Study guide exam 3
A competitive price-searcher market is best described as: a) many firms with some control over price, and some product differentiation. b) many firms with no control over price, producing identical products. c) a few firms with some control over price, producing highly differentiated products. d) a few firms with no control price, producing similar products.
a.
A firm in a price-taker market: a) must take the price that is determined by the market. b) must reduce its price if it wants to sell a larger quantity. c) must be large relative to the total market. d) can exert a major influence on the market.
a.
A profit-maximizing monopolist will continue expanding output as long as: a) marginal revenue exceeds marginal cost. b) marginal revenue is positive. c) the cost of producing an additional unit exceeds the marginal revenue derived from the unit. d) economic profit is more than zero.
a.
Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together, a) they are unable maintain the same degree of monopoly power achieved by a monopolist. b) each firm's profit always ends up being zero. c) competitive pressures are absent from the market. d) it will be easier to maintain collusive agreements.
a.
Competitive price-taker markets are characterized by: a) firms that all produce the same product. b) a small number of firms in the market. c) firms that are large relative to the size of the market. d) widespread use of advertising as a competitive weapon.
a.
Each member of the cartel: a) faces a temptation to cheat on the agreement because lowering its price slightly below the established price will usually increase the firm's sales and profit. b) faces a temptation to cheat on the agreement because raising its price slightly above the established price will usually increase the firm's sales and profit. c) has no temptation to cheat on the agreement because lowering its price slightly below the established price will usually have no impact on the firm's sales and profit. d) has no temptation to cheat on the agreement because raising its price slightly above the established price will usually decrease the firm's sales and profit.
a.
Firms that are price takers: a) are small relative to the total market. b) produce products that are different than their competitors. c) can sell only a portion of their output at the market price. d) have downward-sloping demand curves.
a.
If a movie theatre is going to gain by charging students a dollar less than other customers,: a) the demand of students must be more elastic than that of other customers. b) the demand of students must be less elastic than that of other customers. c) students must have higher incomes than other customers. d) other customers must enjoy movies more than students.
a.
If you were the owner of a price-taker firm operating at an output level where the marginal cost of producing another unit was $5, and the market price was $7, then you: a) could increase your profit by expanding output. b) could increase your profit by decreasing output. c) are maximizing your profit at your current output level. d) will be able to earn positive economic profits in the long run.
a.
In a competitive market, profit can be considered a reward to businesses that: a) produce a good that consumers value more highly than its component resources. b) reduce the value of resources used as inputs in production. c) prohibit rival firms from entering the market and competing. d) control costs, rather than following the wishes of consumers when deciding what products to produce.
a.
In a competitive price-taker market,: a) many other sellers are offering a product that is essentially identical. b) consumers have more influence over the market price than producers do. c) government intervention prevents firms from influencing price. d) producers agree not to change the price.
a.
In a market that is contestable, but only has a few sellers, the a) threat of new entrants will prevent prices from rising above the competitive level. b) producers will be able charge prices that are high enough to produce long-run economic profits. c) producers will not face new competition because the barriers to entry are high. d) market will never be expected to come close to the competitive result.
a.
In a market that is contestable, but only has a few sellers, the: a) threat of new entrants will prevent prices from rising above the competitive level. b) producers will be able to charge prices that are high enough to produce long-run economic profits. c) producers will not face new competition because the barriers to entry are high. d) market will never be expected to come close to the competitive result.
a.
In the short run, a price searcher wishing to maximize profits or minimize losses should produce the output that: a) equate marginal cost with marginal revenue. b) equates marginal cost with price. c) corresponds to the lowest point on the average variable cost curve. d) corresponds to the lowest point on the average total cost curve.
a.
Patents grant their owners: a) a property right to new products and production processes that they have developed. b) the exclusive right to use a newly developed process or product forever. c) the right to use resources owned by their competitors. d) an exception from laws that prohibit price discrimination.
a.
