Deck 11: Price and Output in Monopoly, Monopolistic Competition, and Perfect Competition

Question 1

The rule for profit maximization is the same for a monopolist as for a perfectly competitive firm.

Answer 1

True

Question 2

For a monopolist, MR can never be negative.

Answer 2

False

Question 3

The monopolist produces at minimum average total cost to maximize efficiency.

Answer 3

False

Question 4

The entry of new firms into a monopolistically competitive market makes the demand curves for the existing firms more elastic.

Question 5

As new firms enter a monopolistically competitive market, product differentiation becomes less pronounced.

Question 6

Product differentiation forms the basic rationale for advertising expenditures and monopolistic competition.

Question 7

The primary contribution of the Theory of Monopolistic Competition is the rationale it provides for product differentiation and advertising.

Question 8

Monopoly is preferred to perfect competition due to its efficiency characteristics.

Question 9

The primary difference between monopolistic competition and perfect competition is the number of firms in the market.

Question 10

Due to small profit margins in perfect competition, it is argued that technological development may happen to a greater extent under oligopoly.

Question 11

The rate of technological development is clearly faster under perfectly competitive market structures.

Question 12

If total explicit costs are equal to total implicit costs, then economic profit is zero.

Question 13

Graphically, to find the profit-maximizing price for a monopoly, find the output level where MR = MC and draw a line from that output level vertically to the demand curve.

Question 14

Because its market share is insignificant, a perfectly competitive firm faces an inelastic demand curve.

Question 15

The demand curve facing a firm in monopolistic competition is elastic.

Question 16

In the short-run, profits will only exist for monopolistically competitive firms.

Question 17

In the long-run, profits will exist for firms in monopolistically competitive firms but not monopoly.

Question 18

In perfect competition, the long-run outcome is always maximum efficiency.

Question 19

Economists agree that large firms with big research budgets create most of the economy's technological progress

Question 20

A monopolist's goal is to maximize profit.

Question 21

Without product differentiation, it would be very difficult for firms to develop brand loyalty.

Question 22

According to Alfred Marshall, small firms produce a good more efficiently than a monopoly.

Question 23

In competitive industries, firms that innovate can expect to make no profit in the short run.

Question 24

The MR = MC rule for profit maximization applies to monopolists, as well as to firms in perfect competition

Question 25

A perfectly competitive firm's long-run supply curve is that part of its MC curve that lies above the point where MC = AVC.

Question 26

Entry of new firms into a market results in less product differentiation.

Question 27

Economists may hold many different views about the economy but on this they all agree: That price is always lower in a perfectly competitive market than in a monopoly market.

Question 28

According to economist Joseph Schumpeter, technological advance is more likely to occur in a monopoly than in perfect competition.

Question 29

Economic profit is the same as normal profit.

Question 30

According to economists, although a monopoly's price will be higher than a perfectly competitive firm's price when both produce the same good, the monopoly produces the good more efficiently.

Question 31

Monopolistically competitive firms produce differentiated products.

Question 32

Implicit costs will be zero in the long run.

Question 33

If marginal revenue exceeds marginal cost, the firm should increase output to maximize profit.

Question 34

To maximize profit, a perfectly competitive firm will produce where MR = MC, but a monopoly and a monopolistically competitive firm will produce where price = ATC.

Question 35

A monopoly's economic profit is protected by the lack of entry of new firms even in the long run.

Question 36

-Sam's hamburger shop, represented by Exhibit K-1, is a monopolistic competitor

A) making a profit of $100
B) producing an economically efficient output level of 50 hamburgers
C) in long-run equilibrium at 50 units of output
D) taking in $400 of revenue
E) who can expect new entrants to the market

Question 37

-A technological improvement in the hamburger industry will cause Sam's hamburgershop (Exhibit K-1) to

A) face increased competition
B) experience a rightward shift in demand for its product
C) decrease its output
D) continue as in the past
E) have lower profits

Question 38

-If the diagrams in Exhibit K-2 represent a firm in the market,

A) it will choose to produce no output
B) it is operating in a competitive market
C) it will make economic profit
D) it is in long-run equilibrium
E) there will be reduced competition in the market

