question
Market with only one buyer (e.g., Department of Defense or Company Towns). Some employees supply a single employer
answer
monopsony
question
Ability of a seller or buyer to affect the price of a good.
answer
market power
question
a firm is earning a normal return on its investment, it is doing as well as it could by investing its money elsewhere
answer
zero economic profit
question
all firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded
answer
long run competitive equilibrium
question
industry whose long run supply curve is downward sloping
answer
decreasing cost industry
question
the long run supply curve is upward sloping, expansion in the industry drives input prices up
answer
increasing cost industry
question
industry whose long run supply curve is horizontal
answer
constant cost industry
question
MR curve always has ___ the slope of the demand curve
answer
2x
question
lerner index gives you
answer
profit maximizing markup, or percent of the firms price that is greater than its marginal cost.
question
markup from Lerner index depends on
answer
the price elasticity of demand that the firm faces
question
as demand becomes more inelastic, the elasticity coefficient becomes
answer
smaller in absolute value and the markup should be a larger fraction of price
question
as demand becomes more elactic
answer
the optimal markup falls
question
when demand is perfectly elastic, the firm faces a _____ demand curve, and any effort to charge a higher price will result in a
answer
horizontal, loss in sales
question
when the lerner index is equal to zero
answer
markup is zero, sells at a price equal to marginal cost
question
when demand is perfectly elastic, the firm faces a _____ demand curve,
the value of the elasticity coefficient = ______ and the lerner index = ____
the value of the elasticity coefficient = ______ and the lerner index = ____
answer
vertical
question
when the lerner index is equal to 1
answer
the price is all markup, the profit maximizing price can be very high
question
1) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
answer
A) the demand curve for the firm's product is horizontal.
question
2) If all conditions for a perfectly competitive market are met,
answer
B) firms' demand curves are horizontal.
question
#3 PQ
answer
...
question
4) If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
answer
D) increase output.
question
5) If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be true?
answer
A) p < AVC for all levels of output.
question
6) If a firm is a price taker, then its marginal revenue will always equal
answer
D) price.
question
7) For a monopoly, marginal revenue is less than price because
answer
the demand for the firm's output is downward sloping.
question
8) If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal revenue function is
answer
a - 2bQ.
question
9) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization
answer
B) is achieved when 21 units are produced.
question
10) If the demand for a firm's output is perfectly elastic, then the firm's Lerner Index equals
answer
B) zero.
question
11) A perfect price discriminator
answer
D) charges each buyer her reservation price.
question
12) Bob is the only carpet installer in a small isolated town. The above figure shows the demand curves of two distinct groups of customers-residential and business. If the marginal cost of installing carpet is a constant $1 per sq yard, what price does Bob charge each segment?
answer
A) $5.50 in the residential market and $8 in the business market
question
13) Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. Potential consumer surplus equals
answer
$16.
question
If a perfectly competitive firm can sell 200 computers at $700 each, in order to sell one more computer, the firm:
answer
C)
Can sell the 201st computer at $700.
Can sell the 201st computer at $700.
question
2.
If a perfectly competitive firm is producing a rate of output for which MC exceeds price, then the firm:
A)
Must have an economic loss.
B)
Can increase its profit by increasing output.
C)
Can increase its profit by decreasing output.
D)
Is maximizing profit.
If a perfectly competitive firm is producing a rate of output for which MC exceeds price, then the firm:
A)
Must have an economic loss.
B)
Can increase its profit by increasing output.
C)
Can increase its profit by decreasing output.
D)
Is maximizing profit.
answer
C)
Can increase its profit by decreasing output.
Can increase its profit by decreasing output.
question
A firm that can sell all of its output at the prevailing market price:
A)
Is a competitive firm.
B)
Receives less than its marginal cost.
C)
Faces a downward-sloping demand curve.
D)
Has substantial market power.
A)
Is a competitive firm.
B)
Receives less than its marginal cost.
C)
Faces a downward-sloping demand curve.
D)
Has substantial market power.
answer
A
question
4.
Suppose the cost of fertilizer (a variable input) decreases for peach farmers. In order to maximize profits, ceteris paribus, peach farmers should:
A)
Decrease output.