Suppose that competitive price-searcher firms are experiencing losses. In the transition from this initial situation to a long-run equilibrium: a) the number of firms in the market decreases. b) each existing firm experiences a decrease in demand for its product. c) each firm experiences an upward shift to its marginal cost and average total cost curves. d) each existing firm's average total cost falls to bring economic profit back to zero.
a.
The marginal revenue of a price taker is: a) equal to price. b) less than price. c) more than price. d) unrelated to price.
a.
When economies of scale are important, imposing competition by splitting a monopolistic firm into many rival units will: a) lead to an increase in the per-unit cost of production in the industry. b) not affect per-unit costs but will affect demand conditions. c) generally increase the social efficiency of production. d) cause the industry demand curve to increase (shift to the right).
a.
You are the owner of an ice cream shop that earns a profit most of the year except during the cold winter months. During the month of December, your rent and other fixed costs amount to a total of $200. If you remain open, your total variable costs (workers, ice cream cones, etc.) will amount to $300. If you would be able to sell 100 ice cream cones at $4 each during December, then a) to maximize profits, you should remain open in Dec. b) to maximize profits, you should shut down in Dec. c) you will be able to avoid making a loss by shutting down in Dec. d) you should go out of business in the long run if there is any single month in which you do not earn a profit.
a.
Competitive price-taker firms respond to changing market conditions by varying their: a) price. b) output. c) market share. d) information. e) advertising campaigns.
b.
Even though firms in competitive price-searcher markets do not produce at minimum ATC, competitive price-searcher markets may still be consistent with economic efficiency because: a) strict government regulations force the firms in these markets to keep their costs low. b) they provide consumers with a greater diversity of products. c) they encourage more advertising in both price-searcher and price-taker markets. d) special legal protections for price searchers make it possible for them to more efficiently use resources.
b.
Given the data shown in the table, what price and output level would a profit-maximizing price searcher choose? Output $ TC 1 10 10 2 9 11 3 8 13 4 7 16 5 6 20 6 5 25 a) 8, output 3. b) 7, output 4. c) 6, output 5. d) 5, output 6.
b.
If marginal revenue exceeds marginal cost, a profit-maximizing monopolist will: a) raise price and decrease output. b) lower price and increase output. c) reduce both output and price. d) hold output constant and raise price.
b.
If the market price in a price-taking industry was currently above the average total cost of production for firms in the industry, a) firms in the industry would earn short-run economic profits that would be offset by long-run economic losses. b) new firms would enter the industry, which would drive price down to the average cost of production in the long run. c) firms in the industry would earn positive economic profits in the long run. d) most firms in the industry would shut down in the long run.
b.
In a price-taker market, profits are: a) the result of consumers being charged arbitrarily high prices. b) a reward for creating value. c) the result of barriers to entry into the market. d) a signal that fewer resources are needed in a market.
b.
The difficulty in analyzing oligopolistic behavior arises from the: a) degree of government regulation of the market structure. b) interdependent nature of oligopolistic decisions. c) large number of firms in the industry. d) market power of consumers.
b.
The dynamic process of competition: a) is hindered by the self-interest of business decision makers. b) puts the profit motive of sellers to work for buyers. c) conflicts with the interest of consumers when businesses pursue profit rather than the public interest. d) will permit business decision makers to earn long-run economic profit unless they are regulated by government.
b.
The incentives for managers of a government-operated firm (for example, a state university of the U.S. Post Office) to operate efficiently will be: a) low because all government workers are lazy. b) low because there are no residual claimants to monitor and institute cost-reducing measures. c) high because government employees and officials will be less concerned with personal gain. d) high because voters can easily detect those who are to blame for inefficiencies and replace them.
b.
To maximize profit, the monopolist, whose cost and demand conditions are shown below, should charge a price of Price Output TC 7 1 7 6 2 8 5 3 10 4 4 13 3 5 17 a) 4. b) 5. c) 6. d) 7.
b.
