Deck 5: Market Structure and Firm Performance

Question 1

In a perfectly competitive market, the typical ?rm cannot affect the price of its output because _____.

A) it cannot change its costs
B) it cannot access wider markets
C) its products are highly differentiated
D) it faces a horizontal demand curve

Answer 1

it faces a horizontal demand curve

Question 2

It may not be possible for ?rms to produce at the point where marginal pro?t is equal to zero when _____.

A) ?xed costs are negligible
B) labour unions are highly in?uential
C) the ?nal product is not divisible
D) capacity utilization is high

Answer 2

the ?nal product is not divisible

Question 3

When price equals £4, 250 units of a good are demanded, but when the price is reduced to £3, 400 units are demanded. The revenue gained from decreasing the price is _____.

A) £200
B) £1200
C) £1000
D) £500

Answer 3

£200

Question 4

A pro?t-maximizing ?rm will increase its output if _____.

A) the demand for a substitute good increases
B) its revenues increase as it expands to wider markets
C) the government imposes a tariff on a raw material that it imports
D) labour unions force the management to increase wages

Question 5

Ash Ltd. produces commercial glass using silica as a raw material. Assuming that the ?rm wants to maximize pro?ts, when the price of silica falls, the ?rm will _____.

A) shut down production completely
B) continue to produce the same level of output
C) use substitutes for silica in production
D) increase the level of output produced

Question 6

If price of a product equals £5 and 300 units are sold, then average revenue is equal to _____.

A) £1500
B) £5
C) £60
D) £295

Question 7

Which of the following is likely to be true of a product that has a large number of substitutes?

A) Its income elasticity is likely to be zero.
B) It is likely to be highly price elastic.
C) It will be highly valued because of its exclusivity.
D) Its cost of production is likely to be low.

Question 8

A pro?t-maximizing ?rm will produce a level of output where:

A) average cost is equal to marginal revenue.
B) price is greater than marginal revenue.
C) marginal revenue is equal to marginal cost.
D) price is equal to average cost.

Question 9

One of the assumptions of perfect competition is that:

A) each ?rm in the market has some, but not complete, control over the price of its product.
B) there are no barriers to entry or exit in the market.
C) there are many producers producing different products.
D) ?rms in the market advertise in order to shift the demand curve for their product.

Question 10

Suppose that the demand curve facing XYZ Co. slopes downward. This implies that the ?rm:

A) has very low marginal and average costs.
B) can sell all that it wants at the established market price.
C) must lower its price to sell additional units of output.
D) faces perfectly inelastic demand for its product.

Question 11

The banking industry can be considered oligopolistic because it has _____.

A) a large number of buyers and sellers
B) a small number of large ?rms
C) very few buyers
D) a large number of sellers but only one buyer

Question 12

500 units of a product are demanded when the price for a product is £5. When the price increases to £6, only 400 units of the product are demanded. The revenue lost from increasing the price is:

A) - £100.
B) - £500.
C) - £400.
D) £600.

Question 13

Which of the following is true for marginal revenue and total revenue?

A) The marginal revenue curve is upward sloping while the total revenue curve is a straight line.
B) The total revenue curve is the inverse of marginal revenue curve.
C) Marginal revenue is equal to total revenue divided by the total number of units produced.
D) Total revenue is at its maximum when marginal revenue is zero.

Question 14

A ?rm increases the price of its product from £6 to £8. If it sells 800 units following the price increase, what is its total revenue?

A) £4800
B) £1600
C) £6400
D) £8000

Question 15

A ?rm is producing an output of 500 units. The revenue from an additional unit sold is £6, while the marginal cost of producing each unit is £5. In order to maximize pro?ts, the ?rm should:

A) reduce the number of units produced.
B) continue to produce the same number of units.
C) increase output beyond 500 units.
D) reduce its variable costs.

Question 16

When there is a large number of buyers and sellers in a market, _____.

A) there will be perfect information in the market
B) an individual seller or buyer cannot affect the market price
C) all the sellers will produce differentiated products
D) there are barriers to the entry and exit of ?rms

Question 17

When marginal cost is equal to marginal revenue, _____.

A) the market is perfectly competitive
B) pro?ts are maximized
C) average costs are minimized
D) revenues are maximized

Question 18

One of the features of a perfectly competitive ?rm is that _____.

