Economics Exam Practice Set 2

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Questions and Answers
  • 1. 

    When diseconomies of scale occur?

    • A.

      The long-run average total cost curve rises

    • B.

      The long-run average total cost curve falls

    • C.

      Average fixed costs will rise

    • D.

      Marginal cost intersects average total cost

    Correct Answer
    A. The long-run average total cost curve rises
    Explanation
    Diseconomies of scale occur when a company's long-run average total cost curve rises. This means that as the company increases its production levels, the cost per unit of production increases. This can happen due to various reasons such as inefficiencies in operations, difficulty in coordinating larger teams, or increased costs of inputs. As a result, the company experiences diminishing returns and faces higher costs, leading to a rise in the long-run average total cost curve.

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  • 2. 

    Average fixed cost:

    • A.

      Graphs as a U-shape curve

    • B.

      May be found for any output by adding average variable ost and average total cost

    • C.

      Declines continually as output increases

    • D.

      Equals marginal cost when average total cost is at its minimum

    Correct Answer
    C. Declines continually as output increases
    Explanation
    The average fixed cost declines continually as output increases. This is because fixed costs are spread over a larger number of units as production increases, resulting in a lower average fixed cost per unit. This relationship is represented by a U-shaped curve on a graph, where the average fixed cost initially decreases and then levels off as output increases. The statement about adding average variable cost and average total cost to find the average fixed cost is incorrect, as average fixed cost is calculated by dividing total fixed cost by the quantity of output. Additionally, the statement about average total cost being at its minimum when it equals marginal cost is not relevant to the explanation.

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  • 3. 

    Accounting profits are typically 

    • A.

      Greater than economic profits because the former do not take explicit costs into account

    • B.

      Equal to economic profits because accounting costs include all opportunity costs

    • C.

      Smaller than economic profits because the former do not take implicit costs into account

    • D.

      Greater than economic profits because the former do not take implicit costs into account

    Correct Answer
    D. Greater than economic profits because the former do not take implicit costs into account
    Explanation
    Accounting profits only consider explicit costs, which are the actual monetary expenses incurred in producing goods or services. Economic profits, on the other hand, take into account both explicit costs and implicit costs. Implicit costs refer to the opportunity costs of using resources in one way instead of another, such as the foregone income from using one's own capital or the foregone time that could have been spent on alternative activities. Therefore, accounting profits are typically greater than economic profits because they do not factor in these implicit costs.

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  • 4. 

    The law of diminishing returns indicates that: 

    • A.

      The demand for goods produced by purely competitive industries is downsloping

    • B.

      Because of economies and diseconomies of scale a competitive firm's long-run average total cost curve will be U-shaped

    • C.

      As extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point

    • D.

      Beyond some point he extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction

    Correct Answer
    C. As extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point
    Explanation
    The law of diminishing returns states that as additional units of a variable resource (such as labor) are added to a fixed resource (such as land or capital), the marginal product of the variable resource will eventually decline. This means that each additional unit of the variable resource will contribute less and less to the total output. This occurs because the fixed resource becomes increasingly scarce relative to the variable resource, leading to inefficiencies and reduced productivity.

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  • 5. 

    The long run is characterized by:

    • A.

      At least one fixed input

    • B.

      The ability of the firm to change its plant size

    • C.

      The relevance of the law of diminishing returns

    • D.

      Insufficient time for firms to enter or leave the industry

    Correct Answer
    B. The ability of the firm to change its plant size
    Explanation
    In the long run, a firm has the ability to change its plant size. This means that the firm can adjust its production capacity by either expanding or reducing the size of its physical facilities, such as buildings and machinery. Unlike the short run, where at least one input is fixed, the long run allows for flexibility in adjusting all inputs to optimize production. This ability to change plant size is crucial for firms to adapt to changes in market conditions, technology, and demand, ensuring long-term efficiency and competitiveness.

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  • 6. 

    An explicit cost is

    • A.

      Always in excess of a resources opportunity cost

    • B.

      A money payment made for resources not owned by the firm itself

    • C.

      An implicit cost to the resource owner who receives that payment

    • D.

      Omitted when accounting profits are calculated

    Correct Answer
    B. A money payment made for resources not owned by the firm itself
    Explanation
    An explicit cost refers to a monetary payment made by a firm for the use of resources that are not owned by the firm itself. This means that the firm is paying for resources such as labor, raw materials, or equipment that it does not own. These costs are different from implicit costs, which are the opportunity costs associated with using resources owned by the firm. Explicit costs are important to consider when calculating the total cost of production and determining the profitability of a firm.

