ECONOMICS

11. To maximize total surplus with a monopoly firm, a benevolent social planner would

a. choose the level of output where MR = MC.

b. choose the level of output where MR intersects the demand curve.

c. choose the level of output where MC intersects the demand curve.

d. allow the free market system to determine the level of output.

12. Antitrust laws allow the government to

a. prevent mergers.

b. break up companies.

c. promote competition.

d. All of the above are correct.

5

Figure 15-11

13. Refer to Figure 15-11. If the monopoly firm is not allowed to price discriminate, then consumer surplus amounts

to

a. $0.

b. $500.

c. $1,000.

d. $2,000.

14. Refer to Figure 15-11. If the monopoly firm is not allowed to price discriminate, then the deadweight loss

amounts to

a. $50.

b. $100.

c. $500.

d. $1,000.

15. Which of the following statements is not correct?

a. Monopolistic competition is similar to monopoly because in each market structure the

firm can charge a price above marginal costs.

b. Monopolistic competition is similar to perfect competition because both market structures

are characterized by free entry.

c. Monopolistic competition is similar to oligopoly because both market structures are

characterized by barriers to entry.

d. Monopolistic competition is similar to perfect competition because both market structures

are characterized by many sellers.

16. Each firm in a monopolistically competitive firm faces a downward-sloping demand curve because

a. there are many other sellers in the market.

b. there are very few other sellers in the market.

c. the firm’s product is different from those offered by other firms in the market.

d. that firm faces the threat of entry into the market by new firms.

6

17. A monopolistically competitive firm faces the following demand curve for its product:

Price ($) 10 9 8 7 6 5 4 3 2 1

Quantity 2 4 6 8 10 12 14 16 18 20

The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit. The firm will maximize profit

with the production of

a. 6 units of output.

b. 8 units of output.

c. 10 units of output.

d. 12 units of output.

Figure 16-2

This figure depicts a situation in a monopolistically competitive market.

18. Refer to Figure 16-2. What price will the monopolistically competitive firm charge in this market?

a. $60

b. $70

c. $75

d. $80

19. Refer to Figure 16-2. How much consumer surplus will be derived from the purchase of this product at the

monopolistically competitive price?

a. $200

b. $312.50

c. $400

d. $800

7

20. Some firms have an incentive to advertise because they sell a

a. similar product and charge a price equal to marginal cost.

b. similar product and charge a price above marginal cost.

c. differentiated product and charge a price equal to marginal cost.

d. differentiated product and charge a price above marginal cost.

21. Critics of advertising argue that advertising

a. creates demand for products that people otherwise do not want or need.

b. lowers barriers to entry into an industry because new firms can more easily establish

themselves as competitors.

c. increases competition by providing information about prices.

d. encourages monopolization of markets by raising entry barriers.

22. Which of the following statements is correct?

a. Firms in monopolistic competition and monopoly can earn economic profits in both the

short run and the long run.

b. Both perfectly competitive and monopolistically competitive firms charge a price equal

to marginal cost.

c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits

by producing where marginal revenue equals marginal cost.

d. Both perfectly competitive and monopolistically competitive firms produce the

welfare-maximizing level of output.

Table 14-4

Quantity Total Revenue Total Cost

0 $0 $3

1 $7 $5

2 $14 $8

3 $21 $12

4 $28 $17

5 $35 $23

6 $42 $30

7 $49 $38

23. Refer to Table 14-4. The firm will produce a quantity greater than 4 because at 4 units of output, marginal cost

a. is less than marginal revenue.

b. equals marginal revenue.

c. is greater than marginal revenue.

d. is minimized.

24. When marginal revenue equals marginal cost, the firm

a. should increase the level of production to maximize its profit.

b. may be minimizing its losses rather than maximizing its profit.

c. must be generating positive economic profits.

d. must be generating positive accounting profits.

25. Profit-maximizing firms in a competitive market produce an output level where

a. marginal cost equals marginal revenue.

b. marginal cost equals average total cost.

c. marginal revenue is increasing.

d. price is less than marginal revenue.

8

26. A firm in a competitive market has the following cost structure:

Output Total Cost

0 $5

1 $10

2 $12

3 $15

4 $24

5 $40

If the market price is $16, this firm will

a. produce four units in the short run and exit in the long run.

b. produce five units in the short run and exit in the long run.

c. produce five units in the short run and face competition from new market entrants in the

long run.

d. shut down in the short run and exit in the long run.

27. A firm in a competitive market has the following cost structure:

Output Total Costs

0 $10

1 $12

2 $15

3 $19

4 $24

5 $30

6 $37

7 $46

8 $55

9 $65

If the market price is $8, how many units should the firm produce to maximize profit?

a. 5 units

b. 6 units

c. 7 units

d. 8 units

9

28. A firm in a competitive market has the following cost structure:

Output ATC

0 —

1 $10

2 $8

3 $7

4 $8

5 $10

If the firm’s fixed cost of production is $3, and the market price is $10, how many units should the firm produce to

maximize profit?

a. 1 unit

b. 2 units

c. 3 units

d. 4 units

29. Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a

cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently,

Cold Duck’s revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If

it wants to maximize profit, Cold Duck Airlines should

a. drop the flight immediately.

b. continue the flight.

c. continue flying until the lease expires and then drop the run.

d. drop the flight now but renew the lease if conditions improve.

30. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total

cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current market

price?

a. $9

b. $10

c. $11

d. $12

31. In the short run, a firm operating in a competitive industry will shut down if price is

a. less than average total cost.

b. less than average variable cost.

c. greater than average variable cost but less than average total cost.

d. greater than marginal cost.

10

Figure 14-6

32. Refer to Figure 14-6. If the firm is in a short-run position where P < AVC, it is most likely to be on what segment

of its supply curve?

a. BC

b. CD

c. DF

d. AB

33. In the long run, a profit-maximizing firm will choose to exit a market when

a. average fixed cost is falling.

b. variable costs exceed sunk costs.

c. marginal cost exceeds marginal revenue at the current level of production.

d. total revenue is less than total cost.

34. In the short run, a market consists of 100 identical firms. The market price is $8, and the total cost to each firm of

producing various levels of output is given in the table below. What will total quantity supplied be in the market?

Quantity Total Costs

0 $1

1 $7

2 $14

3 $22

4 $31

5 $41

a. 200 units

b. 300 units

c. 400 units

d. 500 units

11

Figure 14-8

In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b)

depicts the linear market supply curve for a market with a fixed number of identical firms.

35. Refer to Figure 14-8. If there are 200 identical firms in this market, what level of output will be supplied to the

market when price is $2.00?

a. 2,000

b. 10,000

c. 20,000

d. 40,000

36. When new firms enter a perfectly competitive market,

a. demand increases.

b. the short-run market supply curve shifts right.

c. the short-run market supply curve shifts left.

d. existing firms will increase prices to keep the new firms from entering.

37. If there is an increase in market demand in a perfectly competitive market, then in the short run

a. there will be no change in the demand curves faced by individual firms in the market.

b. the demand curves for firms will shift downward.

c. the demand curves for firms will become more elastic.

d. profits will rise.

38. If there is an increase in market demand in a perfectly competitive market, then in the short run prices will

a. rise.

b. remain unchanged at the minimum of average total cost.

c. fall.

d. remain unchanged at the minimum of marginal cost.

12

Scenario 14-3

As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small

business in Anywhere, USA. Her business operates in a perfectly competitive industry. If Mary would have

invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job

with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per

year.

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