Economics Final Exam
natural monopoly
A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost that could two or more firms
A
At Paula's Pizza, the marginal revenue of the last pizza produced is 12$. The marginal cost of the last pizza produced is 10$. In order to increase profits, Paula should: a. increase output b. decrease output c. not change output d. offer a different variety of pizza
Sherman Antitrust Act
(1890) reduced the market power of the large and powerful "trusts" of that time period
Clayton Antitrust Act
(1914) strengthened the government's powers and authorized private lawsuits
D
A monopolist is a. one of a large number of small firms producing a homogeneous good b. one of a small number of large firms producing a differentiated good c. a single seller of a product with many close substitutes d. a single seller of a product with no close substitutes
shutdown
refers to short run decision to not produce anything during a specific period of time because of current market conditions
C
De Beers Consolidated Mines has monopoly power a. because of economies of scale b. through its control over key patents c. through its control of an essential resource d. through government imposed barriers to entry e. because of its reputation for supplying high-quality diamonds
A
Firms that shut down in the short run are unable to avoid their a. fixed costs b. intermediate costs c. variable costs d. marginal cost
A
For perfectly competitive firms, what is the relationship among market price (P), average revenue (AR), and marginal revenue (MR)? a. P=AR=MR b. P> AR=MR c. P=AR>MR d. P=AR<MR
C
Harry's hot dogs is a small street vendor business. Which of the following costs are more likely to be considered fixed costs? a. hotdog buns b. mustard c. cost of renting the hotdog cart d. wages paid to workers that sell hotdogs
C
Hotels in New York City frequently experience an average vacancy rate of about 20% (i.e. on an average night, 80% pf the hotel rooms are full). This kind of excess capacity is indicative of what kind of market? a. monopoly b. perfect competition c. monopolistic competition d. oligopoly
C
If a firm in a competitive market increases its output by 20%, the price of its output is likely to a. increase by more than 20% b. fall by more than 20% c. remain unchanged d. it is impossible to determine without more information
C
If we observed a great deal of advertising of men's shaving products, we can infer that a. the market for those products is perfectly competitive b. it costs firms very little to produce those products c. those products are highly differentiated d. firms are irrational in their decisions to advertise
B
In the long run, each firm in a competitive industry earns a. zero accounting profits b. zero economic profits c. positive economic profits d. positive, negative, or zero economic profits
B
Joe's Garage operated in a perfectly competitive market. At the point where marginal cost equals marginal revenue, ATC = 20$, AVC= 15$, and the price per unit is 10$. In this situation, a. Joe's Garage is earning a positive economic profit b. Joe's garage should shut down immediately c. Joe's Garage is losing money in the short run but should continue to operate d. the market price will rise in the short run to increase profits
ATC falls
MC< ATC
ATC rises
MC> ATC
TP decreases
MP< 0
TP @ max
MP=0
TP increases
MP>0
shutdown
P< AVC or TR< TVC
loss
P<ATC
normal profit
P=ATC
operate at a loss
P> AVC
C
Price discrimination a. forces monopolies to charge a lower price as a result of government regulation b. is an attempt by a monopoly to prevent some customers from purchasing its product by charging a higher price c. is an attempt by a monopoly to increase its profit by selling the same good to different customers at different prices d. increases the consumer surplus associated with a monopolistic market
B
Sizable economic profits can persist over time under monopoly if the monopolist a. produces that output where average total cost is at a maximum b. is protected by barriers to entry c. operates as a price taker rather than a price maker d. realizes revenues that exceed variable costs
ATC
TC/Q or AFC + AVC
total costs
TFC+ TVC
AFC
TFC/Q
accounting profit
TR- explicit costs
economic profit
TR- total costs
AVC
TVC/Q
B
The defining characteristic of a natural monopoly is a. constant returns to scale over the relevant range of output b. economies of scale over the relevant range of output c. diseconomies of scale over the relevant range of output d. marginal cost is constant over the relevant range of output
D
The demand curve any monopolist uses in making an output decision is a. the same as the demand curve facing a perfectly competitive firm b. vertical because there are no close substitutes for its product c. horizontal because there are no close substitutes for its products d. the same as the market demand curve
B
The demand curve in a purely competitive industry is _______________ while the demand curve to a single firm in that industry is ___________________ a. perfectly inelastic; perfectly elastic b. downsloping; perfectly elastic c. downsloping; perfectly inelastic d. perfectly elastic; downsloping
B
The entry of new firms into a competitive market will a. increase market supply and increase market price b. increase market supply and decrease market price c. decrease market supply and increase market price d. decrease market supply and decrease market price
B
The free entry and exit of firms in a monopolistically competitive market guarantees that a. both economic profits and economic losses can persist in the long run b. both economic profits and economic losses disappear in the long run c. economic profits, but not economic losses, can persist in the long run d. economic losses, but not economic profits, can persist in the long run
B
