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Econ Midterm 2 (SOS)

question
Which of the following is NOT a determinant of market structure?
A) The number of sellers.
B) The nature of the product.
C) The ease of entering the industry.
D) The capital-labour ratio of the firm.
E) The market share of the sellers.
answer
D
question
A firm is said to have "market power" only when
A) it has the ability to influence the price of its product.
B) it has the ability to choose its own profit-maximizing level of output.
C) its demand curve is the market demand curve.
D) it is one of 10 or fewer firms in the industry.
E) it is one of 25 or fewer firms in the industry.
answer
A
question
In order to decide the appropriate output to produce, the manager of a perfectly competitive firm needs to know
A) the industry or market demand.
B) the industry or market supply.
C) what other firms in the industry are producing.
D) the prevailing market price for the firm's output.
E) its competitors' market strategies.
answer
D
question
The price elasticity of demand faced by an individual wheat farmer would come closest to which following value?
A) 0.00007
B) 0.7
C) 1.0
D) 71.0
E) 71 000
answer
E
question
Average revenue (AR) for an individual firm in a perfectly competitive market equals
A) MR/TR.
B) MR/q.
C) MR × q.
D) MR.
E) TR/MR.
answer
D
question
For any firm operating in any market structure, marginal revenue is defined as
A) total revenue divided by the number of units sold.
B) the change in total revenue resulting from the sale of an additional unit of the product.
C) the total amount received by the seller from the sale of a product.
D) the change in price resulting from the sale of an additional unit of the product.
E) price times quantity of the product sold.
answer
B
question
Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.04 per unit and the firm is selling 1 million units per month. Now suppose the firm increases its stated price to $0.05 per unit. According to the theory of perfect competition, the result will be
A) total revenue for this firm will increase, but by less than $10 000 per month.
B) total revenue will increase from $40 000 to $50 000 per month.
C) total revenue will decrease from $50 000 to $40 000 per month.
D) total revenue for this firm will fall dramatically, perhaps to zero.
E) no change in the firm's total revenue.
answer
D
question
Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. Its output is 1500 tonnes per month, the marginal cost of the last tonne produced is $710, and the average revenue per tonne is $620. In the short run, this firm should
A) reduce output.
B) increase output until average revenue is equal to marginal cost.
C) increase output until marginal revenue is equal to marginal cost.
D) definitely shut down.
E) The price of the product is not known, so it is not possible to determine.
answer
A
question
If a perfectly competitive firm is faced with average revenue below average variable cost it will produce zero output so as to reduce its
A) costs to below its revenue.
B) costs to zero.
C) losses to the amount of its fixed costs.
D) losses to the amount of its variable costs.
E) losses to the amount of its marginal costs.
answer
C
question
Suppose a typical firm in a competitive industry has the following data in the short run: price = $10; output = 100 units; ATC = $8; AVC = $7. What will likely happen in the long run?
A) In the long run the industry will expand because firms are earning economic profits.
B) In the long run the industry will contract because firms are suffering losses.
C) The size of the industry will remain the same in the long run.
D) The typical firm would shut down, until the remaining firms have a higher price.
E) There is not enough information to formulate an answer.
answer
A
question
One similarity between a monopolist and a perfectly competitive firm is that both
A) are large relative to their markets.
B) may have similarly shaped cost curves.
C) choose the price at which to sell their product.
D) can make economic profits in the long run.
E) need to know the shape of the market demand curve.
answer
B
question
The marginal revenue curve facing a single-price monopolist
A) is the same as the average revenue curve facing the monopolist.
B) is the same as the demand curve facing the monopolist.
C) shows the change in the profit for the firm.
D) lies below the average revenue curve.
E) at first falls to a minimum and then rises as output is increased.
answer
D
question
The average revenue curve for a single-price monopolist
A) is a horizontal line, equal to the price of its product.
B) lies below its demand curve.
C) coincides with its demand curve.
D) slopes upward to the right.
E) does not exist.
answer
C
question
At the profit-maximizing level of output for a single-price monopolist, price
A) always exceeds average total cost.
B) equals marginal cost.
C) exceeds marginal cost.
D) equals marginal revenue.
E) is below marginal revenue.
answer
C
question
Which of the following statements about single-price monopolists is correct?
A) The profit-maximizing level of output is the same as the total revenue-maximizing level of output.
B) The average revenue curve lies above the demand curve.
C) AR is greater than MR.
D) Price elasticity of demand will be equal to one if the firm is profit-maximizing.
E) Price equals marginal cost at the profit-maximizing level of output.
answer
C
question
Suppose the technology of an industry is such that the typical firm's minimum efficient scale is 8000 units per month at an average long-run cost of $5 per unit. If the total quantity demanded at a price of $5 per unit is 8500 units per month, the likely result would be
A) a cartel.
