Exam 2 Econ

d. The scale of a firm is fixed in the short run.

Output can be changed in the short run by adjusting variable resources, but the scale of a firm is fixed in the short run.

Leather World Corp. produces 5,000 leather belts per week. Its average total cost each week is $80, and its fixed cost is $200,000. What is its variable cost?

a. $200,000 Total cost = average total cost × number of units of output produced = $80 × 5,000 = $400,000. Fixed cost of the firm = $200,000. So, variable cost = $400,000 - $200,000 = $200,000.

Peyton, a fashion designer, plans to quit her current job, which pays $25,000 a year, and open a boutique. She intends to take over the building that she owns and currently rents to her friend for $8,000 a year. Her expenses in setting up the boutique will be $50,000 for raw materials and $5,000 for interior décor and electricity. Her implicit costs will amount to _____.

a. $33,000 Implicit cost = value of the office salary given up + value of the rent forgone = $33,000.

Which of these is a form of price discrimination?

a. Cheaper call rates for long-distance night calls A cellular service provider who announces cheaper call rates for night calls is practicing price discrimination.

Suppose a perfectly competitive firm is able to add a new dimension to its existing product through innovation. This gives the firm some market power, allowing it to control the price and output of the product. Which of these will be a likely impact on the consumer surplus?

a. Consumer surplus will decrease. When a firm with market power restricts output and increases the price, the decline in consumer surplus exceeds the increase in producer surplus, resulting in a deadweight loss.

Which of these strategies will result in the highest payoff in a repeated-game setting?

a. Tit-for-tat strategy Tit-for-tat is an optimal strategy that can be used by a player in a repeated game to get the other player to cooperate.

Identify a distinguishing characteristic of an oligopoly market.

d. Interdependence among the sellers

In the short run, if price exceeds average variable cost, a monopolistically competitive firm should:

d. continue producing the same quantity.

Identify a perfectly competitive firm from these examples.

d. A dairy farm

Identify an example of a fixed cost.

d. Charitable donations Fixed costs do not vary with output in the short run. A firm incurs a fixed cost in the short run, even if no output is produced.

Which of the following groups of customers would be charged the lowest price by a monopolist for its product?

d. College students

Product differentiation among the different firms that populate a monopolistically competitive market:

d. makes the demand curve faced by the firm price elastic.

At an output level chosen by a monopolistic competitor, the revenue from selling an additional unit is $500 and the cost of producing that additional unit is $400. To maximize profit in the short run, the firm should:

a. increase its output. In the short run, a monopolistically competitive firm increases output as long as marginal revenue exceeds marginal cost. Such a firm maximizes profit by producing the level of output at which marginal revenue equals marginal cost.

When the demand for the good produced by a monopoly is price elastic, a decrease in price will:

a. increase the total revenue.

The output that maximizes a cartel's profit corresponds to the point of:

a. intersection of the cartel's marginal cost curve and the market's marginal revenue curve. The cartel's marginal cost curve intersects the market's marginal revenue curve to determine the output that maximizes the cartel's profit.

Allocative efficiency occurs when each firm produces the output that:

d. consumers value the most. Allocative efficiency occurs when each firm produces the output most preferred by consumers.

The price charged by a monopoly is:

a. more than its marginal revenue. For a monopolist, marginal revenue is less than the price, or average revenue.

When a monopolist is forced to keep its price below the profit-maximizing level, _____.

a. the deadweight loss will decrease When monopolists keep prices below the profit-maximizing level in response to public scrutiny and political pressure, the deadweight loss is likely to decrease.

Which of the following is true of long run?

b. A firm can vary all its resources to change its output in the long run. In the long run, no resource is fixed. This means the firm can change its production by varying both the fixed and variable resources.

Identify an example of an undifferentiated oligopoly.

b. Atlantic Steel An oligopoly that sells a commodity or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil is called an undifferentiated oligopoly.

Which of these firms is least likely to change its price following its competitor's pricing strategy?

b. Chevron In case of differentiated oligopoly, such as the auto industry, producers are not quite sensitive about each other's prices.

Which of the following concepts can explain the shape of the short-run MC curve?

b. Marginal returns When a firm experiences increasing marginal returns, the marginal cost of its output falls; when it experiences diminishing marginal returns, the marginal cost of its output increases. This explains the shape of the MC curve.

Which of the following will happen if a monopolist starts practicing perfect price discrimination?

b. The demand curve also becomes the marginal revenue curve. If a monopolist can charge a different price for each unit it sells, its marginal revenue from selling one more unit will equal the price of that unit. Thus, the demand curve will become its marginal revenue curve.

