Econ 2010-200/Spring 1997 Midterm 2 Vijaya Sharma

MULTIPLE CHOICE

1. Compared to a perfectly competitive market situation, a monopolist will have

a. a lower price and a lower output.

b. a lower price and a higher output.

c. a higher price and a lower output.

d. a higher price and a higher output.

2. Marginal cost-schedule facing Don, an imperfect competitor, is constant at $11. The demand curve is given below.

The profit-maximizing output of this firm is:

a. 7 units b. 8 units c. 9 units d. 10 units

3. In the short run for a firm:

a. there are no fixed factors of production.

b. a firm always shuts off when there is a loss.

c. the Law of Diminishing Marginal Returns does not apply.

d. the firm operates with at least one fixed input.

4. If an industry consists of three firms with market shares of 20

percent, 30 percent, and 50 percent, then the Herfindahl-Hirschman

Index is:

a. 3,800.

b. 100.

c. 10,000.

d. 2,500.

Answer the next four questions using the information below, which

gives the short run costs of perfectly competitive firm:

5. The total fixed cost (TFC) of this firm is

a. $0

b. $4

c. $6

d. $10

6. The marginal cost (MC) of the 4th unit is

a. $4

b. $6

c. $8

d. $10

7. If the price of the product is $4, then the profit-maximizing level of output is

a. 1 unit.

b. 2 units.

c. 3 units.

d. 4 units.

8. Now suppose that the price of the product increases to $10 and if this firm is typical of other firms in the industry, then

a. the number of firms will tend to decrease in the long run.

b. the firms in this industry should shut down in the short run.

c. the number of firms in this industry will tend to increase in the long run.

d. this industry is in short and long-run equilibrium.

9. If you were to list market structures from one to very many firms, your ordering would be

a. monopoly, oligopoly, perfect competition, monopolistic competition.

b. monopoly, oligopoly, monopolistic competition, perfect competition.

c. oligopoly, monopoly, monopolistic competition, perfect competition.

d. oligopoly, monopolistic competition, perfect competition, monopoly.

10. A perfectly competitive firm is a

a. price giver.

b. price taker.

c. price maker.

d. price leader.

11. In a market with perfectly competitive firms, the market demand curve is usually _____________ and the demand curve facing each individual firm is _____________.

a. upward sloping; horizontal

b. downward sloping; horizontal

c. horizontal; downward sloping

d. downward sloping; downward sloping

12. The short-run supply curve of the competitive firm is

a. the firm's MC curve.

b. the firm's AVC curve.

c. the firm's MC curve above the minimum point on the AVC curve.

d. the firm's MC curve above the minimum point on the AFC curve.

13. If the price falls below minimum AVC, the quantity supplied by a firm in a perfectly competitive market will be

a. the quantity at minimum MC.

b. zero.

c. the quantity at the point where MC intersects AC.

d. the quantity at minimum AC.

14. The most efficient market structure in the long run is

a. perfect competition.

b. monopolistic competition.

c. oligopoly.

d. monopoly.

15. In a market system, the primary instruments used to coordinate

economic activity are

a. plans.

b. prices.

c. input-output analyses.

d. quantities.

16. Questions of what to produce, how much to produce, and who will get the output must be faced by

a. market economies.

b. centrally planned economies.

c. the economies of underdeveloped countries.

d. all economies.

17. If the marginal utility of a product exceeds its MC, we would want, on efficiency grounds

a. to increase production.

b. to decrease production.

c. to leave production constant.

d. One cannot tell without knowing the price.

18. A profit-maximizing monopolist sets

a. her product's price where P = MR = MC.

b. her output where MR = MC.

c. Both a and b are correct.

d. Neither a nor b is correct.

For answering Questions 19 through 22, you need to draw a figure first, referred to as Figure 11.7 below. The horizontal axis is a firm's output q, the vertical axis is the price P, and label the origin as 0. Draw a downward-sloping demand curve D and another downward-sloping MR curve below the demand curve. Draw an MC curve, which will intersect both MR and D curves, say at points f and c, respectively. Now draw an ATC curve, such that it intersects the MC, somewhere between f and c. Call the intersection of MC and ATC as point e. Choose a point between e and c on the MC curve and label it as d. Draw vertical dotted lines from points f, e, d and c to the horizontal axis and label the corresponding quantities in the horizontal axis as 100, 125, 150 and 175, respectively. Also draw a vertical dotted line from the intersection of ATC and D to the horizontal axis and label the corresponding quantity as 200. Now you need to draw horizontal dotted lines and label the corresponding prices on the vertical axis: 4 on the line from f, 6 on the line from g, and 7 on the line from c. Extend the vertical dotted lines from f and from d all the way up to the D-curve and label the corresponding points as a and b on the D-curve. Draw horizontal dotted lines from a and b and label the corresponding prices as 9 and 8 on the vertical axis. You are ready to answer the following questions.

