ECON 202 Blanchard Exam 2

for most producing firms
a. marginal cost rises as output is carried to a certain level, and then begins to decline.
b. total costs rise as output is carried to a certain level, and then begin to decline.
c. average total costs decline as output is carried to a certain level, and then begin to rise.
d. average total costs rise as output is carried to a certain level, and then begin to decline.

c. average total costs decline as output is carried to a certain level, and then begin to rise.

Answer the question on the basis of the following cost data:
Output: 0, 1, 2, 3, 4, 5, 6, 7 Total Cost $24, 33, 41, 48, 54, 61, 69
Refer to the data. The total variable cost of producing 5 units is:
a. $61
b. $48
c. $37
d. $24

c. $37

Which of the following is most likely to be a fixed cost?
a. Shipping charges
b. Property insurance premiums
c. wages for unskilled labor
d. expenditures for raw material

b. Property insurance premiums

Answer the question on the basis of the following cost data:
Output: 0, 1, 2, 3, 4, 5, 6. Total Cost: $24, 33, 41, 48, 54, 61, 69
Refer to the data. The average total cost of producing 3 units of output is:
a. $14
b. $12
c. $13.50
d. $16

d. $16

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed.
Number of workers: 0, 1, 2, 3, 4, 5, 6. Units of Output: 0, 40, 90, 126, 150, 165, 180.
Refer to the data. Diminishing marginal returns become evident with the addition of the:
a. sixth worker
b. fourth worker
c. third worker
d. second worker

c. third worker

Which of the following is a short-run adjustment?
a. A local bakery hires two additional bakers
b. Six new firms enter the plastics industry
c. The number of farms in the U.S. declines by 5%
d. BMW constucts a new assembly plant in South Carolina

a. A local bakery hires two additional bakers

To the economist, total cost includes:
a. explicit and implicit costs
b. neither implicit nor explicit costs
c. implicit, but not explicit, costs
d. explicit, but not implicit, costs

a. explicit and implicit costs

Economies and diseconomies ofd scale explain:
a. the profit-maximizing level of production.
b. why the firm’s long-run average total cost curve is U-shaped
c. why the firm’s short-run marginal cost curve cuts the short-run average variable cost curve at its minimum point.
d. the distinction between fixed and variable costs.

b. why the firm’s long-run average total cost curve is U-shaped.

In the diagram, total product will be at a maximum at:
a .Q3 units of labor
b. Q2 units of labor
c. Q1 units of labor
d. some point that cannot be determined with the above information.

a. Q3 units of labor

The law of diminishing returns describes the:
a. relationship between total costs and total revenues.
b. profit between resource position of a firm
c. relationship between resource inputs and product outputs in the short run
d. relationships between resource inputs and product outputs in the long run.

c. relationship between resource inputs and product outputs in the short run

(Consider This) If the law of diminishing returns applies to study time:
a. the tenth hour of study will likely be less productive than the third.
b. this implies that longer lectures are less productive than shorter ones.
c. there is no benefit to studying a subject more than five hours in any given day.
d. people with less intelligence necessarily experience diminishing returns sooner than those with greater intelligence.

a. the tenth hour of study will likely be less productive than the third.

The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question.
Output: 1, 2, 3, 4, 5, 6. TVC: $30, 50, 65. 85, 110
Refer to the information. The average total cost of 3 units of output is:
a. $65
b. $21.67
c. $40
d. $35

d. $35

Normal profit is:
a. determined by subtracting implicit costs from total revenue.
b. determined by subtracting explicit costs from total revenue.
c. the return to the entrepreneur when economic profits are zero.
d. the average profitability of an industry over the preceding 10 years.

c. the return to the entrepreneur when economic profits are zero.

Refer to the diagram. This firm’s average fixed costs are:
a. not shown
b. the vertical distance between AVC and MC
c. the vertical distance between AVC and ATC
d. equal to the per unit change in MC

c. the vertical distance between AVC and ATC

As the firm in the diagram expands from plant size #1 to plant size #3, it experiences:
a. diminishing returns
b. economies of scale
c. diseconomies of scale
d. constant costs

b. economies of scale

The long-run average total cost curve:
a. displays declining unit costs so long as output is increasing.
b. indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size.
c. has a shape that is the inverse of the law of diminishing returns.
d. can be derived by summing horizontally the average total cost curves of all firms in an industry.

b. indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size.

Output: 1, 2, 3, 4, 5, 6, 7, 8. Average Fixed Cost: $50, 25, 16.67, 12.50, 10, 8.37, 7.14, 6.25 Average Variable Cost: $100, 80, 66.67, 65, 68, 73.33, 80, 87.50
Refer to the data. If the firm closed down in the short run and produced zero units of output, its total cost would be:
a. 0
b. $50
c. $150
c. $100

b. $50

If a firm decides to produce no output in the short run, its costs will be:
a. its marginal costs
b. its variable costs
c. its fixed costs
d. zero

c. its fixed costs

In the short run, which of the following statements is correct?
a. The marginal cost curve intersects the average variable and average fixed cost curves at their minimum points.
b. Average variable cost declines continuously as total output is expanded.
c. Total cost will exceed variable cost.
d. If the inputs of all resources are increased by equal amounts, total output will expand by diminishing amounts.

c. Total cost will exceed variable cost.

The diagram shows the short-run average total cost curves for five different plant sizes of a firm. The position of these five curves in relation to one another reflects:
a. economies and diseconomies of scale.
b. the effect of fixed costs on ATC as output increases.
c. the law of constant costs.
d. the law of diminishing returns.

a. economies and diseconomies of scale.

Refer to the diagram. Constant returns to scale:
a. occur over the 0Q1 range of output
b. occur over the Q1Q3 range of output
c. begin at output Q3
d. are in evidence at all output levels

b. occur over the Q1Q3 range of output

If an industry’s long-run average total cost curve has an extended range of constant returns to scale, this implies that:
a. technology precludes both economies and diseconomies of scale.
b. the industry will be a natural monopoly.
c. both relatively small and relatively large firms can be viable in the industry.
d. the industry will be comprised of a very large number of small firms.

c. both relatively small and relatively large firms can be viable in the industry.

Marginal cost:
a. equals both average variable cost and average total cost at their respective minimums.
b. is the difference between total cost and total variable cost.
c. rises for atime, but then begins to decline whe deminishing returns set in
d. declines continuously as output increases

a. equals both average variable cost and average total cost at their respective minimums.

The following is cost information for the Creamy Crisp Donut Company:

Entrepreneur’s potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur’s talent in the next best entrepreneurial activity = $80,000
Entrepreneur’s forgone interest on personal funds used to finance the business = $6,000

Refer to the data. Creamy Crisp’s explicit costs are:
a. $286,000
b. $150,000
c. $94,000
d. $156,000

b. $150,000

The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question.
Output: 1, 2, 3, 4, 5. TVC: $30, 50, 65, 85, 110
Refer to the information. The total cost of producing 3 units of output is:
a. $65
b. $105
c. $145
d. $185

b. $105

In the short run:
a. TVC will increase for a time at a diminishing rate, but then beyond some point will increase at an increasing rate.
b. TVC will increase for a time at an increasing rate, but then beyond some point will increase at a diminishing rate.
c. TVC will increase by the same absolute amount for each additional unit of output produced.
d. one cannot generalize concerning the behavior of TVC as output increases.

a. TVC will increase for a time at a diminishing rate, but then beyond some point will increase at an increasing rate.

