EC 204 - PRACTICE QUESTIONS

 

 

CHAPTER 8 - QUESTIONS

 

1.      The minimum-cost output is the quantity corresponding to the minimum point of the

  1. marginal cost curve.
  2. marginal product curve.
  3. average variable cost curve.
  4. average total cost curve.

 

2.      Which cost curve is continually upward-sloping?

  1. The total cost curve
  2. The marginal cost curve
  3. The average variable cost curve
  4. The average total cost curve

 

3.      All of the following curves are U-shaped except for

  1. average variable cost.
  2. long-run average total cost.
  3. average total cost.
  4. average fixed cost.

 

4.      How long is the long run?

  1. Long enough for the firm to make a profit.
  2. Long enough for diminishing returns to set in.
  3. Long enough that all costs can become variable.
  4. Long enough that all costs can become fixed.

 

5.      Marginal product is the slope of the

  1. long-run average total cost curve.
  2. marginal cost curve.
  3. total cost curve.
  4. total product curve.

 

6.      Which of the following statements is TRUE?

  1. Whenever marginal cost is below average total cost, marginal cost is decreasing.
  2. When marginal cost equals average total cost, marginal cost is minimized.
  3. Whenever marginal cost is above average total cost, marginal cost is decreasing.
  4. Whenever marginal cost is above average total cost, average total cost is increasing.

 

7.      For cities that provide snow removal, which of the following is a fixed cost?

  1. Wages for snow plow drivers
  2. Gasoline for snow plows
  3. Purchase of salt or other substances used to melt snow
  4. Purchase of snow removal equipment

 

8.      What is on the horizontal axis when we draw a total product curve?

  1. Marginal cost
  2. Quantity of labor input
  3. Quantity of output
  4. Total cost

 

9.      A firm experiencing constant returns to scale

  1. has a horizontal total product curve.
  2. has a horizontal long-run average total cost curve.
  3. has a horizontal marginal cost curve.
  4. has a horizontal marginal product curve.

 

10.  A firm produces 200 units of output at an average total cost of $27 and an average variable cost of $24. What is the firm's level of total fixed cost?

  1. $4800
  2. $3
  3. $200
  4. $600

 

11.  If a firm experiences economies of scale as it expands production,

  1. then it is not subject to diminishing returns.
  2. then its long-run average total cost curve will be downward-sloping in that range.
  3. then its marginal product curve will be downward-sloping in that range.
  4. then its marginal cost curve will be downward-sloping in that range.

 

12.  Since the marginal product of labor equals the change in the quantity of output divided by the change in the quantity of labor, it stands to reason that

  1. a firm would never operate in the range where marginal product is decreasing.
  2. marginal product will continually increase as the firm produces more.
  3. a firm would never operate in the range where marginal product is negative.
  4. there is no predictable relationship between marginal revenue and marginal cost.

 

13.  A firm producing in the short run uses two inputs, capital and labor. The quantity of capital is fixed and generates a monthly cost of $6,000. The quantity of labor can be varied, and the wage rate per hour of labor is $20. If 400 hours of labor are hired for the month, and 140 units of output are produced, what is the firm's average total cost for the month?

  1. $2.80
  2. $100.00
  3. $123.00
  4. $43.00

 

14.  Marginal cost is the slope of the

  1. long-run average total cost curve.
  2. total cost curve.
  3. marginal product curve.
  4. total product curve.

 

15.  Daisy incurs $7,200 per month in fixed costs operating her floral shop. She pays her employees $9.00 per hour and has three assistants each working 120 hours per month. Her other variable costs are $800 per month. What are Daisy's total variable costs and total costs each month?

  1. Total variable costs are $3,240; total costs are $11,240.
  2. Total variable costs are $800; total costs are $11,240.
  3. Total variable costs are $800; total costs are $8,000.
  4. Total variable costs are $4,040; total costs are $11,240.

 

16.  In what way does the spreading effect change average total cost as output rises?

  1. The spreading effect increases ATC, because it reflects the fact that firms are less efficient when they operate on a larger scale.
  2. The spreading effect reduces ATC, because a given fixed cost can be spread across more units of output.
  3. The spreading effect reduces ATC, because a firm's total fixed cost will decline as more is produced.
  4. The spreading effect increases ATC, because it reflects the fact that workers are spread out across more tasks when output rises.

 

17.  A firm is producing 100 units of output at a total cost of $84,000. The firm's fixed cost is $24,000. What is the average variable cost?

  1. $640
  2. $840
  3. $240
  4. $600

 

18.  The argument of The Mythical Man-Month is that

  1. computer programming costs should always be viewed as variable costs.
  2. there are constant returns to scale in computer programming.
  3. labor applied to computer programming is subject to diminishing returns.
  4. computer programming costs should always be viewed as fixed costs.

