Economics 212 Microeconomic Principles Exam No. 3 Date: 7 or 9 May 2012 Name The value of this exam is 100 points Instructor: Brian B. Young Please show your work where appropriate! Multiple Choice 2 points each #1 The factors of production are a. the levels of technology used to produce goods. b. labor, capital, land, and entrepreneurship. c. firms, consumers, markets, and government. d. a techno dance band from Dusseldorf. #2 Which of the following is a difference between perfect competition and monopolistic competition? a. Perfect competition has a large number of independently acting sellers. b. In monopolistic competition, entry into the industry is unblocked. c. Only firms in monopolistic competition can earn an economic profit in the short run. d. Firms in monopolistic competition compete on their product s price as well as its quality and marketing #3 Which of the following is a distinguishing characteristic of oligopolies? a. a standardized product b. the goal of profit maximization c. the interdependence among firms d. downward-sloping demand curves faced by firms Page 1 of 7
#4 A monopsony is a. A market structure in which there is only one seller b. A market structure in which there is only one buyer c. A fictitious animal similar to a Snuffleupagus d. an organization of workers formed for the purpose of increasing wages #5 A perfectly competitive firm should hire additional units of labor in a competitive labor market if a. marginal revenue is less than marginal cost b. the wage rate is higher than the average total cost. c. total revenue exceeds total cost d. the value of marginal product of labor exceeds the wage rate #6 If perfectly competitive firms are making an economic profit, then a. the market must be in long-run equilibrium. b. some firms will exit the market. c. new firms will enter the market. d. the market may be in a long-run equilibrium. #7 A change in the wage rate a. shifts the supply of labor curve so that the supply becomes more elastic. b. shifts the supply of labor curve leftward. c. shifts the supply of labor curve rightward. d. does not shift the supply of labor curve but instead leads to a movement along it. #8 One of the main goals of U.S. antitrust legislation is to a. regulate the prices cartels and monopolies are allowed to charge. b. prevent the establishment of cartels and monopolies. c. create jobs for unemployed attorneys. d. enforce intellectual property rights. Page 2 of 7
#9 Which of the following statements is true? a. Long-run average cost is increasing when there are economies of scale. b. Average fixed costs are always decreasing. c. Marginal revenue is always greater than demand. d. Labor is a variable cost only in the long-run. #10 At a long-run equilibrium in monopolistic competition, price equals a. average total cost. b. marginal cost. c. marginal revenue. d. some point between marginal revenue and marginal cost. #11 In which of the following market types do all firms sell products so identical that buyers do not care from which firm they buy? a. perfect competition b. monopolistic competition c. oligopoly d. monopoly #12 Cheating on a collusive agreement is more likely when a. a price floor is in effect. b. antitrust legislation is seldom enforced. c. it is easy to observe the other firms' prices. d. the number of firms is large. #13 In the long run, a firm in a perfectly competitive market will a. earn zero economic profit, that is, it will earn a normal profit. b. earn zero normal profit but it will earn an economic profit. c. remove all competitors and become a monopolistically competitive firm. d. incur an econometric normal loss but not earn an accounting profit. Page 3 of 7
#14 Which of the following is found ONLY in oligopoly? a. Producers who sell identical products. b. One firm s actions affect another firm s profit. c. Entry into the industry is blocked. d. Sellers face a downward sloping demand curve for their product. #15 The capture theory of regulation predicts that regulations bring to special interest group members and impose on everyone else. a. small benefits; small costs b. small benefits; large costs c. large benefits; small costs d. large benefits; large costs #16 When oligopolists make joint decisions concerning their prices and output levels, they are a. a natural oligopoly b. a cartel c. a duopoly d.. a homogeneous oligopoly #17 When OPEC meets to set prices and output levels, this is an example of a. rent seeking b. profit sharing c. market segmentation d. explicit collusion #18 All of the following are examples of barriers to entry, except one. Which is the exception? a. significant economies of scale b. reputation of established firms c. antitrust legislation d. patents Page 4 of 7
#19 Relative to a competitively organized industry, a monopoly a. produces less output, charges lower prices and earns economic profits. b. produces more output, charges higher prices and earns economic profits. c. produces less output, charges lower prices and earns only a normal profit. d. produces less output, charges higher prices and earns economic profits. #20 Economic profits are: a. the opportunity costs of all inputs. b. the difference between total revenue and total costs. c. a rate of profit that is just sufficient to keep owners and investors satisfied. d. anything greater than the normal opportunity cost of investing. Short Answer 10 points each #1 Ford s Strategies Rebate No Rebate Rebate Chevy s Strategies $100 I $95 $300 II -$200 No Rebate -$120 III $300 $250 $250 IV Page 5 of 7
Ford Motor Co. and General Motors must decide whether or not to offer rebates to purchasers of the Ford Fusion and Chevrolet Malibu, respectively. The payoff matrix above represents the weekly profit ($1,000s) available to the firms under the different rebate strategies. a. What is the dominant strategy for Ford? b. What is the dominant strategy for Chevy? c. Which quadrant represents the equilibrium that will result if both firms act independently and compete with one another? What is the name of this equilibrium? d. Which quadrant represents the equilibrium that will result if the two firms successfully collude? If the two firms collude, what is Ford s incentive to cheat on the collusive agreement? #2 Fill in the blanks in the following table describing industrial organization under the four listed market structures: Number of Firms Herfindahl- Hirschman Index Pricing Power Product Differentiation Efficient Output Level Perfect Competition 0 Yes Monopolistic Competition Some Oligopoly Few Can be either Monopoly Elasticity of Demand Some inelasticity Example Electric utility Page 6 of 7
#3 As long as the marginal cost of production is greater than the average variable cost, then the average variable cost is increasing. Is the preceding statement true or false? Use your knowledge of production and cost to justify your answer. #4 The diagram below shows the cost curves for a perfectly competitive wheat farmer. a. At what price does the wheat farmer shut down? b. What is the minimum price the wheat farmer must receive to earn an economic profit? c. How many bushels of wheat does the farmer produce if the price is $3.00 per bushel? d. How many bushels of wheat does the farmer produce if the price is $0.50 per bushel? #5 In B&P3, Chapter 7, it was established that an effective minimum wage increased unemployment and resulted in an inefficient labor market. However, this may not always be true. Give an example of a labor market in which an effective minimum wage leads to higher employment and greater efficiency. Use a graph in your answer. Does this type of market exist in the real world? Page 7 of 7