Unit 3 & 4 Exam

Which of the following are characteristics of a perfectly competitive industry? I. New firms can enter the industry easily. II. There is no product differentiation. III. The industry's demand curve is perfectly elastic. IV. The supply curve of an individual firm in the industry is perfectly elastic. A) I and II only B) I and III only C) II and IV only D) I, II, and IV only E) I, III, and IV only

A) I and II only

Tara's Price Policy Pam's High | Low Price High $40, $40 | $20, $70 Policy Low $70, $20 | $30, $30 Pam and Tara run two competing lemonade stands in a town. In the payoff matrix above, the first entry in each cell shows the profits to Pam, and the second entry in each cell shows the profits to Tara. According to the information, which of the following is true? A) If Pam sets the high price, Tara will do best by charging the low price. B) If Pam sets the low price, Tara will do best by charging the high price. C) The dominant strategy for both is to charge the high price. D) The dominant strategy for Tara is to set the low price and for Pam is to set the high price. E) Neither Tara nor Pam has a dominant strategy.

A) If Pam sets the high price, Tara will do best by charging the low price.

Which of the following best describes the relationship between the average total cost curve and the marginal cost curve in the short run? A) If the average total cost curve is rising, the marginal cost curve is above the average total cost curve. B) If the average total cost curve is rising, the marginal cost curve is below the average total cost curve. C) If the average total cost curve is above the marginal cost curve, the marginal cost curve is rising. D) If the average total cost curve is below the marginal cost curve, the marginal cost curve is falling. E) If the average and marginal cost curves intersect, the marginal cost curve is at a minimum.

A) If the average total cost curve is rising, the marginal cost curve is above the average total cost curve.

If the three largest widget producers control 85 percent of the total widget market, then these producers are operating in A) an oligopoly B) monopolistic competition C) perfect competition D) a monopoly E) a cartel

A) an oligopoly

Marginal cost is defined as the A) change in total cost resulting from producing an additional unit of output B) change in total cost resulting from using an additional unit of input C) difference between total cost and total variable cost D) difference between total variable cost and total fixed cost E) difference between average total cost and average variable cost divided by output

A) change in total cost resulting from producing an additional unit of output

A merger of two firms may increase economic efficiency by A) decreasing average total cost through an increase in economies of scale B) decreasing output to reduce marginal cost and equalize price C) increasing economic profits but decreasing consumer surplus D) increasing consumer surplus by decreasing economic profits E) increasing consumer surplus by shifting the demand curve for the product to the right

A) decreasing average total cost through an increase in economies of scale

Monopolistically competitive firms are inefficient because they A) produce a lower level of output at a higher average cost than do perfectly competitive firms B) use production processes that are more capital-intensive than do perfectly competitive firms C) face downward-sloping demand curves, ensuring that marginal revenue is greater than average revenue D) produce at that level of output where price equals marginal cost E) realize diseconomies of scale

A) produce a lower level of output at a higher average cost than do perfectly competitive firms

Refer to the following diagram and assume a perfectly competitive market structure. At the price 0A, economic profits are A) ABJG B) ABKH C) ABLI D) ACMG E) C0FM

B) ABKH

Which of the following is true for a perfectly competitive firm in long-run equilibrium? A) It earns positive economic profit. B) It is allocatively efficient. C) It experiences economic losses. D) It is productively inefficient. E) It maximizes revenues.

B) It is allocatively efficient.

A well-known fast-food franchise substantially increases the price of its hamburgers, and loses only some of its customers. Which of the following best explains why the franchise has not lost all of its customers A) Its hamburgers are a perfect substitute for other types of fast food. B) Its hamburgers are differentiated. C) The demand for its hamburgers is perfectly elastic. D) The other competitive fast-food restaurants decrease the price for their hamburgers. E) The barriers to entry are very low for entrepreneurs trying to enter the fast-food business.

B) Its hamburgers are differentiated.

Which of the following statements about the firm whose cost and revenue curves are shown above is correct? A) Its profit-maximizing price is $5. B) Its profit-maximizing output level is 200 units. C) Its maximum profit is $4,000. D) If it produces 250 units, it will earn no economic profits. E) At the profit-maximizing level of output, its total cost is $1,000.

B) Its profit-maximizing output level is 200 units.

In most cases the supply curve for a perfectly competitive industry can be described as which of the following? A) More elastic in the short run than in the long run B) More elastic in the long run than in the short run C) Downward sloping in the short run D) Perfectly inelastic in the long run E) Perfectly elastic in the short run

B) More elastic in the long run than in the short run

Which of the following is necessarily true of the profit-maximizing equilibrium of a monopolist who sets a single price? A) Price equals average total cost. B) Price is greater than marginal cost. C) Average total cost is at its minimum level. D) Marginal revenue is greater than marginal cost. E) Marginal cost is minimized.

B) Price is greater than marginal cost.

