U5 Extreme
To maximize profit, a profit-maximizing monopolist should produce at an output level where: A. MR = MC B. P = MR C. P = MC D. P = ATC
A. MR = MC
Firms often use patent rights as a: A. Barrier to exit B. Barrier to entry C. Way to achieve perfect competition D. None of the above
B. Barrier to entry
A monopoly's s marginal revenue curve is: A. Downward sloping and the same as the product demand curve B. Downward sloping and below the product demand curve C. Downward sloping and above the product demand curve D. Downward sloping with the same slope as the product demand curve
B. Downward sloping and below the product demand curve Demand curve facing the monopolist will be his average revenue curve. The average revenue curve of the monopolist slopes downward through its length Average revenue curves slopes downward, marginal revenue curve will lie below it
Monopolistically competitive firms ignore the effect of their decisions upon other firms in the industry because: A. Each firm is large relative to the market B. Each firm is small relative to the market C. There are few sellers in the market D. There is only one seller in the market
B. Each firm is small relative to the market Both perfectly competitive market and monopolistic competition earn normal or zero economic profits in the long run
All of the following characteristics apply to monopolistic competition EXCEPT: A. A large number of firms compete B. Each firm produces the same identical product C. Firms compete on product quality, price, and marketing D. There are barriers to enter or exit the industry
B. Each firm produces the same identical product
In a perfectly competitive industry, when a firm is producing so that its total revenue equals total cost, the firm is: A. Definitely not maximizing its profit B. Earning zero economic profit, that is, earning a normal profit C. Incurring an economic loss D. Earning an economic profit
B. Earning zero economic profit, that is, earning a normal profit
Being a price taker in a market means that the seller: A. Charges each consumer the maximum that she will be able to pay for the product B. Has no choice but to charge the equilibrium price that results from the market supply and demand curves C. Takes her price from her average total cost curve D. Sells her products at different prices to different customers
B. Has no choice but to charge the equilibrium price that results from the market supply and demand curves
A firm operating in a a perfectly industry faces a demand that is: A. Vertical B. Horizontal C. Downward sloping D. Upward sloping
B. Horizontal The market demand curve for perfectly competitive market is downward sloping, but the demand curve form the perspective of the individual firm is perfectly elastic/horizontal
A monopoly firm will produce at minimum ATC: A. When in long-run equilibrium B. If MR happens to equal MC where ATC is at a minimum C. If price happens to equal ATC at the output where ATC is at its minimum D. Whenever price is everywhere below the monopolist's ATC
B. If MR happens to equal MC where ATC is at a minimum The profit maximizing level of output for a monopolist is the one at which marginal revenue equal MC: MR = MC The monopoly firm produce at MR = MC where ATC is minimum
Name 4 characteristics of oligopoly
-An industry dominated by a small number of large firms -Firms sell either identical or different produces -Industry has significant barriers to entry -Not many sellers
Name 4 reasons Oligopolies arise.
-Economies of scale -Patents and trademarks -Control over the source of raw materials -Need of large capital or high startup cost
What are the major source of barriers to entry in a monopoly market? (4)
-Legal restriction -Control over key raw materials -Efficiency -Patent right
Name the four features that identify different market structures are?
-Number of buyers and sellers -Products uniformity across supplier -Ease of entry into the market -Forms of competition among firms
Products may differ by (4)
-Physical traits -Type of service -Location -Different packaging style
Oligopolistic firms are less likely to collude successfully against interest of consumers if: (4)
-The number of rival firms are large -Its costly to prohibit competitors from offering secret price cuts -Low barriers to entry -Market demand conditions tend to be unstable
Explain how a perfect competitive market decides how much to produce.
A firm maximizes profit by producing the level of output where the difference between revenue and cost is greatest. This is the same level of output where marginal revenue is equal to marginal cost
AR = Birr 2, and MR = Marginal Revenue, and P = Market price. Which one of the following shows the true relationships among AR, MR and P. A. 2 = MR = P B. 2 = MR>P C. P>2 D. 2 > MR > P
A. 2 = MR = P In a perfectly competitive market, P = AR = MR
A monopoly is best defined as: A. An industry with only one firm and in which the good produced has no close substitutes B. A firm that purchases its resources from only one supplier C. An industry that sells all its output to one buyer D. A firm that sells all its output to one buyer
A. An industry with only one firm and in which the good produced has no close substitutes
Which of the following is not true about a perfectly competitive market structure? A. Average revenue is greater than price B. Marginal revenue is equal to price C. Marginal revenue is equal to price D. Average revenue is equal to price
A. Average revenue is greater than price. In a perfectly competitive market structure, price equals average revenue which equals marginal revenue. P = AR = MR
The monopolistically competitive firm has a more elastic demand curve than the monopolist: A. Because of competition from other firms B. Because of more productive resources C. Because the market price is arbitrary D. Because of lower costs
A. Because of competition from other firms The demand curve for monopolistically competitive market is more elastic than monopoly due to the presence of close substitute items and because of competition from other firms.
