Solution at end
1. The marginal revenue curve of a competitive firm is
a. U-shaped.
b. a ray from the origin.
c. a horizontal line at the market price.
d. downward sloping.
2. The demand curve faced by a competitive firm is
a. perfectly elastic at the established market
price.
b. downward sloping, with the same elasticity
as the industry demand curve.
c. more inelastic than the demand curve faced
by its competitors.
d. nonexistent.
3. Any firm, competitive or not, desiring to maximize profits, will choose its quantity according to the rule, produce that quantity at which
a. marginal revenue = price.
b. marginal revenue = marginal cost.
c. average variable cost is at its minimum.
d. marginal cost is at its minimum.
4. A competitive firm's supply curve is determined by
a. its marginal costs.
b. the market price.
c. the zero-profit condition.
d. its fixed inputs
5. When a manufacturer produces 50 chairs, the marginal and average costs are both equal to $50 per chair. A 51st chair raises the marginal cost to $54 per chair and the average cost to $52 per chair. What is the firm's elasticity of supply when 50 chairs are produced?
a. 1/4.
b. 1/2.
c. 1.
d. 2.
6. An industry's output is produced at the lowest possible cost when
a. firms' marginal costs are equal.
b. firms minimize their average costs.
c. all firms earn the same profit.
d. output is evenly divided among the industry's firms.
7. A competitive firm will exit an industry in the long run when the market price falls below its
a. marginal revenue.
b. marginal cost.
c. average cost.
d. average variable cost.
8. Suppose all firms in an industry are identical. In the long run, entry and exit guarantee that all firms will have zero
a. marginal cost.
b. average cost.
c. profit.
d. revenue
9. The competitive firm's long-run supply curve
a. is always perfectly horizontal.
b. includes only that part of the long-run marginal cost curve that lies above long-run average cost.
c. includes only that part of the long-run marginal cost curve that is sloping upwards.
d. is identical to its long-run average cost curve.
10. Farmer Jane grows sunflowers for seed on land that is bought and paid for. She figures her profit per acre is $60 because each she puts $30 of purchased inputs onto each acre, $10 worth of her time into working on each acre, and the harvested seed sells for $100. Farmer Jane
a. has correctly calculated her economic
profit.
b. has forgotten to include the opportunity
cost of the land in her calculation of profit.
c. should not have included the value of her
time in calculating profits.
d. should sell her seed only for a price that
would bring a higher profit.
11. Suppose that the pizza business is a competitive, constant-cost industry. An increase in demand for pizza, will, in the long-run lead to
a. an increase in price and industry output,
but no increase in the output of existing firms.
b. no increase in price, no increase in the
output of existing firms but an increase in industry output because of new
firms.
c. no increase in price and an increase in
industry output as each existing firm produces more.
d. no changes in price, output of existing
firms or the number of firms in the industry.
12. Assume dental care is provided by a competitive industry. A new government regulation requires each dentist to have a newly-developed ultrasound machine for sterilizing dental instruments. What happens to the price of dental care?
a. The price of dental care rises in the
short run and rises further in the long run.
b. The regulation will cause higher prices in
the short run, but it will have no long-run impact.
c. There is no change in the short run, but
dentists will exit and prices will rise in the long run.
d. The machine is a sunk cost, so the price
of dental care does not change in either the short run or the long run.
13. Economists generally assume that the firm's goal is to
a. minimize its costs.
b. maximize its profit.
c. make its market share as large as
possible.
d. maximize its production.
14. Marginal benefit is defined as
a. the net gain from a particular level of an
activity.
b. the additional benefit gained from the
last unit of an activity.
c. the difference between total benefits and
total costs of a particular level of an activity.
d. the difference between variable costs and
fixed costs.
15. As more of an activity is undertaken, it is reasonable to assume that
a. the total benefits will decline.
b. the marginal benefits will decline.
c. the fixed costs will decline.
d. the marginal benefits will increase.
