ECON 2302 EXAM 2 CHAPTER 9-14
Which of the following will not hold true for a competitive firm in long-run equilibrium?
P equals AFC.
Which of the following is characteristic of a purely competitive seller's demand curve?
Price and marginal revenue are equal at all levels of output.
Use your basic knowledge and your understanding of market structures to answer this question. Which of the following companies most closely approximates a monopolistic competitor?
Subway Sandwiches
A purely competitive seller is
a "price taker."
In the long run, a profit-maximizing monopolistically competitive firm sets it price
above marginal cost.
In the short run, a profit-maximizing monopolistically competitive firm sets it price
above marginal cost.
Nonprice competition refers to
advertising, product promotion, and changes in the real or perceived characteristics of a product.
Economists would describe the U.S. automobile industry as
an oligopoly.
An increasing-cost industry is associated with
an upsloping long-run supply curve.
Suppose a purely competitive, increasing-cost industry is in long-run equilibrium. Now assume that a decrease in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price
and industry output will be less than the initial price and output.
The law of diminishing returns indicates that
as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.
For most producing firms,
average total costs decline as output is carried to a certain level, and then begin to rise.
Under pure competition, in the long run
both allocative efficiency and productive efficiency are achieved.
The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.
downsloping; perfectly elastic
We would expect an industry to expand if firms in that industry are
earning economic profits.
The diagram shows the short-run average total cost curves for five different plant sizes of a firm. The position of these five curves in relation to one another reflects
economies and diseconomies of scale.
The four-firm sales concentration ratio for an industry measures the
extent to which the four largest firms dominate the production of a good.
The monopolistic competition model assumes that
firms will engage in nonprice competition.
Which of the following is most likely to be an implicit cost for Company X?
forgone rent from the building owned and used by Company X
Which of the following is most likely to be a variable cost?
fuel and power payments
Accounting profits are typically
greater than economic profits because the former do not take implicit costs into account.
A monopolistically competitive firm has a
highly elastic demand curve.
To economists, the main difference between the short run and the long run is that
in the long run all resources are variable, while in the short run at least one resource is fixed.
If a purely competitive constant-cost industry is realizing economic profits, we can expect industry supply to
increase, output to increase, price to decrease, and profits to decrease.
A decreasing-cost industry is one in which
input prices fall or technology improves as the industry expands.
A monopolistically competitive firm's marginal revenue curve
is downsloping and lies below the demand curve.
A monopolistically competitive industry combines elements of both competition and monopoly. The competition element results from
low entry barriers.
In a decreasing-cost industry,
lower demand leads to higher long-run equilibrium prices.
Monopolistic competition means
many firms producing differentiated products.
In the short run, the individual competitive firm's supply curve is that segment of the
marginal cost curve lying above the average variable cost curve.
A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating
marginal revenue and marginal cost.
When a firm is maximizing profit, it will necessarily be
maximizing the difference between total revenue and total cost.
An industry comprising 40 firms, none of which has more than 3 percent of the total market for a differentiated product, is an example of
monopolistic competition.
The restaurant, legal assistance, and clothing industries are each illustrations of
monopolistic competition.
Under monopolistic competition, entry to the industry is
more difficult than under pure competition but not nearly as difficult as under pure monopoly.
The demand curve of a monopolistically competitive producer is
more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.
In long-run equilibrium, a monopolistically competitive producer achieves
neither productive efficiency nor allocative efficiency.
If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then
new firms will enter this market.
An industry comprising a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions, is called
oligopoly.
Concentration ratios measure the
percentage of total industry sales accounted for by the largest firms in the industry.
The demand schedule or curve confronted by the individual, purely competitive firm is
perfectly elastic.
Suppose that Betty's Beads is a typical firm operating in a perfectly competitive market. Currently Betty's MR = $15, MC = $12, ATC = $10, and AVC = $8. Based on this information, we can conclude that
potential new firms will be encouraged by Betty's success to enter the market.
(Last Word) Oil wells and seasonal resorts will often shut down temporarily because
prices for their output temporarily fall below their average variable costs of production.
Which of the following is not a characteristic of pure competition?
pricing strategies by firms
A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should
produce because the resulting loss is less than its TFC.
