Unit 4 AP-Microeconomics Test Study Guide

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

Monopolies are inefficient compared to perfectly competitive firms because monopolies... a) produce output with average total cost exceeding average revenue b) produce more output than is social desirable c) charge a price less than marginal revenue d) charge a price greater than marginal cost e) charge a price less than average total cost

d

Game theory is most useful in describing outcomes in markets where... a) firms are price takers b) there is only one producer c) there are many small producers d) products are identical for all firms e) there are interdependent firms

e

Which of the following is true of a monopolistically competitive firm in long-run equilibrium? a) Price is greater than marginal cost, and marginal revenue is equal to average total cost. b) Price is greater than marginal revenue, and marginal cost is equal to average total cost. c) Price is greater than marginal revenue, and marginal cost is greater than average total cost. d) Marginal revenue is equal to marginal cost, and price is equal to average total cost. e) Marginal revenue is greater than marginal cost, and price is equal to average total cost.

d

A collusive agreement to fix prices among firms in an oligopolistic industry is most likely to be broken under which of the following conditions? a) It is easy for new firms to enter into the industry. b) All of the firms have identical costs. c) The number of firms is few. d) Firms' sales are widely reported. e) The market demand is stable.

a

Assume that Alpha and Beta are the only sellers of a product and they do not cooperate. Each firm has to decide whether to raise the product price. The payoff matrix below gives the profits, in dollars, associated with each pair of pricing strategies. The first entry in each cell shows the profits to Alpha, and the second, the profits to Beta.Assuming both firms know the information in the matrix, which of the following correctly describes the dominant strategy of each firm? a) Alpha: Do not raise price Beta: Do not raise Price b) Alpha: Do not raise Price Beta: Raise price c) Alpha: Raise Price Beta: No dominant strategy d) Alpha: Raise price Beta: Do not raise price e) Alpha: no dominant strategy Beta: Raise Price

a

For an unregulated monopolist, the profit- maximizing quantity will always be... a) in the elastic region of the demand curve b) where marginal revenue equals price c) where price equals average total cost d) where price equals marginal cost e) where the marginal cost curve intersects the demand curve

a

The cartel model of oligopoly predicts that... a) all the firms in the industry act in unison to set a monopoly price b) each producer acts independently of others c) firms follow the low-price firm in the industry d) differences in cost of production discourage individual firms from cheating e) the markup on marginal cost should be the same for all firms

a

There are four firms in an oligopolistic industry. The four firms agree to collude and act like a monopoly. If one of the firms violates the agreement and charges a lower price or sells a larger quantity than what was agreed to, what will happen in the short run? a) The firm that cheats will earn higher profits, and industry profits will be lower. b) The firm that cheats will earn higher profits, and industry profits will be higher. c) The firm that cheats will earn lower profits, and industry profits will be lower. d) The firm that cheats will earn lower profits, and industry profits will be higher. e) The firms that do not cheat will earn higher profits.

a

Which of the following enables a seller to capture the entire consumer surplus in a market? a) Perfect price discrimination b) Perfect competition c) An excise tax on buyers d) Effective price ceiling e) Effective price floor

a

A cartel is difficult to maintain for which of the following reasons? a) Consumers substitute away from the good when the price increases. b) Individual cartel members are tempted to cheat on the agreement. c) Although the total gain to cartel members is positive, all members lose when everyone sticks to the agreement. d) Some firms will reduce output in an effort to lower costs of production. e) Oligopolistic behavior is generally predictable.

b

A monopolistically competitive firm advertises in order to... a) shift the demand curve for its product to the left. b) make the demand for its product less price elastic c) make its product more similar to its competitors' d) increase its positive externalities e) reduce the industry's barriers to entry

b

If a perfectly competitive industry were monopolized without any changes in cost conditions, the price and quantity produced would change in which of the following ways? a) Price: Increase Quantity: Increase b) Price: Increase Quantity: Decrease c) Price: Increase Quantity: may increase or decrease d) Price: Decrease Quantity: Increase e) Price: Decrease Quantity: Decrease

b

Which of the following is true of a monopolistically competitive firm in long-run equilibrium? a) Price exceeds marginal revenue, and the firm earns positive economic profits. b) Price equals marginal revenue, and the firm earns positive economic profits. c) Price equals marginal cost, and the firm earns zero economic profits. d) Price exceeds marginal cost, and the firm earns zero economic profits. e) Price exceeds marginal cost, and the firm earns positive economic profits.