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  • 7. 

    Marginal cost is the: 

    • A.

      Change in total cost the results from producing one more unit of output

    • B.

      Change in average total cost that results from producing one more unit of output

    • C.

      Rate of change in total fixed cost that results from producing one more unit of output

    • D.

      Change in average variable cost that results from producing one more unit of output

    Correct Answer
    A. Change in total cost the results from producing one more unit of output
    Explanation
    The correct answer is "change in total cost that results from producing one more unit of output." Marginal cost refers to the additional cost incurred by a firm when producing an additional unit of output. It takes into account both variable and fixed costs and helps businesses make decisions regarding production levels and pricing. By calculating the change in total cost, a company can determine the cost-effectiveness of producing more units and optimize its production process.

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  • 8. 

    If a firm decides to produce no output in the short run, its costs will be:

    • A.

      Its variable costs

    • B.

      Its marginal costs

    • C.

      Its fixed costs

    • D.

      Zero

    Correct Answer
    C. Its fixed costs
    Explanation
    If a firm decides to produce no output in the short run, its costs will be its fixed costs. Fixed costs are the expenses that a firm incurs regardless of the level of production. These costs do not change with the quantity of output produced. Therefore, if the firm decides not to produce any output, it will still have to bear its fixed costs such as rent, insurance, or salaries. Variable costs, on the other hand, are directly related to the level of production and would be zero if no output is produced. Marginal costs are the additional costs incurred by producing one more unit of output and would also be zero in this case.

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  • 9. 

    The vertical distance between a firm's ATC and AVC curves represents:

    • A.

      Marginal costs, which decrease as output decreases

    • B.

      AFC, which increases as output increases

    • C.

      Marginal costs, which increase as output increases

    • D.

      AFC, which decreases as output increases

    Correct Answer
    D. AFC, which decreases as output increases
    Explanation
    The vertical distance between a firm's ATC and AVC curves represents AFC, which decreases as output increases. AFC stands for Average Fixed Cost and it represents the fixed cost per unit of output. As output increases, the fixed costs are spread over a larger number of units, causing the AFC to decrease. Therefore, the vertical distance between the ATC and AVC curves represents the AFC.

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  • 10. 

    Economies and diseconomies of scale explain:

    • A.

      The profit-maximizing level of production

    • B.

      The distinction between fixed and variable costs

    • C.

      Why the firm's long-run average total cost curve is U-shaped

    • D.

      Why the firm's short-run marginal cost curve cuts the short-run average variable cost curve at its minimum point

    Correct Answer
    C. Why the firm's long-run average total cost curve is U-shaped
    Explanation
    The firm's long-run average total cost curve is U-shaped because of economies and diseconomies of scale. Initially, as the firm increases its production, it benefits from economies of scale, which lead to lower average costs. This is due to factors such as specialization, bulk purchasing, and efficient use of resources. However, as the firm continues to expand, it may experience diseconomies of scale, which result in higher average costs. These can arise from issues like coordination problems, increased bureaucracy, and diminishing returns to scale. Therefore, the combination of economies and diseconomies of scale leads to a U-shaped long-run average total cost curve.

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  • 11. 

    The basic characteristic of the short run is that:

    • A.

      A firm does not have sufficient time to change the amounts of any of the resources it employs

    • B.

      Barriers to entry prevent new firms from entering the industry

    • C.

      The firm does not have sufficient time to change the size of its plant

    • D.

      The firm does not have sufficient time to cut its rate of output to zero

    Correct Answer
    C. The firm does not have sufficient time to change the size of its plant
    Explanation
    In the short run, a firm is limited in its ability to adjust the size of its plant. This means that the firm cannot easily change the physical capacity of its production facilities, such as adding or reducing the number of machines or expanding the size of the building. The short run is characterized by fixed inputs, which are resources that cannot be easily changed in quantity, such as capital equipment and buildings. Therefore, the firm must operate within the existing capacity of its plant and cannot quickly adjust it to meet changes in demand or other factors.

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  • 12. 

    Economic profits are calculated by subtracting

    • A.

      Explicit costs from total revenue

    • B.

      Explicit and implicit costs from total revenue

    • C.

      Implicit costs from total revenue

    • D.

