Economics 211 Test 3

In answering a question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. For a purely competitive firm, a-the demand and marginal revenue curves will coincide b-the demand curve will lie above the marginal revenue curve c-the marginal revenue curve will lie above the demand curve. d-marginal revenue will graph as an upsloping line

A

The MR=MC rule can be restated for a purely competitive seller as P=MC because: a-each additional unit of output adds exactly its price to total revenue b-the firms average revenue curve is downsloping c-the firms marginal revenue and total revenue curves will coincide d-the market demand curve is downsloping

A

Which of the following is not a barrier to entry? a-Ownership of essential resources. b-Patents. c-X-inefficiency. d-Economies of scale.

A

A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its a-marginal costs b-total fixed costs c-total variable costs d-total costs

C

An example of a government organization involved primarily in public regulation or industrial regulation of natural monopolies would be the: a-Environmental Protection Agency b-Federal Energy Regulatory Commission c-Food and Drug Administration d-Occupational Safety and Health Administration

C

An exclusive legal right as sole producer for 20 years granted to an inventor of a product is called a a-license. b-copyright. c-patent. d-franchise.

C

Innovations that lower production costs or create new products: a-usually generate long-run economic profits for the innovator b-are rare in competitive industries c-often generate short-run economic profits that do not last into the long run d-discourage new firms from entering the industry

C

Marginal revenue is the: a-change in product price associated with the sale of one more unit of output b-change in average revenue is associated with the sale of one more unit of output c-change in total revenue associated with the sale of one more unit of output d-difference between product price and average total cost

C

The theory of creative destruction was advanced many years ago by: a-Bill Gates b-Alfred Marshall c-Joseph Schumpeter d-Adam Smith

C

-very large number of sellers -standardized product -"price takers" -free entry and exit -example is agriculture companies using things such as organic produce, amount of pesticides used, local vs. "foreign" product

Characteristics of Pure Competition

when unrelated companies merge, it is called a:

Conglomerate merger

Entry and exit of firms will not affect resource prices

Constant cost industry

Price discrimination refers to: a-any price above that which is equal to a minimum average total cost. b-selling a given product for different prices at two different points in time. c-the difference between the prices a purely competitive seller and a purely monopolistic seller would charge. d-the selling of a given product at different prices to different customers that do not reflect cost differences.

D

The merger of a firm in one industry with another firm in the same industry that sells similar products is called a: a-Vertical merger b-Conglomerate merger c-Secondary merger d-Horizontal merger

D

-began in the 1970s -has produced large net benefits for society and consumers

Deregulation

If average total cost is more than marginal cost, you are at an:

Economic Loss

-firms enter -supply increases -price falls (happens a lot in agriculture)

Entry eliminates profits

-firms leave -supply decreases -price rises (happens a lot in agriculture)

Exit eliminates losses

-atoms are not alive, but things made of atoms are alive. -if everyone stands, no one can see. -if everyone sells, prices will fall

Fallacy of Composition

merging with competition or a competitor

Horizontal merger

All firms in the industry have set prices that are identical

Identical Costs

market will self correct if left alone

Invisible Hand

If average total cost is less than price, you are:

Making money

ΔTR/ΔQ= -extra revenue from 1 more unit

Marginal Revenue

-considerable emphasis on advertising -differentiated products -strong focus on advertising -example would be malls

Monopolistic Competition

The following are characteristics of what? -single seller, a sole producer -no close subs, unique product -price maker, control over price -blocked entry, strong barriers to entry -non price competition- mostly PR but can engage in advertising to increase demand

Monopoly

the more people that use a product, the better it is

Network Effects

-few large competitors dominate the market -mutual interdependence -example would be Coke, Pepsi, etc

Oligopoly

-charging different buyers different prices -different prices are not based on cost differences

Price Discrimination

Producing where P=minimum ATC

Productive efficiency

when companies work with legislators to better themselves over other companies

Rent Seeking Behavior

monopoly is not illegal unless it unreasonably restrains trade

Rule of reason

producing a product you dont have to modify

Simultaneous consumption

-conditions under which goods and services are produced -make sure work conditions are safe for employees -example is OSHA

Social Regulation

P*Q=

Total Revenue

example of this merger is a jean maker merging with a fabric company

Vertical Merger

using resources poorly due to lack of competition

X-inefficiency

(P-ATC)*Q=

total profit or loss

A pure monopolist should never produce in the: a-inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price. b-inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price. c-elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price. d-segment of its demand curve where the price elasticity coefficient is greater than one.

