Microeconomics 3
If reducing the price of a product from $20 to $18 results in an increase in sales from 100 units to 106 units, what is the product's elasticity of demand?
0.6 The increase in sales is a 6% change, and the decrease in price from $20 to $18 is a change of −10%, so the elasticity is 0.6.
Examine the graph below. If the market price for this firm's product increases from $20 to $40, the firm will produce
150 units.
Examine the graph below. If the wage rate is $15 per hour, the firm will hire
3 units of labor.
A firm is in a competitive market when
A and B
Which of the following statements about a firm's short-run supply (SS) curve is true?
A firm's short-run supply (SS) curve is the same as the firm's marginal cost (MC) curve above the average variable cost (AVC) curve.
Examine the demand curve for a monopolist below. If the monopolist decreases the price of the product from P2 to P1, the area ______________ represents the firm's additional revenue.
ABFG
Which of the following characteristics can be used to differentiate products in a specific market?
Advertising.
A firm produces 1,000 widgets. The firm's average variable costs are $5, and its average fixed costs are $2. If the price of widgets is $6, how much is the firm's profit or loss?
$1,000 loss
Jen runs her own plumbing business. Last year she earned $100,000 in total revenue and paid $65,000 to her employees and suppliers. $15,000 of that amount was economic rent. Last year she received offers to work for other plumbers, the highest offer being $40,000 per year. What is Jen's economic profit?
$10,000
If a monopolist sells 100 units for $10 per unit and has an average cost of $8 per unit, what is the firm's total revenue?
$1000
If explicit costs are $60,000, opportunity costs are $90,000, and accounting profit equals $46,000, then total revenue is _________and economic profit is___________.
$106,000; $16,000
A firm has $12,000 in fixed costs. Its average variable cost (AVC) to produce 10,000 widgets is $1.50. If the price of widgets is $3.95, what is the firm's profit?
$12,500
Examine the graph below. If the price for this firm's product is $40, and the firm is maximizing profits, what is the firm's profit? Assume that the firm is a price taker.
$1200 You must subtract total costs from total revenue. Total revenue is $6000; total costs are $150 × 32 = $4800. Profit is the difference, $6000 − $4800 = $1200.
Examine the graph below. If the product price is $40, the firm's fixed cost is
$1500
Examine the graph below. If the product price is $20, the firm's loss is
$1500. When the price is $20, the firm produces 100 units of output. 100 units is where MC = P. At this output, total revenue is $2000, ATC is $35, and total costs are $3500. The loss is $1500.
A firm produces 8 TVs with 1 unit of labor, 15 TVs with 2 units of labor, and 21 TVs with 3 units of labor. Its marginal revenue on each TV is $300. The value of the marginal product of the third unit of labor is
$1800. VMP = MR × MP. Marginal product of the third unit is 6 (21 − 15).
Walton's Widget Works, Ltd. produced 10,000 widgets at an average total cost of $5.50, and sold total production at $7.95 per widget. What was the firm's profit?
$24,500
In 2001, producing widgets cost the firm $100,000. The firm sold the widgets for $125,000. What was the firm's profit or loss?
$25,000 profit
A firm that makes widgets has fixed costs of $20,000. If the firm's total cost to produce 1,000 widgets is $50,000, what is the minimum price that makes continuing to produce widgets (in the short run) an economically sound decision?
$30
Jen runs her own plumbing business. Last year she earned $100,000 in total revenue and paid $65,000 to her employees and suppliers. Last year she received offers to work for other plumbers, the highest offer being $40,000 per year. What is Jen's accounting profit?
$35,000
If the total revenue (TR) that a monopolist earns for 50 widgets is $20,000 and the marginal revenue (MR) for selling 51 widgets is $145, what is the average revenue (AR) for 51 widgets?
$395 Average revenue (AR) is total revenue (TR) divided by the number of units. AR is $20,145 ($20,000 + $145) divided by 51, which equals $395.
