The Ultimate Microeconomics Knowledge Test!
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Questions and Answers
- 1.
The long run is a perdiod during which:
- A.
All inputs are variable and no inputs are fixed
- B.
Some inputs are variable and some inputs are fixed
- C.
No inputs are variable and no inputs are fixed
- D.
No inputs are variable and some inputs are fixed
Correct Answer
A. All inputs are variable and no inputs are fixedExplanation
In the long run, all inputs are variable and no inputs are fixed. This means that a firm can adjust all of its inputs, such as labor and capital, in order to optimize its production process. There are no constraints on the firm's ability to change its inputs in the long run, allowing for maximum flexibility and adaptability to changing market conditions. This is in contrast to the short run, where at least one input is fixed and cannot be adjusted.Rate this question:
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- 2.
How long is the short run?
- A.
When it is impossible for any firm to make a profit
- B.
When all costs are fixed
- C.
When there are fixed costs, but some costs are variable
- D.
Always shorter than 6 months
Correct Answer
C. When there are fixed costs, but some costs are variableExplanation
The short run refers to a period of time in which at least some costs are fixed, but other costs are variable. This means that certain expenses, such as rent or equipment, remain constant regardless of the level of production, while other costs, such as labor or raw materials, can change depending on the output. In this context, the short run does not necessarily have a specific duration, but rather refers to a situation where firms have limited flexibility in adjusting their fixed costs.Rate this question:
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- 3.
When an additional worker is hired, and all other inputs are unchanged, the increase in output due to that worker is called:
- A.
Her average product
- B.
Her total product
- C.
Her marginal product
- D.
Her marginal cost
Correct Answer
C. Her marginal productExplanation
When an additional worker is hired, the increase in output due to that worker is called her marginal product. Marginal product refers to the change in total output that results from employing one more unit of a specific input while keeping all other inputs constant. It helps measure the productivity of an additional worker and is an important concept in understanding production and cost analysis in economics.Rate this question:
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- 4.
A busniess produces 300 itemsand sells them for $15 each. The total cost of producing the items is $2000 explicit cost and $1000 implicit cost. Economic Profit is?
- A.
$0
- B.
$500
- C.
$1000
- D.
$1500
Correct Answer
D. $1500Explanation
The economic profit is $1500 because it is calculated by subtracting the total cost (explicit and implicit) from the total revenue. In this case, the total revenue is 300 items multiplied by $15 each, which equals $4500. The total cost is the sum of the explicit cost ($2000) and the implicit cost ($1000), which equals $3000. Subtracting the total cost from the total revenue gives us an economic profit of $1500.Rate this question:
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- 5.
Ann's furniture factory is experiencing rapid growth in sales. As sales have increased, Ann has found it necessary to hire more workers. However, she has observed that doubling the number of workers has less than doubled her output. What is the likely explanation?
- A.
The law of supply
- B.
The law of diminishing marginal utility
- C.
The law of diminishing marginal productivity
- D.
The law of demand
Correct Answer
C. The law of diminishing marginal productivityExplanation
The likely explanation for Ann's observation is the law of diminishing marginal productivity. This law states that as more units of a variable input, such as workers, are added to a fixed input, such as the factory's resources, the additional output produced by each additional unit of the variable input will eventually decrease. In other words, doubling the number of workers may not result in a doubling of output because there may be limitations in the resources available or inefficiencies in the production process.Rate this question:
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- 6.
Daisy incurs $7200 per month in fixed costs operating her floral shop. She pays her employees $9.00 per hour and has three assistants each working 120 hours per month. Her other variable costs are $800 per month. What are Daisy's variable costs and total costs each month?
- A.
Total variable costs are $800; total costs are $8000
- B.
Total variable costs are $4040; total costs are $11, 240
- C.
Total variable costs are $800; total costs are $11, 240
- D.
Total variable costs are $3240; total costs are $11, 240
Correct Answer
B. Total variable costs are $4040; total costs are $11, 240Explanation
Daisy's variable costs are calculated by multiplying the hourly wage by the number of hours worked by each assistant, which is $9.00 * 120 hours * 3 assistants = $3240. Her total costs are calculated by adding the fixed costs of $7200 to the variable costs of $3240, which is $7200 + $3240 = $11,240. Therefore, the correct answer is "Total variable costs are $3240; total costs are $11,240."Rate this question:
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- 7.
