Opt Quiz 6 Micro (Market Structure)

Profit Maximizing Principle

MR > MC: produce MR = MC: stop produce Profit = (P-ATC) x Q

Cartels are thought to be inherently unstable because: a. the costs of enforcing cartel agreements are very low. b. each cartel member can privately profit from increasing production beyond agreed-upon levels. c. customers force cartel members to increase production and reduce prices. d. cartel agreements are legally binding and can be upheld in court.

b

Excess capacity occurs in long-run equilibrium under monopolistic competition so that: a. price is less than marginal cost. b. price exceeds minimum average cost. c. marginal revenue exceeds price. d. all of the above occur.

b

The fast-food industry is generally considered to be a constant cost industry in regards to its use of labor as an input. Why? a. Few people prefer to work in the industry. b. Available labor is in short supply. c. Firms use a relatively small share of unskilled labor in most cities. d. The productivity of the workers is relatively low.

c

Three airlines account for most of the air traffic in and out of a local city. If the three airlines joined together in setting fares and air travel schedules, economists would say that they were acting as: a. monopolistic competitors, as each firm would have to differentiate its airline services from its rivals. b. perfect competitors, as each firm would sell travel services at the same fares as the other airlines. c. a cartel, as the three airlines together would attempt to coordinate policies in the local market to jointly maximize profits. d. none of the above

c

What would be the impact if the government forced the breakup of a natural monopoly to promote greater competition in an industry? a. Smaller firms would have a cost advantage over larger firms. b. The price paid by consumers would be unchanged. c. The average cost of producing the good would increase. d. The average cost of producing the good would decrease.

c

When firms enter a monopolistically competitive market: a. product variety diminishes. b. the demand curves of established firms shift to the right. c. prices fall. d. profits increase.

c

Which of the following gives consumers an incentive to reduce the consumption of a service when the cost of providing the service is the highest? a. average cost pricing b. constant pricing c. peak load pricing d. regulated pricing

c

Which of the following is not a necessary characteristic of a successful price discriminator? a. It has market power. b. It can prevent the resale of the product. c. Its marginal costs of production differ across customers. d. Willingness to pay for its product differs across customers.

c

Which of the following is true of monopoly but not true of perfect competition? a. Firms can potentially earn economic profits in the short run. b. Total revenue is the product of price times the quantity sold. c. Firms can potentially earn economic profits in the long run. d. A profit-maximizing firm will shut down if price falls below the average variable cost.

c

Condition of monopoly

- 1 firm - No close substitute - Barriers to entry

Perfectly competition characteristics

- Each firm can't control their own price - Price taker, price follow others - P=MR

In order to maximize profits, a firm should produce the level of output at which total revenue is maximized. True/False

False

Refer to Exhibit 12-5. In the short run, if the market price falls below ____, the firm should shut down. a. $60 b. $45 c. $30 d. $10

c

A monopolist who is unable to price discriminate: a. will never produce in the output range where marginal revenue is positive. b. will never produce in the output range where marginal revenue is negative. c. will never produce in the output range where demand is inelastic. d. will be characterized by both (b) and (c).

d

Refer to Exhibit 13-3. What would the monopolist's profit-maximizing level of output be? a. 2 cans of iced coffee b. 3 cans of iced coffee c. 4 cans of iced coffee d. 5 cans of iced coffee

d

Refer to Exhibit 13-6. In perfect price discrimination, total welfare is area: a. a b. a + b + c c. a + b + d d. a + b + c + d + e

d

Condition of perfect competition characteristics

- Many firms - Must sell same products (homogeneous product) - Free to entry/exit - Full information on P&Q

Explain how economic profits are reduced to zero as new firms enter a monopolistically competitive industry.

Demand curve for each of the existing firms will fall. With entry, not only will the firm's demand curve move inward but it also becomes relatively more elastic due to each firm's products having more substitutes. This decline in demand continues to occur until the average total cost curve becomes tangent with the demand curve, and economic profits are reduced to zero.

Monopolistic competition differs from perfect competition only with regard to the number of firms participating in the market. True/False

False

Refer to Exhibit 12-10. What levels of capital (K=1, K=2, or K=3) would the firm choose in the long run for producing three canisters and five canisters of peanuts per hour, respectively?

