ECON 201 WVU MODULE 8-11
producer surplus.
The amount that a seller is paid for a good minus the seller's actual cost
A flat firm-level demand curve means: a full market pricing power. b limited market pricing power. c no market pricing power. d seasonal market pricing power.
c no market pricing power.
Average cost equals total cost __ quantity. a minus b plus c times d divided by
d divided by
A rent control is a regulation that: a ensures that there are apartments available for rent. b controls rents at constant levels. c upholds rents to above equilibrium levels. d prevents rents from rising to equilibrium levels.
d prevents rents from rising to equilibrium levels.
price floor
keeps a price from falling below a certain level like minimum wage
production
the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
Firms are said to be in perfect competition when
(1) many firms produce identical products; (2) many buyers are available to buy the product, and many sellers are available to sell the product; (3) sellers and buyers have all relevant information to make rational decisions about the product being bought and sold; and (4) firms can enter and leave the market without any restrictions—in other words, there is free entry and exit into and out of the market.
cartel
A group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price
price taker
A perfectly competitive firm, because the pressure of competing firms forces them to accept the prevailing equilibrium price in the market.
production technologies
In planning for the long run, the firm will compare alternative _________
market structure of the industry
Industries differ from one another in terms of how many sellers there are in a specific market, how easy or difficult it is for a new firm to enter, and the type of products that are sold.
price controls
Laws that government enacts to regulate prices, there are price ceiling and price floors
profit
Profit=Total revenue−Total cost= (Price)x(Quantityproduced)- (Averagecost)x(Quantityproduced)
consumer surplus
The amount that individuals would have been willing to pay, minus the amount that they actually paid
Accounting profit vs Economic profit
The difference is important because even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit.
Efficiency in the demand and supply model
The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is being produced and consumed.
shutdown point
The intersection of the average variable cost curve and the marginal cost curve, which shows the price where the firm would lack enough revenue to cover its variable costs
social surplus (economic surplus or total surplus)
The sum of consumer surplus and producer surplus Social surplus is larger at equilibrium quantity and price than it would be at any other quantity. This demonstrates the economic efficiency of the market equilibrium. In addition, at the efficient level of output, it is impossible to produce greater consumer surplus without reducing producer surplus, and it is impossible to produce greater producer surplus without reducing consumer surplus.
deadweight loss
When deadweight loss exists, it is possible for both consumer and producer surplus to be higher, in this case because the price control is blocking some suppliers and demanders from transactions they would both be willing to make.
collusion
When firms act together in this way to reduce output and keep prices high
Ben is willing to work for $4/hour and an employer is willing to hire Ben for $7/hour. Which statements is TRUE? a A minimum wage of $7.50/hour would prevent this mutually beneficial exchange. b Minimum wages do not prevent mutually beneficial exchanges. c A minimum wage of $4.50/hour would prevent this mutually beneficial exchange. d A minimum wage of $3.50/hour would prevent this mutually beneficial exchange.
a A minimum wage of $7.50/hour would prevent this mutually beneficial exchange.
Which of the following statements is TRUE? a Consumer surplus under competition is greater than consumer surplus under monopoly. b Producer surplus under competition is greater than producer surplus under monopoly. c Total surplus under monopoly is greater than total surplus under competition. d Deadweight loss is greater in markets where monopoly power is less significant.
a Consumer surplus under competition is greater than consumer surplus under monopoly.
If the Bill and Melinda Gates Foundation were to buy out and destroy the patent for Combivir, which of the following would NOT be one of the effects? a Drug companies would have no incentive to create new and better drugs. b The price of Combivir would fall. c The number of people treated with Combivir would rise. d No one would have a monopoly on Combivir.
a Drug companies would have no incentive to create new and better drugs.
In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand? a P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0 b P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0 c P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0 d P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20
a P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0
What condition is necessary in a constant cost industry? a Prices of the industry's inputs do not change as the industry expands. b Prices of the industry's inputs decline as the industry expands. c Prices of the industry's inputs rise as the industry expands. d There are barriers that prevent new firms from entering such an industry.
a Prices of the industry's inputs do not change as the industry expands.
Total profit for a given quantity of output can be calculated as: a Total Revenue Ð Total Costs. b Marginal Revenue Ð Marginal Cost. c Total Revenue Ð Marginal Revenue. d Marginal Profit + Marginal Revenue.
a Total Revenue Ð Total Costs.