16. Marginal cost is defined as
a. the additional cost attributable to the
last unit produced.
b. the change in fixed costs associated with
the production of one more unit of output.
c. the difference between total revenue and
total cost.
d. price times quantity.
17. Costs that are independent of the firm's level of output are called
a. fixed costs.
b. marginal costs.
c. opportunity costs.
d. sunk costs.
18. As increasing amounts of a good are produced, the marginal cost of production tends to
a. rise.
b. fall.
c. remain constant.
d. change unpredictably.
Table 1: Demand and Total Cost of Production
The following table which shows the demand for a firm's product and the firm's total cost of production.
|
Demand |
Total Cost |
||
|
Quantity |
Price |
Quantity |
Dollars |
|
0 units |
$35 per unit |
0 units |
$0 |
|
1 |
30 |
1 |
4 |
|
2 |
25 |
2 |
11 |
|
3 |
20 |
3 |
21 |
|
4 |
15 |
4 |
34 |
|
5 |
10 |
5 |
50 |
19. Refer to Table 1. The marginal cost of producing the second unit is
a. $21 per unit.
b. $20 per unit.
c. $10 per unit.
d. $7 per unit.
20. Refer to Table 1. The marginal revenue received from selling the fifth unit is
a. $50 per unit.
b. $10 per unit.
c. $2 per unit.
d. -$10 per unit.
21. Refer to Table 1. The profit from selling 4 units would be
a. $26.
b. $39.
c. $14.
d. $11.
22. Refer to Table 1. According to the equimarginal principle, how many units should the firm produce in order to maximize its profit?
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.
Table 2: Marginal Cost of Production
The following table shows a firm's marginal cost of production.
|
Quantity (number of units) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
|
Marginal Cost (dollars per unit) |
3 |
4 |
6 |
9 |
13 |
18 |
24 |
31 |
23. Refer to Table 2. Suppose the firm has $20 in fixed costs. Its total cost of producing 5 units of output is
a. $29.
b. $33.
c. $55.
d. $42.
24. Refer to Table 2. Suppose demand for the firm's product is horizontal at a price of $18 per unit. How much output should the firm produce in order to maximize its profit?
a. 3 units.
b. 4 units.
c. 6 units.
d. 7 units.
25. Refer to Table 2. Suppose the firm has $20 in fixed costs, and demand for the firm's product is horizontal at a price of $18 per unit. What is the firm's maximum profit?
a. $33.
b. $35.
c. $73.
d. $88.
26. Refer to Table 2. Suppose the firm's fixed costs increase to $60, and demand for the firm's product remains horizontal at a price of $18 per unit. What is the firm's maximum profit?
a. $-7.
b. $-5.
c. $33.
d. $48.
27. An increase in fixed costs will lower a firm's
a. total cost.
b. output.
c. prices.
d. profit.
28. Consider a firm that produces peanut butter. An increase in the price of peanuts will cause the firm to lower its output because
a. fixed costs will rise.
b. marginal cost will rise.
c. the price of peanut butter will rise.
d. marginal revenue will fall.
29. A monopoly will set price
a. at the highest price along its demand curve.
b. equal to the value at which marginal cost intersects the demand curve.
c. so that it can sell the quantity at which marginal revenue is equal to marginal cost.
d. so that it can sell the quantity at which marginal revenue is equal to zero.
30. When a simple monopolist chooses to sell an additional unit of a good or service
a. marginal revenue will be equal to the going market price.
b. marginal revenue will always be negative.
c. it will only have to lower its price on the additional unit.
d. it will have to lower its price on the additional unit and on all other units.
31. What can, in general, be said about a monopoly's supply curve?
a. A monopoly's supply curve, like that for a competitive firm, coincides with its marginal cost curve.
b. A profit-maximizing monopoly will operate only on the elastic portion of its supply curve.
c. The monopoly's supply curve is more inelastic than if the firm were competitive.
d. The concept of a supply curve is meaningless in the context of the monopoly problem.
