Your Name: _____________________________

Class:  Microeconomics    (Sections 10-12; MW and TTh)  

Exam 2      Exam Dates:  Wednesday-Thursday, October 30-31, 2002

Instructions:

I)   On your Scantron card you must print three things:

            1) Print your full name clearly;

            2) Print the day and time of your section (for example MW 1:25);

            3) Print the number I have written in ink on the upper right corner of

                your copy of this test.  (This number tells me which version of the

                test you have.  Without it your test cannot be graded properly and

                you get no credit for your answers.)    

II)   Answer on your Scantron card, using a #2 pencil. 

III)  Warning:  SOME QUESTIONS MUST BE ANSWERED SEVERAL

       TIMES!  Such questions will begin with a phrase such as this: 

            (Repeat answer on lines 37, 38 and 39)

                        Remember to do it!

 

Questions:

 

 

Use the following to answer question 1:

 

 

      1.   (Repeat answer on line 27)  Refer to the graph above.  Given a tax of t on suppliers, revenue collected is:

            A)  B and C.  Suppliers pay B.  Consumers pay C.

            B)   B and C.  Suppliers pay C.  Consumers pay B.

            C)   A, B and C.  Suppliers pay A.  Consumers pay B.

            D)  A, B and C.  Suppliers pay B.  Consumers pay A.

 

      2.   (Repeat answer on lines 28 and 29)  Social welfare is maximized when price equals:

            A)  marginal cost.

            B)   marginal revenue.

            C)   average total cost.

            D)  average variable cost.

 

      3.   Patents are given on new inventions to:

            A)  help firms earn positive economic profit.

            B)   encourage firms to devote resources to the development of new inventions.

            C)   prevent firms from earning positive economic profits.

            D)  guarantee that the products created by new inventions are affordable to consumers.

 

Use the following to answer question 4:

 

 

      4.   (Repeat answer on lines 30 and 31)  Refer to the graph above. If the wage for soldiers is set too low at P = 6, a military draft will be needed to satisfy the demand for soldiers, and the resulting dead weight loss (also known as the "welfare loss" or efficiency loss) will be equal to:

            A)  120.

            B)   320.

            C)   480.

            D)  720.

 

      5.   (Repeat answer on line 32)  The profit-maximization assumption of economic theory is an imperfect fit for reality because:

            A)  all real firms want to maximize long-term profits rather than short-run profits.

            B)   all real firms want to maximize their share of the market.

            C)   all real firms want to maximize their sales growth rate.

            D)  often the decision makers of a firm are not its owners, but are instead managers with their own priorities.

 

      6.   Having government buy patent rights has been suggested as an alternative to regulating the price charged by a patent-holding monopolist. The major benefit of this approach is that:

            A)  government would have to increase taxes to cover the cost of the buyout.

            B)   it would be difficult for government to determine which patents to buy.

            C)   it could have negative incentive effects.

            D)  it would maintain the incentive for companies to engage in research and development.

 

      7.   Which of the following statements best summarizes the text's conclusions regarding the likelihood of technological innovation in a monopolized industry?

            A)  Monopolies earn the profits needed for research and development and have the strongest incentive to innovate.

            B)   Monopolies may earn the profits needed for research and development, but they seldom have the incentive to innovate.

            C)   Monopolies seldom earn the profits needed for research and development, but they have the strongest incentive to innovate.

            D)  Monopolies seldom earn the profits needed for research and development and they have no incentive to innovate.

 

Use the following to answer question 8:

 

 

      8.   Refer to the graph above. Assume the market is initially in equilibrium at price P1. If government imposes a per unit tax equal to the distance from point a to point c in the graph, the welfare loss triangle from this tax is equal to area:

            A)  cfg.

            B)   beg.

            C)   abc.

            D)  bcd.

 

      9.   (Repeat answer on line 33)  The market structure in which many different firms supply similar, but slightly differentiated products, is:

            A)  monopoly.

            B)   oligopoly.

            C)   monopolistic competition.

            D)  perfect competition.

 

     10.   If the response of quantity demanded to a change in price is infinitely large, the burden of a tax on suppliers is borne:

            A)  entirely by the suppliers.

            B)   entirely by the consumers.

            C)   mostly by the suppliers, and partly by the consumers, if the demand curve is inelastic.

            D)  partly by the suppliers, and mostly by the consumers, if the demand curve is elastic.

 

     11.   Which of the following is the result of the monitoring problem?

            A)  A firm successfully erases all evidence of illegal activity.

