ECON 3050 Exam 2 Study Guide Q&A

Mod 2 Lecture 5 Ch 8 Questions – Competitive Firms and Markets 1. In a competitive market, if buyers did not know all the prices charged by the many firms A. firms sell a differentiated product. B. the number of firms will most likely decrease. C. demand curves can be downward sloping for some or all firms. D. all firms still face horizontal demand curves. In perfect competition, buyers with FULL INFORMATION means no single firm can unilaterally raise p > market p* 2. In a perfectly competitive market A. buyers are price-takers. B. buyers view products from different firms as differentiated. C. firms' demand curves are vertical. D. individual buyers have horizontal demand curves. Buyers view products as IDENTICAL in a competitive market, where demand curves for the FIRMS are HORIZONTAL, not vertical 3. In a perfectly competitive market A. firms sell a differentiated product. B. firms can freely enter and exit. C. transaction costs are high. D. All of the above. Firms in a perfectly competitive market sell IDENTICAL products, have free entry/exit, and have LOW transaction costs 4. If all conditions for a perfectly competitive market are met A. firms face sunk cost when entering the market. B. the market demand curve is horizontal. C. firms demand curves are horizontal. D. the firms' demand curves are downward-sloping. Conditions include (1) large number of buyers and sellers, (2) identical products, (3) full information, (4) negligible (low) transaction costs, and (5) free entry and exit 5. The short run is A. when a firm has to decide whether or not to exit. B. usually 3 - 6 months. C. dependent on the characteristics of the industry. D. identical to the long run for most firms. To maximize profit in the short run the firm takes the price To maximize profit in the short run, the firm takes the price from the market and with marginal cost determines its output 6. In the short run A. profit maximizing firms have identical short run supply curves. B. firms will shut down if operating at a loss. C. firms may choose to operate at a loss. D. most firms have short run supply curves that are the same as their long run supply curves. A competitive firm chooses its output to maximize profit or minimize losses when p = MC ( q) 7. A profit maximizing firm selects output such that A. total profit is maximized. B. average profit is maximized. C. marginal profit is maximized. D. marginal cost is minimized. Profit maximizing competitive firms select output where MR = MC or p = MC 8. An increase in the cost of an input in the short run will result in A. a leftward shift of the short-run market demand curve. B. a leftward shift of the short-run market supply curve. C. an downward shift of the firm's short-run marginal cost curve. D. a rightward shift in the firm's short-run supply curve. 9. If a specific tax is implemented A. there is less profit per unit sold. B. the firm's average cost curve shifts up, resulting in lower profits. C. the after-tax marginal cost curve shifts, resulting in lower quantity produced. D. All of the above. Restrictive taxes affect cost negatively. Higher AC lowers profits and output 10. A firm should always shut down if its revenue is A. less than its total costs. B. less than its average fixed costs. C. declining. D. less than its avoidable costs. After determining the output level, q*, the firm shuts down if its revenue is less than its avoidable cost (all costs). It shuts down if it would make an economic loss by operating 11. There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is A. N plus the supply of an individual firm. B. N - 1 times the supply of an individual firm. C. N times the supply of an individual firm. D. It cannot be determined from the information provided. If all firms are If all firms are identical identical, each firm each firm s’ costs are identical costs are identical, supply curves are identical. The market supply at any price is n times the supply of an individual firm; flatter 12. If market price is greater than or equal to the minimum of AVC but below the minimum of AC, then A. revenue is lower than variable costs. B. the firm will shut down. C. the firm will operate because its loss is less than if it shut down. D. profit is positive and so the firm will operate. Shutdown rule for a competitive firm: p < AVC = VC/q. A firm still operates between the minimum AVC and minimum AC 13. If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur? A. It will operate at a loss in the short run. B. It will minimize its loss by decreasing output so that price exceeds marginal cost. C. It will shut down in the short run and wait until the price increases sufficiently. D. It will exit the industry in the long run. In a competitive market, p = MC at equilibrium 14. If the market price is above a firm's average cost at the quantity produced A. the firm operates and makes a profit. B. the market price of the firm's inputs will rise. C. total profit is maximized. D. the firm operates and make zero economic profit. If a firm’s P > AC, the firm does not shut down. The firm operates and makes profit. 15. In the long run, profits will equal zero in a competitive market because of A. free entry and exit. B. the availability of information. C. identical products being produced by all firms. D. constant returns to scale. Firms have zero economic profit in the long run and firms can exit and enter freely. 