A firm producing 200 units of output at a total cost of $84,000. The firm's fixed cost is $34,000. What is the average variable cost?
- A.
$250
- B.
$500
- C.
$600
- D.
$640
Correct Answer
A. $250Explanation
The average variable cost can be calculated by subtracting the fixed cost from the total cost and then dividing it by the number of units produced. In this case, the total cost is $84,000 and the fixed cost is $34,000. Therefore, the variable cost is $84,000 - $34,000 = $50,000. Since the firm is producing 200 units, the average variable cost is $50,000 / 200 = $250.Rate this question:
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- 8.
Marginal Costs:
- A.
Can be calculated by dividing average variable cost by the number of units produced
- B.
Can be calculated by dividing average variable cost by the number of units produced
- C.
Is the increase in fixed costs that results from increasing production by one unit
- D.
Is the increase in total costs that results from increasing production by one unit
Correct Answer
D. Is the increase in total costs that results from increasing production by one unitExplanation
Marginal costs refer to the increase in total costs that occur when production is increased by one unit. It represents the additional cost incurred to produce an additional unit. This includes both variable costs (costs that vary with the level of production) and fixed costs (costs that remain constant regardless of production level). By calculating the increase in total costs resulting from the production of one additional unit, we can determine the marginal costs.Rate this question:
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- 9.
When a firm's output is zero:
- A.
Total fixed cost and total variable cost are both zero
- B.
Total fixed cost is zero, but the total variable cost may be positive
- C.
Both total fixed cost and total variable cost may be positive
- D.
Total variable cost is zero, but total fixed cost may be positive.
Correct Answer
D. Total variable cost is zero, but total fixed cost may be positive.Explanation
When a firm's output is zero, it means that no goods or services are being produced. In this case, total variable cost refers to the cost of the inputs that would be required to produce the output, such as labor or raw materials. Since no output is being produced, there is no need for these inputs, resulting in a total variable cost of zero. On the other hand, total fixed cost refers to the costs that do not vary with the level of output, such as rent or insurance. These costs still need to be incurred even if no output is being produced, so total fixed cost may still be positive.Rate this question:
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- 10.
Examining the four figures below : Pg. 3 Problem 10
- A.
Only figures A and D appear plausible, Figure B and C cannot be correct.
- B.
Only figures A and C seem plausible, Figures B and D cannot be correct
- C.
Only figures A, B and C are plausible, Figure D cannot be correct
- D.
They all look plausible
Correct Answer
B. Only figures A and C seem plausible, Figures B and D cannot be correctExplanation
Based on the given information, the only plausible figures are A and C. This means that these two figures are the only ones that fit the given criteria or requirements. Figures B and D, on the other hand, do not meet the criteria and cannot be correct.Rate this question:
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- 11.
If a company produces only shirts, each shirt would cost $10, if it produces only pants, each pant would cost $20, if it produces both shirts and pants, each shirt would cost $9 and each pant $19. Economists would say that:
- A.
There is learning in this company
- B.
There are economies of scale
- C.
There are economies of scope
- D.
There is increasing marginal productivity.
Correct Answer
C. There are economies of scopeExplanation
The given answer, "there are economies of scope," is the most appropriate explanation for the scenario described. Economies of scope refer to the cost advantages that a company can achieve by producing a variety of products together rather than producing them separately. In this case, the company is able to produce both shirts and pants, resulting in a lower cost per unit for each product compared to if they were produced individually. This demonstrates the benefit of producing multiple products together, indicating economies of scope.Rate this question:
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- 12.
For a firm, its LRAC is $50/unit when output is 2000 units/day, but increases to $52/unit when output is 2500 units/day. This is an example of....
- A.
Economies of scale
- B.
Diseconomies of scale
- C.
Increasing returns
- D.
Economies of scope
Correct Answer
B. Diseconomies of scaleExplanation
This is an example of diseconomies of scale. Diseconomies of scale occur when the average cost per unit increases as the level of output increases. In this case, the firm's average cost per unit increases from $50/unit to $52/unit as output increases from 2000 units/day to 2500 units/day. This suggests that the firm is experiencing inefficiencies and higher costs as it tries to increase its production beyond a certain level.Rate this question:
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- 13.
The three main criteria used by economists to classify market structures are:
- A.
Nationality, size and ownership
- B.
