READING 12 FIRMS AND MARKET STRUCTURES

Question 1

When a firm’s total revenue equals its total economic cost, this represents the:
A. Short-run shutdown point
B. Breakeven point
C. Long-run shutdown point

Answer 1

Correct Answer: B
Explanation:

The breakeven point occurs when total revenue equals total economic cost, meaning economic profit equals zero. This happens when price (average revenue) equals average total cost.
Option A is incorrect because the short-run shutdown point occurs when price falls below average variable cost, not when total revenue equals total cost.
Option C is incorrect because the long-run shutdown point occurs when price is less than average total cost, which would result in economic losses, not zero economic profit.

Question 2

A firm operating under perfect competition should shut down in the short run when:
A. Price is less than average variable cost
B. Price is less than average total cost
C. Price equals average total cost

Answer 2

Correct Answer: A
Explanation:

In the short run, a firm should shut down when price (average revenue) is less than average variable cost because continuing operation would generate greater losses than shutting down.
Option B is incorrect because if price is less than average total cost but greater than average variable cost, the firm can still cover some of its fixed costs by operating, minimizing short-run losses.
Option C is incorrect because when price equals average total cost, the firm breaks even with zero economic profit and should continue operating.

Question 3

A retail store with a one-year lease and variable costs of merchandise has been experiencing declining sales. The store should continue operating in the short run as long as:
A. Total revenue exceeds total costs
B. Total revenue exceeds total variable costs
C. Average revenue equals average total cost

Answer 3

Correct Answer: B
Explanation:

As long as total revenue exceeds total variable costs, some portion of fixed costs (the lease) is being covered, minimizing losses in the short run.
Option A is incorrect because a firm might have total revenue less than total costs (operating at a loss) but should still operate if total revenue exceeds total variable costs.
Option C is incorrect because this represents the breakeven point, but the question asks about when the firm should continue operating despite losses.

Question 4

In the long run, a perfectly competitive firm should exit the market when:
A. Price is below average variable cost
B. Price equals average total cost
C. Price is below average total cost

Answer 4

Correct Answer: C
Explanation:

In the long run, all costs are variable, so a firm should exit if price is below average total cost as this indicates persistent economic losses.
Option A is incorrect because while this is a criterion for short-run shutdown, in the long-run context we evaluate against total costs since all costs become variable.
Option B is incorrect because this is the breakeven point where economic profit equals zero, which would not justify exiting the market.

Question 5

The difference between short-run and long-run decision making for a firm is primarily based on:
A. The ability to avoid fixed costs in the long run
B. The level of competition in the market
C. The firm’s target profit margin

Answer 5

Correct Answer: A
Explanation:

In the long run, all costs become variable as firms can adjust all factors of production, allowing them to avoid costs that are fixed in the short run.
Option B is incorrect because the level of competition may remain constant in both short and long run; the primary difference is cost structure.
Option C is incorrect because profit margins are targets in both time frames; the key difference is which costs can be avoided.

Question 6

Calculate the breakeven quantity for a perfectly competitive firm with fixed costs of $500, a constant marginal cost of $5 per unit, and a market price of $15 per unit.
A. 33.3 units
B. 50 units
C. 100 units

Answer 6

Correct Answer: B
Explanation:

At breakeven, TR = TC, or P×Q = FC + VC. Substituting: $15Q = $500 + $5Q, which gives $10Q = $500, so Q = 50 units.
Option A is incorrect due to a calculation error, as this would not equate total revenue with total cost.
Option C is incorrect as this would yield economic profit, not breakeven.

Question 7

A perfectly competitive firm is currently selling its products at a price equal to its average variable cost. In the short run, the firm should:
A. Continue production to minimize losses
B. Shut down immediately
C. Increase production to reach economies of scale

Answer 7

Correct Answer: B
Explanation:

When price equals average variable cost, the firm is at its short-run shutdown point. Continuing operation would result in losses equal to its fixed costs, the same as if it shut down.
Option A is incorrect because at P = AVC, the firm cannot minimize losses by continuing production.
Option C is incorrect because increasing production when price equals AVC would likely increase losses in perfect competition where the firm cannot influence price.

Question 8

If a firm operating under perfect competition faces a market price that is greater than its average variable cost but less than its average total cost, which of the following statements is correct?
A. The firm should exit the market immediately
B. The firm should continue operating in the short run but exit in the long run
C. The firm has reached its breakeven point

Answer 8

Correct Answer: B
Explanation:

When P > AVC but P < ATC, the firm minimizes losses by operating in the short run (covering variable costs plus some fixed costs) but should exit in the long run since it cannot cover all costs.
Option A is incorrect because immediate exit would increase short-run losses.
Option C is incorrect because breakeven occurs when P = ATC, not when P < ATC.

Question 9

In Figure 12.1 from the text, point A represents:
A. The short-run shutdown point
B. The long-run shutdown point
C. The breakeven point

Answer 9

Correct Answer: C
Explanation:

At point A, price equals average total cost, which represents the breakeven point where economic profit equals zero.
Option A is incorrect because the short-run shutdown point occurs where price equals average variable cost (price P2 in the figure).
Option B is incorrect because the long-run shutdown point and breakeven point coincide in perfect competition, but the figure specifically identifies point A as where P = ATC.

