25. The "monopolistic" element of monopolistic competition is due to the fact that

A) the firm has no rivals that produce close substitutes.

B) the firm is large relative to the market.

C) the firm produces on the inelastic portion of its demand curve.

D) the firm, facing a downward sloping demand curve, has some control over price.

26. In the long run, an industry under monopolistic competition is characterized by excess capacity because         

A) each firm tries to take customers away from other firms by offering discounts to sell more units.

B) firms are spending money on advertising and the extra costs must be recovered.

C) each firm overestimates the capacity it needs when it fails to take into consideration how other firms will respond to the output decisions it makes.

D) entry occurs until zero profits are made, which implies that each firm is producing to the left of the minimum point of its average cost curve.

27. A duopoly is an industry                                                                                                 

A) with two types of customers.

B) with two sellers.

C) with multiple product lines.

D) a homogeneous product.

28. “Deadweight” loss occurs if

A) consumers really want a product, but production costs turn out to be higher than expected, and profits turn out to be lower than expected

B) a monopolist charges a price that is equal to marginal cost

C) a monopolist engages in first degree price discrimination

D) none of the above

29. Economic efficiency involves

A) whatever will maximize profits for sellers

B) continuing production as long as consumers value the product at least much as the marginal cost of producing more units

C) stopping production if the demand curve becomes steeper than average fixed costs

D) none of the above

30. Under two-part pricing (but with no price discrimination) with customers who have demands of varying strength, a firm that wishes to maximize profits is advised to

A) establish a cover charge based on the consumer surplus otherwise available to the highest demanders

B) ignore the Golden Rule of cost minimization, but just in this particular case

C) impose a user charge that is somewhat higher than the level of marginal cost

D) none of the above

31. A monopoly will produce the efficient rate of output if it                        

A) engages in perfect price discrimination.

B) engages in no price discrimination

C) engages in third-degree price discrimination.

D) is regulated and average-cost pricing is enforced.

32. Third degree price discrimination                                                                      

A) causes consumer surplus to be eliminated

B) is called third-degree because it works best for firms if products can be resold later on

C) will maximize profits if a firm charges a price in each market segment that equals its marginal cost multiplied by the price elasticity of demand

D) is the most difficult form of price discrimination to implement.

33. Long-run supply is typically more elastic than short-run supply because

A) the law of diminishing returns does not apply to the short run

B) firms can enter or exit the market in the long run

C) capital is fixed in the long run

D) none of the above

34. According to the “Golden Rule” of cost minimization;

A) if one input has a lower marginal product than another, it should not be employed

B) if one input costs more per hour than another, it should not be employed

C) inputs should be employed such that the ratio of their respective prices equals the ratio of their respective marginal products

D) none of the above

35. Under two-part pricing

A) profits are maximized by setting a user charge at a monopoly level

B) profits are maximized by establishing a set-up charge to capture consumer surplus that would have otherwise remained

C) profits are maximized by having the sum of the user charge and the set-up charge be as high as possible

D) none of the above

36. Some consumer surplus remains under each of the following EXCEPT                       

A) two-part pricing with multiple consumers

B) third-degree price discrimination

C) first-degree price discrimination

D) block pricing

37. In the case of an increasing cost industry in which consumer demand has decreased

A) the final, long run price will be higher than the price at the very beginning

B) the final, long run price will be lower than the price that first emerges in the short run after the decrease in demand, but in the short-run the price will become higher than the price at the very beginning

C) cost curves shift downward in the long run as firms exit the industry

D) none of the above

38. Which of the following would contribute to the emergence of an industry characterized by oligopoly?

A) the level of production consistent with minimum efficient scale is very small in comparison to the size of the overall market

B) barriers to entry that most firms would have difficulty overcoming

C) anti-trust laws that prevent most mergers

D) none of the above

39. When a profit-maximizing monopolist sells output in two distinct markets, which of the following is true?

A) Price will be higher in the market in which demand is unit-elastic.

B) Price will be lower in the market with the more elastic demand

C) Price will be equal in each market, as long as there is a constant marginal cost.

D) Price will be lower in the market for which there are fewer substitute goods.

40. With intertemporal price discrimination                                                               

A) each consumer is charged his/her full willingness to pay.

