Microeconomics Mid-Term 2

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Cash expenditures a firm makes to pay for resources are called:

Explicit costs

Which would be an implicit cost for a firm? The cost:

Of wages foregone by the owner of the firm

If a firm’s revenues just cover all its opportunity costs, then:

Economic profit is zero

An industry is expected to expand if firms in the industry are earning positive:

Economic profits

In the short run:

Output is raised or reduced by changing the levels of variable inputs

Which is most likely to be a long-run adjustment for a firm that manufactures cars on an assembly line basis?

A change in production to a redesigned and retooled facility

According to the law of diminishing marginal returns:

The additional output generated by additional units of an input will diminish

Diminishing marginal returns occurs as a firm adds more variable inputs to at least one fixed input because:

As more variable inputs are hired, the amount of the fixed input per variable input decreases

The law of diminishing returns in a manufacturing plant of a fixed capacity implies that, eventually, employing one:

More worker will decrease the average amount of output per worker

The marginal product of labor curve graphically shows the change in total product resulting from a:

One-unit increase in the quantity of a particular resource used, holding constant other resources

When a bakery manager reports that at her bakery, productivity of her 15 workers last month was 1,800 loaves per worker, she is referring to the:

Average product of labor

The range of diminishing marginal productivity begins when:

Marginal product reaches its maximum

At the Amarillo Piano Company, the average product of labor stays constant at 5, regardless of how much labor is employed. This implies that:

The marginal product of labor is constant

At what point does marginal product equal average product?

Where average product is equal to its maximum value

With fixed costs of $400, a firm has average total costs of $3 and average variable costs of $2.50. Its output quantity must be:

800 units

At an output of 1,000 units per year, a firm’s variable costs are $5,000 and its average fixed costs are $3. Its total costs per year are:


The range over which average variable cost is increasing is the same as the range over which:

Average product is decreasing

If the long-run average total cost curve for a firm is horizontal in the relevant range of production, then it indicates that there:

Are constant returns to scale

Normal profit is an implicit cost.


In the long run, a firm can increase its output quantity, but it will be limited by the size of its existing production plant.


When diminishing marginal returns starts occurring, the addition of successive units of a variable resource to a fixed resource will cause the firm’s production to diminish.


Marginal product is highest where marginal cost is lowest.


Mutual interdependence would tend to limit control over price in which market model?


Under which market model are the conditions of entry into the market easiest?

Pure competition

Local electric or gas utility companies mostly operate in which market model?

Pure monopoly

The steel and automobile industries would be examples of which market model?


Which idea is inconsistent with pure competition?

Product differentiation

Which characteristic would best be associated with pure competition?

Price takers

In a purely competitive industry, each firm:

Can easily enter or exit the industry

Which is true under conditions of pure competition?

No single firm can influence the market price by changing its output

Price is constant or "given" to the individual firm selling in a purely competitive market because:

Each seller supplies a negligible fraction of total demand and supply

A purely competitive firm does not try to sell more of its product by lowering its price below the market price because:

It can sell all it wants to at the market price

The demand curve faced by a purely competitive firm:

Is the same as its marginal revenue curve

Sam owns a firm that produces tomatoes in a purely competitive market. The firm’s demand curve is:

A horizontal line

In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is:

Equal to the price

In a graph for a firm in pure competition with the quantity of output measured on the horizontal axis, the total revenue curve is:


Which is necessarily true for a purely competitive firm in short-run equilibrium?

Marginal revenue less marginal cost equals zero

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 1,000 units is $2.50. The minimum possible average variable cost is $2.00. The market price of the product is $2.50. To maximize profit or minimize losses, the firm should:

Continue producing 1,000 units

T-Shirt Enterprises is selling in a purely competitive market. It is producing 3000 units, selling them for $2.00 each. At this level of output, the average total cost is 2.50 and the average variable cost is $2.20. Based on these data, the firm should:

Shut down in the short run

In pure competition, price is determined where the industry:

Demand and supply curves intersect

If there are many firms in an industry, then it must be a purely competitive market.


In short-run equilibrium, a competitive firm cannot earn economic profits.


Which of the following distinguishes the short run from the long run in pure competition?

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

In a purely competitive industry:

there may be economic profits in the short run, but not in the long run.

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:

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

We would expect an industry to expand if firms in that industry are:

earning economic profits.

Which of the following will not hold true for a competitive firm in long-run equilibrium?

P equals AFC

Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs. After all economic adjustments have been completed product price will be:

higher and total output will be larger than originally.

Assume a purely competitive, increasing-cost industry is in long-run equilibrium. If a decline in demand occurs, firms will:

leave the industry and price and output will both decline.

An increasing-cost industry is the result of:

higher resource prices which occur as the industry expands.

Under what conditions would an increase in demand lead to a lower long-run equilibrium price?

The firms in the market are part of a decreasing-cost industry.

In a decreasing-cost industry:

lower demand leads to higher long-run equilibrium prices.

When LCD televisions first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that:

the LCD television industry is a decreasing-cost industry.

