ECON 101 Fundamentals of Microeconomics (Exam 3 Guide)

Which of the following is not a characteristic of a perfectly competitive industry? A) Each firm seeks to undercut the price of its competitors. B) There is easy entry and exit. C) Each firm has a small share of the market. D) Each firm is a price-taking producer.

A) Each firm seeks to undercut the price of its competitors.

Which of the following statements is true? A) In the long run, the level of fixed costs is an important component of the entry/exit decision. B) In the short run, the level of fixed costs is an important component of the entry/exit decision. C) The firm shuts down if it cannot cover its fixed costs in the short run. D) When price exceeds average variable cost but it is below average total costs, the firm shuts down.

A) In the long run, the level of fixed costs is an important component of the entry/exit decision.

In the short run, a monopoly will stop producing if: A) P < AVC. B) P > MR. C) P < ATC. D) P > ATC.

A) P < AVC.

Provided that there are no external benefits or costs, resources are efficiently allocated when: A) P = MC. B) P = MR. C) MC = AVC. D) P = AVC.

A) P = MC.

(Figure: Costs and Profits for Tomato Producers) Examine the figure Costs and Profits for Tomato Producers. The market for tomatoes is perfectly competitive, and an individual tomato farmer faces the cost curve shown in the figure. The market price of a bushel of tomatoes is $18. If the market price falls to $16, the farmer's marginal revenue _____ and the profit-maximizing output _____. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases

A) decreases; decreases

For a firm producing at any level of output lower than the most profitable one, an increase in output adds: A) more to total revenue than to total cost. B) more to total cost than to total revenue. C) to total revenue but not to total cost. D) the same amount to total revenue as to total cost.

A) more to total revenue than to total cost.

If costs are constant in the industry so that each firm faces the same cost structure, then the long-run industry supply curve is: A) perfectly elastic. B) perfectly inelastic. C) unit elastic. D) somewhat inelastic.

A) perfectly elastic.

The practice of charging different prices to different customers for the same good or service, even though the cost of supplying those customers is the same, is: A) price discrimination. B) monopolization. C) privatization. D) output competition.

A) price discrimination.

Oligopoly is a market structure that is characterized by a: A) small number of interdependent firms producing identical or differentiated products. B) large number of relatively small independent firms producing identical products. C) large number of relatively small independent firms producing differentiated products. D) small number of independent firms producing identical or differentiated products.

A) small number of interdependent firms producing identical or differentiated products.

Free Entry and Exit

An industry has free entry and exit when new firms can easily enter into the industry and existing firms can easily leave the industry.

Perfectly Competitive Industry

An industry in which firms are price-takers.

Oligopoly / Oligopolist

An oligopoly is an industry with only a small number of firms. A producer in such an industry is known as an oligopolist.

(Table: Soybean Cost) Examine the table Soybean Cost. The costs of production of a perfectly competitive soybean farmer are given in the table. What is the break-even price for this farmer? A) $14.00 B) $13.50 C) $13.00 D) $14.50

B) $13.50

For the perfectly competitive firm, economic profit equals: A) (Price - marginal cost) x quantity. B) (Price - average total cost) x quantity. C) (Price - average variable cost) x quantity. D) Total revenue - total fixed cost.

B) (Price - average total cost) x quantity.

(Figure: A Perfectly Competitive Firm in the Short Run) Examine the figure A Perfectly Competitive Firm in the Short Run. If market price is G, the firm's total economic profit at its most profitable level of output is: A) 0GHB. B) FGLK. C) EFJS. D) EGHS.

B) FGLK.

The sum of the squared market shares of each firm in an industry is the: A) employment rate. B) Herfindahl-Hirschman Index. C) market number. D) concentration ratio.

B) Herfindahl-Hirschman Index.

Why do monopolistic competitors not collude to form a monopoly? A) Each firm can charge a monopoly price acting on its own. B) There are too many firms to allow for successful collusion. C) Successful collusion would require that they increase quantity beyond what they are capable of producing. D) Each firm already has its own monopoly within one geographic region.