A monopoly can control the price it charges by A. By controlling market supply B. Controlling market demand C. Controlling the cost of production D. None of the above
A. By controlling market supply Under monopoly there is no distinction between the firm and industry. The monopoly firm is a single - firm industry The monopoly firm is capable of influencing the industry price by changing the level of production which is eventually the industry output
Is a group of firms that have colluded to limit their output and raise their price. A. Cartel B. Oligopoly C. Strategy D. Duopoly
A. Cartel
The following are key features of a monopoly EXCPET A. Diseconomies of scale B. Has no close substitutes C. Influence over price D. Barriers to entry
A. Diseconomies of scale
Which of the following is NOT an example of an oligopolistic barrier to entry? A. Diseconomies of scale B. Advertising & Brand proliferation C. High start-up costs D. Control over an essential resource
A. Diseconomies of scale
In the long run, monopolies generally: A. Earn an economic profit B. Earn a normal rate of return C. Earn zero economic profit D. Break even
A. Earn an economic profit
In the long run, a profit-maximizing monopoly produces an output volume that: A. Equates long-run marginal cost with marginal revenue B. Equates long-run average total cost with average revenue C. Assures permanent positive profit D. Is correctly described by both A and C
A. Equates long run marginal cost with marginal revenue The profit maximizing monopoly firm equalizes its long run marginal cost and long run marginal revenue. LMR = LMC
When economic losses are present in a market, firms will tend to: A. Exit from the market B. Raise their prices until the break-even point is reached C. Lower their prices, regardless of cost, so they can capture more of the market D. Increase output
A. Exit from the market -Economic profits will attract new competitors to the market -Economic losses will cause competitors to exit the market
Which of the following is a characteristic of perfect competition? A. Firms produce homogeneous product B. Barriers to entry exist C. Firms are price-setting D. The government regulates the price so that dead weight loss is eliminated
A. Firms produce homogeneous product
A price discriminating monopolist charges lower prices to customers with: A. Higher average willingness-to-pay B. Lower average willingness-to-pay C. Lower supply elasticity's D. Higher supply elasticity's
A. Higher average willingness-to-pay If the monopolist can discriminate between the buyers, then it is optimal to charge a lower price to the high elasticity group and a higher price to the low elasticity group. Higher prices are sometimes charged to customers who buy smaller amounts of an item.
Monopolistic competition: A. Is a market structure made up of a number of producers with modest barriers to entry B. Is a market structure made up of a few producers whose pricing and production decisions are interdependent C. Is a special type of natural monopoly D. Involves fewer firms than an oligopoly
A. Is a market structure made up of a number of producers with modest barriers to entry
In perfect competition, the marginal revenue curve A. Is always below the demand curve facing the firm B. Intersects the demand curve when marginal revenue is minimized C. Is always above the demand curve facing the firm D. The demand curve facing the firm are identical
A. Is always below the demand curve facing the firm
In monopolistic competition, in the long run firms produce: A. Less output than that which maximizes their ATC B. More output than that which minimizes their ATC C. The amount of output that minimizes their ATC and their AVC D. The amount of output that minimizes their ATC but not their AVC
A. Less output than that which maximizes their ATC
Oligopoly is: A. Like monopoly because there are barriers to entry B. Like perfect competition because oligopoly firms all sell homogeneous goods C. Like monopolistic competition because oligopoly firms all sell differentiated goods D. Like perfect competition because there are many firms in the industry
A. Like monopoly because there are barriers to entry
A perfectly competitive firm produces 3000 units of a good at a total cost of 36,000. The price of each good is 10. Calculate the firm's short run profit or loss. A. Loss of 6000 B. Profit of 30,000 C. Profit of 6,000 D. There is insufficient information to answer the question
A. Loss of 6000 Given: Q = 3,000 TC = 36,000 P = 10 Profit = TR - TC = 30,000 - 36,000 = -6,000
If average total cost is less than marginal cost as its profit-maximizing output, a perfectly competitive firm will: A. Make pure profits B. Will not discontinue production C. Operate at a point to the right of the ATC minimum point D. All of the above
A. Make pure profits
An oligopolistic industry can be characterized by all of the following EXCEPT: A. Many sellers B. Mutual interdependence C. Economies of scale D. Homogeneous product
A. Many sellers
For oligopolists, which one of the following is not an advantage of operating a cartel? A. Opportunity for increased economic profit B. Decreased uncertainty C. Increased barriers to entry D. Decreased competition E. Increased output for each firm
A. Opportunity for increased economic profit A cartel is a group of firms that agree to coordinate their production and pricing decisions, thereby behaving as a monopolist
In the long run, a profit-maximizing, perfectly competitive firm will produce at an output level where: A. P = MC = ATC B. P = MC > ATC C. MR > MC > ATC D. P > ATC
A. P = MC = ATC Perfectly competitive firms produce efficiently in the long run at P = MC = ATC
In the short run, perfectly-competitive firms may earn: A. Positive economic profit B. Positive accounting profit C. Normal profit D. Negative economic profit
A. Positive economic profit
In the long run, a monopolistic competitor will tend to produce where: A. Price equals average cost B. Price equals marginal cost C. Price equals marginal revenue D. All of the above
A. Price equals average cost In the long run, due to possibility of entry of new firms, the price under monopolistic competition becomes equal to long run average cost giving only normal profits.
