ECON 2003--practice test 2

If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then average total cost must be A. $200. B. $250. C. $800. D. $3,200.

A. $200.

How does a cartel differ from an oligopolistic industry? A. Cartels reduce uncertainty to maximize profits. B. Cartels are legal while oligopolies are illegal. C. Oligopolistic industries cannot make economic profit. D. Oligopolies face large amounts of competition while cartels do not.

A. Cartels reduce uncertainty to maximize profits.

The intention of a price floor is to help producers by setting a higher than equilibrium price. What is one unintended consequence of this policy? A. Economic surplus decreases. B. Producer surplus increases. C. Consumer surplus increases. D. There is more scarcity in the economy.

A. Economic surplus decreases.

Which of the following is most likely to be a variable cost of production in the short run? A. Fuel and power payments B. The interest on a business loan C. Rental payments on IBM equipment D. Real estate taxes

A. Fuel and power payments

Which of the following is a barrier to entry? A. Infrastructure costs B. Buyers' incomes C. Close substitutes D. Diminishing marginal returns

A. Infrastructure costs

What point is the profit maximizing level of output? A. MC=MR B. MC=ATC C. D=MC D. MR=ATC

A. MC=MR

Which of the following is characteristic of a perfectly competitive firm's demand curve? A. Price and marginal revenue are equal at all levels of output. B. Average revenue is less than price. C. Its elasticity coefficient is 1 at all levels of output. D. It's the same as the market demand curve.

A. Price and marginal revenue are equal at all levels of output.

You're buying snacks for an Econ Club meeting. You've been given $100 to spend on chips and soda. You buy 25 bags of chips and 15 sodas. If bags of chips cost $3 each and soda costs $1 each, are you within your budget? A. Yes, Under budget by $10 B. No, Over budget by $10 C. Yes, Under budget by $0 D. No, Over budget by $15

A. Yes, Under budget by $10

The decision-making process followed by consumers to maximize utility assumes that A. consumers behave rationally, attempting to maximize their satisfaction. B. consumers have unlimited incomes. C. consumers do not know how much marginal utility they obtain from consuming additional units of various products. D. consumers are unable to rank their preferences.

A. consumers behave rationally, attempting to maximize their satisfaction.

In the long run, the representative firm in monopolistic competition tends to have A. excess capacity. B. economic profits C. no product differentiation. D. a perfectly elastic demand curve.

A. excess capacity.

If the equilibrium wage for fast-food restaurants is $8 and the government enforces a minimum wage of $15 A. fast-food restaurants will hire fewer workers. B. workers will be able to find more jobs. C. workers will get paid less. D. overall, society will be better off.

A. fast-food restaurants will hire fewer workers.

In an oligopoly, producers' agreements to restrict output tend to be unstable because each firm has an incentive to A. produce more than its output quota. B. lower both its price and its output. C. raise its price above the cooperative price. D. establish competitive price and output levels

A. produce more than its output quota.

T-Shirt Enterprises is operating in a perfectly competitive market. It is producing 3,000 t-shirts and selling them for $10 each. At this level of output, the average total cost is $10.50 and the average variable cost is $10.20. Based on these data, the firm should A. shut down in the short run. B. decrease production to 2,500 t-shirts. C. continue to produce 3,000 t-shirts. D. increase production to 3,500 t-shirts.

A. shut down in the short run.

A government-imposed price floor has what effect on efficiency? A. Consumer surplus increases. B. Producer surplus increases. C. Consumer and producer surplus increases. D. There is little dead weight loss.

B. Producer surplus increases

Which of the following is not a barrier to entry in an industry? A. Economies of scale B. Profit maximization C. Strategic pricing D. Government licensing

B. Profit maximization

Which situation is consistent with the law of diminishing marginal utility? A. The more pizza Joe eats, the more he enjoys an additional slice. B. The more pizza Joe eats, the less he enjoys an additional slice. C. Joe's marginal utility from eating pizza becomes positive after eating three slices. D. Joe's marginal utility from eating pizza reaches a maximum when total utility is zero.

B. The more pizza Joe eats, the less he enjoys an additional slice.

A major distinction between a monopolistically competitive firm and an oligopolistic firm is that A. one is a price taker and the other is a price maker. B. a recognized interdependence exists between firms in one industry but not in the other. C. one always produces differentiated products and the other always produces a homogeneous product. D. one necessarily faces a downward-sloping demand curve and the other a horizontal demand curve.

B. a recognized interdependence exists between firms in one industry but not in the other.

Under monopolistic competition, entry to the industry is A. completely free of barriers. B. more difficult than under pure competition but not nearly as difficult as under pure monopoly. C. more difficult than under pure monopoly. D. blocked.

B. more difficult than under pure competition but not nearly as difficult as under pure monopoly.

Which of the following generalizations is correct? Demand tends to be A. relatively more elastic when the price of a good or service, as a proportion of income, is smaller. B. relatively more inelastic for a product considered a necessity. C. relatively more inelastic when more substitutes are available for a product. D. relatively more inelastic the more time consumers have to respond to price changes.

B. relatively more inelastic for a product considered a necessity.

Suppose some firms exit an industry characterized by monopolistic competition. We would expect the demand curve of a firm already in the industry to A. shift to the left. B. shift to the right. C. become less elastic. D. remain the same since entering firms serve other customers in the market.

