Econ Test 2

Caroline sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.95 per knife for as many knives as Caroline is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $2.00, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.50. Assume Caroline is rational in deciding how many knives to sharpen. Her producer surplus is $0.95. $1.15. $1.30. $1.85.

$1.85.

Scenario 15-3 A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. Refer to Scenario 15-3. At Q = 500, the firm's profit is $13,000. $15,000. $17,000. $30,000.

$13,000.

A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of output for $9.98 per unit. The marginal revenue of the 151st unit of output is -$6.98. -$0.02. $2.45. $6.98.

$6.98.

In the short run, a firm operating in a competitive industry will produce the quantity of output where price equals marginal cost as long as the 1) price is less than average total cost. 2) marginal revenue exceeds the marginal cost. 3) price is greater than average variable cost. 4) price is greater than average fixed cost but less than average variable cost.

3) price is greater than average variable cost.

Which of the following statements best expresses a firm's profit-maximizing decision rule? 1) If marginal revenue is greater than marginal cost, the firm should increase its output. 2) If marginal revenue is less than marginal cost, the firm should decrease its output. 3) If marginal revenue equals marginal cost, the firm should continue producing its current level of output. 4) All of the above are correct.

4) All of the above are correct.

Which of the following is a characteristic of a natural monopoly? Fixed costs are typically a small portion of total costs. Average total cost declines over large regions of output. The product sold is a natural resource such as diamonds or water. All of the above are correct.

Average total cost declines over large regions of output.

Which of the following is not a difference between monopolies and perfectly competitive markets? Monopolies can earn profits in the long run while perfectly competitive firms break even. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves.

Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not.

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to the long-run equilibrium? an increase in demand for each firm a decrease in demand for each firm a downward shift in the marginal cost curve for each firm an upward shift in the marginal cost curve for each firm

a decrease in demand for each firm

Consumer surplus is the amount of a good consumers get without paying anything. amount a consumer pays minus the amount the consumer is willing to pay. amount a consumer is willing to pay minus the amount the consumer actually pays. value of a good to a consumer.

amount a consumer is willing to pay minus the amount the consumer actually pays.

A fundamental source of monopoly market power arises from perfectly elastic demand. perfectly inelastic demand. barriers to entry. availability of "free" natural resources, such as water or air.

barriers to entry.

A surplus results when a nonbinding price floor is imposed on a market. nonbinding price floor is removed from a market. binding price floor is imposed on a market. binding price floor is removed from a market.

binding price floor is imposed on a market.

The free entry and exit of firms in a monopolistically competitive market guarantees that both economic profits and economic losses can persist in the long run. both economic profits and economic losses disappear in the long run. economic profits, but not economic losses, can persist in the long run. economic losses, but not economic profits, can persist in the long run.

both economic profits and economic losses disappear in the long run.

For a profit-maximizing monopolistically competitive firm, marginal revenue equals marginal cost in the short run but not in the long run. the long run but not in the short run. both the short run and the long run. neither the short run nor the long run.

both the short run and the long run.

If the government levies a $500 tax per car on sellers of cars, then the price received by sellers of cars would decrease by less than $500. decrease by exactly $500. decrease by more than $500. increase by an indeterminate amount.

decrease by less than $500.

A tax on buyers will shift the demand curve upward by the amount of the tax. demand curve downward by the amount of the tax. supply curve upward by the amount of the tax. supply curve downward by the amount of the tax.

demand curve downward by the amount of the tax.

Drug companies are allowed to be monopolists in the drugs they discover in order to: allow drug companies to charge a price that is equal to their marginal cost. discourage new firms from entering the drug market. encourage research. allow the government to earn patent revenue.

encourage research.

Which of the following is a characteristic of monopolistic competition? ownership of a key resource by a single firm free entry identical product patents

free entry

Which of the following is not a characteristic of a monopoly? the seller has market power one seller free entry and exit a product without close substitutes

free entry and exit

To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which price equals marginal cost. marginal revenue equals marginal cost. average total cost is minimized. All of the above are correct.

marginal revenue equals marginal cost.

A tax imposed on the sellers of a good will raise the price paid by buyers and lower the equilibrium quantity. price paid by buyers and raise the equilibrium quantity. effective price received by sellers and lower the equilibrium quantity. effective price received by sellers and raise the equilibrium quantity.

price paid by buyers and lower the equilibrium quantity.

A monopolist maximizes profits by: producing an output level where marginal revenue equals marginal cost. charging a price equal to marginal revenue and marginal cost. charging a price where marginal cost equals average total cost. Both a and b are correct.

producing an output level where marginal revenue equals marginal cost.

If a price ceiling is not binding, then there will be a surplus in the market. there will be a shortage in the market. the market will be less efficient than it would be without the price ceiling. there will be no effect on the market price or quantity sold.

there will be no effect on the market price or quantity sold.

We can say that the allocation of resources is efficient if producer surplus is maximized. consumer surplus is maximized. total surplus is maximized. sellers' costs are minimized.

total surplus is maximized.

A $2.00 tax levied on the sellers of birdhouses will shift the supply curve upward by exactly $2.00. upward by less than $2.00. downward by exactly $2.00. downward by less than $2.00.

upward by exactly $2.00.

When a certain monopoly sets its price at $8 it sells 64 units. When the monopoly sets its price at $10 it sells 60 units. The marginal revenue for the firm over this range is $11. $22. $33. $44.

$22.

Scenario 15-3 A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. Refer to Scenario 15-3. At Q = 500, the firm's marginal cost is less than $30. $30. $34. greater than $34.

$30.

Scenario 15-3 A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. Refer to Scenario 15-3. The firm's profit-maximizing price is $30. between $30 and $34. between $34 and $60. $60.

$60.

Amanda inherited the only local cable TV/Internet company in town after her father passed away. The company has a local monopoly on the delivery of high-speed Internet service. The company is completely unregulated by the government and is therefore free to operate as it wishes. Assume that Amanda understands the true power of her new monopoly. Which of the following statements is (are) correct? (i) She will be able to set the price of high-speed Internet service at whatever level she wishes. (ii) The customers will be forced to purchase high-speed Internet service at whatever price she wants to set. (iii) She will be able to achieve any profit level that she desires. (i) only (ii) only (i) and (iii) only (i), (ii), and (iii)

(i) only

For a profit-maximizing monopolist, P > MR = MC. P = MR = MC. P > MR > MC. MR < MC < P.

P > MR = MC.

The defining characteristic of a natural monopoly is: constant marginal cost over the relevant range of output. economies of scale over the relevant range of output. constant returns to scale over the relevant range of output. diseconomies of scale over the relevant range of output.

economies of scale over the relevant range of output.

When a tax is placed on the buyers of a product, buyers pay more and sellers receive more than they did before the tax. more and sellers receive less than they did before the tax. less and sellers receive more than they did before the tax. less and sellers receive less than they did before the tax.

more and sellers receive less than they did before the tax.

A monopolist can sell 300 units of output for $45 per unit. Alternatively, it can sell 301 units of output for $44.60 per unit. The marginal revenue of the 301st unit of output is -$120.00. -$75.40. -$0.40. $75.40.

-$75.40.

Scenario 14-1 Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 14-1. At Q = 999, the firm's total costs equal 1) $10,985. 2) $10,990. 3) $10,995. 4) $10,999.

1) $10,985.

Which of the following statements best reflects a price-taking firm? 1) If the firm were to charge more than the going price, it would sell none of its goods. 2) The firm has an incentive to charge less than the market price to earn higher revenue. 3)The firm can sell only a limited amount of output at the market price before the market price will fall. 4)Price-taking firms maximize profits by charging a price above marginal cost.

1) If the firm were to charge more than the going price, it would sell none of its goods.

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then 1) an increase in output will increase the firm's profit. 2) a decrease in output will increase the firm's profit. 3) total revenue exceeds total cost. 4) total cost exceeds total revenue.

1) an increase in output will increase the firm's profit.

Robin owns a horse stables and riding academy and gives riding lessons for children at "pony camp." Her business operates in a competitive industry. Robin gives riding lessons to 20 children per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $100 per child. In order to maximize profits, Robin should 1) give riding lessons to more than 20 children per month. 2)give riding lessons to fewer than 20 children per month. 3)continue to give riding lessons to 20 children per month. 4)We do not have enough information to answer the question.

1) give riding lessons to more than 20 children per month.

Scenario 14-1 Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 14-1. To maximize its profit, the firm should 1) increase its output. 2) continue to produce 1,000 units. 3) decrease its output but continue to produce. 4) shut down.

1) increase its output.

Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $11.50 at the profit-maximizing output level, then in the long run 1) more firms will enter the market. 2) some firms will exit from the market. 3) the equilibrium price per bottle will rise 4) average total costs will rise.

1) more firms will enter the market.

Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its shrimp harvesting boat. The annual loan payment is $25,000 and the boat has a market (salvage) value that exceeds its outstanding loan balance. Prior to the 2010 shrimp harvesting season, Shrimp Galore's accountant predicted that at expected market prices for shrimp, Shrimp Galore would have a net loss of $75,000 dollars after paying all 2010 expenses (including the annual loan payment). In this case, Shrimp Galore should 1) produce nothing and experience a loss of $25,000. 2) produce nothing and experience a loss of $75,000. 3) continue to operate because expected profits will rise in the future. 4) continue to operate even though it predicts a loss of $75,000.

1) produce nothing and experience a loss of $25,000.