The long run is a period of time a. during which at least one resource is fixed b. during which all resources are variable c. during which all resources are fixed d. less than one year e. greater than one year
constant returns to scale
refers to the property whereby long run average total cost stays the same as the quantity of output increases
D
The short run supply curve for a purely competitive marker firm is a. the entire MC curve b. the segment of the AVC curve lying to the right of the MC curve c. the segment of the MC curve lying above the ATC curve d. the segment of the MC curve lying above the AVC curve e. its ATC curve
C
The textile industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses and many sellers have left the industry. Economic theory suggests that these conditions will a. shift the demand curve outward so that price will rise to the level of production cost b. cause the remaining firms to collude so that they can produce more efficiently c. cause the market supply to decline and the price of textiles to rise d. cause firms in the textile industry to suffer long run economic losses
B
When compared to firms in perfect competition, monopolists tend to charge ___________ prices and offer _______________ quantities of output. a. lower; lower b. higher; lower c. lower; higher d. higher; higher
A
When firms are said to be price takers, it implies that if a firm raises its price a. buyers will go elsewhere b. buyers will pay the higher price in the short run c. competitors will also raise their prices d. firms in the industry will exercise market power
B
When marginal cost is less than average total cost, a. marginal cost must be falling b. average total cost is falling c. average total cost is rising d. average variable cost must be falling
C
When market conditions in a competitive industry are such that firms cannot cover their total production costs, then a. the firms will suffer long run economic losses b. the firms will suffer short tun economic losses that will be exactly offset by long run economic profits c. some firms will exit the market, causing prices to rise until the remaining firms can cover their total production costs d. all firms will go out of business, since consumers will not pay prices that enable firms to cover their total production costs
D
Which of the following firms is most likely to be a perfectly competitive firm? a. one of the 3 largest US automakers b. one of the cell phone service carriers c. a public school operated by the government d. a soybean farmer
D
Which of the following is a fixed cost in preparing meals? a. dishwasher detergent b. chicken c. soda d. a microwave oven
B
Which of the following is an example of a barrier to entry? a. Tom charges a higher price that his competitors for his house-painting services b. Dick obtains a copyright for the new computer game that he invented c. Harry offers free concerts on Sunday afternoons as a form of advertising d. Larry charges a lower price than his competitors for his lawn-mowing services
B
Which of the following is not a characteristic of perfect competition? a. many buyers and sellers b. ability to control the price c. standardized (identical) products d. free entry and exit of firms
D
Which of the following is true? a. patents reduce a firm's incentive to develop new products b. patents guarantee economic profits c. patents give a permanent exclusive right to produce a new good d. patents give a temporary exclusive right to produce a new good
C
Which of the following represents the firm's long run condition for exiting a market? a. exit if P< MC b. exit if P< FC c. exit if P< ATC d. exit if MR <MC
C
Which of the following statements is correct regarding a firm's decision making? a. the decision to shut down and the decision to exit are both short run decisions b. the decision to shut down and the decision to exit are both long run decisions c. the decision to shut down is a short run decision, whereas the decision to exit is a long run decision d. the decision to exit is a short run decision, whereas the decision to shut down is a long run decision
C
Which of these assumptions is often realistic for a firm in the short run? a. the firm can vary both the size of its factory and the number of workers it employs b. the firm can vary the size of its factory but not the number of workers it employs c. the firm can vary the number of workers it employs but not the size of its factory d. the firm can vary neither the size of its factory nor the number of workers it employs
markup
a _______________ usually in the form of a percentage is applied to the average cost
monopoly
a firm that is the sole seller of a product without close substitutes
cartel
a group of firms acting in unison (in effect, firms may act as a monopoly)
monopolistic competition
a market structure in which many firms sell products that are similar but not identical
oligopoly
a market structure in which only a few sellers offer similar or identical products
prisoners' dilemma
a particular "game" between 2 captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
perfectly elastic
a perfectly competitive firm's demand curve is
perfect price discrimination
a situation in which the monopolist is able to charge each customer precisely his willingness to pay
free entry
a situation where firms can enter the market without restriction
nash equilibrium
a situation which economic factors interacting with one another choose their best strategy given the strategies that all the other actors have chosen
collusion
an agreement among firms in a market about quantities to produce or prices to charge
duopoly
an oligopoly with only two firms
natural monopoly
arises when there are economies of scale over the relevant range of output
variable costs
the costs that do vary with the amount of output produced
price takers
buyers and sellers in a competitive market that must accept the price that the market determines
fixed costs
those costs that do not vary with the amount of output produced
