ECP3704 Exam 2 Questions with Detailed and Verified ANSWERs (100% Correct ANSWERs) / Graded A+

1. In a perfectly competitive market, the demand curve faced by an individual firm is: A) Perfectly inelastic B) Downward sloping C) Perfectly elastic D) Upward sloping ANSWER: C) Perfectly elastic. In perfect competition, firms are price takers. They can sell any quantity at the market price, so their perceived demand curve is a horizontal line at that price, indicating infinite elasticity. 2. The primary goal of a profit-maximizing firm is to: A) Maximize total revenue B) Maximize market share C) Maximize the difference between total revenue and total cost D) Minimize total cost ANSWER: C) Maximize the difference between total revenue and total cost. This difference is economic profit, which is the fundamental objective in standard managerial economics. 3. The additional revenue gained from selling one more unit of output is known as: A) Marginal Cost B) Average Revenue C) Marginal Revenue D) Total Revenue ANSWER: C) Marginal Revenue. Marginal Revenue (MR) is defined as the change in total revenue from selling one additional unit. 4. A firm should continue to produce in the short run as long as: A) Price is greater than Average Total Cost (ATC) B) Price is greater than Average Fixed Cost (AFC) C) Price is greater than Average Variable Cost (AVC) D) Total Revenue is greater than Total Fixed Cost ANSWER: C) Price is greater than Average Variable Cost (AVC). This ensures the firm can cover its variable costs. Any revenue above AVC can contribute to covering some fixed costs, which are sunk in the short run. 5. The shutdown point for a perfectly competitive firm occurs where: A) Price equals Minimum Average Total Cost B) Price equals Minimum Average Variable Cost C) Total Revenue equals Total Fixed Cost D) Marginal Revenue equals Zero ANSWER: B) Price equals Minimum Average Variable Cost. At this point, the firm is indifferent between producing and shutting down, as its loss is equal to its total fixed costs in either scenario. 6. A monopolist maximizes profit by producing the quantity where: A) MR = MC B) P = MC C) P = ATC D) MR = AVC ANSWER: A) MR = MC. This is the fundamental profit-maximizing rule for all market structures. The monopolist then charges the highest price consumers are willing to pay for that quantity, found on the demand curve. 7. Which of the following is a characteristic of a monopoly? A) Many sellers B) Homogeneous product C) Significant barriers to entry D) Perfect information ANSWER: C) Significant barriers to entry. Barriers to entry (e.g., patents, control of a key resource, government franchise) are what allow a monopoly to exist by preventing competition. 8. Price discrimination is the practice of: A) Charging the same price to all consumers for the same product B) Charging different prices to different consumers for the same product where the price differences are not based on cost differences C) Lowering prices to drive competitors out of business D) Setting a price equal to marginal cost ANSWER: B) Charging different prices to different consumers for the same product where the price differences are not based on cost differences. The key is that the price variation reflects differences in willingness to pay. 9. For a firm in monopolistic competition, the long-run equilibrium occurs where: A) P = MC and P = ATC B) P > MC and P = ATC C) P = MR and P = ATC D) P = MC and P > ATC ANSWER: B) P > MC and P = ATC. Firms have some market power (P > MC), but free entry and exit drive economic profit to zero (P = ATC). 10. In an oligopoly market structure, firms: A) Are price takers B) Face a perfectly elastic demand curve C) Are interdependent in their decision-making D) Sell a standardized product ANSWER: C) Are interdependent in their decision-making. The actions of one firm significantly affect the others, leading to strategic behavior, which is the defining feature of oligopoly. 11. The Herfindahl-Hirschman Index (HHI) is a measure of: A) Marginal cost B) Market concentration C) Price elasticity of demand D) Total industry revenue ANSWER: B) Market concentration. It is calculated as the sum of the squares of the market shares of all firms in the industry. A higher HHI indicates a more concentrated market. 12. In the Cournot model of oligopoly, firms compete by choosing: A) Price B) Advertising expenditure C) Quantity D) Product quality ANSWER: C) Quantity. Firms simultaneously choose their output levels, assuming the output of the rival is fixed. 13. A Nash equilibrium is a situation where: A) All players cooperate to achieve the best joint outcome B) No player can improve their payoff by unilaterally changing their strategy C) All players have dominant strategies D) The outcome is always socially efficient ANSWER: B) No player can improve their payoff by unilaterally changing their strategy. Each player's strategy is optimal given the strategies chosen by the others. 14. In the Bertrand model with homogeneous products, the equilibrium outcome is: A) The same as a monopoly outcome B) The same as the Cournot outcome C) Price equal to marginal cost D) Collusive pricing ANSWER: C) Price equal to marginal cost. Firms undercut each other's prices until price is driven down to marginal cost, resulting in a perfectly competitive outcome. 15. A strategy that is best for a player regardless of what strategies other players choose is called a: A) Nash strategy B) Dominant strategy C) Maximin strategy D) Mixed strategy ANSWER: B) Dominant strategy. A player will always play their dominant strategy if one exists. 16. The "Prisoner's Dilemma" illustrates why: A) Collusion is always stable B) Individual rational behavior can lead to a collectively worse outcome C) Nash equilibria are always efficient D) Communication ensures cooperation ANSWER: B) Individual rational behavior can lead to a collectively worse outcome. Both players have an incentive to cheat (confess), leading to a worse outcome for both than if they had cooperated (remained silent). 17. A cartel is an example of: A) Perfect competition B) Monopolistic competition C) Overt collusion D) A Nash equilibrium ANSWER: C) Overt collusion. A cartel is a formal agreement among firms in an oligopoly to coordinate output and prices to maximize joint profits. 18. The price elasticity of demand for a firm's product is -2.0. If the firm increases its price by 5%, total revenue will: A) Increase B) Decrease C) Remain unchanged D) Cannot be determined ANSWER: B) Decrease. Since |E| > 1, demand is elastic. A price increase leads to a more than proportional decrease in quantity demanded, causing total revenue to fall. 19. If the cross-price elasticity of demand between two goods is positive, the goods are: A) Substitutes B) Complements C) Inferior goods D) Normal goods ANSWER: A) Substitutes. A positive cross-price elasticity means that an increase in the price of one good leads to an increase in demand for the other. 20. The income elasticity of demand for an inferior good is: A) Greater than 1 B) Between 0 and 1 C) Negative D) Positive ANSWER: C) Negative. For an inferior good, an increase in consumer income leads to a decrease in demand. 21. The production function Q = F(K, L) describes the relationship between: A) Price and quantity supplied B) Inputs and the maximum output that can be produced C) Total cost and output D) Revenue and profit ANSWER: B) Inputs and the maximum output that can be produced. It represents the technological relationship between inputs (like capital K and labor L) and the maximum possible output (Q).