# ECON 2302 Exam #3

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Economics is the study of choices. People need to make choices because of…

Scarcity
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The classic example of adverse selection is the…

Market for used cars
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You and your friend are offered some money for your upcoming travels with conditions: both of you are asked to write down a dollar amount on a piece of paper. The dollar amount written down must be between \$100 and \$250. You then reveal your values. If both of you wrote the same valley, you will both be awarded that value. But if the values are different, you will both be awarded the small amount, and the one who wrote the greater number will pay the one who wrote the smaller number \$5. Assume you only care about yourself getting the most money and so does your friend, and you can not communicate in anyway. What is the equilibrium, i.e., what number should you write?

\$100
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When a night watchman only performs two walk-throughs per night when he is being paid to perform five walk-throughs per night, it is an example of…

Moral hazard, but not adverse action
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In your city, each police officer has a budgetary cost of \$50,000 per year. The property loss from each burglary is \$4000. The first officer hired will reduce 52 burglaries, and each additional officer will reduce 8 burglaries less compared to the previous one. How many officers should your city hire?

5
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Which of the following will definitely shift demand curve to the left?

-decrease in price -increase in income -increase in the price of a substitute -all of the above -NONE OF THE ABOVE
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Which of the following will definitely shift supply curve to the left?

-when price is expected to increase
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When a competitive market is in equilibrium,

Quantity demanded is equal to quantity supplied
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A competitive market is now equilibrium. If supply increases while demand stays the same in the next day, which of the following statements must be true?

-equilibrium quantity goes up -equilibrium price goes down -the size of consumer surplus goes up -ALL OF THE ABOVE
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A competitive market is now in equilibrium. If both supply and demand increase in the next day, which of the following statements must be true?

Equilibrium quantity goes up
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A competitive market is now in equilibrium. If supply increases while demand decreases in the next day, which of the following statements must be true?

Equilibrium price does down
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Which of the following will definitely result in a decline in the size of consumer surplus?

-an effective price floor -a quota/ration
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Which of the following will definitely result in a decline in the size of producer surplus?

An effective price ceiling
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Which of the following will definitely create dead weight loss?

-an effective price ceiling -an effective price floor -a quota -ALL OF THE ABOVE
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Which of the following statements is correct?

An effective price floor is set ABOVE equilibrium because it identifies the LOWEST price allowed.
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Demand is inelastic if the price elasticity of deman is…

Negative but greater than -1
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For a good to be a luxury, demand..

Tends to be elastic
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If a 10% decrease in price for a good results in a 20% increase in quantity demanded, the price elasticity of demand is…

-2
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If the price elasticity of demand for a good is 0.5, then a 5% increase in price results in a…

2.5% decrease in the quantity demanded
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Suppose the demand curve is given by the equation Qd=150-3P where Qd denotes quantity demanded and P denotes price. Total revenue reaches its maximum value at the price of..

\$25
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People can be prevented from using a good if the good is..

A private good or a club good
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A free rider is a person who…

Receives the benefit of a good but avoids paying for it
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Which of the following statement is not correct?

All goods provided by the government are public goods
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When a good is taxed…

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A deadweight loss is a consequence of a tax on a good because the tax..

Induces buyers to consume less, and sellers to produce less
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The size of the dead weight loss generated from a tax is affected by the…

Price elasticities of both supply and demand
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Assume for the United States that the opportunity cost of each airplane is 50 cars. Which of these pairs of points could be on the United States’ Production possibilities frontier?

(200 airplanes, 12,500 cars) and (150 airplanes, 15,000 cars)
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Comparative advantage is related most closely to which of the following?

Opportunity cost
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Trade can make everybody better off because it…

Allows people to specialize according to comparative advantage
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When, in our analysis of the gains and losses from international trade, we assume that a country is small, we are effect assuming that the country…

Cannot affect world prices by trading with other countries
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When a country allows trade an becomes an importer of a good…

Domestic producers become worse off, and domestic consumers become better off
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When a country allows international trade and becomes an exporter of a good…

-domestic producers of the good become better off -domestic consumers of the goood become worse off -the gains of the winner exceed the losses of the losers -ALL OF THE ABOVE ARE CORRECT
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In the short run, a firm incurs fixed costs…

Whether it produces output or not
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A firm produces 400 units of output at a total cost of \$1,200. If total variable costs are \$1,000,

Average fixed cost is 50 cents
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The cost of producing an additional unit of output if the firm’s…

Marginal cost
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Which of the following is not a characteristic of a competitive market?

entry is limited
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Which of the following is a characteristic of a competitive market?

buyers and sellers are price takers
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In a competitive market, the actions of any single buyer or seller will

have a negligible impact on the market price
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Which of the following industries is most likely to exhibit the characteristic of free entry?

dairy farming
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Which of the following characteristics of competitive markets is necessary for firms to be price takers?

-there are many sellers -goods offered for sale are largely the same
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For a firm in a competitive market, an increase in the quantity produced by the firm will result in

no change in the product’s market price
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When a competitive firm doubles the quantity of output it sells, its

total revenue doubles
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Price Quantity \$3 0 \$3 1 \$3 2 \$3 3 \$3 4 \$3 5 This firm maximizes total revenue by producing

as many units as possible
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Quantity Total Revenue 0 \$0 1 \$13 2 \$26 3 \$39 4 \$52 For this firm, the marginal revenue is

\$13
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Which of the following statements is correct?

only for competitive firms does average revenue equal marginal revenue
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When a certain competitive firm produces and sells 100 units of output, marginal revenue is \$80. When the same firm produces and sells 200 units of output, what is the average revenue?