Use the following data to answer the question. The letters A, B, and C designate three successively larger plant sizes.
Output: 10, 20, 30, 40, 50, 60, 70, 80, 90, 100. ATC-A: $6, 5, 4, 5, 7, 10, 14, 19, 25, 32. ATC-B: $13, 9, 6, 4, 3, 4, 5, 7, 10, 16. ATC-C: $44, 35, 27, 20, 14, 11, 8, 6, 5, 7.
Refer to the data. At what level of output is minimum efficient scale realized?
a. 30
b. 40
c. 50
d. 60

c. 50

To economists, the main difference between the short run and the long run is that:
a. the law of diminishing returns applies in the long run, but not in the short run.
b. in the long run all resources are variable, while in the short run at least one resource is fixed.
c. fixed costs are more important to decision making in the long run than they are in the short run.
d. in the short run all resources are fixed, while in the long run all resources are variable.

b. in the long run all resources are variable, while in the short run at least one resource is fixed.

In the figure, curves 1, 2, 3, and 4 represent the:
a. ATC, MC, AFC, and AVC curves respectively.
b. MC, AFC, AVC, and ATC curves respectively.
c. MC, ATC, AVC, and AFC curves respectively.
d. ATC, AVC, AFC, and MC curves respectively.

c. MC, ATC, AVC, and AFC curves respectively.

Fixed Cost is:
a. the cost of producing one more unit of capital, for example, machinery
b. any cost that does not change when the firm changes its output.
c. average cost multiplied by the firm’s output.
d. usually zero in the short run.

b. any cost that does not change when the firm changes its output.

In the short run the Sure-Screen T-Shirt Company is producing 500 units of output. Its average variable costs are $2.00 and its average fixed costs are $.50. The firm’s total costs:
a. are $2.50.
b. are $1,250.
c. are $750.
d. are $1,100.

b. are $1,250.

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed.
Number of Workers: 0, 1, 2, 3, 4, 5, 6. Units of Output: 0, 40, 90, 126, 150, 165, 180.
Refer to the data. The marginal product of the sixth worker is:
a. 180 units of output
b. 30 units of output
c. 15 units of output
d. negative

c. 15 units of output

The vertical distance between a firm’s ATC and AVC curves represents:
a. AFC, which increases as output increases.
b. AFC, which decreases as output increases.
c. marginal costs, which decrease as output decreases.
d. marginal costs, which increase as output increases.

b. AFC, which decreases as output increases.

Diseconomies of scale arise primarily because:
a. the short-run average total cost curve rises when marginal product is increasing.
b. of the difficulties involved in managing and coordinating a large business enterprise.
c. firms must be large both absolutely and relative to the market to employ the most efficient productive techniques available.
d. beyond some point marginal product declines as additional units of a variable resource (labor) are added to a fixed resource (capital).

b. of the difficulties involved in managing and coordinating a large business enterprise.

Refer to the short-run production and cost data. In Figure A curve (1) is:
a. total product and curve (2) is average product.
b. total product and curve (2) is marginal product.
c. average product and curve (2) is marginal product.
d. marginal product and curve (2) is average product.

c. average product and curve (2) is marginal product.

Use the following data to answer the question:
Inputs of Labor: 0, 1, 2, 3, 4, 5, 6, 7. Total Product: 0, 8, 18, 25, 30, 33, 34, 32.
Refer to the data. Marginal product becomes negative with the hiring of the __________ unit of labor.
a. third
b. fourth
c. sixth
d. seventh

d. seventh

An explicit cost is:
a. omitted when accounting profits are calculated.
b. a money payment made for resources not owned by the firm itself.
c. an implicit cost to the resource owner who receives that payment.
d. always in excess of a resource’s opportunity cost.

b. a money payment made for resources not owned by the firm itself.

The following is cost information for the Creamy Crisp Donut Company:

Entrepreneur’s potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur’s talent in the next best entrepreneurial activity = $80,000
Entrepreneur’s forgone interest on personal funds used to finance the business = $6,000

Refer to the data. Creamy Crisp’s economic profit is:
a. $150,000
b. $80,000
c. $230,000
d. $94,000

d. $94,000

In the diagram, curves 1, 2, and 3 represent:
a. average variable cost, marginal cost, and average fixed cost respectively.
b. total variable cost, total fixed cost, and total cost respectively.
c. total fixed cost, total variable cost, and total cost respectively.
d. marginal product, average variable cost, and average total cost respectively.

c. total fixed cost, total variable cost, and total cost respectively.

The following is cost information for the Creamy Crisp Donut Company:

Entrepreneur’s potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur’s talent in the next best entrepreneurial activity = $80,000
Entrepreneur’s forgone interest on personal funds used to finance the business = $6,000

Refer to the data. Creamy Crisp:
a. has lower implicit costs, including a normal profit, than its explicit costs.
b. is earning a normal profit but not an economic profit.
c. is earning an economic profit.
d. is suffering an economic loss, when implicit costs are considered.

c. is earning an economic profit.

A purely competitive firm’s short-run supply curve is:
a. perfectly elastic at the minimum average total cost.
b. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
c. upsloping and equal to the portion of the marginal cost curve that lies above the average total cost curve.
d. upsloping only when the industry has constant costs.

b. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.

For a purely competitive firm, total revenue:
a. is price times quantity sold.
b. increases by a constant absolute amount as output expands.
c. graphs as a straight upsloping line from the origin.
d. has all of these characteristics.

d. has all of these characteristics.

The short-run supply curve of a purely competitive producer is based primarily on its:
a. AVC curve
b. ATC curve
c. AFC curve
d. MC curve

d. MC curve

On a per unit basis, economic profit can be determined as the difference between:
a. marginal revenue and product price.
b. product price and average total cost.
c. marginal revenue and marginal cost.
d. average fixed cost and product price.

b. product price and average total cost.

The short-run supply curve for a purely competitive industry can be found by:
a. multiplying the AVC curve of the representative firm by the number of firms in the industry.
b. adding horizontally the AVC curves of all firms.
c. summing horizontally the segments of the MC curves lying above the AVC curve for all firms.
d. adding horizontally the immediate market period supply curves of each firm.

c. summing horizontally the segments of the MC curves lying above the AVC curve for all firms.

Curve (1) in the diagram is a purely competitive firm’s:
a. total cost curve.
b. total revenue curve.
c. marginal revenue curve
d. total economic profit curve

d. total economic profit curve

An industry comprised of a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions, is called:
a. monopolistic competition
b. oligopoly
c. pure monopoly
d. pure competition

b. oligopoly

Refer to the diagram, which pertains to a purely competitive firm. Curve C represents:
a. total revenue and marginal revenue
b. marginal revenue only
c. total revenue and average revenue
d. average revenue and marginal revenue

d. average revenue and marginal revenue

If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:
a. may be either greater or less than $5
b. will also be $5
c. will be less than $5
d. will be greater than $5

b. will also be $5

Curve (3) in the diagram is a purely competitive firm’s:
a. total cost curve
b. total revenue curve
c. marginal revenue curve
d. total economic profit curve

b. total revenue curve

Answer the question on the basis of the following data confronting a firm:
Output: 0, 1, 2, 3, 4, 5, 6. Marginal Revenue: -, $16, 16, 16, 16, 16. Marginal Cost: -, $10, 9, 13, 17, 21.
Refer to the data. This firm is selling its output in a(n):
a. monopolistically competitive market
b. monopolistic market
c. purely competitive market
d. oligopolitic market

c. purely competitive market

Which of the following is not a characteristic of pure competition?
a. Price strategies by firms
b. a standardized product
c. no barriers to entry
d. A larger number of sellers.

a. Price strategies by firms

Answer the question on the basis of the following cost data for a purely competitive seller:
Total Output: 0, 1, 2, 3, 4, 5, 6. Total Fixed Cost: $50, 50, 50, 50, 50, 50, 50. Total Variable Cost: $0, 70, 120, 150, 220, 300, 390. Total Cost: $50, 120, 170, 200, 270, 350, 440.
Refer to the data. The marginal cost of the fifth unit of output is:
a. $80
b. $90
c. $50
d. $20

a. $80

In which of the following industry structures is the entry of new firms the most difficult?
a. Pure monopoly
b. Oligopoly
c. Monopolistic competition
d. Pure competition

a. Pure monopoly

A purely competitive seller is:
a. both a "price maker" and a "price taker"
b. neither a "price maker" nor a "price taker"
c. a "price taker"
d. a "price maker"

c. a "price taker"

