Microeconomics Practice Exam 3

A perfectly competitive firm facing a price of $10 decides to produce 100 units. If its marginal cost of producing the last unit is $12 and it is seeking to maximize profit, the firm should:

produce fewer units

Suppose a monopolist is at the profit-maximizing output level. If the monopolist sells another unit of output:

producer surplus falls but consumer surplus rises

Which of the following statements is true?

Any economically efficient production process is always technically efficient

A cartel is:

a group of firms that collude to maximize group profits.

A monopoly firm is different from a competitive firm in that:

a monopolist can influence market price whereas a competitive firm cannot.

The demand curve for a monopolist differs from the demand curve faced by a competitive firm because the demand curve for:

a monopolist is the market demand curve

The Herfindahl index is calculated by:

adding the squared value of the market shares of all the firms in the industry.

An increase in the number of firms in a perfectly competitive market causes:

an increase in the market supply curve

A market has the following characteristics: There is strategic pricing, output is somewhat restricted, there is interdependent decision making, and some long-run economic profits are possible. This market is:

an oligopoly.

In monopolistic competition there:

are many sellers

Perfectly competitive firms:

are price takers, since they are not large enough to influence the market price.

Platform monopolies initially make large losses because they:

are trying to gain market share as quickly as possible

If government regulators want a natural monopolist to earn only zero economic profit, they will set price equal to:

average total cost (ATC).

Economic efficiency is achieved at a particular output level if:

average total cost is as low as possible.

The higher the concentration ratio in a given industry, the:

closer the industry is to an oligopolistic or monopolistic type of market structure

Refer to the graph shown. Area C represents:

consumer surplus redistributed to the monopolist

Refer to the graph shown. Suppose that the market price is $5. At this price, a perfectly competitive firm should:

continue to produce in both the short run and the long run

Cartels are organizations that:

coordinate the output and pricing decisions of a group of firms.

In a contestable market model of oligopoly, prices are determined by:

costs, barriers to entry, and barriers to exit

If MR < MC, a monopolist should:

decrease production

The upward-sloping part of the long-run average cost curve is explained by:

diseconomies of scale.

Positive expected profits:

encourage people to supply goods.

The existence of positive economic profits induces firms to:

enter an industry, which shifts the market supply curve to the right and decreases market price

For a cartel to be successful in increasing economic profits for its members:

entry of new firms must be blocked.

For a monopolist, the price of the product:

exceeds the marginal revenue.

The existence of economic losses induces firms to:

exit an industry, which shifts the market supply curve to the left and increases market price.

Platform businesses are firms that:

facilitate interaction among people.

Oligopoly is characterized by:

few sellers

When a monopolistically competitive industry is in long-run equilibrium:

firms earn zero economic profits.

Under monopolistic competition:

firms face a downward sloping demand curve

Economies of scope cannot exist in:

firms that produce a single product.

In the case of a natural monopoly, as the number of firms in the industry increases, the average cost of producing a:

fixed number of units increases

A four-firm concentration ratio of 75 tells you that the top:

four firms in the industry produce 75 percent of the industry's output.

One advantage of the Herfindahl index over the concentration ratio is that it:

gives extra weight to firms that are especially large

One reason fewer antitrust cases have been brought before the courts is:

globalization has changed the competitive landscape.

If a monopolist increases output from 14 to 15 by lowering its price from $32 to $31, marginal revenue is:

$17

At one time sea lions were depleting the stock of steelhead trout. One idea to scare sea lions away from the Washington coast was to launch fake killer whales, which are predators of sea lions. The cost of making the first whale is $16,000 ($5,000 for materials and $11,000 for the mold). The mold can be reused to make additional whales, and so additional whales cost $5,000 each. Based on these numbers, the total cost of making two fake killer whales would be:

$21,000.

Refer to the graph shown. Assuming that the monopoly maximizes profit, it will earn profits of:

$40,000 per day.

An entrepreneur most likely would develop a product if expected average total cost is:

$50 and expected price is $75.

Refer to the graph shown. Given the long-run average cost curve, the minimum efficient scale of production is:

18 to 21

A firm can use 50 workers and 10 machines, 70 workers and 9 machines, or 75 workers and 9 machines to produce 40 chairs. If each worker costs $20 and each machine is rented for $500, the economically efficient input combination is:

70 workers and 9 machines.

An assumption of a competitive market is that both buyers and sellers are price takers. When we go to the mall to shop for clothing or to the grocery to buy food, what do we usually observe?

Buyers are often price takers, but sellers are usually price makers

If a college student's demand for newspaper subscriptions is more price-elastic than a business executive's demand for newspaper subscriptions, which of the following pricing strategies would a price-discriminating newspaper publisher follow?

