Hubbard Principle of Economics Practice Questions for Test

Econ 323 section 501 Sample Questions (chapter 9 - 11) Fall, 2004 Chapter 9 For the following 10 questions, refer to

diagram below.

1. If the market is in equilibrium, the consumer surplus earned by the buyer of the 1st unit is

a) $5.00 b) $15.00 c) $22.50 d) $40.00

2. If the market is in equilibrium, the

producer surplus earned by the seller of the 1st unit is

a) $5.00 b) $10.00 c) $15.00 d) $22.50 e) $40.00

3. If the market is in equilibrium, total

consumer surplus is

a) $30. b) $70. c) $400. d) $800. e) $1200.


producer surplus is

a) $30. b) $70. c) $400. d) $800. e) $1200.


consumer and producer surplus is

a) $0. b) $100. c) $800. d) $1200. e) $2000.

6. If the government establishes a price ceiling of $20, how many widgets will be sold?

a) 20 b) 30 c) 40 d) 50 e) 60

7. If the government establishes a price

ceiling of $20, consumer surplus will

a) fall by $200. b) fall by $300. c) remain the same.. d) rise by $200 e) rise by $300.


ceiling of $20, producer surplus will

a) fall by $200. b) fall by $300. c) remain the same. d) rise by $200. e) rise by $300.


ceiling of $20, the resulting deadweight loss will be

a) $0. b) $20. c) $30. d) $300. e) $600.


ceiling of $20, total consumer and producer surplus will be

a) $30. b) $400. c) $600. d) $900. e) $1200.

11. Consumer surplus measures

a) the extra amount that a consumer must pay to obtain a marginal unit of a good or service.

b) the excess demand that consumers have when a price ceiling holds prices below their equilibrium.

c) the benefit that consumers receive from a good or service beyond what they pay.

d) gain or loss to consumers from price fixing.

12. When government intervenes in a competitive market by imposing an effective price ceiling, we would expect the quantity supplied to ______________ and the quantity demanded to ______________.

a) fall; rise b) fall; fall c) rise; rise d) rise; fall

13. Producer surplus is measured as the

a) area under the demand curve above market price.

b) entire area under the supply curve. c) area under the demand curve above the

supply curve. d) area above the supply curve up to the

market price. 14. Price ceilings can result in a net loss in

consumers surplus when the ______________ curve is ______________.

a) demand; very elastic b) demand; very inelastic c) supply; very inelastic d) none of the above, price ceilings

always increase consumer surplus. 15. Price ceilings

a) cause quantity to be higher than in the market equilibrium.

b) always increase consumer surplus. c) may decrease consumer surplus if demand

is sufficiently elastic. d) may decrease consumer surplus if demand

is sufficiently inelastic. e) always decrease consumer surplus.

16. Consider the following statements when

answering this question

I. When a competitive industry's supply curve is perfectly elastic, then the sole beneficiary of a reduction in input prices are consumers.

II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers.

a) I and II are true. b) I is true and II is false. c) I is false and II is true. d) I and II are false.

17. Consider the following statements when answering this question

I. Employers are always hurt by minimum wage laws.

II. Workers always benefit from minimum wage laws.


18. Consider the following statements when

answering this question

I. Overall, the sick will always gain from a price ceiling on prescription drugs.

II. The reduction of supply caused by the imposition of a price ceiling is greater the more inelastic the market supply curve.


19. Which of the following policies could lead

to a deadweight loss?

a) price ceilings. b) price floors. c) policies prohibiting human cloning. d) all of the above. e) a) and (b) only.

For the next five questions, consider the following diagram.

20. If the government establishes a price floor of $2.50, how many pounds of berries will be sold?

a) 200 b) 300 c) 400 d) 600 e) 800

21. If the government establishes a price floor of $2.50, consumer surplus will


22. If the government establishes a price floor of $2.50 and farmers grow only the amount of berries that will be sold, producer surplus will


23. If the government establishes a price floor of $2.50 and farmers grow only the amount of berries that will be sold, the resulting deadweight loss will be

a) $1.50. b) 200 pounds of berries. c) $150. d) $250. e) $300.