A monopoly can be defined as a single firm in a given market. a True b False
a True
A monopoly is a firm with market power, and market power may arise from economies of scale, patent protection, and innovation. a True b False
a True
Firms in competitive industries should adhere to: 1) expanding output if MR > MC, and 2) reducing output if MC > MR. a True b False
a True
In a perfectly competitive market, sellers who set their price above the market price will sell nothing. a True b False
a True
Marginal revenue is always equal to the price of the product for a competitive firm. a True b False
a True
The competitive firm's demand curve is horizontal at the market price. a True b False
a True
The long run is the period after all exit and entry has occurred. a True b False
a True
The more and better substitutes a good has, the more elastic the demand for that good will be. a True b False
a True
The primary reason that AIDS drugs are priced well above cost is monopoly power. a True b False
a True
To better feed his army, Napoleon established a technology prize that led to the development of canning in 1809. Napoleon required the inventorÑNicolas Francois AppertÑto publish the method. Napoleon's reign as Emperor ended after his defeat at Waterloo, a defeat which might not have been so decisive had canned food not made its way to the enemies' mouths. By demanding Appert publish his method, what did Napoleon force Appert to give up? a a monopoly b consumer surplus c deadweight loss d economies of scale
a a monopoly
In Chicago's Southside (and other places), auto mechanics (who work outside the formal sector, without a business license, advertising, or even a garage) will do work for gang members without charging them. In exchange, gang members chase away other mechanics who wish to operate in the area. These auto mechanics have monopoly power; what type of source does it come from? a barriers to entry. b hard to duplicate inputs. c innovation. d economies of scale.
a barriers to entry.
Monopolists are people, too. This means that: a gains to monopolists count just as much as losses to consumers. b gains to monopolists don't count as much as losses to consumers. c it's good when monopolists suffer, because they are evil. d monopolists are corporations, not people.
a gains to monopolists count just as much as losses to consumers.
Firms are profitable when price is: a greater than average cost. b equal to average cost. c less than average cost. d zero.
a greater than average cost.
To maximize profit, firms should keep producing as long as marginal revenue is: a greater than marginal cost. b equal to marginal cost. c less than marginal cost. d greater than total cost.
a greater than marginal cost.
If a single supplier produces a good with many good substitutes, then: a it will have little control over the market price. b the demand curve for its output will be downward sloping. c the price it chooses to set must be less than the market price in order to sell additional output. d the market demand will be perfectly elastic.
a it will have little control over the market price.
Under monopoly, the portion of the outgoing consumer surplus that is not transferred to the monopoly firm or still considered consumer surplus is: a known as deadweight loss. b proof that monopolies should not be allowed. c transferred to the government. d available to third parties who benefit from sales of the monopolist's output.
a known as deadweight loss.
If an American teenager will work for $5 an hour and an employer is willing to pay that wage, but the minimum wage is $7.25 an hour and the employer is not willing to pay that much, the teenager goes unemployed and the market experiences: a lost gains from trade. b wasteful increases in quality. c resource misallocations. d reductions in product quality.
a lost gains from trade.
The power to raise price above marginal cost without fear that other firms will enter the market is: a market power. b firm power c marginal power d cost power
a market power.
The market structures with many competing firms selling different products is called what? a monopolistic competition b monopoly c perfectly competitive d oligopoly
a monopolistic competition
In the long run, demand is __ the short run. a more elastic than in b less elastic than in c equally elastic as in d indeterminately different in elasticity as compared with
a more elastic than in
The influence of the minimum wage in the American economy is very small because MOST workers earn: a more than the minimum wage. b less than the minimum wage. c more or less than the minimum wage. d near the minimum wage.
a more than the minimum wage.
How do oligopoly and monopolistic competition differ? a oligopolies are a few number of sellers, with barriers to entry, who determine their pricing, output, and other decisions based on their competing firms while monopolistic competition is defined as many competing sellers who sell non-identical products. b monopolistic competition is a few number of sellers, with barriers to entry, who determine their pricing, output, and other decisions based on their competing firms while oligopolies are defined as many competing sellers who sell non-identical products. c oligopolies earn profits while monopolistically competitive firms never earn profits d oligopolies are always price takers, while monopolistically competitive firms are always price makers
a oligopolies are a few number of sellers, with barriers to entry, who determine their pricing, output, and other decisions based on their competing firms while monopolistic competition is defined as many competing sellers who sell non-identical products.
