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Final Practive Questions (New material only) Econ 101-5 Spring 2002 The questions herein cover chapters 8, 9, and part of 10 (monopolistic competition is excluded). The final examination will cover material primarily from these three chapters, but everything covered in the class is fair game. 1. Which of the following is a characteristic of perfect competition? a. b. c. d. e. easy entry into or exit from the market a small number of buyers a high degree of government regulation a differentiated product a high degree of collusion 2. The model of perfect competition is most likely to apply to a market where a. it is difficult for existing firms to exit the market b. there are a few buyers, and they are uninformed about the degree of product standardization c. there are many existing sellers, but it is difficult for new sellers to enter the market d. one dominant seller must negotiate with one dominant buyer e. there are many sellers, and they produce a standardized product 3. In perfect competition, no individual producer can significantly affect the market price because a. b. c. d. e. the market is regulated by the government each producer is ignorant of the market price each producer provides a very small portion of the total market supply strictly enforced collusion prevents any producer from acting independently each firm's product is so different that there is no market price 4. For a perfectly competitive firm, a. b. c. d. e. marginal revenue equals total revenue total revenue always exceeds total cost price always exceeds average total cost marginal cost equals average cost the marginal revenue curve and the demand curve are the same 5. Suppose that a firm chose an output level where the total cost and total revenue curves intersect. At this level of output, a. b. c. d. e. the firm is maximizing profits the firm is minimizing losses profit is zero total revenue is maximized total cost is minimized 6. If the firm's marginal revenue exceeds its marginal cost, it should a. b. c. d. e. raise its price advertise more lay off a few employees cut back its overhead increase its output 7. Figure I-2 shows the total revenue and total cost data for a perfectly competitive firm. At what output level will the firm break even? a. b. c. d. e. 1 2 3 4 5 8. Figure I-4 shows the marginal costs for a firm in a perfectly competitive market. Suppose that the market price is $20. What is the profit-maximizing level of output? a. b. c. d. e. 0 1 4 5 6 9. If average cost rises as a firm increases its output level, a. b. c. d. e. profits are not being maximized marginal cost is greater than average cost profits are maximized marginal revenue is positive total cost is minimized 10. If price equals average total cost at the profit-maximizing output level, then in the short run, a. b. c. d. e. profits are positive profits are negative the firm will go out of business the firm will earn zero profit the firm's supply curve is horizontal 11. In short-run equilibrium, the perfectly competitive firm of Figure I-8 will earn a total economic profit of a. b. c. d. e. zero $950 $825 $1,425 $575 12. The portion of the marginal cost curve above the minimum point on the average variable cost curve is part of the perfectly competitive firm's a. b. c. d. e. average revenue curve effective demand curve average variable cost curve supply curve total revenue curve 13. In a perfectly competitive market, a. b. c. d. e. no firm can earn an economic profit it is possible for each firm to earn an economic profit in the short run firms determine the market price and consumers determine the market quantity consumers determine the market price, and firms decide how much to produce at that price the market demand curve is a horizontal line at the market price 14. In a perfectly competitive market, firms will exit in the a. b. c. d. e. short run if they are suffering economic losses short run if they are earning below-normal profit short run if price exceeds average total cost long run if they are earning above-normal profit long run if they are suffering economic losses 15. In the long run, the entry of new firms into a competitive market is typically caused by a. b. c. d. e. government regulation technological innovation inflation economic losses economic profit 16. In the long-run equilibrium for a perfectly competitive market, firms will choose the level of output where a. b. c. d. e. profit is minimized short-run average total cost is minimized long-run average total cost is minimized short-run profit is maximized long-run average fixed cost is minimized 17. In long-run equilibrium, every perfectly competitive firm a. b. c. d. e. maximizes its output chooses its plant size and output level to operate at minimum long-run marginal cost chooses its plant size and output level to operate at minimum long-run average total cost earns an economic profit suffers an economic loss 18. The long-run supply curve is horizontal in a(n) a. b. c. d. e. increasing-cost industry constant-cost industry decreasing-cost industry labor-intensive industry capital-intensive industry 19. A monopoly is a a. b. c. d. e. price taker single buyer of an input into production firm facing a perfectly elastic demand curve group of firms controlling the price and output for an industry price setter 20. A monopoly exists because of a. b. c. d. e. barriers to entry the large number of buyers and sellers the absence of barriers to entry collusion among the dominant firms the absence of exclusive government franchises 21. If cost per unit is minimized when a single producer supplies the entire market, this indicates a. b. c. d. e. the presence of limit pricing that the single producer is a perfect monopoly the presence of substantial economies of scale that the market has been narrowly defined the existence of a single-price monopoly 22. Patents stimulate innovation by a. b. c. d. e. providing incentives to incur research and development costs guaranteed profits for those who innovate prosecuting anyone who purchases the good protected by the patent providing tax breaks to investors increasing the interest rate on borrowed funds 23. For the single-price monopoly, marginal revenue is a. b. c. d. e. more important than marginal cost always more than marginal cost always less than average cost always less than the price of output more significant than total revenue 24. For the monopolist in Figure J-2, which point corresponds to the profit-maximizing level of output? a. b. c. d. e. A B C D E 25. The profit-maximizing monopoly in Figure J-6 will produce a. b. c. d. e. 0 units 225 units 350 units 500 units none of these 26. The profit-maximizing monopoly in Figure J-6 will charge a price of a. b. c. d. e. $2.50 $3.50 $5.00 $5.75 $3.00 27. The single-price monopoly in Figure J-14 will have an economic profit of a. b. c. d. e. $612.50 $506.25 $250.00 $875.00 none of these 28. In Figure J-14, the total cost to the single price monopoly at the profit-maximizing output is a. b. c. d. e. $1,500.00 $1,137.50 $787.50 $875.00 none of these 29. Rent-seeking activity a. b. c. d. e. is any revenue associated with long-term leases is any costly action a firm undertakes to acquire or maintain monopoly power is an attempt to inflate costs and reduce tax liabilities occurs when a monopoly leases out some of its assets is any rational action a consumer undertakes in seeking the lowest rent 30. The firm depicted in Figure J-25 is a perfect price discriminator. What is its equilibrium price and output? a. b. c. d. P' and Q' P and Q P' and Q each consumer is charged the maximum price he or she is willing to pay, and the equilibrium output is Q' e. each consumer is charged the maximum price he or she is willing to pay, and the equilibrium output is Q 31. Which of the following products would be most difficult to resell? a. b. c. d. e. Girl Scout cookies suitcases automobiles pencils medical exams 32. A monopoly will produce the same quantity of output as an otherwise similar perfectly competitive market if a. b. c. d. e. it is a perfect price discriminator it corners the market barriers to entry are high enough resource suppliers have market power too price is greater than average total cost 33. An oligopoly is a market a. b. c. d. e. dominated by a single seller dominated by a single buyer dominated by a small number of strategically interdependent firms with many buyers and sellers, no barriers to entry and differentiated products with many buyers and sellers, no barriers to entry and a standardized product 34. An equilibrium occurs in a game when a. b. c. d. e. price equals marginal cost quantity supplied equals quantity demanded all independent strategies counterbalance all determinate strategies all players follow a strategy that negates the strategies of at least one other player all players follow a strategy that they have no incentive to change 35. Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The yearly economic profits from each strategy are indicated in Figure K12. The upper right side of each rectangle shows Brian's profits; the lower left side shows Matt's profits. Which of the following statements is correct? a. b. c. d. e. Matt's dominant strategy is to charge a low price Brian's dominant strategy is to charge a high price the dominant strategy for both Brian and Matt is to charge a low price Matt's dominant strategy is to charge a high price neither Brian nor Matt has a dominant strategy 36. Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The yearly economic profits from each strategy are indicated in Figure K12. The upper right side of each rectangle shows Brian's profits; the lower left side shows Matt's profits. Which of the following statements is correct for a one-trial game? a. the market equilibrium price is the high price b. a market equilibrium price cannot be established unless Brian and Matt collude c. a market equilibrium price cannot be established unless Brian or Matt engages in tit-for-tat strategy d. a market equilibrium price cannot be established without repeated trials e. the market equilibrium price is the low price 37. When firms cooperate without an explicit agreement they are engaging in a. b. c. d. e. explicit collusion tacit collusion reverse collusion inclusion rent seeking 38. Which of the following types of markets would be the most likely to maintain a successful collusive agreement? a. a market with many sellers, many buyers, unstable market demand, and privately negotiated prices b. a market with few sellers, many buyers, stable market demand, and privately negotiated prices c. a market with few sellers, many buyers, stable market demand, and publicized prices d. a market with many sellers, few buyers, stable market demand, and privately negotiated prices e. a market with few sellers, few buyers, unstable market demand, and publicized prices Final Practice Questions Answer Key 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 A E C E C E D D B D B D B E E C C B E A C A D C C C A B B E E A C E A E B C