Answer the question on the basis of the following cost data for a purely competitive seller:
Total Output: 0, 1, 2, 3, 4, 5, 6. Total Fixed Cost: $50, 50, 50, 50, 50, 50, 50. Total Variable Cost: $0, 70, 120, 150, 220, 300, 390. Total Cost: $50, 120, 170, 200, 270, 350, 440.
Refer to the data. At 5 units of output, average fixed cost, average variable cost, and average total cost are:
a. $10, $60, and $70 respectively
b. $50, $40, and $90 respectively.
c. $10, $70, and $80 respectively.
d. $5, $25, and $30 respectively.

a. $10, $60, and $70 respectively

Which of the following statements is correct?
a. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.
b. The demand curve for a purely competitive firm is downsloping, but the demand curve for a purely competitive industry is perfectly elastic.
c. The demand curves are downsloping for both a purely competitive firm and a purely competitive industry.
d. The demand curves are perfectly elastic for both a purely competitive firm and a purely competitive industry.

a. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.

Curve (4) in the diagram is a purely competitive firm’s:
a. total cost curve
b. total revenue curve
c. marginal revenue curve
d. total profit curve

a. total cost curve

If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing:
a. marginal revenue and marginal cost.
b. price and minimum average variable cost.
c. total revenue and total cost.
d. total revenue and total fixed cost.

b. price and minimum average variable cost.

A perfectly elastic demand curve implies that the firm:
a. must lower price to sell more output.
b. can sell as much output as it chooses at the existing price.
c. realizes an increase in total revenue that is less than product price when it sells an extra unit.
d. is selling a differentiated (heterogeneous) product.

b. can sell as much output as it chooses at the existing price.

The demand schedule or curve confronted by the individual, purely competitive firm is:
a. relatively elastic, that is, the elasticity coefficient is greater than unity.
b. perfectly elastic
c. relatively inelastic, that is, the elasticity coefficient is less than unity.
d. perfectly inelastic

b. perfectly elastic

Refer to the diagram, which pertains to a purely competitive firm. Curve A represents:
a. total revenue and marginal revenue
b. marginal revenue only
c. total revenue and average revenue
d. total revenue only

d. total revenue only

In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.

Refer to the information. For a purely competitive firm, total revenue graphs as a:
a. straight, upsloping line
b. straight line, parallel to the vertical axis.
c. straight line, parallel to the horizontal axis.
d. straight, downsloping line.

a. straight, upscoping line

Answer the question on the basis of the following cost data for a firm that is selling in a purely competitive market.

Total Output: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10. Average Fixed Cost: $150, 75, 50, 37.50, 30, 25, 21.43, 18.75, 16.67, 15. Average Variable Cost: $25, 23, 20, 21, 23, 25, 28, 33, 39, 48. Average Total Cost: $175, 98, 70, 58.50, 54, 50, 49.43, 51. 76, 55.67, 63. Marginal Cost: $25, 21, 14, 24, 31, 35, 46.01, 68.07, 86.95, 128.97.

Refer to the data. At 6 units of output, total fixed cost is ____ and total cost is ____.
a. $25; $50
b. $50; $300
c. $100; $200
d. $150; $300

d. $150; $300

When a firm is maximizing profit, it will necessarily be:
a. maximizing profit per unit of output
b. maximizing the difference between total revenue and total cost.
c. minimizing total cost
d. maximizing total revenue

b. maximizing the difference between total revenue and total cost.

The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.
a. perfectly inelastic; perfectly elastic
b. downsloping; perfectly elastic
c. downsloping; perfectly inelastic
d. perfectly elastic; downsloping

b. downscoping; perfectly elastic

Firms seek to maximize:
a. per unit profit
b. total revenue
c. total profit
d. market share

c. total profit

The MR = MC rule can be restated for a purely competitive seller as P = MC because:
a. each additional unit of output adds exactly its price to total revenue.
b. the firm’s average revenue curve is downsloping.
c. the market demand curve is downsloping
d. the firm’s marginal revenue and total revenue curves will coincide.

a. each additional unit of output adds exactly its price to total revenue.

A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its:
a. total variable cost
b. total costs
c. total fixed costs
d. marginal costs

a. total variable cost

If a purely competitive firm is producing at the P = MC output and realizing an economic profit, at that output:
a. marginal revenue is less than price.
b. marginal revenue exceeds ATC.
c. ATC is being minimized.
d. total revenue equals total cost.

b. marginal revenue exceeds ATC.

31.Award: 0.50 out of 0.50 points
Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation:
a. should close down in the short run
b. is maxizing its profits
c. is realizing a loss of $50
d. is realizing an economic profit of $40

d. is realizing an economic profit of $40

Refer to the diagram. This firm will earn only a normal profit if product price is:
a. P1
b. P2
c. P3
d. P4

c. P3

In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.

Refer to the information. For a purely competitive firm, marginal revenue graphs as a:
a. straight, upsloping line
b. straight line, parallel to the vertical axis
c. straight line, parallel to the horizontal axis
d. straight, downsloping line.

c. straight line, parallel to the horizontal axis

A firm reaches a break-even point (normal profit position) where:
a. marginal revenue cuts the horizontal axis.
b. marginal cost intersects the average variable cost curve.
c. total revenue equals total variable cost.
d. total revenue and total cost are equal.

d. total revenue and total cost are equal.

In the short run, the individual competitive firm’s supply curve is that segment of the:
a. average variable cost curve lying below the marginal cost curve.
b. marginal cost curve lying above the average variable cost curve.
c. marginal revenue curve lying below the demand curve.
d. marginal cost curve lying between the average total cost and average variable cost curves.

b. marginal cost curve lying above the average variable cost curve.

Which of the following is not a basic characteristic of pure competition?
a. Considerable nonprice competition.
b. No barriers to the entry or exit of firms.
c. A standardized or homogeneous product.
d. A large number of buyers and sellers.

a. Considerable nonprice competition.

A purely competitive seller should produce (rather than shut down) in the short run:
a. only if total revenue exceeds total cost.
b. only if total cost exceeds total revenue.
c. if total revenue exceeds total cost or if total cost exceeds total revenue by some amount less than total fixed cost.
d. if total cost exceeds total revenue by some amount greater than total fixed cost.

c. if total revenue exceeds total cost or if total cost exceeds total revenue by some amount less than total fixed cost.

(Consider This) An unprofitable motel will stay open in the short run if:
a. price (average nightly room rate) exceeds average variable cost.
b. marginal revenue exceeds marginal cost.
c. price (average nightly room rate) exceeds average fixed cost.
d. marginal revenue exceeds price.

a. price (average nightly room rate) exceeds average variable cost.

Suppose a purely competitive, increasing-cost industry is in long-run equilibrium. Now assume that a decrease in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price:
a. and industry output will be less than the initial price and output.
b. will be greater than the initial price, but the new industry output will be less than the original output.
c. will be less than the initial price, but the new industry output will be greater than the original output.
d. and industry output will be greater than the initial price and output.

a. and industry output will be less than the initial price and output.

Refer to the diagram. At output level Q2:
a. resources are overallocated to this product and productive efficiency is not realized.
b. resources are underallocated to this product and productive efficiency is not realized.
c. productive efficiency is achieved, but resources are underallocated to this product.
d. productive efficiency is achieved, but resources are overallocated to this product.

a. resources are overallocated to this product and productive efficiency is not realized.

