ECON EXAM
Economic profit is equal to total revenue minus the
opportunity cost of producing goods and services
In calculating accounting profit, accountants typically don't include
opportunity costs that do not involve an outflow of money.
When a monopolist reduces the quantity of output it produces and sells, the
price of its output increases.
Refer to Scenario 14-5. As a result of the increase in the demand for tomatoes, we would predict that in the short run that the
price of tomatoes would rise.
When buyers in a competitive market take the selling price as given, they are said to be
price takers.
Total revenue equals
price x quantity.
For a firm, the relationship between the quantity of inputs and quantity of output is called the
production function
In the short run for a particular market, there are 300 firms. Each firm has a marginal cost of $30 when it produces 200 units of output. $30 is above every firm's average variable cost. One point on the market supply curve is
quantity = 60,000; price = $30.
For a firm, the production function represents the relationship between
quantity of inputs and quantity of output.
A total-cost curve shows the relationship between the
quantity of output produced and the total cost of production
A total-cost curve shows the relationship between the
quantity of output produced and the total cost of production.
When firms have an incentive to exit a competitive market, their exit will
raise the profits of the firms that remain in the market.
Explicit costs .
require an outlay of money by the firm.
The legislation passed by Congress in 1890 to reduce the market power of large and powerful "trusts" was the
Sherman Act.
Which of the following is an example of public ownership of a monopoly?
U.S. Postal Service
Which of the following is not a reason for the existence of a monopoly?
diseconomies of scale
In a market characterized by monopoly, the market demand curve is
downward sloping.
A monopoly chooses to supply the market with a quantity of a product that is determined by the intersection of the
marginal revenue and marginal cost curves.
Competitive firms that earn a loss in the short run should
shut down if P < AVC.
When economists refer to a production cost that has already been committed and cannot be recovered, they use the term
sunk cost.
Which of these types of costs can be ignored when an individual or a firm is making decisions?
sunk costs
When fixed costs are ignored because they are irrelevant to a business's production decision, they are called
sunk costs.
Entry into a market by new firms will increase the
supply of the good.
If a monopoly market were to be transformed into a competitive market, the result would be that
All of the above would be true.
When a monopolist chooses the output that maximizes profits, we know that MR = MC and also that P > MR. This is inefficient because
the monopolist fails to make transactions where the marginal benefit is greater than the marginal cost.
The first major piece of antitrust legislation was the
Sherman Act.
Refer to Table 14-5. For this firm, the average revenue when 14 units are produced and sold is
$11.
Refer to Figure 14-7. Suppose the price of the good is $175. If the firm produces and sells 515 units of output, its total revenue is
$90,125.
Which of the following is an example of a barrier to entry? (i) A key resource is owned by a single firm. (ii) The costs of production make a single producer more efficient than a large number of producers. (iii) The government has given the existing monopolist the exclusive right to produce the good.
(i), (ii), and (iii)
Refer to Figure 14-10. If there are 500 identical firms in this market, what is the value of Q1?
150,000
Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to produce 181 units of output per day when 16 workers are hired, holding other inputs fixed. The marginal product of the 16th worker is
16 units of output
Table 13-3
2
Riva crafts and sells hard cider as a part-time job. She can bottle and sell four cases in a week. She is considering hiring her friend Atul to help her. Together, Riva and Atul can bottle and sell seven cases per week. What is Atul's marginal product?
3 cases
Refer to Table 13-7. What is total output when 1 worker is hired?
40
Refer to Figure 14-9. If there are 600 identical firms in this market, what is the value of Q1?
60,000
Refer to Figure 15-17. Which of the following areas represents the consumer surplus from this profit-maximizing monopolist?
ABE
A seller in a competitive market
All of the above are correct.
If your local gasoline station raised its price by 20 percent, its sales of gasoline would decrease substantially because your local gas station
All of the above are correct.
Refer to Figure 14-7. Let Q represent the quantity of output and suppose the price of the good is $125. Then marginal revenue is $125 at
All of the above are correct.
