ECON 1014 Exam 3 Practice Questions (Mizzou)

New Beginnings Consignment Clothing is a clothing store located in downtown Columbia that charges 10% lower prices for faculty, students, and veterans. This is an example of what?

Third degree price discrimination

Suppose that you are a monopolist who faces two markets with different demand curves. Market 1's demand curve is elastic and Market 2's demand curve is inelastic. How do you maximize profit?

Charge a high price in Market 2 and a low price in Market 1.

Men's deodorant and women's deodorant are almost completely identical products. Even when there are minor differences, such as in the smell, these differences result in only negligibly different costs of production. Yet, women's deodorant is consistently more expensive than men's deodorant. What can you infer about the relative elasticities of men and women's demand for deodorant?

Men's demand for deodorant is more elastic than women's demand for deodorant.

Two months after Apple introduced the iPhone in 2007, the company reduced the price from $600 to $400. How is this drop in price an example of price discrimination?

Early adopters are less sensitive to price than late adopters.

Why is it important for firms practicing price discrimination to prevent arbitrage of their product?

Arbitrage reduces the profits from price discrimination for firms because buyers in the higher-priced market can buy the product at a lower price in the secondary (resale/black) market.

In the video games industry, there is a practice known as "region-locking". Region-locking involves implementing a physical, electronic, or digital system that prevents a video game from one region from being used on a console from another region. For example, an American video game cannot be played on a Japanese console, and vice versa. Why might video games companies do this?

To prevent people from importing games from a low-priced region into a high-priced region.

Universities regularly engage in price discrimination. By what means do they do this?

By offering housing accommodations of differing qualities, by offering scholarships, and by offering student discounts at collegiate sporting events

Suppose that GSK sells one of its drugs for $25/pill in the United States and $13/pill in Canada. Which of the following statements is TRUE?

I. The price discrimination benefits the Canadians, since they pay a lower price.

II. The price discrimination may potentially benefit Americans, even though they pay a higher price, since GSK's larger profits mean more research and development of new drugs for Americans.

III. Price discrimination is beneficial in industries with large fixed costs like the pharmaceutical industry, since price discrimination increases the size of the market, helping to spread large costs over a greater number of consumers.

I, II, and III

Gas masks require a filter in order to adequately protect the user from airborne threats. The gas mask will last a long time while in use, but the filters will require frequent replacement. This is an example of ________.

tying

Refer to the previous question. If gas mask producers untied the purchasing of the masks and the filters, we would expect their profits to ______?

decrease

In fast food restaurants there are menu items called "combos" that include an entree, a side, and a drink for a single price. This is an example of _______.

bundling

In economic context, what is a cartel?

A group of firms who collectively act as if they were a single monopolist

Suppose you are the representative for a nation in OPEC, the world's largest cartel. All of the other members have agreed to raise prices and cut production in order to increase profits. You also agree to do this. However, what do you have the incentive to do when the other members can't observe you?

Increasing production above the agreed upon level, which will lead to a decrease in prices.

How do professional sport leagues like the National Basketball League (NBA), Major League Baseball (MLB), and the National Football League (NFL) behave like buyer's cartels?

They institute player drafts that prevent individual franchises from bidding up the salaries of athletes.

One reason cartels have limited power is that demand curves become:

more elastic over time.

In an oligopolistic market, prices will tend to decrease towards the perfectly competitive level...

...as the number of firms in the market increases.

Which of the following are considered barriers to entry?

I. Government regulations

II. Economies of scale

III. The presence of cartels

IV. Exclusive access to a key input

I, II, and IV only

Which of the following are network goods?

I. Fax machines

II. Pillows

III. Social media

IV. Haircuts

I and III only

The market for telephone communications is dominated by three firms: Verizon, AT&T, and T-Mobile. This market is best described as _________.

oligopolistic

Consider the standards war of the late 2000s between Blu-ray and HD-DVD. Both standards were almost perfect substitutes in the eyes of the consumer. Movie and television publishers had a slight preference for Blu-ray due to higher storage capacity, but either standard would be a vast improvement over normal DVDs. The most important thing for both consumers and producers was to be on the standard that others were also on. This situation is an example of _________.

a coordinations game

Which o the following increases the contest ability of a market?

