Practice Questions: Micro Test #3

 

                                                                            

  Quantity   Price     Total Cost                    

  0                                    $5

  1                 $22             17

  2                  20              28

  3                  18              41

  4                  16              61

  5                  14              91

 

1.   Ben Fisher's Rotisserie Steak Restaurant can sell different quantities of steaks it produces at the prices and costs listed above. On the basis of the information in the table above, how many steaks should Ben make?

      a.   1         

      b.   2

      c.   3

      d.   4

      e.   5

 

2.   Firms in Monopolistic Competition usually face markets with…

      a.   few competitors.

      b.   very inelastic demand.

      c.   some degree of product differentiation among the firms.

      d.   no decent substitutes available for the product in question.

      e.   almost completely inelastic demand curves.

 

3.   Which of the following describes what will happen to market price and market quantity if firms in a competitive market band together to form a cartel?

 

            Price                Quantity

      a.   Decrease          Decrease

      b.   Decrease          Increase

      c.   Increase           Increase

      d.   Increase           Decrease

      e.   Increase           No Change

 

4.   Imperfectly competitive firms may allocate resources inefficiently because they produce at a level of output where…

      a.   average total cost is at its lowest point.

      b.   price equals marginal revenue.

      c.   marginal revenue is greater than marginal cost.

      d.   price equals marginal cost.

      e.   price is greater than marginal cost.

 

5.   A natural monopoly occurs in an industry if…

      a.   economies of scale make it most efficient for only one firm to exist in that market.

      b.   a single firm has gained control of scarce resources through competition.

      c.   a single firm produces inputs for use by other firms.

      d.   only one firm has the technology to produce the product sold in the market.

      e.   a single firm has received a patent on an invention.


               

6.   If the government intended to regulate this monopoly in order to achieve the socially optimum level of output, they would choose…

      a.   Q1, allowing the firm to earn economic profits.

      b.   Q2 because the costs per unit of output are low.

      c.   Q2 because that allows the firm to earn a fair return.

      d.   Q3, but they would have to subsidize the firm to keep it in the market.

      e.   Q3, allowing the firm to earn an economic profit.

 

7.   Which of the following is true about firms in the long run?

      a.   Perfectly competitive firms reach a long run equilibrium where TR>TC.

      b.   Oligopoly firms reach a long-run equilibrium because there is competition in their market.

      c.   Monopolistically competitive firms cannot reach a long-run equilibrium because of product loyalty.

      d.   Oligopoly markets do not reach a long-run equilibrium because there is only one firm.

      e.   Monopolistically competitive firms reach a long-run equilibrium because it is easy to enter and exit their market.

 

                             


 

8.   Which of the following statements is true of the graph above?

                      I.   This firm should exit the market in the short run.

                     II.   This perfectly competitive firm should shut down in the short run.

                   III.   This monopolistically competitive firm is losing money.

      a.   I only                                                          e.   I and III only

      b.   II only                                                        f.    II and III only

      c.   III only                                                       g.   I,II and III only

      d.   I and II only                                                h.   none of the above

 

9.   With respect to the pure monopolist's demand curve it can be said that:

      a.   the stronger the barriers to entry, the more elastic is the monopolist's demand curve.

      b.   price exceeds marginal revenue at all outputs greater than 1.

      c.   demand is perfectly inelastic.

      d.   marginal revenue equals price at all outputs.
      e.   price exceeds average revenue at all outputs.

 

10. In the market for Goldberg Grains (a breakfast cereal made from wheat), what will happen to equilibrium price and quantity after both of the following take place?

                 

      •     The price of Peter Puffs (a breakfast cereal made from rice) decreases by 15%.

      •     Wheat farmers in the USA have a record crop that drives down the cost of wheat by 20%.

           

      Price of Goldberg Grains                      Quantity of Goldberg Grains

      a.   Increase                                         Increase

      b.   Increase                                         Indeterminate

      c.   Indeterminate                                  Increase

      d.   Decrease                                        Indeterminate

      e.   Decrease                                        Decrease

11. A firm is practicing price discrimination if:

  1. It sells the same good to different customers at different prices because of differences in the cost of producing the good.
  2. Some individuals who want to purchase the good at the going market price cannot do so.
  3. It sells the same good to different customers at different prices, and there is no difference in the cost of producing the good.
  4. It sells the same good to different customers at different prices because of differences in transportation costs.

