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1 Micro Problem Set III WCC Fall 2015 Directions: This problem set is graded. Feel free to ask me questions. Turn your answers in on the provided scantron form. A=True / B=False 25 Points 1) All combinations of capital and labor along a given isoquant cost the same amount. 2) An increasing MPP leads to decreasing MC. 3) If the MPP L /P L > MPP K /P K, a cost minimizing firm should reduce its use of capital and increase its use of labor. 4) A profit-maximizing firm will try to select the least costly input combination to produce its chosen level of output. 5) Total profit can be represented by the vertical distance between a total revenue curve and a total cost curve. 6) If MC is greater than MR, total profit must be negative. 7) If price is less than ATC a perfectly competitive firm should immediately shut down. 8) Under both monopoly and perfect competition, there can be no exit or entry in the short-run. 9) Products are homogeneous under perfect competition. Therefore, from whom they buy the product makes a difference to consumers. 10) Compared to a perfectly competitive industry, a monopolist who charges a single price produces a smaller output and charges a higher price. 11) The demand curve for a perfectly competitive industry is horizontal. 12) When regulatory agencies set price equal to average total cost, a subsidy is necessary to keep the regulated firm in business. 13) A monopoly firm's market power enables it to shift the full amount of a pollution tax on to consumers. 14) Under both perfect competition and monopoly, a firm s demand curve can also be described as its average revenue curve. 15) Under monopoly, the industry and firm demand curves are identical.

2 16) The Justice Department will typically oppose vertical mergers. 17) Price fixing is considered to be illegal per se. 18) While tacit collusion is legal in the U.S., cartels are not. 19) If entry by new firms lowers the cost of production, the long-run industry supply curve will have a negative slope under perfect competition. 20) Monopolistically competitive firms typically produce an output at the least cost position on their average total cost curve. 21) The strategic interaction between firms makes perfectly competitive industries difficult to analyze. 22) Both perfect competition and tacit collusion can lead to all firms in an industry charging the same price. 23) An individual using the maximin criterion will choose a strategy that gives them a chance of receiving the highest possible payoff. 24) Generally speaking, it only makes sense for a cartel to form in industries where the demand for the good is inelastic. 25) Monopolized industries may display a persistence of profits. Multiple Choice Pick the single best answer. 30 Points 26) Given the information in the table to the right, where does diminishing MPP set in? a. before the first unit of labor b. between the first and second units of labor c. between the third and fourth units of labor d. between the fourth and fifth units of labor e. between the fifth and sixth units of labor Labor TPP

3 27)Table 3 gives a production function. Assuming the capital stock is fixed at three units and the cost per day of labor is $70, what is the most labor that it is efficient to hire if the product price is $1 per unit? a. 6 b. 5 c. 4 d. 3 Table C A P I T A L Labor 28)Allie's Donuts produces about 600 dozen donuts per day. Due to bad weather, there is a shortage of wheat and the price of flour has risen 20 percent. Which of the cost curves for Allie's will shift up? a. marginal cost only b. marginal cost and average total cost only c. marginal cost, average variable cost, and average total cost only d. marginal cost, average variable cost, average total cost, and average fixed cost 29)In 1975, there was a great surplus of tankers on the world's oceans. As a result, Exxon was able to rent a tanker and the services of its crew from a Japanese ship owner for one year at a cost of $900,000. Salaries of the sailors are the responsibility of the ship owner, and wages for the crew of this tanker were $2 million per year. Japanese unions require crews be paid even if the ship does not sail. For the Japanese, this deal obviously a. was irrational. b. maximized profits. c. increased losses. d. was a mistake.

4 30)The ATC and AVC curves get closer to each other as output increase because a. AFC approaches zero as output increases. b. fixed costs are being spread over a larger and larger output. c. some costs do not change as output increases. d. all of the above are true. 31)Which of the following will shift the ATC curve (everything else equal)? a. the price of the product rises b. technical change raises MPP of one input c. output is increased d. increasing returns to scale 32)Richard owns Gas Monkey Garage. He buys old cars and fixes them up for sale. Recently Richard bought a cheap 57 Chevy at auction for $14,000. While he could have simply relisted the car on his website and sold it for $20,000, he chose to lower the suspension at a cost of $2,000, give it a wicked cool paint job for $3,000, and have Sue install a two-tone leather interior for $4,000. He then sold this car for $38,000. What is Richard s economic profit on this restoration job? a. $38,000 b. $9,000 c. $24,000 d. -$5,000 33) Successful advertising by a monopolist may a. reduce the gap between the monopoly and competitive industry output. b. increase the gap between the monopoly and competitive industry output. c. cause the monopolist to overproduce. d. cause the monopolist to decrease output. 34) Entry of new firms into a perfectly competitive industry will a. reduce short-run profits for firms already in the market. b. shift the industry short-run supply curve outward. c. reduce the profit maximizing level of output for each firm already in the industry. d. do all of the above. e. will do none of the above. 35) Which of the following statements is true of a monopolist? a. The firm charges the highest possible price. b. The firm will always earn an economic profit. c. The firm might earn an economic profit in the long-run. d. The firm generates a larger consumer surplus than a perfectly competitive industry. e. The firm is more productively efficient than a perfectly competitive firm.