24. If the government establishes a price floor of $2.50 and farmers grow only the amount of berries that will be sold, total consumer and producer surplus will be

a) $1.50. b) $300. c) $450. d) $500. e) $600.

25. Eliminating price supports for all US agricultural producers will hurt the farmers who cultivate products that have

a) a high own price elasticity of demand and a high price elasticity of market supply

b) a high own price elasticity of demand and a low price elasticity of market supply

c) a low own price elasticity of demand and a high price elasticity of market supply

d) a low own price elasticity of demand and a low price elasticity of market supply

26. What is the difference between a price support and a price floor?

a) A price support is below equilibrium; a price floor is above it.

b) A price support is above equilibrium; a price floor is below it.

c) Government buys the excess supply to maintain a price floor, but not a price support.

d) Government buys the excess supply to maintain a price support, but not for a price floor.

e) There is no difference between the two.

27. A price support may be pictured by

a) shifting the demand curve to the right by the amount of the government purchase.

b) shifting the demand curve to the left by the amount of the government purchase.

c) shifting the supply curve to the right by the amount of the government purchase.

d) shifting the supply curve to the left by the amount of the government purchase.

e) Drawing a horizontal line below equilibrium price at the supported price.

28. When the federal government installs a

price support program that requires the government to purchase all of a good not bought in the private economy at the support price, changes in producer surplus

a) are negative. b) are positive, but more than offset by

the cost to consumers and the government.

c) are positive, and not offset by the cost to consumers and the government.

d) and consumer surplus are both positive.

29. When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, the impact on total welfare is the

a) change in consumer surplus. b) change in consumer surplus + the change

in producer surplus + the cost to government.

c) change in consumer surplus + the change in producer surplus - the cost to government.

d) change in consumer surplus + the change in producer surplus.

For the next eight questions, consider the following diagram.

30. The government policy pictured is

a) a price ceiling of $20. b) a price support of $20. c) a price ceiling of $15. d) a price support of $15. e) A quota of 600.

31. Before this policy was implemented,

consumer surplus was

a) $20. b) $4000. c) $6000. d) $8000. e) $12000.

32. Before this policy was implemented,

producer surplus was

a) $10. b) $2000. c) $4000. d) $6000. e) $12000.

33. As a result of this policy, quantity will

a) fall to 300. b) rise to 400. c) stay at 400. d) fall to 400. e) rise to 600.

34. As a result of this policy, consumer

surplus will

a) fall to $15. b) fall to $2250. c) rise to $2500. d) fall to $5000. e) rise to $5000.

35. As a result of this policy, producer

surplus will be

a) $2000. b) $3375. c) $4500. d) $6000. e) $12,000.

36. The amount the government pays in the market to implement this policy is

a) $20. b) $3000. c) $4000. d) $6000. e) $12,000.

37. Including the consumers' expected tax

burden, the total change in welfare from this policy is

a) -$6000. b) -$5250. c) -$4500. d) $4500. e) $5250.

For the next ten questions, consider the following diagram.

38. The policy shown is a

a) price floor of $50. b) price support of $50. c) price ceiling of $30. d) quota of 2000. e) quota of 4000.

39. Before the policy was implemented, consumer

surplus was

a) $30. b) $60. c) $45,000. d) $90,000. e) $180,000.

40. Before the policy was implemented, producer

surplus was

a) $30. b) $60. c) $45,000. d) $90,000. e) $180,000.

41. After the policy was implemented, the quantity traded became

a) 1000. b) 2000. c) 3000. d) 4000. e) between 2000 and 4000, but the amount

depends upon producers' reactions, which are uncertain.

42. After the policy was implemented, price

became

a) $10. b) $30. c) $50. d) $70. e) between $50 and $70, but the price is

uncertain because quantity can be any amount between 2000 and 4000.

43. After the policy, consumer surplus became

a) $0. b) $10. c) $20. d) $20,000. e) $40,000.

44. Because of the policy, consumer surplus

fell by

a) $10. b) $20. c) $12,500. d) $25,000. e) $45,000.