Question 39

-Ralph's Ski Shop is a local monopoly in a regional market. This type of situation can result from all of the following except:

A) small population relative to output needed for scale economies
B) patent protection
C) control of local zoning or limited operation permits
D) long distance to alternative ski shops
E) multiple products

Question 40

-Maxine's electrotranslucent circuit board, a newly patented product, has been making her firm (ECB, Inc.) a bundle of money since being introduced to the market 6 months ago.Referring to Exhibit K-3 (on the following page),

A) Maxine's profit is $200
B) profit maximizing output is 100 units
C) Maxine's profit is $450
D) profit will be driven to zero in the long-run
E) total revenue will be $800

Question 41

-Ralph's "Roll Free Rolling Pin" factory used to be the only business of its type but now faces many competitors in its market, each having a similar but differentiated product. Which of the panels in Exhibit K-4 is the most appropriate representation of Ralph's long-run situation producing "q" units of output?

A) Panel 1
B) Panel 2
C) Panel 3
D) Panel 4
E) Panel 5

Question 42

Sue's bagel shop faces many local competitors and has recently begun an advertising campaign which

A) is likely generic advertising about the benefits of bagel consumption
B) demonstrates of her firm's monopoly status
C) differentiates her product from that of other firms
D) will shift the bagel supply curve inwards (leftward)
E) will lower bagel production costs

Question 43

-In Exhibit K-5, which represents a monopoly, an economist would argue that

A) output is lower and price is higher than in perfect competition
B) product price should be set at $6
C) output should be 6 units from society's perspective
D) an output of 10 should be chosen by this monopolist
E) the monopolist's interests are compatible with society's

Question 44

Let's use the example from the text: The Nick Rudd Ice Company is a monopoly. Its goal, then, is to

A) hire as many workers as possible
B) maximize profit
C) produce as much as possible to capture market share
D) produce where marginal cost equals price
E) charge the highest price possible

Question 45

The monopolist's marginal revenue curve lies below the demand curve because

A) the monopoly is not an efficient producer
B) as the monopolist increases output, the price falls
C) there is no account of implicit costs
D) the monopolist's demand curve is the market demand
E) the monopolist can charge the highest price possible

Question 46

Economic profit is defined as

A) price minus the sum of average fixed and marginal cost
B) total revenue minus total implicit cost
C) total revenue minus the average total cost
D) total revenue minus the sum of implicit and explicit costs
E) consumer surplus minus total explicit cost

Question 47

Which of the following statements is true?

A) Accounting profit usually is greater than economic profit.
B) Accountants ignore explicit costs in calculating profit.
C) Explicit costs fall as output increases.
D) Advertising is an implicit cost.
E) Economic profit always increases as output increases.

Question 48

A monopoly can charge any price it wishes, and chooses the

A) highest price
B) price equal to marginal cost
C) price associated with the output level where MR = MC
D) competitive price to keep out potential entrants
E) price associated with greatest efficiency

Question 49

Many economists criticize monopolists because they produce at output levels that are not efficient, that is to say, monopolists

A) charge too high a price
B) don't innovate
C) produce a large quantity of waste
D) usually don't produce at their minimum ATC
E) may be profit conscious but they don't realize that maximum profit means maximum efficiency

Question 50

Remember-from the Added Perspective-Elaine Rodier who quit her job to go into business making appetizers? Which of the following is an implicit cost for her business?

A) cost of rent
B) cost of her own labor
C) cost of hiring workers
D) cost of insurance
E) cost of raw materials

Question 51

Which of the following is an implicit cost of going to college?

A) tuition and fees
B) books, computer equipment
C) income lost from not being able to work full time
D) future income
E) room and board

Question 52

In which industry(ies) are firms price takers?

A) oligopolies
B) monopolies
C) perfect competition
D) oligopolies and monopolies
E) monopolistic competition

Question 53

-In Exhibit K-6, how much profit does the monopoly make when it produces 7 units?