What causes a kinked demand curve? a oligopoly firms match price cuts, but not increases b oligopoly firms match price increases c perfectly competitive firms enter the market d oligopoly firms compete with each other to drive down both the price and quantity, leading to zero economic profits
a oligopoly firms match price cuts, but not increases
GlaxoSmithKline owns a government grant of temporary monopoly rights on the AIDS drug Combivir due to: a patents. b laws preventing entry of competitors. c economies of scale. d innovation
a patents.
n a highly competitive industry, demand for a firm's product is: a perfectly elastic. b slightly elastic. c unit elastic. d perfectly inelastic.
a perfectly elastic.
Why are perfectly competitive firms more allocatively efficient than monopolistically competitive firms in the long run? a price is equal to marginal cost b price is greater than marginal cost c monopolistically competitive firms charge a lower price d perfectly competitive firms operate in the café disco of their competition
a price is equal to marginal cost
Chevron advertises their gasoline as better than other similar gasoline because it has Techron in it. This is an because Chevron wants to make their gasoline distinctive. This is an example of what? a product differentiation b oligopoly c ceteris paribus d producer surplus
a product differentiation
If Homer operates a small bakery and sells donuts for $4/dozen, he should: a sell an additional dozen donuts as long as the marginal cost of producing an additional dozen donuts is less than $4. b sell an additional dozen donuts as long as the total cost of producing an additional dozen donuts is less than $4. c only sell more donuts if his total revenue is greater than his total cost. d sell an additional dozen donuts so long as the fixed cost of production is greater than $4.
a sell an additional dozen donuts as long as the marginal cost of producing an additional dozen donuts is less than $4.
Price ceilings create five important effects: a shortages, reductions in product quality, wasteful lineups, a loss from gains to trade, and a misallocation of resources. b surpluses, increases in product quality, search costs, gains from trade, and resource attrition. c excess demand, long lines, poor service, efficiency, and arbitrage. d shortages, reduced time costs, low vacancy rates, blat, and deadweight loss.
a shortages, reductions in product quality, wasteful lineups, a loss from gains to trade, and a misallocation of resources.
Which statement is NOT an effect of a price ceiling? a surpluses b misallocation of resources c loss of gains from trade d wasteful lineups
a surpluses
How does perceived demand for a monopolistic competitor differ from a monopoly? a the monopolistic competitor sees a more elastic demand curve b the monopolistic competitor sees a more inelastic demand curve c the monopoly sees a marginal revue curve that is equal to the demand curve d the monopolistic competitor sees a marginal revenue curve that is equal to the demand curve
a the monopolistic competitor sees a more elastic demand curve
game theory
a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do. Game theory has found widespread applications in the social sciences, as well as in business, law, and military strategy.
Accounting profit
a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out.
prisoner's dilemma
a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest. It applies well to oligopoly.
Allocative efficiency
a social concept. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost.
duopoly
a two-firm oligopoly
A copyright
according to the U.S. Copyright Office, "is a form of protection provided by the laws of the United States for 'original works of authorship' including literary, dramatic, musical, architectural, cartographic, choreographic, pantomimic, pictorial, graphic, sculptural, and audiovisual creations." No one can reproduce, display, or perform a copyrighted work without permission of the author. Copyright protection ordinarily lasts for the life of the author plus 70 years.
Marginal cost
additional cost of producing one more unit of output. So it is not the cost per unit of all units being produced, but only the next one (or next few). Marginal cost can be calculated by taking the change in total cost and dividing it by the change in quantity.
Implicit costs
allow for depreciation of goods, materials, and equipment that are necessary for a company to operate.
constant returns to scale
allowing all inputs to expand does not much change the average cost of production
production technologies
alternative methods of combining inputs to produce output
A trademark
an identifying symbol or name for a particular good, like Chiquita bananas, Chevrolet cars, or the Nike "swoosh" that appears on shoes and athletic gear.
diseconomies of scale.
as the level of output and the scale rises, average costs rise as well
The marginal revenue (MR) for a firm is a constant $45, and the firm's marginal cost (MC) is given by MC = 1.5Q (where Q is quantity of output). What is the firm's profit-maximizing level of output? a 67.5 b 30 c 45 d 15
b 30
Average total cost is equal to total cost divided by profit. a True b False
b False
Firms have less pricing power if their firm-level product is more unique. a True b False
b False
The market for designer jeans is a good example of a perfectly competitive market. a True b False
b False
Select the statement that is TRUE: a Market power is the ability to raise price and sell more units of a good. b Market power may result from government regulations or patent protection c A monopoly is a firm without market power. d All of the answers are correct.
b Market power may result from government regulations or patent protection
Which of the following statements about monopoly power is correct? a Monopoly power is the power attained solely by dual firm monopolists. b Monopoly power is the power to raise prices above average cost without facing new entry of firms. c Monopoly power is only generated by governments. d Firms attaining monopoly power always set the price at the marginal cost.
b Monopoly power is the power to raise prices above average cost without facing new entry of firms.
