Multiple Choice: Each of the following questions or incomplete statements is followed by a series of suggested answers or completions. Select the one best response for each question. (1 point each) [This exam has a maximum possible value of 100 points. 35 of these points come from the multiple choice questions, 12 of these points come from identification questions, and 53 of these points come from the essay questions.]
1. If all excess capacity in a monopolistically competitive industry was eliminated,
A. the industry would become more competitive.
B. there would be a greater diversity (variety) of products available. C. more firms would be necessary to meet the market’s demand for the industry’s product.
D. fewer firms would be necessary to meet the market’s demand for the industry’s product.
2. A monopoly is most likely to emerge and continue to monopolize its market when A. firms have U-shaped average total cost curves. B. income elasticity of demand for its product is high. C. fixed capital costs are small relative to total costs. D. economies of scale are large relative to market demand.
3. Consumers who clip and redeem discount coupons:
A. cause total revenue to decrease for firms that issue coupons for their products.
B. exhibit a unitary price elasticity of demand since all consumers have the ability to use
C. exhibit the same price elasticity of demand for a given product as consumers who do not
clip and redeem coupons. D. exhibit a more elastic demand for a given product than consumers who do not clip and
redeem coupons. E. exhibit a more inelastic demand for a given product than consumers who do not clip and
4. Critics of social regulation argue that it
A. increases the price level.
B. dampens incentives to invest and innovate.
C. is a relatively greater burden for small firms than for large firms.
D. has all of the above effects.
5. If the CEO of United Airlines plays golf with the CEO of American Airlines and then both
companies increase the prices of their airline tickets by 5% this is most likely a case of
A. a gentleman’s agreement. B. multiproduct pricing. C. cost-plus pricing. D. price leadership.
6. Skilled workers generally earn more than unskilled workers do because
A. the productivity of skilled labor is higher than that of unskilled labor.
B. the supply of skilled labor is greater than the supply of unskilled labor. C. the marginal cost of unskilled labor is higher than that of skilled labor.
D. the demand for unskilled labor is greater than the demand for skilled labor. E. the demand for unskilled labor is more elastic than the demand for skilled labor.
7. The smaller the number of firms in a monopolistically competitive industry and the greater the differentiation degree of product,
A. the greater the divergence between the demand and the marginal revenue curves for the firms in
B. the larger will be the monopolistically competitive firm’s fixed costs.
C. the more inelastic is the monopolistically competitive firm’s demand curve.
D. the more elastic is the monopolistically competitive firm’s demand curve.
8. An example of an inclusive type labor organization / association is
A. the United Automobile Workers
B. the Brotherhood of Electrical Workers (electricians)
C. the American Institute of Certified Public Accountants (CPAs) D. both A and B.
E. All of the above.
9. The “wastefulness” of excess capacity is not considered totally bad by economists because
A. advertisers make more income that is then circulated to the rest of the economy via the
B. the monopolistically competitive firm has a negatively sloped demand curve.
C. the monopolistically competitive firm allocates resources more efficiently than firms in other
D. excess capacity may allow for a greater diversity of products than would otherwise be available.
10. Which of the following will create a demand for U.S. dollars in the foreign exchange market?
A. travel abroad by U.S. citizens
B. the desire of foreigners to buy U.S. stocks
C. the desire of U.S. citizens to purchase foreign stocks
D. U.S. imports
11. Firms are most likely to engage in price discrimination when
A. the product being sold can easily be resold.
B. they operate in a purely competitive industry. C. they operate in an industry which experiences excess capacity. D. all consumers in the market have the same price elasticity of demand. E. All of the above
12. The U.S. garment (clothing) workers’ union
A. favors free trade because American and foreign clothing and clothing workers are substitutes.
B. opposes free trade because American and foreign clothing and clothing workers are substitutes.
C. favors free trade because American and foreign clothing and clothing workers complement each
D. opposes free trade because American and foreign clothing and clothing workers complement
13. Antitrust laws ________ whereas social regulations ________
A. are designed to promote competition; only improve competition in a market.
B. apply to specific firms and specific industries; apply to all firms and all industries.
C. lead to less competition in a market;. improve the quality of and the manner in which products
and services are produced.
