CAS EC 101 Chapter Notes - Chapter 13-17: Monopolistic Competition, Adverse Selection, Product Differentiation

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Text form the insurance pool determine the true quality of the products: high risk individuals are more likely to purchase insurance than low-risk individuals drives up insurance rates, which eliminates low-risk individuals. Insurance companies are faced with adverse selection because companies cannot identify the true risks associated with insuring an individual client. Bertrand model with product differentiation suggests that product differentiation can result in higher prices. Monopolistic competition and oligopoly may result in either too much or too little product differentiation. Informational advertising price advertising positive impact. Product differentiation and advertising can have either a positive or a negative economic impact: gather more information to defeat adverse selection, persuasive advertising has a negative impact, reduces consumer surplus and thus welfare. Definitions elasticity of demand advantage associated with being the first firm to enter a consumer good industry horizontal, then rises at an increasing rate, rises at a decreasing rate, and finally decreases.

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home / study / business / economics / questions and answers / Question 1 Which Of The Following Is The Best Example ... Question: Question 1 Which of the following is the best exam... Bookmark Question 1 Which of the following is the best example of a positive externality? A car company lays off 10,000 employees in order to cut costs. An individual drives a large SUV, which increases the amount of greenhouse gases in the atmosphere. An individual smokes in a restaurant, which bothers other patrons. A child is vaccinated against a disease, which reduces the probability that other children will catch the disease. 4 points Question 2 As a result of a negative externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. As a result of a positive externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. high; high. low; low. high; low. low; high. 4 points Question 3 Based on the diagram below, the deadweight loss area associated with the market equilibrium equals: Week06_graph1.jpg $10 $50 $80 $1,000 4 points Question 4 A firm's accounting profit is given by total revenue: less implicit costs. less explicit costs. less economic profit. less implicit and explicit costs. 4 points Question 5 Suppose an activity has a private cost equal to $30 and a private benefit equal to $30. The associated social cost equals $35 and the social benefit equals $30. Which of the following statements is true about this activity? There is a negative externality associated with this activity but not a positive externality. There is a positive externality associated with this activity but not a negative externality. There is both a positive and a negative externality associated with this activity. There is neither a positive nor a negative externality associated with this activity. 4 points Question 6 The Coase Theorem implies that: the efficient level of an externality is generally zero. private individuals living in market economies should not be concerned with externalities. government intervention is not always needed to arrive at the efficient level of an externality. government laws are unnecessary. 4 points Question 7 An industry in which a small number of large firms sell products that are either close or perfect substitutes is: perfectly competitive. monopolistically competitive. an oligopoly. a monopoly. 4 points Question 8 When a negative externality is present in a market: a tax can increase the level of economic surplus. the social benefits are greater than the private benefits. there is generally too little of the good produced by private markets. the government should ensure that there are zero external costs associated in all markets. 4 points Question 9 In the presence of a positive externality, the government can arrive at the socially optimal output level by: paying producers a subsidy equal to the amount of social benefits associated with the activity. charging producers a tax equal to the amount of social costs associated with the activity. paying producers a subsidy equal to the amount of external benefits associated with the activity. charging producers a tax equal to the amount of external costs associated with the activity. 4 points Question 10 The tragedy of the commons is that: too few individuals have access to high quality healthcare. common people overconsume public goods. the quality of life for lower income people is generally lower than that of higher income people. a resource with no price tends to be exploited until its marginal benefit falls to zero. 4 points Question 11 One potential remedy to the tragedy of the commons is to: never allow a single individual to consume more than one percent of the common resource. criminalize the usage of common resources. allow individuals to use a common resource as long as they receive some benefit from doing so. place a common resource under private ownership. 4 points Question 12 As a result of a positional externality: contestants have a tendency to invest in a series of mutually offsetting investments in performance enhancement. there is generally an underinvestment in performance enhancement. the market price of performance enhancement materials is too high. the quality of performance in competitive situations is lower than the socially optimal level. 4 points Question 13 Which of the following statements is true regarding health insurance? Economics shows that all health related procedures should be free to individuals because the health of an individual is priceless. Total economic surplus would be larger if individuals faced an incentive to only use services when the benefit exceeds their costs. Health maintenance organizations provide an incentive for doctors to prescribe expensive nonessential services. First dollar insurance coverage has likely had very little to do with rising healthcare expenditures since World War II. 4 points Question 14 A strategy that yields a higher payoff no matter what the other players in the game choose is known as a: prisoner's strategy. dominated strategy. dominant strategy. Nash strategy.

