Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 7: Price Searching: The Firm with Market Power
1) Which of the following is not an example of a price searcher?
A) the neighborhood bakery
B) the local phone company
C) the corner gas station
D) a Kansas wheat farmer
E) a commercial airline
2) Which of the following is least likely to be a price searcher?
A) a motel on an interstate highway
B) an Iowa hog producer
C) the company publishing the local newspaper
D) a small private college
E) a gas station
3) Which of the following could be a source of market power?
A) selling a product that is identical in every way to the products offered by other firms
B) refusing to use advertising or other forms of product differentiation
C) selecting a convenient location
D) maintaining a small firm size in relation to the total industry
E) stressing to customers that “our product is just as good as theirs, no better and no worse”
4) The term “market power” refers to
A) the ability to charge any price without reducing sales.
B) the ability to influence the market price of a product.
C) the ability to maintain a monopoly.
D) the ability to operate a factory (or other business) at its capacity.
E) the ability to earn an economic profit in the short run.
5) Product differentiation allows a firm to
A) acquire some pricing discretion.
B) sell as much output as it desires, at as high a price as it desires.
C) charge as high a price as it chooses without losing any sales.
D) sell as much output as it desires and charge as high a price as it chooses without losing any
sales.
E) insure a long-run economic profit.
6) A firm may differentiate its product through all of the following EXCEPT
A) control of industry supply.
B) very unique product features.
C) advertising.
D) slight differences in product design.
E) location.
7) Assume that a price searcher was selling 10 units of output at a price of $5 a unit. If price must
be lowered to $4.75 to sell 11 units, the marginal revenue associated with the 11th unit would be
A) $4.00.
B) $4.75.
C) $2.75.
D) $2.25.
E) $0.25.
8) Suppose a price searcher was selling 20 units of output at a price of $10.00 per unit. If price
must be lowered to $9.60 in order to sell 21 units, the marginal revenue from the 21st unit would
be
A) $9.50.
B) $1.60.
C) $6.40.
D) $3.20.
E) $0.40.
9) Marginal revenue is less than price for a price searcher because
A) the price searcher selects the highest possible price in order to maximize its profit.
B) the price searcher must search for the price at which P = MC.
C) the price searcher’s demand curve is horizontal.
D) to sell more the price searcher must lower price on all units, including those it could have sold
at a higher price.
E) reducing price always causes a price searcher to lose sales.
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10) Because the demand curve facing a price searcher is downward sloping,
A) marginal revenue will exceed price for a price searcher.
B) the price searcher can sell additional units at a higher price than previous units.
C) price will exceed marginal revenue for a price searcher.
D) the price searcher will tend to select the highest possible price.
E) the price searcher’s marginal revenue curve will be horizontal.
11) A price searcher maximizes profit by producing at the output level where
A) MR = P.
B) MC = P.
C) MR = MC.
D) MC = D.
E) average total cost is minimized.
12) If a price searcher is producing at an output where MC exceeds MR,
A) it is producing the profit-maximizing output.
B) it is producing too much to maximize profits.
C) it is producing too little to maximize profits.
D) it must be incurring a loss.
E) it must be earning an economic profit.
13) If a price searcher’s labor costs increased, so that its marginal cost curve shifted upward
A) the profit-maximizing output and price would tend to increase.
B) the profit-maximizing output would tend to increase, but the profit-maximizing price would
fall.
C) the profit-maximizing output would be unchanged, but the profit-maximizing price would
increase.
D) the profit-maximizing price and output would be unchanged.
E) the profit-maximizing output would tend to fall, but the profit-maximizing price would
increase.
14) If a price searcher’s fixed costs increased,
A) the profit-maximizing output would rise.
B) the profit-maximizing output would fall.
C) the profit-maximizing output would be unchanged.
D) the profit-maximizing output could rise, fall, or be unchanged, depending on the magnitude of
the increase in fixed costs.
E) the firm’s profits would increase.
Use the following diagram to answer the following question(s).