Which of these is a valid comparison between the demand curves faced by a monopolist and a perfectly competitive firm?

b. The demand curve faced by a monopolist is more price elastic than that of a competitive firm. The demand curve faced by a monopolist slopes downward, while the same faced by a perfectly competitive firm is horizontal and parallel to the output axis.

In game theory, the outcome achieved when each player's choice does not depend on what the other player does is called the:

b. dominant-strategy equilibrium. The dominant-strategy equilibrium of a game refers to the outcome achieved when each player's action does not depend on what he thinks the other player will do.

Monopolistic competitors tend to act independently because:

b. each firm controls a very small share of the market.

A corn producer in Texas faces a horizontal demand curve because:

b. each firm in the corn market has a small share in the market and is a price taker. Each firm is so small relative to the market that it has no impact on the market price. The demand curve facing an individual farmer is, therefore, a horizontal line drawn at the market price.

A price-discriminating monopolist supplies its product to students studying medicine and to health care providers. In order to maximize profit, a monopolist will charge a higher price to:

b. health care providers who are less sensitive to price. Profit maximization by a price-discriminating monopolist would imply charging a higher price to the group with less elastic demand, that is, charging more to the group less sensitive to the price.

The consumers of a product that has many substitutes in the market are:

b. highly sensitive to changes in price. The demand for a product that has many substitutes is highly price elastic.

The deadweight loss of a monopoly is:

b. the difference between the total loss in consumer surplus and the gain in producer surplus.

The short-run industry supply curve in perfect competition is:

b. the horizontal summation of the upward-sloping short-run marginal cost curves of all the firms. The short-run supply curve of a perfectly competitive firm is the upward-sloping portion of its marginal cost curve, beginning at its shutdown point. The horizontal summation of the short-run supply curves of the firms gives the short-run industry supply curve.

When a firm achieves allocative efficiency, _____.

b. the marginal benefit of its output will be equal to its marginal cost of production Allocative efficiency is achieved when each firm produces the output most preferred by consumers and the marginal benefit from the output equals the marginal cost of production.

A firm is said to be experiencing diminishing marginal returns when:

b. the marginal product of a resource used in production is positive but decreasing. Once decreasing marginal returns set in, the marginal product declines. Total product continues to increase but at a decreasing rate. As long as marginal product is positive, total product increases. Once marginal product turns negative, total product starts falling.

Suppose labor is the only variable input used in production. In this case, the marginal cost of production will increase when:

b. the marginal product of labor declines. When a firm experiences increasing marginal returns to labor, the marginal cost of output falls. When a firm experiences diminishing marginal returns to labor, the marginal cost of output increases.

Which of these is a characteristic of a constant-cost industry?

c. Each firm's per-unit costs are independent of the number of firms in the industry. In a constant-cost industry each firm's long-run average cost curve remains unchanged when industry output changes. In this industry, each firm's per-unit costs are independent of the number of firms in the industry.

Changes in marginal cost reflect changes in the marginal productivity of the variable resource. Which of the following is a valid relationship between marginal cost and marginal product?

c. When marginal product increases, marginal cost falls. When the firm experiences increasing marginal returns, the marginal cost of output falls; when the firm experiences diminishing marginal returns, the marginal cost of output increases.

A situation in which players have difficulty cooperating even though they would benefit from cooperation is called:

c. a prisoner's dilemma. The prisoner's dilemma game shows why players have difficulty cooperating even though they would benefit from cooperation.

A firm is said to experience economies of scale when:

c. average cost falls as a firm expands its plant size. A firm experiences economies of scale when its long-run average cost falls as the scale of production expands.

A firm in a perfectly competitive market has no control over the price because:

c. each firm is small relative to the market. Price in a perfectly competitive market is determined by market demand and supply. A perfectly competitive firm is so small relative to the market that the firm's supply decision does not affect the market price.

A firm's total revenue minus the opportunity cost of all resources used in production is called its:

c. economic profit. Economic profit equals total revenue minus all costs, both implicit and explicit.

The market structure that consists of many firms, each selling a slightly differentiated product is called:

c. monopolistic competition. Monopolistic competition describes a market in which many producers offer products that are substitutes but are not viewed as identical by consumers.

The long-run average cost curve of a firm is sometimes referred to as the firm's:

c. planning curve. The long-run average cost curve, or LRAC curve, sometimes called the firm's planning curve, connects portions of the short-run average cost curves that are lowest for each output rate.

Sandra Martin is the owner of the only diamond jewelry showroom in a town. She supplies jewelry mostly to the upscale residents of this town but is interested in expanding her customer base to middleclass households as well. Recently, she announced a 10 percent discount on the making charges for her new customers but continued to charge the same price to existing customers. This is an example of:

c. price discrimination

The implicit costs of a firm will include:

c. the entrepreneurial skills of the owner. Implicit costs are the opportunity costs of using resources owned by a firm or provided by the firm's owners.

