Economics 202 Study Questions Test #3 Professor Thornton

1. Which of the following is a type of market structure?a. Monopolyb. Perfect competitionc. Oligopolyd. All of the above

2. According to the structure/conduct/performance paradigm, the most importantdeterminant of firm behavior is:a. a firm's political influenceb. the size of a firmc. the structure of the market in which the firm operatesd. the technology available to the firm

3. Suppose there are 100 firms in an industry and these firms produce differentiatedproducts. Which of the following is true?a. Competition will force each firm to charge the same price for its good.b. Consumers perceive these products to be imperfect substitutes, and therefore

are willing to pay different prices for the products sold by different firms.c. Firms will exit the industry in the long-rund. A firms will not attempt to minimize the cost of producing its product

4. Which of the following is a characteristic of a perfectly competitive market?a. A large number of firms exist in the industryb. Firms in the industry are approximately the same sizec. It is easy for firms to enter and exit the industry in the long-rund. All of the above

5. A firm in a perfectly competitive market does not choose:a. the amount of output to produceb. the price to charge for its productc. the method of production it will use to produce its productd. All of the above

6. In a perfectly competitive industry, we are likely to find:a. firms producing a variety of differentiated productsb. barriers to entry that prevent new firms from entering the industryc. firms do not spend money to advertise their productd. a few large firms that sell most of the product to consumers

7. Which of the following firms is most likely to be in a perfectly competitive industry?a. An automobile producerb. An airline firmc. A soybean farmerd. A gasoline station

8. If the price that a firm receives for its product is equal to the average revenue it earnsfrom selling its product, then we can conclude that it sells its product in which of thefollowing types of markets?a. Perfect competitionb. Monopolyc. Oligopolyd. It could be selling its product in any of the above markets

9. If the price that a firm receives for its product is equal to the marginal revenue it earnsfrom selling an additional unit of its product, then we can conclude that it sells its productin which of the following types of markets?a. Perfect competitionb. Monopolyc. Oligopolyd. It could be selling its product in any of the above markets

10. Many country inns shut-down in the off-season because:a. innkeeper can't maximize revenueb. the off-season market price is below the inn's average fixed costc. off-season revenue is not high enough to cover the inn's variable costd. innkeepers like to spend the off-season in Florida

Questions 11 and 12 are based on the information given below for a firm operating in a perfectlycompetitive market.

Output: 4,000 unitsPrice: $1Total Variable Cost: $2,000Total Fixed Cost: $1,000Marginal Cost: $1.10

11. The firm is:a. making economic profitsb. making zero economic profitc. incurring lossesd. producing the level of output where average total cost is equal to marginal cost

12. To maximize profits, the firm should:a. increase outputb. decrease outputc. leave output unchangedd. shut down its operations and produce no output

Questions 13 and 14 are based on the following graph for a firm operating in a perfectlycompetitive market.

MCATCAVC

X 7 //Price $40

$30

$20

$10

100 200 300 400 Quantity

13. If the price the firm receives for its product is $40, then it should produce which of thefollowing amounts of output to maximize profit?a. 100b. 200c. 300d. 400

14. The firm should shut down in the short-run if the price falls below:a. $10b. $20c. $30d. $40

15. The short-run supply curve for a perfectly competitive firm is given by:a. the entire marginal cost curveb. the marginal cost curve at and above average variable costc. the marginal cost curve at and above average total costd. the average variable cost curve to the right of the marginal cost curve

16. Which of the following is not possible in long-run equilibrium in a perfectly competitivemarket?a. Firms making normal profitsb. Firms making economic profitsc. Firms making zero economic profitsd. Both a and b

17. If firms in a competitive industry are earning zero economic profits in the short-run, thenone would expect that in the long-run:a. new firms will enter the industryb. existing firms will leave the industryc. firms will neither enter nor leave the industryd. all firms will shut-down their operations so that total industry output will be zero