Firms in a perfectly-competitive industries may be characterized as: A. Price- takers B. Price creators C. Price makers D. Price setters
A. Price takers
If a monopoly is unable to cover its short run variable costs, it should: A. Shut down B. Raise price C. Lower price D. Increase output
A. Shut down If a monopoly is unable to cover its short run variable cost, it should shut down. If a monopoly covers its variable cost even if it incurs loss, it continues to produce a product P > AVC - continue to produce P < AVC - should shut down
For a perfectly competitive firm: A. The marginal revenue curve and the demand curve are the same B. The marginal revenue curve and the marginal cost curve are the same C. The supply curve and the marginal revenue curve are the same D. The demand curve and the marginal cost curve are the same
A. The marginal revenue curve and the demand curve are the same
A market is perfectly competitive when: A. There are two virtually identical firms which are equally matched and selling in the same market which are equally matched and selling in the same market B. Government authorities set price at an acceptable level which force firms to compete on everything except price C. All sellers must charge approximately the same price for comparable products
A. There are two virtually identical firms which are equally matched and selling in the same market which are equally matched and selling in the same market Firms charge approximately the same price because they have no incentive to charge a price other than that which is determined by the market, market demand and market supply.
If managers do not choose to maximize profit, but pursue some other goal such as revenue maximization or growth A. They are more likely to become takeover targets of profit-maximizing firms B. They are less likely to be replaced by stockholders C. They are less likely to be replaced by board of directors D. They are more likely to have higher profit than if they had pursued that policy explicitly
A. They are more likely to become takeover targets of profit-maximizing firms
The MR = MC rule applies: A. To firms in all types of industries B. Only when the firm is a price taker C. Only to monopolies D. Only to purely competitive firms
A. To firms in all types of industries Under perfect competition, monopoly and monopolistic competition, a seller faces a well defined demand curve for its output, and should choose the quantity where MR = MC.
The average revenue product equals A. Total revenue divided by total product (output) B. Marginal revenue divided by marginal product C. Total revenue multiplied by total product (output) D. Marginal revenue multiplied by marginal product
A. Total revenue divided by total product (output)
All of the following are true about a monopolist except, A. Average and Marginal revenue are not the same B. Marginal revenue is greater than price C. Marginal revenue decreases with increases in output D. Marginal revenue can be negative
B. Marginal revenue is greater than price The marginal revenue curve is below average revenue curve. This implies that the marginal revenue will be less than the price or average revenue. When monopolist sells more, the price of his product falls, marginal revenue therefore must be less than the price.
In economic theory, purely competitive firms, monopolists, and monopolistically competitive firms all: A. Set price equal to marginal cost to decide the level of output B. Maximize profits where MR = MC C. Face downward-sloping demand curves D. Are able to set prices depending on "what the market will bear"
B. Maximize profits where MR = MC
Which of the following statements about a monopoly is FALSE? A. A monopoly is the only supplier of the good B. Monopolies have no barriers to entry or exit C. The good produced by a monopoly has no close substitutes D. None of the above
B. Monopolies have no barriers to entry or exit
The automobile, breakfast, cereal, and tobacco industries are examples of: A. Monopoly B. Monopolistic competition C. Oligopoly D. Perfect competition
B. Monopolistic competition
There are no barriers to entry in which two idealized market structures? A. Perfect competition and oligopoly B. Monopolistic competition and perfect competition C. Perfect competition and pure monopoly D. Oligopoly and monopolistic competition
B. Monopolistic competition and perfect competition
In which of the following market structures is there a clear cut mutual interdependence with respect to price-output policies? A. Pure monopoly B. Oligopoly C. Monopolistic competition D. Pure competition
B. Oligopoly
A cartel is often the result of: A. Perfectly competitive firms that agree to produce a homogeneous product B. Oligopoly competitors that agree to restrict output to maximize joint profits C. A monopoly that has been regulated by the government D. A natural monopoly that has evolved into a perfectly competitive industry
B. Oligopoly competitors that agree to restrict output to maximize joint profits -A cartel is a form of collusion in which two or more firms that secretly agree to control prices, production, or other aspects of the market. -When done right, collusion means that the firms behave as if they are one firm
Markets with only a few sellers, each offering a product similar or identical to the others, are typically referred to as: A. Monopolistically competitive markets B. Oligopoly markets C. Monopoly markets D. Competitive markets
B. Oligopoly markets
Perfectly competitive firms respond to changing short-run market conditions by varying: A. Advertising campaigns B. Output C. Price D. Both C and D
B. Output A firm that is part of a perfectly competitive market will charge the market price, that is, they are price takers; but they do have a choice of how many units to produce
In which type of market do you have the largest number of firms? A. Perfect competition and oligopoly B. Perfect competition and differentiated competition C. Perfect competition and monopoly D. Differentiated competition and oligopoly
B. Perfect competition and differentiated competition
A monopoly's ability to raise its price is: A. Unchecked, which means it can charge any price the monopolist B. Restricted by both market demand and the cost of production C. Restricted only by market demand considerations D. Restricted only by the cost of production
B. Restricted by both market demand and the cost of production The monopoly's price is determined from the demand curve at the point where quantity produced equals the quantity demanded
An oligopoly is the firm characterized by a small number of firms in an industry that share all the following characteristics EXCPET: A. Have barriers to entry B. Should produce identical good C. Have interdependence D. None of the above
B. Should produce identical good
In the short run, the supply curve of a profit maximizing perfectly competitive firm is: A. The MC curve above the ATC curve B. The MC curve above the AVC curve C. The ATC curve above the MC curve D. The AVC curve above the MC curve
B. The MC curve above the AVC curve
A perfectly competitive firm is charging the market price of 18 to sell its product. The firm is producing and selling the profit-maximizing quantity of Birr 50 units at this price. Its average total cost is Birr 17 and its average variable cost is Birr 15. Which of the following statements is TRUE? A. This firm should shut down now B. The firm is earning an economic profit of Birr 50 C. At this current level of production, the firm's marginal cost is Birr 17 D. At this current level of production, the firm's marginal cost is Birr 15
B. The firm is earning an economic profit of Birr 50
If a graph of a perfectly competitive firm shows that the MR = MC point occurs where MR is above AVC but below ATC A. The firm is earning negative profit, and will shut down rather than produce that level of output B. The firm is earning negative profit, but will continue to produce where MR = MC in the short run C. The firm is still earning positive profit, as long as variable costs are covered. D. The firm can cover all of fixed costs but only a portion of variable
B. The firm is earning negative profit, but will continue to produce where MR = MC in the short run The firms price is below ATV but greater than AVC, the firm continues to produce even if it incurs losses.
