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Consider a shop that produces bagels in a monopolistically competitive market.

Consider a shop that produces bagels in a monopolistically competitive market. The graph below shows its demand curve (labeled Demand), marginal revenue curve (labeled MR), marginal cost curve (labeled MC), and average cost curve (labeled AC). Assume that the company is operating in the short run.
See attached files for full problem description.

Consider a shop that produces bagels in a monopolistically competitive
market. The graph below shows its demand curve (labeled Demand),
marginal revenue curve (labeled MR), marginal cost curve (labeled MC),
and average cost curve (labeled AC). Assume that the company is
operating in the short run.
The profit-maximizing level of output is _____ bagels at a price of
______ each. ( 500, $2.50; 400, .50; 700, $1.00; 500, $1.00; 400,
$$2.50; 400, $1.50)
Taking the profit-maximizing level of output and price into account, the
shop's profit equals ______.( $1000, $500, $600 or $400)
Top of Form
Which of the following statements best describes the size of the market
for bagels? Relative to the long-run
equilibrium, there are: (An efficient number of shops. Too many shops in
the industry. Or Too few shops in
the industry.)
 
In which of the following market structures do firms produce at an
output level that displays both allocative and productive efficiency?
Perfect competition
II. Monopolistic competition
III. Monopoly
IV. Oligopoly
The table below shows the four-firm concentration ratio of various
industries.
Source: U.S. Census Bureau, 1997 Economic Census -- Concentration Ratios
in Manufacturing
Which of the following industries is the closest to perfect competition?
(Plastics and rubber product manufacturing, Cigarettes, Coffee and tea
manufacturing, Petroleum and coal products or Aerospace product and
parts)
Consider a town in which only two residents, Mike and Leah, own wells
that produce water safe for drinking. Mike and Leah can pump and sell as
much water as they want at no cost. For them, revenue equals profit. The
table below shows the town's demand schedule for water.
If the market for water were perfectly competitive, the equilibrium
price of water would be ____ per gallon, and the market output would be
______ gallons. ($0; 120, $120; 0, $100; 20 or $60; 60)
Mike and Leah form a cartel and behave as a monopolist. Now the
profit-maximizing price is ____,
and the total output is _____ gallons. ($60; 60, $120; 0, $100; 20, $0,
60; or $0, 120)
As part of their cartel agreement, Mike and Leah agree to split
production equally.
Mike's profit is ______, and Leah's profit is _______. ($1,600; $1,600,
$1,000; $1,000, $1,800; $1,800 or $1,200; $1,200)
Suppose that Mike and Leah have been successfully operating as a cartel.
They each charge the monopoly price and sell half of the monopoly
quantity. Then one night before going to sleep, Mike says to himself,
"Leah and I aren't the best of friends anyway. If I increase my
production by 10 gallons more than the cartel amount, I can increase my
profit even though her profit goes down. I will do that starting
tomorrow." After implementing his new plan, Mike's profit becomes
______, and total profit (the sum of the profits of Mike and Leah)
becomes _______. (Hint: if Mike increases his quantity, total market
quantity will increase, which in turn will affect the market price of
water.) ($1,600; $3,200, $3,500; $5,300, $3,600; $0 or $2,000; $3,500)
Because Mike has deviated from the cartel agreement and increased his
output of water by 10 gallons more than the cartel amount, Leah decides
that she too will increase her production by 10 gallons more than the
cartel amount. After Leah increases her production, Mike's profit
becomes _______, and Leah's profit becomes _______. (Hint: if Mike and
Leah increase their production levels, total market quantity will
increase, which in turn will affect the market price of water.) ($1,800;
$1,800, $1,400; $1,800, $1,600; $1,600 or $2,000; $2,000)
Consider the market for Picasso paintings. Assume that there are four
galleries that sell Picasso paintings and they have formed a cartel.
Suppose there are a limited number of Picasso paintings in existence,
making it difficult for new galleries to acquire Picasso paintings and
enter this market. What effect does this have on the sustainability of
the cartel? (This has no effect on the sustainability of the cartel.,
This makes the cartel less sustainable. Or This makes the cartel more
sustainable.)
Smart Light is one of four firms that sell desk lamps. The graph below
shows Smart Light's kinked demand curve (D1D2) and the resulting
marginal revenue curve (MR1MR2). The graph also shows two possible
marginal cost curves (MC1 and MC2). Assume Smart Light's marginal cost
is represented by MC1.
