Micro Exam #2 - Custom Scholars
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Micro Exam #2

question
A monopoly is a market in which no buyer or seller has market power.
True
False
answer
False
question
Market structure is determined by the
1)Price charged for the good or service produced.
2)Annual revenue, costs, and profits for an industry.
3)Amount of compensation given to the CEOs.
4)Number and relative size of the firms in an industry.
answer
Number and relative size of the firms in an industry.
question
Suppose a company incurs the following costs: labor, $600; equipment, $300; and materials, $200. The company owns the building, so it doesn't have to pay the usual $900 in rent.

(a) What is the total accounting cost?



(b) What is the total economic cost?


(c) If the company sold the building and then leased it back, what would be the new

(i) Accounting costs?

(ii) Economic costs?
answer
A) $1,100
B)$2,000
i) $2000
ii) $2000
question
The perfectly competitive market structure includes all of the following except
Low entry barriers.
Many firms.
Large advertising budgets.
Identical products.
answer
Large advertising budgets.
question
Which of the following is most likely a fixed cost?
The material used to make jackets.
The labor on an automotive assembly line.
The electricity used to run packaging equipment.
The rent for a factory.
answer
The rent for a factory.
question
In the short run, when a firm produces zero output, variable cost equals
Marginal cost.
Total cost.
Zero.
Fixed cost.
answer
Fixed cost.
question
Economic cost
Is the sum of actual monetary payments made for resources used to produce a good.
Includes both implicit and explicit costs.
Decreases as the level of production increases.
Includes only implicit costs.
answer
Includes both implicit and explicit costs.
question
Implicit costs
Are the sum of actual monetary payments made for resources used to produce a good.
Are the value of resources used to produce a good but for which no monetary payment is made.
Include the value of all resources used to produce a good.
Include only payments to labor.
answer
Are the value of resources used to produce a good but for which no monetary payment is made.
question
Economies of scale are reductions in average
Total cost that result from declining average fixed costs.
Fixed cost that result from reducing the firm's scale of operations.
Total cost that result from using operations of larger size.
Fixed cost resulting from improved technology and production efficiency.
answer
Total cost that result from using operations of larger size.
question
Economic profit is the difference between
Total costs and total economic costs.
Accounting profit and explicit costs.
Total revenues and total economic costs.
Accounting profits and external costs.
answer
Total revenues and total economic costs.
question
Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual economic costs for the firm described above?
$90,000.
$450,000.
$120,000.
$360,000.
answer
$450,000.
question
If price is greater than marginal cost, a perfectly competitive firm should increase output because
Total revenues would increase.
The price it receives for its product is increasing.
Additional units of output will add to the firm's profits (or reduce losses).
Marginal costs are increasing.
answer
Additional units of output will add to the firm's profits (or reduce losses).
question
If price is less than marginal cost, a perfectly competitive firm should decrease output because
Marginal revenue is decreasing.
Total revenues are decreasing.
Marginal costs are increasing.
The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).
answer
The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).
question
A catfish farmer will shut down production when
The best he can do is break even.
Total revenue falls below total costs.
He is losing money.
Price falls below AVC.
answer
Price falls below AVC.
question
If Microsoft is thinking about building a new factory, it is making a
Long-run decision that will definitely enhance its profit.
Short-run decision that may enhance its profit.
Long-run decision that may enhance its profit.
Short-run decision that will definitely enhance its profit.
answer
Long-run decision that may enhance its profit
question
In the News: U.S. Sues over Drug's Price Hike
Ovation Pharmaceuticals violated federal law in 2006 when it bought a competitor's drug, creating a monopoly for the heart treatment used on premature babies, and then raised the price, a federal lawsuit says. The Federal Trade Commission wants Ovation to return "millions of dollars" in overcharges for the drug, used to treat a condition that afflicts 30,000 babies each year, Bureau of Competition acting Director David Wales said.

The lawsuit says the price rose from $36 a vial to nearly $500. The company said the FTC's allegations are "without merit."

