Econ Exam 2
Suppose that a pure monopolist can sell 4 units of output at $2 per unit and 5 units at $1.75 per unit. The monopolist will produce and sell the fifth unit if its marginal cost is
$.75 or less.
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000Annual lease on building = $22,000Annual revenue from operations = $380,000Payments to workers = $120,000Utilities (electricity, water, disposal) costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's implicit costs, including a normal profit, are
$136,000.
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's explicit costs are
$150,000.
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000Annual lease on building = $22,000Annual revenue from operations = $380,000Payments to workers = $120,000Utilities (electricity, water, disposal) costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's accounting profit is
$230,000.
Answer the question on the basis of the accompanying table that shows average total costs (ATC) for a manufacturing firm whose total fixed costs are $10. Output ATC 1 $40 2 27 3 29 4 31 5 38 The marginal cost of the fourth unit of output is
$37.
Suppose that a pure monopolist can sell 20 units of output at $10 per unit and 21 units at $9.75 per unit. The marginal revenue of the 21st unit of output is
$4.75.
Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are
$5,000.
Answer the question on the basis of the following cost data. Output Total Cost 0 $24 1 33 2 41 3 48 4 54 5 61 6 69 The average fixed cost of producing 3 units of output is
$8.
Answer the question on the basis of the following cost data. Output Total Cost 0 $24 1 33 2 41 3 48 4 54 5 61 6 69 The marginal cost of producing the sixth unit of output is
$8.
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000Annual lease on building = $22,000Annual revenue from operations = $380,000Payments to workers = $120,000Utilities (electricity, water, disposal) costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's economic profit is
$94,000.
Refer to the accompanying diagram. At the profit-maximizing output, total revenue will be
0AHE.
According to the accompanying diagram, at the profit-maximizing output, total variable cost is equal to
0CFE.
Firm Market Share (%) A 20 B 20 C 20 D 20 E 10 F 10 Refer to the data. The Herfindahl index for the industry is
1,800.
The Herfindahl index for a pure monopolist is
10,000.
If the four-firm concentration ratio in an oligopolistic industry is 100 percent and each firm has an equal percentage of sales, the Herfindahl index is
2,500.
Refer to the short-run data in the accompanying graph. The profit-maximizing output for this firm is
320 units.
Assume the top six firms comprising an industry have market shares of 10, 8, 8, 5, 5, and 4 percent. The remaining 20 firms each have market shares of 2 percent. The Herfindahl index for this industry is
374.
Which of the following is correct?
A purely competitive firm is a "price taker," while a monopolist is a "price maker."
Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct?
AP continues to rise so long as TP is rising.
Refer to the diagram. At output level Q, total fixed cost is
BCDE.
According to the accompanying diagram, at the profit-maximizing output, total fixed cost is equal to
BCFG.
Which of the following definitions is correct?
Economic profit = accounting profit − implicit costs.
Which of the following statements is correct?
Economic profits induce firms to enter an industry; losses encourage firms to leave.
Which of the following distinguishes the short run from the long run in pure competition?
Firms can enter and exit the market in the long run but not in the short run.
Use your basic knowledge and your understanding of market structures to answer this question. Which of the following companies most closely approximates a differentiated oligopolist in a highly concentrated industry?
Ford Motor Company
Which of the following statements is correct?
In seeking the profit-maximizing output, the pure monopolist underallocates resources to its production.
Which of the following is characteristic of a pure monopolist's demand curve?
It is the same as the market demand curve.
The short-run supply curve of a purely competitive producer is based primarily on its
MC curve.
In the figure, curves 1, 2, 3, and 4 represent the
MC, ATC, AVC, and AFC curves, respectively.
If profits are maximized (or losses minimized), which of the following conditions is common to both unregulated monopoly and pure competition?
MR = MC
Which of the following is correct?
Marginal product rises faster than average product and also falls faster than average product.
Which of the following will not hold true for a competitive firm in long-run equilibrium?
P equals AFC.
Refer to the diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is
P2.
Which of the following is characteristic of a purely competitive seller's demand curve?
Price and marginal revenue are equal at all levels of output.
Use your basic knowledge and your understanding of market structures to answer this question. Which of the following companies most closely approximates a monopolistic competitor?
Subway Sandwiches
What do economies of scale, the ownership of essential raw materials, and patents have in common?
They are all barriers to entry.
A purely competitive seller is
a "price taker."
The term oligopoly indicates
a few firms producing either a differentiated or a homogeneous product.
If there are significant economies of scale in an industry, then
a firm that is large may be able to produce at a lower unit cost than can a small firm.
In the long run, a profit-maximizing monopolistically competitive firm sets it price
above marginal cost.
