ECON EXAM 2

Compare long-run equilibrium in a market with monopolistic competition and a competitive market. Long-run equilibrium under monopolistic competition results in __________ output and a ________ price than in a perfectly competitive market. more; higher less; higher less; lower more; lower

less; higher

A good example of a monopolistically competitive market is airlines. local utilities. automobile manufacturers. local restaurants.

local restaurants.

A natural monopoly exists when a single seller experiences ____________ average total costs than any potential competitor. 1. higher 2. lower 3. equal 4. sometimes higher and sometimes lower

lower

Under monopolistic competition, a market has a single producer. many firms. a small number of very large firms. Any number of firms.

many firms.

An outcome from a duopoly is ____________ efficient than a monopolistic outcome and ____________ efficient than a competitive market outcome. less; less more; more more; less less; more

more; less

Under monopolistic competition, there are no long-run barriers to entry of new firms. long-run barriers to entry of new firms. no short-run barriers to entry of new firms. no short or long-run barriers to entry of new firms.

no long-run barriers to entry of new firms.

A Nash equilibrium occurs when an economic decision maker has ______ to gain by changing strategy unless it can collude. everything nothing something None of these are correct.

nothing

Before deciding on a pricing strategy, Wallmart consults with a strategy team to understand what discounts the Doormart is offering. The model that BEST fits this industry is: pure competition. monopolistic competition. oligopoly. monopoly.

oligopoly.

A firm is experiencing a loss of $5,000 per year when operating. The firm has fixed costs of $8,000 per year. The firm should _________ in the short run and should _________ in the long run. 1. operate; shut down 2. shut down; operate 3. operate; operate 4. shut down; shut down

operate; shut down

Which of the following statements is true? Compared to an oligopoly market, the monopoly output is higher prices are lower when an oligopoly market compared to monopoly prices prices are higher when an oligopoly market is compared to competitive markets output will be higher for oligopoly market, than under monopoly

output will be higher for oligopoly market, than under monopoly

The Clayton Act of 1914 is an antitrust law. Which of the following was not added to the list of activities that were deemed socially detrimental? price discrimination. exclusive dealings. tying arrangements. price fixing

price fixing

Predatory pricing occurs when firms deliberately set their prices ___________________, with the intent of driving rivals from the market. below average variable costs above average variable costs below average total costs above average total costs

below average variable costs

A monopolist is ______ likely to advertise than a monopolistically competitive firm. more less equally The answer depends on attributes of the monopolist and the monopolistically competitive firm that are not given in the question.

less

Under monopolistic competition, firms produce identical products. products that are somewhat differentiated. a unique product without close substitutes. identical, differentiated, or unique products, depending on the individual firm.

products that are somewhat differentiated.

If both Pepsi and Coca Cola increase their advertising, it can be said that costs of production will decrease for both companies. the prices of both goods will decrease for customers. the costs of production will increase for both companies. the firms will be investigated for possible collusion.

the costs of production will increase for both companies.

A duopoly is a market in which there are two producers of a product. firms produce two entirely different products at the same time. firms charge two different prices for a product, depending on the type of customer. there are only two inputs in production of a product.

there are two producers of a product.

A dominant strategy is the best strategy for a player to follow only if other players are cooperative the best strategy for a player to follow, regardless of the strategies followed by other players a strategy that must appear in every game a strategy that leads to one player's interests dominating the interests of the other players

the best strategy for a player to follow, regardless of the strategies followed by other players

Compared to perfect competition, monopoly results in 1. fewer units produced and sold. 2. more units produced and sold. 3. the same number of units produced and sold. 4. fewer, more, or the same number of units, depending on the monopoly.

1. fewer units produced and sold.

In 1911, the U.S. government sued Standard Oil, a U.S. company, for violation of antitrust laws. The company broke up into 34 smaller companies. This is an example of 1. promoting competition. 2. reducing trade barriers. 3. regulating currency markets. 4. government failure.

1. promoting competition.

The price of a competitive firm's product is $50 per unit. The firm currently has marginal cost equal to $40. To maximize profits this firm 1. should increase its output 2. should reduce its output 3. should keep its output the same 4. needs more information to determine if it should adjust its output

1. should increase its output

The year is 2278, and the starship Enterprise is running low on dilithium crystals, which are used to regulate the matter/antimatter reactions to propel the ship across the universe. Without the crystals, space-time travel is not possible. If the crystals are government owned or regulated, and the government wants to create the greatest welfare for society, the government should set the price 1. using the marginal-cost-pricing rule. 2. at the monopoly price. 3. at the market-clearing price 4. at the profit-maximizing price.

