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1. In a competitive market, the market-determined price is $60. For a typical firm
producing 100 units of output, short-run marginal cost is constant at $65, average total
cost is $95, and average fixed cost is $30. Is this firm making the profit-maximizing
decision? If not, what should it do?
No, it is not making the profit maximizing decision. In the short run, it should reduce its rate
of production until its marginal cost is equal to $60.
Yes, it is making the profit-maximizing decision.
No, it is not making the profit maximizing decision. In the short run, it should increase its
rate of production until its marginal cost is equal to $60.
No, the firm is not making the profit maximizing decision. It should shut down in the short
run to minimize losses.
2. If price exceeds average costs for a typical firm in a perfectly competitive industry,
____ firms will enter the industry, supply will ____, and price will be driven ____.
no new; remain the same; up
more; decrease; down
more; decrease; up
more; increase; down
3. The perfectly competitive firm
faces a downward-sloping demand function
can influence market price only in a downward direction
cannot earn any economic profits in the short run because it faces a horizontal demand
curve
makes its profit-maximizing decision only on the basis of output
4. A firm reaches its "shutdown point" when
average total cost equals price at the profit-maximizing level of output.
average variable cost equals price at the profit-maximizing level of output.
average fixed cost equals price at the profit-maximizing level of output.
marginal cost equals price at the profit-maximizing level of output.
5. Which of the following statements is not a characteristic of a perfectly competitive
market?
Large number of firms in the industry
Outputs of the firms are perfect substitutes for one another
Limited information is available to all market participants
Ease of entry into the market
6. In a competitive market, the market-determined price is $25. For a typical firm
producing 10,000 units of output, the firm's average cost reaches its minimum value of
$25. Is this firm making the profit-maximizing decision? If not, what should the firm do?
No, it is not making the profit-maximizing decision. In the short run, it should reduce its
rate of production because its marginal cost is not equal to $25.
Yes, it is making the profit-maximizing decision.
No, it is not making the profit-maximizing decision. In the short run, it should increase its
rate of production because its marginal cost is not equal to $25.
No, it is not making the profit-maximizing decision. In the short run, it should reduce its
rate of production until its average variable cost is equal to $12.
7. When price is greater than average variable cost but less than average total cost at
the profit-maximizing level of output, a firm should
continue to produce the level of output at which marginal revenue equals marginal cost.
increase output to minimize its losses.
reduce output to the level at which price equals average variable cost to minimize its losses.
shut down to minimize its losses.
8. Assume a monopoly has the following demand schedule:
Price........Quantity
$20.............200
$15.............300
$10.............500
$5...............700
What can you say about the price elasticity of demand along the demand curve between $15 and $20?
Demand is price elastic.
Demand is price inelastic.
Demand is unitary elastic.
There is not enough information to tell.
9. The following are the inverse demand curve and MR curves for a monopolistically competitive firm.
P = 1000 - 2Q
MR = 1000 - 4Q
Where P is the price of the product and Q is the level of production.
For the 200th unit of Q, MR is equal to _______ and demand is price ____________.
200, elastic
-200, inelastic
600, elastic
-600, inelastic
10. In the long run, firms in a monopolistically competitive industry will
earn substantial economic profits.
tend to just cover costs, including normal profits.
seek to increase the scale of operations.
seek to reduce the scale of operations.
13. Which of the statements below concerning barriers to entry is FALSE?
They restrict entry into industries in which positive economic profits are being made.
They are somewhat lessened by the existence of patents.
They may be due to legal impediments such as licenses.
They may be due to a single firm controlling access to a natural resource or production
process.
12. In comparing monopoly to a competitive market, which of the following is FALSE?
Market price will be higher under monopoly.
Equilibrium quantity will be higher under perfect competition.
Consumers will be worse off with the monopoly.
Employment will be higher under monopoly.
13. ZZZ, Inc. operates in a monopolistically competitive industry. Its demand curve can
be written as P = 160 - Q and its short run total cost curve is equal to TC = 1000 + Q^2.
What is the rate of output that maximizes ZZZ, Inc.'s short run profits?
40
0
53
20
14. Which of the following statements is correct?
Barriers to entry do not affect the industry structure.
Barriers to entry affect the competitiveness of an industry because they determine whether
or not typical firms in an industry will face new competition if they are earning above
normal returns on investment.
Barriers to entry are highest for monopolistic competition.
Barriers to entry can be achieved only through government mandate.
15. All of the following are possible characteristics of a monopoly except
there is a single firm.
the firm is a price taker.
the firm produces a unique product.
the existence of some advertising.