test1-MC-solutions

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ECO 3139 - Test 1 Part 1: Multiple choice, Choose the best answer. Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define a market to be competitive when the firms A) spend large amounts of money on advertising to lure customers away from the competition. B) are price takers. C) watch each other's behavior closely. D) All of the above. 1) 2) A market's structure is described by A) the ability of firms to differentiate their product. B) the ease with which firms can enter and exit the market. C) the number of firms in the market. D) All of the above. 2) 3) If a firm makes zero economic profit, then the firm A) will shut down. B) is better of exiting the industry. C) is indifferent between staying and exiting the industry. D) has no incentive to stay in the industry. 3) 4) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed A) $10. B) $0. C) $5. D) $11. 4) 1

5) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than A) $11. B) $10. C) $0. D) $5. 5) 6) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of A) $40. B) $0. C) $160. D) $4. 6) 7) If a profit - maximizing firm finds that, at its current level of production, MR < MC, it will A) increase output. B) shut down. C) decrease output. D) operate at a loss. 7) 8) A firm will shut down in the short run if A) total revenue from operating would not cover variable costs. B) total revenue from operating would not cover all costs. C) total fixed costs are too high. D) total revenue from operating would not cover fixed costs. 8) 9) The above figure shows the cost curves for a typical firm in a competitive market. If price = 8.5, then A) the firm will produce 55 units. B) the firm will produce 10 units. C) the firm will earn positive profits. D) None of above. 9) 10) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 4, then the firm A) is earning positive profits. B) should shut down. C) should produce 35 units. D) None of above. 10) 2

11) In the long run, profits will equal zero in a competitive market because of A) identical products being produced by all firms. B) free entry and exit. C) constant returns to scale. D) the availability of information. 11) 12) Suppose that for each firm in the competitive market for potatoes, long - run average cost is minimized at 20¢ per pound when 500 pounds are grown. If the long - run supply curve is horizontal, then A) some firms will enjoy long - run profits because they operate at minimum average cost. B) the long - run price will be set just above 20¢ per pound. C) each consumer will purchase $100 worth of potatoes. D) the long - run price will be 20¢ per pound. 12) 13) Long - run economic rent or profit do not exist for fixed factors like land because A) there is no market for such factors. B) bidding drives up the price of the factor until no economic rent exists. C) these factors will earn economic profits. D) these factors have L - shaped isoquants. 13) 14) Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals A) 25. B) 50. C) 12.50. D) 10. 14) 15) Suppose the market supply curve is p = 5 + Q. If price increases from 10 to 15, the change in producer surplus is A) 12.5. B) 50. C) 5. D) 37.5. 15) 16) If a market produces a level of output below the competitive equilibrium, then A) social welfare might still be enhanced if a price ceiling keeps price below the competitive price. B) social welfare is not maximized. C) consumer surplus might still be maximized. D) the actual price will be below the equilibrium price. 16) 17) Deadweight loss occurs when A) the maximum level of total welfare is not achieved. B) consumer surplus is reduced. C) an inferior good is consumed. D) producer surplus is greater than consumer surplus. 17) 3

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18) The above figure shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, the loss in social welfare equals A) b + c. B) f + g. C) f. D) a. 18) 19) The above figure shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, producer surplus A) increases. B) stays the same. C) decreases. D) changes in a direction that cannot be determined from the information given. 19) 20) The above figure shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, producer surplus will be A) d + e. B) d + g. C) d + c + g. D) d. 20) 21) If a firm is able to set price, A) it is a monopoly. B) its marginal revenue is constant. C) it faces a downward - sloping demand curve. D) it sells its output at a constant price. 21) 4

22) One difference between a monopoly and a competitive firm is that A) only a monopoly is a price taker. B) only a monopoly faces a downward - sloping demand curve. C) only a monopoly maximizes profit by setting marginal revenue equal to marginal cost. D) None of the above. 22) 23) If the inverse demand function for a monopoly's product is p = 100 - 2Q, then the firm's marginal revenue function is A) 200 - 4Q. B) 200 - 2Q. C) - 2. D) 100 - 4Q. 23) 24) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization A) is achieved by setting price equal to 21. B) is achieved when 21 units are produced. C) is achieved only by shutting down in the short run. D) cannot be determined solely from the information provided. 24) 25) The monopoly maximizes profit by setting A) price equal to marginal revenue. B) marginal revenue equal to marginal cost. C) marginal revenue equal to zero. D) price equal to marginal cost. 25) 26) The above figure shows the demand and cost curves facing a monopoly. The monopoly maximizes profit by selling A) 25 units. B) 75 units. C) 50 units. D) 0 units. 26) 5

27) The above figure shows the demand and cost curves facing a monopoly. The monopoly maximizes profit by setting price equal to A) $300. B) $200. C) $100. D) $400. 27) 28) If a monopoly is operating on the demand curve where price elasticity is equal to - 3, and price equals 3, then MR is equal to A) 2. B) - 2. C) 1. D) - 1. 28) 29) The above figure shows the demand and cost curves facing a monopoly. If the firm is a profit maximizer, its Lerner Index will equal A) 1.5. B) 1. C) 1/3. D) 3. 29) 30) The above figure shows the demand and cost curves facing a monopoly. At the profit - maximizing price, the elasticity of demand equals A) infinity. B) - 3. C) - 1. D) zero. 30) 31) The Lerner Index is A) equal to (Price - MC)/Price. B) the ratio of the difference between price and marginal to price. C) a measure of market power. D) All of the above. 31) 32) If a monopoly's Lerner Index exceeds 1, then A) marginal revenue is negative. B) it has ultimate market power. C) it must be pricing below marginal cost. D) it is earning maximum profit. 32) 6

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33) Which of the following conditions must be true so that a firm can price discriminate? A) The good is a nondurable. B) The good cannot be easily resold. C) There are no other firms in the market. D) All of the above. 33) 34) When firms price discriminate they turn ________ into ________. A) consumer surplus, profit B) producer surplus, consumer surplus C) total cost, profit D) producer surplus, revenue 34) 35) Charging a higher price for a motel room to customers with dogs or cats than to customers with no pets is most likely an example of A) first - degree price discrimination. B) second - degree price discrimination. C) third - degree price discrimination. D) actual cost differences. 35) 36) "Kids eat free" in a fast food restaurant is an example of A) perfect price discrimination. B) nonlinear price discrimination. C) group price discrimination. D) no price discrimination. 36) 37) A perfect price discriminator A) charges lower prices to customers who buy greater quantities. B) generates a deadweight loss to society. C) charges each buyer her reservation price. D) charges different prices to each customer based upon different costs of delivery. 37) 38) The deadweight loss generated by a perfect - price - discriminating monopoly A) is greater than the deadweight loss of a single - price monopoly. B) equals the sum of all lost consumer surplus. C) equals zero. D) equals the deadweight loss of a single - price monopoly. 38) 39) The above figure shows the market for a particular good. If the market is controlled by a perfect - price - discriminating monopoly, consumer surplus equals A) A. B) A + B + C. C) C. D) zero. 39) 7

40) The above figure shows the market for a particular good. If the market is controlled by a perfect - price - discriminating monopoly, social welfare equals A) A. B) A + B + C. C) A + B + C + D + E. D) zero. 40) 41) The above figure shows the market for a particular good. If the market is controlled by a perfect - price - discriminating monopoly, the deadweight loss equals A) A + B + C. B) C. C) C + E. D) zero. 41) 42) Bob is the only carpet installer in a small isolated town. The above figure shows the demand curves of two distinct groups of customers - residential and business. If the marginal cost of installing carpet is a constant $1 per sq yard, what price does Bob charge each segment? A) $1 in each market B) $5.50 in the residential market and $8 in the business market C) $10 in the residential market and $15 in the business market D) $1 in the residential market and $5 in the business market 42) 43) If two identifiable markets differ with respect to their price elasticity of demand and resale is impossible, a firm with market power will A) set price equal to marginal cost in both markets. B) set a higher price in the market that is more price elastic. C) set a lower price in the market that is more price elastic. D) set price so as to equate the elasticity of demand across markets. 43) 44) Two - part pricing offer a mechanism whereby the firm can A) capture some or all of the consumer surplus. B) reduce some of its fixed costs. C) collect two times as much from consumers as a single - price monopoly can. D) charge two different prices to distinct groups of customers. 44) 8

45) Many theme parks charge an entrance fee and a per - ride fee equal to zero. This is an example of A) perfect price discrimination. B) a two - tier pricing. C) multimarket price discrimination. D) bundling. 45) 9

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Answer Key Testname: TEST1 1) B 2) D 3) C 4) A 5) B 6) C 7) C 8) A 9) A 10) B 11) B 12) D 13) B 14) C 15) D 16) B 17) A 18) B 19) C 20) D 21) C 22) B 23) D 24) B 25) B 26) A 27) A 28) A 29) C 30) B 31) D 32) A 33) B 34) A 35) D 36) C 37) C 38) C 39) D 40) C 41) D 42) B 43) C 44) A 45) B 10

test1-MC-solutions

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