Microeconomics My AP Unit 1
Which of the following statements relating to a firm in an imperfectly competitive market and a firm in a perfectly competitive market is true? (A) Firms in both types of markets will likely advertise the merits of their products to increase sales. (B) Firms in both types of markets will increase price to increase total revenues when their demand is inelastic. (C) An imperfectly competitive firm must lower its price to increase sales, while a perfectly competitive firm can increase sales by increasing output at the current price. (D) Barriers to entry give both imperfectly competitive and perfectly competitive firms market power to raise price. (E) As their product becomes different from their competitors' product, both an imperfectly competitive firm and a perfectly competitive firm will face less elastic consumer demand.
(C) An imperfectly competitive firm must lower its price to increase sales, while a perfectly competitive firm can increase sales by increasing output at the current price. The imperfectly competitive firm is a price maker, and it faces a downward-sloping demand curve. The perfectly competitive firm is a price taker, and it faces a perfectly elastic (horizontal) demand curve. Thus, the imperfectly competitive firm must lower price to increase sales; the perfectly competitive firm can increase its sales at the given market price by increasing output.
If Zeta, a single producer, had exclusive control of a key resource needed to produce good Z , a likely result would be which of the following? (A) Good Z would be produced in a perfectly competitive market. (B) Slight differences in output would lead to good Z being in a monopolistically competitive market. (C) There would be a barrier to entry, and Zeta would have a monopoly on good Z. (D) Only a few firms would produce good Z, so there would be an oligopoly. (E) Zeta must have decreasing returns to scale and operate as a natural monopoly in producing good Z.
(C) There would be a barrier to entry, and Zeta would have a monopoly on good Z. For a monopoly to persist, there needs to be a barrier to entry. Exclusive control of a vital resource would serve as such a barrier to entry and prevent new firms from entering the market to produce good Z.
Which of the following is true for a firm in long-run equilibrium in monopolistic competition? (A) Given barriers to entry, the firm earns economic profits in long-run equilibrium. (B) The firm is productively efficient, producing at the minimum of long-run average total cost. (C) Price equals marginal revenue and marginal cost. (D) There is neither allocative nor productive efficiency. (E) Price is greater than average total cost in long-run equilibrium.
(D) There is neither allocative nor productive efficiency. With easy exit and entry, in the long run, firms earn zero economic profit in monopolistic competition. The firm faces a downward-sloping demand curve, so price is greater than marginal cost, which does equal marginal revenue at the profit-maximizing output level. With price greater than marginal cost, there is no allocative efficiency. Also, since average total cost is falling, where the firm is producing, it is not at the minimum of long-run average cost, so there is no productive efficiency.
Which of the following statements relating to a firm in an imperfectly competitive market and a firm in a perfectly competitive market is true? (A) An imperfectly competitive firm does not experience diminishing returns, while a perfectly competitive firm experiences diminishing returns. (B) An imperfectly competitive firm will always earn economic profits, while a perfectly competitive firm always earns zero economic profits. (C) An imperfectly competitive firm and a perfectly competitive firm have a marginal revenue that equals the product price. (D) When an imperfectly competitive firm raises the price, it will likely continue to sell some units of output, but when a perfectly competitive firm raises the price, it will sell no output. (E) Both imperfectly competitive and perfectly competitive firms face no barriers to entry.
(D) When an imperfectly competitive firm raises the price, it will likely continue to sell some units of output, but when a perfectly competitive firm raises the price, it will sell no output. The imperfectly competitive firm faces a downward-sloping demand curve; when raising price, the firm will sell less output but continue to sell some output. The perfectly competitive firm is a price taker and will sell no output if it charges a price higher than the market price.
Based on the information in the above graph describing a monopolistically competitive firm, which of the following is true? (A) The firm is productively efficient since marginal cost intersects average cost at the minimum of average cost. (B) When maximizing profits, this firm will have economic losses but will still continue to produce. (C) The firm will produce where marginal revenue equals marginal cost and will set its price to equal average total cost. (D) With the firm making economic profits, it can be expected that new firms will enter this market. (E) The firm will produce where demand is inelastic to capture all economies of scale.
(D) With the firm making economic profits, it can be expected that new firms will enter this market. The profit-maximizing firm produces where marginal revenue equals marginal cost and, from the demand curve above that output level, derives its product price. In this case, that price will be above average total cost and the firm will make economic profits. With profits being earned, new firms will enter the market over time.
The payoff matrix above shows the profits of two firms, Alpha and Beta, that compete against each other. Each firm must decide to set a high or low price. The first numeric entry shows Alpha's profits; the second entry shows Beta's profits. Each firm is aware of the information in this payoff matrix. Nash equilibrium occurs with which combination of strategies? A Both firms charging a low price B Both firms charging a high price C Alpha charging a low price and Beta charging a high price D Alpha charging a high price and Beta charging a low price E There is no equilibrium in this game
A Both firms charging a low price Nash equilibrium occurs when both firms follow their dominant strategy to charge a low price; each firm will earn $125. It is a Nash equilibrium because neither firm has an incentive to change its strategy since if they do so they each will end up earning lower profits. Nash equilibrium is a noncooperative outcome.
Which of the following areas shows the consumer surplus? A AP0E B AP1B C AFE D BJE E P0FE
B AP1B The profit-maximizing monopolist would produce Q1 where MR=MC and would set the price at P1. The consumer surplus is the area that is under the demand curve and above the monopoly price line at Q1, which is AP1B.
Based on the information in the graph above, what are the profit-maximizing output quantities for a single-price monopolist and for a monopolist that engages in perfect price discrimination? A For a single-price monopolist, Q0. With perfect price discrimination, Q1. B For a single-price monopolist, Q0. With perfect price discrimination, Q3. C For a single-price monopolist, Q1. With perfect price discrimination, Q3. D For a single-price monopolist, Q2. With perfect price discrimination, Q4. E For a single-price monopolist, Q0. With perfect price discrimination, Q4.
