# CH 16-17

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 Each firm in a monopolistically competitive industry faces a downward-sloping demand curve because A. there are many other sellers in the market. B. there are very few other sellers in the market. C. the firm’s product is different from those offered by other firms in the market. D. the firm faces the threat of entry into the market by new firms. C For a monopolistically competitive firm, A. marginal revenue and price are the same. B. average revenue and price are the same. C. at the profit-maximizing quantity of output, price equals marginal cost. D. at the profit-maximizing quantity of output, price equals the minimum of average total cost. B For a monopolistically competitive firm, at the profit-maximizing quantity of output, A. price exceeds marginal cost. B. marginal revenue exceeds marginal cost. C. marginal cost exceeds average revenue. D. price equals marginal revenue. A Product differentiation causes the seller of a good to face what type of demand curve? A. downward sloping B. vertical C. horizontal D. Any of the above could be correct since product differentiation does not affect the shape of the demand curve. A A firm in a monopolistically competitive market faces a A. downward-sloping demand curve because the firm’s product is different from those offered by other firms. B. downward-sloping demand curve because there are only a few firms in the market. C. horizontal demand curve because there are many firms in the market. D. horizontal demand curve because firms can enter the market without restriction. A In the short run, a firm in a monopolistically competitive market operates much like a A. firm in a perfectly competitive market. B. firm in an oligopoly. C. monopolist. D. monopsonist. C Each firm in a monopolistically competitive market A. earns both short-run and long-run profits. B. faces a downward-sloping demand curve. C. cannot earn economic profit in the short run. D. sets price equal to marginal cost. B In a monopolistically competitive industry, firms set price A. equal to marginal cost since each firm is a price taker. B. below marginal cost since each firm is a price taker. C. above marginal cost since each firm is a price setter. D. always a fraction of marginal cost since each firm is a price setter. C A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market A. chooses its profit-maximizing quantity where marginal revenue equals marginal cost. B. sells its product in a highly-concentrated market. C. faces a downward-sloping demand curve for its product. D. can earn profits in the long run. C A monopolistically competitive firm chooses A. the quantity of output to produce, but the market determines price. B. the price, but competition in the market determines the quantity. C. price, but output is determined by a cartel production quota. D. the quantity of output to produce and the price at which it will sell its output. D Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms, A. marginal revenue will equal average total cost. B. price will exceed marginal cost. C. marginal cost will exceed average revenue. D. average variable cost will be declining. B In a monopolistically competitive industry, a firm’s demand curve also represent its A. marginal revenue. B. marginal cost. C. average revenue. D. profit. C A firm in a monopolistically competitive market is similar to a monopoly in the sense that (i) they both face downward-sloping demand curves. (ii) they both charge a price that exceeds marginal cost. (iii) free entry and exit determines the long-run equilibrium. A. (i) only B. (ii) only C. (i) and (ii) only D. (i), (ii), and (iii) only C A monopolistically competitive firm’s choice of output level is virtually identical to the choice made by A. a perfectly competitive firm. B. a duopolist. C. a monopolist. D. an oligopolist. C To maximize its profit, a monopolistically competitive firm.. A. takes the price as given and chooses its quantity, just as a competitive firm does. B. takes the price as given and chooses its quantity, just as a colluding oligopolist does. C. chooses its quantity and price, just as a competitive firm does. D. chooses its quantity and price, just as a monopoly does. D Because monopolistically competitive firms produce differentiated products, each firm… A. faces a demand curve that is horizontal. B. faces a demand curve that is vertical. C. has no control over product price. D. has some control over product price. D A monopolistically competitive firm chooses the quantity to produce where A. price equals marginal cost. B. demand equals marginal cost. C. marginal revenue equals marginal cost. D. Both a and c are correct. C The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the quantity at which A. marginal revenue is equal to marginal cost. B. average total cost is equal to marginal revenue. C. average total cost is equal to price. D. average revenue exceeds average total cost. A A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following? A. average revenue exceeds marginal revenue B. marginal revenue exceeds average revenue C. average revenue is equal to marginal revenue D. revenue is always maximized along with profit A A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following? A. marginal cost exceeds marginal revenue B. average revenue equals marginal cost C. price exceeds marginal cost D. All of the above are correct. C To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which A. price equals marginal cost. B. marginal revenue equals marginal cost. C. average total cost is minimized. D. All of the above are correct. B A monopolistically competitive firm faces the following demand schedule for its product: SEE DIAGRAM ON DOCUMENT The firm has total fixed costs of \$9 and a constant marginal cost of \$3 per unit. The firm will maximize profit with A. 9 units of output. B. 15 units of output. C. 21 units of output. D. 30 units of output. B A monopolistically