MICRO EXAM 3

Which of the following statements is true about advertising by a monopolistically competitive firm?

Advertising could make the monopolistic competitor's demand more inelastic, but advertising has no effect on a perfect competitor's demand.

College students and faculty members have a more elastic demand than the general public for Apple's iMac desktop computers. From this we can conclude that

Apple will charge college students and faculty members lower prices than it charges the general public.

Which of the following is not an example of price discrimination?

Buyers at an automotive parts store receive a discount for bulk buying because the store is able to pass on to its customers some of the lower average cost for producing large quantities.

Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often break down?

Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.

What is meant by the "law of one price"?

Identical products should sell for the same price everywhere.

Movie theaters often charge different people different prices for admission. Why don't theaters charge different prices for popcorn and other food items?

It is difficult to limit the resale of food items from those who pay low prices to those who would have to pay high prices from the concession stand.

A firm would decide to shut down if its production resulted in

MR < AVC

For the monopolistically competitive firm

P = AR > MR.

A firm will make a profit when

P > ATC.

Which of the following is a characteristic of an oligopolistic market structure?

There are few dominant sellers.

Which of the following is a characteristic of a monopoly?

There is only one seller in the market.

You have just opened a new Italian restaurant in your hometown where there are three other Italian restaurants. Your restaurant is doing a brisk business and you attribute your success to your distinctive northern Italian cuisine using locally grown organic produce. What is likely to happen to your business in the long run?

Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero.

If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing it, the firm

added more to total revenue than it added to total cost.

Marginal cost is the

additional cost of producing an additional unit of output

A characteristic of the long run is

all inputs can be varied.

As a measure of competition in an industry, concentration ratios have several flaws. One of these flaws is that concentration ratios

are calculated for the national market, even though competition in some industries is mainly local.

Why do most firms in monopolistic competition typically make zero profit in the long run?

because the lack of entry barriers would compete away profits

Economists agree that a monopolistically competitive market structure

benefits consumers because firms produce products that appeal to a wide range of consumer tastes.

Many golf courses charge members an annual membership fee as well as a fee each time they golf. One reason for this is

charging both fees allows the courses to transfer more consumer surplus into profit than charging only an admission fee.

A firm that can effectively price discriminate will charge a higher price to

customers who have the more inelastic demand for the product.

Firms in perfect competition are price takers because

each firm is too small relative to the market to be able to influence price

Economic costs of production differ from accounting costs in that

economic costs add the opportunity costs of a firm using its own resources while accounting costs do not

The study of how people make decisions in situations in which attaining their goals depends on their interactions with others is called

game theory.

A patent or copyright is a barrier to entry based on

government action to protect a producer.

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.

A merger between the Ford Motor Company and General Motors would be an example of a

horizontal merger.

When colleges use yield management techniques, they

increase financial aid offers to students whose demand for college education is likely to be more price elastic and reduce financial aid offers to students whose demand for college education is likely to be less price elastic.

Jason is currently producing 20 thousand pounds of apples. To maximize his profit Jason should

increase production to the output rate indicated by point d.

Arbitrage

is the act of buying an item at a low price and reselling the item at a higher price.

Price discrimination

is the practice of charging different prices to different customers when the price differences cannot be attributed to variations in cost.

Improvements in inventory control represent a positive technological change because they allow firms to produce the same output with fewer inputs. In recent years, many firms have adopted an inventory system in which firms accept shipments from suppliers as close as possible to the time they will be needed. Wal-Mart has been a pioneer in using inventory control systems to this in its stores. This type of inventory system is called a ________ inventory system.

just-in-time

For a perfectly competitive firm, at profit maximization

marginal revenue equals marginal cost.

In the United States, the average person mostly patronizes firms that operate in

monopolistically competitive markets.

Interdependence of firms is most common in

oligopolistic industries.

In an oligopoly market

one firm's pricing decision affects all the other firms.

The 10-year protection period from generic competition for drug manufacturers is a form of

patent.

A monopolistically competitive firm maximizes profit where

price > marginal cost.

A Nash equilibrium is

reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.

Governments grant patents to encourage

research and development on new products.

The key characteristics of a monopolistically competitive market structure include

sellers selling similar but differentiated products.

If in a perfectly competitive industry, the market price facing a firm is below its average total cost but above average variable cost at the output where marginal cost equals marginal revenue

some existing firms will exit the industry.

Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because

some of its customers have switched to purchasing the products of new entrants in the market.

A Herfindahl-Hirschman Index is calculated by

summing the squares of the market shares of each firm in the industry.

The law of diminishing marginal returns states

that at some point, adding more of a variable input to a given amount of a fixed input will cause the marginal product of the variable input to decline

Because of the shortcomings of concentration ratios, some economists prefer another measure of competition called

the Herfindahl-Hirschman Index.

The marginal product of labor is defined as

the change in output that a firm produces as a result of hiring one more worker.

If a firm's average total cost is less than price where MR=MC,

the firm should continue to produce the output it is producing.

A four-firm concentration ratio measures

the fraction of an industry's sales accounted for by the four largest firms

Which of the following is the best example of an oligopolistic industry?

the pharmaceutical industry

The most profitable price for a monopolist is

the price for which marginal revenue equals marginal cost

Collusion occurs when

there is an agreement among firms to charge the same price or otherwise not to compete.

Price discrimination is a rational strategy for a profit-maximizing firm when

there is no opportunity for arbitrage across market segments.

A merger between U.S. Steel and General Motors would be an example of a

vertical merger.

A monopoly is a seller of a product

without a close substitute.