Microecon test 3

Monopolistic Competition

it faces a downward sloping demand curve and MR curve. and has some market

To maximize profit a monopolistically competitive firm should produce the level output at which

Marginal Revenue = Marginal Cost

Price for a firm under monopolistic competition is?

greater than marginal revenue

The profit moximizing rule MC=MR is followed by firms under

both monopolistic competition and perfect competition

Which of the following is true

In perfect competition P=MC and in monopolistic competition MR=MC But p>MC and there is excess capacity

a monoplositically competitive firm is operatign in the long run at the optimal level of output. Which of the following must be true

P=ATC>MR=MC

The failure to produce enough to minimize ATC is termed?

excess capacity

The main characteristic that distinguishes monopolistic competition from perfect competition

differentiated products.

Monopolistic competition within an industry results in

chronic excess capacity

in an oligopoly

Firms recognize their independence

Oligopoly is a market structure characterized by

A small number of interdependent firms producing identical or differentiated products

Oligopoly is a market structure characterized by

uncertainty about the behavoir of rival firms

In oligopoly, a firm must realize that

it is in an industry in which another major firm may dominate, and the firm will need to judge its actions accordingly.

Which of the following scenarios best describes an oligopolistic industry?

Coca-Cola and Pepsi sell most of the soft drinks consumed around the world.

Assume an industry is dominated by a few firms. Each of these firms acknowledges that its own choices affect the choices of its rivals. Each firm also recognizes that its rivals’ choices affect the decisions it makes. This industry is an example of a(n)

oligopoly.

An industry with two firms producing is generally called:

a duopoly.

An extreme case of oligopoly in which firms collude to raise joint profits is known as a:

cartel.

When firms openly agree on price, output, and other decisions aimed at achieving monopoly profits, those firms are practicing

overt collusion.

A cartel is an example of

overt collusion

When oligopolistic firms face production capacity constraints they

are more likely to engage in price competition

Game theory is commonly used to explain behavior in oligopolies, because oligopolies are characterized by:

interdependence.

The kinked demand curve model assumes that

rivals will follow a price decrease but not a price increase

Tacit collusion in practice is made more difficult to achieve:

the larger the number of firms in the industry

When one firm responds to a rival’s cheating by cheating and to a rival’s cooperation by cooperating, that firm is practicing a:

tit-for-tat strategy.

Unwritten or unspoken understandings through which firms collude to restrict
competition are called

tacit collusion

A well-known example of an international cartel is:

OPEC.

The study of behavior in situations of interdependence is known as:

game theory

Tacit collusion is limited by which of the following factors?

large numbers of firms and bargaining power of buyers

Price leadership occurs if:

smaller firms in an industry silently agree to charge the same price as the largest firm.

Market power in the United States was often gained in the latter part of the nineteenth century by:

forming trusts

The first law designed to curb monopoly power in the United States was the ________ Act

Sherman Antitrust

A major application of the Sherman Antitrust Act was in ________ against ________.

1911; Standard Oil

In the U.S. economy, oligopoly is rare.

False

Cartels are illegal in the United States.

True

Each firm in a cartel has an incentive to break its word and produce more than the agreed quantity.

True

Antitrust policy refers to government:

attempts to prevent the acquisition of monopoly power.

One characteristic of a perfectly competitive market is that there are ________ sellers of
the good or service.

hundreds or thousands of

If a local California avocado stand operates in a perfectly competitive market, that stand owner will be a:

price-taker.

All except one of the following are characteristics of perfect competition. Which is the exception?

There are many producers; one firm has a 25% market share, and all the remaining firms have a market share of less than 2% each.

Which of the following is not a characteristic of a perfectly competitive industry?

There are differentiated products.

In perfect competition, each firm:

produces a standardized product.

The demand curve for a perfectly competitive firm is:

perfectly elastic.

The assumptions of perfect competition imply that:

individuals in the market accept the market price as given.