A) 0
B) 24
C) 16
D) 12
E) 6

Question 54

If a firm makes normal profit, the entrepreneur must earn a wage that

A) is at least as much as he can earn elsewhere
B) must be less than he can earn elsewhere
C) equals the economic profit generated by the firm
D) lowers the opportunity cost of finding alternative work
E) is enough for him to live on

Question 55

If a perfectly competitive firm made an economic profit in the short run, but not in the long run, it must be true that

A) prices for inputs increased
B) demand declined
C) new firms entered, supply increased, and price fell
D) accounting profit exceeds economic profit
E) labor costs are increasing

Question 56

The perfectly competitive firm's long-run supply curve is

A) the same as the industry's supply curve
B) the average total cost curve
C) perfectly horizontal
D) the marginal cost curve above the ATC
E) the marginal cost curve above the AVC

Question 57

Many economists consider perfect competition to be the most desirable market structure because they believe it generates the

A) highest average cost
B) lowest prices and output
C) greatest economic profit
D) lowest prices and greatest output
E) greatest normal profit

Question 58

As more firms enter a perfectly competitive industry, the industry supply curve shifts

A) to the left and price falls
B) to the right and price rises
C) to the right and price falls
D) to the left and price rises
E) in an unpredictable way

Question 59

A meatball sandwich vendor finds that when he charges a price of $6, he sells 100 meatball sandwiches. When he charges a price of $4, he sells 200 meatball sandwiches. The marginal revenue for each of the additional 100 meatball sandwiches he sells is

A) $6
B) $4
C) $3
D) $2
E) $1

Question 60

The reason why firms in perfect competition end up with no economic profit in the long run is that

A) they do not have the knowledge to run the firm correctly
B) in the long run, firms lose competitiveness
C) in the long run, costs rise to equal prices
D) if they make an economic profit, new firms will enter the industry, driving the price down, and this continues until economic profit is zero
E) in the long run, the losses of firms who leave the industry equals the economic profit of those who remain

Question 61

Schumpeter's hypothesis states that

A) monopolists are always trying to raise prices
B) competition does not always generate the lowest prices
C) when government fosters competition, prices fall
D) price-takers create the highest prices
E) efficiency is highest under conditions of perfect competition

Question 62

A monopolist's goal is to maximize

A) costs
B) sales
C) profit
D) market power
E) price

Question 63

Monopolistically competitive firms sell goods that are

A) close substitutes
B) perfect substitutes
C) not substitutes
D) not differentiated products
E) complements

Question 64

Distinct from any other market structure, the firm in long-run perfect competition ends up producing where

A) P = MR = MC = ATC, and AFC = 0
B) P > MR = MC = ATC, and AFC = 0
C) P < MR = MC < ATC, where ATC = (AFC + AVC + MC)
D) P = MR = MC = ATC, where ATC = (AFC + AVC)
E) P > MR and ATC > MC, where MC = (AFC + AVC)

Question 65

If there is an economic profit in monopolistic competition, there is

A) an incentive for new firms to enter
B) an incentive for existing firms to increase prices
C) at least one firm engaged in advertising
D) an incentive for existing firms to decrease prices
E) the absence of product differentiation

Question 66

Which statement is not consistent with Joseph Schumpeter's hypothesis?

A) Monopolies use profit to invest in research and development.
B) Monopolies end up being more efficient than competitive firms.
C) Monopoly prices end up being lower than prices generated in perfect competition.
D) Perfect competition is more conducive to innovation than monopoly.
E) Perfect competition is more efficient than monopoly.

