Econ 211
Exam 4
Part I: Multiple Choice. Each is worth 2 points.
1.
A)
B)
C)
D)
If the American Medical Association increases the standards necessary to enter medical school or to be licensed as a
physician, the market power of physicians ________ and the income of current physicians ________.
decreases; decreases
increases; decreases
decreases; increases
increases; increases
2.
A)
B)
C)
D)
The reason a natural monopoly does not face new firms entering the industry is a natural monopoly
has legal protection that prevents other firms from competing.
can produce at lower costs than the costs smaller, new companies would have.
earns zero profits so firms don't have a reason to enter the industry.
owns all of the natural resources used in the production of a product.
3.
A monopoly is producing where ATC equals $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level
and the ATC curve is U-shaped, in order to maximize profits this firm should:
increase output.
decrease output.
do nothing; it’s already maximizing profit.
shut down.
A)
B)
C)
D)
4.
A)
B)
C)
D)
5.
The table below shows the quantity demanded at different prices. If this is the demand curve faced by a monopoly with
constant marginal costs of $2, what quantity should the monopoly sell to maximize profit?
6
5
4
3
Price
Quantity
$10
0
$9
1
$8
2
$7
3
$6
4
$5
5
$4
6
A)
B)
C)
D)
If a monopolist finds that the marginal cost of the 6th unit of output is $17 and the marginal revenue from selling it is $15,
then that profit maximizing firm should
increase output and decrease price.
increase output and increase price.
decrease output and increase price.
decrease output and decrease price.
6.
A)
B)
C)
D)
If a monopoly engages in first degree (perfect) price discrimination, then
the marginal revenue curve would perfectly coincide with the demand curve.
the marginal cost curve would perfectly coincide with the average cost curve.
the marginal cost curve would perfectly coincide with the demand curve.
the marginal revenue curve would perfectly coincide with the marginal cost curve.
7.
A)
B)
C)
D)
It is easier for a monopolist to price discriminate between groups for a service than for a product because
it is easier to calculate average willingness-to-pay for services.
it is easier to distinguish between groups of customers for services than customers for products.
it is easier for consumers to resell products than services.
customers for products usually do not differ with respect to their average willingness-to-pay.
8.
A)
B)
C)
D)
Compared to a perfectly competitive industry, a monopolist
produces a larger quantity.
charges a higher price.
increases consumer surplus.
all of the above.
9.
A)
B)
Which of the following is an example of price discrimination?
UPS charges more if a package is sent from New York to Hawaii and less if it is sent from New York to New Jersey.
Frank’s Furniture shop charges no delivery fee for furniture delivered within Dutchess County but charges $40 delivery fee
outside of the county.
Albert pays 25 percent less on prescription drugs because he is a senior citizen.
All are examples of price discrimination.
C)
D)
10.
A)
B)
C)
D)
11.
Jason finds that when a lot of people are logged on to his university's Internet server, it takes much longer for him to
download his homework assignments from the Internet. Access to the university server is an example of
an impure private good because of excludability.
an impure public good because of rivalry in consumption.
a pure public good.
a private good.
A)
B)
C)
D)
A small town of five families is considering having a fireworks display. The value of the display to each family is: $100 for
the Smiths, $200 for the Chungs, $300 for the Wilsons, $400 for the Kents, and $500 for the Jones. The value of the public
good is equal to
$1,500, the sum of the values to each of the five families.
$100, the value to the family that values it the least.
$500, the value to the family that values it the most.
$300, the value to the middle family.
12.
A)
B)
C)
D)
Which of the following is an example of a negative externality?
allowing your cell phone to ring in class
not studying as much for your econ test as you should have so you get a lower grade than you want
getting your car washed
getting a flu immunization shot
13.
A)
B)
C)
D)
If there is a positive externality, the
social benefits will be greater than the private benefits.
external benefits will be greater than the social benefits.
social benefits will be equal to the private benefits.
private benefits will be greater than the social benefits.
14.
A)
B)
C)
D)
Under the Coase Theorem, the role of government in solving externalities is to
provide a subsidy to the party that experiences the external cost.
regulate specifically what the quantity of output can be so that the efficient quantity is obtained.
define and clearly enforce property rights.
put a tax on the party causing the externality.
