Deck 14: The Mechanics of Profit Maximization

Question 1

The market demand curve is ____ and the demand curve for a single firm in a competitive market is ____.

A)horizontal, horizontal
B)downward sloping, horizontal
C)downward sloping, downward sloping
D)horizontal, downward sloping

Answer 1

downward sloping, horizontal

Question 2

Profits are maximized when

A)price equals marginal revenue.
B)marginal revenue equals average total costs.
C)marginal revenue equals marginal cost.
D)when price equals average total costs.

Answer 2

marginal revenue equals marginal cost.

Question 3

The goal of managers is to manage resources in such a way

A)to make them worth as much as they would be in their next best use.
B)to make them worth more than they would be in any other use.
C)to cover the cost of capital.
D)to cover all opportunity costs.

Answer 3

to make them worth more than they would be in any other use.

Question 4

If the average cost of flying the next flight is zero and one passenger is on the plane and has paid $50, should the next flight be flown?

A)Yes.
B)No.
C)Can't tell from the data provided.
D)The plane should wait for at least one more passenger.

Question 5

A market with easy entry could include

A)perfect competition.
B)monopolistic competition.
C)an oligopoly.
D)a.and b.are possible

Question 6

Perfect competition

A)has many sellers.
B)homogenous products.
C)free entry and exit.
D)all of these choices.

Question 7

If the marginal cost of flying the next flight is zero and one passenger is on the plane and has paid $50,

A)fixed cost would still be covered.
B)the passenger should be given a bus ticket.
C)losses would get bigger.
D)the next flight should be flown.

Question 8

The phrase "price-taker" means

A)that market price is independent of the output of a single firm.
B)each firm faces a perfectly elastic demand curve.
C)that price and marginal revenue are the same.
D)all of these choices.

Question 9

A market of price takers is called

A)perfectly competitive.
B)monopolistically competitive.
C)a monopoly.
D)an oligopoly.

Question 10

A market that mainly stresses product differentiation is called

A)perfectly competitive.
B)monopolistically competitive.
C)a monopoly.
D)an oligopoly.

Question 11

A market with a few large sellers is called

A)perfectly competitive.
B)monopolistically competitive.
C)a monopoly.
D)an oligopoly.

Question 12

A market with a single seller is called

A)perfectly competitive.
B)monopolistically competitive.
C)a monopoly.
D)an oligopoly.

Question 13

The MR=MC rule

A)applies to price-makers only.
B)does not vary by market structure.
C)is only true in competitive markets.
D)applies to price-makers that have MR=P.

Question 14

Entry into a competitive market will continue until

A)economic profits are zero.
B)normal profits are zero.
C)when accounting losses are zero.
D)a.and b.are true

Question 15

If marginal revenue exceeds marginal costs

A)production should be increased.
B)production should be increased and profits will grow.
C)production should be increased and losses will decrease.
D)all of these choices are possible.

Question 16

With free entry

A)economic profits are possible over the long run.
B)economic profits are possible but only over limited amounts of time.
C)economic profits are not possible.
D)the cost of capital will not be covered.

Question 17

Profits are maximized when

A)added costs are equal to added revenue.
B)costs equal revenue.
C)average costs equal average revenue.
D)economic profits are zero.

Question 18

Exit from a market will stop when

A)accounting losses are zero.
B)the cost of capital is equal to the risk-free rate of return.
C)economic losses are zero.
D)none of these choices.

Question 19

If marginal revenue is less than marginal costs

A)production should be decreased.
B)production should be decreased and profits will grow.
C)production should be decreased and losses will decrease.
D)all of these choices are possible.

Question 20

The objective of creating value is the same as

A)maximizing shareholder value.
B)maximizing profit.
C)maximizing added value.
D)all of these choices.

Question 21

In monopolistic competition

A)firms can earn long-run economic profit due to product differentiation.
B)firms are unable to earn economic profit over the long run.
C)firms can only earn accounting profits over the long-run.
D)firms can block entry.

