This Document Contains Chapters 9 to 10 Chapter 09 Perfect Competition MULTIPLE CHOICE 1. Many agricultural products, such as wheat, are produced by thousands of different producers that grow essentially the same product. The market structure model that would best characterize such a market is: A. perfect competition. B. monopoly. C. monopolistic competition. D. oligopoly. E. perfect oligopoly. Answer: A 2. Which of the following is true of the model of perfect competition? A. There is a high degree of product differentiation. B. Consumers do not have adequate information concerning the prices and quality of products in the market. C. There are significant barriers to entry and exit. D. There are only a few, large firms in the market. E. An individual firm cannot affect the market price. Answer: E 3. The model of perfect competition best applies to markets with: A. a few firms selling identical products. B. a few firms selling differentiated products. C. many firms selling differentiated products. D. many firms selling identical products. E. significant barriers to entry and exit. Answer: D 4. Which of the following statements characterizes perfect competition? A. Producers enjoy complete freedom of entry and exit from the industry. B. Producers sell differentiated products. C. Producers are price makers. D. Consumers are price makers. E. The firm is not free to choose the quantity that it wishes to produce. Answer: A 5. At the twenty-fifth anniversary of the Woodstock Festival in 1994, there were many vendors who sold tie-dyed t-shirts. No matter where one went, each vendor was selling these t-shirts for $15 apiece. Which market structure model would best characterize such a situation? A. Perfect competition B. Monopolistic competition C. Monopoly D. Oligopoly E. Duopoly Answer: A 6. Perfect competition describes firm behavior when: A. there are few firms producing identical products. B. there are few firms producing highly differentiated products. C. there are many firms producing identical products and entry is easy. D. there are many firms producing highly differentiated products. E. there are so few firms operating that government intervention is required to ensure fairness. Answer: C 7. Which of the following statements concerning perfect competition is not true? A. Firms are price takers. B. The demand curve facing the individual firm is horizontal. C. The firm’s demand curve is identical to its marginal revenue curve. D. The firms produce differentiated products. E. If the firm raises its price, it will lose all of its customers. Answer: D 8. One assumption of the model of perfect competition is that entry into the market is easy. This implies that: A. there are government licensing requirements for a firm to enter the market. B. there are not significant economies of scale relative to the size of the market. C. one firm has gained a patent in the industry. D. significant economies of scale do exist in the industry. E. there is no government intervention. Answer: B 9. If an individual firm in a market is a price taker, then: A. it faces a horizontal demand curve. B. it is operating in a monopolistically competitive market. C. it sells its product at the market price that is solely determined by the buyers. D. it faces a positively sloped marginal revenue curve. E. it faces significant barriers to exit from the market. Answer: A 10. Why is a perfectly competitive firm said to be a price taker? A. It produces such a good which is not produced by any other firm in the market. B. It faces the downward sloping market demand curve. C. The firm’s individual production is insignificant relative to production in the industry. D. There does not exist any barrier to the entry of new firms in the industry. E. The firm’s marginal-revenue curve is downward sloping. Answer: C 11. If a firm in a perfectly competitive market raises its price: A. it will sell less but earn more revenue. B. it will sell less but earn the same revenue. C. it will sell exactly the same amount. D. whether it sells less or more depends on elasticity. E. it will sell nothing. Answer: E 12. The perfectly competitive producer’s demand curve is: A. perfectly elastic. B. the market-demand curve. C. downward sloping but more elastic than the market-demand curve. D. perfectly inelastic. E. vertical. Answer: A 13. The market-demand curve for a product in a perfectly competitive market: A. is horizontal. B. is downward sloping. C. is vertical. D. has elasticity equal to 1. E. is positively sloped. Answer: B 14. A perfectly competitive firm’s pricing decision depends on: A. whether the firm wants to maximize profits. B. whether the firm wants to maximize sales revenue. C. the firm’s costs. D. whether it wants to compete with other firms in the market. E. the market supply and demand. Answer: E 15. Which of the following faces a horizontal demand curve? A. A monopolistic firm B. An oligopolistic firm C. A perfectly competitive firm D. A monopolistically competitive firm E. A duopolistic firm Answer: C 16. For which of the following types of firms does the average revenue curve coincide with the marginal revenue curve? A. A monopolist B. An oligopoly firm C. A monopolistically competitive firm D. A perfectly competitive firm E. A monopsonist Answer: D 17. If the market price of oats is $2. 5 per bushel and a farmer decides to sell at $2. 8 per bushel, he is likely to sell: A. more than 5 bushels per day. B. more than 10 bushels per day. C. less than 5 bushels per day. D. 10 bushels per day. E. nothing. Answer: E 18. At the profit-maximizing output level for a perfectly competitive firm, if the firm increases its price, it will: A. increase profits. B. reduce total cost more than total revenue. C. increase total revenue more than total cost. D. increase total cost more than total revenue. E. cause the firm to lose all of its sales. Answer: E 19. Suppose Atlas Publishing, a perfectly competitive firm, currently produces 2,000 maps per day at a total cost of $1,600. At its current level of output, Atlas is producing where the marginal revenue curve intersects a rising marginal-cost curve. Which of the following can be concluded about Atlas Publishing? A. It is maximizing profit. B. It should produce more to maximize profit. C. It is maximizing losses. D. It should produce less to maximize profit. E. It should produce more to break-even. Answer: A 20. Quickie Inc. , a perfectly competitive firm, currently maximizes profit by producing 400 units of output. If its marginal cost is equal to $25 and its average total cost is $20, then how much is it earning in economic profit? A. Economic profit is always equal to zero in perfect competition. B. $10,000 C. $8,000 D. $2,000 E. $4,000 Answer: D 21. A perfectly competitive firm maximizes its profit when: A. its marginal revenue is equal to its marginal cost. B. its marginal revenue is greater than its marginal cost. C. its marginal cost is negative. D. its marginal cost is greater than its marginal revenue. E. its marginal cost is minimum. Answer: A NARRBEGIN: Table 9. 1 The table given below shows the price of each unit of the product manufactured by a firm and the marginal cost of producing different units of the output. 22. Refer to Table 9. 1. The firm depicted in the table is a(n): A. monopolist. B. oligopolist. C. monopolistically competitive firm. D. perfectly competitive firm. E. monopsonist. Answer: D 23. According to the information in Table 9. 1, the marginal revenue of the firm: A. is equal to the marginal cost at each level of output. B. is equal to price times output. C. is equal to price times marginal cost. D. is equal to $1 at all levels of the output. E. decreases with an increase in output. Answer: D 24. According to the information in Table 9. 1, this firm will maximize profit when total output is equal to _____ units. A. nine B. eight C. seven D. six E. five Answer: A 25. Refer to Table 9. 1. If the market price of the good falls to $0. 80 per unit, the firm: A. should decrease its output to seven units. B. should decrease its output to seven units. C. should increase its output to ten units. D. should produce nine units. E. should keep its output level unchanged. Answer: B 26. A firm's total revenue is $400 for 8 units of output, $600 for 12 units of output, and $1,100 for 22 units of output. Evidently this firm is operating in a(n): A. perfectly competitive market. B. monopolistic market. C. duopolistic market. D. monopolistically competitive market. E. oligopolistic market. Answer: A 27. In which of the following situations will a perfectly competitive firm’s profit always increase when it increases its output? A. When price is greater than marginal revenue B. When price is less than marginal revenue C. When price is greater than marginal cost D. When price is less than marginal cost E. When price is equal to marginal cost Answer: C NARRBEGIN: Table 9. 