Econ exam 3

1. Which market model has the least number of firms?

Pure monopoly

There is no control over price by firms in:

Pure competition

Which is true under conditions of pure competition?

a. A large number of firms b. Standardized product (meaning no product differentiation) c. Price takers (no exertion over product price) d. Free entry and exit in and out of the market e. Individual firms have a perfectly elastic demand curve, but whole industries that represent a market do not have a perfectly elastic curve (market demand)

Competitive firms are assumed to:

a. A large number of firms b. Standardized product (meaning no product differentiation) c. Price takers (no exertion over product price) d. Free entry and exit in and out of the market e. Individual firms have a perfectly elastic demand curve, but whole industries that represent a market do not have a perfectly elastic curve (market demand)

The demand curve faced by a purely competitive firm:

a. Is completely horizontal, meaning perfectly elastic, because a purely competitive firm cannot change the product price no matter how much output they produce or sell. b. Total Revenue is a slope c. Demand = Marginal Revenue = Average Revenue

If a firm is a price taker, then the demand curve for the film’s product is:

a. Completely horizontal because the price will not change.

Refer to the graph on the left for a firm in pure competition. Line A represents:

a. The total revenue made from selling each extra unit of output as per the price at Line B. b. (Additionally, Line B is the demand curve, marginal revenue curve, and average revenue curve.)

Assume the price of a product sold by a purely competitive firm is $5. Given the data in the accompanying table (bottom left), at what output is the total profit highest in the short run?

a. (The graph on the right is not given in the study guide, it is pure calculation in response to trying to figure out the problem.) b. According to the profit-maximizing rule, MR = MC, the total highest profit in the short run is at 40 units of output.

Refer to the above table. If the firm shuts down in the short run, the total cost will be:

a. $2,500, because the firm shutting down means producing 0 output.

Refer to the above table. If the product sells for $1,200 a unit, the firm’s profit-maximizing output is:

a. 5 units of output, because it’s the closest to the MR = MC equation.

In a typical graph for a purely competitive firm, where the total cost and total revenue curves intersect, there is a(n):

a. Break even points at A and F (?) b. Normal profits (?)

Refer to the above table. The equilibrium price of the product is:

a. $40 ( P X Q = TR  P = TR/Q )

Refer to the above table. The marginal revenue from the third unit of output is:

a. $40 (For pure competition, P = MR)

A profit-maximizing firm in the short run will expand output:

a. When marginal revenue is either greater than or equal to marginal cost. b. (Follow the profit-maximizing rule, “MR = MC”.)

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output is $5.00 and the market price is $5.00. What should the firm do?

a. Following the profit-maximizing rule ((P = MR) = MC ), the firm should either shut down if the marginal or average cost output increases or increase if the marginal or average cost output decreases

Refer to the graph on the left. The level of output at which this firm will produce is:

a. Point C, where (P = MR) = MC

Refer to the graph on the left. The level of output at which this firm will shut down is:

a. Point A, where P = MC = AVC b. This is also where AVC (average variable cost) is at its minimum.

Refer to the above graph. The level of output at which this firm is maximizing an economic profit is:

a. Point C, where (P = MR) = MC

Refer to the above cost chart. If the marginal revenue is $6, what output level will the firm produce?

a. 14 units of output

The individual firm’s short-run supply curve is that part of its

a. Marginal cost curve that either equals or is above the average variable cost curve. i. (If you look at the graph for Problems 16, 17, and 18, it’s at point A.) ii. (Anything below that point would mean no output or quantity.)

Refer to the graph on the left. To maximize profits, this firm would produce:

a. Profit Maximizing Rule: MR = MC b. Point H

22. Based on the graph on the left, the firm is earning:

a. Zero economic profits.

Refer to the graph on the left. It represents a profit-maximizing firm producing under conditions of pure competition. When the firm is in equilibrium in the short run, its average fixed cost is:

a. The distance between Point E and Point D. b. ATC = AFC + AVC  AFC = ATC – AVC

24. Refer to the graph on the previous page. It represents a profit-maximizing firm producing under conditions of pure competition. When the firm is in equilibrium in the short run, its average variable cost is:

a. The distance between Point D and Point B.

25. Refer to the graph on the left. It shows the cost curves for a competitive firm. If the market price falls to $0.55, the optimal output rate is:

a. Zero. It would be shut down at this point.

