Micro Exam 4
Which of the following must be true if a price-searcher firm is operating at the profit maximizing output rate? -The marginal cost of producing the fast unit is greater than the marginal revenue derived from its sale. -The marginal cost of producing the last unit is no greater than the marginal revenue derived from its sale . -The total cost of producing all units is no greater than the total revenue derived from the sale of the units. -The total cost of producing all is less than the total revenue derived from the sale of the units
-The marginal cost of producing the last unit is no greater than the marginal revenue derived from its sale
If firms in a competitive price-searcher market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to long-run equilibrium? -An increase in demand for each firm and lower prices -A decrease in demand for each firm and lower prices. -An increase in demand for each firm and higher prices. -A decrease in demand for each firm and higher prices
A decrease in demand for each firm and lower prices.
Suppose a market is initially competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, which of the following would be expected? -An increase in market output and an increase in the price of the product -An increase in market output and an decrease in the price of the product. -A decrease in market output and an increase in the price of the product. -A decrease in market output and a decrease in the price of the product .
A decrease in market output and an increase in the price of the product
Which of the following about price discrimination is true? -A price- discriminating seller will charge consumers with an elastic demand a lower price than consumers with an inelastic demand. -A firm must face a horizontal demand curve for its product in order to engage in effective price discrimination in a market. -Price discrimination always harms consumers and helps sellers in the short run but in the long run consumers benefit at the expense of sellers -A seller must have a monopoly in order to gain from price discrimination
A price- discriminating seller will charge consumers with an elastic demand a lower price than consumers with an inelastic demand
A firm is currently operating where the MC of the last unit produced is $84, and the MR of this unit is $70. What would you advise this firm to do in order to increase profit ? -Shut down . -Increase output . -Stay at its current output . -Decrease output -Decrease price .
Decrease output
Several producers in industry A developed an improved technology that reduces the quantity of resources used to produce a given output. Which of the following would be expected? -The per-unit costs of production of the firms adopting the technology would increase. -In the short run, economic profits would be earned by the earliest firms adopting the technology -Product price would immediately fall to the minimum average total cost of the firms quickly adopting the technology, thus retarding the rate at which firms enter the industry. -Producers who adopt the technology will have short-run economic losses.
In the short run, economic profits would be earned by the earliest firms adopting the technology
Which of the following best explains why economists are generally critical of unregulated monopolists? -Monopolists do not try to minimize their costs of production -Monopolists produce where marginal revenue is greater than marginal costs. -Monopolists attempt to produce too many products, and as a result, their prices are high, and consumers waste time trying to choose between too many options. -Monopolists restrict output, and as a result, they fail to produce units that are valued more than the marginal cost of producing them.
Monopolists restrict output, and as a result, they fail to produce units that are valued more than the marginal cost of producing them
What problem does the government have that makes price regulation less than an ideal solution? -There is no effective way to enforce price regulation . -The government cannot tell what price a firm is charging . -Regulators frequently will not have the information they need to set prices -Regulation often will lead to lower costs.
Regulators frequently will not have the information they need to set prices
Which of the following is a primary difference between price takers and price searchers that opera in markets with low barriers to entry? -The price searchers will maximize profits in the short run, but price takers will not. Price takers can only maximize profits in the long run. -The price searchers will have to search for the price, while price takers will have to take the price determined in the market. -The price searchers will be able to earn profit in the long run, but the price takers will not -The price searchers may be able to earn profit in the short run, but the price takers will no be able to do so
The price searchers will have to search for the price, while price takers will have to take the price determined in the market.
A major fruit juice manufacturer failed in its attempt to engage in price discrimination between students and all other consumers . What is the most likely explanation for this failure ? -There was nothing to prevent the students from reselling the fruit juice to other consumers . -The two groups of consumers have different demand elasticities for fruit juice. -The cost of producing the product is relatively high. -Market demand for fruit juice is inelastic .
There was nothing to prevent the students from reselling the fruit juice to other consumers
A major soda manufacturer failed in its attempt to engage in price discrimination between students and all other consumers . What is the most likely explanation for this failure ? -There was nothing to prevent the students from reselling the soda to other consumers . -The two groups of consumers have different demand elasticities for soda. -The cost of producing the product is relatively high . -Market demand for soda is inelastic .