Given resource prices and technology, a firm can minimize its cost of producing a particular rate of output in the long run by operating along the points of tangency between:

c. the short-run average cost curve and the long-run average cost curve. The points of tangency between the short-run average cost curves and the long-run average cost curves represent the least-cost way of producing each particular rate of output, given resource prices and technology.

Which of these is true of the demand curve faced by a monopolist?

d. It slopes downward.

Product differentiation expenditures incurred by the firms in an industry can:

d. create barriers to entry.

Legal restrictions such as patents:

d. give producers a temporary exclusive right to produce a new good.

A firm's opportunity cost of using a resource it owns is called its:

d. implicit cost. A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment is called implicit cost.

The inequality in economic profits garnered by cartel members are greater when:

d. the average cost of production differs across cartel members.

The slope of the total cost curve at each rate of output equals:

d. the marginal cost at that rate of output. The slope of the total cost curve at each rate of output equals the marginal cost at that rate of output.

If total product for each of six units of labor is 10, 16, 20, 30, 34, and 36, respectively, the marginal product of the fifth unit is:

Marginal product of the fifth unit = total product of the fifth unit - total product of the fourth unit = 34 - 30 = 4.

Which of these is a likely impact of an increase in output in a monopoly market?

The price of the product, as well as the marginal revenue, decreases, but marginal revenue falls faster than price. The marginal revenue curve of a monopolist lies below the demand curve. Therefore an increase in output will lower the marginal revenue by a greater extent than the price of the product.

Identify a key feature of a perfectly competitive market in the long run.

a. Easy entry and exit of firms in the market When perfectly competitive firms earn economic profits in the short run, new firms enter the industry, the existing firms expand their scale of operation, and all firms earn normal profits.

Which of these is a feature of an undifferentiated oligopoly market?

a. High interdependence among firms An undifferentiated oligopoly sells a commodity, or a product that does not differ across suppliers. Thus, the interdependence among firms in this industry is very high.

Which of these is true of a government license?

a. It allows firms to charge prices above the competitive level. A license may not grant a monopoly, but it does block entry and often gives firms the power to charge prices above the competitive level without losing all their customers. Thus, a license can serve as an effective barrier against new competitors.

Which of these is the objective of game theory?

a. It examines the strategic behavior among interdependent firms. Game theory examines oligopolistic behavior as a series of strategic moves and countermoves among rival firms.

The long-run equilibrium for a perfectly competitive firm ensures that:

a. Marginal Revenue = Marginal Cost = Average Total Cost. In the long run, a firm earns normal profit. Hence marginal cost, marginal revenue, and long-run average cost are all equal. There is no reason for new firms to enter the market or for existing firms to leave.

Which of these is an example of a short-run adjustment in production made by a firm?

a. People's Bank hiring two new tellers to meet increased demand for customer services Output can be changed in the short run by adjusting variable resources, but the size, or scale, of a firm is fixed in the short run. In the long run, all resources can be varied. The length of the long run differs from industry to industry because the nature of production differs.

Magic is the only unisex parlor that specializes in trendy haircuts in a small town. The owner, Florence, manages to earn an economic profit in the short run. However, she notices that her marginal revenue for the sixth customer each day is lower than the marginal cost of haircuts, although the demand for haircuts is quite high. Which of the following steps would be taken by Florence to correct this mismatch?

a. She would raise the price of haircut and try to reduce the number of haircuts done per day.

Identify an example of a good that is produced in a monopolistically competitive market.

a. Smart phones In monopolistic competition, the product differs slightly among sellers in terms of physical appearance, the number and variety of locations where it is available, complementary services provided with it, and its image in the consumer's mind. The physical appearances of the different smartphones available in a market differ from each other. Also, each producer provides a somewhat different set of complementary services with it.

Which of these is likely to occur when a typical firm in an oligopoly market changes its product's quality, price, output, or advertising policy?

a. The competing firms react by changing their strategies.

Which of these is a characteristic of monopolistic competition?

a. The demand curve faced by each individual firm is downward sloping. Monopolistic competition is a market structure with many firms selling products that are substitutes but not identical. Thus, each firm's demand curve slopes downward.

Identify a likely impact of an increase in market demand on a typical firm in a constant-cost industry that is in long-run equilibrium.

a. The equilibrium output will increase, while the equilibrium price will remain unchanged For a constant-cost industry, if demand increases, firms temporarily make a profit as price increases above the minimum needed for the firms to stay in business. This will cause firms to expand output or new firms to enter the industry. Because costs are constant in the long run, the long-run supply curve will be horizontal. Therefore, equilibrium output will increase, while the equilibrium price will remain the same.