B) There are too many firms to allow for successful collusion.

An industry with a single firm producing a product for which there are no close substitutes and which is protected by barriers to entry is: A) perfectly competitive. B) a monopoly. C) an oligopoly. D) monopolistically competitive.

B) a monopoly.

Which of the following is not an example of a barrier to entry? A) a copyright B) an innovative product C) a patent D) economies of scale

B) an innovative product

Suppose that Prince Pückler's Ice Cream sells 100 cones each day. It sells the cones for $3, its average variable cost is $2.50, marginal cost is $3 and the average total cost is $3.20. From this we know: A) the firm is not producing according to the optimal output rule. B) firms will exit the industry in the long run. C) firms will enter the industry in the long run. D) the firm is making zero economic profits.

B) firms will exit the industry in the long run.

In an industry characterized by extensive economies of scale: A) small companies will drive out large companies. B) large companies are more profitable than small companies. C) small and large companies are equally profitable. D) small companies are more profitable than large companies.

B) large companies are more profitable than small companies.

For the Colorado beef industry to be classified as perfectly competitive, ranchers in Colorado must have _____ on prices and beef must be a _____ product. A) a huge effect; differentiated B) no noticeable effect; standardized C) no noticeable effect; differentiated D) a huge effect; standardized

B) no noticeable effect; standardized

Which market structures are characterized by imperfect competition? A) oligopoly and monopoly B) oligopoly and monopolistic competition C) monopoly and monopolistic competition D) monopolistic competition and perfect competition

B) oligopoly and monopolistic competition

The demand curve for a perfectly competitive firm is: A) relatively but not perfectly elastic. B) perfectly elastic. C) downward sloping. D) perfectly inelastic.

B) perfectly elastic.

A perfectly competitive firm earns an economic profit when: A) price is above average variable cost. B) price is above average total cost. C) total cost exceeds total revenue. D) total variable cost exceeds total revenue.

B) price is above average total cost.

The ______ says that a price-taking firm's profit is maximized by producing the quantity of output at which the ______ is equal to the marginal cost of the last unit produced. A) optimal output rule; market price B) price-taking firm's optimal output rule; market price C) optimal output rule; total cost D) price-taking firm's optimal output rule; total revenue

B) price-taking firm's optimal output rule; market price

Marginal revenue is a firm's: A) ratio of average revenue to total revenue. B) ratio of the change in total revenue to the change in output. C) profit per unit times the number of units sold. D) increase in profit when it sells an additional unit of output.

B) ratio of the change in total revenue to the change in output.

Suppose that a profit-maximizing monopoly firm undergoes a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost the firm changes its price in a profit-maximizing way, then its total economic profit will: A) fluctuate indeterminately. B) rise. C) remain unchanged. D) fall.

B) rise.

A perfectly competitive firm is currently selling its product at the market price of $6. Its average total cost (ATC) is $5.50. In this case: A) since average total cost is less than the price, the firm will shut down. B) the firm has positive economic profits. C) the firm is losing money but will continue to operate. D) the firm has zero economic profits.

B) the firm has positive economic profits.

Suppose that Prince Pückler's Ice Cream sells 100 cones each day. It sells the cones for $3, its average variable cost is $2.50, marginal cost is $3, and the average total cost is $3.10. From this we know: A) the firm is not producing according to the optimal output rule. B) the firm is suffering a loss. C) the firm should shut down. D) the firm is making positive economic profits.

B) the firm is suffering a loss.

(Table: Total Cost and Output) Examine the table Total Cost and Output. The table describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $67.50, how much is Sergei's total cost at the profit-maximizing output? A) $135 B) $270 C) $170 D) $67.50

C) $170

(Table: Demand and Total Cost) Examine the table Demand and Total Cost. Lenoia runs a natural monopoly producing electricity for a small mountain village. The table shows Lenoia's demand and total cost of producing electricity. The marginal revenue of the fourth unit of production is: A) $500. B) $450. C) $250. D) $200.