K=2 if producing three canisters per hour, and a level of capital where K = 3 if producing five canisters of peanuts per hour. Because per-unit cost of producing peanut canisters at those capital is lowest.

A welfare loss occurs when a monopolist chooses not to produce units of output that are of greater marginal value to consumers than the marginal cost of producing them. True/False

True

The market demand curve in a perfectly competitive industry is downward sloping, while the demand curve faced by an individual perfectly competitive firm is horizontal. True/False

True

Unlike purely competitive firms, firms in monopolistic competition will operate with excess capacity even in long-run equilibrium. True/False

True

A monopolistically competitive firm differs from a perfectly competitive firm in that a monopolistically competitive firm: a. faces a downward-sloping demand curve for its product. b. faces a horizontal demand curve at the market-clearing price. c. is able to earn profits in the long run. d. faces virtually no barriers to entry.

a

A price-discriminating monopolist will tend to charge a lower price to students if it believes that students: a. have a lower willingness to pay than other demanders. b. have a greater willingness to pay than other demanders. c. have very elastic demand curves. d. have nearly vertical demand curves.

a

Beginning from a long run equilibrium in an increasing cost industry, if there is a substantial, permanent fall in demand for industry output: a. firms will leave the industry, the quantity produced will fall, and prices will end up lower than their initial long run equilibrium level. b. firms will leave the industry, the quantity produced will fall, and prices will end up higher than their initial long run equilibrium level. c. firms will leave the industry, the quantity produced will fall, and prices will end up at the same level as their initial long run equilibrium level. d. firms will enter the industry, the quantity produced will rise, and prices will end up lower than their initial long run equilibrium level.

a

For a monopolistically competitive firm in long run equilibrium: a. marginal revenue equals marginal cost and price equals average cost. b. the economic profits it is earning will soon be competed away by entry. c. accounting profits are zero and price equals marginal cost. d. marginal revenue equals marginal cost and average total cost is minimized.

a

If input prices rise as industry output expands, then a perfectly competitive firm's marginal cost and average cost curves will: a. shift upward. b. shift downward. c. not shift. As the firm increases production, however, costs increase as the firm moves upward to the right along these curves. d. not shift. As the firm increases production, however, costs decrease as the firm moves downward to the left along these curves.

a

In the long run a perfectly competitive firm operates ____ and a monopolistically competitive firm operates ____. a. at the efficient scale; with excess capacity b. at the efficient scale; at the efficient scale c. with excess capacity; with excess capacity d. with excess capacity; at the efficient scale

a

Refer to Exhibit 13-5. Identify the area of the welfare loss due to monopoly pricing and output practices. a. ADB b. DCB c. ACB d. DAP1P4

a

Refer to Exhibit 14-2. The firm illustrated in Graph A above maximizes profits (minimizes losses) by producing at level of output ____ and charging price ____. a. q1; P1 b. q2; P1 c. q1; P2 d. q2; P2

a

The practice of selling a product to different customers at different prices when marginal cost is the same is known as: a. price discrimination. b. monopoly pricing. c. arbitrage. d. price segregation.

a

What was the first important law regulating monopoly that prohibited "restraint of trade"? a. Sherman Act b. Robinson-Patman Act c. Cellar-Kefauver Act d. Clayton Act

a

Which of the following industries would most likely represent monopolistic competition? a. clothing b. wheat c. water utilities d. soft drinks

a

Which of the following is characteristic of a perfectly competitive market? a. There is free entry into and exit from the market. b. Individual firms can exert a perceptible influence on the market price. c. Firms in the market produce a differentiated product. d. All of the above are true.

a

Which of the following is not a source of monopoly? a. technologies that allow each of many small firms to produce at the same per-unit costs as one large firm b. patents c. control of crucial inputs d. government licensing requirements

a

If a perfectly competitive industry uses only a small share of the available inputs in a resource market, then the long-run market supply curve for the industry will most likely be: a. vertical. b. horizontal. c. upward sloping. d. downward sloping.

b

If the eyeglass industry is monopolistically competitive, then in the long-run: a. the price of eyeglasses will equal marginal revenue. b. the price of eyeglasses will exceed marginal cost. c. firms can earn economic profits. d. firms are price takers.