By approximately how much did the price of the heart drug for babies increase when a monopoly was established?
answer
$ 464
question
Monopolists are price
Takers, but competitive firms are price makers.
Makers, as are competitive firms.
Takers, as are competitive firms.
Makers, but competitive firms are price takers.
answer
Makers, but competitive firms are price takers.
question
Which of the following is true for a monopolist?
Its marginal revenue curve is equal to its demand curve.
It faces a perfectly elastic demand curve.
It faces many competitors.
It must lower its price on all of its units in order to sell any additional units.
answer
It must lower its price on all of its units in order to sell any additional units.
question
Which of the following rules is satisfied when a monopoly maximizes profits?
Price = AVC.
MR > MC.
Price < MC.
MR = MC.
answer
MR = MC.
question
A profit-maximizing monopolist produces the rate of output where
MR = MC and determines price based on the demand curve.
MR = MC and can set price at any amount it chooses.
MR = MC and determines price based on ATC.
Price = MC.
answer
MR = MC and determines price based on the demand curve.
question
Monopolies need some type of barrier to entry to keep potential competitors away
True
False
answer
True
question
Lawsuits can act as a barrier to entry in monopoly markets.
True
False
answer
True
question
The ultimate market constraint on the exercise of market power
is the ATC curve facing the monopolist.
Is marginal cost pricing.
Is the demand curve facing the monopolist.
Is barriers to entry.
answer
Is the demand curve facing the monopolist.
question
When markets are contestable, a monopoly firm must behave as if it had competitors, even though the market structure is monopolistic.
True
False
answer
True
question
Rival Response
Your Company's Action Reduce Price Don't Reduce Price
Reduce Price Loss = $800 Gain = $50,000
Don't Reduce Price Loss = $6,000 No Loss or Gain
(a) If the probability of rivals matching a price reduction is 90 percent, what is the expected payoff to a price cut?