B)
Keep output the same since the market price did not change.
C)
Increase output.
D)
Increase prices.
Suppose the cost of fertilizer (a variable input) decreases for peach farmers. In order to maximize profits, ceteris paribus, peach farmers should:
A)
Decrease output.
B)
Keep output the same since the market price did not change.
C)
Increase output.
D)
Increase prices.
answer
C
question
Profit is:
A)
TR - FC.
B)
Q × (P - AVC).
C)
(P × Q) - TC.
D)
All of the above.
A)
TR - FC.
B)
Q × (P - AVC).
C)
(P × Q) - TC.
D)
All of the above.
answer
C
question
Short-run profits are maximized, for a perfectly competitive firm, at the rate of output where:
A)
Marginal Revenue is equal to marginal cost.
B)
Total revenue is maximized.
C)
Marginal revenue is zero.
D)
Average total costs are maximized.
A)
Marginal Revenue is equal to marginal cost.
B)
Total revenue is maximized.
C)
Marginal revenue is zero.
D)
Average total costs are maximized.
answer
A
question
7.
Which of the following is true about the demand curve confronting a competitive firm?
A)
Horizontal, as is market demand.
B)
Horizontal, while market demand is downward-sloping.
C)
Downward-sloping, while market demand is flat.
D)
Downward-sloping as in market demand.
Which of the following is true about the demand curve confronting a competitive firm?
A)
Horizontal, as is market demand.
B)
Horizontal, while market demand is downward-sloping.
C)
Downward-sloping, while market demand is flat.
D)
Downward-sloping as in market demand.
answer
B
question
8.
Which of the following represents the change in total revenue that results from a 1-unit increase in the quantity sold?
A)
Marginal cost.
B)
Total revenue.
C)
Marginal profit.
D)
Marginal revenue.
Which of the following represents the change in total revenue that results from a 1-unit increase in the quantity sold?
A)
Marginal cost.
B)
Total revenue.
C)
Marginal profit.
D)
Marginal revenue.
answer
D
question
10.
The difference between the total revenue and total cost curves at a given output is equal to:
A)
Total profit.
B)
Profit per unit.
C)
Average revenue.
D)
Average total cost.
The difference between the total revenue and total cost curves at a given output is equal to:
A)
Total profit.
B)
Profit per unit.
C)
Average revenue.
D)
Average total cost.
answer
A
question
11.
A firm experiencing economic losses will still continue to produce output in the short run as long as:
A)
Revenues are greater than total fixed cost.
B)
Price is above average variable cost.
C)
MR = MC.
D)
All of the above.
A firm experiencing economic losses will still continue to produce output in the short run as long as:
A)
Revenues are greater than total fixed cost.
B)
Price is above average variable cost.
C)
MR = MC.
D)
All of the above.
answer
B
question
A competitive firm is one:
A)
That has a large advertising budget.
B)
Whose output is so small relative to the market supply that it has no effect on market price.
C)
That can alter the market price of the good(s) it produces.
D)
That can raise price to increase profit.
A)
That has a large advertising budget.
B)
Whose output is so small relative to the market supply that it has no effect on market price.
C)
That can alter the market price of the good(s) it produces.
D)
That can raise price to increase profit.
answer
B
question
A firm that makes zero economic profits:
A)
Must eventually go bankrupt.
B)
Does not cover its variable costs and should shut down.
C)
Incurs an accounting loss.
D)
Covers all its costs, including a provision for normal profit.
A)
Must eventually go bankrupt.
B)
Does not cover its variable costs and should shut down.
C)
Incurs an accounting loss.
D)
Covers all its costs, including a provision for normal profit.
answer
D
question
For perfectly competitive firms, price:
A)
Is greater than marginal revenue.
B)
Is less than marginal revenue.
C)
Is equal to marginal revenue.
D)
And marginal revenue are not related.
A)
Is greater than marginal revenue.
B)
Is less than marginal revenue.
C)
Is equal to marginal revenue.
D)
And marginal revenue are not related.
answer
C
question
The market equilibrium price occurs where:
A)
Price equals the minimum of short-run average variable cost.
