1. Suppose that favorable weather conditions significantly increases the supply of sugar in the U.S. this year, and at the same time there is a significant decrease in the demand for sugar, due to the concerns about health risks associated with sugar. What can we say about the new equilibrium price and equilibrium output of sugar, compared to the original levels? Please provide your own answers to the following questions (higher, lower, the same, or uncertain). (Hint: Use a Supply and Demand graph to determine the answers.) a. new equilibrium price? b. new equilibrium output? 2. If occupational safety laws were relaxed so that price-searcher firms no longer had to take expensive steps to meet regulatory requirements, which of the following statements is correct? a. the quantity demanded for products of this industry will decrease. b. the market price of the close substitute products for this industry will decrease. c. the firms in the industry will make long-run economic profits. d. competition will force producers in this industry to pass the lower production costs on to consumers in the long run in the form of lower price. e. the market price of the close substitute products for this industry will increase. 3. Clarence Brown sells corn in a price-taker market. With regard to Brown's price, output, and profits, which of the following is true? (Note: More than one answer is correct, list all correct answers). a. Brown will constantly attempt to lower the cost of production to try to make short-run profits. b. Since the price of his product is dictated by the market, Brown will have strong incentives to control per-unit costs. c. Since the price of his product is dictated by the market, Brown has no production decisions to make. d. It would be senseless for Brown to try to increase sales by lowering the price of his product because his entire output can always be sold at the dictated market price. e. Brown may be able to make positive economic profits in the short-run, but not in the long-run. 4. When the conditions in a competitive price-taker market are such that firms are unable to cover their production costs (more than one answer is correct, list all correct answers): a. the firms will suffer short-run economic losses. b. some firms will go out of business since consumers will not pay prices that enable firms to cover their production costs. c. some firms will exit the industry, and market price will rise until the remaining firms can earn the normal rate of return. d. resource prices will increase, output prices will increase, competition will decline, and eventually the firms in the industry will earn positive economic profits. e. resource prices will decrease, output prices will increase, competition will decline, and eventually firms in the industry will earn zero economic profits. 5. Suppose that tea and coffee are close substitutes, and sharply higher tea prices lead to an increase in demand for coffee. As coffee prices increase, coffee producers experience short-run economic profits. If the coffee industry is a price-taker industry and if sufficient time is allowed for the market to adjust fully to the increase in demand for coffee, then compared to the short-run, one would expect the coffee industry's output, prices and profits, in the long-run to: a. increase, increase, and stay the same. b. decrease, increase, and stay the same. c. decrease, decrease, and disappear. d. increase, decrease and disappear. e. decrease, increase and disappear. 6. If firms in the small-boat industry are initially in long-run equilibrium, what will be the long-run effect on profits and boat prices of an increase in the demand for small boats? Assume boat manufacturers are price takers in an increasing-cost industry. a. Both profits and boat prices will return to their original levels. b. Profits will be higher, but prices will return to their previous level. c. Profits will return to their original level, but prices will be higher. d. Both profits and prices will be higher in the long run. e. Profits will return to their original level but prices will be lower. 7. The above firm depicts the cost curves of a profit-maximizing firm in a price-taker industry. Which of the following statements are true (more than one answer is correct)? a. The firm will minimize per-unit cost at an output level of 100. b. The firm will minimize per-unit cost at an output level of 125. c. At a market price of $35, the firm will have positive economic profits. d. At a market price of $40, the profit-maximizing output is 125. e. At any market price above $40, the firm will be making positive economic profits. 8. Given the short-run cost conditions above, a) what should the price-taker firm in the diagram above do in the short-run, and b) what should it do in the long run? Why? Please provide your own short answers to this question in the form of short essays that explain your answer. 9. The above diagram illustrates a firm that: (Note: Two answers are correct.) a. is currently making zero economic profits. b. is currently experiencing short-run economic profits. c. should continue to operate in the short-run if it expects market conditions above to improve in the future. d. should immediately shut down permanently if the conditions above are permanent and not expected to change. e. should down in the short-run, but reopen and operate in the long-run if the market price is expected to eventually rise. 10. Suppose the development of new drought-resistant hybrid seed corn leads to a 50% increase in the average yield per acre without increasing the cost to the farmers who use the new technology. If the conditions in the corn industry are approximated by the pricetaker model, which of the following will be likely to occur? (Two answers are correct.) a. The market supply of corn will increase. b. The supply of soybeans (a close substitute for corn) will decrease. c. The price of corn will fall and the quantity demanded for corn will increase. d. The demand for corn will increase. e. The price of soybeans (a close substitute for corn) will increase. 11. Which of the following best explains why a price-taker firm faces a horizontal demand curve at the market equilibrium price and a price-searcher firm faces a downward-sloping demand curve? a. A price-taker firm will lose all of its sales if it raises its price above the market equilibrium because it produces products that are identical to its competitors. A price-searcher firm produces a differentiated product and will lose only some sales if it raises its price. b. A price-taker firm will lose all of its sales if it lowers its price below the market equilibrium because it produces products that are identical to its competitors. A price-searcher firm produces a differentiated product and will lose only some sales if it lowers its price. c. A price-taker firm will lose all of its sales if it raises its price above the market equilibrium because it produces products that are differentiated from its competitors. A price-searcher firm produces a product that is identical to its competitors and will lose only some sales if it raises its price. d. A price-taker firm will lose only some of its sales if it raises its price above the market equilibrium because it produces products that are identical to its competitors. A price-searcher firm produces a differentiated product and will lose all of its sales if it raises its price. 12. Assume that "PC Clone" computer makers are price takers operating in an increasing cost industry. If demand increases, initially the PC manufacturers will be able to make economic profits. What is likely to happen to these profits with the passage of time? (Note: There are two correct answers). a. They will persist as long as the demand for personal computers is high. b. As computer makers compete for inputs (chips, disk drives, engineers, etc.), they will bid up input prices, which will increase costs and reduce their profitability. c. Once consumers know that the computer makers are earning profits, they will reduce their purchases, which will lead to a reduction in demand and a lower market price. d. New PC manufacturers will enter the industry over time, which will lead to an increase in supply and a reduction in computer prices until the profits are eliminated. 13. Which of the following statements is true when long-run equilibrium conditions are present in price-taker and competitive pricesearcher markets? (More than one answer is correct.). a. P= MC for price-taker markets and P > MC for competitive price-searcher markets. b. P = MC in both price-taker and competitive price-searcher markets. c. P = ATC in both price-taker and competitive price-searcher markets, and at a point where ATC is at a minimum for pricetaker markets but not at a minimum for price-searcher markets. d. Economic profits are zero for both price-taker and competitive price-searcher markets in the long run. 14. Which of the following statements about price discrimination is correct (more than one answer is correct)? a. A price discriminating firm will want to charge a higher price to the consumer group with the more inelastic demand. b. A firm can usually increase its profits by price discriminating rather than charging the same price to all customers. c. Some consumers will pay a higher price when a firm is a price discriminator than would be the case if all customers were charged the same price. d. Compared to a single-price strategy, a firm that engages in price discrimination usually produces and sells a larger output. e. For price discrimination to be successful, firms generally have to be able to prevent re-sale of their products and control resentment. 15. Which of the following is a true statement about the difference between a price-taker firm and a competitive price-searcher firm in the long run? a. Both will sell their products at a price equal to average total cost, but only the price-searcher will produce at minimum average total cost. b. Both will sell their products at a price equal to marginal cost, and only the competitive price searcher will produce at minimum average total cost. c. Only the competitive price-taker will sell its product at a price equal to marginal cost. d. Only the competitive price searcher will sell its product at a price equal to marginal cost. 16. In some industries where firms experience declining average total costs over the full range of output that consumers are willing to buy (two answers are correct): a. a larger firm will very likely have lower per-unit costs. b. many rival firms will tend to emerge from the competitive process. c. a single large firm will likely develop, and it will have cost advantages that may protect it from potential rivals. d. a single large firm will develop and it will buy out any smaller rival firms because the small firms can produce at a lower per-unit cost. e. smaller firms will likely have per-unit costs that are similar to large firms. 17. In sparsely populated areas of the western United States, physicians often have some local monopoly power since the nearest doctor may be a hundred miles (or more) away. Physicians confronting this circumstance may be able to practice price discrimination, for example, by charging richer families more than poorer ones for the same services. If one such physician is willing to stay in the area only if he or she can earn at least $150,000 per year, and if price discrimination permits him or her do so, then economic reasoning suggests that such price discrimination would most likely (more than one answer is correct): a. make residents of the area worse off with regard to the purchase of physician services. b. make residents of the area better off with regard to the purchase of physician services. c. increase the number of physicians practicing in such sparsely populated areas. d. increase the options available to both the rich and poor families in the community. Use the following graph of a price-searcher firm to answer the next question. 