(b) If the probability of rivals reducing price even though you don't is 10 percent, what is the expected payoff to not reducing price?
answer
a)$ 4,280
b)$ -600
question
If an oligopoly market is contestable and new firms enter, the
Market power of the former oligopolists will be reduced.
Profitability of the industry will increase.
Former oligopolists will raise their prices.
Number of firms in the industry will decrease.
answer
Market power of the former oligopolists will be reduced.
question
Which of the following does not function as a barrier to entry into an oligopoly market?
Predatory pricing.
Control of distribution outlets.
The expense involved in nonprice competition.
Patents.
answer
Predatory pricing.
question
The study of how decisions are made when strategic interaction between firms exists is known as
Contestable market theory.
Market power theory.
Predatory pricing theory.
Game theory.
answer
Game theory.
question
Game theory is
The study of how decisions are made when interdependence exists between firms.
An explanation of how oligopolists become monopolists.
Practiced by perfectly competitive firms.
The study of price-fixing and collusion.
answer
The study of how decisions are made when interdependence exists between firms.
question
Market share is the percentage of total
Market output produced by a single firm.
Market output produced by the four largest firms in an industry.
Market output produced by the largest firm in an industry.
Industry profit earned by a single firm.
answer
Market output produced by a single firm.
question
If oligopolists start cutting prices to capture a larger market share, the result will be a
Movement down the market demand curve.
Movement up the market demand curve.
Leftward shift of the market demand curve.
Rightward shift of the market demand curve.
answer
Movement down the market demand curve.
question
Which of the following characterizes monopolistic competition?
Many interdependent firms sell a homogeneous product.
A few firms produce a particular type of product.
Many firms produce a particular type of product, but each maintains some independent control over its own price.
A few firms produce all of the market supply of a good.
answer
Many firms produce a particular type of product, but each maintains some independent control over its own price.
question
One of the main differences between an oligopoly and a monopolistically competitive firm is that a monopolistically competitive firm
Faces a horizontal demand curve; an oligopoly does not.
Is relatively independent; an oligopoly is interdependent.
Has no market power; an oligopoly has some market power.
Has high barriers to entry; an oligopoly does not.
answer
Is relatively independent; an oligopoly is interdependent.
question
When a monopolistically competitive firm advertises, it is attempting to increase
The demand and decrease the price elasticity of demand for its product.
The demand and increase the price elasticity of demand for its product.
Long-run profits.
Market demand.
answer
The demand and decrease the price elasticity of demand for its product.
question
A monopolistically competitive firm maximizes profits or minimizes losses in the short run by
Setting price equal to marginal cost.
Producing at the output level where ATC is minimized.
Producing at the output level where MR equals MC.
Producing at the output level where MC equals ATC.
answer
Producing at the output level where MR equals MC.
question
According to the article "What's Behind Starbucks' Price Hike?" in October 2006, Starbucks raised the price of its lattes, cappuccinos, drip coffee, and other drinks because of increases in wages and fuel costs. When it chose to hike prices, Starbucks was
Losing sales to its competitors and therefore needed higher prices to maintain revenue.
Relying on the economy to improve in order to offset the loss in sales as a result of the price hikes.
Relying on brand loyalty to prevent a significant loss in sales.
Relying on very elastic demand.
answer
Relying on brand loyalty to prevent a significant loss in sales.
question
When new firms enter a monopolistically competitive industry, ceteris paribus, the
Market price decreases.
Market price increases.
Market price remains unchanged.
Change in market price cannot be determined based on the information given.
answer
Market price decreases.
question
Compared to perfect competition, a market that is monopolized will
a) produce more at a lower price
b) produce less at a lower price
c) produce more at a higher price
d) produce less at a higher price
answer
D
question
Which of the following is an example of a way we can model oligopoly behavior if the oligopolists do not cooperate?
a) price leadership
b) cartel
c) price-fixing
d) game theory
answer
D
question
If demand falls in the market, which of the following is not an impact on the perfectly competitive firm in the short run?
a) firmed profits will fall
b) some firm may decide to shut down
c) some firm may decide to exit the market
d) prices will fall
answer
C (exit the market implies long run)
question
The marginal physical product falls as more of it is used with a given quantity of other fixed inputs, C.P. is known as
a) the law of increasing costs
b) the law of demand
c) the law of diminishing marginal productivity
d) the law of diminishing marginal utility
answer
C
question
Aquafina claims its bottle the "purest of waters" while Dasani asserts that its water is as "pure as water can get." Identify the statement that is NOT a goal of these ads:
a) to build brand loyalty
b) to create product differentiation
c) to increase demand
d) to make demand more price inelastic
e) to increase cross-price elasticity
answer
E
question
Calculate profits for a perfectly competitive firm profit maximizing quantity is 40 units, the market price is $32 and ATC at this quantity is $40. Will the firm produce in the short run?
a) $320, it depends
b) -$320, shut down
c) -$1280, shut down
d) $1280, produce
e) -$320, it depends
answer
E
question
Calculate average variable costs when production 3 units given the following information (look at photo)
a) 83.3
b)99
c) 50
d) 133.3
answer
A
question
A group of firms with an explicit, formal agreement to fix prices and output shares in a particular market is known as
a) price fixing
b) price leadership
c) predatory pricing
d) barrier to entry
e) cartel
answer
E
question
Economic profit is equal to
a) ATC-TC
b) AVC+MC
c) MR=MC
d) TR-TC
e) P-ATC
answer
D
question
In monopolisitic competition in the long run, ___________ barriers to entry _________ competing firms to enter. Therefore, monopolistically competitive firms earn ____________ in the long run.
a) high; allow; profit
b) low; prevents; zero profit
c) high; prevents; profit
d) low; allows; zero profit
answer
D
question
Which of the following is NOT an example of an explicit cost?
a) rent on the office building
b) wages for your assistant
c) your wages you used to earn as a server
d) copy machine
answer
C
question
At which point does a perfectly competitive firm profit maximize?
a) MR = MC
b) P =MC
c) P= ATC
d) Both A and B are correct
e) Both B and C are correct
answer
D
1 of 49
question
A monopoly is a market in which no buyer or seller has market power.
True
False
answer
False
question
Market structure is determined by the
1)Price charged for the good or service produced.
2)Annual revenue, costs, and profits for an industry.
3)Amount of compensation given to the CEOs.
4)Number and relative size of the firms in an industry.
answer
Number and relative size of the firms in an industry.
question
Suppose a company incurs the following costs: labor, $600; equipment, $300; and materials, $200. The company owns the building, so it doesn't have to pay the usual $900 in rent.

