Microeconomics: Perfect Competition vs Monopolistic Markets - Prof. Stephen E. Lile, Exams of Microeconomics

Download Microeconomics: Perfect Competition vs Monopolistic Markets - Prof. Stephen E. Lile and more Exams Microeconomics in PDF only on Docsity! Chapter 8. 1. Which of the following firms would be the best example of perfect competition? a. John Smith's wheat farm. Correct b. General Motors Corporation. Wrong. The auto industry has only a few, large firms that manufacture autos. c. U.S. Steel Corporation. Wrong. The steel industry has only a few, large firms. d. Southwestern College Publishing. Wrong. The college textbook industry in recent years has consolidated to the point where there are only a few firm. 2. Which of the following best describes the shape of the demand curve for a single firm in a perfectly competitive industry a. the demand curve is downward sloping. Wrong. This is the shape of the industry- wide demand curve. b. the demand curve is vertical. Wrong. It’s horizontal. c. the demand curve is upward sloping. Wrong. It’s horizontal. d. the demand curve is horizontal. Correct. 3. A firm operating in a perfectly competitive environment faces the following costs and revenues: ATC = $8; AVC = $4; and MR = MC = $6. This firm should: a. Shut down. Wrong. It’s loses will be less if it continues to produce than if it shuts down. b. decrease production and raise its price. Wrong. A competitive firm will sell nothing if it raises its price above the overall market price. c. Increase production. Wrong. It should continue to produce the present rate of output in the shortrun. d. continue to operate in the short run. Correct. 4. In the long run, the competitive firm a. does not have a shut-down price. Wrong. In the longrun a firm should close down production if price is below ATC. b. earns only a normal profit. Correct. c. may produce even if it suffers a loss. Wrong. In the longrun a firm should close down production if price is below ATC. d. earns an economic profit. Wrong. It earns only a normal profit. 5. What is another name for a competitive firm’s demand curve? A. Marginal cost curve. Wrong. It’s the marginal revenue curve. B. Average fixed cost curve. Wrong. It’s the marginal revenue curve. C. Marginal revenue curve. Correct. D. Longrun curve. Wrong. It’s the marginal revenue curve. 6. Which of the following is true about a competitive firm: A. It is a “price-maker”, i.e. it set the price. Wrong. It is a price-taker. B. It spends a lot on advertising its product or service. Wrong. There is nothing unique to advertise. C. It faces major barriers when contemplating entering the industry. Wrong. There are no barriers. D. It produces the same (homogeneous) product as other firms in the industry. Correct. 7. A perfectly competitive firm’s supply curve is: A. Its average cost curve. Wrong. It’s the rising portion of the marginal cost curve that lies above AVC. B. That portion of its marginal cost curve that lies above AVC. Correct. C. The firm’s total cost curve. Wrong. It’s the rising portion of the marginal cost curve that lies above AVC. D. The declining portion of the firm’s marginal cost curve. Wrong. It’s the rising portion of the marginal cost curve that lies above AVC. Answer question 8 thru 11 from the following data for a hypothetical competitive firm: Quantity AFC AVC ATC Total Cost Marginal Cost 0 -- -- -- $80 -- 1 $80 $20 $100 $100 2 15 110 3 16.6 43.3 130 4 20.0 40.0 160 8. Average fixed cost for an output of 4 is a. $55. Wrong. It’s $20 because total fixed cost is $80. b. $40. Wrong. It’s $20 because total fixed cost is $80. c. $20. Correct. d. $70. Wrong. It’s $20 because total fixed cost is $80. 9. The firm's marginal cost of producing the 3rd unit is: a. $130. Wrong. It’s $20. b. $43.30. Wrong. It’s $20. c. $20. Correct. d. none of the above. Wrong. It’s $20. 10. Average total cost of producing 2 units is: a. $10. Wrong. It’s $110 divided by 2 or $55. b. $55. Correct. c. $40. Wrong. It’s $110 divided by 2 or $55. d. indeterminant. Wrong. It’s $10 divided by 2 or $55. 11. Assume the firm is producing 3 units and that the existing price per unit is $45. The firm is: A. Producing the profit maximizing output. Wrong. Price, which is marginal revenue exceeds marginal cost so it should produce the 4th unit. B. Producing too much. Wrong. Price, which is marginal revenue exceeds marginal cost so it should produce the 4th unit. C. Producing too little; it should increase its output level. Correct. D. None of the above. Wrong. Price, which is marginal revenue exceeds marginal cost so it should produce the 4th unit. 12. A competitive firm will maximize its profits if it produces where: A. The difference between marginal revenue and marginal cost is the greatest. Wrong. It should produce out to where marginal cost equals marginal revenue. 8. A health care provider, such as a physician or chiropractor, who charges a person who has health insurance more for a given procedure than a person who does not have health insurance is practicing: A. price equity. Wrong. It’s price discrimination Price Normality. Wrong. It’s price discrimination. C. Price discrimination. Correct. D. Price monopoly. Wrong. It’s price discrimination. 9. The best example of a local monopoly is: A. The automobile industry. Wrong, There are several domestic producers. B. Higher education. Wrong. There are many colleges and universities. C. Cable TV. Correct. In most communities, there is only one firm that has the franchise from local government to provide this service. D. The oil industry. Wrong. There are many frims in the oil industry. 10. Which of the following is true about a monopolist: A. it charges a lower price as compared to a competitive firms. Wrong. It charges a higher price. B. it produces a larger output level as compared to the sum of all firms in a competitive industry. Wrong. It produces a lower level of output. C. it never charges some customers more than it charges others. Wrong. It often practices price discrimination. D. its demand curve, which is total market demand, is downward-sloping and lies above it’s marginal revenue curve. Correct. 