B) a concentrated oligopoly.
C) a natural monopoly.
D) price discrimination.
E) perfectly competitive firms.
answer
C
question
The cartelization of an industry with a homogeneous product usually means that
A) member firms have agreed to cooperate in reducing costs.
B) member firms have agreed to reduce their joint output.
C) the demand curve facing the industry must be linear.
D) the demand curve facing the industry must be elastic.
E) member firms have agreed to reduce investment.
answer
B
question
One of the reasons cartels are considered unstable is that
A) member firms reduce their investment, thereby becoming uncompetitive over time.
B) it is inefficient to manage individual firms collectively.
C) there are wide fluctuations in price as cartel members vary their output.
D) consumers seek out substitutes to the cartel product.
E) individual members of the cartel have an incentive to violate the cartel agreement.
answer
E
question
The main argument of Joseph Schumpeter's idea of "creative destruction" is that
A) the existence of monopolies leads to destruction of the environment.
B) short-run profits created by the existence of monopolies will lead to antitrust legislation, which will force the fragmentation of monopolies into competitive industries.
C) perfectly competitive industries are characterized by more productive innovation and productivity growth than monopolistic industries, which Schumpeter regarded as destructive.
D) monopoly profits lead to innovation in an effort to sustain those profits.
E) monopolies create profits for themselves at the expense of the destruction of consumer surplus.
answer
D
question
Price discrimination, if possible, allows a price-setting firm to increase its profits by
A) shifting its cost curves downward.
B) raising the price above the competitive price.
C) charging different prices according to the willingness to pay of each consumer.
D) reducing costs through a reduction in output.
E) charging different prices according to the different marginal cost on each unit.
answer
C
question
Which of the following is probably NOT an example of price discrimination?
A) A doctor charging for his services according to the income of his patients.
B) Train fares that are less expensive for weekend travel than weekday travel.
C) A theatre charging children under 12 less for a movie ticket than it charges an adult.
D) Universities charging out-of-province students higher tuition fees.
E) A supermarket charging more for strawberries in December than in June.
answer
E
question
If a monopolist is practicing perfect price discrimination, then
A) the producer surplus is zero.
B) consumer surplus is zero.
C) costs are lower than for the non-price-discriminating monopolist.
D) demand must be inelastic.
E) the monopolist is not profit maximizing.
answer
B
question
Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $100 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $85 and marginal revenue in segment B is $105. How can this firm maximize its profit?
A) increase the output in segment A and decrease the output in segment B
B) increase the output in segments A and B
C) decrease the output in segment A and increase the output in segment B
D) decrease the output in segments A and B
E) maintain the current output and its allocation across segments
answer
C
question
A characteristic common to most imperfectly competitive markets is
A) inelastic market demand curves.
B) a homogeneous product.
C) non-price competition among firms.
D) unexploited economies of scale.
E) common pricing among firms.
answer
C
question
One difference between a perfectly competitive market and a monopolistically competitive market is that
A) there are no barriers to entry in monopolistic competition.
B) there are no barriers to exit in monopolistic competition.
C) there is no product differentiation in perfect competition
D) there is no product differentiation in monopolistic competition
E) there is strategic interaction among firms in monopolistic competition.
answer
C
question
In a monopolistically competitive industry, the freedom of entry and exit leads to
A) a negatively sloped demand curve for the industry.
B) strategic behaviour with regard to other firms in the industry.
C) brand proliferation.
D) zero profits in long-run equilibrium.
E) deficient capacity in the industry.
answer
D
question
When a monopolistically competitive industry is in long-run equilibrium, the excess capacity in an individual firm is indicated by the difference between
A) price and marginal cost.
B) the output at which ATC is at a minimum and the output at which price equals marginal cost.
C) zero and the output at which the demand curve is tangent to the ATC curve.
D) price and average cost.
E) the output at which ATC is at a minimum and the output at which marginal revenue is equal to marginal cost.
answer
E
question
Oligopolists make decisions after taking into account the expected reaction of their competitors. In doing this, oligopolists are exhibiting
A) non-strategic behaviour.
B) collusive behaviour.
C) cooperative behaviour.
D) non-cooperative behaviour.
E) strategic behaviour.
answer
E
question
Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The non-cooperative outcome in this situation is
A) both firms bid $100.
B) both firms bid $180.
C) one firm bids $100, the other firm bids $180.
D) both firms bid $50.
E) both firms bid $90.
answer
A
question
Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The cooperative outcome in this situation is
A) both firms bid $100.
