- 3. Consider Figure 23.1. It contains relevant data for a monopolistic competitor. Which of the following statements about this firm is correct?
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a. The firm maximizes profit by charging the highest possible price.
b. The firm maximizes profit by producing a quantity, such as 0J, that corresponds to the intersection, here at I, of the demand and marginal cost curves.
c. The firm maximizes profit by producing a quantity, such as 0H, that corresponds to the intersection, here at G, of the marginal revenue and marginal cost curves.
d. The firm maximizes total revenue by producing a quantity, such as 0J, that corresponds to the intersection, here at I, of the demand and marginal cost curves.
e. The firm maximizes total revenue by producing a quantity, such as 0H, that corresponds to the intersection, here at G, of the marginal revenue and marginal cost curves.
- 4. Consider Figure 23.1. It contains relevant data for a monopolistic competitor. Which of the following statements about this firm is correct?
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a. The maximum profit that this firm can earn equals BEGD.
b. The maximum profit that this firm can earn equals 0DGH.
c. The maximum profit that this firm can earn equals 0CIJ.
d. The maximum profit that this firm can earn equals EIG.
e. The maximum profit that this firm can earn equals BEFC, but only in the short run.
- 5. Consider Figure 23.1. It contains relevant data for a monopolistic competitor. Which of the following statements about this firm is correct?
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a. If this firm maximizes profit, its total revenue will be 0BEH.
b. If this firm maximizes profit, the price elasticity of demand for its product will have an absolute value <1.
c. If this firm maximizes profit, its total cost will be 0DGH.
d. If this firm maximizes profit, its total profit will be DBEG.
e. All of the above.
- 6. Consider Figure 23.1. It contains relevant data for a monopolistic competitor. Which of the following statements about this firm is correct?
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a. When producing the profit-maximizing output quantity, this firm is earning a positive economic profit of CB = FE per unit.
b. When producing the profit-maximizing output quantity, this firm is incurring a total fixed cost of 0D = HG.
c. When producing the profit-maximizing output quantity, this firm is incurring a total variable cost of DC = GF.
d. When producing the profit-maximizing output quantity, this firm is incurring a total cost of 0C = HF.
e. All of the above statements are correct.
- 7. Consider Figure 23.1. It contains relevant data for a monopolistic competitor. Which of the following statements about this firm is correct?
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a. As this graph clearly shows, a monopolistic competitor is guaranteed positive economic profit, such as area BEFC here.
b. As this graph clearly shows, a monopolistic competitor rips off its customers by charging the highest possible price.
c. As this graph clearly shows, a monopolistic competitor rips off its customers by selling them less than they want.
d. As this graph clearly shows, a monopolistic competitor's price exceeds marginal cost.
e. None of the above.
- 8. Consider Figure 23.2. It contains relevant data for a monopolistic competitor. Which of the following statements about this firm is correct?
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a. When maximizing its profit, this firm produces output quantity 0G.
b. When maximizing its profit, this firm charges price 0B = GE.
c. When maximizing its profit, this firm incurs total cost of 0BEG.
d. The size of this firm's maximum profit equals zero.
e. All of the above statements are correct.
- 9. Consider Figure 23.2. It contains relevant data for a monopolistic competitor. Which of the following statements about this firm is correct?
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a. When maximizing its profit, this firm's total cost equals 0DFG.
b. When maximizing its profit, this firm's total variable cost equals 0DFG.
c. When maximizing its profit, this firm's total fixed cost equals DBEF.
d. This graph contains insufficient information to allow us to break down total cost into its variable and fixed components.
e. When maximizing its profit, this firm's total revenue equals 0AJ.
- 10. Consider Figure 23.2. It contains relevant data for a monopolistic competitor. Which of the following statements about this firm is correct?
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a. When maximizing its profit, this firm is in long-run equilibrium.
b. When maximizing its profit, this firm exhibits excess capacity.
c. The size of this firm's excess capacity is measured by distance EK.
d. All of the above.
e. Only (a) and (b).
