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Salt Lake Community College - ECON 102 CHAPTER 9 - Pure Competition [REPEAT from Teat II] Multiple Choice Questions 1

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Salt Lake Community College - ECON 102

CHAPTER 9 - Pure Competition [REPEAT from Teat II]

Multiple Choice Questions

1. Economists would describe the U.S. automobile industry as:

A) purely competitive. B) an oligopoly. C) monopolistically competitive. D) a pure monopoly.

2. In which of the following market structures is there clear-cut mutual interdependence with respect to price-output policies?

A) pure monopoly B) oligopoly C) monopolistic competition D) pure competition

3. Which of the following industries most closely approximates pure competition?

A) agriculture B) farm implements C) clothing D) steel

5. 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

6. An industry comprised of 40 firms, none of which has more than 3 percent of the total market for a differentiated product is an example of:

A) monopolistic competition B) oligopoly C) pure monopoly D) pure competition

7. A one-firm industry is known as:

A) monopolistic competition B) oligopoly C) pure monopoly D) pure competition

8. An industry comprised of four firms, each with about 25 percent of the total market for a product is an example of:

A) monopolistic competition B) oligopoly C) pure monopoly D) pure competition

9. An industry comprised of a very large number of sellers producing a standardized product is known as:

A) monopolistic competition B) oligopoly C) pure monopoly D) pure competition

10. 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

Pure competition defined; demand curve

11. Which of the following statements applies to a purely competitive producer?

A) It will not advertise its product.

B) In long-run equilibrium it will earn an economic profit.

C) Its product will have a brand name.

D) Its product is slightly different from those of its competitors.

12. A purely competitive seller is:

A) both a "price maker" and a "price taker." C) a "price taker."

B) neither a "price maker" nor a "price taker." D) a "price maker."

13. Which of the following is not characteristic of pure competition?

A) price strategies by firms C) no barriers to entry

B) a standardized product D) a larger number of sellers

14. Which of the following is not a basic characteristic of pure competition?

A) considerable nonprice competition C) a standardized or homogeneous product

B) no barriers to the entry or exodus of firms D) a large number of buyers and sellers

15. 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.

16. Which of the following is characteristic of a purely competitive seller's demand curve?

A) Price and marginal revenue are equal at all levels of output.

B) Average revenue is less than price.

C) Its elasticity coefficient is 1 at all levels of output.

D) It is the same as the market demand curve.

20. If a firm in a competitive industry is confronted with an equilibrium price of $5, its marginal revenue:

A) may be either greater or less than $5. C) will be less than $5.

B) will also be $5. D) will be greater than $5.

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

A) the firm's demand curve is downsloping.

B) of product differentiation reinforced by extensive advertising.

C) each seller supplies a negligible fraction of total supply.

D) there are no good substitutes for its product.

22. For a purely competitive seller, price equals:

A) average revenue. B) marginal revenue. C) total revenue divided by output. D) all of the above.

24. The marginal revenue curve of a purely competitive firm:

A) lies below the firm's demand curve.

B) increases at an increasing rate as output expands.

C) is horizontal at the market price.

D) is downsloping because price must be reduced to sell more output.

25. 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 C) downsloping, perfectly inelastic

B) downsloping, perfectly elastic D) perfectly elastic, downsloping

26. 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 which is less than product price when it sells an extra unit.

D) is selling a differentiated (heterogeneous) product.

27. The vertical distance between the horizontal axis and any point on a competitor's demand curve measures:

A) total revenue.

B) total cost.

C) product price, marginal revenue, and average revenue.

D) the quantity demanded.

28. The fact that a purely competitive firm's total revenue curve is linear and upsloping to the right implies that:

A) product price increases as output increases.

B) product price decreases as output increases.

C) product price is constant at all levels of output.

D) marginal revenue declines as more output is produced.

30. Refer to the above diagram, which pertains to a purely competitive firm. Curve A represents:

A) total revenue and marginal revenue. C) total revenue and average revenue.

B) marginal revenue only. D) total revenue only.

31. Refer to the above diagram, which pertains to a purely competitive firm. Curve C represents:

A) total revenue and marginal revenue. C) total revenue and average revenue.

B) marginal revenue only. D) average revenue and marginal revenue.

32. A purely competitive seller's average revenue curve coincides with:

A) its marginal revenue curve only.

B) its demand curve only.

C) both its demand and marginal revenue curves.

D) neither its demand nor its marginal revenue curve.

34. Marginal revenue for a purely competitive firm:

A) is greater than price. C) is equal to price.

B) is less than price. D) may be either greater or less than price.

Profit maximizing in short run

35. Firms seek to maximize:

A) per unit profit. B) total revenue. C) total profit. D) market share.

36. A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating:

A) price and average total cost. C) marginal revenue and marginal cost.

B) price and average fixed cost. D) price and marginal revenue.

37. In the short run a purely competitive firm that seeks to maximize profit will produce:

A) where the demand and the ATC curves intersect.

B) where total revenue exceeds total cost by the maximum amount.

C) that output where economic profits are zero.

D) at any point where the total revenue and total cost curves intersect.

Use the following to answer questions 38-41:

38. Refer to the above short-run data. Total fixed cost for this firm is:

A) about $67. B) $300. C) $200. D) $100.

39. Refer to the above short-run data. The shape of the total cost curve reflects:

A) diminishing opportunity costs. C) increasing and diminishing returns.

B) the law of rising fixed costs. D) economies and diseconomies of scale.

40. Refer to the above short-run data. The profit-maximizing output for this firm is:

A) above 440 units. B) 440 units. C) 320 units. D) 100 units.

41. Refer to the above short-run data. Which of the following is correct?

A) This firm will maximize its profit at 440 untis of output.

B) Any level of output between 100 and 440 units will yield an economic profit.

C) This firm's marginal revenue rises with output.

D) Any level of output less than 100 units or greater than 440 units is profitable.

42. A competitive firm will maximize profits at that output at which:

A) total revenue exceeds total cost by the greatest amount.

B) total revenue and total cost are equal.

C) price exceeds average total cost by the largest amount.

D) the difference between marginal revenue and price is at a maximum.

Use the following to answer questions 43-48:

43. Curve (1) in the above diagram is a purely competitive firm's:

A) total cost curve. C) marginal revenue curve

B) total revenue curve. D) total economic profit curve.

Answer: D

44. Curve (2) in the above diagram is a purely competitive firm's

A) total cost curve. C) marginal revenue curve

B) total revenue curve. D) total economic profit curve.

45. Curve (3) in the above diagram is a purely competitive firm's

A) total cost curve. C) marginal revenue curve.

B) total revenue curve. D) total economic profit curve.

46. Curve (4) in the above diagram is a purely competitive firm's:

A) total cost curve. B) total revenue curve. C) marginal revenue curve. D) total profit curve.

47. Refer to the above diagram. Other things equal, an increase of product price would be shown as:

A) an increase in the steepness of curve (3), an upward shift in curve (2), and upward shift in curve (1).

B) a decrease in the steepness of curve (3), a downward shift in curve (2), and an upward shift in curve (1).

C) an downward shift in curve (4) and an upward shift in curve (1), with no changes in lines (2) and (3).

D) an upward shift in line (2) only.

48. The firm represented by the above diagram would maximize its profit where:

A) curves (2) and (1) intersect.

B) curve (1) touches the horizontal axis for the second time.

C) the vertical distance between curves (3) and (4) is the greatest.

D) curves (3) and (4) intersect.

49. 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.

50. The MR = MC rule applies:

A) to firms in all types of industries. C) only to monopolies.

B) only when the firm is a "price taker." D) only to purely competitive firms.

51. 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.

52. 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.

55. 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. C) is realizing a loss of $60.

B) is maximizing its profits. D) is realizing an economic profit of $40.

56. A purely competitive firm's short-run supply curve is:

A) perfectly elastic at the minimum average total cost.

B) upsloping and is the portion of the marginal cost curve that lies above the average variable cost curve.

C) upsloping and is the portion of the marginal cost curve that lies above the average total cost curve.

D) upsloping only when the industry has constant costs.

57. Suppose you find that the price of your product is less than minimum AVC. You should:

A) minimize your losses by producing where P = MC.

B) maximize your profits by producing where P = MC.

C) close down because, by producing, your losses will exceed your total fixed costs.

D) close down because total revenue exceeds total variable cost.

58. If a purely competitive firm shuts down in the short run:

A) its loss will be zero.

B) it will realize a loss equal to its total variable costs.

C) it will realize a loss equal to its total fixed costs.

D) it will realize a loss equal to its total costs.

59. A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its:

A) total variable costs. B) total costs. C) total fixed costs. D) marginal costs.

Use the following to answer questions 60-64:

Answer the next question(s) on the basis of the following data confronting a firm:

60. Refer to the above data. This firm is selling its output in a(n):

A) imperfectly competitive market. C) purely competitive market.

B) monopolistic market. D) oligopolistic market.

61. Refer to the above data. If the firm's minimum average variable cost is $10, the firm's profit-maximizing level of output would be:

A) 2. B) 3. C) 4. D) 5.

62. Refer to the above data. At the profit-maximizing output the firm's total revenue is:

A) $48. B) $32. C) $80. D) $64.

63. Refer to the above data. At the profit-maximizing output the firm's total cost is:

A) $48. B) $32. C) $80. D) $64.

64.Refer to the above data. The firm's:

A) economic profit is $12. B) economic profit is $16. C) loss is $14. D) economic profit is $3.

65. In the short run a purely competitive firm will always make an economic profit if:

A) P = ATC. B) P > AVC. C) P = MC. D) P > ATC.

66. Suppose that at 500 units of output marginal revenue is equal to marginal cost. The firm is selling its output at $5 per unit and average total cost at 500 units of output is $6. On the basis of this information we:

A) can say that the firm should close down in the short run.

B) can say that the firm can produce and realize an economic profit in the short run.

C) cannot determine whether the firm should produce or shut down in the short run.

D) can assume the firm is not using the most efficient technology.

67. If a firm is having economic losses in short run, it will decide whether or not to produce by comparing:

A) marginal revenue and marginal cost. C) total revenue and total cost.

B) price and minimum average variable cost. D) total revenue and total fixed cost.

68. A firm finds that at its MR = MC output, its TC = $1000, TVC = $800, TFC = $200, and total revenue is $900. This firm should:

A) shut down in the short run.

B) produce because the resulting loss is less than its TFC.

C) produce because it will realize an economic profit.

D) liquidate its assets and go out of business.

69. The lowest point on a purely competitive firm's short-run supply curve corresponds to:

A) the minimum point on its ATC curve. C) the minimum point on its AFC curve.

B) the minimum point on its AVC curve. D) the minimum point on its MC curve.

Use the following to answer questions 70-73:

70. Refer to the above diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is:

A) P1. B) P2. C) P3. D) P4.

71. Refer to the above diagram for a purely competitive producer. The firm will produce at a loss at all prices:

A) above P1. B) above P3. C) above P4. D) between P2 and P 3.

72. Refer to the above diagram for a purely competitive producer. If product price is P3:

A) the firm will maximize profit at point d. C) economic profits will be zero.

B) the firm will earn an economic profit. D) new firms will enter this industry.

73. Refer to the above diagram for a purely competitive producer. The firm's short-run supply curve is:

A) the abcd segment of the MC curve. C) the cd segment of the MC curve.

B) the bcd segment of the MC curve. D) not shown.

74. The short-run supply curve of a purely competitive producer is based on its:

A) AVC curve. B) ATC curve. C) AFC curve. D) MC curve.

75. On a per unit basis economic profit can be determined as the difference between:

A) marginal revenue and product price. C) marginal revenue and marginal cost.

B) product price and average total cost. D) average fixed cost and product price.

76. In the short run a purely competitive seller will shut down if:

A) it cannot produce at an economic profit.

B) price is less than average variable cost at all outputs.

C) price is less than average fixed cost at all outputs.

D) there is no point at which marginal revenue and marginal cost are equal.

Use the following to answer questions 77-81:

77. Refer to the above diagram. To maximize profit or minimize losses this firm will produce:

A) K units at price C. B) D units at price J. C) E units at price A. D) E units at price B.

78. Refer to the above diagram. At the profit-maximizing output, total revenue will be:

A) 0AHE. B) 0BGE. C) 0CFE. D) ABGE.

79. Refer to the above diagram. At the profit-maximizing output, total fixed cost is equal to:

A) 0AHE. B) 0BGE. C) 0CFE. D) BCFG.

80. Refer to the above diagram. At the profit-maximizing output, total variable cost is equal to:

A) 0AHE. B) 0CFE. C) 0BGE. D) ABGH.

81. Refer to the above diagram. At the profit-maximizing output, the firm will realize:

A) a loss equal to BCFG. C) an economic profit of ACFH.

B) a loss equal to ACFH. D) an economic profit of ABGH.

82. If a purely competitive firm is producing at some level less than the profit-maximizing output, then:

A) price is necessarily greater than average total cost.

B) fixed costs are large relative to variable costs.

C) price exceeds marginal revenue.

D) marginal revenue exceeds marginal cost.

88. If at the MC = MR output, AVC exceeds price:

A) new firms will enter this industry.

B) the firm should produce the MC = MR output and realize an economic profit.

C) the firm should shut down in the short run.

D) the firm should expand its plant.

95. In the short run a purely competitive seller will shut down if product price:

A) equals average revenue. B) is greater than MC. C) is less than AVC. D) is less than ATC.

96. The short-run shut-down point for a purely competitive firm occurs:

A) at any point where price is less than the minimum AVC.

B) between the two break-even points.

C) at any point where total revenue is less than total cost.

D) at any point where the firm is not making an economic profit.

97. In a purely competitive industry:

A) there will be no economic profits in either the short run or the long run.

B) economic profits may persist in the long run if consumer demand is strong and stable.

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

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

98. 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.

101. Assume a competitive firm, MC = AVC at $12, MC = ATC at $20, and MC = MR at $16. This firm will:

A) realize a profit of $4 per unit of output.

B) maximize its profit by producing in the short run.

C) minimize its losses by producing in the short run.

D) shut down in the short run.

102. The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing it is known as the:

A) output-maximizing rule. B) profit-maximizing rule. C) shut-down rule. D) break-even rule.

103. If a purely competitive firm produces at the P = MC output and realizing an economic profit, at that output:

A) marginal revenue is less than price. C) ATC is being minimized.

B) marginal revenue exceeds ATC. D) total revenue equals total cost.

104. If a profit-seeking competitive firm is producing its profit-maximizing output and its total fixed costs fall by 25 percent, the firm should:

A) use more labor and less capital to produce a larger output.

B) not change its output.

C) reduce its output.

D) increase its output.

Use the following to answer questions 105-108:

105. Refer to the above diagram. At P2, this firm will:

A) produce 44 units and realize an economic profit.

B) produce 44 units and earn only a normal profit.

C) produce 66 units and earn only a normal profit.

D) shut down in the short run.

106. Refer to the above diagram. At P1, this firm will produce:

A) 47 units and break even. C) 66 units and earn only a normal profit.

B) 47 units and realize an economic profit. D) 24 units and earn only a normal profit.

107. Refer to the above diagram. At P4, this firm will:

A) shut down in the short run. C) produce 30 units and earn only a normal profit.

B) produce 30 units and incur a loss. D) produce 10 units and earn only a normal profit.

108. Refer to the above diagram. At P3, this firm will:

A) produce 14 units and realize an economic profit.

B) produce 62 units and earn only a normal profit.

C) produce 40 units and incur a loss.

D) shut down in the short run.

109. The loss of a purely competitive firm which shuts down in the short run:

A) is equal to its total variable costs. C) is equal to its total fixed costs.

B) is zero. D) cannot be determined.

110. The Ajax Company is selling in a purely competitive market. Its output is 100 units which sell at $4 each. At this level of output total cost is $600, total fixed cost is $100, and marginal cost is $4. The firm should:

A) reduce output to about 80 units. C) continue to produce 100 units.

B) expand its production. D) produce zero units of output.

111. 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 constant 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.

112. If a purely competitive firm is maximizing economic profit:

A) it is necessarily maximizing per-unit profit.

B) it may or may not be maximizing per unit profit.

C) then per-unit profit will be minimized.

D) it is necessarily overallocating resources to its product.

