question
What will happen to a firm earning zero economic profit?
a. It will be forced to shutdown and leave the market.
b. It will not survive in the long run.
c. It is doing as well as typical firms in other markets.
d. It will also generally be making zero accounting profit.
a. It will be forced to shutdown and leave the market.
b. It will not survive in the long run.
c. It is doing as well as typical firms in other markets.
d. It will also generally be making zero accounting profit.
answer
c. It is doing as well as typical firms in other markets.
question
Competition as a dynamic process implies that individual firms in a market
a. produce a homogeneous product.
b. use price competition as well as other forms of competition to gain the dollar votes of consumers.
c. cooperate, attempting to establish a price and output structure so each firm can survive and continue to serve the consumer.
d. seek to utilize a variety of techniques, such as product, style, and convenience of location, to win the dollar vote of consumers, but they never use price to compete.`
a. produce a homogeneous product.
b. use price competition as well as other forms of competition to gain the dollar votes of consumers.
c. cooperate, attempting to establish a price and output structure so each firm can survive and continue to serve the consumer.
d. seek to utilize a variety of techniques, such as product, style, and convenience of location, to win the dollar vote of consumers, but they never use price to compete.`
answer
b. use price competition as well as other forms of competition to gain the dollar votes of consumers.
question
Which of the following is true regarding the dynamic process of competition?
a. It puts the profit motive of sellers to work for buyers.
b. It is hindered by the self-interest of business decision makers.
c. It conflicts with the interest of consumers when businesses pursue profit rather than the public interest.
d. It will permit business decision makers to earn long-run economic profit unless they are regulated by government.
a. It puts the profit motive of sellers to work for buyers.
b. It is hindered by the self-interest of business decision makers.
c. It conflicts with the interest of consumers when businesses pursue profit rather than the public interest.
d. It will permit business decision makers to earn long-run economic profit unless they are regulated by government.
answer
a. It puts the profit motive of sellers to work for buyers.
question
Which of the following is true when the conditions in a competitive price-taker market are such that the firms are consistently unable to cover their production costs?
a. Some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return.
b. All firms will go out of business since consumers will not pay prices that enable firms to cover their production costs.
c. The firms will suffer short-run economic losses that will be exactly offset by long-run economic profits.
d. Resource prices will increase, competition will decline, and eventually the firms in the industry will earn monopoly profit.
a. Some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return.
b. All firms will go out of business since consumers will not pay prices that enable firms to cover their production costs.
c. The firms will suffer short-run economic losses that will be exactly offset by long-run economic profits.
d. Resource prices will increase, competition will decline, and eventually the firms in the industry will earn monopoly profit.
answer
a. Some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return.
question
Which of the following is true about the dynamic process of competition?
a. It provides profit-seeking sellers with little incentive to heed consumer preferences.
b. It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.
c. It was shown by Adam Smith to be a major source of economic inefficiency.
d. It will permit business decision makers to earn long-run economic profit unless they are regulated by government officials.
a. It provides profit-seeking sellers with little incentive to heed consumer preferences.
b. It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.
c. It was shown by Adam Smith to be a major source of economic inefficiency.
d. It will permit business decision makers to earn long-run economic profit unless they are regulated by government officials.
answer
b. It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.
question
If an amusement park that is highly profitable during the summer months is unable to cover its variable costs during the winter months, what would be the profit maximizing strategy to implement?
a. Operate during the summer but shut down during the winter months.
b. Operate during all months of the year as long as its profits during the summer exceed its losses during the winter.
c. Lower its prices during the summer months.
d. Raise its prices during the winter months.
a. Operate during the summer but shut down during the winter months.
b. Operate during all months of the year as long as its profits during the summer exceed its losses during the winter.
c. Lower its prices during the summer months.
d. Raise its prices during the winter months.
answer
a. Operate during the summer but shut down during the winter months.
question
What must profit-seeking entrepreneurs do in order to be successful?
a. They must produce a product that the consumers value more than the resources required for its production.
