Test 4 Chapter Prep
Which of the following firms is not an example of a monopolistically competitive market? A. Gas stations B. Automobile producers C. Supermarkets D. Makers of women's clothing
Automobile producers
Which of the following is not true for a firm in perfect competition? A. Profit equals total revenue minus total cost. B. Price equals average revenue. C. Marginal revenue equals the change in total revenue from selling one more unit. D. Average revenue is greater than marginal revenue.
Average revenue is greater than marginal revenue.
A trademark is A. a patent on a firm's product. B. a legal right to position a firm's product in high traffic public areas such as airports and post offices. C. a legal instrument which grants a firm the right to differentiate its product. D. a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product.
a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product.
Why do most firms in monopolistic competition typically make zero profit in the long run? A. because the lack of entry barriers would compete away profits B. because firms do not produce at their minimum efficient scale C. because the total market is not large enough to accommodate so many firms D. because firms produce differentiated products
because the lack of entry barriers would compete away profits
Is a monopolistically competitive firm productively efficient? A. Yes, because price equals average total costs. B. No, because it does not produce at minimum average total cost. C. No, because price is greater than marginal cost. D. Yes, because it produces where marginal cost equals marginal revenue.
No, because it does not produce at minimum average total cost.
If the firm chose to produce at price P1, the firm would A. lose an amount equal to its fixed costs. B. break even. C. lose an amount more than fixed costs. Your answer is not correct. D. losean amount less than fixed costs.
lose an amount equal to its fixed costs.
In monopolistic competition there is/are A. only one seller who faces a downward−sloping demand curve. B. many sellers who each face a perfectly elastic demand curve. C. many sellers who each face a downward−sloping demand curve. D. a few sellers who each face a downward−sloping demand curve.
many sellers who each face a downward−sloping demand curve.
The key characteristics of a monopolistically competitive market structure include A. sellers have no incentive to advertise their products. B. barriers to entry are strong. C. many small (relative to the total market) sellers acting independently. D. all sellers sell a homogeneous product.
many small (relative to the total market) sellers acting independently.
A perfectly competitive firm's supply curve is its A. marginal cost curve. B. marginal cost curve above its minimum average variable cost. C. marginal cost curve above its minimum average total cost. D. marginal cost curve above the minimum of its average fixed cost.
marginal cost curve above its minimum average variable cost.
The price of a seller's product in perfect competition is determined by A. the individual demander. B. market demand and market supply. C. the individual seller. D. a few of the sellers.
market demand and market supply.
Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen? A. The firm will sell more output than its competitors. B. The firm's profits will increase. C. The firm's revenue will increase. D. The firm will not sell any output.
The firm will not sell any output.
For productive efficiency to hold, A. price must equal the marginal cost of the last unit produced. B. price must equal marginal revenue of the last unit sold. C. the average total cost must be minimized in production. D. the average variable cost must be minimized in production.
the average total cost must be minimized in production.
marginal revenue
the change in total revenue from an additional unit sold
A four−firm concentration ratio measures A. the fraction of employment of the four largest firms in an industry. B. how the four largest firms became so concentrated. C. the fraction of an industry's sales accounted for by the four largest firms. D. the production of any four firms in an industry.
the fraction of an industry's sales accounted for by the four largest firms.
I the long−run average cost curve is U−shaped, the optimal scale of production from society's viewpoint is A. the minimum efficient scale. B. one which guarantees economic profit. C. where firm profit is large enough to finance research and development. D. where maximum economic profit is earned by producers.
the minimum efficient scale.
What is the allocatively efficient output for a monopoly?
the point where price/demand = MC
If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is A. $5. B. $12.50. C. $125. D. $25.