If the market price for a competitive firm's output doubles then: A. The profit maximizing output will double B. The marginal revenue doubles C. At the new profit maximizing output, price has increased more than marginal cost D. At the new profit maximizing output, price has risen more than marginal revenue
B. The marginal revenue doubles In perfectly competitive market, P = AR = MR, so when price doubles its marginal revenue will also double.
Monopoly arises when: A. There is a firm wanting to maximize profits B. There is a barrier to the entry of other firms C. There is a firm desiring to compete in many markets D. There is government intervention to establish and enforce a price ceiling
B. There is a barrier to the entry of other firms The barriers to entry of other firms allow a monopolist to persist in earning profits
Suppose that a profit maximizing, perfectly competitive firm can sell its entire output for Birr 30. The firm's marginal cost, average variable cost, and average total cost are Birr 20, Birr 25, and Birr 35, respectively. Which of the following is correct? A. This firm should shut down B. This firm should continue to produce C. This firm should decrease its output D. This firm is earning an economic loss
B. This firm should continue to produce In the short run, a perfectly competitive firm earning an economic loss will remain in business as long as price is greater than average variable cost (AVC) P > AVC (30>25). So the firm should continue to produce
The short-run shutdown point for the perfectly competitive firm occurs: A. Where total revenue is just sufficient to cover total cost B. When the demand curve facing the firm is tangent to its average variable cost curve. C. Where total revenue is just sufficient to cover all explicit costs but not any implicit or imputed cost. D. When the firms revenue is able to cover all of its fixed costs and part of its variable costs
B. When the demand curve facing the firm is tangent to its average variable cost curve. If the firms revenue at all output levels are less than variable costs, it minimizes losses by shutting down. If revenue exceeds variable cost, the firm should shut down. If P>AVC, not shut down If P<AVC, should shut down
In a perfectly competitive market, if the market price is Birr 25, the average revenue of selling five units is: A. 5 B. 12.50 C. 25 D. 125
C. 25 In perfectly competitive market, P = AR = MR Price is 25, AR is also 25 at every selling unit
In monopolistic competition, each firm's marginal revenue curve lies __________________ demand curve because of: A. Below; barriers to entry B. Above; barriers to entry C. Below; product differentiation D. Above; product differentiation
C. Below; product differentiation
Monopolistic competitors engage in product differentiation in order to: A. Create excess capacity B. Make it easier to collude with other firms C. Enhance their market power D. Reduce costs
C. Enhance their market power To the extent that a product is perceived as being unique, the firm has some discretion over price.
Patents create monopolies by restricting: A. Prices B. Profits C. Entry D. Demand
C. Entry Patent is a barrier to entry that grants exclusive use of the patented product or process to the inventor
At the profit-maximizing output for a monopolist, price: A. Always exceeds average total cost B. Is less than marginal cost C. Exceeds marginal cost D. Equals marginal cost
C. Exceeds marginal cost Both competitive and monopolist firm expand output until MR = MC For the competitive firm, price equals marginal cost at maximum profit output. This will not be true for monopolist. A profit maximizing monopolist will choose an output rate where price is greater than marginal cost
Which of the following characteristics does perfect competition share with monopolistic competition? A. Price-taking firms B. Zero long-run economic profit C. Homogeneous product D. Some barriers to entry
C. Homogeneous product In the long run, monopolistic competitive market will earn a normal profit due to free entry. When P = ATC, the firm will receive normal profit
A cartel's marginal cost curve is the: A. Highest of all the individual firms' marginal cost curves B. Lowest of all the individual firms' marginal cost curves C. Horizontal sum of all the individual firms' marginal cost curves D. Average of all the individual firms' marginal cost curves
C. Horizontal sum of all the individual firms' marginal cost curves The marginal cost curves of an oligopoly are summed horizontally to drive an industry marginal cost curve. The profit maximizing output and equilibrium price are determined simultaneously by equating the cartel's marginal cost with the industry marginal revenue curve
If a monopolistically competitive firm is producing at a level of output such that its marginal cost is Birr 5 and its marginal revenue is Birr 3, the firm should: A. Increase output in order to reduce per-unit costs B. Decrease the price of its product and expand output C. Increase price and reduce its rate of output D. Reduce both price and output
C. Increase price and reduce its rate of output Conditions for profit maximization are: MR > MC, firm should continue production MR = MC, firm should stop producing additional units MR < MC, should lower output MR = 3, MC = 5 MC>MR, therefore the firm should reduce output
When a monopoly firm is operating in a range of output where total revenue is rising as output raises, then marginal revenue. A. Is also rising B. Is constant C. Is failing but is greater than zero D. Is falling but is less than zero
C. Is failing but is greater than zero A monopoly marginal revenue curve shows the change in total revenue that results as a firm moves along the segment of the demand curve that lies directly above it. When a monopoly's output increases, its total revenue increases and marginal revenue falls but its greater than zero If the monopolist further increases the output, total revenue may fall and marginal revenue becomes negative
The demand curve for a perfectly competitive firm: A. Is downward sloping B. Is upward sloping C. Is perfectly horizontal D. Is perfectly vertical
C. Is perfectly horizontal
A firm operating in a a perfect market maximized its profits by adjusting: A. Its output price until it exceeds average total cost as much as possible B. Its output price until it exceeds marginal cost as much as possible C. Its output until its marginal costs equals to output price D. Its output until its average total cost is minimized
C. Its output until its marginal costs equal to output price The competitive firm intending to stay in business will maximize profits or minimize losses when it produces the output level at which P = MC and variable costs are covered.