Which of these relations is always TRUE for monopolies? a MR > D b P > MR c P > AC d TR < TC
b P > MR
Which is the MOST correct statement about the impact of rent controls? a The short-run supply curve for apartments is inelastic, so rent controls create larger shortages in the short run than in the long run. b The short-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the short run than in the long run. c The long-run supply curve for apartments is inelastic, so rent controls create larger shortages in the long run than in the short run. d The long-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the long run than in the short run.
b The short-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the short run than in the long
A price floor is: a a maximum price allowed by law. b a minimum price allowed by law. c able to produce an efficient outcome. d a tool used to increase government revenues.
b a minimum price allowed by law.
A shortage results when: a a price floor is imposed. b a price ceiling is imposed. c there is excess supply without any price controls. d a price floor is imposed but it is not binding.
b a price ceiling is imposed.
An example of a monopoly would be: a a gasoline service station in Los Angeles. b a sole provider of electrical power in a city. c a grocery store in Chicago. d Walmart.
b a sole provider of electrical power in a city.
Economists call the maximum legal price a price ceiling because the price: a cannot legally go lower than the ceiling. b cannot legally go higher than the ceiling. c must match the legally established ceiling price. d All of these answers are correct.
b cannot legally go higher than the ceiling.
A legal maximum price at which a good can be sold is a price: a stabilization. b ceiling. c support. d floor.
b ceiling.
Which of the following is NOT a source of monopoly power? a government regulations prohibiting entry of new firms b decreasing marginal costs c innovation d economies of scale
b decreasing marginal costs
If a single supplier produces such a small portion of the total market output that changes in its production have no impact on the overall market price,: a the firm will eventually be forced out of business. b demand for the firm's output is perfectly elastic. c the firm's supply curve is perfectly inelastic. d the market supply curve is horizontal.
b demand for the firm's output is perfectly elastic.
Monopolies will have more market power when one firm owns an input that is difficult to duplicate and the: a demand for the product is elastic. b demand for the product is inelastic. c supply of the product is elastic. d supply of the product is inelastic.
b demand for the product is inelastic.
An industry is said to be perfectly competitive when:. a demand in the industry is high. b each firm has virtually no influence over the price of its product. c there are many buyers and sellers, and each is large relative to the total market. d supply in the industry is highly elastic.
b each firm has virtually no influence over the price of its product.
For which of the following is NOT a reason that monopolies arise? a patents b excess competition c economies of scale d control of natural resources
b excess competition
True or False: Oligopolies can compete to the point where economic profits equal zero a true b false
b false
High prices charged by monopolists will cause the monopolists': a gains to exceed the lost consumer surplus. b gains to be less than the lost consumer surplus. c losses to exceed the consumer gain. d losses to be less than the consumer gain.
b gains to be less than the lost consumer surplus.
How does the long run outcome differ from the short run outcome for a monopolistically competitive firm? a in the long run, firms earn small economic profits, while in the short run they earn zero b in the long run firms earn no economic profits, while in the short run they earn positive economic profits c in the long run firms earn positive economic profits, while in the short run they earn negative economic profits d long run profits are the same as short run profits
b in the long run firms earn no economic profits, while in the short run they earn positive economic profits
Over time, housing shortages caused by rent control __ because the supply of housing is __ elastic in the long run. a increase; less b increase; more c decrease; less d decrease; more
b increase; more
New housing takes some time to build, so rent control creates larger shortages in the: a long run than in the short run because short-run supply is more elastic. b long run than in the short run because long-run supply is more elastic. c short run than in the long run because short-run supply is more elastic. d short run than in the long run because long-run supply is more elastic.
b long run than in the short run because long-run supply is more elastic.
Under rent control, tenants can expect: a lower rent and higher-quality housing. b lower rent and lower-quality housing. c higher rent and a shortage of housing. d higher rent and a surplus of housing.
b lower rent and lower-quality housing.
In situations of excess demand, sellers might lower quality when they are unable to raise prices because they wish to: a reduce excess demand. b raise their profit levels. c decrease surpluses. d raise their sales.
b raise their profit levels.
