Economics Micros

15. A consumer will buy a new product rather than an existing product: A. when the MU/P of the new product is less than the MU/P of the existing product. B. when the substitution of the new product for the old product increases the consumer's total utility. C. only if the new product has a lower price than the existing product. D. only if the MU of the new product exceeds the MU of the existing product.

B. when the substitution of the new product for the old product increases the consumer's total utility.

11. Suppose a firm anticipates that an R&D expenditure of $100 million will result in a new production process that will reduce costs and thus create a one-time added profit of $112 million a year later. The firm's expected rate of return is: A. 0.12 percent. B. 112 percent. C. 12 percent. D. 2 percent.

C. 12 percent.

1. Which of the following is correct? A. Both purely competitive and monopolistic firms are "price takers." B. Both purely competitive and monopolistic firms are "price makers." C. A purely competitive firm is a "price taker," while a monopolist is a "price maker." D. A purely competitive firm is a "price maker," while a monopolist is a "price taker."

C. A purely competitive firm is a "price taker," while a monopolist is a "price maker."

1. Which of the following is true concerning purely competitive industries? A. There will be economic losses in the long run because of cut-throat competition. B. Economic profits will persist in the long run if consumer demand is strong and stable. C. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits. D. There are economic profits in the long run, but not in the short run.

C. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.

22. Confronted with the same unit cost data, a monopolistic producer will charge: A. the same price and produce the same output as a competitive firm. B. a higher price and produce a larger output than a competitive firm. C. a higher price and produce a smaller output than a competitive firm. D. a lower price and produce a smaller output than a competitive firm.

C. a higher price and produce a smaller output than a competitive firm.

11. In long-run equilibrium monopolistic competition entails: A. an efficient allocation of resources. B. an overallocation of resources due to inadequate capacity. C. an underallocation of resources due to excess capacity. D. production at the minimum attainable average total cost.

C. an underallocation of resources due to excess capacity.

11. If for a firm P = minimum ATC = MC, then: A. neither allocative efficiency nor productive efficiency is being achieved. B. productive efficiency is being achieved, but allocative efficiency is not. C. both allocative efficiency and productive efficiency are being achieved. D. allocative efficiency is being achieved, but productive efficiency is not.

C. both allocative efficiency and productive efficiency are being achieved.

6. Suppose you find that the price of your product is less than minimum AVC. You should: A. minimize your losses by producing where P = MC. B. maximize your profits by producing where P = MC. C. close down because, by producing, your losses will exceed your total fixed costs. D. close down because total revenue exceeds total variable cost.

C. close down because, by producing, your losses will exceed your total fixed costs.

20. Suppose that Book-Cost Busters (BCB), without authorization, reproduced a best-selling novel and placed it for downloading on the BCB pay-for-use website. This action would violate the publisher's: A. profit rights. B. patent. C. copyright. D. trademark.

C. copyright.

4. The price elasticity of a monopolistically competitive firm's demand curve varies: A. inversely with the number of competitors and the degree of product differentiation. B. directly with the number of competitors and the degree of product differentiation. C. directly with the number of competitors, but inversely with the degree of product differentiation. D. inversely with the number of competitors, but directly with the degree of product differentiation.

C. directly with the number of competitors, but inversely with the degree of product differentiation.

17. Under which of the following situations would a monopolist increase profits by lowering price (and increasing output): A. if it discovered that it was producing where MC = MR B. if it discovered that it was producing where its MC curve intersects its demand curve C. if it discovered that it was producing where MC < MR D. under none of these circumstances because a monopolist would never lower price

C. if it discovered that it was producing where MC < MR

33. Advertising can enhance economic efficiency when it: A. increases brand loyalty. B. raises entry barriers. C. increases consumer awareness of substitute products. D. boosts average total cost.

C. increases consumer awareness of substitute products.

5. The monopolistically competitive seller maximizes profit by producing at the point where: A. total revenue is at a maximum. B. average costs are at a minimum. C. marginal revenue equals marginal cost. D. price equals marginal revenue.

