ECON1020 Ch. 11 Practice Questions

Which type of market can NOT have economic profits in the short run?

none they all can: Perfect competition Oligopoly Monopolistic competition Monopoly -> For positive changes in demand for example in the short run price will be greater than average cost for all market structures leading to positive economic profits in the short run.

Rank each type of market on their prices from highest to lowest. Assume that there is a bit of competition among the oligopolies. Perfect competition Oligopoly Monopolistic competition Monopoly

1. Monopoly 2. Oligopoly 3. Monopolistic competition 4. Perfect competition

Rank each type of market on their industry quantities from highest to lowest. Assume that there is a bit of competition among the oligopolies. Perfect competition Oligopoly Monopolistic competition Monopoly

1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Monopoly When there is less competition it is possible to maintain higher prices with less quantity produced in the market.

What is the only market that their average costs are at a minimum at the profit-maximizing quantity in the long run?

Perfect Competition Only in perfect competition is there an incentive for all firms to produce at the minimum of the average cost curve. This is because a firm producing above this level in perfect competition would not be sustainable in the long run due to the assumptions of the market structure (such as homogeneity of the product). This however does not hold in other market structures.

What is the only market who achieves economic efficiency?

Perfect competition As long as price is greater than marginal cost, the outcome will not be economically efficient because there will be consumers who are willing to pay (the point on the demand curve) more than the cost to the firm of producing the good (the point on the marginal cost curve). The only market structure where price is equivalent to marginal cost is perfect competition.

What is the only market whose price equals their marginal cost?

Perfect competition Since firms have some price setting power in all market structures other than perfect competition, price will not equal marginal cost as marginal revenue is not the same as price for these firms.

Tony's Gas Station and Robert's Gas Station are the only two gas stations in a small town of Westville. If Tony and Robert collude to earn more profits, which of the following would be true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Each will limit the amount of gasoline available and raise prices b Each will limit the amount of gasoline available and lower prices c Each will increase the amount of gasoline available and raise prices d Each will increase the amount of gasoline available and lower prices

a If the producers would like to collude in order to increase profits this suggests that the current market price is too low. In order to achieve an artificially higher price they must lower quantity supplied.

The long-run result of that advertising will be a(n) in the price of the good. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Increase b Decrease c Increase or decrease d Not change

a More advertising increases costs. Thus the long-run price is likely to be higher. The less elastic the demand, the higher on the average cost function the firm is likely to be.

In which of the following markets do sellers act as price takers? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Perfect competition b Monopoly c Cartel d Monopolistic competition

a This is one of the defining factors of a perfectly competitive market.

What do you think would happen in a commercial neighborhood near your home if a restaurant in that neighborhood were making a great deal of profit? Select all that apply. Multiple answers: Multiple answers are accepted for this question a In-and-Out burger will open a new franchise. b Domino's Pizza will move to this neighborhood from a rundown area of the town. c Chipotle will open a new store next door. d The restaurant will close down.

a, b, & c All three new restaurants will enter the market if they saw the large profit margin.

An increase in product differentiation created by advertising in a market with many firms will the elasticity of demand facing the firm: Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Increase b Decrease c Increase or decrease d Not change

b Advertising differentiates the product from others. The more devoted consumers are to one product, the less likely consumers are to switch products in response to a price change and the more likely demand is to be less elastic.

Compare the levels of economic profits in a long-run equilibrium for a perfectly competitive firm, a monopoly, a monopolistically competitive firm, and an oligopoly. Economic profits will most likely be: Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a zero in perfect competition and positive in monopoly, monopolistic competition and oligopoly b zero in perfect competition and monopolistic competition, perhaps positive in a monopoly and perhaps positive in oligopoly c zero in perfect competition, monopolistic competition, and oligopoly and perhaps positive in monopoly d zero in all four market models e positive in all four market models

b In perfect competition and monopolistic competition, due to easy entry, in the long run there will be no economic profit in the industry. For monopolies and oligopolies, due to barriers to entry, profits may be positive.

Suppose that a local Italian restaurant is operating in a monopolistically competitive environment and is maximizing its profit. The price of spaghetti with meat sauce is $10 and the average total cost is $7. Based on this information, the firm is operating in the _______ and we can expect _______. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a short run; firms to exit the market b short run; firms to enter the market c long run; firms to exit the market d long run; firms to enter the market

b In the long run, firms must earn zero economic profit. Since profits in this industry are greater than zero, this must be the short run. This will then induce entry into the industry by other firms that also want to earn these positive profits until the profit is zero.

Suppose there are positive economic profits in the short run for firms in a monopolistically competitive industry. What do we expect to happen in the long run? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a New firms will enter and the demand for each product will become more inelastic b New firms will enter and the demand for each product will become more elastic c Existing firms will exit and the demand for each product will become more inelastic d Existing firms will exit and the demand for each product will become more elastic

b New firms will enter and the demand for each product will become more elastic

In which of the following markets do sellers have the highest profit level? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Perfect competition b Monopoly c Cartel d Monopolistic competition

b Since sellers have the most market power to set prices and control the quantity supplied in the market for a monopoly, this will translate to the highest profits.

Suppose there are losses in the short run for firms in a monopolistically competitive industry. What do we expect to happen in the long run? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a New firms will enter and the demand for each product will become more inelastic b New firms will enter and the demand for each product will become more elastic c Existing firms will exit and the demand for each product will become more inelastic d Existing firms will exit and the demand for each product will become more elastic

c Existing firms will exit and the demand for each product will become more inelastic

Which of the following is true for a profit-maximizing monopolistic competitor? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Marginal cost = price b Marginal cost > marginal revenue c Marginal cost = marginal revenue d Marginal cost < marginal revenue

c For any firm with market power, output level should be set at the intersection of marginal revenue and marginal cost.

