ECON 101 Midterm 3 Sample Tests

TABLE: If the product price is $290, the per-unit economic profit at the profit-maximizing output is

$119

If the monopolist were forced to produce the socially optimal output through the imposition of a ceiling price, the ceiling price would have to be set at

$150

Which cannot be a characteristic of an oligopolistic industry?

A perfectly elastic firm demand curve

A firm will earn economic profits whenever

Average revenue exceeds average total costs

A unique feature of an oligopolistic industry is

Mutual interdependence

A monopolistically competitive industry is like a purely competitive industry in that

Neither industry has significant barriers to entry

Mutual interdependence means that a firm's

Behavior is affected by other firm's actions

If marginal cost is below average variable cost

Both average total cost average variable cost are decreasing

A non discriminating pure monopolist is generally viewed as

Both productively and allocatively inefficient

GRAPH: The firm is

In short-run equilibrium, but not long-run equilibrium

Which assumption is part of the model of monopolistic competition?

There is no collusion mutual interdependence among firms

If monopolistically competitive firms in an industry are making an economic profit, then new firms will enter the industry and the product demand facing existing firms will

decrease

In pure competition, the demand for the product of a single firm is perfectly

elastic because many other firms produce the same product

In long-run equilibrium, a purely competitive firm will operate where price is

equal to MR, MC, and minimum ATC

In the long run, the representative firm in monopolistic competition tends to have

excess capacity

To the economist, total cost includes:

explicit and implicit costs

In an oligopolistic market there are

few sellers

Which constitutes an obstacle to collusion among oligopolists?

large number of firms

GRAPH: The firm is earning

normal profits, since its price just covers ATC

In an oligopoly, producers' agreements to restrict output tend to be unstable because each firm has an incentive to

produce more than its output quota

A purely competitive firm will be willing to produce even at a loss in the short run, as long as

the loss is smaller than its total FIXED costs

The demand curve confronting a non-discriminating pure monopolist is

the same as the industry's demand curve

TABLE: If the monopolist were forced to produce the socially optimal output through the imposition of a ceiling price, the ceiling price would have to be set at

$150

TABLE: The table shows cost data for a firm that is selling in a purely competitive market. If the price of the product is $6, what output level will the firm produce?

14

GRAPH: If the industry were purely competitive, the output quantity would be

160

TABLE: Plant sizes get larger as you move from ATC-1 to ATC-4. Which plant size would produce the least cost for the 3,000-4,000 level of output?

2

A monopolist sells 6 units of a product per day at a unit price of $15. If it lowers price to $14, its total revenue increases by $22. This implies that its sales quantity increases by

2 units per day

Given the data in the table below, what is the short-run profit-maximizing level of output for the firm?

4 units

TABLE: Plant sizes get larger as you move from ATC-1 to ATC-4. In the long run, the firm should use plant size ATC-3 for what level of output?

4,000 to 4,500

TABLE: What output quantity will the monopolistically competitive firm produce to maximize profits?

5

TABLE: If the market price for the firm's product is $180, the competitive firm will produce

7 units and earn economic profits of $238

GRAPH: which point is definitely not on the competitive firm's short-run supply curve?

A

Which of the following is correct?

A purely competitive firm is a "price taker," while a monopolist is a "price maker"

Pure monopoly refers to

A single firm producing a product for which there are no close substitutes.

GRAPH: A successful advertising campaign by the firm will cause its demand curve to shift from

A to B and become less elastic

Answer the next question based on the following payoff matrix for a duopoly in which the numbers indicate the profit in millions of dollars for each firm If firm A adopts the low-price strategy, the firm B would adopt the

High price strategy and earn $200

In monopolistic competition, which of the following would make an individual firm's demand curve less elastic?

Increased brand loyalty toward the firm's product

With a natural monopoly, the fair return price

Is allocatively inefficient; the socially optimal price is allocative efficient

The demand curve faced by a monopolistically competitive firm

Is more elastic than the monopolist's demand curve

The demand curve faced by a purely competitive firm

Is the same as its marginal revenue curve

A firm should continue to operate even at a loss in the short run if

It can cover its variable costs and some of its fixed costs

A purely competitive firm does not try to sell more of its product by lowering its price below the market price because

It can sell all it wants to at the market price

The problem with adopting a fair-return pricing policy for a natural monopoly is that

It is not allocatively efficient

When a firm is experiencing economies of scale

Long-run average total cost is decreasing

Price discrimination is more common in service industries because

Low price buyers will find it virtually impossible to resell the products of such industries to high price buyers

The short-run supply curve of a purely competitive producer is based primarily on its

MC curve

Suppose that TC = $550, TVC = $500, and MC = $100. If the firm produces 10 units of output, then

MC>AVC

An argument for making regulated monopolies adopt marginal cost pricing is that this would

Make the marginal cost equal to society's valuation of the marginal benefit

Which is necessarily true for a purely competitive firm in short-run equilibrium?

Marginal revenue minus marginal cost equals zero

Under monopolistic competition, entry to the industry is

More difficult than under pure competition but not nearly as difficult as under pure monopoly

In which set of market models are there the most significant barriers to entry?

Oligopoly and pure monopoly

In pure competition, if the market price of the product is initially higher than the minimum average total cost of the firms, then

Other firms will enter the industry and the industry supply will increase

The problem with socially optimal pricing regulation of a natural monopoly is that

P<ATC

Which of the following is a barrier to entry?

Patents and licesnes

Which characteristic would best be associated with pure competition?

Price takers

What idea is inconsistent with pure competition?

Product differentiation

Demand and marginal revenue curves are downsloping for monopolistically competitive firms because

Product differentiation allows each firm some degree of monopoly power

Which is a feature of a purely competitive market?

Products are standardized of homogenous

Which is a feature of a purely competitive market?

Products are standardized or homogenous

Which of the following is not a barrier to entry in an industry?

Profit maximization

If the demand curve faced by an individual firm is downward-sloping, the firm cannot be a(n)

Purely competitive firm

Which of the following is a characteristic of monopolistic competition?

Relatively easy entry

Long-run competitive equilibrium

Results in zero economic profits

In which industry in monopolistic competition most likely to be found?

Retail trade

GRAPH: What will happen in the long run to industry supply an the equilibrium price P of the product?

S will decrease, P will increase

GRAPH: The short-run supply curve for this firm is the

Segment of the MC curve lying to the right of output level h

In monopolistic competition, a firm has a limited degree of "price-making" ability. this means that the firm will

Set price above marginal cost

T-Shirt Enterprises is selling in a purely competitive market. It is producing 3,000 units, selling them for $2 each. At this level of output, the average total cost is 2.50 and the average variable cost is $2.20. Based on these data, the firm should

Shut down in the short run

Assume that the market for corn is purely competitive. Currently, firms growing corn are suffering economic losses. In the long run, we can expect

Some firms to exit causing the market price of corn to rise

Which of the following statements is true of price discrimination?

Successful price discrimination will provide the firm with more profit than if it did not discriminate

Under what conditions would an increase in demand lead to the same long-run equilibrium price?

The firms in the market are part of a constant-cost industry

Which of the following is not a necessary characteristic of a purely competitive industry?

The industry or market demand is highly elastic

A firm doubles the quantity of all resources it employs, and as a result, output doubles. Which of the following is correct?

The long-run average total cost curve is flat

In the long run, the economic profits for a monopoistically competitive firm will be

The same as the profits for a purely competitive firm

One difference between monopolistic competition and pure competition is that

There is some control over price in monopolistic competition

Marginal cost can be defined as the change in

Total cost resulting from one more unit of production

Economic profits are equal to

Total revenues minus the opportunity costs of all inputs

GRAPH: If the firm is producing at Q1, the area 0BEQ1 represents

Total variable costs

Xavier produces and sells tomatoes in a purely competitive market. This implies that Xavier's marginal revenue from an extra unit of tomatoes is always equal to the

Unit price

Which industry would be best characterized as monopolistically competitive?

Web design consulting

When a bakery manager reports that productivity of the 15 workers at her bakery last month was 1,800 loaves per worker, she is referring to the

average product of labor

When firms in an industry reach an agreement to fix prices, divide up market share, or otherwise restrict competition, they are practicing the strategy of

collusion

If all resources used in the production of a product are increased by 20% and output increases by 20%, then there must be

constant returns to scale

Productive efficiency refers to

cost minimization, where P = minimum ATC

Variable costs are

costs that change with the level of production

The consumer wifi-service providers' market is best described as a

differentiated oligopoly

Price it taken to be a "given" by an individual firm selling in a purely competitive market because

each seller supplies a negligible fraction of total market

An industry where a change in the number of firms does not affect the prices of the resources used in the industry will have a long-run supply curve that is

horizontal

Suppose that a monopolist calculates that at its present output level, marginal revenue is $1 and marginal cost is $2. He or she could maximize profits or minimize losses by