In the short run, a profit-maximizing monopolistically competitive firm sets it price
above marginal cost.
Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its
accounting profits were $0 and its economic losses were $500,000.
Refer to the diagram, where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If Beta commits to a high-price policy, Alpha will gain the largest profit by
adopting a low-price policy.
Nonprice competition refers to
advertising, product promotion, and changes in the real or perceived characteristics of a product.
OPEC provides an example of
an international cartel.
An increasing-cost industry is associated with
an upsloping long-run supply curve.
Suppose a purely competitive, increasing-cost industry is in long-run equilibrium. Now assume that a decrease in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price
and industry output will be less than the initial price and output.
The law of diminishing returns indicates that
as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.
The marginal revenue curve for a monopolist
becomes negative when output increases beyond some particular level.
Refer to the diagram for a purely competitive producer. The firm will produce at a loss at all prices
between P2 and P3.
Under pure competition, in the long run
both allocative efficiency and productive efficiency are achieved.
Refer to the diagram for a pure monopolist. Monopoly price will be
c.
A perfectly elastic demand curve implies that the firm
can sell as much output as it chooses at the existing price.
Refer to the diagram, where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. Which cell represents a Nash equilibrium?
cell D
Suppose you find that the price of your product is less than minimum AVC. You should
close down because, by producing, your losses will exceed your total fixed costs.
The kinked-demand curve of an oligopolist is based on the assumption that
competitors will follow a price cut but ignore a price increase.
Suppose an oligopolistic producer assumes its rivals will ignore a price increase but match a price cut. In this case the firm perceives its
demand curve as kinked, being steeper below the going price than above.
The supply curve of a pure monopolist
does not exist because prices are not "given" to a monopolist.
The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.
downsloping; perfectly elastic
The mutual interdependence that characterizes oligopoly arises because
each firm in an oligopoly depends on its own pricing strategy and that of its rivals.
Refer to the diagram, where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If both firms follow a high-price policy,
each will realize a $20 million profit.
Oligopolistic firms engage in collusion to
earn greater profits.
We would expect an industry to expand if firms in that industry are
earning economic profits.
The four-firm sales concentration ratio for an industry measures the
extent to which the four largest firms dominate the production of a good.
The monopolistic competition model assumes that
firms will engage in nonprice competition.
Which of the following is most likely to be an implicit cost for Company X?
forgone rent from the building owned and used by Company X
Which of the following is most likely to be a variable cost?
fuel and power payments
Refer to the diagram. Equilibrium output is
g
The Herfindahl index
gives much greater weight to larger firms than to smaller firms in an industry.
Accounting profits are typically
greater than economic profits because the former do not take implicit costs into account.
A monopolistically competitive firm has a
highly elastic demand curve.
The copper, aluminum, cement, and industrial alcohol industries are examples of
homogeneous oligopoly.
Prices are likely to be least flexible
in oligopoly.
Interindustry competition means that
in some markets, the producers of a particular product might face competition from products produced by other industries.
The pure monopolist's demand curve is relatively elastic
in the price range where marginal revenue is positive.
In the United States cartels are
in violation of the antitrust laws.
If a purely competitive constant-cost industry is realizing economic profits, we can expect industry supply to
increase, output to increase, price to decrease, and profits to decrease.
Cartels are difficult to maintain in the long run because
individual members may find it profitable to cheat on agreements.
A decreasing-cost industry is one in which
input prices fall or technology improves as the industry expands.
As a general rule, oligopoly exists when the four-firm concentration ratio
is 40 percent or more
A monopolistically competitive firm's marginal revenue curve
is downsloping and lies below the demand curve.
The demand curve faced by a pure monopolist
is less elastic than that faced by a single purely competitive firm.
Game theory
is the analysis of how people (or firms) behave in strategic situations.
The nondiscriminating pure monopolist's demand curve
is the industry demand curve.
A significant difference between a monopolistically competitive firm and a purely competitive firm is that the
latter's demand curve is perfectly elastic.
A natural monopoly occurs when
long-run average costs decline continuously through the range of demand.
A monopolistically competitive industry combines elements of both competition and monopoly. The competition element results from
low entry barriers.
In a decreasing-cost industry,
lower demand leads to higher long-run equilibrium prices.
Monopolistic competition means
many firms producing differentiated products.
A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating
marginal revenue and marginal cost.
For a pure monopolist, the relationship between total revenue and marginal revenue is such that
marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing.
For a purely competitive seller, price equals
marginal revenue. average revenue. total revenue divided by output.
In the diagram, curves 1, 2, and 3 represent the
marginal, average, and total product curves respectively.
When a firm is maximizing profit, it will necessarily be
maximizing the difference between total revenue and total cost.
In the short run, a monopolist's economic profits
may be positive or negative depending on market demand and cost conditions.
Concentration ratios
may understate the degree of competition because they ignore imported products.
An industry comprising 40 firms, none of which has more than 3 percent of the total market for a differentiated product, is an example of
monopolistic competition.
The restaurant, legal assistance, and clothing industries are each illustrations of
monopolistic competition.
Under monopolistic competition, entry to the industry is
more difficult than under pure competition but not nearly as difficult as under pure monopoly.
The demand curve of a monopolistically competitive producer is
more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.
Which of the following is a unique feature of oligopoly?
mutual interdependence
At its profit-maximizing output, a pure nondiscriminating monopolist achieves
neither productive efficiency nor allocative efficiency.
In long-run equilibrium, a monopolistically competitive producer achieves
neither productive efficiency nor allocative efficiency.
Suppose that a particular industry has a four-firm concentration ratio of 85 and a Herfindahl index of 3,000. Most likely, this industry would achieve
neither productive efficiency nor allocative efficiency.
If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then
new firms will enter this market.
Pure monopolists may obtain economic profits in the long run because
of barriers to entry.
Oligopoly is more difficult to analyze than other market models because
of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.
An industry comprising a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions, is called
oligopoly.
Firm Market Share(%) A 40 B 30 C 20 D 5 E 5 This industry shown in this table illustrates
oligopoly.
Price discrimination is
only illegal if used to lessen or eliminate competition.
Concentration ratios measure the
percentage of total industry sales accounted for by the largest firms in the industry.
Suppose that Betty's Beads is a typical firm operating in a perfectly competitive market. Currently Betty's MR = $15, MC = $12, ATC = $10, and AVC = $8. Based on this information, we can conclude that
potential new firms will be encouraged by Betty's success to enter the market.
Comparing a pure monopoly and a purely competitive firm with identical costs, we would find in long-run equilibrium that the pure monopolist's
price and average total cost would be higher, but output would be lower.
Which of the following is not a characteristic of pure competition?
pricing strategies by firms
A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should
produce because the resulting loss is less than its TFC.
Differentiated oligopoly exists where a small number of firms are
producing goods that differ in terms of quality and design.
A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from
product differentiation.
Which of the following is most likely to be a fixed cost?
property insurance premiums
In which of these continuums of degrees of competition (highest to lowest) is monopolistic competition properly placed?
pure competition, monopolistic competition, oligopoly, pure monopoly
In which of the following industry structures is the entry of new firms the most difficult?
pure monopoly
Output Marginal Revenue Marginal Cost 0 -- -- 1 $16 $10 2 16 9 3 16 13 4 16 17 5 16 21 The data in the accompanying table indicates that this firm is selling its output in a(n)
purely competitive market.
Which of the following is not a basic characteristic of monopolistic competition?
recognized mutual interdependence
Which of the following is not a possible source of natural monopoly?
rent-seeking behavior
A constant-cost industry is one in which
resource prices remain unchanged as output is increased.
Long-run competitive equilibrium
results in zero economic profits.
Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm
should continue producing in the short run but leave the industry in the long run if the situation persists.
When LCD televisions first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that
the LCD television industry is a decreasing-cost industry.
Refer to the diagram for a purely competitive producer. The firm's short-run supply curve is
the bcd segment and above on the MC curve.
The basic characteristic of the short run is that
the firm does not have sufficient time to change the size of its plant.
Implicit and explicit costs are different in that
the former refer to nonexpenditure costs and the latter to monetary payments.
If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes,
the industry would more closely approximate pure competition.
Which of the following best approximates a pure monopoly?
the only grocery store in a small isolated town
The term productive efficiency refers to
the production of a good at the lowest average total cost.
The term allocative efficiency refers to
the production of the product mix most desired by consumers.
Normal profit is
the return to the entrepreneur when economic profits are zero.
Suppose the market for corn is a purely competitive, constant-cost industry that is in long-run equilibrium. Now assume that an increase in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price will be
the same as the initial equilibrium price, but the new industry output will be greater than the original output.
Price discrimination refers to
the selling of a given product to different customers at different prices that do not reflect cost differences.
In a purely competitive industry,
there may be economic profits in the short run but not in the long run.
The MR = MC rule applies
to firms in all types of industries.
Accounting profits equal total revenue minus
total explicit costs.
Firms seek to maximize
total profit.
A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its
total variable costs.
The amount of calendar time associated with the long run
varies from industry to industry.
If a nondiscriminating imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue
will be less than $35.