Question 22

Entry causes ____ to increase and a firm's demand curve to ____.

A)quantity supplied, fall.
B)supply, rise
C)supply, fall.
D)demand, rise.

Question 23

In an oligopoly

A)there are many firms.
B)there is one firm.
C)there are few firms.
D)firms openly collude.

Question 24

Monopolistic competition is characterized by

A)ease of entry.
B)many sellers.
C)product differentiation.
D)all of these choices characterize this market.

Question 25

In a monopoly, consumer surplus is

A)larger than under perfect competition.
B)is equal to that under perfect competition.
C)smaller than under perfect competition.
D)None of these choices is true.

Question 26

Entry continues as long as

A)economic profits are zero.
B)accounting profits are positive.
C)accounting profits are positive and economic profits are negative.
D)economic profits are positive.

Question 27

In order to maximize profits

A)the derivative of total revenue with respect to quantity must be less than the derivative of total cost with respect to quantity.
B)the derivative of total revenue with respect to quantity must be greater than the derivative of total cost with respect to quantity.
C)the derivative of total revenue with respect to quantity must equal the derivative of total cost with respect to quantity.
D)none of these choices.

Question 28

Over the long run, monopolies can earn

A)economic profit.
B)normal profit only.
C)accounting profit only.
D)no economic profit.

Question 29

Maximizing shareholder value is synonymous with adding value.

Question 30

When a firm is a price maker

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

Question 31

One of the characteristics of an oligopoly is

A)many sellers.
B)easy entry.
C)interdependence in decision making.
D)the use of patents to protect market share.

Question 32

Examples of strategic behavior include

A)kinked demand and linear demand.
B)prisoner's dilemma and interdependence.
C)kinked demand and economic profit
D)prisoner's dilemma and kinked demand.

Question 33

In a monopoly,

A)marginal revenue is greater than price.
B)marginal revenue is less than price.
C)the demand curve is horizontal.
D)marginal revenue and price are equal

Question 34

Monopolies exist due to

A)patents.
B)government franchises.
C)cost factors.
D)all of these choices contribute to the power of a monopoly.

Question 35

Firms in an oligopoly

A)act independently.
B)engage in strategic behavior.
C)have perfect knowledge of the behavior of others.
D)openly collude.

Question 36

For a competitive firm

A)price is equal to marginal revenue.
B)price is less than marginal revenue.
C)demand is less than marginal revenue.
D)demand is less than average revenue but equal to marginal revenue.

Question 37

In a monopoly, producer surplus is

A)larger than under perfect competition.
B)is equal to that under perfect competition.
C)smaller than under perfect competition.
D)None of these choices is true.

Question 38

Firms maximize profits when marginal revenue equals marginal cost.

Question 39

Monopolies have ____ substitutes.

A)many
B)few
C)no
D)several but less than 10

Question 40

The kinked demand curve is based on the idea that

A)you will follow my price increase but not my price cut.
B)you will follow my price cut but not my price increase.
C)you will follow all price changes I might initiate.
D)you will not follow my behavior at all.

Question 41

A monopoly can block the entry of others.

Question 42

Entry drives economic profits to zero.

Question 43

Firms make a profit when they equate marginal revenue with marginal cost.

Question 44

Production should be expanded if marginal cost is greater than marginal revenue.

Question 45

To a firm in perfect competition, price and marginal revenue are equal.

Question 46

In a monopoly, price is less than marginal revenue.

Question 47

In order to maximize profits, the derivative of total revenue with respect to quantity must equal the derivative of total cost with respect to quantity.

Question 48

Product differentiation plays an important role in perfect competition.

Question 49

Strategic behavior is a result of the interdependence in decision making between firms.

Question 50

The kinked demand curve is an attempt to model strategic behavior.

Question 51

Price takers face a perfectly inelastic demand curve.

Question 52

A firm in perfect competition perceives the demand curve to be downward sloping.

Question 53

Entry causes the competitive firm's demand curve to fall.