16. If firms in a competitive market are not identical, then an increase in cost will A. push the most efficient firms out of the market. B. shift marginal cost to the right. C. push the most inefficient firms out of the market. D. Need more information. An increase in fixed cost causes the market price and quantity to rise and the number of firms in an industry to fall, as expected. Output per firm increases for the remaining firms 17. A firm will exit a competitive market when A. costs force the marginal cost curve to shift to the left. B. the long-run profit would be negative. C. it can earn only earn a zero long-run profit. D. if the current market price is less than its lowest possible AC. A shift of the market demand curve to the left forces firms to exit the market ( exit the market (π < 0) until the last firm to exit makes zero < 0) until the last firm to exit makes zero long run profit 18. Long-run market supply curves are upward sloping in a perfectly competitive market if A. the number of firms is restricted in the long run. B. firms are identical. C. input prices fall as the industry expands. D. firms can freely enter and exit the markets. When entry is limited, long-run market supply curves slope upward (horizontal sum of a few individual supply curves). The number of firms is limited because of government restrictions, resource scarcity, or high entry cost. 19. Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 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 $0.20 per pound. C. the long-run price will be set just above $0.20 per pound. D. each consumer will purchase $100 worth of potatoes. In the long run, price = minimum of the AC curve when firms are identical 20. Long-run market supply curves are downward sloping if A. input prices fall as the industry expands. B. the number of firms is restricted in the long run. C. firms are identical. D. input prices rise as the industry expands. Theres nothing in the stupid notes about this. This class sucks!!!  21. With identical firms, constant input prices, and all the other characteristics of a competitive market A. the long run equilibrium price is the minimum of the average cost curve. B. a shift in demand will change the equilibrium price and quantity. C. the long run and short run equilibria are identical. D. a shift in demand will change the equilibrium price but not quantity. The long-run supply curve is horizontal if firms are free to enter the market, firms have identical cost, and input prices are constant. All firms in the market are operating at minimum longrun average cost 22. Producer surplus A. is a measure of what a firm gains from trade. B. is the minimum amount a firm must receive to engage in trade. C. represents the opportunity cost of the firm. D. determines whether or not a firm will produce in the long run. monetary difference between the amount a good sells for (price) and the minimum amount amount a good sells for (price) and the minimum amount necessary for the producers to be willing to produce the good (marginal cost). Closest concept to profit and measures gain 23. Assume government policy increases the demand for corn. A. The producer surplus of corn growers will not change. B. The producer surplus of corn growers will decrease. C. The consumer surplus of corn buyers will increase. D. The producer surplus of corn growers will increase. A price ceiling lowers producer surplus. A government policy that limits trade in a competitive market reduces total surplus. 24. What is one reason activists might lobby the government for regulation limiting the production of a product to less than would normally be in a perfectly competitive market? A. They value consumer surplus more than producer surplus. B. They seek to avoid future regulation. C. They value producer surplus more than consumer surplus. D. They seek to minimize total surplus. Producer Surplus (PS), monetary difference between the amount a good sells for (price) and the minimum amount amount a good sells for (price) and the minimum amount necessary for the producers to be willing to produce the good (marginal cost) Mod 2 Lecture 6 Ch 9 Questions - Monopoly 25. If a market produces a level of output below the competitive equilibrium, then A. consumer surplus might still be maximized. B. social welfare is not maximized. C. the actual price will be below the equilibrium price. D. social welfare might still be enhanced if a price ceiling keeps price below the competitive price. Government intervention in a perfectly competitive market reduces a society’s economic well- being, this would reduce output. Perfect competition maximizes total surplus. Producing less or more than the competitive output lowers total surplus 26. The monopolist's marginal revenue curve A. doesn't exist. B. is identical to the demand curve. C. lies below the demand curve. D. lies above the demand curve. The MR curve is a straight line that starts at the same point on the vertical (price) axis as the demand curve but has twice the slope. The 2x slope makes the MR curve steeper. 