Final Exam

Question 1

If firms are making positive economic profits in the short run, then in the long run:

Answer 1

firms will enter the industry

Question 2

If economic profits exist in perfect competition, then firms will enter in the long run because of easy entry, the _________ curve will shift to the right, and _________ in the market will ________.

Answer 2

If economic profit exists in perfect competition, then firms will enter in the long run because of easy entry, the supply curve will shift to the right, and output in the market will fall.

Question 3

Economic profits in a perfectly competitive industry encourage firms to ________ the industry, and losses encourage firms to ________ the industry.

Answer 3

Economic profits in a perfectly competitive industry encourage firms to enter the industry, and losses encourage firms to exit the industry.

Question 4

In perfect competition, the assumption of easy entry and exit implies that:

Answer 4

In the long run all firms in the industry will earn zero economic profits.

Question 5

A curve that shows the quantity of a good or service supplied at various prices after all long-run adjustments to a price change have been completed is a long run:

Answer 5

industry supply curve

Question 6

A perfectly competitive industry is said to be efficient because the:

Answer 6

average total cost of production of the industry’s output is minimized

Question 7

In contrast with perfect competition, a monopolist:

Answer 7

may have economic profits in the long run

Question 8

The ability of a monopolist to raise the price of a product above the competitive level by reducing the output is known as:

Answer 8

market power

Question 9

Compared to a perfectly competitive market, a monopolist will produce ________ and charge a ________ price.

Answer 9

Compared to a perfectly competitive market, a monopolist will produce less and charge a higher price.

Question 10

A natural monopoly exists whenever a single firm:

Answer 10

has economies of scale over the entire range of production that is relevant to its market.

Question 11

Situations in which the more users of a product there are, the more useful the product becomes are:

Answer 11

network effects

Question 12

The demand curve for a monopoly is:

Answer 12

the industry demand curve

Question 13

Because monopoly firms are price-setters:

Answer 13

they can sell more only by lowering price.

Question 14

Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she wants to sell six, she can charge only $20,000 each. The QUANTITY effect of selling the sixth motor home is:

Answer 14

$20,000

Question 15

A downward-sloping demand curve will ensure that:

Answer 15

Profits>Marginal Revenue

Question 16

A monopoly is producing at the output level where average total cost equals $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, in order to maximize profits the firm should:

Answer 16

increase output

Question 17

Suppose a perfectly competitive market is suddenly transformed into one that operates as a monopoly market. We would expect:

Answer 17

Price to rise, output to fall, consumer surplus to fall, producer surplus to rise, and deadweight loss to rise.

Question 18

The change in variable cost divided by the change in quantity is

Answer 18

marginal cost

Question 19

The demand for a product is the amount that

Answer 19

buyers are willing to purchase at a given price

Question 20

This reflects the responsiveness of quantity demanded to a change in price

Answer 20

Price elasticity of demand

Question 21

Additional satisfaction gained from consuming one more unit of a product is known as

Answer 21

marginal utility

Question 22

The opportunity cost of using resources provided by the firm’s owners are called

Answer 22

implicit costs

Question 23

Suppose that the price of golf hats increases from $10 each to $20 each. At the same time that quantity of golf hats demanded decreases from 200 to 150. What is the price elasticity of demand?

Answer 23

3/5 or .6

Question 24

The Toys-R-Us Toy Company can produce 500 water pistols for a total cost of $1,400. If the variable cost of producing 500 water pistols is $1,300, then

Answer 24

The fixed cost must be $100

Question 25

If the demand curve has a price elasticity of demand of 1.0 everywhere, then a 30 percent decrease in price will

Answer 25

cause a 30 percent increase in quantity demanded

Question 26

A local restaurant offers an "all you can eat" ribs special. You pay $11.95 and then you can eat as many servings as you desire at no additional cost. It would follow that you will stop eating when

Answer 26

your marginal utility derived from eating another serving is zero or less

Question 27

Suppose a lawyer leaves his $50,000 per year job and starts his own firm breeding pit bulls. In the first year, his accounting profits are $70,000. Based on this level of success, the lawyer should

Answer 27

stay with his new firm because economic profits are positive

Question 28

Suppose you have purchased a non-refundable plane ticket and, at the last moment, you cannot take the trip. You can, however, sell the ticket. If you paid $700 for the ticket, the cost of sending the ticket to someone through overnight mail is $20, and you spend $10 on a courier to get the ticket to the post office for overnight delivery, what is the minimum you should accept for the ticket?