      Implicit costs from normal profits

    Correct Answer
    B. Explicit and implicit costs from total revenue
    Explanation
    Economic profits are calculated by subtracting both explicit and implicit costs from total revenue. Explicit costs refer to the actual monetary expenses incurred in producing goods or services, such as wages, rent, and materials. Implicit costs, on the other hand, are the opportunity costs of using resources in a particular way, including the foregone income or benefits from alternative uses. By considering both explicit and implicit costs, the calculation of economic profits provides a more comprehensive measure of the true profitability of a business or investment.

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  • 13. 

    The minimum efficient scale of a firm:

    • A.

      Is the smallest level of output at which long-run average total cost is minimized

    • B.

      Occurs where marginal product becomes zero

    • C.

      Is realized somewhere in the range of diseconomies of scale

    • D.

      Is in the middle of the range of constant returns to scale

    Correct Answer
    A. Is the smallest level of output at which long-run average total cost is minimized
    Explanation
    The minimum efficient scale of a firm refers to the smallest level of output at which the long-run average total cost is minimized. This means that at this level of production, the firm is able to achieve the lowest average cost per unit of output. As the firm continues to increase its output beyond this point, it may experience diseconomies of scale, leading to an increase in average costs. Therefore, the minimum efficient scale represents the optimal level of production for the firm in terms of cost efficiency.

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  • 14. 

    In the long run:

    • A.

      Variable costs equal fixed costs

    • B.

      All costs are variable costs

    • C.

      Fixed costs are greater than variable costs

    • D.

      All costs are fixed costs

    Correct Answer
    B. All costs are variable costs
    Explanation
    The statement "all costs are variable costs" means that in the long run, all costs incurred by a business are variable and can be adjusted based on the level of production or sales. This implies that there are no fixed costs in the long run, and all costs can be changed or eliminated as needed. This concept is often associated with flexible cost structures and businesses that can easily adapt their expenses to changes in demand or market conditions.

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  • 15. 

    Suppose a firm in a purely competitive market discovers that the price of its product is above the minimum AVC point but everywhere below ATC. Given this, the firm:

    • A.

      Minimizes the losses by producing at the minimum point of its AVC curve

    • B.

      Should continue producing in the short run, but leave the industry in the long run if the situation persists.

    • C.

      Maximizes profits by producing where MR = ATC

    • D.

      Should close down immediately

    Correct Answer
    B. Should continue producing in the short run, but leave the industry in the long run if the situation persists.
    Explanation
    In a purely competitive market, firms should continue producing in the short run as long as the price of their product is above the minimum average variable cost (AVC) point. This is because producing above the minimum AVC point allows the firm to cover its variable costs and minimize losses. However, if the price remains below the average total cost (ATC) in the long run, the firm should leave the industry to avoid incurring further losses. This is because producing below ATC means the firm is unable to cover both variable and fixed costs, resulting in unsustainable profitability.

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  • 16. 

    The demand schedule or curve confronted by the individual purely competitive firm is: 

    • A.

      Relatively inelastic, that is, the elasticity coefficient is less than unity

    • B.

      Perfectly inelastic

    • C.

      Relatively elastic, that is, the elasticity coefficient is greater than unity

    • D.

      Perfectly elastic

    Correct Answer
    D. Perfectly elastic
    Explanation
    The demand schedule or curve confronted by the individual purely competitive firm is perfectly elastic. This means that any change in price will result in a complete change in quantity demanded. In other words, the firm has no control over the price and must accept the market price for its product. This is typical in a perfectly competitive market where there are many buyers and sellers, and the product is homogeneous.

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  • 17. 

    The MR = MC rule applies: 

    • A.

      Only to purely competitive firms

    • B.

      Only when the firm is a "price taker."

    • C.

      To firms in all types of industries

    • D.

      Only to monopolies

    Correct Answer
    C. To firms in all types of industries
    Explanation
    The MR = MC rule applies to firms in all types of industries. This rule states that a firm should produce at the level where marginal revenue (MR) equals marginal cost (MC) in order to maximize profits. Whether a firm is purely competitive, a price taker, or a monopoly, this rule still holds true. It allows firms to determine the quantity of output that will generate the highest level of profit by considering the additional revenue gained from producing one more unit (MR) and the additional cost incurred (MC) in doing so.

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  • 18. 

    Marginal Revenue is the 

    • A.

      Difference between product price and average total cost

    • B.

      Change in product price associated with the sale of one more unit of output

    • C.