Which of the following is not a characteristic of a perfectly competitive market? 1) Firms are price takers. 2) Firms have difficulty entering the market. 3) There are many sellers in the market. 4) Goods offered for sale are largely the same.

2) Firms have difficulty entering the market.

You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $6 value on reading a book. 1) You should leave the theater since the net benefit from seeing the remainder of the show is -$20, while going home will earn you at least $8 of satisfaction. 2) You should stay and watch the remainder of the show. 3) You should go home and watch TV. 4) You should go home and read a book.

2) You should stay and watch the remainder of the show.

Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should 1) shut down her business in the short run but continue to operate in the long run. 2) continue to operate in the short run but shut down in the long run. 3) continue to operate in both the short run and long run. 4) shut down in both the short run and long run.

2) continue to operate in the short run but shut down in the long run.

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should 1) make more than 20 wedding cakes per month. 2) make fewer than 20 wedding cakes per month. 3) continue to make 20 wedding cakes per month. 4) We do not have enough information to answer the question.

2) make fewer than 20 wedding cakes per month.

Scenario 14-1 Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 14-1. At Q = 999, the firm's profits equal 1) $993. 2) $997. 3) $1,003. 4) $1,007.

3) $1,003.

Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current market price? 1) $9 2) $10 3) $11 4) $12

3) $11

Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has earned $4,500 in monthly revenue. In the short run, Susan should 1) shut down her business, and in the long run she should exit the industry. 2) continue to operate her business, but in the long run she should exit the industry. 3) continue to operate her business, but in the long run she will probably face competition from newly entering firms. 4) continue to operate her business, and she is also in long-run equilibrium.

3) continue to operate her business, but in the long run she will probably face competition from newly entering firms.

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the 1) production of the 100th unit of output increases the firm's profit by $3. 2) production of the 100th unit of output increases the firm's average total cost by $7. 3) firm's profit-maximizing level of output is less than 100 units. 4) production of the101st unit of output must increase the firm's profit by more than $3.

4) production of the101st unit of output must increase the firm's profit by more than $3.

In a competitive market with identical firms, 1) an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run. 2) firms cannot earn positive economic profit in either the short run or long run. 3) firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping. 4)free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

4)free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price rises to $25, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its 2) quantity of output is higher than it was previously. 3) average total cost is higher than it was previously. 4) marginal revenue is higher than it was previously. 5) All of the above are correct.

5) All of the above are correct.

Total surplus can be used to measure a market's efficiency. is the sum of consumer and producer surplus. is the value to buyers minus the cost to sellers. All of the above are correct.

All of the above are correct.

A monopolist maximizes profits by a) producing an output level where marginal revenue equals marginal cost. b) charging a price that is greater than marginal revenue. c) earning a profit of (P - MC) x Q. d) Both a and b are correct.

Both a and b are correct.

All else equal, what happens to consumer surplus if the price of a good decreases? Consumer surplus increases. Consumer surplus decreases. Consumer surplus is unchanged. Consumer surplus may increase, decrease, or remain unchanged.

Consumer surplus increases.

Which of the following statements regarding monopolistic competition is not correct? In the long-run equilibrium, price equals average total cost. In the long-run equilibrium, firms earn zero economic profit. In the long-run equilibrium, firms charge a price above marginal cost. In the long-run equilibrium, firms produce a quantity in excess of their efficient scale.

In the long-run equilibrium, firms produce a quantity in excess of their efficient scale.

A price ceiling will be binding only if it is set equal to the equilibrium price. above the equilibrium price. below the equilibrium price. either above or below the equilibrium price.

below the equilibrium price.

Producer surplus measures the: benefits to sellers of participating in a market. costs to sellers of participating in a market. price that buyers are willing to pay for sellers' output of a good or service. benefit to sellers of producing a greater quantity of a good or service than buyers demand.

benefits to sellers of participating in a market.

A reduction in a monopolist's fixed costs would decrease the profit-maximizing price and increase the profit-maximizing quantity produced. increase the profit-maximizing price and decrease the profit-maximizing quantity produced. not affect the profit-maximizing price or quantity. possibly increase, decrease or not affect profit-maximizing price and quantity, depending on the elasticity of demand.

not affect the profit-maximizing price or quantity.

Which of the following is not a characteristic of a monopoly? barriers to entry one seller one buyer a product without close substitutes

one buyer

A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that the firm is currently maximizing its profit. the profits of the firm are negative. firms are likely to leave this market in the long run. All of the above are correct.

the firm is currently maximizing its profit.

Each firm in a monopolistically competitive industry faces a downward-sloping demand curve because there are many other sellers in the market. there are very few other sellers in the market. the firm's product is different from those offered by other firms in the market. the firm faces the threat of entry into the market by new firms.

the firm's product is different from those offered by other firms in the market.