Econ 201 – Flashcard Test Questions
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A product has utility if it:
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satisfies consumer wants.
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The law of diminishing marginal utility states that:
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beyond some point, additional units of a product will yield less and less extra satisfaction to a consumer.
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The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of the third Pepsi is:
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8 units of utility.
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If the price of product X rises, then the resulting decline in the amount purchased will:
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increase the marginal utility of the last unit consumed of this good.
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Marginal utility is the
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change in total utility obtained by consuming one more unit of a good
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Utility refers to the
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satisfaction that a consumer derives from a good or service.
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Total utility may be determined by
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summing the marginal utilities of each unit consumed.
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Where total utility is at a maximum, marginal utility is
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zero
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Which of the following is correct?
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If marginal utility is diminishing and is a positive amount, total utility will increase.
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The law of diminishing marginal utility explains why
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demand curves slope downward.
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While eating at Alex's "Pizza by the Slice" restaurant, Kara experiences diminishing marginal utility. She gained 10 units of satisfaction from her first slice of pizza consumed and would only receive 5 units of satisfaction from consuming a second slice, at the same price. Based on this information we can conclude that:
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Alex may have to lower the price to convince Kara to buy a second slice.
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The theory of consumer behavior assumes that:
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consumers behave rationally, attempting to maximize their satisfaction.
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To maximize utility, a consumer should allocate money income so that the:
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marginal utility obtained from the last dollar spent on each product is the same.
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Suppose that MUx/Px exceeds MUy/Py. To maximize utility, the consumer who is spending all her money income should buy:
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more of X and less of Y.
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Mrs. Arnold is spending all her money income by buying bottles of soda and bags of pretzels in such amounts that the marginal utility of the last bottle is 60 utils and the marginal utility of the last bag is 30 utils. The prices of soda and pretzels are $.60 per bottle and $.40 per bag respectively. It can be concluded that:
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Mrs. Arnold should spend more on soda and less on pretzels.
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Ben is exhausting his money income consuming products A and B in such quantities that MUa/Pa = 5 and MUb/Pb = 8. Ben should purchase:
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more of B and less of A.
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The marginal utility of the last unit of apples consumed is 12 and the marginal utility of the last unit of bananas consumed is 8. What set of prices for apples and bananas, respectively, would be consistent with consumer equilibrium?
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$6 and $4
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Suppose you have a limited money income and you are purchasing products A and B, whose prices happen to be the same. To maximize your utility, you should purchase A and B in such amounts that:
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their marginal utilities are the same.
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A consumer is maximizing her utility with a particular money income when
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MUa/Pa = MUb/Pb = MUc/Pc = . . . = MUn/Pn.
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Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4 respectively. The marginal utility of the last units of A and B are 16 and 24 respectively. These data suggest that Ms. Thomson:
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should buy less B and more A.
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If a rational consumer is in equilibrium, which of the following conditions will hold true?
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The marginal utility of the last dollar spent on each good purchased will be the same.
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Which of the following best explains the difference between neoclassical economics and behavioral economics?
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Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors.
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Which of the following assumptions about human behavior is most likely to be accepted by behavioral economists?
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People have preferences that are unstable and vary by context.
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Behavioral economists believe that people:
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often succumb to temptation.
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Neoclassical economists generally believe which of the following about human behavior?
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When individuals make mistakes in decision making, they adjust to these errors and rarely repeat them.
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Which of the following sets of personal characteristics best reflects what behavioral economists assume about how people make decisions?
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People have preferences that depend on context, avoid and are bad at computation, often give in to temptation, and are often selfless in their behavior.
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Susie knows that too many sugary treats, while delicious when eaten, have long-term adverse effects on weight and health. Based on this information, a neoclassic economist would expect Susie to:
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carefully weigh the short-term benefits against the long-term costs and make a rational decision about how many treats to eat.
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In the financial crisis that precipitated the 2007-2009 recession, people systematically overestimated their prospects for financial gain. Which branch of economics would most likely have expected to predict this?
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Behavioral economics.
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Which of the following individuals received a Nobel Prize in economics for his work in behavioral economics?
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Daniel Kahneman.
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Susie knows that too many sugary treats, while delicious when eaten, have long-term adverse effects on weight and health. Based on this information, a behavioral economist would expect Susie to:
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eat more sugary treats than is optimal, as she likely gives more weight to present events and outcomes than to ones in the future.
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What do neoclassical economics and behavioral economics believe about giving people options?
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Neoclassical economics focuses on providing more options; behavioral economics focuses on helping people make better decisions with the options available.
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Which of the following statements best reflects how a behavioral economist views individual decision making?
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Balin tries to make good, well-thought-out decisions, but his desire for utility in the present means that he often gives in to costly temptations.
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Because neoclassical economists assume that people are rational decision makers, they:
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ignore the mental processes by which these decisions are made.
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Which of the following supermarket strategies to increase sales would be most consistent with a neoclassical economics (versus behavioral economics) approach?
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Providing discounts for buying in bulk.
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Neoclassical economics and behavioral economics:
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are generally viewed as complementary, together providing better understanding of economic behavior than each could on its own.
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Which of the following supermarket strategies to increase sales would be most consistent with a behavioral economics (versus neoclassical economics) approach?
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Positioning frequently purchased items at the back of the store.
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Why, according to behavioral economics, would supermarkets place gum, candy, and other small convenience items near the cash registers?
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Many of these are small items that people will buy on an impulse.
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Many of these are small items that people will buy on an impulse.
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Maximize impulse buying by consumers.
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Which of the following would represent a systematic error?
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Which of the following would represent a systematic error?
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According to behavioral economists, the human brain:
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uses evolutionary-developed heuristics to make many decisions.
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According to behavioral economists, the human brain frequently employs heuristics because:
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they save energy and time in decision making.
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Behavioral economists believe that the human brain is generally:
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efficient but prone to errors.
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Heuristics
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are shortcuts that save time and energy in decision making.
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Those who believe that "there is no such thing as bad publicity" base this argument on which of the following ideas from behavioral economics?
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That the recognition heuristic will overcome any negative emotional associations.
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Which of the following is not an implication of hardwired heuristics?
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Getting people to make better decisions is simply a matter of providing more information and more options.
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Which of the following statements is most accurate about human brain modularity?
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System 1 uses heuristics, system 2 is more calculating, and most decisions are made by system 1.
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Buck carefully plans out an early morning exercise routine to lose weight and get fit. When it's time to work out, however, Buck just "doesn't feel up to it" and decides to sleep in. Behavioral economics would say that Buck:
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used System 2 of his brain to formulate his workout plan, but then gave in to System 1 when he chose to sleep in.
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Behavioral economics recognizes that people use System 1 to make decisions more often than they use System 2. Which of the following is an implication of that decision-making process?
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A majority of decisions are not made according to the neoclassical assumption of rational behavior.
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Which of the following is the best example of a System 2 decision and action?
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Chuck, who has contemplated a job change for a month and has other offers, chooses to quit when his boss makes him mad.
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According to behavioral economics, cognitive biases:
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are misunderstandings or misperceptions that cause systematic error.
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Dorothy likes to invest in gold as part of her overall financial investment portfolio, as her gut tells her it will increase dramatically in value. Her favorite and generally only source of investment advice is Wizard's Gold Hour on the OZ cable channel. As a result of this advice, Dorothy's portfolio mix is suboptimal, as it is too heavily weighted in gold. Behavioral economists would say that Dorothy suffers from:
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confirmation bias.
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Which of the following cognitive biases refers to people's tendency to attribute their successes to personal ability and effort, and failures to forces outside their control?
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Self-serving bias.
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In anonymous surveys, on average people rate themselves as "above average" with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the:
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overconfidence effect.
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John's friend Rosika won a major lottery jackpot. Seeing this, and despite the fact that millions don't win and the odds of winning are infinitesimal, John goes out and buys a bunch of lottery tickets despite struggling financially. John's decision to buy the lottery tickets under these circumstances would best be explained by the:
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availability heuristic.
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Dan was certain that his upcoming economics test would be so easy that he could wait to study until the night before and still do well on the exam. When he cracked open his book and notes the night before the exam, he realized he should've started studying earlier. According to behavioral economics, Dan's error was caused primarily by:
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a planning fallacy.
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Whenever Josh goes to his favorite restaurant, he wants to buy tiramisu, his favorite dessert. Despite the fact he would enjoy the flavor of the tiramisu the same amount every time, Josh only buys it when others are having dessert, and never buys it if he would be the only one having dessert. Behavioral economists would say that Josh's decision is affected by:
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framing effects.
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Fatal automobile accidents occur much more frequently than do fatal airplane crashes, yet airplane crashes receive a disproportionate amount of media coverage. As a result, some people are overly fearful of flying in planes yet have no problem riding in cars. Which of the following cognitive biases best explains this disconnect between these people's fears and the statistical realities?
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Availability heuristic.
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Specialty shops can charge and get customers to pay higher prices for identical goods than they would pay in "big box" stores. Assuming that these differences are driven by store appearance rather than differences in services provided, which of the following best explains this phenomenon?
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Framing effects.
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When people convince themselves that they "knew all along" what was going to happen, when in fact their predictions were incorrect, they suffer from:
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hindsight bias.
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Economic cost can best be defined as:
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a payment that must be made to obtain and retain the services of a resource.
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Which of the following is most likely to be an implicit cost for Company X?
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Forgone rent from the building owned and used by Company X.
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Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?
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Use of savings to pay operating expenses instead of generating interest income.
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Production costs to an economist:
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reflect opportunity costs.
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To the economist, total cost includes:
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explicit and implicit costs.
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What do wages paid to factory workers, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?
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All are opportunity costs.
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Implicit and explicit costs are different in that:
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the former refer to nonexpenditure costs and the latter to monetary payments.
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Accounting profits equal total revenue minus:
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total explicit costs.
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An explicit cost is:
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a money payment made for resources not owned by the firm itself.
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Accounting profits are typically:
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greater than economic profits because the former do not take implicit costs into account.
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Economic profits are calculated by subtracting:
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explicit and implicit costs from total revenue.
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Normal profit is:
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the return to the entrepreneur when economic profits are zero.
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Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were:
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$200,000 and its economic profits were zero.
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Which of the following definitions is correct?
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Economic profit = accounting profit - implicit costs.
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Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting:
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profits were zero and its economic losses were $500,000.
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The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Refer to the data. Creamy Crisp's explicit costs are:
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$150,000.
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The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Refer to the data. Creamy Crisp's implicit costs, including a normal profit, are:
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$136,000
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The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Refer to the data. Creamy Crisp's total economic costs are:
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$286,000
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The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Refer to the data. Creamy Crisp's accounting profit is:
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$230,000
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The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Refer to the data. Creamy Crisp's economic profit is:
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$94,000
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The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Refer to the data. Creamy Crisp's total revenues exceed its total costs, including a normal profit, by:
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$94,000
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The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Refer to the data. Creamy Crisp:
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is earning an economic profit.
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The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Refer to the data. If, other things equal, Creamy Crisp's revenue fell to $286,000:
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it would earn a normal profit but not an economic profit.
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The basic characteristic of the short run is that:
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the firm does not have sufficient time to change the size of its plant.
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Which of the following represents a long-run adjustment?
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Unable to meet foreign competition, a U.S. watch manufacturer sells one of its branch plants.
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Which of the following is a short-run adjustment?
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A local bakery hires two additional bakers.
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To economists, the main difference between the short run and the long run is that:
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in the long run all resources are variable, while in the short run at least one resource is fixed.
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The amount of calendar time associated with the long run:
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varies from industry to industry.
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The basic difference between the short run and the long run is that:
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at least one resource is fixed in the short run, while all resources are variable in the long run.
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Marginal product is:
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the increase in total output attributable to the employment of one more worker.
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The law of diminishing returns indicates that:
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as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.
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Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct?
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AP continues to rise so long as TP is rising.
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Which of the following best expresses the law of diminishing returns?
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As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital), beyond some point the resulting extra or marginal output will decline.
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Marginal product:
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may initially increase, then diminish, and ultimately become negative.
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The first, second, and third workers employed by a firm add 24, 18, and 9 units to total product respectively. Therefore, we can conclude that:
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marginal product of the third worker is 9.
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Economists would describe the U.S. automobile industry as:
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an oligopoly.
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In which of the following market structures is there clear-cut mutual interdependence with respect to price-output policies?
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Oligopoly
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Which of the following industries most closely approximates pure competition?
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Agriculture
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Economists use the term imperfect competition to describe:
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those markets that are not purely competitive.
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In which of the following industry structures is the entry of new firms the most difficult?
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Pure monopoly.
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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:
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monopolistic competition.
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An industry comprised of four firms, each with about 25 percent of the total market for a product, is an example of:
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oligopoly
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An industry comprised of a very large number of sellers producing a standardized product is known as:
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pure competition.
