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MicroEconomics Final

A competitive firm operating in the short run is producing at the output level at which ATC is at a minimum. If ATC = $8 and MR = $9, in order to maximize profits (or minimize losses), this firm should:

A) increase output.
B) reduce output.
C) shut down.
D) do nothing; the firm is already maximizing profits.

A. increase output.
A wheat farmer operating in the short run produces 100 bushels of wheat. Her average total cost per bushel is $1.75, total revenue is $450, and (total) fixed costs are equal to $100. Then:

A) average fixed cost is equal to $1.50.
B) profit per bushel is equal to $2.75.
C) average variable cost is equal to $1.25.
D) economic profit is equal to $250.

B. Profit per bushel is equal to $2.75.
Zoe’s Bakery operates in a perfectly competitive industry. Suppose that when the market price is $5, the profit-maximizing output level of pastries is 150 units, with average total cost of $4, and average variable cost of $3. From this we know Zoe’s marginal cost is ________, and her short-run profits are ________.

A) $5; $150
B) $5; $300
C) $1; $150
D) $1; $300

A. $5; $150
In the perfectly competitive guidebook industry, the market price is $35. A firm is currently producing 10,000 guidebooks; average total cost is $38, marginal cost is $30, and average variable cost is $30. The firm should:

A) raise the price of guidebooks, because the firm is losing money.
B) keep output the same, because the firm is producing at minimum average variable
cost.
C) produce more guidebooks, because the next guidebook produced increases profit
by $5.
D) shut down, because the firm is losing money.

C. Produce more guidebooks, because the next guidebook produced increases profit by $5
Zoe’s Bakery determines that P < ATC and P > AVC. Zoe should:

A) continue to operate even though she is experiencing an economic loss.
B) continue to operate as she is making an economic profit.
C) shut down immediately as she is experiencing an economic loss.
D) raise the price until she has maximized her profits.

A. continue to operate even though she is experiencing an economic loss
A perfectly competitive firm is definitely earning an economic profit when:

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

B. P > ATC.
A perfectly competitive firm operating in the short run producing 100 units of output has ATC = $6 and AFC = $2. The market price is $3 and is equal to MC. In order to maximize profits (or minimize losses), this firm should:

A) increase output.
B) reduce output, but continue to produce a positive amount of output.
C) shut down.
D) do nothing; the firm is already maximizing profits.

C. Shut down.
If price is consistently below average total cost, then in the short run a perfectly competitive firm should:

A) shut down.
B) continue to produce to minimize losses.
C) raise price.
D) There is not enough information given to answer

D. There is not enough information given to answer
The short-run supply curve for a perfectly competitive firm is:

A) the average total cost curve above the break-even price.
B) the average variable cost curve above the shut-down price.
C) the marginal cost curve above the break-even price.
D) the marginal cost curve above the shut-down price.

D. the marginal cost curve above the shut down pice
A perfectly competitive firm will earn a profit and will continue producing the profit- maximizing quantity of output in the short run if price is:

A) greater than marginal cost.
B) less than marginal cost.
C) less than average variable cost.
D) greater than average total cost.

D. greater than average total cost.
A perfectly competitive firm will continue producing in the short run as long as it can cover its:

A) total cost.
B) average fixed cost.
C) variable cost.
D) fixed cost.

C. variable cost.
In the short run, if P = ATC, a perfectly competitive firm:

A) produces output and earns zero economic profit.
B) produces output and earns an economic profit.
C) produces output and incurs an economic loss.
D) does not produce output and incurs an economic loss.

A. produces output and earns zero economic profit.
Which of the following is true?

A) If price falls below average variable cost the firm will shut down in the short run.
B) Total revenue and marginal revenue are the same in perfect competition.
C) Economic profit per unit is found by subtracting MC from price.
D) Economic profit is always positive in the long run.

A If price falls below average variable cost the firm will shut down in the short run
A perfectly competitive firm’s short-run supply curve is its:

A) average variable cost curve above the marginal cost curve.
B) marginal cost curve above the average fixed cost curve.
C) marginal cost curve above the average total cost curve.
D) marginal cost curve above the average variable cost curve.

D. marginal cost curve above the average variable cost curve.
If firms are making positive economic profits in the short run, then in the long run:

A) the short-run industry supply curve will shift leftward.
B) firms will enter the industry.
C) industry output will rise and price will rise.
D) firms will leave the industry.

B. firms will enter the industry.
In perfectly competitive long-run equilibrium:

A) all firms make positive economic profits.
B) all firms produce at the minimum point of their average total cost curves.
C) the industry supply curve must be upward-sloping.
D) all firms face the same price, but the value of marginal cost will vary directly with
firm size.

B. all firms produce at the minimum point of their average total cost curve
Suppose that some firms in a perfectly competitive industry are incurring negative economic profits. In the long run, the:

A) industry supply curve will not shift.
B) industry supply curve will shift to the left.
C) number of firms in the industry will not change.
D) number of firms in the industry will increase.