Which of the following distinguishes the short run from the long run in pure competition?
a. Firms can enter and exit the market in the long run but not in the short run.
b. Firms attempt to maximize profits in the long run but not in the short run.
c. Firms use the MR = MC rule to maximize profits in the short run but not in the long run.
d. The quantity of labor hired can vary in the long run but not in the short run.

a. Firms can enter and exit the market in the long run but not in the short run.

A constant-cost industry is one in which:
a. resource prices fall as output is increased.
b. resource prices rise as output is increased.
c. resource prices remain unchanged as output is increased.
d. small and large levels of output entail the same total costs.

c. resource prices remain unchanged as output is increased.

Which of the following is true concerning purely competitive industries?
a. There will be economic losses in the long run because of cut-throat competition.
b. Economic profits will persist in the long run if consumer demand is strong and stable.
c. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
d. There are economic profits in the long run but not in the short run.

c. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.

We would expect an industry to expand if firms in that industry are:
a. earning normal profits.
b. earning economic profits.
c. breaking even.
d. earning accounting profits.

b. earning economic profits.

A decreasing-cost industry is one in which:
a. contraction of the industry will decrease unit costs.
b. input prices fall or technology improves as the industry expands.
c. the long-run supply curve is perfectly elastic.
d. the long-run supply curve is upsloping.

b. input prices fall or technology improves as the industry expands.

Which of the following will not hold true for a competitive firm in long-run equilibrium?
a. P equals AFC
b. P equals minimum ATC
c. MC equals minimum ATC
d. P equals MC

a. P equals AFC

Refer to the diagram. Line (2) reflects the long-run supply curve for:
a. a constant-cost industry.
b. a decreasing-cost industry.
c. an increasing-cost industry.
d. a technologically progressive industry.

a. a constant-cost industry.

The primary force encouraging the entry of new firms into a purely competitive industry is:
a. normal profits earned by firms already in the industry.
b. economic profits earned by firms already in the industry.
c. government subsidies for start-up firms.
d. a desire to provide goods for the betterment of society.

b. economic profits earned by firms already in the industry.

Innovations that lower production costs or create new products:
a. are rare in competitive industries.
b. discourage new firms from entering the industry.
c. often generate short-run economic profits that do not last into the long run.
d. usually generate long-run economic profits for the innovator.

c. often generate short-run economic profits that do not last into the long run.

Creative destruction is:
a. the process by which large firms buy up small firms.
b. the process by which new firms and new products replace existing dominant firms and products.
c. a term coined many years ago by Adam Smith.
d. applicable to planned economies but not to market economies.

b. the process by which new firms and new products replace existing dominant firms and products.

Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm:
a. minimizes losses by producing at the minimum point of its AVC curve.
b. maximizes profits by producing where MR = ATC.
c. should close down immediately.
d. should continue producing in the short run but leave the industry in the long run if the situation persists.

d. should continue producing in the short run but leave the industry in the long run if the situation persists.

If the long-run supply curve of a purely competitive industry slopes upward, this implies that the prices of relevant resources:
a. will fall as the industry expands.
b. are constant as the industry expands.
c. rise as the industry contracts
d. rise as the industry expands.

d. rise as the industry expands.

The process by which new firms and new products replace existing dominant firms and products is called:
a. monopolistic competition.
b. mergers and acquisitions.
c. process innovation.
d. creative destruction

d. creative destruction

Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum. Then:
a. the firm is earning an economic profit.
b. there is no tendency for the firm’s industry to expand or contract.
c. allocative but not productive efficiency is being achieved.
d. other firms will enter this industry.

b. there is no tendency for the firm’s industry to expand or contract.

Refer to the diagram. At output level Q1:
a. neither productive nor allocative efficiency is achieved.neither productive nor allocative efficiency is achieved.
b. both productive and allocative efficiency are achieved.
c. allocative efficiency is achieved, but productive efficiency is not.
d. productive efficiency is achieved, but allocative efficiency is not.

a. neither productive nor allocative efficiency is achieved.

Which of the following outcomes is consistent with a purely competitive market in long-run equilibrium?
a. Consumer and producer surplus will be maximized.
b. P = MC = lowest AVC.
c. The minimum willingness to pay equals the maximum acceptable price.
d. We would expect all of these to occur in the long run in a purely competitive market.

a. Consumer and producer surplus will be maximized.

Refer to the diagram. Line (2) reflects a situation where resource prices:
a. decline as industry output expands.
b. increase as industry output expands.
c. rise and then decline as industry output expands.
d. remain constant as industry output expands.

d. remain constant as industry output expands.

Refer to the diagram. Line (1) reflects the long-run supply curve for:
a. a constant-cost industry
b. a decreasing-cost industry
c. an increasing-cost industry.
d. a technologically progressive industry

c. an increasing-cost industry.

A purely competitive firm is precluded from making economic profits in the long run because:
a. it is a "price taker."
b. its demand curve is perfectly elastic.
c. of unimpeded entry to the industry.
d. it produces a differentiated product.

c. of unimpeded entry to the industry.

The term allocative efficiency refers to:
a. the level of output that coincides with the intersection of the MC and AVC curves.
b. minimization of the AFC in the production of any good.
c. the production of the product mix most desired by consumers.
d. the production of a good at the lowest average total cost.

c. the production of the product mix most desired by consumers.

A purely competitive firm:
a. must earn a normal profit in the short run.
b. cannot earn economic profit in the long run.
c. may realize either economic profit or losses in the long run.
d. cannot earn economic profit in the short run.

b. cannot earn economic profit in the long run.

Refer to the diagram. By producing at output level Q:
a. neither productive nor allocative efficiency is achieved.
b. both productive and allocative efficiency are achieved.
c. allocative efficiency is achieved, but productive efficiency is not.
d. productive efficiency is achieved, but allocative efficiency is not.

b. both productive and allocative efficiency are achieved.

If production is occurring where marginal cost exceeds price, the purely competitive firm will:
a. maximize profit, but resources will be underallocated to the product.
b. maximize profit, but resources will be overallocated to the product.
c. fail to maximize profit and resources will be overallocated to the product.
d. fail to maximize profit and resources will be underallocated to the product.

c. fail to maximize profit and resources will be overallocated to the product.

The MR = MC rule applies:
a. in the short run but not in the long run.
b. in the long run but not in the short run.
c. in both the short run and the long run.
d. only to a purely competitive firm.

c. in both the short run and the long run.

Which of the following is an example of creative destruction?
a. An economic recession forces firms out of business.
b. Automobile production causes the wagon industry to shut down.
c. Apple earns more economic profits than other manufacturers of MP3 players.
d. Starbucks shuts down stores to create greater demand for its remaining outlets.

b. Automobile production causes the wagon industry to shut down.

Refer to the diagrams. The demand for Firm B’s product is:
a. perfectly elastic over all ranges of output.
b. perfectly inelastic over all ranges of output.
c. elastic for prices above $4 and inelastic for prices below $4.
d. inelastic for prices above $4 and elastic for prices below $4.

c. elastic for prices above $4 and inelastic for prices below $4

inelastic for prices above $4 and elastic for prices below $4.
a. elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price.
b. inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.
c. inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price.
d. segment of its demand curve where the price elasticity coefficient is greater than one.

b. inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.

Which of the following best approximates a pure monopoly?
a. The foreign exchange market.
b. The Kansas City wheat market.
c. The only bank in a small town.
d. The soft drink market.

c. The only bank in a small town.

A pure monopolist’s short-run profit-maximizing or loss-minimizing position is such that price:
a. equals marginal revenue.
b. will vertically intersect demand where MR = MC.
c. will always equal ATC.
d. always exceeds ATC.

b. will vertically intersect demand where MR = MC.

