Econ 202 Tamu Module 9

To maintain a monopoly, a firm must have a perfectly inelastic demand. an insurmountable barrier to entry. marginal revenue equal to demand. few competitors.

an insurmountable barrier to entry

If a firm shuts down in the short run, its loss equals its fixed cost. its total revenue is not large enough to cover its fixed cost. is makes zero economic profit. its loss equals zero.

its loss equals its fixed cost

If a typical firm in a perfectly competitive industry is earning profits, then new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease. all firms will continue to earn profits. new firms will enter in the long run causing market supply to decrease, market price to rise, and profits to increase. the number of firms in the industry will remain constant in the long run.

new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease

If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, then the firm should shut down. should increase output. should increase price. is earning a profit.

should shut down

A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both average costs of production do not change when their industry expands. fixed costs are lower than variable costs. the implicit costs of production exceed the explicit costs of production. there are many other suppliers of similar goods or services.

there are many other suppliers of similar goods and services

Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's profit? P - TC (P × Q) - TC (P × Q) - (P × ATC) P - ATC

(P × Q) - TC

Which one of the following about a monopoly is false? A monopoly could make profits in the long run. A monopoly could break even in the long run. A monopoly status could be temporary. A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.

A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.

In recent years, Amazon has lowered its profits by offering some of its customers free shipping on books and building more warehouses to hold its book inventories. Which of the following explains Amazons actions? Amazon feared government regulation if its profits were too high. Amazon took these actions to deter entry into its market by new online booksellers. Amazon took these actions to compete more effectively with existing online booksellers. Amazon was forced to take these actions because of the bargaining power of its suppliers.

Amazon took these actions to compete more effectively with existing online booksellers.

If price is equal to average variable cost, then a perfectly competitive firm breaks even. True False

False

A firm could continue to operate for years without ever earning a profit as long as it is producing an output where MR > AVC. ATC > AVC. MR < ATC. AFC < AVC.

MR>AVC

Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly? Yes, there are no substitutes to Peet's coffee. No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes. No, Peet's is not a monopoly because there are many branches of Peet's. Yes, Peet's is the only supplier of Peet's coffee in a market where there are high barriers to entry.

No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes

Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements regarding economic surplus in each market structure is true? Under perfectly competitive conditions, economic surplus in this industry equals consumer surplus plus producer surplus. Under monopoly conditions, some consumer surplus is transferred to producer surplus, but economic surplus is the same as it was under perfectly competitive conditions. Under perfectly competitive conditions, economic surplus in this industry is maximized. Under monopoly conditions, economic surplus is minimized. Under perfectly competitive conditions, economic surplus is equal to consumer surplus; there is no producer surplus because firms are price takers. Under monopoly conditions, economic surplus is equal to producer surplus. Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions, economic surplus is less than under perfect competition and there is a deadweight loss.

Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions, economic surplus is less than under perfect competition and there is a deadweight loss.

Relative to a perfectly competitive market, a monopoly results in a gain in producer surplus equal to the loss in consumer surplus. a gain in producer surplus equal to the gain in consumer surplus. a gain in producer surplus less than the loss in consumer surplus. greater economic efficiency

a gain in producer surplus less than the loss in consumer surplus.

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it? profit maximization allocative efficiency marginal efficiency productive efficiency

allocative efficiency

A natural monopoly is most likely to occur in which of the following industries? the software industry because of the importance of network externalities the diamond mining and marketing industry because one firm can control a key resource an industry where fixed costs are very large relative to variable costs the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years

an industry where fixed costs are very large relative to variable costs

Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not. Why is this so? because Microsoft is large enough to hire the best people in the field because the wealthy corn farmer is a price maker who sets his price independently of the market price, but Microsoft's optimal output depends on the price it selects because Microsoft could potentially lose sales if it sets prices indiscriminately because unlike Microsoft, the wealthy corn farmer is probably a monopolist

because Microsoft could potentially lose sales if it sets prices indiscriminately

Why does a monopoly cause a deadweight loss? because it increases producer surplus at the expense of consumer surplus because it does not produce some output for which demand exceeds supply because it stops producing output at a point where price is above marginal cost because it appropriates a portion of consumer surplus for itself

because it stops producing output at a point where price is above marginal cost

The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds? because the availability of previously owned diamonds would make the market demand curve for diamonds more inelastic and force De Beers to lower its price because the availability of previously owned diamonds would increase the market demand for diamonds and dilute De Beers' monopoly because previously owned diamonds would be a close substitute to newly mined diamonds and would therefore reduce De Beers' market power because De Beers will not be able to guarantee the quality of previously owned diamonds and fears that its reputation might be harmed

because previously owned diamonds would be a close substitute to newly mined diamonds and would therefore reduce De Beers' market power

As word processing on personal computers expanded, sales of typewriters began to disappear. Which competitive force does this event demonstrate? competition from substitute goods or services bargaining power of suppliers bargaining power of buyers the threat of competition from new entrants

competition from substitute goods or services

Which of the following statements is correct? Economic profit takes into account all costs involved in producing a product. Economic profit always exceeds accounting profit. Accounting profit is the same as economic profit. Accounting profit is not relevant in preparing the firm's financial statement.

economic profit takes into account all costs involved in producing a product

The perfectly competitive market structure benefits consumers because firms add a much smaller markup over average cost than firms in any other type of market structure. firms are forced by competitive pressure to be as efficient as possible. firms do not produce goods at the lowest possible price in the long run. firms produce high-quality goods at low prices.

