Microeconomics Test #2
Refer to Exhibit 25-3. Which of the following points represents the profit-maximizing quantity and price of a monopolistic competitor?
A
Perfect competition displays ____ because the social benefits of additional production, as measured by the price that people are willing to pay, are in balance with the ___ to society of that production.
allocative efficiency; marginal costs
In order to determine ____, the firm's total costs must be divided by the quantity of its output.
average cost
Refer to Exhibit 7-4. Curve B is a(n) __ cost curve.
average total
For a price taker, market equilibrium price is $100. At 50 units, MR = MC, ATC = $80, and AVC = $70. This price taker will
earn $1,000 profits if it produces 50 units.
In a monopolistic competitive industry, firms can try to differentiate their products by
enhancing product's physical aspects and all of the above.
Once I'MaPharmaCo. has received confirmation of the registration for its latest drug patent application, it will have created a monopoly for that product by restricting
entry into the market
Which of the following is most unlikely to present a barrier to entry into a market?
deregulation
Monopolistic competitors in the food industry will often include a recyclable symbol on packaging used for their product as a means to
different their product
According to the definition of profit, if a profit-maximizing firm will always attempt to produce its desired level of output at the lowest possible cost, then it will
do so regardless of what type of competition exists in a market.
A constant-cost industry has a long-run (industry) supply curve that is
horizontal
Compared to a monopolistic competitor, a monopolist produces a good with __ substitutes and so has a __ elastic demand curve.
fewer; less
How can parties who find themselves in a prisoner's dilemma situation avoid the undesired outcome and cooperate with each other?
find effective ways to penalize firms who do not cooperate
Compared to the perfectly competitive firm, the monopolist faces a demand curve that is ___ elastic because there are __ substitutes for the product produced by the monopolist
less; fewer
Compared to the perfectly competitive firm, the monopolist faces a demand curve that is ___ elastic because there are __ substitutes for the product produced by the monopolist.
less; fewer
If the firm produces 5 units that it sells at a price of $30.00 each, what will its profits or losses equal?
losses equal $15
In microeconomics, the term _ is synonymous with economies of scale.
increasing returns to scale
In the event that Only1Corp. obtains control of all the natural gas producers in the US, it would most likely
raise prices, cut production, and realize positive economic profits
Following the assumption that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency?
output will be too small and its price too high.
A concentration ratio indicates the
percentage of total sales accounted for by the (for example) four largest firms.
Firms operating in a market situation that creates __________, sell their product in a market with other firms who produce identical or extremely similar products. A
perfect competition
If you were to rank the four market structures in terms of lowest concentration ratio to highest concentration ratio, which of the following rankings would be correct?
perfect competition, monopolistic competition, oligopoly, monopoly
Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?
physical space for the gallery
When a business adopts a strategy of reducing and/or discontinuing production in response to a sustained pattern of losses, it is
preparing to exit operations
The term __________ refers to a firm operating in a perfectly competitive market that must take the prevailing market price for its product.
price taker
The following figure shows the average cost curve, demand curve, and marginal revenue curve for a monopolist. After maximizing profits, what does the firm's revenue equal?
the area of rectangle ADEH
Which of the following cost curves is never U-shaped?
the average fixed cost curve
Marginal revenue is equal to __ divided by __.
the change in total revenue; the change in quantity of output
One reason a Natural Monopoly can exist is,
the company controls a scarce physical resource.
What role can advertising play with respect to differentiated products?
shapes consumers intangible preferences
In the __________, the perfectly competitive firm will seek out __________.
short run; the quantity of output where profits are highest
A monopolistically competitive firm may earn abnormally high profits in the
short, but the process of entry will drive those profits to zero in the long run.
Equilibrium price is $10 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 1,200 units of output. At 1,200 units, ATC is $23, and AVC is $18. The best policy for this firm is to __________ in the short run. Also, this firm earns __________ of __________ if it produces and sells 1,200 units.
shut down; losses; $15,600
If a firm's revenues do not cover its average variable costs, then that firm has reached its __________.
shutdown point
Which of the following should typically be ignored because spending has already been made and cannot be changed?
sunk costs
"Rent seeking" is socially wasteful because
resources devoted to transferring rents are not used to produce goods.