Examine the graph below. If the price for this firm's product is $40, and the firm is maximizing profits, what are the firm's total costs? Assume that the firm is a price taker.
$4800 At the profit-maximizing output level, the firm's total costs are $35 per unit as shown by the firm's ATC curve. Total costs are $32 × 150 = $4800.
Examine the graph below. If the price for this firm's product is $40, and the firm is maximizing profits, what is the firm's total revenue? Assume that the firm is a price taker.
$6000
Examine the graph below. The firm's profit is
$750. At the profit-maximizing output of 150, the firm's average cost is $40 per unit. The firm charges $45 per unit. Its profit is the difference, $5, multiplied by the output, 150.
If a monopolist sells 100 units for $10 per unit and has an average cost of $8 per unit, what is the firm's total cost?
$800 Total costs are average costs multiplied by the outout: $8 × 100 = $800.
A firm has fixed costs of $50,000 per month. In January, the firm's variable costs to produce 1,000 widgets was $200 per widget; in February, its variable costs to produce 1,100 widgets was $202 per widget; and in March, its variable costs to produce 1,200 widgets was $205 per widget. The price for widgets was $275 per widget for the entire quarter. What was the firm's profit for the quarter?
$89,300 Total product (TP) for the quarter is the sum of the monthly product (1,000 + 1,100 + 1,200), or 3,300. Total revenue (TR) for the quarter is TP (3,300) times price ($275), or $907,500. Fixed costs (TFC) for the quarter are $50,000 per month times 3 months, or $150,000. Variable costs (TVC) for the quarter are $200,000 for January ($200 per widget times 1,000 widgets) plus $222,200 for February ($202 per widget times 1,100 widgets) plus $246,000 for March ($205 per widget times 1,200 widgets), or $668,200. Total costs (TC) for the quarter are TFC ($150,000) plus VC ($668,200), or $818,200. Profit for the quarter is TR ($907,500) minus TC ($818,200), or $89,300.
If the price for a product falls below the lowest minimum marginal cost of all firms producing that product, which of the following statements is true?
All firms producing that product will shut down.
Which of the following would not be an example of product differentiation?
All of the above are methods of differentiation.
How do firms respond to changes in price?
All of the above.
Use the graph to answer the question. Which letter represents the profit-maximizing output in a monopoly?
B
Using the graph, at which quantity will the firm maximize its profits?
C
Examine the graph, what type of industry is this?
Constant cost
Examine the graph below. If the firm decreases the product price from P2 to P1, area ____________ represents the firm's lost revenue.
EDCB
The short-run market supply (SS) curve assumes what about the level of production at which each firm will operate?
Each firm will produce at the level where marginal cost equals price.
A Nash equilibrium means that in an oligopoly market,
Each firms choose their own best pricing strategy, given the behavior of other firms in the industry.
Which of the following is a serious problem associated with breaking up a monopoly?
Economies of scale may be disrupted.
Which of the following statements about elasticity is true?
Elasticity changes as the quantity demanded changes.
What will firms do when demand for a product increases?
Firms will hire additional workers, even if the additional workers result in a decrease in productivity.
For a monopolist, which of the following statements about marginal revenue is true?
For a monopolist, marginal revenue depends on the elasticity of the demand curve.
Which of these statements about the marginal cost (MC) curve and average total cost (ATC) curve is true?
For a monopolist, the average total cost (ATC) curve is decreasing when it is above the marginal cost (MC) curve and is increasing when it is below the marginal cost (MC) curve.
Which of these statements is true about a firm with market power?
If a firm with market power faces an elastic demand curve, a small change in price results in positive marginal revenue.
Using the graph, what type of industry is this?
Increasing cost.
Why will U.S. companies not jointly decide to cease advertising?
It would be collusive and illegal
What is the profit maximizing point for both firms in competition and in a monopoly?
MR = MC
Which of the following statements about marginal revenue is true?
Marginal revenue (MR) is always less than the price.