competitive firm faces the following demand curve for its product: SEE DIAGRAM ON DOCUMENT The firm has total fixed costs of \$100 and a constant marginal cost of \$25 per unit. The firm will maximize profit with the production of.. A. 4 units of output. B. 10 units of output. C. 16 units of output. D. 22 units of output. C A monopolistically competitive firm has the following cost structure: SEE DIAGRAM ON DOCUMENT The firm faces the following demand curve: SEE DIAGRAM ON DOCUMENT to maximize profit (or minimize losses), the firm will produce A. 20 units. B. 30 units. C. 40 units. D. 50 units. B A monopolistically competitive firm has the following cost structure: SEE DIAGRAM ON DOCUMENT The firm faces the following demand curve: SEE DIGRAM ON DOCUMENT If the government forces this firm to produce at its efficient scale, it will A. produce 3 units and make \$9. B. produce 4 units and make \$6. C. produce 5 units and lose \$5. D. produce 7 units and lose \$49. C A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to \$20, has marginal revenue equal to \$12, has marginal cost equal to \$12, and has average total cost equal to \$18. From this information we can infer that A. the firm is currently maximizing its profit. B. the profits of the firm are negative. C. firms are likely to leave this market in the long run. D. All of the above are correct. A If "too much choice" is a problem for consumers, it would occur in which market structure(s)? A. perfect competition B. monopoly C. monopolistic competition D. perfect competition and monopolistic competition C In the short run, a firm operating in a monopolistically competitive market can earn A. positive economic profits. B. economic losses. C. zero economic profits. D. All of the above are possible. D In the short run, a firm operating in a monopolistically competitive market A. produces an efficient output level. B. chooses the maximum price to maximize profits. C. produces where marginal cost is minimized. D. chooses a price that exceeds marginal revenue. D In the short run, a firm operating in a monopolistically competitive market A. produces an output level where marginal revenue equals average total cost. B. sets price equal to demand where marginal revenue equals marginal cost. C. must earn zero economic profits. D. maximizes revenues as well as profits. B When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost, A. the firm must be earning a positive economic profit. B. the firm may be incurring economic losses C. there is a deadweight loss to society, but it is exactly offset by the benefit of excess capacity. D. new firms will enter the market in the long run. B Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium? A. P = AR B. MR = MC C. P > MC D. All of the above are correct. D Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium? A. P > AR B. MR > MC C. P > MC D. All of the above are correct. C Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium? A. P > ATC B. P = ATC C. P < ATC D. Any of the above could be correct. D For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in A. the short run but not in the long run. B. the long run but not in the short run. C. both the short run and the long run. D. neither the short run nor the long run. C For a profit-maximizing monopolistically competitive firm, marginal revenue equals marginal cost in A. the short run but not in the long run. B. the long run but not in the short run. C. both the short run and the long run. D. neither the short run nor the long run. C For a profit-maximizing monopolistically competitive firm, marginal revenue exceeds marginal cost in A. the short run but not in the long run. B. the long run but not in the short run. C. both the short run and the long run. D. neither the short run nor the long run. D A firm operating in a monopolistically competitive market can earn economic profits in A. the short run but not in the long run. B. the long run but not in the short run. C. both the short run and the long run. D. neither the short run nor the long run. A When a market is monopolistically competitive, the typical firm in the market is likely to experience a A. positive profit in the short run and in the long run. B. positive or negative profit in the short run and a zero profit in the long run. C. zero profit in the short run and a positive or negative profit in the long run. D. zero profit in the short run and in the long run. B When a market is monopolistically competitive, the typical firm in the market can earn A. losses in the short run and profits in the long run. B. profits in the short run and the long run. C. losses in the short run and zero profit in the long run. D. zero profit in the short run and losses in the long run. C Refer to Figure 16-4. The firm in this figure is monopolistically competitive. This firm A. is operating in the long run. B. is earning a short-run economic profit. C. is incurring a short-run loss. D. The answer cannot be determined from the information given. B Refer to Figure 16-4. At the profit-maximizing, or loss-minimizing, output level, the firm in this figure has total costs of approximately A. \$12,000. B. \$18,000. C. \$21,000. D. \$24,000. C Refer to Figure 16-4. At the profit-maximizing, or loss-minimizing, output level, how many units of output will the firm in this figure produce? A. 20 B. 30 C. 40 D. This firm will choose not to produce. B Refer to Figure 16-4. What price will the monopolistically competitive firm charge in this market? Question 44 options: A. \$400 B. \$600 C. \$700 D. \$800 D Refer to Figure 16-4. At the profit-maximizing, or loss-minimizing, output level, the firm in this figure has total revenue of approximately Question 45 options: A. \$12,000. B. \$21,000. C. \$24,000. D. \$27,300. C Refer to Figure 16-4. Assume the firm in the figure is currently producing 20 units of output and charging \$925. The firm A. will increase its profits if it raises its price and reduces its production