Unit 8 Exam - Imperfect Competition

Which of these statements is true about a firm with market power? a. If a firm with market power faces an elastic demand curve, a small change in price results in positive marginal revenue. b. All firms with market power face inelastic demand curves. c. A firm with market power can sell each unit of output at a different price. d. A firm with market power is guaranteed to be profitable.

a. If a firm with market power faces an elastic demand curve, a small change in price results in positive marginal revenue. If a firm with market power faces an elastic demand curve, a small reduction in price results in enough additional sales to more than make up for the revenue lost because all of the units that could have been sold at a higher price are now being sold at the new lower price.

Oil producing countries can operate as a cartel in all of the following ways except a. each country sets its profit maximizing price and quantity. b. they limit the international oil supply to keep prices elevated. c. they attempt to punish countries who cheat. d. make joint decisions.

a. each country sets its profit maximizing price and quantity. A cartel is a group of firms or countries acting together in an attempt to limit the supply and raise the price of their product. They try to collectively behave like a monopoly.

The following are all examples of rent-seeking practices except a. increasing the monthly rental rate for tenants in a building. b. bribing public officials. c. political lobbying. d. soft money contributions to political candidates.

a. increasing the monthly rental rate for tenants in a building. This action is a pricing activity in a competitive market. A rent-seeking activity is a non-price activity by a monopoly that attempts to maintain the monopoly.

For a monopolist, marginal revenue is a. less than the product's price. b. more than the product's price. c. equal to the product's price. d. equal to the average price.

a. less than the product's price. Marginal revenue is less than the product's price because the firm must lower its price for all previous units as it increases output. Therefore, with each price change marginal revenue changes. Marginal revenue is the change int total revenue for an additional unit sold.

Modeling a cartel as a prisoners' dilemma game shows that ____________________ may be rational even if ____________________. a. non-cooperation; cooperation benefits everyone b. cooperation; cooperation benefits everyone c. cooperation; cooperation damages everyone d. non-cooperation; cooperation damages everyone

a. non-cooperation; cooperation benefits everyone

If a monopolist sells 100 units for $10 per unit and has an average cost of $8 per unit, what is the firm's total cost? a. $1000 b. $800 c. $200 d. None of the above.

b. $800 Total costs are average costs multiplied by the outout: $8 × 100 = $800.

Examine the graph below. The profit-maximizing monopolist would produce _________ units of output. a. 100 b. 200 c. 250 d. 300

b. 200

Which of the following statements about elasticity is true? a. If a firm with market power faces an elastic demand curve, a small reduction in price will result in negative marginal revenue. b. Elasticity changes as the quantity demanded changes. c. A firm with market power does not need to be concerned about the elasticity of its demand curve. d. A firm with market power can determine the elasticity of its demand curve.

b. Elasticity changes as the quantity demanded changes. Elasticity generally decreases as the quantity demanded increases.

For a monopolist, which of the following statements about marginal revenue is true? a. For a monopolist, marginal revenue equals price. b. For a monopolist, marginal revenue depends on the elasticity of the demand curve. c. For a monopolist, marginal revenue is greater than price. d. For a monopolist, marginal revenue is not important.

b. For a monopolist, marginal revenue depends on the elasticity of the demand curve. For a monopolist, marginal revenue depends on the elasticity of the demand curve. At inelastic portions of the demand curve, selling one additional unit of product can actually result in negative marginal revenue (a decrease in total revenue) because to sell that additional unit, the monopolist had to reduce the price on all of the units he would have been able to sell at a higher price.

In a competitive market, the output and price combination that maximizes social value is at the point where a. MR > MC. b. MC = MR. c. MC > MR. d. total revenue is maximized.

b. MC = MR.

Which of the following assumptions is associated with monopolistic competition? a. There are few sellers. b. There are many sellers. c. Each seller produces the same product. d. There is only one firm in the industry.

b. There are many sellers.