C. marginal revenue equals marginal cost.

26. There is some evidence to suggest that X-inefficiency is: A. absent whenever two or more producers are competing with one another. B. not encountered in either competitive or monopolistic firms. C. more likely to occur in monopolistic firms than in competitive firms. D. more likely to occur in competitive firms than in monopolistic firms.

C. more likely to occur in monopolistic firms than in competitive firms.

34. Suppose that a particular industry has a four-firm concentration ratio of 85 and a Herfindahl Index of 3,000. Most likely, this industry would achieve: A. both productive efficiency and allocative efficiency. B. allocative efficiency but not productive efficiency. C. neither productive efficiency nor allocative efficiency. D. productive efficiency but not allocative efficiency.

C. neither productive efficiency nor allocative efficiency.

2. Pure monopolists may obtain economic profits in the long run because: A. of advertising. B. marginal revenue is constant as sales increase. C. of barriers to entry. D. of rising average fixed costs.

C. of barriers to entry.

18. Oligopoly is more difficult to analyze than other market models because: A. the number of firms is so large that market behavior cannot be accurately predicted. B. the marginal cost and marginal revenue curves of an oligopolist play no part in the determination of equilibrium price and quantity. C. of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models. D. unlike the firms of other market models, it cannot be assumed that oligopolists are profit maximizers.

C. of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.

2. Technological advance is shown as a(n): A. movement from a point inside a production possibilities curve to a point on the curve. B. movement along a production possibilities curve. C. outward shift of a production possibilities curve. D. inward shift of a production possibilities curve.

C. outward shift of a production possibilities curve.

18. Suppose that Marlen Fisher has legal protection against anyone producing and selling a fishing lure identical to his unique-action "MarFish" lure, whatever the competitor might name the lure. This legal protection is most likely to be a: A. trademark. B. restraining order. C. patent. D. copyright.

C. patent.

2. A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from: A. the likelihood of collusion. B. high entry barriers. C. product differentiation. D. mutual interdependence in decision making.

C. product differentiation.

5. For an imperfectly competitive firm: A. total revenue is a straight, upsloping line because a firm's sales are independent of product price. B. the marginal revenue curve lies above the demand curve because any reduction in price applies to all units sold. C. the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold. D. the marginal revenue curve lies below the demand curve because any reduction in price applies only to the extra unit sold.

C. the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.

3. Which of the following best approximates a pure monopoly? A. the foreign exchange market B. the Kansas City wheat market C. the only bank in a small town D. the soft drink market

C. the only bank in a small town

9. The term allocative efficiency refers to: A. the level of output that coincides with the intersection of the MC and AVC curves. B. minimization of the AFC in the production of any good. C. the production of the product-mix most desired by consumers. D. the production of a good at the lowest average total cost.

C. the production of the product-mix most desired by consumers.

15. In which of these continuums of degrees of competition (highest to lowest) is oligopoly properly placed? A. pure competition, oligopoly, pure monopoly, monopolistic competition B. oligopoly, pure competition, monopolistic competition, pure monopoly C. monopolistic competition, pure competition, pure monopoly, oligopoly D. pure competition, monopolistic competition, oligopoly, pure monopoly

D. pure competition, monopolistic competition, oligopoly, pure monopoly

6. 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: A. the LCD television industry was once competitive, but is now monopolistic. B. fewer firms produce LCD televisions than was the case five or ten years ago. C. the demand curve for LCD televisions has shifted leftward. D. the LCD television industry is a decreasing-cost industry.

D. the LCD television industry is a decreasing-cost industry.

17. Entrepreneurs in purely competitive industries: A. have no incentive to innovate because in the long run they will earn no economic profits. B. innovate to lower operating costs and generate short-run economic profits. C. utilize pricing strategies to generate short-run economic profits. D. rarely try to innovate because of a lack of financial resources.

B. innovate to lower operating costs and generate short-run economic profits.

12. A profit-maximizing firm should not undertake a R&D project for which the: A. expected rate of return exceeds its interest-rate cost of funds. B. interest-rate cost of funds exceeds the expected rate of return. C. expected returns are in the distant future. D. the expected returns, though potentially very large, are uncertain.