Price ceilings reduce quality because: a buyers are willing to accept a lower quality of goods with lower prices. b sellers facing excess demand cannot raise prices to increase profit. c the law would mandate the quality of goods to match the price of the goods. d None of the answers are correct.
b sellers facing excess demand cannot raise prices to increase profit.
A monopoly is a firm: a that is exempt from patent protection. b that sets price above marginal cost without concern that other firms will enter the industry. c without market power. d that sets price higher than or equal to marginal cost.
b that sets price above marginal cost without concern that other firms will enter the industry.
The price controls of the early 1970s caused: a lead to be removed from gasoline. b the disappearance of the full-service gas station. c gas stations to stay open for more hours. d an excess supply of gasoline.
b the disappearance of the full-service gas station.
When an industry becomes monopolized: a the gains to the monopolist are typically greater than the losses to consumers. b the losses to consumers are typically greater than the gains to the monopolist. c the gains to the monopolist are exactly the same amount as the losses to consumers. d both the monopolist and consumers gain.
b the losses to consumers are typically greater than the gains to the monopolist.
How does perceived demand for a monopolistic competitor differ from a perfect competitor? a the monopolistic competitor sees a flat demand curve, while the perfect competitor sees a downward sloping one b the monopolistic competitor sees a downward sloping demand curve, while the perfect competitor sees a flat one c the monopolistic competitor sees a flat demand curve, while the perfect competitor sees a upward sloping one d they both see the same demand curve
b the monopolistic competitor sees a downward sloping demand curve, while the perfect competitor sees a flat one
If the price of the AIDS drug Combivir was driven down to marginal cost by competition: a fewer people would use Combivir. b there would be less incentive to invest in creating the next improved AIDS drug. c deadweight loss would increase. d GlaxoSmithKline's profits would increase
b there would be less incentive to invest in creating the next improved AIDS drug.
Because Colgate owns patent number 5,547,091, only Colgate sells toothpaste with a flip-top cap, while others use the more traditional screw top. A patent probably wasn't a necessary incentive for Colgate to develop the flip-top cap, so why did it patent the cap? a to decrease the marginal cost of production b to establish market power c to decrease fixed costs d to increase consumer demand for toothpaste
b to establish market power
Damien produces 400 gallons of milk a day in a very competitive industry. The market price for a gallon of milk is $2. Damien's marginal revenue per gallon of milk is: a $200. b $800. c $2. d $0.
c $2.
Which of the following statements is TRUE? a Entry and exit from an industry depend on the firm's market share. b Fixed costs fall as firms produce more output, the so-called Òspreading of the costs.Ó c High profits in an industry give entrepreneurs an incentive to enter that industry. d A firm should enter an industry if average costs are less than producer surplus.
c High profits in an industry give entrepreneurs an incentive to enter that industry.
Which one of the following statements is correct? a Patents are one way of preventing a monopoly. b If pharmaceutical patents are enforced, the number of new drugs will decrease. c Monopoly profit encourages firms to research and develop new drugs. d Competition creates incentives for the invention of new drugs.
c Monopoly profit encourages firms to research and develop new drugs.
To maximize profit, a firm in a competitive market increases output until: a P = TC. b P = AR. c P = MC. d P = AC.
c P = MC.
At a price ceiling of $6 per sheet of drywall, quantity demanded is 100 and quantity supplied is 75. What will happen in the drywall market if there is an increased demand for drywall in the construction industry? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Equilibrium will be restored. b The shortage of drywall will fall below 25 units. c The shortage of drywall will increase above 25 units. d The surplus of drywall will increase above 25 units.
c The shortage of drywall will increase above 25 units.
How does a monopolistically competitive firm decide price and quantity? a They set price and quantity where MR = MC b They set price and quantity where MR = ATC c They set price according to the demand curve and quantity where MR = MC d They set price according to the demand curve and quantity where MR = ATC
c They set price according to the demand curve and quantity where MR = MC
If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, a likely result will be: a an increase in the quantity supplied of the product. b an increase in the price of the product. c a decrease in the quality of the product. d a further decrease in the price of the product.
c a decrease in the quality of the product.
The Edict on Maximum Prices, established by the Roman Emperor Diocletian, created price ceilings on various jobs and goods in a failed effort to curb inflation. For example, legal pay for a farm laborer could be no more than 10.8¢ a day (payment set in modern currency). If the market rate of farm labor was 12¢ a day, which would be a plausible consequence of this law? a farms would produce more food than they otherwise would b nothing unusual c a laborer would work less hard than he otherwise would d an increase in unemployment for farm hands
c a laborer would work less hard than he otherwise would
Rent controls are: a an efficient and equitable way to help the poor. b inefficient, but a pretty good way to solve a serious social problem. c an inefficient way to help the poor in raising their standard of living. d an efficient way to allocate housing.
c an inefficient way to help the poor in raising their standard of living.