A) the product is homogeneous
B) the demand curve is upward sloping
C) the market price equals average total cost
D) economic pro?ts will always be positive in the long run

Question 19

Small service sector industries are considered imperfectly competitive because:

A) the products and services they produce are differentiated.
B) ?rms can freely enter and exit the market.
C) there is a large number of players in the market.
D) the number of buyers in the market is very large.

Question 20

Since a competitive ?rm faces a perfectly inelastic demand curve, _____.

A) it earns supernormal economic pro?ts
B) it is a price setter
C) it cannot control the market price
D) it earns positive economic pro?t but zero economic pro?t

Question 21

For a ?rm to be considered a monopoly, it must _____.

A) take as given the price of the product that is established in the market
B) be the only buyer of a factor of production
C) be the only producer of a good for which there are no close substitutes
D) face only a few competitors that produce similar, but not identical, products

Question 22

Which of the following is likely to act as a barrier to entry in a monopoly market?

A) The monopoly ?rm makes normal economic pro?ts.
B) The monopoly ?rm owns a patent on the good.
C) The number of buyers in the market is large.
D) The good produced by the monopolist is perishable.

Question 23

In perfect competition, a ?rm's _____.

A) average revenue equals average cost
B) total revenue equals total ?xed cost
C) price equals marginal revenue
D) average cost equals price

Question 24

Firms are likely to enter a competitive industry when _____.

A) the market price of the good is low
B) existing ?rms are making supernormal pro?ts
C) the ?xed cost of production is high
D) the costs of economic factors of production are high

Question 25

If a ?rm experiences such signi?cant economies of scale that the market can support only one ?rm, the ?rm is best described as a(n) _____.

A) oligopolist
B) perfectly competitive ?rm
C) natural monopoly
D) monopolistically competitive ?rm

Question 26

What will happen in a perfectly competitive market if there is an increase in the cost of labour, ceteris paribus?

A) Firms will now make supernormal pro?ts that will attract new entrants to the market.
B) The short-run average total cost curve will shift upward reducing ?rms' pro?ts.
C) The supply curve will shift to the right reducing prices in the market further.
D) The average revenue curve will shift upward by the extent of the increase in labour costs.

Question 27

Which of the following is true of supernormal pro?ts?

A) When the costs of all the factors of economic production are greater than revenues, ?rms earn supernormal pro?ts.
B) As long as there are no barriers to entry, a ?rm in an industry can continue to earn
C) Supernormal pro?ts are ?nancial returns greater than normal pro?ts.
D) In the long run, perfectly competitive ?rms earn supernormal pro?ts.

Question 28

When a perfectly competitive ?rm is in equilibrium in the long run, _____.

A) average cost must be lesser than marginal revenue
B) average cost must be greater than marginal revenue
C) average cost must be equal to marginal revenue
D) marginal revenue must be greater than price

Question 29

In the short run, a perfectly competitive ?rm is minimizing losses at an output of 250 units. If the market price is £5 and the average cost is £8 per unit, what is the ?rm's total loss?

A) £750
B) £2000
C) £1250
D) £400

Question 30

A ?rm is productively e?cient in the long run if _____.

A) its marginal cost equals marginal revenue
B) its minimum average variable cost and minimum average total cost curves coincide
C) its minimum average ?xed cost and minimum average total cost curves coincide
D) it produces output at the level where average total cost is minimum

Question 31

A competitive ?rm will make losses when _____.

A) its short-run average total cost is above the market price
B) its ?xed cost is positive but variable costs are negligible
C) the market price is above marginal cost
D) total revenue is greater than total costs

Question 32

_____ is equal to revenues less raw material costs, wages and depreciation.

A) Accounting pro?t
B) Economic pro?t
C) Surplus value
D) Supernormal pro?t

Question 33

In the short run, a perfectly competitive ?rm maximizes pro?ts by producing 500 units of output at a price of £10 per unit and an average cost of £8 per unit. What is the total pro?t earned by the ?rm?

A) £400
B) £2
C) £1000
D) £5000

Question 34

A competitive ?rm is said to be allocatively e?cient if _____.

A) it earns supernormal pro?ts
B) its price equals marginal cost
C) its marginal cost equals average cost
D) its average cost is minimum

Question 35

Which of the following is true for a perfectly competitive ?rm in the long run?

A) There are barriers to entry and exit in the long run.
B) In the long run, price is greater than marginal revenue.
C) Firms make normal pro?ts in the long run.
D) The long-run supply curve is horizontal.

