Economics Homework with Answers

ECON 102.1001 - Principles of Microeconomics Mehmet S. TosunFall 2012

ECON 102 Homework 3 (Due by 2:00pm, Thursday, December 6, 2012)(Answer All Questions on the Class Webcampus Page)

1. In perfect competition, each firm:A) produces about half of the total industry output.B) produces a differentiated product.C) produces a standardized product.D) is a price-maker.

2. Price-takers are individuals in a market who:A) select the average of prices available in a competitive market.B) have no ability to affect the price of a good in a market.C) select the lowest price available in a competitive market.D) select a price from a wide range of alternatives.

3. Marginal revenue is a firm's:A) increase in total revenue when it sells an additional unit of output.B) price per unit times the number of units sold.C) ratio of profit to quantity.D) ratio of average revenue to quantity.

4. Marginal revenue:A) is the price divided by the change in quantity.B) is the change in quantity divided by the change in total revenue.C) is the slope of the average revenue curve.D) equals the market price in perfect competition.

5. The market for breakfast cereal contains hundreds of similar products, such as Fruit Loops, Corn Flakes, and Rice Krispies, that are considered to be different products by different buyers. This situation violates the perfect competition assumption of:A) a standardized product.B) complete information.C) ease of entry and exit.D) many buyers and sellers.

Page 1

ECON 102.1001 Mehmet S. Tosun

6. If a local California avocado stand operates in a perfectly competitive market, that stand owner will be a:A) price-maximizer.B) price-maker.C) price-taker.D) price-discriminator.

Use the following to answer question 7:

7. (Table: Total Cost and Output) The table describes Bart's perfectly competitive ice cream-producing firm. If the market price is $67.50, how many units of output will the firm produce?A) twoB) fourC) oneD) three


Figure: Marginal Revenue, Costs, and Profits

Page 2


8. (Figure: Marginal Revenue, Costs, and Profits) In the figure, if market price increases to $20, marginal revenue ________ and profit-maximizing output ________.A) decreases; increasesB) decreases; decreasesC) increases; decreasesD) increases; increases


Figure: Revenues, Costs, and Profits

9. (Figure: Revenues, Costs, and Profits) At the profit-maximizing quantity of output in the figure, total revenue is $________, total cost is $________, and profit is $________.A) 48; 56; –8B) 30; 42; –12C) 90; 14; 76D) 90; 70; 20

Page 3


Use the following to answer questions 10-11:

Figure: Revenues, Costs, and Profits III

10. (Figure: Revenues, Costs, and Profits III) In the figure, if the market price is $14, the profit-maximizing quantity of output is:A) 4.B) 5.C) 3.D) 2.

11. (Figure: Revenues, Costs, and Profits III) In the figure, if market price is $12, this firm will:A) earn an economic profit.B) break even.C) minimize its losses by shutting down.D) minimize its losses by continuing to produce.

Page 4



Figure: Marginal Decision Rule

12. (Figure: Marginal Decision Rule) Given the market price P1, B is the ________ curve.A) marginal costB) marginal productC) average fixed costD) marginal revenue

13. (Figure: Marginal Decision Rule) At q2 or the ________, the ________ is equal to marginal cost.A) profit-maximizing quantity; market priceB) maximum-cost output; break-even priceC) profit-minimizing quantity; break-even priceD) minimum-cost output; shut-down price

14. The slope of the total cost curve is:A) marginal revenue.B) constant under perfect competition.C) always negative.D) marginal cost.

15. A perfectly competitive firm maximizes profit by producing the quantity at which:A) Q*(P – ATC) = 0.B) TR = TC.C) P >= AVC.D) MR = MC.

Page 5


16. In the perfectly competitive guidebook industry, the market price is $35. A firm is currently producing 10,000 guidebooks; average total cost is $38, marginal cost is $30, and average variable cost is $30. The firm should:A) shut down, because the firm is losing money.B) raise the price of guidebooks, because the firm is losing money.C) keep output the same, because the firm is producing at minimum average variable

cost.D) produce more guidebooks, because the next guidebook produced increases profit

by $5.

