Econ 2113 Test 4 – Flashcards

A market is competitive if each buyer is small compared to the market and each seller is small compared to the market. (T/F)

When a firm has little ability to influence market prices it is said to be in a competitive market. (T/F)

In a competitive market, the actions of any single buyer or seller will have a negligible impact on the market price. (T/F)

For a firm in a perfectly competitive market, the price of the good is always equal to marginal revenue. (T/F)

If a firm in a perfectly competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.

Firms have difficulty entering the market, this is NOT a characteristic of a perfectly competitive market. (T/F)

When buyers in a competitive market take the selling price as given, they are said to be a. market entrants. b. monopolists. c. free riders. d. price takers.

Whenever a perfectly competitive firm chooses to change its level of output, holding the price of the product constant, its marginal revenue increases if MR < ATC and decreases if MR > ATC. (T/F)

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue a. increases if MR < ATC and decreases if MR > ATC. b. does not change. c. increases. d. decreases.

For a competitive firm, Profit = Total revenue - Total cost. (T/F)

For a competitive firm, average revenue equals the price of the good, but marginal revenue is different. (T/F)

Which of the following expressions is correct for a competitive firm? a. Profit = Total revenue - Total cost. b. Marginal revenue = (Change in total revenue)/(Change in quantity of output). c. Average revenue = Total revenue/Quantity of output. d. All of the above are correct.

If marginal cost exceeds marginal revenue, the firm is most likely to be at a profit-maximizing level of output. (T/F)

If marginal cost exceeds marginal revenue, the firm a. is most likely to be at a profit-maximizing level of output. b. should increase the level of production to maximize its profit. c. must be experiencing losses. d. may still be earning a profit.

When marginal revenue equals marginal cost, the firm should increase the level of production to maximize its profit. (T/F)

When marginal revenue equals marginal cost, the firm a. should increase the level of production to maximize its profit. b. may be minimizing its losses, rather than maximizing its profit. c. must be generating economic profits. d. must be generating economic losses.

The additional revenue a firm in a competitive market receives if it increases its production by one unit equals its marginal revenue. (T/F)

The short-run supply curve for a firm in a perfectly competitive market is a. likely to be horizontal. b. likely to slope downward. c. determined by forces external to the firm. d. its marginal cost curve (above average variable cost).

The short-run supply curve for a firm in a perfectly competitive market is likely to be horizontal. (T/F)

When a perfectly competitive firm makes a decision to shut down, it is most likely that marginal cost is above average variable cost (T/F)

When a perfectly competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.

Firms that shut down in the short run still have to pay their variable costs. (T/F)

Firms that shut down in the short run still have to pay their a. variable costs. b. fixed costs. c. total cost. d. All of the above are correct.

When total revenue is less than variable costs, a firm in a competitive market will continue to operate as long as average revenue exceeds marginal cost. (T/F)

When total revenue is less than variable costs, a firm in a competitive market will a. continue to operate as long as average revenue exceeds marginal cost. b. continue to operate as long as average revenue exceeds average fixed cost. c. shut down. d. always exit the industry

In the long run all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is price < average total cost. (T/F)

Profit-maximizing firms enter a competitive market when, for existing firms in that market, total revenue exceeds fixed costs. (T/F)

Profit-maximizing firms enter a competitive market when, for existing firms in that market, a. total revenue exceeds fixed costs. b. total revenue exceeds total variable costs. c. average total cost exceeds average revenue. d. price exceeds average total cost.

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a one-unit increase in output will increase the firm's profit. (T/F)

The decision to shut down and the decision to exit are both short-run decisions , this statement is correct regarding a firm's decisionmaking. (T/F)

Which of the following statements is correct regarding a firm's decisionmaking? a. The decision to shut down and the decision to exit are both short-run decisions. b. The decision to shut down and the decision to exit are both long-run decisions. c. The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision. d. The decision to exit is a short-run decision, whereas the decision to shut down is a long-run decision.

The complete description of a competitive firm's supply curve is as follows: The competitive firm's short-run supply curve is that portion of the average variable cost curve that lies above marginal cost. (T/F)

The complete description of a competitive firm's supply curve is as follows: The competitive firm's short-run supply curve is that portion of the a. average variable cost curve that lies above marginal cost. b. average total cost curve that lies above marginal cost. c. marginal cost curve that lies above average variable cost. d. marginal cost curve that lies above average total cost.