B. Industry supply curve will shift to the left.
If firms are experiencing economic losses in the short run, firms will leave the industry and industry output will ________ and economic losses will ________ in the long run.

A) fall; fall
B) rise; fall
C) rise; rise
D) fall; rise

A. fall; fall
When economic profits in an industry are zero:

A) firms are really doing badly.
B) it means that firms are doing as well as they could do in other markets.
C) firms should exit, so they can make an economic profit in some other market.
D) the industry is not in long-run equilibrium.

B. it means that firms are doing as well as they could do in other markets
Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total costs of producing candy canes by $0.05. Based on the information given,
we can conclude that in the short run a typical producer of candy canes will be making:

A) an economic profit.
B) zero economic profit.
C) negative economic profits.
D) The answer is impossible to determine based on the information given.

C. negative economic profits.
Lilly is the price-taking owner of an apple orchard. Currently the price of apples is high enough that Lilly is earning positive economic profits. In the long run, Lilly should expect:

A) lower apple prices due to entry of new firms.
B) higher apple prices due to exit of existing firms.
C) lower apple prices due to exit of existing firms.
D) higher apple prices due to entry of new firms.

A. lower apple prices due to entry of new firms.
A perfectly competitive industry is currently in a state of long-run equilibrium. Which of the following must be true?

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

C. P = MR = MC = ATC
A perfectly competitive industry is said to be efficient because the:

A) marginal cost of production of the last unit of output is minimized.
B) product is standardized across firms in the industry.
C) average total cost of production of the industry’s output is minimized.
D) market price of the good is equal to economic profit for all firms in the industry.

C. average total cost of production of the industry’s output is minimized
If some firms in a perfectly competitive industry are earning positive economic profits,
then in the long run, the:

A) industry is in long-run equilibrium.
B) industry supply curve will shift to the right.
C) number of firms in the industry will not change.
D) number of firms in the industry will decrease.

B) industry supply curve will shift to the right.
Mr. Porter sells 10 bottles of champagne per week at a price of $50 per bottle. He can sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity and the price effects on total revenue would be, respectively,:

A) an increase of $450 and a decrease of $500.
B) an increase of $495 and a decrease of $550.
C) an increase of $45 and a decrease of $5.
D) an increase of $45 and a decrease of $50.

D. an increase of $45 and a decrease of $50.
Suppose that a monopolist increases production from 10 units to 11 units. If the market price declines from $30 per unit to $29 per unit, marginal revenue for the eleventh unit is:

A) $1.
B) $9.
C) $19.
D) $29.

C) $19
The demand curve facing a monopolist is:

A) downward-sloping.
B) vertical.
C) horizontal.
D) upward-sloping.

A. downward-sloping.
The profit-maximizing rule MR = MC is:

A) followed by a monopoly, but not by a perfectly competitive firm.
B) followed by a perfectly competitive firm but not by a monopoly.
C) followed by all types of firms.
D) not followed by a monopoly, because it would reduce economic profit to zero.

C. followed by all types of firms.
A statement that best reflects an evaluation of monopoly firms is that:

A) they are economically inefficient.
B) they have little or no market power.
C) consumers are given more choices, lower costs, and higher quality.
D) competition should replace all monopolies.

A. they are economically inefficient.
Compared to perfect competition:

A) monopoly produces more at a lower price.
B) monopoly produces where MR > MC, and a perfectly competitively firm produces
where P = MC.
C) monopoly may have economic profits in the long run, but in perfect competition, in the long run, economic profits are larger than in monopoly.
D) monopoly produces less at a higher price.

D. monopoly produces less at a higher price.
The pricing in monopoly prevents some mutually beneficial trades from taking place. The value of these unrealized mutually beneficial trades is called:

A) sunk costs.
B) opportunity costs.
C) a deadweight loss.
D) inequities.

C. a deadweight loss.
Compared to a firm in perfect competition, a monopoly produces a ____ quantity and charges a ____ price.

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

B) lower; higher
Suppose a perfectly competitive industry is suddenly transformed into a monopoly industry. We can assume that monopoly output will be ________ the competitive output and that ________.

A) above; deadweight loss will emerge
B) below; consumer surplus will increase
C) below; deadweight loss will emerge
D) above; consumer surplus will decrease

C. below; deadweight loss will emerge
If the government only allowed one airline to serve the entire U.S. market, there would be a ________ loss associated with ________ efficiency in the airline industry.

A) marginal; reduced
B) deadweight; reduced
C) total; increased
D) deadweight; increased

B. deadweight; reduced
One government policy for dealing with a natural monopoly is to:

A) impose a price floor to eliminate the deadweight loss.
B) impose a price ceiling to eliminate any economic profit.
C) break it up into smaller firms.
D) impose fines on the monopolist.

B. impose a price ceiling to eliminate any economic profit.
The practice of charging different prices to different customers for the same good or service even though the cost of supplying those customers is the same is:

A) privatization.
B) monopolization.
C) output competition.
D) price discrimination.