      Change in total revenue associated with the sale of one more unit of output

    • D.

      Change in average revenue associated with the sale of more unit of output

    Correct Answer
    C. Change in total revenue associated with the sale of one more unit of output
    Explanation
    Marginal revenue refers to the change in total revenue that occurs when one more unit of output is sold. It represents the additional revenue generated by selling an additional unit of a product. It is important for businesses to understand marginal revenue as it helps them determine the optimal level of production and pricing strategies. By comparing marginal revenue with marginal cost, businesses can make informed decisions about production levels and pricing that will maximize their profits.

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  • 19. 

    The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing it is known as the: 

    • A.

      Profit-maximizing rule

    • B.

      Break-even rule

    • C.

      Shut-down rule

    • D.

      Output-maximizing rule

    Correct Answer
    A. Profit-maximizing rule
    Explanation
    The profit-maximizing rule states that a firm should produce up to the point where the marginal revenue from selling an additional unit of output is equal to the marginal cost of producing it. This is because producing beyond this point would result in diminishing returns and lower profits. By producing at the point where marginal revenue equals marginal cost, the firm can maximize its profits.

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  • 20. 

    For a purely competitive seller, price equals:

    • A.

      Average revenue

    • B.

      Marginal revenue

    • C.

      Total revenue divided by output

    • D.

      All of these

    Correct Answer
    D. All of these
    Explanation
    A purely competitive seller operates in a market where there are many buyers and sellers, and they have no control over the market price. In this scenario, the price at which they sell their product is equal to the average revenue, which is the total revenue divided by the quantity sold. Additionally, since they cannot influence the market price, the marginal revenue they earn from selling one more unit is also equal to the price. Therefore, for a purely competitive seller, the price equals both the average revenue and the marginal revenue, making the correct answer "all of these".

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  • 21. 

    The primary force encouraging the entry of new firms into a purely competitive industry is: 

    • A.

      Government subsidies for start-up firms

    • B.

      A desire to provide goods for the betterment of society

    • C.

      Economic profits earned by firms already in the industry

    • D.

      Normal profits earned by firms already in the industry

    Correct Answer
    C. Economic profits earned by firms already in the industry
    Explanation
    The primary force encouraging the entry of new firms into a purely competitive industry is the potential to earn economic profits. When firms in the industry are already making above-normal profits, it signals to potential entrants that there is an opportunity to also earn profits. This attracts new firms into the industry, increasing competition and potentially driving down prices. The desire to provide goods for the betterment of society and government subsidies for start-up firms may be secondary factors, but the main driver is the potential for economic profits.

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  • 22. 

    In which of the following industry structures is the entry of new firms the most difficult? 

    • A.

      Monopolistic competition

    • B.

      Pure competition

    • C.

      Oligopoly

    • D.

      Pure monopoly

    Correct Answer
    D. Pure monopoly
    Explanation
    In a pure monopoly, there is only one firm in the market, which means that there are significant barriers to entry for new firms. These barriers can include high start-up costs, exclusive access to resources or technology, legal restrictions, or economies of scale that make it difficult for new firms to compete effectively. As a result, the entry of new firms is extremely difficult in a pure monopoly, allowing the existing firm to maintain a dominant position in the market and potentially exploit their market power.

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  • 23. 

    If a purely competitive firm shuts down in the short run:

    • A.

      Its loss will be zero

    • B.

      It will realize a loss equal to its total variable costs

    • C.

      It will realize a loss equal to its explicit costs

    • D.

      It will realize a loss equal to its total fixed costs

    Correct Answer
    D. It will realize a loss equal to its total fixed costs
    Explanation
    In the short run, a purely competitive firm will shut down if it is unable to cover its variable costs. This means that it will not be able to generate enough revenue to cover its expenses such as wages and raw materials. As a result, the firm will realize a loss equal to its total fixed costs. Fixed costs are expenses that do not change with the level of output, such as rent and insurance. Even though the firm is not producing any output, it still has to bear these fixed costs, leading to a loss equal to them.

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  • 24. 

    In the short run the individual competitive firm's supply curve is that segment of the:

    • A.

      Marginal cost curve lying between the average total cost and average variable cost curve

    • B.

      Marginal revenue curve lying below the demand curve

    • C.

      Marginal cost curving lying about the average variable cost curve.

    • D.