level. B. will increase its profits if it lowers its price and expands its production level. C. is maximizing profits. D. will increase its profits if it raises its prices and expands its production level. B Refer to Figure 16-4. The maximum total short-run economic profit for the monopolistically competitive firm in this figure is A. -\$3,000. B. \$3,000. C. \$9,000. D. \$24,000. B Refer to Figure 16-4. Which of the following will occur in the long run in this industry? A. Firms will exit this industry. B. Firms will enter this industry. C. This firm will continue to earn positive economic profits. D. This firm will incur losses. B This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Refer to Table 16-4. What price will this firm charge to maximize profit? A. \$25 B. \$30 C. \$35 D. \$40 B This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Refer to Table 16-4. What is this firm’s profit-maximizing level of output? A. 0 units of output B. 3 units of output C. 4 units of output D. 5 units of output C This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Refer to Table 16-4. At the profit-maximizing level of output, what is this firm’s total cost? A. \$10 B. \$40 C. \$88 D. \$100 C This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Refer to Table 16-4. Which of the following is likely to happen in the long run in this market? A. The market is currently in a long-run equilibrium. B. The market price is likely to rise. C. Firms are likely to enter the market since firms are earning a positive economic profit. D. Firms are likely to leave the market since firms are earning a negative economic profit. C This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Refer to Table 16-4. How much profit will this firm earn when it chooses its output to maximize profit? A. a \$12 loss B. an \$8 profit C. a \$25 profit D. a \$32 profit D This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Refer to Table 16-4. If the government forces this firm to produce at its efficient output level, how much output will this firm produce? A. 0 units of output B. 3 units of output C. 4 units of output D. 5 units of output D This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Refer to Table 16-4. If the government forces this firm to produce at its efficient output level, how much profit will this firm earn? A. a \$12 loss B. a \$13 profit C. a \$25 profit D. a \$32 profit C If this firm profit-maximizes, how much revenue will it earn? Refer to Figure 16-11. … Refer to Figure 16-11. If this firm profit-maximizes, how much cost will it incur? 1000 Refer to Figure 16-11. If this firm profit-maximizes, how much profit or loss will it earn? PROFIT OF 500 Refer to Figure 16-11. What, if any, long run adjustment will occur in this industry? firms will enter price will decrease profits will equal zero Refer to Figure 16-12. If this firm profit-maximizes, how much output will it produce? 22 Refer to Figure 16-12. If this firm profit-maximizes, what price will it charge? 58 Refer to Figure 16-12. When this firm profit-maximizes, what is the amount of the firm’s profit or loss? 0 Refer to Figure 16-12. If this firm minimized cost, how much output will it produce? 28 UNITS Refer to Figure 16-12. How much excess capacity does this firm have? 6 UNITS Refer to Figure 16-12. What, if any, long run adjustment will take place in this industry? NONE Refer to Figure 16-12. Does this monopolistically competitive market produce the welfare-maximizing level of output? NO Refer to Figure 16-12. Compare the price and marginal cost in this market with price and marginal cost if this were a perfectly competitive market. Monopolistic competition: P>MC Perfect competition: P=MC Refer to Figure 16-13. Which letter represents the profit-maximizing quantity? L Refer to Figure 16-13. Which letter represents the profit-maximizing price? B Due to free entry and exit in monopolistic competition, in the long run price must be equal to AVG TOTAL COST Monopolistically competitive firms could reduce the average total cost of producing by increasing output; therefore, these firms have EXCESS CAPACITY Entry of new firms in monopolistically competitive industries can convey a positive externality on consumers because new products result in more consumer surplus. This externality is called the PRODUCT- VARIETY EXTERNALITY Entry of new firms in monopolistically competitive industries can convey a negative externality on producers because firms lose customers and profits from the entry of new competitors. This externality is called the business-stealing externality When a new firm considers entering a market, it takes into account only the profit it would make. What are the two external effects that occur in the market that the firm does not consider? product-variety externality business-stealing externality For the economy as a whole, about what percentage of total firm revenue is spent on advertising? 2% Considering perfect competition, monopolistic competition, and monopoly, which of the market structures features entry in the long run? perfect competition monopolistic competition Considering perfect competition, monopolistic competition, and monopoly, which of the market structures results in production of the welfare-maximizing level of output? perfect competition Considering perfect competition, monopolistic competition, and monopoly, which of the market structures can have positive profits in the short run? perfect competition monopolistic competition monopoly A distinguishing feature of an oligopolistic industry is the tension between A. profit maximization and cost minimization. B. cooperation and self interest. C. producing a small amount of output and charging a price above marginal cost. D. short-run decisions and long-run decisions. B The simplest type of oligopoly is A. monopoly. B. duopoly. C. monopolistic competition. D. oligopolistic competition. B If two firms comprise the entire soft drink market, the market would be a(n) A. Nash