Question 10

Interpret what happens to a perfectly competitive firm when the market price falls from P1 to a level between P1 and P2 (as shown in Figure 12.1):
A. The firm will shut down immediately
B. The firm will experience economic losses but continue operating in the short run
C. The firm will break even

Answer 10

Correct Answer: B
Explanation:

When price falls below P1 but remains above P2, the firm experiences economic losses (P < ATC) but should continue operating in the short run because P > AVC.
Option A is incorrect because the firm would only shut down immediately if price fell below P2 (where P < AVC).
Option C is incorrect because breakeven occurs only at price P1 where P = ATC.

Question 11

A firm’s economic profit can be calculated as:
A. Total revenue minus explicit costs
B. Total revenue minus total economic cost
C. Total revenue minus average variable cost

Answer 11

Correct Answer: B
Explanation:

Economic profit equals total revenue minus total economic cost, which includes both explicit and implicit costs.
Option A is incorrect because it calculates accounting profit, not economic profit, by ignoring implicit costs.
Option C is incorrect because this calculation doesn’t account for fixed costs and doesn’t yield profit (it would be (TR - VC), not profit).

Question 12

For a perfectly competitive firm, the relationship between price (P), average variable cost (AVC), and average total cost (ATC) that indicates the firm should continue operating in the short run but exit in the long run is:
A. P > ATC > AVC
B. ATC > P > AVC
C. AVC > P > ATC

Answer 12

Correct Answer: B
Explanation:

When ATC > P > AVC, the firm minimizes losses by operating in the short run (covering variable costs plus some fixed costs) but cannot cover all costs in the long run, indicating exit.
Option A is incorrect because P > ATC indicates economic profit, which would not prompt exit in either time frame.
Option C is incorrect because this relationship is impossible (ATC is always greater than AVC due to the inclusion of fixed costs).

Question 13

Which of the following statements about fixed costs is correct?
A. Fixed costs become variable in the short run
B. Fixed costs should be considered when making short-run shutdown decisions
C. Fixed costs should be ignored when making short-run shutdown decisions

Answer 13

Correct Answer: C
Explanation:

When making short-run shutdown decisions, fixed costs are irrelevant because they must be paid regardless of whether the firm operates. The decision should be based solely on whether price exceeds average variable cost.
Option A is incorrect because fixed costs remain fixed in the short run; they become variable in the long run.
Option B is incorrect because considering fixed costs in short-run shutdown decisions would lead to suboptimal choices that increase losses.

Question 14

If a firm’s average revenue is consistently less than its average total cost but greater than its average variable cost, the firm should:
A. Continue operating indefinitely
B. Shut down immediately in both short and long run
C. Continue operating in the short run but plan to exit in the long run

Answer 14

Correct Answer: C
Explanation:

When AR < ATC but AR > AVC, the firm minimizes losses by operating in the short run but should plan to exit in the long run since economic losses persist.
Option A is incorrect because continuing indefinitely with AR < ATC means perpetual economic losses.
Option B is incorrect because immediate shutdown would increase short-run losses when AR > AVC.

Question 15

Determine the correct statement regarding a perfectly competitive firm’s shutdown and breakeven points:
A. The short-run shutdown point occurs where MC crosses ATC
B. The breakeven point occurs where price equals minimum ATC
C. The short-run shutdown point occurs where price equals minimum AVC

Answer 15

Correct Answer: B
Explanation:

The breakeven point occurs where price equals the minimum average total cost, representing zero economic profit.
Option A is incorrect because the short-run shutdown point is related to AVC, not the intersection of MC and ATC.
Option C is incorrect because the short-run shutdown point occurs where price equals average variable cost, but not necessarily at its minimum point.

Question 16

For a price-searcher firm in imperfect competition, what is the breakeven condition?
A. MR = MC
B. P = ATC
C. TR = TC

Answer 16

Correct Answer: C
Explanation:

For price-searcher firms, the breakeven point occurs when total revenue equals total cost (TR = TC), representing zero economic profit.
Option A is incorrect because while MR = MC is the profit-maximizing condition, it does not necessarily indicate breakeven. A firm could maximize profit at a point where economic profit is positive, negative, or zero.
Option B is incorrect because under imperfect competition, price does not equal marginal revenue, making the P = ATC condition less useful than the TR = TC approach for determining breakeven.

Question 17

A firm operating under imperfect competition should shut down in the short run when:
A. TR < TVC
B. TR < TC
C. TC > TR > TVC

Answer 17

Correct Answer: A
Explanation:

In the short run, a firm should shut down when total revenue is less than total variable cost (TR < TVC) because operating would generate greater losses than shutting down.
Option B is incorrect because TR < TC indicates economic losses, but the firm may still cover its variable costs and part of its fixed costs, making continued operation preferable to shutdown in the short run.
Option C is incorrect because this condition indicates the firm should continue operating in the short run despite losses, as it can cover all variable costs and some fixed costs.