Purely competitive industry X has constant costs and its product is an inferior good. The industry is currently in long-run equilibrium. The economy now goes into a recession and average incomes decline. The result will be:

an increase in output, but not in the price, of the product.

Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline. Industry X is:

an increasing-cost industry.

Under pure competition in the long run:

both allocative efficiency and productive efficiency are achieved.

If for a firm P = minimum ATC = MC, then:

both allocative efficiency and productive efficiency are being achieved.

If a purely competitive firm is producing where price exceeds marginal cost, then:

the firm will fail to maximize profit and resources will be underallocated to the product.

Allocative efficiency occurs whenever:

it is impossible to produce a net benefit for society by changing the combination of goods and services produced.

Entrepreneurs in purely competitive industries:

innovate to lower operating costs and generate short-run economic profits.

Innovations that lower production costs or create new products:

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

The theory of creative destruction was advanced many years ago by:

Joseph Schumpeter.

Creative destruction is least beneficial to:

workers in the "destroyed" industries.

Which of the following is an example of creative destruction?

Automobile production causes the wagon industry to shut down.

(Consider This) The average life expectancy of a U.S. business is approximately:

10.2 years.

(Consider This) Approximately what percentage of start-up firms in the U.S. go bankrupt within the first two years?


(Consider This) Which of the following statements is true about U.S. firms?

Over half are bankrupt within the first five years after starting up.

Barriers to entering an industry:

are the basis for monopoly.

What do economies of scale, the ownership of essential raw materials, and patents have in common?

They are all barriers to entry.

With respect to the pure monopolist’s demand curve it can be said that:

price exceeds marginal revenue at all outputs greater than 1.

The demand curve faced by a pure monopolist:

is less elastic than that faced by a single purely competitive firm.

The marginal revenue curve for a monopolist:

becomes negative when output increases beyond some particular level.

Which of the following is characteristic of a pure monopolist’s demand curve?

It is the same as the market demand curve.

Because the monopolist’s demand curve is downsloping:

price must be lowered to sell more output.

The pure monopolist’s demand curve is relatively elastic:

in the price range where marginal revenue is positive.

For a pure monopolist marginal revenue is less than price because:

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

If a pure monopolist is operating in a range of output where demand is elastic:

marginal revenue will be positive but declining.

Which of the following is incorrect? Imperfectly competitive producers:

do not compete with one another.

A pure monopolist:

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

A pure monopolist’s short-run profit-maximizing or loss-minimizing position is such that price:

may be greater or less than ATC.

The supply curve of a pure monopolist:

does not exist because prices are not "given" to a monopolist.

An important economic problem associated with pure monopoly is that, at the profit maximizing outputs, resources are:

underallocated because price exceeds marginal cost.

Comparing a pure monopoly and a purely competitive firm with identical costs, we would find in long-run equilibrium that the pure monopolist’s:

price and average total cost would be higher, but output would be lower.

There is some evidence to suggest that X-inefficiency is:

more likely to occur in monopolistic firms than in competitive firms.

Price discrimination refers to:

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

Which of the following is not a precondition for price discrimination?

The commodity involved must be a durable good.

If a monopolist engages in price discrimination, it will:

charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.

Price discrimination is:

only illegal if used to lessen or eliminate competition.

A dilemma of regulation is that:

the regulated price that achieves allocative efficiency is also likely to result in losses.

(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. This pricing system occurs because:

(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. This pricing system occurs because:

(Last Word) DeBeers Consolidated Mines markets about:

55 percent of the world’s rough-cut diamonds.

A pure monopolist will maximize profits by producing at that output where price and marginal cost are equal.


All of the following can file antitrust charges under the Sherman Act except:

the Federal Energy Regulatory Commission.

Which of the following is least likely to violate the Sherman Act or the Clayton Act?

Competitive firms F and G independently charge lower prices to frequent customers than to occasional customers.

A function of the Federal Trade Commission is to:

investigate instances of faulty and misleading advertising.

Which of the following laws prohibited mergers by stock acquisition if the effect was to lessen competition?

Clayton Act of 1914

Tying agreements:

obligate a purchaser of product X to also buy product Y from the same seller.

The Celler-Kefauver Act of 1950:

amended the Clayton Act.

Price fixing:

is a per se violation of the antitrust laws.

The Sherman Act:

declared monopoly and restraints of trade to be illegal.

In which of the following cases did the final court decision result in a breakup of the firm into competing businesses?

Standard Oil case

In the Microsoft antitrust case, the Federal government said in essence that:

Microsoft was a "bad monopoly."

In the Alcoa case of 1945 the courts held that:

the mere possession of monopoly power is a violation of the antitrust laws.

In the U.S. Steel case of 1920 the courts held that:

although U.S. Steel possessed monopoly power, it had not violated the Sherman Act because it had not unreasonably used that power.

Which one of the following is most likely to increase the Herfindahl index of a particular industry?

a horizontal merger

A merger between a maker of household detergents and a fast food chain would be an example of:

a conglomerate merger.

A conglomerate merger:

can extend the line of products sold, extend the territories in which products are sold, or combine totally unrelated products.

