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Economics Test 3

1. Industry A has two frims that each control 50% of the market. Industry B has
three firms, where one firm controls 70% of the market and the other two
firms control 15% of the market each. According to the HHI, which industry is
more concentrated? A5,000 B5350
A. Industry A
B. Industry B
C. Both industries are equally concentrated
D. Indeterminate from the given information

2. If the government stops enforcing its collusion laws and oligopolies are now
able to collude, they will ____ the price charged and ____ the total output
produced.
A. Increase; increase
B. Increase; decrease
C. Decrease; increase
D. Decrease; decrease

3. The demand curve facing a dominant firm in the price leadership model is
derived by subtracting the
A. Amount supplied by the smaller firms from market demand
B. Amount supplied by the smaller firms from market supply
C. Amount demanded by customers from smaller firms from market supply
D. Dominant firms marginal cost curve from the industrys supply curve

4. Suppose an industry has total sales of $25 million per year. The two largest
firms have sales of $6 million each, the third largest firm has sales of $2
million, and the fourth largest firm has sales of $1 million. The four-firm
concentration ratio for the industry is 124% + 224% + 38% + 44%
A. 36 percent
B. 60 percent
C. 50 percent
D. 25 percent

5. Suppose there are four firms in an industry. The market shares of the four
firms are 5%, 20%, 35%, and 40%. The Herfindahl-Hirschman index for that
industry is 25+400+1225+1600=3250
A. 6,650
B. 3,250
C. 1,250
D. 100

6. Pie-Oh-My, a monopolistically competitive firm, is baking 80 gourmet pies per


day and selling each pie form $25. At that production level, ATC is $40, AVC
is $30, AFC is $10, and both MR and MC are $16. This firm should
A. Continue to produce 80 pies, as price is greater than AFC
B. Increase output to the point where price equals marginal cost
C. Decrease output to the point where marginal cost equals average cost
D. Produce zero pies and pay fixed costs

7. To conduct a general equilibrium analysis of a change in consumer


preferences toward coffee and away from tea, you must consider
A. Changes in the equilibrium prices and quantities of coffee and tea
B. Changes in the amount of resources allocated to the production of coffee
and tea
C. Changes in the price of resources allocated to the production of coffee and
tea
D. All of the above

8. Preferences have just shifted away from wheat and into corn. If you are a
corn farmer, the best profit-maximizing strategy is to
A. Shut down
B. Produce more corn in order to earn profits in the short run
C. Shift some of your farming capacity into wheat production
D. Cut prices to increase market share

9. Pareto optimality occurs when


A. The distribution of income is equal
B. It is not possible to make some members of society better off without
making at least one other member of society worse off
C. Firms are forced to internalize the effects of all externalities
D. It is possible to make one person better off without making someone else
worse off

10.An economist estimates that the maintenance of a public park cost $20,000 a
year and that the park generates $35,000 a year in revenue for merchants
near it. From societys point of view, the maintenance of this park is
A. Inefficient because everyone in the community pays taxes to support the
park, but only the merchants near the park benefit
B. Inefficient because the additional revenues generated by the park are so
low
C. Potentially efficient because the value of the gains exceed the value of the
losses
D. Potentially efficient because no one would be made worse off as a result of
maintaining the park

11.Absent market imperfections, when firms ___ profits and households ___
utility, Pareto optimality has been obtained.
A. Maximize; maximize
B. Maximize; minimize
C. Minimize; maximize
D. Minimize; minimize

12.You value your favorite shirt at $100. Someone else values it as $160, and
that person is willing to pay you $120 for your shirt. Would selling your shirt
to this person for $120 be Pareto efficient?
A. No, because you did not receive the maximum amount the other person
would have been willing to pay for the shirt.
B. No, the person paid you $120 for the shirt so his net benefit was $40,
while your net benefit was only $20. For this change to be Pareto
efficient, each of you should have the same net benefit
C. Yes, because even though you gain from the trade and he loses, there is
the potential for you to compensate him for his loss
D. Yes, because both of you are better off as a result of the trade