Markets that have only a few producers that sell very similar goods are a. perfectly competitive markets. b. oligopolies. c. monopolistically competitive markets. d. monopolies.

b. oligopolies.

In the long run, a monopolistically competitive firm may not earn economic profits because a. high barriers to entry exist for other firms. b. other firms may enter the industry and and drive the price down. c. there are not enough buyers to ensure strong demand. d. each firm faces a horizontal demand curve.

b. other firms may enter the industry and and drive the price down.

The main problem with monopolies is their ability to a. undercut competitors' pricing. b. restrict output to level below the socially efficient level. c. manipulate the political system to their favor. d. force consumers to pay more than they are willing to pay.

b. restrict output to level below the socially efficient level. Monopolies restrict output and cause deadweight loss by blocking some trades.

Examine the graph below. If the monopolist prices and produces at the socially optimal level, it will a. earn economic profit. b. suffer a loss. c. earn normal profits. d. break even.

b. suffer a loss.

One method of government regulation of monopolies is to require the firm to price the product at its marginal cost and produce at the competitive output level. The problem with this scheme is a. the monopolist still causes a deadweight loss. b. the monopolist may have economic losses and exit the industry. c. the monopolist will increase its profit. d. some trades will be blocked.

b. the monopolist may have economic losses and exit the industry. In most cases, average costs will be greater than marginal costs at the point where marginal cost equals marginal revenue. The firm would have economic losses and exit the industry.

Examine the graph below. The profit-maximizing monopolist will have total revenue a. $2000. b. $3750. c. $4800. d. $5100.

c. $4800.

Examine the graph below. This monopolist is maximizing profits at a. Q1 and charging a price of P0. b. Q0 and charging a price of P0. c. Q1 and charging a price of P1. d. Q0 and charging a price of P1.

c. Q1 and charging a price of P1. The monopolist produces the output where MR equals MC. It then finds the price on its demand curve at that output level.

What is the difference between price and average cost? a. The difference between price and average cost is the marginal cost. b. The difference between price and average cost is profit. c. The difference between price and average cost is the profit per unit, or profit margin. d. The difference between price and average cost is fixed cost.

c. The difference between price and average cost is the profit per unit, or profit margin. The profit margin is the profit per unit, which is the difference between the per unit cost (the average total cost) and the revenue the firm receives for the unit of output, the price.

A natural monopoly exists when a. a firm owns all of a specific resource. b. a government grants an exclusive license to a firm. c. a firm's scale of operation is large relative to the market. d. a firm has the most market power.

c. a firm's scale of operation is large relative to the market.

Use the graph to answer the question. If the graph is a market for a monopoly, which area represents the consumer surplus? a. abcdef. b. cdef. c. ab. d. abcdg.

c. ab. Consumer surplus is the area above the price and under the demand curve.

In the long run, a monopolistic competitor will a. charge a price equal to marginal cost. b. will sell all its product at the market price. c. earn zero economic profit. d. operate at the lowest point on its ATC curve.

c. earn zero economic profit. The industry is likely to attract new entrants because of short-run profits. The price will fall and each firm's economic profits disappear. However, because of the downward sloping demand curve, price will not be as low as in a competitive industry.

Deadweight loss compares a. monopoly profits to competitive profits. b. monopoly producer surplus to competitive prices. c. monopoly surplus to competitive surplus. d. monopoly quantity to competitive price.

c. monopoly surplus to competitive surplus. Deadweight loss examines the loss of surplus when a monopolist is the producer.

Examine the graph below. The firm's profit is a. $6750. b. $6000. c. $1500. d. $750.

d. $750. At the profit-maximizing output of 150, the firm's average cost is $40 per unit. The firm charges $45 per unit. Its profit is the difference, $5, multiplied by the output, 150.

Which of the following would not be an example of product differentiation? a. packaging b. shelf location c. special warranties d. All of the above are methods of differentiation.

d. All of the above are methods of differentiation. Differentiation can be anything used by a firm to set their product apart from the competition.