Refer to the diagram above. In this instance, point e shown on the graph indicates
the point where profits will increase by reducing output
If MR > MC, then
the firm can increase its profits (or minimize its losses) by increasing output.
If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then,
the firm should keep expanding production.
Refer to the diagram above. Which of the following explains the slope of the total revenue curve illustrated in this graph?
the slope of the total revenue curve is explained by both a and b above.
Refer to the diagram above. In this instance, at the range of output represented at point b,
total costs exceed total revenues.
Whatever the firm's quantity of production, _ must exceed total costs if it is to earn a profit.
total revenue
__ include all of the costs of production that increase with the quantity produced.
variable cost
In a free market economy, firms operating in a perfectly competitive industry are said to have only one major choice to make. Which of the following correctly sets out that choice?
what quantity to produce
If a monopolistic competitor raises its price, it ___ customers then a perfectly competitive firm, but ____ customers compared to the number that a monopoly that raised its prices would.
will lose fewer; it will lose more
The excess capacity theorem states that a monopolistic competitor
will produce an output level smaller than the one that would minimize its unit costs.
Refer to Exhibit 7-2. What is the average total cost of producing 140 units of output?
$1.79
I'MABigCorp. produces and sells kitchen wares. Last year, it produced 7,000 can openers and sold each one for $6. To produce the 7,000 can openers, the company incurred variable costs of $28,000 and a total cost of $45,000. I'MABIGCorp.'s average fixed cost to produce the 7,000 can openers was
$2.43
At 100 units of output, total cost is $22,000 and total variable cost is $14,000. At 100 units of output, what is the value of average total cost, average variable cost, and average fixed cost, respectively?
$220; $140; $80
Refer to Exhibit 23-10. What price does this firm charge for its product?
$25
A monopolistic competitor has the following information about cost and demand.What will the firm's profits equal in the short run?
0
Total industry sales are $90 million. The top four firms (A, B, C, and D) account for sales of $15 million, $3.5 million, $1.3 million and $0.8 million, respectively. What is the four-firm concentration ratio?
0.23
Refer to Exhibit 7-14. What is the MPP of the fourth unit of labor [blank (D)]?
15 units
Refer to Exhibit 22-1. The numbers that go in blanks (A) and (B) are, respectively,
20 and 30
In the United States, a pharmaceutical company's exclusive patent rights last for
20 years.
The following table shows a monopolist's demand curve and cost information for the production of its good. What quantity will it produce?
30
_ help to explain why every economy, as it develops, has an increasing proportion of its population living in urban areas.
Agglomeration factors
_ occurs when circumstances have allowed several large firms to have all or most of the sales in an industry.
An oligopoly
Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average total cost = $13, and average variable cost = $7. What will the firm do and why?
Continue to produce in the short run, because price is greater than average variable cost.
(T/F) Accounting profits and economic profits measure the same thing and are always equal.
False
(T/F) Cartels are easy to form and to maintain.
False
(T/F) Monopolists are guaranteed to earn a positive economic profit because they are the only seller in their industry.
False
Why must profits be zero in long-run competitive equilibrium?
If profits are not zero, firms will enter or exit the industry
____ law implies ownership over an idea or concept or image
Intellectual property
__________ refers to the additional revenue gained from selling one more unit.
Marginal revenue
Does the monopolistic competitive firm exhibit resource-allocative efficiency?
No, because at its chosen quantity of output, price is greater than marginal cost.
If profits are positive if at the profit maximizing quantity then it must be true that at that quantity,
P > ATC
Profits are positive if at the profit maximizing quantity,
P > ATC
A firm in a monopolistic competitive market will produce a level of output at which
P > MR
Refer to Exhibit 24-2. The profit-maximizing monopolist produces Q0 units and charges a price of
P3
Refer to Exhibit 24-1. If the product is produced under a monopoly, what quantity will be produced and what price will be charged in order to maximize profit?