D) price discrimination.
Price discrimination leads to a ________ price in the market with a ________ demand.

A) higher; less elastic
B) higher; more elastic
C) higher; perfectly elastic
D) lower; less elastic

A) higher; less elastic
The city bus system charges lower fares to senior citizens than to other passengers. Assuming that this pricing strategy increases the profits of the bus system, we can conclude that senior citizens must have a ________ for bus service than other passengers.

A) greater demand
B) lower demand
C) more elastic demand
D) less elastic demand

C) more elastic demand
The municipal swimming pool charges lower entrance fees to local residents than to nonresidents. Assuming that this pricing strategy increases the profits of the pool, we can conclude that nonresidents must have a ________ for swimming at the pool than residents.

A) greater demand
B) lower demand
C) more elastic demand
D) less elastic demand

D) less elastic demand
Which of the following is not an example of price discrimination?

A) College students receive a discount at the ice cream store when they show their
college ID cards.
B) Ladies receive free admission into a nightclub while men must pay a cover charge.
C) A country club requires members to pay annual dues, but members receive
discounted prices to golf.
D) Street vendors increase the price of umbrellas when it is raining.

D) Street vendors increase the price of umbrellas when it is raining.
In order to engage in price discrimination a firm must be:

A) a price-taker.
B) a price-setter.
C) able to identify consumers whose elasticities differ.
D) a price-setter and it must be able to identify consumers whose elasticities differ.

D) a price-setter and it must be able to identify consumers whose elasticities differ.
To practice effective price discrimination, a monopolist must be able to:

A) estimate its own production and cost functions.
B) avoid detection by government regulatory agencies.
C) prevent the resale of goods among groups of buyers.
D) calculate the utility level of each buyer in the market.

C) prevent the resale of goods among groups of buyers.
Many hotel chains offer discounts for senior citizens. This is an example of ________ that is ________ in the United States.

A) market power; illegal
B) single-price monopoly power; legal
C) price discrimination; illegal
D) price discrimination; legal

C) price discrimination; illegal
All of the following are examples of price discrimination except:

A) discounts for senior citizens at the movies.
B) discounts for families with young children at motels.
C) generally lower prices at Wal-Mart than at Target.
D) cheaper air fares if the traveler stays over a Saturday.

C) generally lower prices at Wal-Mart than at Target.
Because business travelers’ demands for airline flights is relatively ________, small increases in price will result in relatively ________ in additional business travelers.

A) price-inelastic; small decreases
B) price-elastic; large decreases
C) price-inelastic; large decreases
D) price-elastic; small decreases

A) price-inelastic; small decreases
Suppose the price elasticity of demand for coffee at the CoffeeBarn equals 1.71 for women and 0.55 for men. A successful price discrimination strategy would lead to:

A) lower prices for men and women.
B) lower prices for men and higher prices for women.
C) lower prices for men and higher prices for women, as long as the CoffeeBarn could prevent men from reselling drinks to women.
D) higher prices for men and lower prices for women, as long as the CoffeeBarn could prevent women from reselling drinks to men.

D) higher prices for men and lower prices for women, as long as the CoffeeBarn could prevent women from reselling drinks to men.
A Japanese steel firm sells steel in the United States and in Japan. Since the United States buys steel from a number of different sources, the U.S. demand for Japanese steel is more price-elastic than the Japanese demand for Japanese steel. If the Japanese steel firm wishes to maximize its profits it should:

A) charge the same price in both countries (after adjusting for transportation costs).
B) charge a higher price in the United States and a lower price in Japan; otherwise it
would be accused of unfair trade practices.
C) charge a lower price in the United States and a higher price in Japan.
D) figure out which market is more profitable and sell only in that market.

C) charge a lower price in the United States and a higher price in Japan.
Sadia wants to practice price discrimination in her bakery. Which of the following techniques should Sadia not use?

A) discounts for people who buy a large volume of bread
B) higher prices for people who buy on the day bread is baked and lower prices for
people who place advance orders
C) creating an annual fee for customers who want to shop at a discount in her store
D) charging all consumers the same price for freshly baked goods

D) charging all consumers the same price for freshly baked goods
A local community college charges lower tuition fees to local town residents than to nonresidents. This pricing strategy increases the profits of the community college. Using this information, we can conclude that nonresidents must have a ________ for attending the community college than residents.

A) less price-elastic demand
B) greater demand
C) lower demand
D) more price-elastic demand

A) less price-elastic demand
The main reason a monopoly engages in price discrimination is that:

A) it wants to discriminate against a particular ethnic group.
B) doing so increases its profits.
C) it wants to discourage potential competitors.
D) by charging a lower price to some people, it may succeed in discouraging efforts to regulate it.

