Comprehensive Review On the final exam, there will be a series of comprehensive questions. The questions will cover the four topics listed below. Comprehensive Topic 1: Supply and Demand Given scenarios, be able to predict whether supply or demand changes and how. Then predict what happens to price and quantity.

SD-11) The price of 3G or 4G cell service rises

For the next set of scenarios, use the following answers to describe what happens. All questions concern the market for Smart Phones. An answer may be used more than once, and not all answers may be used: a. There’s an increase in demand b. There’s an increase in supply c. There’s a decrease in demand d. There’s a decrease in supply e. There’s no change in supply or demand

SD-13) The income of consumers rises

SD-12) The price of “tablets”, a substitute to a smart phone, drops.

SD-14) Microsoft begins producing and selling smart phones. Figure 1

S2

P

SD-1) Technology drives the cost of small LCD touchscreens lower SD-2) The price of “apps” decreases SD-3) The closure of smart phone factories in Japan due to the earthquake and tsunami SD-4) The price of 3G or 4G cell service rises

D C

S1

B A

D1

D2

Q

SD-5) The price of “tablets”, a substitute to a smart phone, drops. SD-6) The income of consumers rises SD-7) Microsoft begins producing and selling smart phones. For the next set of scenarios, use the following answers to describe what happens. All questions concern the market for Smart Phones. An answer may be used more than once, and not all answers may be used: a. There’s an increase in price and quantity b. There’s an increase in price and a decrease in quantity c. There’s a decrease in price and an increase in quantity d. There’s a decrease in price and quantity e. There’s almost certainly no change in price or quantity SD-8) Technology drives the cost of small LCD touchscreens lower SD-9) The price of “apps” decreases SD-10) The closure of smart phone factories in Japan due to the earthquake and tsunami

SD-15) Using Figure 1, a movement from B to D would be described as a. an increase demand b. an increase in supply c. a decrease in demand d. a decrease in supply e. none of the above SD-16) Using Figure 1, if this is the market for Smart Phones, what would cause a movement from D to B? a. Lower price of “tablets”, a substitute to smart phones b. Lower price of cell phone data service c. Lower cost of LCD touch-screens d. Closure of smart phone factories e. none of the above SD-17) Using Figure 1, what movement would represent the change in the market of a normal good when consumer incomes rise? a. C to A b. A to C c. C to D d. D to C e. none of the above

SD-18) Using Figure 1, what would be an example of prices falling while quantity increases? a. B to D b. D to B c. A to B d. B to A e. none of the above

El-24) Which of the following goods is probably not inelastic in demand a. table salt b. cigarettes c. Exxon gasoline d. sunscreen at the beach during the summer e. food

Comprehensive Topic 2: Price elasticity of demand Understand and utilize the concept of price elasticity of demand. Know when a good tends to be elastic or inelastic. Note: no calculations will be asked, and the other elasticities will not be covered.

El-25) Goods for which there are many available close substitutes will have a. a lower price b. a higher price c. a more elastic demand d. a more inelastic demand e. perfectly inelastic demand

El-19) Price elasticity of demand measures a. how demand will increase when price falls b. how sensitive quantity demanded is to a change in price c. the slope of the demand curve d. the size of demand curve changes e. none of the above El-20) There’s an increase in supply, and demand is inelastic. Economics predicts a. Large price decrease and small quantity increase b. Large price decrease and large quantity decrease c. Small price decrease and small quantity increase d. Small price increase and large quantity decrease e. Small price decrease and small quantity decrease El-21) There’s an increase in the cost of resources and demand is elastic. Economics predicts a. A large increase in price and small decrease in quantity b. A large increase in price and small increase in quantity c. A small increase in price and large decrease in quantity d. A small increase in price and large increase in quantity e. A large increase in price and large decrease in quantity El-22) A good will tend to be inelastic if a. There are available close substitutes b. It is “luxury” good instead of “necessity” c. There is more time to adjust d. It takes only a small part of the consumer’s budget e. Elasticity of demand is greater than 1 El-23) Demand will be more inelastic if a. there’s more time for consumers to adjust b. the good takes up a larger slice of consumers’ budgets c. supply is more inelastic d. price is higher e. there are fewer substitutes available

El-26) One reason a firm differentiates their good is to a. make demand for their product more elastic b. make demand for their product more inelastic c. reduce the cost of resources used to produce the good d. make supply of their product more inelastic e. increase supply

Figure 2

D5 D4 D1

D2

D3

Note: D1 is vertical. D5 is horizontal El-27) In Figure 2, the demand curve that would be described as very (but not perfectly) elastic is a. D1 b. D2 c. D3 d. D4 e. D5 El-28) In Figure 2, the demand curve that would best describe the demand for gasoline would be a. D1 b. D2 c. D3 d. D4 e. D5

El-29) In Figure 2, the demand curve that would best describe the demand for Exxon gasoline would be a. D1 b. D2 c. D3 d. D4 El-30) In Figure 2, the demand curve that is perfectly elastic is a. D1 b. D2 c. D3 d. D4 e. D5 El-31) In Figure 2, this demand curve represents consumers who are very sensitive to a change in the price of the good. a. D1 b. D2 c. D3 d. D4 e. D5 El-32) In Figure 2, with this demand curve, a change in supply would have no effect on price a. D1 b. D2 c. D3 d. D4 e. D5 El-33) In Figure 2, this demand curve would mean the firm is a “price taker” a. D1 b. D2 c. D3 d. D4 e. D5 Comprehensive Topic 3: Firm decision making Determine the price and quantity a monopoly would choose. Determine the price and quantity a perfectly competitive industry would choose.