- 11. According to the excess capacity theorem,
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a. an oligopolistic competitor will, in equilibrium, produce an output smaller than that at which average total cost is minimized.
b. an oligopolistic competitor will, in equilibrium, produce an output larger than that at which average total cost is minimized.
c. a monopolistic competitor will, in equilibrium, produce an output smaller than that at which average total cost is minimized.
d. a monopolistic competitor will, in equilibrium, produce an output larger than that at which average total cost is minimized.
e. monopolistic competitors will tend to be located close to one another.
- 12. The oligopolistic market structure is based on three assumptions:
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a. Many sellers, homogeneous product, no entry barriers.
b. One seller, unique product, huge entry barriers.
c. Many sellers, slightly differentiated product, no entry barriers.
d. Few sellers, homogeneous or differentiated product, significant entry barriers.
e. Few sellers, differentiated product, significant entry barriers.
- 13. An 8-firm sales concentration ratio of 75 indicates that
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a. the 8 largest domestic firms in the industry accounted for 75% of domestic sales in the year for which the data were gathered.
b. the 8 smallest domestic firms in the industry accounted for 75% of domestic sales in the year for which the data were gathered.
c. the 75 largest domestic firms in the industry accounted for 8% of domestic sales in the year for which the data were gathered.
d. the 75 smallest domestic firms in the industry accounted for 8% of domestic sales in the year for which the data were gathered.
e. the 8 largest domestic firms in the industry accounted for 25% of domestic sales in the year for which the data were gathered.
- 14. The theory of kinked oligopoly demand implies which of the following?
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a. A discontinuous marginal revenue line.
b. A horizontal marginal revenue line.
c. An upward-sloping marginal revenue line.
d. An upward-sloping demand line.
e. A continually shifting marginal cost line.
- 15. According to the price leadership theory,
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a. the demand firm facing the dominant firm in an industry is kinked at the current price, which implies that the firm expects competitors to follow suit if it lowers its price, while doing nothing if it raises its price.
b. the demand firm facing the dominant firm in an industry is kinked at the current price, which implies that the firm expects competitors to follow suit if it raises its price, while doing nothing if it lowers its price.
c. the dominant firm in the industry determines price, and all other firms take this price as given.
d. the largest firm in an industry inevitably becomes its dominant firm.
e. both (c) and (d) are correct.
- 16. According to modern cartel theory,
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a. long-run competitive equilibrium implies excess capacity and, thus, P > MC.
b. long-run competitive equilibrium implies excess capacity and, thus, actual ATC > minimum ATC.
c. firms in an oligopolistic industry may act in a manner consistent with there being only one firm in the industry.
d. if the dominant firm raises price, so-called fringe firms will not follow suit.
e. all of the above are true.
- 17. An organization of firms that reduces output and increases price in an effort to increase joint profits, also known as a cartel, tends to have a number of problems, including
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a. that of forming the cartel in the first place.
b. that of formulating generally acceptable cartel policy.
c. that of keeping outsiders from entering the industry.
d. all of the above.
e. the inevitable emergence of a kink in market demand.
- 18. The typical individual cartel member who cheats on the cartel agreement
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a. hopes to raise profit by producing less than allowed and raising the price.
b. hopes to raise profit by producing more than allowed, while charging the cartel price.
c. hopes to raise profit by producing more than allowed, while charging more than the cartel price.
d. hopes to raise profit by producing more than allowed, while charging less than the cartel price.
e. is not correctly described by any of the above.
- 19. A decision-making situation in which people interact with other people and in which these people actively seek to thwart the attainment of the first people's goals is called
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a. a contestable market.
b. a game.
c. an inefficiency.
d. monopolistic competition.
e. a prisoner's dilemma.
- 20. Which of the following statements about contestable markets is false?
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a. There is easy entry into the market.
b. Once in the market, firms are trapped because market exit is extremely costly.
c. New firms entering the market can produce the product at the same cost as firms already in the market.
d. Firms in the market can easily dispose of their fixed assets by selling them.
e. None of the above.