Question 1 (1 point)
Why does asymmetric information limit contracts from solving incentive conflicts?
a. Because of unequal information, it is difficult and costly for parties to ascertain whether or not other parties to the agreement have honored the terms of the contract.
b. All parties share in the same information but because of mutual mistrust they may not be able to reach agreement.
c. All parties share in the same information and therefore are unwilling to give into the other parties requests.
d. Contracting parties can agree to take certain actions and if they do not, they can be heavily penalized because of the equal availability of information to everyone.
e. Parties in the contracts are able to easily ascertain whether others are honoring the terms of the contract but are reluctant to reach formal agreements.
Question 2 (1 point)
Firms that use price discrimination rather than other forms of pricing strategies do so because
a. Their customers have the same price elasticities of demand and can be easily separated into groups.
b. Their customers have the same price elasticities of demand and it is not possible to identify and segment them
c. Their customers have different price elasticities of demand but it is not possible to identify and segment them based on their demand characteristics.
d. Their customers have the different price elasticities of demand and can be easily separated into groups based on their demand characteristics.
e. Their customers do not want to buy their products in large quantities and therefore block pricing is not an effective strategy.
Question 3 (1 point)
You own a theater with 200 seats. The demand for seats is Q = 300 -100 P. All of your costs are fixed (no variable costs, marginal costs are zero). The price elasticity of demand at the point where you maximize profits is:
a. There is not enough information to tell.
b. Where the price elasticity of demand is inelastic.
c. Where the price elasticity of demand is elastic.
d. Where the price elasticity of demand is unitary elastic.
Question 4 (1 point)
Assume you are a small restaurant owner and there are few if any barriers to entry in your industry. If the population in the immediate area of the restaurant increases, what do you expect will happen to the supply and demand curves for your services (assuming restaurant meals are normal goods)? To the equilibrium price and quantity of meals served?
a. Because the demand curve shifts to the left, the equilibrium price and quantity of meals sold will decrease.
b. Because the supply curve shifts to the right, the equilibrium price of meals sold will decrease while the equilibrium quantity will rise.
c. Because of higher demand for restaurant meals, the firm's supply curve will shift to the right to eliminate excess demand.
d. Because the supply curve shifts to the left, the equilibrium price of meals sold will increase and equilibrium quantity of meals sold will decline.
e. Because the demand curve shifts to the right, the equilibrium price and quantity of meals sold will increase.
Question 5 (1 point)
Referring to the previous question, which of the following statements best explains what an economist would expect to happen.
a. The restaurant's profits will increase initially and because there are few barriers to entry, new competitors will enter and take away some of the market share until the restaurant again earns a normal return on investment.
b. The restaurant's profits will increase and it will be able to continue to capture value.
c. The restaurant's profits will remain the same because of its first mover advantage.
d. The restaurant's profits will decrease due to decreasing economies of scale.
e. It is not possible to predict what will happen since this is an oligopoly.
Question 6 (1 point)
Assume you run a widget factory and you are considering hiring another worker. The worker can produce 500 widgets per month. You can sell your widgets for $5 each. How much additional revenue is generated by hiring this worker? What is the value called?
a. $2,500 per month, marginal revenue product
b. $100 per month, marginal revenue product
c. $100 per month, average revenue per worker
d. $2,500 per month, average revenue per worker
e. $500 per month, marginal revenue product.
Question 7 (1 point)
What is the primary way to distinguish monopolistic competition from oligopoly?
a. Advertising expenditures
b. Price elasticity of demand
c. Degree of patent protection
d. The degree of product differentiation
e. Number of firms in the industry
Question 8 (1 point)
Why does increasing competition in an industry reduce the ability of firms to capture value?
a. There are more regulations adding to costs.
b. The firm's demand curve becomes more inelastic due to more competition, and that prevents it from increasing the mark up between average cost and price.
c. All of the above.
d. Producer surplus falls because of a flatter supply curve.
e. The firm's demand curve becomes more elastic or flatter and that reduces its ability to mark up prices above marginal cost.
Question 9 (1 point)
When retailers offer coupons or mail in rebates to customers, they are engaging in a form of
a. Second degree price discrimination because those who buy more of the product get a larger discount
b. First degree price discrimination because each person can decide whether or not to spend the time to redeem the coupons or rebates
c. Two part tariff because people need to invest in the buying the product before getting the coupon or rebate.
d. Third degree price discrimination because customers are segmented into groups based on their willingness to spend the time needed to redeem the coupon or rebate, and each group is effectively charged a different price.
e. Cross subsidies because the customers who don't redeem the coupons or rebates are subsidizing those who do.
a. a firm develops a dominant market share to prevent new firms from entering
b. when neither firm has an incentive to change its price of bid given the other firm's price or bid
c. a firm selects the same strategy no matter what its rival does
d. when firms maximize their joint profits
e. both firms have equal payoffs
Question 11 (1 point)
Some companies sell one product at low prices or low mark-ups and complementary products at higher prices or mark-ups For example: razors and razor blades, printers and print cartridges, or appliance/auto manufacturers and extended service contracts/warranties. What is the name of this strategy?
a. Price discrimination
b. Cost plus pricing
c. Two part tariff
d. Group pricing
e. Block pricing
Question 12 (1 point)
Since the ultimate constraint on the exercise of market power is the price elasticity of demand for its products or service:
a. the greater the price elasticity of demand, the more a monopolist will be unable to establish both high prices and high volumes.
b. the existence of close substitutes does not affect a firm's market power.
c. Advertising to create stronger brand loyalty does not help to increase market power.
d. firms do not want to find ways to make their demand curves more inelastic.
e. firms facing demand curves that are inelastic are not able to raise prices to increase profits
Question 13 (1 point)
The difference between a competitive firm's short and long run supply curve is:
a. The short run supply curve is the firm's average variable cost curve above its marginal cost curve and the long run supply curve is the firm's average total cost curve above its marginal cost curve.
b. Since it is a price taker, the competitive firm's supply curve is horizontal at the market price.
c. There is no difference between a competitive firm's short and long run supply curve.
d. The only difference is that in the short run, the firm will shut down if it does not cover total costs but it will continue to operate in the long run as long as price exceeds average variable cost.
e. The short run supply curve is the firm's marginal cost curve above its average variable cost curve and the long run supply curve is the firm's marginal cost curve above its average total cost curve.
Question 14 (1 point)
The following appeared in The Washington Post on March 9, 1994. "ANAHEIM, CALIFORNIA?Hiroshi Fujishige is a successful strawberry farmer. For over 40 years he has been earning a profit growing and selling strawberries and other produce from his 58-acre farm. Mr. Fujishige could make even more money if he stopped growing strawberries. His 58-acre strawberry patch is located across the street from Disneyland. The people from Disney have offered him $32 million just to lease the farm; developers have offered as much as $2 million per acre to buy the land. But Mr. Fujishige, who lives in a tiny house on the farm he bought 45 years ago (for $2500), isn't selling. 'I'm a farmer, and I've been farming since I got out of high school in 1941,' he says. As long as he can make a profit from strawberries, he says, he'll keep growing them." Which of the following statements is most likely true?
a. Mr. Fujishige's is earning both an economic and accounting profit.
b. Mr. Fujishige is earning an accounting profit which is the same as his economic profit.
c. Mr. Fujishige is earning an economic profit but not an accounting profit.
d. Mr. Fujishige is earning neither an economic nor an accounting profit.
e. Mr. Fujishige is not earning an economic profit but he is earning an accounting profit.