When an economist states that a firm is earning zero economic profit, this statement implies that the firm: a) will be forced out of business unless market conditions change. b) is doing as well as it could in any other line of business. c) is earning zero rate of return on its assets. d) could earn a higher rate of return in other industries.
b.
When new firms have an incentive to enter a competitive price-taker market, their entry will: a) increase the price of the product. b) drive down profits of existing firms in the market. c) shift the market supply curve to the left. d) increase demand for the product.
b.
Which of the following is a major shortcoming of government regulation of business monopoly?: a) the regulators often estimate production costs incorrectly and thus force firms into loss positions. b) the regulators often come to represent the interests of the established firms and use their power to limit competition. c) the regulators usually permit firms to make unusually high accounting profits. d) the regulators, acting in consumers' interests, often force prices so low that even with efficient production techniques the regulated firms lose money.
b.
Which of the following is a primary difference between price takers and price searchers in low entry barrier markets? a) the price searchers will maximize profits in the short run, but price takers will not. Price takers can only maximize profits in the long run. b) the price searchers will have to search for the price, while price takers will have to take the price determined in the market. c) the price searchers will be able to earn profit in the long run, but price takers will not. d) the price searchers may be able to earn profit in the short run, but the price takers will not be able to do so.
b.
"Market power" is an expression used to indicate that a firm has: a) no rivals. b) the power to sell a given output at whatever price it chooses. c) some freedom from the rigors of intense competition. d) a monopoly over the product it produces.
c.
A monopolist will maximize profits by: a) setting his price as high as possible. b) setting his price at the level that will maximize per-unit profit. c) producing the output where marginal revenue equals marginal cost. d) producing the output where price equals marginal cost.
c.
Airlines generally charge travelers willing to stay over Saturday night lower fares because: a) these travelers have lower incomes, and therefore, the airlines would like to help them. b) it cost less to transport travelers willing to stay over a Saturday night. c) the demand of these travelers is elastic, and therefore, the lower fares generate more revenue. d) the demand of these travelers is inelastic, and therefore, the lower fares generate more revenue for the airlines.
c.
Economic theory suggests that government-operated monopolies will: a) be highly efficient and follow policies that are in the consumer's interest. b) be dominated by persons who, while seeking to serve the public interest, are not hard-nosed enough to run a business efficiently. c) be inefficient because of poor incentives for operational efficiency. d) favor the consumer at the expense of special interest groups in and out of government.
c.
FYI Sanitation is currently eight months into a year-long lease contract on a garbage truck at a cost that averages $500 per month. Variable costs (fuel, workers, etc.) for operating the truck amount to $300 per month. If the monthly revenue from operating the truck is $400, and these conditions are expected to continue into the future, to maximize its profit, FYI Sanitation should a) stop operating the truck immediately and not renew the lease for next year. b) continue operating the truck, then renew the least for next year. c) continue operating the truck until the lease expires, then not renew the least for next year. d) stop operating the truck now but renew the lease and begin operating the truck next year.
c.
If a competitive price-taker firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then: a) average revenue exceeds marginal cost. b) the firm is earning a positive profit. c) a one-unit decrease in output would increase the firm's profit. d) all of the above.
c.
If the market price for this product is $50, which of the following output levels should this firm produce if it wants to maximize profits? Output TC 0 25 1 65 2 95 3 140 4 195 5 225 a) 1 b) 2 c) 3 d) 4
c.
In order to prosper, entrepreneurs must: a) have their own wealth with which to finance projects they want to undertake. b) slow technological change and development of new products in their industry. c) undertake projects that create wealth and increase the value of resources. d) undertake projects that are more valuable than the output they produce.
c.