Which statement is false?
Monetary payment must be made before a cost is incurred.
__________ is a type of industry characterized by having only one seller.
Monopoly
An outcome of the prisoner's dilemma in which each player does the best that he / she can do, given what the other players are doing is known as a
Nash equilibrium
A firm that makes widgets has $50,000 in fixed costs. The firm can produce 10,000 widgets at an average total cost of $15. The price of widgets is $12. Should the firm shut down?
No, because continuing to produce (in the short run) allows the firm to minimize losses.
Which of the following statements about economic profit is true?
Opportunity costs are included in economic profit.
At point B, all of the following are true except
P is less than MC.
Which of the following statements is true in determining the level of output a firm should target to maximize profit (π )?
Profit is maximum when marginal cost (MC) equals price and MC is increasing.
What is profit?
Profit is the difference between total cost (TC) and total revenue (TR).
Examine the graph below. This monopolist is maximizing profits at
Q1 and charging a price of P1.
On this graph, which area represents fixed costs?
S and T
Using the graph, the long run supply curve is identified as
S*
Using the graph, which curve represents the long run supply?
S*
On this graph, what area represents economic profit?
T
As production increases, what happens to the average variable cost (AVC) curve and the average total cost (ATC) curve?
The average variable cost (AVC) curve and the average total cost (ATC) curve approach each other asymptotically.
What is the difference between price and average cost?
The difference between price and average cost is the profit per unit, or profit margin.
A firm has fixed costs of $10,000, and its variable cost to produce 20,000 widgets is $30,000. If the price of widgets is $1.80, which of the following statements is true?
The firm has a loss of $4,000.
When a firm is not making a profit, what should it do in the short run?
The firm should remain open if the price at least covers average variable cost.
Which of the following will be true of the monopolistic competitor in the long run?
The firm will not make an economic profit because low barriers to entry permit other firms to enter.
What would be the result for a firm if its marginal cost curve shifted up within the gap on the marginal revenue curve?
The firm would not change either price or output.
A monopolist can sell 20 widgets at $25 each. In order to sell 21 widgets, the firm must lower the price to $23. What happens to marginal revenue?
The marginal revenue (MR) would be −$17.
At which level of output would a monopolist produce to maximize profit?
The monopolist maximizes profit by producing at the level of output where marginal revenue (MR) equals marginal cost (MC).
If the demand for a product increases, what happens to the price?
The price increases.
Which of the following statements about the short-run market supply (SS) curve is not true?
The short run market supply (SS) curve is applicable only to monopolistic firms.
When will the short-run market supply (SS) curve not exist?
The short-run market supply (SS) curve will not exist when the price of the product falls below the lowest minimum marginal cost of all of the firms.
Which of the following is not an assumption of the short-run market supply (SS) curve in a competitve market?
There are very few firms producing the product.
Producing 50,000 widgets costs the firm $250,000. The marginal cost of the 50,001st widget is $3. The price of widgets is $4. Should the firm shut down?
There is not enough information given to answer the question.
Which of the following is an opportunity (implicit) cost?
Tom, who could work for another business, works for himself.
Which of the statements concerning a monopolist's revenue is not always true?
Total revenue increases with each additional unit of output.
The competitive firm will not sell at a price lower than the market price because they can sell all they want at the market price.
True
A firm that is perfectly competitive will hire labor as long as which of the following is true?
VMP > W.
Total profit for a firm is
a and c
Monopoly pricing blocks some trades from taking place. These trades would have taken place if the industry were perfectly competitive. These unrealized trades are
a deadweight loss to society.
Which of the following is a a good example of a monopoly?
a local electric power company
Use the graph to answer the question. If this firm is behaving as a firm with some market power, it is experiencing
a loss.
Use the graph to answer the question. If the graph is a market for a monopoly, which area represents the consumer surplus?
ab
Suppose a firm builds a factory to produce cars. It then discovers that the market for cars has become poor because of new environmental regulations, heavy taxes on gasoline, and mass transit construction. The firm should
abandon automobile manufacturing and find another product.
