ECON 101 Midterm 3 Sample Tests
TABLE: If the product price is $290, the per-unit economic profit at the profit-maximizing output is
$119
If the monopolist were forced to produce the socially optimal output through the imposition of a ceiling price, the ceiling price would have to be set at
$150
Which cannot be a characteristic of an oligopolistic industry?
A perfectly elastic firm demand curve
A firm will earn economic profits whenever
Average revenue exceeds average total costs
A unique feature of an oligopolistic industry is
Mutual interdependence
A monopolistically competitive industry is like a purely competitive industry in that
Neither industry has significant barriers to entry
Mutual interdependence means that a firm's
Behavior is affected by other firm's actions
If marginal cost is below average variable cost
Both average total cost average variable cost are decreasing
A non discriminating pure monopolist is generally viewed as
Both productively and allocatively inefficient
GRAPH: The firm is
In short-run equilibrium, but not long-run equilibrium
Which assumption is part of the model of monopolistic competition?
There is no collusion mutual interdependence among firms
If monopolistically competitive firms in an industry are making an economic profit, then new firms will enter the industry and the product demand facing existing firms will
decrease
In pure competition, the demand for the product of a single firm is perfectly
elastic because many other firms produce the same product
In long-run equilibrium, a purely competitive firm will operate where price is
equal to MR, MC, and minimum ATC
In the long run, the representative firm in monopolistic competition tends to have
excess capacity
To the economist, total cost includes:
explicit and implicit costs
In an oligopolistic market there are
few sellers
Which constitutes an obstacle to collusion among oligopolists?
large number of firms
GRAPH: The firm is earning
normal profits, since its price just covers ATC
In an oligopoly, producers' agreements to restrict output tend to be unstable because each firm has an incentive to
produce more than its output quota
A purely competitive firm will be willing to produce even at a loss in the short run, as long as
the loss is smaller than its total FIXED costs
The demand curve confronting a non-discriminating pure monopolist is
the same as the industry's demand curve
TABLE: If the monopolist were forced to produce the socially optimal output through the imposition of a ceiling price, the ceiling price would have to be set at
$150
TABLE: The table shows cost data for a firm that is selling in a purely competitive market. If the price of the product is $6, what output level will the firm produce?
14
GRAPH: If the industry were purely competitive, the output quantity would be
160
TABLE: Plant sizes get larger as you move from ATC-1 to ATC-4. Which plant size would produce the least cost for the 3,000-4,000 level of output?
2
A monopolist sells 6 units of a product per day at a unit price of $15. If it lowers price to $14, its total revenue increases by $22. This implies that its sales quantity increases by
2 units per day
Given the data in the table below, what is the short-run profit-maximizing level of output for the firm?
4 units
TABLE: Plant sizes get larger as you move from ATC-1 to ATC-4. In the long run, the firm should use plant size ATC-3 for what level of output?
4,000 to 4,500
TABLE: What output quantity will the monopolistically competitive firm produce to maximize profits?
5
TABLE: If the market price for the firm's product is $180, the competitive firm will produce
7 units and earn economic profits of $238
GRAPH: which point is definitely not on the competitive firm's short-run supply curve?
A
Which of the following is correct?
A purely competitive firm is a "price taker," while a monopolist is a "price maker"
Pure monopoly refers to
A single firm producing a product for which there are no close substitutes.
GRAPH: A successful advertising campaign by the firm will cause its demand curve to shift from
A to B and become less elastic
Answer the next question based on the following payoff matrix for a duopoly in which the numbers indicate the profit in millions of dollars for each firm If firm A adopts the low-price strategy, the firm B would adopt the
High price strategy and earn $200
In monopolistic competition, which of the following would make an individual firm's demand curve less elastic?
Increased brand loyalty toward the firm's product
With a natural monopoly, the fair return price
Is allocatively inefficient; the socially optimal price is allocative efficient
The demand curve faced by a monopolistically competitive firm
Is more elastic than the monopolist's demand curve
The demand curve faced by a purely competitive firm
Is the same as its marginal revenue curve
A firm should continue to operate even at a loss in the short run if
It can cover its variable costs and some of its fixed costs
A purely competitive firm does not try to sell more of its product by lowering its price below the market price because
It can sell all it wants to at the market price
The problem with adopting a fair-return pricing policy for a natural monopoly is that
It is not allocatively efficient
When a firm is experiencing economies of scale
Long-run average total cost is decreasing
Price discrimination is more common in service industries because
Low price buyers will find it virtually impossible to resell the products of such industries to high price buyers
The short-run supply curve of a purely competitive producer is based primarily on its
MC curve
Suppose that TC = $550, TVC = $500, and MC = $100. If the firm produces 10 units of output, then
MC>AVC
An argument for making regulated monopolies adopt marginal cost pricing is that this would
Make the marginal cost equal to society's valuation of the marginal benefit
Which is necessarily true for a purely competitive firm in short-run equilibrium?