Compared to perfect competition, a firm in monopolistic competition tends to produce: A. More output and higher price B. More output and lower price C. Less output and higher price D. Less output and lower price
C. Less output and higher price This is because a monopolistically competitive industry faces a downward sloping demand curve; whereas a firm that is part of a perfectly competitive industry faces a horizontal. demand curve at the market price
The butcher shop is producing where MR = MC, the butcher shop must be: A. Maximizing revenue but not maximizing profits B. Earning zero economic profit C. Maximizing profits D. Incurring a loss
C. Maximizing profits
A price war is most likely to occur in which of the following market structures? A. Monopolistic competition B. Perfect competition C. Oligopoly D. Pure monopoly
C. Oligopoly
Marginal profit is negative when: A. Marginal revenue is negative B. Total cost exceeds total revenue. C. Output exceeds the profit maximizing level D. Profit is negative
C. Output exceeds the profit maximizing level Marginal profit is negative when the additional output exceeds the profit-maximizing level of output.
In the short run, a profit-maximizing perfectly-competitive firm will definitely earn positive economic profits when: A. P = MC B. MR = MC C. P > ATC D. P > AVC
C. P > ATC If price is greater than average total cost, then a perfectly competitive firm earns positive economic profits, which will attract new firms into the industry and shifts the market supply curve to the right and drives down the selling price.
The model in which one firm sets a price and others in the industry also charge that price is know as: A. Prisoner's dilemma B. Conscious parallelism C. Price leadership D. Cartel
C. Price leadership In price leadership industry behavior, its common for firms to engage in non-price competition
Monopolies are often referred to as: A. Price takers B. Price creators C. Price makers D. Price setters
C. Price maker
In the long run, a monopolistically competitive firm will: A. Produce a greater variety of goods than do firms in other market structures. B. Produce a greater output level than would a perfectly competitive firm C. Produce where price equals ATC D. Earn an economic profit
C. Produce where price equals ATC In the long run, under monopolistic competition price is equal to the average cost. In the long run, when entry is full, firms only make normal profit.
Under monopolistic competition, demand and marginal revenue curves are downward sloping because: A. Demand and marginal revenue curves are ALWAYS downward sloping B. There is free entry into and exit out of the market C. Product differentiation allows each firm a small degree of monopoly power D. There are few large firms in the industry and each has monopoly power over prices
C. Product differentiation allows each firm a small degree of monopoly power
If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm: A. Should produce in the short run B. Is making short-run profits C. Should shut down in the short run D. Has covered its fixed cost
C. Should shut down in the short run
Which of the following is true about the perfectly competitive firm in the short run? A. The firm earns normal profit B. The firm shuts down if the price falls below average total cost C. The firm earns positive economic profit D. The firm maximizes profit by producing where the price equals marginal revenue
C. The firm earns positive economic profit If the price falls below average total cost, it incurs losses but continues to produce because: P > AVC
The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because: A. The market price is determined (through regulation) by the government B. The firm supplies a different good than its rivals C. The firm's output is a small fraction of the entire industry's output D. The short run market price is determined by the firm's technology
C. The firm's output is a small fraction of the entire industry's output In a perfectly competitive market the number of sellers must be large enough so that no single firm acting by itself can exert any perceptible influence on the market price, because the firm's output is a small fraction
In a monopolistically competitive industry: A. Each firm faces a downward sloping curve B. Firms can charge a higher price for a higher quality product C. Firms are not able to collude because there are too many of them D. All of the above answers are correct
D. All of the above answers are correct
The monopolist's marginal revenue curve is downward-sloping because: A. He operates in the range where MC is downward-sloping B. His total revenue declines as he sells more C. The monopolist must lower his price in order to sell more D. He operates in the range where ATC is downward sloping
C. The monopolist must lower his price in order to sell more The quantity effect and the price effect work in opposite directions for the monopolist. If he wants to increase the sale of his goods, he must lower the price. He can only raise the price if he sacrifices some sales. He can raise the price by reducing his level of sales or outputs.