11. True or False. A monopolist is assured of earning economic profits because by definition it has no competition. A. True. Wrong. A monopolist providing a good for which the demand is weak may not earn even accounting profit, not to mention economic profit. There is no guarantee that demand will lie to the right of ATC. B. False. Correct. A monopolist providing a good for which the demand is weak may not earn even accounting profit, not to mention economic profit. There is no guarantee that demand will lie to the right of ATC. 12. Eli Lilly’s patent on Prozac (fluoxetine), the widely prescribed drug for treating depression, was originally supposed to run until 2004. However, the U. S. Court of Appeals in June 2001 invalidated Eli Lilly’s patent on Prozac. Economic theory would predict that this decision would: A. Increase Lilly’s profits. Wrong. The availability of a generic substitute for Prozac will cause the price elasticity of demand to increase, which in turn will force Lilly to lower the price of Prozac. B. Cause Lilly to increase the price it changes for Prozac. Wrong. The availability of a generic substitute for Prozac will cause the price elasticity of demand to increase, which in turn will force Lilly to lower the price of Prozac. C. Decrease Lilly’s profits. Correct. D. Harm firms that produce generic drugs. Wrong. The court’s decision benefited these firms by allowing them to provide the generic equivalent of Prozac. 13. True or False. Arbitrage refers to illegal, “black-market” activity. A. True. Wrong. Arbitrage is a socially beneficial activity that simply involves buying a good at a low price and reselling it for a higher price. B. False. Correct. Arbitrage is a socially beneficial activity that simply involves buying a good at a low price and reselling it for a higher price. 14. The best example of a monopoly at the national level is: A. The U. S. Postal Service. Correct. Congress has given this independent agency the exclusive right to deliver first-class letters. B. The oil industry. Wrong. There are many firms in the oil industry both in exploration and refining. C. Production of desk-top computers. Wrong. There are many national firms that produce computers. D. Banking. Wrong. There are many independent banks. 15. A profit maximizing monopolist would attempt to produce: A. an output corresponding to the highest price that it could charge. Wrong. It would produce an output where marginal cost equals marginal revenue. B. where ATC is minimum. Wrong. It would produce an output where marginal cost equals marginal revenue. C. where marginal cost equal marginal revenue. Correct. D. the most that it could. Wrong. It would produce an output where marginal cost equals marginal revenue. Chapter 10 1. Which of the following is NOT a characteristic of monopolistic competition? a. product differentiation. Wrong. This is a characteristic. b. mutual interdependence. Correct. The large number of firms rules this out. c. advertising. Wrong. There is advertizing. d. a large number of sellers. Wrong. There is a large number. 2. In the long run for the monopolistic competitor, the demand curve will a. intersect the ATC at its minimum point. Wrong. It will lie tangent to ATC. b. intersect the ATC curve somewhere past the minimum point. Wrong. It will lie tangent to ATC. c. become tangent to the ATC curve at its minimum point. Wrong. It will lie tangent to ATC, but not at its minimum point. d. become tangent to the ATC curve somewhere to the left of its minimum point. Correct. 3. Which of the following is NOT a characteristic of oligopolistic firms? a. mutual interdependence. Wrong. This is a characteristic. b. product differentiation. Wrong. This may be a characteristic. c. nonprice competition. Wrong. Oligopolistic firms may compete on the basis of things other than price. d. a perfectly elastic demand curve. Correct. Demand is not perfectly elastic. 4. Which one of the following industries is the best example of oligopoly? a. automobile production. Correct. There are a few large firms. b. retailing of soft drinks. Wrong. In most communities, there are hundreds of retailers of soft drinks. c. farming. Wrong. There are thousands of farmers. d. public utilities. Wrong. In most communities there is only one public utility which provides water, natural gas, electricity, etc. 5. Monopolistically competitive firms’ tend to have economic profits that are: a. Higher than competitive firms’s profits in the longrun. Wrong. Easy entry is a characteristic of both market structures and therefore both have zero economic profit in the longrun. b. Higher in the longrun than in the shortrun. Wrong. They are zero in the longrun because of easy entry. c. Zero in the longrun due to easy entry. Correct. ` d. Equal to the profit of a monopolist. Wrong. Firms in a monopolistically competitive market tend to have zero economic profit in the longrun due to easy entry. 6. A cartel is: a. a group of firms that formally agree to control the price and quantity of a good that the members of the cartel produce. Correct. b. legal in the U. S. Wrong. It is illegal. c. an organization of firms that attempts to protect consumers from high prices. Wrong. It is a group of firms that formally agree to control the price and quantity of a good that the members of the cartel produce. d. a group of firms that attempt to lower price and increase production. Wrong. It is a group of firms that formally agree to control the price and quantity of a good that the members of the cartel produce. 6. The “kindked demand curve” model: a. Applies to monopolistic competition. Wrong. It applies to oligopoly. b. Applies to monopoly. Wrong. It applies to oligopoly. c. Applies to a perfectly competitive market. Wrong. It applies to oligopoly. d. Applies to oligopoly. Correct. 7. According to the kinked demand curve model, decision makers for a particular firm believe that rival firms will: a. match any price cut, but ignore a price increase. Correct. b. Ignore any price cut, but match a price increase. Wrong. It is assumed that rivals will match any price cut, but ignore a price increase.