A firm will exit a market if, for all positive levels of output, its total revenue is less than its total cost. (T/F)

When new firms have an incentive to enter a competitive market, their entry will increase the price of the product. (T/F)

When new firms have an incentive to enter a competitive market, their entry will a. increase the price of the product. b. drive down profits of existing firms in the market. c. shift the market supply curve to the left. d. All of the above are correct.

In a perfectly competitive market, the process of entry and exit will end when, for firms in the market, price is equal to average variable cost. (T/F)

In a perfectly competitive market, the process of entry and exit will end when, for firms in the market, a. price is equal to average variable cost. b. marginal revenue is equal to average variable cost. c. economic profits are zero. d. All of the above are correct.

In a market that allows free entry and exit, the process of entry and exit ends when, for the typical firm in the market, profit is zero. (T/F)

The entry of new firms into a competitive market will increase market supply and increase market prices. (T/F)

The entry of new firms into a competitive market will a. increase market supply and increase market prices. b. increase market supply and decrease market prices. c. decrease market supply and increase market prices. d. decrease market supply and decrease market prices.

When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is downward sloping. (T/F)

When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is a. downward sloping. b. upward sloping. c. horizontal

A competitive firm is a price maker and a monopoly is a price taker. (T/F)

Which of the following statements is correct? a. A competitive firm is a price maker and a monopoly is a price taker. b. A competitive firm is a price taker and a monopoly is a price maker. c. Both competitive firms and monopolies are price takers. d. Both competitive firms and monopolies are price makers.

A monopoly's marginal cost will be less than its average fixed cost. (T/F)

A monopoly's marginal cost will a. be less than its average fixed cost. b. be less than the price per unit of its product. c. exceed its marginal revenue. d. equal its average total cost.

A monopoly has the ability to set the price of its product at whatever level it desires. (T/F)

Examples of barriers to entry include (i) A key resource is owned by a single firm, (ii) The costs of production make a single producer more efficient than a large number of producers, or (iii) The government has given the existing monopoly the exclusive right to produce the good. (T/F)

To define a monopoly, we cite the following characteristics: (i) and (ii). (i) The firm is the sole seller of its product. (ii) The firm's product does not have close substitutes. (iii) The firm generates a large economic profit. (iv) The firm is located in a small geographic market. (T/F)

A natural monopoly occurs when the product is sold in its natural state (such as water or diamonds). (T/F)

A natural monopoly occurs when a. the product is sold in its natural state (such as water or diamonds). b. there are economies of scale over the relevant range of output. c. the firm is characterized by a rising marginal cost curve. d. production requires the use of free natural resources, such as water or air.

The defining characteristic of a natural monopoly is constant marginal cost over the relevant range of output. (T/F)

The defining characteristic of a natural monopoly is a. constant marginal cost over the relevant range of output. b. economies of scale over the relevant range of output. c. constant returns to scale over the relevant range of output. d. diseconomies of scale over the relevant range of output.

Natural monopolies differ from other forms of monopoly because they a. are not subject to barriers to entry. b. are not regulated by government. c. generally don't make a profit. d. are generally not worried about competition eroding their monopoly position in the market.

Patent and copyright laws are major sources of a. natural monopolies. b. government-created monopolies. c. resource monopolies. d. None of the above are correct.

Which of the following scenarios best represents a monopoly situation? a. Bill and Tom work separately from one another but both sell a very rare form of the same diamond. They are the only sellers of this type of diamond in town. b. Tom owns a fishing tackle shop in Miami, Florida, in which he sells the top-of-the-line fishing equipment. c. Bill owns the only grocery store in a small community that lies 200 miles from the nearest city. d. None of the above adequately represents a monopoly.

A government-created monopoly arises when a. government spending in a certain industry gives rise to monopoly power. b. the government exercises its market control by encouraging competition among sellers. c. the government gives a firm the exclusive right to sell some good or service. d. All of the above could qualify as government-created monopolies.