firms are forced by competitive pressure to be as efficient as possible

A perfectly competitive industry achieves allocative efficiency when firms carry production surpluses. goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. it produces where market price equals marginal production cost. goods and services are produced at the lowest possible cost.

goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

A patent or copyright is a barrier to entry based on ownership of a key necessary raw material. government action to protect a producer. large economies of scale as output increases. widespread network externalities.

government action to protect a producer

A profit-maximizing monopoly's price is greater than the price that would prevail if the industry was perfectly competitive. less than the price that would prevail if the industry was perfectly competitive. the same as the price that would prevail if the industry was perfectly competitive. not consistently related to price that would prevail if the market was perfectly competitive.

greater than the price that would prevail if the industry was perfectly competitive.

A public franchise results from ownership of a key raw material. is a corporation that is owned by stockholders. is a government designation that a private firm is the only legal producer of a good or service. is an unregulated monopoly necessary for the public good.

is a government designation that a private firm is the only legal producer of a good or service.

If a perfectly competitive firm's price is above its average total cost, the firm should shut down. is incurring a loss. is earning a profit. is breaking even.

is earning a profit

If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm should shut down. is breaking even. is earning a profit. is incurring a loss.

is incurring a loss

Compared to perfect competition, the consumer surplus in a monopoly is lower because price is higher and output is lower. is higher because price is higher and output is the same. is unchanged because price and output are the same. is eliminated.

is lower because price is higher and output is lower.

Diet Coke ________ considered a product in a monopoly market, because ________. is; the CocaCola company has market power is not; because it is produced in factories around the world is not; it has many substitutes is; it has only one producer: CocaCola company

is not; it has many substitutes

A monopoly firm's demand curve is perfectly inelastic. is the same as the market demand curve. is more inelastic than the demand curve for the product. is inelastic at high prices and elastic at lower prices.

is the same as the market demand curve

Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit-maximizing outputs? Marginal revenue is less than price. Price equals marginal cost. Average revenue equals average cost. Marginal revenue equals marginal cost.

marginal revenue is less than price

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell the output where marginal revenue equals marginal cost. any positive output the entrepreneur decides upon because all of it can be sold. nothing at all; the firm shuts down. the output where average total cost equals price.

nothing at all; the firm shuts down

Which of the following describes a situation in which a good or service is produced at the lowest possible cost? productive efficiency marginal efficiency allocative efficiency profit maximization

productive efficiency

If a firm shuts down in the short run, it avoids its variable cost but not its fixed cost. True False

true

If a typical firm in a perfectly competitive industry is incurring losses, then all firms will continue to lose money. some firms will exit in the long run, causing market supply to decrease and market price to rise, increasing profits for the remaining firms. some firms will enter in the long run, causing market supply to increase and market price to rise, increasing profit for all firms. some firms will exit in the long run, causing market supply to decrease and market price to fall, increasing losses for the remaining firms.

some firms will exit in the long run, causing market supply to decrease and market price to rise, increasing profits for the remaining firms.

In the long run, a perfectly competitive market will produce only the quantity of output that yields a long-run profit for the typical firm. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. supply whatever amount consumers will buy at a price which earns the market an economic profit. generate a long-run equilibrium where the typical firm operates at a loss.

supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve

In 2017, the Educational Testing Service (ETS) charged $54.50 to take the Scholastic Aptitude Test (SAT) but $205 to take the Graduate Record Exam (GRE). One reason for this difference in price is more people took the SAT than the GRE in 2015. the ETS faces competition in the market for the SAT but no competition for the GRE. an average, those who take the GRE have higher incomes than those who take the SAT. the GRE is a longer test with more questions.

the ETS faces competition in the market for the SAT but no competition for the GRE.

Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful? a rise in the price of a key input, for example, a rise in the price of oil leads to higher energy costs the number of competitors in the market the ability to produce the product at a lower cost changing consumer tastes

the ability to produce the product at a lower cost

Of the factors that are within the control of the firm's owners, the most important factors that make a firm successful are lobbying government to erect or enforce entry barriers in its markets and the marketing of its products as widely as possible. the differentiation of its products and the production of products at a lower average cost than competing firms. the selection of the prices of its products and the selection of the most productive and loyal employees. the establishment of trademarks for its products and the aggressive defense of those trademarks.

the differentiation of its products and the production of products at a lower average cost than competing firms.

What is always true at the quantity where a firm's average total cost equals average revenue? Marginal cost equals marginal revenue. The firm breaks even. The firm's profit is maximized. The firm's revenue is maximized.

the firm breaks even

A monopoly is characterized by all of the following except the firm has market power. there are no close substitutes to the firm's product. entry barriers are high. there are only a few sellers, each selling a unique product.

there are only few sellers, each selling a unique product

For a natural monopoly, the marginal cost of producing an additional unit of its product is relatively small. True False

true

A monopolist's profit-maximizing price and output correspond to the point on a graph where total costs are the smallest relative to price. where price is as high as possible. where marginal revenue equals marginal cost and charging the price on the market demand curve for that output where average total cost is minimized.

where marginal revenue equals marginal cost and charging the price on the market demand curve for that output

A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run? Yes, it should continue to produce because its price exceeds its average fixed cost. Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000. No, it should shut down because it is making a loss. There is insufficient information to answer the question.

yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000