Econ- Test 3 Study Set

Refer to the graph below. In order to maximize profit, what price should the firm charge?

$15

Refer to the table below. How much is the marginal revenue associated with serving seven subscribers per month?

$21

Refer to the graph below. What is the value of total fixed cost for this perfectly competitive firm?

$2400

Refer to the graph below. At which of the following prices is the perfectly competitive firm earning negative economic profit?

$250

Refer to the table below. What is the average revenue associated with the sixth unit of output produced and sold?

$3.00

Refer to the table below. How much is the average revenue associated with serving five subscribers per month?

$45

Refer to the graph below. What is firm's profit when it sells six subscriptions per month?

$72

Refer to the table below. What is the marginal revenue associated with the sixth unit of output produced and sold?

$0.50

A patent typically gives the holder exclusive rights to a product for a period of

20 years

What is the definition of market power?

Market power is the ability of a firm to charge a price greater than marginal price

Match the following definition with one of the terms below: "A situation where each firm chooses the best strategy, given the strategies chosen by other firms."

Nash equilibrium

Which of the following statements regarding natural monopoly is true?

Natural monopoly is most likely to occur in markets where fixed costs are very large relative to variable costs.

Is zero economic profit inevitable in the long run for a monopolistically competitive firm?

No; a firm could try to continue making a profit in the long run by reducing production costs and improving its products

Refer to the graph of monopoly below. What is profit when the firm sells six subscriptions per month?

None of the above; there is insufficient information to answer the question.

Refer to the graphs below. What do you expect to happen in this perfectly competitive market as it approaches long-run equilibrium?

The price will decrease until it is equal to the minimum of average total cost, and profits will become zero

What is a merger between firms in the same industry called?

a horizontal merger

A buyer or seller that is unable to affect the market price is called?

a price taker

Refer to the graphs below. The perfectly competitive firm represented in the graph on the right is experiencing

a profit in the short run

Refer to the graphs below. What do you expect to happen in this market as it approaches long-run equilibrium?

a shift to the right of the market supply curve as new firms enter

Fill in the blanks with the word and phrase that best describe the history of OPEC: Sustaining high prices has been_______because members often________their output quotas.

difficult; produce more than

To maximize profit, which of the following should a firm attempt to do?

find the largest difference between total revenue and total cost

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

firms in these markets do not sell identical products.

Which of the following are characteristics of monopolistic competition?

firms sell similar but not identical products

When the government wants to give an exclusive right to one firm to produce a product it

grants a patent or copyright to an individual or firm.

To be a natural monopoly a firm must

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

Which of the following is most likely to increase market power?

horizontal mergers

Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems?

if Macintosh and Linux were not considered close substitutes for Windows

Ted's Pancake Kitchen suffers a short-run loss. When should Ted decide to shut down rather than continue to produce?

if his Kitchen's revenue is less than its variable costs

If individual countries that are members of OPEC exceed their production quotas, the amount of oil supplied to the world____, and the price of oil_____.

increases; decreases

A perfectly competitive firm has to charge the same price as every other firm in the market. Therefore, the firm

is a price taker.

Whena firm faces a downward-sloping demand curve,marginal revenue

is less than price because a firm must lower its price to sell more.

Refer to the graph below. If the industry changes from being perfectly competitive to being a monopoly, what happens to producer surplus?

it increases by area A and decreases by area C

If a perfectly competitive firm achieves productive efficiency then

it is producing the good it sells at the lowest possible cost.

When a firm's demand curve slopes downward and the firm decides to cut price, which of the following happens?

it sells more units but receives lower revenue per unit

Refer to the graph below. According to this graph, what will happen if Starbucks increases the price of caffè lattes?

it will lose some, but not all, of its customers

For what type of market structure is demand curve the same as marginal revenue?

perfect competition

Refer to the graph below. What point represents the price and quantity that will prevail when the industry is perfectly competitive?

point A

Refer to the graph below. Which point corresponds to a natural monopoly serving this market and breaking even?

point A

Refer to the graphs below. Which points on the graph coincide with productive efficiency?

point A on both graphs

Refer to the graph of monopoly below. What point represents the price and output level that a monopoly will choose?

point B

Refer to the graph of costs for a perfectly competitive firm below. Which of the following best represents profit per unit?

the distance between points A and B

Which of the following rights is given to the holder of a patent?

the exclusive right to a new product

Refer to the graph below. If a perfectly competitive firm is producing at point A, which of the following is true?

the firm earns zero economic profit

Long-run competitive equilibrium is

the situation in which the entry and exit of firms has resulted in the typical firm just breaking even

Refer to the table below. What level of output should be produced in order to maximize profit?