Smart Light will set a profit-maximizing price of: ($15, $12, $10 or $7)
If Smart Light increased its profit-maximizing price, Smart Light's
competitors will: (Decrease their prices, Keep their prices unchanged,
Match the price increase or Increase their prices by more than Smart
Light's price increase)
Which of the following statements is true? (The D1 portion of the kinked
demand curve is relatively more elastic than the D2 portion., The D1
portion of the kinked demand curve is relatively less elastic (more
inelastic) than the D2 portion. Or The D1 and D2 portions of the kinked
demand curve have about the same elasticity.)
If Smart Light's marginal cost increased from MC1 to MC2 on the graph:
(Smart Light will increase its price by $2, Smart Light will increase
its price by $3, Smart Light will not change its price or Smart Light
will decrease its price by $3)
There are only two firms that sell camera phones, Flashtech and Pictone.
The payoff matrix below shows the profits (in millions of dollars) each
company will earn depending on whether it sets a high or low price for
its phones. For example, the lower-left cell shows that if Flashtech
prices low and Pictone prices high, Flashtech will earn a profit of $10
million and Pictone will earn a profit of $3 million.
Flashtech and Pictone are both profit-maximizing firms.
Each firm earns a profit of $8 million when: (Flashtech and Pictone both
price low, Flashtech prices low and Pictone prices high, Flashtech
prices high and Pictone prices low or Flashtech and Pictone both price
high)
If Flashtech prices high, Pictone makes more profits if it chooses
a____, and if Flashtech prices low, Pictone makes more profits if it
chooses a _____. (High price; high price, Low price; high price, High
price; low price or Low price; low price)
If Pictone prices high, Flashtech makes more profit if it chooses a____,
and if Pictone prices low, Flashtech makes more profit if it chooses a
_____. (Low price; high price, High price; high price, High price; low
price or Low price; low price)
If the firms do not collude, what will they end up choosing? (Flashtech
will choose a low price and Pictone will choose a high price, Both
Flashtech and Pictone will choose a high price, Both Flashtech and
Pictone will choose a low price, or Flashtech will choose a high price
and Pictone will choose a low price)
True or False: The game between Flashtech and Pictone is an example of
the prisoners' dilemma.

Below is an excerpt from the Sherman Act of 1890.
"Every person who shall monopolize, or attempt to monopolize, or combine
or conspire with any other person or persons, to monopolize any part of
the trade or commerce... shall be deemed guilty of a misdemeanor, and,
on conviction thereof, shall be punished by fine... or by
imprisonment... or by both said punishments, in the discretion of the
court."
The Sherman Act of 1890 is an example of which of the following? (Price
regulation, Public ownership, Price discrimination or Antitrust laws)
Why is the largest possible value of the Herfindahl index 10,000? (A
Herfindahl index of 10,000 corresponds to 100 firms with 1% market share
each., A Herfindahl index of 10,000 corresponds to a monopoly, that is,
a single firm with 100% market share., If the Herfindahl index of an
industry is greater than 10,000, the Justice Department automatically
regulates it. Or The Justice Department assigns a value of 10,000 to the
most concentrated industry, and then calculates the Herfindahl index of
other industries as a percentage.)
If Microsoft had been broken up into multiple companies, the Herfindahl
index of the software industry would have probably: ( decrease, increase
or remain the same)
True or False: A horizontal merger is the integration of firms selling a
similar product.
Central Communications has an exclusive charter to provide telephone
service to Waterville. It serves 100,000 customers at a long-run average
cost of $30 per month. Its long-run marginal cost is $35, and price is
$40. True or False: Central Communications experiences economies of
scale, and is therefore a natural monopoly.
Time Riders, Inc., has developed and solely controls the technology that
allows consumers to travel back in time. The graph shows demand for time
travel, as well as marginal revenue, long-run marginal cost, and
long-run average cost.
