Economics Exam 3 Practice

Game theory is important for the understanding of a. competitive markets. b. monopolies. c. oligopolies. d. all market structures.

c. oligopolies.

Which of the following statements is correct? a. Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers. b. Monopolistic competition is similar to perfect competition because both market structures are characterized by differentiated products. c. Monopolistic competition is similar to oligopoly because both market structures are characterized by strategic interaction between firms in the market. d. Monopolistic competition is similar to perfect competition because both market structures are characterized by perfectly elastic demand curves for firms.

a. Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers.

For a firm in a perfectly competitive market, the price of the good is always a. equal to marginal revenue. b. equal to total revenue. c. greater than average revenue. d. equal to the firm's efficient scale of output.

a. equal to marginal revenue.

In a competitive market, the actions of any single buyer or seller will a. have a negligible impact on the market price. b. have little effect on market equilibrium quantity but will affect market equilibrium price. c. affect marginal revenue and average revenue but not price. d. adversely affect the profitability of more than one firm in the market.

a. have a negligible impact on the market price.

A downward-sloping demand curve a. is a feature of all monopolistically competitive firms. b. means that the firm in question will never experience a zero profit. c. causes marginal revenue to exceed price. d. prohibits firms from earning positive economic profits in the long run.

a. is a feature of all monopolistically competitive firms.

Refer to Figure 14-2. If the market price is Pa, in the short run the firm will earn a. positive economic profits. b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.

a. positive economic profits.

A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that a. the firm is currently maximizing its profit. b. the profits of the firm are negative. c. firms are likely to leave this market in the long run. d. All of the above are correct.

a. the firm is currently maximizing its profit.

Refer to Table 17-13. If both stores follow a dominant strategy, HomeMax's annual profit will grow by a. $0.6 million. b. $1.5 million. c. $2.5 million. d. $3.4 million.

b. $1.5 million.

Refer to Figure 16-1. Which of the graphs illustrates a relatively elastic, though not perfectly elastic, demand curve consistent with a market that has many substitute products? a. Panel A b. Panel B c. Panel C d. Panel D

b. Panel B

Refer to Figure 16-1. Which of the graphs illustrates the demand curve most likely faced by a firm in a monopolistically competitive market? a. Panel A b. Panel B c. Panel C d. Panel D

b. Panel B

Predatory pricing refers to a. a firm selling certain products together rather than separately. b. a monopoly firm reducing its price in an attempt to maintain its monopoly. c. firms colluding to set prices. d. All of the above are examples of predatory pricing.

b. a monopoly firm reducing its price in an attempt to maintain its monopoly.

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.

b. a one-unit decrease in output will increase the firm's profit.

The market demand curve for a monopolist is typically a. unit price elastic. b. downward sloping. c. horizontal. d. vertical.

b. downward sloping.

Which of the following is a characteristic of monopolistic competition? a. ownership of a key resource by a single firm b. free entry c. identical product d. patents

b. free entry

In the prisoners' dilemma game with Bonnie and Clyde as the players, the likely outcome is one a. in which neither Bonnie nor Clyde confesses. b. in which both Bonnie and Clyde confess. c. that involves neither Bonnie nor Clyde pursuing a dominant strategy. d. that is ideal in terms of Bonnie's self-interest and in terms of Clyde's self-interest.

b. in which both Bonnie and Clyde confess.

Refer to Figure 15-8. What is the socially efficient price and quantity? a. price = A; quantity = X b. price = B; quantity = Y c. price = B; quantity = X d. price = C; quantity = X

b. price = B; quantity = Y

A perfectly competitive market a. may not be in the best interests of society, whereas a monopoly market promotes general economic well-being b. promotes general economic well-being, whereas a monopoly market may not be in the best interests of society. c. and a monopoly market are equally likely to promote general economic well-being. d. is less likely to promote general economic well-being than a monopoly market.

b. promotes general economic well-being, whereas a monopoly market may not be in the best interests of society.

