The document provides information about an economics class, including announcements about practice questions for an upcoming midterm exam, exam specifics, a teaching review request, and summaries of prior and upcoming class topics. It then provides 16 multiple choice practice questions related to the class content, including questions about efficiency, price discrimination, monopolies, game theory, externalities, and natural monopolies.

1. Learning by Doing:
Multiple Choice Q & A
April 26, 2013

2. Announcements (1/3)
• Practice questions for the midterm (week
from today!) are now posted on website.
– Do not need to be ``passed in.”
• Denise will go over ``Old Exam 1 – Old Exam
4” in Mon and Wed Sections
• Jake will do a midterm review Wed night and
go over other 4 documents ``efficiency”-
``externalities.’’
– Wednesday, May 1, WLH 2005, 7-8:50 pm

3. Midterm Specifics (2/3)
• All topics from day 1 through last Friday.
Warnings (2nd announcement):
(1) You must be on-time to exam. Friday, May
3, 3pm sharp.
-10% Deduction if you are 1 second late.
-100% deduction if you arrive after someone
else finishes and leaves room.
(2) No leaving room during exam (it’s less than an
hour).

4. Teaching Reviews (3/3)
• You should have received an email for a “mid-
quarter Evaluation” for this class.
• Please fill it out!

5. Last Class
• Finished discussing externalities
• Focused on the “tragedy of the commons.’’
• Main insight: optimality requires MR=MC, but
individual only pays attention to MR=ATC.

6. Today
• Will do practice multiple choice questions
together
• Three goals:
– (1) Understand where the class is at
– (2) Refresh understanding of different sections
and bring together
– (3) Practice sequential elimination of bogus
answers

7. 1. The concept of efficiency is NEVER based on
which of the following predetermined attributes
of buyers and sellers?
A. Buyers’ income.
B. Technology.
C. Individual worker abilities.
D. Policies that will most quickly increase incomes
for those in poverty.
E. Buyers’ tastes.

8. 2. When compared with a pure
monopoly, price discrimination
A. reduces total surplus
B. increases or keeps constant surplus to sellers and to society as a
whole but never increases buyers’ surplus.
C. increases or keeps constant surplus to buyers and to society as a
whole but never increases sellers’ surplus.
D. always increases total surplus
E. increases or keeps constant surplus to buyers and to society as a
whole and sometimes increases sellers’ surplus.

9. 3. Economists consider monopolies socially
undesirable because a monopolist
A. always earns positive economic profits
B. can charge any price she wants
C. exploits the inelastic nature of demand
D. produces less than the socially efficient amount
E. produces more than the socially efficient amount

10. 4. Economies of scale are a defining feature
of a natural monopoly. This means that
A. marginal cost equals marginal revenue
B. marginal cost will always be less than average total cost
C. marginal cost will always be less than average variable cost
D. marginal cost will always be greater than average total cost
E. marginal cost will always be greater than average variable
cost

11. 5. Game theory is useful in studying imperfect
competition because, unlike the previous tools, it
incorporates
A. profit maximization
B. more than one good
C. time
D. utility maximization
E. interdependency

12. 6. Suppose that two players cannot achieve an
optimal outcome because neither is credible. This is
an example of
A. the prisoner’s dilemma
B. a commitment problem
C. a dominant strategy
D. a Nash equilibrium
E. a payoff

13. 7. Using psychological incentives to solve a
commitment problem will not be very effective in a
game that is played
A. repeatedly between two strangers
B. only once between two family members who live in the
same home
C. only once between two strangers
D. repeatedly between two family members who live in
the same home.
E. Repeatedly between friends who live together

14. 8. Which of the following factors would make it easier
to apply the Coase Theorem to solve an externality?
A. The market supply and demand curves reflect all costs and benefits.
B. The gains from reducing the externality are small compared to the
costs of negotiating a solution
C. The gains from reducing the externality are large compared to the
costs of negotiating a solution
D. The people involved cannot monitor each others’ actions to ensure
they obey an agreement.
E. None of the above.

15. 9. Most states require public school districts to offer
kindergarten to young children. If there is a belief that
attending kindergarten generates an externality, this mandate
is an example of
A. intrusive state governmental mandates
B. a legal remedy for an externality
C. a private solution for an externality, as suggested by the
Coase theorem
D. a government solution of an externality along the lines of
the Coase theorem
E. an external benefit

16. 10. Positional externalities
A. only occur in professional sports
B. arise in situations where absolute performance is the
criteria for success.
C. cause people to invest too little in performance
enhancement
D. arise when an increase in one person’s performance
reduces the expected reward of the other participants
E. arise when one person is taller than another person

17. 11. Which one of the following is an example of
exclusive contracting for a natural monopoly?
A. Municipal garbage collection through a single
private company.
B. A state-owned electric power company.
C. Satellite television service.
D. A bookstore in a small town.
E. An oil well in Alaska.

18. 12. Cost-plus regulation of a natural monopoly involves
A. letting the firm set their price and then reducing that by
a fixed amount.
B. insuring that the firm charges a price equal to its explicit
costs of production plus a markup to cover implicit
costs.
C. granting the firm a patent
D. keeping other firms from entering
E. creating a government-owned corporation.

19. 13.
Bill
Decides
Ted
Decides
$1000 (Ted)
$1000 (Bill)
$1600 (Ted)
$1400 (Bill)
$1400 (Ted)
$1600 (Bill)
$800 (Ted)
$800 (Bill)
A.
B.
C.
D.

20. 14. How many
equilibria?
Bill
Decides
Ted
Decides
$1400 (Ted)
$1500 (Bill)
$800 (Ted)
$1500 (Bill)
$1300 (Ted)
$1600 (Bill)
$700 (Ted)
$1600 (Bill)
A. 1
B. 2
C. 3
D. 4

21. 15. How many
equilibria?
Bill
Decides
Ted
Decides
$1400 (Ted)
$1600 (Bill)
$800 (Ted)
$1600 (Bill)
$1400 (Ted)
$1600 (Bill)
$800 (Ted)
$1600 (Bill)
A. 1
B. 2
C. 3
D. 4

22. 16. A compensating subsidy used to rectify an external
benefit from consuming a good will
A. cause the supply curve to shift up and reduce the quantity of
the good produced
B. cause the demand curve to shift up and increase the
quantity of the good produced
C. cause the supply curve to shift down and increase the
quantity of the good produced
D. cause the demand curve to shift down and decrease the
quantity of the good produced
E. have no effect on the quantity of the good produced