D. Both B and C are correct.
E. All of the above are correct.
14. Suppose Ford Motor Company purchased a small steel company. This acquisition would be
A. a horizontal combination/merger/acquisition.
B. a vertical combination/merger/acquisition.
C. a conglomerate combination/merger/acquisition.
D. a trust corporation.
E. illegal under current U.S. anti-trust laws.
15. Price discrimination refers to
A. selling a given product for different prices at two different points in time. B. a firm charging any price which is not equal to minimum average total cost.
C. the selling of a given product at different prices that reflect demand, not cost,
D. the difference between the price a purely competitive seller and a purely monopolistic
seller would charge.
16. Exclusive unions attempt to increase wages by
A. restricting the supply of labor. B. decreasing the demand for the product being produced. C. organizing all workers in the industry and bargaining for a “fair” wage. D. All of the above are techniques used by exclusive unions.
17. If the last worker hired by a firm has a marginal resource (labor) cost of $16 and a marginal revenue product of $12, the firm
A. is maximizing its profits.
B. can increase its profits by hiring additional workers.
C. can increase its profits by hiring fewer workers.
D. faces a perfectly elastic demand for its product.
18. Monopsonistic employers exist in many less developed countries. Other things equal, these monopsonistic employers will pay a
A. lower wage and employ fewer workers than will a purely competitive market.
B. higher wage and employ fewer workers than will a purely competitive market.
C. lower wage but employ a larger number of workers than will a purely competitive market. D. higher wage and employ a larger number of workers than will a purely competitive market.
E. lower wage but employ the same number of workers as will a purely competitive market.
19. Collusion among oligopolistic producers would be easiest to achieve in which of the following cases?
A. A rather large number of firms producing a standardized product. B. A rather large number of firms producing a differentiated product. C. A very small number of firms producing a standardized product.
D. A very small number of firms producing a differentiated product.
20. If a monopolist engages in price discrimination, it will A. realize a smaller profit because it sells more output at a lower price. B. charge a higher price to individuals who have an inelastic demand and a lower price to individuals who have an elastic demand and thus produce more output and earn a greater
economic profit. C. charge a higher price to individuals who have an inelastic demand and a lower price to individuals who have an elastic demand and thus produce less output and earn a greater economic profit. D. charge a higher price to individuals who have an elastic demand and a lower price to
individuals who have an inelastic demand and thus produce less output and earn a smaller
economic profit. E. charge a higher price to individuals who have an elastic demand and a lower price to
individuals who have an inelastic demand and thus produce less output and earn a greater economic profit.
21. The kinked-demand curve that exists in oligopoly helps to explain price rigidity (inflexibility) in oligopoly because
A. the model assumes firms are engaging in some form of collusion.
B. any independent price change results in increased revenue to the independently operating
oligopolist. C. demand is elastic above and inelastic below the current market price, thus any
independent price change results in decreased revenue to the independently operating
oligopolist. D. demand is inelastic above and elastic below the current market price, thus any
independent price change results in decreased revenue to the independently operating
E. there is a gap in the marginal cost curve within which changes in marginal revenue will not
affect output or price.
22. Which of the following statements is correct? A. The pure monopolist will maximize profit by producing at that point on the demand curve
where elasticity is zero. B. Purely monopolistic sellers earn only normal profits in the long run.
C. The pure monopolist maximizes profits by producing that output at which the differential
between price and average cost is the greatest. D. In seeking the profit-maximizing output the pure monopolist underallocates resources to its
production. E. The pure monopolist maximizes profits by producing that output at which the differential
between marginal revenue and average marginal cost is the greatest.