In Puerto Rico in 1938, the market wage was 3¢ to 4¢ per hour when Congress passed a law raising it to 25¢ per hour. Workers in Puerto Rico were: a happy with their raise. b hoping for a higher minimum wage. c devastated. d indifferent.
c devastated.
Which of the following best illustrates a product sold in a perfectly competitive market? a soft drinks b jeans c eggs d televisions
c eggs
Which would MOST LIKELY result after setting a price ceiling on automobiles? a a surplus of automobiles b more friendly automobile salesmen c fewer safety features d an increase in demand for automobiles
c fewer safety features
A cartel is seen when firms do what? a compete with each other to drive prices down b compete with each other to drive prices up c have a formal agreement to collude to produce the monopoly output and sell at the monopoly price d act together to increase output and keep prices low
c have a formal agreement to collude to produce the monopoly output and sell at the monopoly price
Apple's iPod provides an example that market power may arise from: a laws preventing entry of competitors. b hard to duplicate inputs. c innovation. d economies of scale.
c innovation.
Firms earn negative profit when price is: a greater than average cost. b equal to average cost. c less than average cost. d zero.
c less than average cost.
Modern theories of economic growth emphasize that monopolies: a are always detrimental to economic growth due to the deadweight loss they inflict on markets. b may be beneficial to growth in less-developed countries, but only lead to higher prices in well-developed market economies. c may sometimes be necessary for innovation and economic growth. d only exist because of corruption and government interference in markets.
c may sometimes be necessary for innovation and economic growth.
There are many hair salons competing in a market. These salons advertise that their products are different than the other salons. What type of market structure do these salons compete in? a perfect competition b monopoly c monopolistic competition d oligopoly
c monopolistic competition
How do oligopolies ensure cooperation between firms? a reward those who do not cooperate b collusion c penalize those who do not cooperate d increase the payoffs of those who cooperate, but still make it profitable to not cooperate
c penalize those who do not cooperate
Firms should exit the market if: a sunk costs are a significant portion of the total cost. b producer surplus is just equivalent to recoverable costs. c price falls below the average cost. d marginal cost exceeds the average cost.
c price falls below the average cost.
The presence of price floors in a market usually is an indication that: a there is an insufficient quantity of a good or service being produced. b the forces of supply and demand are unable to establish an equilibrium price. c sellers of the good or service outnumber the buyers. d policymakers believe the price floor does not involve inequities.
c sellers of the good or service outnumber the buyers.
Firms in a perfectly competitive industry maximize profits by: a eliminating the competition. b producing a higher quality good and setting a price higher than the competition. c setting a price equal to the market price. d setting a price less than the market price and undercutting the competition.
c setting a price equal to the market price.
A price ceiling creates a ____ when it is set ____. a surplus; below the equilibrium price b surplus; above the equilibrium price c shortage; below the equilibrium price d shortage; above the equilibrium price
c shortage; below the equilibrium price
When a pharmaceutical company discovers a new drug, patent law gives it market power by guaranteeing: a partial ownership of the right to sell the drug for an unlimited number of years. b partial ownership of the right to sell the drug for a limited number of years. c sole ownership of the right to sell the drug for a limited number of years. d sole ownership of the right to sell the drug for an unlimited number of years.
c sole ownership of the right to sell the drug for a limited number of years.
The total amount of money that a firm receives from sales of its output is called: a gross profit. b net profit. c total revenue. d net revenue.
c total revenue.
The amount of money that the firm pays for its inputs is called: a marginal cost. b total cost. c variable cost. d fixed cost.
c variable cost.
Price ceilings do not have much effect: a in times of high inflation. b ever. c when market prices are at or below the ceiling. d in nonmarket economies.
c when market prices are at or below the ceiling.
Barriers to entry
can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. For example, there are a finite number of radio frequencies available for broadcasting.
intellectual property
combination of patents, trademarks, copyrights, and trade secret law, it implies ownership over an idea, concept, or image, not a physical piece of property like a house or a car.