13.Your upstairs neighbor has a noisy dog that she keeps on her balcony.
Because you are vey sensitive to loud noises, the barking prevents you from
using your own balcony. In this cast. The barking dog is an example of a
A. Public good
B. Good that imposes an external cost
C. Good that provides an external benefit
D. Pareto good

14.When managers in oligopolistic firms make decisions that affect output or


price, they must
A. Also be sure they erect barriers to entry to prevent new entrants from
affecting their plans
B. Anticipate the reactions of their rivals and plan accordingly
C. Register with the Antitrust Division of the Department of Justice
D. Inform the regulators of their industry about their plans

15.For a monopoly to be a natural monopoly,


A. Economies of scale must be realized at a scale that is close to total
demand in the market
B. Economies of scale must be realized at a scale that is small relative to the
market
C. There must be constant returns to scale
D. The long-run average cost curve must continue to increase until it hits the
market demand curve

16.Suppose we know that a monopolist is maximizing its profits. Which of the


following is a correct inference? The monopolist has
A. Maximized its total revenue
B. Set price equal to its average cost
C. Maximized the difference between marginal revenue and marginal cost
D. Equated marginal revenue and marginal cost

17.If P < ATC, then a profit-maximizing, monopolistically competitive firm earns


___ economic profits.
A. Positive
B. Negative
C. Zero
D. Either positive or negative
18.Samurai Sams, a producer of frozen sushi, is a monopolistically competitive
firm. The firm is currently selling frozen California rolls at a $4 price.
Samurai Sams marginal cost is $1.75 and its marginal revenue is $1.50. The
firm should ___ to maximize profits in the short run.
A. Increase output to where price just equals marginal cost
B. Decrease output to where price just equals marginal cost
C. Continue to produce the same output level
D. Indeterminate from the given information

19.If firms in a monopolistically competitive industry are incurring losses, in the


long run firms will ___ this industry until the remaining firms ____.
A. Stay in; shut down
B. Leave; are earning a normal profit
C. Stay in; are earning a normal profit
D. Leave; shut down

20.The maximum profit level for the Memory Company is


A. -#1,800
B. -$1,200
C. -$800
D. $0

21.A monopolist who has a horizontal ATC schedule and perfectly price
discriminates
A. Leaves buyers a decrease but still positive amount of consumer surplus
B. Increases the amount of consumer surplus that is lost to the buyers and
not gained by the monopolist
C. Appropriates all consumer surplus as profit
D. Does not change the amount of consumer surplus that buyers had before
the monopolist perfectly price discriminated

Price ($) Quantity


10.00 1
9.00 2
8.00 3
7.00 4
6.00 5
5.00 6
4.00 7

22.If a monopoly faces the demand schedule given in the table and has a
constant marginal and average cost of $2 per unit of providing the product,
then the monopoly maximizes its profits by charging ___ per unit and selling
____ units of output.
A. $6; 5
B. $7; 4
C. $5; 6
D. $8; 3

23.Relative to a competitively organized industry, a monopoly is more likely to


produce
A. More output, charges higher prices, and earns economic profits
B. Less outputs, charges lower prices, and earn economic profits
C. Less output, charges lower prices, and earns only a normal profit
D. Less output, charges higher price, and earns economic profits

24.If Armstrong Cable is forces to sell the efficient level output, it will
A. Incur a loss of $7,250
B. Incur a loss of $1,250
C. Earn a zero profit
D. Earn a profit of $4,000

25.When a monopolist sells two units of output its total revenue is $600. When
a monopolist sells three units of output its total revenue is $630. When the
monopolist sells three units of output, the price per unit is
A. $210
B. $230
C. $300
D. $630
26.The amount of consumer surplus under monopoly is equal to area
A. AFE
B. GAB
C. BEC
D. AFC

27.From societys point of view, the efficient level of electricity production is ____
megawatts.
A. 500
B. 600
C. 800
D. 1200

28.For a non-discriminating monopolist to sell one more unit, it must ____.