            B)   Insufficient data is available to prosecute two colluding firms.

            C)   U.S. managers' salaries are about four times that of comparable managers in Japan.

            D)  A firm emits pollution that costs the government money to clean up.

 

     12.   (Repeat answer on lines 34 and 35) An important difference between price ceilings and taxes is that price ceilings __________ and taxes __________.

            A)  create shortages; do not

            B)   create shortages; result in no dead weight loss

            C)   result in dead weight loss; do not

            D)  result in dead weight loss; create shortages

 

     13.   Long-run equilibrium for firms in monopolistically competitive industries is similar to that for firms in perfect competition in that:

            A)  price equals minimum possible average total cost.

            B)   price equals marginal cost.

            C)   marginal revenue equals average total cost.

            D)  economic profit equals zero.

 

     14.   (Repeat answer on line 36 and 37)  X-inefficient firms:

            A)  are prevented from operating efficiently by government regulations.

            B)   make higher profits by operating inefficiently than would be possible by operating efficiently.

            C)   are owned by individuals who are not interested in profits.

            D)  operate less efficiently than they are technically capable of producing.

 

     15.   If the supply curve is vertical the burden of a tax on suppliers is borne:

            A)  entirely by the suppliers.

            B)   entirely by the consumers.

            C)   mostly by the suppliers, and partly by the consumers, if the demand curve is inelastic.

            D)  partly by the suppliers, and mostly by the consumers, if the demand curve is elastic.

 

     16.   (Repeat answer on lines 38, 39, 40 and 41)  As discussed in lecture the following statement(s) is/are true about the welfare cost of price discrimination compared to the price welfare cost of monopoly:  

            A)  If the price discriminator only charges prices above the monopoly price, welfare costs are likely to be larger than for monopoly.

            B)   If the price discriminator only charges prices which are equal to or lower than the monopoly price, welfare costs will definitely be lower than for monopoly.

            C)   If the price discriminator charges prices which are both higher and lower than the monopoly price, welfare costs will be be less than for monopoly.

            D)  Three of the other answers are correct.

            E)   A is wrong, but B and C are definitely right.

 

     17.   In the United States lobbying is:

            A)  not important to most monopolies.

            B)   one of the tools used by firms to acquire a monopoly.

            C)   illegal.

            D)  important to firms in perfectly competitive markets.

 

     18.   In a constant-cost industry, long-run market supply is:

            A)  downward-sloping.

            B)   horizontal.

            C)   upward-sloping.

            D)  vertical.

 

Use the following to answer question 19:

 

 

     19.   Refer to the graph above. Initial market equilibrium is at point H. When government imposes a per unit tax, supply shifts from S0 to S1. The effect of this tax is to:

            A)  raise the price consumers pay from D to C.

            B)   raise the price consumers pay from C to A.

            C)   raise the equilibrium quantity sold from E to F.

            D)  raise the price sellers charge from C to B.

 

     20.   (Repeat answer on line 42)  The problem of technological lock-in occurs because:

            A)  more efficient technologies replace less efficient ones.

            B)   less efficient technologies replace more efficient ones.

            C)   prior use of a technology makes the adoption of subsequent technologies difficult.

            D)  prior use of a technology makes the rewards for subsequent innovations greater.

 

     21.   (Repeat answer on line 43)  A(n) __________ contract is defined as an agreement in which the incentives of both parties match their goals as closely as possible.

            A)  X-inefficiency

            B)   monitoring

            C)   incentive-compatible

            D)  corporate takeover

 

     22.   Cost-conscious consumers use cents-off coupons when purchasing items such as soap or frozen dinners.  As a result, they pay a lower price.  This is an example of:

            A)  welfare loss.

            B)   breaking even.

            C)   quantity discrimination.

            D)  price discrimination.

 

     23.   (Repeat answer on line 44 and 45)  The cartel model of oligopoly assumes that:

            A)  a monopoly acts as if it is an oligopoly.

            B)   oligopolies act as if they were perfectly competitive.

            C)   oligopolies act as if they were monopolists.

            D)  monopolistically competitive firms act as if they were monopolists.

 

     24.   Collusion is most likely occur in a(n):

            A)  monopoly.

            B)   oligopoly.

            C)   monopolistically competitive industry.

            D)  perfectly competitive industry.

 

     25.   (Repeat answer on lines 46, 47 and 48)  __________ activities are designed to transfer surplus from one group to another.

