Take this quiz to test your knowledge of Professor Levmore's economics lecture. Find the answer key at the bottom, as well as an additional quiz on the assigned reading!
(1.) Which of the following profiles best matches the economic concept of the rational man?
- (A.) A man owns a ten-bedroom house, but after all of his neighbors are foreclosed on and forced to vacate their homes, he puts his house on the market.
- (B.) A man sees an advertisement on television for a new, state-of-the-art refrigerator, and goes out the next day to buy it in order to replace his five-year-old, still-functional refrigerator.
- (C.) A man owns a farm, and sees that the price of his crop is rising, but does not alter his agricultural plan to grow more acres because he doesn’t wish to do the extra work.
- (D.) A man notices that Yoga classes in his town have filled up, driving up the cost of attendance, so he enrolls in a course to become a certified Yoga instructor.
(2.) In the cookie example used by Levmore, why is the baker unable to charge $10 for his goods?
- (A.) The baker could likely sell a line of cookie for $10 and develop a high-end customer base, but government regulations prevent bakers from selling cookies for that much more than the cost of the inputs.
- (B.) While some customers, like Levmore, would be willing to pay $10 for a cookie, most would not, and if customers became aware that they were being charged more than other people then they would cease to trust the baker.
- (C.) While some customers, like Levmore, would be willing to pay $10 for a cookie, few other people would, and even though the baker would make a high profit margin on a $10 cookie, the volume of sales would slow down enough to offset it.
- (D.) The high profit margin observed on sales of cookies would encourage competitors to sprout up and sell cookies for less. Once enough competitors enter the market, the price of a cookie will approach the marginal cost of producing it.
(3.) What does Levmore mean when he says that prices are messengers?
- (A.) Prices present a message to the consumer about how much a good is worth, and the prices of the inputs of the good present a message to the producer about how to make the product.
- (B.) Prices are set by the government and send messages to producers and consumers about how much goods should be worth, and that determines what consumers can afford and how producers make the good.
- (C.) Prices match the concrete value of a good, and present a message to consumers about how they should rank its importance in their budgets, and present a message to producers about if it’s worthwhile to make the product at all.
- (D.) Prices send a message to consumers about how much the producer thinks the product is worth, and the price of the inputs of a product send a message to the producer about how much the seller of materials thinks the inputs are worth.
(4.) How is it that certain goods, like designer handbags and sneakers, can sell at prices far above the costs of the inputs to make them, as opposed to cookies?
- (A.) Items like handbags and sneakers can generate demand that justifies an inflated price, because expensive fashion items signal the consumer that the good is scarce and desirable and once the item is purchased it signals that the owner can afford the item.
- (B.) Items like handbags and sneakers have greater utility than things like cookies, because the consumer will use them over a longer period of time, creating a higher sense of value despite the fact that the cost of inputs is much lower than the price.
- (C.) Consumers are largely unaware of how much the cost of inputs is for any particular durable good, in this case a handbag or a pair of sneakers, and thus believe that labor and materials used to make are worth the inflated price.
- (D.) Items like handbags and sneakers, which are considered fashionable, are not regulated the same way that food is, and thus producers of handbags and sneakers are allowed to charge whatever they want.
(5.) According to Levmore, economists failed to anticipate the housing bubble crash of 2008 for all of the following reasons EXCEPT:
- (A.) The psychological nature of the housing market caused people to fear not buying a house before the price went up, causing a chain reaction and driving up prices to the point where prices no longer matched individual consumer demand and where prices far exceeded the cost of construction.
- (B.) The housing market is notoriously difficult to forecast correctly, because people buy houses not just as goods that they can live in, but also as investments that are supposed to return a profit in the long run, creating unpredictable speculation.
- (C.) Economists excel at the short-term analysis of price and demand, but are not in the business of detecting cultural trends like the one that drove up housing prices artificially and created a glut of houses on the market.
- (D.) The US government subsidized the housing market in order to create a bubble, distorting the relationship between prices and demand to the point where economists were unable to determine whether or not the housing market was a bubble or a genuine source of economic growth.