A perfectly competitive firm is currently selling its product at the market price of Birr 6. Its average fixed cost is Birr 0.75 and its average total cost id Birr 5.50 How much would the market price have to decline in order for the firm to choose to shut down in the short run? A. The price would have to fall below Birr 0.75 B. The price would have to fall below Birr 5.50 C. The price would have to fall below Birr 4.75 D. The firm should shut down now, at the price of Birr 6.00
C. The price would have to fall below Birr 4.75 Given P=6, AFC = 0.75, AC = 5.5 If P > AVC, the firm continues to produce output If P < AVC, the firm should shut down AC = AFC + AVC AVC = AC - AFC = 5.50 - 0.75 Therefore AVC = 4.75 P > AVC
In a perfectly competitive industry suppose that current producers are earning positive economic profits, which of the following can be expected to occur? A. There will be a decrease in market demand for the product B. There will be an increase in market demand for the product C. There will be an increase in the market supply of the product. D. There will be a decrease in the market supply of the product
C. There will be an increase in market supply of the product. If the typical firm is making economic profits, the number of firms will expand. So there will be an increase in the market supply of the product. If the typical firm is sustaining economic losses, the number of firms will contract and there is a decrease in the market supply of the product.
In the short run, no firm operates with a loss, unless: A. Variable cost equals fixed cost B. Variable cost falls short of fixed cost C. Total revenue covers variable costs D. Total revenue covers fixed costs
C. Total revenue covers variable costs In the short run, firms operate at a loss if the total revenue they earn covers their total variable cost
A formal agreement among firms in an industry to coordinate their production and pricing decisions in order to earn monopoly profits is known as: A. Price discrimination B. The kinked demand curve C. Monopolistic competition D. A cartel
D. A cartel
For a market to be characterized by monopoly, there must be a: A. Large number of firms with no one able to influence price B. Freedom of entry and exit C. Indistinguishable products being sold D. A single seller
D. A single seller
If the price-quantity relationship for a product can be expressed by the equation: P = 100 - 0.005Q, then: A. The equation of the corresponding MR function is MR = 100 - 10Q B.The equation for the corresponding TR function is TR 100Q - 0.5Q^2 C. Marginal revenue will be zero at a sales volume of 1000 unites D. All of the above
D. All TR = PxQ = (100 - 0.05Q)Q TR = 100Q - 0.05Q^2 MR = dTR/dQ = 100 - 0.1 Q MR = 100 - 0.1Q = 100 - 0.1x1000 MR = 0 at Q = 1000
For a market to be characterized by perfect competition there must be: A. A large number of firms with no one able to influence price B. Freedom of entry and exit C. Indistinguishable products being sold D. All of the above
D. All of the above
If a typical firm in a perfectly-competitive industry is earning a negative economic profit, then we can expect: A. Some firms to exit the industry B. The market price of the product to rise C. The market supply curve to shift to the left D. All of the above
D. All of the above
Monopoly power: A. Is limited by the monopoly's economic profits attracting new market entrants with substitutes B. May yield above normal profits C. Tends to be dissipated over time with technological developments D. All of the above
D. All of the above
Which of the following is ALWAYS true for a single-price monopolist in equilibrium? A. P > MC B. P > MR C. MR = MC D. All of the above
D. All of the above
Which one of the following is NOT. a condition of oligopoly? A. Each firm must consider the behavior of its rivals B. The market is dominated by a few sellers C. Entry into the market is difficult D. Each firm faces a perfectly elastic demand curve
D. Each firm faces a perfectly elastic demand curve The demand curve for oligopolistic firms view their demands as inelastic for price cuts, and elastic for price rise. Perfectly elastic demand is the condition of perfectly competitive markets
If average revenue equals average total cost A. Total revenue is maximized B. Average revenue is maximized C. Economic profit is maximized D. Economic profit is zero
D. Economic profit is zero When AR = AC, TR = TC, because we include normal profit When TR = TC, we say the firm earns zero economic profit
A firm could differentiate its product by all EXCEPT one of the following means. Which is the exception? A. Making the product available at a number of different locations B. Increasing the number of services that accompany the product C. Making the product physically different from other products D. Emphasizing that the product provides the same benefits to consumers as the others on the market, even whets its physically different E. Using package or advertising to create a special subjective image of the product in the consumer's mind
D. Emphasizing that the product provides the same benefits to consumers as the others on the market, even whets its physically different
Under monopolistic competition, short run economic profits will lead in the long run to: A. No entry of new firms because of high entry barriers. B. Entry of more firms but a contraction of total market output in the product category C. Entry of new firms and an increase in the prices charged by all producers D. Entry of new firms and a reduction in prices charged by all firms
D. Entry of new firms and a reduction in prices charged by all firms If a monopolistically competitive firm earns economic profits in the short run, new firms can enter the market and the price will reduce. New firms can gain access to these economic profits, eventually driving them down to zero.
"Product differentiation" refers to: A. Different consumers value the same product differently B. The charging of different produces for the same product to different consumers in a certain market C. The selling of identical products in different markets, often at different prices D. Features that make a product seem different from competing products in the same market
D. Features that make a product seem different from competing products in the same market
Which of the following is a correct statement about oligopoly market? A. There is a low degree of interdependence among firms B. There is no non-price competition C. Products are always homogeneous D. Firms are highly interdependent
D. Firms are highly interdependent The firm under oligopoly may produce homogeneous products or heterogeneous product. Oligopoly engaged in non-price competition like advertisement, discount scheme etc... Oligopoly recognizes mutual interdependence
The monopolistically competitive price is above marginal revenue, because: A. Firms are price takers B. Firms produce a homogeneous product. C. The market is allocative efficient D. Firms have differentiated products
D. Firms have differentiated products The ability of a monopolistically competitive firm to have market power of its price depends on how well they can differentiate their product from their competitors. The monopolistically competitive price is above marginal revenue because firms have differentiated products.