In some industries where firms experience declining average total costs over the full range of output that consumers are willing to buy,: a) a smaller firm will always have lower per-unit costs. b) many firms will tend to emerge from the competitive process. c) a single large firm will develop, and it will have cost advantages that protect it from potential rivals. d) a single large firm will develop, and it will buy out any smaller rival firms to avoid the small firm's production at a lower per-unit cost.
c.
In some industries where firms experience declining average total costs over the full range of output that consumers are willing to buy,: a) a smaller firm will always have lower per-unit costs. b) many firms will tend to emerge from the competitive process. c) a single, large firm will develop, and it will have cost advantages that protect it from potential rivals. d) a single large firm will develop, and it will buy out any smaller rival firms to avoid the small firms production at a lower per-unit cost.
c.
Some economists argue that competitive price-searcher markets are inefficient because: a) the firms earn economic profits in the long run. b) the firm's marginal cost and marginal revenues are not always equal. c) firms do not produce the output rate that would minimize their average total cost. d) barriers to entry are high.
c.
Suppose that a price-discriminating firm divides its market into two segments. If the firm sells its product for a price of $22 in the market segment where demand is relatively less elastics, the price in the market segment whose customers' demand is more elastic will be: a) $22. b) greater than $22. c) less than $22. d) $22 plus average fixed costs.
c.
When an entrepreneur introduces a new improved product that is highly valued relative to cost: a) consumers will be worse off. b) the demand for the products that are good substitutes for the new product will increase. c) some of the existing products will become obsolete and businesses producing those products will fail. d) total employment will decline if there are business failures.
c.
When entry barriers into a market are low, firms will tend to earn zero economic profit in the long run because: a) low entry barriers lead to rising costs. b) profit-seeking entrepreneurs will not enter a market when entry barriers are low. c) short-run profit attracts additional suppliers and drives down the market price. d) consumers will refuse to pay more than the cost of producing a good once they find out the producer's per unit cost.
c.
When firms have an incentive to exit a competitive price-taker market, their exit will: a) lower market price. b) necessarily raise the costs of firms that remain in the market. c) raise profits for firms that remain in the market. d) reduce demand for the product.
c.
When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years): a) is usually needed for the members to solidify their cooperation. b) usually result in finer control of prices and markets by the group and larger profit margins. c) is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price. d) seldom has any impact on the agreement, as long as the participants maintain high profit levels as a result of the agreement.
c.
Which of the following is a characteristic of competitive price-taker market?: a) profit maximizing firms in the market will expand output until price equals average variable cost. b) the market demand curve for the product is a horizontal line. c) there are many firms in the market, each producing a small share of total market output. d) the product produced by each of the firms is differentiated.
c.
Which of the following is a term that is sometimes used to describe markets with low entry barriers and firms that are price searchers?: a) pure competition. b) monopoly. c) monopolistic competition. d) oligopoly.
c.
Which of the following would increase the likelihood that firms in an industry could successfully collude?: a) large number of firms in the industry. b) unstable demand conditions in the industry. c) high barriers to entry in the industry. d) product characteristics that make it difficult for firms to detect other firms that cheat on the agreement.
c.
A market in which the costs of entry and exit are low is called a: a) regulated market. b) monopoly market. c) market with high barriers to entry. d) contestable market.
d.
An organization of sellers designed to coordinate their supply decisions to maximize joint profits is called a: a) consumer cooperative. b) marketing association. c) regulatory agency. d) cartel.
d.
Antitrust action restructures a previously monopolized industry into a competitive industry. If economies of scale are unimportant in the industry, the expected result of this movement from monopoly to competition is: a) a reduction in output and increase in price in the industry. b) a reduction in both price and output in the industry. c) an increase in both price and output in the industry. d) an increase in output and a reduction in price in the industry.
d.
If the ice cream industry is a competitive price-taker market and all ice cream producers are earning zero economic profit, what will be the impact of an increase in the demand for ice cream?: a) firms will exit the ice cream industry in the long run since they are earning zero economic profit. b) the firms will now be able to earn long-run economic profit assuming that barriers to entry remain low and new firms can enter in the market. c) a shortage of ice cream will develop. d) the price of ice cream will rise initially, inducing the existing firms to expand output and new firms to enter the industry.
d.
