Deck 6: Competition

Question 1

Which of the following is the closest to being a perfectly competitive market in the United States?

A) Freshly brewed coffee
B) Airline travel
C) Computer hardware
D) Fast-food restaurants
E) Cell phone service

Answer 1

Freshly brewed coffee

Question 2

As competitors enter a market, demand becomes more ____, meaning the demand curve shifts ____ and becomes ____.

A) inelastic; in; steeper
B) inelastic; out; flatter
C) elastic; in; flatter
D) elastic; in; steeper
E) elastic; out; flatter

Answer 2

elastic; in; flatter

Question 3

Most economists like perfect competition because

A) it raises profits.
B) it reduces the role of government in providing public goods.
C) economists appreciate perfect systems.
D) it results in economic efficiency.
E) none of these; economists do not like perfect competition.

Answer 3

it results in economic efficiency.

Question 4

A perfectly competitive market is characterized by

A) large numbers of producers of differentiated products.
B) large numbers of producers of commodities with barriers to entry.
C) small numbers of producers of commodities with ease of entry.
D) large numbers of producers of commodities with ease of entry.
E) none of these.

Question 5

When perfectly competitive firms produce at a quantity where marginal revenue equals marginal costs, they are

A) minimizing profits.
B) maximizing output.
C) employing resources until the extra cost of producing the last unit just equals the price of that unit.
D) employing more people and expanding total output in the process.
E) operating at a loss.

Question 6

A product is turned into a commodity when

A) there is only one seller of a product
B) there is no more incentive for new businesses to enter
C) there is product differentiation
D) economic profits can be earned
E) consumers perceive the product to be differentiated

Question 7

More competitors will increase the market supply, thus

A) creating larger barriers to entry.
B) making demand more elastic.
C) contributing to creative destruction.
D) resulting in lower prices.
E) causing demand to increase.

Question 8

The results of competition will be different depending on

A) the type of product being produced.
B) the size of the largest firm.
C) whether rivals can enter the business.
D) how consumers utilize a product.
E) the season of the year.

Question 9

"Creative destruction" is:

A) always easy and fast
B) the process of competition where the inefficient producers are driven out of business
C) exemplified by farms being replaced by golf courses and resorts
D) one reason for the decrease in consumer buying power
E) when one firm is taken over by another

Question 10

All of the following are characteristics of the market for a commodity product except

A) economic profit is zero.
B) price is driven down to just equal opportunity costs.
C) consumers perceive the goods to be identical no matter who supplies them.
D) entry by new firms is easy.
E) All of these are characteristics of a market for a commodity product.

Question 11

Which of the following is most likely to be a monopoly market in the United States?

A) Retail clothing
B) Patented pharmaceuticals
C) Mobile telephone service
D) Automobile manufacturing
E) College textbook manufacturing

Question 12

Competition benefits individuals because

A) Firms must continually work to improve their products.
B) Technology continually improves.
C) Consumers get the goods and services at the lowest possible price.
D) Resources are allocated to their highest-valued use.
E) All of these are true of competition.

Question 13

A monopolist will earn

A) normal profit in the short run.
B) normal profit in the long run.
C) positive economic profit as long as entry is blocked.
D) less profit than if it were monopolistically competitive.
E) greater economic profit as entry becomes available.

Question 14

Which of the following is least likely to be a monopolistically competitive market in the United States?

A) Farmers' Markets held one or two mornings a week in parking lots around town
B) Patented pharmaceuticals
C) Mobile telephone service
D) Automotive manufacturing
E) Fast food restaurants

Question 15

A monopolistically competitive firm will maximize profits where

A) MR = MC.
B) P = MR.
C) MR + MC = 0.
D) TR- TC = MC.
E) MC - MR = P.

Question 16

The demand curve facing a perfectly competitive firm is

A) the market demand
B) vertical
C) horizontal
D) unit elastic
E) more inelastic than for a firm in monopolistic competition

Question 17

Monopoly is a market structure characterized by

A) one producer with ease of entry.
B) few producers vying to become the sole supplier to the market.
C) many producers but one dominant firm.
D) one producer and entry by other firms is not possible.
E) one producer of something that the government requires everyone to purchase.