d

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

Generally, monopolies are considered inefficient because they... a) produce at a point where marginal cost is less than marginal revenue b) produce at a point where marginal cost exceeds price c) produce more output than does a competitive industry with similar cost conditions d) lead to an overallocation of resources in the affected market e) lead to an underallocation of resources in the affected market

e

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

Let P = price, MR = marginal revenue, MC = marginal cost, and ATC = average total cost. In monopolistic competition, which of the following most accurately describes the long-run equilibrium conditions for a firm? a) P > ATC, MR = MC, and P > MC b) P > ATC, MR > MC, and P = MC c) P = ATC, MR = MC, and P > MC d) P = ATC, MR = MC, and P = MC e) P = ATC, MR > MC, and P > MC

c

The condition for allocative efficiency is violated when... a) firms are price makers( price searchers) b) short-run profits exist in a competitive industry c) price equals average total cost d) the market demand curve is inelastic in a competitive industry e) the market demand curve is elastic in a competitive industry

a

The profit-maximizing firm depicted in the graph above should... a) exit if conditions do not improve in the long run b) produce the output that minimizes average total cost c) increase price to maximize profits d) increase output to maximize profits e) use less capital and more labor to reduce cost

a

In which of the following market structures is it sometimes assumed that rival firms will match price decreases but not match price increases? a) Perfect competition b) Oligopoly c) Natural monopoly d) Monopolistic competition e) Monopoly

b

If the marginal cost curve of a monopolist shifts up, which of the following will occur to the monopolist's price and output? a) Price: Decrease Output: Increase b) Price: Decrease Output: Decrease c) Price: Increase Output: No change d) Price: Increase Output: Increase e) Price: Increase Output: Decrease

e

Price discrimination occurs when... a) the supply of the product is elastic b) a product's average cost is greater than its average revenue c) a product's average cost is less than its average revenue d) differences in a product's price reflect differences in marginal costs e) differences in a product's price do not reflect differences in costs of production

e

The price of an airline ticket is typically lower if a traveler buys the ticket several weeks before the flight's departure date rather than on the day of departure. This pricing strategy is based on the assumption that... a) travelers are not aware of how airline prices change across time b) travelers do not have alternative modes of transportation c) travelers will pay any price to travel as the departure date approaches d) the marginal cost of the last few seats on an airplane is higher than that for the first few seats e) travelers' demand becomes less elastic as the departure date approaches

e

Which of the following best explains why it is difficult to maintain lasting collusive agreements? a) There is an unavoidable conflict in that a collusive agreement can increase the profits of some, but not all, firms in the industry. b) There is little potential for gain from collusion unless there is a large number of consumers in the market. c) Each firm in the industry views itself as facing a vertical demand curve, even though the market demand curve is downward sloping. d) The firms in the industry have a common incentive to increase output to a more competitive level. e) Each firm realizes that its profits would increase if it were the only firm to violate the collusive agreement by increasing its production slightly.

