Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Economists agree that a monopolistically competitive market structure
1)
A)
can eliminate any excess capacity if all firms in the industry devote more funds to
differentiating their products.
B)
benefits consumers because firms produce products that appeal to a wide range of consumer
tastes.
C)
lowers consumers’ utility because consumers pay a price higher than the marginal cost of
production.
D)
is detrimental to society because it leads to a waste of scarce resources.
2)
Refer to Figure 10–5. What is the profit–maximizing price?
2)
A)
P4
B)
P3
C)
P2
D)
P1
3)
A dominant strategy
3)
A)
involves deciding what to do after all rivals have chosen their own strategies.
B)
involves colluding with rivals to maximize joint profits.
C)
is one that is the best for a firm, no matter what strategies other firms use.
D)
is one that a firm is forced into following by government policy.
4)
In 1984 when Apple Computer introduced the Macintosh it was able to sell the product at a hefty
premium while comparable personal computers were priced at less than half the price of a
Macintosh. Despite its much higher price, Apple was able to achieve a 15 percent market share.
Which of the following contributed to Apple’s initial success?
4)
A)
Apple had successfully introduced a personal computer that was strongly differentiated from
its competitors.
B)
Apple used superior materials to produce the Macintosh; this justified the higher price.
C)
Apple spent heavily on advertising to inform consumers about its product.
D)
Apple was catering to a small segment of the market in which demand was relatively
inelastic.
5)
One reason why the coffeehouse market is competitive is that
5)
A)
it is trendy and therefore is likely to have a customer following.
B)
demand for specialty coffee is very high.
C)
barriers to entry are low.
D)
consumption takes place in public.
6)
For allocative efficiency to hold
6)
A)
average variable cost must minimized.
B)
average total cost must be minimized.
C)
price must equal marginal revenue of the last unit sold.
D)
firms must charge a price equal to marginal cost.
7)
At the peak of its success in the mid–1980s to the early 1990s, Apple Computer had a 15 percent
share of the personal computer market. In 2007 Apple’s share of the growing personal computer
market was estimated at 6 percent. During this period what happened to Apple’s demand curve?
7)
A)
The demand curve shifted to the right and became less elastic.
B)
The demand curve shifted to the left and became less elastic.
C)
The demand curve stagnated which is why Apple lost market share.
D)
The demand curve shifted to the left and became more elastic.
8)
A game in which each player adopts its dominant strategy
8)
A)
will not lead to an equilibrium.
B)
can never result in a Nash equilibrium.
C)
could result in a Nash equilibrium.
D)
must be a cooperative game.
Table 10–1
Quantity Price
(Dollars)
Total Revenue
(Dollars)
1$7.50 $7.50
27.00 14.00
36.50 19.50
46.00 24.00
55.50 27.50
65.00 30.00
9)
Refer to Table 10–1. The table shows
9)
A)
an inelastic segment of the demand curve.
B)
a demand curve with an elastic segment of the demand curve from $7.50 to $6.50 followed by
an inelastic segment.
C)
a demand curve with an inelastic segment of the demand curve from $7.50 to $6.50 followed
by an elastic segment.
D)
an elastic segment of the demand curve.
Table 10–2
Quantity
(Cases)
Price
(Dollars)
Total Revenue
(Dollars)
Total Cost
(Dollars)
1$75 $75 $60
270 140 85
365 195 105
460 240 115
555 275 130
650 300 155
745 315 190
840 320 230
935 315 280
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 10–2 shows the firm’s
demand and cost schedules.
10)
Refer to Table 10–2. What is the output (Q) that maximizes profit and what is the price (P)
charged?
10)
A)
P=$55; Q=5 cases
B)
P=$50; Q=6 cases
C)
P=$45; Q=7 cases
D)
P=$40; Q=8 cases
11)
Suppose a monopolistically competitive firm sells 25 units at a price of $10. What is the firm’s
marginal revenue if it sells 5 more units of output when it reduces its price to $9?
11)
A)
$2.50
B)
$270.
C)
$20.
D)
$4.
Figure 10–2
12)
Refer to Figure 10–2. The marginal revenue from selling the Qbinstead of Qa equals
12)
A)
the area G.
B)
the area (H–E).
C)
the area (G+H).
D)
the area (E+F) – (G+H).
13)
A monopolistically competitive firm maximizes profit where
13)
A)
price > marginal cost.
B)
total revenue > marginal cost.
C)
price = marginal revenue.
D)
marginal revenue > average revenue.
14)
The economic analysis of monopolistic competition shows that market forces will eliminate profits
in the long run. In reality, it is possible for some firms to continue to reap profits in the long run.
