Exam 3 Review

If marginal cost exceeds marginal revenue, what would be the best strategy for a profit-maximizing firm?

Decrease quantity until marginal cost equals marginal revenue.

What is the strategy underlying price discrimination?

Increase total revenue by charging higher prices to those with the most inelastic demand for the product and lower prices to those with the most elastic demand.

Which of the following is true about the dynamic process of competition?

It puts the profit motive of sellers to work for buyers.

In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases?

It will reduce output and raise price.

If marginal revenue exceeds marginal cost, what will a profit-maximizing monopolist do to maximize profit?

Lower price and increase output.

If profit-seeking entrepreneurs are going to be successful, what must they do?

Produce a product that the consumers value more than the resources required for its production.

As firms exit a competitive price-searcher market, what happens to the profits of remaining firms and the diversity of products in the market?

Profits rise and product diversity in the market decreases

A monopolist earning short-run economic profit determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?

Raise price and lower output.

If marginal cost exceeds marginal revenue, what will a profit-maximizing monopolist do to maximize profit?

Restrict output to increase the price even higher.

Why do airlines generally charge travelers willing to stay over Saturday night lower fares than other customers?

The demand of Saturday night travelers is elastic, and therefore, the lower fares generate more revenue

What role do losses play in a competitive price-searcher market?

They send a message that more value would be created if the resources were used to produce other goods.

Compared to the outcome when the firms are price takers, competitive price-searcher markets will result in?

a wider variety of products and higher prices.

Which of the following is true of entrepreneurship? a. Entrepreneurial discovery is an important source of economic growth and higher living standards. b. The role of the entrepreneur is not very important and that is why it is generally not included in economic models. c. Economic models are able to capture fully the important role of the entrepreneur in the market process. d. The role of entrepreneurial discovery could be easily integrated into economic models, but nonetheless economists choose not to do so.

a. Entrepreneurial discovery is an important source of economic growth and higher living standards.

Which of the following would be the most likely scenario if firms in a competitive price-searcher market were currently earning economic profit? a. Firms would decrease their rate of output in the short run, causing a decline in profitability in the market. b. New firms would enter the market, resulting in fewer sales by existing firms. c. Production inefficiencies would persist until the profit was eliminated. d. All firms in the market would continue to produce at their current levels and continue to charge the same price.

b. New firms would enter the market, resulting in fewer sales by existing firms.

Which of the following is true in markets characterized by oligopoly? a. Collusive agreements will always prevail. b. Pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market. c. The oligopolists earn the highest profit when they cooperate and behave like a monopolist. d. Collective profits are always lower with cartel arrangements than they are without cartel arrangements.

c. The oligopolists earn the highest profit when they cooperate and behave like a monopolist.

As a group, oligopolists would always earn the highest profit if they would?

charge the same price that a monopolist would charge if the market were a monopoly.

The two conflicting tendencies that a firm has in an oligopolistic industry are the incentive to?

cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit.

Which one of the following must occur if a profit-maximizing restaurant is going to increase its revenues by charging senior citizens (persons age 65 and over) lower prices than other customers? a. Senior citizens must have lower incomes than other potential customers. b. Senior citizens must have higher incomes than other potential customers. c. The demand of senior citizens for the services of the restaurant must be inelastic. d. The demand of senior citizens for the services of the restaurant must be elastic. e. Other customers must enjoy food more than senior citizens.

d. The demand of senior citizens for the services of the restaurant must be elastic.

As new firms enter a competitive price-searcher market, profits of existing firms

decline and product diversity in the market increases.

If a price searcher is producing at a level of output such that its marginal cost is $5 and its marginal revenue is $3, the firm should?

increase price and reduce its rate of output.

If a firm is making zero economic profit, it?

is doing as well as typical firms in other markets.

When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years)?

is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price.

When barriers to entry are high, a monopolist (or cartel) will often be able to increase their profits by?

reducing their output so they can raise their price.

If a firm is losing money, this implies that?

the value of the resources used to make the product is being reduced.

Competition as a dynamic process implies that individual firms in a market?

use price competition as well as other forms of competition to gain the dollar votes of consumers.