e

A firm with market power engages in price discrimination to.. a) earn a higher profit b) increase consumer surplus c) decrease deadweight loss d) make its demand more elastic e) make its demand more inelastic

a

Over the past 5 years, 50 new restaurants have opened and 30 have closed in the city of Zuni. Currently there are 110 restaurants operating in the city. Which of the following best represents the market structure, barriers to entry, and economic profits in the long run? a) Market Structure: Perfect comp Barriers: Low Long-Run: Negative b) Market Structure: Perfect comp Barriers: High Long-Run: positive c) Market Structure: Mono. comp Barriers: Low Long-Run: Zero d) Market Structure: Mono. Comp Barriers: High Long-Run: Positive e) Market Structure: Mono. Comp. Barriers: High Long-Run: Zero

c

The graph above depicts cost and revenue curves for a typical firm in a monopolistically competitive industry. Suppose that the firm is producing 0M units of output. To maximize profits, it should do which of the following to output and price? a) Output: Increase Price: Decrease b) Output: increase Price: Increase c) Output: Decrease Price: Increase d) Output: No change Price: Increase e) Output: No change Price: no change

c

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

The characteristic of oligopolistic firms that makes them different from all other types of firms is that oligopolistic firms... a) are regulated by a state agency or federal agency b) consider each other's decisions c) advertise their products d) produce differentiated products e) produce identical products

b

The graph above shows a firm's cost and revenue curves. This profit-maximizing firm will... a) produce where demand is inelastic b) charge a higher price than that necessary to maximize revenues c) have many profit-maximizing price and quantity combinations d) be unable to increase sales and total revenues by lowering its price e) never have a region of falling average total cost

b

The payoff matrix below gives the profits associated with the strategic choices of two firms in an oligopolistic industry. The first entry in each cell is the profit to Firm A and the second to Firm B. If the two firms collude, Firm A's and Firm B's profits would be which of the following? a) Firm A: $150 Firm B: $50 b) Firm A: $100 Firm B: $100 c) Firm A: $100 Firm B: $150 d) Firm A: $50 Firm B: $100 e) Firm A: $50 Firm B: $50

b

An industry consists of 100 small firms, and the largest firm accounts for only 2 percent of sales. Brand names are considered a signal of quality. The industry described is best classified as... a) monopoly b) perfectly competitive c) monopolistically competitive d) oligopolistic e) monopsonistic

c

Evergreen and Nature View are bidding for a landscaping contract. The payoff matrix above shows what each firm's total weekly profits from all its operations will be for each combination of bids. The first entry in each cell shows Evergreen's profit, and the second entry in each cell shows Nature View's profit. A Nash equilibrium results under which of the following conditions? a) When Evergreen bids low, no matter what Nature View's bid is b) When both firms bid high and when both firms bid low c) When Evergreen bids high and Nature View bids low d) When both firms bid low e) When both firms bid high

c

Which of the following is true of a monopolistically competitive firm in long-run equilibrium? a) It produces where price equals marginal cost, and it earns zero economic profits. b) It produces where marginal revenue exceeds marginal cost, and it earns positive economic profits. c) It produces where marginal cost equals marginal revenue, and the price is equal to average total cost. d) It produces at the minimum average total cost, and it utilizes all excess capacity. e) It produces more than the allocatively efficient quantity, and the price is greater than marginal cost.

c

Which of the following statements correctly identifies a difference between perfect competition and monopolistic competition? a) In perfect competition there are no barriers to entry, but there are strong barriers in monopolistic competition. b) In perfect competition there are many firms, but in monopolistic competition there are only a few firms. c)In perfect competition the firms all sell products that are exactly the same, but in monopolistic competition each firm sells a slightly differentiated product. d) In perfect competition firms maximize profit by selling the quantity where marginal revenue equals marginal cost, but in monopolistic competition firms maximize profit by selling the quantity where marginal revenue exceeds marginal cost. e) In perfect competition there are few consumers, but in monopolistic competition there are many consumers.

c

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

A monopolist introduces a technological innovation that lowers the marginal cost and average cost of production. The price of the good and the level of output are most likely to change in which of the following ways? a) Price: Constant Output: Constant b) Price: Constant Output: Increase c) Price: Increase Output: Decrease d) Price: Decrease Output: Increase e) Price: Decrease Output: Constant

d

Compared with a perfectly competitive market, a single-price monopoly with the same market demand and cost curves will... a) increase output and price b) increase output and decrease price c) decrease output and price d) decrease output and increase price e) produce the same level of output and increase price

d

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