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Intermediate Microeconomics

Practice final exam

1. When a per unit tax is imposed on the sale of a product of a monopolist,


the resulting price increase will
a. always be less than the tax.
b. always be more than the tax.
c. always be less than if a similar tax were imposed on firms in a
competitive market.
d. not always be less than the tax.

Use the following information to answer the questions below.

Barbara is a producer in a monopoly industry. Her demand curve, total


revenue curve, marginal revenue curve and total cost curve are given as
follows:

Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q TC = 4Q MC = 4

2. How much profit will she make?


a. -996
b. 0
c. 1,296
d. 1,568
e. none of the above

3. Some grocery stores are now offering customers coupons which entitle
them to a discount on certain items on their next visit when they go
through the check-out line. This practice is called:
a. intertemporal price discrimination.
b. third degree price discrimination.
c. two-part tariff.
d. bundling.
e. none of the above.

4. Which of the following is true for both perfect and monopolistic


competition?
a. Firms produce a differentiated product.
b. Firms face a downward sloping demand curve.
c. Firms produce a homogeneous product.
d. There is freedom of entry and exit in the long run.

5. In the Cournot duopoly model, each firm assumes that


a. rivals will match price cuts, but will not match price increases.
b. rivals will match all reasonable price changes.
c. the price of its rival is fixed.
d. the output level of its rival is fixed.
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6. What is the value of the Lerner index under perfect competition?


a. 1.
b. 0.
c. Infinity.
d. Two times the price.

7. The situation in which buyers are able to affect the price of a good is
referred to as ______________ power.
a. monopoly
b. purchasing
c. monopsony
d. countervailing

8. If a monopolist's profits were taxed away and redistributed to its


consumers,
a. inefficiency would remain because output would be lower than under
competitive conditions.
b. inefficiency would remain, but not because output would be lower than
under competitive conditions.
c. efficiency would be obtained because output would be increased to the
competitive level.
d. efficiency would be obtained because output would be increased and
profits removed.

9. Monopolistically competitive firms have monopoly power because they


a. have downward sloping demand curves.
b. are great in number.
c. have freedom of entry.
d. are free to advertise.

10. If a monopolist sets her output such that marginal revenue, marginal
cost and average total cost are equal, economic profit must be:
a. negative.
b. positive.
c. zero.
d. indeterminate from the given information.

11. The Cournot equilibrium can be found by treating _____ as a pair of


simultaneous equations and by finding the combination of Q1 and Q2 that
satisfies both equations.
a. the reaction curves for firms 1 and 2
b. the market supply curve and the market demand curve
c. the contract curve and the market demand curve
d. the contract curve and the market supply curve
e. the firm's supply curve and the firm's demand curve

12. A tennis pro charges $15 per hour for tennis lessons for children, and
$30 per hour for tennis lessons for adults. The tennis pro is practicing
a. first-degree price discrimination.
b. second-degree price discrimination.
c. third-degree price discrimination.
d. fourth-degree price discrimination.
e. fifth-degree price discrimination.
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13. In the Stackelberg model, there is an advantage


a. to waiting until your competitor has committed herself to a
particular output level before deciding on your output level.
b. to being the first competitor to commit to an output level.
c. to the firm with a dominant strategy.
d. to producing an output level which is identical to a monopolist's
output level.

14. Discrimination based upon the quantity consumed is referred to as


______________ price discrimination.
a. first-degree
b. second degree
c. third-degree
d. group

15. When people pay a monthly fee to have a hookup to the telephone
company's line plus a fee for each call actually made, we would say that
the telephone company is using
a. limit pricing.
b. a two-part tariff.
c. second-degree price discrimination.
d. two stage price discrimination.

16. The monopolist that maximizes profit


a. imposes a cost on society because the selling price is above marginal
cost.
b. imposes a cost on society because the selling price is equal to
marginal cost.
c. does not impose a cost on society because the selling price is above
marginal cost.
d. does not impose a cost on society because price is equal to marginal
cost.

17. The market structure in which there is interdependence among firms is


a. monopolistic competition.
b. oligopoly.
c. perfect competition.
d. monopoly.

