Pt. 3

Question 1

A perfectly competitive industry is in long-run equilibrium. If demand for the product increases, we can expect the price of the good to:
A: rise at first and then fall. 
B: fall at first and then rise. 
C: rise and remain at the higher level. 
D: fall and remain at the lower price.

Answer 1

rise and remain at the higher level.

Question 2

If a firm in a perfectly competitive market suffers an economic loss,
A: price is less than its marginal cost.
B: price is less than its marginal revenue.
C: price is less than its average total cost.
D: None of the above.

Answer 2

price is less than its average total cost.

Question 3

Figure 2 shows the short-run and long-run effects of an increase in demand.  The industry is:
A: a constant-cost industry. 
B: an increasing-cost industry. 
C: a decreasing-cost industry. 
D: None of the above.

Answer 3

an increasing-cost industry.

Question 4

Figure 2 shows the short-run and long-run effects of an increase in demand. The market’s initial equilibrium is at point A where there are 100 identical firms. Which of the following is correct?
A: Each firm earns zero economic profit at point B.
B: Each firm earns positive economic profit at point B.
C: Each firm earns positive economic profit at point C.
D: Each firm earns negative economic profit at point C.

Answer 4

Each firm earns negative economic profit at point C.

Question 5

Figure 2 shows the short-run and long-run effects of an increase in demand. The market’s initial equilibrium is at point A where there are 100 identical firms. Which of the following is correct?
A: There are less firms in the industry at point C compared to point A.
B: The same amount of firms are in the industry at point C as at point A.
C: The same amount of firms are in the industry at point B as at point A.
D: There are more firms in the industry at point B compared to point A.

Answer 5

The same amount of firms are in the industry at point B as at point A.

Question 6

If a monopolist charges the same price for all of the units of the good that it sells, then beyond the first unit sold:
A: P = MR because the firm maximizes profit.
B: P = MR because the monopolist holds price constant.
C: P < MR because the monopolist must decrease price on all units in order to sell another unit.
D: P > MR because the monopolist must decrease price on all units in order to sell another unit.

Answer 6

P > MR because the monopolist must decrease price on all units in order to sell another unit.

Question 7

You are an economist working for the monopolist whose marginal cost, marginal revenue, average cost, and demand curves are depicted in Figure 3. Suppose that the monopolist is currently charging a price of $12 per unit of output and selling 1000 units. What would you recommend to the firm?
A: Keep the price at the same level. 
B: Lower the price to sell more units. 
C: Raise the price to $15 
D: Raise the price to $18

Answer 7

Raise the price to $15

Question 8

Which of the following is most accurate?
A: In some cases, competitive markets can yield less consumer surplus than would be enjoyed in a monopoly market.
B: In all cases, competitive markets yield more consumer surplus than would be enjoyed in a monopoly market.
C: In all cases, competitive markets yield the same consumer surplus that would be enjoyed in a monopoly market.
D: In all cases, competitive markets yield less consumer surplus than would be enjoyed in a monopoly market.

Answer 8

In all cases, competitive markets yield more consumer surplus than would be enjoyed in a monopoly market.

Question 9

Price discrimination is related to elasticity because:
A: the firm can increase revenues by charging customers with elastic demands lower prices and charging customers with inelastic demands higher prices.
B: the firm can increase revenues by charging customers with elastic demands higher prices and charging customers with inelastic demands lower prices.
C: the firm can increase revenues by charging all customers higher prices.
D: None of the above; elasticity and price discrimination are unrelated.

Answer 9

the firm can increase revenues by charging customers with elastic demands lower prices and charging customers with inelastic demands higher prices.

Question 10

When there are a few firms in the industry, the industry structure is most likely to be:
A:  a perfectly competitive industry. 
B: an oligopoly market. 
C: a monopoly market. 
D: a natural monopoly market.

Answer 10

an oligopoly market

Question 11

In general, the quantity of output in a monopoly market is:
A: lower than an oligopoly.
B : higher than an oligopoly.
C: the same as an oligopoly.

