Unit 2 Microeconomics Test

*The economic inefficiencies of monopolistic competition must be weighed against the benefit of:

A greater product variety for consumers

Initially a purely competitive constant-cost industry is in ling-run equilibrium. A change in economic circumstance causes consumer demand to increase. After all adjustments have been completed, the market price to will _________ and total output will ________.

no change; increase

*Which of the following statements concerning a profit-maximizing single-price monopolist producing at the optimal level of output is NOT always true? A. Marginal revenue equals marginal cost B. Price exceeds marginal revenue C. Price exceeds average total cost D. Price exceeds marginal cost

B. Price exceeds marginal revenue

Monopolistic competition resembles pure competition because firms in both industries: A. face perfectly elastic demand curves. B. can enter, or leave, t he industry relatively easily. C. produce where P=minimum ATC and P=MC. d. All of the above

B. can enter, or leave, the industry relatively easily.

In the long run we would expect new firms to enter a purely competitive industry if existing firms are earning: A. accounting profits B. economic profits C. just enough to pay their total variable costs. D. just enough to pat thier explicit coss and implicit costs.

B. economic profits

Which of the following characteristics is unique to oligopoly? A. the industry demand curve is downward sloping B. mutual interdependence C. standardized products D. All of the above

B. mutual interdependence

Other things equal, a price discriminating firm will ________ a non-discriminating firm. A. produce the same level of output as B. produce a larger level of output than C. produce a smaller level of output than D. realize a smaller economic profit than

B. produce a larger level of output than

When a firm in an imperfectly competitive industry is on the inelastic segment of its demand curve, it can: A. decrease total costs by decreasing price. B. increase total costs by increasing price. C. increase total revenue and economic profit by increasing price. D. increase total revenue and economic profit by decreasing price.

C. increase total revenue and economic profit by increasing price.

Comparing marginal revenue to marginal cost indicates: A. if the firm is earning a profit. B. what type of market structure the firm is operating under. C. the contribution of the last unit of production to total profit. D. whether or not the firm is achieving productive efficiency.

C. the contribution of the last unit of production to total profit.

In the short run, a firm should continue to operate if it incurs an economic loss when: A. its marginal revenue is positive. B. its total is positive. C. the economic loss is less than its fixed costs. D. the economic loss exceeds its fixed costs.

C. the economic loss is less than its fixed costs.

If a firm wanted to know how much it would cost to produce one more unit of output it would look to: A. average total cost. B. total cost. C. average variable cost. D. marginal cost.

D. marginal cost

A key objection to an unregulated, profit-maximizing monopoly that charges aw single price is that the firm will: A. always earn economic profits thus transferring income from households to the firm. B. charge the highest price possible C. produce a level of output at which marginal revenue is greater than marginal cost. D. restrict its level of production such that price exceeds marginal cost.

D. restrict its level of production such that price exceeds marginal cost.

Total fixed costs equal zero when the firm decides to temporarily close down

False

Variable costs can never increase or decrease

False

Fixed costs can never increase or decrease

False; do not change with level of production

Fixed cost are associated with any input whose price is fixed

False; it's the size that is fix

Assume that the market for wheat is purely competitive. In the short run forms growing wheat are earning economic profits. In the long run, we can expect the market supply curve for wheat to_______, the market price to _________, and economic profits of wheat farmers to ________.

Increase; decrease; decrease

A pure monopoly firm (or any imperfectly competitive firm) will never charge a price in the inelastic range of its demand curve because raising price will _________ total revenue, _________ total cost, and __________ profit.

Increase; decrease; increase

In monopolistic competition there is an under-allocation of resources to the production of a product or allocative inefficiency at the profit-maximizing level of output because?

P=MC due to barriers

Monopolistically competitive firms are productively inefficient at he profit maximizing level of output because

P> min ATC due to barriers

Firms in an oligopolistic industry are productively inefficient at the profit maximizing level of output because

P> min, ATC due to barriers

Firms in an oligopolistic industry result in an under-allocation of resources to the production of a product or allocative inefficiency at the profit- maximizing level of output because

P>MC due to barriers

*In the long run, firms in a purely competitive industry can only break even b/c:

There are no barriers into and exit from the industry

Long Run

There are no diminishing returns

*If a firm's fixed costs increase, its marginal cost will not change

True

A firm determines the profit-maximizing level of output by producing where marginal revenue equals marginal costs.

True

A firm will maximize economic profit at that level of output where total revenue exceeds total cost by the maximum amount.

True

A fixed cost is a cost that does not vary with the level of production or output

True

A goal of product differentiation and advertising in monopolistic competition is to make price less of a factor and product differences more of a factor in consumer decisions to buy.

True

A purely competitive industry producing at the optimal level of output is allocatively and productively efficient because no barriers to entry force the firm to charge a price (P) that equals marginal cost (MC) and a price that equals minimum average total cost (min ATC)

True

A reason why there is no advertising by individual firms under pure competition is that firms produce a homogeneous product.

True

A variable cost is a cost that varies with the level of production or output

True

Allocative efficiency is achieved when price equals marginal cost (P=MC)

True

An example of a differentiated oligopoly would be the U.S. breakfast cereal industry.

True

An individual firm's demand curve will become more inelastic (fewer substitutes) if band loyalty toward the firm's product increases

True

Creative destruction is the idea that entrepreneurial innovations are beneficial to society, but that is also leads to many jobs, business, and industries disappearing.

True

Demand and marginal revenue curves are downward sloping for monopolistically competitive firms because product differentiation allows each firm some degrees of market power.

True

Downward-sloping demand curves characterize both purely competitive and monopoly markets

True

Firms in a monopolistically competitive industry tend to earn only a normal profit in the long run because of relatively low barriers to entry.

True

Fixed costs are irrelevant for operating decisions or deciding how much to produce

True

For a single-price, profit-maximizing monopolist producing at the optimal level of output price always exceeds marginal cost because barriers to entry exist.

True

Homogeneous oligopoly exists when a few firms produce virtually identical products

True

If there are significant economies of scale in an industry, then large firms may be able to produce at a lower per unit cost than smaller firms.

True

In pure competition, the price the firm charges is determined where the industry demand and supply curves intersect

True

Marginal cost is a measure of the alternative goods which society forgoes in using resources to produce an additional unit of some specific product.

True

Mutual interdependence arises because a small number if firms produce a large proportion of industry's output.

True

The short-run supply curve for a competitive firm is the rising portion of the marginal cost curve (at or) above the shut down point.

True

Total fixed costs are zero in the long run

True

Marginal cost is the key cost concept b/c:

You have control of it as a business person

At the profit-maximizing level of output, a purely competitive firm wild; a. produce that quality of output at which marginal cost is at its absolute minimum. b. produce that level of output at which price equals marginal cost. c. produce as much as possible to spread fixed costs over a larger number of units. d. produce only when price is less than average variable cost.

b. produce that level of output at which price equals marginal cost.

breaking even

firms in the industry are earning zero economic profit

*In response to an increase marginal cost, a profit-maximizing firm in an imperfectly competitive industry should ________ price and _____ production.

increase; decrease

Monopolistic competition and oligopoly are similar because in both types of market structures: A. resources are under-allocated to the production of the goods produced by these firms at their profit-maximizing level of output. B. the firms face no barriers to entry. C. each firm has a small marker share of the market for its product. D. there are a large number of independently acting firms selling differentiated products.

A. resources are under-allocated to the production of the goods produced by these firms at their profit-maximizing level of output.