There was nothing to prevent the students from reselling the soda to other consumers
Which of the following statements about entrepreneurs is most accurate? -They will prosper if they undertake projects that increase the value of the resources. -They are people who extend loans to other business decision makers. -They are managers who generally work for a salary because they are unwilling to take risks. -They will prosper if they charge prices higher than their rivals.
They will prosper if they undertake projects that increase the value of the resources
If a competitive price-taker firm is currently producing a level of output at which marginal cost exceeds marginal revenue , -then average revenue exceeds marginal cost. -the firm is earning a positive profit -a one-unit decrease in output would increase the firm's profit. -all of the above are correct .
a one-unit decrease in output would increase the firm's profit.
In price-taker market, profits are -the result of consumers being charged arbitrarily high prices. -a reward for creating value. -the result of barriers to entry into the market -a signal that fewer resources are needed in a market.
a reward for creating value
In some industries where firms experience declining average total costs over the full range of output that consumers are willing to buy, -a smaller firm will always have lower per-unit costs. -many firms will tend to emerge from the competitive process . -a single large firm will develop , and it will have cost advantages that protect it from potential rivals. -a single large firm will develop , and it will buy out any smaller rival firms to avoid the small firms ' production at a lower per-unit cost .
a single large firm will develop , and it will have cost advantages that protect it from potential rivals
Compared to the outcome when the firms are price takers, competitive price -searcher markets will result in -a wider variety of products and higher prices -less product Variety and higher prices -a wider variety of products and lower prices -less product variety and lower prices
a wider variety of products and higher prices
The free entry and exit of firms in a competitive price-searcher market guarantees that -both economic profits and economic losses can persist in the long run -both economic profits and economic losses disappear in the long run. -economic profits, but not economic losses, can persist in the long run. -economic losses, but not economic profits, can persist in the long run.
both economic profits and economic losses disappear in the long run
New York City limits the number of taxi cabs that can legally operate in the city. The most likely result of this practice is that - cab fares will be lower -cab fares will be higher. -the cost of operating a taxicab will be lower -subway fares will decrease.
cab fares will be higher
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 if technblogy, imports, and other factors remain constant, these conditions will -shift the market demand curve outward so that price will rise to the level of production cost. -cause the remaining firms to collude so they can produce more efficiently . -cause the market supply to decline and the price of textiles to rise . -cause firms in the textile industry to suffer long-run economic losses
cause the market supply to decline and the price of textiles to rise
If price is above average variable cost and below average total cost, a profit-maximizing price taker should -immediately shut downfailing to do so is contrary to the idea of profit maximization in a competitive market. -continue producing as long as it expects the market price to rise above average total cost in the near future. -attempt to push price upward by slowly reducing output. -cut price so more units can be sold.
continue producing as long as it expects the market price to rise above average total cost in the near future
The two conflicting tendencies that a firm has in an oligopolistic industry are the incentive to -cheat to maximize joint profits and the incentive to raise prices . -cheat and avoid collusion and the incentive to raise price to maximize the firm's share of profits -increase output in order to minimize per -unit costs and the incentive to reduce price in order to maximize joint profit . -cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit .
cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit
Cecilia's Café is in a competitive price-searcher market. Cecilia's is currently producing where average total cost is at its minimum, and Cecilia's is earning a positive economic profitIn the long run we would expect Cecilia's output to -decrease and average total cost to be higher . -decrease and average total cost to be lower. -remain unchanged as Cecilia's is doing the best it can. -increase and average total costs to be lower.
decrease and average total cost to be higher
The competitive market process tends to promote economic prosperity because it -keeps the prices of goods higher than their production costs. -creates inefficiencies , which causes people to economize . -directs self-interested action toward the production of goods that are highly valued relative to their cost . -sends signals to the government about which goods to produce .
directs self-interested action toward the production of goods that are highly valued relative to their cost
When new firms have an incentive to enter a competitive price-taker market, their entry will -increase the price of the product . -drive down profits of existing firms in the market. -shift the market supply curve to the left . -increase demand for the product .
drive down profits of existing firms in the market
In market economy, profits -encourage productive projects and losses weed out the unproductive ones. -discourage productive projects and losses encourage unproductive ones -reduce the value of resources while losses increase their value -indicate the producers gains at the expense of consumers
encourage productive projects and losses weed out the unproductive ones
In the short run, a price searcher wishing to maximize profits or minimize losses should produce the output that -equates marginal cost with marginal revenue. -equates marginal cost with price. -corresponds to the lowest point on the average variable cost curve. -corresponds to the lowest point on the average total cost curve.
