Econ 2113 – Test #4
Dr. Rupp – Fall 2004
Name____________________________________
Honor Pledge: “I have neither given nor received
aid on this exam”
Signature:_________________________________
Multiple Choice (40 questions)
Identify the best answer. Turn cell phones off (if your phone rings during the test you will be
ineligible to answer the extra credit question).
____
1. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town.
Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to
restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true?
a. Meatball prices will be less than marginal cost.
b. Meatball prices will equal marginal cost.
c. Meatball prices will exceed marginal cost.
____
2. Which of the following statements is (are) true of a monopoly?
(i)
A monopoly has the ability to set the price of its product at whatever level it desires.
(ii)
A monopoly's total revenue will always increase when it increases the price of its
product.
(iii)
A monopoly can earn unlimited profits.
____
____
a. (i) only
b. (ii) only
c. (i) and (ii)
d. (ii) and (iii)
e. None of the above are correct.
3. Which of the following is an example of a barrier to entry?
(i)
A key resource is owned by a single firm.
(ii)
The costs of production make a single producer more efficient than a large number
of producers.
(iii)
The government has given the existing monopoly the exclusive right to produce the
good.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) only
d. All of the above are correct.
e. None of the above are correct.
4. To define a monopoly, we cite the following characteristics:
(i)
The firm is the sole seller of its product.
(ii)
The firm's product does not have close substitutes.
(iii)
The firm generates a large economic profit.
(iv)
The firm is located in a small geographic market.
a.
b.
c.
d.
e.
(i) and (ii)
(i) and (iii)
(ii) and (iv)
All of the above are correct.
None of the above are correct.
____
____
____
5. Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly
is often
a. not in the best interest of society.
b. one that fails to maximize total economic well-being.
c. inefficient.
d. All of the above are correct.
6. When a natural monopoly exists, it is
a. always cost effective for government-owned firms to produce the product.
b. never cost effective for one firm to produce the product.
c. always cost effective for two or more private firms to produce the product.
d. never cost effective for two or more private firms to produce the product.
7. Encouraging firms to invest in research and development and individuals to engage in creative endeavors such
as writing novels is one justification for
a. resource monopolies.
b. natural monopolies.
c. government-created monopolies.
d. breaking up monopolies into smaller firms.
Use Scenario 15-1 to answer questions #8 & #9:
Consider the market for water in a small town in the Old West. Assume that the only source of water is the
underground aquifer that lies directly below the town. Wells are used to supply water to the entire town.
____
____
8. If dozens of residents have their own wells, which statement best describes the behavior of sellers of water?
a. Since water is a necessity of life, there will be no decline in the quantity of water
consumed, regardless of how high the price is raised.
b. Sellers will be able to charge a premium for the water.
c. The price of a gallon of water will exceed its marginal cost.
d. The price of a gallon of water will be driven to equal its marginal cost.
9. Refer to Scenario 15-1. Assume that Jack is the sole owner of all the wells in town. He decides to move to a
more suitable climate and sells the wells to a couple of dozen different town residents.
a. The town residents will likely be better off.
b. The price of water is likely to fall.
c. The individual water sellers will not have as much pricing power as Jack had.
d. All of the above are correct.
Figure 15-1 (Use this figure to answer question #10)
____ 10. The shape of the average total cost curve (on previous page) reveals information about the nature of the
barrier to entry that might exist in a monopoly market.Which monopoly type best coincides with Figure 15-1?
a. ownership of a key resource by a single firm
b. natural monopoly
c. government-created monopoly
d. None of the above are correct.
____ 11. The De Beers diamond monopoly is a classic example of a monopoly that
a. is government-created.
b. arises from the ownership of a key resource.
c. results in very little advertising of the product that the monopolist produces.
d. was broken up by the government a long time ago.
____ 12. A profit-maximizing monopolist will produce the level of output at which
a. average revenue is equal to average total cost.
b. average revenue is equal to marginal cost.
c. marginal revenue is equal to marginal cost.
d. total revenue is equal to opportunity cost.
____ 13. When a monopolist decreases the price of its good, consumers
a. continue to buy the same amount.
b. buy more.
c. buy less.
d. may buy more or less, depending on the price elasticity of demand.
____ 14. When a monopolist increases the amount of output that it produces and sells, the price of its output
a. stays the same.
b. increases.
c. decreases.
d. may increase or decrease depending on the price elasticity of demand.
Fill in the blanks in the table below….you’ll use this table to answer questions #15-#18.
