Microeconomics Exam Q&A, Exams of Microeconomics

Download Microeconomics Exam Q&A and more Exams Microeconomics in PDF only on Docsity! ECO 1023 Microeconomics EXAM Q & A 2024 1. Suppose that the demand for pizza is given by Qd = 100 - 2P, where Qd is the quantity demanded in slices per day and P is the price in dollars per slice. The supply of pizza is given by Qs = 50 + 4P, where Qs is the quantity supplied in slices per day. What is the equilibrium price and quantity of pizza in this market? a) P = $5, Q = 70 b) P = $10, Q = 40 c) P = $7.5, Q = 55 d) P = $12.5, Q = 25 Answer: c) P = $7.5, Q = 55 Rationale: The equilibrium occurs where Qd = Qs, so we can set the two equations equal to each other and solve for P: 100 - 2P = 50 + 4P, which implies P = $7.5. Then we can plug this value into either equation to get Q: Qd = 100 - 2(7.5) = 55 or Qs = 50 + 4(7.5) = 55. 2. Consider a market with two firms, A and B, that produce a homogeneous good. The inverse demand function for the good is P = 120 - Q, where P is the price in dollars per unit and Q is the total quantity in units. The marginal cost of production for each firm is constant and equal to $20 per unit. Assume that the firms compete as Cournot duopolists, i.e., they choose their quantities simultaneously and independently. What is the profit-maximizing quantity for firm A? a) QA = 20 b) QA = 25 c) QA = 30 d) QA = 35 Answer: b) QA = 25 Rationale: The profit function for firm A is given by πA = (P - MC)QA = (120 - QA - QB - 20)QA, where QB is the quantity chosen by firm B. To maximize profit, firm A sets its marginal revenue equal to its marginal cost: MR = MC, which implies (120 - 2QA - QB) = 20, or QA = 50 - (1/2)QB. Similarly, the profit-maximizing condition for firm B is QB = 50 - (1/2)QA. Solving these two equations simultaneously gives QA = QB = 25. 3. Suppose that a monopolist faces a linear inverse demand function P(Q) = a - bQ, where P is the price in dollars per unit and Q is the quantity in units. The monopolist has a constant marginal cost of c dollars per unit and no fixed cost. What is the deadweight loss caused by the monopoly pricing compared to the socially optimal pricing? a) DWL = (a - c)^2 / (8b) b) DWL = (a - c)^2 / (4b) c) DWL = (a - c)^2 / (2b) d) DWL = (a - c)^2 / b Answer: a) DWL = (a - c)^2 / (8b) Rationale: The monopoly quantity is determined by setting marginal revenue equal to marginal cost: MR(Q) = MC(Q), which implies a - 2bQ = c, or QM = (a - c) / (2b). The monopoly price is then PM = a - bQM = a - b(a - c) / (2b) = (a + c) / 2. The socially optimal quantity is determined by setting price equal to marginal cost: P(Q) = MC(Q), which implies a - bQ* = c, or Q* = (a - c) / b. The socially optimal price is then P* = E. average fixed cost 7. The larger the number of firms in an industry, A. the easier it is to implicitly collude to fix prices. B. the more intense the rivalry among firms. Your answer is correct. C. the greater the need for a price enforcement mechanism. D. the larger the potential number of market segments. 8. Consider two oligopolistic industries selling the same product in different locations. In the first industry, firms always match price changes by any other firm in the industry. In the second industry, firms always ignore price changes by any other firm. Which of the following statements is true about these two industries, holding everything else constant? A. Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. Your answer is correct. B. No conclusions can be drawn about the pricing behavior under these very different firm behavior. C. Market prices are likely to be the same in both markets because they are both oligopolistic markets. D. Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 9. A Nash equilibrium is A. reached when each player choose the best strategy for himself and for the group. B. an equilibrium comprising non−dominant strategies only. C. reached when each player chooses the best strategy for himself, given the strategies chosen by the other players in the group. Your answer is correct. D. reached when an oligopoly's market demand and supply intersect. 10. Which of the following characterizes the market that Chiptole competes in? A. All fast-casual restaurants face horizontal demand curves. B. Fast-casual restaurants sell identical products. C. Barriers to entry are low. Your answer is correct. D. There are a small number of firms. 11. The value of the four−firm concentration ratio that many economists consider indicative of the existence of an oligopoly in a particular industry is A. anything greater than 30 percent. B. anything greater than 40 percent. Your answer is correct. C. anything greater than 10 percent. D. anything greater than 20 percent. 