18. A third-degree price discriminating monopolist can sell its output


either in the local market or on an internet auction site (or both).
Having sold all of its output it discovers that the marginal revenue in
the local market is $20 while its marginal revenue on the internet
auction site is $30. To maximize profits the firm should
a. have sold more output in the local market and less at the internet
auction site.
b. do nothing until it acquires more information on costs.
c. have sold less output in the local market and more on the internet
auction site.
d. sell less in both markets until marginal revenue is zero.
e. sell more in both markets until marginal cost is zero.
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19. In which oligopoly model(s) do firms earn zero profit?


a. Cournot.
b. Bertrand.
c. Stackelberg.
d. Oligopoly firms always earn positive economic profits.

20. The marginal cost of a monopolist is constant and is $10. The marginal
revenue curve is given as follows:

MR = 100 - 2Q

The profit maximizing price is


a. $70
b. $65
c. $60
d. $55
e. $50

21. Relative to the Nash equilibrium in the Cournot model, the Nash
equilibrium in the Bertrand model with homogeneous products
a. results in the same output but a higher price.
b. results in the same output but a lower price.
c. results in a larger output at a lower price.
d. results in a smaller output at a higher price.
e. any of the above may result.

22. A firms sells an identical product to two groups of consumers, A and B.


The firm has decided that third-degree price discrimination is feasible
and wishes to set prices that maximize profits. Which of the following
best describes the price and output strategy that will maximize profits?
a. PA = PB = MC.
b. MRA = MRB.
c. MRA = MRB = MC.
d. (MRA - MRB) = (1 - MC).

23. A local restaurant offers "early bird" price discounts for dinners
ordered from 4:30 to 6:30 PM. This is an example of
a. peak-load pricing.
b. second-degree price discrimination.
c. a two-part tariff.
d. tying.
e. none of the above.
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Use the following diagram to answer the questions below.

The marginal value curve and expenditure curves in the diagram below are
those of a monopsony.

24. What quantity will the monopsonist purchase to maximize profit?


a. Q1.
b. Q2.
c. Q3.
d. Q4.
e. none of the above.

25. When a drug company develops a new drug it is granted a _____ making it
illegal for other firms to enter the market until the _____ expires.
a. franchise; franchise
b. copyright; copyright
c. government license; government license
d. patent; patent

26. Rather than charging a single price to all customers, a firm charges a
higher price to men and a lower price to women. By engaging in this
practice, the firm:
a. is trying to reduce its costs and therefore increase its profit.
b. is engaging in an illegal activity that is prohibited by the Sherman
Antitrust Act.
c. is attempting to convert producer surplus into consumer surplus.
d. is attempting to convert consumer surplus into producer surplus.
e. both (a) and (c) are correct.
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27. McDonald's restaurant located near the high school offered a Tuesday
special for high school students. If high school students showed their
student ID cards, they would be given 50 cents off any special meal.
This practice is an example of:
a. collusion.
b. price discrimination.
c. two-part tariff.
d. bundling.
e. tying.

28. Third-degree price discrimination involves


a. charging each consumer the same two part tariff.
b. charging lower prices the greater the quantity purchased.
c. the use of increasing block rate pricing.
d. charging different prices to different groups based upon differences
in elasticity of demand.

29. When a monopolist engages in perfect price discrimination,


a. the marginal revenue curve lies below the demand curve.
b. the demand curve and the marginal revenue curve are identical.
c. marginal cost becomes zero.
d. the marginal revenue curve becomes horizontal.

30. An electric power company uses block pricing for electricity sales.
Block pricing is an example of
a. first-degree price discrimination.
b. second-degree price discrimination.
c. third-degree price discrimination.
d. Block pricing is not a type of price discrimination.

31. Which of the following is true at the output level where P=MC?
a. The monopolist is maximizing profit.
b. The monopolist is not maximizing profit and should increase output.
c. The monopolist is not maximizing profit and should decrease output.
d. The monopolist is earning a positive profit.

32. Bundling raises higher revenues than selling the goods separately when
a. demands for two goods are highly positively correlated.
b. demands for two products are mildly positively correlated.
c. demands for two products are negatively correlated.
d. there is a perfect positive correlation between the demands for two
goods.
e. the goods are complementary in nature.

