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Multiple Choice(50):

Problem 1(12):

Problem 2(6):

Problem 3(4):

Problem 4(12):

Problem 5(8):

Problem 6(8):

1. Which of the following is the best example of a public good?

   • [a.] a national system of health care.
   • [b.] Disney World.
   • [c.] a flood control project.
   • [d.] telephone service.

2. A potential Pareto improvement occurs when:

   • [a.] everyone gains from a change in the economy, but it might take some time.
   • [b.] only consumers gain.
   • [c.] the individuals who benefit from the change could compensate those who lose so that no one is worse off from the change.
   • [d.] taxes are reduced.

3. In perfect competition, price is constant and given to the price taker because:

   • [a.] there are no good substitutes for the product.
   • [b.] the market demand curve is perfectly elastic
   • [c.] each seller supplies a negligable fraction of market supply
   • [d.] the firm's demand curve is downward sloping.

4. Which of the following is a natural barrier to entry?

   • [a.] A registered trademark.
   • [b.] Increasing returns to scale.
   • [c.] A copyright.
   • [d.] An operating license.

5. Which of the following characteristics best fits the market structure monopolistic competition?

   • [a.] High barriers to entry.
   • [b.] Numerous sellers.
   • [c.] Sellers are price takers.
   • [d.] No brand-name products.

6. Which of the following is not a characteristic of oligopoly?

   • [a.] A small number of firms.
   • [b.] Each firm is a price taker.
   • [c.] Each firm takes into account the reactions of rivals to its decisions.
   • [d.] Possibly high barriers to entry.

7. When private costs or benefits are changed so that they are equal to social costs or benefits, this is called:

   • [a.] nonexcludability and nonrivalness.
   • [b.] a Nash equilibrium.
   • [c.] externalizing an externality.
   • [d.] internalizing an externality.

8. Which of the following industries is closest to the economist's definition of perfect competition?

   • [a.] fast food restaurants.
   • [b.] airline industry.
   • [c.] fishing industry.
   • [d.] long-distance telephone service.

9. Which of the following is true of monopoly and not of perfect competition?

   • [a.] Profit is maximized where marginal cost is equal to marginal revenue.
   • [b.] The industry demand curve is also the firm's demand curve.
   • [c.] Economic profits are zero in the long-run.
   • [d.] All of the above are true for monopoly and not for perfect competition.

10. Which of the following conditions distinguishes monopolistic competition from perfect competition?

    • [a.] there is freedom of entry and exit.
    • [b.] there are small-size firms.
    • [c.] there are a number of sellers.
    • [d.] there is differentiation of the product.

11. Which of the following industries would not be considered an oligopoly?

    • [a.] Soft drinks.
    • [b.] Automobiles.
    • [c.] Wheat.
    • [d.] Breakfast cereals.

12. Why don't side payments always solve the externality problem?

    • [a.] Transaction costs may be too high.
    • [b.] Legal restrictions prevent side payments.
    • [c.] Side payments are economically inefficient.
    • [d.] Side payments violate equity standards.

13. When a firm is operating under perfect competition, marginal revenue is:

    • [a.] equal to price.
    • [b.] always less than price.
    • [c.] equal to zero when the market is in long-run equilibrium
    • [d.] equal to the change in output divided by the change in total revenue.

14. If the average cost curve is always above the demand curve of a monopolist, then:

    • [a.] the profits of the monopolist will be large.
    • [b.] the monopolist must be producing efficiently.
    • [c.] even a monopolist will suffer economic losses.
    • [d.] entry will occur, forcing the monopolist to reduce price and expand output.

15. If it is prohibitively costly to provide a good only to people who pay for it, the good is said to be:

    • [a.] nonexcludable.
    • [b.] nonrival.
    • [c.] public.
    • [d.] social.

16. Which of the following market structures is most likely to be characterized by extensive advertising by firms?

    • [a.] Monopolistic competition.
    • [b.] Perfect competition.
    • [c.] Monopoly.
    • [d.] All of the above.

17. The equilibrium in the Bertrand model is:

    • [a.] economically inefficient.
    • [b.] economically efficient.
    • [c.] not a Nash equilibrium.
    • [d.] at a price greater than marginal cost.

18. One economically efficient way to eliminate the tragedy of the commons is to:

    • [a.] tax the owners of the land.
    • [b.] prevent anyone from using the land.
    • [c.] reduce the marginal social benefit of the land.
    • [d.] establish private ownership of the land.

