AP Micro Chapter 4 Test Review

Which of the following areas shows the consumer surplus?

A AP1B

Assume that Alpha and Beta are the only sellers of a product and they do not cooperate. Each firm has to decide whether to raise the product price. The payoff matrix below gives the profits, in dollars, associated with each pair of pricing strategies. The first entry in each cell shows the profits to Alpha, and the second, the profits to Beta. Assuming both firms know the information in the matrix, which of the following correctly describes the dominant strategy of each firm? Responses A AlphaBetaDo not raise priceDo not raise price B AlphaBetaDo not raise priceRaise price C AlphaBetaRaise price No dominant strategy D AlphaBetaRaise priceDo not raise price E AlphaBetaNo dominant StrategyRaise price

A AlphaBetaDo not raise priceDo not raise price

Which of the following must be true for a firm that is a natural monopoly? Responses A It can produce and supply its product to an entire market at a lower cost than could a number of smaller firms. B It produces at the minimum of its average total cost curve. C It has a patent on its product. D It will not be able to maximize profits unless subsidized by the government. E It is productively efficient for the government to break up the monopoly into smaller firms.

A It can produce and supply its product to an entire market at a lower cost than could a number of smaller firms.

If a firm engages in perfect price discrimination, it charges A each customer the highest price the customer is willing to pay B each customer the average cost of the product C each customer the lowest price the customer is willing to pay D different prices to customers based on how old they are E different prices to customers based on how many units of output they buy

A each customer the highest price the customer is willing to pay

If the firm produces 10 units of output, its economic profits will equal Responses A 0 B $50 C $100 D $150 E $200

B $50

Imperfectly competitive markets do not achieve allocative efficiency because profit maximization for each firm occurs when which of the following is true? Responses A Price equals average total cost. B Price is greater than marginal cost. C Price equals marginal revenue. D Price is less than marginal benefit. E Price is less than marginal revenue.

B Price is greater than marginal cost.

In the diagram above, the deadweight loss from a profit-maximizing monopolist is represented by area Responses A FGK B FHI C IJK D GHIK E 0HIQ

C IJK

Which of the following statements correctly identifies a difference between perfect competition and monopolistic competition? Responses A In perfect competition there are no barriers to entry, but there are strong barriers in monopolistic competition. B In perfect competition there are many firms, but in monopolistic competition there are only a few firms. C In perfect competition the firms all sell products that are exactly the same, but in monopolistic competition each firm sells a slightly differentiated product. D In perfect competition firms maximize profit by selling the quantity where marginal revenue equals marginal cost, but in monopolistic competition firms maximize profit by selling the quantity where marginal revenue exceeds marginal cost. E In perfect competition there are few consumers, but in monopolistic competition there are many consumers.

C In perfect competition the firms all sell products that are exactly the same, but in monopolistic competition each firm sells a slightly differentiated product.

Which of the following is true for a monopolistically competitive firm that is in short-run equilibrium and earning a positive economic profit? Responses A Accounting profits are less than economic profits. B Marginal cost is greater than price. C Marginal revenue is less than price. D Average total cost is greater than price. E Marginal revenue is less than marginal cost.

C Marginal revenue is less than price.

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? Responses A OutputPriceIncreaseDecrease B OutputPriceIncreaseIncrease C OutputPriceDecreaseIncrease D OutputPriceNot changeIncrease E OutputPriceNot changeNot change

C OutputPriceDecreaseIncrease

If the monopolist chooses to maximize total revenue rather than total profit, it will choose which combination of price and output? Responses A PriceOutputP1Q5 B PriceOutputP2Q4 C PriceOutputP3Q3 D PriceOutputP4Q4 E PriceOutputP5Q5

C PriceOutputP3Q3

If Zeta, a single producer, had exclusive control of a key resource needed to produce good Z , a likely result would be which of the following? Responses A Good Z would be produced in a perfectly competitive market. B Slight differences in output would lead to good Z being in a monopolistically competitive market. C There would be a barrier to entry, and Zeta would have a monopoly on good Z. D Only a few firms would produce good Z, so there would be an oligopoly. E Zeta must have decreasing returns to scale and operate as a natural monopoly in producing good Z.

C There would be a barrier to entry, and Zeta would have a monopoly on good Z.

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 Responses A monopoly B perfectly competitive C monopolistically competitive D oligopolistic E monopsonistic

C monopolistically competitive

North Springs and South Springs are two firms that serve the local market for bottled water. Each firm must choose to either maintain or increase its current output. The first entry in each cell in the payoff matrix below shows the profits for North Springs, and the second entry in each cell shows the profits for South Springs. If the two firms do not cooperate, which of the following represents the payoff North Springs and South Springs receive in the dominant-strategy equilibrium and the Nash equilibrium? Responses A Dominant StrategyNash EquilibriumNone($27, $28) B Dominant StrategyNash Equilibrium$27, $28)($15, $45) C Dominant StrategyNash Equilibrium($30, $26)($15, $45) D Dominant StrategyNash Equilibrium($27, $28)($27, $28) E Dominant StrategyNash Equilibrium($30, $26)($27, $28)

D Dominant StrategyNash Equilibrium($27, $28)($27, $28)

If the monopolist could engage in perfect price discrimination, the monopolist's total output and the price charged for the last unit of output sold would be Responses A Q1 and P1 B Q1 and P2 C Q1 and P4 D Q2 and P3 E Q3 and P2

D Q2 and P3

If the four largest firms in a market produce 88 percent of total industry output, the market is Responses A perfectly competitive B a pure monopoly C a natural monopoly D an oligopoly E a monopsony

D an oligopoly

The table provided shows price and cost data for Howell's Toy Hoops, a typical profit-maximizing firm that sells its toys in a monopolistically competitive market. At the profit-maximizing quantity, the economic profit for Howell's Toy Hoops is Responses A -$19 B -$5 C -$1 D $2 E $3

E $3

Suppose that the two biggest producers of gold, Bmine and Gmine, form a cartel to set price. However, each has the option to cheat or to not cheat on the agreement. The table below shows the payoffs from these strategies, with the first entry in each cell representing the payoff to Bmine and the second representing the payoff to Gmine. Which of the following correctly describes the dominant strategy of each firm? Responses A Neither Gmine nor Bmine has a dominant strategy. B Gmine's dominant strategy is to not cheat; Bmine does not have a dominant strategy. C Gmine's dominant strategy is to cheat; Bmine does not have a dominant strategy. D Gmine's dominant strategy is to cheat; Bmine's dominant strategy is to not cheat. E Gmine's dominant strategy is to not cheat; Bmine's dominant strategy is to cheat.

E Gmine's dominant strategy is to not cheat; Bmine's dominant strategy is to cheat.

Generally, monopolies are considered inefficient because they Responses A produce at a point where marginal cost is less than marginal revenue B produce at a point where marginal cost exceeds price C produce more output than does a competitive industry with similar cost conditions D lead to an overallocation of resources in the affected market E lead to an underallocation of resources in the affected market

E lead to an underallocation of resources in the affected market

The price of an airline ticket is typically lower if a traveler buys the ticket several weeks before the flight's departure date rather than on the day of departure. This pricing strategy is based on the assumption that Responses A travelers are not aware of how airline prices change across time B travelers do not have alternative modes of transportation C travelers will pay any price to travel as the departure date approaches D the marginal cost of the last few seats on an airplane is higher than that for the first few seats E travelers' demand becomes less elastic as the departure date approaches

E travelers' demand becomes less elastic as the departure date approaches