12. Governments grant patents to A. give firms an opportunity to recover research and development costs from the market. This is the correct answer. B. encourage competition. Your answer is not correct. C. encourage low prices. D. encourage firms to reveal secret production techniques. 13. Refer to the diagram to the right which shows the cost and demand curves for a profit−maximizing firm in a perfectly competitive market. If the market price is $30, the firm's profit maximizing output level is A. 0. B. 130. C. 180. Your answer is correct. D. 240. 14. To maintain a monopoly, a firm must have A. an insurmountable barrier to entry. Your answer is correct. B. marginal revenue equal to demand. C. a perfectly inelastic demand. D. few competitors. 15. Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements regarding economic surplus in each market structure is true? A. Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions economic surplus is less than under perfect competition and there is a deadweight loss. Your answer is correct. B. Under perfectly competitive conditions, economic surplus is equal to consumer surplus; there is no producer surplus because firms are price takers. Under monopoly conditions, economic surplus is equal to producer surplus. C. Under perfectly competitive conditions, economic surplus in this industry is maximized. Under monopoly conditions economic surplus is minimized. D. Under perfectly competitive conditions, economic surplus in this industry equals consumer surplus plus producer surplus. Under monopoly conditions, some consumer surplus is transferred to producer surplus, but economic surplus is the same as it was under perfectly competitive conditions. 16. What is the profit−maximizing rule for a monopolistically competitive firm? A. to produce a quantity that maximizes total revenue B. to produce a quantity that maximizes market share C. to produce a quantity such that marginal revenue equals marginal cost Your answer is correct. 24. If, when a firm doubles all its inputs, its average cost of production decreases, then production displays A. diminishing returns. B. diseconomies of scale. C. economies of scale. Your answer is correct. D. declining fixed costs. 25. Jason, a high−school student, mows lawns for families in his neighborhood. The going rate is $12 for each lawn−mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price? A. He would lose some but not all his customers. B. If Jason raises his price, then all others supplying the same service will also raise their prices. C. If Jason raises his price he would lose all his customers. Your answer is correct. D. Initially, his customers might complain but over time they will come to accept the new rate. 26. If a typical firm in a perfectly competitive industry is incurring losses, then A. some firms will exit in the long run causing market supply to decrease and market price to rise Your answer is correct. B. some firms will exit in the long run causing market supply to decrease and market price to fall increasing losses for the remaining firms. C. all firms will continue to lose money. D. some firms will enter in the long run causing market supply to increase and market price to rise increasing profit for all firms. 27. Which of the following is the best example of an oligopolistic industry? increasing profits for the remaining firms. A. the beef market B. the beauty products industry Your answer is not correct. C. the pharmaceutical industry This is the correct answer. D. public education 28. A monopolist's profit-maximizing price and output correspond to the point on a graph A. where marginal revenue equals marginal cost and charging the price on the market demand curve for that output. This is the correct answer. B. where total costs are the smallest relative to price. Your answer is not correct. C. where price is as high as possible. D. where average total cost is minimized. 29. Refer to the diagram to the right. The firm represented in the diagram makes A. should exit the industry. B. should expand its output to take advantage of economies of scale. C. makes zero accounting profit. Your answer is not correct. D. makes zero economic profit. This is the correct answer. 30. The music streaming industry, where a firm's profitability depends on its interactions with other firms, is an example of A. perfect competition. B. monopolistic competition. C. oligopoly. Your answer is correct. D. monopoly. 