Price-takers are individuals in a market who:

have no ability to affect the price of a good in a market

The market for breakfast cereal contains imilar products, such as FruitLoops, Corn Flakes, and Rice Krispies, that are considered to be different products by different buyers. This situation violates the perfect competition assumption of:

standardized product.

Suppose life is discovered on Mars and that itt urns out to be quite sophisticated. In fact, perfect competition prevails everywhere on the planet. Which of the following characteristics of Martian firms are we likely to observe?

They are all price-takers.

An assumption of the model of perfect competition is:

identical goods.

Marginal revenue:

equals the market price in perfect competition.

Marginal revenue is a firm’s:

increase in total revenue when it sells an additional unit of output.

If a perfectly competitive firm sells 30 units of output at a price of $10 per unit, its marginal revenue is:

$10.

Which of the following is true?

Price and marginal revenue are the same in perfect competition.

If it produces, a perfectly competitive firm will maximize profits at which:

marginal revenue equals marginal cost.

Zoe’s Bakery determines that P < ATC and P > AVC. Zoe should:

continue to operate even though she is experiencing an economic loss.

A perfectly competitive firm is definitely earning an economic profit when:

P > ATC.

Suppose Sarah’s pottery studio is currently charging the market price that is just higher than her minimum average total cost. This means that Sarah:

is earning a small economic profit.

A perfectly competitive firm operating in the short run producing 100 units of output has ATC = $6 and AFC = $2. The market price is $3 and is equal to MC. In order to maximize profits (or minimize losses), this firm should:

shut down

During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly
competitive industry. In the short run, Alex will shut down his lawn-mowing service
rather than continue with it if:

the total revenues can’t cover the total variable costs.

The short-run supply curve for a perfectly competitive firm is its:

marginal cost curve above its average variable cost curve.

A perfectly competitive firm maximizes profit by producing the quantity at which:

MR = MC.

If a perfectly competitive firm is producing a quantity that generates MC = MR, then profit:

is maximized.

For a perfectly competitive firm in the short run:

if the firm produces a quantity at which P > ATC, then the firm is profitable.

A perfectly competitive firm will incur an economic loss but will continue producing output in the short run if price is:

greater than average variable cost but less than average total cost.

conomic profits in a perfectly competitive industry induce ________, and losses induce ________.

entry; exit

When a perfectly competitive firm is in long-run equilibrium, the firm is producing at:

When a perfectly competitive firm is in long-run equilibrium, the firm is producing at:

Market structures are categorized by the following two criteria:

the number of firms and whether or not products are differentiated

Which of the following is(are) true concerning monopoly?

Monopoly is at the opposite end of the spectrum from a perfectly competitive firm.monopoly has no rival. Barriers to entry prevent other firms from entering the industry

The market structure called ________ is described as having a single producer selling a
single, undifferentiated product.

monopoly

A monopoly is a market structure characterized by:

barriers to entry and exit.

A monopoly is likely to ________ and ________ than a perfectly competitive firm.

produce less; charge more

Compared to perfect competition:

monopoly may have economic profits in the long run, but in perfect competition in the long run economic profits are zero

Because of monopoly, consumers typically have:

higher prices.

Most electric, gas, and water companies are examples of:

natural monopolies.

If your farm has the only known source of a rare cocoa bean needed to make chocolate-covered peanuts, your monopoly would result from:

control of a scarce resource or input.

The ability of a monopolist to raise the price of a product above the competitive level by reducing the output is known as:

market power.

You own a lemonade stand in a very competitive lemonade market, and as such, you are a price-taking firm. Which of the following events would most likely increase your market power?

You own exclusive rights to harvest lemons from all domestic citrus orchards.

Conditions that prevent the entry of new firms in a monopoly market are:

barriers to entry.

A natural monopoly exists whenever a single firm:

experiences economies of scale over the entire range of production that is relevant to its market.

