ECON 2100 (Fall 2018 Section 11) Exam #3B

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1 ECON 21 (Fall 218 Section 11) Exam #3B Multiple Choice Questions: (3 points each) 1. I am taking of the exam. B. Version B 2. Market Power refers to a situation in which A. a firm charges different consumers different prices for different units of a good (which the price difference not resulting from differences in production costs). B. a firm has some control over the price of its output (i.e., the firm faces a downward sloping demand curve). C. a firm is unable (due to technological constraints) to develop a product which consumers would positively value. D. the free market outcome results in either more than or less than the efficient amount of trade. 3. Excess Capacity refers to the A. amount by which the output of a firm has increased between the last period of production and the current period of production. B. amount by which the output of a firm is less than the efficient scale of output. C. maximum possible amount of output that a firm can produce. D. combined market share of the four largest firms in an industry. 4. If a good is such that it is easy to prevent consumption by those who do not pay for the good, then the good in question is A. a Non-Excludable Good B. an Excludable Good C. Non-Rival in consumption D. Rival in consumption 5. is a market structure in which there is one single seller of a unique good (with no close substitutes ) and in which there are barriers to entry which prevent rival firms from entering the market A. Perfect Competition B. Monopolistic Competition C. Oligopoly D. Monopoly 6. When presented with different options, a distinct voter type is defined by ordered preferences over the different options. For example, if having to choose between only two options, Candidate A and Candidate B, there are potentially two different voter types (those that prefer A over B and those that prefer B over A ). When the first debate of the 216 Republican Presidential Primary season took place, there were 17 different candidates seeking the party s nomination. With 17 different options there are distinct voter types. A. 1 x 2 x 3 x x 16 x 17 = 17! = 355,687,428,96, (over trillion) B = 289 C = 153 D. 17

2 7. Which of the following is NOT one of the three basic elements of a game? A. Referee. B. Strategies. C. Payoffs. D. Players. 8. After going trick-or-treating on Halloween Caden and his younger brother Cameron decide to pool all of the candy they collected. Each of them is able to take and consume a piece of candy from the common pool whenever he wants. Consequently, the candy is a common resource that is non-excludable but rival in consumption. Economic theory would suggest that the candy will be consumed it would have been if each child privately owned the candy that he himself had received. A. at exactly the same pace as B. less quickly than C. more quickly than D. None of the above answers are correct (since economic theory would not provide any insights whatsoever on an issue of this nature). 9. Krist Novoselic, the current Chair of FairVote s Advisory Board, A. was elected to the U.S. House (as a representative from South Carolina) at the age of 25 years, 2 months and 3 days, making him the youngest person ever elected to this body. B. was the bass player in the rock band Nirvana. C. was a major league professional baseball player for four years, three seasons with the Houston Astros and one season with the Atlanta Braves. D. earned his PhD in economics from the University of Chicago and is currently a Professor of Economics at Georgetown University in Washington, DC. For Questions 1 through 12, consider the following simultaneous move game: Player 2 Left Right Player 1 Top 2, 45 4, 65 Bottom 3, 55 1, If Player 1 were to choose Bottom, then the best reply for Player 2 would be to A. choose Left. B. choose Right. C. choose Top. D. also choose Bottom. 11. In this game, A. Player 1 has a dominant strategy, but Player 2 does not. B. Player 2 has a dominant strategy, but Player 1 does not. C. both Player 1 and Player 2 have a dominant strategy. D. neither Player 1 nor Player 2 has a dominant strategy. 12. This game A. does not have any Nash Equilibria (even in mixed strategies ). B. has exactly one Pure Strategy Nash Equilibria. C. has exactly two Pure Strategy Nash Equilibria. D. fits the definition of a Prisoner s Dilemma.

3 13. Which of the following goods fit the definition of a Collective Good? A. National defense. B. A burrito from Chipotle. C. A satellite radio broadcast. D. Fish in the ocean. 14. In a simultaneous move game with two players, it must always be the case that A. the sum of the players payoffs is maximized at an outcome that is a Nash Equilibrium. B. at least one player has a dominant strategy. C. there is at least one Nash Equilibrium (potentially in mixed strategies ). D. None of the above answers are correct. For questions 15 through 17, consider a firm operating in a monopolistically competitive market with short run costs of production and facing demand as illustrated below. $ MC(q) 13. ATC(q) , 1,25 MR(q) 1,5 15. To maximize profit, this firm should sell units of output. A. 1, B. 1,25 C. 1,5 D. 2,5 Demand quantity 2,5 16. The maximum profit of this firm is dollars. A. 2,5 B. 85 C. 2,7 D. 5,2 17. In the Long Run, this firm should A. remain in this market and expect additional firms to enter. B. remain in this market but expect no other firms to enter or exit. C. exit this market. D. increase its profit by transforming the market into a perfectly competitive market (instead of a monopolistically competitive market).