Allowing an inventor to have the exclusive rights to market her new invention will lead to (i) a product that is priced higher than it would be without the exclusive rights. (ii) desirable behavior in the sense that inventors are encouraged to invent. (iii) higher profits for the inventor. a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. All of the above are correct.

Which of the following items is a primary source of barriers to entry? a. The costs of production make a single firm more efficient than a large number of firms. b. A single firm hires all the people who have the management skills that are important in the industry. c. Contracts among firms prohibit them from competing with one another in the production and sale of certain products. d. All of the above are correct.

The key difference between a competitive firm and a monopoly firm is the ability to select a. the level of competition in the market. b. the level of production. c. inputs in the production process. d. the price of its output.

The market demand curve for a monopolist is typically a. unitary elastic at the point of profit maximization. b. downward sloping. c. horizontal. d. vertical.

When a firm operates under conditions of monopoly, its price is a. not constrained. b. constrained by marginal cost. c. constrained by demand. d. constrained only by its social agenda

In order to sell more of its product, a monopolist must a. sell to the government. b. sell in international markets. c. lower its price. d. use its market power to force up the price of complementary products.

Economists assume that monopolists behave as a. cost minimizers. b. profit maximizers. c. price maximizers. d. All of the above are correct.

A monopolist's average revenue is always a. equal to marginal revenue. b. greater than the price of its product. c. equal to the price of its product. d. less than the price of its product.

If a profit-maximizing monopolist faces a downward-sloping market demand curve, its a. average revenue is less than the price of the product. b. average revenue is less than marginal revenue. c. marginal revenue is less than the price of the product. d. marginal revenue is greater than the price of the product.

A profit-maximizing monopolist will produce the level of output at which a. average revenue is equal to average total cost. b. average revenue is equal to marginal cost. c. marginal revenue is equal to marginal cost. d. total revenue is equal to opportunity cost.

For a profit-maximizing monopolist, a. P > MR = MC. b. P = MR = MC. c. P > MR > MC. d. MR < MC < P.

When a monopolist increases the amount of output that it produces and sells, its average revenue a. increases and its marginal revenue increases. b. increases and its marginal revenue decreases. c. decreases and its marginal revenue increases. d. decreases and its marginal revenue decreases.

Which of the following is an impossible feat for a monopolist to accomplish? a. control the price of its good b. charge a higher price and continue to sell the same quantity c. operate at a point on the upper half of the demand curve d. All of the above are correct.

Marginal revenue for a monopolist is computed as a. average revenue divided by quantity sold. b. average revenue times quantity divided by price. c. total revenue divided by quantity sold. d. change in total revenue per one unit increase in quantity sold.

The demand curve for a monopoly firm is depicted by a curve that is: A. Downward sloping B. Upward Sloping C. Vertical D. Horizontal

The marginal revenue curve for a monopoly firm is depicted by curve A. Upward sloping B. Downward sloping C. Horizontal D. Vertical

The marginal cost curve for a monopoly firm is depicted by curve A. Vertical B. Downward sloping C. Upward sloping D. Horizontal

The average total cost curve for a monopoly firm is depicted by a curve that is an A. Downward Curve B. Horizontal C. Vertical D. Upward Curve

If the monopoly firm wants to maximize its profit, it should operate at a level of output equal to a. Q1. b. Q2. c. Q3. d. Q4.

Profit will be maximized by charging a price equal to a. P0. b. P1. c. P2. d. P3.

Profit on a typical unit sold for a profit-maximizing monopoly would equal a. P2 - P1. b. P2 - P0. c. P3 - P2. d. P3 - P0.

At the profit-maximizing level of output, a. marginal revenue is equal to P3. b. marginal cost is equal to P3. c. average revenue is equal to P3. d. None of the above are correct.

The monopolist's profit-maximizing quantity of output is determined by the intersection of which of the following two curves? a. marginal cost and demand b. marginal cost and marginal revenue c. average total cost and marginal revenue d. average variable cost and average revenue

For a monopolist, profit is determined by which of the following equations? a. Profit = Total Revenue - Total Cost b. Profit = (Average Revenue - Average Total Cost) x Quantity c. Profit = (Price - Average Total Cost) x Quantity d. All of the above are correct.

