Test Bank Chapter 10
Chapter 10—Prices, Output, and Strategy: Pure and Monopolistic Competition
MULTIPLE CHOICE
1. The main difference between perfect competition and monopolistic competition is:
a. The number of sellers in the market
b. The ease of entry and exit in the industry
c. The degree of information about market price
d. The degree of product differentiation
e. Whether it is the short run or the long run
2. Long distance telephone service has become a competitive market. The average cost per call is $0.05 a
minute, and it’s declining. The likely reason for the declining price for long distance service is:
a. Governmental pressure to lower the price
b. Reduced demand for long distance service
c. Entry into this industry pushes prices down
d. Lower price for a barrel of crude oil
e. Increased cost of providing long distance service
3. What is the profit maximization point for a firm in a purely competitive environment?
a. The output where P = MC
b. The output where P < MC
c. The output where P > MC
d. The output where MR = MC
e. The output where AVC < P
4. All of the following are true for both competition and monopolistic competition in the long run, except
one of them. Which is it?
a. P = MC
b. P = AC
c. Economic profits become zero in the long-run
d. The barriers to entry and exit are relatively easy
e. None of the above is an exception
5. Which of the following statements is (are) true concerning a pure competition situation?
a.
Its demand curve is represented by a vertical line.
b.
Firms must sell at or below market price.
c.
Marginal revenue is equal to price.
d.
both b and c
e.
both a and b
6. In pure competition:
a.
the optimal price-output solution occurs at the point where marginal revenue is equal to
price
b.
a firm’s demand curve is represented by a horizontal line
c.
a firm is a price-taker since the products of every producer are perfect substitutes for the
products of every other producer
d.
a and b only
e.
a, b, and c
7. In the short-run for a purely competitive market, a manufacturer will stop production when:
a.
the total revenue is less than total costs
b.
the contribution to fixed costs is zero or less
c.
the price is greater than AVC
d.
operating at a loss
e.
a and b
8. In the purely competitive case, marginal revenue (MR) is equal to:
a.
cost
b.
profit
c.
price
d.
total revenue
e.
none of the above
9. In long-run equilibrium, all firms in a pure competition market situation operating under a condition of
certainty will have identical costs even though they may use different production and operation
techniques.
a.
true
b.
false
10. If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will
____, and price will be driven ____.
a.
more; decrease; down
b.
more; decrease; up
c.
more; increase; down
d.
more; increase; up
e.
none of the above
11. A firm in pure competition would shut down when:
a.
price is less than average total cost
b.
price is less than average fixed cost
c.
price is less than marginal cost
d.
price is less than average variable cost
12. In the long-run, firms in a monopolistically competitive industry will
a.
earn substantial economic profits
b.
tend to just cover costs, including normal profits
c.
seek to increase the scale of operations
d.
seek to reduce the scale of operations
13. Uncertainty includes all of the following except ____.
a.
unknown effects of deliberate actions
b.
incomplete information as to the type of competitor
c.
random disturbances
d.
unverifiable claims
e.
accidents due to weather hazards
14. Experience goods are products or services
a.
that the customer already knows
b.
whose performance is highly unusual
c.
whose quality is undetectable when purchased
d.
not likely to cause repeat purchases
e.
all of the above
15. Buyers anticipate that the temporary warehouse seller of unbranded computer equipment will
a.
deliver high quality products consistent with expectations
b.
not attempt to establish any warranty enforcement mechanisms
c.
offer several prices and qualities
d.
produce only one quality
e.
none of the above
16. All of the following are mechanisms which reduce the adverse selection problem except ____.
a.
warranties from established enterprises with non-redeployable assets
b.
high interest rates
c.
large collateral requirements
d.
brand names and product-specific promotions and retail displays
e.
higher prices in repeat customer transactions
17. Asset specificity is largest when
a.
value in first best use is large
b.
value in second best use is large
c.
customers choose their supplier at random
d.
very valuable assets are non-redeployable
e.
customers are loyal to a particular seller
18. Under asymmetric information,
a.
you never get what you pay for
b.
you sometimes get cheated
c.
you always get cheated
d.
at best you get what you pay for
e.
sellers make profits in excess of competitive returns
19. To escape adverse selection and elicit high quality experience goods buyers can
a.
offer price premiums to new firms in the market
b.
seek out unbranded goods
c.
buy from generic storefronts that have leased temporary space
d.
secure warranties from warehouse retailers
e.
none of the above
20. The problems of asymmetric information exchange arise ultimately because
a.
one party to the exchange possesses different information than another
b.
one party has more information than another
c.
one party knows nothing
d.
one party cannot independently verify the information of another
e.
information is scarce
21. The market for “lemons” is one in which
a.
the rational buyer discounts
b.
the seller’s product claims are unverifiable at the point of purchase
c.
“the bad apples drive out the good”
d.
the problem of adverse selection is rampant
e.
all of the above
22. The fraudulent delivery of low quality experience goods at high prices is more likely if
a.
interest rates decline
b.
information about notorious firms is speedily disseminated
c.
price premiums for allegedly high quality increase
d.
sellers invest in non-transferable reputation
e.
none of the above
23. An “experience good” is one that:
a. Only an expert can use
b. Has undetectable quality when purchased
c. Can be readily experienced simply by touching or tasting
d. Improves with age, like a fine wine
e. All of the above
24. A “search good” is:
a. One that depends on how the product behaves over time
b. A product whose quality is only found out over time by finding how durable it is
c. Like a peach that can be examined for flaws
d. Like a used car, since it is easy to determine its inherent quality
e. None of the above
25. The price for used cars is well below the price of new cars of the same general quality. This is an
example of:
a. The Degree of Operating Leverage
b. A Lemon’s Market
c. Redeployment Assets
d. Cyclical Competition
e. The Unemployment Rate
PROBLEMS
1. Sunrise Juice Company sells its output in a perfectly competitive market. The firm’s total cost function
is given in the following schedule:
Output
Total Cost
(Units)
($)
0
50
10
120
20
170
30
210
40
260
50
330
60
430
Total costs include a “normal” return on the time (labor services) and capital that the owner has
invested in the firm. The prevailing market price is $7 per unit.
Prepare (i) marginal cost and (ii) average total cost schedules for the firm.
What is the firm’s profit maximizing output level?
Is the industry in long-run equilibrium? Justify your answer.
50
120
170
210
260
330
Profit-maximizing output level (Q*) occurs where MR = MC
Industry is not in long-run equilibrium since MC = MR = P > ATC (i.e., above “normal”
2. Superior Metals Company has seen its sales volume decline over the last few years as the result of
rising foreign imports. In order to increase sales (and hopefully, profits), the firm is considering a price
reduction on luranium—a metal that it produces and sells. The firm currently sells 60,000 pounds of
luranium a year at an average price of $10 per pound. Fixed costs of producing luranium are $250,000.
Current variable costs per pound are $5. The firm has determined that the variable cost per pound
could be reduced by $.50 if production volume could be increased by 10 percent (fixed costs would
remain constant). The firm’s marketing department has estimated the arc elasticity of demand for
luranium to be −1.5.
How much would Superior Metals have to reduce the price of luranium in order to
achieve a 10 percent increase in the quantity sold?
What would the firm’s (i) total revenue, (ii) total cost, and (iii) total profit be before and
after the price cut?