b. They must produce the product more cheaply than their rivals regardless of quality.
c. They must maximize the salaries of high-level management so they will be able to attract people who will work hard.
d. They must charge a higher price than their competitors so they can make economic profits in the long run.
a. They must produce a product that the consumers value more than the resources required for its production.
b. They must produce the product more cheaply than their rivals regardless of quality.
c. They must maximize the salaries of high-level management so they will be able to attract people who will work hard.
d. They must charge a higher price than their competitors so they can make economic profits in the long run.
answer
a. They must produce a product that the consumers value more than the resources required for its production.
question
A competitive price-taker firm would be willing to remain in the industry in the long run at zero economic profit because
a. it would find it too difficult to exit from the industry in the long run.
b. accounting profit would be negative.
c. its sunk costs would prevent it from leaving the industry.
d. it is covering all costs, including the opportunity cost of capital and labor.
a. it would find it too difficult to exit from the industry in the long run.
b. accounting profit would be negative.
c. its sunk costs would prevent it from leaving the industry.
d. it is covering all costs, including the opportunity cost of capital and labor.
answer
d. it is covering all costs, including the opportunity cost of capital and labor.
question
When profits occur in a competitive market, this indicates that
a. consumers value the goods less than the resources used to produce them.
b. producers value the goods more than the resources used to produce them.
c. consumers value the goods more than the resources used to produce them.
d. producers value the goods more than consumers value the goods.
a. consumers value the goods less than the resources used to produce them.
b. producers value the goods more than the resources used to produce them.
c. consumers value the goods more than the resources used to produce them.
d. producers value the goods more than consumers value the goods.
answer
c. consumers value the goods more than the resources used to produce them.
question
The owners of a firm are earning economic profit if
a. return on their capital is lower than the opportunity cost of employing that capital in their industry.
b. their total revenues exceed the monetary payments to labor and other resources in the long run after all plant size adjustments are made.
c. price exceeds average variable costs at the shutdown point.
d. they are earning a return on their capital that is higher than what can generally be earned in other markets.
a. return on their capital is lower than the opportunity cost of employing that capital in their industry.
b. their total revenues exceed the monetary payments to labor and other resources in the long run after all plant size adjustments are made.
c. price exceeds average variable costs at the shutdown point.
d. they are earning a return on their capital that is higher than what can generally be earned in other markets.
answer
d. they are earning a return on their capital that is higher than what can generally be earned in other markets.
question
Which of the following is the best example of a business firm operating in a competitive price-taker market?
a. a bookstore located a few blocks from a major university
b. Ford Motor company, a major manufacturer of automobiles that operates in numerous markets throughout the world
c. TGIFriday's, a restaurant chain that operates in numerous locations
d. an Indiana hog farmer that raises pigs
a. a bookstore located a few blocks from a major university
b. Ford Motor company, a major manufacturer of automobiles that operates in numerous markets throughout the world
c. TGIFriday's, a restaurant chain that operates in numerous locations
d. an Indiana hog farmer that raises pigs
answer
d. an Indiana hog farmer that raises pigs
question
Competitive price-taker markets are characterized by which of the following?
a. Widespread use of advertising as a competitive weapon.
b. Firms that all produce the same product.
c. Firms that are large relative to the size of the market.
d. A small number of firms in the market
a. Widespread use of advertising as a competitive weapon.
b. Firms that all produce the same product.
c. Firms that are large relative to the size of the market.
d. A small number of firms in the market
answer
b. Firms that all produce the same product.
question
"Competitive price-taker markets" and "purely competitive markets" are
a. similar, but products are differentiated in the former.
b. similar, but competition is stronger in the latter.
c. merely alternative names for the same concept.
d. terms used to designate markets in which the firms confront a downward sloping demand curve.
a. similar, but products are differentiated in the former.
b. similar, but competition is stronger in the latter.
c. merely alternative names for the same concept.
d. terms used to designate markets in which the firms confront a downward sloping demand curve.