(6.) Which statement most accurately describes the difference between competitive and non-competitive pricing?
- (A.) Competitive businesses generally set prices as little above the cost of inputs as possible, to remain competitive with similar products, while monopolies set prices based on what price point, after costs, will generate the most profit.
- (B.) Competitive businesses generally set prices as little above the cost of inputs as possible, to remain competitive with similar products, while monopolies set prices based on the maximum amount that the government will allow them to charge for their product.
- (C.) Competitive business generally set prices higher than the cost of inputs in the hope of raising profit margins by encouraging competitors to do the same, while monopolies set prices based on the maximum amount that the government will allow them to charge for their product.
- (D.) Competitive business generally set prices higher than the cost of inputs in the hope of raising profit margins by encouraging competitors to do the same, while monopolies set prices based on what price point, after costs, will generate the most profit.
(7.) Which of the following scenarios describes a deadweight loss?
- (A.) Outside of a train station, a traveler is confronted by ten different cab drivers lobbying for her business; the traveler is unsure of which cab driver to choose, until one of them lowers his price below what the rest are willing to drive for.
- (B.) An ice cream truck stops at a public park on a hot summer day, and is mobbed by customers; the first 50 people in line purchase popsicles at the listed price before at the truck runs out of product.
- (C.) A popular dog walker is approached by three dog owners who wish to contract his services. He accepts the first two customers, but tells the third that he cannot take on any more dogs; the customer offers to double the dog walker’s fee, but the dog walker is literally unable to manage another customer.
- (D.) The only farmer in a given county who grows watermelons sets up a stall at a farmers market. Based on the line that forms, the farmer decides to sell his watermelons for double the price; many customers balk and walk way, but the farmer ends up making more money than if he had sold watermelons to everyone at the normal price.
(8.) All of the following describe government-enabled barriers to entry EXCEPT:
- (A.) A small firm designs an innovative automobile, but is unable to raise enough money from investors to build a manufacturing plant for the car.
- (B.) In order to legally receive money for cutting people’s hair, a hair stylist must attend a cosmetology school and perform well enough there to receive a license from a regional cosmetology board.
- (C.) A man is denied the right to sell a cheap ePad to compete with the iPad, because it is determined that the ePad uses technology that is too similar to the iPad’s.
- (D.) In order to legally sell hotdogs from a food cart, the owner of the cart must obtain a permit, of which there are only a set amount granted in a single year.
(9.) According to Levmore why can rent seeking on the behalf of a business actually be economically destructive for the resultant monopoly?
- (A.) Not every “auction” for a rent seeking position occurs among equally dispersed information; as such two firms might drive up the “bid” in order to encourage a third competing firm to outbid them for a monopoly position that is unprofitable and will damage the rent seeker, benefiting the two firms that did not win the auction.
- (B.) When a business attains a monopoly through government sanction, it is able to collect rent exclusively, but without competitive pressure to keep the business healthy, it runs a high risk of becoming inefficient and disorganized, thereby wasting the rent seeking advantage.
- (C.) After a business secures monopoly rights through government sanction, there is no guarantee that the political winds won’t change and install new political operators who will demand greater concessions on behalf of the business to retain the monopoly, thereby eroding or reversing the original rent seeking advantage.
- (D.) When competing with other firms for monopoly rights, a business can end up spending more on non-refundable bidding or lobbying than it will end up making as monopoly, but will lose even more money if it loses the bid.
(10.) How are China and India altering long-standing Western notions about how to shape an effective national economy?
- (A.) In India the government provides no public services, leaving it up to entrepreneurs to build roads, supply water, police cities, and educate children; China encourages quality infrastructure and economic performance by setting up local officials to compete for favor within the Communist Party power structure, where good performance results in political advancement.
- (B.) In India prices and competition determine the existence of and access to services, like education and access to water, that are traditionally operated by governments; China uses the apparatus of government to keep the prices and wages in the country artificially low, thus generating massive economic investment from other countries and creating a net gain.