B) both firms bid $180.
C) one firm bids $100, the other firm bids $180.
D) both firms bid $50.
E) both firms bid $90.
answer
B
question
Which of the following is an incorrect statement about a Nash equilibrium?
A) A Nash equilibrium is an example of a non-cooperative equilibrium.
B) In a Nash equilibrium, all players are maximizing their payoffs given the current behaviour of the other players.
C) In a Nash equilibrium, all players are better off than they would be with any other combination of strategies.
D) A Nash equilibrium is a self-policing equilibrium.
E) Once a Nash equilibrium is established, no individual firm has an incentive to depart from it.
answer
C
question
"Brand proliferation" in an oligopolistic industry
A) allows easier entry to a new entrant with small sales.
B) can shift the average total cost curve down and raise the overall minimum scale of operation.
C) allows new entrants to the industry to gain significant market share.
D) will generally reduce the expected market share of new entrants to the industry.
E) allows firms to cooperate to maximize their joint profits.
answer
D
question
Both empirical evidence and everyday observation suggest that oligopolies contribute to economic growth in the very-long-run by
A) achieving allocative efficiency.
B) consistently producing at full-capacity output.
C) achieving technological improvements and innovations through research and development.
D) decreasing minimum efficient scale.
E) rarely laying off workers.
answer
C
question
In a typical oligopolistic market, there are
A) no barriers to entry, but firms sell differentiated products.
B) substantial barriers to entry and firms interact strategically with each other.
C) no barriers to entry and firms sell homogeneous products.
D) substantial entry barriers, and firms are too large to strategically interact with each other.
E) no barriers to entry and firms interact strategically with each other.
answer
B
question
For an entire economy, allocative efficiency requires that
A) goods are allocated equitably across markets.
B) marginal cost equals price for all goods.
C) MRP is equated for all factors of production.
D) price equals average cost for all goods.
E) price is greater than marginal cost for all goods.
answer
B
question
Consider two firms, A and B, that are producing the same product but with different marginal costs. In this case,
A) a reallocation of output between the firms can lower the industry's total cost.
B) neither firm is producing its output at the lowest attainable cost.
C) some resources must be unemployed.
D) each firm is being wasteful.
E) one firm is not maximizing profits.
answer
A
question
Allocative efficiency is actively sought
A) by profit-maximizing firms in all market structures.
B) only by perfectly-competitive firms.
C) only by profit-maximizing imperfectly-competitive firms.
D) by none of the firms in any market.
E) by all firms in all markets.
answer
D
question
Consider a monopolistically competitive industry in long-run equilibrium. Will this industry be productively efficient?
A) Yes. Since the firms are in long-run equilibrium, they will all be producing at the minimum of their LRAC curves.
B) Yes. Since the firms are in long-run equilibrium, they will all be operating on their LRAC curves.
C) Yes. In long-run equilibrium, each firm is producing at an output level where price is equal to marginal cost.
D) No. Firms are selling their output at a level where price exceeds marginal cost and thus, by definition, cannot be productively efficient.
E) No. Since firms are selling differentiated products and there is no industry-wide price, we cannot conclude that marginal cost will be equated across all firms.
answer
E
question
Consider an industry with three profit-maximizing firms producing identical soccer jerseys. At their current levels of output, Firm A has a MC of $22, Firm B has a MC of $26, and Firm C has a MC of $27. Each firm is minimizing its costs for its given level of output. Which of the following statements is definitely true?
A) Each firm and the industry are productively efficient.
B) Each firm is productively efficient but the industry is not.
C) The industry is productively efficient but each firm is not.
D) Each firm is allocatively efficient but the industry is not.
E) Each firm and the industry are allocatively efficient.
answer
B
question
Traditionally, economists have regarded monopoly as an undesirable market structure because
A) of its ability to minimize costs through large output.
B) it is allocatively inefficient.
C) of its wasteful innovation.
D) it is usually characterized by wastefully confrontational labour relations.
E) it allows producers to earn large profits.
answer
B
question
The deadweight loss of monopoly is
A) its fixed cost.
B) any negative profit due to cyclical decreases in demand.
C) the loss of economic surplus due to the low monopoly output level.
D) the cost of maintaining effective barriers to entry.
E) the extra administrative costs of operating a large firm.
answer
C
question
In general, which of the following statements guides policymakers with respect to a natural monopoly? The firm
A) should be broken up into a large number of competitive firms.
B) should be taken over by government and run as a crown corporation.
C) is the best way to produce a given product and should be left alone.
D) generally needs to be regulated in order to reduce allocative inefficiency.
E) will not achieve productive efficiency without regulation.
answer
D
question
Choose the statement that best describes the dilemma facing the regulator of a natural monopoly.