Which of the following statements about marginal revenue is true? a. As the price a monopolist charges per unit decreases, the marginal revenue (MR) increases because of the additional unit sold. b. The slope of the marginal revenue (MR) curve is always positive. c. Marginal revenue (MR) is the same as average revenue. d. Marginal revenue (MR) is always less than the price.

d. Marginal revenue (MR) is always less than the price. Marginal revenue (MR) is always less than the price because in order to sell an additional unit of product, the firm has to lower the price on all of the units that it could have sold at a higher price.

At which level of output would a monopolist produce to maximize profit? a. The monopolist maximizes profit by producing at the level of output where marginal revenue (MR) is 0. b. The monopolist maximizes profit by producing at the level of output where marginal revenue (MR) is maximum. c. The monopolist maximizes profit by producing at the level of output where marginal revenue (MR) is constant. d. The monopolist maximizes profit by producing at the level of output where marginal revenue (MR) equals marginal cost (MC).

d. The monopolist maximizes profit by producing at the level of output where marginal revenue (MR) equals marginal cost (MC). A monopolist maximizes profit by producing at the level of output where marginal revenue (MR) equals marginal cost (like a competitive firm), and by charging the price determined by the firm's demand curve.

A right granted by government to a firm to provide exclusive production of a good or service is called a. a natural monopoly. b. an economy of scale. c. an absolute advantage d. a public franchise.

d. a public franchise. A public franchise is a monopoly that exists because a government grants the company exclusive rights to produce a good or service, thereby excluding all competition. Taxicabs, cable TV service, and some privately-operated bus companies are examples of public franchises.

Market power exists when a firm is a. able to influence the market price of its good and service. b. able determine the output level for the entire market. c. a price setter. d. all of the above

d. all of the above Monopolies have 100% of the market so they are able to set the price / output combination that maximizes profit. Monopolies are called price setters.

Oligopoly differs from monopolistic competition in that a. oligopolies have few buyers, while monopolistically competitive markets have many buyers. b. oligopolies face downward-sloping demand curves, while monopolistic competitors face horizontal demand curves. c. mutual interdependence is essential in monopolistic competition. d. each monopolistically competitive seller produces a slightly differentiated product.

d. each monopolistically competitive seller produces a slightly differentiated product.

By following the profit maximizing rule, a monopolist a. will always have a normal profit. b. will always have an above-zero profit. c. could earn a larger profit by increasing output. d. maximizes its profit (or minimizes its losses).

d. maximizes its profit (or minimizes its losses). At at an output level other than the point where MR = MC, the firm could increase its profit by following the rule. If average costs are greater than the product price at the profit-maximizing output, the firm would be minimizing its losses.

Monopolies can occur in a market for all the following reasons except a. sole ownership of a resource. b. patents. c. decreasing average costs. d. the existence of many substitutes for the product.

d. the existence of many substitutes for the product.

Deadweight loss is a. the loss a monopolist suffers when the product price is less than the average total cost. b. the loss a competitive firm suffers when the product price is less than the average total cost. c. the lost social value caused when a monopolist's marginal revenue is negative. d. the lost social value caused when a monopolist maximizes profit.

d. the lost social value caused when a monopolist maximizes profit.

In the short run, a monopolistically competitive firm chooses a. its price, but competition in the industry determines its output. b. its price, but production quotas determine output. c. its production quantity, but market forces determine its price. d. the quantity to produce and the price at which it can sell the product.

d. the quantity to produce and the price at which it can sell the product. Since the firm has some degree of market power, it can set both price and quantity in the short run.

Governments sometimes force monopolies to set their price at their average cost. The main problem with this regulatory pricing method is that a. this method increases producer surplus. b. this method decreases social welfare. c. monopolists can easily avoid this regulation. d. there is no incentive for a monopolist to lower its costs.

d. there is no incentive for a monopolist to lower its costs. As long as the monopolist is permitted to price at average cost, the monopolist has no incentive to lower average costs.