CIA4A Basic Market Structures Practice Test (31 Marks)

Transcription

1 CIA4A Basic Market Structures Practice Test (31 Marks) Section A: Multiple Choice Circle the option that correctly completes the statement. (1 mark each = 6 marks) 1. In a purely competitive firm, we see that the supply curve is the same as: a) the demand curve; 2. In a purely competitive firm, we see that the demand curve is the same as: a) the supply curve; 3. In the long-run, a purely competitive firm will: a) earn economic profits; b) earn zero economic profits; c) earn less than no economic profits; d) earn normal profits; e) b and d. 4. Both purely competitive firms and monopolies will maximize profits by producing at a level of output where: a) the difference between total revenue and total cost is the least; b) the consumer s are not willing to pay anything more; c) marginal revenue is equal to price; d) marginal cost is equal to marginal revenue; e) a and d. 5. A monopoly: a) is a price-taker; b) is a price-maker; c) has no market power; d) earns normal profits in the long-run; e) b and c. 6. Which of the following would not necessarily create a monopoly? a) legal barriers to market entry (such as patents or copyrights); b) little or no economic profit being earned in the market; c) control of essential resources; d) prohibitive economies of scale; e) none of the above.

2 Section B: Calculations and Graphing Complete the following calculations on this paper. Show your work. (25 marks) 1. i) Complete the following table. The market price of the product is $ (4 marks) Quantity Fixed Variable Profit ii) Identify the profit maximizing output for a purely competitive firm: (1 mark) 2. i) In the blank graph below, illustrate the basic shape and relationship between the following curves for a purely competitive firm that is earning economic profits: i) demand, ii) marginal revenue, iii) average fixed costs, iv) average variable costs, v) average total costs, and vi) marginal costs. Note: Be sure to label each curve at the right-hand side with the appropriate acronym [i.e. D, MR, AFC, etc.] (6 marks) ii) Be sure to label both of the axes of your graph. (1 mark) purely competitive firm. Labels these points P* and q*. (2 marks) iv) Shade in the economic profits being earned by this firm. (2 marks)

3 3. i) In the blank graph below, illustrate the basic shape and relationship between the following curves for a monopoly firm that is earning economic profits: (4 marks) Note: demand, marginal revenue, average total costs, marginal costs. Label each curve at the right-hand side with the appropriate acronym (i.e. D, MR, ATC, etc.) ii) Be sure to properly label both of the axes of your graph. (1 mark) monopoly. Labels these points P* and q*. (2 marks)

4 ANSWER KEY Section A: Multiple Choice Circle the option that correctly completes the statement. (1 mark each = 6 marks) 1. In a purely competitive firm, we see that the supply curve is the same as: a) the demand curve; 2. In a purely competitive firm, we see that the demand curve is the same as: a) the supply curve; 3. In the long-run, a purely competitive firm will: a) earn economic profits; b) earn zero economic profits; c) earn less than no economic profits; d) earn normal profits; e) b and d. 4. Both purely competitive firms and monopolies will maximize profits by producing at a level of output where: a) the difference between total revenue and total cost is the least; b) the consumer s are not willing to pay anything more; c) marginal revenue is equal to price; d) marginal cost is equal to marginal revenue; e) a and d. 5. A monopoly: a) is a price-taker; b) is a price-maker; c) has no market power; d) earns normal profits in the long-run; e) b and c. 6. Which of the following would not necessarily create a monopoly? a) legal barriers to market entry (such as patents or copyrights); b) little or no economic profit being earned in the market; c) control of essential resources; d) prohibitive economies of scale; e) none of the above.

5 Section B: Calculations and Graphing Complete the following calculations on this paper. Show your work. (25 marks) 1) Complete the following table for a purely competitive firm. The market price of the product is $ (4 marks) Quantity Fixed Variable Profit ii) Identify the profit maximizing output for a purely competitive firm: (1 mark) i) In the blank graph below, illustrate the basic shape and relationship between the following curves for a purely competitive firm that is earning economic profits: i) demand, ii) marginal revenue, iii) average fixed costs, iv) average variable costs, v) average total costs, and vi) marginal costs. Note: Be sure to label each curve at the right-hand side with the appropriate acronym [i.e. D, MR, AFC, etc.] (6 marks) ii) Be sure to label both of the axes of your graph. (1 mark) purely competitive firm. Labels these points P* and q*. (2 marks) iv) Shade in the economic profits being earned by this firm. (2 marks)

6 3. i) In the blank graph below, illustrate the basic shape and relationship between the following curves for a monopoly firm that is earning economic profits: (4 marks) Note: demand, marginal revenue, average total costs, marginal costs. Label each curve at the right-hand side with the appropriate acronym (i.e. D, MR, ATC, etc.) ii) Be sure to properly label both of the axes of your graph. (1 mark) monopoly. Labels these points P* and q*. (2 marks) iv) Shade in the economic profits being earned by this firm. (2 marks)