In order for effective price discrimination to occur, a seller must: a) be a pure monopolist. b) have large economies of scale and control over a key natural resource. c) face a horizontal demand curve for its product. d) have at least two distinguishable groups of consumers.
d.
In the long run, the prices charged by a firm in a competitive price-searcher market will be: a) high enough to provide profits to the firm. b) so low that many firms will drop out of the industry. c) equal to marginal cost. d) equal to average cost, including the opportunity cost of capital.
d.
Monopolists may be able to earn profit, even in the long run, as the result of: a) consumer ignorance. b) an inelastic demand for its product. c) product differentiation. d) high barriers to entry.
d.
Only undertaking an activity when it adds more to revenue than to cost is the decision rule a profit-maximizing firm will use when deciding upon: a) the level of output to produce. b) the amount of advertising to undertake. c) the level of product quality (for example, how many years it is designed to last). d) all of the above.
d.
Price discrimination refers to a system of pricing: a) based on buyer income rather than buyer demand conditions, so the poor pay more than the rich. b) that is always more profitable than simple "single-price" pricing. c) that forces customers who require more service to pay higher prices. d) where consumers groups with a more elastic demand for the product are charged lower prices.
d.
Profit-maximizing firms enter a competitive market when, for existing firms in that market,: a) total revenue exceeds fixed costs. b) total revenue exceeds total variable costs. c) average total cost exceeds average revenue. d) price exceeds average total cost.
d.
Suppose the equilibrium price in a competitive price-taker market is $10 and a firm in the industry charges $9. Which of the following is true. a) the firm will not be able to sell any output. b) the firm will sell less output than its competitors. c) the firm will make more profit than it could at the $10 price. d) the firm will make less profit than it could at the $10 price.
d.
Which of the following best explains why economists are generally critical of unregulated monopolists?: a) monopolists do not try to minimize their costs of production. b) monopolists produce where marginal revenue is greater than marginal costs. c) monopolists attempt to produce too many products, and as a result, their prices are high, and consumers waste time trying to choose between too many options. d) monopolists restrict output, and as a result, they fail to produce units that are valued more than the marginal cost of producing them.
d.
Which of the following is true when long-run equilibrium conditions are present in price-taker and competitive price-searcher markets? a) mr=mc in both price-taker and competitive price-searcher markets. b) p= atc in both price-taker competitive price-searcher markets. c) p= mc in both price-taker and competitive price-searcher markets. d) both a and b, but not c are true.
d.
Which of the following is true? a) a monopolist is always guaranteed to earn positive economic profits regardless of their cost of production or the price they charge. b) a monopolist will charge the highest price possible for their product because no matter what price they charge, people will still have to buy it. c) a monopolist has no incentive to find more cost-efficient methods of production because they are protected from competition from other sellers. d) none of the above are correct.
d.
Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is a competitive price-searcher?: a) competitive price searcher produces at the output level where marginal cost equals marginal revenue; a monopolist does not. b) a monopolist faces a downward-sloping demand curve; a competitive price searcher does not. c) a monopolist charges a price higher than marginal cost; a competitive price searcher does not. d) in the long run, a competitive price searcher will earn zero economic profit because of low entry barriers, while a monopolist may earn positive economic profits in the long run.
d.
Which of the following variable is left out of the simple economic model of the firm?: a) the marginal cost of production. b) consumer tastes and preferences. c) the fact that many firms actually earn profits. d) the entrepreneurial decision-making process.
d.
As new firm enter a competitive price-searcher market, it can be expected that: a) market price will increase. b) the output of existing firms will increase. c) profits of existing firms will increase. d) market demand should decrease. e) profits of existing firms will decrease.
e.
