ECON 212 Final Exam

The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's explicit costs are

$150,000

Which of the following statement concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct?

AP continues to rise so long as TP is rising.

If a technological advance reduces the amount of variable resources needed to produce any level of output, then the

MC curve will shift downward.

Which of the following is true under conditions of pure competition?

No single firm can influence the market price by changing its production level.

Which of the following nations is not a member of the OPEC oil cartel?

Norway

Which of the following is most likely to be a fixed cost?

Property insurance premiums

Which of the following is not a precondition for price discrimination?

The commodity involved must be a durable good.

Which case best represents a case of price discrimination? a) A major airline sells tickets to senior citizens at lower prices than to other passengers. b) An insurance company offers discounts to safe drivers. c) A professional baseball team pays two players with identical batting averages different salaries. d) A utility company charges less for electricity used during off-peak hours, when it does not have to operate its less-efficient generating plants.

a

Which constitutes an obstacle to collusion among oligopolists?

a large number of firms

If the demand curve faced by an individual firm is downward-sloping, the firm cannot be

a purely competitive firm.

OPEC provides an example of

an international cartel.

Fixed cost is

any cost that does not change when the firm changes its output.

The MR = MC rule

applies both to pure monopoly and pure competition.

The basic difference between the short run and the long run is that

at least one resource is fixed in the short run, while all resources are variable, in the long run.

Which of the following statements is correct? a) Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn zero economic profits in the long run. b) In the long run, purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits. c) Monopolistically competitive firms earn zero economic profits in both the short run and the long run. d) Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn positive economic profits in the long run.

b

A perfectly elastic demand curve implies that the firm

can sell as much output as it chooses at the existing price.

Three major means of collusion by oligopolists are

cartels, informational understanding, and price leadership.

Marginal revenue is the

change in total revenue associated with the sale of one more unit of output.

When firms in an industry reach an agreement to fix prices, divide up market share, or otherwise restrict competition, they are practicing the strategy of

collusion.

Mutual interdependence means that each firm in an oligopoly

considers the reactions of its rivals when it determines its pricing policy.

Oligopolistic firms engage in collusion to

earn greater profits.

In the long run, a representative firm in a monopolistically competitive industry will end up

earning a normal profit, but not an economic profit.

Which of the following factors tends to foster the development of an oligopoly?

economies of scale

To the economist, total cost includes

explicit and implicit costs.

Natural monopolies result from

extensive economies of scale in production.

X-inefficiency refers to a situation in which a firm

fails to achieve the minimum average total costs attainable at each level of output.

Compared to a purely competitive firm in long-run equilibrium, the monopolistic competitor has a

higher price and lower output.

The copper, aluminum, cement, and industrial alcohol industries are examples of

homogeneous oligopoly.

The demand curve faced by a purely competitive firm

is the same as its marginal revenue curve.

In the short run, the individual competitive firm's supply curve is that segment of the

marginal cost curve lying above the average variable cost curve.

If in the short run a firm's total product is increasing, then its

marginal product could be either increasing or decreasing.

When a firm is maximizing profit, it will necessarily be

maximizing the difference between total revenue and total cost.

The product in an oligopolistic market

may be homogeneous or differentiated.

Concentration ratios measure the

percentage of total industry sales accounted for by the largest firms in the industry

If a firm is a price taker, then the demand curve for the firm's product is

perfectly elastic.

The demand schedule or curve confronted by the individual, purely competitive firm is

perfectly elastic.

If a particular bank regularly announces changes in its interest rate schedules before its competitors, who then set rates very close to those announced by that bank, this could be describe as

price leadership.

Demand and marginal revenue curves are downward-sloping for monopolistically competitive firms because

product differentiation allows each firm some degree of monopoly power.

A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from

product differentiation.

In which of these continuums of degrees of competition (highest to lowest) is monopolistic competition properly placed?

pure competition, monopolistic competition, oligopoly, pure monopoly

If the several oligopolistic firms that compose an industry behave collusively, the resulting price and output will most likely resemble those of

pure monopoly.

Which of the following is not a basic characteristic of monopolistic competition?

recognized mutual interdependence

Other things being equal, a firm in a cartel will most likely cheat on a price-fixing agreement by

secretly lowering price and increasing sales to a few customers.

The basic characteristic of the short run is that

the firm does not have sufficient time to change the size of its plant.

Implicit and explicit costs are different in that

the former refer to nonexpenditure costs and the latter to monetary payments.

If a variable input is added to some fixed input, beyond some point the resulting extra output will decline. This statement describes

the law of diminishing returns.

Which of the following best approximates a pure monopoly?

the only grocery store in a small isolated town

Firms in an industry will not earn long-run economic profits if

there is free entry and exit of firms in the industry.

Firms seek to maximize

total profit.

Mergers of firms in an industry tend to

transform monopolistic competition into oligopoly.