Figure 3 Demand 28 24 20 16 12

MC=ATC

8 4 20 40 60

80 100 120 140

F-34) Using figure 3, if this represents a Pure Monopoly, to maximize profit, this firm would produce how many goods? a. 20 b. 40 c. 60 d. 80 e. 120 F-35) Using figure 3, if this represents a Pure Monopoly, to maximize profit, this firm would charge what price? a. 8 b. 16 c. 20 d. 24 e. 28 F-36) Using figure 3, if this represents a Pure Monopoly, using the above profit maximizing P & Q, profits would be a. 640 b. 720 c. 960 d. 1,200 e. 1,280 F-37) Using figure 3, if this represents a Perfectly Competitive Industry, the industry would produce how many goods? a. 20 b. 40 c. 60 d. 80 e. 120

F-38) Using figure 3, if this represents a Perfectly Competitive Industry, the industry would charge what price? a. 8 b. 16 c. 20 d. 24 e. 28 F-39) Using figure 3, if this represents a Perfectly Competitive Industry, industry profits would be a. -800 b. 0 c. 640 d. 720 e. 960 F-40) Using the previous questions, compared to Perfect Competition, the monopolistic firm would a. Produce the same but charge a higher price b. Produce more at a higher price c. Produce more at a lower price d. Produce fewer at a higher price e. Produce fewer at a lower price. Comprehensive Topic 4: Economic Efficiency Know what economic efficiency is. Know how different industry types affect efficiency. Be able to identify economically efficient quantity and price. Identify or know government polices that may promote efficiency. Ef-41) Using figure 3, the economically efficient quantity would be a. 20 b. 60 c. 100 d. 120 e. 140 Ef-42) Using figure 3, the economically efficient price would be a. $4 b. $8 c. $16 d. $20 e. $28 Ef-43) Economic efficiency is defined as economic decisions made so that the choices a. allow firms to make a profit b. maximize firm profit c. maximize producer surplus d. maximize consumer surplus e. maximize producer and consumer surplus combined

Ef-44) Anti-trust laws are intended to a. Limit competition b. Reduce economic efficiency c. Eliminate monopolies d. Increase producer surplus e. Balance producer and consumer surplus Ef-45) Collusion has this impact upon economic efficiency a. It improves efficiency by raising producer surplus (profits) b. It reduces efficiency because companies will see an increase in costs c. It improves efficiency by allowing firms to produce more expensive products with better quality d. It reduces efficiency because firms agree to produce fewer goods to increase price and profits e. It improves efficiency because all firms agreed, and voluntary agreement promotes efficiency Ef-46) Which of the following is not a policy used to lessen the inefficiency of monopolies a. anti-trust laws b. introduction of barriers to entry c. direct regulation d. government ownership e. introduction of competition Comprehensive Topic 5: Industry Types Know the definition of the four industry types and be able to identify which type an industry belongs. Also, be able to describe the different behaviors of the different types. For next set of descriptions, use the following answers to identify what type of industry it applies to. An answer may be used more than once, and not all answers may be used: a. Perfect Competition b. Pure Monopoly c. Monopolistic Competition d. Oligopoly e. More than one of the above is correct IT-47) Barriers to entry keep out all but just a few large firms IT-48) Is economically efficient IT-49) A pharmaceutical company develops a new drug that does things no other drug can do. They patent the drug. This industry type would best describe the economic condition of this pharmaceutical company

IT-50) The patent runs out on a pharmaceutical company, and a number of other companies are now producing a generic version of the drug that is identical to the original. This industry would now be best described as this.

IT-66) Though this type of firm has some control over the price of their good, the firm will not make profit in the long run.

IT-51) Mutual interdependence is a characteristic of this industry

IT-68) In the market for athletic shoes, if you want to understand why the price of shoes has risen, it might be easiest to use supply and demand analysis which assumes the industry can be well represented by this industry type.

IT-52) The wine industry is made up of many firms. Each winery spends money to make itself stand out and develop consumer loyalty. The wine industry would be best analyzed using this model IT-53) There are barriers to entry IT-54) Is made up of many small firms who produce identical products. IT-55) Does not make profit in the long run

IT-67) These firms break even in the long run.

IT-69) In the market for athletic shoes, if you observe many firms making varying shoe styles but profits that fade in the long run, then this industry model would be the appropriate one to use. IT-70) In the market for athletic shoes, if you want to understand the battle of actions and retaliations between Nike and Reebok, then this industry model would be the appropriate one to use.

IT-56) Game theory is useful to describe firm interaction IT-57) The airline industry is made up of many firms. However, most of the firms are very small and produce very little of the total industry production. Most of the production in the industry is done by a few large firms. Those few large firms would be best analyzed using this model IT-58) Produces a product for which there is no close substitution, and there are significant barriers to entry IT-59) Is susceptible to collusion IT-60) Every firm in this industry type makes identical goods

IT-71) The government uses antitrust laws to prevent firms in this industry from acting in a coordinated way IT-72) Anti-trust laws may be used against a firm of this industry type. IT-73) The ear-buds / headphones (what one uses to listen to an MP3 player) industry is comprised of many firms. Each firm produces a very similar product, but also each firm attempts to establish its own brand and to make itself different. The ear-bud industry would best be described as this. IT-74) The cell-phone service industry is dominated by three large firms Those three firms would be best analyzed using this model

IT-61) Is a price taker IT-62) Is a price maker IT-63) The restaurant industry is made up of many, many firms but all very different. An important difference is location. This industry type would be best to describe this industry. IT-64) Firms in this type of industry may keep their prices low to prevent their competitors from under cutting them and stealing customers. IT-65) This industry type is likely to be the most inefficient by producing less and driving the price up.

IT-75) Economic profits in this type of industry will attract more firms to enter IT-76) Firms will never enter this industry type even if there are large economic profits.