(a) What is the total accounting cost?



(b) What is the total economic cost?


(c) If the company sold the building and then leased it back, what would be the new

(i) Accounting costs?

(ii) Economic costs?
answer
A) $1,100
B)$2,000
i) $2000
ii) $2000
question
The perfectly competitive market structure includes all of the following except
Low entry barriers.
Many firms.
Large advertising budgets.
Identical products.
answer
Large advertising budgets.
question
Which of the following is most likely a fixed cost?
The material used to make jackets.
The labor on an automotive assembly line.
The electricity used to run packaging equipment.
The rent for a factory.
answer
The rent for a factory.
question
In the short run, when a firm produces zero output, variable cost equals
Marginal cost.
Total cost.
Zero.
Fixed cost.
answer
Fixed cost.
question
Economic cost
Is the sum of actual monetary payments made for resources used to produce a good.
Includes both implicit and explicit costs.
Decreases as the level of production increases.
Includes only implicit costs.
answer
Includes both implicit and explicit costs.
question
Implicit costs
Are the sum of actual monetary payments made for resources used to produce a good.
Are the value of resources used to produce a good but for which no monetary payment is made.
Include the value of all resources used to produce a good.
Include only payments to labor.
answer
Are the value of resources used to produce a good but for which no monetary payment is made.
question
Economies of scale are reductions in average
Total cost that result from declining average fixed costs.
Fixed cost that result from reducing the firm's scale of operations.
Total cost that result from using operations of larger size.
Fixed cost resulting from improved technology and production efficiency.
answer
Total cost that result from using operations of larger size.
question
Economic profit is the difference between
Total costs and total economic costs.
Accounting profit and explicit costs.
Total revenues and total economic costs.
Accounting profits and external costs.
answer
Total revenues and total economic costs.
question
Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual economic costs for the firm described above?
$90,000.
$450,000.
$120,000.
$360,000.
answer
$450,000.
question
If price is greater than marginal cost, a perfectly competitive firm should increase output because
Total revenues would increase.
The price it receives for its product is increasing.
Additional units of output will add to the firm's profits (or reduce losses).
Marginal costs are increasing.
answer
Additional units of output will add to the firm's profits (or reduce losses).
question
If price is less than marginal cost, a perfectly competitive firm should decrease output because
Marginal revenue is decreasing.
Total revenues are decreasing.
Marginal costs are increasing.
The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).
answer
The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).
question
A catfish farmer will shut down production when
The best he can do is break even.
Total revenue falls below total costs.
He is losing money.
Price falls below AVC.
answer
Price falls below AVC.
question
If Microsoft is thinking about building a new factory, it is making a
Long-run decision that will definitely enhance its profit.
Short-run decision that may enhance its profit.
Long-run decision that may enhance its profit.
Short-run decision that will definitely enhance its profit.
answer
Long-run decision that may enhance its profit
question
In the News: U.S. Sues over Drug's Price Hike
Ovation Pharmaceuticals violated federal law in 2006 when it bought a competitor's drug, creating a monopoly for the heart treatment used on premature babies, and then raised the price, a federal lawsuit says. The Federal Trade Commission wants Ovation to return "millions of dollars" in overcharges for the drug, used to treat a condition that afflicts 30,000 babies each year, Bureau of Competition acting Director David Wales said.

The lawsuit says the price rose from $36 a vial to nearly $500. The company said the FTC's allegations are "without merit."