At the Fisherman's Wharf in San Francisco, there are a lot of seafood vendors. Suppose that there are twenty vendors selling steamed crab. If Tommy's crab shack sells 100 steamed crabs per day for $20 each, how much economic profit will Tommy earn in the long run? (Assume that the seafood vendors are operating in a monopolistically competitive market.) Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a 2000 b 1000 c 0 d There is not enough information

c In a monopolistically competitive industry long run profits are always zero.

Which of the following accurately describes the long run equilibrium for a typical firm in a monopolistically competitive market? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a P = MC, P = ATC but ATC is not at its minimum b P = MC, P = ATC and ATC is at its minimum c P > MC, P = ATC but ATC is not at its minimum d P > MC, P = ATC and ATC is at its minimum

c P > MC, P = ATC but ATC is not at its minimum

A monopolistically competitive firm in the long run will produce an amount that is _______ the quantity where average cost is at a minimum and charge a price that is _______ marginal cost. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a equal to; greater than b equal to; equal to c less than; greater than d less than; equal to

c Since firms still have some price setting power they will produce at the level where marginal revenue is equal to marginal cost. This will be a lower quantity than that associated with the minimum average cost. Since the price is derived from the demand curve which is above the marginal revenue curve at any given price, the price will exceed the marginal cost.

In the long run, a monopolistically competitive firm will produce where price _________. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a equals marginal cost and is greater than average cost b equals marginal and average cost c equals average cost and is greater than the marginal cost d is greater than marginal and average cost

c Since firms still have some price setting power they will produce at the level where marginal revenue is equal to marginal cost. This will lead to a price that is greater than marginal cost. In the long run due to relatively easy entry, there will be no economic profits for individual firms and thus the price will be equal to the average cost while still being greater than marginal cost.

Monopolistically competitive firms earn economic profits in . Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a May; the short and long runs b May; the long run only c May; the short run only d Will not; either the short or long run

c The firm will earn economic profits in the short run. In the long run, those profits will attract additional firms and be competed away.

An oligopolistic industry with the same costs as a monopoly will have prices: Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Equal to a monopoly price. b Higher than a monopoly price. c Lower than or equal to a monopoly price. d Lower than a monopoly price. e Higher than or equal to a monopoly price.

c The oligopolies will strive to set a price equal to the monopoly price in order to maximize profits. However, there will be incentives to cheat on that agreement. That cheating may result in a lower price than the monopoly price.

OPEC is an example of _______. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a perfect competition b a monopoly c a cartel d monopolistic competition

c This is a group of countries that seek to influence the oil price through co-ordinated efforts to regulate the supply of the market, thus representing a cartel.

Assume that average costs are the same for all firm sizes and types of market structure. Assume that oligopolies compete a bit with one another. Which of the following represents the likely ranking of prices, from low to high, in the long run? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Perfect competition, monopolistic competition, monopoly, oligopoly. b Perfect competition, oligopoly, monopolistic competition, monopoly. c Monopolistic competition, perfect competition, oligopoly, monopoly. d Perfect competition, monopolistic competition, oligopoly, monopoly.

d As competition increases, there will be decreases in the market price. Thus, perfect competition has the lowest price, and industries in which a monopoly exists have the highest price since firms can earn profits in the long run.

A monopolistically competitive firm will incur loss if which of the following is true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Price is higher than average total cost b Price is equal to marginal cost c Price is lower than marginal cost d Price is lower than average total cost

d If price is less than average cost, this means that on each unit sold the firm is receiving less money (the price) than it cost them to make on average (the average cost) and thus the firm will incur a loss.

Suppose that the Peached Tortilla is one of ten food trucks in the town of Happyville, and every food truck is earning substantial economic profits. What is likely to happen in the long run? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Some food trucks will exit the markets. b Some food trucks will lay off their employees because their profits are not high enough. c New food trucks will enter the market and continue to earn economic profits d New food trucks will enter the market and gradually all food trucks will earn zero economic profits. e There is not enough information

d Since profits in this industry are greater than zero, this will then induce entry in to the industry by other firms (food trucks) that also want to earn these positive profits until the profit is zero.

A large number of firms in Biergarten sell flavored beer. However, each firm faces a downward-sloping demand curve. The market for flavored beer is ________. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a perfectly competitive b a monopoly c a cartel d monopolistically competitive

d Since there are many firms competing selling similar products, this is not a monopoly. In addition, because the firms face a downward sloping demand curve, this is not perfect competition.

Suppose a single oligopolistic firm is charging a price where industry marginal revenue is equal to marginal cost. This firm will be tempted to prices, because it faces a more demand if it alone changes its price. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Raise; inelastic b Raise; elastic c Lower; inelastic d Lower; elastic

d The single firm will be able to gain customers if it lowers its price and hence attracts some customers away from other firms. Thus, demand will be more elastic than the market demand alone. If it were to raise prices, it would lose more revenue than it would save in costs.

Which of the following is true regarding the short run outcome of a firm competing in a monopolistically competitive market? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a price = marginal cost b the firm and all its competitors will be earning zero economic profit c the firm chooses an output level where marginal revenue is greater than marginal cost d the firm can earn positive economic profits

d the firm can earn positive economic profits