A firm (or business)
combines inputs of labor, capital, land, and raw or finished component materials to produce outputs. If the firm is successful, the outputs are more valuable than the inputs.
long-run average cost (LRAC)
curve shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
short-run average cost (SRAC)
curve the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
Because of government price controls, a business must now sell soft-serve ice cream at half its original price. This business might respond by: a offering smaller servings of ice cream. b skimping on toppings of nuts, fudge sauce, and cherries. c reducing hours of operation. d All of the answers are correct.
d All of the answers are correct.
In a constant cost industry, the market price and average cost are equal to $23. Therefore, which of the following is correct? a An increase in demand will cause the short-run price to rise above $23, but in the long run, the price will return to $23. b An increase in demand will cause profits to rise and firms to enter the industry until profits return to normal. c A decrease in demand will cause market price to fall below average cost and thus firms will earn negative profits. d All of the answers are correct.
d All of the answers are correct.
Suppose that the government decided to reduce pharmaceutical patent protection by requiring companies to sell their drugs at marginal cost. What are the likely consequences of such a policy? a There would be an increase in consumer surplus. b The deadweight loss in the market would decline. c The future supply of new drugs would decrease. d All of these statements are correct.
d All of these statements are correct.
A market is considered perfectly competitive if:I. there is a lot of product differentiation among sellers.II. there are many sellers, each small relative to the total market.III. the product sold is similar across sellers.IV. there are only a few buyers. a I only b I and II only c I, II, and III only d II and III only e II, III, and IV only
d II and III only
Which observation would be consistent with the impact of price ceilings? a Books are printed on higher-quality paper. b Full-service gasoline stations stay open for 24 hours. c New automobiles are painted with more coats of paint. d Newspapers switch to a smaller font size in order to decrease bulk.
d Newspapers switch to a smaller font size in order to decrease bulk.
For a price floor to prevent market forces from finding the equilibrium price, it must be set: a above the equilibrium price, causing a market shortage. b below the equilibrium price, causing a market shortage. c below the equilibrium price, causing a market surplus. d above the equilibrium price, causing a market surplus.
d above the equilibrium price, causing a market surplus.
Collusion is seen when firms do what? a compete with each other to drive down prices b sell differentiated products c have a formal agreement to produce at the monopoly output d act together to reduce output and keep prices high
d act together to reduce output and keep prices high
Because rent controls on apartments reduce profits: a developers build and rent more apartments to make up for lost profit. b condominiums are converted into apartments. c landlords are less likely to discriminate against minorities in renting out apartments. d apartment managers will give less consideration to renters' complaints.
d apartment managers will give less consideration to renters' complaints.
When the maximum legal price is below the market price we say that there is a price: a floor. b stabilization. c support. d ceiling.
d ceiling.
The economic inefficiency of a monopolist can be measured by the: a excess profit generated by monopoly firms. b poor quality of service offered by monopoly firms. c number of consumers who are unable to purchase the product because of its high price. d deadweight loss involved relative to a competitive firm.
d deadweight loss involved relative to a competitive firm.
Which would NOT happen as the result of a price floor? a a surplus of the good b lost gains from trade c misallocation of resources d decreases in product quality
d decreases in product quality
Products that are distinctively different from competitors products are called what? a normal products b inferior products c complement products d differentiated products
d differentiated products
Which of the following is NOT a source of monopoly power? a laws preventing entry of competitors b economies of scale c innovation d inelastic demand for the product
d inelastic demand for the product
Saudi Arabia has market power in the world's oil markets because: a it has innovated technologies in oil production that other oil producing countries do not possess. b it is able to prevent entry of potential competitors in oil production. c its oil output is known for its prestige and quality. d it controls a significant fraction of the world's oil supply.
d it controls a significant fraction of the world's oil supply.
Which of the following is NOT a source of monopoly power? a innovation b patents c economies of scale d marketing
d marketing
Price ceilings would create all of the following effects EXCEPT: a shortages. b reductions in product quality. c a misallocation of resources. d maximum gains from trade.
d maximum gains from trade.
The imperfectly competitive market structure that is dominated by a few number of firms is called what? a monopolistic competition b monopoly c perfect competition d oligopoly
d oligopoly
The soda market is dominated by a few number of producers. Economists would say the soda market is what kind of market structure? a perfect competition b monopoly c monopolistic competition d oligopoly
d oligopoly
How can sellers increase profits when they face a price ceiling? a charge a higher price for the good b charge a lower price for the good to undercut rival sellers c produce and sell more output d reduce the quality of the product and provide less customer service
d reduce the quality of the product and provide less customer service
If a pharmaceutical company discovering a new drug is not granted a patent to retain its monopoly power on the drug,: a innovation in the pharmaceutical industry will increase. b the number of new drugs is likely to increase. c more pharmaceutical companies will engage in discovering new drugs. d research and development in discovering new drugs will decrease.
d research and development in discovering new drugs will decrease.