A student might describe information about the costs of production as
All of the above could be correct
Patent and copyright laws encourage
Both a and b are correct.
When firms are neither entering nor exiting a perfectly competitive market,
Both a and b are correct.
Explicit costs do not require an outlay of money by the firm.
Both b and c
Which of the following is an example of price discrimination?
Hotel rates for AAA members are lower than for nonmembers.
Refer to Figure 14-7. Let Q represent the quantity of output and suppose the price of the good is $125. Then marginal revenue is
None of the above are correct.
Which of the following statements is correct?
The demand curve facing a competitive firm is horizontal, whereas the demand curve facing a monopolist is downward sloping.
Which of the following firms is the closest to being a perfectly competitive firm?
a hot dog vendor in New York
Which of the following is a characteristic of a monopoly?
a product without close substitutes
Which of the following firms is the closest to being a perfectly competitive firm?
a wheat farmer in Kansas
Foregone investment opportunities are an example of
an implicit cost
For a competitive firm,
average revenue equals marginal revenue.
For a monopoly,
average revenue exceeds marginal revenue.
The fundamental cause of monopoly is
barriers to entry.
Who is a price taker in a competitive market?
both buyers and sellers
Splitting up a monopoly is often justified on the grounds that
competition is inherently efficient.
A firm that has little ability to influence market prices operates in a
competitive market.
The social cost of a monopoly is equal to its
deadweight loss.
As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for the good
decreases.
Suppose that a professional photographer takes a prize-winning digital photo. She can sell a 5"x7" color print of the photo for $10. She can also sell the digital file for $20. There are 500 people willing to buy the color print and 2,000 people willing to buy the digital file. Assume the costs to the photographer are zero and that the people who purchase the digital file cannot resell the file itself or any prints made from it. What should she do in order to maximize her profits?
earn $45,000 by selling both the color prints and the digital files at their respective prices
Refer to Figure 15-1. The shape of the average total cost curve in the figure suggests an opportunity for a profit-maximizing monopolist to take advantage of
economies of scale.
Patent and copyright laws
encourage creative activity.
For a firm in a perfectly competitive market, the price of the good is always
equal to marginal revenue.
A market might have an upward-sloping long-run supply curve if
firms have different costs.
Which of the following is not a characteristic of a monopoly?
free entry and exit
Competitive markets are characterized by
free entry and exit by firms.
Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for
government-created monopolies.
As a general rule, when accountants calculate profit they account for explicit costs but usually ignore
implicit costs.
The marginal product of any input is the
increase in total output obtained from one additional unit of that input.
A restaurant that has market power can
influence the market price for the meals it sells.
A competitive firm
is a price taker, whereas a monopolist is a price maker.
Suppose that Christine owns her own CPA firm. She uses only two inputs in her business: her hours worked (labor) and a computer (capital). In the short run, Christine most likely considers
labor to be variable and capital to be fixed
Economists assume that the typical person who starts her own business does so with the intention of
maximizing profits.
Deadweight loss
measures monopoly inefficiency.
Profit is defined as total revenue
minus total cost.
Suppose ABC Aluminum Inc. owns 80% of the world's bauxite, a mineral used in the production of aluminum. Which of the following reasons describes the fundamental barrier to entry for the aluminum industry?
monopoly resources
When a firm experiences continually declining average total costs, the firm is a
natural monopoly.
When a firm's average total cost curve continually declines, the firm is a
natural monopoly.
When a single firm can supply a product to an entire market at a lower cost than could two or more firms, the industry is called a
natural monopoly.
In a competitive market,
no single buyer or seller can influence the price of the product.
Suppose that a competitive market is initially in equilibrium. Then demand increases. If some resources used in production are not available in sufficient quantities for entering firms,
the long-run market supply curve will be upward sloping.
A natural monopoly arises when
there are economies of scale over the relevant range of output.
The market value of the inputs a firm uses is called
total cost
Profit is defined as
total revenue minus total cost.
When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is
upward sloping.
Analyzing the behavior of the firm enhances our understanding of
what decisions lie behind the market supply curve.