Econ exam 3

Monopoly is a market structure in which: A .one firm makes up the entire market. B. a few firms dominate the market. C. many firms produce differentiated products. D. many firms produce identical products.

A.A monopoly market has a single supplier.

All of the following can be barriers to entry except: A. economies of scale. B. a firm's superior production ability. C. price discrimination. D. patents.

c. Barriers to entry include a firm's superior ability, economies of scale, and government-created monopoly.

If market demand increases in a perfectly competitive increasing-cost industry: A. new firms will enter the industry, factor prices will rise, and the price at which each firm earns zero economic profit will increase. B. new firms will enter the industry, factor prices will fall, and the price at which each firm earns zero economic profit will fall. C. some firms will exit the industry, factor prices will rise, and the price at which each firm earns zero economic profit will increase. D. some firms will exit the industry, factor prices will fall, and the price at which each firm earns zero economic profit will fall.

A In an increasing-cost industry, long run supply is upward-sloping.

Microsoft has a special version of its Windows operating system that it sells at a low price in countries where cheap pirated software is widespread. The cost of producing another copy of this software is the same as the cost of producing another copy of the regular Windows product. Selling this "special edition" software at a low price in certain countries is very similar to what economists call: A. price discrimination. B. natural monopoly. C. a price taker. D. welfare loss.

A Charging different customers different prices for the same product is called price discrimination. In this case Microsoft is making some changes so that it can justify the different charges and to prevent people from reselling from country to country. The cost of producing a CD with the software, or of installing it on a new computer, is the same for the special edition as for the original software.

eBay.com is a vast auction site that is similar to a competitive market in some ways but differs from it in others. Which of the following describes how eBay resembles a competitive market? A. It is easy to enter and easy to leave eBay. B. Sellers sometimes do not describe the products accurately on eBay. C. There is a great variety of different products sold on eBay. D. On eBay the large sellers dominate the market.

A Competitive markets assume no barriers to entry, and there are few or none with eBay.

In a perfectly competitive decreasing-cost industry, a decrease in market demand in the long run causes: A. a decrease in quantity, an increase in price, and no change in profit. B. a decrease in quantity, price, and profit. C. a decrease in quantity, no change in price, and no change in profit. D. a decrease in quantity, an increase in price, and an increase in profit.

A In a decreasing-cost industry, long-run market supply is downward-sloping

The supply curve of a perfectly competitive firm is: A. the marginal cost curve only if price exceeds average variable cost. B. the marginal cost curve only if price exceeds average total cost. C. the average total cost curve only if price exceeds average variable cost. D. nonexistent.

A The supply curve for a competitive firm is its marginal cost curve. If price does not exceed average variable cost, the firm will shut down immediately and quantity supplied will be zero.

Suppose the dry cleaning industry is initially in long-run equilibrium but then experiences a sharp increase in the price of its inputs. Assuming that the industry is perfectly competitive, the increase in costs should: A. decrease the number of firms in the industry in the long run and raise the market price. B. increase the number of firms in the industry in the industry and raise the market price. C. decrease the number of firms in the industry in the long run and reduce the market price. D. increase the number of firms in the industry in the industry and reduce the market price.

A The increase in input prices will create losses within the industry, which will cause some firms to exit. As these firms leave the industry, supply will contract and prices will increase. References

A price-discriminating monopolist will charge a higher price to: A. individuals with a more inelastic demand. B. individuals with a more elastic demand. C. women. D. minorities.

A. Individuals with a more inelastic demand are less responsive to price changes, and so the fall in quantity demanded resulting from a price increase is relatively small and revenue increases as a result.

At the socially optimum quantity of production, price equals: A. marginal cost. B. marginal revenue. C. average total cost. D. average variable cost.

A. If price equals marginal cost, the social benefit from producing an additional unit of output just equals the social cost, and so no improvement in welfare is possible.

An assumption of a competitive market is that both buyers and sellers are price takers. When we go to the mall to shop for clothing or to the grocery to buy food, what do we usually observe? A. Both buyers and sellers are usually price takers. B. Buyers are often price takers, but sellers are usually price makers. C. Buyers are often price makers, but sellers are usually price takers. D. Both buyers and sellers are usually price makers.

B Buyers face fixed prices and decide whether to buy. Sellers very often have some control over the price.

A monopoly firm selling textbooks to students in a small town is currently maximizing profits by charging a price of $50 per book. It follows that the marginal cost of textbooks is: A. equal to $50. B. less than $50. C. greater than $50. D. greater than the average total cost.

B Since marginal revenue is always less than price for a monopolist and since a monopolist maximizes profits by setting output so that marginal revenue equals marginal cost, it must be true that marginal cost is less than the price.

If a monopolist increases output from 14 to 15 by lowering its price from $32 to $31, marginal revenue is: A. $1. B. $17. C. $448. D. $465.

B Total revenue increases from $32 × 14 = $448 to $31 × 15 = $465, and so marginal revenue is 17. $1 is the change in average revenue.

Suppose that the firms in the perfectly competitive oat industry currently are receiving a price of $2 per bushel for their product. The minimum possible average total cost of producing oats in the long run is $1 per bushel. It follows that: A. the oat industry is in equilibrium. B.new firms will enter the oat industry. C. the price of oats will remain at $2 per bushel in the long run. D. firms in the oat industry will earn economic profits in both the long run and the short run.