A competitive firm cannot sell at a price __________ the market price because __________ will sell at the market price and the original firm will not sell any of its product
above; competition
In an advertising "prisoner's dilemma" game, both firms end up __________________ which turns out to be ________________________
advertising; worse for them both
Market power exists when a firm is
all of the above
Use the graph to answer the question. Point c represents the
all of the above.
The fact that average revenue equals price is a characteristic of
all profit-maximizing firms.
Average cost pricing
allows the monopolist to cover per-unit costs.
Which of the following effects is not created by a monopoly?
an increase in innovation
In the long run, a firm in a competive market will operate at
at its point of efficient scale.
Which of the following is not an assumption of perfectly competitive markets?
barriers to entry
A cartel is different from a monopoly
because a cartel is made up of multiple firms.
Under the kinked-demand curve model of oligopoly, you could predict that
both b and c.
Product differentiation matters because it is the method by which monopolistically competitive firms
can have some control over their share of the market.
When firms have either an explicit or implicit agreement among themselves to restrict the quantity of product and regulate its price, the arrangement is called a
cartel.
Marginal revenue is equal to the
change in total revenue ÷change in quantity sold. Marginal revenue is the change in total revenue from selling one more unit of output. You can calculate it by dividing the change in total revenue by the change in output. For example if a firm increases output by 50 and total revenue changes by $100, the marginal revenue is $100/50 = $2.00
The prisoner's dilemma game does not explain _____________________ markets, but is useful in explaining behavior in ________________ markets.
competitive, oligopoly
The VMP curve slopes downward at some point because
congestion in the work place lowers marginal product.
Examine the graph below. If the price falls from $40 to $30, the firm has an incentive to
decrease production to 125 units.
Examine the graph of a monopolist's market. The __________ curve is always downward sloping because price and quantity are _____________ related.
demand; inversely
Examine the graph below. The areas of deadweight loss are
e and f.
Oil producing countries can operate as a cartel in all of the following ways except
each country sets its profit maximizing price and quantity.
Monopolistic competition is an industry structure in which
each firm tries to gain market power by slightly diffrentiating a similar product.
An oligopoly assumes
each firm will react to its competitor's price decreases.
In the long run, a monopolistic competitor will
earn zero economic profit.
Economic rent is how ___________ is disbursed.
economic profit
A natural monopoly exists when
economies of scale are so large that only one firm can survive and achieve low unit cost.
Use the graph to answer the question. Which area represents the deadweight loss in a monopoly?
ef Areas e and f are areas that would be consumer surplus in a competitive market. These areas are lost under a monopoly.
In a kinked-demand curve model, the demand curve at prices greater than the kink is _______________, but the curve below the kink is______________.
elastic; inelastic
Assume Joe has a coffee shop in a competitive market. Assume that weak demand has caused the price of coffee to fall below Joe's average variable cost. Joe shuts his business down, so his losses will be
equal to fixed cost.
In the market for pants, there are many sellers. These sellers distinguish themselves from one another and thus
face downward sloping demand curves.
A firm with market power faces a demand curve with constant elasticity.
false
A monopolist is constrained by marginal revenue in setting price.
false
A monopolist maximizes profit by maximizing price.
false
A monopolistically competitive firm is characterized by high barriers to entry.
false
Accounting records almost always account for opportunity costs.
false
At the output level at point d, if the firm wants to maximize its profits, it should increase its output.
false
For a firm with market power, marginal revenue (MR) equals price.
false
For a monopolist, maximizing revenue is the same as maximizing profit.
false
For a perfectly competitive firm, marginal revenue is less than price.
false
If a firm's marginal product of of labor increases, its marginal cost must also increase.
false
In a game of advertising between two monopolistic competitors, the firms choose the most stable outcome because they can enforce the agreement between them.
false
In a perfectly competitive marketplace, the firm determines the price it charges for its product.