33. Monopoly power results from the ability to


a. set price equal to marginal cost.
b. equate marginal cost to marginal revenue.
c. set price above average variable cost.
d. set price above marginal cost.

34. Excess capacity in monopolistically competitive industries results


because in equilibrium
a. each firm's output rate is too great to minimize average cost.
b. each firm's output rate is too small to minimize average cost.
c. firms make positive economic profit.
d. price equals marginal cost.
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35. The market structure in which strategic considerations are most


important is
a. monopolistic competition.
b. oligopoly.
c. pure competition.
d. pure monopoly.

36. To find the profit maximizing level of output, a firm finds the output
level where
a. price equals marginal cost.
b. marginal revenue and average total cost.
c. price equals marginal revenue.
d. all of the above.
e. none of the above.

Use the following information to answer the questions below.

Suppose mountain spring water can be produced at no cost and that the demand
and marginal revenue curves for mountain spring water are given as follows:

Q = 6000 - 5P MR = 1200 - 0.4Q

37. What will be the price in the long run if the industry is a Cournot
duopoly?
a. $400
b. $600
c. $800
d. $900
e. Competition will drive the price to zero.

38. Which of the following is NOT true for monopoly?


a. The profit maximizing output is the one at which marginal revenue and
marginal cost are equal.
b. Average revenue equals price.
c. The profit maximizing output is the one at which the difference
between total revenue and total cost is largest.
d. The monopolist's demand curve is the same as the market demand curve.
e. At the profit maximizing output, price equals marginal cost.

Use the following information to answer the questions below.

A monopolist faces the following demand curve, marginal revenue curve, total
cost curve and marginal cost curve for its product:

Q = 200 - 2P

MR = 100 - Q

TC = 5Q

MC = 5
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39. Suppose that a tax of $5 for each unit produced is imposed by state
government. What is the profit maximizing level of output?
a. 0
b. 90
c. 95
d. 100
e. none of the above

40. Suppose that in addition to the tax, a business license is required to


stay in business. The license costs $1000. What is the profit maximizing
level of output?
a. 0
b. 90
c. 95
d. 100
e. none of the above

The following integrated series of questions relates to several sections in


the text.

Use the following information to answer the questions below:

Suppose a stream is discovered whose water has remarkable healing powers.


You decide to bottle the liquid and sell it. The market demand curve is
linear and is given as follows:

P = 30 - Q

The marginal cost to produce this new drink is $3.

41. What price would this new drink sell for if it sold in a competitive
market?
a. 0
b. $3
c. $13.50
d. $16.50
e. $27

42. What is the monopoly price of this new drink?


a. 0
b. $3
c. $13.50
d. $16.50
e. $27

43. What will be the price of this new drink in the long run if the industry
is a Bertrand duopoly?
a. $3
b. $9
c. $12
d. $13.50
e. none of the above
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44. A situation in which each firm is doing the best it can, given what its
rivals are doing is called a
a. Nash equilibrium.
b. Cooperative equilibrium.
c. Stackelberg equilibrium
d. zero sum game.

45. After the policy was implemented, the quantity traded became
a. 1000.
b. 2000.
c. 3000.
d. 4000.
e. between 2000 and 4000, but the amount depends upon producers'
reactions, which are uncertain.

46. Before this policy was implemented, producer surplus was


a. $10.
b. $2000.
c. $4000.
d. $6000.
e. $12000.
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For the following questions, consider the diagram below.

47. In order to eliminate international trade in sugar altogether, this


country would have to impose a tariff of
a. $25.
b. $50.
c. $75.
d. $150.
e. $175.

48. The policy shown is a


a. price floor of $50.
b. price support of $50.
c. price ceiling of $30.
d. quota of 2000.
e. quota of 4000.
Page 1

1. d
2. c
3. b
4. d
5. d
6. b
7. c
8. a
9. a
10. b
11. a
12. c
13. b
14. b
15. b
16. a
17. b
18. c
19. b
20. d
21. c
22. c
23. a
24. c
25. d
26. d
27. b
28. d
29. b
30. b
31. c
32. c
33. d
34. b
35. b
36. e
37. a
38. e
39. b
40. b
41. b
42. d
43. a
44. a
45. b
46. b
47. c
48. d

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