Practice exam

Diseconomies of scale a. exist when fixed cost increases as output increases. b. exist when long-run average cost increases as output increases. c. result eventually as the firm uses more and more labor with a fixed capital stock. d. both a and b e. all of the above

A

If a monopolistically competitive market is in long-run equilibrium, each firm: a. charges a price which is higher than long-run marginal cost b. earns economic profits c. produces that level of output at which long-run average cost is at the minimum d. all of the above e. none of the above

A

If a perfectly competitive firm incurs an economic loss, it should a. shut down immediately. b. try to raise its price. c. shut down in the long run. d. shut down if this loss exceeds fixed cost.

A

The primary difference between perfect competition and monopolistic competition is that for monopolistic competition, a. product differentiation occurs b. entry is difficult c. a large number of sellers exist d. perfect information with respect to prices exists e. in the long run above normal profits can be made

A

Which of the following is true for a monopoly? a. P = MC b. P = MR c. P > MR d. P < MR

A

Which of the following products is the best example of perfect competition? a. automobiles b. apples c. soap d. video cassettes

A

A constant-cost industry is one in which a. input prices do not change over time. b. technology does not change over time. c. input prices and technology do not change as firms enter or exit the industry. d. input prices and technology do not change over time. e. firms have reached the maturity phase of the industry's life cycle.

B

A firm in a competitive industry faces a market price for output of $20 and a wage rate of $500. At the current level of employment (50 units of labor), the marginal product of labor is 30. In order to maximize profit, the firm should a. hire less labor because hiring the last unit of labor decreased profit by $500. b. hire less labor because the firm is suffering a loss of $25,000. c. hire more labor because hiring another unit of labor would increase profit by $100 d. keep the level of employment the same because the firm is earning a profit of $500.

B

Average total cost a. increases as output increases. b. decreases as output increases. c. increases if marginal cost is increasing. d. increases if marginal cost is greater than average total cost. e. both c and d

B

Which of the following is not characteristic of perfect competition? a. a differentiated product b. no barriers to entry or exit c. large number of buyers d. complete knowledge of market price

B

Suppose that a perfectly competitive industry is in long-run equilibrium. Then the price of a complementary good decreases. What will happen? I. Next period a typical firm will increase output. II. Next period a typical firm will earn a greater than normal rate of return on investment. III. Eventually firms will exit the industry.

B. both I and II

A monopolistically competitive industry is in the process of moving toward long-run equilibrium. This period that product of a typical firm has more substitutes than last period. This means that: a. there was entry into the industry b. a typical firm will produce more this period c. a typical firm's profits will fall this period d. both a and c e. all of the above

C

A profit-maximizing firm with market power will always produce a level of output where a. demand is elastic. b. demand is inelastic. c. price is greater than average total cost. d. marginal revenue is greater than average total cost.

C

The main difference between the price-quantity graph of a perfectly competitive firm and a monopoly is a. that the competitive firm's demand curve is horizontal, while that of the monopoly is downward sloping. b. that a monopoly always earns an economic profit while a competitive company always earns only normal profit. c. that a monopoly maximizes its profit when marginal revenue is greater than marginal cost. d. that a monopoly does not incur increasing marginal cost.

C

A perfectly competitive firm sells 15 units of output at the going market price of $10. Suppose its average cost is $15 and its average variable cost is $8. Its contribution margin (i.e., contribution to fixed cost) is a. $30. b. $150. c. $105. d. cannot be determined from the above information.

D

In a perfectly competitive industry the market price is $12. A firm is currently producing 50 units of output; average total cost is $10, marginal cost is $15, and average variable cost is $7. In order to maximize profit, the firm should: a. produce more because the firm is earning a profit of $100. b. keep output the same because the firm is earning a profit of $100 c. produce more because the next unit of output increases profit by $2 d. produce less because the last unit of output decreased profit by $3

D

A monopolist which suffers losses in the short run will a. continue to operate as long as total revenue covers fixed cost. b. raise price in order to eliminate losses. c. exit in the long run if there is no plant size that will result in economic profit that is greater than or equal to zero. d. both a and b e. both a and c

D. both a and b

A perfectly competitive firm will maximize profit by producing the level of output at which: a. the last unit of output produced adds the same amount to total revenue as to total cost b. the additional revenue from the last unit of output produced exceeds the additional cost of the last unit by the largest amount c. the firm's total revenue exceeds total cost by the largest amount d. both a and b e. both a and c

E. both a and c

A monopolist is producing a level of output at which price is $8, marginal revenue is $5, average variable cost is $6, and marginal cost is $10. In order to maximize profit, the firm should: a. decrease price b. increase price c. keep price the same d. increase output e. shut down

b. increase price

A monopolist will maximize profit by producing the level of output at which: a. the firm's total revenue exceeds total cost by the largest amount. b. marginal revenue equals marginal cost. c. the last unit of output produced adds the same amount to total revenue as it does to total cost. d. both a and b e. all of the above

e. all of the above