17. In the short run, a perfectly competitive firm produces output and earns an economic profit if:A) AVC > P > ATC.B) P > ATC.C) P = ATC.D) P < AVC.

18. Suppose Sarah's pottery studio is currently charging the market price that is just higher than her minimum average total cost. This means that Sarah:A) is incurring a small economic loss.B) is breaking even.C) should shut down immediately.D) is earning a small economic profit.

19. A monopoly is a market structure characterized by:A) barriers to entry and exit.B) a single buyer and several sellers.C) a product with many close substitutes.D) a large number of small firms.

20. Because of monopoly, consumers typically have:A) higher prices.B) more choices.C) larger quantities.D) higher quality.

Page 6


21. The ability of a monopolist to raise the price of a product above the competitive level by reducing the output is known as:A) barrier to entry.B) market power.C) patents and copyrights.D) product differentiation.

22. Suppose that you build a new jumbo jet that can carry five times more passengers than any other competitor. You experience high fixed costs due to the quantity of capital used to build the jets. There's decreasing average cost for all levels of demand. In this case, your monopoly would result from which of the following?A) locationB) government restrictionsC) sunk costsD) economies of scale

23. If the state government gives you the exclusive right to sell cement to municipalities, your monopoly would result from:A) location.B) economies of scale.C) sunk costs.D) government restrictions.

24. The demand curve for a monopoly is:A) horizontal because no one can enter.B) perfectly elastic.C) the industry demand curve.D) the sum of the supply curves of all the firms in the monopoly's industry.

Page 7



25. (Table: Demand and Total Cost) Lenoia runs a natural monopoly producing electricity for a small mountain village. The table shows Lenoia's demand and total cost of producing electricity. The marginal revenue of the fourth unit of production is:A) $500.B) $200.C) $250.D) $450.

26. (Table: Demand and Total Cost) Lenoia runs a natural monopoly firm producing electricity for a small mountain village. The table shows Lenoia's demand and total cost of producing electricity. To maximize profits, Lenoia should charge a price of:A) $500.B) $350.C) $400.D) $450.

27. One of the major differences between a monopolist and a purely competitive firm is that the monopolist has a ________ demand curve, while the purely competitive firm has a ________ demand curve.A) perfectly elastic; downward-slopingB) downward-sloping; perfectly inelasticC) downward-sloping; perfectly elasticD) perfectly inelastic; perfectly elastic

Page 8



Figure: Profit-Maximizing Output and Price

28. (Figure: Profit-Maximizing Output and Price) In the figure, a perfect competitor would produce at a price of ________ and output of ________.A) $200; 8 unitsB) $600; 16 unitsC) $600; 8 unitsD) $200; 16 units

29. The demand curve for a monopoly is:A) the MR curve above the horizontal axis.B) the entire MR curve.C) above the MR curve.D) the MR curve above the AVC curve.

Page 9



Figure: Computing Monopoly Profit

30. (Figure: Computing Monopoly Profit) The profit-maximizing price is ________ and will generate total economic profit of ________.A) P3; the rectangle P1P2FGB) P3; EFC) P2; EFD) P3; the rectangle P2P3EF

31. (Figure: Computing Monopoly Profit) At the profit-maximizing output, total cost is:A) FQ2

B) P20Q1FC) P10Q1GD) P30Q1E

32. A natural monopoly is one that:A) has increasing returns to scale over the entire relevant range of output.B) typically has low fixed costs, making it easy and “natural” for it to shut out

competitors.C) is based on control of something occurring in nature (such as diamonds).D) monopolizes a natural resource such as a mineral spring.