For a pure monopolist the relationship between total revenue and marginal revenue is such that:
a. marginal revenue is positive when total revenue is at a maximum.
b. total revenue is positive when marginal revenue is increasing, but total revenue becomes negative when marginal revenue is decreasing.
c. marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing.
d. marginal revenue is positive so long as total revenue is positive.

c. marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing.

When a firm is on the inelastic segment of its demand curve, it can:
a. increase total revenue by reducing price.
b. decrease total costs by decreasing price.
c. increase profits by increasing price.
d. increase total revenue by more than the increase in total cost by increasing price.

c. increase profits by increasing price.

Refer to the diagram for a pure monopolist. If a regulatory commission seeks to achieve the socially optimal allocation of resources to this line of production, it will set a price of:
a. P1
b. P3
c. P2
d. P4

c. P2

If a nondiscriminating imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue:
a. may be either greater or less than $35.
b. will also be $35.
c. will be less than $35.
d. will be greater than $35.

c. will be less than $35.

If the firm in the diagram lowers price from P1 to P2, it will:
a. lose P1P2ba in revenue from the price cut but increase revenue by Q1bcQ2 from the increase in sales.
b. lose P1P2ca in revenue from the price cut but increase revenue by Q1acQ2 from the increase in sales.
c. incur a decline in total revenue because it is operating on the elastic segment of the demand curve.
d. incur an increase in total revenue because it is operating on the inelastic segment of the demand curve.

a. lose P1P2ba in revenue from the price cut but increase revenue by Q1bcQ2 from the increase in sales.

Which of the following is correct?
a. Both purely competitive and monopolistic firms are "price takers."
b. Both purely competitive and monopolistic firms are "price makers."
c. A purely competitive firm is a "price taker," while a monopolist is a "price maker."
d. A purely competitive firm is a "price maker," while a monopolist is a "price taker."

c. A purely competitive firm is a "price taker," while a monopolist is a "price maker."

Because the monopolist’s demand curve is downsloping:
a. MR will equal price
b. price must be lowered to sell more output.
c. the elasticity coefficient will increase as price is lowered.
d. its supply curve will also be downsloping.

b. price must be lowered to sell more output.

A pure monopolist:
a. will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output.
b. will realize an economic profit if ATC exceeds MR at the profit-maximizing/loss-minimizing level of output.
c. will realize an economic loss if MC intersects the downsloping portion of MR.
d. always realizes an economic profit.

a. will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output.

Refer to the diagram. The quantitative difference between areas Q1bcQ2 and P1P2ba in the diagram measures:
a. marginal cost
b. total revenue
c. marginal revenue
d. average revenue

c. marginal revenue

Suppose that a pure monopolist can sell 20 units of output at $10 per unit and 21 units at $9.75 per unit. The marginal revenue of the 21st unit of output is:
a. $9.75
b. $204.75
c. $4.75
d. $.25

c. $4.75

Confronted with the same unit cost data, a monopolistic producer will charge:
a. the same price and produce the same output as a competitive firm.
b. a higher price and produce a larger output than a competitive firm.
c. a higher price and produce a smaller output than a competitive firm.
d. a lower price and produce a smaller output than a competitive firm.

c. a higher price and produce a smaller output than a competitive firm.

A purely monopolistic firm:
a. has no entry barriers
b. faces a downsloping demand curve.
c. produces a product or service for which there are many close substitutes.
d. earns only a normal profit in the long run.

b. faces a downsloping demand curve.

Which of the diagrams correctly portrays a nondiscriminating pure monopolist’s demand (D) and marginal revenue (MR) curves?
a. A
b. B
c. C
d. D

b. B

Barriers to entering an industry:
a. encourage allocative efficiency.
b. encourage productive efficiency.
c. are the basis for monopoly.
d. apply only to purely monopolistic industries.

c. are the basis for monopoly.

What do economies of scale, the ownership of essential raw materials, and patents have in common?
a. They must all be present before price discrimination can be practiced.
b. They are all barriers to entry.
c. They all help explain why a monopolist’s demand and marginal revenue curves coincide.
d. They all help explain why the long-run average cost curve is U-shaped.

b. They are all barriers to entry.

In the short run, a monopolist’s economic profits:
a. are always positive because the monopolist is a price-maker.
b. are usually negative because of government price regulation.
c. are always zero because consumers prefer to buy from competitive sellers.
d. may be positive or negative depending on market demand and cost conditions.

d. may be positive or negative depending on market demand and cost conditions.

Price discrimination refers to:
a. selling a given product for different prices at two different points in time.
b. any price above that which is equal to a minimum average total cost.
c. the selling of a given product at different prices to different customers that do not reflect cost differences.
d. the difference between the prices a purely competitive seller and a purely monopolistic seller would charge.

c. the selling of a given product at different prices to different customers that do not reflect cost differences.

(Consider This) Children are charged less than adults for admission to professional baseball games but are charged the same prices as adults at the concession stands. Which of the following conditions of price discrimination explains why this occurs?
a. The seller must have some monopoly power; that is, it must be able to set the product price.
b. The seller must be able to identify buyers by group characteristics such as age or income.
c. Groups must have different elasticities of demand for the product.
d. The items can be bought by people in the low-price group and transferred to members of the high-price group.

d. The items can be bought by people in the low-price group and transferred to members of the high-price group.

Which of the following statements is correct?
a. The pure monopolist will maximize profit by producing at that point on the demand curve where elasticity is zero.
b. In seeking the profit-maximizing output, the pure monopolist underallocates resources to its production.
c. The pure monopolist maximizes profits by producing that output at which the differential between price and average cost is the greatest.
d. Purely monopolistic sellers earn only normal profits in the long run.

b. In seeking the profit-maximizing output, the pure monopolist underallocates resources to its production.

The profit-maximizing output of a pure monopoly is not socially optimal because in equilibrium:
a. price equals minimum average total cost.
b. marginal revenue equals marginal cost.
c. marginal cost exceeds price.
d. price exceeds marginal cost.

d. price exceeds marginal cost.

Refer to the two diagrams for individual firms. In Figure 1, line A represents the firm’s:
a. demand and marginal revenue curves.
b. demand curve only.
c. marginal revenue curve only.
d. total revenue curve only

d. total revenue curve only

If a regulatory commission wants to establish a socially optimal price for a natural monopoly, it should select a price:
a. at which the marginal cost curve intersects the demand curve.
b. at which marginal revenue is zero.
c. at which the average total cost curve intersects the demand curve.
d. that corresponds with the equality of marginal cost and marginal revenue.

a. at which the marginal cost curve intersects the demand curve.

Refer to the diagram. If price is reduced from P1 to P2, total revenue will:
a. increase by A – C.
b. increase by C – A.
c. decrease by A – C.
d. decrease by C – A.

b. increase by C – A.

For a pure monopolist, marginal revenue is less than price because:
a. the monopolist’s demand curve is perfectly elastic.
b. the monopolist’s demand curve is perfectly inelastic.
c. when a monopolist lowers price to sell more output, the lower price applies to all units sold.
d. the monopolist’s total revenue curve is linear and slopes upward to the right.

c. when a monopolist lowers price to sell more output, the lower price applies to all units sold.

A single-price monopoly is economically inefficient because, at the profit-maximizing output:
a. marginal revenue exceeds product price at all profitable levels of production.
b. monopolists always price their products on the basis of the ability of consumers to pay rather than on costs of production.
c. MC > P.
d. society values additional units of the monopolized product more highly than it does the alternative products those resources could otherwise produce.

d. society values additional units of the monopolized product more highly than it does the alternative products those resources could otherwise produce.

Refer to the two diagrams for individual firms. Figure 1 pertains to:
a. an imperfectly competitive firm.
b. a purely competitive firm.
c. an oligopolist
d. a pure monopolist

b. a purely competitive firm.