answer
c. merely alternative names for the same concept.
question
When a law is passed that requires businesses to obtain permission from government officials in order to enter a market, this is an example of
a. antitrust legislation
b. the invisible hand principle
c. price control legislation
d. a barrier to entry
a. antitrust legislation
b. the invisible hand principle
c. price control legislation
d. a barrier to entry
answer
d. a barrier to entry
question
Which of the following results from competition as a dynamic process for the individual firms in an industry?
a. Each firm will utilize a variety of techniques, such as product, style, and price, to win the dollar votes of consumers.
b. Each firm will produce a homogeneous product.
c. Each firm faces a perfectly elastic demand curve.
d. Each firm will cooperate, attempting to establish a price and output structure so each firm can survive and continue to serve the consumer.
a. Each firm will utilize a variety of techniques, such as product, style, and price, to win the dollar votes of consumers.
b. Each firm will produce a homogeneous product.
c. Each firm faces a perfectly elastic demand curve.
d. Each firm will cooperate, attempting to establish a price and output structure so each firm can survive and continue to serve the consumer.
answer
a. Each firm will utilize a variety of techniques, such as product, style, and price, to win the dollar votes of consumers.
question
A competitive price-searcher market is best described as
a. a single firm producing all of the output for the industry, with strong control over price.
b. many firms with some control over price, and some product differentiation.
c. a few firms with some control over price, producing highly differentiated products.
d. a few firms with no control over price, producing similar products.
e. any firms with no control over price, producing identical products.
a. a single firm producing all of the output for the industry, with strong control over price.
b. many firms with some control over price, and some product differentiation.
c. a few firms with some control over price, producing highly differentiated products.
d. a few firms with no control over price, producing similar products.
e. any firms with no control over price, producing identical products.
answer
b. many firms with some control over price, and some product differentiation.
question
Price discrimination refers to a system of pricing
a. that is always more profitable than simple "single-price" pricing.
b. where consumer groups with a more elastic demand for the product are charged lower prices.
c. based on buyer income rather than buyer demand conditions, so the poor pay more than the rich.
d. that forces customers who require more service to pay higher prices.
a. that is always more profitable than simple "single-price" pricing.
b. where consumer groups with a more elastic demand for the product are charged lower prices.
c. based on buyer income rather than buyer demand conditions, so the poor pay more than the rich.
d. that forces customers who require more service to pay higher prices.
answer
b. where consumer groups with a more elastic demand for the product are charged lower prices.
question
What will happen to the demand curves of existing firms when a new firm enters a competitive price-searcher market?
a. shift to the right
b. shift to the left
c. shift in a direction that is unpredictable without further information
d. remain unchanged. it is the firm supply curve that will shift
a. shift to the right
b. shift to the left
c. shift in a direction that is unpredictable without further information
d. remain unchanged. it is the firm supply curve that will shift
answer
b. shift to the left
question
A firm in a competitive price-searcher market can raise its price without losing all of its customers. Why?
a. Because of product differentiation.
b. Because of the small number of firms in the market.
c. Because of low entry barriers.
d. Because of a perfectly elastic market demand.
a. Because of product differentiation.
b. Because of the small number of firms in the market.
c. Because of low entry barriers.
d. Because of a perfectly elastic market demand.
answer
a. Because of product differentiation.
question
A profit-maximizing price searcher will expand output to the point where
a. price equals marginal cost.
b. marginal revenue equals marginal cost.
c. price equals average total cost.
d. total revenue equals total cost.
a. price equals marginal cost.
b. marginal revenue equals marginal cost.
c. price equals average total cost.
d. total revenue equals total cost.
answer
b. marginal revenue equals marginal cost
question
What will happen to a firm in a competitive price-searcher market if it raises price?
a. It will lose all of its sales.
b. It will increase its sales.
c. It will have to go out of business.
d. it will lose only some of its sales
a. It will lose all of its sales.
b. It will increase its sales.
c. It will have to go out of business.