Q1 units at P1
Refer to Exhibit 23-2. What quantity of output does the profit-maximizing (or loss-minimizing) firm produce?
Q2, where marginal cost is equal to marginal revenue.
Refer to Exhibit 25-3. What level of output is productively efficient?
Q3
Which of the following is an assumption of the theory of monopoly?
There are extremely high barriers to entry.
(T/F) Concentration ratios are often used to determine the degree of oligopoly in an industry.
True
(T/F) For a perfectly competitive firm, the demand curve it faces is horizontal at the price determined in the market.
True
(T/F) In an oligopolistic market, the product being produced can be either homogeneous or differentiated.
True
(T/F) In long-run competitive equilibrium, no firm has an incentive to change its plant size.
True
(T/F) In long-run equilibrium, a monopolistic competitive firm will most likely produce a level of output for which price equals average total cost.
True
(T/F) The single-price monopolist produces the quantity of output at which marginal cost equals marginal revenue and charges a price that is greater than marginal revenue.
True
A perfectly competitive firm is a price taker.
True
Which of the following is an example of a legal barrier to entry? a) A public franchise b) a patent c) exclusive ownership of a scarce resource d) a and b e) a, b, and c
a and b
The theory of oligopoly assumes a) a few sellers and many buyers b) a few buyers and many sellers c) significant barriers to entry d) a and c e) b and c Exhibit 25-3
a and c
In economics, a firm that faces no competitors is referred to as _.
a monopoly
A firm that holds a monopoly position in the market place is
a price maker
Monopolies are inefficient because they result in,
a quantity lower than what is produced in a competitive market
Which one of the following is the most accurate description of a monopolist?
a sole producer of a product for which good substitutes are lacking in a market with high barriers to entry
An __________ is calculated by subtracting the firm's costs from its total revenues, __________.
accounting profit; excluding opportunity cost
An assumption of a Monopoly includes, a) a single seller of the good or service b) a firm that sells a product with no close substitutes c) high barriers to entry d) all of the above
all of the above
The marginal revenue curve for a monopolist _ the market demand curve.
always lies beneath
Refer to Exhibit 24-1 The deadweight loss of the profit-maximizing monopoly is identified by what area?
area BCA
For economists, the short run is a period of time in which,
at least one input is fixed.
If the price that a firm charges is higher than its __________ cost of production for that quantity produced, then the firm will earn profits.
average
In order for a monopolist to be earning a profit, price must be greater than
average cost
In long run equilibrium, the monopolistic competitor will most likely
be earning zero economic profit.
A fixed input is an input whose quantity
cannot be changed as output changes in the short run.
Intellectual property law is a body of law that includes
copyright legislation, as well as all of the above
In order to calculate marginal cost, the change in __ is divided by the amount of change in quantity.
either total cost or variable cost
The economies-of-scale curve is a long-run average cost curve, because
it allows all factors of production to change
If the CEO of I'MaBigBank is playing prisoner's dilemma then, from his perspective, the gains to be had from cooperation are
larger than the rewards from pursing self-interest
If a firm is a price taker, its demand curve is
perfectly elastic
The graph above illustrates the electricity market. Consider market competition between firms where price is based on AR and select the most appropriate answer.
this market is imperfectly competitive with excess profits possible in the short-run
What happens in a perfectly competitive industry when economic profit is greater than zero?
all of the above
In order to produce 100 oatmeal cookies, GoodieCookieCo incurs an average total cost of $0.25 per cookie. The company's marginal cost is constant at $0.10 for all oatmeal cookies produced. The total cost to produce 50 oatmeal cookies is
$20
Given the data provided in the table below, what will the marginal revenue equal for production at quantity (Q) level 4?
$5.00
The table below shows the demand curve and cost information for a firm that is a monopoly. If they maximize their profits, what price will they charge?
$600
The table below sets out cost information for the production of volleyballs. Some values are missing. Which of the following statements is correct?