5 36) In which of the following ways is a monopolist different from a perfect competitor? a. Average cost will continually drop as output expands. b. Price is above marginal revenue. c. Average total cost equals average fixed costs plus average variable costs. d. The demand curve for the industry has a negative slope. 37) Cartels are not desirable from a public policy perspective because they a. impose the costs of monopoly with none of the potential benefits. b. are organized by foreigners. c. redistribute income to the rich. d. are unstable. 38) If you were the owner of a business who was charged with price discrimination, your best defense would be a. economies of scale. b. that different prices were based on different costs. c. absence of malice. d. superior innovative performance. 39) Between 1950 and 1956, the three leading aluminum producers raised prices 9 times by exactly the same amount each time and usually within one to three days of the initial price increase. Economists call this pattern of behavior a. destructive competition. b. price leadership. c. price discrimination. d. monopoly. 40) Jason cleans swimming pools in a perfectly competitive local market. A profitmaximizer, he can charge $10 per pool to clean 9 pools per day, incurring total variable costs of $80 and total fixed costs of $20. Which of the following is true? a. Jason should shut down in the short run, with economic losses of $20. b. Jason should shut down in the short run, with economic losses of $10. c. Jason should clean 9 pools per day, with economic losses of $20. d. Jason should clean 9 pools per day, with economic losses of $10. e. Jason should clean 9 pools per day, with economic profits of $10.

6 41) In the figure below, which is the total revenue curve of the perfect competitor? a. A b. B c. C d. None of the above 42) Consider the payoff matrix below. Which of the following statements is true? a. Both Burger King and McDonalds have dominant strategies. b. Advertising is a dominant strategy for Burger King. c. Burger King would choose to advertise if it applied the maximin criteria to selecting a strategy. d. If the firms collude to maximize profits, neither side will have an incentive to cheat. Burger King McDonalds Advertise Don t Advertise Advertise 20, 35 30, 20 Don t Advertise 25, 40 40, 50 43) Coupons allow a supermarket to give a discount to price sensitive shoppers without lowering prices to less price sensitive customers, thereby raising total revenue. Economists label this practice a. false and misleading advertising. b. unfair competition. c. price discrimination. d. special concessions. 44) Natural monopolies form when a. small firms merge to form larger ones b. one firm has sole control over a resource needed to produce the output c. the firm possesses a patent d. long-run average cost declines as the firm expands output. e. the firm s monopoly position is created and enforced by the government

7 45) Student and senior discounts are commonly offered for personal services such as haircuts. We rarely see student and senior discounts on flat-panel TVs. Why is this? a. Everyone places the same value on a TV. b. It is illegal to charge different consumers different prices for TVs. c. It s rather difficult to resell a haircut. d. TV production exhibits economies of scale. 46) Which of the following is not a characteristic of long-run equilibrium under perfect competition? a. Total revenue equals total costs. b. Productive efficiency is achieved. c. Excess profits are zero. d. Firms are entering the industry. e. Allocative efficiency is achieved. 47) Consider Figure 22.1 above. If the monopolist charges the same price to all of her customers, which of the following will not be true? a. The monopolist will select output level G. b. The monopolist will charge a price equal to B. c. The consumer surplus will be equal to area ACH. d. There will be a deadweight loss equal to area EFH.

8 48) Reconsider Figure If the monopolist can practice perfect price discrimination, which of the following will not be true? a. The monopolist will select output level I. b. Producer surplus will be equal to area A0IH. c. There will be no consumer surplus. d. There will be no deadweight loss. 49) Consider the table 1 below. Assuming this monopolist produces at, what would the optimal level of output be? a. 1 unit b. 2 units c. 3 units d. 4 units e. There isn t enough information to determine optimal output. Output Price Total Variable Cost 1 $76 $30 2 $60 $74 3 $52 $124 4 $46 $180 50) Consider the following statements about the short-run and then indicate which statements are true. I. Firms will have fixed costs. II. Both monopolists and perfectly competitive firms can earn profits. III. Firms are free to enter and exit the market under perfect competition, but not monopoly. IV. Firms are free to enter and exit the market under all market structures. a. I b. I and II c. I, II, and III d. I, II, III, and IV e. None of the above are true. 51) Consider a monopolistically competitive industry. In the long-run, entry by new firms will a. reduce economic profits. b. lead to an allocatively efficient outcome. c. lead to a productively efficient outcome. d. do all of the above.

9 52) The figure below shows both a perfectly competitive industry and firm. In the case of industry supply curve S 2, the firm a. should shut down immediately. b. is incurring an accounting loss.. c. is incurring an economic loss. d. is only covering its fixed costs. 53)In the figure below, which of the following occurs as we move from A to B? a. The relative price of machines falls. b. Total cost falls. c. Output increases. d. Labor becomes less productive relative to capital. 54) The federal government imposes a 50 percent tax on the economic profit of all companies. We can expect that firms will a. raise prices. b. reduce output. c. raise prices and reduce output. d. do nothing.

10 55) In the short run, if a firm shuts down, its loss will be a. Zero b. Equal to its variable costs c. Equal to its fixed costs d. Equal to its fixed costs minus its variable costs Short Answer Directions: Please answer the following question on a single, separate, 8.5x11 sheet of paper with no fringes. Your work must meet my standards for neatness (not yours) or it will not be graded. Do not simply write down the first thing that comes to mind. Think carefully, organize your thoughts, and use your own words. While a one sentence answer won t suffice, you should be able to answer the following question in no more than a single, wellcrafted paragraph. (And I am not interested in reading more than that.) 1) Having a pure monopoly guarantees economic profits." Discuss the extent to which this is a valid statement.