A monopoly market a. always maximizes total economic well-being. b. always minimizes consumer surplus. c. generally fails to maximize total economic well-being. d. generally fails to maximize producer surplus.

The economic inefficiency of a monopolist can be measured by the a. number of consumers who are unable to purchase the product because of its high price. b. excess profit generated by monopoly firms. c. poor quality of service offered by monopoly firms. d. deadweight loss.

The socially efficient level of production occurs where the marginal cost curve intersects which of the following curves? a. average variable cost b. average total cost c. demand d. marginal revenue

A benevolent social planner would cause the monopoly firm to operate at an output level a. below Q0. b. above Q0. c. equal to Q0. d. equal to zero.

If the monopoly operates at an output level below Q0, then an increase in output toward Q0 (but not so large an increase as to exceed Q0) would a. raise the price and raise total surplus. b. lower the price and raise total surplus. c. raise the price and lower total surplus. d. lower the price and lower total surplus.

If a monopoly sells a quantity of its good that is smaller than the socially-optimal level, the price will be a. socially efficient. b. inefficiently low. c. inefficiently high. d. inefficiently low or inefficiently high; either case can prevail.

Inefficiency arises from a monopoly because a. the monopoly firm earns an excessively large profit. b. some buyers will refrain from buying the good, due to the high price. c. consumers who buy the goods feel exploited. d. All of the above are correct.

Which of the following areas represents the deadweight loss due to monopoly pricing? a. triangle bde b. triangle bge c. rectangle acdb d. rectangle cfgd

Total surplus lost due to monopoly pricing is reflected in a. triangle bde. b. triangle bge. c. rectangle acdb. d. rectangle cfgd.

If a social planner were running a monopoly, that planner could achieve an efficient outcome by charging the price that is determined by the a. minimum point on the average total cost curve. b. intersection of the average total cost curve and the demand curve. c. intersection of the marginal cost curve and the demand curve. d. intersection of the marginal cost curve and the marginal revenue curve.

One problem with government regulation of monopolies is that a. a benevolent government is likely to be interested in generating profits for political gain. b. regulated industries typically have rising average costs. c. the government typically has little incentive to reduce costs. d. a government-regulated outcome will increase the profitability of the monopoly.

One problem with regulating a monopolist on the basis of cost is that a. regulators are unable to effectively control prices and/or production. b. it does not provide an incentive for the monopolist to reduce its cost. c. a monopolist's costs, by definition, are higher than costs of perfectly competitive firms. d. a monopolist is still able to generate excessive economic profits.

When regulators use a marginal cost pricing strategy to regulate a natural monopoly, the regulated monopoly a. will experience a loss. b. will experience a price below average total cost. c. may rely on a government subsidy to remain in business. d. All of the above are correct.

Antitrust laws allow the government to a. prevent mergers. b. break up companies. c. promote competition. d. All of the above are correct.

Since natural monopolies have a declining average cost curve, regulating natural monopolies by setting price equal to marginal cost would a. cause the monopolist to operate at a loss. b. result in a less than optimal total surplus. c. maximize producer surplus. d. All of the above are correct.

In a natural monopoly, a. society would be better off if anti-trust laws were used to create many different firms in the market. b. the marginal cost curve is positively sloped. c. if the government requires marginal cost pricing, it must pay the monopolist a subsidy. d. the marginal revenue curve is horizontal.

A perfectly price-discriminating monopolist is able to a. maximize profit and produce a socially-optimal level of output. b. maximize profit, but not produce a socially-optimal level of output. c. produce a socially-optimal level of output, but not maximize profit. d. exercise illegal preferences regarding the race and/or gender of its employees.

When a monopolist is able to sell its product at different prices, it is engaging in a. distribution pricing. b. quality adjusted pricing. c. price differentiation. d. price discrimination.

Price discrimination is a rational strategy for a profit-maximizing monopolist when a. the monopolist finds itself able to produce only limited amounts of output. b. consumers are unable to be segmented into identifiable markets. c. the monopolist wishes to increase the deadweight loss that results from profit-maximizing behavior. d. there is no opportunity for arbitrage across market segmentations.

If a monopolist is able to perfectly price discriminate, a. consumer surplus is always increased. b. total surplus is always decreased. c. consumer surplus and deadweight losses are transformed into monopoly profits. d. the price effect dominates the output effect on monopoly revenue.

