Deck 11: Profit Maximisation Under Perfect Competition and Monopoly

Question 1

The fast food industry is not considered perfectly competitive because

A) the firms all produce an identical product.
B) the firm's products are differentiated.
C) entry and exit are strictly regulated by the government.
D) there are a very large number of firms.

Answer 1

the firm's products are differentiated.

Question 2

Which of the following is least likely to be considered a firm in an imperfectly competitive industry?

A) A Kentucky Fried Chicken outlet in Birmingham
B) British Telecom
C) A car repair garage in Sheffield
D) A wheat farmer in East Anglia

Answer 2

A wheat farmer in East Anglia

Question 3

Under perfect competition, super profits are competed away in the long run because

A) firms no longer maximise profits.
B) there are no barriers to entry.
C) firms are price- takers.
D) demand for their product will fall.
E) costs begin to rise.

Answer 3

there are no barriers to entry.

Question 4

The assumption of free entry implies that

A) a firm in monopolistic competition can never earn a profit.
B) firms will always earn a profit since new firms can enter the industry at any time they like.
C) the government regulates the number of firms that are allowed in an industry.
D) if firms in an industry are making excessively high profits, new firms are likely to enter the industry.

Question 5

The wool industry is a perfectly competitive industry. It is difficult for a wool producer to make excess profits because

A) the demand curve facing each wool producer is perfectly elastic.
B) of the assumption that wool producers in the industry do not 'differentiate' their products.
C) wool producers are 'price- takers'
D) of the assumption of free entry into the wool industry.

Question 6

The following diagram shows a perfectly competitive industry and firm.
The position shown is not a long- run equilibrium because

A) AR = MR
B) MC >AC
C) AR > AC at Q_e
D) D = AR

Question 7

The following diagram shows a perfectly competitive industry and firm. Initial supernormal profits have attracted new firms into the industry.
Q_L represents long- run equilibrium output of the firm because

A) LRAC = AR_L
B) S_e > S₁
C) P₁ > P_L
D) D₁ > D_L

Question 8

Which of the following statements does not refer to a characteristic of a perfectly competitive industry?

A) There is perfect information.
B) There are many relatively small firms.
C) The demand curve facing each firm slopes downward and to the right.
D) Firms produce identical products.
E) There is free exit from the industry.

Question 9

E- commerce is bringing more___________to the marketplace.

A) confusion
B) oligopoly
C) competition
D) dominance
E) monopoly

Question 10

Which one of the following is true for the marginal firm under perfect competition?

A) Whether it earns normal or supernormal profits in the SR and LR will depend on the conditions in that particular industry.
B) It can earn supernormal profits in both the SR and LR.
C) It can earn supernormal profits in the LR but only normal profits in the SR.
D) It can earn only normal profits in both the SR and LR.
E) It can earn supernormal profits in the SR but only normal profits in the LR.

Question 11

A 5- firm concentration ratio shows

A) the proportion of industries in the economy that have just five firms.
B) the size of the largest firm relative to the total size of the five largest firms.
C) the share of industry profits earned by the five largest firms.
D) the output of good X produced by the five largest firms, as a proportion of their total output of all types of goods.
E) the sales of the five largest firms, as a proportion of the total industry sales.

Question 12

The degree of competition in an industry can be calculated by measuring the

A) circulation ratio.
B) circulation denominator.
C) concentration ratio.
D) concentration numerator.

Question 13

The following diagram shows cost and revenue curves of a monopolist.
The firm will produce at an output where

A) MC = AR
B) MC = MR
C) MC = AC
D) MR = AC

Question 14

The following cost and revenue data apply to a monopolist. Start by identifying the missing figures.
Based on these figures, what is the profit- maximising output?

A) 5 units
B) 3 units
C) 2 units
D) 4 units
E) 1 unit

Question 15

For a natural monopolist, fixed costs are very , while marginal costs are relatively

A) low; low
B) high; low
C) high; high
D) low; high

Question 16

If a firm experiences lower average costs of production as a consequence of producing a range of products, the firm is experiencing

A) optimisation.
B) diversification.
C) modernisation.
D) economies of scope.
E) network economies.