18. What price (P) will the firm charge, what will be its optimal output level (Q), and what is the firm's economic profit or loss? 19. Given that the short-run cost and demand conditions shown above for a competitive price-searcher firm are representative for all firms in the industry, which statements accurately describe this firm and industry (two answers are correct)? a. The firm's Price exceeds ATC and it will be able to make short-run economic profits. b. The firms will face competition from new entrants into the industry, causing this firm's demand to decline until zero economic profits are restored. c. The firms will face competition from new entrants into the industry, causing this firm's demand to increase until it earns positive economic profits. d. The firm will see some of its competitors exit from the industry, causing this firm's demand to increase until zero economic profits are restored. 20. If the government grants a single firm the patent right (monopoly) for the production of a good, such as a new cancer drug, then compared to the competitive outcome for such a good: a. the price of the cancer drug will be higher, less of the cancer drug will be produced, and the firm will earn positive profits. b. the price of the cancer drug will be lower, less of the cancer drug will be produced, and the firm may be able to earn positive economic profits. c. the price of the cancer drug will be higher, more of the cancer drug will be produced, and the firm may be able to earn positive economic profits. d. the price of the cancer drug will be higher, less of the cancer drug will be produced, and the firm will earn zero economic profits. 21. Assuming that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency? a. The output of the monopolist will be too small and the price too high, compared to ideal market efficiency. b. The output of the monopolist will be too large and the price too high, compared to ideal market efficiency. c. The output of the monopolist will be too small and the price too low, compared to ideal market efficiency. d. The monopolist's price will be too high, but the impact of monopoly on output is indeterminate. 22. Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC) and that the market price is expected to rise at least to ATC in the near future. In the short run, a firm that is a price-taker would: a. immediately shut down and get out of the industry. b. continue to produce a quantity of output such that its marginal revenue equals marginal cost. c. shut down temporarily, in hopes of restarting in the near future. d. cut price and expand output in hopes of achieving economies of scale. 23. Even though a cartel is often profitable for its members, cartel arrangements contain the seeds of their own disintegration because (more than one answer is correct): a. a price maintained above each cartel member's average variable cost provides each member with an incentive to offer secret price reductions to attract additional customers. b. the profits earned by cartel members will induce and attract new firms to enter the industry. c. cartel members will attempt to garner more of the total profit for themselves by cheating on their agreement with other members. d. cheating on cartel agreements by individual members may be difficult to detect and enforce. e. the demand for the products of cartels is inherently unstable relative to the demand for the products of non-cartel industries. 24. Suppose the airline industry is an oligopolistic market with significant barriers to entry. If this is true, we would expect that: a. each airline will strategically set its own price and output without considering how other airlines might respond. b. if the number of airlines declined because of a series of mergers between major airlines, then collusive behavior in the industry leading to higher prices would be less likely. c. the airfares being charged will be greater than what would be charged in a competitive price-taker market with no entry barriers but less than what would be charged by a pure monopolist. d. the firms in the industry will not attempt to maximize profit. 25. When economies of scale are important and the government splits a single monopolistic firm into many rival units will: a. lead to an increase in the per-unit cost of production in the industry. b. not affect per-unit costs but will affect demand conditions. c. generally increase the social efficiency of production. d. cause the industry demand curve to increase (shift to the right). 26. People can travel within Washington, D.C., via the Metro subway system or by taxicabs. Suppose that taxi fares (prices) remain the same, while subway fares (prices) increase for the Metro system. How will the total revenue (TR) from subway and taxi travel be affected by the increase in subway fares? The total revenue (TR): a. from taxi fares will increase, and revenue from subway fares will increase, but only if demand is elastic. b. from subway fares will decrease, and revenue from taxi fares might either increase or decrease. c. from taxi fares will decrease, and revenue from subway fares might either increase or decrease. d. from taxi fares will increase, and revenue from subway fares might either increase or decrease. 27. Which of the following is a problem that arises when regulations force \"natural monopolies,\" like electric utilities, to charge a price that is equal to their marginal cost (MC)? a. This price will force the firms out of business in the long run, unless they are subsidized. b. The firms will have an incentive to pad their fixed costs. c. When price is equal to MC, new firms will enter the industry and drive up the costs of production. d. Both b and c are correct. e. Both a and b are correct. 