Microeconomics Final Exam

In perfect competition, the demand faced by a single firm is perfectly

elastic, because many other firms produce the same standardized product.

Suppose an increase in market demand occurs in a constant-cost industry. As a result

perfectly competitive firms will eventually enter the industry.

Marginal Cost

equals both average variable cost and average total cost at their respective minimums.

Which idea is inconsistent with perfect competition?

product differentiation

The table shows cost data for a perfectly competitive firm. If the market price for the firm's product is $6, what output level will the firm produce to maximize profits?

14

Use the following graph to answer the question. What is the profit-maximizing quantity of output for this pure monopoly?

90

Which of the following reasons explain why a natural monopoly might exist?

Extremely high startup costs.

What is one major hurdle monopolies face to engage in first-degree price discrimination?

Finding everyone's willingness to pay is costly and difficult.

Answer the next question based on the following demand and cost data faced by a pure monopoly. At equilibrium, the pure monopoly will generate

an economic profit of $6.50.

Accounting profit equals total revenue minus

explicit costs

The table shows cost data for a perfectly competitive firm. If the market price for the firm's product is $80, the firm will

produce 4 units to maximize profits.

The long-run perfectly competitive equilibrium

results in normal profits.

Use the following graph to answer the next question. What per-unit profit will this firm receive?

$10

If the government regulated the pure monopoly and made it produce the level of output that would achieve allocative efficiency, what price and quantity of output levels would we observe in the short run?

P2 and Q3

In long-run equilibrium, a perfectly competitive firm will operate where price is

equal to MR, MC, and the minimum ATC.

Economic profit is

equal to the difference between accounting profit and implicit costs.

A perfectly competitive firm does not try to raise its price above the market price because

it would not be able to sell its output.

Chipotle offered free burritos to celebrate teachers. What type of price discrimination does this demonstrate?

third-degree price discrimination

If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then average total cost must be

$200

Use the following information to answer the next question. Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The explicit costs of Harvey's firm in the first year were

$605,000.

In a perfectly competitive industry, each firm

can easily enter or exit the industry.

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output level of 1,000 units is $2.50. The minimum possible average variable cost is $2. The market price of the product is $2.50. To maximize profits, the firm should

continue producing 1,000 units.

In a perfectly competitive industry

economic profits may exist in the short run but not in the long run.

Imagine that a firm expands the size of its plant, doubling its total cost of production but more than doubling its output. This situation is known as

economies of scale

The ability of Intel to spread product development costs over a larger number of units of output arises from

economies of scale.

The larger the diameter of a natural gas pipeline is, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of one reason for

economies of scale.

Suppose that a pure monopoly calculates that at its present output level, marginal revenue is $1 and marginal cost is $2. The monopoly could maximize profits or minimize losses by

increasing price and decreasing output.

The total variable cost associated with the production of 5 units of output is

63

Which case below best represents a case of third-degree price discrimination?

A major airline sells tickets to senior citizens at lower prices than to other passengers.

Which of the following is true under conditions of perfect competition?

No single firm can influence the market price.

Pure monopolies are said to be allocatively inefficient because

price is greater than marginal cost.

Use the following table to answer this question, which provides information on the production of a product that requires one variable input. The average product of the 40th input item is

20.5

Use the following graph to answer the next question. The perfectly competitive firm will maximize profits if it produces and sells output at

C

Use the following graph to answer the next question. A firm that has the long-run cost curves shown in the graph above would not be able to

attain lower unit costs by reducing its output level.

If the marginal cost curve is below the average variable cost curve

both average total cost and average variable cost are decreasing.

Which of the following constitutes an implicit cost to the Asarta Manufacturing Company?

foregone interest income from using savings to pay for operating expenses

One defining characteristic of pure monopoly is that the

monopoly produces a product with no close substitutes.

Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs of production are $300,000. The firm earns an accounting profit of ________ and an economic profit of ________.

$500,000; $200,000

Use the following table to answer the next question. The table shows the total costs associated with varying levels of output produced by a perfectly competitive firm. If the product sells for $1,200 a unit, the firm's profit-maximizing output is

4

Use the following graphs to answer the next question. "The bigger the volume, the lower the cost, and we pass the savings on to you" is a familiar slogan. Its idea is illustrated in which of the above graphs?

Graph 1

Use the following graphs to answer the next question. The graphs show the long-run average total cost (LRATC) curve for cars. For which graph is the output level Q0 at minimum efficient scale?

Graph 1

A nondiscriminating pure monopoly must decrease the price on all units of a product to sell more units. This explains why

a pure monopoly's marginal revenue curve is below its demand curve.

Use the following graph for a perfectly competitive firm generating a loss in the short run to answer the next question. Which area in the graph represents the portion of total cost that the firm can recoup by continuing to produce rather than shutting down?

0beg

The marginal cost associated with the production of the third unit of output is

7

Use the following table to answer this question, which provides information on the production of a product that requires one variable input. The average product generated with 5 units of the input is

10

Jose owns his own business. The first three employees can create 10, 12, and 11 widgets per hour. When Jose hires the 4th worker the total production from all employees increased to 40 total widgets per hour. What was the marginal product of the 4th worker?

7 widgets

For a pure monopoly to sell a quantity of 10 units, the price must be $8. Marginal revenue (MR) at this output level will be

< $8.

The lowest point on a perfectly competitive firm's short-run supply curve corresponds to the minimum point on its

AVC curve.

Use the following graphs for a perfectly competitive market in the short run to answer the next question. What will happen in the long run to market supply and the equilibrium price of the product?

Market supply will decrease and equilibrium price will increase.

Use the following graph showing short-run cost curves for a perfectly competitive firm to answer the next question. At what price would the firm generate the same profit or loss whether it chooses to produce or not?

P3

Use the following graph showing the demand and marginal revenue curves faced by a pure monopoly to answer the next question. What price should the pure monopoly charge to maximize total revenue?

P3

Use the following graph to answer the next question. If the government regulated the pure monopoly and made it set a normal profit price, what price and quantity of output levels would we observe in the short run?

P3 and Q2

Use the following figure to answer the next question. At which point is marginal cost (MC) at its minimum?

Point A

If a perfectly competitive firm is facing a situation where the price of its product is lower than the average total cost, which of the following statements is true?

The firm is generating a loss, and if things are not expected to improve the firm will leave the industry.

Use the following graph for a pure monopoly operating in the short run to answer the next question. At the profit-maximizing level of output, this firm

generates a loss per unit equal to DE.

When compared with a perfectly competitive market with identical costs of production, a pure monopoly will produce

less output and charge a higher price.

Third-degree price discrimination is more common in service industries because

low price buyers will find it virtually impossible to resell the products of such industries to high price buyers.

Implicit costs are

opportunity costs of using owned resources.

Use the following graphs for a perfectly competitive market in the short run to answer the next question. The graphs suggest that in the long run, as automatic market adjustments occur, the demand faced by the perfectly competitive firm will

shift down.

One argument for having the government regulate natural monopolies is that without regulation

these monopolies produce at a level where price is greater than marginal cost.