In a monopoly market: a the lack of competition causes the price of the product to equal average cost. b a firm maximizes profits by producing the level of output that minimizes average cost. c the additional revenue from selling one more unit of output usually is greater than the price. d the lure of above-normal profits may give a firm an incentive to develop new products and technologies.
d the lure of above-normal profits may give a firm an incentive to develop new products and technologies.
Profit is defined as: a net revenue minus depreciation. b average revenue minus average total cost. c marginal revenue minus marginal cost. d total revenue minus total cost.
d total revenue minus total cost.
For a monopolist, MR is always less than P because: a when a monopolist lowers the price to sell more units, it must lower the prices of all units sold. b MR is always less than P regardless of what type of firm we are discussing. c marginal revenue is always lower for the next unit sold. d when a monopolist needs to sell more units, it must lower marginal revenue in order to do so.
d when a monopolist needs to sell more units, it must lower marginal revenue in order to do so.
In the long run, due to entry and exit, economic profits in a monopolistically competitive market will be equal to what? a a positive number b a negative number c keleven - a mistake plus keleven gets you home by seven d zero
d zero
average profit
divide profit by the quantity of output produced
Firms in competitive industries:I. can only charge a price equal to the market price.II. cannot charge any more than the market price.III. will earn less profit if they charge less than the market price. a I and II only b I only c I and III only d II only e I, II, and III
e I, II, and III
Fixed costs
expenditures that do not change regardless of the level of production, at least not in the short term. Whether you produce a lot or a little, the fixed costs are the same. One example is the rent on a factory or a retail space. Once you sign the lease, the rent is the same regardless of how much you produce, at least until the lease runs out.
Monopolistically competitive markets
feature a large number of competing firms, but the products that they sell are not identical.
A patent
gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time; in the United States, exclusive patent rights last for 20 years.
rent controls
government imposed maximum rents on apartments and homes
profit margin
if the market price is above average cost, average profit, and thus total profit, will be positive; if price is below average cost, then profits will be negative.
The rule of profit maximization
in a world of perfect competition was for each firm to produce the quantity of output where P = MC, where the price (P) is a measure of how much buyers value the good and the marginal cost (MC) is a measure of what marginal units cost society to produce.
kinked demand curve
in which competing oligopoly firms commit to match price cuts, but not price increases.
Variable costs
incurred in the act of producing—the more you produce, the greater the variable cost. Labor is treated as a variable cost, since producing a greater quantity of a good or service typically requires more workers or more work hours. Variable costs would also include raw materials.
Production
involves a number of important decisions that define the behavior of firms. What product or products should the firm produce? How should the products be produced (i.e., what production process should be used)? How much output should the firm produce? What price should the firm charge for its products? How much labor should the firm employ?
price celling
keeps a price from rising above a certain level price ceilings are enacted in an attempt to keep prices low for those who demand the product.
A price ceiling is a(n): a legally established minimum price that can be charged for a good. b illegally established minimum price that can be charged for a good. c legally established maximum price that can be charged for a good. d illegally established maximum price that can be charged for a good.
legally established maximum price that can be charged for a good.
short run firms
limited to operating on a single average cost curve (
Perfect Competition
monopolies tend to earn significant economic profits and these profits should attract vigorous competition
average profit
profit divided by the quantity of output produced; profit margin
The marginal revenue curve
shows the additional revenue gained from selling one more unit.
Total revenue
the income brought into the firm from selling its products. It is calculated by multiplying the price of the product times the quantity of output sold: Total Revenue=Price × Quantity
long-run average cost curve
the least expensive average cost curve for any level of output based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. shows the cost of producing each quantity in the long run, when the firm can choose its level of fixed costs and thus choose which short-run average costs it desires.
long run firms
they can choose to operate on any average cost curve
Oligopolistic markets
those dominated by a small number of firms
Average total cost
total cost divided by the quantity of output.
Economic profit
total revenue minus total cost, including both explicit and implicit costs.
accounting profit
total revenues minus explicit costs, including depreciation
Average variable cost
variable cost is divided by quantity of output.
legal monopoly
where laws prohibit (or severely limit) competition.
natural monopoly
where the barriers to entry are something other than legal prohibition.