A

A pure monopolist: a-always realizes an economic profit. b-will realize an economic profit if ATC exceeds MR at the profit-maximizing/loss-minimizing level of output. c-will realize an economic loss if MC intersects the downsloping portion of MR. d-will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output.

A

Allocative efficiency occurs whenever: a-it is impossible to produce a net benefit for society by changing the combination of goods and services produced b-firms have maximized their profits c-consumer surplus is maximized d-it is impossible to make someone in society better off without making someone else worse off

A

The process by which new firms and new products replace existing dominant firms and products is called: a-creative destruction b-monopolistic competition c-process innovation d-mergers and acquisitions

A

Which business practice is rarely challenged by the government under antitrust laws? a-Price discrimination b-Price fixing c-Tying contracts d-Interlocking directorates

A

Which of the following is correct? a-Both purely competitive and monopolistic firms are "price makers." b- A purely competitive firm is a "price taker," while a monopolist is a "price maker." c-Both purely competitive and monopolistic firms are "price takers." d- A purely competitive firm is a "price maker," while a monopolist is a "price taker."

A

Producing where P=MC

Allocative efficiency

TR/D=P -Revenue per unit

Average Revenue

A dilemma of regulation is that: a-the regulated price that results in a "fair return" restricts output by more than would unregulated monopoly. b-the regulated price that achieves allocative efficiency is also likely to result in persistent economic profits. c-the regulated price that achieves allocative efficiency is also likely to result in losses. d-regulated pricing always conflicts with the "due process" provision of the Constitution.

B

A purely competitive seller should produce (rather than shut down) in the short run a-only if total cost exceeds total revenue b-if total revenue exceeds total cost or if total cost exceeds total revenue by some amount less than total fixed cost c-if total cost exceeds total revenue by some amount greater than total fixed cost d-only if total revenue exceeds total cost

B

Allocative efficiency is achieved when the production of a good occurs where a-total revenue is equal to TFC b-P = MC c-P = minimum ATC d-P = minimum AVC

B

Confronted with the same unit cost data, a monopolistic producer will charge. a- a higher price and produce a larger output than a competitive firm. b-a higher price and produce a smaller output than a competitive firm. c-the same price and produce the same output as a competitive firm. d- a lower price and produce a smaller output than a competitive firm.

B

Firms seek to maximize: a-per unit profits b-total profit c-total revenue d-market share

B

Government regulation concerning the conditions under which goods are produced, the impact of production on society, and the physical qualities of the goods is known as: a-Economic regulation b-Social regulation c-Industrial regulation d-Antitrust regulation

B

Supporters of social regulation contend that: a-The existence of natural monopoly requires a regulatory response from government b-Higher costs are the price that must be paid for a better society c-There is a pressing need to eliminate price fixing in U.S. business d-Benefits of public ownership of businesses are greater than the costs

B

The MR = MC rule: a-applies only to pure monopoly. b-applies both to pure monopoly and pure competition. c-applies only to pure competition. d-does not apply to pure monopoly because price exceeds marginal revenue.

B

The basic purpose of antitrust laws is to: a-Enforce laws that restrict competition b-Limit monopoly power in industry c-Provide subsidies for American business d-Control prices to protect consumers

B

Under which of the following situations would a monopolist increase profits by lowering price (and increasing output): a-if it discovered that it was producing where its MC curve intersects its demand curve. b-if it discovered that it was producing where MC < MR. c-if it discovered that it was producing where MC = MR. d-under none of these circumstances because a monopolist would never lower price.

B

Which of the following best approximates a pure monopoly? a-The soft drink market. b-The only bank in a small town. c-The foreign exchange market. d-The Kansas City wheat market.

B

Which of the following industries most closely approximates pure competition? a-farm implements b-agriculture c-steel d-clothing

B

Which of the following is a characteristic of pure monopoly? a-Close substitute products. b-Barriers to entry. c-"Price taking." d-The absence of market power.

B

Which of the following is not a precondition for price discrimination? a-The seller must be able to segment the market, that is, to distinguish buyers with different elasticities of demand. b-The commodity involved must be a durable good. c-The seller must possess some degree of monopoly power. d-The good or service cannot be profitably resold by original buyers.

B

factors that prevent firms from entering an industry -economies of scale -legal barriers to entry line patents and licenses -ownership or control of essential resources -pricing and other strategic barriers

Barriers to entry

A natural monopoly occurs when: a-long-run average costs decline continuously through the range of demand. b-economies of scale are obtained at relatively low levels of output. c- a firm owns or controls some resource essential to production. d- long-run average costs rise continuously as output is increased.