B) doing so increases its profits.
Compared to a perfectly competitive industry, a monopolist:

a.produces a large quantity
b. charges a higher pice
c. increases consumer surplus
d. earns less profit in the long run

B. Charges a higher price
A perfectly competitive firm will incur an economic loss but will continue producing the profit-maximizing quantity of output in the short run if price is:

a. less than MC
b. less than AVC
c. greater than ATC
d. greater than AVC and less than ATC

D. greater than the AVC and less than ATC
Economic profits in a perfectly competitive industry induce _______ and losses induce _______

a. exit, entry
b. entry, entry
c. entry, exit
d. exit, exit

c. entry, exit
In long run equilibrium, economic profits in a perfectly competitive industry are:

a. positive
b. zero
c. negative
d. indeterminate

b. zero
The break even price for a perfectly competitive firm is equal to:

a. the minimum value of AVC
b. the MR, provided that MR is equal to MC
c. the AFC at the output level at which the firm is producing
d. the minimum value of ATC

d. the minimum value of ATC
Suppose that some firms in a perfectly competitive industry are earning positive economic profits. In the long run the:

a. industry is in long run equilibrium
b. industry supply curve will shift to the left
c. number of firm in the industry will not change
d. number of firms in the industry will increase

d. number of firms in the industry will increase
Which of the following statements is correct?

a. a firm should adjust prices so that customers with price inelastic demand pay lower prices than those with elastic demand
b. a firm should adjust prices so that customers with price inelastic demand pay higher prices than those with inelastic demand
c. a firm should adjust prices so that customers with price elastic demand pay lower prices than those with inelastic demand

c. a firm should adjust prices so that customers with price elastic demand pay lower prices than those with inelastic demand
In a perfectly competitive long run equilibrium:

a. all firms make positive economic profits
b. all firms produce at the minimum point of their average total cost curves
c. the industry supply curve must be upward sloping
d. all firms face the same price but the value of MC will very directly with firm size

b. all firms produce at the minimum point of their average total cost curves
The demand curve for a monopoly is:

a. above the marginal revenue curve
b. below the marginal revenue curve
c. horizontal due to economics of scale
d. infinitely elastic

a. above the marginal revenue curve
The practice of selling the same product at different prices in different markets, without corresponding differences in costs is:

a. price discrimination
b. privatizing
c. monopolizing
d. output prioritizing

a. price discrimination
One of the major differences between a monopolist and a purely competitive firm is that the monopolist has a ________ demand curve, while the purely competitive firm has a _______ demand curve

a. downward sloping, perfectly elastic
b. perfectly inelastic, perfectly elastic
c. downward sloping, perfectly inelastic
d. perfectly elastic, downward sloping

a. downward sloping, perfectly elastic
Wendy has a monopoly in the retailing of motor homes. She can sell five per week at 21,000 each. If she wants to sell six, she must charge $20,000 each. The price effect of selling the sixth motor home is:

a. 20,000
b. -15,000
c. -5,000
d. 25,000

c. -5,000
The marginal external cost of a good or activity equals the amount:

a. by which the marginal social benefit curve is higher than the demand curve
b. by which the marginal social cost curve is lower than the supply curve
c. by which the marginal social cost curve is higher than the supply curve
d. at which the marginal social benefit curve intersects the demand curve

c. by which the marginal social cost curve is higher than the supply curve
The restaurant industry is characterized by excess capacity. this means that:

a. restaurants are producing more than their profit maximizing level
b. the profit maximizing level is less than the level that minimizes average total costs
c. the restaurants are producing less than their profit maximizing level

b. the profit maximizing level is less than the level that minimizes average total costs
Antitrust policy refers to government:

a. attempts to prevent the acquisition of monopoly power
b. attempts to encourage the exercise of monopoly power
c. encouragement of collusion in the marketplace

a. attempts to prevent the acquisition of monopoly power
When a vaccination program generates a positive externality the:

a. market demand curve is above the marginal social benefit curve
b. market demand curve is below the marginal social benefit curve
c. the marginal cost of production is below the market demand curve

b. market demand curve is below the marginal social benefit curve
long run equilibrium in perfect competition and in monopolistic competition are similar because both firms:

a. produce at the minimum point of the average total cost curve
b. set price equal to marginal cost
c. make zero economic profits

c. make zero economic profits
When firms openly agree on price, output, and other decisions aimed at achieving monopoly profits, those firms are practicing:

a. overt collusion
b. tactic collusion
c. leadership price

a. overt collusion
In the classic prisoners’ dilemma with two accomplices in crime, the dominant strategy for each individual is to:

a. not confess
b. confess
c. confess only if the other confesses

b. confess
The difference between the marginal social cost curve and the marginal cost of production curve is the:

a. additional cost of producing an additional good
b. marginal external cost
c. producers supply curve

b. marginal external cost
The Orlando theme park industry tends to follow a price leadership model. this means:

a. each theme park sets its own price and operating hours independent of what other parks do
b. disney often sets a price and rival theme parks then follow with similar, if not identical prices
c. disney often sets prices only to be undercut by rival firms who prefer to engage in price wars

b. disney often sets a price and rival theme parks then follow with similar, if not identical prices
Which of the following would make it difficult for oligopolists to collude?