2 The table given below shows the total revenue and total cost of a firm at different levels of output. 28. Consider the perfectly competitive firm described in Table 9. 2. How many units of the good should the firm produce to maximize profit? A. 16 units B. 17 units C. 18 units D. 19 units E. 20 units Answer: C 29. What is the equilibrium price for the perfectly competitive firm described in Table 9. 2? A. $2 B. $4 C. $6 D. $8 E. $10 Answer: B 30. Consider the perfectly competitive firm described in Table 9. 2. How much profit will the firm make if it is a profit maximizer? A. $20 B. $45 C. $46 D. $80 E. $50 Answer: C 31. Given a perfectly competitive market structure at the profit-maximizing output level, a firm’s total fixed cost is $10, total variable cost is $100, marginal revenue is $4, and the quantity demanded is 50. The total profit earned by the firm is: A. $70. B. $65. C. $90. D. $70. E. $75. Answer: C 32. To maximize profits in the short run, a perfectly competitive firm will produce that output at which: A. marginal revenue equals demand. B. price equals marginal revenue. C. price equals marginal cost. D. marginal revenue equals average total cost. E. total revenue equals total cost. Answer: C NARRBEGIN: Figure 9. 1 The figure given below shows the revenue and cost curves of a perfectly competitive firm. Figure 9. 1 NARREND 33. In Figure 9. 1, the firm maximizes its profit at an output level of _____ units. A. R B. S C. T D. U E. V Answer: D 34. In Figure 9. 1, average fixed cost at the profit-maximizing output is equal to ______. A. UH B. UG C. GH D. UN E. HN Answer: C 35. In Figure 9. 1, the firm's profit is equal to the area: A. OIWR. B. JKEF C. OKET D. LMNG E. OJFS Answer: D 36. Suppose a perfectly competitive firm's total revenue equals $210 and its output is 70 units when the firm's marginal-cost curve intersects its marginal-revenue curve. Since the firm is a profit-maximizing firm, what is marginal revenue equal to? A. $15 B. $3 C. $30 D. $7 E. $70 Answer: B 37. If a perfectly competitive firm’s price increases, then: A. the marginal-cost curve will shift up. B. the demand curve faced by the firm will shift to the left. C. marginal cost will fall as output declines. D. the marginal-revenue curve for the firm will shift up. E. the marginal-cost curve for the firm will shift down. Answer: D 38. A perfectly competitive firm incurs loss in the short run if at the profit maximizing level of output: A. the marginal revenue curve lies below the marginal cost curve. B. the marginal revenue curve lies above the average revenue curve. C. the average cost curve lies below the average revenue curve. D. the average revenue curve lies below the average cost curve. E. marginal revenue curve lies above the marginal cost curve. Answer: D 39. If in the short run, at the profit maximizing level of output, the average revenue curve of a competitive firm lies above the average cost curve: A. the firm is incurring losses. B. the firm is just able to cover its total cost. C. the firm enjoys above-normal profits. D. the firm must shut down. E. the firm is barely able to cover its variable costs. Answer: C 40. A perfectly competitive firm produces 50 units of output at equilibrium in the short run. The total cost borne by the firm is $300 and the average revenue is $2. Therefore: A. is just breaking even. B. is earning positive profits. C. is facing a positively sloped demand curve. D. is suffering losses. E. is experiencing diseconomies of scale. Answer: D 41. Suppose that in a perfectly competitive market, the market supply of a good increases. As a result, the individual firm’s: A. supply curve would shift outward and the firm would increase output. B. supply curve would shift inward and the firm would decrease output. C. average-total-cost curve would shift upward and the firm would increase output. D. marginal-revenue curve would shift upward and the firm would increase output. E. marginal-revenue curve would shift downward and the firm would decrease output. Answer: E 42. At an output level above the profit-maximizing one for a perfectly competitive firm, a reduction in output will: A. reduce total revenue more than total cost. B. reduce total cost more than total revenue. C. increase total revenue more than total cost. D. increase total cost more than total revenue. E. decrease total revenue and total cost by the same amount. Answer: B 43. If the marginal cost exceeds the marginal revenue, a perfectly competitive firm should: A. raise the level of output to maximize profit. B. keep the level of output constant. C. raise the level of output to minimize loss. D. reduce the level of output to minimize loss. E. shut down. Answer: D 44. A firm whose price is below its average cost: A. is earning negative economic profit. B. is earning positive economic profit. C. is just breaking even. D. is earning zero economic profit. E. is earning zero accounting profit. Answer: A NARRBEGIN: Figure 9. 2 The figure given below shows the revenue and cost curves of a perfectly competitive firm. Figure 9. 2 MC: Marginal cost curve MR: Marginal revenue curve ATC: Average-total-cost curve AVC: Average-variable-cost curve NARREND 45. Refer to Figure 9. 2. What is the profit-maximizing price and output level? A. $35 and 10 units B. $50 and 15 units C. $50 and 20 units D. $20 and 20 units E. $35 and 20 units Answer: C 46. Refer to Figure 9. 2. What is the firm’s total fixed cost at the profit-maximizing output level? A. $400 B. $300 C. $600 D. $450 E. $500 Answer: B 47. Refer to Figure 9. 2. Compute the profit earned by the firm at the profit-maximizing level of output. A. $300 B. $450 C. $700 D. $500 E. $350 Answer: A 48. Refer to Figure 9. 2. If the marginal-revenue curve would have intersected the average-total-cost curve at its lowest point and the firm maximized profit, then total revenue would have been equal to: A. $500. B. $550. C. $600. D. $450. E. $400. Answer: D 49. Refer to Figure 9. 2. If the marginal-revenue curve would have intersected the average-total-cost curve at the latter’s lowest point and the firm maximized profit, then total profit would have been equal to: A. $30. B. zero. C. -$10. D. $20. E. -$20. Answer: B 50. Refer to Figure 9. 2. If the market price falls to $10, the firm would produce: A. nothing. B. 15 units. C. 5 units. D. 10 units. E. 20 units. Answer: D 51. Refer to Figure 9. 2. The firm will suspend production if the price falls below: A. $30. B. $50. C. $10. D. $20. E. $35. Answer: C 52. According to Figure 9. 2, the break-even price of the firm is: A. $30. B. $50. C. $20. D. $10. E. $35. Answer: A 53. In the short run a firm continues to produce only if it can cover the: A. fixed costs. B. sunk costs. C. explicit costs. D. variable costs. E. implicit costs. Answer: D 54. The minimum point of the _____ curve is called the shutdown price. A. average-fixed-cost B. marginal cost C. average -total-cost D. total fixed cost E. average-variable-cost Answer: E 55. A perfectly competitive firm decides to shut down if: A. the price falls below the average-total-cost. B. average revenue falls below the average-variable-cost. C. the price falls below the marginal cost. D. the average revenue curve lies below the marginal cost curve. E. the total revenue is less than total cost. Answer: B NARRBEGIN: Figure 9. 3 The figure given below shows the revenue and the cost curves of a perfectly competitive firm. Figure 9. 3 NARREND 56. In Figure 9. 3, the profit maximizing output of the firm is _____ units. A. 4 B. 16 C. 11 D. 7 E. 14 Answer: E 57. Refer to Figure 9. 3 and calculate the firm’s total revenue at the profit maximizing level of output. A. $200. B. $169. C. $196. D. $225. E. $154. Answer: C 58. Refer to Figure 9. 3 and calculate the total fixed cost borne by the firm at the profit maximizing level of the output. A. $28 B. $84 C. $70 D. $56 E. $42 Answer: E 59. In Figure 9. 3, at equilibrium, the firm enjoys a profit of: A. $69. B. $42. C. $60. D. $27. E. $48. Answer: B 60. In Figure 9. 3, the firm will have to suspend its operations if the price falls below _____. A. $2 B. $4 C. $10 D. $11 E. $14 Answer: B 61. Refer to Figure 9. 3 and identify the price level at which the firm earns only normal profit. A. $4 B. $8 C. $10 D. $2 E. $14 Answer: C NARRBEGIN: Figure 9. 