If the state government gives you the exclusive right to sell cement to municipalities, your monopoly would result from:

government restrictions.

The demand curve facing a monopolist is:

downward-sloping, unlike the horizontal demand curve facing a perfectly competitive firm.

Which of the following is true?

MR = MC is a profit-maximizing rule for any firm.

The demand curve for a monopoly is:

the industry demand curve.

Critics of the National Collegiate Athletic Association (NCAA) argue that the NCAA monopolizes college athletics and prevents student-athletes from earning money while in college. If this is true, what type of entry barrier does the NCAA have?

control of a scarce resource or input

Diamond rings are relatively scarce because:

De Beers limits the quantity of diamonds supplied to the market.

Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she wants to sell six, she must charge $20,000 each. The quantity effect of selling the sixth motor home is:

$20,000.

Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she wants to sell six, she must charge $20,000 each. The price effect of selling the sixth motor home is:

-$5,000

Compared to a perfectly competitive industry, a monopolist

charges a higher price.

Which of the following statements about monopoly equilibrium and perfectly competitive equilibrium is incorrect?

In the long run, economic profits are driven to zero in both a monopoly and a perfect competitive market.

Suppose a monopoly is producing at the profit-maximizing level of output. At that level of output:

marginal revenue equals marginal cost.

Marginal revenue for a monopolist is:

less than price.

A demand curve that is downward-sloping will ensure that:

P > MR.

The profit-maximizing rule MR = MC is:

followed by all types of firms.

Price discrimination is the practice of:

charging different prices to buyers of the same good.

Suppose a monopoly can separate its customers into two groups. If the monopoly practices price discrimination, it will charge the lower price to the group with:

the higher price elasticity of demand.

In the short run:

some inputs are fixed and some inputs are variable.

The short run is a period that is:

long enough in which to vary output but not plant capacity.

In the long run:

all inputs are fixed. inputs are neither variable nor fixed. at least one input is variable and one input is fixed

An input whose quantity can be changed during a particular period is a(n):

variable input.

An input whose quantity cannot be changed during a particular period is a(n):

fixed input.

A total product curve indicates the relationship between:

a variable input and output.

The total product curve:

will become flatter as output increases, if there are diminishing returns to the variable input.

The ________ is the increase in output obtained by hiring an additional worker.

marginal product

A farm can produce 1,000 bushels of wheat per year with two workers and 1,300 bushels of wheat per year with three workers. The marginal product of the third worker is:

300 bushels

The idea of diminishing returns to an input in production suggests that if a local college adds more and more custodians, the marginal product of labor for the custodial staff will
________ over time.

decrease

Diminishing marginal returns means that:

each additional unit of an input used will increase output, but by smaller and smaller amounts.

The marginal cost curve is the mirror image of the:

marginal product curve.

A firm’s marginal cost is

the ratio of the change in total cost to the change in the quantity of output.

The sum of fixed and variable costs is:

total cost.

Average total cost is:

total cost divided by output.

The ________ curve continually declines as more output is produced in the short run

average fixed cost

At 20 units of output, a firm finds that its average variable cost is $5 per unit and its average total cost is $8 per unit. Therefore, its:

average fixed cost is $3 per unit.

If marginal cost is greater than average total cost, then:

average total cost is increasing.

If marginal cost is equal to average total cost, then:

average total cost is at its minimum.

The short-run average total cost curve is U-shaped because at low output levels the spreading effect of falling average fixed costs dominates the diminishing returns effect,
while at high output levels the reverse is true.

True

A firm finds that as it produces more, its long-run average total costs increase. This firm is experiencing:

diseconomies of scale

The slope of a long-run average total cost curve exhibiting diseconomies of scale is:

positive.

When diseconomies of scale outweigh economies of scale, the:

long-run average cost curve rises.

Economies and diseconomies of scale are associated with the:

long-run average total cost curve and the long run.