Charge a higher price to business executives

Microsoft sells a special version of its Windows operating system at a low price in countries where cheap pirated software is widespread. Since the cost of producing another copy of this software is the same as the cost of producing another copy of the regular Windows product, why is Microsoft charging this lower price?

It is trying to take advantage of the different demand elasticities in the different countries

Which of the following statements is true?

Many different production processes can be technically efficient, but only the method that involves the lowest possible cost is economically efficient.

Which of the following provides the best explanation for diseconomies of scale?

Monitoring costs

Which of the following is one of the necessary conditions for perfect competition?

No barriers to entry

Strategic decision making is most likely to occur in which market structure?

Oligopoly

The profit-maximizing condition for a perfectly competitive firm is:

P = MC.

Refer to the graph shown. If a natural monopolist were not regulated, the firm would charge:

P1

Why are patents important to those who hold them?

Patents act as a barrier to entry, allowing monopoly profits.

Refer to the graph shown. If the market price is P 4, the firm will produce:

Q4 and earn a profit.

Which of the following provides the best explanation for constant returns to scale?

Replication of production techniques

There is only one firm in the market. The economist analyzing that market has said she would expect the price to equal the firm's average total costs.

She must be analyzing this market using a contestable market model.

Which of the following is the best example of a market that exhibits network externalities?

Social media

You are shown a graph of a monopolist in long-run equilibrium and a graph of a monopolistically competitive firm in short-run equilibrium. How could you tell which is which?

You probably could not

The drug maker Wyeth produces the hormone-therapy drug Premarin, which is derived from the urine of pregnant mares. Not even Wyeth knows exactly what chemicals are in it, and the method of making the drug is a trade secret. Barr Laboratories has been trying to make a pill that is close enough to Premarin to be approved by the U.S. Food and Drug Administration as an "equivalent" drug. This story illustrates the importance of:

barriers to entry in keeping a monopoly position

To manufacture 1,000 pairs of shoes in a week, a firm must use at least 1,500 workers and 5 machines or 100 machines and 150 workers. Which method can be technically efficient?

both

The merger between two general merchandise stores, Sears and Kmart, each of which carried some specialty items, most likely produced:

both economies of scope and economies of scale

Refer to the graph shown. A firm that produces 900 units of output using the plant size associated with SATC 3 minimizes:

both long-run and short-run average total cost.

Suppose a monopolist is at the profit-maximizing output level. If the monopolist reduces output:

both producer surplus and consumer surplus decrease.

A monopolist:

can earn profits or incur losses in the short run.

When OPEC reduces output to keep prices high, OPEC is acting as a:

cartel

If a natural monopoly faces a relatively inelastic consumer demand over the range of the production, it will have an incentive to:

charge a high price

The market demand curve for a product produced in a perfectly competitive industry is normally:

downward sloping.

Economies of scale occur when a firm's long-run average total cost curve is:

downward-sloping

A problem with using the judgment by performance criterion is that:

each action of a firm must be analyzed separately and within a particular context.

If a natural monopolist were forced to set price equal to average cost, it would:

earn a normal profit.

When carmakers began to cut the costs of producing cars by designing the chassis, engines, and transmissions so that different models could be produced on the same assembly line, production costs fell $240 per car. This idea best illustrates:

economies of scale.

The reason for the merger of two businesses that sell unrelated goods but can share business practices and sales forces might best be explained by:

economies of scope

In the market for bank credit, a large bank sometimes announces a change in interest rates. After the changes in interest rates are announced, other banks in the industry usually react by changing their rates in the same way. This is an example of:

implicit collusion

A firm's average cost increases as it increases its output by expanding its plant and hiring additional workers (its only inputs to production). The firm's owner blames the increase in per-unit costs on the law of diminishing marginal productivity. The owner's reasoning is:

incorrect because all inputs are varied in the example

As long as marginal cost is below marginal revenue, a perfectly competitive firm should:

increase

If the marginal revenue of the next unit a firm produces is $50 and its marginal cost is $35, a firm should:

increase production

Economies of scale are associated with:

indivisible setup costs

The central characteristic of oligopolistic industries is:

interdependent pricing decisions

The economically efficient method of production:

is influenced by the relative scarcity of inputs.

To be successful in increasing prices for their product, members of a cartel:

limit output.

Suppose there is an improvement in the technology of producing TVs and the production of TVs becomes an increasingly competitive industry. Assuming that the TV industry is initially in equilibrium, the long-run effect of this improvement is:

lower TV prices and greater TV production.

A perfectly competitive firm in the long run:

makes zero economic profits.

A monopolistically competitive industry has:

many firms producing differentiated products.

In a perfectly competitive market, market prices are determined by:

market supply and market demand.

A monopolist engages in price discrimination to:

maximize profits

Oligopolistic firms:

may seek to drive competitors out of business for personal reasons, even at great expense.

The level of production that minimizes long-run average total costs is referred to as the:

minimum efficient level of production.

Globalization has made economies of scope:

more important to firms because global corporations can segment the production process.

In economics, the purpose of competition is to:

motivate firms to make better goods at lower cost.

Suppose that the firms in the perfectly competitive oat industry currently are receiving a price of $2 per bushel for their product. The minimum possible average total cost of producing oats in the long run is $1 per bushel. It follows that:

new firms will enter the oat industry.

If the average total cost of supplying a good exceeds the price at which the good can be sold, then entrepreneurs have:

no incentive to supply the good.

The law of diminishing marginal productivity does not apply in the long run because:

no inputs are fixed in the long run

Since capital is relatively scarce in India, the economically efficient method of producing food would probably:

not be capital intensive

A natural monopoly:

occurs when a single firm can supply the entire market demand for a product at a lower average total cost than would be possible if two or more firms supplied the market.

The cartel model of oligopoly assumes that:

oligopolies act as if they were monopolists by assigning output quotas to each member so that joint profits are maximized.

When the FTC investigated whether firms conspired to fix prices of computer memory called dynamic random-access memory (DRAM) chips, Samsung, Micron Technology, Hynix Semiconductor, and Infineon controlled more than 75 percent of the market for DRAM chips. The market for these chips is most likely:

oligopolistic

Monopoly is a market structure in which:

one firm makes up the entire market

In a perfectly competitive market, the demand curve faced by an individual firm is:

perfectly elastic

All of the following can be barriers to entry except:

price discrimination

Dynamic pricing allows a website to use the personal information collected on a customer, such as income or location, to individualize the price of a product for each customer. Economists consider this type of pricing an example of:

price discrimination.

An entrepreneur is willing to bring a supply of goods to the market if expected:

price is greater than expected average total cost

From society's perspective, a possible benefit of a cartel is that it could:

provide incentives for the introduction of superior products by competitors

In a perfectly competitive market, firms set:

quantities but not prices

Regulations created some years ago allow cell phone customers to keep the same phone number even when they switch to a different provider. This change:

reduced the monopoly power of cell phone providers

Barriers to entry:

restrict the number of firms in an industry.

It makes sense for Wendy's to advertise its new menu that allows customers to choose fruit or salad as a substitute for French fries in its values meals, as long as doing so raises:

revenue by more than it raises the cost of advertising.

If a monopolistically competitive market became perfectly competitive, output probably would:

rise

Each firm in perfect competition:

sets quantity based on market price.

Learning by doing:

shifts average total cost curves downward.

If a perfectly competitive firm finds that price is less than average variable cost, it should:

shut down immediately

Refer to the graph shown. Suppose the market price is $3. At this price, a perfectly competitive firm should:

shut down immediately

As firms leave a monopolistically competitive industry that is sustaining economic losses:

the demand curves facing the remaining firms in the industry shift to the right

Network externalities exist when:

the greater use of a product increases the benefit of that product to everyone.

Refer to the graph shown. Areas C and D represent:

the loss of surplus by consumers resulting from a monopoly.

The deadweight loss from monopoly exists because:

the marginal benefit of the monopolist's product to society exceeds the monopolist's marginal cost.

Marginal revenue is not equal to price for a monopolist because:

the monopolist must lower the price of all units in order to sell more

The Sherman Antitrust Act of 1890 was passed primarily because of:

the practices of various trusts in the railroad, steel, tobacco, and oil industries

Refer to the graph shown. Suppose the industry is currently perfectly competitive but then is taken over by a monopolist. Assuming that the monopolist maximizes profit:

the price of computers will increase from $400 to $600 and the quantity demanded will fall from 400 to 200.

Under oligopoly:

there are only a few sellers in the industry.

Firms continue to produce (illegally) counterfeit computer software and documentation. Some of the illegal copies are Microsoft products, though Microsoft still has a large share of the market for its products. The presence of enforced copyright protection laws indicates that the market for Microsoft software cannot be considered a competitive market because:

there are significant barriers to entry.

The North American Industry Classification System (NAICS) categorizes firms by:

type of economic activity, and groups firms with like production processes

When you use a service like Facebook for free, it is likely that:

you are not the customer; you are the product.

A perfectly competitive firm in the long run earns:

zero economic profits and positive normal profits