4 The figure given below shows the demand and cost curves of a perfectly competitive firm. Figure: 9. 4 D: Demand curve MC: Marginal cost curve ATC: Average-total cost curve AVC: Average-variable-cost curve NARREND 62. According to Figure 9. 4, the firm’s shutdown price is: A. above $60. B. $60. C. $50. D. between $50 and $60. E. less than $15. Answer: C 63. Refer to Figure 9. 4. At the profit-maximizing output level, which of the following is true? A. The firm is making a profit of $10 per unit. B. The firm is making a profit of $45 per unit. C. The firm is losing $35 per unit. D. The firm is losing $10 per unit. E. The firm is breaking even. Answer: D 64. Refer to Figure 9. 4. The presence of the average-variable-cost curve suggests that the firm is operating: A. in the short run. B. in the long run. C. at a gain. D. in a monopoly. E. at a zero profit. Answer: A 65. Refer to Figure 9. 4. The total profit or loss for the firm is: A. $500 profit. B. $2,500 profit. C. $2,500 loss. D. $650 loss. E. $500 loss. Answer: E 66. Some competitive firms are willing to operate at a loss in the short run because: A. their average variable cost is less than the price. B. their fixed costs are less than their current losses. C. their average total cost is less than the price. D. they do not attempt to maximize profits or minimize losses. E. their revenues are at least able to cover their fixed costs. Answer: A 67. If a firm in a perfectly competitive market is operating at its profit-maximizing level of output and suddenly faces a reduction in the price it can charge for its product, will the firm suspend operations? A. No, because it can always raise its prices in the short run. B. No, because it can always raise its prices in the long run. C. No, as long as the firm earns sufficient revenue to pay all of the variable costs. D. Yes, since it never makes sense to operate at a loss, even in the short run. E. No, because it always makes sense to operate at a loss, even in the long run. Answer: C 68. In the short run, certain costs, such as rent on land and equipment, must be paid whether or not any output is produced. These are: A. the firm’s variable costs. B. the firm’s break-even costs. C. the firm’s sunk costs. D. the firm’s marginal costs. E. the firm’s fixed costs. Answer: E NARRBEGIN: Figure 9. 5 The figure given below shows the revenue and cost curves of a perfectly competitive firm. Figure 9. 5 MC: Marginal cost curve MR: Marginal revenue curve. ATC: Average-total-cost curve AVC: Average-variable-cost curve NARREND 69. Assume the price facing the firm in Figure 9. 5 is P1. Which of the following statements is true? A. Total revenue for the firm is area 0BDQ1. B. The firm should produce Q2. C. Total cost for the firm is area 0P1EQ1. D. The firm’s total revenue is more than sufficient to cover its variable costs, so it should remain in operation. E. The firm should shut down because price per unit received is less than average total cost. Answer: D 70. According to Figure 9. 5, the firm has: A. profits equal to the area AP1EF. B. profits equal to the area P1BDE. C. losses equal to the area 0AFQ1. D. losses equal to the area P1BDE. E. no profit no loss. Answer: D 71. A firm should not necessarily shut down if: A. total revenue is less than total variable cost. B. losses are greater than fixed costs. C. the demand curve facing the firm lies below its average variable cost curve. D. price is less than average variable cost. E. losses exceed variable costs. Answer: E 72. For a perfectly competitive firm in the short run, which of the following statements is true? A. A price above minimum average variable cost, but below average total cost will produce an economic profit. B. A price below minimum average variable cost will cause the firm to shut down. C. Marginal cost is parallel to the axis showing quantity of output. D. Price is always greater than marginal revenue. E. Every firm contributes a significant amount to the total market output. Answer: B 73. If a profit-maximizing, perfectly competitive firm is producing at a loss in the short run, then it implies that: A. marginal revenue must be less than marginal cost. B. price must be less than the average variable cost. C. price must be less than average total cost but greater than average variable cost. D. the average revenue curve must lie below the average variable cost curve but above the average fixed cost curve. E. price must be less than both average variable cost and average fixed cost. Answer: C 74. In the short run, a firm attempting to minimize losses: A. must leave the industry in order to maximize opportunity costs. B. will produce as long as marginal cost equals marginal revenue. C. will produce as long as total revenue exceeds total variable cost. D. will produce as long as total revenue exceeds total fixed cost. E. will produce as long as competitors continue to produce. Answer: C 75. Since the beginning of the millennium, the United States has witnessed closure of many Internet start-up companies. According to the model of perfect competition, these companies must have shut down in the short run because: A. the price they were charging was too high to attract customers. B. the price they were charging was too low to provide sufficient revenues. C. they weren’t earning enough revenue to cover their total costs. D. they were not earning enough revenue to cover their total variable costs. E. they were not earning enough revenue to cover their total fixed costs. Answer: D 76. When revenue is less than total cost but more than variable cost it implies: A. the firm is enjoying positive economic profits. B. the firm is earning normal profits. C. the firm can cover its variable cost and a part of its fixed costs. D. the firm is unable to cover its costs and should shut down. E. the firm is able to cover all its fixed and variable costs. Answer: C 77. The permanent shut down point of a perfectly competitive firm in the long run is: A. the minimum point of the AVC curve. B. the minimum point of the MC curve. C. the minimum point of the AR curve. D. the minimum point of the ATC curve. E. the minimum point of the AFC curve. Answer: D 78. In the short run, the firm’s break-even point is: A. the minimum point of the firm’s demand curve. B. the minimum point of the firm’s average-total-cost curve. C. the minimum point of the firm’s average-variable-cost curve. D. the minimum point of the firm’s marginal-cost curve. E. the minimum point on the average-fixed-cost curve. Answer: B 79. If a profit-maximizing, perfectly competitive firm is making only a normal profit in the short run, then the firm is in: A. disequilibrium. B. equilibrium where MR exceeds minimum ATC. C. equilibrium where MR equals minimum AVC. D. equilibrium where P = AFC. E. equilibrium where P = ATC Answer: E 80. In the short run a competitive firm is said to break-even if, at the equilibrium: A. price is equal to marginal revenue. B. price is equal to average revenue. C. price is equal to average variable cost. D. price is equal to the average total cost. E. price is equal to marginal cost. Answer: D 81. An individual perfectly competitive firm’s supply curve is its: A. average-fixed-cost curve. B. marginal revenue curve. C. average-variable-cost curve. D. marginal cost curve. E. total cost curve. Answer: D 82. A perfectly competitive firm’s supply curve is the portion of the: A. TC curve that lies above the TR curve. B. MR curve that lies above the MC curve. C. AFC curve that lies above the AR curve. D. AVC curve that lies above the ATC curve. E. MC curve that lies above the AVC curve. Answer: E 83. Which of the following statements is true in the context of the long run? A. All the factors of production are fixed. B. No new firms enter the market. C. The producer can vary all the factors of production. D. The firms earn positive economic profit. E. Large firms tend to acquire market power. Answer: C 84. One method that firms in many nations use to exit the market is the use of: A. antitrust laws. B. the uniform commercial code. C. bankruptcy laws. D. statutes laws. E. the federal code. Answer: C 85. Under perfect competition, entry of new firms into the market in the long run tends to: A. raise the aggregate supply. B. raise the level of profit of the existing firms. C. raise the aggregate demand for goods. D. reduce the degree of competitiveness in the market. E. reduce the market power of the existing firms. Answer: A 86. What causes the market supply curve to shift rightward? A. Increase in the aggregate demand B. Decrease in the number of existing firms C. Decrease in the price level D. Increase in the cost of production E. Entry of new firms Answer: E 87. Why do the perfectly competitive firms earn only normal profits in the long run? A. Entry or exit is barred B. Firms produce identical products C. A large number of buyers and sellers exist in the market D. Aggregate demand remains constant E. There is free entry and exit of firms Answer: E NARRBEGIN: Figure 9. 