      Average variable cost curve lying below the marginal cost curve

    Correct Answer
    C. Marginal cost curving lying about the average variable cost curve.
    Explanation
    The correct answer is "marginal cost curving lying about the average variable cost curve." In the short run, a competitive firm's supply curve is determined by its marginal cost. The marginal cost curve represents the additional cost of producing one more unit of output. The average variable cost curve represents the average variable cost per unit of output. The supply curve will be the segment of the marginal cost curve that lies above the average variable cost curve because the firm will only produce if the price is above the average variable cost to cover its variable costs.

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  • 25. 

    Firms seek to maximize: 

    • A.

      Market share

    • B.

      Total profit

    • C.

      Per unit profit

    • D.

      Total revenue

    Correct Answer
    B. Total profit
    Explanation
    Firms seek to maximize total profit because it represents the overall financial gain they can achieve. By maximizing total profit, firms can ensure long-term sustainability and growth. This involves optimizing various factors such as cost management, pricing strategies, and production efficiency to generate the highest possible profit margin. Market share, total revenue, and per unit profit are important considerations, but they are not the ultimate goal for firms as they do not necessarily guarantee long-term profitability.

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  • 26. 

    Which of the following is NOT a characteristic of pure competition?

    • A.

      No barriers to entry

    • B.

      A larger number of sellers

    • C.

      A standardized product

    • D.

      Price strategies by firms

    Correct Answer
    D. Price strategies by firms
    Explanation
    Pure competition is a market structure where there are many buyers and sellers, a standardized product, and no barriers to entry. In this type of market, firms have no control over the price and are price takers. Therefore, price strategies by firms are not a characteristic of pure competition as they cannot independently set or manipulate prices.

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  • 27. 

    Which of the following industries most closely approximates pure competition?

    • A.

      Steel

    • B.

      Clothing

    • C.

      Farm implements

    • D.

      Agriculture

    Correct Answer
    D. Agriculture
    Explanation
    Agriculture is the industry that most closely approximates pure competition. In pure competition, there are many buyers and sellers in the market, with no single entity having control over the market price. Agriculture fits this description as there are numerous farmers producing a variety of crops and livestock, and buyers have many options to choose from. Additionally, there are low barriers to entry and exit in the agricultural industry, allowing new farmers to enter the market easily.

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  • 28. 

    In a purely competitive industry:

    • A.

      They maybe economic profits in the short run, but not in the long run

    • B.

      Economic profits may persist in the long run if consumer demand is strong and stable

    • C.

      There will be no economic profits in either the short run or the long run

    • D.

      There may be economic profits in the long run, but not in the short run

    Correct Answer
    A. They maybe economic profits in the short run, but not in the long run
    Explanation
    In a purely competitive industry, there may be economic profits in the short run due to factors such as high demand or low competition. However, in the long run, these profits will likely diminish or disappear as new firms enter the market, increasing competition and driving prices down. In the long run, firms in a purely competitive industry tend to earn only normal profits, which are just enough to cover their opportunity costs and keep them in the industry.

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  • 29. 

    Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum then: 

    • A.

      There is no tendency for the firm's industry to expand or contract

    • B.

      Allocative but not productive efficiency is being achieved

    • C.

      Other firms will enter this industry

    • D.

      The firm is earning an economic profit

    Correct Answer
    A. There is no tendency for the firm's industry to expand or contract
    Explanation
    If a purely competitive firm is maximizing profit at an output where long-run average total cost is at a minimum, it means that the firm is operating efficiently. This implies that the firm is producing at the lowest possible cost per unit, which indicates productive efficiency. Additionally, since the firm is maximizing profit, it suggests that the firm is not earning any economic profit, but rather just covering its costs. In this scenario, there is no tendency for the firm's industry to expand or contract because all firms in the industry are already operating at their most efficient level.

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  • 30. 

    A constant-cost industry is one in which:

    • A.

      Resource prices fall as output is increased

    • B.

      Resource rices remain unchanged as output is increased

    • C.

      Small and large levels of output entail the same total costs

    • D.

      Resource prices rise as output is increased

    Correct Answer
    B. Resource rices remain unchanged as output is increased
    Explanation
    In a constant-cost industry, resource prices remain unchanged as output is increased. This means that the cost of resources, such as labor or raw materials, does not increase as the level of production increases. This could be due to factors such as economies of scale, efficient production processes, or stable input prices. As a result, the total cost of production remains constant regardless of the level of output.

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  • 31. 

    Price discrimination refers to:

    • A.

