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AP Economics Quiz 05: Theory of the Firm 02 Name: ______________________ Date: _______________________ Here is a quick review of perfectly competitive firms: Identify the following: OGKC 1. Rectangle of Total Revenue for this firm (4 letters) K 2. Point where MR=MC (1 letter) HJ 3. Per unit average fixed cost (2 letters – line segment) JK 4. Per unit profit (2 letters – line segment) M 5. Minimum Average total cost (1 letter) JFGK 6. Rectangle of economic profit (4 letters) R The beginning of the firm’s supply curve (1 letter) 7. _____ 8. Given the same cost data, a monopolistic producer will charge: ___. a. the same price and produce the same output as a competitive firm b. a higher price and produce a larger output than a competitive firm c. a higher price and produce a smaller output than a competitive firm d. a lower price and produce a smaller output than a competitive firm e. a lower price and produce a larger output than a competitive firm Orf/Purpura AP-IB Econ 2010-2011 _____ 9. 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 of a purely competitive seller and a purely monopolist seller would charge _____ 10. Which of the following statements is true for a monopolist at the profit maximizing output level? a. price exceeds marginal revenue b. marginal cost exceeds price c. demand is price inelastic d. profit maximization happens when the demand curve intersects the supply curve. e. price equals marginal cost, which equals average total cost _____ 11. 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 which is essential to production c. long-run average costs rise continuously as output is increased d. economics of scale disappear quickly e. minimum average costs are never reached _____ 12. Which of the following is true in the elastic range of the firm’s demand curve? a. the firm should expand output to increase economic profits b. an increase in price will also lead to an increase in total costs c. a decrease in the price will likely lead to an increase in total revenue d. marginal revenue is negative e. the firm is maximizing total revenue _____ 13. The practice of price discrimination is associated with pure monopoly because: ___. a. it can be practiced whenever a firm’s demand curve is down-sloping b. most monopolists sell differentiated products c. monopolists have considerable ability to control output and price d. monopolists usually realize economies of scale e, these firms sell “special goods” _____ 14. For a monopoly, allocative efficiency occurs at the point where: ___. a. marginal costs intersects with average variable cost (MC=AVC) b. price is equal to average revenue (P=AR) c. price is equal to marginal cost (P=MC) d. price is equal to average variable cost (P=AVC) _____ 15. Productive efficiency refers to: ___. a. any short-run equilibrium position of a competitive firm b. the production of the product-mix most desired by consumers c. the production of a good at the lowest average costs (P=min ATC) d. fulfilling the condition P=MC Orf/Purpura AP-IB Econ 2010-2011 ____16. A key characteristic of monopolistic competition is: a. few dominant firms and low entry barriers b. relatively large number of firms and substantial entry barriers c. relatively large number of firms and low entry barriers d. few dominant firms and substantial entry barriers ____17. Monopolistically competitive firms: a. realize normal profits in the short run but losses in the long run b. tend to incur persistent losses in both short and long run c. may realize either profits or losses in the short run, but tend to realize only small economic profits in the long run d. persistently realize economic profit in both the short run and the long run ____18. Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because: a. the number of firms in the industry is larger b. monopolistically competitive cannot realize an economic profit in the long run c. of product differentiation and consequent product promotion activities d. Monopolistically competitive producers are mutually interdependent in their pricing strategies ____19. A Monopolistically competitive firm has a a. relatively elastic demand curve b. perfectly inelastic demand curve c. relatively inelastic demand curve d. perfectly elastic demand curve ____20. The monopolistically competitive seller maximizes profits by producing at the point where: a. total revenue is at a maximum b. average costs are at a minimum c. marginal revenue = marginal cost d. price = marginal revenue e. marginal revenue = average cost ____21. When a monopolistically competitive firm is in long-run equilibrium a. production takes place where ATC is minimized b. marginal revenue equals marginal cost and price is near average total cost c. normal profits are zero and price equals marginal cost d. economic profits are zero and price equals marginal cost ____22. The demand curve of a monopolistically competitive producer is: a. perfectly elastic and derived from the market price b. less elastic than that of either a pure monopolist or purely competitive seller c. less elastic than that of a pure monopolist, but more elastic than that of a purely competitive seller d. more elastic than a pure monopolist, & less elastic than a purely competitive seller e. more elastic than that of a pure monopolist or a purely competitive seller Orf/Purpura AP-IB Econ 2010-2011 ____23. In equilibrium, a monopolistic competitor achieves: a. neither productive efficiency nor allocative efficiency b. both productive efficiency and allocative efficiency c. productive efficiency but not allocative efficiency d. allocative efficiency but not productive efficiency ____24. Non price competition refers to: a. competition between products of different industries b. price increases by a firm, which is 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 ____25. Concentration ratios measure a. geographic location of the largest corporation 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 ____26. 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 the products produced by its rivals d. produces a product similar but not identical to the products of its rivals ____27. If the several oligopolistic firms, which comprise an industry, behave collusively, the resulting price and output will most likely resemble that of a. regulated monopoly b. monopolistic competition c. perfect competition d. unregulated monopoly ____28. Which of the following best characterizes the firms in the oligopoly industry? a. there are more than 2 but less than 10 b. there are more than in a monopolistically competitive industry c. they are independent d. they collude to increase their profits e. they use strategic decision-making ____29. Game theory is an explanation for the profit- maximizing behavior of a firm under which of the following market structures? a. Perfect competition b. Oligopoly c. Pure monopoly d. Monopolistic competition e. All of the above Orf/Purpura AP-IB Econ 2010-2011 ____30. A strategy that gives the player the best outcome regardless of the action of the other player is called: a. Nash Equilibrium b. Dominated c. Dominant d. prisoner’s dilemma Questions 31-33 refer to the payoff matrix below. ACME Advertise Don’t Advertise Advertise Acme: 150 AAA: 150 Acme: -100 AAA: 400 Don’t Advertise Acme: 400 AAA: -100 Acme: 0 AAA: 0 AAA Acme and AAA are the two major firms in the industry. Each must decide whether to conduct a television advertising campaign. The returns from each firm’s decision depend on the decision of the other. The profits resulting from each possible combination of the firm’s decisions are given in the payoff matrix above. ___31. If AAA advertises and Acme does not, Acme will make how much as a result of their advertising? a. -$100 b. $0 c. $150 d. $300 e. $400 ___32. If AAA advertises, Acme: ___. a. will decide not to advertise because that is its dominant strategy b. will advertise because that is its dominant strategy c. does not have a dominant strategy d. loses money e. will increase its profits by $400 if it advertises ___33. Which of the following statements are true? a. If AAA advertises, Acme’s dominant strategy is to advertise b. If Acme advertises, AAA’s dominant strategy is not to advertise c. the two firms are in a “prisoner’s dilemma” game d. the two firms would be better off to agree to save their money and not to advertise e. a collusive agreement to advertise would benefit both firms Orf/Purpura AP-IB Econ 2010-2011 ___34. As its output increases, a firm’s short-run marginal cost will eventually increase because of (a) diseconomies of scale (b) a lower product price (c) inefficient production (d) the firm’s need to break even (e) diminishing returns Orf/Purpura AP-IB Econ 2010-2011