Question 18

A price taker is

A) an individual seller in a commodity market
B) a monopoly firm
C) the electric company as their rates are set by the Public Utilities Commission
D) a firm that has a brand name
E) a firm that enjoys positive economic profits

Question 19

Competition is exemplified by:

A) Walmart offers lower prices due to its economies of scale.
B) Nordstrom focuses on superior customer service.
C) Sharper Image attempts to be the first to offer a product.
D) Apple focuses on innovation and offers products that others do not have.
E) All of these are examples of competition.

Question 20

A brand new store, Billy's Boards, opens and business takes off. We would expect:

A) Billy's Boards to be in business for a very long time.
B) new firms will enter the board business.
C) the price for Billy's Boards products will increase.
D) people will change their preferences to boarding.
E) government to investigate this new business.

Question 21

Over time, the only way firms can continue to earn positive economic profits is

A) with government control over price.
B) hire top entrepreneurs.
C) if other firms cannot copy the unique aspects of the firm's product or service.
D) by reducing diseconomies of scale.
E) through increased competition.

Question 22

Free entry into a market will result in

A) profits in the long run.
B) zero economic profits in the long run.
C) uncontrolled competition requiring government intervention.
D) economic profits from interdependence.
E) none of these.

Question 23

Assume that the firm described in Table 6.1 is incurring a loss at the profit-maximizing output level. In the short run, the firm will

A) shut down temporarily because fixed costs are being paid for.
B) go out of business because bankruptcy is certain.
C) increase the price of its product.
D) produce at the profit-maximizing output level if the price exceeds average fixed cost.
E) produce at the profit-maximizing output level if the price exceeds average variable cost.

Question 24

Which of the following is not a signal of information that consumers associate with a specific firm?

A) The name on a bottle of Paul Mitchell hair styling product
B) Television
C) The Calvin Klein name on jeans
D) The Nike name on shoes
E) The golden arches

Question 25

Figure 6.1

Refer to Figure 6.1. Given MR₂, what is total revenue if the firm produces 60 units and the lowest point of the average-total-cost curve is $4?

A) $240
B) $300
C) $400
D) $440
E) The amount cannot be determined from the information given.

Question 26

Because of their brand names, Apple, Sony, BMW, Mercedes-Benz, and other well-known firms are able to charge significantly higher prices for their products than their competitors without losing any business. Expenditures made by firms to create brand names

A) are always inefficient.
B) provide information to consumers.
C) lead to monopolies.
D) leads to advertising wars.
E) would not exist if information were less costly for firms than consumers to obtain.

Question 27

If, at the current level of output, the extra revenue received from producing and selling the last unit of output is less than the extra cost of producing that output, the firm should

A) expand rapidly.
B) expand cautiously.
C) do nothing.
D) reduce output to the point where the extra revenue is less than the extra cost.
E) reduce output to the point where the extra revenue just equals the extra cost.

Question 28

If a firm is producing at a point where marginal revenue is greater than marginal cost, it should

A) continue producing at the current level.
B) raise its prices.
C) lower its prices.
D) increase the level of production.
E) decrease the level of production.

Question 29

The more differentiated a firm's product, the more

A) elastic the firm's demand curve.
B) elastic the firm's supply curve.
C) inelastic the firm's demand curve.
D) inelastic the firm's supply curve.
E) the demand curve shifts right.

Question 30

In the long run, if a perfectly competitive firm is incurring an economic loss, the firm

A) is earning greater than normal profit but not an economic profit.
B) will minimize opportunity costs by staying in business.
C) will have some long-run fixed costs.
D) will leave the industry.
E) will produce as long as total revenue exceeds total fixed cost.

Question 31

Assume that the firm described in Table 6.1 is earning a normal profit at the profit-maximizing output level. The firm will

A) go out of business immediately.
B) increase the price of its product.
C) produce at the profit-maximizing output level in both the short run and the long run.
D) produce at the profit-maximizing output level in the short run and shut down in the long run.
E) produce at the profit-maximizing output level in the short run and go out of business in the long run.

