changes
c. monopoly - change very little
d. perfect competition -- are constantly changing to meet the competitor's price
changes
30. OPEC is the Organization of Oil Exporting Countries. They control a good deal of the world's oil production and attempt to set prices and output quotas. They sound like they are
a. monopolistic competitors.
b. perfect competitiors.
c. a cartel.
d. both a) and c) are correct.
31. Game theory shows an industry would maximize profits if no one advertised. However since one firm cannot trust the other not to advertise, then each firm continues to advertise and profits are less.
a. true
b. false
32. The revenue maximizing model
a. is associated with perfect competition.
b. shows that maximizing revenues is the same as maximizing profits.
c. is associated with oligopoly.
d. all of the above.
e. b) and c) are correct.
33. Airlines generally charge business travelers more than leisure travelers. Therefore business travelers must have the more ________ demand and quantity demanded changes _______ for a given percentage price change compared to a leisure traveler.
a. elastic -- faster
b. inelastic-more slowly
c. elastic-more slowly
d. inelastic-faster
34. Since airlines have these two distinct markets, they
a. must be a pure monopoly.
b. can engage in 1st degree price discrimination.
c. can engage in 3rd degree price discrimination
d. both a) and c) are correct.
e. both b) and c) are correct.
35. In monopoly there is a deadweight loss, which implies
a. allocative inefficiency.
b. transfer of some consumer surplus to the firm's profits.
c. transfer of some consumer surplus to no one.
d. all of the above.
e. a) and c), but not b) are correct.
36. Which of the following is true about the graphical model of monopolistic competition?
a. It does not have U-shaped average cost curves.
b. It has a negatively sloped marginal revenue curve, just like in perfect competition.
c. It has a negatively sloped marginal revenue curve, just like in pure monopoly.
d. Price equals marginal cost, just like in both perfect competition and monopoly.
Below is a simple algebraic proof that in perfect competition, Price equals Marginal Cost. Each blank represents a justification of each step. Fill in the blanks with the choices given after the proof.
37. In competition P = MR=AR ________
38. It is also true that MC = MR. _________
39. Therefore P=MC. __________
Choices (One is not used).
a. profit maximizing condition for all firms
b. characteristics of the perfectly competitive firm's perfectly elastic demand curve
c. characteristics of the perfectly competitive firm's negatively sloped demand curve.
d. application of algebraic transitive property: If a=b and b=c, then a=c.
The remaining multiple-choice questions are from Heilbroner's Worldly Philosophers.
40. The story of the cloth button makers in France is an example that shows the market evolved
a. quickly since markets are second-nature to all people.
b. slowly but painlessly.
c. slowly, and some paid a huge price for engaging in market activity.
41. Adam Smith
a. invented capitalism since before he published THE WEALTH OF NATIONS there was no buying or selling.
b. argued that selfish behavior can lead to socially desirable results when there is competition.
c. both of these.
42. According to Heilbroner's discussion of Francis Edgeworth, Edgeworth's main interest in economics was because it dealt with
a. people.
b. mathematics.
c. socialism.
d. making a better world.
43. Veblen was a of classical and neoclassical economics.
a. supporter
b. critic
c. mathematical interpreter
d. both a) and c) are correct.
44. John Stuart Mill said that it was possible to develop a new theory of
a. distribution.
b. production.
45. The scissors analogy of Alfred Marshall referred to
a. external and internal costs
b. explicit and implicit costs
c. supply and demand
d. microeconomics and macroeconomics
e. all of the above
46. Find a recent newspaper editorial that applies to the economics of health care (other than the one your group turned in.) You need not turn in the article, but give the title of the article and its source. Then do the following:
a. Take a statement in the article that you consider a positive statement. Reword in if, then form. The statement should be no more than 15 words.
b. Find one normative statement in the article OR tell what you think are the normative implications of the article .
c. Do you think the emphasis is more on efficiency in health care delivery or equity? You may answer either by quoting a statement or two in the article OR giving your own statement
47. Based on Clarke's "Zapping and Diminishing Marginal Utility" answer in approximately 50 words why many people are constantly playing with the remote control. There should be very little quoting from the article, and any direct quote needs to be put in quotation marks. Must use the following three terms in the answer and use them correctly:
• diminishing marginal utility
• marginal cost
• marginal benefit