Which of the following will hold true in the short run if a perfectly competitive firm stalls production?

a. The firm will have to bear its fixed cost. A firm that shuts down in the short run must still pay its fixed cost. However, it might be able to cover its variable costs as well as some of its fixed costs if it continues to produce. Therefore, a firm continues to produce in the short run rather than shutting down if total revenue exceeds the variable cost of production.

Which of these describes the allocative inefficiency that results from the price-output decision of a profit maximizing monopolist?

a. The loss in consumer surplus The monopolist restricts quantity below what would maximize social welfare. The loss in consumer surplus that results from the output decision under a monopoly is partly covered by the gain in producer surplus; the rest is a deadweight loss on the society. Thus the monopoly output results in allocative inefficiency

Which of these is true for a nonprice-discriminating monopolist whose average revenue is equal to the average total cost at the profit-maximizing output?

a. The monopolist earns a normal profit. A monopolist will earn no economic profit if the price of its product is below its average total cost. However, if price is above the average variable cost of production, it will continue to operate in the short run.

When a firm earns normal profit,

a. accounting profit equals implicit costs. The accounting profit just sufficient to ensure that all resources used by the firm earn their opportunity cost is called a normal profit. Any accounting profit in excess of a normal profit is economic profit.

A cartel in an oligopoly market is defined as a group of firms that agree to:

a. coordinate their production and pricing decisions.

The average total cost incurred by a ball bearing manufacturer equals the average revenue earned by him when he produces 1,000 units of output. This implies that at this output level the firm is:

a. earning a normal profit. When the average total cost of production is equal to the market price, the firm is earning a normal profit. This is also known as the break-even point.

A key feature of an oligopoly market is that, there are:

a. few suppliers and many buyers. In an oligopoly market, there may be few suppliers but there are many demanders. There are so many buyers that none of the buyers have any control over the price.

Graphically, the distance between the total cost curve and the total variable cost curve at each level of output reflects the:

a. fixed cost. The total cost curve is simply the variable cost curve shifted vertically by the fixed cost.

The minimum efficient scale is the lowest output at which:

a. the firm takes full advantage of economies of scale. Minimum efficient scale is the lowest output at which the firm takes full advantage of economies of scale.

A cartel's profit can be maximized only when output is allocated between the firms such that:

a. the marginal cost of the final unit produced by each firm is identical. For cartel profit to be maximized, output must be allocated so that the marginal cost of the final unit produced by each firm is identical.

An important feature of perfect competition is:

a. the presence of a standardized product. A perfectly competitive market is characterized by many buyers and sellers, a standardized product, perfect information, and mobility of firms and resources.

The total cost and the variable cost of producing 1,000 soft toys are $2,500and $1,800, respectively. This implies that:

a. the total fixed cost of producing the soft toys is $700. The total fixed cost of the firm is equal to the difference between the total cost and the total variable cost.

The firms in a perfectly competitive market will expand their scale of operation in the long run if:

a. they earn economic profits in the short run. Short-run economic profit attracts new firms to the industry in the long run. The new entry shifts out market supply, forcing the market price down until economic profit disappears.

Innovation can be described as the process of:

a. turning an invention into a marketable product. A patent law provides a stimulus to the firm to turn inventions into marketable products, a process called innovation.

Suppose the marginal cost of production increases. Which of these steps will be taken by a monopolist in the short run?

b. It will reduce its output to extract a higher price from customers.

Which of these is a long run feature of firms in a monopolistically competitive market?

b. The firms can easily enter or leave the market. Firms in monopolistic competition can, in the long run, enter or leave the market with ease because barriers to entry are low.

Identify a difference between a collusive oligopoly and a perfectly competitive market.

b. The industry output in a collusive oligopoly is smaller than that in perfect competition and the market price in a collusive oligopoly is higher than that in perfect competition. If oligopolists engage in some sort of implicit or explicit collusion, industry output will be smaller and the price would be higher than under perfect competition

Identify a valid comparison between colluding firms and competing firms.

b. The output under a cartel is lower than the competitive level. Colluding firms, compared with competing firms, usually produce less, charge more, block new firms, and earn more economic profit.

A firm that sells products which are substitutes but are not viewed as identical by the consumers will face:

b. a downward-sloping demand curve. In monopolistic competition the products of different suppliers differ slightly so the demand curve for each supplier slopes downward, giving them some control over the price.

The long-run average cost curve of a firm is often horizontal over a particular output range. Over this range, the firm experiences:

b. constant average cost. Constant long-run average cost is a condition that occurs if, over some range of output, long-run average cost neither increases nor decreases with changes in the firm size.

For a monopolist that charges a single price to all consumers, marginal revenue:

b. is less than average revenue. The marginal revenue of a monopolist equals the price minus the revenue forgone by selling all previous units for a lower price. Because a monopolist's marginal revenue equals the price minus the loss, marginal revenue is always less than the price or the average revenue.