15.
A)
B)
C)
D)
If government officials set an emissions tax too high:
there will be too much pollution.
there will be too little pollution.
the marginal social benefit of pollution will exceed the marginal social cost of pollution.
Both (A) and (C).
16.
A)
B)
C)
D)
For a good to be nonrival, which of the following must be true?
A person is willing to pay any price to ensure that the product is available.
A person cannot be prevented from consuming that good even if he or she did not pay for it.
One person’s consumption of that good does not decrease another person’s consumption of that good.
A person is not willing to pay for the good because even without paying for it, the person can consume the good anyway.
17.
A)
B)
C)
D)
Consider two firms. Firm 1 is a small company with equipment that is not very energy efficient. The cost of reducing
pollution for firm 1 is very high. Firm 2 is a large company with equipment that can easily be adapted to reduce pollution.
The cost of reducing pollution for firm 2 is very low. The government uses marketable permits as a way to regulate
pollution. Which of the following do you expect to happen and why?
Firm 1 will buy permits because its cost of reducing pollution is high.
Firm 1 will sell permits because it is a small company so it needs the money.
Firm 2 will buy permits because the firm is large so it can afford permits.
Neither firm will buy or sell permits because they would rather use the permits they have and get rid of any pollution they
don't have permits for.
18.
A)
B)
C)
D)
Common resources tend to be overused because:
individuals tend to ignore the cost their use of the resource has on others.
the individual marginal cost is greater than the marginal social cost.
common resources are nonrival and nonexcludable.
the marginal cost of allowing 1 more unit of consumption is zero.
19.
A)
B)
C)
D)
The socially optimal quantity of pollution occurs where:
the marginal social benefit of pollution is equal to the marginal social cost of pollution.
the marginal social benefit of pollution is greater than the marginal social cost of pollution.
the marginal social benefit of pollution is less than the marginal social cost of pollution.
there is no pollution.
20.
A)
B)
C)
D)
The efficient output will be less than the free market output when
marginal social benefit is greater than marginal private benefit.
marginal social benefit and marginal private benefit are equal.
marginal social cost and marginal private cost are equal.
marginal social cost is greater than marginal private cost.
Part II: Answer ONE of the following three questions for 4 points.
21.
Consider two coastal communities. In the first community, there are a lot of independent fishing boats that are fishing the
coastline. In the second community, there is one large fishing company that owns all of the boats that fish the coastline.
Fish in the ocean are considered common property until they are caught—at which point the fish become private property.
Considering the idea of common property rights, in which community would you expect more fish to be caught? Explain
why.
22.
Can an unregulated monopoly earn an economic profit in the long run? Explain your answer.
23.
Why is the definition of the “relevant market” important in antitrust cases?
Part III: You must answer EACH question.
24. The table below shows the marginal value of each unit of a good to Amy, Bob, and Carl. The good is a pure public good. Assume
the price of the good is equal to the marginal cost of providing the good, $100 for each unit.
Quantity
of the Good
1
2
3
4
Amy's
Marginal Value
80
60
50
30
Bob's
Marginal Value
90
50
30
10
Carl's
Marginal Value
110
95
75
40
a) What quantity of the good would be purchased by Amy, Bob, and Carl if the good were sold in the market?
b) What quantity would be the efficient quantity to have produced? Explain.
25. The graph below depicts a monopolist.
a) What is the profit-maximizing output and price for the monopolist?
b) How much profit will the monopolist earn?
c) Suppose that the Average Cost curve shifts down by $2 due to a drop in insurance premiums. What output and price should the
monopolist now set?
26. The graph below shows the demand, supply, and marginal social benefit for a product.
a) Does this product have a positive externality, a negative externality, or no externality? Explain. [2 points]
The market does have a positive externality (MSB) which corresponds to the demand curve. So at any given point on the demand
curve, as more of the product is demanded the more benefit which can come about.
b) If there is no government intervention, will the market result in the efficient quantity of the good? Explain. In your explanation,
state what quantity will be the market quantity and what the efficient quantity is if it is different from the market quantity.
c) Would the government have to impose a tax or grant a subsidy to correct the market failure? What would be the necessary perunit tax or per-unit subsidy?