Econ 2010-200 Principles of Microeconomics, Spring 1997
Homework # 6.
All questions are multiple choice questions.
1. An efficient allocation of resources exists if
a. one group of people can get more of the things they want without somone else having to give up anything.
b. no one can get more of the things he wants without someone else having to give up something.
c. the economy operates at any point under the production possibilities frontier.
d. the economy is operating at any point above the production possibilities frontier.
2. In a free market, economic activity is coordinated by
a. central planners.
b. costs.
c. prices.
d. majority rule.
3. If the marginal cost of producing steel exceeds the marginal utility (benefit) of using steel, then for economic or allocative efficiency,
a. the price of steel should fall.
b. society should produce less steel.
c. the price of goods made with steel should fall.
d. society should direct resources toward steel production and away from the production of other goods.
4. To be a natural monopoly, a firm must
a. control an essential natural resource input.
b. be very large.
c. have a continuously falling average cost curve as output rises.
d. have falling average costs over a substantial range of total market demand.
5. At his current level of output, a monopolist has an MR of $10, an MC of $6, and an economic profit of zero. If the market demand curve is downward sloping and his marginal cost curve upward sloping, the monopolist
a. is producing his profit maximizing level of output.
b. could increase his profit by increasing his output.
c. could increase his profit by increasing his price.
d. should exit the market if he has positive fixed costs.
Please draw a figure according to the following instructions and then answer Questions 6 through 9. In a graph with Q in the horizontal axis and $ per unit in the vertical axis, draw four curves: D, MR, MC, and ATC. From the same point in the vertical axis (call it a), draw D and MR, such that MR lies below the D curve. Label the point of intersection of MC with MR as r, the point of intersection of MC with D as n. Draw a vertical dotted line from Point r to the horizontal axis and label the point where it meets the horizontal axis as i. Extend this dotted vertical line to meet the demand curve and label the point where it meets demand as s. Now draw the ATC curve, such that its minimum point meets the MC curve between points n and r. Label the intersection of MC and ATC as m. Label the point of intersection of ATC with D as t. Now draw vertical dotted lines from m, from n, and from t to meet the horizontal axis, and label the corresponding points in the horizontal axis as l,k, and j, respectively. Now draw horizontal dotted lines from s,n,t, and r to the vertial axis, and label the corresponding points in the vertical axis as b,f,d, and g, respectively. Label the point of intersection of the dotted vertical line si and the dotted horizontal line nf as p. Now answer the questions.
6. If the firm is an unregulated monopoly, what is the profit maximizing price and output?
a. (g,i)
b. (f,k)
c. (b,i)
d. (d,j)
7. Compared to a perfect competition case, the monopoly reduces the consumer surplus by
a. area fnsb
b. area abs
c. area bspf
d. area bsrg
8. The social welfare (total surplus) loss arising out of the monopoly is:
a. area spn
b. area prn
c. area srn
d. area bsnrg
9. What shall be the price and output if the firm is regulated
by the average cost pricing rule?
a. (g,i)
b. (f,k)
c. (b,i)
d. (d,j)
10. Which of the following is not a condition that would make collusive agreements among firms likely to succeed?
a. A small number of firms in the agreement.
b. The industry produces a homogeneous product.
c. There are no barriers to entry to the industry.
d. All of the above.
11. In what sense is the monopoly output too little?
a. The profit-maximizing level of output selected by the monopolist does not occur where marginal revenue equals marginal cost.
b. The marginal revenue from producing an extra unit exceeds the price received for selling the unit.
c. The marginal social benefit from producing an extra unit exceeds the marginal social cost of producing an extra unit.
d. The marginal revenue from the last unit sold is equal to the marginal cost of producing the last unit.
Use the table below to answer question 12.
|
Output units |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
|
Price, $ |
20 |
19 |
18 |
17 |
16 |
15 |
14 |
13 |
12 |
|
TC, $ |
0 |
13 |
26 |
39 |
52 |
65 |
78 |
91 |
104 |
12. What is the profit-maximizing output of the monopolist?
a. 1 b. 4 c. 7 d. 8
13. The monopolistic competitive firm differs from monopoly in that its
a. demand curve is flatter.
b. demand curve slopes downward.
c. MR curve lies below its demand curve.
d. profit is maximized where MR=MC.
14. Refer to the figure below. For a monopolistically competitive firm, long-run equilibrium can occur only at the quantity indicated by which point? (You need to draw the figure yourself. Draw a graph with Q in the horizontal axis and $ per unit in the vertical axis. Now draw two curves: MC and ATC, such that MC intersects ATC at the minimum point of ATC. Choose any point on the MC above the ATC and label it A. Choose a point on the MC below the ATC and label it D. Choose a point on the ATC to the right of MC and label it B. Choose a point on the ATC to the left of the MC and label it C.)
a. A
b. B
c. C
d. D
15. According to the excess capacity theorem, if every firm under monopolistic competition
a. expanded its output, cost per unit of output would rise.
b. expanded its output, social benefits would increase.
c. expanded its output, cost per unit of output would decrease.
d. expanded its output, MC and AC would remain unchanged.
16. The analysis of oligopolistic behavior is difficult because
a. there are few real-world examples of oligopolies for economists to study.
b. oligopolists make decisions independently of each other.
c. firms in oligopolistic industries react to each other's behavior in many ways.
d. economists have paid little attention to the topic in recent years and so have not yet applied to it the techniques of modern economic theory.
17. Pick and Pay is deciding whether to open its stores for 24 hours per day. Its rival is Stop and Shop. The payoff matrix below shows the profit options. If they follow the maximin criterion, which do they choose? (continued on the next page)
|
Stop & Shop Open |
Stop & Shop Not Open |
|
|
Pick & Pay Open |
$100 (SS) $100 (PP) |
$90 (SS) $175 (PP) |
|
Pick & Pay Not Open |
$175 (SS) $90 (PP) |
$120 (SS) $120 (PP) |
a. open, open
b. open, not open
c. not open, open
d. not open, not open
18. A market is contestable if
a. the number of firms is larger than oligopoly.
b. firms spend a lot on advertising.
c. there is free entry and exit.
d. the four-firm concentration ratio is large.
19. If an industry consists of three firms with market shares of 10%, 30%, and 60%, then the Herfindahl-Hirschman Index is:
a. 100 b. 900
c. 3600 d. 4600
20. Two firms, Continental and United, are the only airline companies in Denver. Each must decide whether to lower its fares, for which the payoff matrix is given below.
|
United Lower Fares |
United Do not lower Fares |
|
|
Continental Lower Fares |
$15 (united) $10 (continental) |
$10 (united) $25 (continental) |
|
Continental Do not lower Fares |
$35 (united) $5 (continental) |
$25 (united) $20 (continental) |
What is the Nash Equilibrium for this game?
a. United: Lower Fares, Continental: Do not Lower Fares
b. Both: Lower Fares
c. United: Do not Lower Fares, Continental: Lower Fares
d. Both: Do not Lower Fares
Answer Key
1b, 2c, 3b, 4d, 5b, 6c, 7a, 8c, 9d, 10c, 11c, 12b, 13a, 14c, 15c, 16c, 17a, 18c, 19d, 20b