 

19.  Samir owns a coffee shop that has monthly variable costs equal to $8,560. If Samir sells 11,000 cups of coffee each month, what is the average variable cost per cup?

  1. $0.78
  2. $0.99
  3. $0.85
  4. $1.30

 

20.  Writing in 1798, Thomas Malthus made the argument that

  1. attempts to grow more food on a given amount of land would be limited by diminishing returns.
  2. scientific improvements in agriculture would make it possible to grow the same amount of food with a smaller amount of labor input, thereby allowing standards of living to improve.
  3. the concept of diminishing returns did not apply to manufacturing.
  4. the concept of diminishing returns did not apply to agriculture.

 

 

CHAPTER 8 - ANSWERS

 

1.      D. This point identifies the level of output that will minimize the comprehensive per-unit cost. Page: 194

2.      A. Total cost rises with output, because variable costs accumulate. Page: 187

3.      D. Average fixed cost continually declines as more is produced. Page: 194

4.      C. In the long run, fixed costs are zero. Page: 197

5.      D. The total product curve shows the level of output associated with each quantity of labor input. As labor input increases, output also rises, and the extent of the increase in reflected in the slope of the curve. Page: 185

6.      D. To the right of the firm's minimum-cost output, average total cost increases. Page: 195

7.      D. The cost of having purchased the equipment will not change with the frequency of its use. Page: 201

8.      B. Each point on the total product curve has two coordinates. The horizontal coordinate identifies the quantity of labor; the vertical coordinate indicates the corresponding level of output. Page: 183

9.      B. The short-run cost and production functions will still have their traditional shape. Page: 200

10.  D. The firm's total cost is $5400, broken down into $4,800 of variable cost and $600 of fixed cost. Page: 192

11.  B. If the LRATC is U-shaped, the upward-sloping portion corresponds to the range which is characterized by diseconomies of scale. Page: 200

12.  C. A firm that is concerned with maximizing profit would not pay to hire more workers who would only reduce total output. Page: 185

13.  B. The total cost of $14,000 is divided among 140 units of output. Page: 191

14.  B. The total cost curve shows the comprehensive cost associated with each level of output. As output rises, the magnitude of the increase in total cost is reflected in the slope of the curve. Page: 190

15.  D. Daisy's total variable costs consist of wages ($3,240) plus the $800 in other variable costs. Page: 190

16.  B. The spreading effect and the diminishing returns effect work in opposite directions. Page: 193

17.  D. The total variable cost of $60,000 will be spread across 100 units. Page: 192

18.  C. The effect of diminishing returns is seen in the extra effort needed to coordinate work across different programmers. Page: 188

19.  A. The cost of $8,560 is spread across 11,000 cups of coffee sold. Page: 192

20.  A. Malthus went on to predict that the average standard of living would not rise much above the level of subsistence. Page: 186

 

 

 

CHAPTER 9 - QUESTIONS

 

1.      Suppose that the long-run industry supply in the production of synthetic fabrics is perfectly elastic. Which of the following statements then is TRUE?

A.     The long-run industry supply for synthetics is upward-sloping.

B.     The existence of profit within the industry will not draw new firms into the market.

C.     The long-run industry supply for synthetics is horizontal.

D.     The marginal cost curve of each synthetic-producing firm is horizontal.

 

2.      The existence of profit in a perfectly competitive industry means that

A.     the current price exceeds marginal cost.

B.     each producer is charging a different price.

C.     new producers will seek to enter the industry.

D.     consumers will switch to substitute goods.

 

3.      A perfectly competitive firm is charging the market price of $18 to sell its product. The firm is producing and selling the profit-maximizing quantity of 50 units at this price. Its average total cost is $17 and its average variable cost is $15. Which of the following statements is then TRUE?

A.     This firm should shut down now.

B.     The firm is earning an economic profit of $50.

C.     At this current level of production, the firm's marginal cost is $17.

D.     At this current level of production, the firm's marginal cost is $15.

 

4.      Luis operates a cherry orchard in Northern Oregon and sells the cherries in a perfectly competitive market at a price of $1.70 per pound. Last month Luis sold 2,000 pounds of cherries. His fixed cost of production was $800 and his average variable cost was $1.00 per pound. What was his profit?

A.     $3,400

B.     $800

C.     $2,600

D.     $600

 

5.      Gabriel operates a tree-trimming business in Maine. He charges the perfectly competitive price of $47 per hour. The marginal cost of working the 36th hour each week is $42; the marginal cost of working the 37th hour is $44; of the 38th hour is $46; and of the 39th hour is $48. How many hours should he work each week?

A.     He should work 36 hours per week, because the marginal cost of working rises after this point.

B.     He should work 40 hours per week, because he can always earn more revenue by working more.

C.     He should work 39 hours per week, because he would have to lower his price if her wanted to work more than that.

D.     He should work 38 hours per week, because this is the workload that maximizes his net gain.

 

6.      Tara sells her organic carrots in a perfectly competitive market for a price that is just higher than her minimum average variable cost of production, but lower than her minimum average total cost of production. Which of the following statements is then TRUE?