Marginal revenue minus marginal cost equals zero
Under monopolistic competition, entry to the industry is
More difficult than under pure competition but not nearly as difficult as under pure monopoly
In which set of market models are there the most significant barriers to entry?
Oligopoly and pure monopoly
In pure competition, if the market price of the product is initially higher than the minimum average total cost of the firms, then
Other firms will enter the industry and the industry supply will increase
The problem with socially optimal pricing regulation of a natural monopoly is that
P<ATC
Which of the following is a barrier to entry?
Patents and licesnes
Which characteristic would best be associated with pure competition?
Price takers
What idea is inconsistent with pure competition?
Product differentiation
Demand and marginal revenue curves are downsloping for monopolistically competitive firms because
Product differentiation allows each firm some degree of monopoly power
Which is a feature of a purely competitive market?
Products are standardized of homogenous
Which is a feature of a purely competitive market?
Products are standardized or homogenous
Which of the following is not a barrier to entry in an industry?
Profit maximization
If the demand curve faced by an individual firm is downward-sloping, the firm cannot be a(n)
Purely competitive firm
Which of the following is a characteristic of monopolistic competition?
Relatively easy entry
Long-run competitive equilibrium
Results in zero economic profits
In which industry in monopolistic competition most likely to be found?
Retail trade
GRAPH: What will happen in the long run to industry supply an the equilibrium price P of the product?
S will decrease, P will increase
GRAPH: The short-run supply curve for this firm is the
Segment of the MC curve lying to the right of output level h
In monopolistic competition, a firm has a limited degree of "price-making" ability. this means that the firm will
Set price above marginal cost
T-Shirt Enterprises is selling in a purely competitive market. It is producing 3,000 units, selling them for $2 each. At this level of output, the average total cost is 2.50 and the average variable cost is $2.20. Based on these data, the firm should
Shut down in the short run
Assume that the market for corn is purely competitive. Currently, firms growing corn are suffering economic losses. In the long run, we can expect
Some firms to exit causing the market price of corn to rise
Which of the following statements is true of price discrimination?
Successful price discrimination will provide the firm with more profit than if it did not discriminate
Under what conditions would an increase in demand lead to the same long-run equilibrium price?
The firms in the market are part of a constant-cost industry
Which of the following is not a necessary characteristic of a purely competitive industry?
The industry or market demand is highly elastic
A firm doubles the quantity of all resources it employs, and as a result, output doubles. Which of the following is correct?
The long-run average total cost curve is flat
In the long run, the economic profits for a monopoistically competitive firm will be
The same as the profits for a purely competitive firm
One difference between monopolistic competition and pure competition is that
There is some control over price in monopolistic competition
Marginal cost can be defined as the change in
Total cost resulting from one more unit of production
Economic profits are equal to
Total revenues minus the opportunity costs of all inputs
GRAPH: If the firm is producing at Q1, the area 0BEQ1 represents
Total variable costs
Xavier produces and sells tomatoes in a purely competitive market. This implies that Xavier's marginal revenue from an extra unit of tomatoes is always equal to the
Unit price
Which industry would be best characterized as monopolistically competitive?
Web design consulting
When a bakery manager reports that productivity of the 15 workers at her bakery last month was 1,800 loaves per worker, she is referring to the
average product of labor
When firms in an industry reach an agreement to fix prices, divide up market share, or otherwise restrict competition, they are practicing the strategy of
collusion
If all resources used in the production of a product are increased by 20% and output increases by 20%, then there must be
constant returns to scale
Productive efficiency refers to
cost minimization, where P = minimum ATC
Variable costs are
costs that change with the level of production
The consumer wifi-service providers' market is best described as a
differentiated oligopoly
Price it taken to be a "given" by an individual firm selling in a purely competitive market because
each seller supplies a negligible fraction of total market
An industry where a change in the number of firms does not affect the prices of the resources used in the industry will have a long-run supply curve that is
horizontal
Suppose that a monopolist calculates that at its present output level, marginal revenue is $1 and marginal cost is $2. He or she could maximize profits or minimize losses by
increasing price and decreasing output
The demand curve faced by a purely competitive firm
is the same as its marginal revenue curve
Pure monopolists may obtain economic profits in the long run because
of barriers to entry
An exclusive legal right as sole producer for 20 years granted to an inventor of a product is called a
patent
If a firm is a price taker, then the demand curve for the firm's product is
perfectly elastic
TABLE: At equilbrium the monopolist will realize a
profit of $6.50
TABLE: At equilibrium, the monopolist will realize a
profit of $6.50
Assume a purely competitive constant-cost industry is initially at long-run equilibrium. Now suppose that a decrease in consumer demand occurs. After all the long-run adjustments have been completed, the new equilibrium price
will be the same as the initial price, and the output will be less
GRAPH: which area of the graph represents the amount of economic loss for the firm?