Question 32

Figure 6.1

Refer to Figure 6.1. Given MR₂, what is total cost at the profit-maximizing quantity if the lowest point of the average-total-cost curve is $4?

A) $50
B) $60
C) $120
D) $200
E) The amount cannot be determined from the information given.

Question 33

Assume that the firm described in Table 6.1 is incurring a total cost of $25,000 at the profit-maximizing output level. The firm will

A) lose $10,000 in the short run.
B) break even.
C) earn a profit of $3,000.
D) earn a profit of $30,000.
E) earn a profit of $55,000.

Question 34

Economic profits are earned

A) when price is less than average total cost.
B) when price exceeds average total cost.
C) by perfectly competitive firms in the long run.
D) when marginal revenue equals marginal cost.
E) when price exceeds average sunk cost.

Question 35

Assume that the firm described in Table 6.1 is incurring a loss at the profit-maximizing output level. In the long run, the firm will

A) produce more than the profit-maximizing output level.
B) go out of business.
C) increase the price of its product.
D) produce at the profit-maximizing output level if the price exceeds average fixed cost.
E) produce at the profit-maximizing output level if the price exceeds average variable cost.

Question 36

What price will be charged by the profit-maximizing firm described in Table 6.1 if the firm is earning a positive economic profit?

A) $15
B) $14
C) $13
D) $11
E) $10

Question 37

Individual sellers in a commodity market are called

A) price takers
B) price makers
C) profit-maximizers
D) monopolistic competitors
E) oligopolists

Question 38

One could argue that advertising

A) creates diseconomies of scale.
B) creates barriers to entry.
C) is a waste of resources.
D) makes demand curves more elastic.
E) enables firms to take advantage of diseconomies of scale.

Question 39

Figure 6.1

Refer to Figure 6.1. Given MR₁, what is total revenue if marginal cost at the profit-maximizing quantity is $2?

A) $50
B) $60
C) $80
D) $100
E) The amount cannot be determined from the information given.

Question 40

In the long run, if a perfectly competitive firm cannot cover its costs, the profit-maximizing firm will

A) continue to produce as long as total revenue exceeds total fixed cost.
B) continue to produce as long as total revenue exceeds total variable cost.
C) continue to produce to maximize its opportunity costs.
D) seek more rewarding opportunities in some other industry.
E) increase output and lower price.

Question 41

The disappearance of jobs for secretaries and telephone operators are examples of

A) creative destruction.
B) producer loss.
C) diseconomies of scale.
D) mutual synthesis.
E) creative license.

Question 42

Creative destruction is the process by which

A) competition ends and monopolies are started.
B) environmental principles are replaced by market discipline.
C) deadweight loss is destroyed.
D) old, inefficient products are driven out of business.
E) all of these occurs.

Question 43

Successful product differentiation ____ the price elasticity of demand and gives the firm ____ ability to control its price.

A) reduces; more
B) increases; more
C) increases; less
D) reduces; less
E) Successful product differentiation has no effect on price elasticity of demand or ability for the firm to set its price.

Question 44

If firms could not advertise their products in any way other than to present the physical characteristics and facts pertaining to the product,

A) consumers would benefit by lower prices.
B) producers would benefit because they would not have to compete.
C) brand names would disappear.
D) consumers would bear the additional costs of learning those characteristics of the product that were described in the image advertising.
E) nothing would change.

Question 45

An example of a firm with high sunk costs is

A) the local electric company
B) United-Continental Airlines
C) Nike
D) Costco
E) all of these firms have high sunk costs

Question 46

What distinguishes monopolistic competition from perfect competition?

A) The number of firms
B) The ease of entry and exit
C) The difficulty new firms have in entering monopolistic competition as compared with perfect competition.
D) In monopolistic competition each firm sells a slightly different or unique product; that is not the case in perfect competition.
E) In perfect competition each firm sells a slightly different or unique product; that is not the case in monopolistic competition.