$25
Monopolist shutdown rule A monopolist should shut down when price (average revenue) is less than _____ _____ _____ FOR EVERY OUTPUT LEVEL; in other words, it should shut down if the demand curve is entirely below the _____ _____ _____ curve
average variable cost
Economists agree that a monopolistically competitive market structure A. benefits consumers because firms to produce products that appeal to a wide range of consumers tastes. B. lowers consumers' utility because consumers pay a price higher than the marginal cost of production. C. is detrimental to society because it leads to a waste of scarce resources. D. can eliminate any excess capacity if all firms in the industry devote more funds to differentiating their products.
benefits consumers because firms to produce products that appeal to a wide range of consumers tastes.
When a credit card company offers different services with its card, like travel insurance for air travel tickets purchased with the credit card or product insurance for items purchased with the card, the credit card company is trying to A. shift the demand curve for competing firms to the right. B. convince customers that its card has greater value than those offered by rival firms. C. create a barrier to entry for competing firms. D. create a perfectly competitive market in which to sell its credit card.
convince customers that its card has greater value than those offered by rival firms.
Marginal revenue for an oligopolist is A. difficult to determine because the firm's demand curve is typically unknown. B. downward sloping beneath the firm's demand curve. C. identical to the demand for the firm's product. D. horizontal on a price−quantity diagram.
difficult to determine because the firm's demand curve is typically unknown.
A monopolistically competitive industry that earns economic profits in the short run will A. experience a rise in demand in the long run. B. experience the exit of old firms out of the industry in the long run. C. experience the entry of new rival firms into the industry in the long run. D. continue to earn economic profits in the long run.
experience the entry of new rival firms into the industry in the long run.
The perfectly competitive market structure benefits consumers because A. firms add a much smaller markup over average cost than firms in any other type of market structure. B. firms produce high-quality goods at low prices. C. firms are forced by competitive pressure to be as efficient as possible. D. firms do not produce goods at the lowest possible price in the long run.
firms are forced by competitive pressure to be as efficient as possible.
Long run equilibrium under monopolistic competition is similar to that under perfect competition in that A. price equals marginal revenue. B. firms earn normal profits. C. firms produce at the minimum point of their average cost curves. D. price equals marginal cost.
firms earn normal profits.
A monopolistically competitive firm will A. produce an output level that is productively and allocatively efficient. B. always produce at the minimum efficient scale of production. C. have some control over its price because its product is differentiated. D. charge the same price as its competitors do.
have some control over its price because its product is differentiated.
Both individual buyers and sellers in perfect competition A. can influence the market price by joining with a few of their competitors. B. have the market price dictated to them by government. C. can influence the market price by their own individual actions. D. have to take the market price as a given.
have to take the market price as a given.
The demand for an individual seller's product in perfect competition is A. the same as market demand. B. downward sloping. C. horizontal. D. vertical.
horizontal.
In theory, in the long run, monopolistically competitive firm earns zero profits. However, in reality there are some ways by which a firm can avoid losing profits. Which of the following is one such way? A. gradually increase the mark-up on the goods produced B. find a market niche and keep it as narrow as possible so as to prevent other producers from entering this market segment C. identify new markets and develop products precisely for those markets D. lower the price of its products to expand its market share
identify new markets and develop products precisely for those markets
Unlike a perfectly competitive firm, for a monopolistically competitive firm A. price ≠ marginal revenue for all output levels. B. price ≠ marginal cost for all output levels. C. marginal revenue = marginal cost at the profit maximizing output. D. price ≠ average revenue for all output levels.
price ≠ marginal REVENUE for all output levels.
For allocative efficiency to hold, A. price must equal the marginal cost of the last unit produced. B. the average total cost must be minimized in production. C. price must equal marginal revenue of the last unit sold. D. the average variable cost must be minimized in production.
price must equal the marginal cost of the last unit produced.
A monopolistically competitive firm maximizes profit where A. price = marginal revenue. B. marginal revenue > average revenue. C. price > marginal cost. D. total revenue > marginal cost.
price > marginal cost.
Which of the following describes a situation in which a good or service is produced at the lowest possible cost? A. productive efficiency B. profit maximization C. allocative efficiency D. marginal efficiency
productive efficiency
The reason that the fast-casual restaurant market is monopolistically competitive rather than perfectly competitive is because A. entry into the market is blocked. B. barriers to entry are very low. C. products are differentiated. D. there are many firms in the market.
products are differentiated.
All of the following are examples of oligopolistic markets except A. the broadcasting industry B. aircraft manufacture C. college bookstores D. seafood restaurant chains
seafood restaurant chains
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, then the firm A. should increase output. B. should increase price. C. is earning a profit. D. should shut down.
should shut down.
If a typical firm in a perfectly competitive industry is incurring losses, then A. all firms will continue to lose money. B. some firms will exit in the long run causing market supply to decrease and market price to fall, increasing losses for the remaining firms. C. some firms will exit in the long run causing market supply to decrease and market price to rise, increasing profits for the remaining firms. D. some firms will enter in the long run causing market supply to increase and market price to rise, increasing profit for all firms.
some firms will exit in the long run causing market supply to decrease and market price to rise, increasing profits for the remaining firms.
In the long run, a perfectly competitive market will A. supply whatever amount consumers will buy at an economic profit price. B. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. C. produce only the quantity of output that yields a long run profit for the typical firm. D. generate a long run equilibrium where the typical firm operates at a loss.
supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.
A major difference between monopolistic competition and perfect competition is A. that products are not standardized in monopolistic competition unlike in perfect competition. B. the barriers to entry in the two markets. C. the number of sellers in the markets. D. the degree by which the market demand curves slope downwards.
that products are not standardized in monopolistic competition unlike in perfect competition.
Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful? A. a rise in the price of a key input for example, a rise in the price of oil leads to higher energy costs B. the choice of technology used to produce the product C. the ability to produce the product at a lower cost D. changing consumer tastes
the ability to produce the product at a lower cost
If buyers of a monopolistically competitive product feel the products of different sellers are strongly differentiated, then A. the demand for each seller's product is perfectly elastic. B. the demand for each seller's product is relatively inelastic. C. the demand for each seller's product is relatively elastic. D. the demand for each seller's product is perfectly inelastic.
the demand for each seller's product is relatively inelastic.
Brand management refers to A. picking a brand name for a new product that will attract attention. B. selling the right to use a brand name in a particular market. C. efforts to reduce the cost of production. D. the efforts to maintain the differentiation of a product over time.
the efforts to maintain the differentiation of a product over time.
A very large number of small sellers who sell identical products imply A. the inability of one seller to influence the price. B. a multitude of vastly different selling prices. C. a downward sloping demand curve for each seller's product. D. chaos in the market
the inability of one seller to influence the price.
In perfect competition A. the market demand curve and the individual's demand curve are identical. B. the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic. C. the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic. D. the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic.
the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.
Refer to the diagram to the right. If this is a constant cost industry, what is the market price in the long run equilibrium?
the point where MC=ATC
What is the productively efficient output for the firm represented in the diagram?
the point where price = minimum ATC
What is the profit−maximizing rule for a monopolistically competitive firm? A. to produce a quantity such that price equals marginal cost B. to produce a quantity such that marginal revenue equals marginal cost C. to produce a quantity that maximizes total revenue D. to produce a quantity that maximizes market share
to produce a quantity such that marginal revenue equals marginal cost
Is a monopolistically competitive firm allocatively efficient? A. No, because price is greater than marginal cost. B. No, because it does not produce at minimum average total cost. C. Yes, because price equals average total costs. D. Yes, because it produces where marginal cost equals marginal revenue.
No, because price is greater than marginal cost.
If the market price is $30, should the firm represented in the diagram continue to stay open?
Yes, because it is covering part of its fixed cost. (AVC is $22, so it spends the excess $8 per item on part of the fixed cost)
If this firm continues to produce, what is likely to happen to the product's price in the long run? A. It will remain constant. B. It will increase. C. It will fall. D. Cannot be determined without information on its long run demand curve.