6 The following figure shows equilibrium at the industry and firm level. Figure 9. 6 In the figure, S1, S2, S3 are the market supply curves. D1 and D2 are the market demand curves. MC is the marginal cost curve of the firm. MR1 and MR2 are the marginal revenue curves of the firm. ATC is the average-total-cost curve of the firm. NARREND 88. According to Figure 9. 6, in the long run, the firm: A. will produce at quantity 9 and price $1. 50. B. will produce at quantity 9 and price $1. C. will produce at quantity 10 and price $1. 50. D. will produce at quantity 19 and price $1. 25. E. will shut down. Answer: B 89. According to Figure 9. 6, if the market price was $1. 50, the individual firm would: A. be earning a negative economic profit of about $5. B. be earning a positive economic profit of about $5. C. be earning a positive economic profit of about $0. 87. D. be earning a negative economic profit of about $4. 50. E. be earning a positive economic profit of about $0. 50. Answer: B 90. According to Figure 9. 6, at a price of $1, the firm would earn an economic profit of: A. $15. B. $9. C. $13. 50. D. $12. 50. E. 0. Answer: E 91. According to Figure 9. 6, a shift of the S curves in the graph on the left side represents: A. an increased supply because the firm produces more. B. an increased supply because more firms are producing. C. an increased supply resulting from a larger number of customers. D. an increased supply resulting from a lower demand. E. an increased supply resulting from a lower price. Answer: B 92. According to Figure 9. 6, an upward shift of the MR curve will result from: A. a larger demand. B. more firms in the industry. C. fewer firms in the industry. D. a smaller demand. E. the firm being more efficient. Answer: A 93. In the long run, a perfectly competitive firm will produce: A. in the upward-sloping portion of its LRAC curve. B. where P = minimum AVC. C. in the downward-sloping portion of its LRAC curve. D. where P is greater than minimum ATC. E. where P = minimum ATC. Answer: E 94. On August 5, 2003, a tragic fire destroyed a large Jim Beam whiskey factory in Kentucky. Assume that the U. S. market for whiskey is perfectly competitive, and that the market was originally in long run equilibrium. What would be the effects of such a whiskey factory fire? A. An increase in supply would cause a reduction in price, which would then lead to entry of firms. B. A decrease in supply would cause an increase in price, which would then lead to entry of firms. ` C. An increase in supply would cause an increase in price, which would then lead to entry of firms D. A decrease in supply would cause an increase in price, which would then lead to exit of firms. E. Price of the whiskey remains unchanged and the existing firms continue to earn zero economic profit. Answer: E 95. Above-normal profits earned by existing firms in a perfectly competitive market will eventually lead to: A. exit of the firms from the market. B. an increase in the market price of the good. C. entry of new firms into the market. D. a decrease in the aggregate supply. E. existing firms emerging as price makers. Answer: C 96. When firms leave a perfectly competitive market, then, other things remaining unchanged: A. the market supply will decrease but the market price will rise. B. both the market supply and the market price will fall. C. both the market demand and the price will increase. D. the market demand will decrease but the market price will fall. E. both the market demand and the market supply will decrease. Answer: A 97. If market demand increases, a perfectly competitive firm will find: A. its cost curves shifting up. B. its profit-maximizing output level increasing. C. the demand curve facing the firm shifting down. D. its marginal cost falling. E. its profits decreasing. Answer: B 98. From a social viewpoint, when price = marginal cost: A. the economy as a whole would be better off if more was produced. B. the economy as a whole would be better off if less was produced. C. firms would be better off by producing less. D. economic efficiency is attained as a whole. E. consumers will be better by consuming less. Answer: D 99. Since a firm is willing to sell its product at the marginal cost and since the firm receives the market price, the difference between the two is: A. consumer surplus. B. economic profit. C. marginal revenue. D. producer surplus. E. a shortage. Answer: D 100. Graphically, consumer surplus is the area: A. above the equilibrium price and below the demand curve. B. below the equilibrium price and above the supply curve. C. above the equilibrium price and below the supply curve. D. below the equilibrium price and above the demand curve. E. above the equilibrium price and above the supply curve. Answer: A 101. Graphically, producer surplus is the area: A. above the equilibrium price and below the demand curve. B. below the equilibrium price and below the supply curve. C. above the supply curve and below the demand curve. D. below the equilibrium price and above the supply curve. E. below the equilibrium price and above the demand curve. Answer: D 102. Under the long-run equilibrium for perfectly competitive markets without any government intervention: A. producer surplus is greater than consumer surplus. B. consumer surplus is greater than producer surplus. C. the sum of consumer and producer surplus is maximized. D. consumer surplus is maximized. E. producer surplus is maximized. Answer: C NARRBEGIN: Figure 9. 7 The figure given below shows the aggregate demand and supply curves of a perfectly competitive market. Figure 9. 7 NARREND 103. Refer to Figure 9. 7 and calculate the consumer surplus. A. $200 B. $600 C. $400 D. $800 E. $500 Answer: C 104. Refer to Figure 9. 7 and calculate the producer surplus. A. $600 B. $500 C. $800 D. $400 E. $200 Answer: D TRUE/FALSE 1. If significant barriers to entry exist in a market, then the market is best described through the model of perfect competition. Answer: False 2. An individual firm in perfect competition can exercise a significant control over the market price of the good. Answer: False 3. If a firm is a price taker, then the demand curve faced by the firm is perfectly elastic. Answer: True 4. A perfectly competitive firm faces the downward sloping market demand curve. Answer: False 5. Under perfect competition, the average revenue curve of the firm coincides with its average cost curve. Answer: False 6. The profit of a perfectly competitive firm is maximized at a level of output where its marginal cost is rising. Answer: True 7. Under perfect competition, the per unit revenue of the firm is equal to its marginal revenue. Answer: True 8. When the perfectly competitive firm's demand curve lies above its average total cost curve, the firm incurs an economic loss at that level of output. Answer: False 9. Given a perfectly competitive market structure at the profit-maximizing output level, a firm’s total fixed cost is $15, total variable cost is $137, marginal revenue is $4, and the quantity demanded is 65. The total profit earned by the firm is $108. Answer: True 10. If, at the profit-maximizing level of output, a typical perfectly competitive firm’s price is greater than its average total cost, the firm should increase output. Answer: False 11. If at the profit maximizing level of output, the AR curve lies below the ATC curve in the short run, the firm is earning positive economic profit. Answer: False 12. In the short run a perfectly competitive firm can earn normal profits or above normal profit but it cannot incur losses. Answer: False 13. Some competitive firms are willing to operate at a loss in the short run because their revenues are at least able to cover their variable costs. Answer: True 14. A firm’s break-even price is the price that is just equal to the minimum point of the AVC curve in the short run. Answer: False 15. If the market price falls below the average-variable-cost, the firm will suspend production. Answer: True 16. For a perfectly competitive firm the break-even price is equal to the shutdown price in the short run. Answer: False 17. When the marginal costs, of firms in perfect competition increases, the