Which of the following best explains why the short-run average total cost curve is U-shaped? A) Spreading total fixed costs over a larger output, and constant returns B) Spreading total fixed costs over a larger output, and eventually diminishing returns C) Increasing total fixed costs and increasing returns D) Increasing average variable costs and decreasing returns E) Decreasing average variable costs and increasing returns

B) Spreading total fixed costs over a larger output, and eventually diminishing returns

Under which of the following circumstances is a firm experiencing economics of scale? A) The firm increases only its labor input, and output decreases. B) The firm doubles its inputs, and output triples. C) The firm builds a new plant, and the average cost of production increases. D) The firm hires a new plant manager, and profits increase. E) The product price increases, and the firm increases its output.

B) The firm doubles its inputs, and output triples.

A perfectly competitive firm, earning economic profits, produces and sells 100 units of output at a price of $20 per unit. If its marginal cost of increasing output to a rate of 101 units is $18, which of the following statements is correct? A) The total revenue from selling 101 units is the same as the total revenue from selling 100 units B) The total profit from selling 101 units is $2 greater than the total profit from selling 100 units. C) The total cost of producing 101 units is $2 greater than the total cost of producing 100 units. D) To sell 101 units, the firm must reduce its price below $20. E) To sell 101 units, the firm must raise its price above $20.

B) The total profit from selling 101 units is $2 greater than the total profit from selling 100 units.

Technological advances will lead to A) an increase in marginal utility B) a decrease in average total costs C) a decrease in net exports D) an increase in marginal costs E) diseconomies of scale

B) a decrease in average total costs

In the short run in perfect competition, the industry's demand curve and a firm's demand curve have which of the following slopes? A) Industry's Demand Curve | Firm's Demand Curve Horizontal | Downward sloping B) Industry's Demand Curve | Firm's Demand Curve Horizontal | Horizontal C) Industry's Demand Curve | Firm's Demand Curve Downward sloping | Horizontal D) Industry's Demand Curve | Firm's Demand Curve Downward sloping | Downward sloping E) Industry's Demand Curve | Firm's Demand Curve Vertical | Horizontal

C) Industry's Demand Curve | Firm's Demand Curve Downward sloping | Horizontal

The graph above depicts cost and revenue curves for a typical firm in a monopolistically competitive industry. Suppose that the firm is producing 0M units of output. To maximize profits, it should do which of the following to output and price? A) Output | Price Increase | Decrease B) Output | Price Increase | Increase C) Output | Price Decrease | Increase D) Output | Price Not change | Increase E) Output | Price Not change | Not change

C) Output | Price Decrease | Increase

Units of Labor Input Units of Output 1 8 2 20 3 30 The table above shows the amount of labor inputs necessary to produce given levels of output. If the cost of a unit of labor is $20 and total fixed cost is $100, the average total cost of producing 20 units of output is A) $1 B) $2 C) $7 D) $40 E) $120

C) $7

Locotek produces toy trains and pays each worker $350 per week. Five workers can produce 40 trains per week and six workers can produce 45 trains per week. The marginal product per week of the sixth worker is A) $70 B) $350 C) 5 trains D) 7.5 trains E) 42.5 trains

C) 5 trains

If a perfectly competitive industry is in long-run equilibrium, which of the following is most likely to be true? A) Some firms can be expected to leave the industry. B) Individual firms are not operating at the minimum points on their average total cost curves. C) Firms are earning a return on investment that is equal to their opportunity costs. D) Some factors are not receiving a return equal to their opportunity costs. E) Consumers can anticipate price increases.

C) Firms are earning a return on investment that is equal to their opportunity costs.

A monopoly is different from a perfectly competitive firm in that a monopoly A) does not have a U-shaped average total cost curve B) has an average fixed cost curve that is perfectly horizontal C) has a marginal revenue curve that lies below its demand curve D) always earns economic profits E) operates in the inelastic segment of its demand curve

C) has a marginal revenue curve that lies below its demand curve

An industry consists of 100 small firms, and the largest firm accounts for only 2 percent of sales. Brand names are considered a signal of quality. The industry described is best classified as A) monopoly B) perfectly competitive C) monopolistically competitive D) oligopolistic E) monopsonistic

C) monopolistically competitive

The following questions refer to the graph below showing cost curves for a perfectly competitive firm. At market price $6, the profit-maximizing rate of output will result in A) economic profits B) economic losses C) normal profits D) profits that are less than normal E) profits that are greater than normal

C) normal profits

A monopolist produces two unrelated goods, X and Y. The demand for X is currently price elastic and the demand for Y is currently price inelastic. To increase its total revenue, the firm should change the price of X and Y in which of the following ways? A) Price of X | Price of Y Increase | No change B) Price of X | Price of Y Increase | Decrease C) Price of X | Price of Y Increase | Increase D) Price of X | Price of Y Decrease | Increase E) Price of X | Price of Y Decrease | Decrease