1. using the marginal-cost-pricing rule.

Which of the following is true with regard to monopoly? 1. There is no deadweight loss associated with a monopoly outcome. 2. A monopolist charges a price where marginal cost is equal to marginal revenue. 3. A monopolist would never engage in rent seeking. 4. Government oversight of monopolies should never be encouraged.

2. A monopolist charges a price where marginal cost is equal to marginal revenue.

Which of the following is true regarding regulating natural monopolies? 1. Subsidies are never needed in order to encourage the regulated firm to produce the good. 2. Price can be set equal to the average total cost. 3. The government should never own and operate the regulated monopolist. 4. The regulated monopolist should be taxed in order to get the firm to achieve the efficient outcome.

2. Price can be set equal to the average total cost

Compared to perfect competition, monopolies charge 1. a lower price. 2. a higher price. 3. the same price. 4. a higher or lower price, depending on the monopoly.

2. a higher price.

Over the long run, a monopolist 1. cannot continue to make profits and will earn a loss. 2. can continue to make economic profits if it can maintain a monopoly and keep competitors from entering the market. 3. will not make a profit or a loss but will operate at zero economic profit. 4. will always face government regulation.

2. can continue to make economic profits if it can maintain a monopoly and keep competitors from entering the market.

The markup the firm charges in a monopolistically competitive market is ___________ the markup charged by a firm in a perfectly competitive market, and the excess capacity in a monopolistically competitive market is ___________ the firm's excess capacity in a perfectly competitive market. 1. greater than; less than 2. greater than; greater than 3. less than; less than 4. greater than; equal to

2. greater than; greater than

In a perfectly competitive market, the long-run market supply curve is' 1. upward sloping 2. horizontal at the market price 3. vertical at the profit maximizing output level 4. downward sloping

2. horizontal at the market price

A firm in monopolistic competition tends to have more control over price when it is 1. less successful at differentiating its product. 2. more successful at differentiating its product. 3. able to use predatory pricing. 4. able to tie in the selling of its products.

2. more successful at differentiating its product.

Converse, an apparel company, has been fairly successful selling denim-colored college sportswear. Lydia sees an opportunity for profit and enters the market. After producing her profit maximizing level of output, she finds that her average total cost per unit is $40, her average variable cost per unit is $30, and the market price is $35. In the short run, Lydia should 1. shut down her denim-colored college sportswear business and go back to college 2. stay in business even though she is suffering a loss 3. expand production since she is making a positive economic profit 4. be happy with the fact that she is breaking even

2. stay in business even though she is suffering a loss

A competitive firm maximizes profit at an output level of 500 units, market price is $24, and ATC is $24.50. At what range of AVC values for an output level of 500 would the firm choose not to shut down? 1. AVC > $24 2. AVC = $24 3. AVC < $24 4. cannot be determined from the given information

3. AVC < $24

Which of the following statements is true? 1. Firms in monopolistic competition should be regulated. 2. Advertising can only benefit society. 3. Monopolistically competitive firms produce less than those operating at the most efficient scale of production. 4. The demand curve for monopolistic competition is horizontal because it resembles a competitive market.

3. Monopolistically competitive firms produce less than those operating at the most efficient scale of production.

Suppose a firm comes up with a new air freshener that produces its own smells. They operate in monopolistic competition, and are making a profit. Which of the following would most likely occur? 1. The firm faces lawsuits stating that they stole someone's patent. 2. The government will investigate the firm for illegal pricing. 3. Other firms are attracted by the profits and will want to produce a similar air freshener. 4. Due to high barriers to entry, other firms cannot enter the market, and as a result the profit will increase.

3. Other firms are attracted by the profits and will want to produce a similar air freshener.

Suppose that at the current level of production, the price of a monopolist's product is equal to $15 per unit. Marginal revenue is equal to $10 per unit, and marginal cost is equal to $15 per unit. This monopoly 1. has maximized profit and should keep production the same. 2. can increase its profit by producing and selling more units of its product. 3. can increase its profit by producing and selling fewer units of its product. 4. should shut down.

3. can increase its profit by producing and selling fewer units of its product.

When a company spends money for television commercials, it intends to shift the 1. demand curve to the right and make demand more elastic. 2. supply curve to the right and make supply more elastic. 3. demand curve to the right and make demand less elastic. 4. supply curve to the right and make supply less elastic.