A monopolist is said to have market power because:

b. it has complete control over product price.

A firm experiences diseconomies of scale when:

b. its long-run average cost increases as output increases. Diseconomies of scale eventually increase a firm's average cost as the scale of operation expands in the long run.

A firm experiences increasing marginal returns when:

b. its total product increases at an increasing rate. When increasing marginal returns sets in, the marginal product increases. Total product also increases at an increasing rate.

A profit-maximizing monopolist will choose to supply the output at which:

b. marginal revenue equals marginal cost. According to the golden rule of profit maximization, the profit-maximizing output occurs where marginal revenue equals marginal cost.

The demand curve facing an individual firm in a perfectly competitive market is:

b. perfectly price elastic. The demand curve facing an individual firm in a perfectly competitive industry is a horizontal line drawn at the market price.

If two firms in a perfectly competitive market have the same marginal cost, they are likely to:

b. produce the same quantity at the market price. If two firms in a perfectly competitive market produce the same quantity at the market price, they must have the same marginal cost.

Mathematically, the average revenue of a firm is calculated as:

b. the ratio of total revenue and the quantity of output. Average revenue equals total revenue divided by quantity of output.

In game theory, a payoff matrix is a table that lists:

b. the rewards and penalties associated with pursuing various strategies. A payoff matrix is a table listing the rewards or the penalties that each player can expect based on the strategy each pursues.

The market demand curve in a monopoly is:

b. the same as the demand curve for the monopolist's output. A monopoly, by definition, supplies the entire market. So, the demand curve for a monopolist's output is also the market demand curve.

In a perfectly competitive market, the portion of a firm's marginal cost curve that intersects and rises above the lowest point on its average variable cost curve represents:

b. the short-run supply curve of the firm. The short-run firm supply curve shows how much a firm supplies at each price in the short run. In a perfectly competitive market, the short-run supply curve of a firm is that portion of the firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve.

Factors of production that can be adjusted quickly to increase or decrease production are called:

b. variable inputs. Any resource that can be varied in the short run to increase or decrease production is called a variable input.

Identify an important feature of a monopoly market.

c. The product is unique and has no close substitute. Monopolists sell goods and services with no close substitutes.

Suppose the demand for the output produced by a perfectly competitive firm is zero for any price at or above $10. As price falls from $10, the quantity of output demanded increases. If the equilibrium price and output of this firm are $4 and 10,000 units, respectively, the value of the consumer surplus would be:

c. $30,000. For a given level of output, consumer surplus is the area below the demand curve and above the market clearing price. Consumer surplus = (½) × 10,000 × ($10 − $4) = 10,000 × 3 = 30,000.

Which of these is true of Nash equilibrium?

c. A Nash equilibrium occurs when the strategy chosen by each player is similar to the other player and the players enjoy identical payoffs. Nash equilibrium is a situation in which a firm, or a player in game theory, chooses the best strategy given the strategies chosen by others. No participant can improve his or her outcome by changing strategies even after learning about the strategies selected by other participants.

For a monopolist who does not price discriminate, economic profit is maximized in the short run at a price of $200. Which of these can be concluded from the given information?

c. Average revenue of the firm at that output level is $200. At the profit-maximizing output, marginal cost is equal to marginal revenue but is less than the average revenue. The price at the profit maximizing output is equal to the average revenue of the firm.

Which of these will guarantee positive economic profits to a monopolist in the long run?

c. Creating barriers to the entry of new firms in the market If a monopoly is insulated from competition by high barriers that block new entry, economic profit can persist into the long run.

Which of the following costs will be incurred by a firm even if it stalls production in the short run?

c. Fixed cost A firm continues to incur a fixed cost even when output is zero. The variable cost of production is zero when the firm produces no output.

Which of the following is true of a patent law?

c. It encourages investment in research and innovation. Patent laws encourage inventors to invest the time and money required to discover and develop new products and processes. If other firms could simply copy successful products, inventors would have less incentive to incur the up-front costs of invention.

Identify the market structure in which the minimum efficient scale of a typical firms relatively large compared to the industry output?

c. Oligopoly When a firm's minimum efficient scale is relatively large compared to industry output, only a few firms are needed to satisfy industry demand.

Which of these equations describes the relationship between market price (P), average revenue (AR), and marginal revenue (MR) for a profit-maximizing monopolist who charges a single price?

c. P = AR > MR In a monopoly, the average revenue curve lies above the marginal revenue curve. Thus, price is always more than the marginal revenue.