C) $250.

(Figure: PPV) Examine the figure PPV. The figure shows the demand and marginal revenue for a pay-per-view football game from a cable TV company. Assume that the marginal cost and average cost are a constant $20. If the cable company is in a perfectly competitive industry, how much is consumer surplus? A) $160 B) $500 C) $320 D) $0

C) $320

Zoe's Bakery operates in a perfectly competitive industry. When the market price of iced cupcakes is $5, the profit-maximizing output level is 150 cupcakes. Her average total cost is $4, and her average variable cost is $3. Zoe's marginal cost is _____, and her short-run profits are _____. A) $1; $150 B) $5; $300 C) $5; $150 D) $1; $300

C) $5; $150

(Table: Lilly's Apple Orchard) Examine the table Lilly's Apple Orchard. Lilly is the price-taking owner of an apple orchard; its variable costs are given in the table. Her orchard has fixed costs of $30. If the price of a bushel of apples is $35, her economic profit will be equal to: A) $0 B) $5 C) -$5 D) -$30

C) -$5

(Figure: Cost Curves for Corn Producers) Examine the figure Cost Curves for Corn Producers. The market for corn is perfectly competitive, and an individual corn farmer faces the cost curves shown in the figure. If the price of a bushel of corn in the market is $4, then in the short run the farmer will produce _____ of corn and earn an economic _____ equal to _____. A) 0 bushels; loss; average fixed costs B) 3 bushels; profit; $20 per bushel C) 0 bushels; loss; total fixed costs D) 3 bushels; loss; $30 per bushel

C) 0 bushels; loss; total fixed costs

In perfect competition, the profit-maximizing level of output occurs where the: A) price < marginal cost above minimum AVC. B) P = MR above MC. C) MR = MC above minimum AVC. D) MR > MC below minimum AVC.

C) MR = MC above minimum AVC.

A perfectly competitive firm maximizes profit by producing the quantity at which: A) P > AVC. B) TR = TC. C) MR = MC. D) Q × (P - ATC) = 0.

C) MR = MC.

(Figure: Short-Run Monopoly) Examine the figure Short-Run Monopoly. The profit-maximizing price is price: A) P. B) Q. C) N. D) O.

C) N.

Tara sells her organic carrots in a perfectly competitive market for a price that is just higher than her minimum average variable cost (AVC) of production, but lower than her minimum average total cost (ATC) of production. Which of the following statements is then TRUE? A) Although she is currently incurring a loss, she could restore profitability by advertising her carrots. B) She can minimize her losses by shutting down her operations now. C) She is incurring a loss because price is less than ATC. D) She is earning a profit because price is above AVC.

C) She is incurring a loss because price is less than ATC.

When perfect competition prevails, which characteristic of firms is likely to be observed? A) They all try to highlight the substantial product differentiation between producers. B) They spend time erecting and maintaining barriers to new firms. C) They are all price-takers. D) There are not many of them.

C) They are all price-takers.

If all firms in an industry are price-takers, then: A) each firm takes the market price as given for its current output level, recognizing that the price will change if it alters its output significantly. B) the market sets the price, and each firm can take it or leave it by setting a different price. C) an individual firm cannot alter the market price even if it doubles its output. D) each firm can sell at the price it wants to charge, provided it is not too different from the prices other firms are charging.

C) an individual firm cannot alter the market price even if it doubles its output.

In the calculation of economic profit, a firm's total cost incorporates: A) only implicit costs. B) only explicit costs. C) both implicit and explicit costs. D) only accounting costs.

C) both implicit and explicit costs.

The difference between total revenue and total cost is: A) marginal revenue. B) average revenue. C) economic profit or loss. D) nominal revenue.

C) economic profit or loss.

In perfect competition, a change in fixed cost will: A) cause a change in output in the short run. B) cause a change in the price in the short run. C) encourage entry or exit in the long run so that price will change enough to leave firms earning zero profits. D) cause a change in variable cost, too.

