Ch. 6/7/9 quizzes

Which of the following market structures has the fewest barriers to entry?

a. perfect competition -easy entry and exit is a market characteristic of perfect competition.

The term externalities refers to:

b. all costs and benefits of a market activity borne by a third party. -any cost which exists outside of the market mechanism is considered an external cost.

If a perfectly competitive firm wanted to maximize its total revenues, it would produce:

b. as much output as it is capable of producing. -if a firm operated at maximum output its profit would likely be small or negative because its marginal costs exceeded the market price; the profit per unit of output would decline and so then would its profit.

Which of the following is not characteristic of a perfectly competitive market?

b. brand loyalty -brand loyalty is a characteristic of a monopolistically competitive market.

Which of the following is not an example of market failure?

b. government intervention -government intervention is a policy where government tries to correct market failure.

A catfish farmer, in a perfectly competitive market:

b. might like to keep other potential catfish producer's out of the market but cannot do so. -since a major characteristic of a competitive market is low barriers to entry an individual firm has no control over actions of competitors.

If an individual perfectly competitive firm raises its price above the market price, it will:

b. not sell any output -since a perfectly competitive firm's product is standardized and therefore a perfect substitute for every other product produced by the industry, it must accept the market price.

An individual wheat farmer has no market power because:

d. it must accept the equilibrium market price. -since a wheat farmer's output relative to the total market is small, it must accept the market price.

The total quantities of a good that people are willing and able to buy at alternative prices defines:

d. market demand. -the demand schedule or the demand curve of all buyers of a good or service is called market demand.

Total revenue is equal to the:

d. price of the product multiplied by the quantity sold.

When firms exit a market, all of the following occurs except:

d. the market demand curve shifts to the right. -as firms exit a market the market supply curve shifts to the left (up the market demand curve) and this causes the market price to rise and the quantity demanded to fall.

The market will:

d. under produce goods that generate external benefits. -since external benefits are not recognized by the market process they will not encourage market production.

Which of the following is most likely a pubic good?

a. a park -unless there was an admission into the park it would be a public good.

Obstacles that make it difficult or impossible for would-be producers to enter a market are known as:

a. barriers to entry. -anything that artificially prevents the entry of firms into an industry is called barriers to entry.

A perfectly competitive firm:

a. can sell all of its output at the prevailing price. -since s perfectly competitive firm faces a horizontal demand curve it can sell all of its output at the market price.

The federal government's role in protecting the environment is justifies by consideration of:

a. externalities. -since the cost and benefits of a clean environment cannot be handled by the market the government must play a role.

If the economy relies entirely on markets to answer the WHAT question, it tends to:

b. overproduce private goods and under produce public goods. -due to the free rider problem in that a person can enjoy a public good without having to pay for it, public goods will be under produced.

Economic profits disappear when:

b. price falls to the level of minimum average total cost. -when an industry is in long-run competitive equilibrium economic profits are equal to zero which means that the market price will be tangent to the average total cost curve at its minimum.

In a competitive market with economic profits, equilibrium:

b. price will fall as new firms enter the market. -if economic profits are above normal profits then firms will enter the industry. this will cause industry supply to shift rightward. economic profits will fall and eventually equal normal profits.

A profit-maximizing competitive firm want to ___ the rate of output when marginal cost ___ price.

b. reduce; exceeds -if the current cost of production is greater than the revenue then the loss will decrease if the firm reduces output.

Which of the following is true for a monopoly?

b. the demand curve indicates the highest price consumers are willing to pay for the rate of output. -maximum profit is at the point where marginal revenue equals marginal cost and the price on the demand curve would be the highest price at the level of output.

Which of the following is not a barrier to entry into a monopoly market?

b. the existence of substitute goods. -the presence of substitute goods in an industry insures competition.

Sources of microeconomic failure that may require government intervention include all of the following except:

b. the need for private goods. -private goods will always be produced by the market since most of the costs/benefits are internal to the market.

An industry dominated by one firm is:

c. a monopoly

For a monopolist, marginal revenue is:

c. always less than price, after the first unit. -if every unit could be sold at the same price marginal revenue would equal average revenue (price) but since the demand curve is downward sloping the marginal revenue must lie below the average revenue curve.

A monopolist sets its price:

c. at the rate of output where marginal revenue equals marginal cost. -maximum profit is at the point where marginal revenue equals marginal costs and the profit per unit would be the difference between the price and the average total cost.

A private good is a good that:

c. can be denied to those who do not pay for it. -a private good can be produced by a firm because its use can be excluded from nonpayers.

In a market economy, producers will produce the goods and services that:

c. consumers demand. -while costs are always important in a market economy the goal of a market is to deliver goods and services that consumers demand most.

Market failure establishes a basis for:

c. government intervention -when the market fails to produce the goods and services that society deems optimal then government will intervene.

Market power:

c. is the ability to alter the market price of a good or service. -since a monopolist faces a downward sloping demand curve in which each amount of output is associated with one unique price it can set the price to maximize revenue. Firms may have market power in other market structures as well as oligopoly and monopolistic competition.

Monopolists are price:

c. makers, but perfectly competitive firms are price takers. -unlike a firm in a competitive industry whose output is small relative to the total market, a monopolist is the market supply and therefore sets the price.

The most important motivation for production is the desire to:

c. maximize economic profits. -when a producer maximizes economic profits it means that its marginal revenue is equal to its marginal costs.

The market under produces public goods because:

c. people are less willing to pay for public goods than for private goods. -public goods suffer from the free rider problem in that they can be enjoyed without any payment for them

If external benefits occur when a good is consumed, then the government should:

c. subsidize the consumption or production of the good. -if external benefits of a good are large then the government might be justified in encouraging production of the good.

Market failure occurs when:

d. an imperfection in the market mechanism prevents an optimal outcome. -whenever external benefits and costs exist, the market will not produce at the optimal outcome.

Suppose a market is dominated by three firms. This type of market is called:

d. an oligopoly

An industry in which a few large firm supply most or all of a product is known as:

d. an oligopoly -oligopolies are noted for their dependence upon each other's pricing policies since there are only a few firms.

In economics, a public good:

d. cannot be denied to consumers who do no pay.

A monopoly realizes larger profits than a comparable competitive market by charging a ___ price and producing ___ output.

d. higher; less -since a monopolist demand curve is downward sloping whereas a firm in a competitive market is flat, the marginal revenue curve for a monopolist will intersect with the marginal cost curve sooner and therefore the monopolist will charge a higher price and produce a lower quantity.