A.     She is earning a profit, because price is above AVC.

B.     She can minimize her losses by shutting down her operations now.

C.     Although she is currently incurring a loss, she could restore profitability by advertising her carrots.

D.     She is incurring a loss, because price is less than ATC.

 

7.      How does the long run differ from the short run in perfect competition?

A.     The long run is long enough to allow for the entry of new firms into the industry.

B.     In the long run, some firms will charge higher prices than others.

C.     In the short run, the firm seeks to maximize profit; it the long run it seeks to maximize revenue.

D.     In the short run, the firm seeks to maximize profit; it the long run it seeks to minimize cost.

 

8.      A perfectly competitive firm is currently selling its product at the market price of $6. Its average fixed cost is $0.75 and its average total cost is $5.50. How much would the market price have to decline in order for the firm to choose to shut down in the short run?

A.     The price would have to fall below $0.75

B.     The price would have to fall below $5.50.

C.     The price would have to fall below $4.75.

D.     The firm should shut down now, at the price of $6.00

 

9.      A firm will choose to shut down in the short run when

A.     price is below the minimum point of AVC.

B.     total revenue is not sufficient to cover total cost.

C.     marginal cost begins to increase.

D.     price is above the minimum point of AVC but below the minimum point of ATC.

 

10.  Why does economic theory predict that the perfectly competitive firm will produce at the point where price equals marginal cost?

A.     Because this point results in zero economic profit.

B.     Because this point will minimize ATC for the firm.

C.     Because this point maximizes profit for the firm.

D.     Because this point provides an efficient allocation of society's resources.

 

11.  A perfectly competitive firm earns an economic profit when

A.     total cost exceeds total revenue.

B.     price is above average total cost.

C.     total variable cost exceeds total revenue.

D.     price is above average variable cost.

 

12.  How does the long-run industry supply curve compare to the short-run industry supply curve?

A.     The long-run curve is based on the assumption that firms can control the price they charge, whereas the short-run curve assumes that the market sets the price.

B.     The long-run curve is always steeper than the short-run curve.

C.     The short-run curve is based on the assumption that firms can control the price they charge, whereas the long-run curve assumes that the market sets the price.

D.     The long-run curve is always flatter than the short-run curve.

 

13.  Which of the following is NOT a characteristic of a perfectly competitive industry?

A.     Each firm seeks to undercut the price of its competitors.

B.     There is easy entry and exit.

C.     Each firm is a price-taking producer.

D.     Each firm has a small share of the market.

 

14.  In maximizing net gains, the perfectly competitive firm will seek to

A.     minimize average variable cost.

B.     minimize average total cost.

C.     maximize profit.

D.     minimize marginal cost.

 

15.  Nadia operates a frame shop and charges the perfectly competitive price of $65 for custom framing of a standard size picture. She is a price-taking producer. In order to maximize her profit, Nadia will

A.     seek to operate at the minimum point on her marginal cost curve.

B.     seek to produce at the point where her average variable cost is $65.

C.     accept framing orders up until the point where the marginal cost of doing so is $65.

D.     seek to operate at the minimum point on her average variable cost curve.

 

16.  The short-run individual supply curve of the perfectly competitive firm is

A.     its marginal cost curve above average variable cost.

B.     the upward-sloping portion of its average variable cost curve.

C.     its marginal cost curve above average total cost.

D.     its average total cost curve.

 

17.  For the perfectly competitive firm, economic profit equals

A.     (price - average variable cost) x quantity.

B.     (price - average total cost) x quantity.

C.     (price-marginal cost) x quantity.

D.     total revenue - total fixed cost.

 

18.  The quantity supplied by a perfectly competitive firm at a given market price is determined by

A.     the number of firms in the market.

B.     the firm's marginal cost curve.

C.     the firm's marginal revenue curve.

D.     the firm's average total cost curve.

 

19.  Suppose that firms in the perfectly competitive potato-growing industry are earning economic profits. According to economic theory, what is likely to happen?