d. it will lose only some of its sales
answer
d. it will lose only some of its sales
question
Suppose that competitive price-searcher firms are experiencing losses. In the transition from this initial situation to a long-run equilibrium,
a. each existing firm experiences a decrease in demand for its product.
b. each firm experiences an upward shift to its marginal cost and average total cost curves.
c. each existing firm's average total cost falls to bring economic profit back to zero.
d. the number of firms in the market decreases.
a. each existing firm experiences a decrease in demand for its product.
b. each firm experiences an upward shift to its marginal cost and average total cost curves.
c. each existing firm's average total cost falls to bring economic profit back to zero.
d. the number of firms in the market decreases.
answer
d. the number of firms in the market decreases.
question
When a firm exits a competitive price-searcher market, the individual demand curves faced by all remaining firms in that market will
a. remain unchanged. It is the supply curve that will shift.
b. shift to the right.
c. shift to the left.
d. shift in a direction that is unpredictable without further information
a. remain unchanged. It is the supply curve that will shift.
b. shift to the right.
c. shift to the left.
d. shift in a direction that is unpredictable without further information
answer
b. shift to the right.
question
For effective price discrimination to occur, a seller must
a.have large economies of scale and control over a key natural resource.
b. be able to prevent consumers from reselling the product to other consumers.
c. be a pure monopolist.
d. face a horizontal demand curve for its product.
a.have large economies of scale and control over a key natural resource.
b. be able to prevent consumers from reselling the product to other consumers.
c. be a pure monopolist.
d. face a horizontal demand curve for its product.
answer
b. be able to prevent consumers from reselling the product to other consumers.
question
When there is no decision rule that can be applied using only information that is freely available, which of the following is most needed?
a. Protection from competition.
b. Entrepreneurial judgment.
c. Government direction.
d. Team production.
a. Protection from competition.
b. Entrepreneurial judgment.
c. Government direction.
d. Team production.
answer
b. Entrepreneurial judgment.
question
Which of the following is a necessary condition for price discrimination to be profitable?
a. All consumers must have identical preferences.
b. It must be easy to distinguish consumer groups with differing responses to higher prices.
c. The seller must face a horizontal demand curve for its product in at least one part of the market.
d. Both b and c are correct.
a. All consumers must have identical preferences.
b. It must be easy to distinguish consumer groups with differing responses to higher prices.
c. The seller must face a horizontal demand curve for its product in at least one part of the market.
d. Both b and c are correct.
answer
b. It must be easy to distinguish consumer groups with differing responses to higher prices
question
Which of the following is a necessary condition for price discrimination to be profitable?
a. Groups of consumers with different demand elasticities must be easily distinguishable.
b. It must be possible for buyers to resell the product at a low cost.
c. All consumers must have an identical demand for the product.
d. The market demand for the product must be highly elastic
a. Groups of consumers with different demand elasticities must be easily distinguishable.
b. It must be possible for buyers to resell the product at a low cost.
c. All consumers must have an identical demand for the product.
d. The market demand for the product must be highly elastic
answer
a. Groups of consumers with different demand elasticities must be easily distinguishable.
question
Long-run equilibrium in a competitive price-searcher market requires which of the following?
a. The quantity produced must be at the point where average cost is at a minimum.
b. The demand curve intersects the average cost curve.
c. Price must equal to marginal cost.
d. The demand curve needs to be tangent to the average cost curve
a. The quantity produced must be at the point where average cost is at a minimum.
b. The demand curve intersects the average cost curve.
c. Price must equal to marginal cost.
d. The demand curve needs to be tangent to the average cost curve
answer
d. The demand curve needs to be tangent to the average cost curve
question
A price-discriminating firm charges the lowest price to the group that
a. has the most elastic demand.
b. purchases the largest quantity.
c. engages in the most arbitrage.
d. is least responsive to price changes
a. has the most elastic demand.
b. purchases the largest quantity.
c. engages in the most arbitrage.
d. is least responsive to price changes
answer
a. has the most elastic demand.