Question 17

In June 2000 a US Federal Judge ruled that Microsoft should be split into two in order to

A) achieve economies of scale.
B) prevent it operating as a monopoly.
C) improve the stability of the Windows operating system.
D) increase product development.
E) create more employment.

Question 18

You live in a small town where there is only one Indian restaurant. The next Indian restaurant is 30 miles away. Is the Indian restaurant in your town a monopoly?

A) No, because there are Indian restaurants in other towns.
B) Yes, because the demand curve facing the Indian restaurant is downward- sloping.
C) No, because there are close substitutes for the Indian restaurant such as other restaurants in town and Indian food sold in the local supermarket.
D) Yes, because it is the only Indian restaurant in the town.

Question 19

Which of the following statements is false?

A) Participants in a contestable market are continually faced with competition or the threat of competition because entry is cheap.
B) In a contestable market with very few competitors market forces will guarantee that the firms produce efficiently or be driven out of business.
C) For a market to be contestable the product must be produced with a labour- intensive technology.
D) In a contestable market economic profits cannot persist in the long run.

Question 20

The bus service to the areas where you live is

A) highly contestable.
B) moderately contestable.
C) not contestable.
D) slightly contestable.

Question 21

Which of the following statements about contestable markets is false?

A) The higher the entry costs to the industry, the greater the threat of competition.
B) If there is potential competition, a monopolist may be forced to behave as if it were in a competitive market.
C) The lower the exit costs from the industry, the greater the threat of competition.
D) The threat of competition has a similar effect to actual competition.
E) Monopolies may remain because of economies of scale and the size of the market.

Question 22

Monopolies may become inefficient without competitive pressure resulting in higher costs. This is sometimes called

A) X axis.
B) ex ante.
C) X inefficiency.
D) X factor.

Question 23

How would you classify the market for parcels delivery?

A) Slightly contestable
B) Moderately contestable
C) Highly contestable
D) Not contestable

Question 24

Perfect competition exists in an industry that contains many relatively small firms producing identical products with profit- maximising prices equal to the respective marginal costs of products.

Question 25

The type of product sold is a key difference between a perfectly competitive industry and a monopolistically competitive industry.

Question 26

Under perfect competition, a firm will increase output if marginal cost is less than price.

Question 27

A firm in long- run equilibrium is also in short- run equilibrium.

Question 28

Concentration ratios are a good guide to the degree of competition when an industry competes with overseas suppliers.

Question 29

A monopolist will always sell in the inelastic portion of its demand curve.

Question 30

If entry and exit are not costless, a monopoly can still make supernormal profits in the long run.

Question 31

Economies of scope occur when a firm's average costs are lower because it produces a range of products.

Question 32

For a firm to be a natural monopoly, economies of scale must be realised at a scale that is close to total demand in the market.

Question 33

The efficient regulatory solution for a natural monopoly is to set price equal to average cost and allow the monopolist to earn a normal return.

Question 34

If a natural monopoly is broken up into smaller competing firms, the price of the product will increase because the smaller competing firms will face higher average costs of production than the natural monopolist.

Question 35

In a contestable market, the threat of competition will be greater the lower the entry costs to the industry.

Question 36

Under contestable theory, it is not the number of firms that is the most important factor.

Question 37

Assume the wool industry is a perfectly competitive industry. Why is it difficult for a wool producer to make excess profits as implied by the assumptions of perfect competition?

Question 38

What is supernormal profit?

Question 39

What is the connection between perfect competition and the public interest?

Question 40

Why is perfect competition incompatible with achieving substantial economies of scale?

Question 41

Explain the four decisions that must be made by a firm that has market power, i.e. a monopolist.

Question 42

What are some of the causes of barriers to entry?

Question 43

What are the main disadvantages and advantages of monopoly?

Question 44

What are concentration ratios?

Question 45

What are contestable markets?

Question 46

What is 'hit and run' competition?

Question 47

Why is costless exit so important in a contestable market?