A.     More firms will enter the market, thereby increasing the industry supply and lowering the market price.

B.     The costs of the firms will increase, eventually eliminating the profit.

C.     More firms will enter the market, thereby decreasing the industry supply and raising the market price

D.     The existence of profits will lead to a drop in the demand for potatoes.

 

20.  Which of the following is NOT a characteristic of the long-run equilibrium in perfect competition?

A.     Each firm is producing at the minimum point on the MC curve..

B.     Price equals ATC for each firm.

C.     Each firm is producing an efficient quantity.

D.     Each firm is earning zero economic profit.

 

 

CHAPTER 9 ANSWERS

 

1.      C. If profits are observed in the industry, each firm will continue to produce at the profit-maximizing point, but there will be more producers. Page: 224

2.      C. As new firms enter the industry, the market price will drop. Page: 223

3.      B. The firm will earn a profit of $1 per unit on each of the 50 units sold. Page: 217

4.      D. As this is a perfectly competitive market, we would expect that the existence of profit will lead to the creation of more cherry orchards. Page: 215

5.      D. If he worked beyond 38 hours, Gabriel would be adding to his cost by more than he adds to his revenue. Page: 212

6.      D. The way to minimize this loss is to stay in business, at least for the duration of the short run. Page: 216

7.      A. Once all entry and exit has occurred, the market price will settle at its long-run equilibrium level. Page: 222

8.      C. The firm will continue to operate as long as the price is at least as great as average variable cost. Page: 217

9.      A. It is only when price is below AVC that the firm can minimize losses by shutting down. Page: 217

10.  C. There are many conditions resulting from this profit-maximizing outcome, but they are not necessarily part of the firm's motivation. Page: 212

11.  B. If price exceeds ATC, then the firm's total revenue will exceed total cost. Page: 214

12.  D. In the long run, price increases resulting from an increase in demand will draw more firms into the industry. Page: 225

13.  A. In a perfectly competitive market, each firm takes the price as given. Page: 207

14.  C. The firm is willing to incur costs, as long as revenue is generated in doing so. Page: 211

15.  C. Net gains to the firm are maximized when the firm produces at the point where marginal revenue equals marginal cost. Page: 212

16.  A. In this sense, you can see how the cost structure involved in producing a certain good will determine the elasticity of its supply. Page: 217

17.  B. This is a restatement of the formula that profit equals total revenue minus total cost. Page: 214

18.  B. Each point on the marginal cost curve identifies the quantity that will be supplied at the corresponding price. Page: 217

19.  A. The entry of new firms in this circumstance contributes to the relatively greater elasticity of long-run supply. Page: 222

20.  A. The long-run equilibrium position is on the upward-sloping portion of MC. Page: 225

 

 

 

CHAPTER 14 - QUESTIONS

 

1.      Monopoly is a type of

A.     market structure.

B.     price discrimination.

C.     business strategy.

D.     pricing strategy.

 

2.      A price ceiling imposed on a monopoly

A.     can enhance the market power of the monopolist.

B.     always creates a surplus.

C.     always creates a shortage.

D.     can increase total surplus.

 

3.      Suppose an industry initially had been perfectly competitive and then became a monopoly. Which of the following would occur?

A.     The deadweight loss would be eliminated.

B.     Producer surplus would decrease

C.     Consumer surplus would decrease.

D.     Consumer surplus would increase.

 

4.      The monopolist's marginal revenue curve is downward-sloping because

A.     he operates in the range where MC is downward-sloping.

B.     his total revenue declines as he sells more.

C.     the monopolist must lower his price in order to sell more.

D.     he operates in the range where ATC is downward-sloping.

 

5.      If the regulated price for a natural monopoly is set equal to marginal cost,

A.     other firms will seek to enter the industry and compete at this price.

B.     the firm will not cover all of its costs.

C.     the firm will produce the socially efficient level of output.

D.     the firm will make either positive or zero economic profits.

 

6.      If a monopoly practices perfect price discrimination, it will

A.     erode its own market power.

B.     eliminate consumer surplus.

C.     maximize consumer surplus.

D.     eliminate producer surplus.

 

7.      Price discrimination is

A.     charging different prices to different customers based on their willingness to pay.

B.     charging different prices to different customers based on different costs of serving them.

C.     an illegal practice.

D.     a practice that leads to the same outcome as would public ownership of a monopoly.

 

8.      If a monopolist engages in price discrimination, it is with the goal of

A.     lowering cost.

B.     improving goodwill with the public.

C.     making the demand for its good less elastic.

D.     increasing profit.

 

9.      To persist, a monopoly must

A.     be regulated.

B.     set its price so as to eliminate the deadweight loss.

C.     be protected by a barrier against the entry of other firms.

D.     be a natural monopoly.

 

10.  Which of the following is NOT an example of a barrier to entry?

A.     a patent

B.     an innovative product

C.     a copyright

D.     economies of scale

 

11.  Monopoly arises when

A.     there is a firm wanting to maximize profits.

B.     there are barriers to the entry of other firms.

C.     there is a firm desiring to compete in many markets.

D.     there is government intervention to establish and enforce a price ceiling.

 

12.  When natural monopolies are regulated so as to be efficient, the goal is to

A.     have the firm produce the quantity at which marginal revenue equals average total cost.

B.     set price equal to average total cost, so as to maximize consumer surplus and allow the firm to break even.

C.     have the firm produce the quantity at which marginal revenue equals marginal cost.

D.     set price equal to marginal cost, even if marginal cost is less than average total cost.

 