The practice of selling the same goods to different customers at different prices, but with the same marginal cost, is known as a. price segregation. b. price discrimination. c. arbitrage. d. monopoly pricing.

Price discrimination requires the firm to a. separate customers according to their willingness to pay. b. differentiate between different units of its product. c. engage in arbitrage. d. All of the above are correct.

The process of buying a good in one market at a low cost and selling the good in another market for a higher cost in order to profit from the price difference is known as a. sabotage. b. conspiracy. c. arbitrage. d. collusion.

Many movie theaters allow discount tickets to be sold to senior citizens because a. senior-citizen laws mandate such discounts. b. efforts of goodwill show community respect and win loyal patrons. c. the theaters are profit maximizers. d. senior citizens usually comprise a solid portion of those who voice their opinions.

Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back. What is the reason for this price discrepancy? a. Airlines are practicing imperfect price discrimination to raise their profits. b. Airlines charge a different rate based on the different nature of peoples' travel needs. c. Airlines are attempting to charge people based on their willingness to pay. d. All of the above are correct.

The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its own. This is evidence that they have a monopoly position to some degree. (T/F)

The amount of power that a monopoly has is a function of whether there are close substitutes for its product. (T/F)

Declining average total cost with increased production is one of the defining characteristics of a natural monopoly. (T/F)

When a monopoly charges a higher price, fewer of its goods are sold. (T/F)

Average revenue for a monopoly is the total revenue divided by the quantity produced. (T/F)

For a monopoly, marginal revenue is often greater than the price they charge for their good. (T/F)

Like monopolies, competitive firms choose to produce a quantity in which marginal revenue equals marginal cost. (T/F)

During the life of a drug patent, the monopoly pharmaceutical firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. (T/F)

Antitrust laws give the Justice Department the authority to challenge potential merges between companies, in an effort to safeguard society from monopoly power. (T/F)

Some companies merge in order to lower costs through efficient joint production. (T/F)

The proper level of government intervention is ambiguous when dealing with a monopoly. (T/F)

Movie theatres charge different prices to different groups of people based on the differing marginal costs that exist from group to group. (T/F)

Airlines often separate their customers into business travelers and personal travelers by giving a discount to those travelers who stay over a Saturday night. (T/F)

University financial aid can be viewed as a type a price discrimination. (T/F)

By offering lower prices to customers who buy a large quantity, a monopoly is price discriminating. (T/F)

In competitive markets, firms that raise their prices are typically rewarded with larger profits (T/F)

When individual firms in competitive markets increase their production, it is likely that the market price will fall. (T/F)

In a competitive market, firms are unable to differentiate their product from that of other producers. (T/F)

Firms in competitive markets are said to be price takers. (T/F)

For a firm in a competitive market, marginal revenue is always equal to average revenue. (T/F)

The assumption of free entry and exit is necessary for firms in a competitive market to be price takers. (T/F)

A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost. (T/F)

A firm in a competitive market will maximize profit when the level of production is such that marginal cost equals price. (T/F)

By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximizing level of production. (T/F)

A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin. (T/F)

Marginal adjustments to production end when firms in competitive markets experience a price equal to marginal revenue. (T/F)

When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production. (T/F)

A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production. (T/F)

A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production (T/F)

The supply curve of a firm in a competitive market is the average variable cost curve, above the minimum of marginal cost. (T/F)

In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive market will choose to exit (or not enter) the market. (T/F)

The long-run equilibrium in a competitive market characterized by firms with identical costs is generally characterized by firms operating at efficient scale. (T/F)

A competitive market will typically experience entry and exit until all accounting profits are zero. (T/F)

In the long run, a competitive market with 1,000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost. (T/F)

At the end of the process of entry and exit, it is possible that some firms in a competitive market are making a positive economic profit. (T/F)

The short-run supply curve in a competitive market must be more elastic than the long-run supply curve. (T/F)

When a firm experiences zero-profit equilibrium, the firm's revenue must be sufficient to cover all opportunity costs. (T/F)

The marginal firm in a competitive market will earn zero economic profits in the long run. (T/F)

A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run. (T/F)