Page 10


33. Which of the following is true regarding monopolies?A) Monopolies create an efficiency problem but are not associated with an equity

problem.B) Monopolies produce too little and charge too much from the standpoint of

efficiency.C) Monopolies produce too much and charge too much from the standpoint of

efficiency.D) Monopolies usually are economically efficient because they have economic profits

with which to work.

34. If a monopoly is forced to charge a price equal to marginal cost:A) consumer surplus will decrease.B) output will fall.C) other firms will enter the industry.D) the deadweight loss will decrease.

35. Price discrimination is the practice of:A) equating price to marginal revenue.B) charging different prices to buyers of the same good.C) paying different prices to suppliers of the same good.D) equating price to marginal cost.

36. A ________ price in the market with a ________ demand is likely due to price discrimination.A) lower; more elasticB) lower; less elasticC) higher; perfectly elasticD) higher; more elastic

37. The city bus system charges lower fares to senior citizens than to other passengers. Assuming that this pricing strategy increases the profits of the bus system, we can conclude that senior citizens must have a ________ for bus service than other passengers.A) more elastic demandB) less elastic demandC) lower demandD) greater demand

Page 11


38. If a firm wants to charge different customers different prices it must be:A) in perfect competition.B) a price-setter.C) a price-setter in perfect competition.D) a price-taker.

39. To practice effective price discrimination, a monopolist must be able to:A) prevent the resale of goods among groups of buyers.B) calculate the utility level of each buyer in the market.C) avoid detection by government regulatory agencies.D) estimate its own production and cost functions.

40. Attempts by the federal government to prevent the exercise of monopoly power in the United States are called ________ policy.A) governmentB) stabilizationC) antitrustD) fiscal

41. An industry dominated by a few firms, where each firm recognizes that its own choices will affect the choices of its rivals and vice versa, is:A) characterized by monopolistic competition.B) characterized by perfect competition.C) an oligopoly.D) a monopoly.

42. Which of the following scenarios best describes an oligopolistic industry?A) Coca-Cola and Pepsi sell most of the soft drinks consumed around the world.B) A single cable company serves customers in a small town.C) A college has one bookstore selling textbooks to students.D) Thousands of soybean farmers sell their output in a global commodities market.

43. The sum of the squared market shares of each firm in an industry is the:A) employment rate.B) market number.C) concentration ratio.D) Herfindahl-Hirschman Index.

Page 12


44. The largest HHI possible is in the case of ________ and the index is ________ .A) monopoly; 10,000B) monopoly; 100,000C) oligopoly; 100,000D) monopoly; 10

45. An industry with two firms producing is generally called:A) monopolistic competition.B) perfect competition.C) a monopoly.D) a duopoly.

46. An extreme case of oligopoly in which firms collude to raise joint profits is known as a:A) cartel.B) price war.C) duopoly.D) dominant producer.


Figure: Collusion

47. (Figure: Collusion) In the figure, panel (c) gives the combined marginal revenue, demand, and marginal cost curves for an industry containing several firms. Panels (a) and (b) give marginal cost curves for two of those firms. The quantity of output produced by the industry under collusion is shown by:A) T.B) Q.C) R.D) S.

Page 13


48. The airline industry often engages in Bertrand behavior. This means that firms often ________ prices until profits ________.A) raise; approach zeroB) raise; are maximizedC) lower; are maximizedD) lower; approach zero

49. If rival gas stations in Reno limit production and ________ prices in a way that increases their profits, without meeting with one another in a formal way, this is known as ________ collusion.A) lower; explicitB) lower; tacitC) raise; explicitD) raise; tacit

50. Game theory is commonly used to explain behavior in oligopolies, because oligopolies are characterized by:A) perfect competition.B) interdependence.C) large profits in the long run.D) either homogeneous or heterogeneous products.