C) encourage entry or exit in the long run so that price will change enough to leave firms earning zero profits.

Because of the existence of a large number of similar but not identical substitutes in most communities, the market for chiropractors is best considered to be: A) an oligopoly. B) a monopoly. C) monopolistically competitive. D) perfect competition.

C) monopolistically competitive.

Suppose a perfectly competitive market is suddenly transformed into one that operates as a monopoly market. One would expect: A) price to rise, output to fall, consumer surplus to fall, producer surplus to fall, and deadweight loss to rise. B) price to rise, output to fall, consumer surplus to rise, producer surplus to rise, and deadweight loss to fall. C) price to rise, output to fall, consumer surplus to fall, producer surplus to rise, and deadweight loss to rise. D) price to fall, output to rise, consumer surplus to rise, producer surplus to fall, and deadweight loss to fall.

C) price to rise, output to fall, consumer surplus to fall, producer surplus to rise, and deadweight loss to rise.

If a monopoly has a linear demand curve and is producing at the profit-maximizing level of output, then it can be assumed that at that level of output, demand is: A) perfectly price-inelastic. B) price-inelastic. C) price-elastic. D) price unit-elastic.

C) price-elastic.

(Figure: The Profit Maximizing Firm) Examine the figure The Profit Maximizing Firm. The figure shows the short-run cost curves for a firm operating in a perfectly competitive market. If the market price is P3, the firm will produce quantity _____ and _____ in the short run. A) q1; break even B) q2; make a profit C) q2; incur a loss D) q4; incur a loss

C) q2; incur a loss

A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the same and the firm does not shut down. Compared to the condition before the increase in marginal costs, the monopolist will _____ its price and _____ its level of production. A) lower; increase B) not change; decrease C) raise; decrease D) raise; increase

C) raise; decrease

Suppose that Prince Pückler's Ice Cream sells 100 cones each day. It sells the cones for $3, its average variable cost is $3.10, marginal cost is $3, and the average total cost is $3.50. From this we know: A) the firm is not producing according to the optimal output rule. B) the firm is breaking even. C) the firm should shut down. D) the firm is making positive economic profits.

C) the firm should shut down.

Monopoly arises when: A) there is a firm desiring to compete in many markets. B) there is a firm wanting to maximize profits. C) there are barriers to the entry of other firms. D) there is government intervention to establish and enforce a price ceiling.

C) there are barriers to the entry of other firms.

(Figure: PPV) Examine the figure PPV. The figure shows the demand and marginal revenue for a pay-per-view football game from a cable TV company. Assume that the marginal cost and average cost are a constant $20. If the cable company is in a perfectly competitive industry, how much is deadweight loss? A) $160 B) $500 C) $320 D) $0

D) $0

(Table: Variable Costs for Lawns) Examine the table Variable Costs for Lawns. During the summer Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry made up of 100 identical firms. The table shows his variable costs for lawn-mowing and the number of lawns mowed. Assume that costs are constant in each interval (that is, the variable cost of mowing anywhere from 1 through 10 lawns is $100). Alex's fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $40, how much is Alex's total revenue at the profit-maximizing output? A) $1,000 B) $1,500 C) $500 D) $1,200

D) $1,200

(Table: Variable Costs for Lots) Examine the table Variable Costs for Lots. During the winter, Alexa runs a snow-clearing service, and snow clearing is a perfectly competitive industry. The table provided shows her variable costs for snow clearing and number of lots cleared. Assume that costs are constant in each interval (that is, the variable cost of clearing anywhere from 1 through 10 lots is $200). Her only fixed cost is $1,000 for a snowplow. Her variable costs include fuel, her time, and hot coffee. If the price per cleared lot is $14, how many lots should Alexa clear? A) 20 B) 50 C) 40 D) 0

D) 0

Which statement about monopoly equilibrium and perfectly competitive equilibrium is false? A) When a monopoly exists, the consumer surplus is less than if the market were perfectly competitive. B) Monopoly output will be less than the output of a comparable perfectly competitive industry. C) Price is greater than marginal cost in monopoly, and price equals marginal cost in perfect competition. D) In the long run, economic profits are driven to zero in both a monopoly and a perfectly competitive market.