15) Based on the figure above, in order to maximize profit (or minimize loss) this price searcher
would
A) produce Q1 units at a price of P1.
B) produce Q1 units at a price of P3.
C) produce Q2 units at a price of P2.
D) produce Q3 units at a price of P1.
E) produce Q3 units at a price of P2.
16) By looking at the above diagram, what can be concluded about the profits or losses of this
price searcher?
A) The firm is earning an economic profit.
B) The firm is incurring an economic loss but should continue to operate.
C) The firm is breaking even.
D) The firm is incurring an economic loss and should shut down to minimize the loss.
E) There is not sufficient information to determine whether this firm is earning a profit or
incurring a loss.
17) Based on the figure above, it is impossible to determine whether this firm is earning a profit
or a loss without the addition of the firm’s
A) average fixed cost curve.
B) average total cost curve.
C) average variable cost curve.
D) total revenue curve.
E) total cost curve.
18) Based on the figure above, in order for resources to be allocated efficiently, this price
searcher would need to
A) produce Q1 units and charge a price of P1.
B) produce Q2 units and charge a price of P2.
C) produce Q3 units and charge a price of P1.
D) produce Q1 units and charge a price of P3.
E) produce Q3 units and charge a price of P2.
19) Price searchers distort the allocation of scarce resources because
A) they produce less output than is socially desirable.
B) they produce more output than is socially desirable.
C) they charge a price that is less than marginal cost.
D) they charge a price that is equal to marginal cost.
E) they always select the output at which average total cost is minimized.
20) Price searchers do not produce the socially optimal level of output because
A) they do not operate where marginal revenue is equal to marginal cost.
B) they can sell a given output level at any price they choose.
C) they do not operate where price is equal to marginal cost.
D) they do not produce where marginal revenue is equal to price.
E) they want to be antisocial.
21) The reason that price takers produce the socially optimal level of output while price
searchers do not, is that
A) price takers attempt to maximize profit while price searchers do not.
B) price takers do not attempt to maximize profit while price searchers do.
C) price takers maximize their profit by producing the socially optimal level of output, while
price searchers do not.
D) price searchers can earn a higher profit by producing more than the socially optimal output,
while price takers cannot.
E) price searchers charge the highest possible price while price takers do not.
22) The total amount of profit earned by a price searcher is equal to
A) the difference between price and average total cost multiplied by the number of units sold.
B) the difference between total revenue and marginal cost.
C) the excess of marginal revenue over marginal cost multiplied by the number of units sold.
D) the selling price multiplied by the number of units sold.
E) the selling price minus the average total cost.
23) If the demand curve faced by a price searcher lies below its average total cost curve at all
levels of output,
A) the firm will earn an economic profit.
B) the firm will incur an economic loss, but more information is needed to determine if it will
operate or shut down.
C) the firm will break even.
D) the firm will earn a normal profit.
E) the firm will incur an economic loss and will shut down rather than operate.
24) If the average total cost (ATC) curve is tangent to the demand curve at the output where MR
equals MC, the price searcher
A) will shut down in the short run.
B) will earn a loss, but continue to operate.
C) will earn an economic profit.
D) will earn a normal profit.
E) It will be indifferent between operating and shutting down.
Use the following diagram to answer the following question(s).
25) The profit-maximizing (loss-minimizing) price of the price searcher in the graph above is
A) $18.
B) $14.
C) $12.
D) $8.
E) $40.
26) Based on the figure above, when the price searcher is producing the profit-maximizing (loss-
minimizing) output, total revenue is
A) $40.
B) $70.
C) $90.
D) $98.
E) $30.
27) Based on the figure above, when the price searcher is producing the profit-maximizing (loss-
minimizing) output, total cost is
A) $40.
B) $60.
C) $84.
D) $98.
E) $90.
28) Based on the figure above, this price searcher will
A) earn exactly a normal profit.
B) incur a loss of $20.
C) earn a profit of $14.
D) earn a profit of $30.
E) incur a loss of more than $20.