A) Marginal-cost pricing leads to profit or losses; average-cost pricing results in allocative inefficiency.
B) Marginal-cost pricing will result in allocative inefficiency; average-cost pricing leads to profits or losses.
C) Marginal-cost pricing will result in productive and allocative inefficiency; average-cost pricing will not.
D) Both kinds of regulation have the same implications for allocative efficiency.
E) There is no dilemma.
answer
A
question
The economic efficiency of a natural monopoly can be improved with the use of two-part tariffs because it allows the monopoly to
A) charge users according to their willingness to pay.
B) charge residential users different rates than business users.
C) charge users according to their ability to pay.
D) charge users separately for fixed and variable costs.
E) lower its total costs.
answer
D
question
explicit costs
answer
The actual payments a firm makes to its factors of production and other suppliers.
question
implicit costs
answer
Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
question
accounting profit formula
answer
revenues - explicit costs
question
economic profit formula
answer
revenue - explicit costs - implicit costs
question
if economic profit is less than zero...
a. will induce firm to exit
b. will attract firm entry
answer
b
question
if economic profit is greater than 0...
a. will induce firm to exit
b. will attract firm entry
answer
b
question
production function
answer
the relationship between quantity of inputs used to make a good and the quantity of output of that good (in the short run)
question
average product
answer
the output of a typical worker
question
average product formula
answer
AP=Q/L
question
Marginal product
answer
the change in the total output resulting from the use of one additional (or one less) unit of an input (one additional worker)
question
marginal product formula
answer
MP = ΔTP / Δ L
question
law of diminishing returns
answer
increasing amounts of X given to a fixed factor will eventually decrease marginal product (hiring more workers will help productivity at the beginning, but at some point there will be too many which will result in productivity decreasing)
- if there is a fixed amount of physical capital (ex office space), eventually the marginal product begins to decline
question
in the short run, when TP is rising at an increasing rate (curving up) MP is...
a. negative and rising
b. negative and falling
c. positive and rising
d. positive and falling
answer
c
question
when TP is rising at a decreasing rate (curving down), MP is...
a. negative and rising
b. negative and falling
c. positive and rising
d. positive and falling
answer
d
question
when TP is falling, MP is
a. positive
b. negative
c. none of the above
answer
b
question
fixed costs
answer
Costs that do not vary with the quantity of output produced (rent, full time staff)
question
average fixed cost formula
answer
AFC= FC/Q
question
Variable cost
answer
vary with quantity of output produced (ex. products, electricity)
question
Average variable cost formula
answer
AVC = VC/Q
question
Total cost formula
answer
TC= FC + VC
question
Average total cost forumla
answer
ATC = TC/Q
question
ATC =
answer
AFC + AVC
question
Marginal Cost
answer
the change in total cost associated with a change in the quantity of output
question
Marginal cost formula
answer
MC = ΔTC/ΔQ
question
Because fixed costs do not vary with output, the only part of TC that changes is the
a. variable cost
b. marginal cost
c. Average cost
answer
a
question
Marginal cost ------ as quantity of goods produced increases, because of diminishing MP
a. decrease
b. stays the same
c. increase
answer
c
question
marginal product of labour is the increase in total product that results from a
a. one-unit increase in the quantity of labour employed, other inputs remaining the same
b. one unit increase in the quantity of fixed inputs employed, holding the quantity of the variable inputs constant
c. one unit increase in both quantity of variable and fixed inputs
d. change in costs of labour
answer
a
question
marginal cost ---- with quantity of output
a. falls
b. rises
answer
b
question
the average total cost curve is
a. straight line
b. concave
c. u shaped
answer
c
question
AVC ---- as output increases because of diminishing marginal product
a. rises
b. falls
answer
a
question
AFC ----- as output increases because FC are spread over more units
a. inclines
b. declines
answer
b
question
the MC crosses the ATC where and why
answer
the bottom of the u-shape at the quantity that minimizes ATC (point efficient scale)
question
An increase in the price of variable inputs (in the short run)
Ex. the average weight in the room
answer
shifts up, MC, AVC and ATC
question
an increase in the price of fixed inputs
answer
-shifts up ATC
- leaves MC and AVC UNCHANGED
question
An increase in the quantity of the fixed factor
answer
- raises productivity
(MC and AVC shift DOWN)
- Raises fixed costs (AFC shifts UP)
- Has an ambiguous (one way or another) effect on ATC
question
short run- some of the firms factors of production are
answer
fixed
question
long run - firms factors of production ----- but ---- is fixed
answer
varied, technology
question
very long run - all the firms factors of production and technology can be
answer
varied
1 of 82
question
Which of the following is NOT a determinant of market structure?