Quantity
Price
1
2
3
4
5
6
7
8
9
10
35
Total
Revenue
Average
Revenue
Marginal
Revenue
35
64
32
29
29
17
11
23
120
17
99
8
11
80
-1
-7
-13
____ 15. If the monopolist sells 8 units of its product, how much total revenue will it receive from the sale?
a. 40
b. 112
c. 128
d. 164
e. It cannot be determined from the information provided.
____ 16. When 4 units of output are produced and sold, what is average revenue?
a. 17
b. 21
c. 23
d. 26
e. 24
____ 17. What is the marginal revenue for the monopolist for the sixth unit sold?
a. 3
b. 5
c. 11
d. 17
e. 6
____ 18. Assume this monopolist's marginal cost is constant at $11. What quantity of output (Q) will it produce and
what price (P) will it charge?
a. Q = 4, P = $27
b. Q = 4, P = $25
c. Q = 5, P = $23
d. Q = 7, P = $17
e. Q = 6, P = $20
Figure 15-5 (Use this to answer questions #19-#21)
_____ 19. What is the profit-maximizing price for this monopolist?
a. Price = a
b. Price = c
c. Price = f
d. None of the above, since this monopolist should be closed.
_____ 20. Which of the following areas in the Figure above represents the deadweight loss due to monopoly pricing?
a. triangle bde
b. triangle bge
c. rectangle acdb
d. rectangle cfgd
e. None of the above since there is no deadweight loss for this monopolist.
____ 21. Which of the following areas in the Figure on previous page represents producer surplus for the monopolist?
a. triangle bde
b. triangle bge
c. rectangle acdb
d. rectangle cfgd
e. rectangle afgb
____ 22. The practice of selling the identical good to different customers at different prices is known as
a. price segregation.
b. price discrimination.
c. arbitrage.
d. monopoly pricing.
____ 23. Many movie theaters give senior citizens reduced ticket prices because
a. senior-citizen laws mandate such discounts.
b. efforts of goodwill show community respect and win loyal patrons.
c. theaters are profit maximizers.
d. senior citizens usually comprise a solid portion of those who voice their opinions.
____ 24. Markets with only a few sellers, each offering a similar product are typically referred to as
a. competitive markets.
b. monopoly markets.
c. monopolistically competitive markets.
d. oligopoly markets.
____ 25. Monopolistically competitive firms are typically characterized by
a. many firms selling products that are similar, but not identical.
b. many firms selling identical products.
c. a few firms selling products that are similar, but not identical.
d. a few firms selling highly different products.
Imagine a small town in which only two residents, Tony and Jill, own wells that produce water for safe
drinking. Each Saturday, Tony and Jill work together to decide how many gallons of water to pump, bring the
water to town, and sell it at whatever price the market will bear. To keep things simple, suppose that Tony and
Jill can pump as much water as they want without cost; therefore, the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water is reflected in the table below.
Table 16-2 (Use this table to answer the next three questions)
Weekly
Weekly
Quantity
Total Revenue
(in gallons)
Price
(and Total Profit)
0
10
20
30
40
50
60
70
80
90
100
110
120
$12
11
10
9
8
7
6
5
4
3
2
1
0
$ 0
110
200
270
320
350
360
350
320
270
200
110
0
____ 26. Refer to Table 16-2. If the market for water was perfectly competitive, how many gallons of water would be
produced and sold?
a. 70
b. 90
c. 110
d. 120
____ 27. Refer to Table 16-2. If Tony and Jill operate as a profit-maximizing monopoly, how much total weekly
revenue will their monopoly earn?
a. $200
b. $270
c. $350
d. $360
____ 28. Refer to Table 16-2. Suppose the town enacts new antitrust laws that prohibit Tony and Jill from operating as
a monopolist. What will the new price of water end up being once the Nash equilibrium is reached?
a. $3
b. $4
c. $5
d. $6
____ 29. Once a cartel is formed, the market is in effect served by
a. a monopoly.
b. an oligopoly.
c. imperfect competition.
d. monopolistic competition.
____ 30. A situation in which economic actors interacting with one another each choose their best strategy given the
strategies the others have chosen is called
a. a competitive equilibrium.
b. an open market solution.
c. a socially optimal solution.
d. a Nash equilibrium.
Each year the United States considers renewal of Most Favored Nation (MFN) trading status with China.
Historically, legislators have made threats of not renewing MFN status because of human rights abuses in
China. The non renewal of MFN trading status is likely to involve some retaliatory measures by China. The
Game below reflects the potential economic gains associated with a two-outcome game in which China may
impose trade sanctions against U.S. firms and the United States may not renew MFN status with China. The
following table contains the dollar value of all trade flow benefits to the United States and China under two
trade-relationship scenarios.