Identify a valid relation between price (P), average revenue (AR) and marginal revenue (MR) for a monopolistic competitor in the short run.

c. P = AR > MR The demand curve facing a monopolistic competitor is also its average revenue curve. The marginal revenue curve lies below the demand curve.

Identify a valid difference between the equilibrium price-output combinations of a monopolist and a perfectly competitive firm.

c. The equilibrium output is comparatively lower and the equilibrium price is higher for a monopolist. The monopolist charges a higher price and produces a lower output compared to a perfectly competitive firm.

Which of these will be a possible impact of an increase in demand in a perfectly competitive, increasing-cost industry?

c. The equilibrium price as well as the equilibrium output will increase. The higher price that buyers are willing to pay because of an increase in demand induces existing firms to increase their quantities supplied as they move along their individual marginal cost curves. The market, as such, moves along the original market supply curve from one equilibrium point to a higher equilibrium point. An increase in demand therefore increases both the equilibrium price and the equilibrium output.

Suppose a monopolistic competitor is producing an output at which marginal revenue is less than marginal cost. Which of the following steps should be taken by the firm in the short run in order to maximize profit?

c. The firm should increase price and decrease output. In the short run, a monopolistically competitive firm increases output as long as marginal revenue exceeds marginal cost and it can cover its variable costs. It maximizes profit by producing the output at which marginal revenue equals marginal cost.

The total revenue of a perfectly competitive firm is $3,000, its variable cost of production is $2,800, and its fixed cost is $600. Which of the following decisions will be taken by the owner of the firm in the short run?

c. The firm will continue to operate in the short run since its total revenue exceeds its total variable cost. In the short run, a firm produces rather than shuts down if total revenue exceeds the variable cost of production.

Artisan Co. is a labor-intensive cottage firm. When it adds the first four workers to its production process in the short run, its output rises from 0 to 15 to 35 to 45 to 50. Which of the following can be concluded about the marginal product of labor from this information?

c. The marginal product of the third worker is 10 units of output. The marginal product is 15 units of output for the first worker, 20 units of output for the second worker, 10 units for the third worker, and 5 units for the fourth worker.

Which of these is a similarity between a monopolistically competitive firm and a non-price-discriminating monopolist?

c. The marginal revenue curve lies below the demand curve. A monopolistic competitor faces a downward-sloping demand curve just like a monopolist. The marginal revenue curve also slopes downward and lies below the demand curve.

Which of the following conditions will guarantee that a firm has achieved productive efficiency?

c. The market price of the firm's product is equal to the minimum average cost. Productive efficiency occurs when each firm produces at the minimum point on its long-run average cost curve, so the market price equals the minimum average cost.

The payment made to coal suppliers by a thermal power plant would be an example of a(n):

c. explicit cost. A firm's explicit costs are its actual cash payments for resources: wages, rent, interest, insurance, taxes, and the like. Additional Resources

A monopolist's average revenue curve is the same as:

c. its demand curve. All along the demand curve, price equals average revenue. Therefore, the demand curve is also the monopolist's average revenue curve.

A price-discriminating monopolist who wants to maximize profits divides its market into two segments. The monopolist's marginal cost of producing each unit of output is $20. If it charges a price of $30 in the market segment where demand is relatively less elastic, its price in the market segment where demand is more elastic will be:

c. less than $30 but more than $20. A monopolist facing two groups of consumers with different demand elasticities may be able to practice price discrimination to increase profit or reduce any loss. With marginal cost the same in both markets, the firm charges a higher price to the group which has less elastic demand.

Unlike a perfectly competitive firm, the marginal revenue curve of a monopolist:

c. lies below the average revenue curve. The average revenue curve of a monopolist lies above the marginal revenue curve. This is different from perfect competition where the marginal revenue curve coincides with the average revenue curve.

When the total cost of a competitive firm grows at an increasing rate with an increase in its output, we can conclude that its:

c. marginal cost is positive and increasing. The marginal cost of a firm is equal to the change in total cost divided by the change in output. When total cost increases at an increasing rate, marginal cost also increases.

The change in total product that results when a firm increases its usage of a particular resource by one unit, keeping all other resources constant, is referred to as the:

c. marginal product of that resource.

A cartel acts like a monopoly that runs many plants. Thus, its marginal cost curve is:

c. the horizontal sum of all the individual firms' marginal cost curves. The marginal cost curve for the cartel is the horizontal sum of each firm's marginal cost curve.

The output level at which the average revenue curve is tangent to the minimum point on the average variable cost curve is referred to as:

c. the shutdown point. When price just equals the average variable cost, the firm is indifferent between producing and shutting down.

The marginal revenue of a firm is graphically represented by the slope of:

c. the total revenue curve. Marginal revenue is the change in total revenue on account of a change in output. It is equal to the slope of the total revenue curve.

