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Practice Final Exam (KEY) Name (First and Last):_________________________________________________ Email ID:_________________________@psu.edu PSU ID# (starts with a 9): ______________________________ ******************************************************************************************************************************************** Abbreviations: SR = Short Run LR = Long Run ATC = Average Total Cost AVC = Average Variable Cost FC = Fixed Cost MC = Marginal Cost TR = Total Revenue MR = Marginal Revenue P = Price Q = Quantity Market Structures: Monopoly Oligopoly Monopolistic Competition Perfect Competition A monopolist can use price discrimination or be a single-price monopolist. Abbreviations: CS = Consumer Surplus PS = Producer Surplus DWL = Deadweight Loss This graph shows the supply and demand in the market for textbooks. The equilibrium price is P*. The University is considering implementing a price ceiling of PC in the market. 1. Assume the market price is equal to the equilibrium price of P*. What area represents consumer surplus? A. H B. H + J + K C. H + J + M D. K + N + L E. H + J + M + K + N + L 2. If the price ceiling of PC is implemented, what will consumer surplus be? A. H B. H + J + K C. J + K + L D. L E. M + N 3. If the price ceiling of PC is implemented, what will producer surplus be? A. H B. H + J + K C. J + K + L D. L E. M + N 4. If the price ceiling of PC is implemented, what will deadweight loss be? A. H B. H + J + K C. J + K + L D. L E. M + N This graph shows the supply and demand in the market for beans. The equilibrium price is P*. The state is considering implementing a price floor of PF in the market. 5. Assume the market price is equal to the equilibrium price of P*. What area represents producer surplus? A. X B. W + Z + X C. T + V + W + X D. V + Y + W + Z E. X + Y + Z 6. If the price floor of PF is implemented, what will consumer surplus be? A. T B. T + V + W C. V + W + X D. X E. Y + Z 7. If the price floor of PF is implemented, what will producer surplus be? A. T B. T + V + W C. V + W + X D. X E. Y + Z 8. If the price floor of PF is implemented, what will deadweight loss be? A. T B. T + V + W C. V + W + X D. X E. Y + Z 9. Refer to Figure A. If the current market price is $6, the profit-maximizing output for this firm is A. 100 units. B. 200 units. C. 300 units. D. 400 units. 10. Refer to Figure A. If the price is $6 and the firm is producing at its profit-maximizing output, then total costs for the firm are A. $100. B. $300. C. $1,600. D. $2,400. E. $3,500. 11. Refer to Figure A. If the market price is $1.25, the firm will produce ________ units of output in the short run. A. 0 B. 200 C. some output level between 0 and 100 D. some output level between 100 and 199 12. Refer to Figure A. If the market price is $2, the firm will A. shut down and make zero profit. B. shut down and suffer a loss equal to its fixed cost. C. continue operating in the short run and make a loss that is less than its fixed cost. D. continue operating in the short run and make a loss equal to its total fixed cost. 13. Which of the following is NOT a characteristic of a perfectly competitive market? A. The products sold by the firms in the market are homogeneous. B. There are many buyers and sellers in the market. C. It is difficult for a firm to enter or leave the market. D. Each firm is a price taker. 14. Which of the following is NOT a characteristic of a perfectly competitive industry? A. There is free entry and exit in the long run. B. The industry demand curve is downward sloping. C. Each firm produces the same homogeneous product. D. Economic profits must be positive in the short run. 15. Clothing retailers have faced greater competition in recent years as more firms have entered the clothing market. Some of the competition has come from foreign competitors, but much of it is domestic competition. As a result there is much competition in markets for many types of clothing and A. individual buyers and sellers cannot affect the market price because it is determined by the market forces of demand and supply. B. there are no other implications. C. firms have a great degree of flexibility in pricing their products because these products can be sold at a high profit level. D. there are relatively few buyers and sellers in the market, and one individual firm can determine the market price. 16. The demand curve for a perfectly competitive industry is A. perfectly elastic. B. downward sloping. C. perfectly inelastic. D. unit elastic. 17. The demand curve for the product of a perfectly competitive firm is A. downward sloping. B. upward sloping. C. perfectly inelastic. D. perfectly elastic. 18. Perfect competition is characterized by A. many buyers and sellers. B. a small number of firms. C. differentiated products of firms in the industry. D. high barriers to entry. 19. In the above figure, the market price charged by this profit-maximizing, perfectly competitive firm is A. $5 per unit of output. B. $10 per unit of output. C. $8 per unit of output. D. $14 per unit of output. 20. In the above figure, at output levels between 5 units and 13 units, A. the firm's accounting profits are negative. B. total revenue equals total costs. C. the firm's economic profits are positive. D. the firm is breaking even. 21. In the above figure, at which output level is this firm earning negative economic profits? A. 2 B. 5 C. 10 D. 12 22. Which of the following is an example of a vertical merger? A. Northeastern Illinois University merging with McDonald's. B. Northeastern Illinois University merging with a training academy for new professors. C. Northeastern Illinois University merging with Roosevelt University. D. Northeastern Illinois University going from a public to a private university. 23. Which of the following is an example of a horizontal merger? A. Northeastern Illinois University merging with McDonald's. B. Northeastern Illinois University merging with a training academy for new professors. C. Northeastern Illinois University merging with Roosevelt University. D. Northeastern Illinois University going from a public to a private university. 24. Refer to the above figure. Profits will equal zero A. when the price equals $1. B. when the price equals $2. C. when the price equals $4. D. at prices between $1 and $2. 25. Refer to the above figure. Profits will be positive A. when the price equals $1. B. when the price equals $2. C. at prices between $1 and $2. D. when the price is above $2. 26. Refer to the above figure. The firm will just be covering all of its variable cost but none of its fixed cost A. when the price equals $1. B. when the price equals $2. C. when the price equals $4. D. at prices between $1 and $2. 27. Refer to the above figure. Profits will be negative A. when the price equals $2. B. when the price is above $2. C. when the price is below $2. D. only when the price equals $1. 28. Refer to the above figure. The firm's short-run shutdown price is A. at $1. B. at $2. C. at $4. D. above $4. 29. Monopoly producers face A. many competitors producing the same product. B. only a few competitors producing the same product. C. at least one competitive producer of the same product. D. no competitive producers of the same product. 30. A monopolist is defined as A. a firm with annual sales over $10 million. B. a large firm, making substantial profits, that is able to make other firms do what it wants. C. a single supplier of a good or service for which there is no close substitute. D. a producer of a good or service that is expensive to produce, requiring large amounts of capital equipment. 31. To be able to engage in profit-maximizing price searching, a monopoly firm must be able to A. prevent the entry of other firms into the market for its product. B. induce the entry of other firms into the market for its product. C. avoid earning negative economic profits in the short run. D. always earn zero economic profits. 32. Which of the following is NOT a barrier to entry that would allow a monopolist to keep potential competitors out of its market? A. Significant economies of scale exist. B. The market price of the product is too high. C. The firm has a patent on the good or control over some resource required for the production of the good. D. The firm has government authorization to be a monopoly. 33. To sell more units, a monopolist A. simply moves across its horizontal demand curve to a larger quantity. B. moves down its demand curve to a lower price that will increase quantity demand. C. can continue to receive the same price it always has as long as it has its customers' goodwill. D. must be willing to lower the barriers to entry that have protected it. 34. A monopolist's marginal revenue curve is A. the same as a perfectly competitive firm's marginal revenue curve. B. higher than the monopolist's demand curve. C. below the firm's demand curve. D. a horizontal line at the market price. 35. Which of the following statements about the elasticity of demand for a monopolist is TRUE? A. Since a monopolist produces a good with no close substitutes, the price elasticity of demand for the good is zero. B. A monopolist produces a good with demand that is perfectly inelastic because people can not do without the good. C. Since every good has some substitute, even if imperfect, the demand for a good produced by a monopolist will not have zero price elasticity. D. Since the demand curve of a monopolist is downward sloping, the demand for the good must be inelastic. 36. In the above figure, if the firm is producing at Q3 and charging a price of P3, it should A. increase output and decrease price. B. decrease output and increase price. C. not change output or price. D. shut down. 37. In the above figure, if the firm is producing Q1 units at a price P1, the firm should A. increase output and decrease price. B. decrease output and increase price. C. not change output or price. D. shut down. 38. In the above figure, if the firm is producing Q2 units at a price P2, it should A. increase output and decrease price. B. decrease output and increase price. C. not change output or price. D. shut down. 39. Which of the following is NOT a necessary condition for price discrimination? A. Preventing resale of the product B. Downward sloping demand curve C. Separating markets for the good D. Having a constant marginal cost 40. Price discrimination is the A. refusal by a firm to sell to all customers. B. selling of a given product at more than one price when the price differences reflect cost differences. C. pricing of a product so that not everyone can afford it. D. selling of a given product at more than one price when the price difference is unrelated to cost differences. 41. A monopoly will look for opportunities to price discriminate because the practice A. leads to selling more units. B. leads to greater profits. C. allows it to charge higher prices. D. is desired by customers. 42. Which of the following statements is FALSE? A. Other things being equal, society's overall well-being is reduced when a perfectly competitive industry is monopolized. B. When both a perfectly competitive industry and a monopolist face the same production costs and the same market demand curve,the monopolist offers a lower level of output for sale. C. The profit-maximizing monopolist will always produce only along the inelastic portion of the demand curve, whereas equilibrium in a perfectly competitive industry always occurs along the elastic portion of the demand curve. D. When both a perfectly competitive industry and a monopolist face the same production costs and the same market demand curve, the monopolist charges a higher price for its product than what would be charged in a perfectly competitive situation. 43. Which of the following is NOT a characteristic of monopolistic competition? A. A large number of sellers in a highly competitive market B. Differentiated products C. The existence of advertising D. Marginal cost pricing in the long run 44. Monopolistic competition is characterized by A. relative ease of entry into the market. B. a standard, undifferentiated product. C. persistent long-run economic profits. D. production at minimum average cost in the long run. 45. The distinguishing of products by brand name, color, and other attributes A. is known as interdependence. B. is known as product differentiation. C. leads to many firms in the market. D. leads to collusion. 46. Referring to the above graphic, which of the following statements is FALSE? A. In panel (a), a competitive situation is shown in which equilibrium is established at the intersection of D and S at point E. B. In panel (a), the equilibrium price is Pe and the equilibrium quantity Qe. C. The price the monopolist charges in panel (b) at Pm is lower than the price that the competitive producer charges. D. The monopolist produces at Qm, and charges a price of Pm, while maximizing profits at the intersection of MC and MR. 47. Entry into a monopolistically competitive industry A. is relatively easy. B. is very difficult. C. can be easy or difficult, depending on the type of product. D. is about the same as entering a monopoly industry. 48. The major similarity between monopolistic competition and perfect competition is A. the shape of the demand curve. B. that both assume many buyers and sellers. C. price equals marginal revenue in each. D. both assume products are differentiated. 49. In general, the demand for the product of a monopolistic competitor is A. unitary elastic. B. relatively inelastic. C. relatively elastic. D. perfectly elastic. 50. Firms in a monopolistically competitive market will advertise because A. they want to differentiate their products. B. they want to increase the elasticity of the demand curve. C. of the significant differences in their product over their competitors. D. the elasticity for their product is inelastic. 51. Which of the following products is most likely to be sold in a monopolistically competitive market? A. fast food B. coal C. wheat D. electricity 52. Monopolistic competition means A. monopolies from several countries compete in the global market. B. a large number of firms producing homogeneous products. C. a large number of firms producing differentiated products. D. few firms producing differentiated products. 53. Considering the relevant market structures, which is an INCORRECT statement? A. In a perfectly competitive situation, there is an extremely large number of firms. B. In pure monopoly, there is only one firm. C. In monopolistic competition, there is a large number of firms. D. In any market situation, the number of firms is not very important. 54. Which of the following does NOT help explain why oligopolies exist? A. Economies of scale B. Mergers C. Product homogeneity D. Barriers to entry 55. Which of the following is a characteristic of oligopoly? A. Easy entry and exit B. Many firms C. Strategic dependence D. None of the above 56. A merger between firms that are in the same industry is called a A. conglomerate merger. B. horizontal merger. C. vertical merger. D. none of the above. 57. The measurement of industry concentration which calculates the percentage of all sales contributed by a specific number of leading firms is called the A. Herfindahl-Hirschman Index. B. concentration ratio. C. producer price index. D. P/E ratio. 58. Which of the following is NOT a common characteristic of oligopoly? A. strategic dependence among firms in the industry B. product differentiation C. barriers to entry D. marginal cost pricing. 59. If a firm is an oligopolist, which is NOT true? A. It must pay attention to other firms' prices. B. It is one of a relatively small number of firms dominating its industry. C. It can sell all the units it wants at the going market price. D. It is engaged in a strategic game. 60. The most common reason for the existence of oligopolies is A. ease of entry. B. economies of scale. C. diseconomies of scale. D. advertising. Four-Firm Concentration Ratios 61. The most competitive industry of those presented in the above table is likely to be industry A. W. B. X. C. Y. D. Z. 62. The most oligopolistic industry of those presented in the above table is likely to be industry A. W. B. X. C. Y. D. Z. 63. Over the past several decades, U.S. firms have faced more competition from overseas firms. Does this have any impact on the market power of U.S. oligopoly firms? A. No, because domestic firms in oligopoly markets are always so dominant that overseas producers have little or no impact on those markets. B. No, because the United States government has effectively blocked all imports that might compete with domestic firms in oligopoly industries. C. Yes, competition from overseas firms can substantially limit domestic firms' market power. D. There is no way to know. 64. A market situation in which a large number of firms produce similar but not identical products is A. a collusive market structure. B. competitive monopoly. C. a homogeneous market. D. monopolistic competition. 65. All of the following are assumptions of monopolistic competition EXCEPT A. many buyers and sellers. B. homogeneous product. C. easy entry of new firms in the long run. D. profit-maximizing behavior. 66. Products can be differentiated A. if the buyers are homogeneous and their number increases. B. by location and by brand name. C. only by brand name. D. none of the above 67. The demand for the product of a monopolistically competitive firm is highly elastic when A. firms collude. B. there are fewer firms in the industry. C. there is a lot of product differentiation. D. there are a lot of close substitutes. 68. A monopolistic competitor behaving in a profit-maximizing way will A. not advertise. B. advertise as much as it can in order to increase its sales. C. advertise to the point where the additional sales from advertising equal the additional marginal costs of the product. D. advertise to the point where the additional revenue from one more dollar of advertising just equals the extra dollar cost of advertising. 69. When managers in oligopolistic firms make decisions that affect output or price, they must A. also be sure they erect barriers to entry to prevent new entrants from affecting their plans. B. anticipate the reactions of their rivals and plan accordingly. C. register with the Antitrust Division of the Department of Justice. D. inform the regulators of their industry about their plans. 70. Which of the following statements about concentration ratios is correct? A. A high concentration ratio indicates that the industry is a monopoly. B. A high concentration ratio indicates that the industry is monopolistically competitive. C. A high concentration ratio suggests that the industry is characterized by strategic independence. D. A high concentration ratio suggests that the industry is characterized by strategic dependence. 71. In the above figure, the monopolistically competitive firm's profit-maximizing output is A. 1,000 units. B. 300 units. C. 900 units. D. 700 units. 72. In the above figure, when this monopolistically competitive firm produces its profit-maximizing output, it sets a per-unit price of A. $13. B. $11. C. $10. D. $9. 73. At its profit-maximizing output, the firm in the above figure incurs a total cost of production of A. $7,000. B. $9,000. C. $6,300. D. $3,900. 74. In the above figure, this monopolistic competitive firm will realize an economic profit of A. $7,700. B. $6,300. C. $1,400. D. $700. 75. Since the firm in the above figure is operating in a monopolistically competitive industry, in the long run we can expect to see A. the typical firm's economic profits expand as production becomes more efficient. B. more firms entering the industry until economic profits are zero. C. the typical firm producing at the minimum point on its ATC curve. D. each firm expand its share of the total market. 76. Suppose an industry has total sales of $25 million per year. The two largest firms have sales of $6 million each, the third largest firm has sales of $2 million, and the fourth largest firm has sales of $1 million. The four-firm concentration ratio for this industry is A. 36 percent. B. 60 percent. C. 50 percent. D. 25 percent. 77. Suppose that an industry consists of 100 firms, and the top 4 firms have annual sales of $1 million, $1.5 million, $2 million, and $2.5 million, respectively. If the entire industry has annual sales of $8.5 million, the four-firm concentration ratio is approximately A. 82 percent. B. 50 percent. C. 94 percent. D. 70 percent. 78. Joe's hotdog stand merges with a company that supplies the condiments to Joe's. This is an example of A. conglomerate merger. B. concentration ratio. C. vertical merger. D. horizontal merger. 79. Which of the following is NOT a cause for an oligopoly to exist? A. economies of scale B. structural dependence C. barriers to entry D. horizontal mergers 80. A situation where a consumer's willingness to use an item depends on how many others use it is A. a positive-sum game. B. a network effect. C. price-leadership. D. a vertical merger. 81. Jane is on Facebook only because her friends are. This is A. price-leadership. B. negative-sum game. C. positive market feedback. D. negative market feedback. 82. Product compatibility is A. the capability of a product sold by one firm to compete with another firm's product. B. the capability of a product sold by one firm to function together with another firm's complementary product. C. the sensitivity of the price of one product is to the change of the price of another product. D. how much one product can be substituted for another product. 83. By reducing the product compatibility of iPod, Apple can lower the price elasticities of demand for A. Apple products that are complementary to the iPod. B. Apple products that are substitutable to the iPod. C. products by other firms that have a positive network effects. D. products that are not related to the iPod. 84. An industry battle between incompatible product formats can occur if competing firms selling compatible products A. take into account network effects. B. fail to take into account network effects. C. take into account economies of scale. D. fail to take into account economies of scale. 85. All firms in a perfect competition industry A. are price makers. B. produce differentiated products. C. produce identical products. D. lose money. 86. A price taker is a firm that A. seeks to maximize revenue rather than profit. B. cannot influence the market price. C. searches for the best price and then takes the highest profits possible. D. buys inputs for firms. 87. What does it mean when the products sold by the firms in an industry are homogeneous? A. The product sold by one firm is a perfect substitute of the product sold by another firm in the same industry. B. Firms in the industry can produce the same product with different inputs. C. All firms in the industry are identical in size. D. The product sold by one firm is a perfect complement of the product sold by another firm in the same industry. 88. Which of the following is NOT a characteristic of perfect competition? A. Firms are "price takers." B. All firms sell identical products. C. There are substantial barriers to entry into the industry. D. There are many buyers and sellers. 89. For a firm in a perfectly competitive industry, the demand curve for its own product is A. horizontal. B. vertical. C. upward sloping. D. downward sloping. 90. The demand curve for the product of a perfectly competitive firm's demand curve indicates that if the firm A. lowers its price, it can sell more. B. accepts the market-set price, the number of units the firm can sell is limited. C. raises its price, sales will fall to zero. D. changes its price, the quantity demanded will change in the opposite direction. 91. Which of the following statements is correct about the demand curve of the perfectly competitive industry? A. The demand curve of the perfectly competitive industry is horizontal as are the demand curves facing the individual firms. B. The market demand curve of perfect competition is vertical because the individual consumers are buying a homogeneous product. C. The market demand curve of the perfectly competitive industry is downward sloping while the demand curve facing an individual firm is horizontal. D. The market demand curve of the perfectly competitive industry is downward sloping, so the demand curves of the individual firms are also downward sloping. 92. When price and marginal cost are equal for a perfectly competitive firm, the firm is A. minimizing average total cost. B. maximizing total revenue. C. maximizing economic profit. D. earning negative economic profit. 93. The monopolist determines the price and quantity combination that maximizes short-run profits by A. finding the quantity at which marginal cost and marginal revenue are equal and then using the demand curve to find price. B. determining the price by finding the highest price at which sales can be made and then using the demand curve to find the appropriate quantity. C. finding the point at which marginal revenue and demand intersect. This gives the price and quantity that maximizes profits. D. finding the quantity at which average revenue and average total cost are furthest apart. 94. If a monopolist produces to a point at which marginal revenue is less than marginal cost then A. profits are being maximized. B. profits will always be negative. C. the incremental cost of producing the last unit exceeds the incremental revenue. D. the incremental cost of producing the last unit is less than the incremental revenue. 95. A pure monopolist is selling 7 units at a price of $12. If the marginal revenue of the 8th unit is $4, then the price of the 8th unit is A. $10. B. $11. C. greater than $12. D. $4. 96. Which of the following is true of a perfectly competitive firm and a monopoly in the long run? A. P = MC B. P = ATC C. MR = MC D. P = MR 97. Surge pricing is when firms _____ price due to __________. A. increase; an increase in demand B. increase; an increase in production costs C. decrease; an increase in supply D. decrease; a competitor offering a lower price 98. For a monopoly earning positive economic profits at the profit-maximizing output level, all of the following are true EXCEPT A. P > ATC. B. P > MR. C. P > MC. D. P = MR. 99. A profit-maximizing monopolist earns an economic loss whenever A. it pays taxes to the government on each unit of output it produces. B. the price it charges for its product exceeds average total cost. C. the demand curve lies completely below the ATC curve. D. it produces along the elastic portion of a demand curve. 100. Price discrimination is more likely in the case of services than in the case of goods because A. producers of goods usually do not face downward sloping demand curves. B. it is easier to distinguish customers with different elasticities of demand with respect to services than with goods. C. elasticities of demand vary more with services than with goods. D. it is more difficult to resell services. 101. Firms with __________ will not change prices very often. A. low menu costs B. high menu costs C. price leadership D. large network effects