The vertical distance between the horizontal axis and any point on a nondiscriminating monopolist’s demand curve measures:
a. the quantity demanded.
b. product price and marginal revenue.
c. total revenue
d. product price and average revenue.

d. product price and average revenue.

Suppose a pure monopolist is charging a price of $12 and the associated marginal revenue is $9. We thus know that:
a. demand is inelastic at this price.
b. the firm is maximizing profits.
c. total revenue is increasing.
d. total revenue is at a maximum.

c. total revenue is increasing.

Oligopolistic firms engage in collusion to:
a. minimize unit costs of production.
b. realize allocative efficiency, that is, the P = MC level of output.
c. earn greater profits
d. increase production

c. earn greater profits

Cartels are difficult to maintain in the long run because:
a. they are illegal in all industrialized countries.
b. individual members may find it profitable to cheat on agreements.
c. it is more profitable for the industry to charge a lower price and produce more output.
d. entry barriers are insignificant in oligopolistic industries

b. individual members may find it profitable to cheat on agreements.

The kinked-demand curve of an oligopolist is based on the assumption that:
a. competitors will follow a price cut but ignore a price increase.
b. competitors will match both price cuts and price increases.
c. competitors will ignore a price cut but follow a price increase.
d. there is no product differentiation.

a. competitors will follow a price cut but ignore a price increase.

Refer to the diagrams, which pertain to monopolistically competitive firms. Short-run equilibrium entailing economic loss is shown by:
a. diagram a only
b. diagram b only
c. diagram c only
d. both diagrams a and c

c. diagram c only

Monopolistic competition is characterized by a:
a. few dominant firms and low entry barriers
b. large number of firms and substantial entry barriers
c. large number of firms and low entry barriers
d. few dominant firms and substantial entry barriers

c. large number of firms and low entry barriers

Refer to the data. The Herfindahl index for the industry is:
Firm: A, B, C, D, E, F. Market Share (%): 20, 20, 20, 20, 10, 10.
a. 1,600
b. 1,800
c. 18,000
d. 80

b. 1,800

In game theory, the credibility of a threat:
a. determines whether or not a Nash equilibrium to a game exists.
b. influences the degree of cooperation between two rivals.
c. is relevant only in simultaneous games.
d. determines whether or not a firm has a dominant strategy.

b. influences the degree of cooperation between two rivals.

If the four-firm concentration ratio in an oligopolistic industry is 100 percent and each firm has an equal percentage of sales, the Herfindahl index is:
a. 10,000
b. 2,500
c. 3,750
d. 1,000

b. 2,500

Monopolistically competitive firms:
a. realize normal profits in the short run but losses in the long run.
b. incur persistent losses in both the short run and long run.
c. may realize either profits or losses in the short run but realize normal profits in the long run.
d. persistently realize economic profits in both the short run and long run.

c. may realize either profits or losses in the short run but realize normal profits in the long run.

Suppose an oligopolistic producer assumes its rivals will ignore a price increase but match a price cut. In this case the firm perceives its:
a. demand curve as being of unit elasticity throughout.
b. supply curve as kinked, being steeper below the going price than above.
c. demand curve as kinked, being steeper below the going price than above.
d. demand curve as kinked, being steeper above the going price than below.

c. demand curve as kinked, being steeper below the going price than above.

When a monopolistically competitive firm is in long-run equilibrium:
a. P = MC = ATC.
b. MR = MC and minimum ATC > P.
c. MR > MC and P = minimum ATC.
d. MR = MC and P > minimum ATC.

d. MR = MC and P > minimum ATC.

The Herfindahl index:
a. measures the prices charged by oligopolistic manufacturers.
b. is another name for the four-firm concentration ratio.
c. tells us whether oligopolistic firms are engaging in collusion.
d. gives much greater weight to larger firms than to smaller firms in an industry.

d. gives much greater weight to larger firms than to smaller firms in an industry.

In the payoff matrix:
a. both firms have a dominant strategy
b. neither firm has a dominant strategy.
c. Alpha has a dominant strategy, but Beta does not.
d. Beta has a dominant strategy, but Alpha does not.

a. both firms have a dominant strategy

Aluminum competes with copper in the market for power transmission lines. This illustrates:
a. mutual interdependence.
b. differentiated oligopoly.
c. interindustry competition.
d. homogeneous oligopoly.

c. interindustry competition.

In the United States cartels are:
a. quite common in industries that produce nondurable goods.
b. in violation of the antitrust laws
c. concentrated in monopolistically competitive industries.
d. encouraged by government policy so firms can achieve economies of scale.

b. in violation of the antitrust laws

Concentration ratios measure the:
a. geographic location of the largest corporations in each industry.
b. degree to which product price exceeds marginal cost in various industries.
c. percentage of total industry sales accounted for by the largest firms in the industry.
d. number of firms in an industry.

c. percentage of total industry sales accounted for by the largest firms in the industry.

In the short run, the price charged by a monopolistically competitive firm attempting to maximize profits:
a. must be less than ATC
b. must be more than ATC.
c. may be either equal to ATC, less than ATC, or more than ATC.
d. must be equal to ATC.

c. may be either equal to ATC, less than ATC, or more than ATC.

If the four-firm concentration ratio for industry X is 80:
a. the four largest firms account for 80 percent of total sales.
b. each of the four largest firms accounts for 20 percent of total sales.
c. the four largest firms account for 20 percent of total sales.
d. the industry is monopolistically competitive.

a. the four largest firms account for 80 percent of total sales.

Which of the following is correct for a monopolistically competitive firm in long-run equilibrium?
a. MC = ATC.
b. MC exceeds MR.
c. P exceeds minimum ATC.
d. P = MC

c. P exceeds minimum ATC.

In the payoff matrix shown:
a. neither firm has a dominant strategy.
b. both firms have a dominant strategy to price high.
c. both firms have a dominant strategy to price low.
d. one firm has a dominant strategy to price high, the other to price low.

c. both firms have a dominant strategy to price low.

Firm: A, B, C, D, E. Market Share (%): 40, 30, 20, 5, 5.
Refer to the data. The four-firm concentration ratio for this industry is:
a. 90%
b. 95%
c. 100%
d. indeterminate because we don’t know which four firms are included.

b. 95%

Excess capacity refers to the:
a. amount by which actual production falls short of the minimum ATC output.
b. fact that entry barriers artificially reduce the number of firms in an industry.
c. differential between price and marginal costs that characterizes monopolistically competitive firms.
d. fact that most monopolistically competitive firms encounter diseconomies of scale.

a. amount by which actual production falls short of the minimum ATC output.

Suppose the Herfindahl indexes for industries A, B, and C are 1,200, 5,000, and 7,500 respectively. These data imply that:
a. market power is greatest in industry A.
b. market power is greatest in industry B.
c. market power is greatest in industry C.
d. industry A is more monopolistic than industry C.

c. market power is greatest in industry C.

Under monopolistic competition, entry to the industry is:
a. completely free of barriers.
b. more difficult than under pure competition but not nearly as difficult as under pure monopoly.
c. more difficult than under pure monopoly.
d. blocked.

b. more difficult than under pure competition but not nearly as difficult as under pure monopoly.

As a general rule, oligopoly exists when the four-firm concentration ratio:
a. exceeds the Herfindahl index.
b. is less than the Herfindahl index.
c. is 40 percent or more.
d. is 15 percent or more.

c. is 40 percent or more.

Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because:
a. of product differentiation and consequent product promotion activities.
b. monopolistically competitive firms cannot realize an economic profit in the long run.
c. the number of firms in the industry is larger.
d. monopolistically competitive producers use strategic pricing strategies to combat rivals.

a. of product differentiation and consequent product promotion activities.