The textbook cites the example of L’Oréal, the world’s largest cosmetics and beauty products firm
as one that has experienced substantial profits even in the long run. Which of the following
strategies has contributed to L’Oréal’s success?
14)
A)
focusing only on wealthy markets such as those the United States and Europe
B)
developing new products or improving existing products to cater to changing consumer
tastes
C)
making its products similar to those of its competitors
D)
advertising heavily with celebrity endorsements
Table 10–5
15)
Refer to Table 10–5. If Coke produces a low quantity (Q), what is Pepsi’s best response?
15)
A)
Produce a high quantity and earn a profit of $20 million.
B)
Produce a low quantity and earn a profit of $20 million.
C)
Produce a low quantity earn a profit of $25 million.
D)
Produce a high quantity and earn a profit of $25 million.
Figure 10–3
Figure 10–3 shows short run cost and demand curves for a monopolistically competitive firm in the market for designer
watches.
16)
Refer to Figure 10–3. If the firm represented in the diagram is currently producing and selling Qa
units, what is the price charged?
16)
A)
P0
B)
P1
C)
P2
D)
P3
17)
If the demand curve for a firm is downward–sloping its marginal revenue curve
17)
A)
will lie below the demand curve.
B)
is horizontal.
C)
will lie above the demand curve.
D)
is coincident with the demand curve.
A
18)
A cooperative equilibrium results when firms
18)
A)
choose the strategy that maximizes the total game payoff.
B)
choose the best strategy regardless of what other players do.
C)
choose the strategy that minimizes the payoff to other players.
D)
choose a strategy by random chance.
A
C
19)
In theory, monopolistically competitive firms earn zero profits in the long run. In reality there are
ways a firm can continue to earn profits in the long run. One way a firm can continue to earn
profits is to
19)
A)
lower the prices of its products to expand its market share.
B)
identify new markets and develop products precisely for those markets.
C)
find a market niche and keep it as narrow as possible so as to prevent other producers from
entering this market segment.
D)
gradually increase the mark–up on the goods produced.
20)
Refer to Figure 10–5. If the diagram represents a typical firm in a monopolistically competitive
market, what is likely to happen in the long run?
20)
A)
Some firms will exit the market causing the demand to increase for firms remaining in the
market.
B)
Inefficient firms will exit the market and be replaced by new, smaller firms.
C)
New firms will enter the market causing the demand to decrease for existing firms.
D)
Competition will intensify as firms strive to make long–run profits.
21)
All of the following are examples of oligopolistic markets except
21)
A)
aircraft.
B)
college bookstores.
C)
beer.
D)
seafood restaurant chains.
22)
Which of the following is not necessarily a consequence of occupational licensing laws?
22)
A)
The laws result in higher quality service.
B)
The laws ensure that licensed professionals meet some minimum qualifications.
C)
Consumers pay higher prices for the services of licensed professions.
D)
The laws restrict competition.
23)
One reason why, in the last four decades, the number of new auto makers in the world has been
very small is that
23)
A)
new auto makers cannot obtain necessary inputs to produce new cars.
B)
governments restrict who can produce automobiles.
C)
the automobile cannot be improved upon in any way by new producers.
D)
new producers cannot match the economies of scale of existing auto makers.
24)
At the peak of its success in the mid–1980s to the early 1990s, Apple Computer had a 15 percent
share of the personal computer market. In 2007 Apple’s share of the growing personal computer
market was estimated at 6 percent. Which of the following best accounts for this decline in market
share?
24)
A)
Apple was not able to keep up with technological advancements in the personal computer
market.
B)
The entry of rivals eliminated Apple’s product differentiation.
C)
Rivals engaged in predatory pricing but Apple was not willing to engage in a price war.
D)
The entry of rivals revealed that Apple was producing sub–standard computers.
Table 10–1
Quantity Price
(Dollars)
Total Revenue
(Dollars)
1$7.50 $7.50
27.00 14.00
36.50 19.50
46.00 24.00
55.50 27.50
65.00 30.00
25)
Refer to Table 10–1. What portion of the marginal revenue of the 5th unit is due to the output effect
and what portion is due to the price effect?
25)
A)
Output effect = $1.50; Price effect = $2.00
B)
Output effect = $4.00; Price effect = – $0.50
C)
Output effect = $5.50; Price effect = – $2.00
D)
Output effect = $3.00; Price effect = $0.50
26)
Assuming that the total market size remains constant, a monopolistically competitive firm earning
profits in the short run will find the demand for its product decreasing in the long run because
26)
A)
its costs of production will rise.
B)
new entrants into the market are more likely to have cutting edge products.