3. demand curve to the right and make demand less elastic.

Which of the following is considered a natural barrier? 1. control of resources 2. employment laws 3. economies of scale 4. licensing

3. economies of scale

For a perfectly competitive firm, marginal revenue is 1. greater than price 2. less than price 3. equal to price 4. at first greater than price but eventually will be less than price

3. equal to price

Monopolies choose their profit maximizing 1. output level. 2. price. 3. output level and price. 4. neither output level nor price.

3. output level and price.

In the long run, how is price related to marginal cost in both perfect competition and in monopolistic competition? 1. The long-run price is driven to marginal cost in both competitive markets and markets that are monopolistically competitive. 2. Both markets can charge more than marginal cost in the long run because products are differentiated in both markets. 3. Products are identical in perfectly competitive markets, so a firm must charge less than marginal cost in order to differentiate itself. This is not true in monopolistically competitive markets where firms can charge more than marginal cost. 4. Because monopolistically competitive firms have market power, they set a price higher than marginal cost, while perfectly competitive firms cannot.

4. Because monopolistically competitive firms have market power, they set a price higher than marginal cost, while perfectly competitive firms cannot.

Network externalities are important for gas stations. AARP, an organization that advocates for seniors. slot machines music concerts

AARP, an organization that advocates for seniors.

To maximize profits, firms expand output until 1. MR = MC 2. MR > MC 3. MR < MC 4. Either where MR > MC or MR < MC

1. MR = MC

Which of the following is true regarding monopolies? 1. They engage in rent seeking. 2. Monopolies produce more output than would otherwise be produced in a perfectly competitive market. 3. They provide an efficient outcome. 4. They provide more choice than a perfectly competitive market.

1. They engage in rent seeking.

Which of the following is a firm in the most perfectly competitive market? 1. a local independent corn farmer 2. the Tennessee Valley Authority, a large electricity producer that serves areas of five states 3. pizza delivery 4. a grocery store

1. a local independent corn farmer

Firms producing an identical product in a perfectly competitive market are producing at a quantity that maximizes profit. The current market price is $4.50 per unit, and the firms are producing at a long-run average cost of $3.50 per unit. Firms in this market experience 1. a profit 2. a loss and leave the market 3. zero profit 4. a loss and stay in business

1. a profit

Microsoft likely has to spend billions of dollars building and developing an operating system, but once it is produced, the cost to get the software to each customer is almost zero. When Microsoft sells more units, their average total costs decrease. This means Microsoft is said to have ____________________. 1. economies of scale 2. constant returns to scale 3. diseconomies of scale 4. negative externalities

1. economies of scale

Firms producing an identical product in a competitive market are producing at a level of output that maximizes profit. The current market price is $4.50 per unit and the firms are producing at a long-run average cost of $3.50 per unit. Over the long-run one should expect 1. entry of new firms into this market 2. exit of firms from this market 3. no change in the number of firms in this market 4. the whole market to collapse, and every firm leave

1. entry of new firms into this market

In competitive markets, price is equal to marginal cost in the long run. In monopolistic competition, why is price greater than marginal cost in the long run? 1. Price is driven to marginal cost in both competitive markets and markets that are monopolistically competitive. 2. Both markets can charge more than marginal cost in the long run because products are differentiated in both markets. 3. Products are identical in perfectly competitive markets, so a firm must charge less than marginal cost in order to differentiate itself. This is not true in monopolistically competitive markets where firms can charge more than marginal cost. 4. The demand curves for the two types of firms are different. Monopolistically competitive firms have market power and a downward sloping demand curve, so they set a price higher than marginal cost.

4. The demand curves for the two types of firms are different. Monopolistically competitive firms have market power and a downward sloping demand curve, so they set a price higher than marginal cost.

Suppose an unregulated natural monopoly becomes regulated using marginal-cost pricing. As a result, the firm's profits would 1. increase substantially. 2. decrease substantially, but remain positive. 3. be brought down to zero. 4. become negative.

4. become negative.