By approximately how much did the price of the heart drug for babies increase when a monopoly was established?
answer
$ 464
question
Monopolists are price
Takers, but competitive firms are price makers.
Makers, as are competitive firms.
Takers, as are competitive firms.
Makers, but competitive firms are price takers.
answer
Makers, but competitive firms are price takers.
question
Which of the following is true for a monopolist?
Its marginal revenue curve is equal to its demand curve.
It faces a perfectly elastic demand curve.
It faces many competitors.
It must lower its price on all of its units in order to sell any additional units.
answer
It must lower its price on all of its units in order to sell any additional units.
question
Which of the following rules is satisfied when a monopoly maximizes profits?
Price = AVC.
MR > MC.
Price < MC.
MR = MC.
answer
MR = MC.
question
A profit-maximizing monopolist produces the rate of output where
MR = MC and determines price based on the demand curve.
MR = MC and can set price at any amount it chooses.
MR = MC and determines price based on ATC.
Price = MC.
answer
MR = MC and determines price based on the demand curve.
question
Monopolies need some type of barrier to entry to keep potential competitors away
True
False
answer
True
question
Lawsuits can act as a barrier to entry in monopoly markets.
True
False
answer
True
question
The ultimate market constraint on the exercise of market power
is the ATC curve facing the monopolist.
Is marginal cost pricing.
Is the demand curve facing the monopolist.
Is barriers to entry.
answer
Is the demand curve facing the monopolist.
question
When markets are contestable, a monopoly firm must behave as if it had competitors, even though the market structure is monopolistic.
True
False
answer
True
question
Rival Response
Your Company's Action Reduce Price Don't Reduce Price
Reduce Price Loss = $800 Gain = $50,000
Don't Reduce Price Loss = $6,000 No Loss or Gain
(a) If the probability of rivals matching a price reduction is 90 percent, what is the expected payoff to a price cut?