increasing price and decreasing output

The demand curve faced by a purely competitive firm

is the same as its marginal revenue curve

Pure monopolists may obtain economic profits in the long run because

of barriers to entry

An exclusive legal right as sole producer for 20 years granted to an inventor of a product is called a

patent

If a firm is a price taker, then the demand curve for the firm's product is

perfectly elastic

TABLE: At equilbrium the monopolist will realize a

profit of $6.50

TABLE: At equilibrium, the monopolist will realize a

profit of $6.50

Assume a purely competitive constant-cost industry is initially at long-run equilibrium. Now suppose that a decrease in consumer demand occurs. After all the long-run adjustments have been completed, the new equilibrium price

will be the same as the initial price, and the output will be less

GRAPH: which area of the graph represents the amount of economic loss for the firm?

bcde

To practice long-run price discrimination, a monopolist must

Be able to separate buyers into different markets with different price elasticities

Consumers who clip and redeem discount coupons

Exhibit a higher price elasticity of demand for a given product than consumers who do not clip and redeem coupons

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The economic profits of Harvey's firm in the first year were

$160,000

Suppose that you could either prepare your own tax return in 15 hours or hire a tax specialist to prepare it for you in 2 hours. You value your time at $11 an hour; the tax specialist will charge you $55 an hour. The opportunity cost of preparing your own tax return is

$165

TABLE: Suppose that entry of firms into the industry changes this firm's demand schedule from columns 1 and 3 to columns 2 and 3. Maximum economic profit will decrease to

$35

TABLE: The market price of the product in the short run is: a. $80 b. $40 c. $160 d. $120

$40

GRAPH: This firms total cost

$400

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The implicit costs of Harvey's firm in the first year were

$60,000

Use the following information to answer the next question. Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The explicit costs of Harvey's firm in the first year were

$605,000

If you know that with 8 units of output average fixed cost is $12.50 and average variable cost if $81.25, then total cost at this output level is

$750

If you know that with 8 units of output average fixed cost is $12.50 and average variable cost is $81.25, then total cost at this output level is

$750

TABLE: The average variable cost of producing 3 units of output is

$9.33

If you know that when a firm produces 10 units of output, total costs are $1,030 and average fixed costs are $10, then total variable costs are

$930

If average variable cost is $74 and total fixed cost is $100 at 5 units of output, then average total cost at this output level is

$94

Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs of production are $300,000. The firm earns an accounting profit of

%500,000 and an economic profit of $200,000

Select the marginal cost

(Change in TVC)/(Change in Q)

TABLE: What will be the economic profit or loss for this monopolistically competitive firm at the profit-maximizing level of output

+$20

TABLE: Nina, a monopolist selling baskets. What is the change in total revenue if she raises the price from $10 to $12?

-$120

A monopoly most likely results in productive inefficiency because at the profit-maximizing output level

ATC is not at its minimum level

Collusion refers to a situation where rival firms decide to

Agree with each other to set prices and output

TABLE: The letters A, B, and C designate three successively larger plant sizes. In the long run, the firm should use plant size "C" for

All units of output greater than or equal to 80

If you operated a small bakery, which of the following would be a variable cost in the short run?

Baking supplies (flour, salt, etc)

In a purely competitive industry, each firm:

Can easily enter or exit the industry

In the short run, total output in an industry

Can vary as the result of using a fixed amount of plant and equipment more or less intensively

Fixed costs of production in the short run

Cannot be reduced by producing less output

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 500 units is $1.50. The minimum possible average variable cost is $1. The market price of the product is $1.25. To maximize profits or minimize losses, the firm should

Continue production, but produce less than 500 units

A firm in an oligopoly is similar to a monopoly in that both firms

Could have significant market power and control over price

GRAPHS: A short-run equilibirum that would produce losses for a monopolistically competitive firm would be represented by graph

D

Under oligopoly, if one firm in an industry significantly increases advertising expenditures in order to capture a greater market share, it is most likely that other firms in that industry will

Decide to increase advertising expenditures even if it means a reduction in profits

The economic incentive for price discrimination is based upon

Differences among buyers' elasticities of demand

GRAPH: When the firm is in equilibrium in the short run, the amount of economic profit per unit is

EH

Which set of characteristics below best describes the best features of monopolistic competition?

Easy entry, many firms, and differentiated products

The larger the diameter of a natural gas pipeline is, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of one reason for

Economies of scale

Economic profits are

Equal to the difference between accounting profits and implicit costs

In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is

Equal to the price