equates marginal cost with marginal revenue
If the average total cost curve is always above the demand curve of a monopolist, -the profits of the monopolist will be large. -the monopolist must be producing inefficiently. -even a monopolist will suffer economic losses. -entry will occur, forcing the monopolist to reduce price and expand output.
even a monopolist will suffer economic losses
The traditional view of competitive price-searcher markets holds that this type of market structure is inefficient because -there are too few firms to reach an efficient level of competition -barriers to entry are high -excessive advertising is encouraged -consumers are not allowed a sufficient amount of choice in which to express their individual preferences
excessive advertising is encouraged
A price-discriminating firm charges the lowest price to the group that -has the most elastic demand . -purchases the largest quantity -engages in the most arbitrage. -is least responsive to price changes .
has the most elastic demand
In a competitive price-taker market, the actions of any single buyer or seller will -have a negligible impact on the market price. -have little effect on overall production but will ultimately change final product price . -cause a noticeable change in overall production and a change in final product price. -adversely affect the profitability of more than one firm in the market .
have a negligible impact on the market price
In order for effectivewrice discrimination to occur, seller must -be a pure monopolist . -have large economies of scale and control over a key natural resource. -face a horizontal demand curve for its product . -have at least two distinguishable groups of consumers .
have at least two distinguishable groups of consumers
Monopolists may be able to earn profit , even in the long run, as the result of -consumer ignorance. -an inelastic demand for its product. -product differentiation -high barriers to entry
high barriers to entry
The entry of new firms into a competitive market will -increase market supply and increase market prices . -increase market supply and decrease market prices. -decrease market supply and increase market prices -decrease market supply and decrease market prices .
increase market supply and decrease market prices
A profit- maximizing monopolist that produces in the short run will -produce the level of output where marginal revenue exceeds marginal cost by the largest amount -increase output as long as the marginal revenue exceeds the marginal cost of producing that unit . -produce the level of output average total cost is at minimum. -increase price as long as the average revenue exceeds the average total cost -produce the level of where average revenue exceeds average total cost by the largest amount
increase output as long as the marginal revenue exceeds the marginal cost of producing that unit
If price searcher is producing at a level of output such that its marginal cost is $16 and its marginal revenue is $9, the firm should -increase output in order to reduce per-unit costs. -decrease the price of its product and expand output . -increase price and reduce its rate of output. -reduce both price and output .
increase price and reduce its rate of output
When a firm in a competitive market is earning profits, this indicates that the firm is -exploiting consumers . -increasing the value of resources. -blocking the entry of competing firms. -reducing overall wealth in the market.
increasing the value of resources
The difficulty in analyzing oligopolistic behavior arises from -the degree of government regulation of the market structure. - interdependent nature of oligopolistic decisions. -large number of firms in the industry -market power of consumers .
interdependent nature of oligopolistic decisions
When an economist states that a firm is earning zero economic profit, this statement implies that the firm -will be forced out of business unless market conditions change. -is doing as well as it could in any other line of business -is earning a zero rate of return on its assets -could earn a higher rate of return in other industries.
is doing as well as it could in any other line of business
When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years) -is usually needed for the members to solidify their cooperation. --usually results in finer control of prices and markets by the group and larger profit margins . -is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price. -seldom has any impact on the agreement, as long as the participants maintain high profit levels as a result of the agreement .
is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price.
The key element in preserving a monopoly is -government subsidy of critical enterprises , -keeping potential rivals out of the market . -guaranteeing availability of substitute products. -increased advertising expenditure .
keeping potential rivals out of the market
When economies of scale are important, imposing competition by splitting a monopolistic fir into many rival units will -lead to an increase in the per- unit cost of production in the industry. -not affect per-unit costs but will affect demand conditions. -generally increase the social efficiency of production. -cause the industry demand curve to increase (shift to the right).