a. there are few firms in the market
b. there are few buyers in the market
c. the oligopolists have similar costs of production

b. there are few buyers in the market
Advertising is least likely to occur in which of the following market structures

a. monopoly
b. perfect competition
c. oligopoly

b. perfect competition
The first law designed to curb monopoly power in the UNited States was the ________ Act

a. Sherman Antitrust
b. Clayton
c. Federal Trade Commission

a. Sherman Antitrust
Oscar owns a meat processing plant that emits unpleasant odors that waft across the city. Because his production of processed meat provides a negative externality to the community the government should:

a. impose a tax on oscars production of processed meat because the market quantity is less than the socially optimal quantity.
b. impose a tax on oscars production of processed meat because the market quantity is greater than the socially optimal quantity
c. subsidize oscars production of processed meat because the market quantity is less than the socially optimal quantity

b. impose a tax on oscars production of processed meat because the market quantity is greater than the socially optimal quantity
Garys gas and franks fuel are the only two providers of gasoline in smalltown. gary and frank decide to form a cartel. later gary summarizes his pricing strategy as “ill cheat on the cartel because regardless of what frank does, cheating gives me the best payoff” this is an example of:

a. a dominate strategy
b. a tit for tat strategy
c. an irrational strategy

a. a dominate strategy
suppose the dry cleaning market is monopolistically competitive and economically profitable this year. in the long run the demand for any one firms dry cleaning services will ________ as more firms enter the industry causing profits to ________

a. decrease, become economic losses
b. decrease, fall to zero
c. not change, fall

b. decrease, fall to zero
In an oligopolistic market structure, collusion between firms usually leads to higher profits than noncooperative behavior. however, formal, overt collusion doesn’t usually occur in the United States because:

a. it is illegal
b. there is no incentive for each firm to cheat on a collusive agreement
c. an oligopolistic firm will typically prefer lower profits if the only way to make higher profits is to improve the profit posit position of its rivals.

c. an oligopolistic firm will typically prefer lower profits if the only way to make higher profits is to improve the profit posit position of its rivals.
Suppose the production of roses generates a positive externality in that travelers enjoy the scenic rural vistas. then an appropriate government policy yielding the efficient outcome would be a:

a. Pigouvian tax
b. Pigouvian subsidy
c. system of rose production permits

b. Pigouvian subsidy
If monopolistically competitive firms are earning positive economic profits in the short run, then in the long run:

a. firms will leave the industry
b. the demand curves faced by existing firms will move to the right
c. economic profits will increase

b. the demand curves faced by existing firms will move to the right
A duopoly is an industry that consists of:

A) a single firm.
B) two firms.
C) three or more firms.
D) a large number of small firms.

B two firms.
If the only two firms in an industry agree to fix the price at a given level, this is an example of:

A) collusion.
B) satisfying demand.
C) price extortion.
D) price leadership

A collusion.
An extreme case of oligopoly in which firms collude to raise joint profits is known as a:

A) duopoly.
B) cartel.
C) dominant producer.
D) price war.

B cartel.
Collusive agreements are typically difficult for cartels to maintain because each firm can increase profits by:

A) producing more output than the quantity that maximizes joint cartel profits.
B) producing less output than the quantity that maximizes joint cartel profits.
C) increasing the price above the price that maximizes joint cartel profits.
D) engaging in less advertising than the level of advertising that maximizes joint cartel
profits.

A) producing more output than the quantity that maximizes joint cartel profits.
Overt collusion exists if:

A) firms agree openly on price, output, and other decisions aimed at achieving
monopoly profits.
B) smaller firms in an industry tacitly agree to charge the same price as the largest firm.
C) competition among a large number of small firms generates a stable market price.
D) competition among a large number of small firms generates similar, but slightly
different, prices.

A) firms agree openly on price, output, and other decisions aimed at achieving monopoly profits.
In an oligopolistic market structure, collusion between firms usually leads to higher profits than noncooperative behavior. However, formal, overt collusion doesn’t usually occur in the United States because:

A) it is illegal.
B) there is an incentive for each firm to cheat on a collusive agreement.
C) an oligopolistic firm will typically prefer lower profits if the only way to make
higher profits is to improve the profit position of its rivals.
D) it is illegal and because there is an incentive for each firm to cheat on a collusive agreement.

D) it is illegal and because there is an incentive for each firm to cheat on a collusive agreement.
Game theory is commonly used to explain behavior in oligopolies, because oligopolies are characterized by:

A) large profits in the long run.
B) either homogeneous or heterogeneous products.
C) interdependence.
D) imperfect competition.

C) interdependence.
In the classic prisoners’ dilemma with two accomplices in crime, the Nash equilibrium is for:

A) both individuals to not confess.
B) both individuals to confess.
C) one to confess and the other not confess.
D) This game does not have a Nash equilibrium.

B) both individuals to confess.
An action is a dominant strategy when it is a player’s best action:

A) regardless of the actions by other players.
B) given certain profit-maximizing actions of other players.
C) assuming the other players do not correctly anticipate the action.
D) if there is only one other competitor.

A) regardless of the actions by other players.
Tacit collusion in practice is made more difficult to achieve:

A) the larger the number of firms in the industry.
B) the fewer the number of products being sold.
C) the more similar the marginal costs of each firm.
D) if customers have little or no bargaining power.

A) the larger the number of firms in the industry.
An analytical approach through which strategic choices can be assessed is called:

A) benefit-cost analysis.
B) econometric theory.
C) game theory.
D) monopolistic competition.

C) game theory.
An analytical framework used in the analysis of strategic choices is:

A) the tacit supply curve model.
B) game theory.
C) perfect competition.
D) risk assessment.

B) game theory.
OPEC is:

A) the Organization of Petroleum Exporting Countries.
B) an international cartel made up of oil-producing countries.
C) the cartel that was responsible for the large increases in crude oil prices in the
1970s.
D) described by all of these answer choices.

D) described by all of these answer choices.
If the only two firms in an industry openly agree to fix the price at a given level, then this is an example of:

A) overt collusion.
B) price leadership.
C) contestability.
D) tacit collusion.

A) overt collusion.
Attempts by the federal government to prevent the exercise of monopoly power in the United States are called ________ policy.

A) stabilization
B) antitrust
C) fiscal
D) government

B) antitrust
The Sherman Antitrust Act:

A) was aimed at preventing the creation of more monopolies and was the beginning of
antitrust policy.
B) introduced the HHI measure to industries.
C) initially allowed firms to collude legally.
D) allowed the creation of trusts.

A) was aimed at preventing the creation of more monopolies and was the beginning of
antitrust policy.
Microsoft sets prices for their new line of computers and Dell and HP follow. This practice is known as________.

A) antitrust pricing.
B) price extortion.
C) price leadership.
D) supply & demand behavior.

C) price leadership.
When most cars sold in the United States were produced by the Big Three auto companies, General Motors would announce its prices for the new model year first and then the other companies would match it. This practice was an example of:

A) price leadership.
B) noncooperative behavior.
C) a price war.
D) a cartel.

A) price leadership.
A situation in which one firm sets the price and other firms in the industry match it is known as:

A) a Nash equilibrium.
B) price leadership.
C) Cournot competition.
D) price competition.

B) price leadership.
Which of the following is most likely to be observed when firms engage mainly in non- price competition?

A) actively encouraging the sale of generic, as opposed to brand-name, products
B) advertising and product differentiation
C) discounts offered through coupons
D) low interest rates for financing the purchase of big-ticket items

B) advertising and product differentiation
In the long run, monopolistically competitive firms:

A) produce output at the level that minimizes average total cost.
B) set marginal revenue equal to price.
C) cannot earn an economic profit.
D) produce so that marginal cost equals price.

C) cannot earn an economic profit.
Monopolistically competitive firms have zero economic profits in the long run because of:

A) excess capacity.
B) price wars among firms.
C) easy entry and exit.
D) excessive advertising.

C) easy entry and exit.
In monopolistic competition:

A) firms advertise to increase demand for their product.
B) entry of new firms shifts the demand curve for existing firms to the right.
C) when some firms exit, the demand curve for the firms that remain in the industry
shifts to the left.
D) firms earn large economic profits in the long run.

A) firms advertise to increase demand for their product.
A monopolistically competitive industry shares some of the same characteristics as perfect competition, including:
A) many firms making economic profit in the long run.
B) easy entry and exit.
C) identical products.
D) easy entry and exit and identical products.
B) easy entry and exit.
The main characteristic that distinguishes monopolistic competition from perfect competition is:

A) easy entry and exit.
B) many firms.
C) differentiated products.
D) that in perfect competition, to maximize profits, a firm will produce where MR = MC.

C) differentiated products.
Monopolistic competition within an industry results in:

A) overutilization of plants.
B) chronic excess capacity.
C) less advertising than in perfect competition.
D) lower prices than in perfect competition

B) chronic excess capacity.
A monopolistically competitive firm has excess capacity in the long run. This means that it:

A) produces less than the output at which average total costs are minimized.
B) produces less than the output at which price and marginal cost are equal.
C) could produce more by moving to a larger plant size.
D) doesn’t maximize profits.

A) produces less than the output at which average total costs are minimized.
Monopolistic competition is different from perfect competition due to the fact that within monopolistic competition:

A) firms experience easy entry and exit.
B) there are many firms.
C) products are differentiated.
D) to maximize profits, a firm will produce where MR = MC.

C) products are differentiated.
In many cities you can stay at a Holiday Inn in the downtown area, in a suburban community, or near the airport. These Holiday Inn establishments are examples of product differentiation by:

A) type.
B) location.
C) quality.
D) style.

B) location.
Many customers will walk right past a diner that serves coffee and go to Starbucks and pay more for a cup of coffee. For these customers, cups of coffee are differentiated by:
A) style.
B) location.
C) quality.
D) type.
C) quality.
The sources of product differentiation do not include:

A) differences in location.
B) differences in quality.
C) the perception by consumers that products are different, even if they are physically
identical.
D) consumers’ value in uniformity.