Question 11 One potential remedy to the tragedy of the commons is to: never allow a single individual to consume more than one percent of the common resource. criminalize the usage of common resources. allow individuals to use a common resource as long as they receive some benefit from doing so. place a common resource under private ownership. 4 points Question 12 As a result of a positional externality: contestants have a tendency to invest in a series of mutually offsetting investments in performance enhancement. there is generally an underinvestment in performance enhancement. the market price of performance enhancement materials is too high. the quality of performance in competitive situations is lower than the socially optimal level. 4 points Question 13 Which of the following statements is true regarding health insurance? Economics shows that all health related procedures should be free to individuals because the health of an individual is priceless. Total economic surplus would be larger if individuals faced an incentive to only use services when the benefit exceeds their costs. Health maintenance organizations provide an incentive for doctors to prescribe expensive nonessential services. First dollar insurance coverage has likely had very little to do with rising healthcare expenditures since World War II. 4 points Question 14 A strategy that yields a higher payoff no matter what the other players in the game choose is known as a: prisoner's strategy. dominated strategy. dominant strategy. Nash strategy. 4 points Question 15 Based on the diagram below, if the costs of hospital care are constant at $200 per day, and the individual does not incur any cost for each day for hospital care, then: the individual will stay 7 days and there will be no loss in economic surplus. the individual will stay 3 days and there will be no loss in economic surplus. the individual will stay 7 days and there will be lost economic surplus. the individual will stay 3 days and there will be lost economic surplus. 4 points Question 16 Economic research by Manning and colleagues suggests that people with deductible health insurance policies: spend substantially less on health care and have substantially worse health outcomes compared to people with first-dollar insurance coverage. spend substantially more on health care and have substantially better health outcomes compared to people with first-dollar insurance coverage. spend basically the same amount on health care and have substantially worse health outcomes compared to people with first-dollar insurance coverage. spend substantially less on health care and have no measurable difference in health outcomes compared to people with first-dollar insurance coverage. 4 points Question 17 An efficient program for reducing pollution is one for which: all polluters incur the same total costs of abatement. all polluters pay the same amount in taxes to the government. all polluters have the same marginal costs of abatement. all polluters reduce their emissions by the same amount. 4 points Question 18 Given the information on pollution abatement costs of the two firms shown below, which of the following is an efficient combination of pollution reduction? Quantity of pollution abatement Firm A's MC of abatement Firm B's MC of abatement 1 $30 $25 2 $35 $30 3 $40 $35 4 $45 $40 Firm A reduces by 1 ton and Firm B reduces by 1 ton. Firm A reduces by 2 tons and Firm B reduces by 3 tons. Firm A reduces by 4 tons and Firm B reduces by 1 ton. Firm A reduces by 3 tons and Firm B reduces by 2 tons. 4 points Question 19 All of the following are characteristics of perfectly competitive markets except: there are a large number of firms. productive resources are mobile. all firms produce a differentiated product. buyers and sellers are well informed. 4 points Question 20 An advantage of the auction method to pollution abatement is that: it is very expensive to firms. regulators can achieve a desired abatement target without having detailed knowledge of the abatement technologies available to polluters. it requires all firms to reduce by exactly the same amount. it assures that eventually society will reach a level of zero pollution emissions. 4 points Question 21 There are 2 firms each emitting 200 tons of a pollutant. Firm A's abatement costs are constant at $20/ton, and Firm B's abatement costs are constant at $40/ton. The government's goal is to reduce pollution by half. If the government auctions 200 one ton permits to the highest bidder: Firm A will purchase all 200 permits. Firm B will purchase all 200 permits. each firm will buy 100 tons. there is no way to know who the highest bidder for any permit would equal. 4 points Question 22 As a result of economies of scale, as output expands: fixed costs are decreasing. average total costs are decreasing. marginal costs are increasing. total costs are decreasing. 4 points Question 23 Generally, when countries open their borders to free trade: both domestic producers and consumers of imported goods gain. both domestic producers and consumers of exported goods gain. domestic producers of imported goods and domestic consumers of exported goods gain. domestic producers of exported goods and domestic consumers of imported goods gain. 4 points Question 24 Which of the following is the best example of a tariff? South Korea bans imports of U.S. beef because of safety concerns. The U.S. requires toys imported from China to undergo testing for lead content. The U.S. imposes a tax on sugar imported from Brazil. The U.S. restricts the quantity of cars imported from Japan. 4 points Question 25 A means-tested program is a benefit program: in which benefits decline as a recipient's earned income increases. in which all individuals must undergo health screening to be eligible for benefits. in which all recipients exclusively receive benefits through in-kind transfers. that only affects the average income of a specific segment of the population. 4 points Save and Submit Click Save and Submit to save and submit. Click Save All Answers to save all answers.