AFC
decline continuously as output increases because a fixed sum is being spread over a larger and larger number of units of production
law of diminishing marginal returns
diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases
D
economies of scale arise when a. an economy is self-sufficient in production b. individuals in society are self-sufficient c. fixed costs are large relative to variable costs d. workers are able to specialize in a particular task
marginal revenue
equals the price of the good in perfect competition how much revenue a firm receives for one additional unit of output change in TR/ change in Q
oligopoly
few interdependent sellers producing a homogeneous or differentiated product may have considerable control over the price high barriers to entry
profit
firm's revenues minus its costs
price leadership (tacit collusion)
firms follow the dominant firm
barriers to entry
fundamental cause of a monopoly
industry
group of firms producing the same or similar product
average revenue
how much revenue a firm receives for one unit sold TR/Q equals price of the good
AP falls
if MP< AP
AP @ max
if MP=AP
AP rises
if MP> AP
decrease Q
if MR<MC
Q @ profit maximizing level
if MR=MC
increase Q
if MR>MC
economic profit
if P>ATC
loss
if TR< TC
exit
if TR<TC or if P<ATC
breakeven
if TR=TC
enter
if TR>TC or if P> ATC
allocative efficiency
if business firms are competitive and profit-maximizing, the price of a good equals the marginal cost of making that good
efficient scale
if firms can freely enter and exit the market, the price also equals the lowest possible average total cost of production
marginal product
increase in output that arises from an additional unit of that input change in TP/ change in Q
implicit costs
input costs that do not require an outlay of money by the firm [opportunity costs of self-employed, self-owned resources]
explicit costs
input costs that require a direct outlay of money by the firm
MC
intersects AVC and ATC at their minimum points
ATC
lies above AFC and AVC; also u-shaped
monopolistic competition
many sellers product differentiation some ability to control the price free entry and exit
monopolistic competition
markets that have some features of competition and some features of monopoly
average product
measures how much each worker produces on average TP/ # of workers
perfectly competitive market
number of sellers= many type of product= uniform or identical control over the price= none; firm is price taker conditions of entry= easy; no barriers to entry
Firm
organization that owns and operates one or more plants
excess capacity
output is less than the efficient scale of perfect competition
economies of scale
refer to the property whereby long run average total cost falls as the quantity of output increases
diseconomies of scale
refer to the property whereby long run average total cost rises as the quantity of output increases
exit
refers to a long run decision to leave the market
long run
period of time in which all resources [and costs] are variable
short run
period of time in which some resources [ie plant] are fixed and some are variable
plant
physical unit that contains equipment
Competitive firm's short run supply curve
portion of the marginal cost curve that lies above average variable cost
competitive markets
price equals marginal cost in
markup
price exceeds marginal cost
monopolized markets
price exceeds marginal cost
monopolistic competition
price exceeds marginal cost price equals average total cost zero economic profit
MR=MC
profit is maximized when _____________ (competitive firm and monopoly)
MR=MC
profit maximization of a monopoly (same as a perfectly competitive firm)
production function
shows the relationship between quantity of inputs used to make a good and the quantity of output of that good
concentration ratio
statistic used to measure a market's domination by a small number of firms the percentage of total output in the market supplied by the four largest firms in the industry
mutual interdependence
the actions of one seller in the market can have a large impact on the profits of all the other sellers
costs
the amount that the firm pays to buy inputs
total revenue
the amount the firm receives for the sale of its product market price x amount sold
dominant strategy
the best strategy for a player to follow regardless of the strategies pursued by other players
price discrimination
the business practice of selling the same good at different prices to different customers
marginal cost
the extra or additional cost of producing one more unit of output change in TC/ change in Q
efficient scale
the quantity of output that minimizes average total cost
efficient scale
the quantity that minimizes average total cost
game theory
the study of how people/firms behave in strategic situations
AVC and ATC
u-shaped reflecting the law of diminishing marginal returns
decrease
when a monopoly drops the price to sell more, the revenue received from previous units sold will __________
flatter
when the marginal product declines, the production function becomes ____________________
C
which of the following is a short run adjustment? a. toyota builds an automobile plant in Kentucky b. faced with increasing enrollment, a state college builds a new school of education building c. people's bank hires two new tellers to meet increased demand for customer services d. because of staggering losses, three insurance companies exit the industry
D
which of the following is an implicit cost? a. salaries paid to owners who work for them b. interest on money borrowed to finance equipment purchases c. cash payments for raw materials d. foregone rent on office space owned and used by the firm
A
which of the following is the best example of a variable cost? a. monthly wage payments for hired labor b. annual property tax payments for a building c. monthly rent payments for a warehouse d. annual insurance payments for a warehouse