D) consumers’ value in uniformity.
A monopolistic competitor is likely to engage in advertising to:

A) create a greater perception of product differentiation in the minds of potential
consumers.
B) shift the demand curve for its product rightward.
C) convey information about the product it is offering for sale.
D) All of these answer choices are correct.

D) All of these answer choices are correct.
For some economists, advertising is a waste of resources because:

A) rational consumers end up spending too little on brand names.
B) consumers might be irrational and buy things they do not need.
C) advertising creates excess capacity.
D) advertising leads to lower costs for goods and services.

B) consumers might be irrational and buy things they do not need.
Advertising is an economically productive activity and not a waste of resources because:

A) advertisements increase profits.
B) advertisements can convey information about the product.
C) in a situation in which consumers don’t have good information about a product, ads can serve as indirect signals about the provider.
D) advertisements can convey information about the product, and because in a
situation in which consumers don’t have good information about a product, ads can serve as indirect signals about the provider.

D) advertisements can convey information about the product, and because in a situation in which consumers don’t have good information about a product, ads can serve as indirect signals about the provider.
Which of the following is(are) true?

A) There is no role for advertising in perfect competition.
B) Firms in monopolistic competition and oligopoly use advertising in expectation of
increasing profit.
C) Advertising has costs but few, if any, benefits.
D) There is no role for advertising in perfect competition, and firms in monopolistic competition and oligopoly use advertising in expectation of increasing profit.

D) There is no role for advertising in perfect competition, and firms in monopolistic competition and oligopoly use advertising in expectation of increasing profit.
Critics of advertising argue that it:

A) tends to make markets more perfect.
B) leads to low-cost mass production.
C) results in higher prices to consumers.
D) encourages competition through new-product advertising.

C) results in higher prices to consumers.
An external benefit is a(n):

A) example of a negative externality.
B) benefit that accrues to domestic firms due to the actions of foreign (external) firms.
C) benefit that accrues to foreign (external) firms due to the actions of domestic firms.
D) benefit that individuals or firms confer on others without receiving compensation.

D) benefit that individuals or firms confer on others without receiving compensation.
Assume there are external benefits associated with the production of Good X. Without government regulation, the market will:

A) produce too much of Good X.
B) price Good X less than the marginal social cost.
C) price Good X less than the marginal social benefit.
D) price Good X greater than the marginal cost.

C) price Good X less than the marginal social benefit.
Consider the market for pigs and assume there is a marginal external cost associated with raising pigs. Without government regulation, at the market equilibrium price and quantity of pigs:

A) too few pigs will be raised.
B) the price will be less than the marginal social cost.
C) the price will be less than the marginal benefit.
D) the price will be less than the marginal cost to pig farmers.

B) the price will be less than the marginal social cost.
Consider the market for pigs and assume there is a marginal external cost associated with raising pigs. If the marginal external cost is $100 per pig and the government imposes a tax of $200 per pig, then at the equilibrium price and quantity of pigs:

A) too few pigs will be raised.
B) the price will be less than the marginal social cost.
C) the price will be less than the marginal social benefit.
D) the price will be less than the marginal cost to pig farmers.

A) too few pigs will be raised.
The difference between the marginal social benefit curve and the market demand curve is the:

A) additional cost of producing an additional good.
B) marginal external cost.
C) marginal benefit to the consumers of the good.
D) marginal external benefit.

D) marginal external benefit.
Which of the following is an example of an activity generating a positive externality?

A) You buy a new car and then find $5,000 in the door panel.
B) Your next-door neighbor mows the lawn at 6 A.M.
C) Your next-door neighbor installs a bat house and the bats eat mosquitoes.
D) Joe buys health insurance, but decides not to take the time to get a flu shot.

C) Your next-door neighbor installs a bat house and the bats eat mosquitoes.
A Pigouvian subsidy is:

A) designed to discourage activities generating externalities.
B) designed to encourage activities generating external benefits.
C) appropriate when the marginal social cost curve is above the marginal cost of
production curve.
D) appropriate when the marginal social cost curve and the marginal social benefit
curve intersect at an inefficient level.

B) designed to encourage activities generating external benefits.
When an activity like education generates a positive externality, the:

A) market demand curve is below the marginal social benefit curve.
B) market demand curve is above the marginal social benefit curve.
C) marginal cost of production is below the market demand curve.
D) market will produce more than the efficient level of output.

A) market demand curve is below the marginal social benefit curve.
One of the reasons community colleges receive government subsidies is that it is believed that education creates ________, and therefore without subsidies the quantity produced would be ________ the socially optimal quantity.

A) positive externalities; greater than
B) positive externalities; less than
C) negative externalities; greater than
D) no externalities; less than

B) positive externalities; less than
The marginal external cost of a good or activity equals the amount:

A) by which the marginal social benefit curve is higher than the demand curve.
B) by which the marginal social cost curve is lower than the supply curve.
C) by which the marginal social cost curve is higher than the supply curve.
D) at which the marginal social benefit curve intersects the demand curve.