B)
Market supply crosses market demand.
C)
A firm's marginal revenue equals short-run marginal cost.
D)
A firm's short-run marginal cost equals average total cost.
A)
Price equals the minimum of short-run average variable cost.
B)
Market supply crosses market demand.
C)
A firm's marginal revenue equals short-run marginal cost.
D)
A firm's short-run marginal cost equals average total cost.
answer
B
question
When the short-run marginal cost curve is upward-sloping:
A)
The average total cost curve is upward-sloping.
B)
The average total cost curve is above the marginal cost curve.
C)
Diminishing returns occur with greater output.
D)
There are diseconomies of scale.
A)
The average total cost curve is upward-sloping.
B)
The average total cost curve is above the marginal cost curve.
C)
Diminishing returns occur with greater output.
D)
There are diseconomies of scale.
answer
C
question
Other things being equal, as more firms enter a market, the market supply curve:
A)
Becomes more inelastic.
B)
Shifts to the left.
C)
Shifts to the right.
D)
Intersects the demand curve at a higher price.
A)
Becomes more inelastic.
B)
Shifts to the left.
C)
Shifts to the right.
D)
Intersects the demand curve at a higher price.
answer
C
question
20.
Examples of barriers to entry include:
A)
Government regulation.
B)
Lack of control over resource prices.
C)
Diseconomies of scale.
D)
Rising marginal cost.
Examples of barriers to entry include:
A)
Government regulation.
B)
Lack of control over resource prices.
C)
Diseconomies of scale.
D)
Rising marginal cost.
answer
A
question
If long-run economic losses are being experienced in a competitive market:
A)
More firms will enter the market.
B)
The market supply curve will shift to the right.
C)
Equilibrium price will rise as firms exit.
D)
All of the above.
A)
More firms will enter the market.
B)
The market supply curve will shift to the right.
C)
Equilibrium price will rise as firms exit.
D)
All of the above.
answer
C
question
The entry of firms into a market:
A)
Reduces the equilibrium price.
B)
Reduces the profits of existing firms in the market.
C)
Shifts the market supply curve to the right.
D)
All of the above.
A)
Reduces the equilibrium price.
B)
Reduces the profits of existing firms in the market.
C)
Shifts the market supply curve to the right.
D)
All of the above.
answer
D
question
For a competitive market in the long run:
A)
Economic losses induce firms to shut down.
B)
Economic profits induce firms to enter until profits are normal.
C)
Accounting profit is zero.
D)
All of the above.
A)
Economic losses induce firms to shut down.
B)
Economic profits induce firms to enter until profits are normal.
C)
Accounting profit is zero.
D)
All of the above.
answer
B
question
A barrier to entry is:
A)
A law established by the government to protect new industries.
B)
A commitment on the part of big business to allow smaller companies to compete.
C)
An obstacle that prevents additional workers from entering an industry, such as a union.
D)
An obstacle that makes it difficult for new firms to enter a market.
A)
A law established by the government to protect new industries.
B)
A commitment on the part of big business to allow smaller companies to compete.
C)
An obstacle that prevents additional workers from entering an industry, such as a union.
D)
An obstacle that makes it difficult for new firms to enter a market.
answer
D
question
Suppose a monopoly firm produces tables and can sell 10 tables per month at a price of $500 per table. In order to increase sales by one table per month, the monopolist must lower the price of its tables by $30 to $470 per table. The marginal revenue of the eleventh table is:
A)
$170.
B)
$-30.
C)
$70.
D)
$5170.
A)
$170.
B)
$-30.
C)
$70.
D)
$5170.
answer
A
question
Which of the following is true for a monopolist?
A)
It faces a downward-sloping demand curve.
B)
It must lower its price on all of its units in order to sell any additional units.
C)
Its marginal revenue curve is below its demand curve.
D)
All of the above.
A)
It faces a downward-sloping demand curve.
B)
It must lower its price on all of its units in order to sell any additional units.
C)
Its marginal revenue curve is below its demand curve.
D)
All of the above.
answer
D
question
At the long-run profit-maximizing equilibrium in a monopoly:
A)
Economic profits are zero.