13.  Suppose a monopoly firm has a constant marginal cost equal to $8. Its demand and marginal revenue curves are given respectively by the equations P = 40-2Q and MR = 40-4Q. For this firm, the profit-maximizing price and output levels are

A.     P = $24, Q = 8

B.     P = $24, Q = 16

C.     P = $20, Q = 20

D.     P = $12, Q = 12

 

14.  One difference between monopoly and perfect competition is that

A.     a monopolist seeks to maximize profit; a perfect competitor does not.

B.     a perfect competitor seeks to maximize profit; a monopolist does not.

C.     the marginal revenue curve for a perfect competitor is downward-sloping, and for a monopolist it is horizontal.

D.     the marginal revenue curve for a monopolist is downward-sloping, and for a perfect competitor it is horizontal.

 

15.  In today's U.S. economy, which of the following industries is best described as a monopoly?

A.     fast food restaurants

B.     pharmaceuticals

C.     accounting services

D.     hair salons

 

16.  Suppose a monopoly firm has a constant marginal cost equal to $10. Its demand and marginal revenue curves are given respectively by the equations P = 86-2Q and MR = 86-4Q. For this firm, the profit-maximizing price and output levels are

A.     P = $21.50, Q = 5

B.     P = $48, Q = 19

C.     P = $43, Q = 10

D.     P = $43, Q = 17

 

17.  Which of the following statements about monopoly is NOT correct?

A.     A monopolist can sell as much as she wants at whatever price she chooses.

B.     Because a monopoly has market power, it will charge a price higher than what would prevail under conditions of perfect competition.

C.     In order for a monopoly to persist, there must be barriers to the entry of other firms.

D.     When a monopolist increases production, the quantity effect will tend to increase total revenue and the price effect will tend to decrease total revenue.

 

18.  The U.S. beer industry is characterized by market power for only a few firms, with the largest one enjoying a fifty percent market share. One reason for this is economies of scale. This means that

A.     patents have allowed beer producers to have low costs of production.

B.     as beer production increases, the average total cost of production falls.

C.     if the industry were made perfectly competitive, the costs of production would fall.

D.     as beer production increases, costs increase significantly.

 

19.  If an airline wants to practice price discrimination so as to enhance its profit levels, it will

A.     charge higher fares to those with a more elastic demand.

B.     charge higher fares to those with a less elastic demand.

C.     determine a fare for each passenger according to the costs of serving them.

D.     charge everyone the same fare.

 

20.  Public ownership of a natural monopoly is intended to do all of the following EXCEPT

A.     create an efficient outcome.

B.     eliminate the deadweight loss.

C.     increase demand for the good.

D.     protect consumer interests.

 

 

CHAPTER 14 ANSWERS

 

1.      A. Monopoly is defined by the nature of competitive conditions faced by the firm. There are no other firms in the industry, but the monopolist's profit-maximizing behavior is constrained by the market demand curve. Page: 334

2.      D. A price ceiling can serve to move the price closer to the perfectly competitive level. Page: 351

3.      C. Consumer surplus would be diminished due to both the increase in producer surplus and to the emergence of a deadweight loss. Page: 348

4.      C. The quantity effect and the price effect work in opposite directions for the monopolist. Page: 340

5.      B. This is why regulation does not seek to create marginal cost pricing for a natural monopolist. Page: 350

6.      B. How might a firm determine each consumer's willingness to pay? Page: 353

7.      A. To engage in effective price discrimination, a producer must be able to prevent one group of customers from reselling the good to other customers. Page: 353

8.      D. Successful price discrimination involves a transformation of consumer surplus into profits for the producer. Page: 353

9.      C. It is the barriers to the entry of other firms that allow a monopolist to earn positive economic profits in the long run, whereas a perfect competitor cannot do this. Page: 337

10.  B. To the extent that other producers can copy the innovation, they will. Page: 337

11.  B. The barriers to entry of other firms allow a monopolist to persist in earning profits. Page: 337

12.  B. This can be the most efficient outcome, given the technology of the production process. Page: 350

13.  A. This price exceeds what it would be at the perfectly competitive level. Page: 344

14.  D. The monopolist faces a downward-sloping marginal revenue curve, because she must lower her price in order to increase quantity sold. Page: 341

15.  B. The patents granted for pharmaceutical treatments serve as a barrier to entry. Page: 338

16.  B. The steps you take in solving this problem are a good reminder that the monopolist finds the profit-maximizing quantity first; then determines the price corresponding to that quantity along the demand curve. Page: 344

17.  A. The monopolist always faces the demand curve as a constraint. Page: 335

18.  B. The technology of an industry will determine whether there are economies of scale in production. Page: 337

19.  B. The price charged corresponds to the customer's willingness to pay. Page: 353

20.  C. Public ownership serves largely the same function as does regulation. Page: 349

 