4 18. Which of the following statements related to imposing a corrective Pigouvian Tax in the presence of a negative externality is true? A. A Pigouvian Tax will reduce the level of trade in a market. B. A Pigouvian Tax will not generate any revenue for the government. C. A Pigouvian Tax will create a negative Deadweight-Loss. D. Economists typically favor command-and-control regulations (such as strict limits on levels of or bans on pollution) over Pigouvian Taxes over. 19. According to the FTC classification of market concentration, a market is not concentrated if HHI is and is highly concentrated if. A. positive; negative. B. below 4; above 25. C. below 1,; above 1,8. D. above 1,; below A broadly refers to a benefit from an activity realized by someone who is not engaging in the activity. A. collective good B. positive externality C. negative externality D. dominant strategy For questions 21 and 22, consider a situation in which three different candidates (George, Bill, and Ross) are seeking an office. Voter preferences are summarized by the table below. The person to fill the position will be decided by plurality rule all three names will appear on the ballot and the person receiving the most votes will be chosen to fill the office. Voter Type 1 st Choice 2 nd Choice 3 rd Choice % of Population [i] George Bill Ross 1% [ii] George Ross Bill 2% [iii] Bill George Ross 12% [iv] Bill Ross George 32% [v] Ross George Bill 18% [vi] Ross Bill George 8% 21. Suppose that all voters choose to vote truthfully (i.e., for their most preferred candidate, in-line with their actual preferences). The candidate who would receive the most votes and win the election is. A. George B. Bill C. Ross D. None of the above answers are correct, since there would be a three way tie. 22. Now suppose that the type [v] voters choose to vote strategically and vote for George instead of Ross. (Continue to suppose that all other voter types truthfully vote for their most preferred candidate.) In comparison to the outcome when everyone votes truthfully, this strategic voting by the type [v] voters results in A. Ross winning the election instead of Bill, which is better for the type [v] voters. B. Ross winning the election instead of George, which is better for the type [v] voters. C. George winning the election instead of Bill, which is better for the type [v] voters. D. Bill winning the election instead of George, which is worse for the type [v] voters.

5 23. Collusion refers to A. a market in which there is both a positive externality and a negative externality. B. a parable which illustrates why a common good will be used/consumed at a level above that which is socially efficient. C. a game in which no players have a dominant strategy. D. an effort by firms to coordinate their actions in an attempt to increase both total industry profit and individual profit of every firm (compared to the profit levels which would result without any such coordination). 24. was the first economist to argue that the problem of externalities could potentially be solved by simply internalizing the externality by clearly and completely defining property rights, and then allowing affected parties to negotiate with one another. A. Adam Smith B. Ronald Coase C. Arthur Pigou D. John Nash 25. Consider a firm facing demand for its output such that price elasticity of demand is equal to 5 at every point along the demand curve. Further suppose that the Marginal Cost of producing every unit of output is a constant $16 per unit. It follows that in order to maximize profit, this firm must charge a price of per unit. A. $8 B. $2 C. $11 D. $3.2 For questions 26 and 27, consider a market for which in 1994, 26, and 218 market shares and squared values of market shares were as reported in the two tables below. Year Share of Share of 2 nd Share of 3 rd Share of 4 th Share of 5 th Share of 6 th Share of 7 th Year Share of Share of 2 nd Share of 3 rd Share of 4 th Share of 5 th Share of 6 th Share of 7 th The value of the Four Firm Concentration Ratio (C4) A. increased between 1994 and 26, and then increased further between 26 and 218. B. increased between 1994 and 26, but then decreased between 26 and 218. C. decreased between 1994 and 26, but then increased between 26 and 218. D. decreased between 1994 and 26, and then decreased further between 26 and The value of the Herfindahl-Hirschman Index (HHI) in this market in 218 was. A. 36 B. 88 C. 1,992 D. 2,66

6 28. Sven is living in the United States illegally and does not pay any Federal Income Taxes. The U.S. Federal Government provides national defense by using some of the money that it receives from this tax. As a result, Sven is able to enjoy the benefits of national defense provided by the government without making any contribution whatsoever to the costs of its provision. This implies that Sven is A. engaging in behavior which creates a significant positive externality. B. violating anti-trust law. C. a free rider. D. applying the Inverse Elasticity Pricing Rule. For questions 29 through 31, consider the market illustrated below: $ Marginal Private Costs = Marginal Social Costs c a d b e Marginal Social Benefits Marginal Private Benefits quantity 2,5 9,125 14,625 17, 29. It would appear as if A. this good is produced by a cartel of oligopolists. B. this good is a collective good. C. production/consumption of this good generates a positive externality. D. production/consumption of this good generates a negative externality. 3. The efficient level of trade in this market is, while the free market level of trade is. A. 9,125 units; 17, units. B. 9,125 units; 14,625 units. C. 14,625 units; 9,125 units. D. 14,625 units; 2,5 units. 31. At the free market outcome, there is a Deadweight-Loss equal to A. area e. B. areas a+b+c+d. C. area b. D. area a.

7 For Questions 32 and 33, consider a monopolist facing demand and with marginal costs of production as illustrated below. The Marginal Revenue curve which is illustrated below was drawn under the assumption that the firm charges a common price for every unit of output sold. $ a b MC(q) ,75 c d 9,875 f e MR(q) 12,25 Demand 18,175 quantity 35, This monopolist maximizes profit by charging a price of and selling of output. A. $9.3 per unit; 6,75 units. B. $14.1 per unit; 12,25 units. C. $2.4 per unit; 6,75 units. D. $34.6 per unit; 9,875 units. 33. When this monopolist maximizes profit, Deadweight Loss is equal to A. areas e+f. B. area e. C. areas c+d. D. areas a+b.

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