Question 47

Product differentiation

A) separates monopolistically competitive firms from perfectly competitive firms.
B) means the firm has an elastic demand curve.
C) allows the firm to raise its price without losing all of its customers.
D) is often accomplished through advertising or trivial product changes.
E) All of these choices

Question 48

Barriers to entry take the form of

A) Creating a brand name
B) Sunk costs
C) Unique Resources
D) Economies of scale
E) All of these are barriers to entry

Question 49

Because consumers often possess incomplete information in markets,

A) gaining information about products itself may be costly.
B) brand names provide valuable information to consumers about the quality of products.
C) firms often provide information through marketing.
D) guarantees can help to increase consumer confidence in a product.
E) All of these choices

Question 50

As new firms enter a monopolistically competitive industry, the demand facing a typical firm will most likely

A) increase and become less elastic.
B) decrease and become more elastic.
C) increase and become more elastic.
D) decrease and become less elastic.
E) not change.

Question 51

When economists discuss product differentiation, they are referring to

A) the cost structures of firms.
B) the diseconomies of scale.
C) the supply curves of firms.
D) the profit-maximizing level of output.
E) consumer perceptions of products.

Question 52

A firm can gain monopoly power by

A) creating a brand name
B) raising the cost to rivals for entering the business
C) seeking government's help
D) controlling unique resources
E) all of these are ways of gaining monopoly power.

Question 53

Compared with a perfectly competitive market, a monopolistically competitive firm's demand curve is

A) downward sloping.
B) more elastic.
C) horizontal.
D) upward sloping.
E) less elastic.

Question 54

What characteristic is unique to oligopolistic firms?

A) Barriers to entry in the market
B) Interdependence of firms
C) Homogeneous products
D) Economic profits can exist in the long run.
E) Economic profits can exist in the short run.

Question 55

Most televisions produced today no longer include hardware for playing VHS tapes. This is an example of

A) creative destruction.
B) consumer loss.
C) monopoly control.
D) new technology.
E) government mandate.

Question 56

Which of the following is not an example of nonprice competition?

A) Advertising
B) Quality improvements
C) Salespersonship
D) Location
E) Price discounts

Question 57

What is an assumption of the model of monopolistic competition?

A) There are only a few firms in the industry.
B) Each firm sells an identical product.
C) There are significant barriers to entry in the market.
D) Consumers lack adequate information about the prices and qualities of products.
E) None of these choices.

Question 58

In an oligopoly market,

A) many firms produce differentiated products.
B) one firm dominates the market.
C) easy entry is one of its characteristics.
D) a few firms dominate market.
E) the other firms' demand curves are not affected by a large firm's behavior change.

Question 59

Any time firms in monopolistic competition are earning above-normal profit,

A) new firms enter the market, and entry continues until firms are earning normal profit.
B) new firms have no incentive to enter the market.
C) new firms have incentive to enter the market but are legally barred from doing so.
D) they can maintain those levels indefinitely.
E) their cost structure automatically shifts up, eliminating the additional profit.

Question 60

Consumers are willing to pay a higher price for a brand-name product as opposed to a generic product because

A) a brand name provides a signal about a product's quality and reliability.
B) they are willing to pay more for the privilege of watching the firm's commercials.
C) a brand-name product itself is always of higher quality.
D) consumers maximize utility by purchasing the most expensive products.
E) consumers are irrational.

Question 61

Which of the following products would most likely not be produced in a perfectly competitive market structure?

A) Wheat.
B) Airplanes.
C) Potatoes.
D) Apples.
E) All of these would be produced in a perfectly competitive market structure.

Question 62

According to the payoffs in Table 6.2,

A) Firm A will advertise, no matter what, if Firm B does not advertise.
B) Firm A will advertise only if Firm B advertises.
C) Firm A has a dominant strategy but Firm B does not.
D) Firm B has a dominant strategy but Firm A does not.
E) both firms have a dominant strategy of not advertising.

Question 63

Mike is about to start up a business in a monopolistically competitive market. He can expect to find entry into the market to be ____, the number of competitors to be ____, and the product he sells to be ____.

A) easy; very large; nondifferentiated
B) difficult; very large; differentiated
C) easy; relatively few; nondifferentiated
D) impossible; relatively few; differentiated
E) easy; large; differentiated

Question 64

When a cartel is successful,

A) it offers consumers the lowest possible prices.
B) it minimizes profits for its members.
C) it behaves as a monopolist in the market.
D) it has no effective mechanism for enforcing agreements.
E) it will always be stable.