29) Price searchers may be able to earn economic profits in the long run if
A) they sell a differentiated product.
B) there are substantial barriers to entry.
C) they charge the highest possible price.
D) they operate at the output where the ATC curve is tangent to the demand curve.
E) they operate at the output where the ATC curve is at its minimum.
30) Price discrimination occurs when
A) all consumers are forced to pay the same price for a product, regardless of their incomes.
B) different customers or classes of customers are charged different prices for the same product.
C) firms select the price at which marginal revenue is equal to marginal cost.
D) firms ignore their demand curve in order to sell a higher quantity of output.
E) firms select the highest possible price and charge that one price to all customers.
31) If firms practice “individual” price discrimination,
A) they will tend to sell fewer units than firms that do not discriminate.
B) they will make less profit than firms that do not discriminate.
C) they will continue to sell additional units until price is equal to marginal cost.
D) their demand curves will be perfectly inelastic.
E) they will charge different prices to different categories of customers.
32) Firms practicing group price discrimination
A) attempt to charge each individual consumer the maximum he or she will pay.
B) must negotiate with each consumer.
C) tend to charge higher prices to categories of consumers whose demand is less elastic.
D) tend to charge higher prices to categories of consumer whose demand is more elastic.
E) charge every consumer a different price.
33) When firms practice individual price discrimination, the marginal revenue from selling an
additional unit of output is
A) less than the product’s selling price.
B) equal to the product’s selling price.
C) greater than the product’s selling price.
D) constant.
E) indeterminate.
Use the following demand function to answer the following question(s).
Demand for Sailboats at Betty’s Marine
34) Based on the table above, suppose that Betty’s Marine charges a single price to all customers.
(That is to say, the firm does NOT practice price discrimination). What would be the marginal
revenue associated with the sale of the second sailboat?
A) $4,000
B) $3,000
C) $2,000
D) $1,000
E) $500
35) Based on the table above, if marginal cost is constant at $1,000, and the firm is unable to
practice price discrimination, how many units should Betty sell in order to maximize her profits
and what price should she charge?
A) 1, $5,000
B) 2, $4,000
C) 3, $3,000
D) 4, $2,000
E) 2, $2,000
36) Based on the table above, if Betty’s Marine is able to practice individual price discrimination,
what would be the marginal revenue associated with the sale of the second sailboat?
A) $4,000
B) $3,000
C) $2,000
D) $1,000
E) $500
37) Based on the table above, if Betty practices individual price discrimination and marginal cost
is constant at $1,000, how many sailboats should she sell to maximize her profits?
A) 1
B) 2
C) 3
D) 4
E) 5
38) Firms that use the cost-plus pricing technique
A) first estimate marginal cost, and then add some markup to arrive at the selling price.
B) first estimate annual depreciation cost, and then add some markup to arrive at the selling
price.
C) begin by estimating average total cost, and then add some markup to arrive at the selling
price.
D) begin by determining the cost of raw materials, and then add some markup to arrive at the
selling price.
E) always earn economic profits.
39) Firms may use the cost-plus pricing technique because
A) it will allow them to earn higher profits than they can make by producing where MR equals
MC.
B) they lack the information required to use the MR = MC approach.
C) the MR = MC approach ignores certain costs which must be considered in the real world.
D) it ensures that the firm will earn a profit by building all of its costs into the selling price.
E) the MR = MC approach considers fixed costs, while the cost-plus approach does not.
40) Ultimately, the amount of markup on cost that the firm will be able to earn is determined by
A) the objectives of the firm.
B) the firm’s assessment of what is “fair.”
C) the degree of competition.
D) industry custom.
E) industry custom and the firm’s assessment of what is “fair.”
1) Safety Tire spends millions of dollars on advertisements promoting their tires as “the safest on
the
market.” This is an example of
A) price discrimination.
B) market power.
C) product differentiation.
D) economies of scale.
2) Which of the following is false?
A) Price searchers can raise their prices without losing all their customers.
B) Price searchers may earn economic profits in the long run.