- (C.) In India prices and competition determine the existence of and access to many social services, like education and drinking water, that are traditionally operated by governments; China encourages quality infrastructure and economic performance by setting up local officials to compete for favor within the Communist Party power structure, where good performance results in political advancement.
- (D.) In India the government provides no public services, leaving it up to entrepreneurs to build roads, supply water, police cities, and educate children; China uses the apparatus of government to keep the prices and wages in the country artificially low, thus generating massive economic investment from other countries and creating a net gain.
Answer Key: (1.) B, (2.) D, (3.) A, (4.) A, (5.) C, (6.) A, (7.) B, (8.) D, (9.) D, (10.) C
This quiz is based on:
Course Pack: Samuelson & Nordhaus, Economics, 17th edition. (Chapter 9)
(1.) Which of the following scenarios best describes a condition of imperfect competition?
- (A.) A producer of house paint comes up with a new color, but has to sell this product at the same price as its many competitors.
- (B.) Three lemonade stands open up on the same city block, and each vender finds that it can sell a glass of lemonade for $0.25 at a constant demand.
- (C.) A farmer grows a larger than average crop of wheat one year, and sells the whole quantity at the going market rate.
- (D.) The maker of a popular breakfast cereal raises its price $0.10 above that of its closest generic competitor.
(2.) Which of the following scenarios best describes monopolistic competition?
- (A.) The maker of a computer operating system controls over 80% of the market, and uses its economic weight to stifle small firms that try to enter into competition.
- (B.) An automobile manufacturer is one of three that compete for consumers in a given country, and depends on the unique features of its cars to differentiate itself.
- (C.) The producer of an industrial chemical competes against two other companies that produce the same chemical, and slightly lowers its price to goose the competition.
- (D.) A national pizza chain launches an advertising campaign against its many national competitors, claiming that its pizza tastes the best and now has the lowest price as well.
(3.) Which of the following statements best describes why costs are the main driver of market imperfections?
- (A.) Embedded oligarchs in certain industries spend hundreds of millions of dollars every year in advertising to ensure that their products occupy the majority of the consumer mindspace, and new competitors can’t match this advertising spending to break in.
- (B.) The amount of money it takes to break into a capital-intensive industry, such as airplane manufacturing, is so high that no new firm could realistically accomplish the feat.
- (C.) The economy of scale in many industries reaches its lowest-cost point when individual companies control large chunks of the market, making it infeasible for more than a handful of competitors to exist.
- (D.) Certain forms of monopolistic competition are created by government regulation, where one firm is granted the excusive market for a geographic region. The costs of lobbying the government and infrastructure construction for new firms is too high to make competition a rational endeavor.
(4.) Which of the following statements best describes marginal revenue?
- (A.) Marginal revenue is the amount of revenue that a producer receives when it maximizes its price/output ratio.
- (B.) Marginal revenue is the change in revenue that is generated by an additional unit of sales.
- (C.) Marginal revenue is the amount of revenue that a company loses when it must lower its price in order to sell more units.
- (D.) Marginal revenue is the amount of revenue that a company loses or receives outside of its central area of imperfect competition.
(5.) Which of the following scenarios best describes an individual or firm operating under the marginal principle?
- (A.) A computer manufacturer finds that it has mis-calibrated its price, lowering its market share. The company accepts this loss of potential revenue in the past and makes an adjustment to match its marginal revenue to the marginal cost of production.
- (B.) A tennis shoe company has faded in relevance over the last decade, and decides to launch itself back into the spotlight by generating a negative marginal revenue in order to sell many more units.
- (C.) A company that produces fashionable handbags believes its brand to be diluted, so it cuts back on production, increasing its marginal revenue over its marginal cost.
- (D.) An investor has taken a beating on the market over the last two years, and decides to sell off all of his remaining stock at a below-market rate to recoup his losses.
Answer Key: (1.) A, (2.) A, (3.) C, (4.) B, (5.) D