28. If the price of sandals is fixed by law below the market-clearing price: (Note: More than one answer is correct.) Hint: Draw a Supply and Demand diagram like Exhibit 2 on p. 71 in the textbook. a. a shortage of sandals will result. b. sandal inventories at shoe stores will be greater than when the market price prevails. c. the quantity of sandals purchased will be greater than the quantity purchased at the market price. d. the quantity of sandals supplied will be less than the quantity supplied at the market price. e. the quantity of sandals demanded will be greater than the quantity supplied. 29. An expansion in the number of plumbers in a local area has resulted in lower profits. The local plumbing contractors have called a meeting to discuss ways to improve their long-run profitability. Of the four plans being discussed seriously, which would most likely increase their long-run profits? a. repeal of the current tax on installation of plumbing units. b. passage of legislation requiring the local government to share the cost of installing all private sewage systems. c. passage of legislation requiring new contractors to be licensed, which would require passing a stiff licensing exam and paying a $5,000 fee. d. an \"off-the-record\" agreement that each plumbing contractor would increase his or her prices by an average of 10%. 30. Using the graph above, if the firms in this oligopolistic industry can collude effectively and can restrict the entry of potential competitors, the price of their product will tend to be (Note: P2 > P1): (Note: There are two correct answers.) a. if the firms in this oligopolistic industry can collude effectively and can restrict the entry of potential competitors, the price of their product will tend to be greater than P2. b. if the firms in this oligopolistic industry can collude effectively and can restrict the entry of potential competitors, the price of their product will tend to be close to P2. c. if the firms in this oligopolistic industry can collude effectively and can restrict the entry of potential competitors, the price of their product will tend to be approximately equal P1. d. if the firms in this oligopolistic industry cannot collude effectively and cannot restrict the entry of potential competitors, the price of their product will tend to be close to P1. e. if the firms in this oligopolistic industry cannot collude effectively and cannot restrict the entry of potential competitors, the price of their product will tend to be close to P2. 31. Economic analysis suggests that patent laws that can often be used to limit the entry of potential competitors into an industry: (Note: There are two correct answers.) a. redistribute income from consumers to business decision makers without affecting the allocation of resources. b. may be a source of business monopoly power, but they may also encourage innovation and the development of costreducing production techniques in the long run. c. encourage product development and the adoption of cost-reducing technologies in the short run but in the long run generally lead to business monopoly. d. help inventors at the expense of consumers in the short run. 32. Given the current market conditions in the graph above for a typical firm in a price-taking industry, what of the following statements apply? (Note: Two answers are correct.) a. new firms will enter the industry. b. the firm's total cost is represented by the area 0CFq 3. c. the firm's total revenue is represented by the area CBFI. d. the firm's per-unit profit is represented by the distance FI. 33. An exotic new metal, billium, is extremely useful in the manufacture of electrical motors. Its manufacture, however, is subject to economies of scale in the relevant range of its production. The larger the plant, the cheaper are per-unit costs of production. Economic thinking suggests that: a. price regulation of billium would improve the efficiency of resource allocation. b. there is likely to be the problem of natural monopoly, but over time, competing materials and competing technologies should erode that natural monopoly. c. the only problem of natural monopoly in this case would occur if the government stepped in to regulate. d. unregulated private production of billium would clearly be inferior to either price regulation or socialized production because of the natural monopoly. e. none of the above 34. Refer to the figure above. If a regulatory agency were using the "normal return" (zero economic profit) criteria to impose a price on a monopolist with the cost and demand conditions depicted above, what price would the regulators set and what output would the monopolist produce? a) Without any regulation, would price would the monopolist charge and what output would it produce? P = ? and Q = ? a) If a regulatory agency were using the "normal return" (zero economic profit) criteria to impose a price, what price would the regulators set and what output would the monopolist produce? P = ? and Q = ? 35. In the diagram above, the movement from points A to B to C can best be explained by which of the following factors? a. an increase in demand, followed by the entry of new firms and an expansion in supply in a constant cost industry. b. an increase in demand, followed by the entry of new firms and an expansion in supply in an increasing cost industry. c. a decrease in demand, followed by the exit of firms and a decline in supply in an increasing cost industry. d. an increase in demand, followed by the exit of firms and a decline in supply in an increasing cost industry. 36. Which of the following statements are true about the price-searcher firms and industry described above (two answers are correct): a. This firm will maximize profits (or minimize losses) by producing a quantity of output equal to I and a price equal to D. b. This firm will experience economic profits equal to the rectangular area CDEF. c. This firm's total cost (ATC x Q) is equal to the rectangle 0BGJ. d. This firm's total revenue (P x Q) will be equal to the area 0CFI. e. This firm will maximize profits or minimize losses by producing a quantity of output equal to I and a price equal to C