b

In a perfectly competitive market, in response to a permanent decrease in demand: a. the short run equilibrium price will be higher than the eventual long run equilibrium price. b. the short run equilibrium price will be lower than the eventual long run equilibrium price. c. the short run equilibrium price will be the same as than the eventual long run equilibrium price. d. we cannot know whether the short run equilibrium price will be below the eventual long run equilibrium price.

b

In long run equilibrium, a perfectly competitive firm: a. can earn positive economic profits. b. earns zero economic profits. c. can earn negative economic profits. d. can do any of the above.

b

In the monopolistic competitive model, all firms are assumed to be producing: a. products that are heavily advertised. b. differentiated products. c. identical products. d. complementary products.

b

Necessary conditions for price discrimination include: a. identical tastes among buyers. b. differences in willingness to pay among customers. c. easy resale. d. both (b) and (c)

b

Refer to Exhibit 12-7. The firm depicted above should: a. shut down in order to minimize losses. b. keep operating in the short run in order to minimize losses, since price exceeds average variable cost. c. keep operating in the short run in order to minimize losses, since price exceeds average total cost. d. decrease output to 30 units, since marginal revenue exceeds marginal cost by the greatest dollar amount at that level of output.

b

The "demonstration effect" created by advertising: a. manipulates consumer needs for trivial products. b. creates urges among consumers to buy products previously unknown to them. c. conveys misleading claims to the consumer. d. none of the above

b

Toys for Toddlers, Inc., sells in a perfectly competitive market, with an equilibrium price of $5. Its marginal revenue: a. is greater than $5. b. is $5. c. is less than $5. d. is less than zero.

b

When a monopolist is able to sell its product at different prices to different customers, it is likely engaging in: a. quality-adjusted pricing. b. price discrimination. c. price differentiation. d. illegal activities.

b

When firms exit a monopolistically competitive industry: a. the average total cost curves of remaining firms will shift upward. b. the demand curves of remaining firms are increased at each level of output. c. the remaining firms will decrease production. d. the average revenue received by remaining firms will decrease at each level of output.

b

When marketing makes customers better informed about all firms in the market: a. demand curves for specific brands in the market are likely to become less elastic. b. each firm is likely to have less market power. c. firms are better able to foster stronger brand loyalty. d. the market power of individual firms is strengthened.

b

Which of the following is characteristic of a monopolistic competitor? a. a standardized product b. the ability to influence price c. allocative efficiency d. a horizontal firm demand curve

b

A monopolist can sell 6 units per day at $8 per unit, or 7 units per day at $7 per unit. Its marginal revenue for the seventh unit of output is: a. $49. b. $7. c. $1. d. $-1

c

A monopoly is inefficient because: a. consumers are forced to pay higher prices for products. b. firms are able to earn economic profits. c. the cost of increased production is less than the value that society places on it. d. price exceeds marginal revenue.

c

Economic losses caused several firms to leave the car wash business in Portland, Oregon. Though prices have risen, firms are still leaving the industry. Apparently: a. economic profits exist but they are not as high as in other industries. b. economic profits are zero and firms won't stay in the industry if they are not earning an economic profit. c. firms are still generating economic losses. d. economic profits have decreased because of the exit of existing firms.

c

If Mary wants to use advertising to reduce the elasticity of demand for her dry cleaning services, she should make sure the advertising: a. clearly states the prices she charges. b. shows that she is producing a product like the other dry cleaners in town. c. shows why her services are truly different from the other dry cleaners in town. d. does none of the above.

c

In monopolistically competitive markets, economic profits ____, and ____ shifts the demand curve of the remaining firms to the ____. a. signal some remaining firms to exit; exit; right b. signal some remaining firms to exit; exit; left c. signal new firms to enter; entry; left d. signal new firms to enter; entry; right

c

In the perfectly competitive model, all firms are assumed to be producing: a. products that are heavily advertised. b. differentiated products. c. identical products. d. complementary products.

c

Monopolistic competitors and perfect competitors are alike in: a. facing horizontal demand curves. b. earning zero economic profit in the short run. c. earning zero economic profit in the long run. d. relying on advertising to attract buyers to their products.