Answer 28

$30 because the $700 is a sunk cost

Question 29

Suppose that computer games are a normal good. If the incomes of computer game players increase, you predict that in the market for computer games

Answer 29

both equilibrium price and quantity will rise

Question 30

Suppose we observe an increase in the price of oranges. What is NOT a possible cause of this?

Answer 30

A decrease in the price of apples, a substitute

Question 31

Pretend you are an economic detective and are given the following clues about the market for wine: the equilibrium price of wine rose and the equilibrium quantity declined. In writing up your investigative report, what is responsible for the outcome?

Answer 31

A decrease in the supply of wine

Question 32

Alex's Furniture Mart produces and sells dining room tables in a perfectly competitive market. When Alex's Furniture Mart produces and sells 250 dining room tables per month, its marginal cost is equal to $200. If the market price of dining room tables is equal to $150, Alex's Furniture Mart should:

Answer 32

decrease its rate of dining room production

Question 33

Assume that pizzas and calzones are SUBSTITUTES in production and the price of pizza decreases. What should happen to the equilibrium price and quantity of calzones?

Answer 33

The equilibrium price falls and the equilibrium quantity rises.

Question 34

You observe that at your current rate of production of lunchboxes, the average total cost of producing lunchboxes is $5 and the marginal cost of producing lunchboxes is $2. What should happen if you increase the rate of production by one unit?

Answer 34

Average total cost will fall

Question 35

Total cost divided by the rate of output the firm chooses when it can choose a production facility of any size or capacity is

Answer 35

the long run average cost of production

Question 36

Under which conditions might decreasing returns to scale result?

Answer 36

Hampered coordination brought about by bureaucrazy

Question 37

Which of the following is most likely to be a perfectly competitive firm?

Answer 37

Bubba's corn farm in eastern South Dakota

Question 38

A perfectly competitive firm can

Answer 38

sell as much as it can produce at the market price

Question 39

If, in the short run, price falls below minimum average variable cost, a firm

Answer 39

should produce no output

Question 40

In a perfectly competitive market, if the market price is greater than average total cost, we can expect

Answer 40

firms to enter the market in the long run

Question 41

Assume that a perfectly competitive market is in long run equilibrium. An increase in market demand

Answer 41

creates short run economic profits that cause firms to enter a perfectly competitive industry in the long run

Question 42

If an industry is a constant cost industry,

Answer 42

prices of its inputs remain constant as the number of firms increases.

Question 43

Perfectly competitive firms in the long run achieve productive efficiency because

Answer 43

output is being produced at the lowest possible resource cost

Question 44

When market exchange occurs voluntarily in a perfectly competitive market

Answer 44

the sum of consumer surplus and producer surplus is maximized

Question 45

Indication that the equilibrium output in a perfectly competitive market is efficient?

Answer 45

The sum of consumer and producer surplus is maximized

Question 46

This prevents potential competitors from entering a monopolist's market

Answer 46

patent and copyright protection

Question 47

If a monopolist must lower the price on all units in order to sell an additional unit,

Answer 47

price will always be greater than marginal revenue

Question 48

A profit-maximizing monopolist produces an output level that is inefficient because

Answer 48

price is greater than marginal cost

Question 49

Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she wants to sell six, she can charge only $20,000 each. The PRICE effect of selling the sixth motor home is:

Answer 49

-$5,000