Table 16-4 (Use this table to answer the next two questions)
United
States
Don't renew MFN
status with China
Renew MFN status
with China
China
Impose trade sanctions
against U.S. firms
U.S. trade value = $65 b
China trade value = $75 b
U.S. trade value = $35 b
China trade value = $285 b
Do not impose trade sanctions
against U.S. firms
U.S. trade value = $140 b
China trade value = $5 b
U.S. trade value = $130 b
China trade value = $275 b
____ 31. Refer to Table 16-4. When this game reaches a Nash equilibrium, the value of trade flow benefits will be
a. United States $35 b and China $285 b.
b. United States $65 b and China $75 b.
c. United States $140 b and China $5 b.
d. United States $130 b and China $275 b.
____ 32. Refer to Table 16-4. If trade negotiators are able to communicate effectively about the consequences of
various trade policies (i.e., enter into an agreement about the policy they should adopt), then we would expect
the game outcome to be
a. United States $35 b and China $285 b.
b. United States $65 b and China $75 b.
c. United States $140 b and China $5 b.
d. United States $130 b and China $275 b.
Scenario 16-4 (use this information to answer the next three questions)
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies
split the market. If they both advertise, they again split the market, but profits are lower, since each company
must bear the cost of advertising. Yet if one company advertises while the other does not, the one that
advertises attracts customers from the other.
____ 33. Refer to Scenario 16-4. What will these two companies do if they behave as individual profit maximizers?
a. Neither company will advertise.
b. Both companies will advertise.
c. One company will advertise, the other will not.
d. None of the above are correct; there is no way of knowing without more information.
____ 34. Refer to Scenario 16-4. What is PM Inc.'s dominant strategy?
a. to refrain from advertising, regardless of whether Brown Inc. advertises
b. to advertise only if Brown Inc. advertises
c. to advertise only if Brown Inc. does not advertise
d. to advertise, regardless of whether Brown Inc. advertises
____ 35. Refer to Scenario 16-4. In 1971, Congress passed a law that banned cigarette advertising on television. If
cigarette companies are profit maximizers, it is likely that
a. neither company opposed the ban on advertising.
b. Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights
violation.
c. both companies sued the federal government on grounds that the ban constitutes a civil
rights violation.
d. both companies retaliated with black-market operations.
____ 36. Perfect price discrimination describes a situation in which the monopolist
a. knows the exact willingness to pay of each of its customers.
b. charges exactly two different prices to exactly two different groups of customers.
c. maximizes consumer surplus.
d. experiences a zero economic profit.
____ 37. In theory, perfect price discrimination
a. decreases the monopolist's profits.
b. decreases consumer surplus.
c. increases deadweight loss.
d. All of the above are correct.
_____ 38. Deadweight loss is:
a. The reduction in consumer surplus due to monopolist pricing.
b. The reduction in producer surplus due to the monopolist producing an inefficient level of output.
c. The reduction in profits due to monopolist pricing.
d. The loss of trade due to excise taxes.
e. The reduction in total surplus due to the monopolist producing an inefficient level of output.
Use the following table to answer the next question:
Rebok High Price
Rebok Low Price
Nike High Price
60, 75
80, 40
Nike Low Price
50, 95
45, 55
_____39. What is the Nash Equilibrium for this game?
a. Rebok High Price & Nike High Price.
b. Rebok High Price & Nike Low Price.
c. Rebok Low Price & Nike Low Price.
d. Rebok Low Price & Nike High Price.
e. No Nash Equilibrium exists.
_____40. Who is President George W. Bush’s current chief Economic Advisor?
a. Alan Greenspan
b. Robert Rubin
c. Larry Samuelson
d. N. Gregory Mankiw
e. John W. Snow
Extra Credit (These all come from student presentations of Wall Street Journal articles)
_____41. The college board explains that which of the following is responsible for the recent rise in public tuition:
a. Faculty salary increases
b. New construction and renovations
c. Drops in fund-raising and endowment returns
d. Increasing cost of heating-oil
e. Children of baby boomers are now attending college
_____42. Four recent hurricanes in Florida have caused the State of Florida to pass new laws that:
a. Prohibit ocean-front houses from being rebuilt
b. Allow illegal immigrants to be hired by construction companies
c. Require mandatory evacuations for Category 4 or higher hurricanes
d. Implement stricter building codes
e. Require every resident purchase hurricane and flood insurance.
43. The following is an actual interview question that appeared in the Wall Street Journal. “How many hair stylists are
there in the United States?” (Explain your reasoning and how your answer was calculated).