116. If total revenue is less than total variable costs at the MR = MC output, a purely competitive firm should:

A) shut down. C) produce and may or may not realize a profit.

B) produce, but will necessarily realize a loss. D) increase its output.

117. Assume a purely competitive firm is selling 200 units of output at $3 each. At this output its total fixed cost is $100 and its total variable cost is $350. This firm:

A) is maximizing its profit.

B) is making a profit, but not necessarily the maximum profit.

C) is incurring losses.

D) should shut down in the short run.

133. 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 but less than total fixed cost.

D) if total cost exceeds total revenue by some amount greater than total fixed cost.

134. In the short run a purely competitive firm will maximize profit by producing that output at which:

A) total revenue exceeds total cost by a maximum amount.

B) total revenue exceeds total cost by a minimum amount.

C) total revenue and total cost are equal.

D) total fixed cost equals total variable cost.

140. A purely competitive firm's short-run supply curve is:

A) the upward sloping portion of its marginal cost curve.

B) the upward sloping portion of its average variable cost curve.

C) its marginal cost curve above average variable cost.

D) its average total cost curve.

141. In the short run, a purely competitive firm will earn a normal profit when:

A) P = AVC. B) P > MC. C) that firm's MR = market equilibrium price. D) P = ATC.

Profit maximizing in long run

148. 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.

150. If a competitive firm is producing at the MR = MC output level and earning an economic profit, then:

A) the selling price for this firm is above the market equilibrium price.

B) new firms will enter this market.

C) some existing firms in this market will leave.

D) there must be price fixing by the industry's firms.

151. Long-run competitive equilibrium:

A) is realized only in constant-cost industries. C) is not economically efficient.

B) will never change once it is realized. D) results in zero economic profits.

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

A) earning normal profits. C) incurring economic losses.

B) earning economic profits. D) earning accounting profits.

153. Which of the following statements is correct?

A) Economic profits induce firms to enter an industry; losses encourage firms to leave.

B) Economic profits induce firms to leave an industry; profits encourage firms to leave.

C) Economic profits and losses have no significant impact on the growth or decline of an industry.

D) Normal profits will cause an industry to expand.

154. Let a competitive increasing-cost industry be in long-run equilibrium. 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.

155. Which of the following statements is correct?

A) The long-run supply curve for a purely competitive increasing-cost industry will be upsloping.

B) The long-run supply curve for a purely competitive increasing-cost industry will be perfectly elastic.

C) The long-run supply curve for a purely competitive industry will be less elastic than the industry's short-run supply curve.

D) The long-run supply curve for a purely competitive decreasing-cost industry will be upsloping.

156. A constant-cost industry is one in which:

A) a higher price per unit will not result in an increased output.

B) if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.

C) the demand curve and therefore the unit price and quantity sold seldom change.

D) the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.

157. 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

158. Assume a 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:

A) lower, but total output will be larger than originally.

B) higher and total output will be larger than originally.

C) lower and total output will be smaller than originally.

D) higher, but total output will be smaller than originally.

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

A) leave the industry, price will decrease, and quantity produced will increase.

B) enter the industry and price and quantity will both increase.

C) leave the industry and price and output will both increase.

D) leave the industry and price and output will both decline.

160. When a purely competitive firm is in long-run equilibrium:

A) marginal revenue exceeds marginal cost.

B) price equals marginal cost.

C) total revenue exceeds total cost.

D) minimum average total cost is less than the product price.

161. 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.

162. 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.

163. An increasing-cost industry is associated with:

A) a perfectly elastic long-run supply curve. C) a perfectly inelastic long-run supply curve.

B) an upsloping long-run supply curve. D) an upsloping long-run demand curve.

167. 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.

168. An increasing-cost industry is the result of:

A) higher resource prices which occur as the industry expands.

B) a change in the industry's minimum efficient scale.

C) X-inefficiency.

D) the law of diminishing returns.

169. A purely competitive firm is precluded from making economic profit in the long run because:

A) it is a "price taker." C) of unimpeded entry to the industry.

B) its demand curve is perfectly elastic. D) it produces a differentiated product.

172. 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.

174. Suppose that an industry's long-run supply curve is downsloping. This suggests that:

A) it is an increasing-cost industry.

B) relevant inputs have become more expensive as the industry has expanded.

C) technology has become less efficient as a result of the industry's expansion.

D) it is a decreasing-cost industry.

175. Suppose an increase in product demand occurs in a decreasing-cost industry. As a result:

A) the new long-run equilibrium price will be lower than the original long-run equilibrium price.

B) equilibrium quantity will decline.

C) firms will eventually leave the industry.

D) the new long-run equilibrium price will be higher than the original price.

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

A) a constant-cost industry. C) an increasing-cost industry.

B) a decreasing-cost industry. D) encountering X-inefficiency.

184. The MR = MC rule applies:

A) in the short run, but not in the long run. C) in both the short run and the long run.

B) in the long run, but not in the short run. D) only to a purely competitive firm.

Pure competition and efficiency

188. Allocative efficiency is achieved when the production of a good occurs where:

A) P = minimum ATC. B) P = MC. C) P = minimum AVC. D) total revenue is equal to TFC.

190. Resources are efficiently allocated when production occurs where:

A) marginal cost equals average variable cost. C) price is equal to marginal cost.

B) price is equal to average revenue. D) price is equal to average variable cost.

191. The term productive efficiency refers to:

A) any short-run equilibrium position of a competitive firm.

B) the production of the product-mix most desired by consumers.

C) the production of a good at the lowest average total cost.

D) fulfilling the condition P = MC.

192. If the price of product Y is $25 and its marginal cost is $18:

A) Y is being produced with the least-cost combination of resources.

B) society will realize a net gain if less of Y is produced.

C) resources are being underallocated to Y.

D) resources are being overallocated to Y.

193. 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.

194. Under pure competition in the long run:

A) neither allocative efficiency nor productive efficiency are achieved.

B) both allocative efficiency and productive efficiency are achieved.

C) productive efficiency is achieved, but allocative efficiency is not.

D) allocative efficiency is achieved, but productive efficiency is not.

True/False Questions

211. In maximizing profit a firm will always produce that output where total revenues are at a maximum.

212. In the short run a competitive firm will always choose to shut down if product price is less than the lowest attainable average total cost.

213. After all long-run adjustments have been completed, a firm in a competitive industry will produce that level of output where average total cost is at a minimum.

214. The long-run supply curve for a decreasing-cost industry is downsloping.

215. A competitive firm will produce in the short run so long as its price exceeds its average fixed cost.

216. Marginal cost is a measure of the alternative goods which society forgoes in using resources to produce an additional unit of some specific product.

217. Price and marginal revenue are identical for an individual purely competitive seller.

218. Because the equilibrium position of a purely competitive seller entails an equality of price and marginal costs, competition produces up to an efficient allocation of economic resources.

219. The short-run supply curve slopes up because firms must be compensated for rising marginal costs.

220. The demand curve for a purely competitive industry is perfectly elastic, but the demand curves faced by individual firms in such an industry are downsloping.

221. The total revenue curve of a competitive seller graphs as a straight, upsloping line.

222. Marginal revenue is the addition to total revenue resulting from the sale of one more unit of output. True

CHAPTER 10: Pure Monopoly

5. Pure monopolists may obtain economic profits in the long run because:

A) of advertising. C) of barriers to entry.

B) marginal revenue is constant as sales increase. D) of rising average fixed costs.

6. Which of the following approximates a pure monopoly?

A) the foreign exchange market C) the diamond market

B) the Kansas City wheat market D) the soft drink market

7. Which of the following is a characteristic of pure monopoly?

A) close substitute products B) barriers to entry C) the absence of market power D) "price taking"

8. Which of the following is not a barrier to entry?

A) patents B) X-inefficiency C) economies of scale D) ownership of essential resources

12. Large minimum efficient scale of plant combined with limited market demand may lead to:

A) natural monopoly. B) patent monopoly C) government franchise monopoly. D) shared monopoly.

17. A pure monopolist's demand curve:

A) is perfectly inelastic. C) lies above its marginal revenue curve.

B) coincides with its marginal revenue curve. D) lies below its marginal revenue curve.

20. 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.

