Price Theory Test 3

What is the value of the Lerner index under perfect competition?

0

As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200. You should

reduce output until marginal revenue equals marginal cost.

The profit maximizing level for all firms, regardless of industry structure, is the output level where

MR = MC

Which of the following is true at the output level where P=MC?

The monopolist is not maximizing profit and should decrease output

Marginal Revenue is the

added revenue a firm takes when it increases output by one additional unit

If price is between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is

continue operating, but plan to go out of business.

As other firms enter a monopoly's market power

declines

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity.

higher; smaller

For a monopolist, price

is greater than marginal revenue

A firm never operates

on the downward-sloping portion of its AVC curve.

Ronny's Pizza House operates in the perfectly competitive local pizza market. If the price of pizza cheese increases (ceteris paribus), what is the expected impact on Ronny's profit-maximizing output decision?

) Output decreases because the marginal cost curve shifts upward

One difference between a monopoly and a competitive firm is that

A monopoly faces a downward sloping demand curve

What happens in a perfectly competitive industry when economic profit is greater than zero?

A) Existing firms may get larger. B) New firms may enter the industry. C) Firms may move along their LRAC curves to new outputs. D) There may be pressure on prices to fall.

For a monopolist, changes in demand will lead to changes in

A) price with no change in output. B) output with no change in price. C) both price and quantity. D) any of the above can be true. Answer: D

Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit- maximizing outputs?

Marginal Revenue is less than price

Suppose your firm operates in a perfectly competitive market and decides to double its output. How does this affect the firm's marginal profit?

Marginal revenue increases but marginal cost remains the same

If current output is less than the profit-maximizing output, which must be true?

Marginal revenue is greater than marginal cost

An important distinction between perfect competition and a monopoly is that in

Monopoly, the firm faces the market demand curve

The demand curve for the product of a perfectly competitive firm is..

Perfectly elastic

For a monopolist to maximize profit, its..

Price exceeds marginal cost

A monopolist has determined that at the current level of output the price elasticity of demand is -0.15. Which of the following statements is true?

The firm should cut output

Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should

continue producing in the short run, but plan to go out of business in the long run.

When the marginal revenue curve cuts the horizontal axis

demand is unitary elastic

Market power guarantees profit

false, market power guarantees price greater than marginal cost

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the

firm's output is smaller than the profit maximizing quantity.

Producer surplus in a perfectly competitive industry is

the difference between revenue and variable cost.

The more elastic the demand facing a firm,

the lower the value of the Lerner index.

If the market price for a competitive firm's output doubles then

the marginal revenue doubles

When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that

the minimum value of the firm's average variable cost lies between $5 and $10

A few sellers may behave as if they operate in a perfectly competitive market if the market demand is

very elastic

If current output is less than the profit-maximizing output, then the next unit produced

will increase revenue more than it increases cost.

The more elastic the demand curve, a monopoly

will lose more sales as it raises its price

Which of following is a key assumption of a perfectly competitive market?

Each seller has a very small share of the market.

The relationship between the price that a perfectly competitive firm can charge buyers and the firm's marginal revenue is __________________ marginal revenue over all output

Equal to

Marginal Revenue for a perfectly competitive firm is

Horizontal

In a monopoly, the market demand curve is

The same as the demand curve facing the firm

At the profit-maximizing level of output, what is relationship between the total revenue (TR) and total cost (TC) curves?

They must have the same slope.

A monopolist has set her level of output to maximize profit. The firm's marginal revenue is $20, and the price elasticity of demand is -2.0. The firm's profit maximizing price is approximately:

$40

If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:

positive.

Use the following two statements to answer this question: I. For a monopolist, at every output level, average revenue is equal to price. II. For a monopolist, at every output level, marginal revenue is equal to price.

I is true, and II is false.

because of a patent, Alcoa is the only manufacturer of soda cans with a stay put tab. Alcoa can earn a profit on the sale of soda cans with stay put tabs

In the long run because entry into the new industry is blocked until the patent expires

Assume Dell Computer Company operates in a perfectly competitive market producing 5,000 computers a day. At this output level, price exceed marginal cost. To maximize profits, Dell should..

Increase their output

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as

P = MC.

Ronny's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Ronny's profit maximizing decisions?

Ronny's decision depends on the circumstances -- if their profits are larger than $250 per year, then the tax does not impact output; otherwise, Ronny's Pizza House will shut down.

If the demand for a firm's output is perfectly elastic, then the firm's Lerner Index equals

Zero

If a competitive firm's marginal costs always increase with output, then at the profit maximizing output level, producer surplus is

positive because price exceeds average variable costs.

The perfectly competitive firm's marginal revenue curve is

horizontal.

The XYZ Computer Company has a monopoly over the production of a specialized color printer. The company will find it profitable to reduce output as long as marginal revenue is

is less than marginal cost

In general, the quantity that maximizes revenue for the monopolist

is less than the quantity that maximizes profit

A profit- maximizing monopolist

is not guaranteed to make a positive profit

At the profit-maximizing level of output, marginal profit

is zero.

When the demand curve is downward sloping, marginal revenue is (monopoly)

less than price.

The monopolist's marginal revenue curve

lies below the demand curve

A firm maximizes profit by operating at the level of output where

marginal revenue equals marginal cost.

A monopolist has equated marginal revenue to zero. The firm has:

maximized revenue.

In the short run, a perfectly competitive firm earning positive economic profit is

on the upward-sloping portion of its ATC.

Marginal profit is negative when:

output exceeds the profit-maximizing level.

The demand curve facing a perfectly competitive firm is

perfectly horizontal.

Revenue is equal to

price times quantity

Monopoly power results from the ability to

set price above marginal cost.

The Lerner index measures

the amount of monopoly power a firm chooses to exercises when maximizing profits

For a monopolist to sell more units of output

the price must be reduced

The monopolist has no supply curve because

the quantity supplied at any particular price depends on the monopolist's demand curve.

The demand curve facing a perfectly competitive firm is

the same as its average revenue curve and its marginal revenue curve.

Marginal revenue, graphically, is

the slope of the total revenue curve at a given point