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.
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 $100.00. (4 marks) Quantity Fixed Variable Profit 10 350 510 860 110 11 350 600 950 12 350 750 1100 13 350 930 1280 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. 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)
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.
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 $100.00. (4 marks) Quantity Fixed Variable Profit 10 350 510 860 110 1000 100 140 11 350 600 950 90 1100 100 150 12 350 750 1100 150 1200 100 100 13 350 930 1280 180 1300 100 20 ii) Identify the profit maximizing output for a purely competitive firm: (1 mark) 11 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. 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)