bcde
To practice long-run price discrimination, a monopolist must
Be able to separate buyers into different markets with different price elasticities
Consumers who clip and redeem discount coupons
Exhibit a higher price elasticity of demand for a given product than consumers who do not clip and redeem coupons
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The economic profits of Harvey's firm in the first year were
$160,000
Suppose that you could either prepare your own tax return in 15 hours or hire a tax specialist to prepare it for you in 2 hours. You value your time at $11 an hour; the tax specialist will charge you $55 an hour. The opportunity cost of preparing your own tax return is
$165
TABLE: Suppose that entry of firms into the industry changes this firm's demand schedule from columns 1 and 3 to columns 2 and 3. Maximum economic profit will decrease to
$35
TABLE: The market price of the product in the short run is: a. $80 b. $40 c. $160 d. $120
$40
GRAPH: This firms total cost
$400
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The implicit costs of Harvey's firm in the first year were
$60,000
Use the following information to answer the next question. Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The explicit costs of Harvey's firm in the first year were
$605,000
If you know that with 8 units of output average fixed cost is $12.50 and average variable cost if $81.25, then total cost at this output level is
$750
If you know that with 8 units of output average fixed cost is $12.50 and average variable cost is $81.25, then total cost at this output level is
$750
TABLE: The average variable cost of producing 3 units of output is
$9.33
If you know that when a firm produces 10 units of output, total costs are $1,030 and average fixed costs are $10, then total variable costs are
$930
If average variable cost is $74 and total fixed cost is $100 at 5 units of output, then average total cost at this output level is
$94
Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs of production are $300,000. The firm earns an accounting profit of
%500,000 and an economic profit of $200,000
Select the marginal cost
(Change in TVC)/(Change in Q)
TABLE: What will be the economic profit or loss for this monopolistically competitive firm at the profit-maximizing level of output
+$20
TABLE: Nina, a monopolist selling baskets. What is the change in total revenue if she raises the price from $10 to $12?
-$120
A monopoly most likely results in productive inefficiency because at the profit-maximizing output level
ATC is not at its minimum level
Collusion refers to a situation where rival firms decide to
Agree with each other to set prices and output
TABLE: The letters A, B, and C designate three successively larger plant sizes. In the long run, the firm should use plant size "C" for
All units of output greater than or equal to 80
If you operated a small bakery, which of the following would be a variable cost in the short run?
Baking supplies (flour, salt, etc)
In a purely competitive industry, each firm:
Can easily enter or exit the industry
In the short run, total output in an industry
Can vary as the result of using a fixed amount of plant and equipment more or less intensively
Fixed costs of production in the short run
Cannot be reduced by producing less output
A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 500 units is $1.50. The minimum possible average variable cost is $1. The market price of the product is $1.25. To maximize profits or minimize losses, the firm should
Continue production, but produce less than 500 units
A firm in an oligopoly is similar to a monopoly in that both firms
Could have significant market power and control over price
GRAPHS: A short-run equilibirum that would produce losses for a monopolistically competitive firm would be represented by graph
D
Under oligopoly, if one firm in an industry significantly increases advertising expenditures in order to capture a greater market share, it is most likely that other firms in that industry will
Decide to increase advertising expenditures even if it means a reduction in profits
The economic incentive for price discrimination is based upon
Differences among buyers' elasticities of demand
GRAPH: When the firm is in equilibrium in the short run, the amount of economic profit per unit is
EH
Which set of characteristics below best describes the best features of monopolistic competition?
Easy entry, many firms, and differentiated products
The larger the diameter of a natural gas pipeline is, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of one reason for
Economies of scale
Economic profits are
Equal to the difference between accounting profits and implicit costs
In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is
Equal to the price