A) The number of sellers.
B) The nature of the product.
C) The ease of entering the industry.
D) The capital-labour ratio of the firm.
E) The market share of the sellers.
answer
D
question
A firm is said to have "market power" only when
A) it has the ability to influence the price of its product.
B) it has the ability to choose its own profit-maximizing level of output.
C) its demand curve is the market demand curve.
D) it is one of 10 or fewer firms in the industry.
E) it is one of 25 or fewer firms in the industry.
answer
A
question
In order to decide the appropriate output to produce, the manager of a perfectly competitive firm needs to know
A) the industry or market demand.
B) the industry or market supply.
C) what other firms in the industry are producing.
D) the prevailing market price for the firm's output.
E) its competitors' market strategies.
answer
D
question
The price elasticity of demand faced by an individual wheat farmer would come closest to which following value?
A) 0.00007
B) 0.7
C) 1.0
D) 71.0
E) 71 000
answer
E
question
Average revenue (AR) for an individual firm in a perfectly competitive market equals
A) MR/TR.
B) MR/q.
C) MR × q.
D) MR.
E) TR/MR.
answer
D
question
For any firm operating in any market structure, marginal revenue is defined as
A) total revenue divided by the number of units sold.
B) the change in total revenue resulting from the sale of an additional unit of the product.
C) the total amount received by the seller from the sale of a product.
D) the change in price resulting from the sale of an additional unit of the product.
E) price times quantity of the product sold.
answer
B
question
Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.04 per unit and the firm is selling 1 million units per month. Now suppose the firm increases its stated price to $0.05 per unit. According to the theory of perfect competition, the result will be
A) total revenue for this firm will increase, but by less than $10 000 per month.
B) total revenue will increase from $40 000 to $50 000 per month.
C) total revenue will decrease from $50 000 to $40 000 per month.
D) total revenue for this firm will fall dramatically, perhaps to zero.
E) no change in the firm's total revenue.
answer
D
question
Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. Its output is 1500 tonnes per month, the marginal cost of the last tonne produced is $710, and the average revenue per tonne is $620. In the short run, this firm should
A) reduce output.
B) increase output until average revenue is equal to marginal cost.
C) increase output until marginal revenue is equal to marginal cost.
D) definitely shut down.
E) The price of the product is not known, so it is not possible to determine.
answer
A
question
If a perfectly competitive firm is faced with average revenue below average variable cost it will produce zero output so as to reduce its
A) costs to below its revenue.
B) costs to zero.
C) losses to the amount of its fixed costs.
D) losses to the amount of its variable costs.
E) losses to the amount of its marginal costs.
answer
C
question
Suppose a typical firm in a competitive industry has the following data in the short run: price = $10; output = 100 units; ATC = $8; AVC = $7. What will likely happen in the long run?
A) In the long run the industry will expand because firms are earning economic profits.
B) In the long run the industry will contract because firms are suffering losses.
C) The size of the industry will remain the same in the long run.
D) The typical firm would shut down, until the remaining firms have a higher price.
E) There is not enough information to formulate an answer.
answer
A
question
One similarity between a monopolist and a perfectly competitive firm is that both
A) are large relative to their markets.
B) may have similarly shaped cost curves.
C) choose the price at which to sell their product.
D) can make economic profits in the long run.
E) need to know the shape of the market demand curve.
answer
B
question
The marginal revenue curve facing a single-price monopolist
A) is the same as the average revenue curve facing the monopolist.
B) is the same as the demand curve facing the monopolist.
C) shows the change in the profit for the firm.
D) lies below the average revenue curve.
E) at first falls to a minimum and then rises as output is increased.
answer
D
question
The average revenue curve for a single-price monopolist
A) is a horizontal line, equal to the price of its product.
B) lies below its demand curve.
C) coincides with its demand curve.
D) slopes upward to the right.
E) does not exist.
answer
C
question
At the profit-maximizing level of output for a single-price monopolist, price
A) always exceeds average total cost.
B) equals marginal cost.
C) exceeds marginal cost.
D) equals marginal revenue.
E) is below marginal revenue.
answer
C
question
Which of the following statements about single-price monopolists is correct?
A) The profit-maximizing level of output is the same as the total revenue-maximizing level of output.
B) The average revenue curve lies above the demand curve.
C) AR is greater than MR.
D) Price elasticity of demand will be equal to one if the firm is profit-maximizing.
E) Price equals marginal cost at the profit-maximizing level of output.
answer
C
question
Suppose the technology of an industry is such that the typical firm's minimum efficient scale is 8000 units per month at an average long-run cost of $5 per unit. If the total quantity demanded at a price of $5 per unit is 8500 units per month, the likely result would be
A) a cartel.