      Any price above that which is equal to a minimum average total cost

    • B.

      The selling of a given product at different prices that do not reflect cost differences

    • C.

      The difference between the prices a purely competitive seller and a purely monopolistic seller would charge

    • D.

      Selling a given product for different prices at two different points in time

    Correct Answer
    B. The selling of a given product at different prices that do not reflect cost differences
    Explanation
    Price discrimination refers to the practice of selling a given product at different prices that do not reflect cost differences. This means that the seller charges different prices to different customers or in different markets, even though the cost of producing the product is the same. Price discrimination allows the seller to maximize their profits by charging higher prices to customers who are willing to pay more, while still attracting customers who are willing to pay a lower price. This strategy is commonly used in industries such as airlines, where different customers are charged different prices for the same flight based on factors like demand and booking time.

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  • 32. 

    Pure monopoly refers to:

    • A.

      A single firm producing a product for which there are no close substitues

    • B.

      A large number of firms producing a differentiated product

    • C.

      Any market in which the demand curve to the firm is downsloping

    • D.

      A standardized product being produced by many firms

    Correct Answer
    A. A single firm producing a product for which there are no close substitues
    Explanation
    Pure monopoly refers to a market structure where there is only one firm that produces a product without any close substitutes. This means that consumers have no alternative options to choose from, giving the monopolistic firm complete control over the market. In a pure monopoly, the firm has the power to set prices and determine the quantity of the product produced, without facing any competition. This type of market structure often leads to higher prices and lower consumer surplus, as the monopolistic firm can exploit its market power.

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  • 33. 

    A price discriminating pure monopolist will attempt to charge each buyer (or group of buyers)

    • A.

      The same price if per unit is constant for each unit of the product

    • B.

      The maximum price each would be willing to pay

    • C.

      Different prices to compensate for differences in the characteristics of the product

    • D.

      That price which equals the buyer's marginal cost

    Correct Answer
    B. The maximum price each would be willing to pay
    Explanation
    A price discriminating pure monopolist will attempt to charge each buyer (or group of buyers) the maximum price each would be willing to pay. This is because price discrimination allows the monopolist to extract the maximum possible consumer surplus from each buyer by charging them the highest price they are willing to pay. By charging different prices to different buyers based on their willingness to pay, the monopolist can capture more of the consumer surplus for themselves and increase their profits.

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  • 34. 

    X-inefficiency refers to a situation in which a firm:

    • A.

      Fails to realize all existing economies of scaled

    • B.

      Is not as technologically progressive as it might be

    • C.

      Encounters diseconomies of scaled

    • D.

      Fails to achieve the minimum average total costs attainable to each level of output

    Correct Answer
    D. Fails to achieve the minimum average total costs attainable to each level of output
    Explanation
    X-inefficiency refers to a situation in which a firm fails to achieve the minimum average total costs attainable to each level of output. This means that the firm is not able to minimize its costs efficiently, resulting in higher costs than necessary for each level of production. This could be due to various factors such as inefficient management practices, lack of technological advancements, or poor utilization of resources. Ultimately, X-inefficiency leads to higher costs for the firm, reducing its competitiveness in the market.

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  • 35. 

    Which of the following is a characteristic of pure monopoly?

    • A.

      "price taking"

    • B.

      Close subsitute product

    • C.

      Barriers to entry

    • D.

      The absence of market power

    Correct Answer
    A. "price taking"
    Explanation
    A characteristic of pure monopoly is "price taking." This means that the monopolist has complete control over the price of the product and can set it at any level they desire. There are no competitors in the market, so the monopolist does not have to consider the prices set by other firms. This is in contrast to a competitive market where firms are price takers and have no control over the price, as it is determined by the forces of supply and demand.

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  • 36. 

    The MC = MC rule: 

    • A.

      Applies only to pure competition

    • B.

      Does not apply to pure monopoly because price exceeds marginal revenue

    • C.

      Applies only to pure monopoly

    • D.

      Applies both to pure monopoly and pure competition

    Correct Answer
    D. Applies both to pure monopoly and pure competition
    Explanation
    The MC = MC rule applies both to pure monopoly and pure competition. In pure competition, firms are price takers and their marginal cost (MC) equals the market price, so they maximize profits by producing where MC = market price. In pure monopoly, the firm has market power and can set its own price, but it still maximizes profits by producing where MC = marginal revenue. Therefore, the MC = MC rule is applicable to both market structures.

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  • 37. 