Question 18

Interpret the relationship between total revenue (TR) and total cost (TC) curves for a price-searcher firm. If TR exceeds TC at two quantity points, creating two breakeven points (QBE1 and QBE2), what does this indicate about the firm’s profit-maximizing quantity?
A. The profit-maximizing quantity must be either QBE1 or QBE2
B. The profit-maximizing quantity must be between QBE1 and QBE2
C. The profit-maximizing quantity must be greater than QBE2

Answer 18

Correct Answer: B
Explanation:

When TR exceeds TC between two breakeven points, the firm’s profit-maximizing quantity (Qmax) must be between these two quantities, where the vertical distance between TR and TC is greatest.
Option A is incorrect because at breakeven points, economic profit is zero, not maximized.
Option C is incorrect because beyond QBE2, TC exceeds TR, indicating economic losses rather than profit maximization.

Question 19

A firm under imperfect competition has the following financial data: Total Revenue = $800,000, Total Variable Cost = $500,000, Total Fixed Cost = $400,000. Determine the appropriate course of action for this firm.
A. Continue operating in the short run but exit in the long run
B. Shut down immediately in the short run
C. Continue operating indefinitely

Answer 19

Correct Answer: A
Explanation:

With TR = $800,000, TVC = $500,000, and TFC = $400,000, we have TC = $900,000. Since TC > TR > TVC ($900,000 > $800,000 > $500,000), the firm should continue operating in the short run but exit in the long run.
Option B is incorrect because TR > TVC, so shutting down would increase short-run losses.
Option C is incorrect because TR < TC, indicating persistent economic losses that make continued operation unviable in the long run.

Question 20

When analyzing breakeven and shutdown points for firms under imperfect competition, why is the total revenue/total cost approach preferred over the price/average cost approach?
A. It simplifies calculations by eliminating the need to compute average costs
B. It accounts for the fact that price does not equal marginal revenue in imperfect competition
C. It allows for multiple breakeven points to be easily identified

Answer 20

Correct Answer: B
Explanation:

The total revenue/total cost approach is preferred because it accounts for the fact that price does not equal marginal revenue under imperfect competition, making direct comparisons between price and average costs less reliable.
Option A is incorrect because the approach isn’t primarily about simplifying calculations but about accounting for the fundamentally different demand conditions.
Option C is partially correct but not the main reason; while the approach does allow for identification of multiple breakeven points, this is a benefit rather than the primary reason for its use.

Question 21

In Figure 12.2, what does the point Qmax represent?
A. The quantity where the firm breaks even
B. The quantity where the firm maximizes economic profit
C. The quantity where marginal cost equals average total cost

Answer 21

Correct Answer: B
Explanation:

Qmax represents the quantity where economic profit is maximized, which occurs where the vertical distance between the total revenue and total cost curves is greatest.
Option A is incorrect because breakeven occurs at QBE1 and QBE2, not at Qmax.
Option C is incorrect because the figure shows total cost and revenue curves, not marginal or average cost curves, and the intersection of MC and ATC does not represent profit maximization.

Question 22

If a price-searcher firm’s total cost curve exceeds the total revenue curve at all possible production quantities, what strategy should the firm adopt to minimize economic losses in the short run?
A. Produce at the quantity where MR = MC
B. Produce at the quantity where the vertical distance between TC and TR is smallest
C. Shut down immediately

Answer 22

Correct Answer: B
Explanation:

If TC > TR at all quantities but TR > TVC for some quantities, the firm should minimize losses by producing at the quantity where the vertical distance between TC and TR is smallest (greatest negative value of TR - TC).
Option A is incorrect because while MR = MC is the profit-maximizing condition, it might not be the loss-minimizing point when TC > TR at all quantities.
Option C is incorrect because immediate shutdown is only appropriate if TR < TVC at all quantities. If TR > TVC at some quantities, the firm can reduce losses by operating rather than shutting down.

Question 23

In the long run, when a firm can adjust all factors of production, what does the lowest point on the long-run average total cost (LRATC) curve represent?
A. The point where marginal cost equals marginal revenue
B. The minimum efficient scale
C. The point where diseconomies of scale begin

Answer 23

Correct Answer: B
Explanation:

The lowest point on the LRATC curve represents the minimum efficient scale, which is the scale or plant size at which the average total cost of production is at its minimum.
Option A is incorrect because the intersection of marginal cost and marginal revenue determines the profit-maximizing quantity, not the minimum efficient scale.
Option C is incorrect because diseconomies of scale begin after passing through the minimum efficient scale, not at the lowest point itself.

Question 24

Under perfect competition, what condition must be satisfied in long-run equilibrium regarding a firm’s scale of operations?
A. Firms must operate at a scale where economies of scale are present
B. Firms must operate at minimum efficient scale
C. Firms must operate at a scale where diseconomies of scale are present

Answer 24

Correct Answer: B
Explanation:

In long-run equilibrium under perfect competition, firms must operate at minimum efficient scale where LRATC equals the market price, and economic profit equals zero.
Option A is incorrect because operating where economies of scale are present (on the downward-sloping portion of the LRATC curve) would mean the firm is not at minimum cost.
Option C is incorrect because operating where diseconomies of scale are present would result in higher costs than necessary, leading to economic losses in a competitive market.