D) In the long run, economic profits are driven to zero in both a monopoly and a perfectly competitive market.

In the short run, a perfectly competitive firm produces output and breaks even if the firm produces the quantity at which: A) P > ATC. B) P < ATC. C) P = (TR/Q + TC/Q) × Q. D) P = ATC.

D) P = ATC.

A profit-maximizing, 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 50 units at this price. Its average total cost (ATC) is $17 and its average variable cost is $15. Which of the following statements is then TRUE? A) This firm should shut down now. B) At this current level of production, the firm's marginal cost is $17. C) At this current level of production, the firm's marginal cost is $15. D) The firm is earning an economic profit of $50.

D) The firm is earning an economic profit of $50.

If there is free entry and exit in a perfectly competitive industry, the long-run equilibrium will: A) be characterized by increasing marginal revenue for each firm. B) be characterized by decreasing marginal revenue for each firm. C) requires that all firms earn a positive economic profit. D) be at the level of zero economic profit for each firm.

D) be at the level of zero economic profit for each firm.

If the government allowed only one airline to serve the entire U.S. market, there would be a _____ loss associated with _____ efficiency in the airline industry. A) deadweight; increased B) marginal; reduced C) total; increased D) deadweight; reduced

D) deadweight; reduced

When a monopolist practices price discrimination, compared to a single-price monopolist, deadweight loss will: A) increase initially, and then return to its original level. B) increase. C) remain the same. D) decrease.

D) decrease.

Airlines that engage in price discrimination charge lower prices to vacation travelers because their: A) supply is more elastic than that of other travelers. B) supply is more inelastic than that of other travelers. C) demand is more inelastic than that of other travelers. D) demand is more elastic than that of other travelers.

D) demand is more elastic than that of other travelers.

Suppose that Madelyne builds a new jumbo jet that can carry five times more passengers than any other competitor. She has high fixed costs due to the quantity of capital used to build the jets, and average cost is decreasing for all levels of demand. In this case, Madelyne's monopoly would result from: A) location. B) government restrictions. C) sunk costs. D) economies of scale.

D) economies of scale.

Which industry is most likely to be monopolistically competitive? A) electric utility production B) automobile production C) corn farming D) fresh bagel shops

D) fresh bagel shops

Since a monopolistic competitor produces a product with many close substitutes, it: A) has no market power. B) faces a highly inelastic demand curve. C) has unlimited market power. D) has some degree of market power.

D) has some degree of market power.

The profit-maximizing level of output for a perfectly competitive firm in the short run occurs where: A) average revenue equals average total cost. B) total revenue equals total cost. C) marginal revenue equals price. D) marginal cost equals price.

D) marginal cost equals price.

The market for dentists in most communities can be considered a(n) _____ because there are a large number of similar but not identical dental services in the market. A) perfect competition B) oligopoly C) monopoly D) monopolistic competition

D) monopolistic competition

A firm breaks even when: A) price = marginal cost. B) price = marginal revenue. C) marginal cost = average total cost. D) price = average total cost.

D) price = average total cost.

In the short run, if P > ATC, a perfectly competitive firm: A) produces output and incurs an economic loss. B) produces output and earns zero economic profit. C) does not produce output and earns economic profit. D) produces output and earns an economic profit.

D) produces output and earns an economic profit.

Price regulation may be used in cases of natural monopoly with the goal of: A) setting a price equal to average variable cost. B) shifting the demand curve for the product. C) minimizing the amount of consumer surplus. D) setting a price equal to average total cost.

D) setting a price equal to average total cost.

Suppose that Prince Pückler's Ice Cream sells 100 cones each day. It sells the cones for $3, its average variable cost is $2.50, marginal cost is $3 and the average total cost (ATC) is $3.00. From this we know: A) the firm is not producing according to the optimal output rule. B) the firm is not breaking even. C) the firm is making zero accounting profits. D) the firm is making zero economic profits.

D) the firm is making zero economic profits.

Under conditions of perfect price discrimination: A) the monopolist will charge the highest prices to those customers with the most elastic demand. B) all consumers will pay a price that is equal to marginal cost. C) the monopolist will charge only two different prices. D) the monopolist will capture all of consumer surplus as profit for the firm.

D) the monopolist will capture all of consumer surplus as profit for the firm

(Figure: The Profit Maximizing Firm) Examine the figure The Profit Maximizing Firm. The figure shows the short-run cost curves for a firm operating in a perfectly competitive market. If the market price is P4: A) the firm will produce q4. B) firms will leave the industry and the price will fall in the long run. C) there will be losses and the price will fall in the long run. D) there will be economic profits and firms will enter the industry in the long run.

D) there will be economic profits and firms will enter the industry in the long run.

Herfindahl—Hirschman Index

Herfindahl—Hirschman Index, or HHI, is the square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.

Section 9

Market Structure and Perfect Competition

Price-taking Firm

The actions of a price-taking firm have no effect on the market price of the good or service it sells.

Break-even Price

The break-even price of a price-taking firm is the market price at which it earns zero economic profit.

Marginal Revenue

The change in total revenue generated by an additional unit of output.

Industry Supply Curve

The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole.

Long-run Industry Supply Curve

The long-run industry supply curve shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

Optimal Output Rule

The optimal output rule says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

Short-run Industry Supply Curve

The short-run industry supply curve shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms.

Short-run Market Equilibrium

There is a short-run market equilibrium when the quantity supplied equals the quantity demanded, taking the number of producers as given.

Barrier to Entry

To earn economic profits, a monopolist must be protected by a barrier to entry—something that prevents other firms from entering the industry.

Imperfect Competition

When no one firm has a monopoly, but producers nonetheless realize that they can affect market prices, an industry is characterized by imperfect competition.

Price-taking Consumer

A consumer whose actions have no effect on the market price of the good or service he or she buys.

Copyright

A copyright gives the creator of a literary or artistic work the sole right to profit from that work.

Shut-down Price

A firm will cease production in the short run if the market price falls below the shut-down price, which is equal to minimum average variable cost.

Market Share

A firm's market share is the fraction of the total industry output accounted for by that firm's output.

Standardized Product / Commodity

A good is a standardized product, also known as a commodity, when consumers regard the products of different firms as the same good.

Perfectly Competitive Market

A market in which all market participants are price-takers.

Long-run Market Equilibrium

A market is in long-run market equilibrium when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.

Monopolistic Competition

A market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run.

Monopolist & Monopoly

A monopolist is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.

Natural Monopoly

A natural monopoly exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output.

Patent

A patent gives an inventor a temporary monopoly in the use or sale of an invention.

Price-taking Firm's Optimal Output Rule

A price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

(Table: Turkeys) Examine the table Turkeys. Trader Tom is a monopolist that sells fried turkeys for Thanksgiving dinner for a constant marginal and average cost of $10 per turkey. Assume that Tom has no fixed cost. Tom has 6 potential customers, each of which will buy at most one turkey if the price is just equal to or lower than their willingness to pay, which is shown in the table. If Tom acts as a single-price monopolist to maximize profits, how much is producer surplus? A) $30 B) $10 C) $25 D) $20

A) $30

(Table: Demand and Total Cost) Examine the table Demand and Total Cost. Lenoia runs a natural monopoly producing electricity for a small mountain village. The table shows Lenoia's demand and total cost of producing electricity. The price effect of increasing production from 3 megawatts to 4 megawatts is: A) -$150. B) $450. C) $500. D) -$50.

A) -$150.

In the short run, a perfectly competitive firm produces output and incurs an economic loss if: A) AVC < P < ATC. B) AVC > P > ATC. C) P < AVC. D) P > ATC.

A) AVC < P < ATC.