I. Low fixed costs of entry

II. No legal barriers to entry

III. Consumers willing to try substitute goods

I, II, and III

Frequent flyer programs are often designed to:

limit contestability

An experiment by Duncan J. Watts, a sociologist at Columbia University, showed that when consumers knew a particular song had been downloaded by many other people, more consumers wanted to download that song as well. If this is true, this suggests that music itself may be:

a network good

Monopolistic competition is a market that has:

many sellers, free entry, and product differentiation

Firms in a monopolistically competitive industry:

I. sell their products at a higher price than firms in a perfectly competitive industry.

II. generally sell their products at a higher price than firms in an oligopolistic industry.

III. offer value to consumers through product variety

I and III only

Under monopolistic competition, firms face a _______ demand curve and earn ______ economic profits on average.

downward-sloping; zero

Which list of products is most likely to be produced by monopolistically competitive firms?

Microbrew beer, Restaurant meals, Barbershops

Which of the following statements is/are TRUE?

I. The demand for labor is downward sloping.

II. The marginal product of labor declines as a firm hires more labor.

III. The marginal product of labor is the demand curve for labor.

I, II, and III

An individual's labor supply curve:

May be backward bending if the wage is high enough.

If higher wages give the incentive for some workers to work fewer hours:

The quantity of labor supplied in the market will likely still rise as new workers enter the market.

Compared with a similar job that requires little human capital, a job that require a large amount of human capital will likely pay:

a higher wage rate

Why do similar jobs have similar compensation packages?

I. The law of demand and supply will ensure that the salaries will be similar over time.

II. Wages and "fun" adjust between jobs until compensation packages are similar.

III. Because compensation equivalence is a requirement of labor market law.

I and II only

What negative impacts can unions have on industries and the economy?

I. They can initiate worker strikes and sit-ins that stall production.

II. By limiting the supply of labor in one industry, they can cause an increased supply of labor in other industries, which causes lower wages in those industries.

III. Unions increase the supply of labor in the market where the union is present thus lowering wages in the market.

I and II only

The supply of nurses in country A is the same as the supply of nurses in country B, but the nurses in country A earn 90 percent more than the nurses in country B. What can explain this difference?

Country A's economy is more productive than country B's, so the demand for nurses is higher in country A.

According to the theory of marginal productivity of income distribution, at equilibrium a worker's wage is equal to their

marginal product of labor

Toilet paper is a rival good because:

One person's use of toilet paper reduces the ability of another person to use the same sheets.

COVID-19 tests are an example of a good that is generally:

Excludable and rival

Club goods are likely to be:

underprovided by the market

What is a forced rider?

someone who pays a share of the costs of a public good through taxation, but who does not enjoy any of the benefits of the good.

The incentive to dedicate private resources toward maintaining a common resource such as the ozone layer is low because:

There is a lack of ownership so others will reap the benefit of the private investment.

A tragedy of the commons often results from _________ and _________.

rivalry; non-excludability

Tuna fish are being driven to extinction because of overfishing. If all the fishermen know about this, why don't they fish less to keep the tuna population from going extinct?

Due to a lack of well-defined property rights, if an individual fisherman chooses to fish less, the fish he would have caught will just be caught by another fisherman.

Why is rational ignorance important from an economic standpoint?

I. Voters might not make informed choices.

II. Voters will make decisions based on incorrect or incomplete information

III. Special interest groups may control economic outcome if they are the only ones who are not rationally ignorant.

I, II, and III

A woman approached Senator Adlai Stevenson when he was running for president, saying, "Senator, you have the vote of every thinking person!" The senator is often credited with responding, "That's not enough, madam, we need a majority!" Which concept does this quip best reflect?

rational ignorance