D) Price of X | Price of Y Decrease | Increase

The following questions refer to the graph below showing cost curves for a perfectly competitive firm. If the market price is $10, how many widgets should this profit-maximizing firm produce? A) 3,000 B) 6,000 C) 12,000 D) 16,000 E) 21,000

D) 16,000

The following questions are based on the table below, which gives cost information for a perfectly competitive firm. Quantity Average Average Marginal Fixed Cost Variable Costs Costs 0 1 $100.00 $55.00 $55.00 2 50.00 45.00 35.00 3 33.33 50.00 60.00 4 25.00 55.00 70.00 5 20.00 60.00 80.00 6 16.67 65.00 90.00 If the product price is $85, how many units of output must the firm produce in order to maximize profits? A) 0 B) 3 C) 4 D) 5 E) 6

D) 5

Which of the following is always true of the relationship between average and marginal costs? A) Average total costs are increasing when marginal costs are increasing. B) Marginal costs are increasing when average variable costs are higher than marginal costs. C) Average variable costs are increasing when marginal costs are increasing. D) Average variable costs are increasing when marginal costs are higher than average variable costs. E) Average total costs are constant when marginal costs are constant.

D) Average variable costs are increasing when marginal costs are higher than average variable costs.

Which of the following statements is true for both a monopolistically competitive firm and a perfectly competitive firm in long-run profit-maximizing equilibrium? A) Economic profits equal zero, and price equals marginal cost. B) Economic profits equal zero, and price equals marginal revenue. C) Marginal revenue equals marginal cost, and profits are positive. D) Economic profits equal zero, and marginal revenue equals marginal cost. E) Economic profits equal zero, and price exceeds marginal cost.

D) Economic profits equal zero, and marginal revenue equals marginal cost.

In the short run, a profit-maximizing firm should shut down if which of the following is true? A) It is not making an economic profit. B) It is not making a normal profit. C) Its total revenue is less than its total cost. D) Its product price is less than its average variable cost. E) Its product price is greater than its average variable cost but less than its average total cost.

D) Its product price is less than its average variable cost.

The diagram above shows a perfectly competitive firm's short-run cost curves. If the price of the output increases from $8 to $10, the profit-maximizing firm will A) continue producing 15 units because average total cost is a minimum B) continue producing 15 units because average total cost is equal to marginal cost C) increase output to 20 units because this is the output at which price equals average total cost D) increase output to 18 units because this is the output at which price equals marginal cost E) decrease output to 10 units because this is the output at which average variable cost is at a minimum

D) increase output to 18 units because this is the output at which price equals marginal cost

The profit-maximizing output level produced by an unregulated monopoly is A) the socially optimal output level, since the firm's marginal revenue equals its marginal cost B) greater than the socially optimal level, since the firm's marginal cost exceeds its marginal revenue C) greater than the socially optimal level, since the firm makes economic profits D) less than the socially optimal level, since the price paid by consumers exceeds the firm's marginal cost E) less than the socially optimal level, since the price of the product is less than the firm's marginal revenue

D) less than the socially optimal level, since the price paid by consumers exceeds the firm's marginal cost

From the point of view of economic efficiency, a monopolist produces A) too much of a good and charges too low a price B) too much of a good and charges too high a price C) too little of a good and charges too low a price D) too little of a good and charges too high a price E) the socially optimal amount of a good

D) too little of a good and charges too high a price

If the marginal cost curve of a monopolist shifts up, which of the following will occur to the monopolist's price and output? A) Price | Output Decrease | Increase B) Price | Output Decrease | Decrease C) Price | Output Increase | No change D) Price | Output Increase | Increase E) Price | Output Increase | Decrease

E) Price | Output Increase | Decrease

Which of the following is true about a firm's average variable cost? A) It will rise if marginal cost is less than average variable cost. B) It will never equal the firm's marginal cost. C) It will decline when the firm's marginal product declines. D) It will be negative if marginal revenue declines. E) It will equal average total cost when fixed costs are zero.

E) It will equal average total cost when fixed costs are zero.

If a perfectly competitive firm increases its price above the market equilibrium price, which of the following will be true for this firm? A) Its total revenue will increase. B) Its profit will increase. C) Its sales will decrease but profit will not be affected. D) Its demand curve will become downward sloping. E) It will not be able to sell any output.

E) It will not be able to sell any output.

Price discrimination occurs when A) the supply of the product is elastic B) a product's average cost is greater than its average revenue C) a product's average cost is less than its average revenue D) differences in a product's price reflect differences in marginal costs E) differences in a product's price do not reflect differences in costs of production

E) differences in a product's price do not reflect differences in costs of production

Game theory is a useful model to explain the behavior of firms in a market when the firms are A) independent of one another B) price takers C) regulated by government D) altruistic E) interdependent

E) interdependent

Economies of scale exist when A) the doubling of all inputs doubles the output produced B) short-run average total cost decreases as output increases C) short-run average total cost remains constant as output increases D) long-run average total cost increases as output increases E) long-run average total cost decreases as output increases

E) long-run average total cost decreases as output increases