The following questions are optional extra credit questions. Questions 51-55 are about Game Theory which is used in Chapter 14 to explain behavior of firms in an oligopoly. Questions 56-60 are based on the PBS documentary “Commanding Heights: The Battle for the World Economy.” You can access the documentary web site that has the video clips at http://www.pbs.org/wgbh/commandingheights/lo/story/index.html You are advised to watch the clips for Chapters 1, 2 and 19 from Episode 1; Chapters 1, 7, 8, 9, 12, 13, 15, 16, 19, 20 and 21 from Episode 2 to answer those questions. Each question is worth 2 points.

51. In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium is for:A) This game does not have a Nash equilibrium.B) both individuals to not confess.C) both individuals to confess.D) one to confess and the other not confess.

Page 14

http://www.pbs.org/wgbh/commandingheights/lo/story/index.html


52. An action is a dominant strategy when it is a player's best action:A) assuming the other players do not correctly anticipate the action.B) if there is only one other competitor.C) given certain profit-maximizing actions of other players.D) regardless of the actions by other players.


Figure: Payoff Matrix I for Blue Spring and Purple Rain

53. (Figure: Payoff Matrix I for Blue Spring and Purple Rain) The figure shows the payoff matrix for two producers of bottled water, Blue Spring and Purple Rain. The Nash equilibrium in the figure is reached when:A) Blue Spring charges a high price and Purple Rain charges a low price.B) both firms charge a high price.C) Purple Rain charges a high price and Blue Spring charges a low price.D) both firms charge a low price.

54. (Figure: Payoff Matrix I for Blue Spring and Purple Rain) In the accompanying figure, if both firms follow a tit-for-tat strategy, equilibrium will be reached when:A) Blue Spring charges a high price and Purple Rain charges a low price.B) Purple Rain charges a high price and Blue Spring charges a low price.C) both firms charge a low price.D) both firms charge a high price.

Page 15


55. Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary summarizes his pricing strategy as, “I'll do to Frank what Frank did to me last time.” This is an example of:A) an irrational strategy.B) product differentiation.C) a tit-for-tat strategy.D) a dominant strategy.

56. In the first part of the documentary (Episode 1) we were introduced to two influential economists that were rivals in the battle of ideas in the 20th century. Who were those economists?A) Milton Friedman and Karl MarxB) John Maynard Keynes and Friedrich von HayekC) James Buchanan and Richard MusgraveD) Winston Churchill and Franklin Roosevelt

57. What is the core debate featured in the documentary?A) Military alliances and economic supremacy for the control of the commanding

heights of the world economyB) Free trade agreementsC) Collapse of the Soviet Union and problems with market reformD) Role of the governments and markets in the control of the commanding heights of

the world economy

58. What has been the orthodoxy regarding this core debate throughout the 20th century?A) Less government at the beginning of 20th century, and more government during

the rest of the centuryB) More government throughout the 20th centuryC) Less government at the beginning of 20th century, more government during the

middle and then less government again at the end of the centuryD) Less government throughout the 20th century

59. The middle portion of the documentary (Episode 2) was about the “Agony of Reform.” We watched examples of economic reform efforts from which three countriesA) Chile, Poland, RussiaB) Russia, Bolivia, PolandC) Hungary, Russia, ChinaD) Poland, India, China

Page 16


60. What was one of the most problematic aspects of market reform in Russia?A) Entrepreneurial activity was allowedB) Private property was allowedC) PerestroikaD) Loans for shares program that distributed state owned property among a small

group of business elite called "oligarchs"

Page 17


Answer Key

1. C2. B3. A4. D5. A6. C7. B8. D9. D

10. A11. D12. D13. A14. D15. D16. D17. B18. D19. A20. A21. B22. D23. D24. C25. C26. C27. C28. D29. C30. D31. B32. A33. B34. D35. B36. A37. A38. B39. A40. C41. C42. A43. D44. A

Page 18


45. D46. A47. A48. D49. D50. B51. C52. D53. D54. D55. C56. B57. D58. C59. A60. D

Page 19

Documents

Economics Homework with Answers