A perfectly competitive firm will be compelled to shut down its operation in the short run if, before the shutdown, at all positive output levels, _____.

c. the total variable cost was more than the total revenue A firm will continue to produce in the short run as long as its total revenue exceeds the variable cost of production.

A firm is likely to experience increasing marginal returns from labor when:

c. there is specialization and division of labor. Division of labor increases the marginal product of each worker and allows a firm to experience increasing marginal return from labor.

Peyton, a fashion designer, plans to quit her current job, which pays $25,000 a year, and open a boutique. She intends to take over the building that she owns and currently rents to her friend for $8,000 a year. Her expenses in setting up the boutique will be $50,000 for raw materials and $5,000 for interior décor and electricity. What are Peyton's explicit costs?

d. $55,000 Explicit cost = cost of raw materials + cost of interior décor and electricity = $55,000.

For which of the following industries is the long-run industry supply curve perfectly elastic?

d. Constant-cost, perfectly competitive industry The long-run supply curve for a perfectly competitive constant cost industry is a horizontal straight line parallel to the output axis.

Which of these is a likely impact of perfect price discrimination by a profit-maximizing monopolist?

d. Consumer surplus falls to zero. By charging a different price for each unit sold, a perfectly discriminating monopolist is able to convert every dollar of consumer surplus into economic profit.

Suppose the firms in a perfectly competitive industry were earning normal profit before an economic downturn decreased the market demand for the product. Which of the following will be a likely short-run impact of this economic change?

d. Each firm will incur economic loss. A fall in market demand in a perfectly competitive market exerts a downward pressure on the market price. Since each firm in a perfectly competitive market charges the market price, the average revenue of the individual firms will also decline when market demand declines. When the firms were earning normal profit, MC = MR = AR = AC. As the new price level is below the average total cost of production, each firm will incur an economic loss.

Which of these conditions can lead to the formation of a natural monopoly?

d. Economies of scale A monopoly that emerges from economies of scale is called a natural monopoly, to distinguish it from the artificial monopolies created by government patents, licenses, and other legal barriers to entry.

The minimum efficient scale refers to the:

d. lowest rate of output at which a firm takes full advantage of economies of scale. The minimum efficient scale is the lowest rate of output at which a firm takes full advantage of economies of scale.

Which of these is most likely to create a barrier to entry in an automobile industry?

d. Economies of scale In the automobile industry, economies of scale create a barrier to entry. To compete with existing producers, a new entrant must sell enough automobiles to reach a competitive scale of operation.

Which of the following is true of the long run in a perfectly competitive market?

d. Firms earn a normal profit. In the long run, perfectly competitive firms earn normal profit. Hence marginal cost, marginal revenue, and long-run average cost are all equal.

Which of the following is true of the total revenue curve faced by a perfectly competitive firm?

d. It is a straight line emanating from the origin with a constant slope. The total revenue curve for a perfectly competitive firm is a straight line with a constant slope. The slope of the total revenue curve is equal to the market price.

Which of these conditions is the profit-maximizing condition for a monopolistic competitor?

d. Marginal Revenue = Marginal Cost The profit-maximizing output of a monopolistic competitor is the level of output at which marginal revenue equals marginal cost.

Which of these conditions is true fora monopolistic competitor in the short run?

d. Marginal revenue is less than average revenue. In a monopolistically competitive market, the marginal revenue curve slopes downward and lies below the demand curve. Thus, for a given level of output, marginal revenue is less than average revenue.

Which of the following is an example of a long-run adjustment in a firm?

d. Siemens healthcare sets up a new factory to increase its production of ultrasound machines.

At the end of a particular quarter, a perfectly competitive firm observes that its marginal cost of production is $15, while its marginal revenue is $18. Further, the market price of its product exceeds the average variable cost of production by $2. Given this information, which of the following decisions should be taken by the firm to maximize profit?

d. The firm should temporarily stall its production. At the current rate of output, MR > MC. Therefore, the firm should increase its output until the profit-maximizing condition MR = MC is achieved.

Edward marries Melisa and makes her the co-owner of his law firm. Melisa, who holds a degree in financial accounting, decides to handle the accounting work for the firm that was earlier outsourced to a consultant. Which of the following will result from this change?

d. The firm's explicit costs will fall, but its implicit costs will rise. The law firm will no longer have to pay the consultant for the accounting services, so the explicit cost will fall. The use of the owner's personal resources leads to an increase in the implicit costs.

Which of these steps will be taken by a monopolist when the total variable cost of production falls due to a decline in the price of one or more resources used in production?

d. The monopolist will marginally reduce the price of its product to attract new customers.