B For a single-price monopolist, Q0. With perfect price discrimination, Q3. Profit maximization requires the firm to produce where marginal revenue equals marginal cost. For a single-price monopoly, marginal revenue is less than the price. In the graph above, the single-price profit-maximizing firm would produce at Q0. For a firm that can perfectly price discriminate, the marginal revenue curve and the demand curve are the same curve. Therefore, if the profit-maximizing firm could perfectly price discriminate, it would produce Q3.
Which of the following areas shows the producer surplus and the deadweight loss? A The producer surplus is area P1BCP0, and the deadweight loss is area BJE. B The producer surplus is area P1BJF, and the deadweight loss is area BJE. C The producer surplus is area P1BQ10, and the deadweight loss is area BJE. D The producer surplus is area P1BQ10, and the deadweight loss is area BCE. E The producer surplus is area P0EA, and the deadweight loss is area CEJ.
B The producer surplus is area P1BJF, and the deadweight loss is area BJE. With monopoly, the firm restricts output and raises price. The producer captures surplus from the consumer (P0P1BC), so its total producer surplus would be P1BJF. Additionally, there is a deadweight loss equal to area BJE.
The payoff matrix above shows the profits of two firms, Alpha and Beta, that compete against each other. Each firm must decide to set a high or low price. The first numeric entry shows Alpha's profits; the second entry shows Beta's profits. Each firm is aware of the information in this payoff matrix. Given that each firm is aware of the information in the payoff matrix, which of the following is true? A Neither Alpha nor Beta has a dominant strategy. B Both Alpha and Beta have a dominant strategy to price high. C Both Alpha and Beta have a dominant strategy to price low. D Alpha has a dominant strategy to price low, whereas Beta has a dominant strategy to price high. E Alpha has a dominant strategy to price high, whereas Beta has no dominant strategy.
C Both Alpha and Beta have a dominant strategy to price low. Each firm has a dominant strategy to price low. If Beta priced high, Alpha would earn $150 if it priced high but would earn more, $180, if it priced low. So, Alpha would price low when Beta prices high. If Beta priced low, Alpha would earn $120 if it priced high and $125 if it priced low. So, Alpha would price low when Beta prices low. Therefore, Alpha would price low regardless of what Beta charges. Beta also has a dominant strategy to price low. Beta would earn more profits charging a low price regardless of the price Alpha charges.
Which of the following statements concerning a natural monopoly is true? A Average total cost is always less than marginal cost in the long run. B At the allocatively efficient level of output, monopoly profit and deadweight loss are both equal to zero. C If the monopolist chooses to produce the quantity at which price is equal to average cost, it would earn a normal profit. D The monopolist can earn positive economic profits by producing the allocatively efficient output in the short run. E Production efficiency could be improved if another firm were to enter and compete with the single monopolist.
C If the monopolist chooses to produce the quantity at which price is equal to average cost, it would earn a normal profit. With a natural monopoly, there are economies of scale (falling long-run average cost) over the range of the effective demand. Thus, a single firm can supply the entire market at a lower average total cost than two or more competing firms sharing the market. If the monopoly chooses to set the price equal to average total cost and avoid regulation, it would earn a normal or zero economic profit.
Assume a profit-maximizing monopolist is able to price discriminate, dividing its consumers into two distinct groups charging each a different price. Based on this information, which of the following is true? A The monopolist would earn greater profit charging each consumer the same price, not charging two different prices. B The price discrimination can only be successful if one group can resell the product but the other group cannot. C The group with the more elastic demand will pay the lower price. D The consumers with less willingness to pay will pay the higher price. E The group with greater production costs will pay a lower price.
C The group with the more elastic demand will pay the lower price. By charging each group a different price, based on willingness to pay, the producer makes a greater profit. The group with the greater willingness to pay, or less elastic demand, pays a higher price, and the group that has the more elastic demand will pay the lower price.
In which of the following market structures is firm interdependence and strategic behavior most commonly observed? A Monopoly protected by a patent B Short-run perfect competition C Monopsony D Oligopoly E Monopolistic competition
D Oligopoly In an oligopoly market there are a few firms whose individual actions are predicated on the reaction of rival firms. Thus, interdependence and strategic decision making are prevalent.
Which of the following is true for a monopolist that engages in perfect price discrimination? A The firm sells the profit-maximizing quantity of the regular monopolist but charges each consumer a price higher than the regular monopoly price. B There is more consumer surplus than exists with a regular monopoly. C The monopolist further restricts output compared to the regular monopoly, creating greater deadweight loss. D The monopolist sells the allocatively efficient quantity of output. E The monopolist no longer faces a downward-sloping demand curve, becoming a price taker.
D The monopolist sells the allocatively efficient quantity of output. The perfectly price-discriminating monopolist sells each unit of output at the maximum price the consumer is willing to pay, as shown by the demand curve. The firm continues to sell output demand equals marginal cost, which is the allocatively efficient output level. Since each consumer pays the maximum price, he or she is willing to pay for the product and there is no consumer surplus. All surplus is producer surplus.
Which of the following is true of monopolistically competitive firms in long-run equilibrium? A Firms can earn positive economic profits. B Firms face a perfectly elastic demand curve. C Price equals marginal cost, which equals marginal revenue. D Price will always be above average total cost. E Marginal revenue equals marginal cost, and price equals average total cost.
E Marginal revenue equals marginal cost, and price equals average total cost. The profit-maximizing firm produces where marginal revenue equals marginal cost. With easy exit and entry, in the long run, firms earn zero economic profit in monopolistic competition, and therefore, price equals average total cost.