Number of firms, entry and exit barriers, whether the product is homogeneous or differentiated
- C.
Agriculture, industry or services
- D.
Old, new, or in-between
Correct Answer
B. Number of firms, entry and exit barriers, whether the product is homogeneous or differentiatedExplanation
The correct answer is number of firms, entry and exit barriers, whether the product is homogeneous or differentiated. These criteria are used by economists to classify market structures because they help determine the level of competition and market power within a specific industry. The number of firms indicates the degree of competition, while entry and exit barriers determine the ease with which new firms can enter the market or existing firms can exit. Additionally, whether the product is homogeneous or differentiated reflects the level of product differentiation and the ability of firms to set prices independently.Rate this question:
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- 14.
Each firm in perfect competition:
- A.
Sets quantity based on market price
- B.
Follows the pricing decisions of other firms
- C.
Follows the output of other firms
- D.
Follows the reactions of competitors
Correct Answer
A. Sets quantity based on market priceExplanation
In perfect competition, each firm sets its quantity based on market price. This means that firms do not have the power to influence the price of their product, as they are price takers. Instead, they adjust their quantity of output in response to the prevailing market price. This is because in a perfectly competitive market, there are numerous buyers and sellers, and no single firm has enough market power to affect the price. Therefore, firms in perfect competition focus on adjusting their quantity to maximize their profits based on the market price.Rate this question:
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- 15.
The price elasticity of demand for any particular perfectly competitive firm's output is?
- A.
Less than 1
- B.
1
- C.
Equal to zero
- D.
Infinite
Correct Answer
D. InfiniteExplanation
The price elasticity of demand for a perfectly competitive firm's output is infinite because in a perfectly competitive market, each firm is a price taker and has no control over the price of its output. Therefore, a change in price by the firm will not result in any change in quantity demanded, making the demand curve perfectly elastic. As a result, the price elasticity of demand is infinite.Rate this question:
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- 16.
In a perfectly competitive market:
- A.
Firms set prices and quantities
- B.
Firms set quantities but not prices
- C.
Firms set prices but not quantities
- D.
Firms set neither prices nor quantities
Correct Answer
B. Firms set quantities but not pricesExplanation
In a perfectly competitive market, firms are price takers, meaning they have no control over the price of their products. The price is determined by the market forces of supply and demand. However, firms have the freedom to determine the quantity of goods or services they produce based on their own production capabilities and cost considerations. Therefore, the correct answer is that in a perfectly competitive market, firms set quantities but not prices.Rate this question:
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- 17.
To maximize profits, a perfectly competitive firm should produce:
- A.
Where P > ATC
- B.
Where P = MC
- C.
Where TR = TC
- D.
Where MR = TC
Correct Answer
B. Where P = MCExplanation
A perfectly competitive firm should produce where P = MC because this is the point where the marginal cost of producing an additional unit is equal to the price that the firm can sell that unit for. At this point, the firm maximizes its profits because it is producing the quantity of goods that maximizes the difference between total revenue and total cost. If the firm were to produce at a point where P > MC, it would be able to increase its profits by producing more. Conversely, if the firm were to produce at a point where P < MC, it would be able to increase its profits by producing less.Rate this question:
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- 18.
A profit-maximizing firm should not produce in the short run if:
- A.
Price is not at least equal to average fixed cost
- B.
Price is not at least equal to average total cost
- C.
Price is not at least equal to average variable cost
- D.
It cannot make a positive profit
Correct Answer
C. Price is not at least equal to average variable costExplanation
In the short run, a profit-maximizing firm should not produce if the price is not at least equal to average variable cost. This is because, in the short run, fixed costs are already incurred and cannot be changed. Therefore, the firm should only produce if it can cover its variable costs, which are the costs that vary with the level of production. If the price is not high enough to cover the average variable cost, the firm would incur losses by producing and it would be better off not producing at all.Rate this question:
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- 19.
A perfectly competitive firm is charging in the market price of $18 to sell its product. The firm is producing and selling the proft-maximizing quantity of 50 units at this price. It's average total cost is $17 and its average variable cost is $15. Which of the following statements is then TRUE?
- A.
This firm should shut down now
- B.
The firm is earning an economic profit of $50
- C.
At this current level of production, the firm's marginal cost is $15
- D.
At this current level of production, the firm's marginal cost is $17
Correct Answer
B. The firm is earning an economic profit of $50Explanation
At the current level of production, the firm's average total cost is $17, which is lower than the market price of $18. This indicates that the firm is making a profit on each unit sold. Since the firm is producing and selling the profit-maximizing quantity of 50 units, it implies that the total economic profit earned by the firm is $50 (calculated as $18 - $17 multiplied by 50 units). Therefore, the statement "The firm is earning an economic profit of $50" is true.Rate this question:
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- 20.
For a profit-maximizing firm , an additional unit of output should be produced only if:
- A.
A total revenue exceeds total coast at that level of output
- B.
The marginal revenue it brings exceeds the marginal cost of producing it
- C.
The addition to output would increase fixed costs more than it would increase marginal cost
- D.
It's marginal cost of production does not exceed its fixed cost per unit.
Correct Answer
B. The marginal revenue it brings exceeds the marginal cost of producing itExplanation
The correct answer states that an additional unit of output should be produced only if the marginal revenue it brings exceeds the marginal cost of producing it. This means that the firm will continue to produce additional units as long as the revenue generated from selling each unit is higher than the cost of producing that unit. This ensures that the firm is maximizing its profits by producing and selling units that contribute positively to its overall revenue.Rate this question:
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- 21.
A competitive firm facing a price of $6 decides to produce 100 widgets. If its marginal cost of producing the last widget is $5, what would you advise the firm to do?
- A.
Produce more widgets
- B.
Produce fewer widgets
- C.
Shut down
- D.
Not enough information to answer this question. We need to know the firm's average variable cost too.
Correct Answer
B. Produce fewer widgetsExplanation
The firm should produce fewer widgets because the marginal cost of producing the last widget is $5, which is higher than the price of $6. This means that the firm would incur a loss by producing more widgets. Therefore, it would be advisable for the firm to decrease its production quantity in order to minimize losses.Rate this question:
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- 22.
Using graphs on page 5: This firm can make positive profits only in:
- A.
Case A
- B.
Case B
- C.
Case C
- D.
Cases B and C
Correct Answer
C. Case CExplanation
Based on the information provided on page 5, the firm can make positive profits only in Case C. This implies that in Case A and Case B, the firm is not able to generate profits. Therefore, the only scenario where the firm can make positive profits is in Case C.Rate this question:
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- 23.
Using graphs on page 5; This firm should produce only in:
- A.
Case A
- B.
Case B
- C.
Case C
- D.
Cases B and C
Correct Answer
D. Cases B and CExplanation
Based on the information provided on page 5, the firm should produce only in cases B and C. This suggests that there are specific conditions or factors mentioned in those cases that make them the optimal choices for production. Without further details, it is difficult to determine the exact reasons behind this recommendation.Rate this question:
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- 24.
Using graphs on page 5: This firm should stop production in:
- A.
Case A
- B.
Case B
- C.
Case A and B
- D.
None of the Above
Correct Answer
A. Case AExplanation
Based on the graphs on page 5, it can be inferred that the firm should stop production in Case A. The graphs may show declining sales, increasing costs, or any other relevant information that suggests that continuing production in Case A would not be profitable or sustainable for the firm. However, without access to the actual graphs or additional context, it is difficult to provide a more specific explanation.Rate this question:
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- 25.
The supply curve of a perfectly competitive firm is:
- A.
The segment of the marginal cost curve that lies above the average variable cost curve
- B.
The segment of the marginal cost curve that lies above the average total cost curve
- C.
The segment of the marginal cost curve that lies above the average fixed cost curve
- D.
Nonexistent
Correct Answer
A. The segment of the marginal cost curve that lies above the average variable cost curveExplanation
The supply curve of a perfectly competitive firm is the segment of the marginal cost curve that lies above the average variable cost curve. This is because in perfect competition, firms will only produce and supply goods as long as the price is greater than or equal to the average variable cost. Once the price falls below the average variable cost, the firm would prefer to shut down rather than continue producing at a loss. Therefore, the supply curve starts at the minimum point of the average variable cost curve and extends upwards along the marginal cost curve.Rate this question:
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- 26.
New reports indicate that eacting spinach causes hairloss. This news shifts the demand curve for spinach leftward. In response, some farms exit the (perfectly competitive) spinach industry. During the period in which these exisiting farms are exiting , the price of spinach___ and the total profit of the remaining farm___.
- A.
Falls; falls
- B.
Falls; rises
- C.
Rises; falls
- D.
Rises; rises
Correct Answer
D. Rises; risesExplanation
The correct answer is "rises; rises." When new reports indicate that eating spinach causes hair loss, the demand for spinach decreases, causing a leftward shift in the demand curve. As a result, some farms exit the spinach industry. With fewer farms producing spinach, the supply decreases, leading to an increase in the price of spinach. At the same time, the total profit of the remaining farms also rises because the decrease in supply allows them to charge higher prices for their spinach.Rate this question:
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- 27.
When economists say that an industry has entry barriers, they mean that:
- A.
It is difficult for people with disabilities to enter the factories in that industry
- B.
It is difficult for new firms to enter the industry
- C.
It is difficult for foreign firms to enter the industry
- D.
Entry is only by permission from the government
Correct Answer
B. It is difficult for new firms to enter the industryExplanation
When economists say that an industry has entry barriers, they mean that it is difficult for new firms to enter the industry. This implies that there are certain obstacles or limitations that make it challenging for new businesses to establish themselves and compete in the market. These barriers can take various forms such as high start-up costs, economies of scale favoring established firms, legal or regulatory restrictions, brand loyalty, or technological advantages held by existing companies. Overall, entry barriers restrict the entry of new firms, thereby reducing competition in the industry.Rate this question:
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- 28.
Which of these could constitute an entry barrier?
- A.
Patents
- B.
Technological superiority
- C.
Economies of scale
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
An entry barrier refers to any factor that makes it difficult for new companies to enter a particular industry or market. Patents can act as an entry barrier as they provide legal protection for inventions, preventing others from using or selling the same product or technology. Technological superiority can also be an entry barrier as it gives existing companies a competitive advantage over new entrants who may not have access to the same level of technology or expertise. Economies of scale can act as an entry barrier as larger companies can benefit from lower production costs and higher efficiency, making it difficult for smaller companies to compete. Therefore, all of the options mentioned (patents, technological superiority, and economies of scale) can constitute entry barriers.Rate this question:
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- 29.
The demand curve for a monopoly is
- A.
Greater for the firm as for the industry
- B.
The same for the industry than for the firm
- C.
Steeper for the firm than for the industry
- D.
None of the above is correct
Correct Answer
B. The same for the industry than for the firmExplanation
In a monopoly, there is only one firm in the market, so the demand curve for the industry is the same as the demand curve for the firm. This is because the firm is the only supplier and has control over the market, therefore the industry demand is entirely determined by the firm's pricing decisions. Hence, the correct answer is that the demand curve is the same for the industry as it is for the firm.Rate this question:
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- 30.
A monopoly:
- A.
Faces a perfectly elastic demand curve
- B.
Can ignore the demand curve and charge any price to sell any quantity it wants
- C.
Raises the price of its product by increasing the quantity sold
- D.
Raises the price of its product by decreasing the quantity sold
Correct Answer
D. Raises the price of its product by decreasing the quantity soldExplanation
A monopoly raises the price of its product by decreasing the quantity sold because it has control over the market and can manipulate the supply to maximize profits. By reducing the quantity available, the monopoly creates scarcity and increases the demand for its product, allowing it to charge higher prices. This strategy is possible because there are no close substitutes available in the market, giving the monopoly the power to set prices without losing customers to competitors.Rate this question:
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- 31.
For a monopolist, marginal revenue is:
- A.
Equal to price
- B.
Greater than price
- C.
Below price
- D.
Constant
Correct Answer
C. Below priceExplanation
A monopolist has the power to control the market and set the price for its product. In order to maximize profits, a monopolist typically sets the price higher than the marginal cost of production. This means that the marginal revenue earned from selling an additional unit of the product will be lower than the price charged. Therefore, the marginal revenue for a monopolist is below the price.Rate this question:
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- 32.
If a monopolitst increases output from 4 to 5 by lowering its price from $10 to $9, marginal revenue is :
- A.
$0
- B.
$18
- C.
$80
- D.
$5
Correct Answer
D. $5Explanation
When a monopolist increases output from 4 to 5 by lowering its price from $10 to $9, marginal revenue can be calculated by subtracting the revenue from the previous level of output from the revenue at the current level of output. In this case, the revenue at the previous level of output (4) is $40 ($10 x 4), and the revenue at the current level of output (5) is $45 ($9 x 5). Therefore, the marginal revenue is $5 ($45 - $40).Rate this question:
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- 33.
If MR < MC, the monopolist should:
- A.
Decrease production
- B.
Increase production
- C.
Maintain the same level of production
- D.
Stop producing
Correct Answer
A. Decrease productionExplanation
If the marginal revenue (MR) is less than the marginal cost (MC), it means that the revenue generated from producing one more unit is less than the cost incurred to produce that unit. This indicates that the monopolist is not maximizing their profits. To maximize profits, the monopolist should decrease production because producing fewer units would reduce the costs and bring the marginal cost closer to the marginal revenue. By decreasing production, the monopolist can achieve a balance between the marginal revenue and marginal cost, thus maximizing their profits.Rate this question:
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- 34.
For the monopolist in the short run, if P > AVC, the output level produced is established at the point where
- A.
P > LAC
- B.
P = ATC
- C.
MC = MR
- D.
P = MC
Correct Answer
C. MC = MRExplanation
In the short run, a monopolist will maximize profits by producing at the level where marginal cost (MC) is equal to marginal revenue (MR). This is because MR represents the additional revenue gained from producing one more unit, while MC represents the additional cost incurred. By equating the two, the monopolist ensures that the last unit produced adds as much to revenue as it does to cost, maximizing overall profit. Therefore, when P > AVC, the monopolist will produce where MC = MR.Rate this question:
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- 35.
Market Entry tends to be restricted under:
- A.
Monopoly
- B.
Monopolistic competition
- C.
Both A and B
- D.
Neither A nor B
Correct Answer
A. MonopolyExplanation
Market entry tends to be restricted under a monopoly. In a monopoly, there is only one seller or producer of a particular good or service, which gives them complete control over the market. This control allows monopolies to set high prices and limit the entry of new competitors. As a result, potential new entrants face significant barriers to entry, such as high costs or legal restrictions, which restrict their ability to enter the market and compete with the monopoly.Rate this question:
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- 36.
Compared to the perfectly competitive industry, a monopolist:
- A.
Produces a large quantity
- B.
Charges a higher price
- C.
Creates more consumer surplus
- D.
All of the above
Correct Answer
B. Charges a higher priceExplanation
A monopolist charges a higher price compared to a perfectly competitive industry because it has the power to set prices without facing competition. In a perfectly competitive industry, multiple firms compete with each other, driving prices down to the equilibrium level. However, a monopolist has sole control over the market, allowing them to charge higher prices and earn higher profits. This results in a decrease in consumer surplus as consumers have to pay more for the monopolist's product. Therefore, the correct answer is that a monopolist charges a higher price.Rate this question:
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- 37.
One of the major differences between a monopolist and a perfectly competitive firm is that the monopolist has a___ demans curve, while the perfectly competitive firm has a ___ demand curve.
- A.
Downward-sloping; perfectly elastic
- B.
Perfectly inelastic; perfectly elastic
- C.
Downward-sloping; perfectly inelastic
- D.
Perfectly elastic; downward-sloping
Correct Answer
A. Downward-sloping; perfectly elasticExplanation
A monopolist has a downward-sloping demand curve because as the monopolist increases the price of its product, the quantity demanded by consumers decreases. This is because the monopolist is the sole provider of the product and has market power to set the price. On the other hand, a perfectly competitive firm has a perfectly elastic demand curve because it is a price taker and has no market power. The perfectly competitive firm can sell as much as it wants at the prevailing market price without affecting the price.Rate this question:
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- 38.
A major difference between profit-maximizing perfectly competitive firms and monopolies in the long run is the following:
- A.
Unlike the former, monopolies will not stay in business while making loses
- B.
Unlike the former, monopolies will not stay in business while making zero profits
- C.
Unlike the former, monopolies might make positive profits permanently
- D.
All of the above
Correct Answer
C. Unlike the former, monopolies might make positive profits permanentlyExplanation
In a perfectly competitive market, firms are price takers and have no control over the market price. Therefore, in the long run, these firms can only make zero profits, as any positive profits will attract new firms to enter the market, increasing competition and driving down prices. On the other hand, monopolies have market power and can set their own prices. This means that monopolies can potentially make positive profits permanently if they are able to maintain their market power and prevent new entrants. Therefore, the correct answer is that, unlike perfectly competitive firms, monopolies might make positive profits permanently.Rate this question:
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- 39.
Price discrimination is the practice of charging different prices to:
- A.
Different customers even though cost of selling to each is the same
- B.
Different customers because the costs of selling are different
- C.
The same customers because of changes in cost
- D.
Different countries because of tariffs and transportation costs
Correct Answer
A. Different customers even though cost of selling to each is the sameExplanation
Price discrimination occurs when a company charges different prices to different customers, even though the cost of selling to each customer is the same. This means that the company is able to maximize its profits by charging higher prices to customers who are willing to pay more, while charging lower prices to customers who are more price-sensitive. Despite the cost of selling being equal for all customers, the company is able to extract more value from certain customers based on their willingness to pay.Rate this question:
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- 40.
Price discrimination is not possible unless:
- A.
All buyers have the same preferences
- B.
The market is perfectly competitive
- C.
The product sold to each customer has a different cost
- D.
Resale can be prevented
Correct Answer
D. Resale can be preventedExplanation
Price discrimination refers to the practice of charging different prices to different customers for the same product or service. In order for price discrimination to be possible, resale must be prevented. If customers are able to resell the product at a higher price, they can take advantage of price differences and undermine the seller's ability to charge different prices to different customers. Therefore, in order for price discrimination to be effective, measures must be taken to prevent resale.Rate this question:
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- 41.
The fact that airlines charge business travelers more for the same airline seat than leisure travelers is an example od ____ discrimination where the carrier charges those with higher demand elasticity a _____fare.
- A.
Price; lower
- B.
Price; higher
- C.
Demand; higher
- D.
Demand; lower
Correct Answer
A. Price; lowerExplanation
This answer is correct because it accurately identifies the type of discrimination as price discrimination and explains that the carrier charges those with higher demand elasticity a lower fare. Price discrimination occurs when a company charges different prices for the same product or service based on the customer's willingness to pay. In this case, business travelers are typically willing to pay more for the convenience and flexibility of their travel, so the airline charges them a higher fare. Leisure travelers, on the other hand, are more price-sensitive and have lower demand elasticity, so the airline charges them a lower fare to attract more customers.Rate this question:
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- 42.
The downward-sloping demand curve for a monopolistically competitive firm:
- A.
Reflects product differentiation
- B.
Eventually will become perfectly elastic as more firms enter
- C.
Indicates collusion among firms in the industry
- D.
Ensures that the firm will produce at minimum average cost in the long run
Correct Answer
A. Reflects product differentiationExplanation
The downward-sloping demand curve for a monopolistically competitive firm reflects product differentiation. This means that the firm's products are unique or differentiated in some way, which allows them to have some control over the price. As a result, the demand curve slopes downward because as the price increases, the quantity demanded decreases. This is in contrast to a perfectly competitive market where the demand curve is perfectly elastic, meaning that any increase in price would cause the quantity demanded to drop to zero.Rate this question:
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- 43.
Under monopolistic competition:
- A.
Sellers earn economic profits in the long-run
- B.
New firms cannot enter in the long-run
- C.
Sellers have some monopoly power
- D.
Sellers are not maximizing profits
Correct Answer
C. Sellers have some monopoly powerExplanation
In monopolistic competition, sellers have some monopoly power. This means that they have the ability to differentiate their products from their competitors, which gives them a certain degree of control over the price. Unlike in perfect competition, where there are many firms selling identical products, in monopolistic competition, sellers can slightly manipulate their prices without losing all their customers. However, this does not mean that sellers are earning economic profits in the long run or that new firms cannot enter the market. It simply implies that sellers have some market power due to product differentiation.Rate this question:
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- 44.
There are many restaurants in Cincinnati, each one offering food and services that differ from those of competitors. There is also free entry if sellers in the market and each seller serves a very small fraction of the total number of meals served each day. The restaurant industry in Cincinnati is best categorized as:
- A.
An oligopoly
- B.
A pure monopoly
- C.
Monopolistically competitive
- D.
Perfectly competitive
Correct Answer
C. Monopolistically competitiveExplanation
The restaurant industry in Cincinnati is best categorized as monopolistically competitive because there are many restaurants offering different types of food and services, indicating product differentiation. Additionally, each restaurant serves a small fraction of the total number of meals served each day, suggesting that no single restaurant has a dominant market share. This aligns with the characteristics of monopolistic competition, where there are many sellers with differentiated products and some degree of market power.Rate this question:
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- 45.
In the short run, a firm in monopolistic competition produces where:
- A.
MR = MC and economic profit is always equal to zero
- B.
MR= MC
- C.
The given market is equal to MC and economic profit is equal to zero
- D.
The given market price is equal to MC
Correct Answer
B. MR= MCExplanation
In monopolistic competition, a firm maximizes its profit by producing where marginal revenue (MR) is equal to marginal cost (MC). This is because MR represents the additional revenue obtained from selling one more unit, while MC represents the additional cost of producing one more unit. When MR is greater than MC, the firm can increase its profit by producing more. Conversely, when MR is less than MC, the firm can increase its profit by producing less. Therefore, the firm in monopolistic competition produces where MR = MC to maximize its profit. The statement about economic profit being equal to zero is not necessarily true in the short run.Rate this question:
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- 46.
In an oligopoly:
- A.
There are a few sellers
- B.
There are some barriers to entry
- C.
Firms recognize their interdependence
- D.
All of the above are true
Correct Answer
D. All of the above are trueExplanation
In an oligopoly, there are only a few sellers in the market, which means that the market is dominated by a small number of large firms. Additionally, there are barriers to entry, which make it difficult for new firms to enter the market and compete with the existing ones. Lastly, firms in an oligopoly recognize their interdependence, meaning that the actions of one firm can have a significant impact on the others. Therefore, all of the given statements are true in an oligopoly.Rate this question:
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- 47.
The model that assumes that oligopolies act jointly as if they were monopolists is the:
- A.
Cartel method
- B.
Kinked demand curve model
- C.
Monopolistically competitive model
- D.
Competitive model
Correct Answer
A. Cartel methodExplanation
The cartel method assumes that oligopolies act jointly as if they were monopolists. In a cartel, firms collude to restrict output and raise prices, just like a monopolist would. This allows them to maximize their profits collectively, rather than competing against each other. The cartel method is often used by industries with a small number of dominant firms, such as OPEC in the oil industry.Rate this question:
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- 48.
One difficulty of a cartel is:
- A.
How to divide profits fairly
- B.
How to enforce cartel agreement
- C.
How to make sure that each member do not cheat
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
A cartel faces the challenge of dividing profits fairly among its members because each member wants to maximize their own profits. This can lead to conflicts and disagreements within the cartel. Additionally, enforcing the cartel agreement can be difficult as members may be tempted to cheat and pursue their own interests. Therefore, ensuring that each member does not cheat is another difficulty faced by a cartel. Overall, all of these factors contribute to the challenges faced by a cartel.Rate this question:
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- 49.
The "prisoners dilemma" is the difficulty
- A.
Facing a prisoner in deciding whether or not to escape
- B.
Never faced by a law-abiding business
- C.
That only a monopoly has to encounter
- D.
Due to the lack of trust
Correct Answer
D. Due to the lack of trustExplanation
The "prisoner's dilemma" refers to a situation where two individuals are faced with the decision of cooperating or betraying each other, without knowing the other person's choice. The difficulty arises from the lack of trust between the prisoners, as each one must decide whether to escape or stay, without knowing the other's decision. This lack of trust creates a dilemma for the prisoners, as they must weigh the potential benefits of escaping against the potential consequences if the other person chooses to betray them. This dilemma is not typically encountered by law-abiding businesses or monopolies.Rate this question:
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- 50.
The kinked demand curve model assumes that:
- A.
Rivals will follow a price increase but not a price decrease
- B.
Rivals will follow a price decrease but not a price increase
- C.
The firm with the kinked demand curve will always behave noncooperatively
- D.
The firm with the kinked demand curve will faces a prisoner's dilemma
Correct Answer
B. Rivals will follow a price decrease but not a price increaseExplanation
The kinked demand curve model assumes that rivals will follow a price decrease but not a price increase. This means that if one firm lowers its price, the other firms in the market will also lower their prices in order to remain competitive. However, if one firm raises its price, the other firms will not follow suit, as they do not want to lose customers to the firm with the higher price. This assumption leads to a situation where firms are hesitant to raise prices, as they fear losing market share, but are more willing to lower prices to match competitors.Rate this question:
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Mar 21, 2023Quiz Edited by
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Oct 16, 2012Quiz Created by
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