Suppose a business analyst observes that a perfectly competitive firm's marginal revenue, marginal cost, and average revenue are all equal to the price of its product when output is 5,000 units. If the rent paid by the firm for factory space increases, which of the following is likely to happen?

d. The profit-maximizing output will remain at 5,000 units, but the profit earnings will decrease. A firm produces rather than shuts down if total revenue exceeds the variable cost of production. The profit-maximizing output remains fixed at 5,000 units even when the fixed cost increases, as long as the variable costs of production are covered. However, the total profit earned by the firm decreases.

Identify a key feature of explicit costs.

d. These are actual cash payments made by a firm to its suppliers of inputs. Explicit costs are the opportunity costs of resources employed by a firm that take the form of cash payments.

Which of the following conditions is common in a perfectly competitive market?

d. Uniform product price An individual buyer or seller has no control over the price in a perfectly competitive market. Price is determined by market demand and supply. Once the market establishes the price, any firm is free to supply whatever quantity maximizes its profit.

Under which of the following situations is a monopolist likely to keep its price below the profit maximizing level?

d. When the demand for the product is price inelastic A monopolist might keep the price below the profit-maximizing level to avoid attracting competitors to the market.

A perfectly competitive firm guarantees _____ in the long run.

d. allocative and productive efficiency Perfect competition guarantees both productive efficiency and allocative efficiency in the long run

Variable costs refer to costs that:

d. change as output changes. Any production cost that changes as the rate of output changes is called variable cost.

In the prisoner's dilemma game, if player A chooses his dominant strategy, player B will:

d. choose his own dominant strategy.

The demand curve faced by a monopolist who can practice perfect price discrimination:

d. coincides with the marginal revenue curve. If a monopolist can charge a different price for each unit it sells, its marginal revenue from selling one more unit will equal the price of that unit. Thus, the demand curve will become its marginal revenue curve.

The long-run industry supply curve for a constant-cost industry:

d. is a horizontal line parallel to the output axis. The long-run supply curve for a constant-cost industry is horizontal and parallel to the output axis.

A fixed cost refers to a production cost that:

d. is independent of the rate of output. Any production cost that is independent of the firm's rate of output is called a fixed cost.

A firm will continue its operation as long as:

d. its economic profit is positive. As long as economic profit is positive, a firm should continue its production.

A short-run feature of a firm under perfect competition is:

d. limited entry and exit. A firm in a perfectly competitive market cannot go out of business or produce something else in the short run. The short run is, by definition, a period too short to allow existing firms to leave the industry.

The owner of a wheat farm sells her produce in a perfectly competitive market. Her annual wheat turnover amounts to 800 bushels, generating a total revenue of $4,800. However, harvesting the 801st bushel of wheat increases her total cost of farming from $4,800 to $4,806. This implies that the wheat producer's:

d. marginal revenue will equal marginal cost for the 801st bushel of wheat. The average revenue of the firm equals $4,800/800 ═ 6. Since AR ═ price, the price of each bushel of wheat is $6. The average cost of producing 800 bushels of wheat is $4,800/800 ═ $6. When output increases by 1 bushel of wheat, total cost increases by $6. Therefore, MC ═ $6. The marginal revenue is $6.

The average revenue of a firm is equal to:

d. market price of its product. Average revenue equals total revenue divided by quantity of output. In all market structures, average revenue equals the market price.

In order to maximize total revenue, a monopolist always chooses to produce:

d. on the elastic portion of the demand curve. A profit-maximizing monopolist would never expand output to the inelastic range of demand because doing so would reduce total revenue.

When the market price of a good sold in a perfectly competitive market decreases, _____.

d. the average revenue curve shifts downward In each market, the average revenue earned by a firm is equal to the price of the good that the firm sells. In perfect competition, price is constant, so average revenue is a horizontal linear curve parallel to the output axis at the given price.

The short-run variable costs of a law firm include:

d. the commission given to the lawyers. Any production cost that changes as the rate of output changes is called a variable cost. In this example, the lawyers are the variable resources used by the firm. Therefore, the commission paid to the lawyers is a variable cost borne by the firm.

Suppose a firm incurs no fixed cost for producing a good. If the variable costs of production incurred by the firm for the first three units of output are $200, $400, and $650, respectively, we can conclude that:

d. the marginal cost of producing the third unit is $250. Marginal cost = change in total cost/change in output. When output is increased from 2 to 3 units, total cost increases from $400 to $650. Thus, MC = $250/1 = $250.

Unlike a monopoly, in a perfectly competitive market, _____.

d. there are no barriers to the entry of new firms A monopolized market is characterized by barriers to entry, which are restrictions on the entry of new firms into an industry.

The resource prices in a constant cost industry remain stable when output expands because the firms in this industry:

d. use a small portion of the available resources. A constant-cost industry uses such a small portion of the resources available that expanding industry output does not bid up resource prices.