Sophia Microeconomics Unit 3 Challenge 3 Exam Questions And Answers

Sophia Microeconomics Unit 3 Challenge 3 Exam Questions And Answers The market structure with the highest level of competition is - CORRECT ANSWERS Perfect competition Perfect competition has the highest level of competition among the market structures. An example of a market in the United States with a high concentration ratio is the - CORRECT ANSWERS breakfast cereal market The U.S. ready-to-eat breakfast cereal market has one of the highest concentration ratios, with four firms controlling 95% of the market. The market structure with the least amount of market power i - CORRECT ANSWERS Perfect competition Because there are no barriers to entry in a perfectly competitive market, sellers' economic profits are - CORRECT ANSWERS Completely unprotected Firms can freely enter and exit the market in perfect competition, so when economic profits exist, firms will enter. This increases supply, which drives down the equilibrium price and thus drives down economic profits to zero economic profits. Those profits are completely unprotected. Because there are a large number of buyers and sellers in the market, perfectly competitive firms are - CORRECT ANSWERS Price taker Because of the large number of buyers and sellers in a perfectly competitive market, supply and demand in the market as a whole determines the price. Firms cannot influence the price, so they are known as price takers. The product produced by all firms in a perfectly competitive firm must be - CORRECT ANSWERS Identical Products in a perfectly competitive market are identical and undifferentiated in any way. Consider the diagram below. At a selling price of $12 per unit, how much profit or loss is this perfectly competitive firm experiencing, and should they continue to produce or shut down temporarily? - CORRECT ANSWERS a.) Economic profit of $1,100; continue to produce At a quantity where MR = MC, which is where profits are maximized, the quantity is 550 units, price = $12, and ATC = $10. This means the firm is earning a positive economic profit of 550 × ($12 − $10) = 550 × $2 = $1,100. Consider the graph below. At a selling price of $5 per unit, this perfectly competitive firm is earning - CORRECT ANSWERS a normal profit At the quantity where MR = MC, which is where profits are maximized, the price = ATC, which means the firm is earning zero economic profit or a normal profit. Consider the diagram below. How much profit or loss is this perfectly competitive firm experiencing, and should they continue to produce or shut down temporarily? - CORRECT ANSWERS a.) Loss of −$800; continue to produce Because the point at which MR = MC falls below the ATC curve, the firm is experiencing economic loss. The loss = 400 × ($8 − $10) = 400 × (−$2) = −$800. The firm should continue to produce because, although there is a loss, it does not warrant shutting down as the price is still above the AVC. How do barriers to entry affect firms in a monopoly market structure? - CORRECT ANSWERS They protect the profits of the established firm. Barriers to entry protect the profits of a monopoly firm because they keep the market in a state of monopoly. By preventing entry into the market, they also prevent competition In a monopoly market, there is just one seller or one dominant supplier, which means that - CORRECT ANSWERS the firm is the market With a single supplier, the firm having monopoly is the market. Because there is only one seller or dominant supplier in a monopoly market, firms are - CORRECT ANSWERS Price setters Being the only seller or dominant supplier in the market gives the monopolist the most power over price. The monopolist is therefore referred to as a price setter. What quantity (Q) will the profit-maximizing monopolist below produce, what price (P) will they charge, and how much will their profit or loss be? - CORRECT ANSWERS Q = 8 units P = $7,000 Profit = $24,000