Examination 3
Microeconomics

These multiple choice questions are from the exam bank. If you believe one or more answers are not correct, then speak with the instructor. He is human and makes mistakes.

Lesson 9 - Competitive Markets

1. Which of the following industries most closely approximates pure competition?

A. agriculture
B. farm implements
C. clothing
D. steel

2. Which of the following is not a basic characteristic of pure competition?

A. considerable nonprice competition
B. no barriers to the entry or exodus of firms
C. a standardized or homogeneous product
D. a large number of buyers and sellers

3. If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:

A. may be either greater or less than $5.
B. will also be $5.
C. will be less than $5.
D. will be greater than $5.

4. Firms seek to maximize:

A. per unit profit.
B. total revenue.
C. total profit.
D. market share.

5. A competitive firm will maximize profits at that output at which:

A. total revenue exceeds total cost by the greatest amount.
B. total revenue and total cost are equal.
C. price exceeds average total cost by the largest amount.
D. the difference between marginal revenue and price is at a maximum.

6. A purely competitive firm's short-run supply curve is:

A. perfectly elastic at the minimum average total cost.
B. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
C. upsloping and equal to the portion of the marginal cost curve that lies above the average total cost curve.
D. upsloping only when the industry has constant costs.

7. Suppose you find that the price of your product is less than minimum AVC. You should:

A. minimize your losses by producing where P = MC.
B. maximize your profits by producing where P = MC.
C. close down because, by producing, your losses will exceed your total fixed costs.
D. close down because total revenue exceeds total variable cost.

8. If a purely competitive firm shuts down in the short run:

A. its loss will be zero.
B. it will realize a loss equal to its total variable costs.
C. it will realize a loss equal to its total fixed costs.
D. it will realize a loss equal to its total costs.

9. In the short run a purely competitive firm will always make an economic profit if:

A. P = ATC.
B. P > AVC.
C. P = MC.
D. P > ATC.

10. In a purely competitive industry:

A. there will be no economic profits in either the short run or the long run.
B. economic profits may persist in the long run if consumer demand is strong and stable.
C. there may be economic profits in the short run, but not in the long run.
D. there may be economic profits in the long run, but not in the short run.

11. Long-run competitive equilibrium:

A. is realized only in constant-cost industries.
B. will never change once it is realized.
C. is not economically efficient.
D. results in zero economic profits.

12. A constant-cost industry is one in which:

A. resource prices fall as output is increased.
B. resource prices rise as output is increased.
C. resource prices remain unchanged as output is increased.
D. small and large levels of output entail the same total costs.

13. A purely competitive firm is precluded from making economic profit in the long run because:

A. it is a "price taker."
B. its demand curve is perfectly elastic.
C. of unimpeded entry to the industry.
D. it produces a differentiated product.

14. A decreasing-cost industry is one in which:

A. contraction of the industry will decrease unit costs.
B. input prices fall or technology improves as the industry expands.
C. the long-run supply curve is perfectly elastic.
D. the long-run supply curve is upward sloping.

15. Allocative efficiency is achieved when the production of a good occurs where:

A. P = minimum ATC.
B. P = MC.
C. P = minimum AVC.
D. total revenue is equal to TFC.

Answers:

Lesson 10 - Monopolies

1. Which of the following is correct?

A. Both purely competitive and monopolistic firms are "price takers."
B. Both purely competitive and monopolistic firms are "price makers."
C. A purely competitive firm is a "price taker," while a monopolist is a "price maker."
D. A purely competitive firm is a "price maker," while a monopolist is a "price taker."

2. Pure monopolists may obtain economic profits in the long run because:

A. of advertising.
B. marginal revenue is constant as sales increase.
C. of barriers to entry.
D. of rising average fixed costs.

3. Which of the following is not a barrier to entry?

A. patents
B. X-inefficiency
C. economies of scale
D. ownership of essential resources

4. A natural monopoly occurs when:

A. long-run average costs decline continuously through the range of demand.
B. a firm owns or controls some resource essential to production.
C. long-run average costs rise continuously as output is increased.
D. economies of scale are obtained at relatively low levels of output.

5. The pure monopolist's demand curve is:

A. identical with the industry demand curve.
B. of unit elasticity throughout.
C. perfectly inelastic.
D. perfectly elastic.

6. Price exceeds marginal revenue for the pure monopolist because the:

A. law of diminishing returns is inapplicable.
B. demand curve is downward sloping.
C. monopolist produces a smaller output than would a purely competitive firm.
D. demand curve lies below the marginal revenue curve.

7. An unregulated pure monopolist will maximize profits by producing that output at which:

A. P = MC.
B. P = ATC.
C. MR = MC.
D. MC = AC.

8. The supply curve for a monopolist is:

A. perfectly elastic.
B. upward sloping.
C. that portion of the marginal cost curve lying above minimum average variable cost.
D. nonexistent.

9. Economic profit in the long run is:

A. possible for both a pure monopoly and a pure competitor.
B. possible for a pure monopoly, but not for a pure competitor.
C. impossible for both a pure monopolist and a pure competitor.
D. only possible when barriers to entry are nonexistent.