short-run supply curve of the industry will shift to the left. Answer: True 18. A competitive firm’s minimum supply price in the short run is its shutdown price. Answer: True 19. For a farmer, the long run would be the current growing season, where she can vary the amount of irrigation, pesticides, and fertilizer on a fixed number of acres planted. Answer: False 20. If losses are incurred in a competitive industry, then over the long run we can expect a greater quantity supplied because market price will rise. Answer: False 21. An increase in price facing a perfectly competitive firm means that the profit-maximizing output level will increase. Answer: True 22. Under perfect competition, existing firms leave the market in the long run if the price falls below total fixed cost. Answer: False 23. Under long-run equilibrium in perfect competition, each firm operates at the minimum point of its average-variable-cost curve. Answer: False 24. In the long run, a perfectly competitive firm will leave the market if it is unable to cover all of its fixed costs. Answer: False 25. In long-run equilibrium in perfect competition, the entry and exit of firms will drive economic profits to zero. Answer: True 26. At long run equilibrium of a perfectly competitive firm the following condition holds good: Long Run Average-Total-Cost = Long Run Marginal Cost = Average Revenue = Marginal Revenue = Price. Answer: True 27. In the long run with the entry of new firms in a competitive market shifts the aggregate supply curve to the left. Answer: False 28. A firm will shut down permanently if total revenue is not sufficient to pay for total costs in the long run. Answer: True 29. Economic efficiency is achieved when the price of a unit of a commodity is equal to the marginal cost of producing that unit. Answer: True 30. The theory of the long run in perfect competition helps to provide a rationale for the belief in a limited role for government in society. Answer: True 31. The governmental interference with the market exchange often reduces the total surplus. Answer: False Chapter 10 Monopoly MULTIPLE CHOICE 1. Perfect competition provides one model in which there are many firms with no barriers to entry. If perfect competition as a model lies on one extreme, the model that lies on the opposite extreme is: A. monopolistic competition. B. oligopoly. C. monopoly. D. imperfect competition. E. oligopolistic competition. Answer: C 2. Which of the following is an assumption of the monopoly model? A. There exists a large number of buyers and sellers. B. There are no close substitutes of the good. C. The firm faces a horizontal demand curve. D. There is free entry and exit of firms. E. The firm is a price taker. Answer: B 3. Which of the following will be the best example of a monopoly firm? A. The US Bank B. The Bank of America C. National City Bank D. The Federal Reserve E. Washington Mutual Funds Bank Answer: D 4. Barriers to entry do not occur when: A. economies of scale in production exist in an industry. B. the government requires a professional license or franchise agreement. C. the firm that introduces a product is granted a patent. D. a firm controls a scarce resource. E. diseconomies of scale in production exist in an industry. Answer: E 5. Which of the following would least likely be a barrier to entry into a monopoly? A. Economies of scale enjoyed by a large firm. B. Tariffs on foreign goods are eliminated. C. A company is the sole inventor of what it produces and no one else can make a good substitute. D. Government restrictions such as license requirements are enacted. E. A company is the only owner of an essential resource needed to produce its product. Answer: B 6. Which of the following is an industry without significant barriers to entry? A. Electricity generation B. Natural gas distribution C. Cable television provision D. Corn farming E. Postal services Answer: D 7. In many cities the market for cab services is monopolized. This monopoly arises because: A. of economies of scale. B. of government restriction of entry. C. there is a limited space on the streets for taxis. D. it protects the consumers from unscrupulous drivers. E. of high fixed costs of entering the business. Answer: B 8. Before World War II, Alcoa controlled the supply of bauxite in the United States. Because bauxite is a scarce resource that is vital to the production of aluminum: A. Alcoa was bound to charge a nominal price in the U. S. aluminum market. B. Alcoa had a monopoly in the U. S. aluminum market. C. the U. S. aluminum market was highly competitive. D. Alcoa can be said to have operated a monopolistically competitive market. E. Alcoa was altruistic and willing to share its bauxite with other aluminum firms. Answer: B 9. When Glaxo-Wellcome introduced AZT, an AIDS drug, it was able to enjoy high profits because: A. it was highly recommended by the doctors. B. the quick response of rivals in introducing substitute drugs. C. barriers to entry provided by patents. D. of its competitive price in the pharmaceutical industry. E. it experienced constant returns to scale in the long run. Answer: C 10. Which of the following refers to a natural monopoly? A. A monopoly resulting from government control. B. A monopoly resulting from economies of scale. C. A monopoly resulting from output leadership. D. A monopoly resulting from a large advertising budget. E. A monopoly resulting from trade restrictions. Answer: B 11. When long-run average costs are declining for the entire range of demand, the firm is known as a(n): A. local monopoly. B. regulated monopoly. C. monopolistically competitive firm. D. natural monopoly. E. oligopoly. Answer: D 12. A local monopoly is a firm that: A. is the sole supplier of a good without substitutes in a specific geographic area. B. is one of the suppliers of a good in a specific geographic area. C. supplies to the consumers within only one country. D. produces to meet the requirement of only one consumer. E. supplies its product to customers only in one city. Answer: A 13. A firm such as a public utility, which is the sole producer in a market in which government determines prices and standards of service, is known as a(n): A. local monopoly. B. natural monopoly. C. regulated monopoly. D. oligopoly. E. monopolistically competitive firm. Answer: C 14. Firms that have downward-sloping demand curves: A. earn positive economic profits even in the long run. B. produce homogeneous products. C. operate in a perfectly competitive market structure. D. enjoy monopoly or market power. E. be price takers. Answer: D 15. If a firm has a perfectly elastic demand curve, then: A. it must be a monopoly firm. B. it can charge any price it desires. C. the firm has significant market power. D. the firm has no market power. E. the firm should shut down. Answer: D 16. Which of the following statements is true? A. A perfectly competitive firm's demand curve is the market-demand curve. B. For a monopolist, the demand curve faced by a monopolist is more elastic than the one faced by a competitive firm. C. For a monopolist, the law of demand generally does not apply because it is the only firm in a market. D. A monopolist's demand curve is the market-demand curve. E. The demand curve faced by a monopolist is flatter than the market demand curve. Answer: D 17. Which of the following is true of the demand curve faced by a monopolist? A. A monopolist's demand curve is infinitely elastic. B. A monopolist's demand curve is more elastic than a competitive firm's demand curve. C. A monopolist faces a relatively inelastic demand curve. D. A monoplist's demand curve coincides with its marginal revenue curve. E. A monopolist faces a positively sloped demand curve. Answer: C 18. Which of the following is true under monopoly? A. Price is equal to marginal revenue B. Price is equal to marginal cost C. Price is less than marginal revenue D. Price is less than marginal cost E. Price is greater than marginal revenue Answer: E 19. A clothing store can sell two shirts for $20 each or three shirts for $18 each. At a quantity of three shirts sold, marginal revenue is _____. A. $18 B. $14 C. $54 D. $20 E. $44 Answer: B NARRBEGIN: Table 10. 1 The following table shows the units of the output sold at different price levels by Gizmo’s Inc. 20. According to Table 10. 1, what is the marginal revenue of the third unit? A. $42 B. $32 C. $18 D. $14 E. $10 Answer: E 21. According to Table 10. 1, at what level of output is marginal revenue equal to $14? A. 1 B. 2 C. 3 D. 4 E. 5 Answer: B 22. Refer to Table 10. 