19. The firm in Figure 11.7 is an unregulated monopolist; it will produce which of the following?

a. 175 units at a price of 7

b. 100 units at a price of 6

c. 100 units at a price of 9

d. 150 units at a price of about 7.5

20. The firm in Figure 11.7 is an unregulated monopolist; it will earn long-run profits of how much?

a. 500

b. 400

c. 300

d. 200

21. For the firm in Figure 11.7, an unregulated monopolist, output falls below the efficient level in the short run by how much?

a. 50

b. 75

c. 35

d. 100

22. For the firm in Figure 11.7, the loss in total surplus due to an unregulated monopoly is

a. area aceg.

b. area acf.

c. area bcd.

d. area gef.

23. Which of the following characteristics of perfect competition does not apply to monopolistic competition?

a. free entry and exit.

b. homogeneous products.

c. numerous participants.

d. zero long-run profit.

24. In the long run the prices charged by a firm in monopolistic

competition will be

a. high enough to provide profits to the firm.

b. so low that many firms will drop out of the industry.

c. equal to marginal cost.

d. equal to average cost.

25. The monopolistically competitive firm differs from monopoly in that its

a. demand curve is flatter.

b. demand curve slopes downward.

c. MR curve lies below its demand curve.

d. profit is maximized where MR = MC.

26. An oligopoly is a market

a. with few buyers.

b. with one buyer.

c. dominated by a few sellers.

d. under the control of a few politically powerful individuals.

27. The difficulty in analyzing oligopolistic behavior arises from

a. the degree of government regulation of the market structure.

b. the interdependent nature of oligopolistic decisions.

c. the large number of firms in the industry.

d. the market power of consumers.

28. A cartel is a

a. motel for cars.

b. chain of auto repair shops.

c. collusive group of firms.

d. computer chip manufacturer.

29. Game theory applies to problems that arise in

a. perfect competition.

b. monopolies.

c. oligopolies.

d. pure competition.

30. Displayed below is the payoff matrix of firm A for three different strategies, A1, A2, A3, and the potential retaliatory responses of

If both firms use the maximin criterion, what will be the equilibrium outcome?

a. A1,B3

b. A2,B1

c. A3,B2

d. A2,B2

31. Setting price equal to marginal cost in a natural monopoly will lead to

a. excess profits for the firm.

b. losses for the firm.

c. zero profits for the firm.

d. One cannot tell without further information.

32. In many antitrust cases, the court must first decide whether the relevant market should be defined narrowly (as the market for cellophane) or broadly (as the market for flexible wrapping materials). Which of the following economic concepts would be most useful to the court in making this decision?

a. marginal cost

b. opportunity cost

c. price elasticity of demand

d. cross price elasticity of demand

33. When firms have had to defend themselves against the charge that they have adopted unjustifiably low prices either to drive a competitor out of business or to prevent the entry of a rival, they have been accused of

a. creating a trust.

b. conspiracy.

c. predatory pricing.

d. price discrimination.

34. The four-firm concentration ratio for an industry is

a. the number of firms in the industry, divided by four.

b. the share of industry output sold by the four largest firms in

the industry.

c. the percentage of total industry profits claimed by the four

largest firms.

d. the share of industry output sold by the fourth largest firm in

the industry.

35. Of the graphs in Figure 7.1, which best represents marginal physical product?

a. (1)

b. (2)

c. (3)

d. (4)

36. Figure 7.13 shows the average total cost curves of four firms that produce milk. Some of the dairies are more productive. AR = P is the long-run price of milk. How many of these dairies will remain in the industry in the long run?

a. all of them

b. only two

c. only three

d. cannot determine with information given

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Econ 2010-200/Spring 1997 Midterm 2 Vijaya Sharma

ANSWER KEY FOR TEST

1. c. a higher price and a lower output.

2. b. 8 units (MR=MC)

3. d. the firm operates with at least one fixed input.

4. a. 3,800.

5. b. $4

6. c. $8

7. b. 2 units.

8. c. the number of firms will tend to increase due to positive economic profit.

9. b. monopoly, oligopoly, monopolistic competition, perfect

competition.

10. b. price taker.

11. b. downward sloping; horizontal

12. c. the firm's MC curve above the minimum point on the AVC curve.

13. b. zero.

14. a. perfect competition.

15. b. prices.

16. d. all economies.

17. a. to increase production.

18. b. her output where MR = MC.

19. c. 100 units at a price of 9

20. c. 300

21. b. 75

22. b. area acf.

23. b. homogeneous products

24. d. equal to average cost, including the opportunity cost of

capital.

25. a. demand curve is flatter.

26. c. dominated by a few sellers.

27. b. the interdependent nature of oligopolistic decisions.

28. c. collusive group of firms.

29. c. oligopolies.

30. c. A3,B2

31. b. losses for the firm.

32. d. cross price elasticity of demand

33. c. predatory pricing.

34. b. the share of industry output sold by the four largest firms in the industry.

35. b.

36. c. only three