Microeconomics Exam 2

Economists normally assume that the goal of a firm is to

maximize profit

XYZ corporation produced 300 units of output but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. Each of the 275 units were sold for a price of $95. Total revenue for the XYZ corporation would be:

26,125

Profit is defined as

total revenue minus total (opportunity) cost

An example of an implicit cost of production would be

the income an entrepreneur could have earned working for someone else

Foregone interest from investing your own personal savings into a business is an example of

an implicit cost

Economic profit is equal to

total revenue minus the total opportunity cost of producing goods and services

Accounting profit is equal to

total revenue minus the explicit cost of producing goods and services

Firms can have

(i) accounting profits and economic losses

(ii) accounting profits and economic profits

(iii) accounting losses and economic losses

(iv) accounting losses and economic profits

only (i), (ii), and (iii)

The production function describes

the relationship between quantity of inputs and quantity of output

The principle that rational people think at the margin

(i) is important to understanding how firms decide how many

workers to hire

(ii) is of little use to firms who are trying to maximize profit

(iii) provides the behavioral foundation for analyzing how firms make

optimal decisions

(i) and (iii) only

The marginal product of labor (MPL) can be defined as

 total output /  quantity of labor, where  denotes "change in"

Diminishing marginal product of labor occurs when

adding another unit of labor increases output, but not by as large a margin as the previously employed labor

________ do not vary with the amount of output a firm produces.

Fixed costs

Categorizing a factor of production, such as a large piece of machinery, as a fixed cost or a variable cost often depends on

the time horizon being considered

The cost to produce one additional unit is called

marginal cost

If XYZ company chooses not to produce anything this month, its ________ will be zero for the month.

marginal cost

As the quantity produced increases,

average fixed cost decreases

Average total cost (ATC) equals

(fixed costs + variable costs) / quantity produced

The most efficient or optimal scale of production for Bill's Bones occurs at

Q = 150

Over what output range would marginal cost (MC) be above average variable cost (AVC) but below average total cost (ATC)?

120 to 150

Diseconomies of scale occur when

average total cost increases as output increases

Typically, the marginal cost curve ________ as output increases.

briefly decreases then increases

Which of the following cost functions always has a negative slope?

Average fixed cost (AFC)

The efficient scale of a firm occurs when

All of the above

When marginal cost (MC) is less than average total cost (ATC),

All of the above

Decreasing (diminishing) returns to scale occur when output is at

Q = 400

A perfectly competitive market is characterized by which of the following attributes:

 

(i) many buyers and many sellers

(ii) barriers to entry

(iii) goods offered for sale are largely the same

(iv) price takers

(i), (iii) and (iv)

Quantity      Price

     1              $13

     2              $13

     3              $13

     4              $13

     5              $13

     6              $13

     7              $13

     8              $13

     9              $13

 

Over what range of output is marginal revenue (MR) declining?

None. Marginal revenue is constant over the whole range of output.

For a firm in a perfectly competitive market, __________________ equals the price of the good.

all of the above

If marginal cost exceeds marginal revenue

the firm may still be generating economic profit, but will not be maximizing profit.

To the best of their ability, a profit maximizing producer always chooses to produce the level of output where

marginal revenue equals marginal cost.

For the perfectly competitive firm depicted in the graph,

average revenue is equal to $5.00

Firms in a perfectly competitive market are said to be price takers because

All of the above

Which of the following industries is generally assumed to be most closely associated with a perfectly competitive market?

Agriculture

If you were to buy a product from a perfectly competitive firm, the price you would pay for the product would be

All of the above

If a perfectly competitive firm receives $500 in total revenue and has a marginal revenue of $10, what is the average revenue, and how many units were sold?

$10 and 50

When price is greater than marginal cost for a perfectly competitive firm

there are profit opportunities to be exploited by increasing production and output.

The supply curve for an individual firm in a perfectly competitive market

both b and c are correct

Firms maximize profits when marginal cost equals

marginal revenue.

When a firm in a perfectly competitive market shuts down production,

the market supply curve shifts left.

When new firms enter a market in pursuit of economic profit,

economic profit of existing firms in the market will begin to fall, all else equal.

The entry and exit decisions of firms are signaled by

economic profits and economic losses

The fundamental source of monopoly market power arises from

barriers to entry

Which of the average total cost curves shown in the graphs below would be consistent with a natural monopolist?

Panel c

A firm in a market characterized by significant barriers to entry, products which have no close substitutes, and no competitors, is said to be

a monopoly.

The goal of a(n) ________ is to maximize profit.

all of the above

An industry is a(n) ________ when a single firm can supply a good or service to an entire market at a lower cost than two or more firms could.

natural monopoly

In order to sell more of its product a monopolist

must lower its price on all units it sells.

When a monopolist faces a downward sloping market demand curve, its

marginal revenue is always less than the price of the units it sells.

A profit maximizing monopolist will produce the number of units that coincides with the level of output at which

marginal revenue is just equal to marginal cost.

Which of the graphs shown below best depicts the demand side of the market for a typical monopolist?

Panel b

A profit maximizing monopolist will choose to produce approximately _________ units of output.

Q1

A profit maximizing monopolist will have economic profits roughly equal to

(P4 - P1) * Q1

If this monopolist decided to produce (and sell) Q2 units of output

it would continue to make an economic profit, but would not be operating at a level consistent with profit maximization

As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for the good __________.

decreases due to the law of decreasing marginal benefit

For a competitive firm, marginal revenue ________ the price of its good, and for a monopolist, marginal revenue ________ the price of its good.

equals, is less than

A profit maximizing monopolist will cause a deadweight loss equal to

F

The real economic problem with monopolies is their ability

to restrict output below the socially efficient level of production

Under conditions of monopoly, the socially efficient level of production occurs where the marginal cost curve intersects the ________ curve.

demand

Because P > MC, monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized mutually beneficial trades are ________ to society.

a deadweight loss or excess burden

If a monopolist sells 100 units at $8 per unit and realizes an average cost of $6 per unit, what is the monopolist's profit?

$200

What is the deadweight loss due to monopoly pricing under the following conditions:

The price charged for goods produced is $16.

The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and price is $8.

The socially efficient level of production is 12 units

$8

One problem with government regulation of natural monopolies is that

the government typically has poor information about the socially optimal level of production

If a regulated natural monopoly is unable to generate profits at the "marginal-cost pricing" regulated level of production

it may be necessary for the government to subsidize the natural monopolist, which requires raising taxes or cutting public spending elsewhere

One problem with regulating a natural monopolist on the basis of its average cost is

that it does not provide an incentive for the monopolist to reduce or minimize its costs, possibly encouraging the monopolist to overstate costs or become less efficient

Which of the graphs shown below best describes the situation of a regulated natural monopolist with marginal-cost pricing regulation?

Panel d

A perfectly price discriminating monopolist is able to

maximize profit and produce a level of output consistent with optimal social well-being

If a monopolist is able to price discriminate

consumer surplus and deadweight losses are transformed into producer surplus and monopoly profits at a point closer to the socially efficient level of output

A monopolist who is able to engage in perfect price discrimination will have profit equal to

A + B + C + D + E

Price discrimination requires the firm to

both c and d

Markets which are characterized by only a few sellers with large market shares that sell similar or nearly identical (homogeneous) products are typically referred to as

oligopoly markets

In general, market structures that fall somewhere in between Monopoly and Perfect Competition are called

imperfectly competitive markets

Monopolistic competition is characterized by which of the following attributes:

(i) Many sellers

(ii) Product Differentiation

(iii) Barriers to entry

(iv) Natural monopolies

(i) and (ii) only

In a monopolistically competitive market structure, because each good sold in the market is _________________ each firm is considered a _________________.

slightly different, price setter or price maker

In a monopolistically competitive industry, price is likely to be _________________ marginal cost since each firm is a _________________.

above, price setter or price maker

When many sellers are involved in selling their products in a market, the market structure could be which of the following:

(i) perfect competition

(ii) monopolistic competition

(iii) monopoly

(iv) oligopoly

both (i) and (ii)

When freedom of entry is one of the attributes of a market structure, economic profits are

eventually driven to zero

A monopolistically competitive firm differs from a perfectly competitive firm because a monopolistically competitive firm

faces a downward sloping demand curve for its product due to product differentiation

Which of the graphs shown above would be consistent with a monopolistically competitive firm that is making economic profits?

Panel a

Which of the graphs shown above would be consistent with a monopolistically competitive firm that is making economic losses?

Panel b

If firms in a monopolistically competitive market are earning economic profits, which of the graphs shown would reflect the change in demand for incumbent firms as the market adjusts to its new equilibrium?

Panel a

In monopolistically competitive markets, economic losses ____________, and __________________ shifts the demand curve of incumbent firms to the ___________________. 

signal some incumbent firms to exit, exit, right

As new firms enter a monopolistically competitive market, economic profits of existing firms ____________ and product diversity in the market _________________.

declines, increases

Which of the panels shown reflects a long run equilibrium in a monopolistically competitive market?

Panel a

Panel b in the set of images shown above is consistent with

a monopolistically competitive firm in short-run equilibrium, but not a long-run equilibrium

For a monopolistically competitive firm in long-run equilibrium ___________________ like in a monopoly market, and ________________________ like in a competitive market.

price exceeds marginal cost, price equals average total cost?

If regulators were to require that monopolistically competitive firms set price equal to marginal cost in the long run, then

all monopolistically competitive firms would experience economic losses

Advertising that conveys information about the prices of different goods being offered for sale

is likely to enhance the ability of markets to allocate scarce resources more efficiently

When advertising encourages customers to become more informed about all firms in the market, then

each firm is likely to have less market power and prices are likely to be lower

Firms that have large advertising budgets, such as those firms that advertise during the Super Bowl, are likely to be providing consumers with

a potential signal about product quality

When compared to perfect competition, the theoretical disadvantages of monopolistic competition are __________ and __________, whereas the practical benefit that consumers get in return is __________.

excess capacity, deadweight losses, product variety

In markets characterized by oligopoly,

there is often tension between cooperation with rivals and pursuit of self interest

When a profit maximizing oligopolist makes a production decision

it generally must consider the behavior of competing rival firms

There are two types of markets in which firms face some competition yet are still able to have some control over the prices of their products. The names given these market structures are

monopolistic competition and oligopoly/duopoly

An agreement among firms over production output and price is called _______.  This group of firms that are acting in unison is called a ________.

collusion, cartel

An oligopolist is part of a cartel that is collectively producing at the monopoly level of output. The oligopolist, being self-interested will

increase production beyond the agreed-upon level to undercut rivals within the cartel

________ is the study of how people behave in strategic situations.

Game theory

The prisoners' dilemma is an important game to study because

it identifies the fundamental difficulty in maintaining cooperative agreements

Given the following prisoners' dilemma table, if Bonnie and Clyde make the appropriate self-interested decision independent of the other, how much time would each end up spending in jail?

8 years each

In game theory, a strategy is called a ________ if it is the best strategy for a player to follow regardless of the strategies pursued by other players.

dominant strategy