27. If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal revenue function is A. a - (1/2)bQ. B. a - bQ. C. a - 2bQ. D. a. MR curves are 2x the slope of inverse demand curve. You can find this 2 ways: 1. Total revenue function - MR(Q) = dR(Q) / dQ ▪ R(Q) = (a – bQ)Q = aQ – bQ2  MR(Q) = a – 2bQ 2. MR function - MR(Q) = a – (2)bQ = a – 2bQ 28. A monopolist that chooses price A. necessarily produces less than a monopolist that chooses quantity, hence the laws against price fixing. B. produces the same amount as a monopolist that chooses quantity. C. operates according to the Harvard tradition rather than the Chicago tradition. D. produces more than a monopolist that chooses quantity, thus the irony of laws against price fixing. Whether the monopoly sets its price or its quantity, the other variable is determined by the downward sloping market demand curve. Setting price or quantity are equivalent for a monopoly. We assume it sets quantity 29. A monopoly that is maximizing profits never operates in the portion of the demand curve. A. elastic B. unitary elastic C. inelastic D. horizontal A profit-maximizing monopoly never operates in the inelastic portion of its demand curve. A monopoly’s profit is maximized in the elastic portion of the demand curve 30. The monopolist's supply curve A. is identical to the demand curve. B. is the region of its marginal cost curve above average cost. C. doesn't exist. D. is the region of its marginal cost curve that lies above the marginal revenue curve but below the demand curve. There is no supply curve in a monopoly market 31. The fact that a monopoly has to take the shapes of marginal cost AND marginal revenue into account when making decisions is reflected in the fact that A. monopolies have the same supply curve as perfectly competitive firms. B. monopolies don't have a demand curve. C. monopolies don't have a supply curve. D. monopolies maximize profit. The effect of a shift in demand on a monopoly’s output depends on the shapes of both the marginal cost curve and the demand curve. The MR at any given quantity depends on the demand curve’s height (the price) and shape, because it is 2x the slope of the inverse demand 32. A monopoly shuts down when A. never, because it can raise its prices as high as necessary to keep operating and maximize profits. B. the average cost is less than price. C. the long run price is below its average variable costs. D. the short run price is below its average variable costs. A monopoly shuts down to avoid making a loss in the short run if its price is below its average variable cost at its profitmaximizing (or loss minimizing) quantity 33. If the demand for a monopoly's output shifts rightward, the change in quantity produced is A. zero. B. positive. C. negative. D. not predictable. The effect of a shift in demand on a monopoly’s output depends on the shapes of both the marginal cost curve and the demand curve. The new equilibrium (MR = MC) may occur at new levels of prices and quantities, or two different prices for the same quantity, or the same price for two different quantities 34. A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming profit maximization, the implicit demand elasticity is A. -1.25. B. -5.0. C. -0.2. D. -0.8. Two ways to find this: 1. P = MC / (1 +1/e)  P/MC = 1/ (1 + 1/e) ▪ 50/10 = 1 / (1 + 1/e)  5 = 1 / (1 + 1/e) ▪ Flip the fractions so that: 1/5 = 1 + 1/e ▪ Turn 1 into fraction so that: 1/5 – 5/5 = 1/e ▪ -4/5 = 1/e ▪ Flip fractions so that: -5/4 = e = -1.25 2. Using Lerner Index: (p – MC)/p = -1/e ▪ Flip so that: p / (p – MC) = - e ▪ 50 / 50 – 10 = - e = - 1.25 35. The Lerner Index is A. a measure of market power. B. the ratio of the difference between price and marginal cost to elasticity of demand. C. equal to (MC - Price)/Price D. equal to (Price - MC)/MC The Lerner Index measures a firm’s market power: the larger the difference between price and marginal cost, the larger the Lerner Index = (p – MC)/p = -1/e 36. What is the value of the Lerner index under perfect competition? A. 1 B. 0 C. two times the price D. infinity If ε = - ∞, perfectly elastic, the ratio [p = MC / (1 + 1/e) ] shrinks to 1 and p = MC: no market power, same as perfect competition 37. Which factors determine the firm's elasticity of demand? A. number and the proximity of competing firms. B. availability of close substitutes and number of competing firms. C. availability of close substitutes, number of firms, and the proximity among competiting firms. D. availability of close substitutes and the proximity among competiting firms. Availability of substitutes, number of firms and proximity of competitors determine market power are the sources of market power or inelastic demand. More inelastic demand = high market power for the firm 38. Deadweight loss from monopoly power is expressed on a graph as the area between the A. competitive price line and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets. B. competitive price line and the monopoly price line bounded by zero output and the output chosen by the monopolist. C. average revenue curve and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets. D. competitive price and the average revenue curve bounded by the quantities produced by the competitive and monopoly markets. A monopolist sets its price above its MC (market power) and creates a deadweight loss or market failure due to monopoly pricing.