45. Without counting any government payments

received by firms, as a result of this policy the producer surplus earned on the units sold in the market a) rose by $15,000. b) rose by $20,000. c) rose by $40,000. d) fell by $5,000. e) fell by $45,000.

46. The amount the government will have to pay to producers to sustain this policy is at least

a) $0. b) $10,000. c) $15,000. d) $20,000. e) $100,000.

47. Because of this policy, total producer surplus including funds received from the government will be at least

a) $10,000. b) $40,000. c) $80,000. d) $100,000. e) $160,000.

48. Import tariffs generally result in

a) higher domestic prices. b) less consumer surplus. c) more producer surplus for domestic

producers. d) a deadweight loss. e) all of these.

49. Compared to a tariff, an import quota,

which restricts imports to the same amount as the tariff, will leave the country as a whole

a) worse off than a comparable tariff. b) not as bad off as a comparable tariff. c) about the same as a comparable tariff. d) any of the above can be true.

For the next nine questions, consider the following diagram.

50. At free trade, domestic consumer surplus

would be

a) $20,000. b) $27,500. c) $40,000,000. d) $45,000,000. e) $75,625,000.

51. At free trade, domestic producer surplus

would be

a) $2,500. b) $50,000. c) $1,250,000. d) $2,500,000. e) $20,000,000.

52. At free trade, domestic consumption is

a) 5500; domestic production is 1000; imports are 4500.

b) 5000; domestic production is 2000; imports are 3000.

c) 4000; domestic production is 4000; imports are 0.

d) 2000; domestic production is 5000; imports are 3000.

e) 1000; domestic production is 5500; imports are 4500.

Now suppose an import quota of 3000 trucks is imposed.

53. The quota will make total consumer surplus equal to

a) $25,000. b) $13,125,000. c) $40,000,000. d) $62,500,000. e) $75,625,000.

54. The quota will make total domestic producer

surplus equal to

a) $2,500. b) $5,000. c) $5,000,000. d) $10,000,000. e) $30,000,000.

55. Government revenue from the quota will be

a) $0. b) $2,500. c) $7,500,000. d) $12,500,000. e) $13,125,000.

56. The quota will increase the revenue of

foreign firms by

a) $0. b) $2,500. c) $7,500,000. d) $12,500,000. e) $13,125,000.

57. An alternative to the quota that would have

the same impact on the number of imports would be a tariff of

a) $2,500. b) $5,000. c) $15,000. d) $20,000. e) $13,125,000.

58. If the government wanted to cut off all international trade without changing the quota, it could allow the quota amount of 3000 trucks in at no tariff and then charge a tariff on all imports above the quota amount. What tariff would accomplish the goal?

a) $0. b) $5,000 c) $7,500 d) $10,000 e) $20,000

59. Where Es is the elasticity of supply and Ed

is the own price elasticity of demand, the fraction of the tax passed on to consumers in the form of higher prices is

a) Es/(Es-Ed). b) Ed/(Es-Ed). c) Es/(Ed-Es). d) Ed/(Ed-Es). e) Ed/Es.

60. The benefit of a subsidy accrues mostly to

consumers

a) in every instance. b) if Ed/Es is large. c) if Ed/Es is small. d) if Ed and Es are equal. e) in no instance.

61. Consider the following statements when answering this question

I. "It is impossible to shift taxes from producers to consumers without hurting the latter."

II. "Only polluters pay (through production taxes) for the environmental damage they cause."


62. The formula Es/(Es - Ed) is used to calculate the:

a) deadweight loss from price support programs.

b) increase in consumer surplus from a price ceiling.

c) fraction of a specific tax that is passed through to consumers.

d) none of the above.