B) a concentrated oligopoly.
C) a natural monopoly.
D) price discrimination.
E) perfectly competitive firms.
answer
C
question
The cartelization of an industry with a homogeneous product usually means that
A) member firms have agreed to cooperate in reducing costs.
B) member firms have agreed to reduce their joint output.
C) the demand curve facing the industry must be linear.
D) the demand curve facing the industry must be elastic.
E) member firms have agreed to reduce investment.
answer
B
question
One of the reasons cartels are considered unstable is that
A) member firms reduce their investment, thereby becoming uncompetitive over time.
B) it is inefficient to manage individual firms collectively.
C) there are wide fluctuations in price as cartel members vary their output.
D) consumers seek out substitutes to the cartel product.
E) individual members of the cartel have an incentive to violate the cartel agreement.
answer
E
question
The main argument of Joseph Schumpeter's idea of "creative destruction" is that
A) the existence of monopolies leads to destruction of the environment.
B) short-run profits created by the existence of monopolies will lead to antitrust legislation, which will force the fragmentation of monopolies into competitive industries.
C) perfectly competitive industries are characterized by more productive innovation and productivity growth than monopolistic industries, which Schumpeter regarded as destructive.
D) monopoly profits lead to innovation in an effort to sustain those profits.
E) monopolies create profits for themselves at the expense of the destruction of consumer surplus.
answer
D
question
Price discrimination, if possible, allows a price-setting firm to increase its profits by
A) shifting its cost curves downward.
B) raising the price above the competitive price.
C) charging different prices according to the willingness to pay of each consumer.
D) reducing costs through a reduction in output.
E) charging different prices according to the different marginal cost on each unit.
answer
C
question
Which of the following is probably NOT an example of price discrimination?
A) A doctor charging for his services according to the income of his patients.
B) Train fares that are less expensive for weekend travel than weekday travel.
C) A theatre charging children under 12 less for a movie ticket than it charges an adult.
D) Universities charging out-of-province students higher tuition fees.
E) A supermarket charging more for strawberries in December than in June.
answer
E
question
If a monopolist is practicing perfect price discrimination, then
A) the producer surplus is zero.
B) consumer surplus is zero.
C) costs are lower than for the non-price-discriminating monopolist.
D) demand must be inelastic.
E) the monopolist is not profit maximizing.
answer
B
question
Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $100 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $85 and marginal revenue in segment B is $105. How can this firm maximize its profit?
A) increase the output in segment A and decrease the output in segment B
B) increase the output in segments A and B
C) decrease the output in segment A and increase the output in segment B
D) decrease the output in segments A and B
E) maintain the current output and its allocation across segments
answer
C
question
A characteristic common to most imperfectly competitive markets is
A) inelastic market demand curves.
B) a homogeneous product.
C) non-price competition among firms.
D) unexploited economies of scale.
E) common pricing among firms.
answer
C
question
One difference between a perfectly competitive market and a monopolistically competitive market is that
A) there are no barriers to entry in monopolistic competition.
B) there are no barriers to exit in monopolistic competition.
C) there is no product differentiation in perfect competition
D) there is no product differentiation in monopolistic competition
E) there is strategic interaction among firms in monopolistic competition.
answer
C
question
In a monopolistically competitive industry, the freedom of entry and exit leads to
A) a negatively sloped demand curve for the industry.
B) strategic behaviour with regard to other firms in the industry.
C) brand proliferation.
D) zero profits in long-run equilibrium.
E) deficient capacity in the industry.
answer
D
question
When a monopolistically competitive industry is in long-run equilibrium, the excess capacity in an individual firm is indicated by the difference between
A) price and marginal cost.
B) the output at which ATC is at a minimum and the output at which price equals marginal cost.
C) zero and the output at which the demand curve is tangent to the ATC curve.
D) price and average cost.
E) the output at which ATC is at a minimum and the output at which marginal revenue is equal to marginal cost.
answer
E
question
Oligopolists make decisions after taking into account the expected reaction of their competitors. In doing this, oligopolists are exhibiting
A) non-strategic behaviour.
B) collusive behaviour.
C) cooperative behaviour.
D) non-cooperative behaviour.
E) strategic behaviour.
answer
E
question
Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The non-cooperative outcome in this situation is
A) both firms bid $100.
B) both firms bid $180.
C) one firm bids $100, the other firm bids $180.
D) both firms bid $50.
E) both firms bid $90.
answer
A
question
Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The cooperative outcome in this situation is
A) both firms bid $100.
B) both firms bid $180.