lead to an increase in the per- unit cost of production in the industry
When economies of scale are important, imposing competition by splitting a monopolistic firm into many rival units will -lead to an increase in the per-unit cost of production in the industry. -not affect per-unit costs but will affect demand conditions. -generally increase the social efficiency of production . -cause the industry demand curve to increase (shift to the right)
lead to an increase in the per-unit cost of production in the industry
The U.S. Postal Service has a monopoly on the delivery of first-class mail due to -economies of scale. -a lack of initiative on the part of competing firms -legal barriers limiting entry . -Control over an essential resource:
legal barriers limiting entry
If zinc suppliers are successful in forming an international zinc cartel, they will -lower output and raise prices, which discourages the entry of new firms into the industry -lower output, raise prices, and have a need to prevent the entry of new firms into the industry -raise output and raise prices, which discourages the entry of new firms into the industry. -raise output, raise prices and have a need to prevent the entry of new firms into the industry.
lower output, raise prices, and have a need to prevent the entry of new firms into the industry
If long-run equilibrium is present in a competitive market, the typical firm in the market will be -making economic losses. -making zero economic profit . -making economic profit . -making a rate of return that is higher than the rate earned in other industries . -both and d are correct
making zero economic profit
When a single firm has control over the market supply of a resource that is essential to the production of a good, -economies of scale are usually important . -monopoly is frequently the result. -diseconomies of scale are the usual cause. -competition for the resource makes monopoly almost impossible
monopoly is frequently the result
When competition is present, self-interested business decision makers have a strong incentive to -produce efficiently -ignore the wishes of customers who are also self-interested -adopt technological improvements slowly in order to avoid making wrong decisions -maximize price in order to maximize profits .
produce efficiently
A monopolist will maximize profits by -setting price as high as possible. -setting price at the level that will maximize per-unit profit. -producing the output where marginal revenue equals marginal cost. -producing the output where price equals marginal cost.
producing the output where marginal revenue equals marginal cost
The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which -total revenue is equal to variable cost -total revenue is equal to fixed cost - total revenue is equal to cost -profit is maximized
profit is maximized
In order to be successful in a competitive market economy, an entrepreneur must -provide buyers at least as much satisfaction per dollar spent as the buyer could get elsewhere. -supply consumers with goods and services valued less highly than the resources necessary to produce them -take resources from other producers, thus reallocating wealth not creating new wealth - gain government grants and subsidies.
provide buyers at least as much satisfaction per dollar spent as the buyer could get elsewhere.
The dynamic process of competition -provides profit-seeking sellers with little incentive to heed consumer preferences -was shown by Adam Smith to be a major source of economic inefficiency -provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers. -will permit business decision makers to earn long-run economic profit unless they are regulated by government officials
provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.
Assume a competitive price-searcher firm is cárning an economic profit. The marginal revenue from selling an additional unit is $30 and the marginal cost of producing that additional unit is $23. The firm should -change neither its price nor its output level. -reduce its price and increase its output level. -increase its price and reduce its output level. -reduce both its price and its output level. -increase both its price and its output level .
reduce its price and increase its output level
When the marginal cost of a price-taker firm is more than the market price of its product, the firm should -expand output . -reduce output -maintain output -charge more than the market price.
reduce output
If marginal cost exceeds marginal revenue, a profit-maximizing firm should -expand output until marginal cost equals marginal revenue. -expand output until marginal revenue equals price -reduce output until marginal cost equals marginal revenue. -reduce output until price equals average total cost.
reduce output until marginal cost equals marginal revenue
In an oligopolistic market, if rival sellers act independently, each will have a strong incentive to -reduce price in order to increase sales and gain a larger share of the total market. -increase price in order to get a larger share of the market and make larger profits -restrict output and raise price in order to achieve higher profits. -agreements to lower price and decrease product quality in order to earn higher profits.
reduce price in order to increase sales and gain a larger share of the total market
If marginal cost exceeds marginal revenue, a profit-maximizing monopolist will -restrict output to increase the price even higher. -raise price and expand output to increase profit. -lower price and expand output to increase profit. -attempt to maintain this position because it is consistent with profit maximization .
restrict output to increase the price even higher
When profits exist in a competitive price-searcher market, -rival firms will be attracted into the market. -high barriers to entry will prevent rival firms from entering the market. -differentiation will prevent new firms from making a profit. -the profits will persist because the firms face a downward-sloping demand curve.
rival firms will be attracted into the market.
If a restaurant in a summer tourist area is highly profitable during the summer months but unable to cover even its variable costs during the winter months, the restaurant should -go out of business immediately, because no firm should continue to operate if it is losing money; doing so is contrary to the idea of profit maximization. -go out of business as soon as the summer is over; losses should never be tolerated -operate during all months of the year as long as its profits during the summer exceed its losses during the winter - shut down during the winter but continue operating during the summer as long as the summer profits exceed the losses (fixed costs) during the winter shutdown period.
shut down during the winter but continue operating during the summer as long as the summer profits exceed the losses (fixed costs) during the winter shutdown period.
In some industries where firms experience declining average total costs over the full range of output that are willing to buy -a smaller will always have lower per costs many firms will tend to emerge from the competitive process -single large will develop, and it will have cost advantages that protect it from potential rivals. -a single large firm will develop and it will buy out smaller rival to the small production
single large will develop, and it will have cost advantages that protect it from potential rivals
If a decrease in the demand for corn leads to economic losses for corn farmers, -some existing corn farmers will exit the industry -the price of corn will remain in the long run due to the economic losses. -the suppliers of corn will suffer long-run economic losses. -all of the above are correct
some existing corn farmers will exit the industry
In a price-taker market, economic losses indicate that - some firms are using unfair tactics to harm others. -some firms have miscalculated producing goods that are less valuable than the resources used to make them -the situation is normal and need to make no adjustments. -the firms in the industry are not minimizing their cost; they should expand output in order to fully realize the economies of scale in the industry.
some firms have miscalculated producing goods that are less valuable than the resources used to make them
When an entrepreneur introduces a new improved product that is highly valued relative to cost -consumers will be worse off -the demand for the products that are good substitutes for the new product will increase -some of the existing products will become obsolete and businesses producing those products will fail -total employment will decline if there are business failures .
some of the existing products will become obsolete and businesses producing those products will fail
When an entrepreneur introduces a new improved product that is highly valued relative to cost - consumers will be worse off -the demand for the products that are good substitutes for the new product will increase. -some of the existing products will become obsolete and businesses producing those products will fail -total employment will decline if there are business failures
some of the existing products will become obsolete and businesses producing those products will fail
If a profit-maximizing is going to increase its revenues by charging senior citizens (persons age 65 and over) lower prices than other customers, -the demand of senior citizens for the services of the restaurant must be inelastic. -senior citizens must have lower incomes than other potential customers. -the demand of senior citizens for the services of the restaurant must be elastic. -senior citizens must have higher incomes than other potential customers. -other customers must enjoy food more than senior citizens.
the demand of senior citizens for the services of the restaurant must be elastic
If a movie theater is going to gain by charging students a dollar less than other customers, -the demand of students must be more elastic than that of other customers. -the demand of students must be less elastic than that of other customers. -students must have higher incomes than other customers -other customers must enjoy movies more than students.
the demand of students must be more elastic than that of other customers
In markets characterized by oligopoly , -the oligopolists earn the highest profit when they cooperate and behave like a monopolist. -collusive agreements will always prevail -collective profits are always lower with cartel arrangements than they are without cartel arrangements. -pursuit of self-interest by profit -maximizing firms always maximizes collective profits in the market
the oligopolists earn the highest profit when they cooperate and behave like a monopolist
A competitive market economy with low barriers to entry affords an entrepreneur with -an environment that shields each currently successful producer from changing market conditions . -the opportunity to bring new and different products and services to the market. -little opportunity for wealth creation . -a static business environment .
the opportunity to bring new and different products and services to the market
An oligopolistic firm that is deciding the price to charge, the output to produce, or quality of product to offer, must consider -the regulatory price limits that are always present with oligopoly. -the potential reactions of rivals in the market. -the fact that per-unit costs will usually increase as the scale of production increases. -that entry barriers into oligopolistic markets are low.
the potential reactions of rivals in the market
In a market that is contestable, but has only a few sellers, -the threat of new entrants will prevent prices from rising above the competitive level. -producers be able to charge prices that are high enough to produce long-run economie profits -producers will not face new competition because the barriers to entry are high -market will never be expected to come close to the competitive result .
the threat of new entrants will prevent prices from rising above the competitive level
In a competitive price-taker market the actions of any single buyer or seller -will have a negligible impact on the market price. -have little effect on overall production but will ultimately change final product price. -cause a noticeable change in overall production and a change in final product price. -adversely affect the profitability of more than one firm in the market.
will have a negligible impact on the market price