63. The Clinton administration has recommended an increase in the tax on yachts to help pay for government programs. Which of the following is true?

a) The burden of this tax will fall entirely on yacht consumers.

b) The burden of this tax will fall entirely on yacht manufacturers.

c) The sales of yachts will decrease. d) The profit of yacht manufacturers will

increase. e) Employment of workers in the yacht

industry will increase. 64. Consider a good whose own price elasticity

of demand is 0 and price elasticity of supply is 1. The fraction of a specific tax that will be passed through to consumers is:

a) 0. b) 0.25 c) 0.5 d) 0.75 e) 1

65. Consider a good whose own price elasticity

of demand is -0.5 and price elasticity of supply is 1.5. The fraction of a specific tax that will be passed through to consumers is:

a) 0. b) 0.25 c) 0.5 d) 0.75 e) 1

66. The price elasticity of demand is -1.5.

The price elasticity of supply is 1.5. The fraction of a specific tax that is borne by producers is:

a) 0. b) 0.25 c) 0.5 d) 0.75 e) 1

67. The burden of a tax per unit of output will

fall heavily on consumers when demand is relatively ______________ and supply is relatively ______________.

a) inelastic; elastic b) inelastic; inelastic c) elastic; elastic d) elastic; inelastic

68. A specific tax will be imposed on a good. The supply and demand curves for the good are shown in the diagram below. Given this information, the burden of the tax:

a) is shared about evenly between consumers and producers.

b) falls mostly on consumers. c) falls mostly on producers. d) cannot be determined without more

information on the price elasticities of supply and demand.

69. A specific tax will be imposed on a good. The supply and demand curves for the good are shown in the diagram below. Given this information, the burden of the tax:

a) is shared about evenly between consumers and producers.

b) falls mostly on consumers. c) falls mostly on producers. d) cannot be determined without more

information on the price elasticities of supply and demand.

Chapter 10 70. When the demand curve is downward sloping,

marginal revenue is a) equal to price. b) equal to average revenue. c) less than price.

d) more than price.

71. For the monopolist shown below, the profit maximizing level of output is:

a) Q1. b) Q2. c) Q3. d) Q4. e) Q5.

72. How much profit will the monopolist whose cost and demand curves are shown below earn at output Q1?

a) 0CDQ1. b) 0BEQ1. c) 0AFQ1. d) ACDF. e) BCDE.

73. Which of the following is NOT true regarding monopoly?

a) Monopoly is the sole producer in the market.

b) Monopoly price is determined from the demand curve.

c) Monopolist can charge as high a price as it likes.

d) Monopoly demand curve is downward sloping.

74. Which of the following is true at the output level where P=MC?

a) The monopolist is maximizing profit. b) The monopolist is not maximizing profit

and should increase output. c) The monopolist is not maximizing profit

and should decrease output. d) The monopolist is earning a positive

profit.

75. Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ______________ price and sell a ______________ quantity.

a) higher; larger b) lower; larger c) higher; smaller d) lower; smaller e) none of these

76. Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the

a) firm is maximizing profit. b) firm's output is smaller than the

profit maximizing quantity. c) firm's output is larger than the profit

maximizing quantity. d) firm's output does not maximize profit,

but we cannot conclude whether the output is too large or too small.

77. Suppose that a firm can produce its output

at either of two plants. If profits are maximized, which of the following statements is true?

a) The marginal cost at the first plant must equal marginal revenue.

b) The marginal cost at the second plant must equal marginal revenue.

c) The marginal cost at the two plants must be equal.

d) all of the above. e) none of the above.

78. When a per unit tax is imposed on the sale

of a product of a monopolist, the resulting price increase will

a) always be less than the tax. b) always be more than the tax. c) always be less than if a similar tax

were imposed on firms in a competitive market.

d) not always be less than the tax. 79. For a monopolist, changes in demand will

lead to changes in

a) price with no change in output. b) output with no change in price. c) both price and quantity. d) any of the above can be true.

80. Which of the following is NOT true for monopoly?

a) The profit maximizing output is the one at which marginal revenue and marginal cost are equal.

b) Average revenue equals price. c) The profit maximizing output is the one

at which the difference between total revenue and total cost is largest.

d) The monopolist's demand curve is the same as the market demand curve.

e) At the profit maximizing output, price equals marginal cost.

81. If a monopolist sets her output such that

marginal revenue, marginal cost and average total cost are equal, economic profit must be:

a) negative. b) positive. c) zero. d) indeterminate from the given

information. 82. A monopolist has equated marginal revenue

to zero. The firm has:

a) maximized profit. b) maximized revenue. c) minimized cost. d) minimized profit.