C) by which the marginal social cost curve is higher than the supply curve.
If a good produces a positive externality and the government does not correct it, the equilibrium market quantity is ________ than the socially optimal quantity and the equilibrium market price is ________ than the socially optimal price.

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

B) lower; lower
When a vaccination program generates a positive externality, the:

A) market demand curve is above the marginal social benefit curve.
B) market demand curve is below the marginal social benefit curve.
C) marginal cost of production is below the market demand curve.
D) market will produce more than the efficient level of output.

B) market demand curve is below the marginal social benefit curve.
Which of the following is an example of a positive externality?

A) Sam dug a pond so he could go fishing, but the pond has contributed to an
explosion of mosquitoes in your neighborhood.
B) Sam has dozens of cats and they come into your yard to hunt the birds that come to
your bird bath.
C) Sam buys a dilapidated house, renovates it, and increases the property values of all houses in the neighborhood.
D) Liquid waste from Sam’s chicken farm flows into a neighbor’s well water.

C) Sam buys a dilapidated house, renovates it, and increases the property values of all houses in the neighborhood.
Which of the following is an example of a nonexcludable good?

A) health care
B) national defense
C) education
D) ice cream

B) national defense
For a good to be efficiently provided by a market economy, which of the following characteristics is essential?

A) It is rival in consumption.
B) It is excludable.
C) It is a common resource.
D) It is rival in consumption and it is excludable.

D) It is rival in consumption and it is excludable.
An individual is more likely to free ride when a good is:

A) private.
B) nonexcludable.
C) nonrival.
D) artificially scarce.

B) nonexcludable.
A(n) ________ is nonexcludable and nonrival in consumption.

A) private good
B) artificially scarce good
C) public good
D) common resource

C) public good
A public good is a good or service for which exclusion is:

A) possible and which is rival in consumption.
B) possible and which is nonrival in consumption.
C) not possible and which is rival in consumption.
D) not possible and which is nonrival in consumption.

D) not possible and which is nonrival in consumption.
Regardless of whether or not they pay for them, people cannot be excluded from receiving the benefits of:

A) private goods.
B) public goods.
C) common resources.
D) public goods and common resources.

D) public goods and common resources.
The best example of a public good is:

A) legal services.
B) national defense.
C) a municipal library.
D) cable television broadcasting.

B) national defense.
The best example of a common resource is:

A) public education.
B) a municipal library.
C) clean water.
D) cable television broadcasting.

C) clean water.
The tendency of people or firms to consume a public good without paying for it is the ________ problem.

A) free-cost
B) free-rider
C) free-goods
D) free-market

B) free-rider
When the market does not result in an efficient allocation of scarce resources, economists call this:

A) market dropout.
B) normative economics.
C) market disincentives.
D) market failure

D) market failure
If a good suffers from the free-rider problem and an inefficiently low level of production, the good must be a(n):

A) private good.
B) public good.
C) common resource.
D) artificially scarce good.

C) common resource.
If left to the free market, the amount of fire protection provided in a city would be ________ than it is now, and free-riders would pay ________ for fire protection.

A) greater; more
B) greater; nothing
C) lower; nothing
D) lower; a higher price

C) lower; nothing
Bluefin tuna travel in schools throughout the world’s oceans. Fishing boats from many nations harvest bluefin tuna as the schools migrate through their national waters. The schools of bluefin tuna are best described as:

A) a private good.
B) a public good.
C) an artificially scarce resource.
D) a common resource.

D) a common resource.
The tendency of people to avoid paying for a good’s benefits when the benefits can be obtained free is the:

A) free-cost problem.
B) free-rider problem.
C) free-goods problem.
D) free-market problem.

B) free-rider problem.
Which of the following is used to provide public goods?

A) voluntary contributions
B) taxes
C) self-interested business firms
D) voluntary contributions, taxes, and self-interested business firms

D) voluntary contributions, taxes, and self-interested business firms
A public good is ________ and ________ in consumption.

A) excludable; rival
B) nonexcludable; nonrival
C) excludable; nonrival
D) nonexcludable; rival

B) nonexcludable; nonrival
A characteristic of public goods is that:

A) people pay for them in proportion to the benefits received.
B) the costs of producing them are less than if they were private goods.
C) their benefits cannot be withheld from anyone, regardless of whether the person
pays for them.
D) they are produced only by the public sector, not by the private sector.

C) their benefits cannot be withheld from anyone, regardless of whether the person
pays for them.
A key element that a public good displays is:

A) over production.
B) rival consumption.
C) payment through charitable contributions.
D) nonexclusion.

D) nonexclusion.
Which of the following is an example of a common resource?

A) a public beach with free access
B) seats on an airplane
C) a highway to which access is granted only to those who pay a specified toll
D) a city sewer system

A) a public beach with free access

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