It will fall.
A perfectly competitive firm breaks even at a price equals to its minimum average total cost. True False
T
Suppose the fixed cost of production rises by $500 and if the price per unit is still $8. What happens to the firm's profit maximizing output level?
It will remain the same (because the firm can still cover the variable cost)
For a profit maximizing monopolistically competitive firm, for the last unit sold, the marginal cost of production is less than the marginal benefit received by a customer from the purchase of that unit. True False
True
Which of the following is a disadvantage of trademarking a firm's product? A. A trademark may become so widely used to denote a particular type of product that the trademark may no longer be a legally protected brand name. B. A trademark differentiates a firm's product. C. A trademark conveys information about the product to the public. D. A trademark does not affect demand for the firm's product.
A trademark may become so widely used to denote a particular type of product that the trademark may no longer be a legally protected brand name.
Which of the following statements is true about advertising by a monopolistically competitive firm? A. Advertising could make the monopolistic competitor's demand more inelastic but advertising has no effect on a perfect competitor's demand. B. Since the monopolistic competitor, like the perfect competitor, makes zero profit in the long run, it is a waste of resources to advertise its products. C. Advertising will be more beneficial if a monopolistic competitor colludes with other firms to advertise the products of the industry as a whole rather than an individual firm's product. D. Monopolistically competitive firms tend to shun advertising because advertising draws attention to the variety of differentiated products available in the industry.
Advertising could make the monopolistic competitor's demand more inelastic but advertising has no effect on a perfect competitor's demand.
Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry? A. Concentration ratios do not include sales in the United States by foreign firms. B. Concentration ratios do not address the fact that competition sometimes exists between firms in different industries. C. Concentration ratios assign weights to only the four largest firms in an industry. D. Concentration ratios are calculated for the national market, even though the competition in some industries is mainly local.
Concentration ratios assign weights to only the four largest firms in an industry. The rest ARE shortcomings.
In the short run, a profit maximizing firm's decision to produce should be guided by whether A. its total revenue exceeds its fixed cost. B. its total revenue covers its variable cost. C. it makes a profit. D. its marginal profit is maximized.
its total revenue covers its variable cost.
Which of the following is true of a typical firm in a monopolistically competitive industry? A. Each firm acts independently. B. Product differentiation allows a successful firm to emerge as a market leader in the industry. C. The more successful firms have an incentive to merge in order to exert greater market power. D. All firms have identical cost structures.
Each firm acts independently.
Which of the following is not a characteristic of a monopolistically competitive market structure? A. There are no barriers to entry of new firms. B. Each firm must react to actions of other firms. C. All sellers sell products that are differentiated. D. There is a large number of independently acting small sellers.
Each firm must react to actions of other firms.
In monopolistic competition, if a firm produces a highly desirable product relative to its competitors, the firm will be able to raise its price without losing any customers. True False
False
When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the income effect and a gain in revenue due to the substitution effect. True False
False
In long−run perfectly competitive equilibrium, which of the following is false? A. There is efficient, low−cost production at the minimum efficient scale. B. Economies of scale are exhausted. C. Economic surplus is maximized. D. Firms earn economic profit.
Firms earn economic profit.
Which of the following characteristics is not common to monopolistic competition and perfect competition? A. The market demand curve is downward sloping. B. Firms act to maximize profit. C. Entry barriers into the industry are low. D. Firms take market prices as given.
Firms take market prices as given.
Refer to the diagram to the right. What is the amount of profit if the firm produces Q2 units?
It is equal to the vertical distance c to g (NOT multiplied by Q2 units)
For a perfectly competitive firm, which of the following is not true at profit maximization? A. Price equals marginal cost. B. Market price is greater than marginal cost. C. Total revenue minus total cost is maximized. D. Marginal revenue equals marginal cost.
Market price is greater than marginal cost.