C) one firm bids $100, the other firm bids $180.
D) both firms bid $50.
E) both firms bid $90.
answer
B
question
Which of the following is an incorrect statement about a Nash equilibrium?
A) A Nash equilibrium is an example of a non-cooperative equilibrium.
B) In a Nash equilibrium, all players are maximizing their payoffs given the current behaviour of the other players.
C) In a Nash equilibrium, all players are better off than they would be with any other combination of strategies.
D) A Nash equilibrium is a self-policing equilibrium.
E) Once a Nash equilibrium is established, no individual firm has an incentive to depart from it.
answer
C
question
"Brand proliferation" in an oligopolistic industry
A) allows easier entry to a new entrant with small sales.
B) can shift the average total cost curve down and raise the overall minimum scale of operation.
C) allows new entrants to the industry to gain significant market share.
D) will generally reduce the expected market share of new entrants to the industry.
E) allows firms to cooperate to maximize their joint profits.
answer
D
question
Both empirical evidence and everyday observation suggest that oligopolies contribute to economic growth in the very-long-run by
A) achieving allocative efficiency.
B) consistently producing at full-capacity output.
C) achieving technological improvements and innovations through research and development.
D) decreasing minimum efficient scale.
E) rarely laying off workers.
answer
C
question
In a typical oligopolistic market, there are
A) no barriers to entry, but firms sell differentiated products.
B) substantial barriers to entry and firms interact strategically with each other.
C) no barriers to entry and firms sell homogeneous products.
D) substantial entry barriers, and firms are too large to strategically interact with each other.
E) no barriers to entry and firms interact strategically with each other.
answer
B
question
For an entire economy, allocative efficiency requires that
A) goods are allocated equitably across markets.
B) marginal cost equals price for all goods.
C) MRP is equated for all factors of production.
D) price equals average cost for all goods.
E) price is greater than marginal cost for all goods.
answer
B
question
Consider two firms, A and B, that are producing the same product but with different marginal costs. In this case,
A) a reallocation of output between the firms can lower the industry's total cost.
B) neither firm is producing its output at the lowest attainable cost.
C) some resources must be unemployed.
D) each firm is being wasteful.
E) one firm is not maximizing profits.
answer
A
question
Allocative efficiency is actively sought
A) by profit-maximizing firms in all market structures.
B) only by perfectly-competitive firms.
C) only by profit-maximizing imperfectly-competitive firms.
D) by none of the firms in any market.
E) by all firms in all markets.
answer
D
question
Consider a monopolistically competitive industry in long-run equilibrium. Will this industry be productively efficient?
A) Yes. Since the firms are in long-run equilibrium, they will all be producing at the minimum of their LRAC curves.
B) Yes. Since the firms are in long-run equilibrium, they will all be operating on their LRAC curves.
C) Yes. In long-run equilibrium, each firm is producing at an output level where price is equal to marginal cost.
D) No. Firms are selling their output at a level where price exceeds marginal cost and thus, by definition, cannot be productively efficient.
E) No. Since firms are selling differentiated products and there is no industry-wide price, we cannot conclude that marginal cost will be equated across all firms.
answer
E
question
Consider an industry with three profit-maximizing firms producing identical soccer jerseys. At their current levels of output, Firm A has a MC of $22, Firm B has a MC of $26, and Firm C has a MC of $27. Each firm is minimizing its costs for its given level of output. Which of the following statements is definitely true?
A) Each firm and the industry are productively efficient.
B) Each firm is productively efficient but the industry is not.
C) The industry is productively efficient but each firm is not.
D) Each firm is allocatively efficient but the industry is not.
E) Each firm and the industry are allocatively efficient.
answer
B
question
Traditionally, economists have regarded monopoly as an undesirable market structure because
A) of its ability to minimize costs through large output.
B) it is allocatively inefficient.
C) of its wasteful innovation.
D) it is usually characterized by wastefully confrontational labour relations.
E) it allows producers to earn large profits.
answer
B
question
The deadweight loss of monopoly is
A) its fixed cost.
B) any negative profit due to cyclical decreases in demand.
C) the loss of economic surplus due to the low monopoly output level.
D) the cost of maintaining effective barriers to entry.
E) the extra administrative costs of operating a large firm.
answer
C
question
In general, which of the following statements guides policymakers with respect to a natural monopoly? The firm
A) should be broken up into a large number of competitive firms.
B) should be taken over by government and run as a crown corporation.
C) is the best way to produce a given product and should be left alone.
D) generally needs to be regulated in order to reduce allocative inefficiency.
E) will not achieve productive efficiency without regulation.
answer
D
question
Choose the statement that best describes the dilemma facing the regulator of a natural monopoly.