32. A monopolist will always end up choosing to operate
a. even if its profits are negative.
b. on the elastic portion of its demand curve.
c. until such time as a new competitor enters its market.
d. only if it can capture the entire consumer surplus.
Figure 1
PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.
1. Refer to Figure 1. What area represents the consumer surplus earned in the monopoly equilibrium?
a. Area A + B
b. Area C + F + A + B
c. Area C + D + F + G.
d. Area C + D + E.
2. An economic problem with using subsidies or price ceilings to move a monopoly toward the competitive equilibrium is that
a. it may increase monopoly profits.
b. it may decrease monopoly profits.
c. policy makers may not be able to determine what the competitive equilibrium is.
d. policy makers always need to be lobbied before taking any actions.
3. Consider a price ceiling imposed on a monopoly. For what quantities will the monopoly's new marginal revenue curve be horizontal at the ceiling price?
a. For quantities where the demand curve lies above the ceiling price.
b. For quantities where demand is elastic.
c. For quantities where marginal cost is rising.
d. Marginal revenue will be constant and equal to the ceiling price for all quantities.
4. Suppose regulators impose a price ceiling on a monopoly. If the price ceiling is set ABOVE the monopoly price, then the monopoly will
a. reduce its output.
b. increase its production.
c. produce the same output at the same price.
d. earn zero profit.
5. In order to practice any form of price discrimination, a monopoly must be able to
a. identify the maximum price that each customer is willing to pay.
b. separate its customers into distinct groups.
c. prevent resale of its product.
d. establish a legal barrier to entry.
6. Legal restrictions on entry into an industry
a. are strongly opposed by those already in an industry.
b. are promoted through lobbying efforts by those already in the industry, thereby further increasing the social costs of monopoly.
c. are promoted by those who wish to enter the industry, thereby potentially increasing the social welfare generated by the industry.
d. are always instituted to protect the public's health and welfare.
7. Before Walmart's entry into the retail pharmacy business which drove down prices, existing pharmacies
a. were operating efficiently, so this is an example of predatory pricing.
b. were colluding on price, so this is an example of a contestable market.
c. were not operating as efficiently as afterwards, so this is not a case of predatory pricing.
d. did not advertise but were forced to do so by the new competition.
8. Economists are skeptical about the degree to which predatory pricing is used because
a. "price wars" are rarely observed in actual markets.
b. when used as a warning to potential rivals, predation has minimal value.
c. buy-outs are less costly than predation and have no offsetting disadvantages.
d. firms can easily counter predation by "laying low" or borrowing funds.
9. According to the law of demand, if other relevant factors remain unchanged, then a rise in the price of a commodity will cause
a. a reduction in the equilibrium quantity.
b. excess supply.
c. suppliers to reduce their production in reaction to the lower demand.
d. a fall in the quantity demanded.
10. Which of the following would cause the demand curve for peanuts to shift to the left?
a. A rise in the price of peanuts.
b. A blight that destroyed 75% of the peanut harvest.
c. A report claiming that the high fat content of peanuts causes heart disease.
d. A tariff that doubles the price of imported pistachio nuts.
11. If the demand curve for cigarettes is relatively steep, then
a. higher cigarette prices would cause a large number of people to quit smoking.
b. the law of demand does not hold for cigarettes.
c. shifts in the supply curve for cigarettes will have relatively little effect on the price of cigarettes.
d. the price of cigarettes has relatively little effect on smokers' decision to buy cigarettes.
12. A fall in supply is illustrated by
a. a downward shift in the supply curve.
b. moving the equilibrium point down and to the left along the supply curve.
c. drawing the supply curve flatter.
d. shifting the supply curve to the left.
13. A fear that consumption of beef may be related
to a life threatening disease spreads rapidly through
a. the demand falls, price decreases and therefore French consumers buy more beef.
b. the demand falls, price decreases and the quantity supplied therefore falls.
c. a fall in demand followed by a fall in supply.
d. the equilibrium quantity falls, but the price does not change.