equilibrium. B. monopolistically competitive market. C. oligopolistically competitive market. D. duopoly. D A special kind of imperfectly competitive market that has only two firms is called A. a two-tier competitive structure. B. an incidental monopoly. C. a doublet. D. a duopoly. D Game theory is necessary to understand which kinds of markets? (i) perfectly competitive (ii) monopolistically competitive (iii) oligopoly (iv) duopoly (v) monopoly A. (i) and (ii) only B. (iii), (iv), and (v) only C. (iii) and (iv) only D. (i), (ii), (iii), (iv), and (v) C If four firms comprise the entire golf club industry, the market would be A. competitive. B. characterized by interdependence of firms. C. a duopoly. D. a monopoly. B An agreement between two duopolists to function as a monopolist usually breaks down because A. they cannot agree on the price that a monopolist would charge. B. they cannot agree on the output that a monopolist would produce. C. each duopolist wants a larger share of the market to capture more profit. D. each duopolist wants to charge a higher price than the monopoly price. C An agreement among firms in a market about quantities to produce or prices to charge is called A. collusion. B. Nash equilibrium C. dominant strategy. D. behavioral economics. A Which of the following statements is correct? A. If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. B. Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it does not push the duopolists to reach the competitive price. C. Although the logic of self-interest increases a duopoly’s level of output above the monopoly level, it does not push the duopolists to reach the competitive level. D. All of the above are correct. D Suppose that Bieber and Rihanna are duopolists in the music industry. In May, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By June, each singer is considering breaking the agreement. What would you expect to happen next? A. Bieber and Rihanna will determine that it is in each singer’s self interest to maintain the agreement. B. Bieber and Rihanna will each break the agreement. Both singers’ profits will decrease. C. Bieber and Rihanna will each break the agreement. Both singers’ profits will increase. D. Bieber and Rihanna will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase. B As the number of firms in an oligopoly increases, the A. price approaches marginal cost, and the quantity approaches the socially efficient level. B. price and quantity approach the monopoly levels. C. price effect exceeds the output effect. D. individual firms’ profits increase. A If a certain market were a monopoly, then the monopolist would maximize its profit by producing 4,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude? A. Each duopolist produces 4,000 units of output. B. Each duopolist produces 1,500 units of output. C. One duopolist produces 2,400 units of output and the other produces 1,600 units of output. D. One duopolist produces 3,000 units of output and the other produces 1,500 units of output. C Which of the following statements is correct? A. When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly level of output. B. When oligopoly firms collude, they are behaving as a cartel. C. In an oligopoly, self-interest drives the market to the competitive outcome. D. An oligopoly is an example of monopolistic competition. B As the number of firms in an oligopoly increases, the magnitude of the A. output effect increases. B. output effect decreases. C. price effect increases. D. price effect decreases. D As the number of sellers in an oligopoly becomes very large, A. the quantity of output approaches the socially efficient quantity. B. the price approaches marginal cost. C. the price effect is diminished. D. All of the above are correct. D In markets characterized by oligopoly, A. the oligopolists earn the highest profit when they cooperate and behave like a monopolist. B. collusive agreements will always prevail. C. collective profits are always lower with cartel arrangements than they are without cartel arrangements. D. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market. A As a group, oligopolists would always be better off if they would act collectively A. as if they were each seeking to maximize their own individual profits. B. in a manner that would prohibit collusive agreements. C. as a single monopolist. D. as a single perfectly competitive firm. C As a group, oligopolists would always earn the highest profit if they would A. produce the perfectly competitive quantity of output. B. produce more than the perfectly competitive quantity of output. C. charge the same price that a monopolist would charge if the market were a monopoly. D. operate according to their own individual self-interests. C Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together, A. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist. B. each firm’s profit always ends up being zero. C. society is worse off as a result. D. Both a and c are correct. A Table 17-1 ON DOC Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge? A. \$25 B. \$30 C. \$35 D. \$40 B Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how many gallons of water will be produced and sold? A. 0 B. 500 C. 600 D. 1,200 C Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn? A. \$8,750 B. \$9,000 C. \$12,000 D. \$18,000 B Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? A. 0 gallons B. 600 gallons C. 900 gallons D. 1,200 gallons D Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Refer to Table 17-1. What is the socially efficient quantity of water? A. 0 gallons B. 600 gallons C. 900 gallons D. 1,200 gallons D Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic, what price would be charged? A. \$0 B. \$30 C. \$40 D. \$60 A Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. What will be the price of water once Rochelle and Alec reach a Nash equilibrium? A. \$15 B. \$20 C. \$25 D. \$30 B

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