Econ #2

variable costs

A cost that depends on the level of production chosen

Oligopolistic firms often choose not to compete on price. A) True B) False

A)

One of the earliest actions of antitrust policy was the breakup of: A) the Standard Oil Company. B) Bell Telephone. C) Microsoft. D) IBM.

A)

An action is a dominant strategy when it is a player's best action: A) regardless of the actions by other players. B) given certain profit-maximizing actions of other players. C) assuming the other players do not correctly anticipate the action. D) if there is only one other competitor.

A).

average fixed cost

Average fixed cost is total fixed cost divided by the number of units of output; a pre-unit measure of fixed costs (AFC=TFC/q)

average varibale cost

Average variable cost: total variable cost divided by the number of units of output (AVC=TVC/q)

In the short run, a perfectly competitive firm produces output and earns zero economic profit if: A) P>ATC. B) P=ATC. C) P<AVC. D) AVC>P>ATC.

B)

(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 $35, how many tubs of ice cream will Sergei produce in the short run? A) 1 B) 2 C) 3 D) 4

C)

A major application of the Sherman Antitrust Act was in ________ against ________. A) 1880; the Ford Motor Company B) 1889; Bell C) 1911; Standard Oil D) 1889; Bell and Standard Oil

C)

When marginal cost is below average variable cost, average variable cost must be: A) above average total cost. B) below average total cost. C) falling. D) rising.

C)

perfectly competitive industry is in a state of long-run equilibrium. A) P=MR=MC>ATC. B) P=MR=MC=AVC. C) P=MR=MC=ATC. D) P>MR=MC=AVC

C)

fixed cost

Fixed costs are costs that does not depend on the firms' level of output. -These costs are incurred even if the firm is producing nothing. -There are no fixed costs in the long run

What are some factors that contribute to a firm achieving increasing returns to scale (or economies of scale) in the long run?

Larger firms have more opportunities to specialize both labor and capital to certain tasks. A worker, if allowed to specialize in a task, gets more skilled at performing that task as he or she produces more units of output. More skill translates to fewer mistakes and lower average cost. Other factors include spreading a very large initial setup cost over many units of output, managerial, accounting, and other organizational economies, and network externalities.

What is marginal revenue?

The additional revenue that a firm takes in when it increases output by one additional unit. In perfect competition, P=MR

How are total cost and average total cost related to fixed and variable costs?

They are the sum of them. TC= TFC + TVC ATC= TC/q (TC=FC+VC)

What is average total cost?

Total cost divided by the number of units of output ATC= TC/q

What is total cost?

Total fixed costs + total variable costs TC= TFC+TVC

What is marginal cost?

the increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.

(Table: Variable Costs for Lots) Look at 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. Her only fixed cost is $1,000 for a snowplow. Her variable costs include fuel, her time, and hot coffee. If the price to clear a lot is $30, what is Alexa's profit or loss per unit at the optimal output? A) -$13.75 B) $720 C) $0 D) -$12.25

A)

. A field of law that attempts to limit the ability of oligopolists to collude and restrict competition is called: A) antitrust policy. B) product safety policy. C) fuel efficiency standards. D) excise tax policy.

A)

31. Price discrimination is the practice of: A) charging different prices to buyers of the same good. B) paying different prices to suppliers of the same good. C) equating price to marginal cost. D) equating price to marginal revenue.

A)

A firm's total fixed cost: A) stays constant in the short run. B) falls as the firm produces more output in the short run. C) falls as the firm produces more output in the long run. D) increases as the firm produces more output.

A)

A monopolist responds to an increase in marginal cost by ________ price and ________ output. A) increasing; decreasing B) increasing; increasing C) decreasing; increasing D) decreasing; decreasing

A)

A perfectly competitive firm's supply curve is its marginal cost curve above the average variable cost curve. A) True B) False

A)

An oligopoly is characterized as an industry in which: A) there are few firms, each producing a differentiated or similar product. B) there are many firms, each producing a similar product. C) all market participants are price-takers. D) only one firm produces a very differentiated product.

A)

As a firm increases production in the short run, the marginal cost of output increases because the marginal product of the variable input decreases. A) True B) False

A)

As output increases, the total cost curve A) gets steeper. B) gets flatter. C) becomeshorizontal. D) increases at first, and then decreases.

A)

Because monopoly firms are price-setters: A) they can sell more only by lowering price. B) they sell more at higher prices than at lower prices. C) they take the market-determined price as given and sell all they can at that price. D) they charge the highest possible price.

A)

Each firm in a cartel has an incentive to break its word and produce more than the agreed quantity. A) True B) False

A)

If a monopolist is producing a quantity that generates MC = MR, then profit: A) is maximized. B) is maximized only if MC = P. C) can be increased by increasing production. D) can be increased by decreasing production.

A)

If a perfectly competitive firm is producing a quantity where P = MC, then profit: A) is maximized. B) can be increased by decreasing the quantity. C) can be increased by decreasing the price. D) can be increased by increasing production.

A)

If firms are experiencing economic losses in the short run, firms will leave the industry, industry output will ________, and economic losses will ________ in the long run. A) fall; fall B) rise; fall C) rise; rise D) fall; rise

A)

If the Herfindahl-Hirschman index (HHI) for an industry is 900, this market is considered: A) a strongly competitive market. B) a somewhat competitive market. C) oligopolistic. D) monopolistic.

A)

If the only two firms in an industry openly agree to fix the price at a given level, then this is an example of: A) overt collusion. B) price leadership. C) contestability. D) tacit collusion.

A)

If your farm had the only known source of a rare cocoa bean needed to make chocolate-covered peanuts, your monopoly would result from: A) control of a scarce resource or input. B) technological superiority. C) increasing returns to scale. D) government-created barriers.

A)

In general, economists are critical of monopoly where ________ exist(s). A) no natural monopoly B) a natural monopoly C) only a few firms D) persistent economies of scale

A)

In the short run, the fixed costs of running a farm should play no role in determining the level of production. A) True B) False

A)

Large barriers to entry in the gas station business explain why the two only gas stations in a small town: A) can earn an economic profit in the long run. B) must produce at the minimum average total cost in the long run. C) have no fixed costs in the long run. D) must produce a level of output such that MR = MC in order to maximize their profit.

A)

One of the major differences between a monopolist and a purely competitive firm is that the monopolist has a ________ demand curve, while the purely competitive firm has a ________ demand curve. A) downward-sloping; perfectly elastic B) perfectly inelastic; perfectly elastic C) downward-sloping; perfectly inelastic D) perfectly elastic; downward-sloping

A)

Perfect Competition Cindy's Nails operates in the perfectly competitive pedicure industry. The city is considering requiring nail salons to be certified by a health inspector. The certification will cost $1,000 annually and is thus a fixed cost. The certification will affect Cindy's decision to operate, not the number of pedicures she chooses to perform if she operates. A) True B) False

A)

Suppose that the market for haircuts in a community is perfectly competitive and that the market is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for haircuts. In the short run, we expect that the typical firm is likely to begin: A) earning an economic profit. B) incurring an economic loss. C) experiencing no change in its economic profit. D) experiencing neither an economic profit nor an economic loss.

A)

The noncooperative equilibrium of a prisoners' dilemma kind of game can be avoided if the game is played repeatedly and firms engage in strategic behavior. A) True B) False

A)

The term imperfect competition is used to refer to both oligopoly and monopolistic competition. A) True B) False

A)

You own a small deli that produces sandwiches, soups, and other items for customers in your town. Which of the following is a fixed input for the production function at your deli? A) the dining room where customers eat their meals B) the loaves of bread used to make sandwiches C) the cans of tomato sauce used to make soups D) the employees hired to help make the food

A)

A cost that does not depend on the quantity of output produced is called a: A) marginal cost. B) fixed cost. C) variablecost. D) average cost.

B)

A downward-sloping demand curve will ensure that: A) P=MR. B) P>MR. C) P<MR. D) P=MC.

B)

A monopoly's short-run supply curve is upward sloping because of diminishing marginal returns. A) True B) False

B)

A well-known example of an international cartel is: A) Japan. B) OPEC. C) Exxon. D) General Motors.

B)

An analytical framework used in the analysis of strategic choices is: A) the tacit supply curve model. B) game theory. C) perfect competition. D) risk assessment.

B)

An extreme case of oligopoly in which firms collude to raise joint profits is known as a: A) duopoly. B) cartel. C) dominantproducer. D) price war.