83. A monopolist has determined that at the

current level of output the price elasticity of demand is -0.15.:

a) The firm should cut output. b) This is typical for a monopolist;

output should not be altered. c) The firm should increase output. d) None of the above is necessarily

correct. Use the following information to answer the next 9 questions. A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:

Q = 200 - 2P

MR = 100 - Q

TC = 5Q

MC = 5

84. What level of output maximizes total

revenue?

a) 0 b) 90 c) 95 d) 100 e) none of the above

85. What is the profit maximizing level of output?


86. Suppose that a tax of $5 for each unit

produced is imposed by state government. What is the profit maximizing level of output?


87. What is the profit maximizing price?

a) $95. b) $5. c) $52.50. d) $10.

88. How much profit does the monopolist earn?

a) $4512.50. b) $4987.50. c) $475. d) $5.


produced is imposed by state government. What is the profit maximizing price?

a) $90. b) $10. c) $55. d) $52.50.


produced is imposed by state government. How much profit does the monopolist earn?

a) $4050. b) $4950. c) $450. d) $5.

91. Suppose that in addition to the tax, a

business license is required to stay in business. The license costs $1000. What happens to profit?

a) It increases by $1000. b) It decreases by $1000. c) It decreases by less than $1000. d) It stays the same.

92. Suppose that in addition to the tax, a business license is required to stay in business. The license costs $1000. What is the profit maximizing level of output?


Use the following information to answer the next 5 questions. The demand curve and marginal revenue curve for red herrings are given as follows:

Q = 250 - 5P

MR = 50 - 0.4Q

93. What level of output maximizes revenue?

a) 0 b) 45 c) 85 d) 125 e) 245

94. The marginal cost of red herrings is given

as: MC = 0.6Q. What is the profit-maximizing level of output?

a) 0 b) 25 c) 50 d) 60 e) 125

95. At the profit-maximizing level of output,

demand is

a) completely inelastic. b) inelastic, but not completely

inelastic. c) unit elastic. d) elastic, but not infinitely elastic. e) infinitely elastic.

96. Compared to a competitive red herring

industry, the monopolistic red herring industry

a) produces more output at a higher price. b) produces less output at a higher price. c) produces more output at a lower price. d) produces less output at a lower price. e) not enough information to relate the

monopolistic red herring industry to a competitive industry.

97. Suppose that a tax of $5 per unit of output

is imposed on red herring producers. The price of red herring will

a) not change. b) increase by less than $5. c) increase by $5. d) increase by more than $5. e) decrease.

98. A multiplant monopolist can produce her output in either of two plants. Having sold all of her output she discovers that the marginal cost in plant 1 is $30 while the marginal cost in plant 2 is $20. To maximize profits the firm will

a) produce more output in plant 1 and less in the plant 2.

b) do nothing until it acquires more information on revenues.

c) produce less output in plant 1 and more in plant 2.

d) produce less in both plants until marginal revenue is zero.

e) shut-down plant 1 and only produce at plant 2 in the future.

Use the following information to answer the next 3 questions. The marginal revenue of green ink pads is given as follows:

MR = 2500 - 5Q

The marginal cost of green ink pads is 5Q.

99. How many ink pads will be produced to

maximize revenue?


100. How many ink pads will be produced to

maximize profit?


101. Suppose that the firm chooses to

produce 200 ink pads. At this level of output the demand for ink pads is

a) inelastic. b) unit elastic. c) elastic. d) unit elastic.

102. A multiplant firm has equated marginal

costs at each plant. By doing this

a) profits are maximized. b) costs are minimized given the level of

output. c) revenues are maximized given the level

of output. d) none of the above.

103. The _____ elastic a firm's demand curve, the greater its _____.

a) less; monopoly power b) less; output c) more; monopoly power d) more; costs

104. Monopoly power results from the ability

to

a) set price equal to marginal cost. b) equate marginal cost to marginal

revenue. c) set price above average variable cost. d) set price above marginal cost.

105. What is the value of the Lerner index

under perfect competition?

a) 1. b) 0. c) Infinity. d) Two times the price.