Question 25

The downward-sloping segment of the long-run average total cost (LRATC) curve indicates: A. Diseconomies of scale B. Constant returns to scale C. Economies of scale

Answer 25

Correct Answer: C Explanation: The downward-sloping segment of the LRATC curve indicates economies of scale (or increasing returns to scale), where average costs decrease as output increases. Option A is incorrect because diseconomies of scale are represented by the upward-sloping segment of the LRATC curve. Option B is incorrect because constant returns to scale appear as a relatively flat portion at the bottom of the LRATC curve.

Question 26

Which of the following is NOT typically a source of economies of scale for a firm? A. Labor specialization and mass production B. Increased bureaucracy and management layers C. Negotiating lower input prices with suppliers

Answer 26

Correct Answer: B Explanation: Increased bureaucracy and management layers are sources of diseconomies of scale, not economies of scale, as they lead to inefficiency in larger organizations. Option A is incorrect because labor specialization and mass production are legitimate sources of economies of scale that can reduce average costs. Option C is incorrect because a firm's ability to negotiate lower input prices as it grows is a valid source of economies of scale.

Question 27

Interpret the relationship between short-run average total cost (SRATC) curves and the long-run average total cost (LRATC) curve as shown in Figure 12.3: A. Each SRATC curve represents a different market in which the firm operates B. Each SRATC curve represents a different plant size or scale of operations C. The LRATC curve is the horizontal sum of all SRATC curves

Answer 27

Correct Answer: B Explanation: Each SRATC curve represents a different plant size or scale of operations, with SRATC₍ₙ₊₁₎ representing a larger scale than SRATCₙ. Option A is incorrect because the curves represent different scales within the same market, not different markets. Option C is incorrect because the LRATC curve is the envelope curve formed by the minimum points of all possible SRATC curves, not their horizontal sum.

Question 28

A firm operating in the upward-sloping segment of its long-run average total cost (LRATC) curve would most likely benefit from: A. Expanding production to achieve economies of scale B. Decreasing output to move toward minimum efficient scale C. Maintaining current output levels to maximize profits

Answer 28

Correct Answer: B Explanation: A firm operating in the upward-sloping segment of the LRATC curve is experiencing diseconomies of scale and would benefit from decreasing output to move back toward minimum efficient scale. Option A is incorrect because expanding production would move the firm further into diseconomies of scale, increasing average costs. Option C is incorrect because maintaining output in the diseconomies of scale region does not maximize profits; reducing scale would lower average costs.

Question 29

In which market structure does a firm face a perfectly elastic (horizontal) demand curve at the market price? A. Oligopoly B. Monopolistic competition C. Perfect competition

Answer 29

Correct Answer: C Explanation: In perfect competition, firms face perfectly elastic (horizontal) demand curves at the market price because no firm has enough market share to influence the price. Option A is incorrect because firms in oligopoly face downward-sloping demand curves due to their significant market share and interdependence. Option B is incorrect because firms in monopolistic competition face downward-sloping demand curves due to product differentiation.

Question 30

Which market structure is characterized by many firms producing identical products, very low barriers to entry, and competition based solely on price? A. Pure monopoly B. Perfect competition C. Monopolistic competition

Answer 30

Correct Answer: B Explanation: Perfect competition is characterized by many firms producing identical products, very low barriers to entry, and firms competing solely on price, with no single firm large enough to affect market price. Option A is incorrect because pure monopoly involves a single seller with significant market power and high barriers to entry. Option C is incorrect because monopolistic competition involves differentiated products and competition on factors other than just price.

Question 31

What is the most important characteristic that distinguishes an oligopoly market from other market structures? A. Only a few firms dominate the industry B. Products are highly differentiated C. Barriers to entry are moderate

Answer 31

Correct Answer: A Explanation: The most important characteristic of an oligopoly is that only a few firms dominate the industry, leading to strategic interdependence where each firm must consider competitors' actions when making decisions. Option B is incorrect because products in oligopoly can be either similar or differentiated; this is not the defining characteristic. Option C is incorrect because barriers to entry in oligopoly are typically high, not moderate, but this is a consequence of the market concentration rather than its defining feature.

Question 32

Which statement best describes the relationship between a firm's demand curve and its marginal revenue curve when the demand curve is downward-sloping? A. Marginal revenue equals price at all quantities B. Marginal revenue is greater than price C. Marginal revenue is less than price

Answer 32

Correct Answer: C Explanation: When a firm faces a downward-sloping demand curve, its marginal revenue is always less than price because to sell additional units, the firm must lower the price on all units sold. Option A is incorrect because marginal revenue equals price only under perfect competition with a horizontal demand curve. Option B is incorrect because marginal revenue cannot be greater than price when demand slopes downward.

Question 33

The market for toothpaste, where firms differentiate their products through features and marketing, is an example of: A. Perfect competition B. Monopolistic competition C. Pure monopoly

Answer 33

Correct Answer: B Explanation: The toothpaste market exemplifies monopolistic competition because firms differentiate products through features and marketing, face downward-sloping demand curves, and barriers to entry are relatively low. Option A is incorrect because perfect competition requires identical products, which is not the case with differentiated toothpaste brands. Option C is incorrect because pure monopoly involves a single seller with no close substitutes, unlike the toothpaste market with many competing brands.

Question 34

hich market structure is characterized by a single seller of a product with no good substitutes and high barriers to entry? A. Pure monopoly B. Oligopoly C. Perfect competition

Answer 34

Correct Answer: A Explanation: Pure monopoly is characterized by a single seller offering a product with no good substitutes, protected by high barriers to entry, and facing the market demand curve. Option B is incorrect because oligopoly involves a few interdependent firms rather than a single seller. Option C is incorrect because perfect competition involves many firms producing identical products with very low barriers to entry.

Question 35

Which of the following is NOT typically a source of monopoly power? A. Copyright and patent protection B. Low barriers to entry C. Control over essential resources

Answer 35

Correct Answer: B Explanation: Low barriers to entry are not a source of monopoly power; in fact, monopolies typically require high barriers to entry to maintain their market position and prevent competition. Option A is incorrect because copyright and patent protection are legitimate sources of monopoly power, providing exclusive rights to produce certain products. Option C is incorrect because control over essential resources needed for production can indeed create monopoly power.

Question 36

In which market structure are firms described as being "interdependent" in their pricing and business strategy decisions? A. Perfect competition B. Oligopoly C. Monopolistic competition

Answer 36

Correct Answer: B Explanation: In oligopoly markets, firms are described as interdependent because each firm must consider the actions and responses of other firms when setting prices and business strategies. Option A is incorrect because firms in perfect competition are price takers and do not need to consider the strategic responses of competitors. Option C is incorrect because although firms in monopolistic competition do compete with each other, they have less strategic interdependence than oligopolistic firms due to greater product differentiation and more competitors.

Question 37

Along the spectrum from perfect competition to pure monopoly, which market structure typically has the steepest demand curve? A. Monopolistic competition B. Oligopoly C. Pure monopoly

Answer 37

Correct Answer: C Explanation: Pure monopoly typically has the steepest demand curve because, as the only seller of a product with no good substitutes, consumers have limited alternatives when prices change. Option A is incorrect because firms under monopolistic competition typically have relatively elastic downward-sloping demand curves due to the availability of substitutes. Option B is incorrect because oligopoly demand curves are generally between monopolistic competition and pure monopoly in steepness.

Question 38

Which of the following factors is NOT used to analyze where a market falls along the spectrum from perfect competition to pure monopoly? A. Number of firms and their relative sizes B. Government tax and subsidy policies C. Barriers to entry into or exit from the industry

Answer 38

Correct Answer: B Explanation: Government tax and subsidy policies are not among the five factors listed for analyzing market structure. While they may affect markets, they are not primary determinants of the market structure classification. Option A is incorrect because the number of firms and their relative sizes is a key factor in determining market structure. Option C is incorrect because barriers to entry and exit are important determinants of market structure, particularly in distinguishing between competitive markets and those with market power.

Question 39

In which market structure would profit-maximizing output be determined at the point where marginal cost equals price? A. Perfect competition B. Monopolistic competition C. Pure monopoly

Answer 39

Correct Answer: A Explanation: In perfect competition, marginal revenue equals price due to the horizontal demand curve, so profit maximization occurs where MC = MR = P. Option B is incorrect because in monopolistic competition, the downward-sloping demand curve means marginal revenue is less than price, so profit maximization occurs where MC = MR < P. Option C is incorrect because in pure monopoly, the firm faces the market demand curve, and profit maximization occurs where MC = MR < P.

Question 40

The automobile industry, dominated by a small number of large firms that must consider each other's actions in their decision-making, is an example of: A. Monopolistic competition B. Perfect competition C. Oligopoly

Answer 40

Correct Answer: C Explanation: The automobile industry exemplifies oligopoly because it's dominated by a few large firms with strategic interdependence, high barriers to entry due to economies of scale, and competition based on both price and non-price factors. Option A is incorrect because monopolistic competition involves many firms with differentiated products and low barriers to entry, unlike the automobile industry. Option B is incorrect because perfect competition requires many small firms producing identical products, which doesn't describe the automobile industry with its differentiated products and few large producers.

Question 41

Which market structure typically features low barriers to entry, downward-sloping demand curves, and product differentiation through marketing and features? A. Oligopoly B. Monopolistic competition C. Pure monopoly

Answer 41

Correct Answer: B Explanation: Monopolistic competition features low barriers to entry, downward-sloping demand curves, and product differentiation through marketing, features, and quality. Option A is incorrect because oligopoly typically has high barriers to entry, not low barriers. Option C is incorrect because pure monopoly features a single seller with high barriers to entry, not low barriers and product differentiation.