B)

As a New York businessperson who does a lot of flying, you are keenly aware of even small changes in airfare from New York to Chicago. You have flown this route long enough to know that each airline is essentially a perfect substitute for the others. You notice that every time the largest airline changes the price, smaller airlines follow, but the smaller airlines are always priced slightly below the fare of the largest airline. This industry could best be described as one with: A) price wars. B) non-price competition. C) cartel behavior. D) price leadership.

B)

Attempts by the federal government to prevent the exercise of monopoly power in the United States are known as ________ policy. A) stabilization B) antitrust C) fiscal D) government

B)

Average variable cost is: A) the firm's variable cost per unit multiplied by the quantity. B) total variable cost divided by quantity. C) the difference between average total cost and total cost. D) the difference between total cost and total fixed cost.

B)

During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. In the short run, Alex will shut down his lawn-mowing service rather than continue mowing grass if: A) the total revenues can't cover the total fixed costs. B) the total revenues can't cover the total variable costs. C) the total revenues can't cover the total cost. D) the price exceeds the average total cost.

B)

If an eyeglass business produces 10 pairs of eyeglasses and incurs $30 in average variable cost and $5 in average fixed cost, then average total cost is: A) $30. B) $35. C) $50. D) $300.

B)

If two firms are identical in all respects except that one has more capital than another, the total product curve for the firm with more capital: A) must equal the total product curve for the firm with less capital. B) will lie above the total product curve for the firm with less capital. C) will lie below the total product curve for the firm with less capital. D) will show no diminishing marginal returns.

B)

Microsoft's Windows operating system is a standardized product, since everyone who buys a particular version of the product gets exactly the same thing. This means that Microsoft is a perfectly competitive firm. A) True B) False

B)

Monopoly is inefficient because some consumer surplus is transferred to producer surplus. A) True B) False

B)

The Orlando, Florida, theme park industry tends to follow a price leadership model. This means that: A) each theme park sets its own price and operating hours independent of what other parks do. B) Disney often sets a price and rival theme parks then following with similar if not identical prices. C) Disney often sets prices only to be undercut by rival firms who prefer to engage in price wars. D) firms use written agreements to explicitly agree to charge identical prices.

B)

The average total cost curve has a U-shape because the ___________ effect is dominant at low levels of output, and the __________ effect is dominant at high levels of output. A) diminishing returns; spreading B) spreading; diminishing returns C) comparative advantage; absolute advantage D) absolute advantage; comparative advantage

B)

The demand curve for a monopolist is as follows: P = 75 - 0.5Q, and the monopolist has the following MC expressed as P = 2Q. Assume also that ATC at the profit-maximizing level of production is equal to $12.50. 34. (Scenario: Monopolist) Using the information from the scenario Monopolist, the MR curve is: A) P=150-0.5Q. B) P=75-Q. C) P=150-Q. D) P=225-Q.

B)

A curve that shows the quantity of a good or service supplied at various prices after all long-run adjustments to a price change have been completed is a long-run: A) marginal revenue curve. B) marginal cost curve. C) industry supply curve. D) production curve.

C)

After the first unit sold, the marginal revenue a monopolist receives from selling one more unit of a good is less than the price at which that unit is sold because of: A) diminishing marginal returns. B) increasing marginal cost. C) a downward-sloping demand curve. D) declining average fixed cost.

C)

Ashley Bakery expects its marginal cost curve will eventually slope upward, because as with most production processes, baking has: A) constant opportunity costs. B) a maximum efficient scale. C) diminishing marginal returns. D) decreasing opportunity costs.

C)

Diminishing returns are a reason: A) the marginal cost curve is downward sloping. B) fixed costs remain constant. C) the marginal cost curve is upward sloping. D) the average fixed cost curve is downward sloping.

C)

Given the large amount of interdependence among them, cooperation with one's competitors is the most profitable strategy for: A) perfect competitors. B) monopolistic competitors. C) oligopolists. D) monopolists.

C)

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

C)

If marginal cost is greater than average total cost, then: A) average total cost is at its maximum. B) average total cost is at its minimum. C) average total cost is increasing. D) average total cost is decreasing.

C)

In an oligopoly: A) there are many sellers. B) there are no barriers to entry. C) firms recognize their interdependence. D) total surplus is maximized.