26. A monopolistic firm sells 10 garages at $10,000 each, but if it restricts its output to 9 per week it can sell these at $11,000 each. The marginal revenue of the tenth unit of sales per week is:

A) -$1,000. B) $9,000. C) $10,000. D) $1,000.

33. The pure monopolist's demand curve is:

A) identical with the industry demand curve. C) perfectly inelastic.

B) of unit elasticity throughout. D) perfectly elastic.

Use the following to answer questions 34-37:

34. Refer to the above diagram. This firm is selling in:

A) a market in which there are an extremely large number of other firms producing the same product.

B) an imperfectly competitive market.

C) a market in which demand is elastic at all prices.

D) a purely competitive market.

35. Refer to the above diagram. Demand is relatively elastic:

A) in the P2P1 price range. C) in the P2P4 price range.

B) in the 0P1 price range. D) only at price P2.

36. Refer to the above diagram. Demand is relatively inelastic:

A) at price P3. B) at any price below P2. C) in the P2P4 price range. D) in the P2P3 price range.

37. Refer to the above diagram. If this somehow was a costless product (that is, the total cost of any level of output was zero), the firm would maximize profits by:

A) selling the product at the highest possible price at which a positive quantity will be demanded.

B) producing Q1 units and charging a price of P1.

C) producing Q3 units and charging a price of P3.

D) producing Q2 units and charging a price of P2.

38. Price exceeds marginal revenue for the pure monopolist because the:

A) law of diminishing returns is inapplicable.

B) demand curve is downsloping.

C) monopolist produces a smaller output than would a purely competitive firm.

D) demand curve lies below the marginal revenue curve.

39. The demand curve faced by a pure monopolist:

A) may be either more or less elastic than that faced by a single purely competitive firm.

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

C) has the same elasticity as that faced by a single purely competitive firm.

D) is more elastic than that faced by a single purely competitive firm.

42. The quantitative difference between areas Q1bcQ 2 and P1P2ba in the above diagram measures:

A) marginal cost. B) total revenue. C) marginal revenue. D) average revenue.

43. Which of the following is characteristic of a pure monopolist's demand curve?

A) Average revenue is less than price.

B) Its elasticity coefficient is 1 at all levels of output.

C) Price and marginal revenue are equal at all levels of output.

D) It is the same as the market demand curve.

45. The pure monopolist's demand curve is relatively elastic:

A) in the price range where total revenue is declining.

B) at all points where the demand curve lies above the horizontal axis.

C) in the price range where marginal revenue is negative.

D) in the price range where marginal revenue is positive.

46. When the pure monopolist's demand curve is elastic, marginal revenue:

A) may be either positive or negative. B) is zero. C) is negative. D) is positive.

47. When total revenue is increasing:

A) marginal revenue may be either positive or negative.

B) the demand curve is relatively inelastic.

C) marginal revenue is positive.

D) marginal revenue is negative.

48. A nondiscriminating monopolist:

A) will never produce in the output range where marginal revenue is positive.

B) will never produce in the output range where demand is inelastic.

C) will never produce in the output range where demand is elastic.

D) may produce where demand is either elastic or inelastic, depending on the level of production costs.

50. A pure monopolist's demand curve is:

A) downsloping. B) upsloping. C) parallel to the vertical axis. D) parallel to the horizontal axis.

Use the following to answer questions 52-54:

52. Refer to the above diagram for a monopolist. Demand is elastic:

A) in the q1q 3 output range. C) for all levels of output less than q2.

B) only for outputs greater than q4. D) for all levels of output greater than q2.

53. Refer to the above diagram for a monopolist. Marginal revenue will be zero at output:

A) q4. B) q3. C) q2. D) q1.

54. Refer to the above diagram for a monopolist. The profit-seeking monopolist will:

A) always produce at output q2. C) never produce an output larger than q2.

B) always produce more than q2. D) never produce an output larger than q1.

55. Assume a pure monopolist is currently operating at a price-quantity combination on the inelastic segment of its demand curve. If the monopolist is seeking maximum profits, it should:

A) retain its current price-quantity combination. C) charge a higher price.

B) increase both price and quantity sold. D) charge a lower price.

58. If a monopolist were to produce in the inelastic segment of its demand curve:

A) total revenue would be at a maximum. C) the firm would be maximizing profits.

B) marginal revenue would be negative. D) it would necessarily incur a loss.

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

A) it cannot possibly be maximizing profits. C) marginal revenue will be positive and rising.

B) marginal revenue will be positive but declining. D) total revenue will be declining.

60. If a 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. C) the firm is maximizing profits.

B) total revenue is increasing. D) total revenue is at a maximum.

61. A pure monopolist sells 6 units at a price of $12. If the marginal revenue of the seventh unit is $5, then:

A) price of the seventh unit is $10. C) price of the seventh unit is greater than $12.

B) price of the seventh unit is $11. D) firm's demand curve is perfectly elastic.

62. The vertical distance between the horizontal axis and any point on a monopolist's demand curve measures:

A) the quantity demanded. C) total revenue.

B) product price and average revenue. D) product price and marginal revenue.

66. A pure monopolist finds that it can sell its fiftieth unit of output for $50. We can surmise that the marginal:

A) cost of the fiftieth unit is also $50. C) revenue of the fiftieth unit is less than $50.

B) revenue of the fiftieth unit is also $50. D) revenue of the fiftieth unit is greater than $50.

68. Assuming a pure monopolist's demand curve is downsloping, its total revenue:

A) is rising. B) is falling. C) may be either rising or falling. D) must be negative.

72. 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 twenty-first unit of output is:

A) $9.75. B) $204.75. C) $4.75. D) $.25.

73. Suppose that a pure monopolist can sell 10 units of output at $5 per unit and 11 units at $4.90 per unit. The marginal revenue of the eleventh unit is:

A) $3.90. B) $.10. C) $53.90. D) $4.90.

75. In the long run a pure monopolist maximizes profits by producing an output such that marginal cost equals

A) average total cost. B) marginal revenue. C) average variable cost. D) average cost.

76. An unregulated pure monopolist will maximize profits by producing that output at which:

A) P = MC. B) P = ATC. C) MR = MC. D) MC = AC.

85. A pure monopolist produces so that ATC = $4, P = $5, MC = $2, and MR = $3. This firm is realizing:

A) a loss that could be reduced by producing more output.

B) a loss that could be reduced by producing less output.

C) an economic profit that could be increased by producing more output.

D) an economic profit that could be increased by producing less output.

86. Which of the following statements is incorrect?

A) A monopolist's 100 percent market share ensures economic profits.

B) The monopolist's marginal revenue is less than price for any given output greater than 1.

C) A monopolistic firm produces a product having no close substitutes.

D) A pure monopolist's demand curve is the industry demand curve.

87. If a monopolist's marginal revenue is $3.00 and its marginal cost is $4.50, it will increase its profits by:

A) reducing output and raising price. C) increasing both price and output.

B) reducing both output and price. D) raising price while keeping output unchanged.

95. In equilibrium which of the following conditions are common to both monopoly and to pure competition?

A) MC = P B) MC = ATC C) MR = MC D) P = MR

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

A) equals marginal revenue. C) will always equal ATC.

B) may be greater or less than ATC. D) always exceeds ATC.

99. The short-run profit maximizing position of an unregulated pure monopolist is characterized by:

A) P = minimum ATC. B) P = MC. C) MR = MC. D) MC = ATC.

74. The MR = MC rule:

A) applies only to pure competition. B) applies only to pure monopoly.

C) does not apply to monopoly because price > MR D) applies both to monopoly and pure competition.

75. In the long run a pure monopolist maximizes profits at that output where marginal cost is equal to:

A) average total cost. B) marginal revenue. C) average variable cost. D) average cost.

76. An unregulated pure monopolist will maximize profits by producing that output at which:

A) P = MC. B) P = ATC. C) MR = MC. D) MC = AC.

77. Suppose that a pure monopolist can sell 5 units of output at $4 per unit and 6 units at $3.90 per unit. The monopolist will produce and sell the sixth unit if its marginal cost is:

A) $4 or less. B) $3.90 or less. C) $3.50 or less.. D) $3.40 or less.

78. Suppose that a pure monopolist can sell 4 units of output at $2 per unit and 5 units at $1.75 per unit. The monopolist will produce and sell the fifth unit if its marginal cost is:

A) $1 or less. B) $.75 or less. C) $1.75 or less. D) $2 or less.