Refer to the diagram for a noncollusive oligopolist. Suppose that the firm is initially in equilibrium at point E, where the equilibrium price and quantity are P and Q. If the firm’s rivals will ignore any price increase but match any price reduction, then the firm’s demand curve will be (moving from left to right):
a. D1ED2
b. D2ED1
c. D1ED1
d. D2ED2

b. D2ED1

A significant benefit of monopolistic competition compared with pure competition is:
a. less likelihood of X-inefficiency.
b. improved resource allocation.
c. greater product variety.
d. stronger incentives to achieve economies of scale.

c. greater product variety

A monopolistically competitive industry combines elements of both competition and monopoly. It is correct to say that the competitive element results from:
a. a relatively large number of firms and the monopolistic element from product differentiation.
b. product differentiation and the monopolistic element from high entry barriers.
c. a perfectly elastic demand curve and the monopolistic element from low entry barriers.
d. a highly inelastic demand curve and the monopolistic element from advertising and product promotion.

a. a relatively large number of firms and the monopolistic element from product differentiation.

Game theory can be used to demonstrate that oligopolists:
a. rarely consider the potential reactions of rivals.
b. experience economies of scale.
c. can increase their profits through collusion.
d. may be either homogeneous or differentiated.

c. can increase their profits through collusion.

Firm: A, B, C, D, E, F. Market Share (%): 20, 20, 20, 20, 10, 10.
Refer to the data. The industry characterized by the information is:
a. an oligopoly
b. a monopolistically competitive industry.
c. a purely competitive industry.
d. a pure monopoly.

a. an oligopoly

A monopolistically competitive firm has a:
a. highly elastic demand curve.
b. highly inelastic demand curve.
c. perfectly inelastic demand curve.
d. perfectly elastic demand curve.

a. highly elastic demand curve.

Prices are likely to be least flexible:
a. in oligopoly.
b. in monopolistic competition.
c. where product demand is inelastic.
d. in pure competition.

a. in oligopoly.

Nonprice competition refers to:
a. competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts.
b. price increases by a firm that are ignored by its rivals.
c. advertising, product promotion, and changes in the real or perceived characteristics of a product.
d. reductions in production costs that are not reflected in price reductions.

c. advertising, product promotion, and changes in the real or perceived

The Herfindahl index for a pure monopolist is:
a. 100
b. 10,000
c. 100,000
d. 10

b. 10,000

Clear-cut mutual interdependence with respect to the price-output policies exists in:
a. pure monopoly.
b. oligopoly
c. monopolistic competition.
d. pure competition.

b. oligopoly

If the firms in an oligopolistic industry can establish an effective cartel, the resulting output and price will approximate those of:
a. a purely competitive producer.
b. a pure monopoly.
c. a monopolistically competitive producer.
d. an industry with a low four-firm concentration ratio.

b. a pure monopoly.

Which of the following is an illustration of differentiated oligopoly?
a. The aluminum industry
b. The steel industry
c. The soft drink industry
d. Retail stores in large cities

c. The soft drink industry

Use your basic knowledge and your understanding of market structures to answer this question. Which of the following companies most closely approximates a differentiated oligopolist in a highly concentrated industry?
a. Subway Sandwiches.
b. Pittsburgh Plate Glass
c. Ford Motor Company
d. Kaiser Aluminum

c. Ford Motor Company

Firm: A, B, C, D, E. Market Share (%): 40, 30, 20, 5, 5.
Refer to the data. If Firm B merged with Firm C, the industry’s four-firm concentration ratio would ____ and its Herfindahl index would ____.
a. rise; rise
b. fall; rise
c. remain the same; rise
d. remain the same; fall

a. rise; rise

The general rule for hiring any input (say, labor) in the profit-maximizing amount is MRC = MRP. This rule takes the special form W = MRP (where W is the wage rate) when the:
a. labor supply curve is upsloping.
b. supply of labor is inelastic.
c. firm is hiring labor under purely competitive conditions.
d. firm is hiring labor under imperfectly competitive conditions.

c. firm is hiring labor under purely competitive conditions.

The substitution effect indicates that a profit-seeking firm will use:
a. more of an input whose price has fallen and less of other inputs in producing a given output.
b. more of all inputs if production costs fall.
c. more of those inputs whose marginal productivity is the greatest.
d. less of an input whose price has fallen and more of other inputs in producing a given output.

a. more of an input whose price has fallen and less of other inputs in producing a given output.

Wate Rage: $16, 14, 12, 10, 8. Quantity of Labor Demanded: 800, 1,000, 1,200, 1,600, 1,800.
Refer to the given data. For the $16 to $14 range of wage rates, labor demand is:
a. perfectly elastic
b. elastic
c. perfectly elastic
d. inelastic

b. elastic

Marginal resource cost is:
a. the increase in total resource cost associated with the production of one more unit of output.
b. the increase in total resource cost associated with the hire of one more unit of the resource.
c. total resource cost divided by the number of inputs employed.
d. the change in total revenue associated with the employment of one more unit of the resource.

b. the increase in total resource cost associated with the hire of one more unit of the resource.

The labor demand curve of an imperfectly competitive seller is downsloping:
a. solely because of diminishing marginal utility.
b. because of both diminishing returns and the necessity to lower price to sell more output.
c. solely because product price must be reduced to sell more output.
d. solely because of diminishing returns.

b. because of both diminishing returns and the necessity to lower price to sell more output.

Assume that the coefficient of elasticity of product demand is 0.5 in industry A and is 3.2 in industry B. Other things equal, labor demand will be:
a. more elastic in industry A than in B.
b. relatively elastic in both industries A and B.
c. more elastic in industry B than in A.
d. relatively inelastic in both industries A and B.

c. more elastic in industry B than in A.

Assuming a competitive resource market, a firm is hiring resources in the profit-maximizing amounts when the:
a. firm’s total outlay on resources is minimized.
b. marginal revenue product of each resource is equal to its price.
c. price of each resource employed is the same.
d. marginal revenue product of the last unit of each resource hired is the same.

b. marginal revenue product of each resource is equal to its price.

Answer the question on the basis of the following information for Manfred’s Shoe Shine Parlor. Assume Manfred hires labor, its only variable input, under purely competitive conditions. Shoe shines are also sold competitively.

Units of Labor: 0, 1, 2, 3, 4, 5, 6, 7. Total Product: 0, 14, -, 30, 35, 39, -, 44. Marginal Product: -, 14, 10, -, -, -, -, 2. Total Revenue: -, $42, -, 90, -, 117, 126, 132.

Refer to the given data. At what price does each shoe shine sell?
a. $1
b. $2
c. $3
d. $2.50

c. $3

Refer to the graph. A move from b to a along labor demand curve D1 would result from:
a. a decrease in the price of a substitute resource, assuming that the substitution effect exceeds the output effect.
b. an increase in the wage rate.
c. a decrease in the wage rate.
d. an increase in the demand for the product that this labor is helping to produce.

b. an increase in the wage rate.

Resource pricing is important because:
a. resource prices are a major determinant of money incomes.
b. resource prices allocate scarce resources among alternative uses.
c. resource prices, along with resource productivity, are important to firms in minimizing their costs.
d. of all of these reasons

d. of all of theses reasons

The demand for airline pilots results from the demand for air travel. This fact is an example of:
a. resource substitutability.
b. rising marginal resource cost.
c. elasticity of resource demand.
d. the derived demand for labor.

d. the derived demand for labor.

Assume the price of capital doubles and, as a result, firms make no change in the relative quantities of capital and labor they employ. This implies that:
a. labor is not readily substitutable for capital.
b. the law of diminishing returns is not applicable.
c. the firms are producing an inferior good.
d. the demand for capital is highly price elastic.

a. labor is not readily substitutable for capital.