A) Marginal-cost pricing leads to profit or losses; average-cost pricing results in allocative inefficiency.
B) Marginal-cost pricing will result in allocative inefficiency; average-cost pricing leads to profits or losses.
C) Marginal-cost pricing will result in productive and allocative inefficiency; average-cost pricing will not.
D) Both kinds of regulation have the same implications for allocative efficiency.
E) There is no dilemma.
answer
A
question
The economic efficiency of a natural monopoly can be improved with the use of two-part tariffs because it allows the monopoly to
A) charge users according to their willingness to pay.
B) charge residential users different rates than business users.
C) charge users according to their ability to pay.
D) charge users separately for fixed and variable costs.
E) lower its total costs.
answer
D
question
explicit costs
answer
The actual payments a firm makes to its factors of production and other suppliers.
question
implicit costs
answer
Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
question
accounting profit formula
answer
revenues - explicit costs
question
economic profit formula
answer
revenue - explicit costs - implicit costs
question
if economic profit is less than zero...
a. will induce firm to exit
b. will attract firm entry
answer
b
question
if economic profit is greater than 0...
a. will induce firm to exit
b. will attract firm entry
answer
b
question
production function
answer
the relationship between quantity of inputs used to make a good and the quantity of output of that good (in the short run)
question
average product
answer
the output of a typical worker
question
average product formula
answer
AP=Q/L
question
Marginal product
answer
the change in the total output resulting from the use of one additional (or one less) unit of an input (one additional worker)
question
marginal product formula
answer
MP = ΔTP / Δ L
question
law of diminishing returns
answer
increasing amounts of X given to a fixed factor will eventually decrease marginal product (hiring more workers will help productivity at the beginning, but at some point there will be too many which will result in productivity decreasing)
- if there is a fixed amount of physical capital (ex office space), eventually the marginal product begins to decline
question
in the short run, when TP is rising at an increasing rate (curving up) MP is...
a. negative and rising
b. negative and falling
c. positive and rising
d. positive and falling
answer
c
question
when TP is rising at a decreasing rate (curving down), MP is...
a. negative and rising
b. negative and falling
c. positive and rising
d. positive and falling
answer
d
question
when TP is falling, MP is
a. positive
b. negative
c. none of the above
answer
b
question
fixed costs
answer
Costs that do not vary with the quantity of output produced (rent, full time staff)
question
average fixed cost formula
answer
AFC= FC/Q
question
Variable cost
answer
vary with quantity of output produced (ex. products, electricity)
question
Average variable cost formula
answer
AVC = VC/Q
question
Total cost formula
answer
TC= FC + VC
question
Average total cost forumla
answer
ATC = TC/Q
question
ATC =
answer
AFC + AVC
question
Marginal Cost
answer
the change in total cost associated with a change in the quantity of output
question
Marginal cost formula
answer
MC = ΔTC/ΔQ
question
Because fixed costs do not vary with output, the only part of TC that changes is the
a. variable cost
b. marginal cost
c. Average cost
answer
a
question
Marginal cost ------ as quantity of goods produced increases, because of diminishing MP
a. decrease
b. stays the same
c. increase
answer
c
question
marginal product of labour is the increase in total product that results from a
a. one-unit increase in the quantity of labour employed, other inputs remaining the same
b. one unit increase in the quantity of fixed inputs employed, holding the quantity of the variable inputs constant
c. one unit increase in both quantity of variable and fixed inputs
d. change in costs of labour
answer
a
question
marginal cost ---- with quantity of output
a. falls
b. rises
answer
b
question
the average total cost curve is
a. straight line
b. concave
c. u shaped
answer
c
question
AVC ---- as output increases because of diminishing marginal product
a. rises
b. falls
answer
a
question
AFC ----- as output increases because FC are spread over more units
a. inclines
b. declines
answer
b
question
the MC crosses the ATC where and why
answer
the bottom of the u-shape at the quantity that minimizes ATC (point efficient scale)
question
An increase in the price of variable inputs (in the short run)
Ex. the average weight in the room
answer
shifts up, MC, AVC and ATC
question
an increase in the price of fixed inputs
answer
-shifts up ATC
- leaves MC and AVC UNCHANGED
question
An increase in the quantity of the fixed factor
answer
- raises productivity
(MC and AVC shift DOWN)
- Raises fixed costs (AFC shifts UP)
- Has an ambiguous (one way or another) effect on ATC
question
short run- some of the firms factors of production are
answer
fixed
question
long run - firms factors of production ----- but ---- is fixed
answer
varied, technology
question
very long run - all the firms factors of production and technology can be
answer
varied
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