What price should Time Riders set to maximize profit? ($4,000 per trip,
$6,000 per trip, $5,000 per trip or $10,000 per trip)
The newly established Bureau of Time Travel has been given authority to
regulate time travel. If the bureau sets a price that limits Time Riders
to zero economic profit (thereby achieving average-cost pricing), what
price will time travelers pay per trip? ($5,000 per trip, $4,000 per
trip, $10,000 per trip, or $6,000 per trip)
The Assistant Secretary for Time Travel recommends that the bureau
choose the socially optimal price, the price necessary for allocative
efficiency. Which price is required for efficient allocation of
resources? ($5,000 per trip, $6,000 per trip, $10,000 per trip or $4,000
per trip)
The Bureau of Time Travel decides to set the socially optimal price, the
price required for allocative efficiency. In addition, the bureau
arranges a grant of $10,000,000 per week from the National Historical
Society, conditional on Time Riders' producing the number of trips
required for efficient allocation of resources. Given these conditions,
will Time Riders remain in business in the long run? (Yes. With the
grant, Time Riders can cover its long-run costs. Or No. Despite the
offer of a grant, the company's best option is to leave the industry.)
Assuming that Time Riders does not receive supplemental revenues (for
example, subsidies), which price is consistent with maximum long-run
output? ($6,000 per trip, $4,000 per trip, $5,000 per trip, $10,000 per
trip)
Based on the public-interest theory of regulation, why might it be
appropriate for a government agency to regulate the only cable
television station in a community? (In the absence of regulation, the
cable company might charge prices higher than socially optimal., The
cable company might not otherwise carry the Cartoon Network., In the
absence of regulation, the cable company might not earn economic profit.
Or The cable company might not otherwise pay its workers a fair wage.)
The capture theory of regulation asserts that: (Regulators pursue
strategies intended to maximize consumer well-being, Regulators capture
the economic profits of the firm they regulate, Workers in regulated
firms earn lower wages or Regulators promote the interests of the firms
they regulate)
According to cost/benefit analysis, additional regulation increases the
welfare of society if: (The social benefits of additional regulation
exceed the social costs of the added regulation, Its costs are moderate,
One segment of society benefits greatly while the costs are spread over
the entire economy or The regulation generates benefits)
A regulatory agency concerned with issues of well-being that involve a
wide range of industries, such as workplace safety, is involved in:
(Fiscal policy, Public-interest regulation, Social regulation or
Economic (industrial) regulation)
True or False: Airline deregulation has led to lower average fares for
consumers.
Farmer McCall raises chickens on an island just off the coast of England
and sells eggs in the local market. The more grain he buys, the greater
his output. In particular, if he buys no grain at all, his chickens
starve and no eggs are produced; if he buys 20 pounds of grain, his
chickens are healthy and produce 90 dozen eggs; and if he buys 40 pounds
of grain, his chickens begin to get too heavy and produce 120 dozen
eggs. The marginal revenue product of grain is measured in units of:
(Dozens of eggs, Revenue per pound of grain, Dozens of eggs per pound of
grain or Pounds of grain)
Suppose that grain is used to feed chickens and cows. An English
cow is found to have BSE ("mad cow disease"), and countries around
the world pass a ban on British beef; as a result, the price of British
beef falls. The effect of this on the English market for grain would
what?
You found previously that the discovery of mad cow disease leads to a
change in the price of grain. How would the effect of this change in the
price of grain on the market for eggs.
Consider the workers at Live Happley Orchards, whose output is shown in
the following table:
Labor (L)
(Number of workers) Output (Q)
Live Happley is a small player in the apple business and has no
individual effect on wages and prices. Suppose that the market wage for
apple pickers is $100 per day. Calculate the total revenue and total
cost at each level of output. How many workers should Live Happley hire
if the price of apples is $12 per bushel? ( 1, 2, 3, 4, or 5 workers)
Suppose that the price of apples rises to $16 per bushel, but the wage
rate remains the same at $100 per day. How many workers should Live
Happley hire now? (1, 2, 3, 4, or 5 workers)
Assuming that all apple-producing firms have similar output tables, what
would the effects of the increase in the price of apples on the market
for apple pickers.
Suppose that wages rise to $120 per day due to the increased demand for
workers. How many workers will Live Happley hire now? (1, 2, 3, 4, or 5
workers)
Consider a salt mine operating near a town in rural Utah. The mine is
the only employer in the town, and there are very few potential workers
around. Indeed, most of the residents of the town choose to commute over
50 miles to the nearest city, where they work for anywhere between $5 to
$20 per hour. In order to attract 100 workers, the salt mine must offer
a wage of $6. If it wants to attract 200 workers, it must offer a wage
of $10. From this we can gather that: (The firm faces decreasing
marginal factor costs, The firm operates in a perfectly competitive
environment, The firm is a factor price taker or The firm faces
increasing marginal factor costs)
Which of the following best sums up the least-cost rule? (For a given
output quantity, the cost-minimizing combination of inputs occurs when
an additional factor unit of any input would result in the same amount
of output., A firm is most productive when it only uses its most
productive input., A firm achieves its lowest average costs by choosing
an optimal output quantity. Or For a given output quantity, the
cost-minimizing combination of inputs occurs when the increased output
achieved by spending an additional dollar on any factor is the same.)
The year is 2047. In many occupations, robots are replacing humans. As
it turns out, robots make very good housekeepers but very bad
chauffeurs. Assuming the other determinants of demand for the two
services are roughly similar, we would expect that the demand for human
housekeepers is ________ the demand for human chauffeurs. (Less elastic
than, Derived from, More elastic than or As elastic as)
In construction, carpenters and electricians are complementary workers.
On a graph how would the labor demand for carpenters be affected when
the wage of electricians rises. Would their demand go up or down?
Consider the labor market for the computer industry. Assume that all
firms are profit-maximizing producers. The calculator below shows the
market demand and market supply curves for computer engineers who are
responsible for designing new computers.
Wage rate=25 Labor Demand=33 Labor Supplied=33 Hours of
training=50
Price of computer=500 Size of the office=5000 Immigrant Workers= 8
What must the wage rate be if there is a labor surplus of 50,000
engineers? ($25 per hour, $40 per hour, $15 per hour or $45 per hour)
According to the marginal productivity theory of income distribution,
what can we conclude about the wage rate of the last engineer hired in
this market? (The last engineer hired will be paid $30 per hour; firms
intentionally pay a higher wage rate so that the workers have incentive
to work harder., The last engineer hired will be paid $20 per hour just
like the others; firms will increase the number of hours for each
employee to increase their marginal productivity., The last engineer
hired will be paid $25 per hour just like the others; at this wage rate,
when firms select the profit-maximizing number of engineers to hire, the
quantity of engineers they demand is equal to the quantity supplied. Or
The last engineer hired will be paid $45 per hour; firms can maximize
their profits this way, even though this creates a surplus of
engineers.)
Recall the initial labor market equilibrium. Now suppose that the market
reaches a new equilibrium in which the market-clearing wage is the same,
but the number of workers employed in the industry has increased to
58,000 workers. Which of the following scenarios could possibly explain
the move from the initial equilibrium to the new equilibrium? (Every
firm in the market gives away $100-off coupons for the purchase of a
computer., Firms increase the size of their office by 50 square feet.,
Government-subsidized training programs increase the number of hours of
training for each engineer by 15 hours; the number of immigrant
engineers in the labor force increases to 18,000. or An increase in
demand increases the price of computers to $750 each; the number of
immigrant workers in the labor market falls by half.)
An economics textbook publishing company is hiring new sales associates
to sell textbooks to universities across the country. The company first
hires Chris, who increases the amount of textbooks sold by 5,000 per
year. Then the company hires Ying, who increases the amount of textbooks
sold by 4,000 per year. Next, the company hires Katya, who increases the
amount of textbooks sold by 2,000 per year. Finally, the company hires
Marc, who increases the amount of textbooks sold by 1,000 per year.
Assume that all sales associates have the same amount of education and
training, and all are equally skilled at selling textbooks. The market
price of each textbook is $50. The company decides to stop hiring after
Marc because hiring four workers is the profit-maximizing amount of
employment. The company pays each worker $50,000 per year. Chris sues
the company for discrimination. He thinks he should be paid his marginal
revenue product of labor of $250,000 per year.
Marc is the last sales associate to be hired. What is the value of his
marginal product of labor?
($200,000, $250,000, $50,000 or 100,00)
In light of the marginal productivity theory of income distribution,
what will be the judge's verdict when
Chris goes to court? (There is no evidence of discrimination -- the
company is paying each associate the
marginal revenue product of labor of the last associate hired., There
is evidence of discrimination; the company
can eliminate discrimination and still maximize profits by paying all
sales associates $250,000., There is
evidence of discrimination -- Chris should be paid his marginal revenue
product of labor of $250,000 per year;
other sales associates' salaries should remain unchanged. Or There is no
evidence of discrimination; however,
the company should pay each associate his or her marginal revenue
product of labor.

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