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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:
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oligopoly
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Which of the following statements applies to a purely competitive producer?
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It will not advertise its product.
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A purely competitive seller is:
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a "price taker."
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Which of the following is not a basic characteristic of pure competition?
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Considerable nonprice competition.
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The demand schedule or curve confronted by the individual, purely competitive firm is:
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perfectly elastic.
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Which of the following is characteristic of a purely competitive seller's demand curve?
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Price and marginal revenue are equal at all levels of output.
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In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. Refer to the information. For a purely competitive firm, total revenue graphs as a:
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straight, upsloping line.
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In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. Refer to the information. For a purely competitive firm, marginal revenue graphs as a:
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straight line, parallel to the horizontal axis.
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In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. Refer to the information. For a purely competitive firm
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the demand and marginal revenue curves will coincide.
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If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:
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will also be $5.
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Price is constant to the individual firm selling in a purely competitive market because:
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each seller supplies a negligible fraction of total supply.
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For a purely competitive seller, price equals:
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average revenue. marginal revenue. total revenue divided by output. all of these.
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For a purely competitive firm, total revenue:
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is price times quantity sold. increases by a constant absolute amount as output expands. graphs as a straight upsloping line from the origin. has all of these characteristics.
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The marginal revenue curve of a purely competitive firm:
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is horizontal at the market price.
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The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.
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downsloping; perfectly elastic
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A perfectly elastic demand curve implies that the firm:
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can sell as much output as it chooses at the existing price.
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The fact that a purely competitive firm's total revenue curve is linear and upsloping to the right implies that:
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product price is constant at all levels of output.
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Which of the following statements is correct?
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The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.
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Marginal revenue is the:
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change in total revenue associated with the sale of one more unit of output.
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Firms seek to maximize:
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total profit.
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A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating:
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marginal revenue and marginal cost.
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In the short run, a purely competitive firm that seeks to maximize profit will produce:
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where total revenue exceeds total cost by the maximum amount.
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A competitive firm will maximize profits at that output at which:
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total revenue exceeds total cost by the greatest amount.
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Pure monopoly refers to:
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a single firm producing a product for which there are no close substitutes.
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Which of the following is correct?
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A purely competitive firm is a "price taker," while a monopolist is a "price maker."
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A purely monopolistic firm:
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faces a downsloping demand curve.
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Pure monopolists may obtain economic profits in the long run because:
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of barriers to entry.
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Which of the following best approximates a pure monopoly?
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The only bank in a small town.
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Which of the following is a characteristic of pure monopoly?
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Barriers to entry.
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Which of the following is not a barrier to entry?
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X-inefficiency.
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Barriers to entering an industry:
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are the basis for monopoly.
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A natural monopoly occurs when
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long-run average costs decline continuously through the range of demand.
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Large minimum efficient scale of plant combined with limited market demand may lead to:
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natural monopoly.
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What do economies of scale, the ownership of essential raw materials, and patents have in common?
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They are all barriers to entry.
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The nondiscriminating pure monopolist's demand curve:
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is the industry demand curve.
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The nondiscriminating monopolist's demand curve:
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is less elastic than a purely competitive firm's demand curve.
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If a nondiscriminating imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue:
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will be less than $35.
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For an imperfectly competitive firm:
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the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.
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When a firm is on the inelastic segment of its demand curve, it can:
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increase profits by increasing price.
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A monopolistic firm has a sales schedule such that it can sell 10 prefabricated garages per week 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:
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$1,000
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With respect to the pure monopolist's demand curve, it can be said that:
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price exceeds marginal revenue at all outputs greater than 1.
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The demand curve faced by a pure monopolist:
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is less elastic than that faced by a single purely competitive firm.
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The marginal revenue curve for a monopolist:
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becomes negative when output increases beyond some particular level.
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Which of the following is characteristic of a pure monopolist's demand curve?
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It is the same as the market demand curve.
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Because the monopolist's demand curve is downsloping:
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price must be lowered to sell more output.
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The pure monopolist's demand curve is relatively elastic:
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in the price range where marginal revenue is positive.
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A nondiscriminating profit-maximizing monopolist:
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will never produce in the output range where demand is inelastic.
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For a pure monopolist the relationship between total revenue and marginal revenue is such that:
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marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing.
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