micro ch 3

Monopolists may be able to earn profit, even in the long run, as the result of consumer ignorance. an inelastic demand for its product. product differentiation. high barriers to entry.

high barriers to entry.

If marginal cost exceeds marginal revenue, a profit-maximizing firm should expand output until marginal cost equals marginal revenue. expand output until marginal revenue equals price. reduce output until marginal cost equals marginal revenue. reduce output until price equals average total cost.

reduce output until marginal cost equals marginal revenue.

For effective price discrimination to occur, a seller must be a pure monopolist. have large economies of scale and control over a key natural resource. face a horizontal demand curve for its product. be able to prevent consumers from reselling the product to other consumers.

be able to prevent consumers from reselling the product to other consumers.

The competitive market process tends to promote economic prosperity because it keeps the prices of goods higher than their production costs. creates inefficiencies, which causes people to economize. directs self-interested action toward the production of goods that are highly valued relative to their cost. sends signals to the government about which goods to produce.

directs self-interested action toward the

In the long run the prices charged by a firm in a competitive price-searcher market will be high enough to provide profits to the firm. so low that many firms will drop out of the industry. equal to marginal cost. equal to average cost, including the opportunity cost of capital.

equal to average cost, including the opportunity cost of capital.

A price-discriminating firm charges the lowest price to the group that has the most elastic demand. purchases the largest quantity. engages in the most arbitrage. is least responsive to price changes.

has the most elastic demand.

A profit-maximizing monopolist that produces in the short run will produce the level of output where marginal revenue exceeds marginal cost by the largest amount. increase output as long as the marginal revenue exceeds the marginal cost of producing that unit. produce the level of output where average total cost is at a minimum. increase price as long as the average revenue exceeds the average total cost. produce the level of output where average revenue exceeds average total cost by the largest amount.

increase output as long as the marginal revenue exceeds the marginal cost of producing that unit.

Losses are important to a competitive price-searcher market (industry) because they send a message to the market participants that more resources should be devoted to a particular industry. resources can rise in value if diverted away from that particular industry. resources are allocated exactly as they should be. the firms should charge lower prices.

resources can rise in value if diverted away from that particular industry.

Suppose that competitive price-searcher firms are experiencing losses. In the transition from this initial situation to a long-run equilibrium, the number of firms in the market decreases. each existing firm experiences a decrease in demand for its product. each firm experiences an upward shift to its marginal cost and average total cost curves. each existing firm's average total cost falls to bring economic profit back to zero.

the number of firms in the market decreases.

Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together, they are unable to maintain the same degree of monopoly power achieved by a monopolist. each firm's profit always ends up being zero. competitive pressures are absent from the market. it will be easier to maintain collusive agreements.

they are unable to maintain the same degree of monopoly power

If the average total cost curve is always above the demand curve of a monopolist, the profits of the monopolist will be large. the monopolist must be producing inefficiently. even a monopolist will suffer economic losses. entry will occur, forcing the monopolist to reduce price and expand output.

even a monopolist will suffer economic losses.

Some economists argue that competitive price-searcher markets are inefficient because the firms earn economic profits in the long run. the firms' marginal costs and marginal revenues are not always equal. firms do not produce the output rate that would minimize their average total costs. barriers to entry are high.

firms do not produce the output rate that would minimize their average total costs.

It is difficult to predict the behavior of oligopolistic firms because there are few real-world examples of oligopolies for economists to study. oligopolists make decisions independently of each other. firms in oligopolistic industries react to each other's behavior in many ways. economists have paid little attention to the topic in recent years and so have not yet applied to it the techniques of modern economic theory.

firms in oligopolistic industries react to each other's behavior in many ways.

Why is it difficult for economists to predict the price and output policy that will emerge in oligopolistic markets? Economists cannot determine if barriers to entry exist in a market. Economists cannot predict the reactions that firms will have to the actions and decisions of other firms. The government prevents economists from acquiring the information that would lead to good predictions. Firms have a set price and output policy, but the policy is concealed to discourage competition.

Economists cannot predict the reactions that firms will have to the actions and decisions of other firms.

Which of the following best explains why economists are generally critical of unregulated monopolists? Monopolists do not try to minimize their costs of production. Monopolists produce where marginal revenue is greater than marginal costs. Monopolists attempt to produce too many products, and as a result, their prices are high, and consumers waste time trying to choose between too many options. Monopolists restrict output, and as a result, they fail to produce units that are valued more than the marginal cost of producing them.

Monopolists restrict output, and as a result, they fail to produce units that are valued more than the marginal cost of producing them.

Which of the following would be most likely if firms in a competitive price-searcher market were earning economic profit? Production inefficiencies would persist until the profit was eliminated. Firms would decrease their rate of output in the short run, causing a decline in profitability in the market. New firms would enter the market, resulting in fewer sales by existing firms. All firms in the market would continue to produce at their current levels and continue to charge the same price.

New firms would enter the market, resulting in fewer sales by existing firms.

In the price-taker model, what impact does the individual firm have on the price of its product? The firm must accept the price determined in the market if it is going to sell its product. The firm may raise or lower its price to a small extent, but sales revenues will tend to be the same regardless of price. The firm may raise its price and, thereby, increase its revenues. The firm may raise or lower its price to a considerable extent, but sales revenues will tend to be the same regardless of price.

The firm must accept the price determined in the market if it is going to sell its product.

If a competitive price-taker firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a one-unit increase in output will increase the firm's profit. a one-unit decrease in output will increase the firm's profit. total revenue exceeds total cost. total cost exceeds total revenue.

a one-unit increase in output will increase the firm's profit.

If mutual interdependence among firms is present, each profit-maximizing firm in the market produces a product that must be identical to the products of its rivals. must consider the reactions of its rivals when it determines its price policy. faces a perfectly elastic demand curve for its product. faces a perfectly inelastic demand curve for its product.

must consider the reactions of its rivals when it determines its price policy.

In the short run, a firm that is a price taker will stay in business as long as price equals average revenue. marginal revenue is greater than or equal to marginal cost. price exceeds average variable cost. price is less than average variable cost.

price exceeds average variable cost.

In a competitive market, profit can be considered a reward to businesses that produce a good that consumers value more highly than its component resources. reduce the value of resources used as inputs in production. prohibit rival firms from entering the market and competing. control costs, rather than following the wishes of consumers when deciding what products to produce.

produce a good that consumers value more highly than its component resources.

Assume a competitive price-searcher firm is earning an economic profit. The marginal revenue from selling an additional unit is $30 and the marginal cost of producing that additional unit is $23. The firm should change neither its price nor its output level reduce its price and increase its output level increase its price and reduce its output level reduce both its price and its output level increase both its price and its output level

reduce its price and increase its output level

When barriers to entry are high, a monopolist (or cartel) will often be able to increase their profits by expanding their output so they can increase their price. reducing their output so they can raise their price. expanding their output so they can lower their price. reducing their output so they can lower their price.

reducing their output so they can raise their price.