Econ Practice Test 3

If the market price is $40 in a perfectly competitive market, the marginal revenue from selling the fifth unit is A) $8. B) $20. C) $40. D) We do not know.

C) $40.

Which of the following explains why the marginal cost curve has a U shape? A) Initially, the marginal product of labor falls, then rises. B) Initially, the average product of labor rises, then falls. C) Initially, the marginal product of labor rises, then falls. D) Initially, the average cost of production rises, then falls.

C) Initially, the marginal product of labor rises, then falls.

In the long run which of the following is true? A) Total cost = fixed cost + variable cost. B) The size of a firm's physical plant can be changed but the firm cannot adopt new technology. C) There are no fixed costs. D) The firm can vary its explicit costs but not its implicit costs.

C) There are no fixed costs.

Jennifer Borts moves her office from the premises she rents at a local mall to her home. As a result of this move A) Jennifer's explicit costs fall and her implicit costs rise. B) Jennifer's total costs fall. C) Jennifer's implicit costs fall. D) Jennifer's opportunity costs fall.

A) Jennifer's explicit costs fall and her implicit costs rise.

Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit maximizing outputs? A) Marginal revenue is less than price. B) Marginal revenue equals marginal cost. C) Price equals marginal cost. D) Average revenue equals average cost.

A) Marginal revenue is less than price.

The delivery of first-class mail by the U.S. Postal Service is an example of A) a monopoly. B) perfect competition because consumers have access to other methods of written communication; for example, email and text messaging. C) monopolistic competition, because mail delivery is a differentiated product provided by many firms. D) an oligopoly because a few other firms provide delivery of letters and packages.

A) a monopoly.

Which of the following can a firm do in the long run but not in the short run? A) decrease the size of its physical plant B) reduce its rate of output by laying off workers C) increase its variable costs D) increase its use of raw materials

A) decrease the size of its physical plant

In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue covers its A) explicit plus its implicit costs. B) fixed costs. C) implicit costs. D) explicit costs.

A) explicit plus its implicit costs.

Economies of scale can lead to an oligopolistic market structure because A) if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms. B) if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms. C) a few firms can force rivals to produce at low levels of output. D) a few firms can use high profits to keep out new entrants.

A) if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms.

The demand curve for the monopoly's product is A) the market demand for the product. B) more elastic than the market demand for the product. C) more inelastic than the market demand for the product. D) undefined.

A) the market demand for the product.

A merger between U.S. Steel and General Motors would be an example of a A) vertical merger. B) horizontal merger. C) conglomerate merger. D) conspiracy in restraint of trade.

A) vertical merger.

Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's profit? A) P - ATC B) (P - ATC) ×Q C) (P ×Q) - TC D) P - TC

B) (P - ATC) ×Q

Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not. Why is this so? A) because Microsoft is large enough to hire the best people in the field B) because Microsoft could potentially lose sales if it sets prices indiscriminately C) because the wealthy corn farmer is a price taker who chooses his optimal output independently of market price but Microsoft's optimal output depends on the price it selects D) because unlike Microsoft, the wealthy corn farmer is probably a monopolist

B) because Microsoft could potentially lose sales if it sets prices indiscriminately

When a firm doubles all its inputs, its average cost of production decreases, then production displays A) diminishing returns. B) economies of scale. C) diseconomies of scale. D) declining fixed costs.

B) economies of scale.

When a firm produces more output using the same inputs or the same output using fewer inputs we say that the firm A) experiences an increase in demand. B) experiences positive technological change. C) will hire more workers in order to produce more output. D) is operating in the short run.

B) experiences positive technological change.

Ben's Peanut Shoppe suffers a short-run loss. Ben will not choose to shut down if A) his Shoppe's total revenue exceeds his fixed cost. B) his Shoppe's total revenue exceeds his variable cost. C) his Shoppe's total revenue exceeds his implicit costs. D) his Shoppe's total revenue exceeds his capital costs.

B) his Shoppe's total revenue exceeds his variable cost.

The DeBeers Company of South Africa was able to block competition through A) economies of scale. B) ownership of an essential input. C) government-imposed barriers. D) differentiating its product.

B) ownership of an essential input.

The prisoner's dilemma illustrates A) how oligopolists engage in implicit collusion under strategic situations. B) why firms will not cooperate if they behave strategically. C) why firms have an incentive to cheat on agreements. D) how cooperation in strategic situations lead to the economically efficient market outcome

B) why firms will not cooperate if they behave strategically.

A perfectly competitive firm has to charge the same price as every other firm in the market. Therefore, the firm A) faces a perfectly inelastic demand curve. B) is not able to make a profit in the short run. C) is a price taker. D) faces a perfectly elastic supply curve.

C) is a price taker.

If an airport decides to expand by building an additional passenger terminal, and in doing so it lowers its average cost per airplane landing, it was previously operating at A) minimum efficient scale. B) more than minimum efficient scale. C) less than minimum efficient scale. D) minimum capacity. 4

C) less than minimum efficient scale.

The price of a seller's product in perfect competition is determined by A) the individual seller. B) a few of the sellers. C) market demand and market supply. D) the individual demander.

C) market demand and market supply.

Long-run cost curves are U-shaped because A) of the law of demand. B) of the law of diminishing returns. C) of economies and diseconomies of scale. D) of the law of supply.

C) of economies and diseconomies of scale.

If we use a narrow definition of monopoly, then a monopoly is defined as a firm A) that has been granted special production rights by the government. B) that can ignore the actions of all other firms because it produces a superior product compared to its rivals' products. C) that can ignore the actions of all other firms because it produces a product for which there are no close substitutes. D) that has the largest market share in an industry.

C) that can ignore the actions of all other firms because it produces a product for which there are no close substitutes.

In the short run, a firm that is operating at a loss has two options. These options are A) to reduce output or reduce its variable costs. B) to go out of business or declare bankruptcy. C) to shut down temporarily or continue to produce. D) to adopt new technology or change the size of its physical plant.

C) to shut down temporarily or continue to produce.

In the short run, which of the following costs will not change as output changes? A) marginal cost B) total variable cost C) total fixed cost D) average fixed cost

C) total fixed cost

When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increases to $9.4 million. Within this range, the marginal cost of an additional unit of output is

D) $145.

The formula for total fixed cost is A) TFC = TC + TVC. B) TFC = TVC - TC. C) TFC = TC/TVC. D) TFC = TC - TVC.

D) TFC = TC - TVC.

A monopolist faces A) a perfectly elastic demand curve. B) a perfectly inelastic demand curve. C) a horizontal demand curve. D) a downward-sloping demand curve.

D) a downward-sloping demand curve.

Both buyers and sellers are price takers in a perfectly competitive market because A) the price is determined by government intervention and dictated to buyers and sellers. B) each buyer and seller knows it is illegal to conspire to affect price. C) both buyers and sellers in a perfectly competitive market are concerned for the welfare of others. D) each buyer and seller is too small relative to others to independently affect the market price.

D) each buyer and seller is too small relative to others to independently affect the market price.

Some markets have many buyers and sellers but fall into the category of monopolistic competition rather than perfect competition. The most common reason for this is A) there are high barriers to entering these markets. B) firms in these markets sell identical products. C) firms in these markets make high profits. D) firms in these markets do not sell identical products.

D) firms in these markets do not sell identical products.

To be a natural monopoly a firm must A) control a key resource input. B) be very large relative to the total market. C) have significant network externalities. D) have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms.

D) have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms.

All of the following are examples of oligopolistic markets except A) pharmacies and drugstores B) aircraft manufacture C) college bookstores D) seafood restaurant chains

D) seafood restaurant chains

If a firm shuts down in the short run it will A) break even. B) declare bankruptcy. C) suffer a loss equal to its variable costs. D) suffer a loss equal to its fixed costs.

D) suffer a loss equal to its fixed costs.