85. A monopolist produces such that ATC = $4, P = $5, MC = $2, and MR = $3. This firm is realizing:

A) a loss that could be reduced by producing more output.

B) a loss that could be reduced by producing less output.

C) an economic profit that could be increased by producing more output.

D) an economic profit that could be increased by producing less output.

86. Which of the following statements is incorrect?

A) A monopolist's 100 percent market share ensures economic profits.

B) The monopolist's marginal revenue is less than price for any given output greater than 1.

C) A monopolistic firm produces a product having no close substitutes.

D) A pure monopolist's demand curve is the industry demand curve.

87. If a monopolist's marginal revenue is $3.00 and its marginal cost is $4.50, it will increase its profits by:

A) reducing output and raising price. C) increasing both price and output.

B) reducing both output and price. D) raising price while keeping output unchanged.

Use the following to answer questions 91-94:

91. Refer to the above diagram. To maximize profits or minimize losses this firm should produce:

A) E units and charge price C. C) M units and charge price N.

B) E units and charge price A. D) L units and charge price LK.

Answer: B

92. Refer to the above diagram. In equilibrium total revenue will be:

A) NM times 0M. B) 0AJE. C) 0EGC. D) 0EHB.

93. Refer to the above diagram. In equilibrium total cost will be:

A) NM times 0M. B) 0AJE. C) 0CGC. D) 0BHE.

94. Refer to the above diagram. In equilibrium the firm will realize:

A) an economic profit of ABHJ. C) a loss of GH per unit.

B) an economic profit of ACGJ. D) a loss of JH per unit.

96. A pure monopolist:

A) will realize an economic profit if price exceeds ATC at the equilibrium output.

B) will realize an economic profit if ATC exceeds MR at the equilibrium output.

C) will realize an economic loss if MC intersects the downsloping portion of MR.

D) always realizes an economic profit.

97. If a pure monopolist is producing at that output where P = ATC, then:

A) its economic profits will be zero. B) it will be realizing losses.

C) it will be producing less than optimum D) it will be realizing an economic profit.

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

A) equals marginal revenue. C) will always equal ATC.

B) may be greater or less than ATC. D) always exceeds ATC.

103. In the short run a pure monopolist's profit:

A) will be maximized where price = ATC B) may be positive, zero, or negative.

C) are always positive. D) will be zero.

104. Purely competitive firms and pure monopolists are similar in that:

A) the demand curves of both are perfectly elastic. C) both are price makers.

B) significant entry barriers are common to both. D) both maximize profit where MR = MC.

105. 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.

106. A profit-maximizing monopolist will set its price:

A) as far above ATC as possible.

B) along the elastic portion of its demand curve.

C) where the marginal cost curve intersects the demand curve.

D) as close as possible to the minimum point of ATC.

110. When a pure monopolist is producing its profit -maximizing output, price will:

A) be less than MR. B) equal neither MC nor MR. C) equal MR. D) equal MC.

113. The supply curve of a pure monopolist:

A) is that portion of its marginal cost curve which lies above average variable cost.

B) is the same as that of a purely competitive industry.

C) is its average variable cost curve.

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

114. If the variable costs of a profit-maximizing pure monopolist decline, the firm should:

A) produce more output and charge a higher price. C) reduce both output and price.

B) produce more output and charge a lower price. D) raise both output and price.

115. In the short run a pure monopolist:

A) always earns an economic profit.

B) always earns a normal profit.

C) always realizes a loss.

D) may realize an economic profit, a normal profit, or a loss.

116. To maximize profit a pure monopolist must:

A) maximize its total revenue.

B) maximize the difference between marginal revenue and marginal cost.

C) maximize the difference between total revenue and total cost.

D) produce where average total cost is at a minimum.

104. Purely competitive firms and pure monopolists are similar in that:

A) the demand curves of both are perfectly elastic. C) both are price makers.

B) significant entry barriers are common to both. D) both maximize profit where MR = MC.

106. A profit-maximizing monopolist will set its price:

A) as far above ATC as possible.

B) along the elastic portion of its demand curve.

C) where the marginal cost curve intersects the demand curve.

D) as close as possible to the minimum point of ATC.

110. When a pure monopolist is producing its profit -maximizing output, price will:

A) be less than MR. B) equal neither MC nor MR. C) equal MR. D) equal MC.

112. The supply curve for a monopolist is:

A) perfectly elastic.

B) upsloping.

C) that portion of the marginal cost curve lying above minimum average variable cost.

D) nonexistent.

114. If the variable costs of a profit-maximizing pure monopolist decline, the firm should:

A) produce more output and charge a higher price. C) reduce both output and price.

B) produce more output and charge a lower price. D) raise both output and price.

124. 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.

125. A problem associated with pure monopoly is that, at the profit maximizing outputs, resources are:

A) overallocated because price exceeds marginal cost.

B) overallocated because marginal cost exceeds price.

C) underallocated because price exceeds marginal cost.

D) underallocated because marginal cost exceeds price.

126. A single-price monopoly is economically undesirable because, at the profit maximizing output:

A) marginal revenue exceeds product price at all profitable levels of production.

B) monopolists charges price based on the ability of consumers to pay rather than on costs of production.

C) MC > P.

D) society values additional units of the product more than the alternative products product.

127. If a pure monopolist is producing more output than the MR = MC output:

A) the firm may, or may not, be maximizing profits.

B) it will be in the interest of the firm, but not necessarily of society, to reduce output.

C) it will be in the interest of the firm and society to increase output.

D) it will be in the interest of the firm and society to reduce output.

128. At its profit-maximizing output, a pure monopolist achieves:

A) neither productive efficiency nor allocative efficiency.

B) both productive efficiency and allocative efficiency.

C) productive efficiency but not allocative efficiency.

D) allocative efficiency but not productive efficiency.

129. The profit-maximizing output of a pure monopoly is economically inefficient because in equilibrium:

A) price equals minimum average total cost. C) marginal cost exceeds price.

B) marginal revenue equals marginal cost. D) price exceeds marginal cost.

130. A single-price pure monopoly is economically inefficient:

A) only because it produces beyond the point of minimum average total cost.

B) only because it produces short of the point of minimum average total cost.

C) because it produces short of minimum average cost and price is greater than marginal cost.

D) because it produces beyond minimum average total cost and marginal cost is greater than price.

Use the following to answer questions 132-137:

132. Refer to the above diagrams. Diagram (A) represents:

A) equilibrium price and quantity in a purely competitive industry.

B) the pure monopoly model.

C) an industry in which there is productive efficiency but not allocative efficiency.

D) a single firm operating in a purely competitive industry.

133. Refer to the above diagrams. Diagram (B) represents:

A) the pure competition model.

B) an industry in which there is allocative efficiency but not productive efficiency.

C) the pure monopoly model.

D) a long-run constant-cost industry.

134. Refer to the above diagrams. In diagram (B) the profit-maximizing quantity is:

A) g and the profit-maximizing price is e. C) g and the profit-maximizing price is f.

B) h and the profit-maximizing price is e. D) g and the profit-maximizing price is d.

135. Refer to the above diagrams. With the industry structure represented by diagram:

A) (A) there will be only a normal profit in the long run, while in (B) an economic profit can persist.

B) (A) price exceeds marginal cost, resulting in allocative inefficiency.

C) (B) price equals marginal cost, resulting in allocative efficiency.

D) (B) equilibrium price and quantity will be e and h, respectively.

136. Refer to the above diagrams. With the industry structure represented by diagram:

A) (A) there will be allocative inefficiency. C) (B) output will be less than in diagram (A).

B) (A) economic profit can persist in the long run. D) (B) output will be the same as in diagram (A).

137. Refer to the above diagrams. The price will be _______ and the quantity will be _______ with the industry structure represented by diagram (B) compared to the one reprsented in (A).

A) higher; higher. B) higher, lower. C) lower, lower. D) lower, higher.

138. X-inefficiency refers to a situation in which a firm:

A) is not as technologically progressive as it might be.

B) encounters diseconomies of scale.

C) fails to realize all existing economies of scale.

D) fails to achieve the minimum average total costs attainable at each level of output.