question
In order for effective price discrimination to occur, a seller must
a. face a horizontal demand curve for its product.
b. be a pure monopolist.
c. have at least two distinguishable groups of consumers.
d. have large economies of scale and control over a key natural resource
a. face a horizontal demand curve for its product.
b. be a pure monopolist.
c. have at least two distinguishable groups of consumers.
d. have large economies of scale and control over a key natural resource
answer
c. have at least two distinguishable groups of consumers.
question
"Market power" is an expression used to indicate that a firm has
a. no freedom from the rigors of intense competition.
b. the power to sell a given output at whatever price it chooses.
c. a monopoly over the product it produces.
d. enough market share to be somewhat insulated from competition.
a. no freedom from the rigors of intense competition.
b. the power to sell a given output at whatever price it chooses.
c. a monopoly over the product it produces.
d. enough market share to be somewhat insulated from competition.
answer
d. enough market share to be somewhat insulated from competition.
question
What is the primary reason why the U.S. Postal Service has a monopoly on the delivery of first-class mail?
a. It has economies of scale.
b. It has control over an essential resource.
c. There are legal barriers limiting entry.
d. Due to a lack of initiative on the part of competing firms.
a. It has economies of scale.
b. It has control over an essential resource.
c. There are legal barriers limiting entry.
d. Due to a lack of initiative on the part of competing firms.
answer
c. There are legal barriers limiting entry.
question
Under which one of the following market structures are sellers most likely to consider the reaction of rival sellers when they set the price of their product?
a. price searchers with low entry barriers
b. pure monopoly
c. oligopoly
d. price taker firms
a. price searchers with low entry barriers
b. pure monopoly
c. oligopoly
d. price taker firms
answer
c. oligopoly
question
what is collusion?
a. It involves cooperative actions by sellers at the expense of buyers.
b. It can only be achieved in price-taker markets.
c. It requires competitive actions by sellers to win customers from rival firms.
d. It is exactly the same thing as competition.
a. It involves cooperative actions by sellers at the expense of buyers.
b. It can only be achieved in price-taker markets.
c. It requires competitive actions by sellers to win customers from rival firms.
d. It is exactly the same thing as competition.
answer
a. It involves cooperative actions by sellers at the expense of buyers.
question
The difficulty in analyzing oligopolistic behavior arises from which of the following?
a. The market power of consumers.
b. A large number of firms in the industry.
c. Interdependent nature of oligopolistic decisions.
d. The degree of government regulation of the market structure.
a. The market power of consumers.
b. A large number of firms in the industry.
c. Interdependent nature of oligopolistic decisions.
d. The degree of government regulation of the market structure.
answer
c. Interdependent nature of oligopolistic decisions.
question
At his current level of output, a monopolist has an MR of $10, an MC of $6, and an economic profit of zero. If the market demand curve is downward sloping and his marginal cost curve upward sloping, which of the following is true?
a. The firm should exit the market if he has positive fixed cost.
b. The firm could increase his profit by increasing his output.
c. The firm could increase his profit by increasing his price.
d. The firm is producing his profit-maximizing level of output
a. The firm should exit the market if he has positive fixed cost.
b. The firm could increase his profit by increasing his output.
c. The firm could increase his profit by increasing his price.
d. The firm is producing his profit-maximizing level of output
answer
b. The firm could increase his profit by increasing his output.
question
A monopolist will maximize profits by
a. producing the output where price equals marginal cost.
b. setting his price at the level that will maximize per-unit profit.
c. setting his price as high as possible.
d. producing the output where marginal revenue equals marginal cost
a. producing the output where price equals marginal cost.
b. setting his price at the level that will maximize per-unit profit.
c. setting his price as high as possible.
d. producing the output where marginal revenue equals marginal cost
answer
d. producing the output where marginal revenue equals marginal cost
question
In essence, patents grant their owners which of the following?
a. The exclusive right to use a newly developed process or product forever.
b. A property right to new products and production processes that they have developed.
c. An exemption from laws that prohibit price discrimination.
d. The right to use resources owned by their competitors.
a. The exclusive right to use a newly developed process or product forever.
b. A property right to new products and production processes that they have developed.
c. An exemption from laws that prohibit price discrimination.
d. The right to use resources owned by their competitors.
answer
b. A property right to new products and production processes that they have developed.
question
Why is it difficult to predict the behavior of oligopolistic firms?
a. There are few real-world examples of oligopolies for economists to study.
b. Economists have paid little attention to the topic in recent years and so have not yet applied to it the techniques of modern economic theory.
c. oligopolists make decisions independently of each other.
d. Firms in oligopolistic industries react to each other's behavior in many ways
a. There are few real-world examples of oligopolies for economists to study.
b. Economists have paid little attention to the topic in recent years and so have not yet applied to it the techniques of modern economic theory.
c. oligopolists make decisions independently of each other.
d. Firms in oligopolistic industries react to each other's behavior in many ways
answer
d. Firms in oligopolistic industries react to each other's behavior in many ways
question
Which of the following is most likely to contribute to the presence of monopoly in an industry?
a. inefficiency due to bureaucratic decision-making procedures in the industry
b. an elastic market demand for the product produced by the industry
c. economies of scale
d. controlling over 50 percent of the market
a. inefficiency due to bureaucratic decision-making procedures in the industry
b. an elastic market demand for the product produced by the industry
c. economies of scale
d. controlling over 50 percent of the market
answer
c. economies of scale
question
A profit-maximizing monopolist will continue expanding output as long as
a. economic profit is more than zero.
b. the cost of producing an additional unit exceeds the marginal revenue derived from the unit.
c. marginal revenue exceeds marginal cost.
d. marginal revenue is positive
a. economic profit is more than zero.
b. the cost of producing an additional unit exceeds the marginal revenue derived from the unit.
c. marginal revenue exceeds marginal cost.
d. marginal revenue is positive
answer
c. marginal revenue exceeds marginal cost.
question
A law that requires hairdressers to undergo many hours of training and acquire a license before they can offer haircuts to the public, is an example of a
a. barrier to entry
b. positive externality
c. public good
d. natural monopoly
a. barrier to entry
b. positive externality
c. public good
d. natural monopoly
answer
a. barrier to entry
question
Which of the following factors is least likely to be a barrier limiting the entry of potential competitors into a market?
a. an inelastic demand for a product
b. legally enforced patent rights
c. control over an essential resource
d. licensing
a. an inelastic demand for a product
b. legally enforced patent rights
c. control over an essential resource
d. licensing
answer
a. an inelastic demand for a product
question
What is one key characteristic that is distinctive of an oligopoly market?
a.There is only one firm that produces a product for which there are no good substitutes.
b. The decisions of one seller often influence the price of products, the output, and the profits of rival firms.
c. There are many sellers in the market and each is small relative to the total market.
d. The demand curve facing each firm is downward sloping, with a marginal revenue curve that lies below the firm's demand curve.
a.There is only one firm that produces a product for which there are no good substitutes.
b. The decisions of one seller often influence the price of products, the output, and the profits of rival firms.
c. There are many sellers in the market and each is small relative to the total market.
d. The demand curve facing each firm is downward sloping, with a marginal revenue curve that lies below the firm's demand curve.
answer
b. The decisions of one seller often influence the price of products, the output, and the profits of rival firms.
question
Which of the following is a unique characteristic of the oligopolistic market structure?
a. mutual interdependence among firms in demand, and thus, in price decisions
b. product differentiation among the products produced by individual firms
c. low barriers to entry
d. a large number of firms producing highly differentiated products that are complements to each other
a. mutual interdependence among firms in demand, and thus, in price decisions
b. product differentiation among the products produced by individual firms
c. low barriers to entry
d. a large number of firms producing highly differentiated products that are complements to each other
answer
a. mutual interdependence among firms in demand, and thus, in price decisions
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