A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from
product differentiation.
Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting
profits were $0 and its economic losses were $500,000.
Which of the following is most likely to be a fixed cost?
property insurance premiums
In which of these continuums of degrees of competition (highest to lowest) is mono
pure competition, monopolistic competition, oligopoly, pure monopoly
In which of the following industry structures is the entry of new firms the most difficult?
pure monopoly
Which of the following is not a basic characteristic of monopolistic competition?
recognized mutual interdependence
A constant-cost industry is one in which
resource prices remain unchanged as output is increased.
Long-run competitive equilibrium
results in zero economic profits.
Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm
should continue producing in the short run but leave the industry in the long run if the situation persists.
When LCD televisions first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that
the LCD television industry is a decreasing-cost industry.
(Last Word) Temporary shutdowns of firms are most widespread when
the economy experiences recession.
The basic characteristic of the short run is that
the firm does not have sufficient time to change the size of its plant.
Implicit and explicit costs are different in that
the former refer to nonexpenditure costs and the latter to monetary payments.
If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes,
the industry would more closely approximate pure competition.
The term productive efficiency refers to
the production of a good at the lowest average total cost.
The term allocative efficiency refers to
the production of the product mix most desired by consumer
Normal profit is
the return to the entrepreneur when economic profits are zero.
In a purely competitive industry,
there may be economic profits in the short run but not in the long run.
The MR = MC rule applies
to firms in all types of industries.
Accounting profits equal total revenue minus
total explicit costs.
Firms seek to maximize
total profit.
For a purely competitive seller, price equals
total revenue divided by output. marginal revenue. average revenue. all of the above
A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its
total variable costs.
The amount of calendar time associated with the long run
varies from industry to industry.
If the four-firm concentration ratio in an oligopolistic industry is 100 percent and each firm has an equal percentage of sales, the Herfindahl index is
2,500.
Assume the top six firms comprising an industry have market shares of 10, 8, 8, 5, 5, and 4 percent. The remaining 20 firms each have market shares of 2 percent. The Herfindahl index for this industry is
374.
Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct?
AP continues to rise so long as TP is rising.
What do wages paid to factory workers, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?
All are opportunity costs.
Which of the following is correct?
Marginal product rises faster than average product and also falls faster than average product.
The Herfindahl index for a pure monopolist is
10,000.
Answer the question on the basis of the accompanying table that shows average total costs (ATC) for a manufacturing firm whose total fixed costs are $10. Output ATC 1 $40 2 27 3 29 4 31 5 38 The marginal cost of the fourth unit of output is
16
The short-run supply curve of a purely competitive producer is based primarily on its
MC curve.
In the figure, curves 1, 2, 3, and 4 represent the
MC, ATC, AVC, and AFC curves, respectively.
The total output of a firm will be at a maximum where
MP is zero.
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000Annual lease on building = $22,000Annual revenue from operations = $380,000Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's implicit costs, including a normal profit, are
$136,000
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's explicit costs are
$150,000.
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000Annual lease on building = $22,000Annual revenue from operations = $380,000Payments to workers = $120,000Utilities (electricity, water, disposal) costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's accounting profit is
$230,000.
Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are
$5,000
Output Total Cost 0 $24 1 33 2 41 3 48 4 54 5 61 6 69 The average fixed cost of producing 3 units of output is
$8.
Output. Total Cost 0 $24 1 33 2 41 3 48 4 54 5 61 6 69 The marginal cost of producing the sixth unit of output is
$8.
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000Annual lease on building = $22,000Annual revenue from operations = $380,000Payments to workers = $120,000Utilities (electricity, water, disposal) costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's economic profit is
$94,000.
Which of the following definitions is correct?
Economic profit = accounting profit − implicit costs.
Which of the following statements is correct?
Economic profits induce firms to enter an industry; losses encourage firms to leave.
Which of the following distinguishes the short run from the long run in pure competition?
Firms can enter and exit the market in the long run but not in the short run.
A perfectly elastic demand curve implies that the firm
can sell as much output as it chooses at the existing price.
Suppose you find that the price of your product is less than minimum AVC. You should
close down because, by producing, your losses will exceed your total fixed costs. Correct