B) groups are charged different prices in accordance with the principles of third-degree price discrimination

C) monopolists capture all the consumer surplus.

D) Both A and C are true.

Case Study 5–5 All in a Day’s Work

Sarah Goodman, senior manager of network development for Holy Managed Care Company, looked over her calendar for the day and sighed deeply. It seemed as if there would be no time at all to work on the project she’d been putting off for most of the week. Circumstances seemed to be such that she simply didn’t have any control over her own time anymore.

Well, first things first, she determined. At 9:00 she was due at a meeting of senior managers who were involved in trying to devise a strategy for counteracting a threatened unionization drive by the company’s nonexempt employees. As Sarah thought about the people working for her, she began to wonder exactly what they wanted. They had a pleasant working space, good benefits package, and secure employment. She heard the laughter and chatter drifting into her office as people came into work and thought what a pleasant and congenial group they were. What more could they want?

Then at 10:30 there was another meeting. This one could be very exciting! In six months Sarah’s office was scheduled to be moved to a new industrial park on the west side of town. The plans she’d seen so far had all kinds of great perks for employees: on-site day-care center, fitness center, ample parking, great facilities for training. The company was certainly spending a lot of money on this new site. Sarah certainly hoped it would help increase productivity; it certainly would make the employees happier
and make recruitment easier.

She’d have to hurry to her lunch meeting with the adviser for the MHA program at Saint Thomas University. Sarah had decided as a part of her New Year’s resolution that she was finally going to begin her graduate degree. She felt she was simply stagnating in her job and, after looking around at positions in her company that looked interesting, she realized she needed a graduate degree if she were going to progress. The only problem was that she wasn’t sure how enthusiastic Richard, her husband, would be about the whole idea. And her mother certainly wouldn’t be happy! The hints about grandchildren had become an outright discussion over the holidays.

Discuss the various motivation theories reflected in this case study.

These include:

Maslow's Hierarchy of Needs Theory

Alderfer's ERG Theory

Herzberg's Two-Factor Theory

Hackman and Oldham's Job Design Theory

McClelland's Three-Needs Theory

1. Use the budget constraint PxX+PYY=M, thinking of good X as a food item and good Y as other goods. Present an analysis where an increase in price of the food item causes the consumer to by less food, demonstrating the “law of demand.” Then, present a second analysis where an increase in the price of the food item causes the consumer to buy more of the food item, which is the Giffen Good case. Finally, identify two food items, one which you think fits the first case and one which you think fits the second case.

Refer to the following mentioned data.

Cruz Inc. manufactures a popular premium toy. During its first year, the company incurred these costs:

$427000 Cost to manufacture 7000 toys
$110000 Research and development costs
$35000 Cost to ship completed products to retailers

Cruz sells 80% of its products for $183 each.

1. What will Cruz report as sales revenue for Year1?  

2. What will Cruz report as the cost of goods sold for Year1?  

3. What will Cruz report as net income for Year1?  

4. What will Cruz report as inventory on the balance sheet as of the end of Year1?  

Assume the following information for a company that produced 10,000 units and sold 8,000 units during its first year of operations and produced 8,000 units and sold 10,000 units during its second year of operations:

Using absorption costing, what is the cost of goods sold for the second year of operations?

Multiple Choice

• $1,780,000

• $1,795,000

• $1,406,000

• $1,486,000

Suppose the Fed increases interest rates in the country.

a. Which curve shifts first and why? Graph the Goods and Services market, including the shift.

b. What happened to the price level and RGDP in the short-run? What type of business cycle did this cause?

c. Over time, what will eventually happen to resource costs given the above scenario?

d. From your answer in part c, what subsequent shift will occur? Indicate this shift using your graph given above. What is the ultimate long-run effect on the Deflator and RGDP?

Proteger Company manufactures insect repellant lotion. The Mixing Department, the first process department, mixes the chemicals required for the repellant. The following data are for the current year:

Direct materials are added at the beginning of the process. Ending inventory is 95 percent complete with respect to direct labor and overhead. The cost of goods transferred out for the year is:

a.$3,780,000

b.$3,571,200

c.$3,024,000

d.$4,471,200