C)

In oligopoly, a firm must realize that: A) what it does has no effect on the other firms in the industry. B) its behavior will be ignored by other firms in the industry. C) another major firm may dominate choices in the industry, and it will need to behave accordingly. D) collusion was made legal in 2004.

C)

Marginal cost is the change in: A) total product resulting from a one-unit change in a variable input. B) total cost resulting from a one-unit change in quantity of a variable input. C) total cost divided by the change in output. D) average cost resulting from a one-unit change in quantity of output.

C)

Microsoft sets prices for its new line of computers, and Dell and HP follow. This practice is known as________. A) antitrust pricing. B) price extortion. C) price leadership. D) kinked demand behavior.

C)

Perfectly competitive firms will: A) maximize total revenue by using the marginal decision rule. B) increase output up to the point that the marginal benefit of an additional unit of output is greater than the marginal cost. C) increase output up to the point that the marginal benefit of an additional unit of output is equal to the marginal cost. D) always attempt to minimize average variable cost.

C)

Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total costs of producing candy canes by $0.05. Based on the information given, we can conclude that in the short run a typical producer of candy canes will be making: A) an economic profit. B) zero economic profit. C) negative economic profits. D) The answer is impossible to determine based on the information given.

C)

The profit-maximizing rule MR = MC is: A) followed by a monopoly but not by a perfectly competitive firm. B) followed by a perfectly competitive firm but not by a monopoly. C) followed by all types of firms. D) not followed by a monopoly because it would reduce economic profit to zero.

C)

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

C)

Which of the following scenarios best describes an oligopolistic industry? A) A single cable company serves customers in a small town. B) Thousands of soybean farmers sell their output in a global commodities market. C) Coca-Cola and Pepsi sell most of the soft drinks consumed around the world. D) A college has one bookstore selling textbooks to students.

C)

(Table: Variable Costs for Lots) Look at 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. Her only fixed cost is $1,000 for a snowplow. Her variable costs include fuel, her time, and hot coffee. loss at the optimal output? A) $1,200 B) $1,500 C) $0 D) -$550

D)

A monopoly is an industry structure characterized by: A) a single buyer and several sellers. B) a product with many close substitutes. C) a large number of small firms. D) barriers to entry and exit.

D)

If a perfectly competitive firm increases production from 10 units to 11 units and the market price is $20 per unit, total revenue for 11 units is: A) $10. B) $20. C) $200. D) $220.

D)

In the long run: A) all inputs are fixed. B) inputs are neither variable nor fixed. C) at least one input is variable and one input is fixed. D) all inputs are variable.

D)

OPEC is: A) the Organization of Petroleum Exporting Countries. B) an international cartel made up of oil-producing countries. C) the cartel that was responsible for the large increases in crude oil prices in the 1970s. D) described by all of these answer choices

D)

Sadia wants to practice price discrimination in her bakery. Which of the following techniques should Sadia not use? A) discounts for people who buy a large volume of bread B) higher prices for people who buy bread on the day it is baked and lower prices for people who place advance orders C) an annual fee for customers who want to shop at a discount in her store D) the same price for all consumers for freshly baked goods

D)

Suppose that the market for haircuts in a community is perfectly competitive and that the market is initially in long-run equilibrium. Subsequently, a decrease in population decreases the demand for haircuts. In the short run, we expect that the market price will ________ and the output of a typical firm will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

D)

The competitive model assumes all of the following except: A) a large number of buyers. B) easy entry into and easy exit from the market. C) standardized product. D) patents and copyrights

D)

The demand curve for a monopoly is: A) the MR curve above the AVC curve. B) the MR curve above the horizontal axis. C) the entire MR curve. D) above the MR curve.

D)

When Caroline's dress factory hires two workers, the total product is 50 dresses. When she hires three workers, total product is 60, and when she hires four workers, total product is 65. The slope of the marginal product curve when two to four workers are hired is A) upward sloping. B) horizontal. C) vertical. D) downward sloping.

D)

When firms in a particular industry informally agree to charge the same price as the largest firm in that industry, it is called: A) satisfying. B) price extortion. C) overt collusion. D) tacit collusion.

D)

What is the relationship between average total cost and marginal cost?

When marginal cost is below average cost, average cost is declining. When marginal cost is above average cost, average cost is increasing.