Question 65

The policy used by Mexican government officials to force mergers to create larger companies and appoint their friends to head them is called

A) capitalism.
B) semicapitalism.
C) quasi capitalism.
D) crony capitalism.
E) None of these

Question 66

Firms operating in a perfectly competitive market are price takers because

A) they have a lot of market power.
B) in the market there are many firms, it's easy to enter, and the firms produce identical product.
C) they choose to set a price that differs from the market price but do not lose profit.
D) they choose to set a price that differs from the market price in order to gain market share.
E) in a perfectly competitive market, price is dictated through various government agencies.

Question 67

In oligopoly

A) firms never cooperate.
B) one firm always wants to destroy the rival firms.
C) a firm does not need to consider the reactions of the rival firms.
D) firms may act jointly to make more profits.
E) None of these choices.

Question 68

A most-favored customer is one who

A) buys the most of a firm's product.
B) is a relative of the owner of the firm.
C) is given a guarantee of receiving the lowest price.
D) spends the most money.
E) None of these

Question 69

Perfect competition, monopoly, monopolistic competition, and oligopoly are all examples of

A) ceteris paribus assumptions.
B) real-world situations that firms face.
C) market structure models.
D) markets with positive economic profits.
E) voodoo economics.

Question 70

Which of the following is not a characteristic of monopolistic competition?

A) Differentiated products
B) A downward-sloping demand curve for individual firms
C) Firms that are price makers
D) Impeded entry to the industry
E) A large number of firms

Question 71

When oligopoly firms collude, they usually do so to

A) increase their size.
B) increase costs and raise barriers to entry.
C) avoid antitrust prohibitions.
D) increase their profits.
E) become more efficient.

Question 72

A dominant strategy is

A) a strategy that every firm likes to choose.
B) a strategy the rival firms do not choose.
C) the only strategy a firm has.
D) a strategy that produces the best results no matter what strategy the opposing player follows.
E) None of these choices.

Question 73

Table 6.2

A) explains how rival firms react using game theory.
B) represents the prisoner's dilemma.
C) shows an equilibrium in which both firms advertise.
D) demonstrates that Firm A has the dominant strategy.
E) demonstrates that Firm B has the dominant strategy.

Question 74

A monopoly market structure is characterized by

A) large number of firms, standardized products, easy entry and exit.
B) large number of firms, differentiated products, easy entry and exit.
C) small number of firms, standardized or differentiated products, difficult entry.
D) one firm, an unique product without close substitutes, and impossible entry.
E) one firm, differentiated product, impossible entry.

Question 75

A Nash equilibrium occurs

A) when a unilateral move by a participant does not make the participant better off.
B) when a unilateral move by a participant makes the participant better off.
C) when a unilateral move by a participant does not make the other participant better off.
D) when a unilateral move by a participant makes the other participant worse off.
E) None of these choices.

Question 76

When firms in an illegal market form a cartel,

A) they are able to supply higher quality products.
B) it is more difficult for police to detect their activities.
C) they are able to increase profits by behaving as a monopolist.
D) they actually become economically efficient by setting price equal to marginal cost.
E) they rely on goodwill to keep the cartel stable.

Question 77

The characteristic that distinguishes a perfectly competitive market from a monopolistically competitive market is

A) ease of entry.
B) large number of firms.
C) degree of government regulation.
D) product differentiation.
E) market share.

Question 78

One factor that distinguishes oligopoly from other market structures is

A) the ease of entry into the market.
B) the interdependence of firms.
C) the slope of the demand curve.
D) the degree of product differentiation.
E) the amount of advertising expenditures.

Question 79

When firms in an industry jointly make pricing and output decisions, they are

A) dumping.
B) colluding.
C) arbitrating.
D) regulating.
E) trying to irritate the government.

Question 80

A typical convention is

A) the person who called originally does not call again.
B) the person who called originally calls again.
C) the person waits another person's call.
D) another person who called originally does not call again.
E) None of these choices.