ECON200 Sample Test

Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium?

P > MC and demand = ATC

Suppose that a monopolist produces good A. The profit-maximizing quantity is 40 units, the profit-maximizing price is $160, and the marginal cost of the 40th unit is $120. If good A were produced in a perfectly competitive market, the equilibrium quantity would be 50, and the equilibrium price would be $150. What is the value of the deadweight loss created by the monopolist?

200

The profit-maximization problem for a monopolist differs from that of a competitive firm in which of the following ways?

A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at the point where average revenue exceeds marginal cost.

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

An ice cream parlor charges a higher price for ice cream sundaes than for milkshakes.

Which of the following statements is correct?

Game theory is not necessary for understanding competitive markets.

Why does a firm in a competitive industry charge the market price?

If a firm charges less than the market price, it loses potential revenue and If a firm charges more than the market price, it loses all its customers to other firms and also The firm can sell as many units of output as it want to at the market price.

Katherine gives piano lessons for $20 per hour. She also grows flowers, which she arranges and sells at the local farmer's market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer's market. Which of the following statements is correct regarding Katherine's profits from selling flowers produced from those 5 hours of work?

Katherine's accounting profits are $100, and her economic profits are $0.

Which of the following statements is not correct?

Monopolistic competition is similar to oligopoly because both market structures are characterized by barriers to entry.

Mrs. Smith operates a business in a competitive market. The current market price is $8.50, and at her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Which of the following statements about Mrs. Smith's firm is correct?

Mrs. Smith should continue to operate in both the short run and long run.

Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur?

New firms will enter the market. and In the long run, all firms will be producing at their efficient scale.

Which two federal agencies are responsible for enforcing antitrust law?

The Federal Trade Commission and the Department of Justice Antitrust Division.

Which two curves are tangent to each other in a monopolistically competitive market with zero economic profit?

demand and average total cost

Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market?

exactly $2.50

Total cost can be divided into two types of costs:

fixed costs and variable costs.

In general, game theory is the study of

how people behave in strategic situations.

The length of the short run

is different for different types of firms.

A firm cannot price discriminate if

it operates in a competitive market.

The higher the concentration ratio, the

more control an individual firm has to set prices. and less competitive the industry.

A perfectly competitive market

promotes general economic well-being, whereas a monopoly market may not be in the best interests of society.

An important property of cost curves is that

the marginal cost curve eventually rises with the quantity of output.

Since the 1980s, Wal-Mart stores have appeared in many communities across the US. Wal-Mart buys its goods in huge quantities and can negotiate with suppliers for cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Locally-owned retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that

there are economies of scale in retail sales.

Which of the following pairs illustrates the two extreme examples of market structures

competition and monopoly