19. When an economist says a firm is earning zero economic profit, this statement implies that the firm:

    • [a.] will be forced out of business in the near future unless market conditions change.
    • [b.] is also earning a zero accounting profit.
    • [c.] can do better by going into a different line of business
    • [d.] none of the above is correct.

20. Which of the following is true for a natural monopoly?

    • [a.] It is cheaper for one firm to produce all the industry output than to split production among many small firms.
    • [b.] Average cost is falling throughout the range of output that can be sold in the market.
    • [c.] If price is set where the marginal benefit to buyers is equal to the marginal cost of production, then the firm will have losses.
    • [d.] all of the above are true.

21. Which of the following is not part of the definition of a game?

    • [a.] How many players there are.
    • [b.] The strategies for each player.
    • [c.] Who the winner will be.
    • [d.] Each players' payoffs.

22. A good that is nonrival and nonexcludable is called:

    • [a.] a social good.
    • [b.] a private good.
    • [c.] a public good.
    • [d.] an inferior good.

23. The goal of a cartel is to:

    • [a.] reduce output and raise price to earn monopoly profits, which are shared among cartel members.
    • [b.] share information about technology and other matters to benefit all members.
    • [c.] raise output in order to boost profits.
    • [d.] lobby the government to impose price supports to increase the incomes of producers.

24. A good is nonrival if:

    • [a.] the quantity available for other people does not fall when someone consumes it.
    • [b.] supply of the good always exceeds demand of the good.
    • [c.] the quantity available for other people falls when someone consumes it.
    • [d.] demand for the good always exceeds supply of the good.

25. The Clayton Act of 1914 made which of the following illegal?

    • [a.] Tie-in sales.
    • [b.] Mergers.
    • [c.] Price discrimination.
    • [d.] All of the above are illegal if they help create a monopoly or reduce competition.

1. Suppose you have a monopolistic industry with, P = 30-3Q,MR = 30-6Q, and MC = AC = 6.

   • [a.] Graph the demand curve, the marginal revenue curve, the marginal cost curve, and the average cost curve. (2 points)
   • [b.] Calculate the monopolist's equilibrium price, quantity, and profit, and label them on your graph. Also calculate the consumer surplus and the dead weight loss, and label them on your graph. (5 points)
   • [c.] What are the monopolist's profits if she can price discriminate? What is the consumer surplus? The dead weight loss? Is this efficient? Why or why not? (5 points)

2. If firms in a monopolistically competitive industry have positive profits in the short run, what happens in the long run? Describe the chain of events, and draw the resulting long run equilibrium for a monopolistically competitive firm. (6 points)

3. Suppose Americans only care about one issue, and there are two candidates running for election. Their platforms are almost identical. What theory (that was discussed in class) might explain this phenomena? Using this theory describe what is happening here. (4 points)

4. Suppose that there is a duopoly, with market demand given by P = 50-2Q. If both firms formed a cartel, their MR = 50-4Q. The two firms have identical constant cost structures with, MC = AC = 10.

   • [a.] In the Bertrand model what does each firm assume about the other? What is the Bertrand equilibrium price, and why is this so? What is the industry's output? What are the industry's profits? (5 points)
   • [b.] In the Cournot model what does each firm assume about the other? Calculate a price that the Cournot equilibrium price will be less than, also give a price that the Cournot equilibrium price will be greater than, justify your answers. Do this for industry quantity and industry profit as well. (7 points)

5. Suppose we have two firms, Ford and Chevy, that produce trucks. The game below gives the payoffs to the three different pricing strategies each firm can choose, given what the other firm chooses to do.
   Table 1: Duopoly Pricing

   	Chevy, p=12	Chevy, p=14	Chevy, p=16
   Ford, p=12	8,8	12,6	14,2
   Ford, p=14	6,12	10,10	12,6
   Ford, p=16	2,14	6,12	7,7

   • [a.] Define Nash Equilibrium. (2 points)
   • [b.] Does Chevy have a dominant strategy? If so what is it? (2 points)
   • [c.] Does Ford have a dominant strategy? If so what is it? (2 points)
   • [d.] What is the Nash Equilibrium for this game? Why? (2 points)

6. Externalities

   • [a.] What is true about the MSC and MPC, when there is a positive production externality. In words what does this mean? (2 points)
   • [b.] Is the equilibrium outcome efficient? If not is too much being produced or too little? Illustrate this using a graph. (3 points)

   • [c.] What might the government do to correct this situation? Illustrate this solution on a new graph. Label the cost to the government on your graph. (3 points)