5 units of output

Refer to the graph below which shows the marginal cost and marginal revenue curves for a farmer in the perfectly competitive market for wheat. What is the profit-maximizing level of output if the producer can produce only whole units of output?

6 bushels

Refer to the table below. Based on the numbers in the table, how much should this farmer produce in order to maximize profit?

6 bushels

Which of the following is the definition of business strategy?

A business strategy refers to actions taken by firms to attain their objectives.

Which one of the following is not a possible barrier to entry high enough to keep competing firms out of a monopoly industry?

A highconcentration ratio.

Assumea hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements comparing the conditions in the industry under both market structures is true?

A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good.

Refer to the graph below. Which of the curves is not necessary for determining the level of profit earned by a perfectly competitive firm?

All three curves are needed to determine the level of profit earned by a perfectly competitive firm

Refer to the graph below. Assume that the firm represented by the cost and demand curves below is maximizing profit. Which area represents the formula: (P - ATC) × Q?

Area A

Refer to the table below. When is average total cost minimized?

At 6 units of output

Which of the following measures is conceptually the same as price?

Average revenue

Which of the following is true for a monopolist?

Being the only seller in the market, the monopolist faces the market demand curve.

Domino's and Little Caesars are competing over the price of pizza. What is the dominant Strategy? Note: There will be a problem like this one the final.

Both firms charge $5

Refer to the payoff matrix below. Suppose that Wal-Mart and Target are selling Sony flat-screen computer monitors for a price of either $150 or $200 each. Based on the information on the payoff matrix, what is the dominant strategy?

Both firms will charge $150

REI and Level 9 sports are competing over the price of gloves. What is the dominant strategy? Note: there will be a problem like this on the final.

Both firms will charge $50

Suppose Autozone and O'Reilly Auto are competing over the price of car batteries. What is the dominant strategy? Note: There will be a problem like this on the final.

Both firms will charge $50

Assume a hypothetical case where an industrybegins as perfectly competitive and then becomes a monopoly. As a result of this change

Consumer surplus will be smaller, producer surplus will be greater and there will be a reduction in economic efficiency.

What trade-offs do consumers face when buying a product from a monopolistically competitive firm?

Consumers pay a price greater than marginal cost but also have choices more suited to their tastes

Refer to the graph below. Assuming the computer industry is monopolistically competitive, which set of demand and marginal revenue curves for a typical firm is more consistent with long-run equilibrium in the computer industry?

D2 and MR2

Refer to the graph below. Which demand curve is associated with the shutdown point for this perfectly competitive firm?

Demand2

How does the entry of new coffeehouses affect the profits of existing coffeehouses?

Entry will decrease the profits of existing coffeehouses by shifting each of their individual demand curves to the left and making the demand curves more elastic

Refer to the graphs below. The graph on the left depicts demand and supply in the competitive market for wheat. The graph on the right depicts the demand curve facing Farmer Whapple, an individual producer in the market for wheat. The demand curve for Farmer Whapple's wheat is horizontal at the market price of $4.00 because

Farmer Whapple is a price taker

How do you find the profit maximizing quantity for a firm under monopoly?

For all firm types it is the same process. Go to the point where MR=MC. Then find the quantity on the x-axis below MR=MC.

How do you find the profit maximizing quantity for a monopolistically competitive firm?

For all firm types it is the same process. Go to the point where MR=MC. Then find the quantity on the x-axis below MR=MC.

How do you find the profit maximizing quantity for perfectly competitive firm?

For all firm types, it is the same process. Go to the point where MR = MC. Then find the quantity on the x-axis below MR=MC.

A firm will break even when

P = ATC.

What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?

Price is equal to both average revenue and marginal revenue

Refer to the graph below. Which level of output indicates excess capacity?

Q1

Refer to the graph below. Which quantity is more likely to be the quantity produced by the typical firm in an oligopoly?

Q2

Refer to the graph below. At what level of output does this perfectly competitive firm maximize profit?

Q3

What is the term given to a cost that has already been paid and cannot be recovered?

Sunk cost

Refer to the graph below of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the following?

The firm can sell any amount of output as long as it accepts the market price of $4.00

If marginal revenue slopes downward, which of the following is true?

The firm must decrease its price to sell a larger quantity

Refer to the graph below. Assume that the firm is producing 600 units. What should the firm do in order to maximize profit?

The firm should increase the level of output, because at 600 units, marginal revenue is greater than marginal cost. The firm should increase the level of output until it reaches the minimum average total cost.

Refer to the graphs below. As market demand shifts to the left, how will the firm's level of output change?

The firm will decrease its output and suffer losses

If a firm has the ability to affect the price of the good or service it sells, what is the relationship between its marginal revenue curve and its demand curve?