Question 36

A pro?t-maximizing ?rm is producing an output of 300 units where price is £10 per unit and average total cost is £8 per unit. Given that the ?rm operates in a perfectly competitive market, which of the following is likely to be true?

A) The ?rm will stop production and exit the market.
B) The ?rm will sell each unit of the product at a higher price.
C) The market supply curve will shift to the right.
D) The existing ?rms will exit the industry.

Question 37

In the short run, a competitive ?rm will maximize pro?ts by expanding output when _____.

A) average total cost is greater than price
B) marginal cost is greater than price
C) price is greater than marginal cost
D) price is greater than average total cost

Question 38

Normal economic pro?ts are:

A) the same as positive accounting pro?ts.
B) the average rate of return which can be gained in the economy.
C) positive for a competitive ?rm in the long run.
D) revenues less raw material costs, wages and depreciation.

Question 39

Suppose a perfectly competitive ?rm is making supernormal pro?ts. What is likely to happen in the long run?

A) The ?rm will have to shut down production.
B) The ?rm can increase its supernormal pro?ts if it increases its output.
C) The ?rm will continue to make supernormal pro?ts.
D) New entrants will compete away the ?rm's supernormal pro?ts.

Question 40

In the long run, the supply curve for a perfectly competitive industry:

A) will shift to the right if new ?rms enter the industry.
B) is the sum of all individual ?rms' average total cost curves.
C) is horizontal at the market price.
D) is the same as the marginal cost curve over all levels of output.

Question 41

The concept of the threat from substitutes in Porter's ?ve forces model can be likened to the assumption of _____.

A) homogeneous products in perfect competition
B) a large number of buyers and sellers in perfect competition
C) product differentiation in monopolistic competition
D) collusion among competitors in an oligopoly

Question 42

For a monopoly ?rm, the vertical distance between the demand curve and average cost curve _____.

A) gives the per unit pro?t at that level of output
B) gives the total value of the pro?t earned by the ?rm
C) is maximized when the price charged by the ?rm equals the average ?xed cost of producing the last unit
D) is equal to the vertical distance between the ?rm's total cost and total revenue curve at

Question 43

An important difference between a perfectly competitive market and a monopoly is that:

A) the demand curve facing a monopoly is horizontal, while the demand curve facing a competitive ?rm is upward sloping.
B) a monopoly ?rm is a price taker, while a perfectly competitive ?rm is a price setter.
C) a perfectly competitive ?rm makes supernormal pro?ts, while a monopoly ?rm makes zero pro?ts.
D) market price is not equal to marginal cost in a monopoly, while for a perfectly competitive

Question 44

What is meant by the Coase conjecture?

A) Firms in perfectly competitive markets are unable to retain their competitive advantage since products are homogeneous.
B) A monopoly that sells durable goods competes with itself and so is no longer a monopoly.
C) Firms in perfectly competitive markets are unable to cover their high ?xed costs.
D) A monopoly ?nds it di?cult to sustain its supernormal pro?ts as there are no barriers to

Question 45

_____ occurs when a new entrant out-competes incumbent companies by virtue of being innovative.

A) Economies of scope
B) Creative destruction
C) Intra-brand competition
D) Market failure

Question 46

Unlike a perfectly competitive ?rm, a monopolist:

A) charges a price that is equal to marginal cost.
B) faces a perfectly elastic demand curve.
C) has no market power.
D) makes supernormal pro?ts in the long run.

Question 47

The French service station industry's ability to generate pro?ts is constrained due to _____.

A) the small number of buyers in the market
B) the high bargaining power of suppliers
C) a very minimal threat of substitute products
D) high restrictions for new entrants in the industry

Question 48

A monopoly is producing 1000 units of output at a price of £20. At that level of output, marginal cost is £5 and average cost is £8. The monopoly ?rm is earning pro?t equal to _____.

A) £20 000
B) £15 000
C) £7000
D) £12 000

Question 49

It is possible for a monopolist to be more e?cient than a perfectly competitive ?rm if _____.

A) the monopolist charges a higher price for its output than does the competitive ?rm
B) the monopolist's marginal cost curve lies below that of the competitive ?rm
C) the monopolist offers a lower level of output for sale than does the competitive ?rm
D) the monopolist practices price discrimination

Question 50

Which of the following drivers of competition in Porter's ?ve forces model is similar to the assumption in perfect competition that there are many buyers and sellers in the market?

A) Threat of entry.
B) Homogeneous products.
C) Perfect information among buyers and sellers.
D) Buying power of customers and suppliers.