1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

		$0.60
		$0.40
		$0.75
		$0.67

2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

		a tax of $5 in Market X and a subsidy of $10 in Market Y.
		subsidizing both markets.
		taxing Market Y and subsidizing Market X.
		taxing both markets.

3.Economic theory suggests that a natural monopoly should be:

		eliminated whenever it arises.
		regulated to take advantage of economies of scale.
		left alone to operate with excess capacity.
		taken over by the government.

4.When the size of the production is the most efficient:

		total cost is at the minimum.
		average cost is at the minimum.
		marginal cost is at the minimum.
		fixed cost is at the minimum.

5.A firm should exit the industry if which of the following conditions apply?

		TR > TC
		P < AC
		Lifetime expected profit is positive.
		Prices are low now but expected to rise.

6.Figure: Costs

Reference: Ref 11-6

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

		$75.
		$300.
		$225.
		$0, because P = MC at P = $20.

7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

		too low; too high
		equal to the efficient price; too low
		too high; too low
		equal to the efficient price; too high

8.Which of the following statements is TRUE?

I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.

II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.

III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

		I only
		II and III only
		I, II, and III
		III only

9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:

		various options.
		more quantity.
		more discount.
		higher quality.

10.Figure: Government Price Controls

Reference: Ref 8-3

(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:

		a shortage of 15 units.
		a surplus of 15 units.
		a supply of 20 units.
		no effect on the market.

11.In which of these instances does price function as a signal in the market?

		Suppliers invest more in exploration when the price of oil increases.
		Consumers complain of price gouging as the price of oil skyrockets.
		Government imposes price controls on the skyrocketing price of oil.
		All of the answers are correct.

12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.

		demand for; decrease; decrease
		supply of; increase; increase
		supply of; decrease; increase
		demand for; increase; increase

13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?

		Cotton growers in California don't pay payroll taxes.
		The water used to grow California cotton is highly subsidized by the government.
		Cotton growers in California are mostly operated as nonprofit enterprises.
		The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield.

14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:

		the equilibrium price will fall to $7.50.
		competition among buyers will increase the current price.
		the current price will fall below $7.50 as sellers compete for market share.
		There is not enough information provided to answer the question.

15.Which of the following would increase the demand for beef?

		lower pork prices
		higher consumer income
		higher prices of feed grains used to feed beef cattle
		an increase in the price of beef

16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.

True

False

17.Table: Production in the United States and Germany

Labor units required to produce:

One Clock

One Sofa

United States		2	5
Germany		3	9

Reference: Ref 2-8

(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.

		two clocks; three clocks
		10 clocks; 27 clocks
		0.4 clocks; 0.33 clocks
		2.5 clocks; three clocks

18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

		This trade makes Ella worse off by $200.
		This trade makes Mark better off by $200.
		Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800.
		This trade creates value by moving the guitar and drum set to people who value them more.

CAS EC 101 Chapter Notes - Chapter 13-17: Monopolistic Competition, Adverse Selection, Product Differentiation

CAS EC 101 Full Course Notes

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