Texas A&M International University

ECO 3320

CHAPTER 9

1)These are characteristics of a competitive industry, except:

1. 1. Many substitutes
   2. No barriers to entry
   3. Homogenous product
   4. Little or no information on rivals’ products

2. Which of the products below is towards the spectrum of perfectly competitive industry?
   1. Nike shoes
   2. Eggs
   3. Purdue Chicken
   4. Restaurants

3. A monopoly firm is a                                             and faces a                              sloping demand curve.
   1. Price taker; horizontal
   2. Price searcher; horizontal
   3. Price searcher; downward
   4. Price taker; downward

4. In a perfectly competitive market industry, firm’s prices are equal to
   1. Average revenue
   2. Marginal revenue
   3. Both a and b
   4. None of the above

5. Profits of a monopoly are driven to zero
   1. In the long-run as all assets are mobile in the long-run
   2. Immediately in the short-run as assets move from low-valued uses to high-valued uses instantly
   3. In the long run because the demand curve becomes more inelastic
   4. In the short run because the demand curve becomes more elastic

6. How does Ebay differ from an economist’s view of a perfect competitive market?
   1. Ebay has few buyers whereas perfect competitive industry assumes many buyers
   2. Ebay has few sellers whereas perfect competitive industry assumes many sellers
   3. There is limited information in ebay whereas perfect competitive industry assumes full information for both buyers and sellers
   4. There is no difference between these two markets.

7. A monopolist maximizes profit by producing
   1. At MR= rising MC
   2. At MR>MC
   3. At P=MR
   4. At MC=0

8. Lipitor, with few substitutes, should have an own-price elasticity of demand that is:

1. 1. Relative elastic
   2. Relatively inelastic
   3. Perfectly inelastic
   4. Perfectly elastic

9. The owner of an Oakley store has a more demand curve and the owner of a chicken farm has a more                                                              demand curve.
   1. inelastic; inelastic
   2. elastic; inelastic
   3. inelastic; elastic
   4. elastic; elastic

10. Monopoly firms have a downward sloping curve in the short-run because
    1. They have no close substitutes
    2. There are no barriers to entry
    3. They have no cost advantage over their rivals
    4. None of the above

11. A firm sees its marginal revenue increase by $20 and marginal cost increase by $15 when it produces its 1000^th product. This implies

1. the production of the 1000th unit of output increases the firm's profit by $5.
2. The firm is past its profit maximizing output
3. We cannot say much on the profitability of the firm
4. Producing the 1000^th item will in fact decrease the overall firm’s profits.

12. Which of the following cannot be classified as a market structure?
    2. Oligopoly
    3. Monopolistic Competition
    4. Mergers
    5. Perfect Competition

13. In the long-run, a perfectly competitivel firm will achieve
    1. Average rate of return
    2. Above average profits
    3. Losses
    4. Economic Profits

14. The short run supply curve for a perfect competitive firm is
    1. Marginal cost curve
    2. Average revenue curve
    3. Marginal revenue curve
    4. Marginal cost curve above its average variable cost curve

15. A perfectly competitive firm has
    1. A perfectly elastic demand curve
    2. A perfectly elastic supply curve
    3. A downward sloping demand curve
    4. A downward sloping supply curve

16. A perfectly competitive industry has
    1. A perfectly elastic demand curve
    2. A perfectly elastic supply curve
    3. A downward sloping demand curve
    4. A downward sloping supply curve

17. If a firm in a perfectly competitive industry is experiencing average revenues greater than average costs, in the long-run
    1. Some firms will leave the industry and price will rise
    2. Some firms will enter the industry and price will rise
    3. Some firms will leave the industry and price will fall
    4. Some firms will enter the industry and price will fall

18. A sudden rise in the market demand in a competitive industry leads to
    1. A market equilibrium price higher than the original equilibrium in the short-run
    2. A market equilibrium price equal to the original equilibrium in the long-run
    3. Both a and b
    4. None of the above

19. A market tends to be monopolistic if
    1. The good has too many substitutes
    2. The good has very few substitutes
    3. The good has too many complements
    4. The good has very few complements

20. A monopoly has
    1. A perfectly elastic demand curve
    2. A perfectly elastic supply curve
    3. A downward sloping demand curve
    4. A upward sloping demand curve

21. A monopolist maximizes revenue at
    1. At MR= MC
    2. At MR>MC
    3. At P=MR
    4. At MR=0

22. As a patent in a the pharmaceutical industry expires, the market for these drugs
    1. Can now be categorized as a competitive market
    2. Can now be categorized as a monopolistic market
    3. Was and is still a monopolistic market
    4. Was and is still a competitive market

23. All these are characteristics of a monopoly except,
    1. There is one seller of the product
    2. Has few substitutes
    3. Controls a large share of the market
    4. Controls a small share of the market

24. Mobil Energy Corp has a monopoly on gas sales in Texas. If the price of oil increases, the price of gas will
    1. increase.
    2. decrease.
    3. remains the same.
    4. may increase or decrease.

25. In the above scenario, the quantity of gas sold will
    1. increase.
    2. decrease.
    3. remains the same.
    4. may increase or decrease.

26. In the above scenario, the profit of the company will
    1. increase.
    2. decrease.
    3. remains the same.
    4. may increase or decrease.

27. Each firm in the egg industry (competitive) produces 15 million eggs per year. Each egg has an average cost of $0.02 and they sell an egg for $0.06. The marginal cost of a string is

a) $0.02

b) $0.06

c) $0.04

d) not enough information provided.

28. Based on the above scenario, is the industry in the long run equilibrium?
    1. yes, because all firms are producing at P=MR=MC

1. 2. no, because the price is still greater than the minimum average total cost.
   3. cannot answer because need information on MR
   4. cannot answer unless we see that the market lets some firms enter and/or some firms exit.

29. A monopolist’s profit maximizing price is $15. At MC=MR, the output is 100 units and the MC is $10. At this level of production, average total costs are $12.

Monopolist’s profits are

a) $300

b) $1500

c) $500

d) None of the above

30. In a competitive industry buffeted by demand supply shocks, prices increase and decrease, but economic profits tend to revert to zero. Hence, profits are exhibiting
    1. Above-average return
    2. Positive earnings
    3. Mean reversion
    4. None of the above

31. A sudden decrease in the market demand in a competitive industry leads to
    1. A market equilibrium price higher than the original equilibrium in the short-run
    2. A market equilibrium price equal to the original equilibrium in the long-run
    3. Both a and b
    4. None of the above

32. A sudden decrease in the market demand in a competitive industry leads to
    1. Losses in the short-run and average profits in the long-run
    2. Above average profits in the short-run and average profits in the long-run
    3. New firms being attracted to the industry
    4. Demand creating supply

33. A sudden increase in the market demand in a competitive industry leads to
    1. Losses in the short-run and average profits in the long-run
    2. Above average profits in the short-run and average profits in the long-run
    3. New firms being attracted to the industry
    4. Demand creating supply

34)          When Clean City banned the air pollution that still plagues Smogville, over time, we would expect that:

1. 5. The residents of Clean City are happy with the decision
   6. The residents of Smogville are happy that they did not enact a similar law
   7. House prices in Clean City will have risen