C)
as the firm raises its price it will lose some customers to new entrants into the market.
D)
some of its customers will switch to purchasing the products of new entrants into the market.
Figure 10–8
27)
Refer to Figure 10–8. What is the productively efficient output for the firm represented in the
diagram?
27)
A)
Q1 units
B)
Q2units
C)
Q3 units
D)
Q4 units
28)
A monopolistically competitive firm faces a downward–sloping demand curve because
28)
A)
of product differentiation.
B)
there are few substitutes for its product.
C)
its market decisions are affected by the decisions of its rivals.
D)
it is able to control price and quantity demanded.
29)
Which of the following statements about marginal revenue is true?
29)
A)
If marginal revenue is zero it means that quantity demanded falls to zero when a firm
changes its price.
B)
If marginal revenue is positive the additional revenue received from selling 1 more unit of a
good is smaller than the revenue lost from receiving a lower price on all the units that could
have been sold at the original price.
C)
Marginal revenue increases as price falls and quantity sold increases.
D)
If marginal revenue is negative the additional revenue received from selling 1 more unit of a
good is smaller than the revenue lost from receiving a lower price on all the units that could
have been sold at the original price.
Table 10–3
Quantity Price
(Dollars)
Total Revenue
(Dollars)
Total Variable
Cost
(Dollars)
Total Cost
(Dollars)
0$22 $0 $0 $50
120 20 16 66
219 38 31 81
318 54 45 95
417 68 59 109
516 80 75 125
615 90 93 143
714 98 112 162
813 104 140 190
912 108 180 230
10 11 110 230 280
Table 10–3 shows the firm’s demand and cost schedules for a firm in monopolistic competition.
30)
Refer to Table 10–3. What is its average variable cost of production at its optimal output level?
30)
A)
$0 (because its optimal output =0)
B)
$15
C)
$14.75
D)
$29
Figure 10–3
Figure 10–3 shows short run cost and demand curves for a monopolistically competitive firm in the market for designer
watches.
31)
Refer to Figure 10–3. Should the firm represented in the diagram continue to stay in business
despite its losses?
31)
A)
Yes, its total revenue covers its variable cost.
B)
Yes, it should increase its revenue by raising its price.
C)
No, it should shut down.
D)
No, it is not able to cover its fixed cost.
32)
OPEC periodically meets to agree to restrict the cartel’s oil output, and yet almost every member of
OPEC produces more than its own output quota. This suggests that OPEC has
32)
A)
new potential entrants.
B)
a cooperative equilibrium.
C)
a threat of substitute goods.
D)
a noncooperative equilibrium.
33)
Which of the following is true for a firm with a downward–sloping demand curve for its product?
33)
A)
Price equals average revenue but is greater than marginal revenue.
B)
Price, average revenue, and marginal revenue are all equal.
C)
Price equals average revenue but is less than marginal revenue.
D)
Price, average revenue, and marginal revenue are all different.
34)
A Nash equilibrium is
34)
A)
reached when each player choose the best strategy for himself and for the group.
B)
reached when an oligopoly’s market demand and supply curves intersect.
C)
reached when each player chooses the best strategy for himself, given the strategies chosen by
the other players in the group.
D)
an equilibrium comprising non–dominant strategies only.
35)
What is the profit–maximizing rule for a monopolistically competitive firm?
35)
A)
to produce a quantity that maximizes market share
B)
to produce a quantity such that marginal revenue equals marginal cost
C)
to produce a quantity that maximizes total revenue
D)
to produce a quantity such that price equals marginal cost
36)
A monopolistically competitive industry that earns economic profits in the short run will
36)
A)
experience a rise in demand in the long run.
B)
experience the exit of old firms out of the industry in the long run.
C)
experience the entry of new rival firms into the industry in the long run.
D)
continue to earn economic profits in the long run.
37)
Is a monopolistically competitive firm productively efficient?
37)
A)
Yes, because it produces where marginal cost equals marginal revenue.
B)
No, because price is greater than marginal cost.
C)
Yes, because price equals average total costs.
D)
No, because it does not produce at minimum average total cost.
38)
Which of the following firms does not operate in a monopolistically competitive market?
38)
A)
makers of women’s clothing
B)
automobile producers
C)
video stores
D)
supermarkets
Figure 10–8
39)
Refer to Figure 10–8. What is the allocatively efficient output for the firm represented in the
diagram?
39)
A)
Q1 units
B)
Q2 units
C)
Q3 units
D)
Q4 units
40)
Which of the following is not a characteristic of long–run equilibrium in a monopolistically
competitive market?
40)
A)
Price equals average total cost.
B)
Price is greater than marginal cost.