If a firm is hiring variable resources D and F in perfectly competitive input markets, it will minimize the cost of producing any level of output by employing D and F in such amounts that:
a. the price of each input equals its MP.
b. MPD = MPF.
c. MPD/PD = MPF/PF.
d. MPD/PF = MPF/PD.

c. MPD/PD = MPF/PF.

The marginal revenue product schedule is:
a. the same whether the firm is selling in a purely competitive or imperfectly competitive market.
b. the firm’s resource demand schedule.
c. the firm’s resource supply schedule.
d. upsloping

b. the firm’s resource demand schedule

Resource X has many close substitutes, whereas resource Y has no close substitutes. Other things equal, we would expect:
a. the demand for resource Y to be more elastic than the demand for resource X.
b. resources X and Y to be close substitutes.
c.resource X to be more expensive than resource Y.
d. the demand for resource X to be more elastic than the demand for resource Y.

d. the demand for resource X to be more elastic than the demand for resource Y.

Other things equal, the resource demand curve of an imperfectly competitive seller will:
a. lie below its marginal revenue product curve.
b. be subject to increasing marginal productivity.
c. be less elastic than that of a purely competitive seller.
d. be more elastic than that of a purely competitive seller.

c. be less elastic than that of a purely competitive seller.

Which of the following occupations is projected to be the fastest growing in the U.S. in terms of percentage increases?
a. Medical assistants
b. Biomedical engineers
c. Personal care aides
d. Software engineers

c. Personal care aides

Marginal revenue product measures the:
a. amount by which the extra production of one more worker increases a firm’s total revenue.
b. decline in product price that a firm must accept to sell the extra output of one more worker.
c. increase in total resource cost resulting from the hire of one extra unit of a resource.
d. increase in total revenue resulting from the production of one more unit of a product.

a. amount by which the extra production of one more worker increases a firm’s total revenue.

Which of the following statements is true? Other things equal, the demand for labor will be less elastic the:
a. easier it is to substitute capital for labor.
b. greater the elasticity of resource supply.
c. greater the elasticity of product demand.
d. smaller the ratio of labor costs to total costs.

d. smaller the ratio of labor costs to total costs.

Answer the question on the basis of the following information: Suppose a firm hires both labor (L) and capital (C) under purely competitive conditions. The price of labor is PL and that of capital is PC. The marginal product of labor is MPL and that of capital is MPC. The firm sells its product competitively at a price of PX.

Refer to the given information. In competitive labor markets, the marginal cost of an additional unit of labor:
a. is equal to PL * MPL
b. is equal to MPL/PL
c. is equal to PL
d. cannot be determined from the information given

c. is equal to PL

(Last Word) ATMs and human bank tellers:
a. are substitute resources
b. are capital goods
c. have both declined in number because of bank mergers.
d. are complementary resources

a. are substitute resources.

Assume labor is the only variable input and that an additional input of labor increases total output from 72 to 78 units. If the product sells for $6 per unit in a purely competitive market, the MRP of this additional worker is:
a. $6
b. $12
c. $36
d. $72

c. $36

Answer the question on the basis of the following information: Harry owns a barber shop and charges $6 per haircut. By hiring one barber at $10 per hour, the shop can provide 24 haircuts per eight-hour day. By hiring a second barber at the same wage rate, the shop can now provide a total of 42 haircuts per day.

Refer to the given information. The MP of the second barber is:
a. $240
b. $108
c. 18 haircuts
d. 42 haircuts

c. 18 haircuts

Answer the question on the basis of the following marginal product data for resources a and b. The output of these independent resources sells in a purely competitive market at $1 per unit.
Inputs of a: 1, 2, 3, 4, 5, 6, 7. MPa: 25, 20, 15, 10, 5, 2, 1. Inputs of b: 1, 2, 3, 4, 5, 6, 7. MPb: 40, 36, 32, 24, 20, 16, 8
Refer to the given data. Assume now that the prices of a and b are $15 and $20 respectively. To maximize profits, what combination of a and b should the employer hire?
a. 3 of a and 5 of b
b. 5 of a and 7 of b
c. 7 of a and 7 of b
d. 6 of a and 2 of b

a. 3 of a and 5 of b

For a firm selling its product in an imperfectly competitive market, the marginal revenue product of labor can be found by:
a. adding marginal product to total product as one more unit of labor is employed.
b. adding marginal revenue to total product as one more unit of labor is employed.
c. multiplying marginal product by product price.
d. multiplying marginal product by marginal revenue.

d. multiplying marginal product by marginal revenue.

A decline in the price of resource A will:
a. increase the demand for complementary resource B.
b. shift the demand curve for A to the left.
c. shift the demand curve for A to the right.
d. reduce the demand for complementary resource B.

a. increase the demand for complementary resource B.

Answer the question on the basis of the data contained in the following table. Assume that the firm is hiring labor in a purely competitive market.
Units of Labor: 0, 1, 2, 3, 4, 5, 6. Total Product: 0, 15, 28, 39, 48, 55, 60. Product Price: $2.20, 2, 1.80, 1.60, 1.40, 1.20, 1.10.
The given data reveal that:
a. the firm is selling its product in a purely competitive market.
b. the firm is selling its product in an imperfectly competitive market.
c. there is no level of output at which this firm can operate at a profit.
d. the law of diminishing returns is not applicable to this firm.

b. the firm is selling its product in an imperfectly competitive market.

The relationship between the elasticity of product demand and the elasticity of demand for labor employed in its production is such that, other things being equal:
a. the more elastic the demand for the product, the less elastic the demand for labor.
b. the more elastic the demand for the product, the more elastic the demand for labor.
c.
the elasticity of product demand only affects the elasticity of labor demand when the product market is purely competitive.
d. if product demand is perfectly elastic, labor demand will be perfectly inelastic.

b. the more elastic the demand for the product, the more elastic the demand for labor.

The labor demand curve of a purely competitive seller:
a. slopes downward because the elasticity of demand is always less than unity.
b. slopes downward because of diminishing marginal productivity.
c. is perfectly elastic at the going wage rate.
d. slopes downward because of diminishing marginal utility.

b. slopes downward because of diminishing marginal productivity.

Answer the question on the basis of the following information. A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired; 32 when two workers are hired; 37 when three are hired; and 40 when four are hired. The farmer’s product sells for $3 per unit and the wage rate is $13 per worker.

Refer to the given information. The marginal product of the second worker is:
a. 24
b. 8
c. 5
d. 1

b. 8

A profit-maximizing firm employs resources to the point where:
a. MRC=MP
b. resource price equals product price
c. MRP=MRC
d. MP= product price

c. MRP = MRC

Suppose a firm is hiring resources l and m under purely competitive conditions to produce product Y, which sells for $2 in a purely competitive market. The prices of l and m are $10 and $4 respectively. In equilibrium the MPs of l and m, respectively, are:
a. 1 and 1
b. 2 and 5
c. 10 and 4
d. 5 and 2

d. 5 and 2

The elasticity of resource demand measures the:
a. responsiveness of workers to changes in wage rates.
b. responsiveness of producers to changes in resource prices.
c. ratio of marginal revenue product to resource price.
d. sensitivity of marginal revenue product to changes in product price.

b. responsiveness of producers to changes in resource prices.

The elasticity of resource demand will be greater the:
a. smaller the portion of the product’s total costs accounted for by the resource.
b. less the elasticity of demand for the product it is producing.
c. easier it is to substitute other resources in production.
d. less the elasticity of resource supply.

c. easier it is to substitute other resources in production.

If resources A and B are complementary and employed in fixed proportions:
a. a change in the price of A will have no effect on the quantity of B employed.
b.
an increase in the price of A may either increase or decrease the demand for B.
c. an increase in the price of A will increase the demand for B.
d. an increase in the price of A will decrease the demand for B.

d. an increase in the price of A will decrease the demand for B.