ECON midterm 4

Patents A) require that monopolies increase the amount they produce. B) grant the holder a monopoly that lasts forever. C) increase the incentive to innovate. D) are granted only to competitive firms and not monopolies. E) increase the incentive to capture economies of scale.

*increase the incentive to innovate*

If new firms enter a perfectly competitive industry, the market supply A) becomes more price inelastic. B) increases. C) decreases because each firm produces less than before the entry. D) becomes more price elastic. E) does not change.

*increases*

A natural monopoly that is regulated to set price equal to marginal cost A) could make an economic loss, an economic profit, a normal profit. B) incurs an economic loss. C) earns zero normal profit. D) earns an economic profit. E) breaks even by earning a normal profit.

*incurs an economic loss*

Because economic profits are eliminated in the long run in monopolistic competition, to earn an economic profit firms continuously A) shut down. B) exit the industry. C) innovate and develop new products. D) declare bankruptcy. E) decrease their costs by decreasing their selling costs.

*innovate and develop new products*

Price discrimination occurs when a firm A) charges customers different prices for different goods. B) is able to sell different units of a good at different prices. C) can determine which of the many market equilibrium prices it will charge. D) charges customers the same price for different goods. E) has a marginal cost curve that is horizontal.

*is able to sell different units of a good at different prices*

Product differentiation means A) the inability to set your own price. B) making a product that has perfect substitutes. C) making your demand curve horizontal. D) making a product that is slightly different from products of competing firms. E) making a product that is entirely unique.

*making a product that is slightly different from products of competing firms*

A profit-maximizing output for a single-price monopoly is determined by the intersection of the ________ curves and the profit-maximizing price is found on the ________ curve. A) total revenue and total cost, total revenue B) marginal cost and marginal revenue; marginal revenue C) marginal cost and marginal revenue; demand D) demand and supply; supply E) marginal cost and average total cost; demand

*marginal cost and marginal revenue; demand*

The maximum profit for a single-price monopoly is found when the firm produces the level of output so that A) it can charge the highest possible price. B) marginal revenue exceeds marginal cost by as much as possible. C) total revenue equals total cost. D) price equals marginal cost. E) marginal revenue equals marginal cost.

*marginal revenue equals marginal cost*

An industry with a large number of firms, differentiated products, and free entry and exit is called A) oligopoly. B) monopolistic oligopoly. C) perfect competition. D) monopoly. E) monopolistic competition.

*monopolistic competition*

The United Company competes with many other firms each producing slightly different products. Firms freely enter and exit this industry. The type of industry United Company operates in is ________. A) oligopoly B) monopolistic competition C) oligopolistic monopoly D) a monopoly E) perfect competition

*monopolistic competition*

If firms in monopolistic competition are earning economic profits, eventually A) the market turns into a monopoly. B) the firms in the market increase their production so that their economic profit disappears. C) they exit the industry. D) they shut down. E) new firms enter the industry.

*new firms enter the industry *

Which of the following is NOT a characteristic of long-run equilibrium in monopolistic competition? A) production at minimum average total cost B) marginal revenue equal to marginal cost C) price exceeds marginal revenue D) price equal to average total cost E) the firm earns a normal profit

*production at minimum average total cost*

When new firms enter a perfectly competitive market, the market supply curve shifts ________ and the price ________. A) rightward; rises B) rightward; falls C) leftward; rises D) rightward; does not change E) leftward; falls

*rightward; falls*

If a perfectly competitive industry is taken over by a single firm that operates as a single-price monopoly, the price will ________ and the quantity will ________. A) fall, decrease B) fall, increase C) not change; decrease D) rise, decrease E) rise, increase

*rise, decrease*

If a monopoly wants to sell a larger quantity, it must A) set a lower price. B) maintain the current price. C) increase the barrier to entry that protects it. D) set a higher price. E) implement new technology.

*set a lower price*

In monopolistic competition, the entry of new firms A) shifts existing firms' supply curves rightward. B) shifts existing firms' demand curves rightward . C) has no effect on the existing firms' demand curves. D) shifts existing firms' demand curves leftward. E) only results in a movement along the existing firms' demand curves.

*shifts existing firms demand curves leftward*

In monopolistic competition, the products of different sellers are assumed to be A) similar but slightly different. B) perfect substitutes. C) unique without any close or perfect substitutes. D) identical. E) either identical or differentiated.

*similar but slightly different*

Monopolistic competition is judged to be economically inefficient because A) firms earn an economic profit in the long run. B) firms earn a normal profit in the long run. C) firms have deficient capacity in the long run D) the selling price is greater than marginal cost. E) marginal revenue equals marginal cost.

*the selling price is greater than marginal cost*

One of the requirements for a monopoly is that A) products are high priced. B) there is no barrier to entry. C) there are several close substitutes for the product. D) the product cannot be produced by small firms. E) there is a unique product with no close substitutes.

*there is a unique product with no close substitutes*

For a single-price monopolist, why is marginal revenue less than price? A) To sell another unit, the price must be lowered. B) Because the firm is a price taker C) Demand is elastic when another unit is sold. D) Demand is inelastic when another unit is sold. E) The question is false because marginal revenue is always equal to price.

