Question 1. Why does a firm in a competitive industry charge the market price?
a. If a firm charges less than the market price, it loses potential revenue.
b. If a firm charges more than the market price, it loses all its customers to other firms.
c. The firm can sell as many units of output as it want to at the market price.
d. All of the above are correct.
Question 2. If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then
a. average revenue exceeds marginal cost.
b. the firm is earning a positive profit.
c. decreasing output would increase the firm's profit.
d. All of the above are correct.
Question 3. A firm will shut down in the short run if, for all positive levels of output
a. its loss exceeds its fixed costs.
b. its total revenue is less than its variable costs.
c. the price of its product is less than its average variable cost.
d. All of the above are correct.
Question 4. A firm that exits its market has to pay
a. its variable costs but not its fixed costs.
b. its fixed costs but not its variable costs.
c. both its variable costs and its fixed costs.
d. neither its variable costs nor its fixed costs.
Question 5. Which of the following statements is not correct?
a. In a long-run equilibrium, marginal firms make zero economic profit.
b. To maximize profit, firms should produce at a level of output where price equals average variable cost.
c. The amount of gold in the world is limited. Therefore, the gold jewelry market probably has a long-run supply curve that is upward sloping.
d. Long-run supply curves are typically more elastic than short-run supply curves.
Question 6. Competitive firms differ from monopolies in which of the following ways?
(i) Competitive firms do not have to worry about the price effect lowering their total revenue.
(ii) Marginal revenue for a competitive firm equals price, while marginal revenue for a monopoly is less than the price it is able to charge.
(iii) Monopolies must lower their price in order to sell more of their product, while competitive firms do not.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)
Question 7. Refer to the Figure above. In the short run, if the market price is higher than P1 but less than P4, individual firms in a competitive industry will earn
a. positive profits.
b. zero profits.
c. losses but will remain in business.
d. losses and will shut down.
Question 8. Refer to the Figure above. In the short run, if the market price is higher than P4 but less than P6, individual firms in a competitive industry will earn
a. positive profits.
b. zero profits.
c. losses but will remain in business.
d. losses and will shut down.
Question 9. Refer to the Figure above. Firms would be encouraged to enter this market for all prices that exceed
a. P1
b. P2
c. P3
d. P4
Question 10. For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.
Question 11. Refer to the Figure above. If the monopoly firm is currently producing Q3 units of output, then a decrease in output will necessarily cause profit to
a. remain unchanged.
b. decrease.
c. increase as long as the new level of output is at least Q2.
d. increase as long as the new level of output is at least Q1.
Question 12. Refer to the Figure above. If the monopoly firm wants to maximize its profit, it should operate at a level of output equal to
a. Q1
b. Q2
c. Q3
d. Q4
Question 13. Refer to the Figure above. A profit-maximizing monopoly's total revenue is equal to
a. P4 x Q2.
b. P3 x Q4.
c. (P4-P2) x Q2.
d. (P4-P3) x Q2.
Question 14. Refer to the Figure above. What is the monopoly price and quantity?
price = F; quantity = A
price = G; quantity = B
price = G; quantity = A
price = D; quantity = A
Question 15. Refer to the Figure above. What area represents the total surplus lost due to monopoly pricing?
a. the rectangle (F-D)xA
b. the triangle 1/2[(F-D)x(B-A)]
c. the triangle 1/2[(F-G)x(B-A)]
d. the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)]
Question 16. In a perfectly competitive market, the process of entry and exit will end when
a. price equals minimum marginal cost.
b. marginal revenue equals marginal cost.
c. economic profits are zero.
d. accounting profits are zero.
Question 17. Which of the following statements is true?
(i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price.
(ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price.
(iii) Average revenue is the same as price for both competitive and monopoly firms.
(ii) only
(iii) only
(i) and (ii) only
(ii) and (iii) only
Question 18. A firm in a monopolistically competitive market is similar to a monopoly in the sense that
(i) they both face downward-sloping demand curves.
(ii) they both charge a price that exceeds marginal cost.
(iii) free entry and exit determines the long-run equilibrium.
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i), (ii), and (iii) only
Question 19. In monopolistically competitive markets, free entry and exit suggests that
a. the market structure will eventually be characterized by perfect competition in the long run.
b. all firms earn zero economic profits in the long run.
c. some firms will be able to earn economic profits in the long run.
d. some firms will be forced to incur economic losses in the long run.
Question 20. "In a long-run equilibrium, price is equal to average total cost." This statement applies to
a. competitive markets, but not to monopolistically competitive markets or monopolies.
b. competitive and monopolistically competitive markets, but not to monopolies.
c. competitive markets, monopolistically competitive markets, and monopolies.
d. None of the above is correct.
Question 21. Refer to the Figure above. Suppose that average total cost is $18 when Q=12. What is the profit-maximizing price and resulting profit?
a. P=$12, profit=$0
b. P=$18, profit=$72
c. P=$18, profit=$24
d. P=$18, profit=$0
Question 22. Refer to the Figure above. If the average variable cost is $12 at the profit-maximizing quantity, and if the firm's fixed costs amount to $30, then the firm's maximum profit is
a. $-30.
b. $22.
c. $36.
d. $42.
Question 23. Refer to the Figure above. Which of the graphs depicts a short-run equilibrium that will encourage the entry of other firms into a monopolistically competitive industry?
a. panel a
b. panel b
c. panel c
d. panel d
Question 24. Refer to the Figure above. Panel a shows a profit-maximizing monopolistically competitive firm that is
a. earning zero economic profit.
b. likely to exit the market in the long run.
c. producing its efficient scale of output.
d. not maximizing its profit.
Question 25. Refer to the Figure above. Which of the panels depicts a firm in a monopolistically competitive market earning positive economic profits?
a. panel a
b. panel b
c. panel c
d. panel d