B)
Price equals the minimum average total cost.
C)
Both a and b are correct.
D)
Marginal revenue equals marginal cost.
A)
Economic profits are zero.
B)
Price equals the minimum average total cost.
C)
Both a and b are correct.
D)
Marginal revenue equals marginal cost.
answer
D
question
31.
The demand curve faced by a monopoly firm is:
A)
Perfectly inelastic reflecting the firm's dominance of the market.
B)
Perfectly elastic reflecting the fact that the monopolist can sell as much as it wants as the price it sets.
C)
The same as the market demand for the product.
D)
Below its marginal revenue curve.
The demand curve faced by a monopoly firm is:
A)
Perfectly inelastic reflecting the firm's dominance of the market.
B)
Perfectly elastic reflecting the fact that the monopolist can sell as much as it wants as the price it sets.
C)
The same as the market demand for the product.
D)
Below its marginal revenue curve.
answer
C
question
Which of the following contributes to a firm maintaining a monopoly?
A)
Exclusive control of an important input.
B)
A large number of firms in the industry.
C)
The existence of substitute goods.
D)
All of the above.
A)
Exclusive control of an important input.
B)
A large number of firms in the industry.
C)
The existence of substitute goods.
D)
All of the above.
answer
A
question
Which of the following rules will always be satisfied when any firm (i.e. perfectly competitive or monopoly) has maximized profits?
A)
Price = lowest level of ATC.
B)
Price = MC.
C)
MR = MC.
D)
Total revenues are also maximized.
A)
Price = lowest level of ATC.
B)
Price = MC.
C)
MR = MC.
D)
Total revenues are also maximized.
answer
C)
MR = MC.
MR = MC.
question
If a competitive industry in long-run equilibrium experiences an increase in fixed costs, the short-run response of individuals firms will be:
A)
To raise their price to offset the higher costs.
B)
To increase price, decrease output, and earn lower profits.
C)
To keep output and price constant but earn lower profits.
D)
To lower price, raise output, and earn higher profits.
A)
To raise their price to offset the higher costs.
B)
To increase price, decrease output, and earn lower profits.
C)
To keep output and price constant but earn lower profits.
D)
To lower price, raise output, and earn higher profits.
answer
C
question
Assume there exists a monopoly firm earning economic profits. If the demand for this firm's product increases, the firm will.
A)
Raise price, raise output, and earn higher profits.
B)
Lower price, lower output, and earn higher profits.
C)
Lower price, raise output, amd earn higher profits.
D)
Keep price and output constant while earning higher profits.
A)
Raise price, raise output, and earn higher profits.
B)
Lower price, lower output, and earn higher profits.
C)
Lower price, raise output, amd earn higher profits.
D)
Keep price and output constant while earning higher profits.
answer
A
question
If a monopoly industry is characterized by having positive economics profits, in the long-run economists expect
A)
Price to decrease as new firms enter the industry.
B)
Profits to eventually fall to zero due to higher competition.
C)
Profits to continue if significant barriers to entry exist.
D)
The firm will decrease it's price to treat customers 'fairly'
A)
Price to decrease as new firms enter the industry.
B)
Profits to eventually fall to zero due to higher competition.
C)
Profits to continue if significant barriers to entry exist.
D)
The firm will decrease it's price to treat customers 'fairly'
answer
C
question
A special license is required to operate a taxi in many cities. The number of licenses is restricted. More drivers want licenses than are issued. This describes a non-perfectly competitive market because
answer
firms cannot freely enter and exit the market.
question
7) If a firm operates in a perfectly competitive market, then it will most likely
answer
settle for whatever price is offered.
question
If a firm operates in a perfectly competitive market, then
answer
no firms will advertise.
question
16) If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will
answer
decrease output
question
17) A firm should always shut down if its revenue is
answer
D) less than its avoidable costs.
question
If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must betrue?
answer
p < AVC for all levels of output
question
21) A firm will shut down in the short run if
answer
C) total revenue from operating would not cover variable costs.
question
23) If a firm is a price taker, then its marginal revenue will always equal
answer
price.
question
Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
answer
has no variable costs.
question
27) In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the output and
answer
average variable cost
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