Exam
Answer Section
MULTIPLE CHOICE
1. ANS: C
Meatball prices will exceed marginal cost.
DIF: 2
2. ANS: A
(i) only
REF: SECTION: 15.1
OBJ: TYPE: M
DIF: 2
REF: SECTION: 15.1
3. ANS: D
All of the above are correct.
OBJ: TYPE: M
DIF: 1
4. ANS: A
(i) and (ii)
REF: SECTION: 15.1
OBJ: TYPE: M
DIF: 2
REF: SECTION: 15.1
5. ANS: D
All of the above are correct.
OBJ: TYPE: M
DIF: 2
REF: SECTION: 15.1
OBJ: TYPE: M
6. ANS: D
never cost effective for two or more private firms to produce the product.
DIF: 2
REF: SECTION: 15.1
7. ANS: C
government-created monopolies.
OBJ: TYPE: M
DIF: 1
REF: SECTION: 15.1
OBJ: TYPE: M
8. ANS: D
The price of a gallon of water will be driven to equal its marginal cost.
DIF: 2
REF: SECTION: 15.1
9. ANS: D
All of the above are correct.
DIF: 2
10. ANS: B
natural monopoly
OBJ: TYPE: M
REF: SECTION: 15.1
OBJ: TYPE: M
DIF: 2
REF: SECTION: 15.1
11. ANS: B
arises from the ownership of a key resource.
OBJ: TYPE: M
DIF: 2
REF: SECTION: 15.1
OBJ: TYPE: M
12. ANS: C
marginal revenue is equal to marginal cost.
DIF: 2
13. ANS: B
buy more.
REF: SECTION: 15.2
OBJ: TYPE: M
DIF: 1
14. ANS: C
decreases.
REF: SECTION: 15.2
OBJ: TYPE: M
DIF: 2
15. ANS: B
112
REF: SECTION: 15.2
OBJ: TYPE: M
DIF: 2
16. ANS: D
26
REF: SECTION: 15.2
OBJ: TYPE: M
DIF: 2
17. ANS: B
5
REF: SECTION: 15.2
OBJ: TYPE: M
DIF: 2
18. ANS: C
Q = 5, P = $23
REF: SECTION: 15.2
OBJ: TYPE: M
DIF: 2
19. ANS: A
Price = a
REF: SECTION: 15.2
OBJ: TYPE: M
DIF: 2
20. ANS: B
Triangle bge
REF: SECTION: 15.3
OBJ: TYPE: M
DIF: 2
REF: SECTION: 15.5
OBJ: TYPE: M
21. ANS: E (is the best answer, but this question was tossed out since producer surplus is the area above MC
and below price. Hence the correct PS area is all the stuff below the dotted line “ab” and above MC).
DIF: 2
REF: SECTION: 15.5
22. ANS: B
Price discrimination
OBJ: TYPE: M
DIF: 2
REF: SECTION: 15.5
23. ANS: C
the theaters are profit maximizers.
OBJ: TYPE: M
DIF: 2
24. ANS: D
oligopoly markets.
OBJ: TYPE: M
REF: SECTION: 15.5
DIF: 1
REF: SECTION: 16.1
25. ANS: A
many firms selling products that are similar, but not identical.
OBJ: TYPE: M
DIF: 1
26. ANS: D
120
REF: SECTION: 16.1
OBJ: TYPE: M
DIF: 2
27. ANS: D
$360
REF: SECTION: 16.2
OBJ: TYPE: M
DIF: 2
28. ANS: B
$4
REF: SECTION: 16.2
OBJ: TYPE: M
DIF: 3
29. ANS: A
a monopoly.
REF: SECTION: 16.2
OBJ: TYPE: M
DIF: 2
REF: SECTION: 16.2
30. ANS: D
a Nash equilibrium.
OBJ: TYPE: M
DIF: 1
REF: SECTION: 16.2
31. ANS: B
United States $65 b and China $75 b.
OBJ: TYPE: M
DIF: 2
REF: SECTION: 16.3
32. ANS: D
United States $130 b and China $275 b.
OBJ: TYPE: M
DIF: 2
REF: SECTION: 16.3
33. ANS: B
Both companies will advertise.
OBJ: TYPE: M
DIF: 2
REF: SECTION: 16.3
34. ANS: D
to advertise, regardless of whether Brown Inc. advertises
OBJ: TYPE: M
DIF: 2
REF: SECTION: 16.3
35. ANS: A
neither company opposed the ban on advertising.
OBJ: TYPE: M
DIF: 2
REF: SECTION: 16.3
36. A
37. B
38. E
39. B
40. D
41. C
42. D
OBJ: TYPE: M