 

 

CHAPTER 15 - QUESTIONS

 

1.      Which of the following statements about oligopolies is NOT correct?

A.     There are only a few firms in the industry.

B.     Oligopolistic firms are always large.

C.     An important reason for the existence of oligopolies is the presence of economies of scale.

D.     Each firm possesses some market power.

 

2.      For the members of OPEC, it is in their combined interests to

A.     engage in product differentiation.

B.     maximize yearly petroleum output.

C.     restrict yearly output and keep prices high.

D.     reach a noncooperative equilibrium.

 

3.      Which word best characterizes the interaction among firms in any oligopoly?

A.     cooperation

B.     confrontation

C.     collusion

D.     interdependence

 

4.      In a Nash equilibrium outcome,

A.     each player is happy with his decision, given the decisions of the other players.

B.     one player convinces the others to follow a course of action that will be in everyone's best interest.

C.     players collude to produce the best possible outcome.

D.     the total well-being of all players is maximized.

 

5.      In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium outcome is one in which

A.     both individuals confess.

B.     neither individual confesses.

C.     neither individual follows a dominant strategy.

D.     one confesses and the other does not.

 

6.      The model in which one firm sets a price and others in the industry also charge that price is known as

A.     prisoners' dilemma.

B.     a tit-for-tat strategy.

C.     price leadership.

D.     Nash equilibrium.

 

7.      The reason why game theory is not applied to perfect competition is that

A.     the behavior of one perfectly competitive firm does not affect the behavior of its rivals.

B.     it is difficult to define the pay-offs that motivate perfectly competitive firms.

C.     we cannot define a dominant strategy for perfect competition.

D.     the price leadership model works better in describing perfect competition.

 

8.      The U.S. baseball glove industry is an oligopoly. This means that glove suppliers face a _________ than a monopoly glove supplier would.

A.     larger price effect

B.     higher cost structure

C.     lower cost structure

D.     smaller price effect

 

9.      When firms engage in tacit collusion, they

A.     compete on price by undercutting each other.

B.     meet periodically to establish a monopoly price.

C.     limit production in a way that enhances industry profits.

D.     meet periodically to establish production quotas.

 

10.  The 1890 Sherman Antitrust Act makes it illegal for firms to

A.     engage in price discrimination.

B.     engage in tacit collusion.

C.     raise prices in an attempt to increase profits.

D.     create monopoly power.

 

11.  Why is collusion more likely in cases of oligopoly than in perfect competition?

A.     Oligopoly moves towards an equilibrium outcome; perfect competition does not.

B.     There are too many firms in perfect competition to allow for collusion.

C.     In oligopoly, all firms sell an identical product; but in perfect competition, the product varies between producers.

D.     Perfect competition moves towards an equilibrium outcome; oligopoly does not.

 

12.  In the classic prisoners' dilemma with two accomplices in crime, the dominant strategy for each individual is to

A.     confess.

B.     confess only if the other individual confesses.

C.     not confess.

D.     confess only if she feels more at fault than the other.

 

13.  For competing firms, a(n) ____________________ strategy is when it is in each firm's best interest to pursue an action ________________ the action taken by the other firm.

A.     dominant, only after considering

B.     equilibrium, only after considering

C.     tit-for-tat, regardless of

D.     dominant, regardless of

 

14.  The kinked demand curve model applies to a situation of

A.     tacit collusion.

B.     output quotas designed to produce monopoly pricing.

C.     antitrust enforcement.

D.     perfect competition.

 

15.  Successful tacit collusion is most likely to arise among oligopolistic firms when

A.     they are all the same size.

B.     they do not have a means of engaging in nonprice competition.

C.     they all have the same production costs.

D.     they each play the tit-for-tat strategy.

 

16.  In using a prisoners' dilemma game to model the behavior of firms within an oligopoly, we are assuming that

A.     each firm seeks to act in its own best interest.

B.     each firm seeks to act in the best interest of the industry as a whole.

C.     all firms will pursue the same strategy.

D.     each firm will pursue a different strategy.

 

17.  A firm engaged in strategic behavior

A.     fits the definition of a natural monopoly.

B.     takes the market price as given, as does a perfectly competitive firm.

C.     is not seeking to maximize long-term profit.

D.     attempts to influence the behavior of other firms.

 

18.  A price war is evidence of

A.     a collapse of tacit collusion.

B.     a perfectly competitive market.

C.     a successful nonprice competition.

D.     a successful tacit collusion.

 

19.  Game theory is

A.     the branch of economics that looks at psychological motives.

B.     the branch of economics that looks at political motives.

C.     the study of behavior in situations of interdependence.

D.     the science of designing effective product differentiation.

 