31. Few firms in the United States are monopolies because A. most products that firms produce have substitutes. B. when a firm earns profits, other firms will enter its market. Your answer is correct. C. few firms experience economies of scale. D. of antitrust laws. 32. Which of the following describes a situation in which a good or service is produced at the lowest possible cost? A. profit maximization B. allocative efficiency C. marginal efficiency D. productive efficiency 33. Oligopolies are difficult to analyze because A. how firms respond to a price change by a rival is uncertain. Your answer is correct. B. the firms are so large. C. demand and cost curves do not exist for these types of industries. D. oligopolies are a recent development so economists have not had time to develop models 34. Marginal cost is equal to the A. change in average product divided by the change in output. B. change in average total costs divided by the change in output. Your answer is not correct. 42. The graphs in the figure above represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry. Refer to the figure above. Which of the following statements is true? A. The current market price is $3 but the firm will be able to increase the price in the future. B. The current market price is $3 but the price will fall in the long run as a result of a decrease in demand. Your answer is not correct. C. The current market price is $3 but the price will fall in the long run as new firms enter the market. This is the correct answer. D. The current market price is $3 but the price will increase in the future as the market demand increases. 43. If a typical monopolistically competitive firm is making short run losses, then A. as some firms leave, the demand for the products of the remaining firms will become more elastic. B. as some firms leave, the remaining firms will experience an increase in the demand for their products. Your answer is correct. C. the industry will eventually cease to exist. D. other more competitive firms will enter the market. 44. Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches. Should the firm represented in the diagram continue to stay in business despite its losses? A. Yes, it should increase its revenue by raising its price. Your answer is not correct. B. No, it is not able to cover its fixed cost. C. No, it should shut down. D. Yes, its total revenue covers its variable cost. 45. In San Francisco there are many restaurants that specialize in a wide variety of cuisines. Patronage at these restaurants is influenced by factors such as tastes, price, and location. This market is A. monopolistically competitive. This is the correct answer. B. perfectly competitive. C. oligopolistic. Your answer is not correct. D. monopolistic. 46. Red Stone Creamery currently hires 5 workers. When it added a 6th worker, its output actually fell. Which of the following statements is true? A. The total product becomes negative. B. The sixth worker is not as skilled as the fifth worker. C. The average product of the sixth worker is negative. D. The marginal product of the sixth worker must be negative 47. When a firm produces more output using the same inputs or the same output using fewer inputs we say that the firm A. experiences an increase in demand. Your answer is not correct. B. is operating in the short run. C. will hire more workers in order to produce more output. D. experiences positive technological change. 48. Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches. If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged? A. $ P0 B. $P1 C. $P2 Your answer is correct. D. $P3 49. In the short run, a profit maximizing firm's decision to produce should be guided by whether A. This is the correct answer. B. it makes a profit. Your answer is not correct. C. its total revenue exceeds its fixed cost. D. its marginal profit is maximized. 50. Sam Lewis owns a firm in New York City's garment district. If Sam keeps adding workers to use the same number of sewing machines, eventually the workplace will become so crowded that workers will get in each other's way. At this point A. Sam's business will be in violation of safety rules that have been established by the New York City government. B. the marginal product of labor in Sam's business would be negative and his total output would decrease. This is the correct answer. C. Sam should begin using a division of labor in his business. Your answer is not correct. D. Sam should encourage his workers to share their sewing machines. 51. When Wal−Mart decides to build a new retail store in a town, it will decide to build a large store rather than a small store if the large store is expected to earn a greater economic profit. What other motive would Wal−Mart have for choosing to build a large store? A. Because of economies of scale, the average total cost of production is less for a larger store than a smaller store. B. A larger store may deter entry into the town by a rival firm. This is the correct answer. C .A larger store will help Wal−Mart maintain its position as the leading retail company in the world more than a smaller store would. D. A larger store will give Wal−Mart greater political influence in the community. 52. its total revenue covers its variable cost.