In a monopolistically competitive industry, a firm in long run equilibrium will be operating where price is: A. Greater than average total cost (ATC) but equal to marginal cost (MC) B. Greater than ATC and greater than MC C. Equal to both ATC and MC D. Greater than MC but equal to ATC
D. Greater than MC but equal to ATC -In the long run, a monopolistically competitive market makes only normal profit because of competitive conditions and freedom of entry. -When price equals average total cost, the firm earns normal profit. -In the long run a monopolistically competitive industry operating where price is greater than marginal cost but equal to average cost
The perfectly competitive firms marginal revenue curve is: A. Exactly the same as marginal cost curve B. Downward sloping, at twice the (negative) slope of the market demand. C. Vertical D. Horizontal
D. Horizontal The demand curve facing the perfectly competitive firm is horizontal or perfectly elastic at the going market price Since price and marginal revenue in perfectly competitive market are the same, the marginal revenue curve is also horizontal.
One difference between perfect competition and monopolistic competition is that: A. In perfect competition, firms cant earn long run economic profit B. In perfect competition, firms take full advantage of economies of scale in long run equilibrium; in monopolistic competition, firms do not C. Only under perfect competition is there ease of entry and exit D. In monopolistic competition, the firm's demand curve slopes downward
D. In monopolistic competition, the firm's demand curve slopes downward
If a monopolist engages in price discrimination, its with the goal of: A. Lowering cost B. Improving goodwill with the public C. Making the demand for its good less elastic. D. Increasing profit
D. Increasing profit Successful price discrimination involves a transformation of consumer surplus into profits for the producer
Monopolistically competitive industries consist of: A. One firm selling several products B. One firm selling one product C. Many firms, all selling identical products D. Many firms, each selling a slightly different product
D. Many firms, each selling a slightly different product Unlike a perfectly competitive firm which produces a homogeneous product, a firm that is monopolistically competitive will produce a slightly different product than their competitors.
The perfectly competitive firm will seek to produce the output level for which: A. Average variable cost is at a minimum B. Average total cost is at a minimum C. Average fixed cost is at a minimum D. Marginal cost equals marginal revenue
D. Marginal cost equals marginal revenue
The competitive firm maximizes its profit by operating where: A. Average costs are at a minimum B. Total revenue is at a maximum C. Profit per unit is at a maximum D. Marginal cost equals price
D. Marginal cost equals price
A firm maximizes profit by operating at the level of output where: A. Average revenue equals average cost B. Average revenue equals average variable cost C. Total costs are minimized D. Marginal revenue equals marginal cost
D. Marginal revenue equals marginal cost
The shut down point of the perfectly competitive firm in the short run corresponds to the point where the market price is equal to the __________ A. Average Total Cost B. Maximum of the average variable cost C. Average fixed cost of production D. Minimum of the average variable cost
D. Mimimum of the average variable cost The shut down price is the minimum price that the firm would like to accept in the short run so as to start supplying the product. The shut down price is equal to the minimum of the average variable cost
The market structure where very many sellers sell slightly different things is referred to as: A. Perfect competition B. Pure monopoly C. Duopoly D. Monopolistic competition
D. Monopolistic competition
Barriers to entry are highest in which two types of markets: A. Differentiated competition and oligopoly B. Perfect competition and differentiated competition C. Monopoly and differentiated competition D. Oligopoly and monopoly
D. Oligopoly and monopoly
A profit-maximizing perfectly-competitive firm will break even when: A. P = MC B. MR=MC C. AVC = ATC D. P = ATC
D. P= ATC When P = ATC, then a perfectly-competitive firm breaks even, i.e., earns zero economic profits. At this break-even price, the industry is in long run competitive equilibrium rum, which implies that P = MC = ATC
The two most extreme market structures in terms of performance and number of firms are: A. Perfect competition and monopolistic competition B. Monopolistic competition and pure monopoly C. Monopolistic competition and oligopoly D. Perfect competition and pure monopoly
D. Perfect competition and pure monopoly Perfect competition is a market structure in which there are a large number of informed buyers and sellers of a homogeneous product, which no obstacles to entry/exit of firms in the long run Monopoly is a market structure in which there is a sole producer of a product for which there are no close substitutes
Which of the following is unique to perfect competition? A. The individual firm cannot earn economic profit in the long run B. It is easy for new firms to enter the industry C. The market demand curve slopes downward D. The demand curve facing an individual firm is perfectly elastic
D. The demand curve facing an individual firm is perfectly elastic Under perfect competition, the price at which an individual firm can sell its product remains the same at all levels of output The average revenue curve or the demand curve for its product becomes horizontal The demand curve facing an individual firm is perfectly elastic
Which of the following is not correct for a firm operating in a perfectly competitive market? A. MR=P since the firm cannot affect market price by increasing output B. TR curve is upward sloping and straight line since the firm can sell at any quantity at a given price C. AR=P since the firm can sell all outputs as the same price no matter how large or small quantity is sold. D. The horizontal demand curve for the firm's product indicates that the firm will sell nothing if it reduces price.