C) A cartel is a firm that has substantial market power.
D) An oligopoly is an industry composed of a few firms.
3) When a price searcher practices individual price discrimination, the marginal revenue it
obtains from selling one more unit of its product is
A) always equal to the selling price of the product.
B) always less than the selling price of the product.
C) always more than the selling price of the product.
D) None of the above is true.
4) If a price searcher is operating at an output where MR exceeds MC, then
A) the firm is producing the profit-maximizing output.
B) the firm is producing too little output; it needs to produce more to maximize its profit.
C) the firm is producing too much output; it needs to reduce output to maximize its profit.
D) Either B or C is true; you can’t tell from the information provided.
Use the following exhibit to answer the following question(s).
5) Based on the figure above, to maximize its profit or minimize its loss, this price searcher
should
A) produce 6 units and charge a price of $50.
B) produce 6 units and charge a price of $110.
C) produce 8 units and charge a price of $90.
D) produce 9 units and charge a price of $80.
6) Based on the figure above, this price searcher is
A) incurring a loss of $180.
B) earning a normal profit.
C) earning a profit of $360.
D) earning a profit of $180.
7) Based on the figure above, allocative efficiency would require this firm to
A) produce seven and one-half units of output and charge a price of $78.
B) produce 8 units and charge a price of $90.
C) produce 6 units and charge a price of $50.
D) None of the above.
8) If a price searcher’s fixed costs have increased,
A) the firm’s profit-maximizing quantity will increase.
B) the firm’s profit-maximizing quantity will not change.
C) the firm’s profit-maximizing quantity will decline.
D) the firm will operate at a loss.
Use the following information to answer the following question(s).
9) Based on the table above, Sonic Waterbeds faces a traditional downward-sloping demand
curve. But Sonic’s marginal cost curve is a horizontal straight line at a height of $600. In other
words, marginal cost is constant at $600. How many units should Sonic sell, and what price
should it charge to maximize profit? (Assume Sonic cannot practice price discrimination.)
A) one unit at $1,000
B) two units at $900
C) three units at $800
D) four units at $700
E) five units at $600
10) Based on the table above, if Sonic Waterbeds was able to practice individual price
discrimination, it would sell ________ waterbeds and earn a profit of ________ dollars on the
last waterbed sold. (Assume marginal cost remains constant at $600.)
A) 3; 200
B) 4; 200
C) 5; 0
D) 6; 0
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11) When firms practice group price discrimination, they tend to charge higher prices to
consumers
A) whose demand is more elastic.
B) who are more price-sensitive.
C) whose demand is less elastic.
D) who do comparison shopping.
12) When a price searcher produces the output level at which marginal revenue is equal to
marginal cost, it is
A) maximizing its profit and producing the allocatively efficient level of output.
B) maximizing its profit but producing more than the allocatively efficient level of output.
C) maximizing its profit but producing less than the allocatively efficient level of output.
D) producing less than the profit-maximizing output.
13) Imagine a situation in which a firm experienced diseconomies of scale immediately. The
long-run average total cost curve would be
A) U-shaped.
B) downward-sloping.
C) upward-sloping.
D) a horizontal straight line.
14) Imagine a long-run average cost curve that is U-shaped and has its minimum at 5,000 units
of output and an average cost of $10. Under those conditions this industry would be
A) a natural monopoly if only 5,000 units were demanded at $10 but highly competitive if
10,000 units were demanded at that price.
B) an oligopoly if only 5,000 units were demanded at $10 but highly competitive if 10,000 units
were demanded at that price.
C) highly competitive if 10,000 units were demanded at $10.
D) a natural monopoly if only 5,000 units were demanded at $10 but highly competitive if
500,000 units were demanded at that price.
1) Firms that possess market power
A) can charge any price they please and still sell any quantity they desire.
B) face vertical demand curves.
C) have some discretion in selecting the price they charge for their product.
D) always earn economic profits.
2) Which of the following is not a source of market power?
A) controlling a significant fraction of industry output