C

If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing: a-total revenue and fixed cost b-marginal revenue and marginal cost c-price and average variable cost d-total revenue and total cost

C

The demand curve is purely competitive industry is_________, while the demand curve to a single firm in that industry is________. a-downsloping, perfectly inelastic b-perfectly elastic, downsloping c-downsloping, perfectly elastic d-perfectly inelastic, perfectly elastic

C

-competition and innovation may lead to ________ -creation of new products and methods may destroy the old products and methods (example would be blockbuster)

Creative Destruction

A merger between one firm and another firm that is its supplier is known as a: a-Conglomerate merger b-Horizontal merger c-Parallel merger d-Vertical merger

D

A pure monopolist should never produce in the: a-inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price b-elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price. c-segment of its demand curve where the price elasticity coefficient is greater than one. d-inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.

D

An industry comparing a very large number of sellers producing a standardized product is known as a-monopolistic competition b-oligopoly c-pure monopoly d-pure competition

D

Economic profit in the long run is: a-only possible when barriers to entry are nonexistent. b-impossible for both a pure monopolist and a pure competitor. c-possible for both a pure monopoly and a pure competitor. d-possible for a pure monopoly but not for a pure competitor.

D

If a monopolist engages in price discrimination, it will: a-produce a smaller output than when it did not discriminate. b-realize a smaller profit. c-charge a competitive price to all its customers. d-charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.

D

If a pure monopolist is producing at that output where P = ATC, then: a-it will be realizing an economic profit. b-it will be realizing losses. c-it will be producing less than the profit-maximizing level of output. d-its economic profits will be zero.

D

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then: a-some existing firms in this market will leave b-there must be price-fixing by the industry's firms c-the selling price for this firm is above the market equilibrium price d-new firms will enter this market

D

If economies of scale in an industry are so extensive that a single firm could serve the entire market at a lower cost than if the market was split between two or more firms, this industry is called a(n): a-Oligopoly b-Conglomerate c-Restraint of trade d-Natural monopoly

D

The demand schedule or curve confronted by the individual, purely competitive firm is a-relatively elastic, that is, the elasticity coefficient is greater than unity b-relatively inelastic, that is, the elasticity coefficient is less than unity c-perfectly inelastic d-perfectly elastic

D

The higher prices charged by monopolists: a-have no effect on the distribution of income. b-are socially optimal because they better reflect how much society values the good relative to the resources used to produce it. c-return to consumers through the public goods provided by monopolies. d-are like a private tax that redistributes income from consumers to monopoly sellers.

D

Which of the following distinguishes the short run from the long run in pure competition? a-the quantity of labor hired can vary in the long run but not in the short run b-firms attempt to maximize profits in the long run but not in the short run c-firms use the MR=MC rule to maximize profits in the short run but not in the long run d-firms can enter and exit the market in the long run but not in the short run.

D

Which of the following is a primary concern of social regulation? a-Industry concentration b-Per se violation c-Price fixing d-Product design

D

Which of the following statements is correct? a-normal profits will cause an industry to expand b-economic profits and losses have no significant impact on the growth or decline of an industry c-Economic profits induce firms to leave an industry, profits encourage firms to leave d-economic profits induce firms to enter an industry, losses encourage firms to leave

D

With respect to the pure monopolist's demand curve, it can be said that: a-the stronger the barriers to entry, the more elastic is the monopolist's demand curve. b-demand is perfectly inelastic. c-marginal revenue equals price at all outputs. d-price exceeds marginal revenue at all outputs greater than 1.

D

X-inefficiency refers to a situation in which a firm: a-is not as technologically progressive as it might be. b-encounters diseconomies of scale. c-fails to realize all existing economies of scale. d-fails to achieve the minimum average total costs attainable at each level of output.

D

-using the MR=MC rule -for price taker, price = marginal revenue -The firm considers 3 questions: -Should the firm produce? -if so, what amount? -What economic profit (loss) will be realized?

Profit Maximization

Find where MR and MC lines intersect in order to find:

Profit maximizing output

-many buyers and sellers -no barriers to entry -standardized product -example would be Agriculture industry

Pure Competition

-unique seller with no close substitutes -only one producer -blocked entry -example would be utility companies

Pure monopoly

-perfectly elastic demand (sensitive to price) -firm produces as much or as little as they wish at the market price -demand graphs as a horizontal line

Purely Competitive Demand