B. interest-rate cost of funds exceeds the expected rate of return.

15. Allocative efficiency occurs whenever: A. consumer surplus is maximized. B. it is impossible to produce a net benefit for society by changing the combination of goods and services produced. C. firms have maximized their profits. D. it is impossible to make someone in society better off without making someone else worse off.

B. it is impossible to produce a net benefit for society by changing the combination of goods and services produced.

16. In long-run equilibrium, purely competitive markets: A. minimize total cost. B. maximize the sum of consumer surplus and producer surplus. C. yield economic profits to most sellers. D. inevitably degenerate into monopoly in increasing cost industries.

B. maximize the sum of consumer surplus and producer surplus.

20. Economic profit in the long run is: A. possible for both a pure monopoly and a pure competitor. B. possible for a pure monopoly, but not for a pure competitor. C. impossible for both a pure monopolist and a pure competitor. D. only possible when barriers to entry are nonexistent.

B. possible for a pure monopoly, but not for a pure competitor.

23. Comparing a pure monopoly and a purely competitive firm with identical costs, we would find in long-run equilibrium that the pure monopolist's: A. price, output, and average total cost would all be higher. B. price and average total cost would be higher, but output would be lower. C. price, output, and average total cost would all be lower. D. price and output would be lower, but average total cost would be higher.

B. price and average total cost would be higher, but output would be lower.

1. Which of the following is not a basic characteristic of monopolistic competition? A. the use of trademarks and brand names B. recognized mutual interdependence C. product differentiation D. a relatively large number of sellers

B. recognized mutual interdependence

21. Suppose that a firm's legal staff concludes that a new production process which a firm is developing is patentable. Graphically, this new information would shift the firm's expected rate of return curve on R&D to the: A. right and reduce its optimal amount of R&D. B. right and increase its optimal amount of R&D. C. left and increase its optimal amount of R&D. D. left and reduce its optimal amount of R&D.

B. right and increase its optimal amount of R&D.

9. If all monopolistically competitive firms in the industry have profit circumstances similar to the firm shown above: A. new firms will enter the industry. B. some firms will exit the industry. C. all firms will exit the industry. D. no firms will exit the industry.

B. some firms will exit the industry.

18. Creative destruction is: A. the process by which large firms buy up small firms. B. the process by which new firms and new products replace existing dominant firms and products. C. a term coined many years ago by Adam Smith. D. is applicable to planned economies, but not to market economies.

B. the process by which new firms and new products replace existing dominant firms and products.

4. Which of the following is a true statement? A. innovation normally follows invention and precedes diffusion. B. invention normally follows diffusion and precedes innovation. C. diffusion normally follows invention and precedes innovation. D. innovation normally follows diffusion and precedes invention.

A. innovation normally follows invention and precedes diffusion.

3. The successful commercial introduction of a new product, the use of a new method, or the creation of a new form of business enterprise is called: A. innovation. B. invention. C. creative destruction. D. diffusion.

A. innovation.

1. An industry comprised of 40 firms, none of which has more than 3 percent of the total market for a differentiated product is an example of: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition.

A. monopolistic competition.

4. Large minimum efficient scale of plant combined with limited market demand may lead to: A. natural monopoly. B. patent monopoly. C. government franchise monopoly. D. shared monopoly.

A. natural monopoly.

17. The marginal cost column reflects: A. the law of diminishing returns. B. the law of diminishing marginal utility. C. diseconomies of scale. D. economies of scale.

A. the law of diminishing returns.

26. Creative destruction is not automatic because: A. there are major obstacles to the entry of new innovative firms into concentrated industries. B. consumer tastes are highly unstable. C. corporate takeovers increase dynamic competition. D. large firms rarely are technologically progressive.

A. there are major obstacles to the entry of new innovative firms into concentrated industries.

19. Suppose that Marlen Fisher has legal protection against anyone producing and selling a fishing lure specifically named "MarFish." This legal protection is most likely to be a: A. trademark. B. restraining order. C. patent. D. copyright.