23. The fair-return price method of regulating monopolies
A. causes monopolists to produce surplus amounts of their products. B. often causes the monopoly to encounter losses.
C. gives the monopolist no incentive to control costs.
D. often requires the government to subsidize the regulated monopoly.
E. causes an overallocation of resources to the monopolist’s product.
24. A non-discriminating pure monopolist’s demand curve
A. is perfectly elastic.
B. is perfectly inelastic. C. lies below its marginal revenue curve. D. lies above its marginal revenue curve. E. coincides with its marginal revenue curve.
25. If a pure monopolist is operating at a price-quantity combination on the inelastic segment of its demand curve, in order to increase and maximize profits, it should A. charge a lower price. B. charge a higher price. C. increase both price and quantity sold. D. retain its current price-quantity combination.
26. Cartels are difficult to maintain in the long run because
A. they are illegal everywhere in the world. B. entry barriers are insignificant in oligopolistic industries. C. individual members may find it profitable to “cheat” on the cartel. D. it is profitable for the industry to charge a lower price and produce more output.
E. All of the above.
27. A firm will vertically integrate, if it is primarily trying to accomplish which of the following?
A. to expand and diversify asset holdings
B. to exercise greater market control
C. to increase control over suppliers of its inputs.
D. to increase competition among sellers
28. Assume six firms comprising an industry have market shares of 30%, 30%, 10%, 10%, 10%, and 10% percent. The Herfindahl Index for this industry is A. 80, representing extremely workable competition.
B. 100, representing the idle workable competition.
C. 1,100, representing very workable competition.
D. 2,000, representing less than workable competition.
E. 2,200, representing less than workable competition.
29. If a government regulatory commission wants to establish a socially optimal price for a natural monopoly, it should select a price A. at which marginal revenue is zero.
B. at which the marginal cost curve intersects the demand curve. C. at which the average total cost curve intersects the demand curve. D. which corresponds with the equality of marginal cost and marginal revenue.
30. Suppose there are only four manufacturers/sellers of pizza in Bremerville. The largest producer establishes the price for his pizza and the other three firms then set their pizza prices in the same range. This best describes
A. a cartel
B. price leadership.
C. multiproduct pricing.
D. a gentleman’s agreement.
31. Many oil industry analysts argue that when OPEC succeeds in increasing the price of crude oil this
may eventually harm OPEC and also drive the price of oil to lower levels. The analysts believe
A. the demand for oil will increase since the supply of oil has increased.
B. the current high economic profits will draw other producers into the oil industry.
C. some OPEC members may be encouraged to cheat on the cartel’s (OPEC’s) low production
D. both B and C are reasonable answers.
E. All of the above are reasonable answers
32. The table below gives the number of tons of apples and bananas that can be produced in
Country X and Country Y by employing the same amount of productive resources.
|Country X||10||0||Country Y||9||0|
The theory of comparative advantage, which is based on opportunity cost, implies that, under
these conditions, Country X would find it advantageous to
A. export apples and import bananas.
B. export bananas and import apples.
C. export both apples and bananas and import nothing.
D. import both apples and bananas and export nothing.
33. The kinked demand curve of the oligopolist is based on the assumption that
A. independently operating competitors will follow a price decrease but ignore a price increase.
B. independently operating competitors will match both price decreases and increases.
C. independently operating competitors will follow a price increase but ignore a price decrease.
D. there is no product differentiation in the oligopolistic industry.
E. other firms will determine their pricing and output policies in collusion with the given firm.
34. Social regulations
A. increase the prices of goods and services.
B. dampen firms’ incentives to invest and innovate.
C. are a relatively greater burden for small firms than for large firms.
D. have all of the above effects.
35. Assume that the short-run equilibrium for a monopolistically competitive firm yields these results: P = $28.47; ATC = $22.13; and MR = MC = $17.47. Which of the following would be true?