1. At what level of output is total revenue maximized? A. 3 B. 4 C. 5 D. 6 E. 7 Answer: C 23. According to Table 10. 1, Gizmo’s cannot be: A. a monopsonist. B. a monopoly. C. an oligopolistic firm. D. a perfectly competitive firm. E. a monopolistically competitive firm. Answer: D 24. For a monopolist with a linear demand curve, total revenue is maximum when: A. marginal revenue is positive. B. marginal revenue is at its maximum. C. the price elasticity of demand is greater than unity. D. the price elasticity of demand is equal to unity. E. the marginal revenue is at its minimum. Answer: D NARRBEGIN: Figure 10. 1 The figure given below shows the demand curve faced by a firm. Figure 10. 1 NARREND 25. Refer to Figure 10. 1 and calculate the revenue lost when the firm lowers the price of its product from $8 to $4. A. $20 B. $18 C. $24 D. $16 E. $28 Answer: D 26. Refer to Figure 10. 1 and calculate the revenue gained by the firm when it reduces the price of its product from $8 to $4. A. $4 B. $8 C. $32 D. $16 E. $10 Answer: B NARRBEGIN: Figure 10. 2 The figures given below represent the revenue curves of a monopolist. Figure 10. 2 TR: Total revenue curve AR: Average revenue curve MR: Marginal revenue curve NARREND 27. According to Figure 10. 2, at point C: A. price elasticity of demand is equal to infinity. B. price elasticity of supply is equal to 1. C. price elasticity of supply is equal to 1. D. price elasticity of demand is equal to 0. E. price elasticity of demand is equal to 1. Answer: E 28. Refer to Figure 10. 2. If the output at E is 600 units, then the output at B is _____ units. (We know that the slope of the marginal revenue curve is twice the slope of the average revenue curve. ) A. 900 units. B. 200 units. C. 300 units. D. 1200 units. E. 800 units. Answer: C 29. Refer to Figure 10. 2. If the monopolist is selling a quantity between B and E,then to maximize total revenue, the monopolist should: A. increase price because it is operating on the elastic portion of the demand curve. B. decrease price because it is operating on the elastic portion of the demand curve. C. increase price because it is operating on the inelastic portion of the demand curve. D. decrease price because it is operating on the inelastic portion of the demand curve. E. increase price because it is operating at the point at which price elasticity of demand is greater than 1. Answer: C 30. Refer to Figure 10. 2. In order to maximize profits, what quantity should the monopolist produce? A. B B. E C. Between B and E D. Impossible to determine because we are not given the cost curves. E. Impossible to determine because we are not given the demand curve. Answer: D 31. A monopolist maximizes profit: A. by charging the highest possible price on the demand curve. B. by charging a price that equals its marginal cost. C. by producing a level of output where the average-cost curve intersects the demand curve. D. by producing a level of output where marginal revenue equals marginal cost. E. by charging a price equal to its average total cost. Answer: D 32. If a monopolist is producing at a point at which marginal revenue is greater than marginal cost, it should: A. continue producing at the current level. B. raise its prices. C. lower its prices. D. increase the level of production. E. decrease the level of production. Answer: D 33. If at an output of 10 units a monopolist is earning a positive profit, marginal revenue is $6, and marginal cost is $4, then the monopolist: A. is in equilibrium. B. should increase output. C. should reduce output. D. should lower the price at the current output level. E. should raise the price at the current output level. Answer: B NARRBEGIN: Table 10. 2 The table given below shows the price charged by a firm and the marginal cost incurred by it for the different levels of the output. 34. The firm described in Table 10. 2: A. must be a monopoly firm. B. must be a perfectly competitive firm. C. cannot be a perfectly competitive firm. D. has no market power. E. cannot be a monopoly. Answer: C 35. What is the profit-maximizing output level for the monopoly firm described in Table 10. 2 if the firm is earning a positive economic profit? A. 1 unit B. 2 units C. 3 units D. 5 units E. 6 units Answer: D 36. Assume that the firm described in Table 10. 2 is incurring a total cost of $25 at the profit-maximizing output level. The firm will: A. lose $10 in the short run. B. break even. C. earn a profit of $50. D. earn a profit of $30. E. earn a profit of $55. Answer: D NARRBEGIN: Table 10. 3 The table given below shows the prices charged and marginal cost incurred by a monopolist for different units of the output. 37. What is the profit-maximizing output level for the monopoly firm described in Table 10. 3, if the firm is earning a positive economic profit? A. 1 unit B. 3 units C. 5 units D. 8 units E. 9 units Answer: D 38. What price will the profit-maximizing firm described in Table 10. 3 charge, if the firm is earning a positive economic profit? A. $1,500 B. $1,400 C. $1,350 D. $1,300 E. $1,550 Answer: C 39. Assume that the firm described in Table 10. 2 is incurring a total cost of $7,000 at the profit-maximizing output level. The firm will A. lose $10,000 in the short run. B. break even. C. earn a profit of $3,800. D. earn a profit of $3,500. E. earn a profit of $5,500. Answer: C 40. If a monopolist is producing at the profit-maximizing level of output what price will it charge? A. The price given by the marginal-revenue curve at that level of output. B. The price given by the marginal-cost curve at that level of output. C. The price given by the average-cost curve at that level of output. D. The price given by the average-revenue curve at that level of output. E. The price given by the total revenue curve at that level of output. Answer: D 41. Suppose you inherit the only spring of mineral water in an area and want to maximize profits from this costless product. You would ask your customers to bring their containers with them and: A. charge them the highest price possible to sell some output. B. charge them the lowest price possible to sell as much as you can. C. ask them how much they would like to pay and accept it. D. charge the price at which MR is zero. E. charge the price at which MR is maximum. Answer: D 42. If at the profit-maximizing level of output, a monopolist’s average-total-cost curve lies above its demand curve, then: A. the firm should shut down in the short run. B. the firm is earning economic losses. C. the firm is earning economic profits. D. the firm should increase its output. E. the firm should decrease its output. Answer: B NARRBEGIN: Figure 10. 3 The following figure shows the revenue and cost curves of a monopolist. Figure 10. 3 D: Average Revenue MR: Marginal Revenue ATC: Average Total Cost MC: marginal Cost NARREND 43. Consider the monopolist described in Figure 10. 3. If the firm engages in profit-maximizing behavior, what price will it charge? A. P1 B. P2 C. P3 D. P4 E. P5 Answer: E 44. Consider the monopolist described in Figure 10. 3. The firm can maximize profit by producing: A. zero units. B. Q1 units. C. Q2 units. D. Q3 units. E. Q4 units. Answer: C 45. Consider the monopolist described in the Figure 10. 3. If the firm engages in profit-maximizing behavior, economic profit per unit of output will be: A. 0 B. P2 C. P4 minus P2 D. P5 minus P4 E. P5 minus P1 Answer: A NARRBEGIN: Table 10. 4 The table given below shows the price, marginal revenue and marginal cost of a monopolist at different levels of the output. The firm does not incur a fixed cost of production. 46. Refer to Table 10. 4. Assuming that the monopolist is maximizing profits, the price the monopolist will charge is _____. A. $13. B. $14. C. $12. D. $16. E. $15. Answer: A 47. Refer to Table 10. 4 and calculate the total revenue earned by the monopolist at the profit maximizing level of output. A. $60. B. $16. C. $52. D. $42. E. $30. Answer: C 48. In Table 10. 