Micro Chapter 10 study guide questions

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1 Micro Chapter 10 study guide questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. For the competitive price searcher, a. price will exceed marginal cost at the profit-maximizing level of output. b. price will equal average total cost in the long run. c. economic profit will be driven to zero in the long run by the entry and exit of firms. d. all of the above are correct. 2. Only undertaking an activity when it adds more to revenue than to cost is the decision rule a profitmaximizing firm will use when deciding upon a. the level of output to produce. b. the amount of advertising to undertake. c. the level of product quality (for example, how many years it is designed to last). d. all of the above. 3. A competitive price-searcher market is characterized by firms a. being able to choose their price and no barriers preventing firms from entering or leaving the market. b. being able to choose their price and high barriers preventing firms from entering or leaving the market. c. being able to accept the market price for their product and high barriers preventing firms from entering or leaving the market. d. having to accept the market price for their product and no barriers preventing firms from entering or leaving the market. 4. The fact that barriers to entry are low in competitive price-searcher markets means that if current firms are making economic losses, a. these losses will remain in the long run because firms will not exit the market. b. some current firms will exit the market, causing the demand curves that face the remaining firms to increase. c. new firms will enter the market, causing the demand curves that face the existing firms to decrease. d. new firms will enter the market, causing no change in the demand curves that face the existing firms in the market. 5. Which of the following is true when long-run equilibrium conditions are present in price-taker and competitive price-searcher markets? a. MR = MC in both price-taker and competitive price-searcher markets b. P = ATC in both price-taker and competitive price-searcher markets c. P = MC in both price-taker and competitive price-searcher markets d. Both a and b, but not c are true. 6. A market in which the costs of entry and exit are low is called a a. regulated market. b. monopoly market. c. market with high barriers to entry. d. contestable market.

2 7. In both price-taker and competitive price-searcher markets, short-run economic profits will lead to a. firms being able to sustain those economic profits into the long run. b. the exit of firms from the market and the eventual restoration of zero long-run economic profits. c. the entry of additional firms into the market and the eventual restoration of zero long-run economic profits. d. none of the above. 8. In order for a firm to be able to engage in price discrimination, it must be able to a. identify and separate groups with different price elasticities of demand. b. prevent resale of the product between customer groups. c. maximize profits at the point where average total cost is minimized. d. do both a and b, but not c. 9. If economic profits were present in a competitive price-searcher industry, a. production inefficiency would develop, causing costs to increase until the profits had been eliminated. b. firms would operate in the short run, but they would be forced out of business in the long run as competition eliminated the economic profit. c. competition from new entrants would occur until the economic profits had been eliminated. d. the firms would eventually find these profits offset by long-run economic losses. 10. The practice of price discrimination has which of the following effects? a. Groups with the higher elasticity of demand will pay higher prices. b. Groups with the lower elasticity of demand will pay higher prices. c. With price discrimination, total output and allocative efficiency will fall. d. Groups will pay identical prices that are exactly equal to the firm's marginal cost. 11. Neither price takers nor competitive price searchers will be able to earn long-run economic profit because a. with low entry barriers, the entry and exit of firms result in prices that are equal to per-unit costs in the long run. b. competition from new firms will result in higher prices in the market, which offset any economic losses they earn. c. in both markets, firms charge a price equal to marginal cost. d. in both markets, firms produce products that are identical to the products produced by their competitors.

3 The following question(s) refer(s) to the figure below, which depicts the demand, marginal revenue, and cost curves facing a firm in a competitive price-searcher industry. Figure Refer to Figure This firm will maximize profits by producing a quantity of output equal to a. E and charging a price equal to A. b. E and charging a price equal to D. c. F and charging a price equal to H. d. F and charging a price equal to C. 13. Refer to Figure The firm is currently earning an economic a. profit equal to the area CKGA. b. profit equal to the area DJGA. c. loss equal to the area CKGA. d. loss equal to the area DJGA. 14. Refer to Figure In the long run, we would expect the firm's a. ATC curve to fall as firms enter the industry, forcing the firm to increase its efficiency. b. demand curve to decrease as firms enter the industry due to the presence of positive economic profits. c. demand curve to increase as firms exit the industry due to the presence of economic losses. d. demand curve to shift such that marginal revenue and marginal cost intersect at quantity F- -the point where average total cost is at a minimum.

4 The following question(s) refer(s) to the figure below, which depicts the demand, marginal revenue, and cost curves facing a firm in a competitive price-searcher industry. Figure Refer to Figure This firm will maximize profits by producing a quantity of output equal to a. I and charging a price equal to A. b. I and charging a price equal to C. c. I and charging a price equal to D. d. J and charging a price equal to B. 16. Refer to Figure The firm is currently earning an economic a. profit equal to the area AHFC. b. profit equal to the area CFED. c. loss equal to the area AHED. d. loss equal to the area CFED. 17. Refer to Figure In the long run, we would expect a. more firms to enter this industry until zero economic profits are restored. b. firms to exit this industry until zero economic profits are restored. c. the number of firms to remain constant and existing firms will continue to suffer economic losses in the long run. d. the number of firms to remain constant and existing firms will continue to earn economic profits in the long run.

5 18. Given the data shown in the table, what price and output level would a profit-maximizing price searcher choose? Output Price Total Cost 1 $10 $ a. price of $8, output of 3 units b. price of $7, output of 4 units c. price of $6, output of 5 units d. price of $5, output of 6 units 19. The idea that business failure is a positive force for progress in a market economy is often summarized by the term "creative destruction." Which of the following best states the central idea of this principle? a. When a business fails, the assets and resources from that business become unemployed, resulting in higher government subsidies. b. Business failure allows the assets and resources from that business to move into other areas where those resources are now more productive and highly valued. c. Only through frequent business failure will it be possible to avoid income being concentrated in a few rich entrepreneurs. d. The new, rival businesses that drive out old competitors tend to be less efficient and less creative than the older established businesses. 20. (I) The entrepreneurial discovery and development of improved products and production processes is a central element of economic progress. (II) Traditional economic models of the firm accurately capture the role of the entrepreneur. a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false. Critical Thinking and Application 21. When you go to a grocery store, most candy bars of a given size sell for virtually the same price. Can we conclude that this is evidence of collusion on the part of candy bar manufacturers? 22. When Cabbage Patch Dolls were introduced, they were extremely popular at Christmas, and most stores sold out. By the next year, there were plenty still available at Christmas. What happened? 23. The market for home-delivered pizza is extremely competitive in Introville, Utah, and prices continue to fall. Assume they have fallen so low that the 20 pizza delivery firms are all suffering economic losses. What will likely happen in the long run? 24. Why do the airlines charge less for passengers who stay over Saturday night and purchase their tickets two weeks in advance?

6 Micro Chapter 10 Study Guide Questions 13e Answer Section MULTIPLE CHOICE 1. D 2. D 3. A 4. B 5. D 6. D 7. C 8. D 9. C 10. B 11. A 12. A 13. A 14. B 15. B 16. D 17. B 18. B 19. B 20. A

Quiz #4 Week 04/05/2009 to 04/11/2009

Quiz #4 Week 04/05/2009 to 04/11/2009 You have 30 minutes to answer the following 15 multiple choice questions. Record your answers in the bubble sheet. Your grade in this quiz will count for 1% of your