Tying involves a firm a. colluding with another firm to restrict output and raise prices. b. selling two individual products together for a single price rather than selling each product individually at separate prices. c. temporarily cutting the price of its product to drive a competitor out of the market. d. requiring that the firm reselling its product do so at a specified price.

b. selling two individual products together for a single price rather than selling each product individually at separate prices.

Refer to Figure 15-9. To maximize total surplus, a benevolent social planner would choose which of the following outcomes? a. 100 units of output and a price of $20 per unit b. 150 units of output and a price of $20 per unit c. 150 units of output and a price of $30 per unit d. 200 units of output and a price of $20 per unit

c. 150 units of output and a price of $30 per unit

Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how many gallons of water will be produced and sold? a. 0 b. 500 c. 600 d. 1,200

c. 600

For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in a. the short run but not in the long run. b. the long run but not in the short run. c. both the short run and the long run. d. neither the short run nor the long run.

c. both the short run and the long run.

A monopoly a. can set the price it charges for its output and earn unlimited profits. b. takes the market price as given and earns small but positive profits. c. can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits. d. can set the price it charges for its output but faces a horizontal demand curve so it can earn unlimited profits.

c. can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits.

Refer to Table 14-1. The price and quantity relationship in the table is most likely a demand curve faced by a firm in a a. monopoly. b. concentrated market. c. competitive market. d. strategic market.

c. competitive market.

When a firm operates under conditions of monopoly, its price is a. not constrained. b. constrained by marginal cost. c. constrained by demand. d. constrained only by its social agenda.

c. constrained by demand.

Refer to Table 17-13. Pursuing its own best interest, Lopes will a. increase the size of its store and parking lot only if HomeMax also increases the size of its store and parking lot. b. increase the size of its store and parking lot only if HomeMax does not increase the size of its store and parking lot. c. increase the size of its store and parking lot regardless of the decision made by HomeMax. d. not increase the size of its store and parking lot regardless of the decision made by HomeMax.

c. increase the size of its store and parking lot regardless of the decision made by HomeMax.

The market for novels is a. perfectly competitive. b. a monopoly. c. monopolistically competitive. d. an oligopoly.

c. monopolistically competitive.

When price exceeds average variable cost in the short run, a competitive firm's marginal cost curve is regarded as its supply curve because a. the position of the marginal cost curve determines the price for which the firm should sell its product. b. among the various cost curves, the marginal cost curve is the only one that slopes upward. c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price. d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be maximized.

c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price.

Refer to Table 15-7. What is the marginal cost of the 6th pair of shoes? a. $44 b. $46 c. $55 d. $60

d. $60

If your local gasoline station raised its price by 20 percent, its sales of gasoline would decrease substantially because your local gas station a. has little or no market power. b. is small relative to the size of the gasoline market. c. is a competitive firm. d. All of the above are correct.

d. All of the above are correct.

Which of the following statements about oligopolies is not correct? a. An oligopolistic market has only a few sellers. b. The actions of any one seller can have a large impact on the profits of all other sellers. c. Oligopolistic firms are interdependent in a way that competitive firms are not. d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues.

d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues.

Games that are played more than once generally a. lead to outcomes dominated purely by self-interest. b. lead to outcomes that do not reflect joint rationality. c. encourage cheating on cartel production quotas. d. make collusive arrangements easier to enforce.

d. make collusive arrangements easier to enforce.

In order to maximize profits in the short run, a firm should produce where a. marginal revenue exceeds marginal cost by the greatest amount. b. marginal cost is minimized. c. average total cost is minimized. d. marginal cost equals marginal revenue.

d. marginal cost equals marginal revenue.

Which of the following is an example of a monopolistically competitive industry? a. electric lamp bulbs b. aircraft manufacturing c. corn d. sweaters

d. sweaters

In perfect competition as well as in monopolistic competition, a. marginal revenue is equal to price for each firm. b. profit is positive in a long-run equilibrium for each firm. c. entry and exit by firms are restricted. d. there are many firms in a single market.

d. there are many firms in a single market.

Refer to Figure 14-2. If the market price is Pb, in the short run the firm will earn a. positive economic profits. b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.

d. zero economic profits.