139. Which of the following is not a possible source of natural monopoly?

A) large-scale network effects. C) greater use of specialized inputs.

B) simultaneous consumption. D) rent-seeking behavior.

144. In which one of the following market models is X-inefficiency most likely to be the greatest?

A) pure competition B) oligopoly C) monopolistic competition D) pure monopoly

145. In which one of the following market models is X-inefficiency least likely to be present?

A) pure competition B) oligopoly C) monopolistic competition D) pure monopoly

146. 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 that do not reflect cost differences.

D) the difference between prices a competitive seller and a purely monopolistic seller would charge.

147. If a monopolist engages in price discrimination, we can expect:

A) profits to increase and output to fall.

B) both profits and output to increase.

C) both profits and output to decrease.

D) the demand curve to lie below the marginal revenue curve.

148. The practice of price discrimination is associated with pure monopoly because:

A) it can be practiced whenever a firm's demand curve is downsloping.

B) monopolists have considerable ability to control output and price.

C) monopolists usually realize economies of scale.

D) most monopolists sell differentiated products.

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

A) The commodity involved must be a durable good.

B) The good or service cannot be resold by original buyers.

C) The seller can segment the market, that is, to distinguish buyers with different elasticities of demand.

D) The seller must possess some degree of monopoly power.

150. A perfectly discriminating pure monopolist will charge each buyer:

A) different prices to compensate for differences in the characteristics of the product.

B) the same price if per unit cost is constant for each unit of the product.

C) that price which equals the buyer's marginal cost.

D) the maximum price each would be willing to pay.

153. If a monopolist engages in perfect price discrimination, it will:

A) realize a smaller profit.

B) charge a higher price when demand is inelastic and a lower price when demand is elastic.

C) produce a smaller output than when it did not discriminate.

D) charge a competitive price to all its customers.

154. The vertical distance between the horizontal axis and any point on a perfectly discriminating monopolist's demand curve measures:

A) the quantity demanded. C) product price and marginal revenue.

B) total revenue. D) average revenue and average total cost.

Use the following to answer questions 155-160:

Answer the next question(s) on the basis of the following information for a pure monopolist:

155. How many units would the above profit-maximizing monopolist produce?

A) 1 B) 2 C) 3 D) 4

156. The above monopolist should set its price at:

A) $300. B) $250. C) $200. D) $15.

157. At its profit-maximizing output, the above monopolist:

A) incurs a loss. C) earns a normal profit of $250.

B) earns an economic profit of $250. D) earns an economic profit of $150.

158. If the above monopolist could engage in perfect price discrimination, it would:

A) not alter its level of output. C) decrease output by 1 unit.

B) increase output by 1 unit. D) increase output by 2 units.

159. If the above monopolist could engage in perfect price discrimination, its total revenue would be:

A) $600. B) $1250. C) $800. D) $1400.

160. If the above monopolist could engage in perfect price discrimination, its economic profit would be:

A) $650. B) $920. C) $1000. D) $740.

164. Other things equal, a perfectly discriminating monopolist will:

A) realize a smaller economic profit than a nondiscriminating monopolist.

B) produce a larger output than a nondiscriminating monopolist.

C) produce the same output as a nondiscriminating monopolist.

D) produce a smaller output than a nondiscriminating monopolist.

171. If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to:

A) minimum average fixed cost. B) average total cost. C) marginal cost. D) marginal revenue.

173. Suppose for a regulated monopoly that price equals minimum ATC but price exceeds MC. This means that:

A) both productive and allocative efficiency are being achieved.

B) productive efficiency is being achieved, but not allocative efficiency.

C) allocative efficiency is being achieved, but not productive efficiency.

D) neither productive nor allocative efficiency is being achieved.

174. If a regulatory commission imposes upon a nondiscriminating natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output, then:

A) the firm will realize an economic profit.

B) the firm will earn only a normal profit.

C) allocative efficiency will be worsened.

D) the firm must be subsidized or it will go bankrupt.

175. If a regulatory commission forces a natural monopoly to charge a price equal to its marginal cost:

A) the monopoly may incur a loss. C) output will decrease.

B) resource allocation will be worsened. D) the firm will earn only a normal profit.

176. If a regulatory commission forces a natural monopoly to charge a price equal to its average total cost:

A) output will decrease. C) resource allocation will worsen.

B) the monopolist will realize a normal profit. D) the firm will earn an economic profit.

True/False Questions

185. In the long run a monopolist must produce at that output where average total cost is at a minimum. :

186. A monopolist maximizes profits by producing at that output where price and marginal cost are equal.

187. In the short run a pure monopolist will maximize profits by producing at that level of output where the difference between price and average total cost is at a maximum.

188. In the short run a pure monopolist will charge the highest price the market will bear for its product.

189. Pure monopolists always earn economic profits.

191. Because of their large-scale level of production, pure monopolists overallocate resources to their industry by producing beyond the P = MC output.

207. Natural monopoly may result where products produce substantial network effects and can be simultaneously consumed by a large number of consumers.

208. Extensive network effects may drive a market toward natural monopoly because consumers tend to choose a common, standard product that everyone else is using.

CHAPTER 11: Monopolistic Competition and Oligopoly

Multiple Choice Questions

2. 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.

3. 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.

5. Which of the following is not a basic characteristic of monopolistic competition?

A) the use of trademarks and brand names C) product differentiation

B) recognized mutual interdependence D) a relatively large number of sellers

7. Which of the following is not characteristic of monopolistic competition?

A) relatively large numbers of sellers C) production at minimum ATC in the long-run

B) product differentiation D) relatively easy entry to the industry

8. The book publishing, furniture, and clothing industries are each illustrations of:

A) countervailing power. C) monopolistic competition.

B) homogeneous oligopoly. D) pure monopoly.

11. A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from:

A) the likelihood of collusion. C) product differentiation.

B) high entry barriers. D) mutual interdependence in decision making.

12. Nonprice competition refers to:

A) low barriers to entry.

B) product development, advertising, and product packaging.

C) the differences in information which consumers have regarding various products.

D) an industry or firm in long-run equilibrium.

13. A significant difference between a monopolistically competitive firm and a purely competitive firm is that the:

A) former does not seek to maximize profits.

B) latter recognizes that price must be reduced to sell more output.

C) former sells similar, although not identical, products.

D) former's demand curve is perfectly inelastic.

15. Monopolistically competitive and purely competitive industries are similar in that:

A) both are assured of short-run economic profits.

B) both produce differentiated products.

C) the demand curves facing individual firms are perfectly elastic in both industries.

D) there are few, if any, barriers to entry.

16. The monopolistic competition model predicts that:

A) allocative efficiency will be achieved.

B) productive efficiency will be achieved.

C) firms will engage in nonprice competition.

D) firms will realize economic profits in the long run.

18. A monopolistically competitive firm has a:

A) highly elastic demand curve. C) perfectly inelastic demand curve.

B) highly inelastic demand curve. D) perfectly elastic demand curve.

19. The monopolistically competitive seller's demand curve will become more elastic the:

A) more significant the barriers to entering the industry.

B) greater the degree of product differentiation.

C) larger the number of competitors.

D) smaller the number of competitors.

21. The demand curve of a monopolistically competitive producer is:

A) less elastic than that of either a pure monopolist or a pure competitor.

B) less elastic than that of a pure monopolist, but more elastic than that of a pure competitor.

C) more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.

D) more elastic than that of either a pure monopolist or a pure competitor.

22. A monopolistically competitive firm's marginal revenue curve:

A) is downsloping and coincides with the demand curve.

B) coincides with the demand curve and is parallel to the horizontal axis.

C) is downsloping and lies below the demand curve.

D) does not exist because the firm is a "price maker."

25. In short-run equilibrium, a monopolistically competitive firm sets it price:

A) equal to marginal revenue. C) above marginal cost.

B) equal to marginal cost. D) below marginal cost.

26. In long-run equilibrium, a monopolistically competitive firm sets it price:

A) above marginal cost. C) equal to marginal revenue.

B) below marginal cost. D) equal to marginal cost.

27. In short-run equilibrium, the price charged by the monopolistically competitive firm:

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.

28. In long-run equilibrium, the price charged by the monopolistically competitive firm:

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) will be equal to ATC.