14. New safety regulations increase manufacturers' costs of producing signs. What happens in the market for signs?
a. The demand falls as buyers refuse to bear the higher production costs.
b. The supply falls, resulting in a higher equilibrium price and lower equilibrium quantity.
c. Both supply and demand fall, resulting in fewer signs being bought and sold.
d. The supply rises as manufacturers attempt to use higher sales to offset their lower profit margins.
15. Which of the following could decrease the equilibrium price but increase the equilibrium quantity of oranges?
a. Higher wages are paid to the agricultural workers who harvest the oranges.
b. A rise in the cost of treating pests destroying oranges.
c. Many new orange groves are planted.
d. An increase in the market supply of grapefruit.
16. A simultaneous increase in both the demand for computers and the supply of computers must increase
a. the number of computers bought and sold.
b. the price of computers.
c. both the equilibrium price and quantity of computers.
d. the shortage of computers in the market.
17. Assume that the demand curve for apples is downward-sloping and the supply curve for apples is upward-sloping. If the government imposes an excise tax of 10¢ per apple, then the total price (including the tax) that demanders must pay for an apple
a. remains unchanged.
b. rises by less than 10¢ per apple.
c. rises by exactly 10¢ per apple.
d. rises by more than 10¢ per apple.
18. To make child daycare more affordable, government advisors are debating two possible options. Plan A is to give daycare centers a $100 subsidy per month per child. Plan B is to give the parents $100 reduction in taxes per month per child in daycare. Which plan benefits parents more?
a. Plan A because it will increase the supply of childcare and decrease the price.
b. Plan B because the $100 goes directly to the parents.
c. The plans are equivalent in terms of their impact on the price minus subsidy paid by parents.
d. Plan A because the price will fall, while under Plan B the price will rise.
19. The slope of the tangent to the total
revenue curve measures
a. marginal cost
b. marginal revenue
c. average revenue
d. fixed revenue
20. The slope of a line drawn from the origin
to the total revenue curve measures
a. marginal cost
b. marginal revenue
c. average revenue
d. fixed revenue
21. In order to maximize profit the monopolist
should produce at that point where
a. marginal cost equals marginal revenue
b. the slopes of the total revenue and total cost
curves are equal
c. the distance between the total revenue and
total cost curves are greatest
d. all of the above
22. A price discriminating monopolist will
charger a ___________ price in a market where the elasticity of demand is
___________ over the relevant price range
a. higher, lower
b. lower, higher
c. lower, lower
d. higher, higher
e. a and b of the above
23. A price discriminating monopolist sells
simultaneously in two markets. In which market will marginal cost be higher?
a. in the market where more is sold
b. in the market where less is sold
c. neither the marginal cost is the same in
both markets
d. he will always sell the same in both
markets
24. Network effects refer to
a. the effect of rumors in a market
b. the effect word of mouth in getting a job
c. the phenomenon that makes a good or service
more valuable the larger the number of people who use it
d. the price of software
25. Consider Figure 2 above. The two demand curves D1 and D2 have the same slope. The price elasticity of demand at point B is ___________ at point C.
a. greater than
b. smaller than
c. the same as
d. all of the above are possible
26. Consider Figure 3 above. The two demand curves D1 and D2 have the same slope. The price elasticity of demand at point D is ___________ at point C.
a. greater than
b. smaller than
c. the same as
d. all of the above are possible
27. Consider a straight line Engel curve that goes through the origin. The income elasticity of demand
a. goes from 0 to infinite along the curve
b. is everywhere equal to unity along the curve
c. is constant and will be higher the steeper the curve
d. is negative
28. Which of the following barriers to entry is the most credible?
a. government protection
b. economies of scale
c. advertising barriers
d. predatory behavior
e. product differentiation
Solution: