Directions: There is one best answer to each question, after reading all answers; remember that a multiple choice question is just a series of T-F questions in which one of the responses is true.

1) A good sold in a perfectly competitive market can be best characterized as having:
a. many sellers and buyers (Correct...so many that no one or group can affect price)
b. low prices.
c. no close substitutes.
d. a range of style and quality variations.
e. All of the above are traits of goods sold in perfectly competitive markets.

2) The short-run elasticity of supply is more inelastic than the long-run elasticity of supply because:
a. In the short run, a firm cannot alter fixed inputs of machines and buildings.
b. In the short run, customers cannot discover substitutes.
c. In the short run, new firms cannot enter or exit the industry.
d. a and c. (Correct...something is fixed in the short-run which prevents low-cost expansion or new entry)
e. All of the above.

3) Diminishing marginal utility means that:
a. The usefulness of the good is limited.
b. The willingness to pay for an extra unit decreases as more of a good is consumed. (Correct)
c. The good is less scarce.
d. The market price of the good decreases as more of the good is consumed.
e. None of the above.

4) According to the Law of Diminishing Returns (or Law of Diminishing Marginal Product):
a. As more of all inputs are employed, the added output decreases.
b. As more of one input is employed, holding other inputs unchanged, the added output decreases. (Correct)
c. As more of the output is produced, the cost of production diminishes.
d. As more of the output is produced, the marginal cost of production diminishes.
e. None of the above.

5) At an output level where the marginal cost curve is below the average cost curve:
a. The average cost curve is at its minimum.
b. The marginal cost curve is at its minimum.
c. The marginal cost curve is downward sloping.
d. The average cost curve is downward sloping.(Correct)
e. The average cost curve is upward sloping.

6) Average revenue:
a. Is less than price for a monopoly firm because as it sells more output, it must lower the price.
b. Equals price for either a competitive or monopoly firm.(Correct--TR divided by Q is always P for either)
c. Is the additional revenue that the firm receives for selling another unit of output.
d. Is the extra profit that the firm receives from selling another unit of output, after accounting for all opportunity costs.
e. b and d.

7) A firm will exit a competitive market whenever:
a. The market price is below the minimum average total cost at which the firm can produce.(Correct...shut-down isn't exit)
b. The firm can earn revenues greater than total costs.
c. Price is greater than the minimum of the average total cost curve.
d. Price equals marginal cost.
e. Marginal revenue equals marginal cost.

8) Mike spends all of his income on burgers and cokes. His marginal utility for another burger is 6 utils and the price of a burger is $3. His marginal utility for another coke is 2 utils and the price of a coke is $0.50. To maximize his utility Ernie should:
a. Buy more cokes and fewer burgers. (Correct)
b. Buy more burgers and fewer cokes.
c. Buy more of both burgers and cokes.
d. Buy fewer of both burgers and cokes.
e. Impossible to say from the given information.

9) If a monopoly firm has fixed costs, but no variable costs, it should operate:
a. where it maximizes total revenue.
b. where marginal revenue is zero.
c. where average fixed costs are minimized.
d. a and b.(Correct...if no variable costs, MC = 0, hence MR = 0, which is at "top" of TR, its maximum)
e. All of the above, since they are equivalent in this case.

10) ?Marginal cost equals marginal revenue? is the rule for maximizing profits for firms in which of the following market structures:
a. Perfect competition.
b. Monopolistic competition.
c. Monopoly.
d. Oligopoly.
e. All of the above.(Correct)

11) Barriers to entry:
a. Do not exist in perfect competition.
b. Are seldom illegal.
c. Allow firms in the industry to continue to earn economic profits.
d. Do not alter the profit maximum condition that marginal revenue equals marginal cost.
e. All of the above are true.(Correct)

12) A group of companies that act jointly to maximize profits is called:
a. A monopoly.
b. Monopolistic competition.
c. A cartel.(Correct)
d. An antitrust.
e. None of the above.

13) Which of the following is false:
a. The demand curve facing the firm is flat in perfect competition.
b. Compared to perfect competition, monopolies produce less and charge higher prices.
c. A competitive firm will shut down in the short run when price falls below the minimum of the average variable cost.
d. Price exceeds marginal cost for a profit-maximizing monopolist.
e. Total costs are the sum of average and marginal costs.(Correct...TC =TVC+TFC)

14) Assume the law of diminishing marginal product holds. A perfectly competitive firm is currently producing at level of output with a marginal cost of $20 and an average total cost of $25. The market price for the commodity produced by the firm is $25/unit. To maximize profit, the firm should:
a. Decrease production, and economic profit will be positive in the short run.
b. Decrease production, but it?s not possible to conclude whether economic profits will be positive, negative, or zero.
c. Increase production, but economic profit will be negative in the short run, which means some firms in the industry will exit in the long run.
d. Increase production and experience positive economic profits.(Correct...ATC is falling at current output, hence P>ATC at the optimal larger output level)
e. Decrease production, but economic profit will be negative in the short run, which means some firms in the industry will exit in the long run.

15) A competitive firm?s output in long-run equilibrium will not satisfy which of the following:
a. P=MC.
b. MR=MC.
c. P=AVC.(Correct...P=ATC in long-run)
d. P=MR.
e. All of the above will be satisfied.

16) The single-price monopolist selects their quantity where marginal revenue equals marginal cost, and charges the price at which:
a. the marginal cost curve equals the marginal revenue curve.
b. average variable costs are just covered at the optimal quantity.
c. average total costs are just covered at the optimal quantity.
d. the optimal quantity can be sold, from the demand curve.(Correct...you go *up* to the demand curve from MR=MC point)
e. marginal revenue exceeds marginal cost by the largest amount.

17) If an optimizing monopolist is taxed a percentage, say 50%, of its economic profits, it will:
a. increase its price to make up for lost revenue.
b. decrease its price in an effort to sell more to offset the tax revenue loss.
c. increase its quantity sold without changing its price.
d. either a. or c. could be correct depending on circumstances.
e. none of the above; the monopolist will not change its behavior.(Correct...50% of the max is larger than 50% of anything else...the tax does not affect either marginal costs or marginal revenue, hence cannot rationally affect behavior)

18) Which of the following is true:
a. marginal cost exceeds average variable cost at the minimum of the average variable cost curve.
b. a firm's fixed costs are often zero in the short run.
c. the average fixed cost is first falling then rising as output increases.
d. the marginal-cost curve may be rising or falling when it is below the average-total-cost curve.(Correct)
e. none of the above.

19) In the short run, a profit-maximizing monopolist with a negative economic profit (loss) of $100 and fixed costs of $50, along with marginal revenue of $10 and marginal cost of $10, would want to:
a. shut down in the short-run.(Correct...could lose only $50 that way; is not covering TVC which are avoidable)
b. expand output and cut price.
c. expand output and raise price.
d. cut output and raise price.
e. do nothing--the data suggest the monopolist is already profit-maximizing.

20) A profit maximizing competitive firm will produce up to the point at which:
a. average revenue is maximized.
b. average cost is minimized.
c. marginal revenue is maximized.
d. total revenue = total cost.
e. price = marginal cost.(Correct)

21) Which of the following is true about an unregulated single-price monopolist:
a. It never operates in the elastic portion of the market demand curve it faces.
b. It never operates in the inelastic portion of the market demand curve it faces.(Correct)
c. It always tries to operate where price equals marginal cost to maximize profit.
d. It can sell as much as it wishes regardless of the price level it charges.
e. None of the above are true.

22) In the long run under perfect competition, the equilibrium is best described as:
a. Each existing firm would earn positive economic profit, but not high enough to attract other firms to enter the industry.
b. Each firm would earn zero economic profit.(Correct)
c. Each firm would suffer a loss, but the loss is less than the total fixed cost.
d. Some firms would earn positive economic profit, some suffer the loss and some earn zero economic profit, but the aggregate economic profit would be zero.
e. Each firm earns the same profits, positive or negative, that they did in the short run.

23) If market price is $70/unit, and a perfectly competitive firm is maximizing its profit at an output level where total cost (TC)=$5000, total fixed cost (TFC)=$3000, and output=80. Then
a. it's MC=70.
b. it makes positive profit.
c. it would stay in the market in the long-run.
d. a, b and c are all correct.(Correct)
e. only a and c are correct.

24) The following is the MR and MC of a monopolist at for various outputs,
Q (output)     MR     MC
800               60        40
1000             50        50
1200             38        63

If the present output is 1200, then the firm would:
a. decrease output to 1000 and set price equal to 50.
b. decrease output to 1000 and sell that quantity at some price higher than 50.(Correct...MR<P for monopolist)
c. decrease output to 800 to increase the spread between MR and MC.
d. maintain this output level, setting price greater than or equal to 63.

25) Monopolistic Competition:
a. Occurs when a small number of monopolists are fighting over a market.
b. Occurs when each of a great many competitors has a slightly differentiated product in the same ?product group.?
c. Is very much like monopoly, with persistent profits.
d. Is very much like perfect competition, except for slightly higher costs for the more diverse set of goods.
e. Both b. and d. are correct.(Correct)