C)
Production is at minimum average total cost.
D)
Marginal revenue equals marginal cost.
Figure 10–3
Figure 10–3 shows short run cost and demand curves for a monopolistically competitive firm in the market for designer
watches.
41)
Refer to Figure 10–3. What area represents the total revenue made by the firm?
41)
A)
0P1bQa
B)
0P2cQa
C)
0P0aQa
D)
0P3dQa
42)
What type of demand curve does a monopolistically competitive firm face?
42)
A)
vertical
B)
horizontal
C)
upward–sloping
D)
downward–sloping
43)
Which of the following is the best example of an oligopolistic industry?
43)
A)
public education
B)
the beauty products industry
C)
the pharmaceutical industry
D)
the beef market
Figure 10–6
44)
Refer to Figure 10–6. The monopolistically competitive firm represented in the diagram
44)
A)
makes zero accounting profit.
B)
should exit the industry.
C)
should expand its output to take advantage of economies of scale.
D)
makes zero economic profit.
D
45)
A four–firm concentration ratio measures
45)
A)
how the four largest firms became so concentrated.
B)
the fraction of an industry’s sales accounted for by the four largest firms.
C)
the fraction of employment of the four largest firms in an industry.
D)
the production of any four firms in an industry.
B
C
46)
You are planning to open a new Italian restaurant in your hometown where there are three other
Italian restaurants. You plan to distinguish your restaurant from your competitors by offering
northern Italian cuisine and using locally grown organic produce. What is likely to happen in the
restaurant market in your hometown after you open?
46)
A)
The demand curve facing each restaurant owner shifts to the right.
B)
While the demand curves facing your competitors becomes more elastic, your demand curve
will be inelastic.
C)
The demand curve facing each restaurant owner becomes more elastic.
D)
Your competitors are likely to change their menus to make their products similar to yours.
Figure 10–5
47)
Refer to Figure 10–5. Assume that the firm maximizes its profit. What area represents this profit?
47)
A)
P4edP2
B)
P3baP2
C)
Profit = 0
D)
P4eaP1
A
48)
In the long run what happens to the demand curve facing a monopolistically competitive firm that
is earning short–run profits?
48)
A)
The demand curve will shift to the right and become less elastic.
B)
The demand curve will shift to the right and become more elastic.
C)
The demand curve will shift to the left and become less elastic.
D)
The demand curve will shift to the left and become more elastic.
D
C
49)
A monopolistically competitive firm will
49)
A)
produce an output level that is productively and allocatively efficient.
B)
always produce at the minimum efficient scale of production.
C)
charge the same price as its competitors do.
D)
have some control over its price because its product is differentiated.
50)
Is a monopolistically competitive firm allocatively efficient?
50)
A)
Yes, because price equals average total costs.
B)
Yes, because it produces where marginal cost equals marginal revenue.
C)
No, because price is greater than marginal cost.
D)
No, because it does not produce at minimum average total cost.
C
51)
If a firm has excess capacity this means
51)
A)
that the firm’s long–run average cost of producing a given quantity exceeds its short–run cost
of producing that same quantity.
B)
that the firm expends too much of its resources on advertising without seeing an increase in
sales.
C)
that the firm does not produce at the minimum point of it average total cost curve.
D)
that the firm’s quantity supplied exceeds its quantity demanded.
C
52)
A cartel is
52)
A)
a group of firms that collude by agreeing to restrict output to increase prices and profits.
B)
a temporary storage facility for automobiles.
C)
a group of firms that collectively regulate a competitive industry.
D)
a group of firms that enter into an informal agreement to fix prices to maximize joint profits.
A
D
Table 10–3
Quantity Price
(Dollars)
Total Revenue
(Dollars)
Total Variable
Cost
(Dollars)
Total Cost
(Dollars)
0$22 $0 $0 $50
120 20 16 66
219 38 31 81
318 54 45 95
417 68 59 109
516 80 75 125
615 90 93 143
714 98 112 162
813 104 140 190
912 108 180 230
10 11 110 230 280
Table 10–3 shows the firm’s demand and cost schedules for a firm in monopolistic competition.
53)
Refer to Table 10–3. What is the profit–maximizing/loss–minimizing output level(Q) and what is
the output price (P)?
53)
A)
Q=0 (firm should not produce)
B)
Q=3; P=$18
C)
Q=4; P=$17
D)
Q=5; P=$16
54)
Why do most firms in monopolistic competition typically make zero economic profit in the long
run?
54)
A)
because the total market is not large enough to accommodate so many firms
B)
because firms do not produce at their minimum efficient scale
C)
because firms produce differentiated products
D)
there are no barriers to the entry
D
C