    Pure monopolists may obtain economic profits in the long run because 

    • A.

      Of advertising

    • B.

      Of rising average fixed costs

    • C.

      Marginal revenue is constant as sales increase

    • D.

      Of barriers to entry

    Correct Answer
    D. Of barriers to entry
    Explanation
    Pure monopolists may obtain economic profits in the long run because of barriers to entry. Barriers to entry refer to factors that make it difficult for new firms to enter the market and compete with the monopolist. These barriers can include legal restrictions, high start-up costs, economies of scale, patents, or control over key resources. By preventing or limiting competition, the monopolist can maintain its market power and charge higher prices, leading to economic profits.

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  • 38. 

    Economic profit in the long run is:

    • A.

      Possible for a pure monopoly, but not for a pure competitor

    • B.

      Possible for both a pure monopoly and a pure competitor

    • C.

      Only possible when barriers to entry are nonexistent

    • D.

      Impossible for both a pure monopolist and pure competitor

    Correct Answer
    A. Possible for a pure monopoly, but not for a pure competitor
    Explanation
    In the long run, economic profit is possible for a pure monopoly because a monopoly has the ability to set prices above marginal cost and limit competition. This allows them to earn higher profits. On the other hand, a pure competitor operates in a perfectly competitive market where there are many firms selling identical products and no barriers to entry. In this situation, firms can only earn normal profit, which is just enough to cover their opportunity costs. Therefore, economic profit is not possible for a pure competitor.

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  • 39. 

    A dilemma of regulation is that

    • A.

      Regulated pricing always conflicts with the "due process" provision of the Constitution

    • B.

      The regulated price that achieves allocative efficiency is also likely to result in persistent economic profits

    • C.

      The regulated price that achieves allocative efficiency is also likely to result in losses

    • D.

      The regulated price that results in a "fair return" restricts output by more than would unregulated monopoly

    Correct Answer
    C. The regulated price that achieves allocative efficiency is also likely to result in losses
  • 40. 

    Which of the following is NOT a barrier to entry? 

    • A.

      Patents

    • B.

      X-inefficiency

    • C.

      Economies of scale

    • D.

      Ownership of essential resources

    Correct Answer
    B. X-inefficiency
    Explanation
    X-inefficiency is not a barrier to entry. X-inefficiency refers to a situation where a firm is not operating at its optimal level of efficiency, resulting in higher costs and lower productivity. While it can negatively impact a firm's profitability, it does not prevent new firms from entering the market. Barriers to entry, on the other hand, are factors that make it difficult for new firms to enter and compete in a market, such as patents, economies of scale, and ownership of essential resources.

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  • 41. 

    In an oligopolistic market: 

    • A.

      One firm is always dominant

    • B.

      The industry is monopolistically competitive

    • C.

      Products may be standardized or differentiated

    • D.

      The four largest firms account for 20 percent or less of total sales

    Correct Answer
    C. Products may be standardized or differentiated
    Explanation
    In an oligopolistic market, products may be standardized or differentiated. This means that firms in the market have the option to either produce standardized products, which are identical to those of their competitors, or differentiated products, which have unique features or attributes. This allows firms to differentiate themselves from their competitors and potentially gain a competitive advantage. The choice between standardized and differentiated products depends on various factors such as consumer preferences, market demand, and the firm's strategic goals.

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  • 42. 

    Cartels are difficult to maintain in the long run because:

    • A.

      Individual members may find it profitable to cheat on agreements

    • B.

      It is more profitable for the industry to charge a lower price and produce more output

    • C.

      Entry barriers are insignificant in oligopolistic industries

    • D.

      They are illegal in all industrialized countries

    Correct Answer
    A. Individual members may find it profitable to cheat on agreements
    Explanation
    Cartels are difficult to maintain in the long run because individual members may find it profitable to cheat on agreements. This means that even though the cartel members initially agree to set prices and limit production to maximize profits, individual members may be tempted to break the agreement and produce more output or charge lower prices in order to gain a competitive advantage. This undermines the cartel's ability to control the market and maintain their agreed-upon prices, ultimately leading to its downfall.

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  • 43. 

    Game theory: 

    • A.

      Reveals that mergers between rival firms are self-defeating

    • B.

      Is the analysis of how people (or firms) behave in strategic situations

    • C.

      Is best suited for analyzing purely competitive markets

    • D.