26. Refer to the graph on the left. It shows the short-run cost curves for a purely competitive firm together with a number of different prices. At what price is the firm making only normal profit?

a. At the price of P3. b. Normal profit occurs at the break-even point, where total cost (or average total cost) equals marginal cost (meaning there’s no extra cost, which means neither losing money nor making money). c. Note that MC = ATC at its minimum ONLY

Refer to the above graph. It shows the short-run cost curves for a purely competitive firm together with a number of different prices. At what price is the shutdown point for the firm?

a. At the price of P1, where MC = AVC.

The long-run supply curve would be perfectly elastic in:

a. A constant-cost industry in pure competition

Allocate efficiency occurs when the:

a. “When it is impossible to produce any net gains for society by altering the combination of goods and services that are produced from society’s limited supply of sources.” b. The definition of allocative efficiency is the allocation of the society’s scarce resources, redirected toward producing goods and services that people most want to consume.

In long-run equilibrium under conditions of pure competition and productive efficiency, all firms produce at minimum:

a. Average total cost.

One feature of pure monopoly is that the monopolist is:

a. The only seller of that particular good or service in the industry. b. The price maker of the industry. c. Not affected by other competition.

One defining characteristic of pure monopoly is that:

a. There is only one seller. b. There are no close substitutes. c. Businesses are price makers. d. There is blocked entry. e. There is non-price competition.

The classic example of a private, unregulated monopoly is:

b. (Internet research suggests De Beers, a company that dominates the diamond industry.)

Which is a barrier of entry?

a. Economies of scale. b. Patents and licenses. c. Ownership/control of essential resources. d. Personal blockage from the monopoly business itself.

Natural monopolies result from:

a. Economies of scale

One feature of pure monopoly is that the demand curve:

a. Is downward sloping (meaning that it’s not perfectly elastic).

A pure monopoly firm will never charge a price in the inelastic range of its demand curve because lowering price to get into this region will:

a. Lower total revenue, raise total cost, and lower profits. b. The inelastic range starts with P and MR at 0 and decreases from there.

38. Refer to the graph on the left showing the short-run revenue curves for a monopolist. What price should be charged in order to maximize total revenue?

a. The relationship between MR and TR is that when MR is at zero when TR is at its maximum. b. Therefore, the price that should be charged is P3.

Refer to the above table. What is the change in total revenue if she lowers the price from $20 to $18?

a. TR = P X Q, MR = TR2 – TR1 b. TR1 = ($20 X 3) = $60; TR2 = ($18 X 5) = $90; MR = ($90 - $60) = $30

40. At the profit-maximizing level of output, a monopolist will always operate where:

a. Price ≥ marginal cost

The profit maximizing monopolist in it will set its price at:

a. Point 0 to Point J b. This is where the MC = MR rule applies.

A profit-maximizing monopolist facing the situation shown in the graph on the left should:

a. Stop production and shut down. b. The AVC and ATC are both way above the demand curve, indicating that there is no need or desire for the current product.

The supply curve for a pure monopolist:

a. Is nonexistent. b. There is no supply curve for a pure monopolist because there is no unique price associated with each output level, due to lack of competition.

Monopolists are said to be allocatively inefficient because:

a. The demand of the product (price) and marginal benefit is greater than marginal cost; thus resources go into short-run benefits (immediate production) rather than long-run benefits (increasing later production of goods).

Based on the graph to the left, what is the difference between the purely competitive equilibrium level of output and the pure monopolist equilibrium level of output?

a. 20 units

Refer to the graph on the left. If the monopoly shown is able to begin practicing perfect price discrimination, what will the profit-maximizing quantity be?

a. The profit-maximizing quantity will be at the point where marginal cost intersects the demand curve because price discrimination means charging the consumers the maximum prices each are willing to pay. Thus the quantity is Q2.

For the last unit sold by a perfectly price discriminating monopolist, price will be:

a. Lower than the first unit.

A major characteristic of monopolistic competition is:

A large number of firms selling the product in question. b. Product differentiation, in which monopolistically competitive firms churn out variations of the product in question. c. Limited control over market price. d. No collusion between firms over output and set prices. e. Independent action, meaning no interdependence on other firms for profit.

Which assumption is part of the model of monopolistic competition?

a. See problem 48.

One difference between monopolistic competition and pure competition is that:

a. Monopolistic competition has product differentiation while pure competition doesn’t. b. Monopolistic competition have limited control over market price while pure competition doesn’t have any control. c. Monopolistic competition is not dependent on other firms, but pure competition is.

Refer to the graph on the left. A successful advertising campaign by a monopolistically competitive firm will cause the demand curve to shift from:

a. B to A and become more elastic

Refer to the graph on the left. In the short run, this monopolistically competitive firm will set price at:

a. $65 and 35 units of output (MR = MC)

Refer to the graph on the left. At the profit-maximizing level of short-run output, this monopolistically competitive firm will be making a profit of:

(Price on D at MR=MC is $65) - (Price on ATC at MR=MC is $50) = $15     Quantity at D = 35 units       Profit=   ( $15 ) (  35 units )   =  $525

In the long run, a representative firm in a monopolistically competitive industry will typically:

a. Have a normal profit only, no economic profit.

Refer to the graphs on the left. A short-run equilibrium that would produce profits for a monopolistically competitive firm would be represented by graph:

a. A b. This graph is the only one where the demand curve is above the average total cost curve.

Monopolistic competition is characterized by excess capacity because:

a. “Plant and equipment that are underused because firms are producing less than the minimum-ATC output.”

In an oligopolistic market there are:

b. A few large producers c. Homogenous or differentiated products. d. Entry barriers, but no exit barriers. e. Firms that have control over price, but also mutual interdependence.

The primary lead industry in the United States would be described by an economist as:

b. A high-concentration industry (?)

Which would be most characteristic of oligopoly?

b. See Problem 57 c. Collusion between firms and an incentive to cheat

Industry X is dominated by four large firms that hold market shares of 30, 30, 20, and 20. The Herfindahl index for this industry is:

=2600

If an oligopolist’s demand curve has a “kink” in it, then:

a. The oligopolist’s competitor(s) followed a price cut. b. There should be no change in price or output following the “kink”.

Given the oligopolistic firm pictured to the left, what is the profit-maximizing price?

a. At P3. b. Profit-maximizing still occurs at MR=MC, which indicates P3 according to the vertical segment.

The kinked demand curve is based upon the assumption that an oligopolist’s rivals will:

a. Either match price changes or ignore price changes i. Match in the case of price cuts, and ignore in the case of price raises.

A potential negative effect of advertising for society is that it can:

b. Alter/manipulate the preferences of the audience in favor of the specified product. c. Be misleading, exaggerated, and confuse consumers, persuading people to pay a lot for a bad product rather than pay a little for a good one. d. Establish substantial brand-name loyalty for a firm and monopolize the market. e. Prevent other firms from entering the industry due to an increase in advertising costs. f. Be self-cancelling

In the long run, an oligopoly:

ASK SOMEONE

Broadly defined, technological advance:

a. “Is new and better goods and services or new and better ways of producing or distributing them.”

In economist’s models, technological advance occurs in:

a. “The very long run”. i. Between a few months to many years. ii. Described as a period in which technology can change and in which firms can develop and offer entirely new products.

Technological advance in a three-step process involving:

a. Invention, innovation, and diffusion.

The successful commercial introduction of a new product, the use of a new method, or the creation of a new form of business enterprise is called:

a. Innovation

The first discovery, as opposed to first commercial application, of the water-soluble material used in contact lens is an example of:

a. Invention

About _____ percent of business R&D spending is for basic research.

a. According to the 2008 chart, about 5% of business R&D spending is for basic research.

Entrepreneurs:

b. Are initiators, innovators, and risk bearers. c. Combine their entrepreneurial ability and resources to produce new goods and services. d. Form start-ups (small new companies that create/introduce new products/techniques).

Process innovation causes an upward shift in a firm’s total product curve and:

b. More units can now be produced at each level of resource usage. c. A downward shift in the firm’s average-total-cost curve.

Process innovation can be depicted as:

b. New and improved methods of production or distribution

As it relates to R&D, the imitation problem is that:

a. A firm’s rivals may be able to imitate its new product or process, greatly reducing the originator’s profit from its R&D effort.

All of the following increase the expected rate of return on R&D expenditures, except:

a. The following can increase the expected rate of return: i. Patents ii. Copyrights and Trademarks iii. Brand-Name Recognition iv. Trade Secrets and Learning by Doing v. Time Lags b. The answer must be the opposite of one of these.

Legal protections against direct copying of written material are called __________; legal protections against using a product’s name are called _________.

a. Copyrights; trademarks

Which pair of market structures provide firms with the greatest ability to finance R&D out of retained earnings?

a. Oligopolies and pure monopolies i. Note: this may seem a bit confusing between questions 78 and 79, but this question asks greatest ability to finance. Question 79 asks the least conducive, which means less helpful.

Which of the following market structures do economists generally agree is the least conducive to R&D and innovation?

a. Pure Monopoly

In the inverted-U theory:

a. Deals with the relationship between market structure and technological advance. b. Relates R&D spending as a percentage of a firm’s sales to the industry’s four-firm concentration ratio. i. Graph-wise, R&D spending/expenditures increases at the beginning as concentration rises, then falls as concentration continues to rise. ii. Creates an arc.