Answer 11

lower than an oligopoly.

Question 12

A dominant strategy is one that:
A: maximizes total revenue.
B: is the optimal choice under all circumstances.
C: never yields a negative payoff.
D: is the optimal choice under some circumstances.

Answer 12

is the optimal choice under all circumstances.

Question 13

Consider Figure 4 where, numbers in boxes represent respective profits. Firm 1’s equilibrium strategy is _________ and Firm 2’s equilibrium strategy is ________.
A: high; high
B: Low; low
C: high; low

Answer 13

Low; Low

Question 14

Consider Figure 4. If Firm 1 and Firm 2 could coordinate their decisions then:
A: they would each earn profits of 900.
B: they would both choose to charge a low price and earn profits of 300 each.
C: they would both choose to charge a high price and earn profits of 600 each.
D: they would both choose to charge a high price and earn profits of 200 each.

Answer 14

C: they would both choose to charge a high price and earn profits of 600 each.

Question 15

When one person or nation can produce a good at a lower
opportunity cost than another, it is said to have
A. a market advantage
B. a comparative advantage
C. an absolute advantage
D. a specialization advantage
E. none of the above

Answer 15

a comparative advantage

Question 16

An individual or country that has a comparative
advantage in the production of one good
A. must have an absolute advantage in the good’s production
B. must not have an absolute advantage in the good’s production
C. may or may not have an absolute advantage in the good’s production
D. must have a comparative advantage in the production of all goods

Answer 16

may or may not have an absolute advantage in the good’s production

Question 17

Consider two individuals, Rose and Sharon, who produce fish
and coconuts. Rose and Sharon’s hourly productivity are as
follows:

               Coconuts/hour    Fish/hour  Rose               6 per hour       2 per hour  Sharon             3 per hour       4 per hour

Which of the following is true?
A. Rose has an absolute advantage in producing coconuts but not fish
B. Rose has an absolute advantage in producing fish but not coconuts
C. Rose has an absolute advantage in producing both goods
D. Rose has an absolute advantage in producing neither goods

Answer 17

Rose has an absolute advantage in producing coconuts but not fish

Question 18

Consider two individuals, Rose and Sharon, who produce fish
and coconuts. Rose and Sharon’s hourly productivity are as
follows:

               Coconuts/hour    Fish/hour  Rose               6 per hour       2 per hour  Sharon             3 per hour       4 per hour

Rose’s opportunity cost of producing one fish is 
A. 1/3 coconuts 
B. 3/2 coconuts 
C. 6 coconuts 
D. 3 coconuts 
E. None of the above

Answer 18

3 coconuts

Question 19

Consider two individuals, Rose and Sharon, who produce fish
and coconuts. Rose and Sharon’s hourly productivity are as
follows:

               Coconuts/hour    Fish/hour  Rose               6 per hour       2 per hour  Sharon             3 per hour       4 per hour

Sharon’s opportunity cost of producing one coconut is 
A. 3/4 fish 
B. 4/3 fish 
C. 3 fish 
D. 4 fish 
E. None of the above

Answer 19

4/3 fish

Question 20

Suppose that a freeze in California reduces the supply
of avocados. Avocados are an input in the production of
guacamole, and guacamole is in turn a substitute for salsa.
What should happen?
A. The quantity of guacamole decreases and the quantity of salsa
decreases
B. The quantity of guacamole decreases and the quantity of salsa
increases
C. The price of guacamole decreases and the price of salsa
increases
D. The price of guacamole decreases and the price of salsa
decreases
E. None of the above are correct

Answer 20

The quantity of guacamole decreases and the quantity of salsa
increases

Question 20

Suppose that in 1996, 8 million cars were purchased at
$15,000 each, while in 1997, 10 million cars were purchased
at $12,000 each. What might have caused this change?
A. The price of airplane tickets (a substitute for cars) fell
B. The price of airplane tickets rose
C. Automobile manufacturing technology increased.
D. Automobile manufacturing technology decreased
E. None of the above

Answer 20

Automobile manufacturing technology increased.

Question 21

Suppose that steak is a normal good. When income
increases
A. The price of steak rises and the quantity of steak falls
B. The price of steak rises and the quantity of steak rises
C. The price of steak falls and the quantity of steak falls
D. The price of steak falls and the quantity of steak rises
E. None of the above is correct

Answer 21

The price of steak rises and the quantity of steak rises

Question 22

Fish and Chiken are substitutes. When the price of
Fish falls, and a technological advance in Chicken
production occurs at the same time,
A. The price of Chiken rises and the quantity of Chiken falls
B. The price of Chiken is ambiguous and the quantity of Chiken
rises
C. The price of Chiken falls and the quantity of Chiken rises
D. The price of Chiken falls and the quantity of Chiken is
ambiguous
E. None of the above is correct

Answer 22

The price of Chiken falls and the quantity of Chiken is

ambiguous

Question 23

Suppose that the supply of K-State T-shirts increases
by 40%. Further, suppose that the elasticity of demand for
K-State T-shirts is 1 and the elasticity of supply is 4.
What will happen to the equilibrium price of K-State T-
shirts?
A. rise by 8%.
B. fall by 8%.
C. rise by 4%.
D. fall by 4%.
E. fall by 5%.

Answer 23

fall by 8%.

Question 24

Suppose that the percentage change in supply is 20%, the price elasticity of demand is 3, and the percentage change in price is 4%. What is the price elasticity of supply? A. 0 B. 2 C. 4 D. 5 E. None of the above

Answer 24

B: 2

Question 25

Suppose that the price of a can of tuna is $2 each. Emma is willing to pay $4 for the first can, Max is willing to pay $3 for the second can, Charlie is willing to pay $2 for the third can, and Joe is willing to pay $1 for the fourth can. In equilibrium, what is the total consumer surplus from the consumption of tuna? A. $0 B. $2 C. $3 D. $9 E. None of the above

Answer 25

C: $3

Question 26

If a firm's fixed costs are $20, the firm's marginal cost of producing the first unit of output is $20, and the average total cost of producing two units of output is $25, the marginal cost of the second unit of output is A. $50 B. $40 C. $18 D. $10 E. not enough information to answer

Answer 26

D: $10

Question 27

``` When the marginal cost exceeds the average total cost, we know that A. Marginal cost is constant B. Marginal cost is decreasing C. Average total cost is increasing D. Average total cost is decreasing E. None of the above ```

Answer 27

Average total cost is increasing

Question 28

``` The marginal cost curve intersects the short-run average cost curve where A. Marginal cost is minimized B. Average variable costs are minimized C. Average total costs are minimized D. Average variable costs are maximized E. Average total costs are maximized ```

Answer 28

Average total costs are minimized

Question 29

Indivisible inputs and economies of scale are related because A. As a firm that uses an indivisible input increases its production, the cost of the input is spread over more units of production B. As a firm purchases more of the indivisible input, the cost of the input per unit of output produced increases C. As a firm purchases more of the indivisible input, the cost of the input per unit of output produced decreases D. As a firm that uses an indivisible input increases its production, the average cost of the input increases E. None of the above is correct

Answer 29

As a firm that uses an indivisible input increases its production, the cost of the input is spread over more units of production

Question 30

Suppose that the quantity demanded equals Qd = 100 - P and quantity supplied equals Qs = P. If the government sets a price ceiling of $60, the resultant market price will be A. $40 B. $50 C. $60 D. $100 E. none of the above

Answer 30

B. $50

Question 31

Suppose that the quantity demanded equals Qd = 100 - P and quantity supplied equals Qs = P. If the government sets a price floor of $40, the resultant market price will be A. $40 B. $50 C. $60 D. $100 E. none of the above

Answer 31

B: $50