false
Is the following statement true or false? A firm that produces output at the level where marginal cost (MC) equals price and MC is increasing will be profitable (not operating at a loss).
false
Is the following statement true or false? A monopolist will always be able to operate at a profit.
false
Marginal revenue is always less than price for a competitive firm.
false
Marginal revenue product is the name applied to value of the marginal product when a firm is in a perfectly competitive market.
false
Monopolists always require government protection to maintain their monopoly position.
false
Monopolists set the price of their products on the demand curve at the output level where the supply curve intersects the marginal revenue curve.
false
One of the main characteristics of an oligopoly is firms' complete independence from one another.
false
Price-taking firms can charge whatever price they need in order to recover their costs and make a profit.
false
Situations of perfect competition possess the steepest possible demand curve.
false
The competitive firm produces at the output at which the firm's marginal revenue (the product price) equals its marginal cost and at which its marginal cost is decreasing.
false
The demand curve facing a monopolist is the same as the one facing every other firm in the industry.
false
The long run supply curve is upward sloping in a decreasing cost industry.
false
To produce at the profit-maximizing point, the marginal cost curve must be downward sloping at that point.
false
When a firm is not making a profit, it should always shut down.
false
When a firm shuts down, it has no costs to cover.
false
When firms in a competitive industry earn accounting profits, other firms will enter that industry, in the long run.
false
When regulators consider ways to regulate monopolies, they should choose to set price and output where marginal cost equals demand, thus maximizing social value.
false
Which of the following is an example of a monopolistically competitive industry?
fast-food hamburger restaurants
Derived demand for labor means that when a firm hires labor, it has to derive its demand
from the demand for the product that the labor produces.
A monopolist's price is _______ and output is ______ than perfect competition.
greater; less
If one company is a single seller of a good and is earning economic profits, what prevents other firms from entering the market and competing with the firm?
high barriers to entry
Which of the following is not a problem associated with cartels?
higher production costs
Cartels are
illegal in the U.S. for restraining free trade.
All of the following are reasons some monopolies are legal in the U.S. except
increasing availability of jobs.
The following are all examples of rent-seeking practices except
increasing the monthly rental rate for tenants in a building.
A firm produces 8 TVs with 1 unit of labor, 15 TVs with 2 units of labor, and 21 TVs with 3 units of labor. Its marginal revenue on each TV is $300. This would indicate that the firm
is a price taker (perfectly competitive firm).
For natural monopolies, average total cost falls continuously and never begins to increase. Therefore, marginal cost
is always less than average total cost.
One of the paradoxes of game theory is that the players' "dominant strategy"
is not necessarily the most efficient outcome
For a monopolist, marginal revenue is
less than the product's price.
In the graph, area abcd represents a perfectly competitive firm's
long-run total revenue.
Which of the following would hinder the success of a cartel?
low barriers to entry
Monopolistically competitive markets are like competitive markets in that they have
many sellers
A firm in a competitive industry will try to produce the output level for which
marginal cost equals marginal revenue.
To maximize revenue, a monopolist prices its product at the point where ___________ is equal to zero.
marginal revenue
Examine the graph below. At point A,
marginal revenue is greater than marginal cost.
The slope of the total revenue curve for a competitive firm is equal to __________, which is equal to __________.
marginal revenue; price
By following the profit maximizing rule, a monopolist
maximizes its profit (or minimizes its losses).
A monopolistically competitive firm behaves somewhat like
monopoly due to their market power.
Deadweight loss compares
monopoly surplus to competitive surplus.
The ____________ firms there are in the market, the ____________ the market supply curve.
more; smoother
If firms in a monopolistically competitive market are making short-run economic profits,
new firms are likely to enter the market.
Product differentiation is a type of
nonprice competition.
Many recreation parks shut down because in the off season
off-season revenue cannot cover variable cost.
In the kinked-demand curve model, the kink means that
other firms in the industry match all price decreases below the kink.