If competitive firms experience a loss, over the long run there will be a(n) 1. increase in market supply to reduce the market price 2. increase in market supply to increase the market price 3. decrease in market supply to reduce the market price 4. decrease in market supply to increase the market price

4. decrease in market supply to increase the market price

In a perfectly competitive market, the price of the product is 1. independently set by each competing firm 2. set by the market leader and then copied by other firms 3. jointly set after a meeting of all firms in the market 4. set by market supply and demand

4. set by market supply and demand

Wallmart is accused of predatory pricing by Doormart. Wallmart could defend itself against this accusation. Which of the following would not be one of their arguments? Doormart signed an agreement with Wallmart allowing both firms to engage in predatory pricing. The courts have no simple rule that helps to determine when Wallmart has stepped over the line. The decisions by Wallmart can look and feel like spirited competition. Wallmart believes that raising prices once Doortmart leaves the industry is a poor business decision.

Doormart signed an agreement with Wallmart allowing both firms to engage in predatory pricing.

We have antitrust laws To protect small businesses. To protect the competitiveness of U.S. markets. To ensure firms earn only a normal profit. To protect the prices of American-made products

To protect the competitiveness of U.S. markets.

You are assigned a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you are both very busy and get more happiness if you can get a good grade with less work. If you and your partner are required to work together on a number of projects throughout the semester, what other possible equilibrium might you be able to sustain? You work hard, and your partner works less hard. Your partner works hard, and you work less hard. You both work hard. You both work less hard.

You both work hard.

In monopolistic competition, demand for a single firm's product is a fraction of overall market demand. equal to market demand. perfectly elastic demand set at the market price. perfectly inelastic demand set at the market price.

a fraction of overall market demand.

Which of the following sets of firms is best described as an oligopoly? your local electric power company local restaurants automobile industry wheat farmers

automobile industry

With regards to social welfare, oligopolists forming a cooperative alliance is : good because it leads to less disagreement and lower prices and more variety good because forming a cooperative alliance closely resembles a perfectly competitive outcome bad because because prices are too high and output is too low bad because output is too high and prices are too high

bad because because prices are too high and output is too low

A sequential game's outcomes can best be displayed using a payoff matrix bar chart decision tree pie chart

decision tree

If Coca-Cola increases its advertising, and the advertising is effective, we would expect the equilibrium price for Pepsi to ___________________ and the equilibrium quantity to _____________________. decrease, decrease increase, increase not change, increase increase, not change

decrease, decrease

Suppose that Boeing and Rolls-Royce Holdings are the sole producers of a particular jet engine. The two firms currently charge the same price for their products. If neither firm reduces the price of its engine, each firm earns $36 million in profit. If both firms reduce their prices, then each firm will earn $10 million in profit. If one firm reduces its price and the other does not, then the firm that reduces price will earn a profit of $50 million while the other firm will earn a profit of $5 million. If the firms can operate as a cartel, then each firm will reduce its price. each firm will maintain its current price. Boeing will reduce its price and Rolls-Royce Holdings will maintain its current price Rolls-Royce Holdings will reduce its price and Boeing will maintain its current price

each firm will maintain its current price.

Suppose there are two breakfast restaurants in your college town, Waffle Kingdom and Flip's Flapjacks, and they decide to operate collusively as a cartel. If both restaurants abide by the cartel's agreement, then each will earn $100,000 in profit. If both restaurants cheat on the cartel's agreement, then each will earn $25,000 in profit. If one restaurant cheats and the other abides by the agreement, then the cheater will earn a profit of $150,000 while the firm that abides will have a loss of $12,500. The most profitable combined outcome for the two restaurants would be for both restaurants to abide by the cartel's agreement. for both restaurants to cheat on the cartel's agreement. for Waffle Kingdom to cheat on the agreement and Flip's Flapjacks to abide by the agreement. There is not a profitable outcome for both restaurants.

for both restaurants to abide by the cartel's agreement.

In monopolistic competition, the firm's optimal price is equal to marginal revenue. equal to marginal cost. greater than marginal cost. less than marginal cost.

greater than marginal cost.

Which of the following can be considered a competitive market? 1. international market for coffee beans 2. market for U.S. treasury bonds 3. market for fast food 4. market for cars

international market for coffee beans

Which of the following is a way in which monopolistically competitive firms can choose to differentiate? labor practices location quantity of goods produced how much they pay in taxes

how much they pay in taxes

If Pepsi increases its advertising, and the advertising is effective, we would expect the equilibrium price for Pepsi to ___________________ and the equilibrium quantity to _____________________. decrease, decrease increase, increase increase, decrease decrease, increase

increase, increase

The network effect arises when a buyer's preference for a product ____________ as the number of people buying it ______________. increases; decreases decreases; increases increases; increases decreases; decreases

increases; increases