A. trademark.

10. In exchange for a share of ZYX's profits if it succeeds, Firm ABC provides development funds to newly formed ZYX which is developing an innovative product. ABC funds are called ____________ while ZYX is known as a ____________. A. venture capital; startup B. retained earnings; entrepreneurial firm C. mutual funds; startup D. transfer payments; entrepreneurial firm

A. venture capital; startup

30. Cartels are difficult to maintain in the long run because: A. they are illegal in all industrialized countries. B. individual members may find it profitable to cheat on agreements. C. it is more profitable for the industry to charge a lower price and produce more output. D. entry barriers are insignificant in oligopolistic industries.

B. individual members may find it profitable to cheat on agreements.

20. (Last Word) The entry of generic drugs into a previously monopolized pharmaceutical market will: A. discourage the development of new drugs. B. increase efficiency by increasing consumer surplus. C. create inefficiency by introducing chemically-inferior medications. D. not affect the market price because pharmaceutical firms are "price takers."

B. increase efficiency by increasing consumer surplus.

27. Which of the following conditions is not required for price discrimination? A. Buyer with different elasticities must be physically separate from each other. B. The good or service cannot be profitably resold by original buyers. C. The seller must be able to segment the market, that is, to distinguish buyers with different elasticities of demand. D. The seller must possess some degree of monopoly power.

A. Buyer with different elasticities must be physically separate from each other.

23. Which of the following supports the contention that pure competitors have a weak incentive to engage in R&D? A. Entry to purely competitive industries is easy and thus profit from innovation is quickly competed away. B. In pure competition, products are already highly differentiated. C. Most purely competitive industries are increasing-cost industries. D. Pure competitors are happy to earn only a normal profit.

A. Entry to purely competitive industries is easy and thus profit from innovation is quickly competed away.

3. 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? A. Subway Sandwiches B. Pittsburgh Plate Glass C. Ford Motor Company D. Microsoft

A. Subway Sandwiches

4. Which of the following statements is correct? A. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping. B. The demand curve for a purely competitive firm is downsloping, but the demand curve for a purely competitive industry is perfectly elastic. C. The demand curves are downsloping for both a purely competitive firm and a purely competitive industry. D. The demand curves are perfectly elastic for both a purely competitive firm and a purely competitive industry.

A. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.

6. Excess capacity refers to the: A. amount by which actual production falls short of the minimum ATC output. B. fact that entry barriers artificially reduce the number of firms in an industry. C. differential between price and marginal costs which characterizes monopolistically competitive firms. D. fact that most monopolistically competitive firms encounter diseconomies of scale.

A. amount by which actual production falls short of the minimum ATC output.

3. Which of the following is not a basic characteristic of pure competition? A. considerable nonprice competition B. no barriers to the entry or exit of firms C. a standardized or homogeneous product D. a large number of buyers and sellers

A. considerable nonprice competition

21. Which of the following statements is correct? A. The pure monopolist will maximize profit by producing at that point on the demand curve where elasticity is zero. B. In seeking the profit-maximizing output the pure monopolist underallocates resources to its production. C. The pure monopolist maximizes profits by producing that output at which the differential between price and average cost is the greatest. D. Purely monopolistic sellers earn only normal profits in the long run.

B. In seeking the profit-maximizing output the pure monopolist underallocates resources to its production.

19. (Consider This) Which of the following statements is true about U.S. firms? A. Over half are bankrupt within the first two years after starting up. B. Over half are bankrupt within the first five years after starting up. C. Nearly 65 percent last 10 years or more. D. The life expectancy of a U.S. firm is approximately 22 years.

B. Over half are bankrupt within the first five years after starting up.

23. If Beta commits to a high-price policy, Alpha will gain the largest profit by: A. also adopting a high-price policy. B. adopting a low-price policy. C. adopting a low-price policy, but only if Beta agrees to do the same. D. engaging in non-price competition only.

B. adopting a low-price policy.

10. Under pure competition in the long run: A. neither allocative efficiency nor productive efficiency are achieved. B. both allocative efficiency and productive efficiency are achieved. C. productive efficiency is achieved, but allocative efficiency is not. D. allocative efficiency is achieved, but productive efficiency is not.