A monopolist is not as good for society as a perfectly competitive firm because
output is lower and price is higher than under competition.
Advertising by monopolistically competitive firms assumes that
people will pay more for a product they consider superior.
Which of the following is not a barrier to entry for a market that exhibits market power?
perfect competition
The economic problem with a monopoly is
price is high and quantity is low.
In competition, the firm is a
price taker.
Firms produce efficiently in the long run by
producing at the minimum of LRAC.
The firm adjusts _______________ to the level that ___________________ by comparing marginal revenue and marginal cost.
production, maximizes profit
All of the following are examples of how monopolies are created except
profitability.
Use the graph to answer this question. Suppose the price of the product increases to p1. In the short run, the firm will produce quantity
q1.
Examine the graph below. After a price increase to p1, the firm would like to increase output to
q2.
The main problem with monopolies is their ability to
restrict output to level below the socially efficient level.
All of the following may be methods of regulating a monopoly, except
restricting quantity sold.
The total revenue curve __________ at a __________ rate.
rises; constant
If price is less than average variable cost, a firm, in the short run, will
shut down.
A natural monopoly arises because of the interaction between the __________ of the market and the __________ scale of operation of a single firm.
size; efficient.
Which of the following is probably not a method of product differentiation.
small number of sellers
An unrecoverable cost that economists recommend that decision makers ignore in current or future decisions is called a(n) ______________ cost.
sunk
The portion of a firm's marginal cost curve that is above the average variable cost curve is
the firm's short run supply curve.
If a regulated monopolist has a loss when the government forces it to price at its marginal cost,
the government should subsidize the firm.
In a competitive market, if firms are required to put safety latches on tool boxes to meet government regulations, their costs increase. It is likely that
the market supply curve shifts to the left.
One method of government regulation of monopolies is to require the firm to price the product at its marginal cost and produce at the competitive output level. The problem with this scheme is
the monopolist may have economic losses and exit the industry.
For a firm in perfect competition, the value of the marginal product is
the price of the product multiplied by the additional output resulting from an additional unit employed.
In the short run, a monopolistically competitive firm chooses
the quantity to produce and the price at which it can sell the product.
What do oligopolies and perfectly competitive firms have in common?
the rule of profit maximization
The short-run market supply curve is
the summation of the short-run supply curves of of all firms in the market.
Governments sometimes force monopolies to set their price at their average cost. The main problem with this regulatory pricing method is that
there is no incentive for a monopolist to lower its costs.
A monopolist calculates its profit by multiplying the quantity of output by average revenue minus average cost.
true
A monopoly is a single seller of a good or service.
true
For a monopolist, profit maximization occurs at the output where marginal revenue is equal to marginal cost
true
For a monopolistically competitive firm, when price equals average total cost, the price must lie above marginal cost.
true
For a profit-maximizing monopoly, when total revenue is maximized, marginal revenue is zero.
true
If a firm in a competitive market sees an increase in market demand and makes a short-run profit, it responds to the the profit by increasing output.
true
If a monopolist firm has an inelastic demand curve, it can increase its price and expect a more than proportionate increase in revenue.
true
Monopolies create a social cost because consumers who may be willing to pay for the product up to its marginal cost are not served.
true
Product differentiation leads to some degree of market power.
true
The main criticism of the kinked-demand curve model is that it does not explain how firms reach the original price / output at the kink.
true
To determine its profitability, a competitive firm must compare its average total cost to the product price.
true
A monopolistically competitive firm will advertise
whether or not it believes the competitor will advertise.
In a competitive market, a change in the price of the product
will cause movement along the short run MC curve.
Game theory assumes that your competitor
will react to your actions.
In the short run, if a firm shuts down, the firm's total revenue is equal to
zero
A profit-maximizing competitive firm sells its product for $9. Its average total cost of producing this product is $10. The firm's profit maximizing output level is 10 units. How much total profit does this firm earn?
−$10