B Since price exceeds minimum long-run average total cost, firms will be making positive economic profits, and this will induce additional firms to enter the market.

If MR > MC, a monopolist should: A. decrease production. B. increase production. C. maintain the same level of production. D. stop producing.

B. Production should be increased because the increase in revenue obtained by producing another unit exceeds the increase in cost.

A perfectly competitive firm in the long run earns: A. positive economic profits but zero normal profits. B.positive normal profits but zero economic profits. c .positive economic profits and positive normal profits. D. zero economic profits and zero normal profits.

B.Firm exit and entry in the long run guarantees zero economic profits, but entrepreneurs still earn a normal profit that reflects the opportunity cost of operating a firm.

* Barriers to entry: A. do not affect the number of firms in an industry. B. exist only in perfectly competitive markets. C. restrict the number of firms in an industry. D. limit output in an industry. Since firms are not free to enter an industry with barriers, the number of firms is restricted. The level of output is not restricted.

C Since firms are not free to enter an industry with barriers, the number of firms is restricted. The level of output is not restricted.

iTunes charges British customers 20 percent more than customers in France and Germany. Apple defended the price differential, saying that the "underlying economic model in each country has an impact on how we price our track downloads." An economist would say that Apple is engaged in: A. collusion. B. monopolistic competition. C. price discrimination. D. reverse engineering.

C .Charging different prices in different countries is a common type of price discrimination.

A monopoly firm is different from a competitive firm in that: A. there are many substitutes for a monopolist's product whereas there are no substitutes for a competitive firm's product. B. a monopolist's demand curve is perfectly inelastic whereas a competitive firm's demand curve is perfectly elastic. C. a monopolist can influence market price whereas a competitive firm cannot. D. a competitive firm has a U-shaped average cost curve whereas a monopolist does not.

C A competitive firm is too small to affect market price. In contrast, a monopolist is the only seller of a product and thus is large enough to affect market price.

If MC = Q/15 represents marginal cost for a monopolist and market demand is given by Qd = 500 - 10P, the equation for marginal revenue is: A.MR = 50Q - (1/5)Q2. B. MR = 50Q - (1/10)Q2. C. MR = 50 - (1/5)Q. D. MR = 50 - (1/10)Q.

C Total revenue (P × Q) is 50Q - (1/10)Q2. The first derivative of total revenue with respect to Q is the MR equation.

* In a perfectly competitive market, the demand curve faced by an individual firm is: A. perfectly inelastic. B. relatively inelastic. C. perfectly elastic. D. relatively elastic.

C. In a perfectly competitive market, any one firm's output is so small relative to total market demand that a firm can sell whatever quantity it desires at the market price, making its demand curve horizontal.

The DeBeers Company is a profit-maximizing monopolist that exercises monopoly power in the distribution of diamonds. If the company earns positive economic profits this year, the price of diamonds will: A. be equal to the marginal cost of diamonds. B. be equal to the average total cost of diamonds. C. exceed the marginal cost of diamonds but be equal to the average total cost of diamonds. D. exceed both the marginal cost and the average total cost of diamonds.

D. Economic profits can be positive only if price exceeds average total cost.

If there were no barriers to entry: A. natural monopolies would still exist. B. patents could still be offered by the government. C. "just" monopolies would still exist. D. firms would compete away monopoly profits.

D. Without barriers to entry, firms would enter a market if any monopoly profits existed. This entry would continue until the monopoly profits were eliminated. References

* Spam (junk e-mail) is a major annoyance for many people who use the Internet. However, spammers sometimes have to send thousands of messages to get just one response that pays money. Given this information: A. spamming cannot be profitable because of the low numbers of buyers; its sole purpose is to annoy others. B. spamming cannot be profitable because of the low numbers of buyers; it is fraudulently profitable. C. spamming can be profitable even with a very low number of buyers because the marginal cost of sending spam is virtually zero. D. as with many other activities on the Internet, spammers are profitable only because they rely on the fees from advertising.

c The revenue per message is very low, but if the costs are even lower, there can be a profit. The amount of spam suggests that it is profitable and virtually costless for a spammer to send messages. A spammer does seem to be quite similar to a firm in perfect competition—there is a demand curve that is virtually flat over a tremendous range. The marginal cost curve is also flat over a tremendous range, and as a result the profit-maximizing quantity is large.

For a monopolist, the price of the product: A. equals the marginal revenue. B. is less than the marginal revenue. C. exceeds the marginal revenue. D. equals the marginal cost.

c Marginal revenue is less than price because the demand curve is downward-sloping. A monopolist must reduce the price of all units sold to make additional sales. Since some revenue must be sacrificed to increase sales, total revenue increases by less than price.

A perfectly competitive firm facing a price of $50 decides to produce 500 widgets. Its marginal cost of producing the last widget is $50. If the firm's goal is maximize profit, it should: A. produce more widgets. B. produce fewer widgets. C. continue producing 500 widgets. D. shut down.

c Since price equals marginal cost, the firm maximizes its profits by producing and selling 500 widgets. References