\$80
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Whenever a perfectly competitive firm chooses to change its level or output, its marginal revenue

does not change
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If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer’s elasticity of demand

will in infinite
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If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

decreasing output would increase the firm’s profit
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At the profit-maximizing level of output,

marginal revenue equals marginal cost
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Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing

the quantity at which market price is equal to Mr. McDonald’s marginal cost of production
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When profit-maximizing firms in competitive markets are earning profits,

new firms will enter the market
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Profit-maximizing firms in a competitive market produce an output level where

marginal cost equals marginal revenue
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If a profit-maximizing firm in a competitive market discovers that, at its current level or production, price is greater than marginal cost, it should

increase its output
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Mrs. Smith operates a business in a competitive market. The current market price is \$8.10. At her profit-maximizing level of production, the average variable cost is \$8.00, and the average total cost is \$8.25. Mrs. Smith should

continue to operate in the short run but shut down in the long run
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Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect

new firms to enter the market
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We can measure the profits earned by a firm in a competitive industry as

(P-ATC) x Q
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Suppose that a firm in a competitive market is currently maximizing its short-run profit at an output of 50 units. If the current price is \$9, the marginal cost of the 50th unit is \$9, and the average total cost of producing 50 units is \$4, what is the firm’s profit?

\$250
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Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost of production equal to \$6, and is earning \$240 economic profit in the short run. What is the current market price?

\$12
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The short-run supply curve for a firm in a perfectly competitive market is

the portion of its marginal cost curve that lies above its average variable cost
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Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will

experience losses but will continue to produce rubber bands
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When fixed costs are ignored because they are irrelevant to a business’s production decision, that are called

sunk costs
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Which of the following statements is not correct?

To maximize profit, firms should profit, firms should produce at a level of output where price equals average variable cost
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In the long run, each firm in a competitive industry earns

zero economic profits
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A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will

rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium..
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When entry and exit behavior of firms in an industry does not affect a firm’s cost structure,

the long-run market supply curve must be horizontal
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For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal

False
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A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost.

True
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Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost.

True
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When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production.

True
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The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost.

False
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A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.

True
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True
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In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost.

False
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The long-run supply curve in a competitive market is more elastic than the short-run supply curve.

True
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A benefit of a monopoly is

profit that can be invested in research and development
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A firm that is a natural monopoly

-is not likely to be concerned about new entrants eroding is monopoly power -is taking advantage of economies of scale -would experience a higher average total cost if more firms entered the market -ALL OF THE ABOVE ARE CORRECT
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A fundamental source of monopoly market power arises from

barriers to entry
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A monopolist

does not have a supply curve because the monopolist sets its price at the same time it chooses to quantity to supply
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A monopolist can sell 300 units of output for \$45 per unit. Alternately, is can sell 301 units of output for \$44.60 per unit. The marginal revenue of the 301st unit of output is

-\$75.40
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A monopolist faces a

downward-sloping demand curve
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A monopolist maximizes profits by

producing an output level where marginal revenue equals marginal cost
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A profit-maximizing monopolist will produce the level of output at which

marginal revenue is equal to marginal cost
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Because a monopolist must lower its price in order to sell another unit or output,

marginal revenue is less than price
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Bob’s Butcher Shop is the only place within 100 miles that sells bison burgers. Assuming that Bob is maximizing his profit, which of the following statements is true?

the price of Bob’s bison burgers will exceed Bob’s marginal cost
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For a monopolist, when does marginal revenue exceed average revenue?

never
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For a monopoly firm, the shape and position of the demand curve play a role in determining the

-profit-maximizing price -shape and position of the marginal-revenue curve
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For a monopoly firm, which of the following equalities is always true?

price=average revenue
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For a profit-maximizing monopolist,

P>MR=MC
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Sizable economic profits can persist over time under monopoly if the monopolist

is protected by barriers to entry
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Suppose when a monopolist produces 75 units its average revenue is \$10 per unit, its marginal revenue is \$5 per unit, its marginal cost is \$6 per unit, and its average total cost is \$5 per unit. What can we conclude about this monopolist?

the monopolist is not currently maximizing profits; it should produce fewer units and charge a higher price to maximize profits
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The supply curve for the monopolist

does not exist
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“Monopolists do not worry about efficient production and minimizing costs since they can just pass along any increase in costs to their consumers.” This statement is

false; price increases will mean fewer sales, which may lower profits
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A monopolist produces

less than the socially efficient quantity of output but at a higher price than in a competitive
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A monopolist that practices perfect price discrimination

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A monopolist’s profits with price discrimination will be

higher than if the firm charged just one price because the firm will capture more consumer surplus
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A monopoly chooses to supply the market with a quantity of a product that is determined by the intersection of the

marginal revenue and marginal cost curves
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Customers who purchase an audio CD from Sally’s Sounds are charged 20% more than customers who purchase the audio CD from the Sally’s Sounds website. This is an example of

price discrimination
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For a firm to price discriminate,

it must have some market power
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For a monopoly, the socially efficient level of output occurs where

average revenue equals marginal cost
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If a monopolist can practice perfect price discrimination, the monopolist will

-eliminate consumer surplus -eliminate deadweight loss -maximize profits -ALL OF THE ABOVE ARE CORRECT
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In theory, perfect price discrimination

decreases consumer surplus
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Perfect price discrimination describes a situation in which the monopolist

knows the exact willingness to pay of each of its customers
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Perfect price discrimination