Question 51

Which one of the following correctly identi?es a characteristic of a monopolistic market?

A) A monopolist maximizes pro?t at the point where price = marginal cost.
B) A monopolist will always earn supernormal pro?ts.
C) A monopoly ?rm faces a perfectly elastic demand curve.
D) There is no excess capacity in a monopoly.

Question 52

Which of the following strategies is adopted by discount airlines to overcome the problem of high ?xed costs?

A) Utilizing popular airports that have high landing fees.
B) Increasing the number of stopover destinations for each ?ight.
C) Utilizing hub-and-spoke operations.
D) Flying point-to-point between small regional airports.

Question 53

Monopolies may not be interested in exploiting economies of scale because:

A) they have to sell goods at the market price.
B) they cannot control supply in the market
C) they do not have any competitors.
D) they earn normal economic pro?ts in the short run.

Question 54

International carriers do not make huge pro?ts as compared to domestic airlines because:

A) they incur very high ?xed costs.
B) the demand for international ?ights is low.
C) they utilize hub and spoke operations.
D) they are natural monopolies.

Question 55

For a monopoly, the demand curve _____.

A) is highly responsive to price changes
B) lies below the marginal revenue curve
C) intersects the average total cost curve at its minimum point
D) is the same as the market demand curve

Question 56

If a competitive market becomes a monopoly, _____, other things unchanged.

A) the price in the market will be higher
B) the number of buyers in the market will increase
C) the equilibrium quantity of output will increase
D) the level of e?ciency in the market will increase

Question 57

Which of the following factors can correctly explain why supermarkets have emerged as successful retailers of fuel in the French service station industry?

A) There are a very large number of buyers in the market for fuel.
B) Switching costs in the fuel market are very low.
C) Supermarkets have negotiating power over fuel suppliers due to their size.
D) Fuel is a highly differentiated product.

Question 58

The difference between the price and marginal cost is a measure of a ?rm's _____.

A) labour productivity
B) e?ciency in production
C) monopoly power
D) capital usage

Question 59

If a ?rm's marginal revenue is less than price at all levels of output, this means that _____.

A) it must lower its price to sell an additional unit of output
B) it is a price taker in the market
C) there are no barriers to entry and exit in the market
D) there are a large number of buyers and sellers in the market

Question 60

Which of the following is true of the average and marginal revenue for a monopoly ?rm?

A) The monopolist's marginal revenue curve is the same as the average revenue curve.
B) The monopolist's marginal revenue bears a constant relationship with average revenue.
C) The monopolist's marginal revenue falls at a faster rate than average revenue.
D) Marginal revenue is greater than average revenue for the monopolist.

Question 61

Total revenue starts falling when marginal revenue is positive but falling.

Question 62

Profits earned in a monopoly are greater than that in a perfectly competitive market.

Question 63

At the profit-maximizing output level, marginal profit will be maximum.

Question 64

If a firm faces a horizontal demand curve, it is operating in an imperfectly competitive market.

Question 65

The demand line and the marginal revenue line are essentially the same.

Question 66

In reality, it is difficult to find true monopolies, but there are many examples of perfectly competitive markets.

Question 67

If marginal cost is greater than marginal revenue, a firm should expand its output in order to maximize profits.

Question 68

When a competitive firm's short-run average total cost is lower than price in the short run, it earns supernormal profits.

Question 69

The UK competition authorities define a monopoly as a market structure where only one firm supplies the market.

Question 70

When marginal revenue is greater than marginal cost, each additional unit sold generates a positive profit and adds to overall profits.

Question 71

Since a kebab is a homogeneous product, the price of a kebab is likely to be almost the same as the marginal cost of producing a kebab.

Question 72

Supernormal profits are the profits earned over and above normal economic profits.

Question 73

A firm is allocatively efficient if its price equals the minimum long-run average cost of production.

Question 74

In a perfectly competitive market, resources are assumed to be completely mobile.

Question 75

In a perfectly competitive market, both buyers and sellers take price as given.

Question 76

The marginal revenue curve is downward sloping.

Question 77

Marginal profit is the profit made on each unit produced and is zero when marginal revenue is less than marginal cost.

Question 78

A good that has limited substitutes has relatively inelastic demand.

Question 79

The supermarket industry, where the goods or services produced are differentiated, is an example of imperfect competition.

Question 80

The absence of barriers to entry and exit in a perfectly competitive market allows firms to make supernormal profits in the long run.