Conspiracies to fix prices are:

per se violations of the antitrust laws.

Critics of the regulation of natural monopolies contend that:

the industry may "capture" or control the regulatory commission.

The main purpose of industrial regulation is to:

lower price to average total cost such that the firm earns a fair return.

Critics of industrial regulation say that such regulation:

perpetuates monopoly long after new technology has eroded natural monopoly.

The largest efficiency gains from deregulation have occurred in the:

airlines, trucking, and railroad industries.

Social regulation differs from industrial regulation in that:

social regulation applies to virtually all industries, while industrial regulation applies to a restricted number.

Which one of the following is concerned with social regulation?

Equal Employment Opportunity Commission

(Consider This) The Consider This box "Of Catfish and Art (and Other Things in Common)" lists examples of recent antitrust cases involving:

price fixing.

(Consider This) According to the Consider This box on catfish and art, which of the following firms were recently convicted of price fixing?

Sotheby’s and Christy’s (art auction houses)

(Last Word) In 2001, Microsoft was found guilty of violating:

Sections 1 and 2 of the Sherman Act.

The average household income in the United States in 2008 was:


The percentage of total before-tax income received by the top 20 percent of households in 2008 was about:

50 percent

A Lorenz curve showing perfect equality in the distribution of income:

Is a straight line with a 45-degree angle

Which of the following is an example of a noncash transfer that is typically not included in the income-distribution data?


Suppose that Jane earns $10,000 in year 1 and $15,000 in year 2, while Jim earns $15,000 in year 1 and $10,000 in year 2. Is there income equality for the two individuals?

The annual data indicate inequality, but the two-year data indicate equality

Two major criticisms of the Bureau of Census data as a portrayal of the degree of income inequality are that the income concept employed is too:

Narrow and the income accounting period is too short

The degree of inequality in income distribution based on single-year data is:

Overstated because it does not take into account income mobility

One of the major causes of income inequality is differences in:


Which of the following would be considered part of wealth?

Corporate stock holdings

Reasons for the growing income inequality in the United States since 1970 include the following, except:

Increase in the number of households headed by single or divorced women

"A more equal distribution of income in the United States would result in greater total consumer satisfaction." This statement is based on the concept that:

Incomes are subject to diminishing marginal utility

Of the following groups, which had the highest incidence of poverty in 2008?


Social insurance programs partially replace income that has been lost due to the following, except:

Resignation from a job

Government programs that pay benefits to those who are unable to earn income because of permanent disabilities or to those who have very low incomes and dependent children are called:

Public assistance programs

The Temporary Assistance for Needy Families (TANF) program:

Put a limit on receiving welfare payments and required able-bodied adults to work after receiving assistance for two years

One of the provisions of the Temporary Assistance for Needy Families (TANF) program was to:

Set a 5-year lifelong limit on welfare benefits

Suppose that a prejudiced white employer is willing to hire white workers at a rate of $16/hour, and this employer has a discrimination coefficient of $4. This implies that the employer would:

Hire a non-white worker only at a rate of $12/hour or less

Suppose that white workers are getting paid $21/hour, while similarly-productive African-American workers are getting paid $18/hour. A prejudiced white employer with a discrimination coefficient of $24/hour will:

Not hire African-Americans at all, even if they offer to work for free

Ending discrimination against minority groups in educational processes and in employment situations would cause total domestic output to:

Rise, because of an increase in the productivity of the labor force

In statistical discrimination:

The average characteristics of the group are applied to individual members

The crowding model of occupational discrimination suggests that occupational segregation results in:

A lower domestic output than would otherwise be the case

The Lorenz curve is a graph that relates income to household spending.


The Supplemental Nutrition Assistance Program (formerly the food-stamp program) mostly pays out cash-vouchers to eligible households.


The Temporary Assistance for Needy Families (TANF) that replaced the old Aid for Families with Dependent Children welfare program succeeded in reducing the number of welfare recipients and increasing the employment rate among single mothers.


In 2008, about what percentage of U.S. households had personal incomes of less than $10,000?

About 7 percent

The Lorenz curve is helpful in visualizing the:

Degree of inequality in the distribution of income

As the area between the Lorenz curve and diagonal gets larger, the Gini ratio:

Rises to reflect greater inequality

When taxes and transfer payments are taken into account, the distribution of income in the United States:

Is more equally distributed

Since 1970, the distribution of personal income in the United States has:

Moved toward greater inequality

Entitlement programs include:

Both public assistance programs and social insurance programs

Which of the following statements applies to the Social Security program?

It is financed by payroll taxes on employees and employers

The earned income tax credit (EITC) is, in essence:

A wage subsidy for low-income workers to offset Social Security taxes

A major criticism of the welfare system that led to reforms in the mid-1990s is that welfare payments:

Create dependency on government programs

Differences in ability are one major reason for income differences in the United States.


If income inequality is increasing, it means that the income levels of the poor are falling while the income levels of the rich are rising.


The basic reason why the debate between income equality versus inequality is on-going is because there is a tradeoff between income equality and economic efficiency.


All social insurance programs are welfare or public charity programs.


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