Which of the following is true for a firm with a downward−sloping demand curve for its product? A. Price, average revenue, and marginal revenue are all different. B. Price, average revenue, and marginal revenue are all equal. C. Price equals average revenue but is greater than marginal revenue. D. Price equals average revenue but is less than marginal revenue.
Price equals average revenue but is greater than marginal revenue.
Refer to the diagram to the right. What is the amount of excess capacity? A. Q4−Q2 units B. Q3−Q1 units C. Q4−Q3 units D. Q3−Q2 units
Q4−Q2 units (MC=ATC)-(MC=MR)
If the diagram represents a typical firm in the designer watch market, what is likely to happen in the long run? A. Firms will have to raise their prices to cover costs of production. B. Some firms will exit the market causing the demand to increase for firms remaining in the market. C. Inefficient firms will exit the market and new cost-efficient firms will enter the market. D. The firms that are making losses will be pu
Some firms will exit the market causing the demand to increase for firms remaining in the market.
Which of the following is a characteristic of an oligopolistic market structure? A. Each firm need not react to the actions of rivals. B. Each firm sells a unique product. C. It is easy for new firms to enter the industry. D. There are few dominant sellers.
There are few dominant sellers.
Which of the following is a characteristic of a monopoly? A. It is easy for new firms to enter the market. B. There is only one seller in the market. C. The firm has no control over price. D. The product is not unique.
There is only one seller in the market.
An increase in a firm's fixed cost will not change the firm's profit−maximizing output in the short run. True False
True
You have just opened a new Italian restaurant in your hometown where there are three other Italian restaurants. Your restaurant is doing a brisk business and you attribute your success to your distinctive northern Italian cuisine using locally grown organic produce. What is likely to happen to your business in the long run? A. If your success continues, you will be likely to establish a franchise and expand your market size. B. Your competitors are likely to change their menus to make their products more similar to yours. C. Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero. D. If you continue to maintain consistent quality, you will be able to earn profits indefinitely.
Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero.
A perfectly competitive firm earns a profit when price is A. equal to minimum average fixed costs. B. above minimum average total cost. C. equal to minimum average total cost. D. equal to minimum average variable cost.
above minimum average total cost.
Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it? A. allocative efficiency B. profit maximization C. productive efficiency D. marginal efficiency
allocative efficiency
The value of the four−firm concentration ratio that many economists consider indicative of the existence of an oligopoly in a particular industry is A. anything greater than 20 percent. B. anything greater than 30 percent. C. anything greater than 40 percent. D. anything greater than 10 percent.
anything greater than 40 percent.
If a firm shuts down in the short run, A. its loss equals zero. B. its total revenue is not large enough to cover its fixed costs. C. is makes zero economic profit. D. its loss equals its fixed cost.
its loss equals its fixed cost.
An oligopoly firm is similar to a monopolistically competitive firm in that A. both firms face the prisoners' dilemma. B. both operate in a market in which there are significant entry barriers. C. both firms have market power. D. both firms are in industries characterized by an interdependent firms.
both firms have market power.
Both buyers and sellers are price takers in a perfectly competitive market because A. each buyer and seller is too small relative to others to independently affect the market price. B. the price is determined by government intervention and dictated to buyers and sellers. C. each buyer and seller knows it is illegal to conspire to affect price. D. both buyers and sellers in a perfectly competitive market are concerned for the welfare of others.
each buyer and seller is too small relative to others to independently affect the market price.
The demand for each seller's product in perfect competition is horizontal at the market price because A. all the demanders get together and set the price. B. all the sellers get together and set the price. C. each seller is too small to affect the market price. D. the price is set by the government.
each seller is too small to affect the market price.
Assume price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $23 and marginal cost is $19, then to maximize profits the firm should A. decrease output. B. shut down. C. continue to produce the same quantity. D. increase output.
increase output.
A characteristic found only in oligopolies is A. interdependence of firms. B. break-even level of profits. C. products that are slightly different. D. independence of firms.
interdependence of firms.