4, assume that total fixed costs are $20. What is the maximum profit the firm can earn at equilibrium? A. $0 B. $4 C. $16 D. $30 E. $52 Answer: B 49. If the monopolist’s price happens to be greater than the average-variable cost but less than the average total cost, in the short run the monopolist will: A. be forced to shut down to minimize the cost. B. operate at a loss. C. operate at an economic profit. D. operate at a normal profit. E. go out of business. Answer: B 50. Why is there a supply point and not a supply curve for a monopolist? A. A monopolist cannot affect the market price by changing its supply. B. A monopolist produces a homogeneous product having similar substitutes C. A monopolist equates the price which it charges with its marginal cost D. There is only one quantity and price at which a monopolist operates E. A monopolist supplies to a large number of consumers Answer: D 51. A monopolist can charge a high price if: A. the quantity demanded is positively related to price. B. the demand is relatively price-elastic. C. the demand curve is negatively sloped. D. the demand is relatively price-inelastic. E. there exist a large number of substitutes. Answer: D 52. One of the popular myths about monopoly is that: A. a monopolist is the single seller of a particular commodity. B. a monopolist can charge any price for his/her good. C. a monopolist is a price maker. D. a monopolist may earn positive profits even in the long run. E. a monopolist faces the market demand curve. Answer: B 53. Identify the correct statement. A. A monopolist’s pricing decision is limited by the demand for its product. B. A monopolist is able to choose any price and quantity combination that it desires. C. A monopolist can increase its profits by increasing price if the demand for its good is relatively elastic. D. A monopolist does not suffer losses even in the short run. E. A monopolist is not able to reap positive profits in the long run. Answer: A 54. The ability of a firm to charge different customers different prices is called _____: A. price ceiling. B. price discrimination. C. predatory pricing. D. price flooring. E. basing point pricing. Answer: B 55. Which of the following is true of a firm that can successfully practice price discrimination? A. Its total revenue is often reduced. B. It appropriates a part of the consumer surplus. C. It has no way of distinguishing between types of customers. D. It has no market power in the industry. E. It must be a perfectly competitive firm. Answer: B 56. To practice price discrimination, a firm: A. must be facing a relatively elastic demand curve. B. must have customers with different elasticities of demand. C. must not be able to distinguish between customers based on elasticities of demand. D. must not be able to prevent resale of the product. E. must be a price taker. Answer: B 57. Price discrimination is best described as a monopolist: A. selling a product at the fixed market determined price. B. charging buyers an excessive price for the product. C. charging different customers different prices when the costs are equal. D. selling a product for different prices during two different periods of time. E. charging same prices to different customers when the costs are different. Answer: C 58. Which of the following is not a necessary condition for price discrimination? A. The firm must be a price maker. B. The firm must be able to distinguish between customers. C. The firm must be able to prevent resale between customers. D. The firm must be able to product homogenous products. E. The firm must be facing a downward-sloping demand curve. Answer: D 59. Grocery store coupons, mail-in rebates, senior discounts, and in-state versus out-of-state tuition fees are all examples of: A. government intervention. B. price neutrality. C. arbitrage pricing. D. price discrimination. E. illegal business practice. Answer: D NARRBEGIN: Table 10. 5 The following table shows the marginal revenues earned by a price discriminating monopolist from two different markets. 60. Refer to Table 10. 5. How would a price-discriminating monopolist allocate his or her product between market X and market Y if marginal cost is $40 in both markets? A. 4 units in market X; 1 unit in market Y B. 3 units in market X; 2 units in market Y C. 2 units in market X; 3 units in market Y D. Nothing in market X; 5 units in market Y E. 5 units in market X; nothing in market Y Answer: C 61. Refer to Table 10. 5. If marginal cost is $30 in both markets, what quantities will be supplied in each of the markets? A. 4 units in market X; 1 unit in market Y B. 4 units in market X; 2 units in market Y C. 2 units in market X; 3 units in market Y D. 3 units in market X; 3 units in market Y E. 3 units in market X; nothing in market Y Answer: D 62. Movie theaters are able to offer discounts to senior citizens because: A. the elderly deserve lower prices because of their contributions to society. B. senior citizens have the most inelastic demand. C. theaters can separate senior citizens from other customers, and it is easier to prevent resale. D. senior citizens cannot see the movie very well anyway because of poor eyesight. E. senior citizens should be given special privileges owing to their age. Answer: C 63. When practicing price discrimination, a firm can increase its revenue by: A. charging a higher price to the customers with a more inelastic demand. B. charging a higher price to the customers with a perfectly elastic demand. C. supplying more in a market with a more inelastic demand. D. supplying less in a market with lower elasticity of demand. E. charging a lower price in a market dominated by wealthy consumers. Answer: A NARRBEGIN: Figure 10. 4 The figure given below shows the demand curves of two classes of buyers for tickets to a football match. Figure 10. 4 D1: Demand curve of group 1 D2: Demand curve of group 2 MR1: Marginal revenue of group 1 MR2: Marginal revenue of group 2 MC: Marginal cost NARREND 64. In Figure 10. 4, the demand curve D2: A. has a price elasticity of demand greater than 1. B. is relatively less price elastic than D1. C. is the inverse of the demand curve D1. D. has a price elasticity of demand less than 1. E. represents the demand of the group that is more responsive to price changes. Answer: B 65. Refer to Figure 10. 4. What price must be charged to both the groups to maximize profits? A. P1 B. P2 C. Group 1 must be charged P1 and group 2 must be charged P2. D. Group 1 must be charged P2 and group 2 must be charged P1. E. Both the groups must be charged a price that is equal to the marginal cost. Answer: C 66. Perfect price discrimination occurs when: A. each customer is charged the maximum price that each is willing and able to pay. B. two classes of customers are charged different prices as they have different elasticities of demand. C. senior citizens are offered restaurant discounts. D. the firm sets MR < MC for each class of customers. E. the firm charges same price to different customers so that it is equal to the equilibrium price. Answer: A 67. The perfectly competitive market structure results in economic efficiency because: A. price is equal to marginal revenue in the short run. B. firms are producing at the minimum point of the average-total-cost curve in the short run. C. a normal profit is being earned in the long run. D. a normal profit is being earned in the short run. E. in the long run, price is equal to marginal cost and minimum average-total-cost. Answer: E 68. Compared with a perfectly competitive market with similar cost conditions, a monopolist will have: A. a higher output and lower price. B. a lower output and lower price. C. a higher output and a lower price. D. a lower output and a higher price. E. equal output and a higher price. Answer: D 69. The long-run equilibrium price-output combination for a monopolist is economically inefficient because: A. it does not operate on the minimum point of its marginal-cost curve. B. it does not produce the level of output at which price equals marginal cost. C. consumer surplus is maximized but not producer surplus. D. producer surplus is maximized but not consumer surplus. E. it operates on the downward sloping portion of the average-total-cost curve. Answer: B NARRBEGIN: Figure 10. 5 The figure below shows the market equilibrium (point B) at the intersection of demand and supply curves under perfect competition. Figure 10. 5 D: Market demand curve S: Market supply curve NARREND 70. Refer to Figure 10. 5. Which of the following regions on the graph represents consumer surplus in a perfectly competitive market? A. The area PPCBA B. The area 0BPPC C. The area 0BA D. Half of area PPCBA E. The area ABS Answer: A 71. Refer to Figure 10. 5. Assume that the curve labeled S represents the monopolist’s marginal-cost curve and the curve labeled D represents the monopolist’s demand curve. Which of the following will represent the consumer surplus? A. The area PPCBA B. The area 0BPPC C. The area 0BA D. An area that is less than PPCBA E. The area ABS Answer: D 72. Assume that in Figure 10. 