B. shift to the right.

One major barrier to entry under pure monopoly arises from _____. A. the availability of close substitutes for a product. B. the cost of the infrastructure needed to produce. C. the price-taking ability of the monopoly. D. diseconomies of scale.

B. the cost of the infrastructure needed to produce.

If a firm operating in a perfectly competitive industry is confronted with an equilibrium market price of $5, its marginal revenue A. may be either greater or less than $5. B. will also be $5. C. will be less than $5. D. will be greater than $5.

B. will also be $5.

Which of the following shows the combinations of goods or services that a person can purchase? A. Demand line B. Production possibility line C. Budget line D. Indifference curve

C. Budget line

Which factor could contribute to a firm experiencing economies of scale? A. A rising long-run average total cost B. The law of diminishing marginal returns C. Productivity gains from more specialized labor D. Deterioration of information and control within a firm

C. Productivity gains from more specialized labor

If all resources used in the production of a product are increased by 20% and total output increases by 20%, then the firm must be experiencing A. economies of scale. B. diseconomies of scale. C. constant returns to scale. D. increasing average total costs.

C. constant returns to scale.

Variable costs are A. sunk costs. B. costs that change every day. C. costs that change with the amount of output a firm produces. D. the change in total cost associated with the production of an additional unit of output.

C. costs that change with the amount of output a firm produces.

It is a "given" that an individual firm selling in a perfectly competitive market will take the market price because A. the firm's demand curve is downward-sloping. B. there are no good substitutes for the firm's product. C. each producer supplies a negligible fraction of total market. D. product differentiation is reinforced by extensive advertising.

C. each producer supplies a negligible fraction of total market.

Which set of characteristics below best describes the basic features of monopolistic competition? A. easy entry, many firms, and standardized products B. barriers to entry, few firms, and differentiated products C. easy entry, many firms, and differentiated products D. easy entry, few firms, and standardized products

C. easy entry, many firms, and differentiated products

In an oligopolistic market there are A. many buyers. B. few buyers. C. few sellers. D. many sellers.

C. few sellers.

If a product has a diminishing, but positive, marginal utility, then total utility A. decreases at an increasing rate. B. will become negative. C. increases at a diminishing rate. D. decreases at a diminishing rate.

C. increases at a diminishing rate

A perfectly competitive firm should continue to operate even at a loss in the short run if A. its output is above the break-even point. B. its revenues are less than its fixed costs. C. it can cover its variable costs of production. D. it has some fixed costs that cannot be brought down to zero.

C. it can cover its variable costs of production.

The goal of product differentiation and advertising in monopolistic competition is to make A. the firm allocatively efficient even if it is not productively efficient. B. the firm productively efficient even if it is not allocatively efficient. C. price less of a factor and product differences more of a factor in consumer purchases. D. price more of a factor and product differences less of a factor in consumer purchases.

C. price less of a factor and product differences more of a factor in consumer purchases.

In the long run, the economic profits for a monopolistically competitive firm will be A. the same as the profits for a monopolist. B. slightly less than the profits of a monopolist. C. the same as the profits for a purely competitive firm. D. slightly more than the profits of a purely competitive firm.

C. the same as the profits for a purely competitive firm.

Which cannot be a characteristic of an oligopolistic industry? A. differentiated products B. a large number of consumers C. significant barriers to entry D. a perfectly elastic firm demand curve

D. a perfectly elastic firm demand curve

At any level of output A. average variable cost will exceed average total cost in the short run. B. marginal cost will exceed average variable cost by the amount of the average fixed cost. C. average variable cost will exceed average fixed cost by the amount of the average total cost. D. average total cost will exceed average variable cost by the amount of the average fixed cost.

D. average total cost will exceed average variable cost by the amount of the average fixed cost.

When firms in an industry reach an agreement to fix prices, divide up market share, or otherwise restrict competition, they are practicing the strategy of A. interindustry competition. B. limit pricing. C. price leadership. D. collusion.

D. collusion.

The economic incentive for third-degree price discrimination is based upon _____. A. prejudices of business managers B. differences among sellers' costs C. a desire to evade antitrust legislation D. differences among buyers' elasticities of demand

D. differences among buyers' elasticities of demand

What is the most likely effect of the development of DVDs, rental movies, and online movie streaming on the movie theater industry? A. decreased costs of producing movies B. increased demand for movie theater tickets C. movie theater tickets become an inferior good D. increased price elasticity of demand for movie theater tickets

D. increased price elasticity of demand for movie theater tickets

Many people believe that pure monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing pure monopoly occurs where ____. A. marginal cost equals average revenue B. marginal revenue equals average cost C. average total cost equals average revenue D. marginal revenue equals marginal cost

D. marginal revenue equals marginal cost

Which of the following is a characteristic of monopolistic competition? A. standardized product B. a relatively small number of firms C. absence of nonprice competition D. relatively easy entry

D. relatively easy entry

Which phrase would be most characteristic of pure monopoly? A. close substitutes B. efficient advertiser C. price taker D. single seller

D. single seller

If a cartel is successful A. the consumers will pay lower prices. B. the consumers will have more goods and services to choose from. C. the firms will lose profits in a perfectly competitive market. D. the firms will act like a monopoly.

D. the firms will act like a monopoly.