D. The horizontal demand curve for the firm's product indicates that the firm will sell nothing if it reduces price. Lowering the price can result in more sales
Collusion is difficult to achieve and maintain in oligopoly when: A. There are few firms in the industry B. The firm's products are homogeneous C. The firm's cost structures are very different D. There is a very weak barrier to entry
D. There is a very weak barrier to entry
Which characteristic of a perfect competition ensures that economic profit will be zero in the long run? A. Each firm's output is small in relation to total market supply B. The product is homogenous C. There is barrier of entry in the market D. There is freedom of entry/exit in the market
D. There is freedom of entry/exit in the market In a perfectly competitive industry there are almost no barriers to entry or exit. Therefore, when a profit is made, firms will easily enter the industry. Likewise, when losses are made, some firms will easily leave the industry.
A monopoly is a market structure in which: A. A single firm exercises its power over smaller firms B. A single firm produces a product with a wide variety of very close substitutes C. Each firm is run by a small proprietor D. There is only one firm producing a product which has no close substitutes
D. There is only one firm producing a product which has no close substitutes
When a competitive firm produces the profit maximizing output and its shutdown point the firm's ________ A. Marginal revenue equals average fixed cost B. Total revenue is less than its total variable cost C. Marginal cost is less than its average variable cost D. Total revenue equals total variable cost
D. Total revenue equals total variable cost A firm should shut down operations if Total Revenue is less than Variable Costs. TR<VC = Shutdown
Monopolies may derive their market power from: A. Patent rights B. Control of productive resources C. Economies of Scale D. Government franchise E. All of the above
E. All of the above
For a profit-maximizing monopolist: A. P > MR B. P = MR C. P >MC D. P = ATC E. Both A and C are correct
E. Both A and C are correct Unlike a perfectly competitive firm, selling price is always greater than the marginal revenue, i.e., P > MR. Like a perfectly competitive firm, the monopolist earns an economic profit when P > ATC.
Explain the interdependence of three rival firms in an oligopoly market structure.
Each firm watches the other firms in the market and prepares to react to any changes in price or level of production or advertising for fear of losing any market share.
When are firms likely to enter an industry? When are they likely to exit an industry?
If a firm makes economic profit in the short run, new firms will enter the industry until the market price has fallen enough to widen out the profit. If they make economic losses however, firms will exit the industry until the market price has risen enough to widen out the losses
Why would a firm choose to operate at a loss in the short run
If the firm can cover their variable costs in the short run, then they can start to pay down some of their fixed costs by producing. If they shut down they must pay all of their fixed costs. If the firm can cover the variable costs they can use any excess revenue towards paying their fixed costs, which is a better outcome than shutting down in the short run. In the long run, a firm cannot constantly operate at losses and will eventually leave the industry unless costs change.
When do firms decide to shut down production in the short run?
If the firm cannot cover their variable costs, then the act of production is going to lead to larger losses than simply shutting down and paying the fixed costs. It doesn't make sense for a firm to lose more money by staying open than what they would lose if they simply didn't produce.
What is the difference between a homogeneous oligopoly and a differentiated oligopoly?
In a homogeneous oligopoly, the product, such as steel, is identical among producers. In a differentiated oligopoly, firms sell products that are different
Why are both industry and firm demand curves downward sloping in monopoly markets?
In a monopoly, the firm is the industry. Thus, firm and industry demand and supply curves are identical. The monopoly demand curve will be downward sloping, like all industry demand curves, because this output must to a greater/lesser degree, compete with all goods and services for a share in the consumer's market basket. The diminishing marginal utility associated with the consumption of all goods and services will ensure that the industry demand curve is downward sloping for all products.
In the long-run, will a competitive firm earn negative economic profits, positive economic profits or zero economic profits?
In the long run, economic profit is always zero since there is free entry/exit in a perfectly competitive market. Firms will either enter the industry until there are no possible profit opportunities . If there are economic losses, firms will leave the industry until profits hit zero.
Explain why firms may shutdown temporarily.
In the short run firms will continue to produce as long as its price is at least equal to its average variable cost If price falls below average variable cost, the firm will shutdown. In the long run, a firm will shutdown if price falls below average total cost
Why monopolists earn economic profit in the long run?
Monopolist faces a downward sloping demand and marginal revenue curves. A monopolist that earns economic profit does not face the entry of new firms into the market. Therefore, a monopolist can earn economic profit in the long run.
How does the market structure of monopolistic competition contain elements of both "monopoly" and "competition" ?
Monopoly - each firm has some control over price Competitions - barriers to entry are low; competitive firms can and do enter the market
Describe the factors that drive profits to zero in perfectly competitive markets in the long run
The biggest factor is driving this is the free entry/exit of firms in the long run, and that firms are selling identical products. With firms being able to enter and exit the markets as they wish, profit opportunities cannot last. If I observe another firm making positive profits, there is an incentive for me to enter the industry and try to take advantage of some of these profits.
What price should a monopolistically competitive price-searcher firm with the cost and demand conditions depicted in the above figure charge if it wants to maximize its profit?
Profit is maximized when MR = MC. This occurs at price of 20
Why do oligopolists spend large amounts to advertise their products?
The oligopolist spends large amounts to advertise their product because they need to differentiate their product among the few competitors