5, the market is originally perfectly competitive but then becomes a monopoly. Compared with perfect competition, a monopoly would have: A. a price lower than PPC. B. a quantity more than QPC. C. a greater consumer surplus. D. a deadweight loss. E. a lower producer surplus. Answer: D 73. The efficiency loss that occurs when a market is monopolized is known as: A. a deadweight loss. B. a monopoly loss. C. an economic loss. D. an X-loss. E. a capital loss. Answer: A NARRBEGIN: Figure 10. 6 The following figure shows the revenue curves of a monopolist: Figure 10. 6 D: Average revenue MR: Marginal revenue NARREND 74. In Figure 10. 6, assume that marginal costs are constant at $2,500 and fixed costs are zero. What price and output level would result from perfect competition? A. P = $2,500, Q = 400 B. P = $2,500, Q = 200 C. P = $5,000, Q = 0 D. P = $4,000, Q = 400 E. P = $4,000, Q = 200 Answer: A 75. In Figure 10. 6, assume that marginal costs are constant at $2,500 and fixed costs are 0. What would be the amount of consumer surplus if the market was perfectly competitive? A. $1,000,000 B. $500,000 C. $300,000 D. $250,000 E. $250,000 Answer: B 76. Refer to Figure 10. 6. Assume that marginal costs are constant at $2,500 and fixed costs are zero. Under a monopoly, consumer surplus would be: A. $100,000. B. $500,000. C. $300,000. D. $250,000. E. $200,000. Answer: A NARRBEGIN: Figure 10. 7 The following figures show the demand and cost curves of a perfectly competitive and a monopoly firm respectively. Figure 10. 7 D: Average Revenue AC: Average cost MC: Marginal cost MR: Marginal cost NARREND 77. According to Figure 10. 7, when the monopolist is maximizing profit: A. its resources are not being used efficiently. B. its price is higher than that charged by the perfectly competitive firm. C. its price is equal to the price charged by the perfectly competitive firm. D. it is earning above-normal profit. E. it is actually incurring a loss. Answer: A 78. Refer to Figure 10. 7. If the perfectly competitive industry and the monopoly produces the same quantity, then: A. there are 10 firms in the perfectly competitive industry. B. there are 800 firms in the perfectly competitive industry. C. there are 1,000 firms in the perfectly competitive industry. D. there are 2,000 firms in the perfectly competitive industry. E. there are 100 firms in the perfectly competitive industry. Answer: C 79. According to Figure 10. 7, which of the following statements is incorrect about the price P1? A. The monopolist is maximizing profit at P1. B. In the long run, firms will leave the perfectly competitive industry and force the price upward. C. The monopolist is earning normal profit at P1. D. Both the firms maximize their profits at P1 . E. The perfectly competitive firm would produce 10 units of output at P1. Answer: E 80. Calculate the deadweight loss in Figure 10. 6, if the perfectly competitive industry is monopolized after it had been producing an output of 10,000 units? A. The area P2ACP1 B. The area ABC C. The area P2ABP1 D. The distance AB E. There is no deadweight loss Answer: E 81. Why does a efficiency loss arise under monopoly rather than under perfect competition? A. A monopolist charges a lower price for the product to gain market entry. B. A monopolist sells a lesser quantity at a higher price. C. There is a net increase in consumer surplus but a net decline in producer surplus. D. There is an increase in producer surplus, consumer surplus remaining unchanged. E. A monopolist sells a greater quantity than a perfect competitor. Answer: B NARRBEGIN: Figure 10. 8 The following figure shows revenue and cost curves of a monopolist. Figure 10. 8 AR: Average revenue curve MR: Marginal revenue curve MC: Marginal cost curve NARREND 82. According to Figure 10. 7, the profit maximizing price of the monopolist is: A. 0. B. P4. C. P3. D. P2. E. P1. Answer: D 83. According to Figure 10. 7, what will be the price charged by a perfectly competitive firm? A. P4 B. P3 C. P2 D. P1 E. 0 Answer: B 84. According to Figure 10. 7, the deadweight loss of monopoly is: A. the area ABC. B. the area BCD. C. the area ACD. D. the area P3P2AC. E. the area P3P4DC. Answer: C NARRBEGIN: Figure 10. 9 The figure given below shows the cost and revenue curves of a monopolist. Figure 10. 9 D: Average revenue MR: Marginal revenue ATC: Average total cost MC: Marginal cost NARREND 85. In Figure 10. 9, what is the consumer surplus at the profit-maximizing levels of output and price? A. JNM B. 0JNV C. HMQ D. 0HQX E. JHQN Answer: A 86. Refer to Figure 10. 9. Suppose that the market is perfectly competitive. The consumer surplus would be represented by the area _____. A. JNM B. 0JNV C. HMQ D. 0HQX E. JHQN Answer: C TRUE/FALSE 1. A monopoly is a market model in which just one firm sells a product with no close substitutes. Answer: True 2. Economies of scale, control over a scarce input, and patents are all examples of barriers to entry. Answer: True 3. If an industry experiences economies of scale in production, then entry into the market by other firms is easy. Answer: False 4. A patent issued by the government, gives a firm monopoly power on certain products or discoveries. Answer: True 5. A regulated monopoly is a monopoly which can charge any arbitrary price for its product. Answer: False 6. Monopolization is a process by which the government restricts the growth of monopoly firms. Answer: False 7. A monopolist’s demand curve is less elastic than a perfect competitor’s demand curve. Answer: True 8. The marginal revenue curve of a monopolist firm coincides with its average revenue curve. Answer: False 9. A monopolist always produces on the elastic portion of the demand curve. Answer: True 10. If a monopolist is producing at a point at which marginal revenue is greater than marginal cost, it should decrease the level of production. Answer: False 11. The price charged by a monopolist is the point on the demand curve that corresponds to the output where marginal revenue equals marginal cost. Answer: True 12. A monopolist earns only normal profits in the long run. Answer: False 13. If a monopolist’s demand curve shifts to the left such that it becomes tangent to the ATC curve at the output for which marginal revenue equals marginal cost, the monopolist will make only a normal profit. Answer: True 14. If a monopolist is producing at that output where price equals average variable cost in the short run, then it is earning a negative profit. Answer: True 15. If a monopolist is producing the output level at which price equals average total cost in the short run, then the firm is earning a normal profit. Answer: True 16. A monopolist’s supply curve cannot be derived directly from its marginal cost curve as in the case of a competitive firm. Answer: True 17. As a perfectly competitive firm produces at the point where price equals marginal cost, it has no supply curve, only a supply point. Answer: False 18. A monopoly firm never incurs a loss as it is the sole supplier of the good in the market. Answer: False 19. A monopolist can charge whatever price it wants and can therefore reap phenomenal profits. Answer: False 20. A monopolist enjoys the least market power compared to the other market structures. Answer: False 21. By discriminating between the consumers, the monopolist actually takes away a portion of the consumer surplus. Answer: True 22. Airlines can increase profits by charging higher fares to business customers because those customers have a more elastic demand for airline travel. Answer: False 23. The only types of firms that cannot theoretically practice price discrimination are perfectly competitive firms. Answer: True 24. In order to practice price discrimination successfully, a monopolist must ensure that there is no resale of the product. Answer: True 25. Grocery coupons and mail-in rebates are forms of price discrimination. Answer: True 26. A price discriminating monopolist charges a very high price to the consumers with high price elasticity of demand. Answer: False 27. If a firm is able to collect the entire producer surplus, it is said to have practiced perfect price discrimination. Answer: False 28. Under price discrimination, a monopolist equates the marginal cost with the average revenues in different markets. Answer: False 29. A monopolist produces at the minimum point of the average total cost curve in the long run. Answer: False 30. A monopolist sells a lesser quantity at a higher price compared to a perfect competitor. Answer: True 31. Given the same unit costs, a monopolist will produce less output than a perfectly competitive firm. Answer: True 32. A deadweight loss arises under perfect competition. Answer: False Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154
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