ECON December 4, 2008 Exam 3

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1 Name Portion of ID# Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. A fundamental source of monopoly market power arises from a. perfectly elastic demand. b. perfectly inelastic demand. c. barriers to entry. d. availability of "free" natural resources, such as water or air. 2. If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios would best reflect the change facing incumbent firms (who are able to stay in the market) as the market adjusts to its new equilibrium? a. a downward shift in their marginal cost curve b. an upward shift in their marginal cost curve c. a decrease in demand d. an increase in demand 3. One key difference between an oligopoly market and a competitive market is that oligopolistic firms a. are price takers while competitive firms are not. b. are interdependent while competitive firms are not. c. sell completely unrelated products while competitive firms do not. d. sell their product at a price equal to marginal cost while competitive firms do not. 4. In monopolistically competitive markets, economic profits a. signal some incumbent firms to exit the market. b. signal new firms to enter the market. c. are maintained through government-imposed barriers to entry. d. are never possible. 5. When international firms have agreements among themselves on the quantity to produce and/or the price at which to sell output, we refer to their form of organization as a a. Nash arrangement. b. cartel. c. monopolistically competitive oligopoly. d. perfectly competitive oligopoly. 6. The US Postal Service monopoly on mail delivery is a classic example of a monopoly that a. is government-created. b. arises from the ownership of a key resource. c. results in very little advertising of the product that the monopolist produces. d. was broken up by the government a long time ago. 7. Markets with only a few sellers, each offering a product similar or identical to the others, are typically referred to as a. competitive markets. b. monopoly markets. c. monopolistically competitive markets. d. oligopoly markets. Form A Page 1 of 5

2 8. The likely outcome of the prisoners' dilemma is that a. none of the prisoners confess. b. exactly one prisoner confesses. c. all prisoners confess. d. not enough information is given to determine the answer. 9. To define a monopoly, we cite the following characteristics: (i) The firm is the sole seller of its product. (ii) The firm's product does not have close substitutes. (iii) The firm generates a large economic profit. (iv) The firm is located in a small geographic market. a. (i) and (ii) b. (i) and (iii) c. (ii) and (iv) 10. Refer to the figure above. Which of the graphs would most likely represent a profit-maximizing firm in a monopolistically competitive market? a. panel a b. panel b c. panel c d. panel d 11. Antitrust laws allow the government to a. prevent mergers. b. break up companies. c. promote competition. Form A Page 2 of 5

3 12. Monopolistic competition differs from perfect competition because in monopolistically competitive markets a. there are barriers to entry. b. all firms can eventually earn economic profits. c. each of the sellers offers a somewhat different product. d. strategic interactions between firms is vitally important. 13. Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for a. resource monopolies. b. natural monopolies. c. government-created monopolies. d. breaking up monopolies into smaller firms. a. (i) and (ii) c. (ii) and (iv) b. (i) and (iii) Suppose you manage a Christmas tree lot in Corpus Christi. Assume the table below shows revenue and cost information for various levels of your Christmas tree sales per hour. Refer to for answering the following three (3) questions. Quantity (dozens) Total Average Marginal Total Cost 0 $0.00 $ Average Cost Marginal Cost 14. Given the information in the table and what you learned in Chapters 12, 13 & 14, you know that the Christmas tree market is an industry that in economics we refer to as a. monopolistic competition. b. natural monopoly. c. a cartel. d. oligopoly. 15. How many trees should you sell per hour to maximize your profit? a. 4 b. 5 c. 6 d. None of the above. 16. At the profit-maximizing level of output, the profit level is a. $5.00. c. $ b. $ d. None of the above. Form A Page 3 of 5

4 17. In order to be successful, a cartel must a. find a way to encourage its members to produce more than they would otherwise produce. b. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. c. agree on the total level of production and on the amount produced by each member. d. find a way to encourage its members to reduce their costs. The figure below reflects the cost and revenue structure for a monopoly firm. Use it to answer the following questions. 18. Refer to the figure above. The profit maximizing quantity for this monopoly firm is a. Q 1. b. Q 2. c. Q 3. d. Q Refer to the figure above. The profit maximizing price for this monopoly firm is a. P 0. b. P 1. c. P 2. d. P Refer to the figure above. The marginal cost curve for a monopoly firm is depicted by curve a. A. b. B. c. C. d. D. 21. When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium quantity, a. its average revenue will equal its marginal cost. b. its marginal revenue will exceed its marginal cost. c. it will be earning positive economic profits. d. its demand curve will be tangent to its average-total-cost curve. 22. When firms are faced with making strategic choices in order to maximize profit, economists typically use a. the theory of monopoly to model their behavior. b. the theory of aggressive competition to model their behavior. c. game theory to model their behavior. d. cartel theory to model their behavior. Form A Page 4 of 5

5 23. A natural monopoly occurs when a. the product is sold in its natural state (such as water or diamonds). b. there are economies of scale over the relevant range of output. c. the firm is characterized by a rising marginal cost curve. d. production requires the use of free natural resources, such as water or air. 24. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following? i. Average revenue exceeds marginal revenue. ii. Marginal revenue exceeds average revenue. iii. Average revenue is equal to marginal revenue. iv. is always maximized along with profit. a. (i) and (ii) c. (ii) and (iv) b. (i) and (iii) d. (i) only. 25. The difference in total surplus between a socially efficient level of production and a monopolist's level of production is a. offset by regulatory revenues. b. called a deadweight loss. c. usually offset by taxes levied against monopolies. EXTRA CREDIT 26. What is the monopolist's profit under the following conditions? The profit-maximizing price charged for goods produced is $16. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $8. Average total cost for 10 units of output is $6. a. $20 c. $100 b. $80 d. $160 Scenario: Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market. If they both advertise, they again split the market, but profits are lower, since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. 27. Refer to the Scenario above. What will these two companies do if they behave as individual profit maximizers? a. Neither company will advertise. b. Both companies will advertise. c. One company will advertise, the other will not. d. None of the above are correct; there is no way of knowing without more information. 28. Refer to the Scenario above. In 1971, Congress passed a law that banned cigarette advertising on television. If cigarette companies are profit maximizers, it is likely that a. neither company opposed the ban on advertising. b. Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation. c. both companies sued the federal government on grounds that the ban constitutes a civil rights violation. d. both companies retaliated with black-market operations. Form A Page 5 of 5

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