      Reveals that price-fixing among firms reduces profits

    Correct Answer
    B. Is the analysis of how people (or firms) behave in strategic situations
    Explanation
    Game theory is the analysis of how people or firms behave in strategic situations. It involves studying the decisions and actions taken by individuals or firms when they are aware that their choices will affect others and vice versa. Game theory helps in understanding the strategic interactions, decision-making, and outcomes in situations where the actions of one party depend on the actions of others. It provides insights into various scenarios such as cooperation, competition, bargaining, and conflict resolution.

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  • 44. 

    Which of the following statements is correct? 

    • A.

      Monopolistic competitive firms earn zero economics profits in both the short run and the long run

    • B.

      In the long run purely competitive firms and monopolistically competitive firms earn zero economics profits, while pure monopolies may or may not earn economic profits

    • C.

      Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn positive economic profits in the long run

    • D.

      Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn zero economic profits in the long

    Correct Answer
    B. In the long run purely competitive firms and monopolistically competitive firms earn zero economics profits, while pure monopolies may or may not earn economic profits
    Explanation
    In the long run, purely competitive firms and monopolistically competitive firms earn zero economic profits because in these market structures, there is free entry and exit of firms, leading to competition that drives profits down to zero. On the other hand, pure monopolies may or may not earn economic profits in the long run because they have significant barriers to entry, allowing them to maintain market power and potentially earn positive economic profits.

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  • 45. 

    A significant difference between a monopolistically competitive firm and a purely competitive firm is that the: 

    • A.

      Former does not seek to maximize profits

    • B.

      Former sells similar, although not identica;, products

    • C.

      Former's demand curve is perfectly inelastic

    • D.

      Latter recognizes that price must be reduced to sell more output.

    Correct Answer
    B. Former sells similar, although not identica;, products
    Explanation
    The correct answer is that a monopolistically competitive firm sells similar, although not identical, products. This means that the firm's products are differentiated in some way, such as through branding, quality, or features, which allows the firm to have some degree of market power and control over pricing. In contrast, a purely competitive firm sells identical products and has no control over pricing as it is determined by market forces.

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  • 46. 

    In the long-run, the price charged by the monopolistically competitive firm attempting to maximize profits

    • A.

      Must be more than ATC

    • B.

      Will be equal to ATC

    • C.

      Must be less than ATC

    • D.

      May be either equal to ATC, less than ATC, or more than ATC

    Correct Answer
    B. Will be equal to ATC
    Explanation
    In the long-run, the price charged by a monopolistically competitive firm attempting to maximize profits will be equal to ATC. This is because in the long-run, firms in monopolistically competitive markets have the freedom to enter or exit the market. If a firm is earning above-normal profits, new firms will enter the market, increasing competition and driving down prices. Conversely, if a firm is earning below-normal profits, firms may exit the market, reducing competition and allowing prices to rise. In the long-run equilibrium, firms will earn zero economic profits, and the price charged will be equal to the average total cost (ATC) of production.

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  • 47. 

    Monopolistic competition is characterized by a 

    • A.

      Large number of firms and low entry barriers

    • B.

      Few dominant firms and low entry barriers

    • C.

      Large number of firms and substantial entry barriers

    • D.

      Few dominant firms and substantial entry barriers

    Correct Answer
    A. Large number of firms and low entry barriers
    Explanation
    Monopolistic competition is a market structure where there are many firms operating and selling differentiated products. This means that each firm has some control over the price of its product. The large number of firms in monopolistic competition ensures that no single firm can dominate the market. Additionally, low entry barriers allow new firms to enter the market easily, which promotes competition and prevents any one firm from having significant market power. Therefore, the correct answer is "large number of firms and low entry barriers."

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  • 48. 

    Nonprice competition refers to

    • A.

      Price increases by a firm that are ignored by its rivals

    • B.

      Reductions in production costs that are not reflected in price reductions

    • C.

      Competition between products and different industries, for example, competition between aluminum and steel in the manufacture of automobile parts

    • D.

      Advertising, product promotion, and changes in the real or perceived characteristics of a product

    Correct Answer
    D. Advertising, product promotion, and changes in the real or perceived characteristics of a product
    Explanation
    Nonprice competition refers to advertising, product promotion, and changes in the real or perceived characteristics of a product. This means that firms compete with each other by focusing on factors other than price, such as marketing strategies, advertising campaigns, and making changes to the product itself to make it more appealing to consumers. This type of competition aims to differentiate a product from its competitors and attract customers based on factors other than price.

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