Managerial Economics, 7e (Keat)
Chapter 8 Pricing and Output Decisions: Perfect Competition and Monopoly (Appendices
8A and 8B)
Multiple-Choice Questions
1) Which of the following markets comes closes to the model of perfect competition?
A) automobile industry
B) information technology industry
C) aerospace industry
D) agriculture
2) A feature of perfect competition is
A) use of non-price competition by firms.
B) mutual interdependence among firms.
C) unique products.
D) standardized products.
3) Which is a required characteristic of a perfectly competitive industry?
A) There are few firms so that none can influence market price.
B) Products are highly differentiated.
C) Barriers to entry are high.
D) None of the above
4) Which of the following characteristics is most important in differentiating between perfect
competition and all other types of markets?
A) whether or not the product is standardized
B) whether or not there is complete market information about price
C) whether or not firms are price takers
D) All of the above are equally important.
5) Demand facing an individual, perfectly competitive firm is
A) perfectly inelastic at the quantity the firm chooses to produce.
B) perfectly inelastic at the quantity determined by market forces.
C) perfectly elastic at the price the firm chooses to charge.
D) perfectly elastic at the price determined by market forces.
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6) In perfect competition
A) the firm’s demand curve is relatively elastic.
B) the firm’s demand curve is relatively inelastic.
C) the firm’s demand curve is perfectly elastic.
D) the firm’s demand curve is perfectly inelastic.
7) For a demand curve that is horizontal, the marginal revenue curve
A) will be to the right of the demand curve and half as steep.
B) will be to the left of the demand curve and half as steep.
C) will be to the right of the demand curve and twice as steep.
D) will be the same as the demand curve.
8) According to the shutdown rule, a firm should produce no output in the short run if
A) price is below minimum average total cost.
B) price is above minimum average total cost.
C) total revenues are lower than total fixed costs.
D) price is below minimum average variable costs.
9) Which of the following conditions would definitely cause a perfectly competitive company to
shut down in the short run?
A) P < MC
B) P = MC < AC
C) P < AVC
D) P = MR
10) A normal profit is
A) revenues minus opportunity cost of zero.
B) revenues minus accounting cost of zero.
C) a zero accounting profit.
D) revenues minus accounting and opportunity cost of zero.
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11) In economic analysis, any amount of profit earned above zero is considered “above normal”
because
A) normally firms are supposed to earn zero profit.
B) this would indicate that the firm’s revenue exceeded both its accounting and opportunity cost.
C) this would indicate that the firm was at least earning a profit equal to its opportunity cost.
D) this would indicate that the firm’s revenue exceeded its accounting cost.
12) If a perfectly competitive firm incurs an economic loss, it should
A) shut down immediately.
B) try to raise its price.
C) shut down in the long run.
D) shut down if this loss exceeds fixed cost.
13) A perfectly competitive firm sells 15 units of output at the going market price of $10.
Suppose its average fixed cost is $15 and its average variable cost is $8. Its contribution margin
(i.e., contribution to fixed cost) is
A) $30.
B) $150.
C) $105.
D) Cannot be determined from the above information
14) Mars Inc. produces 100,000 boxes of Snickers bars which sell for $4 a box. If variable costs
are $3 per box, and it has $150,000 fixed operating costs, in the short run, it should
A) shut down as fixed costs are not being covered.
B) keep producing as profits are $50,000.
C) keep producing as variable costs are being met.
D) keep producing as total costs are being recovered.
15) In perfect competition, if firms enter the market in the long run
A) total supply will increase causing market price to increase.
B) total supply will decrease causing market price to decrease.
C) total supply will decrease causing market price to increase.
D) total supply will increase causing market price to decrease.
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16) In long-run equilibrium a perfectly competitive firm will operate where the price is
A) greater than MR but equal to MC and minimum ATC.
B) greater than MR and MC, but equal to minimum ATC.
C) greater than MC and minimum ATC, but equal to MR.
D) equal to MR, MC and minimum to ATC.
17) The principle marginal revenue equal-marginal-cost rule for maximizing profit
A) does not apply to firms in the monopoly or oligopolistic industries.
B) applies only for firm in perfect competition but not in monopolistic competition.
C) applies to new firms but not to existing firms in an industry.
D) applies to all the firms in all industries.
18) Assume a profit maximizing firm’s short-run cost is TC = 700 + 60Q. If its demand curve is P
= 300 – 15Q, what should it do in the short run?
A) shut down
B) continue operating in the short run even though it is losing money
C) continue operating because it is earning an economic profit
D) Cannot be determined from the above information
19) Assume a perfectly competitive firm’s short-run cost is TC = 100 + 160Q + 3Q2. If the
market price is $196, what should it do?
A) produce 5 units and continue operating
B) produce 6 units and continue operating
C) produce zero units (i.e., shut down)
D) Cannot be determined from the above information
20) Which of the following is false?
A) A monopolist will sell less at a higher price.
B) A monopolist has a marginal revenue that is less than the price.
C) A monopolist will produce where MR = MC.
D) A monopolist is a price taker.
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21) A monopolist sells 100 units at $10 per unit and 90 units at $15 per unit. The marginal
revenue from the tenth unit is
A) $1000.
B) $1350.
C) $100.
D) $350.
22) For a linear demand curve that is downward sloping, the marginal revenue curve
A) will be to the left of the demand curve and twice as steep.
B) will be to the right of the demand curve and twice as steep.
C) will be to the left of the demand curve and half as steep.
D) will be the same as the demand curve.
23) If an industry could be organized either perfectly competitively or as monopoly, a monopoly
would
A) produce less output.
B) produce where P > MC.
C) charge higher prices.
D) All of the above
24) Which of the following correctly completes this statement? The monopolist’s marginal
revenue
A) will be greater than price.
B) will be less than price.
C) will be equal to price.
D) will be greater than total revenues.
25) At the point at which P=MC, suppose that a perfectly competitive firm’s MC = $100, its AVC
= $80 and its AC = $110. This firm should
A) shut down immediately.
B) continue operating in the short run.
C) try to take advantage of economies of scale.
D) try to increase its advertising and promotion.
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26) When a firm produces at the point where MR = MC, the profit that it is earning is considered
to be
A) maximum.
B) normal.
C) above normal.
D) Not enough information is provided.
27) When a firm has the power to establish its price
A) P = MR.
B) P = MC.
C) P > MR.
D) P < MR.
28) When MR = MC
A) marginal profit is maximized.
B) total profit is maximized.
C) marginal profit is positive.
D) total profit is zero.
29) In the short run, which of the following would indicate that a perfectly competitive firm is
producing an output for which it is receiving a normal profit?
A) P > AC
B) AVC < P < AC
C) P = AC
D) P = AVC
30) A firm that seeks to maximize its revenue is most likely to adhere to which of the following?
A) MR = MC
B) MR = 0
C) MR = P
D) MR < MC
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