A = 42, E = 12
(T/F) In the prisoner's dilemma, each prisoner would be better off if neither one confesses.
True
(T/F) Perfect competition is a market structure in which many firms provide an identical product.
True
(T/F) The profit-maximizing monopolistic competitive firm produces a level of output at which marginal revenue equals marginal cost.
True
Which of the following is a characteristic of perfect competition?
buyers and sellers having all relevant information
A situation where the level of output, scale and average costs are all rising is called
decreasing returns to scale
A "price taker" is a firm that
does not have the ability to control the price of the product it sells
The market demand curve in a perfectly competitive market is
downward sloping
The demand curve as perceived by a monopolistic competitor is ____.
downward-sloping
In a monopolistic competitive industry,
each firm in the industry produces a slightly differentiated product.
For a monopolist, if price is above average cost, the monopolist is
earning an economic profit
The monopolistic competitive firm will most likely earn a normal profit in the long run because of
easy entry and exit.
In the long run, if inputs are increased by 10 percent and output increases by 20 percent, then __ are said to exist.
economies of scale
The term __ describes a situation where the quantity of output rises, but the average cost of production falls.
economies of scale
A natural monopoly exists when
economies of scale are so large that only one firm can survive and achieve low unit costs.
If a firm earns normal profit, then it has generated revenues
equal to the sum of implicit and explicit costs.
If a perfectly competitive firm raises its price, the quantity demanded of its product ____.
falls to zero
The branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs most often used by economists is
game theory
In maximizing profits, a monopolist will charge a price that is
greater than marginal cost
Economic profit can be derived from calculating total revenues minus all of the firm's costs,
including its opportunity costs
Kate's 24-Hour Breakfast Diner menu offers one item, a $5.00 breakfast special. Kate's costs for servers, cooks, electricity, food, etc. average out to $3.95 per meal. Her costs for rent, insurance cleaning supplies and business license average out to $1.25 per meal. Since the market is highly competitive, Kate should
keep the business open in the short-run, but plan to go out of business in the long-run.
The term _ is used to describe the additional cost of producing one more unit.
marginal cost
In economic terms, a practical approach to maximizing profits requires an examination of how changes in production affect __________ and __________.
marginal revenue; marginal cost
The price charged by a perfectly competitive firm is determined by
market demand and market supply, together
A ___ exists when the quantity demanded in the market is less than the quantity at the bottom of the long-run average cost curve.
natural monopoly
In which market structure can the good being produced be either homogeneous or differentiated?
oligopoly
Refer to Exhibit 24-3. The profit of the monopolist is
positive
The use of sharp, temporary price cuts as a form of ____ would enable traditional US automakers to discourage new competition from smaller electric car manufacturers.
predatory pricing
A ___ refers to a group of firms colluding with one another to produce at the monopoly output and sell at the monopoly price.
prisoner's dilemma
Monopolistic competitors can make a __ in the short-run, but in the long run, ___ will drive these firms toward ____.
profit or loss; entry and exit; a zero-profit outcome
If the firm produces 5 units that it sells for $39.00 each, what will its profits or losses equal?
profits equal $30
The following figure shows the average cost curve, demand curve, and marginal revenue curve for a monopolist. After maximizing profits, what do the firm's costs equal?
the area of rectangle ABGH
For the monopoly firm, its demand curve is
the market demand curve.
Refer to Exhibit 22-1. Diminishing marginal returns set in with the addition of which unit of the variable input?
the third
Refer to the diagram above. Based on the information illustrated in the graph, which of the following is correct?
the transition point between where MC is pulling down and pulling up AC always occurs at the minimum point of the AC curve
The marginal cost curve is generally __, because diminishing marginal returns implies that additional units are ____.
upward-sloping; more costly to produce
If a monopoly or a monopolistic competitor raises their prices, the quantity demanded ____.
will decline
Would raising the price for a product create a larger decline in quantity demanded for a monopolistic competitor's than it would for a monopoly?
yes; consumers will buy from competitors offering lower priced substitutes