*to sell another unit, the price must be lowered*

Firms in monopolistic competition determine the profit-maximizing level of output by producing A) where average total cost is minimized. B) where price equals average total cost. C) the same output level as rivals do. D) at the point of minimum average fixed cost. E) where marginal revenue equals marginal cost.

*where marginal revenue equals marginal cost*

In the long run, a perfectly competitive firm makes A) either a positive economic profit or a normal profit. B) negative economic profit, that is, an economic loss. C) a positive economic profit. D) zero economic profit. E) zero accounting profit.

*zero economic profit*

The deadweight loss with perfect price discrimination is A) larger than the deadweight loss with perfect competition. B) sometimes less than and sometimes more than the deadweight loss of a single-price monopoly. C) equal to the deadweight loss of a single-price monopoly. D) more than the deadweight loss of a single-price monopoly. E) zero.

*zero*

Which of the following must a firm be able to do to successfully price discriminate? i. divide buyers into different groups according to their willingness to pay ii. prevent resale of the good or service iii. identify into which group (high willingness to pay or low willingness to pay) a buyer falls A) iii only B) i and iii C) i, ii, and iii D) ii only E) i and ii

*I, ii and iii*

The outcome of regulating a natural monopoly using the marginal cost pricing rule is A) that the firm earns a normal profit. B) that consumer surplus is less than what it would be if the firm maximized its profit. C) that the firm maximizes its profit. D) an efficient level of production. E) that the firm earns an economic profit.

*an efficient level of production*

A barrier to entry is A) illegal in most markets. B) anything that protects a firm from the arrival of new competitors. C) a factor that increases competition because firms must continue to operate in the market in which they were founded. D) the same as rent seeking. E) the economic term for diseconomies of scale.

*anything that protects a firm from the arrival of new competitors*

A market is initially in a long-run equilibrium and there is a permanent increase in demand. After the new long-run equilibrium is reached, there A) is no change in the market. B) are more firms in the market. C) are the same number of firms in the market. D) are fewer firms in the market. E) probably is a different number of firms in the market, but more information is needed to determine if the number of firms rises, falls, or perhaps does not change.

*are more firms in the market*

in a *perfectly competitive market*, it firms are earning an economic profit, the economic profit? a. is less than the normal profit b. generally leads to firms exiting as they seek higher profit in other markets c. attracts entry by more firms, which lowers the market price d. leads to a decrease in market demand e. can be earned both in the short run and the long run

*attracts entry by more firms, which lowers the market price*

At a long-run equilibrium in monopolistic competition, price equals A) marginal cost but not marginal revenue B) marginal revenue but not marginal cost. C) average total cost. D) marginal revenue and marginal cost. E) zero.

*average total cost*

For a natural monopoly to cover its total cost, its price must equal its A) total fixed cost. B) marginal cost. C) demand. D) average total cost. E) marginal revenue.

*average total cost*

In the long run, perfectly competitive firms produce at the output level that has the minimum A) total revenue. B) average variable cost. C) marginal cost. D) average fixed cost. E) average total cost.

*average total cost*

Assume someone organizes all farms in the nation into a single-price monopoly. As a result, the amount of food produced A) increases. B) remains constant. C) decreases. D) might increase or decrease depending on whether the demand for food is elastic or inelastic. E) might increase or decrease depending on whether the monopoly's marginal revenue curve lies below or above its demand curve.

*decreases*

If advertising increases the numbers of firms in an industry, each firm's demand A) does not change. B) increases. C) decreases. D) might increase or decrease depending on whether the new firms produce exactly the same product or a product that is slightly differentiated. E) None of the above answers is correct.

*decreases*

Firms in monopolistic competition have demand curves that are A) horizontal. B) downward sloping. C) U-shaped. D) vertical. E) upward sloping.

*downward sloping*

A natural monopoly is one that arises from A) ownership of a natural resource. B) patent law. C) copyright law. D) economies of scale. E) the legal system.

*economies of scale*

In monopolistic competition, profit is maximized by producing so that marginal revenue A) is negative. B) equals marginal cost and equals price. C) equals marginal cost and is less than price. D) equals price. E) equals average total cost but not marginal cost.

*equals marginal cost and is less than price*

Advertising is a ________ cost that is incurred by ________. A) variable; monopolies B) fixed; perfectly competitive firms C) fixed; monopolistically competitive firms D) marginal; monopolistically competitive firms E) variable; perfectly competitive firms

*fixed; monopolistically competitive firms*

For a single-price monopoly, price is A) greater than marginal revenue. B) unrelated to marginal revenue. C) always less than average total cost when the firm maximizes its profit. D) one half of marginal revenue. E) equal to marginal revenue.

*greater than marginal revenue*

If a firm is maximizing its profit and producing less than the output at which its average total cost is minimized, then that firm A) must be earning an economic profit. B) has excess capacity. C) is producing at its capacity output. D) must be earning a normal profit. E) must be suffering an economic loss.

*has excess capacity*

In the long run, a firm in monopolistic competition ________ excess capacity and a firm in perfect competition ________ excess capacity. A) does not have; has B) might have; might have C) has; has D) does not have; does not have E) has; does not have

*has; does not have*

Which of the following is (are) price discrimination? i. charging different prices based on differences in production cost ii. charging business flyers a higher airfare than tourists iii. charging more for the first pizza than the second A) ii and iii B) i, ii, and iii C) i and iii D) ii only E) i only

*ii and iii*