10. X-inefficiency refers to a situation in which a firm:

A. is not as technologically progressive as it might be.
B. encounters diseconomies of scale.
C. fails to realize all existing economies of scale.
D. fails to achieve the minimum average total costs attainable at each level of output.

11. Price discrimination refers to:

A. selling a given product for different prices at two different points in time.
B. any price above that which is equal to a minimum average total cost.
C. the selling of a given product at different prices that do not reflect cost differences.
D. the difference between the prices a purely competitive seller and a purely monopolistic seller would charge.

12. Which of the following conditions is not required for price discrimination?

A. Buyer with different elasticities must be physically separate from each other.
B. The good or service cannot be resold by original buyers.
C. The seller must be able to segment the market, that is, to distinguish buyers with different elasticities of demand.
D. The seller must possess some degree of monopoly power.

13. Which government price control lets a regulated monopoly set two prices: A fixed charge and a rate charge?

A. Ramsey Pricing
B. Marginal Cost Pricing
C. Average Cost Pricing
D. X-inefficiency

14. What is it called when a monopoly uses its wealth and power to influence the government in its favor?

A. Ramsey Pricing
B. Rent seeking behavior
C. Average Cost Pricing
D. X-inefficiency

15. If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to:

A. minimum average fixed cost.
B. average total cost.
C. marginal cost.
D. marginal revenue.

Answers:

Lesson 11 - Oligopolies and Monopolistic Competition

1. Monopolistic competition means:

A. a market situation where competition is based entirely on product differentiation and advertising.
B. a large number of firms producing a standardized or homogeneous product.
C. many firms producing differentiated products.
D. a few firms producing a standardized or homogeneous product.

2. Nonprice competition refers to:

A. competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts.
B. price increases by a firm that are ignored by its rivals.
C. advertising, product promotion, and changes in the real or perceived characteristics of a product.
D. reductions in production costs that are not reflected in price reductions.

3. If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes:

A. the likelihood of realizing economic profits in the long run would be enhanced.
B. individual firms would now be operating at outputs where their average total costs would be higher.
C. the industry would more closely approximate pure competition.
D. the likelihood of collusive pricing would increase.

4. Nonprice competition refers to:

A. low barriers to entry.
B. product development, advertising, and product packaging.
C. the differences in information which consumers have regarding various products.
D. an industry or firm in long-run equilibrium.

5. When a monopolistically competitive firm is in long-run equilibrium:

A. P = MC = ATC.
B. MR = MC and minimum ATC > P.
C. MR > MC and P = minimum ATC.
D. MR = MC and P > minimum ATC.

6. Product variety is likely to be greater in:

A. monopolistic competition than in pure competition.
B. pure competition than in monopolistic competition.
C. homogenous oligopoly than in monopolistic competition.
D. homogenous oligopoly than in differentiated oligopoly.

7. The term oligopoly indicates:

A. a one-firm industry.
B. many producers of a differentiated product.
C. a few firms producing either a differentiated or a homogeneous product.
D. an industry whose four-firm concentration ratio is low.

8. The mutual interdependence that characterizes oligopoly arises because:

A. the products of various firms are homogeneous.
B. the products of various firms are differentiated.
C. a small number of firms produce a large proportion of industry output.
D. the demand curves of firms are kinked at the prevailing price.

9. The copper, aluminum, cement, and industrial alcohol industries are examples of:

A. interproduct competition.
B. homogeneous oligopoly.
C. monopolistic competition.
D. differentiated oligopoly.

10. Mutual interdependence means that each oligopolistic firm:

A. faces a perfectly elastic demand for its product.
B. must consider the reactions of its rivals when it determines its price policy.
C. produces a product identical to those of its rivals.
D. produces a product similar but not identical to the products of its rivals.

11. Concentration ratios measure the:

A. geographic location of the largest corporations in each industry.
B. degree to which product price exceeds marginal cost in various industries.
C. percentage of total sales accounted for by the four largest firms in the industry.
D. number of firms in an industry.

12. The Herfindahl index for a pure monopolist is:

A. 100.
B. 10,000.
C. 100,000.
D. 10.

13. Interindustry competition means that:

A. in oligopolistic industries a few large firms compete with one another in bidding down product price.
B. in some markets the producers of a particular product might face competition from products produced by other industries.
C. firms that sell a product at one stage of production are faced with firms that buy the product at the next stage of production.
D. in most industries there are usually a number of firms producing identical products.

14. OPEC provides an example of:

A. a tacit understanding.
B. noncollusive oligopoly.
C. an international cartel.
D. a monopolistically competitive industry.

15. Suppose the Herfindahl Indexes for industries A, B, and C are 1,200, 5,000, and 7,500 respectively. These data imply that:

A. market power is greatest in industry A.
B. market power is greatest in industry B.
C. market power is greatest in industry C.
D. industry A is more monopolistic than industry C.

Answers: