Unit 6 Perfect Competition and Monopoly - Practice Problems

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1 Unit 6 Perfect Competition and Monopoly - Practice Problems Multiple Choice Identify the choice that best completes the statement or answers the question. 1. One characteristic of a perfectly competitive market is that there are sellers of the good or service. a. one or two b. a few c. usually less than 10 d. hundreds or thousands of e. zero 2. In a perfectly competitive industry, the market demand curve is usually: a. perfectly inelastic. b. perfectly elastic. c. downward-sloping. d. vertical. e. relatively elastic. 3. The market structure called is described as having a single producer selling a single, undifferentiated product. a. perfect competition b. monopoly c. oligopoly d. monopolistic competition e. duopoly 4. An industry that contains a firm that is the only producer of a good or service for which there are no close substitutes and for which entry by potential rivals is prohibitively difficult is: a. a duopoly. b. a monopoly. c. an oligopoly. d. perfect competition. e. monopolistic competition 5. Suppose that you build a high-speed, magnetically powered transportation system from New York to Los Angeles. High fixed costs resulting from the enormous quantity of capital used in this system enable decreasing average cost for any conceivable level of demand. Your monopoly would result from: a. control of a scarce resource or input. b. technological superiority. c. increasing returns to scale. d. government-created barriers. e. diseconomies of scale. 6. Conditions that prevent the entry of new firms in a monopoly market are: a. barriers to entry. b. terms of sale. c. labor market stipulations. d. production controls. e. antitrust laws.

2 7. The land you own has the only known source of aloe needed to make anti-itch lotion. In this case, your monopoly would result from which of the following? a. government restrictions b. location c. sunk costs d. ownership of inputs e. patents and copyrights 8. If the state government gives you the exclusive right to sell cement to municipalities, your monopoly would result from: a. sunk costs. b. government restrictions. c. economies of scale. d. location. e. ownership of inputs. 9. Marginal revenue: a. is the slope of the average revenue curve. b. equals the market price in perfect competition. c. is the change in quantity divided by the change in total revenue. d. is the price divided by the change in quantity. e. is the total revenue divided by the market price. Figure 58-1: Marginal Revenue, Costs, and Profits 10. (Figure 58-1: Marginal Revenue, Costs, and Profits) In the figure, if market price decreases to $16, marginal revenue and profit-maximizing output. a. increases; decreases b. increases; increases c. decreases; increases d. decreases; decreases e. remains constant; remains constant Quantity per Period Total Cost 0 $

3 Table 58-3: Total Cost for a Perfectly Competitive Firm 11. (Table 58-3: Total Cost for a Perfectly Competitive Firm) If the market price is $3.50, the profit-maximizing quantity of output is units. a. five b. ten c. eight d. nine e. seven 12. In the figure, total cost at the profit-maximizing quantity of bushels is $. a b. 14 c. 56 d. 72 e (Figure 59-5: Perfectly Competitive Firm) The figure shows a perfectly competitive firm that faces demand curve d, has the cost curves shown, and maximizes profit. The firm's total cost per day is: a. $475. b. $300. c. $900. d. $1,200. e. $600.

4 14. (Figure 59-5: Perfectly Competitive Firm) The figure shows a perfectly competitive firm that faces demand curve d, has the cost curves shown, and maximizes profit. If the firm faces a market price of $3.00, its total profit per day is: a. zero. b. $250. c. $275. d. $300. e. $ If price is greater than average variable cost and less than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will: a. continue to produce at an economic loss. b. earn an economic profit. c. encourage other firms to enter the industry. d. produce more than the profit-maximizing quantity. e. break even. 16. If price is less than average variable cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will: a. produce at a loss. b. produce at a profit. c. shut down production. d. produce more than the profit-maximizing quantity. e. break even. Figure 59-2: Cost Curve and Profits 17. (Figure 59-2: Cost Curves and Profits) The market for corn is perfectly competitive, and an individual corn farmer faces the cost curves shown in the figure. If the price of a bushel of corn in the market is $14, then the farmer will produce of corn and earn an economic equal to. a. 4 bushels; profit; $0 b. 4 bushels; profit; just less than $80 per bushel c. 2 bushels; profit; $0 d. 2 bushels; loss; just more than $80 per bushel e. 4 bushels; loss; just less than $20 per bushel 18. (Figure 59-2: Cost Curves and Profits) In the figure, if market price is $18, the profit-maximizing quantity of output is: a. 2.

5 b. 3. c. 4. d. 5. e In perfectly competitive long-run equilibrium: a. all firms make positive economic profits. b. all firms produce at the minimum point of their average total cost curves. c. the industry supply curve must be upward-sloping. d. all firms face the same price, but the value of marginal cost will vary directly with firm size. e. the price will equal average variable cost. 20. Economic profits in a perfectly competitive industry induce, and losses induce. a. exit; entry b. entry; entry c. entry; exit d. exit; exit e. entry; shutdown 21. When a perfectly competitive firm is in long-run equilibrium, the firm is producing at: a. maximum average total cost. b. maximum average variable cost. c. minimum marginal cost. d. minimum long-run average total cost. e. the shut-down point. Figure 60-1: Perfectly Competitive Firm 22. (Figure 60-1: Perfectly Competitive Firm) The figure shows a perfectly competitive firm that faces demand curve d, has the cost curves shown, and maximizes profit. The firm's economic profit in the long run will be: a. zero. b. $250. c. $275. d. $300. e. $400.

6 23. In the long run, firms in a perfectly competitive industry will: a. minimize average total cost. b. earn a positive economic profit. c. exit the industry if price is greater than average total cost. d. produce an output level at which price is greater than average total cost. e. produce a differentiated product. 24. Compared to perfect competition: a. monopoly produces more at a lower price. b. monopoly produces where MR > MC, and a perfectly competitively firm produces where P = MC. c. monopoly may have economic profits in the long run, but in perfect competition economic profits are zero in the long run. d. perfect competition may have economic profits in the long run, but in monopoly economic profits are zero in the long run. e. monopoly produces where MR = MC, and a perfectly competitively firm produces where P = MR > MC. 25. The demand curve for a monopoly is: a. the sum of the supply curves of all the firms in the monopoly's industry. b. the industry demand curve. c. horizontal because no one can enter. d. perfectly elastic. e. price-inelastic due to many available substitute products. Figure 61-3: A Profit-Maximizing Monopoly Firm 26. (Figure 61-3: A Profit-Maximizing Monopoly Firm) The profit-maximizing firm in this figure will produce units of output per week. a. 160 b. 220 c. 250

7 d. 300 e (Figure 61-3: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's cost per unit at its profit-maximizing quantity is: a. $8. b. $15. c. $16. d. $18. e. $ (Figure 61-3: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's price per unit is: a. $20. b. $26. c. $29. d. $35. e. $ (Figure 61-3: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's profit per unit is: a. $5. b. $13. c. $14. d. $20. e. $2. Figure 61-5: A Gadget Monopoly 30. (Figure 61-5: A Gadget Monopoly) The graph shows a monopoly firm that sells gadgets. If the firm acts to maximize profit, the firm will sell units at a price of per unit. a. Q 2; P 1 b. Q 2; P 5 c. Q 3; P 2 d. Q 4; P 3 e. Q 4; P (Figure 61-5: A Gadget Monopoly) The graph shows a monopoly firm that sells gadgets. If the firm acts to maximize profit, the firm will earn profit equal to: a. (P 1 P 5)*Q 2 b. (P 1 P 4)*Q 2

8 c. (P 4 P 5)*Q 2 d. (P 2 P 3)*Q 3 e. (P 1 P 5)*Q The demand curve facing a monopolist is: a. vertical, the same as that facing a perfectly competitive firm. b. perfectly inelastic, the same as that facing a perfectly competitive firm. c. upward-sloping, the same as that facing a perfectly competitive firm. d. downward-sloping, like the industry demand curve in perfect competition. e. horizontal, the same as that facing a perfectly competitive firm. 33. The demand curve for a monopoly is: a. the MC curve above the AVC curve. b. the MR curve above the horizontal axis. c. identical to the MR curve. d. also the industry demand curve. e. more elastic as the price falls. 34. Marginal revenue for a monopolist is: a. equal to price. b. greater than price. c. unrelated to price. d. the change in total revenue divided by the change in output. e. total revenue divided by output. 35. If a monopolist is producing a quantity that generates MC < MR, then profit: a. is maximized. b. is maximized only if MC = P. c. can be increased by increasing production. d. can be increased by decreasing production. e. can be increased by increasing price. Figure 61-6: Short-Run Monopoly 36. (Figure 61-6: Short-Run Monopoly) The profit-maximizing output rule is satisfied by the intersection at point:

9 a. G. b. H. c. J. d. L. e. I. 37. (Figure 61-6: Short-Run Monopoly) The marginal cost of producing the profit-maximizing quantity is cost: a. N. b. O. c. P. d. Q. e. G. 38. In the figure, the natural monopoly: a. would incur an economic profit if regulated to produce where price is less than marginal cost. b. would incur an economic profit if regulated to charge a price equal to average total cost. c. creates more consumer surplus if regulated to produce either where price equals marginal cost or price equals average total cost. d. creates more consumer surplus if regulated to produce where price is above the average total cost. e. eliminates consumer surplus if regulated to produce where price is above the average total cost. 39. If large fixed costs result in ATC falling as output increases, this industry is referred to as a: a. constant cost industry. b. natural monopoly. c. network externality. d. profit-maximizer. e. a barrier to entry. 40. The practice of charging different prices to different customers for the same good or service even though the cost of supplying those customers is the same is: a. privatization. b. monopolization. c. output competition. d. price discrimination. e. product differentiation

10 Unit 6 Perfect Competition and Monopoly - Practice Problems Answer Section MULTIPLE CHOICE 1. D 2. C 3. B 4. B 5. C 6. A 7. D 8. B 9. B 10. D 11. E 12. C 13. E 14. D 15. A 16. C 17. A 18. D 19. B 20. C 21. D 22. A 23. A 24. C 25. B 26. B 27. C 28. C 29. B 30. A 31. B 32. D 33. D 34. D 35. C 36. D 37. C 38. C 39. B 40. D