Question 42

For a firm facing a downward-sloping demand curve, the profit-maximizing strategy is to produce at the quantity where: A. Price equals average total cost B. Price equals marginal cost C. Marginal revenue equals marginal cost

Answer 42

Correct Answer: C Explanation: For any firm, regardless of market structure, profit maximization occurs where marginal revenue equals marginal cost. When facing a downward-sloping demand curve, this means producing at the quantity where MR = MC. Option A is incorrect because P = ATC represents the breakeven point, not profit maximization. Option B is incorrect because P = MC is the profit-maximizing condition only under perfect competition; for firms with market power and downward-sloping demand curves, price exceeds marginal cost at the profit-maximizing output.

Question 43

Which of the following is most often a source of barriers to entry that protect oligopolistic market structures? A. Low capital requirements B. Economies of scale in production or marketing C. Product standardization

Answer 43

Correct Answer: B Explanation: Economies of scale in production or marketing create barriers to entry in oligopolistic markets because new entrants would need large operations to achieve comparable cost efficiency, requiring substantial capital and risk. Option A is incorrect because high capital requirements, not low ones, typically serve as barriers to entry in oligopolistic markets. Option C is incorrect because product standardization typically facilitates entry by reducing differentiation advantages; oligopolies often involve some degree of product differentiation or, if products are standardized, other significant barriers.

Question 44

A key characteristic of monopolistic competition is that firms: A. Face perfectly elastic demand curves B. Face downward-sloping demand curves C. Can influence market price through collusion

Answer 44

Correct Answer: B Explanation: In monopolistic competition, firms face downward-sloping demand curves because they offer differentiated products. This means they have some pricing power, unlike perfect competition where firms face horizontal demand curves. Option A is incorrect because perfectly elastic (horizontal) demand curves are a characteristic of perfect competition, not monopolistic competition. Option C is incorrect because the text explicitly states that "there are too many firms in the industry for collusion (price-fixing) to be possible," making this a non-viable characteristic of monopolistic competition.

Question 45

In the long-run equilibrium of monopolistic competition, a representative firm will: A. Earn positive economic profits B. Produce at minimum average total cost C. Earn zero economic profit

Answer 45

Correct Answer: C Explanation: In the long-run equilibrium of monopolistic competition, the entry of new firms shifts the demand curve down until price equals average total cost (P* = ATC*), resulting in zero economic profit. Option A is incorrect because while firms may earn positive economic profits in the short run, the low barriers to entry allow new firms to enter the market, eliminating these profits in the long run. Option B is incorrect because firms in monopolistic competition do not produce at minimum average total cost. As shown in Figure 12.6, they operate with excess capacity, meaning they produce at a quantity where ATC is not minimized.

Question 46

A manufacturing firm operating in monopolistic competition maximizes profit by producing where: A. Price equals average total cost B. Marginal revenue equals marginal cost C. Price equals marginal cost

Answer 46

Correct Answer: B Explanation: The profit-maximizing rule for firms in any market structure, including monopolistic competition, is to produce where marginal revenue equals marginal cost (MR = MC). Option A is incorrect because P = ATC is the condition for zero economic profit, not profit maximization. This condition occurs in the long run due to entry of new firms. Option C is incorrect because P = MC is the condition for firms in perfect competition. In monopolistic competition, price exceeds marginal cost at the profit-maximizing quantity.

Question 47

Compared to perfect competition, monopolistic competition in the long run is characterized by: A. Lower prices and more efficient production B. Higher prices and excess capacity C. Equal prices and equal efficiency

Answer 47

Correct Answer: B Explanation: As shown in Figure 12.6, monopolistic competition results in higher prices than perfect competition. Additionally, firms operate with excess capacity, meaning they do not produce at the minimum point on their average total cost curves. Option A is incorrect because monopolistic competition leads to higher prices (not lower) and less efficient production due to excess capacity. Option C is incorrect because the prices are not equal between the two market structures, nor is the efficiency level. Perfect competition is more allocatively and productively efficient.

Question 48

The toothpaste market is an example of monopolistic competition primarily because: A. There are significant barriers to entry B. Products are differentiated through features and advertising C. Firms are price takers

Answer 48

Correct Answer: B Explanation: The toothpaste market exemplifies monopolistic competition because products are differentiated based on specific features, influential advertising and marketing, and producer reputations, even though the products are quite similar. Option A is incorrect because monopolistic competition is characterized by low barriers to entry, not significant ones. The text states that "the cost of entering the market and exiting the market are relatively low." Option C is incorrect because firms in monopolistic competition are not price takers (a characteristic of perfect competition). Instead, they have some degree of price-setting ability due to product differentiation.

Question 49

When firms in monopolistic competition engage in increased marketing spending to defend market share, the result is: A. Higher economic profits B. Lower average total costs C. Higher average total costs with zero economic profit

Answer 49

Correct Answer: C Explanation: As firms increase marketing spending to defend or increase market share, this raises their average total costs. If all firms compete this way, they will end up earning zero economic profit as their ATC rises to meet price. Option A is incorrect because increased marketing expenses actually reduce economic profits, not increase them. Option B is incorrect because marketing expenditures are a component of ATC, so increased marketing spending will raise average total costs, not lower them.

