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ABSE 203
Exercises
Firms’ conduct
1. At present output levels, a competitive firm is in the following position: output = 4,
market price = $1.10, FC = $2, VC = $1, MC = $1.20. This firm is:
a) not maximizing its profit but could do so by decreasing its output.
b) making a zero economic profit.
c) losing money, although it could make a profit by increasing its output.
d) not maximizing its profit but could do so by increasing its output.
2. In the long run the perfect competitor will:
a) make economic profits;
b) make normal profits;
c) take a loss;
d) there is not enough information given to be able to tell.
3. Market conditions for a monopoly firm can produce all of the following short-run
results EXCEPT:
a) greater than market price.
b) normal profit.
c) greater than normal profit.
d) operating loss.
4. If a profit maximizing firm in perfect competition is earning zero economic profit:
a) it should leave the business;
b) marginal cost is higher than average cost;
c) price is equal to average variable cost;
d) the firm is technologically efficient.
5. The demand curve of the perfectly competitive firm is equal to:
a) its marginal revenue curve;
b) its supply curve;
c) its average cost curve;
d) all of the above.
6. Imperfect competition occurs;
a) when any individual firm can increase its production and sales without affecting the price
of the good;
b) whenever firms are losing money;
c) when firms have some control over price;
d) all of the above.
7. Which of the following is consistent with long-run equilibrium in a monopoly market:
a) AC are minimized;
b) MC < MR;
c) prices cannot be lowered without forcing the firm out of the industry;
d) MC < P
8. As compared to the pure monopoly with the same cost structure, the perfectly competitive
industry produces:
а) more output;
b) less output;
c) the same output, but sell it at a higher price;
d) more output, but sell it at a higher price.
9. Which of the following is an accurate argument against monopoly:
a) it restricts output and raises prices;
b) it provides greater incentives to pursue R&D;
c) it maximizes profits;
d) all of the above.
10. The short-run shut down point for the perfectly competitive firm occurs:
a) when the demand curve facing the firm is tangent to its average variable cost curve.
b) where total revenue is just sufficient to cover all explicit cost but not any implicit or
imputed costs.
c) when the firm is able to cover only its variable costs.
d) when the firm is able to cover only its fixed costs.
11. In the long-run for a competitive industry:
a) all factors of production are variable so that firms are free to enter or leave the market.
b) all inputs are fixed for the industry as a whole.
c) firms can earn more than normal accounting profits if demand is high.
d) profits serve as a signal for entry which does not happen for other market structures
(such as monopolies, oligopolies, or monopolistically competitive firms).
12. When typical firms in a perfectly competitive industry are making economic profits, then
all of the following will take place except:
a) new firms will enter the industry.
b) the industry supply curve will shift to the right.
c) the firm demand curves will shift down.
d) all of the above will occur.
13. In the long-run, competition in competitive markets:
a) yields economic inefficiency with the absence of government intervention.
b) results in output being produced at maximum opportunity cost.
c) forces all surviving firms to adopt the most efficient technology.
d) guarantees each firm economic profits.
14. Consider the market for wheat. You know that there are numerous firms in the market, all
of which are relatively small. Assume further that there are no entry costs that cannot be
recovered on exiting the industry. Suppose that a health fad emerges in the country that
encourages the consumption of natural grains and cereals. What will be the effect on
profits of wheat farmers, the price of wheat and output in both the short-run and the longrun? (Assume that input prices are constant over the relevant range.)
a) price, quantity and profits will rise in the short-run but remain constant in the longrun.
b) price, quantity and profits will rise in both the short-run and the long-run.
c) quantity will rise in both the short and the long-run, price will rise in the short-run but
remain constant in the long-run, profits will rise in the short-run but fall to zero in the
long-run.
d) price and quantity will increase in both the short and the long-run while profits,
although initially rising, will fall to zero in the long-run.
15. That portion of a perfectly competitive firm's marginal cost curve lying above its AVC
curve has all of the following characteristics except:
a) it is the firm's supply curve.
b) it intersects the firm's ATC curve at minimum ATC.
c) its intersection with the firm's MR curve determines the firm's profit maximizing output level.
d) all of the above are true.
16. When in long-run equilibrium, perfectly competitive firms:
a) must employ the most efficient (least costly) production technology or be driven out of
the business by competition.
b) are paid a price that equals the maximum value of the long-run average cost curve.
c) collectively produce more output than society desires.
d) reap economic profits if the firm is exceptionally efficient.
17. If the monopolist operates in the elastic range of its demand curve:
a) it could raise total revenue by lowering price.
b) the firm would be acting to maximize total revenue rather than profit.
c) marginal revenue would be negative.
d) it could increase its profit by increasing both price and output.
18. When a monopoly firm is operating in a range of output where total revenue is rising as
output rises, then marginal revenue:
a) is also rising.
b) is constant.
c) is falling but is greater than zero.
d) is falling but is less than zero.
19. At the profit-maximizing output for a monopolist, price:
a) always exceeds average total cost.
b) is less than marginal cost.
c) exceeds marginal cost.
d) equals marginal cost.
20. The simple analysis of monopoly that we carried out in class suggested that monopolists
are inefficient from society's viewpoint. However, monopolists may not always be
inefficient. Which of the following is not an argument which could be used to justify the
existence of monopoly power on the basis of economic efficiency?
a) entry and exit are almost always relatively costless so that the mere threat of
competition will force the monopolist's price to the competitive price.
b) when substantial economies of scale exist, the monopolist may have lower costs than
any number of smaller firms.
c) when there is a threat of entry, monopolist firms have more incentive to innovate than
perfectly competitive firms.
d) none of the above.
21. Although a monopolistically competitive firm in long-run equilibrium is producing output
at an average total cost higher than the minimum, economists are not greatly concerned
about this inefficiency because:
a) additional firms may enter the industry and force price down.
b) consumers gain satisfaction from having a wide variety of products available.
c) consumers would unquestionably benefit from having fewer products produced more
cheaply.
d) firms are making zero economic profit.
22. In the long run, the profit-maximizing, monopolistically competitive firm fails to produce
a level of output where:
a) MR = MC.
b) P = AC.
c) P > MC.
d) economic profits are realized.
23. The demand curve that confronts a monopolistically competitive firms is:
a) less elastic than the demand curve that confronts the industry.
b) perfectly inelastic because of numerous substitutes for the firm's product.
c) less elastic than the demand curve facing a perfectly competitive firm.
d) perfectly elastic in the long-run, driving economic profits to zero.
24. In a monopolistically competitive industry, a firm in long-run equilibrium will
be operating where price is:
a) greater than AC but equal to MC;
b) greater than AC and greater than MC.
c) equal to both AC and MC.
d) greater than MC but equal to ATC.
25. The important difference between the characteristics of perfectly competitive and
monopolistically competitive markets is that firms in monopolistically competitive
industries:
a) have a downward sloping and relatively inelastic demand (as compared to market
demand.)
b) do not try to maximize profits by producing where MR = MC.
c) sell similar but not identical products.
d) have substantial barriers to deter the entry of competing firms while perfectly
competitive firms do not.
26. Explain why governments often practice price and profit rate controls with respect to
monopoly, while they do not set such regulations to monopolistic competition.
27.
"We regret that rising costs have compelled us to raise our prices." That's a very
common statement made by sellers who are raising their prices. But is it true? Do
increases in suppliers' costs always compel them (or even allow them) to raise their
prices?
28.
Congratulations! You were appointed as an economic consultant at a firm under
monopolistic competition that is currently experiencing excess capacity. Under what
circumstances should the firm increase output?