The firm will have a marginal revenue curve that is below its demand curve

If market demand shifts to the right, how will a competitive firm's level of output change?

The firm will increase its output, and its profits will increase

Refer to the graphs below. After the market demand curve shifts to the left, which of the following would happen in this perfectly competitive market as it adjusts to long-run equilibrium?

The market supply curve will shift to the left.

If firms in a perfectly competitive industry are earning positive profits, what would you expect to see in the long run?

The market supply curve will shift to the right as firms enter the market, prices will fall, and profits will fall

Assume that firms in a perfectly competitive market are earning economic profits. Which of the following statements describes the change in market price and output as a result of the entry of new firms into this market?

The short-run market supply curve shifts to the right, causing price to fall and total market output to increase.

Which of the following conditions must exist in order to have a perfectly competitive market?

There must be many buyers and many sellers, all of whom are small relative to the market

A group of firms that colludes by agreeing to restrict output to increase prices and profits is called

a cartel

A strategy that is the best for a firm, no matter what strategies other firms use is

a dominant strategy

Which of the following is a barrier to entry?

all of the above: economies of scale; ownership of a key input; patents

Which of the following are characteristics of a perfectly competitive industry?

all of the above: firms are unable to control the prices of the products they sell, firms are unable to earn an economic profit in the long run, firms sell identical products

Which of the following are effects of monopoly?

all of the above: monopoly causes a reduction in consumer surplus; monopoly cause an increase in producer surplus; monopoly causes a reduction in economic efficiency

Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?For the instructor, this was question 11.

all of the above: perfectly competitive firms; monopolistically competitive firms; monopolies

Which firms face a downward-sloping demand curve and a downward-sloping marginal revenue curve?

all price makers

Suppose you invest $200,000 in a business. The return you could earn each year on a similar investment using that money is 10 percent, or $20,000. In an economic sense, the $20,000 is

an economic cost

What are laws aimed at promoting competition among firms called?

antitrust laws

In the United States, government policies with respect to monopolies and collusion are embodied in

antitrust laws.

Refer to the graph below. A decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the loss of revenue?

area A

Refer to the graph below. Which area shows a reduction in consumer surplus that is transferred to producers as a result of this industry being a monopoly rather than being perfectly competitive?

area A

Refer to the graph below. Which area shows the reduction in consumer surplus that results from this industry being a monopoly rather than perfectly competitive?

area A + area B

Refer to the graph below. A decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the revenue gain?

area B

Refer to the graph below. Which area is considered a reduction in economic surplus as a result of this industry being a monopoly rather than being perfectly competitive?

area B + area C

If increased competition leads to higher costs and higher prices in an industry, how should that market be characterized?

as a natural monopoly

Network externalities

exist when the usefulness of a product increases with the number of consumers who use it.

Which of the terms below is defined as "Anything that keeps new firms from entering an industry in which firms are earning economic profits?"

barriers to entry

Monopolistic competition is a market structure in which

barriers to entry are low.

Why does a monopolistically competitive firm have a downward-sloping demand curve?

because changing the price will affect the quantity sold

Economic loss refers to a situation in which a firm's total revenue is less than its total cost. To calculate the amount of a loss, which of the following costs should be included?

both explicit and implicit costs

Refer to the graphs below. Assuming both firms are producing 5 cups per week, which firm is maximizing profits?

both firms

Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?

both perfectly competitive and monopolistically competitive firms

Refer to the graph below. How can the loss of economic efficiency resulting from this market being a monopoly rather than being perfectly competitive be estimated?

by estimating the size of the triangle B + C

Assume that an industry that began as a perfectly competitive industry becomes a monopoly. Which of the following describes a change in the market as a result of becoming a monopoly? Compared to when the industry was perfectly competitive, the monopolist will

charge a higher price and produce less output

An agreement among firms to charge the same price or to otherwise not compete is

collusion

Economies of scale help determine the extent of

competition in an industry

A monopolistically competitive firm that earns an accounting profit in the short run

could earn an economic profit, break even or suffer an economic loss in the short run.

Fill in the blanks. Suppliers have more bargaining power when____firms can supply the input and the input____specialized.

few; is

Which type of barrier to entry is the granting of a patent or copyright to an individual or firm considered?

entry blocked by government action

Economies of scale exist when a firm's_____average costs fall as it_____output.

long-run; increases

Refer to the payoff matrix below. The payoff matrix describes the payoffs to two members of the OPEC cartel. The Nash equilibrium of this game will occur with Saudi Arabia producing a _____ output and Nigeria producing a ______output.

low; high

A supplier of an input is unlikely to have bargaining power if

many firms can supply the input.

Which of the following terms best describes the additional revenue associated with selling an additional unit of output?

marginal revenue

To maximize profit a monopolist will produce where

marginal revenue is equal to marginal cost.

Refer to the graph below. The loss in revenue from decreasing price is greater than the gain in revenue from increasing price whenever

marginal revenue is negative

Refer to the graph below. Based on the information on the graph, what is true about marginal revenue?

marginal revenue remains constant as the quantity of bushels sold increases

In which of the following market structures is the firm's demand curve the same as the market demand for the product?

monopoly

What is the name given to the situation where economies of scale are so large that one firm can supply the entire market at a lower average total cost than two or more firms?

natural monopoly

Refer to the graph below. What does the shaded area in the graph represent for a perfectly competitive firm that produces at output level Q?

negative economic profit

Which type of efficiency is achieved by a monopolistically competitive firm in the long run?

neither allocative nor productive efficiency

The more cell phones in use, the more valuable they become to consumers. This is an example of

network externalities

If firms in a monopolistically competitive industry are making profits in the short run

new firms will enter the market.

If an individual firm in a perfectly competitive market increases its price, the firm will experience

none of the above (options: higher revenue, lower average total cost, increased sales)

Which of the terms below is defined as "A market structure in which a small number of interdependent firms compete?"

oligopoly

Which term best describes the minimum amount that a firm needs to earn on a $100,000 investment to be willing to remain in a perfectly competitive industry in the long run?

opportunity cost

At the profit-maximizing level of output for a perfectly competitive firm

price equals marginal cost.

If price = marginal cost at the output produced by a perfectly competitive firm, and the firm is earning an economic profit then

price exceeds average total cost.

Which of the following terms best describes how the result of the forces of competition drives the market price to the minimum average cost of the typical firm?

productive efficiency

Refer to the graph below. If 30 billion kilowatt-hours of electricity are supplied by two firms who supply 15 billion kilowatt-hours of electricity each instead of by one firm, the average total cost of electricity

rises from $0.04 to $0.06.

Every game has these characteristics:

rules, strategies, and payoffs

Refer to the graph below. Which of the curves in the graph is not necessary for determining the level of output that maximizes profit for a perfectly competitive firm?

the ATC curve

Refer to the graph below. In this graph, which curve is conceptually the same as average revenue?

the demand curve

Refer to the graphs below. Which firm is a monopolistic competitor operating in the long run?

the firm on the left

Refer to the graph below. When the perfectly competitive firm faces demand curve Demand3, which of the following is true?

the firm will suffer losses but should continue to operate

In the broadest sense, game theory studies the decisions of firms in industries where the profits of each firm depend on

the firm's interactions with other firms

The fraction of an industry's sales that are accounted for by the largest firms is called

the four-firm concentration ratio.

Refer to the graphs below. Which graph best depicts the profit or loss situation for a monopolistically competitive firm in the long run?

the graph in the middle

Refer to the graphs below. Which graph depicts a situation in which some firms will exit the industry?

the graph in the middle

Refer to the graphs below. Which graph best depicts a firm in a monopolistically competitive industry that has an incentive to exit the industry in the long run?

the graph on the left

Refer to the graphs below. Which graph best depicts the relationship between price and average total cost in the long run for a monopolistically competitive firm?

the graph on the left

Refer to the graphs below, which represent the situations facing typical firms in three different monopolistically competitive industries. Which graph best represents the situation where new firms are likely to enter the industry?

the graph on the right

What is marginal cost?

the increase in total cost resulting from producing one more unit of output

For a perfectly competitive firm average revenue is equal to

the market price.

Refer to the graphs below. Suppose the graph on the left represents a typical firm's supply curve in a perfectly competitive industry, and there are 100 identical firms in the industry. Then the graph on the right represents

the market supply curve

When a monopolistically competitive firm decreases price, good and bad things happen. Which of the following is considered a good thing for the firm?

the output effect

When a monopolistically competitive firm decreases price, good and bad things happen. Which of the following is considered a bad thing for the firm?

the price effect

Economies of scale will create a barrier to entry in an oligopoly industry when

the typical firm's long-run average total cost curve reaches a minimum at a level of outputthat is a large fraction of total industry sales.

Using a broad definition, a firm would have a monopoly if

there is no other firm selling a substitute for its product close enough that its economic profits are competed away in the long run.

If automobile companies have significant bargaining power when buying tires, you would expect that

tire prices will be low

What is the dominant strategy of eBay auction participants?

to place a bid equal to the maximum value you place on the item

Refer to the graph below. Fill in the blanks. When the level of output produced is Q1, economies of scale in the industry are relatively______and the industry will have a_____number of firms.

unimportant; large

In which of the following situations can a firm be considered a monopoly?

when a firm can ignore the actions of all other firms