c

Refer to Exhibit 12-5. The firm's short-run supply curve corresponds to which segment of the marginal cost curve in the diagram? a. ABCDE b. BCDE c. CDE d. DE

c

Refer to Exhibit 14-4. The extent of excess capacity of this firm is: a. 11,000 pairs of blue jeans. b. 7,000 pairs of blue jeans. c. 4,000 pairs of blue jeans. d. 1,000 pairs of blue jeans.

c

Refer to Exhibit 14-2. In Graph B, the profit-maximizing (loss-minimizing) firm is making a ____ shown by the area ____. a. profit; P1 V R S b. loss; P2 P1 S T c. profit; P2 P1 S T d. loss; P1 V R S

d

Assume a perfectly competitive firm sells its output for $150 per unit. At its current 2,000 units of output, marginal cost is $180 and increasing, and average variable cost is $160. Assuming it wants to maximize its profits, it should: a. increase output. b. decrease output, but not shut down. c. maintain its current output rate. d. shut down. e. decrease output as long as the minimum of AVC is above $150 and shut down if the minimum of AVC is below $150.

d

Assume a perfectly competitive firm sells its output for $150 per unit. It currently produces 6,000 units of output, at which output level it minimizes its average variable cost at $152 per unit. Assuming it wants to maximize its profits, it should: a. increase output. b. decrease output, but not shut down. c. maintain its current output rate. d. shut down.

d

Firms in monopolistically competitive markets can differentiate their products on the basis of: a. brand identity. b. quality. c. convenience. d. all of the above.

d

If input prices for perfectly competitive firms increase as the output of its industry expands: a. their short run average cost curves will shift up as the industry expands. b. after a permanent increase in demand, the long run equilibrium price will be higher than the original price. c. after a permanent increase in demand, the short run equilibrium price will be higher than the eventual long run equilibrium price. d. all of the above will be true.

d

In the long run, a monopolistic competitor: a. earns a normal rate of return. b. sells a level of output at which marginal revenue is less than price. c. sells a level of output at which marginal revenue equals marginal cost. d. is characterized by all of the above.

d

In which of the following industry models are the individual firms not price takers? a. oligopoly b. monopolistic competition c. perfect competition d. (a) and (b) above only

d

Monopolistic competition is characterized by: a. homogeneous products. b. barriers to entry c. firms earning economic profits in the long run. d. differentiated products.

d

Predatory pricing: a. occurs when a firm increases price in order to exploit inelastic demand by consumers. b. occurs when a firm prices below average variable cost in order to drive competitors out of the market. c. is difficult to distinguish from vigorous competition in practice. d. is characterized by both (b) and (c).

d

Refer to Exhibit 12-9. This pair of graphs demonstrates the chain of events for a lawn care firm, beginning with an increase in the market demand for lawn care services. Which of the following statements is incorrect? a. This particular firm increases its production of lawn care services in response to an increase in the price of lawn care services. b. The overall quantity of lawn care services increases in the industry. c. The equilibrium price of lawn care services is initially P0, then increases to P1 because of the increase in demand, and eventually decreases to P0 once again when the market supply of output increases as a result of new firms entering the industry. d. The diagrams depict an increasing cost industry.

d

Refer to Exhibit 13-6. In perfect competition, deadweight loss is area: a. a b. a + b + c c. a + b + c + d + e d. zero

d

Which of the following is generally true of monopoly? a. Price exceeds marginal cost. b. Marginal revenue is less than price. c. Output is restricted relative to the socially efficient level. d. All of the above are generally true of monopoly.

d

Which of the following is most likely to be a price taker? a. a respected heart surgeon b. an ice cream shop owner located in Atlanta, Georgia c. a beachside tourist resort d. a Kansas wheat farmer

d

Which of the following is true? a. Monopolists, monopolistically competitive firms and perfectly competitive firms all earn positive economic profits in the long run. b. Monopolists, monopolistically competitive firms and perfectly competitive firms all earn zero economic profits in the long run. c. Only monopolists and monopolistically competitive firms, but not perfectly competitive firms, can earn positive economic profits in the long run. d. Monopolists, monopolistically competitive firms and perfectly competitive firms can potentially all earn positive economic profits in the short run.

d