MICRO CHAPTER 3

A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's total cost? a. $23 b. $150 c. $1,000 d. $1,150 e. $20

C. $1,000

Competition among rent seekers results in a. higher rents. b. firms earning normal profits. c. firms setting lower prices. d. lower costs. e. all competing firms earning an economic profit.

b. firms earning normal profits.

The prisoners' dilemma game

shows that prisoners are better off if they cooperate

When firms in an oligopoly successfully collude and do not cheat on a cartel agreement, they can make a long-run economic profit similar to

monopoly.

Which of the following four-firm concentration ratios would be the best indicator of an oligopoly?

78 percent

If we compare a perfectly competitive market to a single-price monopoly with the same c.osts, the monopoly sells

a smaller quantity at a higher price

One requirement for an industry to be perfectly competitive is that in the industry there

are many firms for whom the efficient scale of production is small.

The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot Pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, the price per pillow is a. $70. b. $60. c. $40. d. $100. e. $30.

a. $70.

The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the efficient scale for one firm is ________ units per hour. a. 2,000 b. 4,000 c. 8,000 d. 10,000 e. more than 10,000

a. 2,000

The above figure definitely shows a. a long-run equilibrium for a monopolistically competitive firm. b. an industry with few firms. c. a long-run equilibrium for a perfectly competitive firm. d. a long-run equilibrium for a perfectly competitive market. e. a short-run equilibrium for a monopoly.

a. a long-run equilibrium for a monopolistically competitive firm.

Resale price maintenance a. can lead to efficiency by preventing low-price shops from being free riders. b. can lead to inefficiency by preventing low-price shops from being free riders. c. is always legal. d. is a clear example of predatory pricing. e. is an example of a tying arrangement.

a. can lead to efficiency by preventing low-price shops from being free riders.

To maximize its profit, a single-price monopoly produces the amount of output so that its marginal revenue

equals its marginal cost.

In monopolistic competition, profit is maximized by producing so that marginal revenue

equals marginal cost and which are less than price.

To maximize profit, a firm in monopolistic competition will produce the quantity where marginal revenue

equals marginal cost.

The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC2, each produces 40 units, and the market price of the good is $20 per unit, then

firms will enter the industry and the number of firms increases.

To maximize its profit, a perfectly competitive firm produces so that ________ and a single-price monopoly produces so that ________.

MR = MC; MR = MC

In the above figure, a perfectly competitive market will have a price of ________, and a single-price monopoly will have a price of ________.

P2 and quantity of Q2; P1 and quantity of Q1

A market is classified as an oligopoly when

a few firms compete.

Under what conditions would it be legal for two bakeries in Minneapolis to explicitly agree to raise their prices by 5 percent? a. if the price rise was not predatory b. if the price rise did not measurably increase producer surplus c. never d. if the price rise did not harm consumers in the long run by reducing competition e. if the price rise was necessary to keep one or both bakeries from closing.

c. never

The capture theory of regulation assumes that regulation benefits

producers

The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the Nash equilibrium, Firm A will set a price of ________ and Firm B will set a price of ________

$10; $10

The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar maximizes his profit, Omar's profit equals A. $80. B. $11. C. $30. D. $16. E. $105.

$16

The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under an average cost pricing rule, what is the price of cable television in Oakland? a. $40 b. $30 c. $20 d. $10 e. $50

$20

Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. If the market price of a wafer is $2,400 dollars, how many wafers will the firm produce?

4 or 5

For a perfectly competitive firm, the market price of a good is

Answers a given which the firm cannot change and equal to the firm's marginal revenue are correct.

In perfect competition, marginal revenue a. increases as more is sold. B. decreases as more is sold. C. is equal to the market price. D.is zero. E. is always greater than marginal cost.

C. is equal to market price

Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per pencil is $2, and the marginal cost is $2, then Peter A. makes an economic profit because marginal revenue is equal to marginal cost at this output level. B. should decrease his output to increase his profit. C. is maximizing his profit and is making an economic profit. D. should increase his output to increase his profit. E. is not maximizing his profit but is making zero economic profit anyway.

C. is maximizing his profit and is making and economic profit

A market in which many firms sell identical products is a monopoly. an oligopoly. only perfectly competition. only monopolistic competition. both perfect competition and monopolistic competition.

C. only perfectly competition

When new firms enter the perfectly competitive Miami bagel market, the market A. supply curve shifts leftward. B. supply curve does not change. C. demand curve shifts rightward. D. supply curve shifts rightward. E. demand curve shifts leftward.

D. supply curve shifts rightward

The above figure shows a perfectly competitive firm. If the market price is more than $20 per unit, the firm will definitely shut down to minimize its losses. will stay open to produce and will make zero economic profit. will stay open to produce and will incur an economic loss. will stay open to produce and will make an economic profit. might shut down but more information is needed about the fixed cost.

D. will stay open to produce and will make an economic profit

Which of the following statements is correct?

If firms in oligopoly look only at their own self-interest in deciding the output they should produce, the total market output will exceed that of a monopoly.

A firm that is a natural monopoly a. can supply the entire market at a lower average total cost than two or more firms. b. has very small fixed costs and very large marginal costs. c. is infrequently regulated because having one firm serve the market is economically sound. d. cannot make an economic profit if it is not regulated because it must serve a very large customer base. e. produces the efficient quantity of output when it is not regulated.

a. can supply the entire market at a lower average total cost than two or more firms

Intel and AMD are a duopoly that produces CPU chips. Intel and AMD can conduct R&D or they cannot conduct R&D. The table above shows the payoff matrix for the two firms. The numbers are millions of dollars of profit. The Nash equilibrium is for Intel to ________ and for AMD to ________ . a. conduct R&D; conduct R&D b. conduct R&D; not conduct R&D c. not conduct R&D; conduct R&D d. not conduct R&D; not conduct R&D e. conduct R&D; either conduct R&D or not conduct R&D, the equilibrium could be either choice for AMD

a. conduct R&D; conduct R&D

Which of the following goods is the best example of a natural monopoly? a. distribution of electricity b. diamonds c. first-class mail d. a patented good e. blouses

a. distribution of electricity

A natural monopoly's average cost curve a. i only. b. ii only. c. iii only. d. i and iii. e. i, ii, and iii.

a. i only.

In which market structure does one firm sell a good or service with no close substitutes and there is a barrier blocking the entry of new firms? a. only monopoly b. only oligopoly c. perfect competition d. monopolistic competition e. either monopoly or oligopoly

a. only monopoly

The prisoners' dilemma game a. shows that prisoners are better off if they cooperate. b. shows it is easy to cooperate. c. has an equilibrium in which both prisoners are made as well off as possible. d. would have the same outcome even if the prisoners can communicate and cooperate. e. has an equilibrium in which one prisoner is made as well off as possible and the other prisoner is made as worse off as possible.

a. shows that prisoners are better off if they cooperate.

Product differentiation involves making a product that is a. slightly different from the products of competing firms. b. no different than the products of competing firms. c. very different from the products of competing firms. d. completely different from the products of competing firms. e. cheaper than the products of competing firms.

a. slightly different from the products of competing firms.

A firm's marginal revenue is a. the change in total revenue that results from a one-unit increase in the quantity sold. b. total revenue minus total cost. c. the change in total revenue minus the change in total cost. d. the change in total revenue that results from an increase in the demand for the good or service. e. less than the market price for a perfectly competitive firm.

a. the change in total revenue that results from a one-unit increase in the quantity sold.

If a few oil-producing countries in the Middle East decide to jointly limit the production of oil, a. they are forming a cartel. b. they would like the price of oil to be the same as if the market were perfectly competitive. c. game theory does not apply to their actions because they are nations, not firms. d. they will try to operate as a large, monopolistically competitive firm. e. they will agree to lower the price of oil in order to increase their profits.

a. they are forming a cartel.

Perfect competition ________ a fair outcome ________.

achieves; because both the fair rules and fair results conditions are met

Which of the following best describes the capture theory of regulation? a. i only b. ii only c. iii only d. i and ii e. i, ii, and iii

c. iii only

Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. What price will Kevin charge per session? a. $100 b. $60 c. $40 d. $20 e. $80

b. $60

Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule shown in the table above. What is Christy's marginal revenue from the 35th haircut? a. zero b. -$5.00 c. $5.00 d. $12.50

b. -$5.00

The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, Paul produces ________ pillows per hour, and if the market was perfectly competitive, ________ pillows per hour would be produced. a. 0; 4,000 b. 3,000; 4,000 c. 4,000; 4,000 d. 3,000; 3,000 e. 0; 3,000

b. 3,000; 4,000

What is the Herfindahl-Hirschman Index if the four firms in an industry account have market shares of 62 percent, 15 percent, 15 percent, and 8 percent? a. 100 b. 4,358 c. 111,600 d. 2,822 e. 6,200

b. 4,358

When oligopolies seek to operate as a single-price monopoly, the firms produce at the point where a. P = MC. b. MR = MC. c. P < ATC. d. P = MR. e. MC = ATC.

b. MR = MC.

A price-discriminating monopoly charges a. the same price to every buyer for the same product. b. a different price to different types of buyers for the same product, even though there are no differences in costs. c. a different price to different buyers, because the costs are different. d. different prices to buyers for different products. e. each customer a price that equals the marginal cost of serving that customer.

b. a different price to different types of buyers for the same product, even though there are no differences in costs.

Monopolistic competition is efficient when compared to a. perfect competition. b. complete product uniformity. c. the short run. d. the long run. e. None of these answers is correct.

b. complete product uniformity.

The corn market is perfectly competitive, with thousands of corn farmers. In the 2000s, the price of corn soared so that new farmers entered the corn market. Initially, entry ________ the economic profit of the initial corn farmers and in the long run the initial corn farmers ________. a. increased; made an even greater economic profit than initially b. decreased; made zero economic profit c. increased; made zero economic profit d. decreased; incurred an economic loss e. increased; made an economic profit

b. decreased; made zero economic profit

In part, perfect competition arises if a. i only b. ii only c. i and ii d. iii only e. ii and iii

b. ii only

Excess capacity exists when a firm produces a. more than the profit-maximizing level of output. b. less than the quantity that minimizes average total cost. c. less than the quantity that minimizes marginal cost. d. more than the quantity that minimizes marginal cost. e. None of these answers is correct.

b. less than the quantity that minimizes average total cost.

The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a a. lower price, economic losses by rutabaga farmers, and entry into the market. b. lower price, economic losses by rutabaga farmers, and exit from the market. c. higher price, economic profits for rutabaga farmers, and entry into the market. d. higher price, economic losses by rutabaga farmers, and exit from the market. e. lower price, economic profits for rutabaga farmers, and entry into the market.

b. lower price, economic losses by rutabaga farmers, and exit from the market.

A perfectly competitive firm maximizes its profit by producing at the point where a. total revenue equals total cost. b. marginal revenue is equal to marginal cost. c. total revenue is equal to marginal revenue. d. total cost is at its minimum. e. total revenue is at its maximum.

b. marginal revenue is equal to marginal cost.

For a firm in monopolistic competition, innovation and product development are a. senseless because economic profit is always zero in the long run. b. necessary in order to have a chance of making at least a short-run economic profit. c. inconsequential because each firm produces a different product. d. necessary to allow new firms to enter. e. uncommon because other firms already produce similar products.

b. necessary in order to have a chance of making at least a short-run economic profit.

If firms in monopolistic competition are making economic profits, then a. they can expect to earn the profits indefinitely. b. new rivals enter the industry and the demand for any seller's good decreases. c. the market demand becomes more inelastic. d. the industry is in long-run equilibrium. e. new rivals enter the industry and the demand for any seller's good increases.

b. new rivals enter the industry and the demand for any seller's good decreases.

Which of the following is found ONLY in oligopoly? a. producers who sell identical products b. one firm's actions affect another firm's profit c. entry into the industry is blocked d. sellers face a downward sloping demand curve for their product e. the firm's demand curve is horizontal

b. one firm's actions affect another firm's profit

We define a monopoly as a market with a. one supplier and no barriers to entry. b. one supplier with barriers to entry. c. many suppliers with no barriers to entry. d. many suppliers with barriers to entry. e. a few suppliers and barriers to entry.

b. one supplier with barriers to entry.

Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they enter the market, the minimum average total cost for a bundle of rubber bands, for the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then a. all three of them will enter the market. b. only Alice will enter the market. c. Alice and Bud will enter the market. d. Bud and Celia will enter the market. e. Alice and Celia will enter the market.

b. only Alice will enter the market.

Price cap regulation a. does not provide incentives to firms to minimize their costs because firms cannot change prices. b. sets the maximum price these firms can charge. c. gives firms the incentive to exaggerate their costs. d. Both answers does not provide incentives to firms to minimize their costs because firms cannot change prices and gives firms the incentive to exaggerate their costs are correct. e. Both answers does not provide incentives to firms to minimize their costs because firms cannot change prices and sets the maximum price these firms can charge are correct.

b. sets the maximum price these firms can charge.

If firms in an oligopolistic industry consistently cut their price to sell more output, what price and output will result? a. the monopoly price and output b. the competitive price and output c. the monopolistically competitive price and output d. a price lower than the competitive price and less output than the competitive amount e. a price lower than the competitive price and more output than the competitive amount

b. the competitive price and output

The largest loss a profit-maximizing perfectly competitive firm can incur in the short run equals its a. average variable cost multiplied by output. b. total fixed cost. c. marginal cost multiplied by the number of units produced. d. average total cost multiplied by the number of units produced. e. total variable cost.

b. total fixed cost

The social interest theory of regulation is defined as the a. use of regulations to maximize firms' profits. b. use of regulations to assure an efficient use of resources. c. removal of regulations on business activities. d. implementation and removal of regulations on the cable TV industry. e. use of rate of return regulation.

b. use of regulations to assure an efficient use of resources.

For a natural monopoly, the efficient quantity is produced when the firm is regulated so that a. P = ATC. b. P > ATC. c. P = MC. d. P > MC. e. P < MC.

c. P = MC.

Because of product differentiation, firms a. do not have to compete because their products are unique. b. cannot compete on price. c. can compete on the basis of quality. d. are unable to compete by using advertising. e. must compete on only price.

c. can compete on the basis of quality.

In an industry with a large number of firms, a. each firm will produce a large quantity, relative to market demand. b. one firm will dominate the market. c. collusion is impossible. d. competition is eliminated. e. barriers to exit must exist.

c. collusion is impossible.

The prisoners' dilemma is an example of a. product differentiation. b. collusion. c. game theory. d. monopolistic competition. e. decision making in a monopoly.

c. game theory.

A firm in monopolistic competition is a. efficient because in the long run it makes zero economic profit. b. efficient because it produces at the minimum average total cost. c. inefficient because price exceeds marginal cost. d. efficient because of the ease of entry. e. efficient because it produces where MR = MC.

c. inefficient because price exceeds marginal cost.

In a perfectly competitive market, the market price is $23. At the current level of output, a firm has a marginal cost of $28. What should the firm do? a. produce a larger output to make more profit b. nothing, it is currently maximizing profit c. produce less output to make more profit d. shut down e. raise the price of its product

c. produce less output to make more profit

A cartel is a collusive agreement among a number of firms that is designed to a. expand output and lower prices but not to a predatory level. b. restrict output and lower prices to a predatory level. c. restrict output and raise prices. d. expand output and raise prices. e. expand output and lower prices to a predatory level.

c. restrict output and raise prices

As a result of a wave of mergers in the early part of the twentieth century, which act was passed? a. the Anti-Merger Act of 1900 b. the Sherman Act of 1909 c. the Clayton Act of 1914 d. the Horizontal Merger Act of 1919 e. the Pro-Competition Act of 1912

c. the Clayton Act of 1914

An example of a firm in monopolistic competition is a. your local water company. b. the sole cable television company. c. the many Chinese restaurants in San Francisco . d. Kansas Power and Light, the sole provider of electricity in Kansas City. e. Shaniq, a wheat farmer.

c. the many Chinese restaurants in San Francisco

An example of a firm in monopolistic competition is a. your local water company. b. the sole cable television company. c. the many Chinese restaurants in San Francisco . d. Kansas Power and Light, the sole provider of electricity in Kansas City. e. Shaniq, a wheat farmer.

c. the many Chinese restaurants in San Francisco .

In long-run equilibrium, a firm in monopolistic competition makes a. an economic profit but the economic profit is less than it would be if the firm was a monopoly. b. an economic profit that is higher than what it would be if the firm was a monopoly. c. zero economic profit. d. an economic profit that is the same amount as it would be if the firm was a monopoly. e. an economic profit, an economic loss, or zero economic profit.

c. zero economic profit

If a natural monopoly is regulated using a. a marginal cost pricing rule, the firm maximizes its profit. b. an average cost pricing rule, the firm incurs an economic loss. c. a total cost pricing rule, the firm will exit the industry. d. a marginal cost pricing rule, the firm incurs an economic loss. e. an average cost pricing rule, the firm maximizes its profit.

d. a marginal cost pricing rule, the firm incurs an economic loss.

The larger the four-firm concentration ratio, the ________ competition within an industry; the larger the Herfindahl-Hirschman Index, the ________ competition within an industry. a. more; more b. more; less c. less; more d. less; less e. The premise of the question is wrong because the four-firm concentration ratio applies only to markets with four firms in it and these markets are, by definition, not competitive.

d. less; less

In the short run, a perfectly competitive firm a. must make an economic profit. b. must incur an economic loss. c. must make zero economic profit. d. might make an economic profit, zero economic profit, or incur an economic loss. e. None of these answers is correct.

d. might make an economic profit, zero economic profit, or incur an economic loss.

The social interest theory of regulation is that a. regulators help producers maximize economic profit. b. regulation seeks to increase the government's revenue. c. regulation causes producers to produce at a point where they are earning normal profits. d. regulation seeks an efficient use of resources. e. regulation focuses on the consumers' interests and ignores producers' interests.

d. regulation seeks an efficient use of resources.

Price discrimination is possible, in part, because a. costs of production vary as output increases. b. monopolies are regulated. c. monopolies don't profit maximize. d. the willingness to pay can vary among groups of buyers. e. monopolies face horizontal demand curves.

d. the willingness to pay can vary among groups of buyers.

One way to identify oligopoly is to a. determine the market's minimum price. b. determine the market's maximum price. c. determine whether the firm's ATC exceeds price. d. use the Herfindahl-Hirschman Index (HHI). e. use the Efficiency test.

d. use the Herfindahl-Hirschman Index (HHI).

The deadweight loss with perfect price discrimination is a. equal to the deadweight loss of a single-price monopoly. b. sometimes less than and sometimes more than the deadweight loss of a single-price monopoly. c. more than the deadweight loss of a single-price monopoly. d. zero. e. larger than the deadweight loss with perfect competition.

d. zero

Under the Clayton Act and its amendments, which of the following activities is illegal if it creates monopoly? a. i only b. ii only c. ii and iii d. i and iii e. i, ii, and iii

e. i, ii, and iii

The above figure illustrates a perfectly competitive firm. If the market price is $40 a unit, to maximize its profit (or minimize its loss) the firm should a. shut down. b. produce more than 10 and less than 30 units. c. produce 30 units. d. produce more than 30 units and less than 40 units.. e. produce 40 units.

e. produce 40 units.

A monopolistically competitive firm is inefficient because the firm a. makes positive economic profit in the long run. b. is producing at an output where marginal cost equals price. c. is not maximizing its profits. d. produces a product identical to that of its competitors. e. produces at an output level where average total cost is not at its minimum.

e. produces at an output level where average total cost is not at its minimum.

The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC0, each produces 20 units, and the market price of the good is $16 per unit, then

firms will exit the industry and the number of firms decreases.

If we compare regulating a natural monopoly using a marginal cost pricing rule to using an average cost pricing rule, we see that output is

greater with marginal cost pricing, but average cost pricing allows for costs to be covered.

The Shiny Watch company, a manufacturer of expensive watches, requires all of its retailers to sell its watches for a specific price. Which of the following statements are true? i. The Shiny Watch company is engaged in predatory pricing. ii. The Shiny Watch company is definitely violating the law iii. The Shiny Watch company creates an efficient outcome it its retailers provide an efficient level of service.

iii only.

Suppose a perfectly competitive market is in a short-run equilibrium. If some firms exit the market, the profit of the remaining firms ________; if some firms enter the market, the profit of each existing firm ________.

increases; decreases

The figure above shows a ________ where ________ firm(s) produce(s) ________.

natural oligopoly; 3; 30 units each

If perfectly competitive lawn care firms are making an economic profit, then

new firms will enter the industry.

A natural monopoly exists when

one firm can supply an entire market at a lower average total cost than can two or more firms.

Setting a price so low that competitors are driven out of a market and then boosting the price is called

predatory pricing.

As a firm in monopolistic competition sets the price for its product, the firm faces a tradeoff between

price and the quantity it can sell.

A monopolistically competitive firm is inefficient because the firm

produces at an output level where average total cost is not at its minimum.

One of the major benefits to society of monopolistic competition is

product differentiation.

Product differentiation allows a firm to compete with another firm on the basis of

quality, price, and marketing.

To determine if a market is an oligopoly, we need to determine if

the firms are so few that they recognize their mutual interdependencies.

The primary reason why monopolistically competitive firms cannot make an economic profit in the long run is because

there is freedom of entry.

A monopoly produces a product ________ and there ________ barriers to entry into the market.

with no close substitutes; are

When used with a natural monopoly, an average cost pricing rule results in

zero economic profit for the firm.