30. The monopolistically competitive seller maximizes profit by producing at the point where:

A) total revenue is at a maximum. C) marginal revenue equals marginal cost.

B) average costs are at a minimum. D) price equals marginal revenue.

31. In long-run equilibrium a monopolistically competitive firm's price will:

A) be less than both MC and ATC. C) exceed MC, but equal ATC.

B) exceed ATC, but equal MC. D) exceed both MC and ATC.

32. 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

33. In long-run equilibrium a monopolistically competitive firm will:

A) earn an economic profit. C) equate price and marginal cost.

B) realize all economies of scale. D) have excess production capacity.

34. 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 which characterizes monopolistically competitive firms.

D) fact that most monopolistically competitive firms encounter diseconomies of scale.

Use the following to answer questions 35-38:

35. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm's profit-maximizing price will be:

A) $10. B) $13. C) $16. D) $19.

36. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing output for this firm will be:

A) 210. B) 180. C) 160. D) 100.

37. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic:

A) loss of $320. B) loss of $280. C) profit of $480. D) profit of $600. E) profit of $360.

38. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. Assume the firm is part of an increasing-cost industry. In the long run firms will:

A) leave this industry, causing both demand and the ATC curve to shift upward.

B) enter this industry, causing demand to rise and the ATC curve to shift downward.

C) enter this industry, causing demand to fall and the ATC curve to shift upward.

D) enter this industry, causing both demand and the ATC curve to shift upward.

39. In the short run a monopolistically competitive firm's economic profit:

A) will be maximized where price equals average total cost.

B) may be positive, zero, or negative.

C) are always positive.

D) will always be zero.

Use the following to answer questions 43-45:

43. In short-run equilibrium, the monopolistically competitive firm shown in the above figure will set its price:

A) below ATC. B) above ATC. C) below MC. D) below MR.

44. The monopolistically competitive firm shown in the above figure:

A) will realize allocative efficiency at its profit-maximizing output.

B) cannot operate at a loss.

C) is in long-run equilibrium.

D) is realizing an economic profit.

45. If all monopolistically competitive firms in the industry have profit circumstances similar to shown above:

A) new firms will enter the industry. C) all firms will exit the industry.

B) some firms will exit the industry. D) no firms will enter the industry.

49. Which of the following is not characteristic of long-run equilibrium under monopolistic competition?

A) price equals minimum average total cost C) price is equal to average total cost

B) marginal cost equals marginal revenue D) price exceeds marginal cost

Use the following to answer questions 50-52:

50. Refer to the above diagram. Long-run equilibrium price will be:

A) above A. B) EF. C) A. D) B.

51. Refer to the above diagram. Long-run equilibrium output will be:

A) greater than E. B) E. C) D. D) C.

52. Refer to the above diagram. If more firms would enter the industry and product differentiation would weaken:

A) resource misallocation would become more severe.

B) the demand curve would become more elastic.

C) equilibrium output would decline and equilibrium price would rise.

D) equilibrium output would decline and equilibrium price would fall.

53. Long-run equilibrium for a monopolistically competitive firm where economic profits are zero results from:

A) rising marginal costs. C) relatively easy entry.

B) a perfectly elastic product demand curve. D) product differentiation and development.

Use the following to answer questions 54-55:

54. In long-run equilibrium, the firm shown in the diagram above will:

A) earn a normal profit. B) go bankrupt. C) incur a loss. D) realize an economic profit.

55. In long-run equilibrium, production for the firm shown in the diagram above is:

A) greater than would occur under pure competition.

B) less efficient than in a purely competitive market.

C) more efficient than in a purely competitive market.

D) optimally efficient.

56. When a monopolistically competitive firm is in long-run equilibrium:

A) production takes place where ATC is minimized.

B) marginal revenue equals marginal cost and price equals average total cost.

C) normal profit is zero and price equals marginal cost.

D) economic profit is zero and price equals marginal cost.

57. In the long run, new firms will enter a monopolistically competitive industry:

A) provided economies of scale are being realized. C) until minimum average total cost is achieved.

B) even though losses are incurred in the short run. D) until economic profits are zero.

58. If some firms leave a monopolistically competitive industry, the demand curves of the remaining firms will:

A) be unaffected. B) shift to the left. C) become more elastic. D) shift to the right.

59. When a monopolistically competitive firm is in long-run equilibrium:

A) P = MC = ATC. C) MR > MC and P = minimum ATC.

B) MR = MC and minimum ATC > P. D) MR = MC and P > minimum ATC.

62. For a monopolistically competitive firm in long-run equilibrium:

A) price will equal marginal cost. C) marginal revenue will exceed marginal cost.

B) price will equal average total cost. D) economic profits will be some positive amount.

63. In long-run equilibrium both purely competitive and monopolistically competitive firms will:

A) produce at minimum average total cost. C) achieve allocative efficiency.

B) earn economic profits. D) equate marginal cost and marginal revenue.

64. In long-run equilibrium monopolistic competition entails:

A) an efficient allocation of resources. B) an overallocation of resources.

C) an underallocation of resources. D) production at the minimum attainable average total cost.

70. Suppose that entry into this industry changes this firm's demand schedule from columns (1) and (3) shown above to columns (2) and (3). We can conclude that this industry is:

A) a pure monopoly. C) a constant cost industry.

B) purely competitive. D) monopolistically competitive.

71. With the demand schedule shown above by columns (2) and (3), in long-run equilibrium:

A) price will equal average total cost. C) marginal cost will exceed price.

B) total cost will exceed total revenue. D) price will equal marginal revenue.

72. An important similarity between a monopolistically competitive firm and a purely competitive firm is that:

A) both face perfectly elastic demand schedules. C) both realize productive efficiency.

B) economic profit tends toward zero for both. D) both realize allocative efficiency.

73. An important similarity between a monopolistically competitive firm and a pure monopolist is that both:

A) realize an economic profit in the long run.

B) achieve allocative efficiency.

C) face demand curves which are less than perfectly elastic.

D) achieve productive efficiency.

78. In the long run a monopolistically competitive firm:

A) earns an economic profit. C) produces where MR exceeds MC.

B) produces where P = ATC. D) achieves allocative efficiency.

81. Inefficiencies occur under monopolistic competition because:

A) each firm's demand curve becomes more elastic as we move down the curve.

B) each firm's marginal revenue curve coincides with its demand curve.

C) each firm's downsloping demand curve is tangent to the ATC curve in the long run.

D) entry barriers greatly restrict the entry of new firms.

82. 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.

86. In long-run equilibrium a monopolistically competitive producer achieves:

A) neither productive efficiency nor allocative efficiency.

B) both productive efficiency and allocative efficiency.

C) productive efficiency, but not allocative efficiency.

D) allocative efficiency, but not productive efficiency.

88. The more elastic a monopolistic competitor's long-run demand curve, the:

A) greater its excess capacity.

B) the higher its price relative to that of a pure competitor having the same cost curves.

C) lower its long-run profit.

D) lower its average total cost at its equilibrium level of output.

91. In an oligopolistic market:

A) one firm is always dominant.

B) products may be standardized or differentiated.

C) the four largest firms account for 20 percent or less of total sales.

D) the industry is monopolistically competitive.

92. Oligopolistic industries are characterized by:

A) a few dominant firms and substantial entry barriers.

B) a few dominant firms and no barriers to entry.

C) a large number of firms and low entry barriers.

D) a few dominant firms and low entry barriers.

96. The mutual interdependence that characterizes oligopoly arises because:

A) the products of various firms are homogeneous.

B) the products of various firms are differentiated.

C) a small number of firms produce a large proportion of industry output.

D) the demand curves of firms are kinked at the prevailing price.

97. Barriers to entry in oligopolistic industries may consist of:

A) diseconomies of scale. C) ownership of essential resources.

B) diminishing returns. D) patent expirations.

98. The copper, aluminum, cement, and industrial alcohol industries are examples of:

A) interproduct competition. C) monopolistic competition.

B) homogeneous oligopoly. D) differentiated oligopoly.

99. Which of the following is the best example of oligopoly?

A) women's dress manufacturing B) automobile manufacturing C) restaurants D) cotton farming

100. If there are significant economies of scale in an industry, then:

A) a firm that is large may be able to produce at a lower unit cost than can a small firm.