106. The more elastic the demand facing a

firm,

a) the higher the value of the Lerner index.

b) the lower the value of the Lerner index.

c) the less monopoly power it has. d) the higher its profit.

107. Which factors determine the firm's

elasticity of demand?

a) Elasticity of market demand and number of firms.

b) Number of firms and the nature of interaction among firms.

c) Elasticity of market demand, number of firms, and the nature of interaction among firms.

d) None of the above. 108. The monopolist that maximizes profit

a) imposes a cost on society because the selling price is above marginal cost.

b) imposes a cost on society because the selling price is equal to marginal cost.

c) does not impose a cost on society because the selling price is above marginal cost.

d) does not impose a cost on society because price is equal to marginal cost.

109. Which of the following statements about natural monopolies is true?

a) Natural monopolies have natural barriers to entry.

b) Natural monopolies are in the markets for natural resources (like crude oil and coal).

c) For natural monopolies, marginal cost is always below average cost.

d) For natural monopolies, average cost is always increasing.

e) Natural monopolies cannot be regulated. Use the following information to answer the next question.

The marginal cost of a monopolist is constant and is $10. The demand curve and marginal revenue curves are given as follows:

demand: Q = 100 - P

marginal revenue: MR = 100 - 2Q

110. The deadweight loss from monopoly power is

a) $1000.00 b) $1012.50 c) $1025.00 d) $1037.50 e) none of the above

Use the following information to answer the next 5 questions.

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows:

P = 360 - 4Q MR = 360 - 8Q MC = 4Q

111. What level of output maximizes the sum of consumer surplus and producer surplus?


112. What is the profit maximizing level of

output?


113. At the profit maximizing level of

output, what is the level of consumer surplus?

a) 0 b) 1,800 c) 2,700 d) 3,600 e) 4,800

114. At the profit maximizing level of output, what is the level of producer surplus?

a) 0 b) 1,800 c) 5,400 d) 7,200 e) 9,600

115. At the profit maximizing level of

output, what is the deadweight loss?

a) 0 b) 450 c) 900 d) 1,800 e) none of the above

chapter 11

116. Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm:

a) is trying to reduce its costs and therefore increase its profit.

b) is engaging in an illegal activity that is prohibited by the Sherman Antitrust Act.

c) is attempting to convert producer surplus into consumer surplus.

d) is attempting to convert consumer surplus into producer surplus.

e) both (a) and (c) are correct.

117. An electric power company uses block pricing for electricity sales. Block pricing is an example of

a) first-degree price discrimination. b) second-degree price discrimination. c) third-degree price discrimination. d) Block pricing is not a type of price

discrimination. 118. When a firm charges each customer the

maximum price that the customer is willing to pay, the firm

a) engages in a discrete pricing strategy. b) charges the average reservation price. c) engages in second-degree price

discrimination. d) engages in first-degree price

discrimination. 119. The maximum price that a consumer is

willing to pay for each unit bought is the ______________ price.

a) market b) reservation c) consumer surplus d) auction e) choke

120. Second-degree price discrimination is the practice of charging

a) the reservation price to each customer. b) different prices for different blocks

of the same good or service. c) different groups of customers different

prices for the same products. d) each customer the maximum price that he

or she is willing to pay. 121. A firm is charging a different price

for each unit purchased by a consumer. This is called

a) first-degree price discrimination. b) second-degree price discrimination. c) third-degree price discrimination. d) fourth-degree price discrimination. e) fifth-degree price discrimination.

122. A tennis pro charges $15 per hour for

tennis lessons for children, and $30 per hour for tennis lessons for adults. The tennis pro is practicing

a) first-degree price discrimination. b) second-degree price discrimination. c) third-degree price discrimination. d) fourth-degree price discrimination. e) fifth-degree price discrimination.

123. Discrimination based upon the quantity

consumed is referred to as ______________ price discrimination.

a) first-degree b) second degree c) third-degree d) group

124. A doctor sizes up patients' income and

charges wealthy patients more than poorer ones. This pricing scheme represents is not a form of

a) first-degree price discrimination. b) second-degree price discrimination. c) third-degree price discrimination. d) pricing at each consumer’s reservation

price. 125. Third-degree price discrimination

involves

a) charging each consumer the same two part tariff.

b) charging lower prices the greater the quantity purchased.

c) the use of increasing block rate pricing.

d) charging different prices to different groups based upon differences in elasticity of demand.

126. cDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any special meal. This practice is an example of:

a) collusion. b) price discrimination. c) two-part tariff. d) bundling. e) tying.

127. In 1994, the Walt Disney Corporation

ran a special promotion on tickets to Disneyland. Residents of southern California were offered admission at the special price of $22. Other visitors to Disneyland were charged about $30. This practice is an example of:

a) collusion. b) price discrimination. c) two-part tariff. d) bundling. e) tying.

128. For Christmas 1993, Northwest Airlines

came up with a special promotion that was quickly copied by its competitors. One week before Christmas it announced that it would sell travelers a round trip ticket to anywhere that the airline flies for not more than $119. Tickets were sold on a space available basis and the outbound flight and return flight both had to begin on Christmas day. This practice is an example of:

a) intertemporal price discrimination. b) price discrimination. c) a two-part tariff. d) bundling. e) none of the above.

129. Some grocery stores are now offering

customers coupons which entitle them to a discount on certain items on their next visit when they go through the check-out line. This practice is called:

a) intertemporal price discrimination. b) third degree price discrimination. c) two-part tariff. d) bundling. e) none of the above.

130. Which of the following is NOT a

condition for third degree price discrimination?

a) Monopoly power. b) Different own price elasticities of

demand. c) Economies of scale. d) Separate markets.

131. A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). Having sold all of its output it discovers that the marginal revenue in the local market is $20 while its marginal revenue on the internet auction site is $30. To maximize profits the firm should

a) have sold more output in the local market and less at the internet auction site.

b) do nothing until it acquires more information on costs.

c) have sold less output in the local market and more on the internet auction site.

d) sell less in both markets until marginal revenue is zero.

e) sell more in both markets until marginal cost is zero.

132. Suppose that the marginal cost of an

additional ton of steel produced by the Japanese is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct?

a) The Japanese will sell more steel abroad than they will sell in Japan.

b) The Japanese will sell more steel in Japan than they will sell abroad.

c) The Japanese will sell steel at a lower price abroad than they will charge domestic users.

d) The Japanese will sell steel at a higher price abroad than they will charge domestic users.

e) Insufficient information exists to determine whether the price or quantity will be higher or lower abroad.

133. You are the producer of stereo

components. There are two markets, foreign and domestic. The two groups of consumers cannot trade with one another. If your firm practices third-degree price discrimination, when you have maximized profits, the marginal revenue

a) in the foreign market will equal the marginal cost.

b) in the domestic market will equal the marginal cost.

c) in the domestic market will equal the marginal revenue in the domestic market.

d) all of the above. e) none of the above

134. You are the producer of stereo components. There are two markets, foreign and domestic. The two groups of consumers cannot trade with one another. You will charge the higher price in the market with the

a) lower own price elasticity of demand (more inelastic demand).

b) higher own price elasticity of demand (more elastic demand).

c) larger teenage population. d) greater consumer incomes.

135. A firms sells an identical product to

two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits?

a) PA = PB = MC. b) MRA = MRB. c) MRA = MRB = MC. d) (MRA - MRB) = (1 - MC).

136. Bindy, an 18 year old high school graduate, and Luciana, a 40 year old college graduate, just purchased identical hot new sports cars. Acme Insurance charges a higher rate to insure Bindy than Luciana. This practice is an example of:

a) collusion. b) price discrimination. c) two-part tariff. d) bundling. e) none of the above.

137. Under perfect price discrimination, consumer surplus

a) is less than zero. b) is greater than zero. c) equals zero. d) is maximized.

138. When a monopolist engages in perfect price discrimination,

a) the marginal revenue curve lies below the demand curve.

b) the demand curve and the marginal revenue curve are identical.

c) marginal cost becomes zero. d) the marginal revenue curve becomes

horizontal.

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Hubbard Principle of Economics Practice Questions for Test