(b) If the probability of rivals reducing price even though you don't is 10 percent, what is the expected payoff to not reducing price?
answer
a)$ 4,280
b)$ -600
question
If an oligopoly market is contestable and new firms enter, the
Market power of the former oligopolists will be reduced.
Profitability of the industry will increase.
Former oligopolists will raise their prices.
Number of firms in the industry will decrease.
answer
Market power of the former oligopolists will be reduced.
question
Which of the following does not function as a barrier to entry into an oligopoly market?
Predatory pricing.
Control of distribution outlets.
The expense involved in nonprice competition.
Patents.
answer
Predatory pricing.
question
The study of how decisions are made when strategic interaction between firms exists is known as
Contestable market theory.
Market power theory.
Predatory pricing theory.
Game theory.
answer
Game theory.
question
Game theory is
The study of how decisions are made when interdependence exists between firms.
An explanation of how oligopolists become monopolists.
Practiced by perfectly competitive firms.
The study of price-fixing and collusion.
answer
The study of how decisions are made when interdependence exists between firms.
question
Market share is the percentage of total
Market output produced by a single firm.
Market output produced by the four largest firms in an industry.
Market output produced by the largest firm in an industry.
Industry profit earned by a single firm.
answer
Market output produced by a single firm.
question
If oligopolists start cutting prices to capture a larger market share, the result will be a
Movement down the market demand curve.
Movement up the market demand curve.
Leftward shift of the market demand curve.
Rightward shift of the market demand curve.
answer
Movement down the market demand curve.
question
Which of the following characterizes monopolistic competition?
Many interdependent firms sell a homogeneous product.
A few firms produce a particular type of product.
Many firms produce a particular type of product, but each maintains some independent control over its own price.
A few firms produce all of the market supply of a good.
answer
Many firms produce a particular type of product, but each maintains some independent control over its own price.
question
One of the main differences between an oligopoly and a monopolistically competitive firm is that a monopolistically competitive firm
Faces a horizontal demand curve; an oligopoly does not.
Is relatively independent; an oligopoly is interdependent.
Has no market power; an oligopoly has some market power.
Has high barriers to entry; an oligopoly does not.
answer
Is relatively independent; an oligopoly is interdependent.
question
When a monopolistically competitive firm advertises, it is attempting to increase
The demand and decrease the price elasticity of demand for its product.
The demand and increase the price elasticity of demand for its product.
Long-run profits.
Market demand.
answer
The demand and decrease the price elasticity of demand for its product.
question
A monopolistically competitive firm maximizes profits or minimizes losses in the short run by
Setting price equal to marginal cost.
Producing at the output level where ATC is minimized.
Producing at the output level where MR equals MC.
Producing at the output level where MC equals ATC.
answer
Producing at the output level where MR equals MC.
question
According to the article "What's Behind Starbucks' Price Hike?" in October 2006, Starbucks raised the price of its lattes, cappuccinos, drip coffee, and other drinks because of increases in wages and fuel costs. When it chose to hike prices, Starbucks was
Losing sales to its competitors and therefore needed higher prices to maintain revenue.
Relying on the economy to improve in order to offset the loss in sales as a result of the price hikes.
Relying on brand loyalty to prevent a significant loss in sales.
Relying on very elastic demand.
answer
Relying on brand loyalty to prevent a significant loss in sales.
question
When new firms enter a monopolistically competitive industry, ceteris paribus, the
Market price decreases.
Market price increases.
Market price remains unchanged.
Change in market price cannot be determined based on the information given.
answer
Market price decreases.
question
Compared to perfect competition, a market that is monopolized will
a) produce more at a lower price
b) produce less at a lower price
c) produce more at a higher price
d) produce less at a higher price
answer
D
question
Which of the following is an example of a way we can model oligopoly behavior if the oligopolists do not cooperate?
a) price leadership
b) cartel
c) price-fixing
d) game theory
answer
D
question
If demand falls in the market, which of the following is not an impact on the perfectly competitive firm in the short run?
a) firmed profits will fall
b) some firm may decide to shut down
c) some firm may decide to exit the market
d) prices will fall
answer
C (exit the market implies long run)
question
The marginal physical product falls as more of it is used with a given quantity of other fixed inputs, C.P. is known as
a) the law of increasing costs
b) the law of demand
c) the law of diminishing marginal productivity
d) the law of diminishing marginal utility
answer
C
question
Aquafina claims its bottle the "purest of waters" while Dasani asserts that its water is as "pure as water can get." Identify the statement that is NOT a goal of these ads:
a) to build brand loyalty
b) to create product differentiation
c) to increase demand
d) to make demand more price inelastic
e) to increase cross-price elasticity
answer
E
question
Calculate profits for a perfectly competitive firm profit maximizing quantity is 40 units, the market price is $32 and ATC at this quantity is $40. Will the firm produce in the short run?
a) $320, it depends
b) -$320, shut down
c) -$1280, shut down
d) $1280, produce
e) -$320, it depends
answer
E
question
Calculate average variable costs when production 3 units given the following information (look at photo)
a) 83.3
b)99
c) 50
d) 133.3
answer
A
question
A group of firms with an explicit, formal agreement to fix prices and output shares in a particular market is known as
a) price fixing
b) price leadership
c) predatory pricing
d) barrier to entry
e) cartel
answer
E
question
Economic profit is equal to
a) ATC-TC
b) AVC+MC
c) MR=MC
d) TR-TC
e) P-ATC
answer
D
question
In monopolisitic competition in the long run, ___________ barriers to entry _________ competing firms to enter. Therefore, monopolistically competitive firms earn ____________ in the long run.
a) high; allow; profit
b) low; prevents; zero profit
c) high; prevents; profit
d) low; allows; zero profit
answer
D
question
Which of the following is NOT an example of an explicit cost?
a) rent on the office building
b) wages for your assistant
c) your wages you used to earn as a server
d) copy machine
answer
C
question
At which point does a perfectly competitive firm profit maximize?
a) MR = MC
b) P =MC
c) P= ATC
d) Both A and B are correct
e) Both B and C are correct
answer
D

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