A. Existing firms will be encouraged to leave this industry.
B. This firm could increase profits by decreasing output.
C. This firm could increase profits by increasing output.
D. Additional firms would be attracted into this industry.
E. Per unit loss is $6.34.
(Identification and Essay Question 1 are on the following page)
Identification: In a sentence or two, briefly define or otherwise demonstrate your knowledge of the following concepts. (3 points each)
1. Monopolistic Competition
2. Game Theory
3. Citizen Utility Board
4. Consumer Surplus
ESSAYS: Answer the following 3 questions. Answer all parts to each question, and answer each question as fully and carefully as you can. Use complete sentences and a logical economic thought process in each of your answers. These questions are not so much essay questions as they are a series of short answer questions. Thus, you may feel more comfortable answering each part separately rather than trying to create one single essay answer. (Question 1 = 17 points; question 2 = 18 points; question 3 = 18 points)
1. Many people believe that if monopolies are not regulated, they will charge the highest
price they possibly can. Thus, the thought continues, monopolies must be totally
regulated by the government.
· Is the goal of a purely monopolistic firm to charge the highest price? If so why? If not what is the goal of the purely monopolistic firm and how does it achieve this goal? (3 points)
· How is it possible for the pure monopolist to earn economic profits in the long run? Why do most firms in the monopolistically competitive market structure earn only normal profits or minimal economic profit in the long run? Is it possible for some firms in the monopolistically competitive market structure to earn some economic profit in the long run? Why or why not?
· Of the two methods of government regulation, the socially optimum pricing method provides the more ideal societal results. What ideal results does this pricing method provide and how does it achieve this goal? Why doesn’t government frequently use this method of price regulation (i.e., what are the disadvantages of this pricing method)? (5 points)
· What pricing method does government usually employ when regulating pure monopolies? What results/improvement is the government trying to achieve under this approach? What are the advantages of this approach compared to the socially optimum price? What are the disadvantages of this approach compared to the socially optimum price? (5 points)
· Explain all of your answers fully and in terms of economics.
(Essay Questions 2 and 3 are on the following page)
2. There are more U.S. industries that operate in the monopolistically competitive market structure than
there are industries operating in either the pure competitive or pure monopoly.
· “Purely competitive and purely monopolistic industries will tend to be one-price industries. Monopolistic competition, however, is a multiprice industry.” Why are purely competitive industries and purely monopolistic industries one price industries and why are monopolistically competitive industries multiprice industries? Explain Fully. (5 points)
· Firms in oligopolistic industries also tend to sell their product (service) at the same price or in price clusters and tend to alter price infrequently. Using economic concepts, explain fully the reasons why oligopolistic firms tend to charge very similar prices and why they tend to change these prices fairly infrequently. (4 points)
· When oligopolistic firms do change price, all the firms in the industry tend to change their prices at the same time, or within days of one another. What types of agreements might allow oligopolistic firms to act in this collusive manner? Briefly explain each of these types of collusion. (3 points)
· Oligopolistic firms often develop via mergers or acquisitions. What are the three types of mergers or acquisitions that can occur? What is the difference between each of these types of mergers / acquisitions and what objective is (objectives are) firms trying to accomplish with each type of merger? (3 points)
· Which mergers are most often not allowed by the U.S. Justice Department? What measures does the Justice Department use in order to determine whether to allow a merger or not? (3 points)
· Explain all of your answers fully and in terms of economics.
3. Labor unions attempt to increase wages, maintain employment of members, and improve working conditions.
· What are the two basic types of labor unions, and what is the primary method (are the primary methods) used by each in its attempts to increase wages and employment? What are the results, advantages, and disadvantages of each approach? (5 points)
· What is a monopsonistic labor market? Are the wage and employment results in a monopsonistic labor market different than the wage and employment results in a competitive labor market? Why and how do the results differ? (5 points)
· The percentage of the U.S. labor force that belongs to labor unions has been declining for several decades? What are some of the reasons that labor unions are less prevalent today than they were forty years ago? Explain each briefly. (4 points)
· Labor unions frequently oppose free international trade and support trade restrictions. Why? What are the two major forms of international trade restriction, how do they differ from each other, and why do labor unions support these trade restrictions? (4 points)
Explain all of your answers fully using economic logic and theory.