20.  Antitrust policy is designed to

A.     protect the employees of monopoly firms.

B.     protect the stockholders of monopoly firms.

C.     prevent firms from engaging in price discrimination.

D.     prevent firms from exercising monopoly power.

 

 

CHAPTER 15 ANSWERS

 

1.      B. Oligopolistic firms may be any size. Page: 364

2.      C. To the extent that the members of OPEC can jointly act as a monopoly, the overall profits from petroleum production will be enhanced. Page: 378

3.      D. Firms within an oligopoly may or may not collude, but they are always interdependent. Page: 364

4.      A. A Nash equilibrium is reached when no player wishes to change her decision, having seen the decisions of the other players. Page: 373

5.      A. This is the outcome in which each individual is happy with his or her own decision, given the decision of the other person. Page: 373

6.      C. In this industry behavior, it is common for firms to engage in nonprice competition. Page: 382

7.      A. In perfect competition, no individual firm can affect the market price or the profit level of its rivals. Page: 371

8.      D. This accounts for the temptation firms have to expand output in a way that is described as noncooperative behavior. Page: 368

9.      C. Firms can enhance their profits if they abide by an understood agreement to keep industry production close to the monopoly level. Page: 380

10.  D. A firm can create monopoly power without actually being a monopoly. Page: 379

11.  B. In perfect competition, the incentives for any firm to cheat on a collusive agreement are quite strong. Page: 368

12.  A. The decision to confess is in a player's best interest regardless of the decision made by the other player. Page: 373

13.  D. If a dominant strategy exists, economic theory predicts that the firm will choose it. Page: 373

14.  A. The price at the kink in the demand curve is set by the price leader. Page: 376

15.  D. Incentives to collude are reinforced when each firm mimics the behavior of its rivals. Page: 375

16.  A. The driving assumption of a game theory model is that each firm pursues its own best interest. Page: 375

17.  D. If you are following some type of strategy, you are anticipating and maybe influencing someone else's actions. Page: 374

18.  A. Firms know that they can increase their sales by undercutting their rivals. Once this behavior starts, the collusive agreement unravels. Page: 381

19.  C. In this respect, game theory has made valuable contributions to many branches of social science, not just to economics. Page: 371

20.  D. The hope is that antitrust policy will promote efficiency in markets. Page: 379

 

 

 

CHAPTER 16 - QUESTIONS

 

1.      Why do monopolistic competitors not collude to form a monopoly?

  1. Each firm can charge a monopoly price acting on its own.
  2. Each firm already has its own monopoly within one geographic region.
  3. There are too many firms to allow for successful collusion.
  4. Successful collusion would require that they increase quantity beyond what they are capable of producing.

 

2.      Which of the following is true of monopoly but is NOT true of monopolistic competition?

A.     The firm faces a downward-sloping demand curve.

B.     The firm will produce at a point where price equals marginal cost.

C.     The firm will earn positive economic profits in the long run.

D.     The firm faces a downward-sloping marginal revenue curve.

 

3.      What is the effect in the market as more firms enter a monopolistically competitive industry?

A.     The market supply curve shifts to the left.

B.     The demand curve faced by each firm shifts out and to the right.

C.     The demand curve faced by each firm shifts in and to the left.

D.     The market supply curve shifts to the right.

 

4.      Which of the following is true of perfect competition but is NOT true of monopolistic competition?

A.     The firm faces a downward-sloping demand curve.

B.     The firm faces a downward-sloping marginal revenue curve.

C.     The firm will produce at a point where price equals marginal cost.

D.     The firm will earn zero economic profit in the long run.

 

5.      For any given firm in a monopolistically competitive market, the long run economic profit tends to be __________ and firms operate to the ____________ of the minimum point on the average total cost curve.

A.     negative, left

B.     zero, left

C.     positive, left

D.     negative, right

 

6.      Which of the following would be an example of a monopolistically competitive industry with differentiation by style or type?

A.     cucumbers

B.     electric power

C.     cotton

D.     running shoes

 

7.      Since a monopolistic competitor produces a product with many close substitutes, it

A.     has unlimited market power.

B.     has no market power.

C.     faces a highly inelastic demand curve.

D.     has some degree of market power.

 

8.      Which of the following is true of monopolistic competition but is NOT true of perfect competition?

A.     Each firm distinguishes its product from that of its competitors.

B.     The firm engages in marginal cost pricing.

C.     There are significant barriers to the entry of new firms in the industry.

D.     The firm produces at the point where average total cost is minimized.

 

9.      In long run equilibrium, a monopolistically competitive firm is producing at a point on its average total cost curve where

A.     price equals average total cost.

B.     price equals marginal revenue.

C.     marginal revenue equals average total cost.

D.     price equals marginal cost.

 

10.  Monopolistically competitive firms spend money on celebrity endorsements in order to

A.     convey objective information about their products.

B.     show that successful people are willing to offer free endorsements of their products.

C.     illustrate the idea that advertising and brand naming create efficiencies in the market.

D.     send a signal that they are successful companies.

 