Refer to the diagram to the right. The diagram depicts a firm A. in a constant-cost industry. B. in an increasing-cost industry. C. in long-run equilibrium. D. that is making short-run losses.
in long-run equilibrium.
If a perfectly competitive firm's price is above its average total cost, the firm A. is incurring a loss. B. is earning a profit. C. should shut down. D. is breaking even.
is earning a profit.
If a monopolistically competitive firm breaks even, the firm A. should advertise its product to stimulate demand. B. is earning an accounting profit and will have to pay taxes on that profit. C. expand production. D. is earning zero accounting and zero economic profit.
is earning an accounting profit and will have to pay taxes on that profit.
For a monopolistically competitive firm, marginal revenue A. is less than the price. B. and the price are unrelated. C. equals the price. D. is greater than the price.
is less than the price.
If a firm faces a downward−sloping demand curve, A. it will always make a profit. B. it must reduce its price to sell more units. C. the demand for its product must be inelastic. D. it has no control over the price or the quantity sold.
it must reduce its price to sell more units.
If a typical firm in a perfectly competitive industry is earning profits, then A. the number of firms in the industry will remain constant in the long run. B. new firms will enter in the long run causing market supply to decrease, market price to rise, and profits to increase. C. all firms will continue to earn profits. D. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.
new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.
Oligopolies exist and do not attract new rivals because A. of barriers to entry. B. there can be no product differentiation. C. the firms keep profits and prices so low that no rivals are attracted. D. of competition.
of barriers to entry.
A monopolistically competitive firm faces a downward−sloping demand curve because A. there are few substitutes for its product. B. of product differentiation. C. it is able to control price and quantity demanded. D. its market decisions are affected by the decisions of its rivals.
of product differentiation.
In an oligopoly market A. the pricing decisions of all other firms have no effect on an individual firm. B. individual firms pay no attention to the behavior of other firms. C. advertising of one firm has no effect on all other firms. D. one firm's pricing decision affects all the other firms.
one firm's pricing decision affects all the other firms.
When a monopolistically competitive firm cuts its price to increase its sales, it experiences a gain in revenue due to the A. output effect. B. substitution effect. C. price effect. D. income effect.
output effect.
An individual seller in perfect competition will not sell at a price lower than the market price because A. the seller would start a price war. B. demand for the product will exceed supply. C. the seller can sell any quantity she wants at the prevailing market price. D. demand is perfectly inelastic.
the seller can sell any quantity she wants at the prevailing market price.
Which of the following is the best example of a perfectly competitive industry? A. the steel market. B. the wheat market. C. the airplane market. D. the electricity market.
the wheat market.
An oligopolist differs from a perfect competitor in that A. there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power. B. there are no entry barriers in perfect competition but there are entry barriers in oligopoly. C. firms in an oligopoly do not produce homogeneous products while firms in perfect competition do. D. the market demand curve for a perfectly competitive industry is perfectly elastic but it is downward−sloping in an oligopolistic industry.
there are no entry barriers in perfect competition but there are entry barriers in oligopoly.
In the long run, if price is less than average cost, A. there is an incentive for firms to exit the market. B. there is profit incentive for firms to enter the market. C. the market must be in long-run equilibrium. D. there is no incentive for the number of firms in the market to change.
there is an incentive for firms to exit the market.
A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until A. the firm's demand curve is tangent to its average total cost curve. B. the firm's demand curve is perfectly elastic. C. the firm exits the market. D. the original firm is driven into bankruptcy.
the firm's demand curve is tangent to its average total cost curve.
A firm that successfully differentiates its product or lowers its average cost of production creates A. a perfectly inelastic demand curve for its product. B. economies of scale. C. entry barriers into its market. D. value for its customers.
value for its customers.
The firm will not produce in the short run if the output price falls below A. $8. Your answer is not correct. B. $4. C. $3.20. D. $2.80.
$2.80 (because it earns revenue equal to its variable cost at a quantity of 200)