 

12. Of the following, which could most easily practice price discrimination?

  1. A record store
  2. An oral surgeon
  3. A book publisher
  4. A grocery store

 

Questions 13 and 14 are based on the following graph for a monopolist.

 

13. To maximize profit, the monopolist must produce ______ units of output and charge a price of ______.

  1. 400, $4
  2. 400, $10
  3. 475, $8
  4. 650, $7

 

14. At the profit maximizing level of output, the monopolist is making an economic profit of:

  1. $ 800
  2. $1,900
  3. $2,400
  4. $2,800

 

15. A feature that distinguishes oligopoly from monopoly and perfect competition is that oligopolistic

firms

a.       make positive economic profits.

b.      produce inefficiently.

c.       do not attempt to maximize profits.

d.      consider the impact of their behavior on other firms.      

e.       charge a price that is less than marginal cost.

 

16. The typical firm in a monopolistic competition earns zero economic profit in long-run equilibrium

because

a.       advertising costs make monopolistic competition a high cost market structure rather than a low cost one.

b.      the firms in the industry do not operate at the minimum point of their average total cost curve.

c.       entry and exit from the industry is easy.

d.      the firms in the industry are unable to engage in product differentiation.  

e.       there are close substitutes for each firm's product.

 

17. If there are significant economies of scale in an industry, then

a.       a firm which is large will be forced to produce at a higher unit cost than a small firm.

b.      a firm which is large may be able to charge a lower price than can a small firm.

c.       the industry is more likely to be organized as monopolistic competition than as oligopoly.

d.      the demand will be price elastic throughout the entire relevant range of output.

e.       new firms will easily be able to enter the industry.

 

18. In the long-run, compared to a perfectly competitive firm, a monopolistically competitive firm with

the same costs will have

a.       a higher price and a lower output

b.      a higher price and a higher output

c.       a lower price and a lower output

d.      a lower price and higher output

e.       the same price and lower output

 

19. Firms in Monopolistic Competition usually face markets with

a.       few competitors.

b.      very inelastic demand.

c.       some degree of product differentiation among the firms.

 

20. A firm operating in perfect competition finds that, at its best possible operating position (for any non-

zero output), its TR does not cover its TC, although this revenue is more than enough to cover FC.  This firm

a.       is incurring a loss and should shut down.

b.      is incurring a loss, but minimizes that loss by continuing to operate at their current position.

c.       is incurring a loss, but could reduce or remove it by increasing production and sales.

d.      is incurring a loss, but the information given is insufficient to tell whether it could minimize that loss by continuing to operate or shutting down.

e.       may be incurring a loss, but there is not enough information to tell.

 

21. If industry supply shifts sharply to the left as industry demand moves to the right, we would expect

a.       the same price to prevail.

b.      quantity to fall while price might not change.      

c.       price and quantity to fall.

d.      price to rise while quantity might not change.

e.       demand to be highly elastic.

 

22. In a monopoly market, equilibrium price is

a.       less than the cost of producing the last unit

b.      equal to the cost of producing the last unit

c.       more than the cost of producing the last unit

d.      equal to the minimum average total cost

e.       equal to the minimum average variable cost

 

23. What characteristics distinguish an oligopoly market from a monopolistic competition market?

 

 

 

 

 

 

24. In which markets will firms reach a long-run equilibrium? In which markets won't they reach a long

run equilibrium? Explain why.

 

 

 

 

 

 

 

 

25. From society's point of view, what are the pros and cons of a monopoly market when compared to a

perfectly competitive market?

 

 

 

 

 

 

 

 

26. From society's point of view, what are the pros and cons of a monopolisticly competitive market when

compared to a perfectly competitive market?

 

 

 

 

 

 

 

 

27. When is a business productively efficient? Explain why.

 

 

 

 

 

 

 

 

 

28. When does a firm achieve allocative efficiency?  Explain the logic behind this assumption.

 

 

 

 

 

 

 

 

 

29. In what situation does a firm underallocate resources?  When does it overallocate resources?

 

 

 

 

 

30. What is a natural monopoly? Describe the characteristics and provide an example.

 

 

 

 

 

 

 

 

31. How do regulatory agencies make decisions about price and output regulations for natural

monopolies? Describe the two most popular options.

 

 

 

 

 

 

 

 

 

Practice Short Essay:

 

A single airline provides service from City A to City B.

 

a) Explain how this airline will determine the number of passengers it will carry and the price it will charge.

 

b) Suppose the fixed costs for this airline increase. How will this increase in fixed costs affect the airlines price and output decisions in the short run?