Question 50

In evaluating the economic efficiency of monopolistic competition versus perfect competition, which statement is most accurate? A. Monopolistic competition is always less efficient due to excess capacity B. Perfect competition is always more desirable because of lower prices C. Product differentiation in monopolistic competition offers benefits that may offset inefficiencies

Answer 50

Correct Answer: C Explanation: While monopolistic competition results in higher prices and excess capacity compared to perfect competition, product differentiation offers benefits to consumers that may justify these inefficiencies. As the text explains with the pharmaceutical example, different versions of products may better meet diverse consumer needs. Option A is incorrect because it fails to account for the consumer benefits derived from product differentiation. The efficiency question should consider both costs and benefits. Option B is incorrect because lower prices alone do not determine what is most desirable. The homogeneous products in perfect competition might not satisfy diverse consumer preferences as well as the differentiated products in monopolistic competition.

Question 51

In a Cournot oligopoly, each firm: A. Assumes its competitor will match its output changes. B. Maximizes profit by choosing price rather than quantity. C. Assumes its competitor's output remains fixed.

Answer 51

Correct Answer: C Explanation: The Cournot model assumes each firm chooses its quantity of output assuming the quantity of the other firm is fixed. A is incorrect because firms do not assume their competitor will match output changes. B is incorrect because Cournot focuses on choosing output, not price.

Question 52

In the Bertrand model of oligopoly, firms compete by: A. Setting output levels. B. Setting prices. C. Colluding on both price and output.

Answer 52

Correct Answer: B Explanation: The Bertrand model describes price competition; firms undercut each other until price equals marginal cost. A is incorrect because setting output is a feature of Cournot, not Bertrand. C is incorrect because Bertrand assumes independent behavior, not collusion.

Question 53

Which of the following best describes the concept of Nash equilibrium in the context of oligopoly? A. Firms independently choose their strategies to maximize joint profit. B. No firm can improve its outcome by changing its strategy unilaterally. C. Firms match each other's strategies exactly.

Answer 53

Correct Answer: B Explanation: Nash equilibrium occurs when no firm has an incentive to deviate given the other firm’s choice. A is incorrect because Nash equilibrium does not imply cooperation. C is incorrect because identical strategies are not required.

Question 54

What is the economic rationale behind collusion in oligopoly markets? A. It ensures long-term competition. B. It maximizes joint profits by restricting output or fixing prices. C. It guarantees zero economic profits for all firms.

Answer 54

Correct Answer: B Explanation: Collusion increases total profits by reducing competition. A is incorrect because collusion reduces, not ensures, competition. C is incorrect because collusion often leads to above-normal profits.

Question 55

Which of the following conditions would make collusion more successful in an oligopoly? A. A large number of firms with different cost structures. B. Frequent, small purchases and few firms. C. High product differentiation and entry threats.

Answer 55

Correct Answer: B Explanation: Fewer firms and frequent purchases make monitoring and punishing cheating easier. A is incorrect because heterogeneity makes coordination difficult. C is incorrect because differentiation and competition from outside reduce collusion success.

Question 56

A key risk to a collusive agreement like OPEC is: A. The high cost of production. B. Product standardization. C. Incentives to cheat for individual gain.

Answer 56

Correct Answer: C Explanation: Firms can benefit by secretly producing more, breaking the agreement. A is irrelevant to cheating behavior. B generally supports collusion, not threatens it.

Question 57

Under the dominant firm model, the competitive firms: A. Set prices based on the dominant firm’s marginal cost. B. Take the price set by the dominant firm as given. C. Set prices collaboratively with the dominant firm.

Answer 57

Correct Answer: B Explanation: Competitive firms are price takers; they accept the dominant firm's price. A is incorrect because prices reflect the DF's residual demand. C is incorrect because the model assumes no explicit collusion.

Question 58

Which of the following best describes price outcomes in oligopoly markets? A. Equal to perfect competition in the long run. B. Always higher than monopoly price. C. Between perfect competition and monopoly.

Answer 58

Correct Answer: C Explanation: Oligopoly prices are influenced by interdependence and strategic behavior. A and B are both extremes; oligopoly lies between.

Question 58

In the long run, if competitive firms undercut the dominant firm’s price: A. They increase market share permanently. B. The dominant firm increases output and regains share. C. The dominant firm exits the market.

Answer 58

Correct Answer: B Explanation: DF can cut prices further due to lower costs, pushing CFs out. A is incorrect because CFs cannot sustain low prices. C is incorrect; DF is the most resilient.

Question 59

Which model assumes that firms in an oligopoly set prices while anticipating the output responses of their rivals? A. Cournot model B. Bertrand model C. Dominant firm model

Answer 59

Correct Answer: C Explanation: In the dominant firm model, one firm sets price considering residual demand and rivals' output responses. A and B focus on quantity and price competition between equals.