18. Assume the market for wine is a perfectly competitive market. Wine firms are makingzero economic profit. Suppose an increase in income increases the demand for wine.Which of the following will occur in the short-run?a. Firms in the wine industry will make economic profitsb. Firms in the wine industry will receive a higher price for their productc. Firms in the wine industry will produce and sell more wined. All of the above

19. In an increasing-cost industry, the entry of new firms results in which of the following?a. an increase in input pricesb. an increase in economic profitsc. a decrease in demandd. a decrease in supply

20. The long-run supply industry supply curve for a constant-cost industry is:a. verticalb. horizontalc. upward slopingd. downward sloping

21. A firm in a perfectly competitive industry is maximizing profit at an output of 3,000 unitsper month. Assume its fixed cost increases. To maximize profit, the firm should now:a. increase output and produce more than 3,000 units per monthb. decrease output and produce less than 3,000 units per monthc. continue to produce 3,000 units per monthd. shut down operations and produce no output

22. Assume that the dairy farm industry is a perfectly competitive constant-cost industry. It iscurrently in long-run equilibrium and the price of milk is $3.00 per gallon. Assume thatthe demand for milk increases. How will this affect the price of milk in the short-run andlong-run?a. The price of milk will increase above $3.00 in both the short-run and long-runb. The price of milk will decrease below $3.00 in both the short-run and long-runc. The price of milk will increase above $3.00 in the short-run, but fall back to $3.00

in the long-run.d. The price of milk will decrease below $3.00 in the short-run, but rise back to

$3.00 in the long-run

23. Assume that the dairy farm industry is a perfectly competitive increasing-cost industry. Itis currently in long-run equilibrium and the price of milk is $3.00 per gallon. Assume thatthe demand for milk increases. How will this affect the price of milk in the short-run andlong-run?a. The price of milk will increase above $3.00 in both the short-run and long-runb. The price of milk will decrease below $3.00 in both the short-run and long-runc. The price of milk will increase above $3.00 in the short-run, but fall back to $3.00

in the long-run.d. The price of milk will decrease below $3.00 in the short-run, but rise back to

$3.00 in the long-run

24. Firms in an industry achieve production efficiency in the long-run when they:a. produce their product at minimum average costb. produce their product at minimum marginal costc. maximize their total revenued. produce just the right amount of their product

25. Allocation efficiency occurs in a market when:a. firms maximize the amount of output they produce from the inputs they employb. firms minimize the average cost of the output they producec. the marginal social benefit of the last unit of the product produced is equal to the

marginal social costd. Both a and b

26. We may be certain that a firm is a monopoly if:a. it is the only producer of a productb. it produces the level of output where marginal revenue equals marginal costc. it faces a highly elastic demand curved. Both a and b

27. Which of the following is not considered an entry barrier?a. Diseconomies of scaleb. Economies of scalec. Ownership of essential raw materialsd. Patents

28. The demand curve of a monopolist:a. is the same as the marginal revenue curveb. is the same as the average revenue curvec. is the industry demand curved. Both b and c

29. Consider the following demand schedule for a monopolist.

Price Quantity$90$80$70$60$50

12345

ithThe marginal revenue of the 4 unit sold is:a. $10b. $30c. $60d. $240

Questions 30, 31, and 32 are based on the following graph for a monopolist.

Price $10

$8$7$6

$3

MC'TC

300 400 500 Quantity

30. To maximize profit, the monopolist must produceprice of .a. 300, $4b. 300, $10c. 400, $6d. 500, $8

units of output and charge a

31. At the profit maximizing level of output, the monopolist is making economic profit of:a. $0b. $900c. $2,400d. $3,000

32. Suppose that the monopolist experiences an increase in the demand for its product. As aresult:a. both price and output will increaseb. price will increase, but output will remain the samec. price will increase, but output will decreased. neither price nor output will change

33. Suppose that Southern Cable Company is a monopolist in the market for cable TVservices in the rural town of Smithsburg, Virginia. If the market wage rate of thetechnicians it employees increases ceteris paribus, then this firm will:a. continue to charge the same price and make a smaller profitb. charge a lower price and make the same profitc. charge a higher price and make the same profitc. charge a higher price but make a smaller profit

34. The differences between a monopolistic firm and a perfectly competitive firm include allof the following except:a. the demand curve for the monopolist is downward sloping and the demand curve

for the competitive firm is horizontal.b. marginal revenue is less than price for the monopolist and equal to price for the

perfectly competitive firmc. marginal cost is upward sloping for the monopolist and horizontal for the

perfectly competitive firmd. in short-run equilibrium the monopolist will produce the level of output for which

price is greater than marginal cost and the perfectly competitive firm will producethe level of output where price is equal to marginal cost

35 In the long-run, monopolists may earn economic profits but firms in a competitive marketdo not. Which of the following best explains why?a. Consumers are more willing to pay high prices for the product of the monopolist

because its product is highly differentiated from the products produced by itscompetitors

b. The monopolist uses resources more efficiently than the typical firm in acompetitive market

c. There are entry barriers that keep firms from entering the monopolist's marketd. the monopolist has greater incentive to advertise its product

36. Of the following, which could most easily practice price discrimination?a. A record storeb. An oral surgeonc. A book publisherd. A grocery store

37. A firm is practicing price discrimination if:a. it sells the same good to different customers at different prices because of

differences in the cost of producing the goodb. some individuals who want to purchase the good at the going market price cannot

do soc. it sells the same good to different customers at different prices, and there is no

difference in the cost of producing the goodd. it sells the same good to different customers at different prices because of

differences in transportation costs

38. Which of the following would not be considered price discrimination?a. Airline fares are lower if you purchase your ticket several weeks in advanceb. Senior citizens pay a lower price for restaurant mealsc. Doctors charge high-income patients a higher price for a physical examination

than low-income patients.d. A drug company charges a higher price of a cholesterol-lowering drug than for

aspirin.

39. Which of the following is an example of an actual cartel?a. The Organization of Petroleum Exporting Countries (OPEC)b. General Motors, Ford, and Chryslerc. American Airlines, United Airlines, and Delta Airlinesd. All of the above

40. For a cartel to be successful in increasing the price all member firms receive for theirproduct, it must be able to:a. increase the collective output of all members of the cartelb. restrict the collective output of all members of the cartelc. increase advertising by all members of the carteld. decrease the prices members of the cartel pay for their inputs

41. If zinc suppliers are successful in forming an international cartel, then they willexperience:a. higher zinc prices, higher zinc output, and greater profitsb. lower zinc prices, higher zinc output, and greater profitsc. lower zinc prices, lower zinc output, and greater profitsd. higher zinc prices, lower zinc output, and greater profits

42. Each member of a cartel has an economic incentive to cheat on its agreed output quotabecause:a. producing more output than its quota will increase the cheating firm's sales and

and profitsb. producing more output than its quota forces other members of the cartel to

decrease their cost, which increases the cheating firm's profitsb. producing less output than its quota will increase the cheating firm's sales and

profitsc. Both a and b

43. During certain periods in the past few decades, if one of three major breakfast cerealproducers in the U.S. announced a price increase, the other two followed by announcingprice increases. This is a good example of:a. a cartelb. typical firm behavior in monopolistic competitionc. price leadership in an oligopolistic industryd. non-profit maximizing behavior

44. Which of the following statements about is true?a. The Sherman Antitrust Act of 1890 made cartels and price fixing illegal in the

U.S.b. Since the Sherman Antitrust Act, no firms have attempted to fix pricesc. International cartels do not currently exist in the world marketd. Both a and b

NOTE: Use the study questions for test #1 and test #2 as study questions for the previousmaterial.