The Ohio State University Economics 2001.01, Principles of Microeconomics William J. White Answers to Second Mid-Term Practice Questions – 10/26/2016 Identification of Terms 20 Points Total Directions: Please match the definitWe also discuss several other topics like bucknell moodle
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ion in questions 1-5 to the appropriate term from the list below the first section. Match the definition in questions 6-10 to the appropriate term from the second list. Each question in this section is worth two (2) points. 1. The increase in total revenue obtained by increasing quantity by one unit ____D______ 2. A situation in which a firm charges different prices to different customers ____E______ 3. The reduction in social welfare associated with sales and excise taxes ____B______ 4. The increase in total cost from production of an additional unit of output ____A______ 5. A combination of price and quantity producing no excess demand or supply ____C______ A. Average Marginal cost D. Marginal revenue B. Dead-weight loss E. Price discrimination C. Equilibrium 6. A market with many firms in which the products are differentiated ____B______ 7. A goods market in which many buyers and many sellers interact ____E______ 8. A measure of the market dominance of the largest competing firms ____A______ 9. A market in which only a few large sellers compete for customers ____D______ 10. A market in which one seller provides all the goods purchased by buyers ____C______ A. Herfindahl-Hirschman Index D. Oligopoly B. Monopolistic competition E. Perfect competition C. MonopolyMultiple Choice Questions 40 Points Total Directions: Please choose the letter of the answer that best completes the statement or answers the question. Each question is worth two points. __B__ 11. Accounting profits are generally greater than economic profits because: A) both implicit and explicit costs are considered in calculating accounting profit; B) implicit costs are not considered in calculating accounting profits; C) explicit costs are not considered in calculating accounting profits; D) accountants have a different measure of revenue than economists. __B__ 12. Economists normally assume that the goal of a firm is to: A) maximize its total revenue; B) maximize its total profit; C) minimize its total cost; D) minimize its explicit costs. __C__ 13. A competitive firm will choose to cease operating in the long run if: A) price rises above total average cost; B) too many new firms enter its once profitable business; C) price falls below average total cost; D) price falls below average variable cost but remains above average total cost. __A__ 14. If the demand curve facing a particular firm is horizontal, we can assume that: A) it is engaged in perfect competition; B) it produces a product that is slightly different from those of its competitors; C) it must pay close attention to the prices and quantities set by its rivals; D) it has a monopoly in its market and should raise prices as high as possible. __D__ 15. If a government regulator forced a natural monopoly firm to charge a price equal to its marginal cost: A) the firm would not be able to make a profit; B) the firm's average total cost would exceed its average revenue; C) the firm would most likely choose to shut down; D) all of the above are true. __A__ 16. Which of the following would most likely be considered a Clayton Act violation? A) John D. Rockefeller buying out his competitors in the petroleum industry; B) Manufacturers of harvesting equipment forming a cartel to keep prices high; C) Samsung cutting cell phone prices to take market share away from Apple; D) A dairy from Marysville entering the profitable Columbus milk market. __D__ 17. Which of these markets displays aspects of first degree price discrimination? A) The market for college tuition; B) The market for new automobiles; C) The market for airline tickets; D) All of the above.__C__ 18. If price is greater than average total cost: A) all firms in the industry are experiencing losses; B) average total cost must be declining; C) new entrants are likely to be attracted to the market; D) marginal costs must be declining. __A__ 19. The Herfindahl-Hirschman Index (HHI) was developed to: A) measure the level of concentration in a market; B) prevent companies from engaging in price-cutting behavior; C) measure the profitability of a perfectly competitive market; D) confuse students in Principles of Microeconomics classes. __D__ 20. Which of the following would be considered implicit costs? A) Rental value of land owned by the business and used in production; B) Salary foregone by an entrepreneur starting a new business; C) Equipment purchased for use by the business; D) A) and B) are both correct. __A__ 21. When average cost is increasing as output increases, marginal cost must be: A) above average cost; B) decreasing; C) constant; D) below average cost. __A__ 22. In the Prisoner's Dilemma game, which feature of the game setup causes the players to achieve the worst possible result? A) The advantage gained by defecting regardless of the choice made by the rival; B) The potential for different outcomes in a repeated strategic game; C) The ability of the two players to coordinate their actions; D) All of the above are correct. __D__ 23. When firms in a competitive market have different costs, it is likely that: A) the assumption of free entry and exit in the market will be violated; B) the assumption of identical products in the market will be violated; C) long-run market supply will be downward sloping; D) some firms may earn positive profits in the long run. __B__ 24. Firms engaged in monopolistic competition face a demand curve that is: A) more elastic than would be the case if all firms produced identical products; B) highly elastic due to the ease of substitution among similar products; C) horizontal because they have no ability to charge a price above their marginal cost; D) more steeply sloping than their marginal revenue curve. __C__ 25. Governments attempt to discourage or eliminate monopolies in most industries: A) because they charge a price that is too low versus the competitive equilibrium; B) in order to increase the size of the dead-weight loss produced by monopolies; C) because they produce a quantity that is too low versus the competitive equilibrium; D) all of the above.__C__ 26. When a firm has a natural monopoly, the firm's: A) marginal cost always exceeds its average total cost; B) total cost curve is horizontal; C) average total cost curve is downward sloping; D) marginal cost curve must lie above its average total cost curve. __C__ 27. Which of the following would be most likely to have violated the Sherman Act? A) Sony and Microsoft charging the same price for video games as Nintendo, which acts as a price leader; B) Henry Ford cutting the price for Model T automobiles and thus driving his competitors out of business; C) Executives of Archer Daniels Midland and four Asian companies holding secret meetings to set lysine prices; D) Owens-Illinois buying Brockway Glass and thus becoming the only producer of glass bottles in the U.S. __B__ 28. Which feature of first degree price discrimination improves economic efficiency? A) Elimination of consumer surplus; B) Elimination of dead-weight loss; C) Reduction in total revenue received by the seller; D) Elimination of producer surplus. __D__ 29. Which of these markets is most likely to involve monopolistic competition? A) A market for soybeans; B) A market for cell phones; C) A market for cigarettes; D) A market for fast food meals. __D__ 30. Which of the following would not be considered fixed costs? A) Salaries of top executives; B) Production equipment; C) Property and casualty insurance; D) Raw materials.Short Answer Questions 40 Points Total (20 points) Ben's Buckles is a profit maximizing firm that manufactures belts in a competitive market. This firm has a small amount of fixed cost ($100 per day) which it must incur regardless of the level of production. The variable cost, consisting of materials and labor, changes along with production levels. Please fill in the entries in the following cost table, then use the table values to answer questions 31-40. Total Total Average Average Production Variable Fixed Total Marginal Total Variable Quantity Cost Cost Cost Cost Cost Cost (belts/day) ($) ($) ($) ($/belt) ($/belt) ($/belt)__ 0 0 $100 $100 ------ ------ $8.00 30 240 $100 _$340 $11.33 _$8.00 $6.00 60 420 $100 _$520 _$8.67 _$7.00 $4.00 90 540 $100 _$640 _$7.11 _$6.00 $6.00 120 720 $100 $820 _$6.83 _$6.00 $8.00 150 960 $100 $1,060 _$7.06 _$6.40 $16.00 180 1,440 $100 $1,540 _$8.56 _$8.00 ------------------------------------------------------------------------------------------------------------- __B__ 31. The total cost at a production level of 90 belts is: A. $520 per day. B. $640 per day. C. $920 per day. D. $1,060 per day. __A__ 32. The marginal cost as production rises from 30 to 60 belts per day is: A. $6.00 per belt. B. $8.00 per belt. C. $16.00 per belt. D. $120 per belt. __C__ 33. The average total cost at a production level of 180 belts per day is: A. $7.06 per belt. B. $8.00 per belt. C. $8.56 per belt. D. $16.00 per belt.__C__ 34. The average variable cost at a production level of 60 belts per day is: A. $4.00 per belt. B. $6.00 per belt. C. $7.00 per belt. D. $8.00 per belt. __B__ 35. Minimum average variable cost (AVC) for Ben's Buckles is approximately: A. $4.00 per belt. B. $6.00 per belt. C. $7.00 per belt. D. $8.00 per belt. __B__ 36. Minimum average total cost (ATC) for Ben's Buckles is approximately: A. $6.00 per belt. B. $6.83 per belt. C. $7.06 per belt. D. $11.33 per belt. __A__ 37. Which of the following is true about the relationship between marginal cost (MC) and average total cost (ATC)? A. The MC curve rises through the ATC curve at minimum ATC. B. The MC curve falls through the ATC cuBrve at maximum ATC. C. The quantity at which MC rises through the ATC curve is smaller than the quantity at which MC rises through the average variable cost curve. D. If ATC is rising, then MC must be below ATC. __D__ 38. If the market price for belts is $12.00, what quantity per day will Ben's Buckles produce? A. 45 belts. B. 120 belts. C. 135 belts. D. 150 belts. __B__ 39. How much profit per day will Ben's Buckles earn at the production level in Q38? A. $110. B. $740. C. $1,540. D. $1,800. __B__ 40. Which of the following market prices for belts will cause Ben's Buckles to keep producing in the short run, but shut down in the long run? A. $6.00 per belt. B. $6.50 per belt. C. $7.00 per belt. D. $7.50 per belt.(20 points) The table below represents market share information for U.S. automobile sales so far in 2016. (Source: Wall Street Journal, wsj.com). Calculate the HHI, 4-firm concentration ratio (4-CR) and 8-firm concentration ratio (8-CR) using the spaces in the table if you wish. Then use this information to answer Questions 41-50. Manufacturer Market Share (use these columns for calculations) General Motors Corporation 17.3 % __17.3_ __299__ Ford Motor Company 15.6 % __32.9_ __243__ Toyota Motor Sales USA Inc. 14.0 % __46.9_ __196__ Chrysler LLC 13.3 % __60.2_ __177__ Nissan North America Inc. 9.5 % __69.7_ ___90__ American Honda Motor Co. Inc. 8.8 % __78.5_ ___77__ Hyundai Motor America 3.9 % __82.4_ ___15__ Kia Motors America Inc. 3.5 % __85.9_ ___12__ Subaru of America Inc. 3.3 % __89.2_ ___11__ Volkswagen of America (inc. Audi) 2.6 % __91.8_ ____7__ All others 8.2 % xxxxxxx xxxxxxx Totals 100.0 % _1127__ __C__ 41. The 4-firm CR for the US auto industry so far in 2016 is approximately: A. 17.3 %. B. 46.9 %. C. 60.2 %. D. 100.0%. __B__ 42. The 8-firm CR for the US auto industry so far in 2016 is approximately: A. 78.5 %. B. 85.9 %. C. 89.2 %. D. 91.8%. __D__ 43. The HHI for the US auto industry so far in 2016 is approximately: A. 91.8. B. 915. C. 1110. D. 1128. __A__ 44. Based on your calculations above, what can you say about concentration in the US automobile industry? A. The industry is un-concentrated as measured by the HHI. B. The industry is moderately concentrated as measured by the HHI. C. The industry is highly concentrated as measured by the HHI. D. The industry is un-concentrated as measured by the CR-4.__D__ 45. Now suppose that Honda were to propose a buyout of Subaru of America's operations. Assuming market shares for all other competitors were unaffected by this buyout, what would be the impact on CR-4? A. CR-4 would increase by 12.1%. B. CR-4 would increase by 8.8%. C. CR-4 would increase by 3.3%. D. CR-4 would be unaffected by this buyout. __B__ 46. If the proposed buyout from Q45 were allowed to proceed, what would be the impact on the HHI? A. The HHI would decrease by 88 points. B. The HHI would increase by 58 points. C. The HHI would increase by 146 points. D. The HHI would be unaffected by this buyout. __A__ 47. What would be the impact of the buyout on the level of concentration in the US automobile industry? A. The industry would remain un-concentrated as measured by the HHI. B. The industry would become moderately concentrated as measured by the HHI. C. The industry would become highly concentrated as measured by the HHI. D. The industry would remain un-concentrated as measured by the CR-4. __D__ 48. Would this buyout likely be challenged as anti-competitive by the FTC or Justice Department's Antitrust Division? A. The buyout would almost certainly be challenged by the FTC. B. The buyout would almost certainly be challenged by the Antitrust Division. C. The buyout would receive close scrutiny by one of the two agencies, who would be likely to order changes in order to approve the merger. D. The two government agencies would be unlikely to take any action. __A__ 49. Are there any mergers between two automotive firms that would be likely to create stronger government action based on increases in concentration? A. Any merger between two of the top four firms could be problematic, due to increases in HHI and CR4. B. A merger between Nissan and General Motors could cause increased scrutiny due to the increase in HHI. C. A merger between Nissan and American Honda could cause increased scrutiny due to increases in HHI and CR4. D. No mergers between two firms would change the result from Q48. __D__ 50. Although Hyundai and Kia are separate companies, Hyundai actually owns a controlling stake in KIA motors. If the US government considered them to be one company, how would this change the analysis above? A. The CR-4 would increase significantly. B. The industry would now be considered moderately concentrated by HHI. C. The industry would now be considered highly concentrated by HHI. D. The HHI would be only slightly affected and the analysis would not change.