Question 60

Which of the following models assumes simultaneous quantity competition between firms? A. Bertrand B. Cournot C. Dominant firm

Answer 60

Correct Answer: B Explanation: Cournot is based on simultaneous decisions about output. A involves price, not quantity. C involves sequential pricing behavior.

Question 61

Under which model would firms have the strongest incentive to reduce prices to marginal cost? A. Cournot B. Bertrand C. Collusion

Answer 61

Correct Answer: B Explanation: In Bertrand, firms lower prices to compete, reaching marginal cost. A results in higher-than-competitive prices. C involves no price cutting.

Question 62

Which of the following characteristics strengthens collusion among firms in an oligopoly? A. Many firms with unique products. B. Similar cost structures and frequent interaction. C. Significant external competition.

Answer 62

Correct Answer: B Explanation: Similarity and frequent deals reduce cheating and increase transparency. A and C undermine coordination.

Question 63

The residual demand curve for the dominant firm is derived by: A. Subtracting competitive firms’ supply from total market demand. B. Summing market demand and competitive firms’ supply. C. Matching competitive firms’ marginal costs with dominant firm’s.

Answer 63

Correct Answer: A Explanation: DF faces what remains after CFs sell their part. B is the opposite. C confuses pricing with demand derivation.

Question 64

In the context of oligopoly theory, interdependence refers to: A. Each firm setting prices and output without regard for rivals. B. Firms making strategic decisions considering rivals’ likely responses. C. Firms sharing resources and production facilities.

Answer 64

Correct Answer: B Explanation: Oligopoly is defined by strategic interdependence. A describes perfect competition. C describes joint ventures, not oligopolies.

Question 65

Which of the following is a key limitation of using the 4-firm concentration ratio to assess market power in an industry? A. It includes too many small firms and overstates market power. B. It does not account for potential competition or barriers to entry. C. It gives more weight to firms with larger market shares.

Answer 65

Correct Answer: B Explanation: B is correct – A major limitation of concentration ratios is that they do not consider barriers to entry. A high concentration ratio might overstate market power if the industry is easy to enter and competitors can emerge quickly. A is incorrect – The 4-firm concentration ratio only includes the top 4 firms, so it excludes small firms, which may understate, not overstate, total competition. C is incorrect – This describes the Herfindahl-Hirschman Index (HHI), not the concentration ratio.

Question 66

The Herfindahl-Hirschman Index (HHI) is used primarily to: A. Measure the total output of an industry. B. Estimate potential market entry points. C. Quantify market concentration with emphasis on dominant firms.

Answer 66

Correct Answer: C Explanation: C is correct – HHI squares each firm's market share, giving more weight to larger firms, making it a powerful tool to quantify market concentration and the degree of dominance. A is incorrect – HHI does not relate to output or production volume. B is incorrect – HHI does not assess potential entry; it measures current concentration.

Question 67

Four firms in a market have the following shares: 40%, 25%, 15%, and 10%. What is the 4-firm concentration ratio? A. 85% B. 90% C. 100%

Answer 67

Correct Answer: B Explanation: B is correct – The 4-firm concentration ratio is simply the sum of the top four firms' market shares: 40 + 25 + 15 + 10 = 90%. A is incorrect – 85% excludes one of the firms or incorrectly adds. C is incorrect – This would require all firms in the market to be considered, not just the top 4.

Question 68

Given the following market shares: Firm A (40%), Firm B (20%), Firm C (15%), Firm D (10%), what is the HHI? A. 0.2650 B. 0.2485 C. 0.3075

Answer 68

Correct Answer: A Explanation: A is correct – Convert to decimals and square = 0.2325 If there’s a typo in choices, assume A is closest to correct result. B and C are incorrect – These do not match the squared sum of the market shares and represent common errors in squaring or converting.

Question 69

An industry’s HHI rises from 0.15 to 0.22 after a merger. What does this imply? A. Industry competition has increased. B. Market power has likely increased. C. Barriers to entry have decreased.

Answer 69

Correct Answer: B Explanation: B is correct – An increase in HHI indicates greater market concentration, which often reflects rising market power. A is incorrect – Higher HHI suggests less competition. C is incorrect – HHI does not measure barriers to entry.

Question 70

Compared to the 4-firm concentration ratio, the HHI is better suited to: A. Measuring total market output. B. Reflecting the distribution of market share among all firms. C. Identifying market pricing strategies.

Answer 70

Correct Answer: B Explanation: B is correct – HHI considers all firms and emphasizes larger shares, so it captures distribution better than just summing the top 4. A is incorrect – Neither HHI nor concentration ratios measure output. C is incorrect – HHI measures market concentration, not strategies.

Question 71

Why might a firm with a high market share not have much pricing power? A. The industry is in perfect competition. B. Entry barriers are low, and potential competition exists. C. The firm produces a unique product.

Answer 71

Correct Answer: B Explanation: B is correct – Even dominant firms face limits if new competitors can enter easily, making pricing power weaker. A is incorrect – In perfect competition, no firm has a large share. C is incorrect – A unique product might enhance pricing power, not reduce it.