Question 67

In the text, when the Nick Rudd Ice Company starts as a monopoly and then finally faces competition from a new entering ice company, its

A) price falls, its economic profit falls, but its output increases
B) price falls, its economic profit falls, and its ATC falls
C) price falls, its economic profit falls, and it faces a more elastic demand curve
D) price increases, its economic profit falls, and it faces a less elastic demand curve
E) ATC falls, its economic profit falls, and it faces a less elastic demand curve

Question 68

In an added perspective, we learn that Elaine Rodier gave up a job as a nursery school teacher to make appetizers. In doing this, she incurs a(n)

A) implicit cost less than her lost income
B) explicit cost at least equal to her lost income
C) opportunity cost at least equal to her lost income
D) variable cost equal to her lost income
E) marginal cost equal to her lost income

Question 69

One reason why firms in monopolistically competitive markets earn zero profit in the long run is because

A) product differentiation disappears
B) barriers to entry become prohibitive
C) the price elasticity of demand for each firm falls to zero
D) so many firms enter the market that each firm's demand curve eventually becomes tangent to the firm's ATC curve
E) each firm's ATC curve shifts upward to eventually become tangent to its demand curve

Question 70

In the Theory of Price, George Stigler points out that a monopolist is no less desirous of profits than a competitive firm. According to Stigler, what distinguishes the monopolist from other entrepreneurs?

A) strategy
B) morality
C) objective
D) market position
E) motivation

Question 71

If a monopoly finds that at the present level of production, marginal revenue exceeds marginal cost, the firm should

A) shut down
B) increase production
C) maintain the production level because MR > MC signifies economic profit
D) decrease production so that MC will equal MR
E) raise price

Question 72

The demand curve that a monopolist firm faces is

A) the same as the demand curve facing a perfectly competitive firm except the monopolist is a price maker and the competitive firm is a price taker
B) the same as the demand curve facing a perfectly competitive firm except the monopolist is a price taker and the competitive firm is a price maker
C) horizontal, because there are no close substitutes for its product
D) the same as its industry demand curve
E) vertical, because there are no close substitutes for its product

Question 73

A monopolist faces a demand curve that is

A) more elastic than a perfectly competitive firm's demand curve
B) the market demand curve
C) downward sloping as is the perfectly competitive firm's demand curve but the monopoly's demand curve is more inelastic
D) horizontal as is the perfectly competitive firm's demand curve but the monopoly's demand curve is more inelastic
E) totally insensitive to changes in consumer tastes

Question 74

If a monopolist lowers its price to increase sales from 100 to 200 units, then the

A) price at the 200th unit will be less than the marginal revenue of the 200th unit
B) price at the 100th unit will be greater than the marginal revenue of the 200th unit
C) profit earned producing 200 units will be greater than the profit earned producing 100 units
D) price at the 200th unit will be greater than the marginal revenue of the 200th unit
E) profit earned producing 100 units will be greater than the profit earned producing 200 units

Question 75

Unlike firms in perfect competition, monopolists have control over

A) the costs of production
B) what technology to use
C) what price to charge
D) how much to produce
E) the choice of plant size

Question 76

A monopolist earns $1,000,000 economic profit in the short run producing 25,000 units of a good. The marginal revenue of the 25,000th unit is $23 and the marginal cost is $30. What should the monopolist do?

A) raise price and produce less than 25,000 units
B) lower price and produce less than 25,000 units
C) raise price and produce more than 25,000 units
D) lower price and produce more than 25,000 units
E) produce more than 25,000 units at the same price

Question 77

Think of a firm that has a monopoly producing milk. The firm's demand curve is

A) identical to the demand curve for milk facing the industry
B) identical to its marginal revenue curve
C) tangent to the firm's ATC curve
D) tangent to its marginal revenue curve
E) more elastic than the demand curve of any perfectly competitive firm producing milk

Question 78

Suppose the baseball card industry is monopolistic. We know then that for the monopolist,

A) price elasticity of demand everywhere along its demand curve is infinite
B) price elasticity of demand everywhere along the demand curve is zero
C) as price increases, marginal revenue decreases
D) as price decreases, marginal revenue decreases
E) price equals marginal revenue everywhere along its demand curve

Question 79

If total revenue is increased, which of the following must have been true?

A) MR = 0
B) MR > 0
C) MR = AR
D) MR < 0
E) MR < MC

Question 80

Picture in your mind's eye the graph of a profit-maximizing monopolist. If its cost curves-both ATC and MC-shift upward while its demand curve remains unchanged, the monopolist will

A) decrease price and increase output
B) decrease both price and output
C) increase price and decrease output
D) increase both price and output
E) keep both price and output at the same level