A. Raise the price of only the last unit produced
B. Lower the price of only the last unit produced
C. Raise the price of the last as well as all previous units produced
D. Lower the price of the last as well as all previous units produced

29.A monopolist is currently maximizing profits. In addition, if P > ATC > MC,
then the monopolist
A. Just breaks even
B. Earns positive economic profits
C. Is covering total variable costs but not total fixed costs
D. Is covering total fixed costs but not total variable costs

30.The Exclusive Gift Company has monopoly over the sale of gold hula hoops.
This company is currently pricing and producing where marginal revenue is
equal to marginal cost. It is selling 50 gold hula hoops at a price of $5,000
each. Total costs for the company are $300,000 of which fixed costs are
$100,000. You are hired as an economic consultant to this company. You
should advise this monopolist to
A. Shut down in the short run and exit the industry in the long run
B. Produce in the short run and expand capacity in the long run
C. Produce in the short run but exit the industry in the long run if conditions
do not change
D. Shut down in the short run but expand capacity in the long run if
conditions do not change
31.Suppose a monopolist faces the demand and costs in the figure and is able to
perfectly
price discriminate. How many widgets does the monopoly supply when they
act so as to maximize their profits?
A. 200
B. 400
C. 500
D. Indeterminate from the given information

32.Oligopoly is difficult to analyze because


A. There is no price competition among oligopolistic firms
B. Of the complex interdependence that usually exits among oligopolistic
firms
C. Price is NOT a decision variable for oligopolistic firms
D. There is price completion among oligopolistic firms but no completion on
product quality

33.Assume that firms in an oligopoly are currently colluding to set price and
output to maximize total industry profit. If the government forces the
oligopolists to stop colluding, the price charged by the oligopolies will ____
and the total output produced will _____.
A. Increase; increase
B. Increase; decrease
C. Decrease; increase
D. Decrease; decrease

34.If this firm is producing the profit-maximizing quantity and selling it as the
profit-maximizing price, the firms profit will be
A. $0
B. $88
C. $154
D.$242
35.Six firms that produce chewing gum form a cartel. The cartel faces the
market demand curve given by D. To maximize profits, the cartel should
produce ____ packs of chewing gum and the price should be ____.
A. 12,000; $.25
B. 12,000; $.40
C. 14,000; $.30
D. 16,000; $.35

Bs Strategy
Raise Price Dont Raise Price
Raise Price As profit $3,000 As profit $10,000
As Strategy Bs profit $3,000 Bs profit $15,000

Dont Raise As profit $15,000 As profit $5,000


Bs profit $10,000 Bs profit $5,000

36.Firm As optimal strategy is


A. To not raise the price of its product
B. To raise the price of its product
C. Dependent on what Firm B does
D. Indeterminate form this information, as no information is provided on Firm
As risk preference

37.If both firms follow a maximum strategy, the equilibrium in the game for A
and B respectively is
A. (Raise Price, Dont Raise Price)
B. (Raise Price, Raise Price)
C. (Dont Raise Price, Raise Price)
D. (Dont Raise Price, Dont Raise Price)

38.If a donut shop runs a special and sells a dozen donuts for $3.00, Tarik buys a
dozen donuts each week. If donuts are not on special and the price is $6.00
per dozen, Tarik buys no donuts each week. Which of the following is true?
A. Tariks demand for donuts in inelastic
B. Tariks utility from a dozen donuts is less than $3.00
C. The value of Tariks utility from a dozen donuts is at least $3.00 and less
than $6.00
D. Tariks utility from a dozen donuts is greater than $6.00
39.If Clips Ahoy maximizes profits, it ____ of $80.
A. Receives a total revenue
B. Earns a profit
C. Has a total cost
D. Suffers a loss

40.From societys point of view, the ____ level is 25 haircuts.


A. Minimum output
B. Monopoly output
C. Efficient output
D. Shut down

Bs Strategy
Advertise Dont Advertise
As profit $100 As profit $200
million million
Advertise Bs profit $100 Bs profit $50
million million
As Strategy
Dont As profit $50 As profit $75
million million
Advertise Bs profit $200 Bs profit $75
million million

41.Firm As dominant strategy is


A. To advertise
B. To not advertise
C. Dependent on what Firm B does
D. Indeterminate from this information, as no information is provided on Firm
As risk preference

42.What is the Nash equilibrium in the game?


A. (Advertise, Advertise)
B. (Dont Advertise, Dont Advertise)
C. (Dont Advertise, Advertise)
D. (Advertise, Dont Advertise)

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