B. both allocative efficiency and productive efficiency are achieved.

1. Broadly defined, technological advance: A. can occur in the short run, long run, or very long run. B. comprises new and improved goods and services and new and improved ways of producing or distributing them. C. includes invention, but not innovation or diffusion. D. includes product innovation, but not process innovation.

B. comprises new and improved goods and services and new and improved ways of producing or distributing them.

32. Other things equal, cartels and similar collusive arrangements are easier to establish and maintain: A. when there are ample opportunities for the firms to make secret price concessions to selected buyers. B. during periods of business-cycle stability and full employment. C. when the demand and cost conditions of the participating firms differ substantially. D. when the number of firms is relatively large.

B. during periods of business-cycle stability and full employment.

17. The copper, aluminum, cement, and industrial alcohol industries are examples of: A. interproduct competition. B. homogeneous oligopoly. C. monopolistic competition. D. differentiated oligopoly.

B. homogeneous oligopoly.

2. A constant-cost industry is one in which: A. a higher price per unit will not result in an increased output. B. if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth. C. the demand curve and therefore the unit price and quantity sold seldom change. D. the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.

B. if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.

28. (Consider This) Children are charged less than adults for admission to professional baseball games but are charged the same prices as adults at the concession stands. Which of the following conditions of price discrimination explain why this occurs? A. The seller must have some monopoly power; that is, it must be able to set the product price. B. The seller must be able to identify buyers by group characteristics such as age or income. C. Groups must have different elasticities of demand for the product. D. The items cannot be bought by people in the low-price group and transferred to members of the high-price group.

D. The items cannot be bought by people in the low-price group and transferred to members of the high-price group.

24. Economists who contend that oligopolists have a strong incentive to engage in R&D say that: A. the undistributed profits of oligopolists give them a source of readily available, relatively low cost funds for financing R&D. B. entry barriers enable oligopolists to sustain the profit it gains from innovation. C. the large size of oligopolists' R&D departments allows them to use very specialized, expensive R&D equipment and employ teams of specialized researchers. D. all of these are true.

D. all of these are true.

22. Even where imitation is possible, a firm may gain advantage from being the first to introduce an innovative product because of: A. long-lasting brand-name recognition. B. a time lag between innovation and imitation by rivals. C. trade secrets that limit the ability of rivals to imitate the product. D. all of these.

D. all of these.

9. New scientific knowledge mainly comes from university and government laboratories, not private firms, because: A. large corporations do not have funds available to channel toward basic research. B. government pays scientists higher salaries than do private firms. C. entrepreneurs find it difficult to secure venture capital to finance innovation. D. basic scientific principles, as such, cannot be patented and do not always have commercial applicability.

D. basic scientific principles, as such, cannot be patented and do not always have commercial applicability.

5. Innovation: A. is the first discovery of a product or process, rather than its first successful commercial introduction. B. includes new products, but not new production methods. C. is also known as diffusion. D. can either increase or decrease the market share of a large firm, depending on whether it is introduced by the large firm or one of its competitors.

D. can either increase or decrease the market share of a large firm, depending on whether it is introduced by the large firm or one of its competitors.

5. Marginal revenue is the: A. change in product price associated with the sale of one more unit of output. B. change in average revenue associated with the sale of one more unit of output. C. difference between product price and average total cost. D. change in total revenue associated with the sale of one more unit of output.

D. change in total revenue associated with the sale of one more unit of output.

14. The economic inefficiencies of monopolistic competition may be offset by the fact that: A. advertising expenditures shift the average cost curve upward. B. available capacity is fully utilized. C. resources are optimally allocated to the production of the product. D. consumers have increased product variety.

D. consumers have increased product variety.

25. The process by which new firms and new products replace existing dominant firms and products is called: A. monopolistic competition. B. the inverted-U process. C. process innovation. D. creative destruction.

D. creative destruction.

16. In the short run, a monopolist's economic profits: A. are always positive because the monopolist is a price-maker. B. are usually negative because of government price regulation. C. are always zero because consumers prefer to buy from competitive sellers. D. may be positive or negative depending on market demand and cost conditions.

D. may be positive or negative depending on market demand and cost conditions.