            A)  Welfare

            B)   Surplus

            C)   External

            D)  Rent-seeking

 

     26.   (Repeat answer on lines 49 and 50)  The demand curve faced by a perfectly competitive firm is the same as:

            A)  its marginal cost curve.

            B)   its marginal revenue curve.

            C)   its average total cost curve.

            D)  its average fixed cost curve.

 

 


Answer Key -- MicroEc Ex 2--Taxes + Market Theory

 

      1.   A         B and C.  Suppliers pay B.  Consumers pay C.

LO: 7-3

Page: 162

            Origin:  GTA Subset--Taxes + Market Thy....12

      2.   A         marginal cost.

LO: 12-5

Page: 270

            Origin:  GTA Subset--Taxes + Market Thy....47

      3.   B          encourage firms to devote resources to the development of new inventions.

LO: 12-7

Page: 274

            Origin:  GTA Subset--Taxes + Market Thy....54

      4.   A         120.

LO: 7-4

Page: 167

            Origin:  GTA Subset--Taxes + Market Thy....15

      5.   D         often the decision makers of a firm are not its owners, but are instead managers with their own priorities.

LO: 14-1

Page: 306

            Origin:  GTA Subset--Taxes + Market Thy....75

      6.   D         it would maintain the incentive for companies to engage in research and development.

LO: 12-7

Page: 274

            Origin:  GTA Subset--Taxes + Market Thy....57

      7.   B          Monopolies may earn the profits needed for research and development, but they seldom have the incentive to innovate.

LO: 14-6

Page: 319

            Origin:  GTA Subset--Taxes + Market Thy....87

      8.   C          abc.

LO: 7-1

Page: 159

            Origin:  GTA Subset--Taxes + Market Thy....2

      9.   C          monopolistic competition.

LO: 13-2

Page: 286

            Origin:  GTA Subset--Taxes + Market Thy....61

     10.   A         entirely by the suppliers.

LO: 7-3

Page: 161

            Origin:  GTA Subset--Taxes + Market Thy....7

     11.   C          U.S. managers' salaries are about four times that of comparable managers in Japan.

LO: 14-1

Page: 307

            Origin:  GTA Subset--Taxes + Market Thy....78

     12.   A         create shortages; do not

LO: 7-4

Page: 165

            Origin:  GTA Subset--Taxes + Market Thy....11

     13.   D         economic profit equals zero.

LO: 13-3

Page: 289

            Origin:  GTA Subset--Taxes + Market Thy....67

     14.   D         operate less efficiently than they are technically capable of producing.

LO: 14-2

Page: 308

            Origin:  GTA Subset--Taxes + Market Thy....80

     15.   A         entirely by the suppliers.

LO: 7-3

Page: 161

            Origin:  GTA Subset--Taxes + Market Thy....9

     16.   D         Three of the other answers are correct.

LO: (None)

Page: (None)

            Origin:  GTA Subset--Taxes + Market Thy....55

     17.   B          one of the tools used by firms to acquire a monopoly.

LO: 14-4

Page: 314

            Origin:  GTA Subset--Taxes + Market Thy....84

     18.   B          horizontal.

LO: 11-7

Page: 254

            Origin:  GTA Subset--Taxes + Market Thy....29

     19.   D         raise the price sellers charge from C to B.

LO: 7-1

Page: 158

            Origin:  GTA Subset--Taxes + Market Thy....5

     20.   C          prior use of a technology makes the adoption of subsequent technologies difficult.

LO: 14-6

Page: 321

            Origin:  GTA Subset--Taxes + Market Thy....91

     21.   C          incentive-compatible

LO: 14-1

Page: 307

            Origin:  GTA Subset--Taxes + Market Thy....76

     22.   D         price discrimination.

LO: 12-4

Page: 269

            Origin:  GTA Subset--Taxes + Market Thy....44

     23.   C          oligopolies act as if they were monopolists.

LO: 13-5

Page: 292

            Origin:  GTA Subset--Taxes + Market Thy....72

     24.   B          oligopoly.

LO: 13-5

Page: 292

            Origin:  GTA Subset--Taxes + Market Thy....74

     25.   D         Rent-seeking

LO: 7-5

Page: 167

            Origin:  GTA Subset--Taxes + Market Thy....16

     26.   B          its marginal revenue curve.

LO: 11-2

Page: 242

            Origin:  GTA Subset--Taxes + Market Thy....25