11.  To the extent that brand names developed in monopolistic competition provide a benefit to the consumer, it is

A.     by encouraging the entry of new competitors.

B.     by allowing the firm to engage in price discrimination.

C.     through their assurance that the firm will provide a quality product in order to preserve repeated transactions.

D.     by allowing for a lower total cost.

 

12.  The goal of a monopolistically competitive firm is to

A.     minimize cost.

B.     maximize the quantity sold.

C.     create product diversity.

D.     maximize profit.

 

13.  The product diversity resulting from monopolistic competition comes at the expense of having

A.     a higher average total cost of production than would prevail under perfect competition.

B.     firms that are too small to maximize profit.

C.     firms that will earn positive profits.

D.     higher profit than would prevail under perfect competition.

 

14.  A monopolistically competitive firm faces

A.     the market demand curve for the good.

B.     a perfectly elastic demand curve.

C.     a perfectly inelastic demand curve.

D.     a highly elastic demand curve.

 

15.  Which of the following is true of the long run in perfect competition but NOT true of the long run in monopolistic competition?

A.     The firm produces where ATC is minimized.

B.     The firm will fail to produce enough to minimize ATC.

C.     Economic profit is zero.

D.     Marginal revenue equals marginal cost.

 

16.  In the oil change market, monopolistic competition prevails. This means that collusion among oil change suppliers is ______________ and firms engage in ___________ behavior.

A.     common, cooperative

B.     common, uncooperative

C.     rare, uncooperative

D.     rare, cooperative

 

17.  Suppose that a monopolistically competitive firm is currently producing at the point where marginal revenue equals marginal cost and is incurring a loss. In this situation, economic theory would predict that the firm will

A.     be able to switch to a point of profitability by producing where price equals marginal cost.

B.     collude with other producers.

C.     exit the industry.

D.     raise prices in order to lessen the amount of the loss.

 

18.  Monopolistic competitors engage in product differentiation in order to

A.     create excess capacity.

B.     make it easer to collude with other firms

C.     enhance their market power.

D.     reduce costs.

 

19.  What accounts for the fact that profit is zero in the long-run equilibrium in monopolistic competition?

A.     Firms have excess capacity.

B.     Firms are too small relative to the market.

C.     There are no barriers to the entry of new firms.

D.     Firms spend too much on product development.

 

20.  If monopolistically competitive firms are earning positive economic profits in the short run, then in the long run

A.     the level of profits will be unchanged.

B.     firms will be unable to enter the industry because of the existence of barriers to entry.

C.     they will make zero economic profits.

D.     a limited number of firms will enter the industry, and profits will be reduced but will remain positive.

 

 

CHAPTER 16 ANSWERS

 

1.      C. The problems of organizing and enforcing a collusive agreement are multiplied with a large number of firms. Page: 393

2.      C. It is the barriers to the entry of other firms that allow a monopolist to continue generating economic profit in the long run. Page: 396

3.      C. There are now more firms dividing up a given market. Page: 395

4.      C. For a monopolistic competitor, price will exceed marginal cost. Page: 394

5.      B. The condition of free entry guarantees a long-run equilibrium in which each firm will earn zero economic profit. Page: 394

6.      D. As agricultural products, cotton and cucumbers fit the definition of being perfectly competitive industries. Electric power is a natural monopoly. Page: 390

7.      D. To the extent that the firm can distinguish its product from that of its competitors, it will enhance its own market power. Page: 393

8.      A. In perfect competition, the product is homogeneous across all suppliers. Page: 390

9.      A. The graph of monopolistic competition in long-run equilibrium shows the relationship among all these variables. Page: 394

10.  D. A celebrity endorsement conveys a sense of permanence. Page: 401

11.  C. A firm with a reputation to protect has an incentive to provide a satisfactory product in every instance. Page: 402

12.  D. Economic theory assumes that the goal of all firms is to maximize profit. Page: 393

13.  A. The fact that there are so many producers in a monopolistically competitive market means that there will be a variety of products, but that each firm will select a quantity that is below the minimum cost output. Page: 400

14.  D. The fact that the firm produces a good for which there are many close substitutes means that the demand will be highly elastic. Page: 394

15.  A. Excess capacity does not arise in perfect competition. Page: 396

16.  C. The large number of firms means that collusive agreements would be difficult to arrange and enforce. Page: 393

17.  C. If the maximum amount of profit is negative, the firm will pursue its best interest by exiting the industry. Page: 396

18.  C. To the extent that a product is perceived as being unique, the firm has some discretion over price. Page: 390

19.  C. The presence of profit will attract new firms. Page: 395

20.  C. New firms will be drawn into the industry, and each individual firm will experience a decrease in the demand for its product. Page: 396