B) a firm that is large will have to charge a higher price than will a small firm.

C) entry to that industry will be easy.

D) firms must differentiate their products to earn economic profits.

101. In which of the following market models do demand and marginal revenue diverge?

A) pure monopoly, oligopoly, and monopolistic competition

B) pure monopoly, oligopoly, and pure competition

C) pure monopoly only

D) oligopoly only

109. Which of the following is a unique feature of oligopoly?

A) mutual interdependence C) product differentiation

B) advertising expenditures D) nonprice competition

110. Prices are likely to be least flexible:

A) in oligopoly. C) where product demand is inelastic.

B) in monopolistic competition. D) in pure competition.

112. Clear-cut mutual interdependence with respect to the price-output policies exists in:

A) pure monopoly B) oligopoly C) monopolistic competition D) pure competition

113. 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 sales accounted for by the four largest firms in the industry.

D) number of firms in an industry.

114. 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.

115. An industry having a four-firm concentration ratio of 85 percent:

A) approximates pure competition. C) is a pure monopoly.

B) is monopolistically competitive. D) is an oligopoly.

116. As a general rule, oligopoly exists when the four-firm concentration ratio:

A) exceeds the Herfindahl index. C) is 40 percent or more.

B) is less than the Herfindahl index. D) is 15 percent or more.

118. The Herfindahl index for a pure monopolist is:

A) 100. B) 10,000. C) 100,000. D) 10.

120. Suppose that total sales in an industry in a particular year are $600 million and sales by the top four sellers are $200 million, $150 million, $100 million, and $50 million, respectively. We can conclude that:

A) price leadership exists in this industry.

B) the concentration ratio is more than 80 percent.

C) this industry is a differentiated oligopoly.

D) the firms in this industry face a kinked demand curve.

128. 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.

129. 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.

130. Assume six firms comprising an industry have market shares of 30, 30, 10, 10, 10, and 10 percent. The Herfindahl Index for this industry is:

A) 2,525. B) 1,600. C) 2,200. D) 80.

131. Suppose the Herfindahl Indexes for industries A, B, C are 1,200, 5,000, and 7,500 respectively. These imply:

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.

Use the following to answer questions 132-136:

132. The industry characterized by the above information is:

A) an oligopoly. C) a purely competitive industry.

B) a monopolistically competitive industry. D) a pure monopoly.

133. The four-firm concentration ratio for the above industry is:

A) 100 percent.

B) indeterminate, since we don't know which four firms are included.

C) 80 percent.

D) 20 percent.

134. The Herfindahl Index for the above industry is:

A) 1,600. B) 1,800. C) 18,000. D) 80.

135. If all the firms in the above industry merged into a single firm, the Herfindahl Index would become:

A) 100. B) 1,000. C) 10,000. D) 100,000.

136. Suppose that firms in this industry miraculously split up such that there were 100 firms, each with a one percent market share. The four-firm concentration ratio and the Herfindahl Index respectively would be:

A) 100 percent and 10,000. B) 4 percent and 4. C) 100 percent and 16. D) 4 percent and 16.

Use the following to answer questions 137-140:

137. Refer to the above data. The four-firm concentration ratio for this industry is:

A) 90 percent.

B) 95 percent.

C) 100 percent.

D) indeterminate, because we don't know which four firms are included.

138. Refer to the above data. The Herfindahl Index for this industry is:

A) 95. B) 1000. C) 2925. D) 2950.

139. Refer to the above data. This industry illustrates:

A) pure competition. B) monopolistic competition. C) oligopoly. D) pure monopoly.

140. Refer to the data above. 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.

142. The study of how people (or firms) behave in strategic situations is called:

A) cost-benefit analysis. B) recursive analysis. C) normative economics. D) game theory.

143. The terms strategic behavior and payoff matrix both relate directly to:

A) the perfect competition model. C) game theory.

B) the monopolistic competition model. D) the price leadership model.

144. Game theory is best suited to analyze the pricing behavior of:

A) pure monopolists. B) pure competitors. C) monopolistic competitors. D) oligopolists.

Use the following to answer questions 146-151:

146. The above matrix best illustrates:

A) game theory. B) the principal-agent problem. C) product differentiation. D) price discrimination.

147. Refer to diagram millions $. Beta's profits are shown in the northeast corner and Alpha's in the southwest corner of each cell. If both firms follow a high-price policy:

A) Alpha will realize a $10 million profit and Beta a $30 million profit.

B) each will realize a $20 million profit.

C) Beta will realize a $10 million profit and Alpha a $30 million profit.

D) each will realize a $15 million profit.

148. Refer to diagram in millions $. Beta's profits are shown in the northeast corner and Alpha's in the southwest corner of each cell. If Beta commits to a high-price policy, Alpha will gain the largest profit by:

A) also adopting a high-price policy.

B) adopting a low-price policy.

C) adopting a low-price policy, but only if Beta agrees to do the same.

149. Refer to diagram in millions $. Beta's profits are shown in the northeast corner and Alpha's in the southwest corner of each cell. With independent pricing the outcome of this duopoly game will gravitate to cell:

A) A. B) B. C) C. D) D.

150. Refer to the above diagram showing profits in millions $. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If Alpha and Beta engage in collusion, the outcome of the game will be at cell:

A) A. B) B. C) C. D) D.

151. Refer to the above diagram showing profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If Alpha and Beta agree to a high-price policy through collusion, the temptation to cheat on that agreement is demonstrated by the fact that:

A) Beta can increase its profit by lowering its price.

B) Beta can increase its profit by increasing its price still further.

C) both Alpha and Beta can earn even more profits if both agree to a low-price policy.

D) Alpha can increase its profit by reducing its production costs.

True/False Questions

235. The monopolistically competitive seller maximizes profits by equating price and marginal cost.

238. The larger the number of firms and the less the degree of product differentiation, the greater will be the elasticity of a monopolistically competitive seller's demand curve.

239. The economic profits earned by monopolistically competitive sellers are zero in the long run.

240. The excess capacity problem associated with monopolistic competition implies that fewer firms could produce the same industry output at a lower total cost.

241. The demand curve of a monopolistically competitive firm is more elastic than that of a pure monopolist.

242. The monopolistically competitive seller equates price and marginal cost in maximizing profits.

244. Monopolistically competitive sellers produce efficiently because they obtain only normal profits in the long run.

245. The oligopolist's kinked-demand curve is highly elastic below and highly inelastic above the going product price.

246. Mutual interdependence means that oligopolistic producers rely on price competition in determining their shares of the total market for their product.

251. Two industries that have the same 4-firm concentration ratio can have significantly different Herfindahl indexes.

252. As it relates to oligopoly, game theory focuses on the strategic behavior of rival firms.

253. The highest possible value of the Herfindahl index is 1,000.

254. The market structure called "oligopoly" includes industries with one or a small number of firms.

255. The U.S. breakfast cereal industry is an example of differentiated oligopoly.

256. The U.S. steel industry is an example of homogeneous oligopoly.

CHAPTER 12: Technology, R&D, and Efficiency

Technological advance: invention; innovation; diffusion

1. Broadly defined, technological advance:

A) can occur in either the short run, long run, or very long run.

B) comprises new and improved goods / services and new and improved ways to produce or distribute them.

C) includes invention, but not innovation or diffusion.

D) includes product innovation, but not process innovation.

2. In economists' models, technological advance occurs in:

A) the very long run.

B) either the short run, long run, or very long run.

C) manufacturing industries but not in service industries.

D) pure competition, but not in monopolistic competition, oligopoly, and pure monopoly.

3. Technological advance is shown as a(n):

A) movement from a point inside a production possibilities curve to a point on the curve.

B) movement along a production possibilities curve.

C) outward shift of a production possibilities curve.

D) inward shift of a production possibilities curve.

4. Technological advance is a three-step process involving:

A) invention, duplication, and diffusion. C) invention, innovation, and diffusion.

B) duplication, innovation, and diversity. D) necessity, invention, and solution.

5. Fiber-optic telephone lines are rapidly replacing copper telephone cable. This is an example of:

A) capital-labor substitutability. C) market (or monopoly) power.

B) economies of scale. D) technological advance.

6. The first discovery (as distinct from first commercial application) of a product or process is called: