The mr mc rule applies

ECON 1102 Test 3 (061416)

Test 3: ECON 1102 Sec. 711 (Microeconomics)

Answer all 40 questions (Use the answer sheet)

1) The MR = MC rule applies:

A) only when the firm is a "price taker."

B) to firms in all types of industries.

C) only to monopolies.

D) only to purely competitive firms.

Answer questions 2 through 4 based on the graph below of a perfectly competitive firm

2) The profit maximizing level of output for the firm is equal to ___ units. (put your answer on the answer

sheet.)

3) At the profit maximizing level of output, the firm is earning

A) an economic loss equal to $123.50.

B) an economic loss equal to $119.00.

C) an economic loss equal to $187.00.

D) a normal profit

4) What will the firm choose to do in the short-run and why?

A) shut down because the firm incurs an economic loss

B) stay in business because it is earning a normal profit

C) stay in business because the firm's economic loss is less than fixed costs

D) stay in business because the firm is making an economic profit

5) An example of a perfectly competitive industry is

A) the market for corn in the United States.

B) a big city police department.

C) the market for French impressionists' paintings.

D) the National Football League.

6) The market for lawn services is perfectly competitive. Larry's Lawn Service cannot increase its total

revenue by raising its price because ________.

A) Larry's supply of lawn services is perfectly elastic

B) the demand for Larry's services is perfectly inelastic

C) Larry's supply of lawn services is inelastic

D) the demand for Larry's services is perfectly elastic

ECON 1102 Test 3 (061416)

7) A perfectly competitive firm will operate and incur an economic loss in the short run if

A) the loss is smaller than its total fixed costs.

B) it knows it can recoup the loss in the long run.

C) shareholders do not know about the loss.

D) the loss can offset future profits.

The table below shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local

market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $8.

Answer questions 8 through 11 based on the numbers in the table.

Output

(sandwiches per hour)

Average total cost

($ per sandwich)

1 17.00

2 10.00

3 8.00

4 8.00

5 8.80

6 10.00

8) What is Evan's marginal revenue from the 2nd sandwich sold? ____

9) If Evan's sells the 5th sandwich, the marginal cost is ________ the marginal revenue, so the firm's profit

________.

A) greater than; decreases

B) greater than; increases

C) less than; increases

D) less than; decreases

10) What quantity of sandwiches produced will maximize Evan's economic profit in the short run?

A) 2 sandwiches per hour

B) 3 sandwiches per hour

C) 4 sandwiches per hour

D) 5 sandwiches per hour

11) If the market price does not change, Evan's will

A) continue to operate in the short run, but will exit the industry in the long run.

B) continue to operate in the short run and in the long run.

C) shut down.

D) increase its production in the long run.

12) In the short run, perfectly competitive firms ________ but in the long run, perfectly competitive firms

________.

A) can incur an economic loss; incur an economic loss

B) can incur an economic losses; make zero economic profit

C) must make an economic profit; make an economic profit

D) can incur an economic loss; make an economic profit

13) A monopolistic firm has a sales schedule such that it can sell 10 prefabricated garages per week at $20,000

each, but if it increases its output to 11 per week it can sell those at $18,000 each. The marginal revenue of the

eleventh unit of sales per week is _______.

ECON 1102 Test 3 (061416)

14) Which of the following is necessary for a monopolist to price discriminate between groups?

A) The groups are not easily identifiable.

B) The groups all have the same willingness to pay.

C) A customer from one group cannot resell to a customer in another group.

D) ALL of the above conditions are necessary for the monopolist to price discriminate.

In the following table is demand and cost data for a pure monopolist. Complete the table by filling in the

columns for total revenue, marginal revenue, and marginal cost, and then answer questions 15, 16 and 17:

Quantity

Price

Total

revenue

Marginal

revenue

Total cost

Marginal

cost

0 $40 $_____ $ 20

1 38 _____ $_____ 38 $_____

2 36 _____ _____ 48 _____

3 34 _____ _____ 54 _____

4 32 _____ _____ 58 _____

5 30 _____ _____ 66 _____

6 28 _____ _____ 80 _____

7 26 _____ _____ 100 _____

8 24 _____ _____ 130 _____

15 Profit maximizing output is ______

16) Profit maximizing price is ______

17 Total profit is _______

18) The economic inefficiencies of monopolistic competition may be offset by the fact that:

A) resources are optimally allocated to the production of the product.

B) advertising expenditures shift the average cost curve upward.

C) consumers have a number of variations of the product from which to choose.

D) available capacity is fully utilized.

19). When firms in monopolistic competition incur an economic loss, some firms will.

A) enter the industry and produce more products.

B) exit the industry, and demand will increase for the firms that remain.

C) enter the industry, and demand will become more elastic for the original firms

D) exit the industry, and demand will decrease for the firms that remain.

20) Which of the following companies most closely approximates a monopolistic competitor?

A) Pittsburgh Plate Glass B) Dunkin Donuts C) Ford Motor Company D) Microsoft

21) Economic analysis of a monopolistically competitive industry is more complicated than that of pure

competition because:

A) monopolistically competitive firms cannot realize an economic profit in the long run.

B) the number of firms in the industry is larger.

C) monopolistically competitive producers use strategic pricing strategies to combat rivals.

D) of product differentiation and consequent product promotion activities.

ECON 1102 Test 3 (061416)

22) ACME, Inc. operates in a market structure in which there are many other firms that find it easy to enter

or exit. ACME is operating in ________ market.

A) definitely a perfectly competitive

B) either a perfectly competitive or a monopolistically competitive

C) neither a perfectly competitive nor a monopolistically competitive

D) definitely a monopolistically competitive

23) Which of the following is a characteristic of monopolistic competition?

A) standardized product

B) many firms

C) mutual interdependence

D) barriers to entry

24) A product that is a close substitute but not a perfect substitute for the products of the other firms is called

A) a homogeneous product.

B) an efficient product.

C) an inelastic product.

D) a differentiated product.

The figure below shows the demand curve for Nike shoes (D), and Nike's marginal revenue curve (MR),

marginal cost curve (MC), and average total cost curve (ATC). Answer the next three questions based on the

figure.

25) Nike maximizes its profit if it sells ________ pairs of shoes per day.

26) Nike maximizes its profit if it charges ________ per pair of shoes.

27) Nike's economic profit is ________.

ECON 1102 Test 3 (061416)

28) Expenditures on advertising ________.

A) always lower average total cost because whenever a firm advertises, it increases the quantity sold

B) cannot lower average total cost because when a firm advertises it increases its costs

C) are variable costs so do not affect the average total cost

D) can lower average total cost if the advertising increases the quantity sold by a large enough amount

29) If firms in an industry differentiated their products and made economic profits in the short-run, what

other characteristic would be important to determine if this is an oligopoly or a monopolistically

competitive market?

A) the number of close substitutes for the good being produced

B) the number of firms in the market

C) the number of buyers in the market

D) if the good being sold is a normal or inferior good

30) In ________ market structure, a firm's output depends ________.

A) an oligopoly; only on its own marginal revenue and marginal cost curves

B) a monopolistically competitive; in part on its competitors' price and quantity decisions

C) a monopolistically competitive; only on its marginal revenue curve

D) an oligopoly; in part on its competitors' price and quantity decisions

31) The small town of Narberth has two pizza stores. Which of the following statements are correct?

I. The profits of each store depend on the price of the pizza at the other store.

II. Both stores would increase their profit if they cooperated in setting their prices.

A) I only

B) II only

C) Both I and II

D) Neither I nor II

32) In the market for batteries, the four largest firms earn 90% of the total revenue and there are 35 firms

in the industry. This industry is best described as

A) monopoly.

B) oligopoly.

C) monopolistic competition.

D) perfect competition.

33) In what type of market is a cartel possible?

A) a market in which there are many firms

B) a market in which firms sell a homogeneous good

C) a market in which firms sell a differentiated good

D) a market in which there are only a few firms and barriers to entry exist

34) Once a cartel determines the profit-maximizing price,

A) each firm faces the temptation to cheat by lowering its price.

B) each firm faces the temptation to cheat by raising its price.

C) changes in the output of any member firm will not affect the market price.

D) entry into the industry by rival firms will not affect the profit of the cartel.

ECON 1102 Test 3 (061416)

35) The ABC Nail Company has entered into a collusive agreement with the other firm in the industry,

the DC Nail Company. What occurs in the nail industry if ABC decides to cheat on the agreement?

A) ABC lowers the price of its nails.

B) The total industry output increases.

C) The total profits in the nail industry will decrease.

D) All of the above answers are correct.

Sears and Wal-Mart must decide whether to lower their prices based on the profits shown in the table

below. Answer the next two questions based on the table.

Sears

Lower prices Don't lower prices

Lower prices S: $5 million

W: $5 million

S: $1 million

W: $30 million

Wal-Mart

Don't lower

prices

S: $30 million

W: $1 million

S: $20 million

W: $20 million

36) Which of the following is TRUE?

A) This situation is not a prisoners' dilemma.

B) If Sears lowers its prices and Wal-Mart does not, Sears will make a $20 million economic profit.

C) If Wal-Mart lowers its prices, Sears should keep its prices high.

D) Both Sears and Wal-Mart would jointly be better off if they could each keep their prices high.

37) A market in which firms can enter and leave so easily that firms in the market face competition from

potential entrants is called a

A) limit pricing market.

B) cartel.

C) contestable market.

D) monopolistic competition market.

38) Limit pricing is a strategy used by a firm to

A) enhance short run profits.

B) deter entry.

C) raise its prices.

D) lower its costs.

39) Antitrust law is law that

A) does not allow individuals to open trust savings accounts.

B) prohibits competition in certain industries.

C) prohibits certain kinds of market behavior by firms.

D) allows firms under special circumstances to be a monopoly.

40) Critics of industrial regulation say that such regulation:

A) benefits small firms at the expense of large firms.

B) creates insurmountable principal-agent problems.

C) perpetuates monopoly long after new technology has eroded natural monopoly.

D) has resulted mainly from the paradox of voting.