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Refer to Figure 23.1 for a perfectly competitive firm. This firm should shut down in the short run if the market price is
below
→
$5.
$10.
$15.
$20.
A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when price is
less than the minimum average variable cost ($5).
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Refer to Figure 23.5 for a perfectly competitive firm. This firm will maximize profits by producing the level of output that
corresponds to point
A.
→
B.
C.
D.
A competitive firm maximizes total profit at the output rate where MR is equal to MC—point B.
Which of the following is consistent with long-run equilibrium for a perfectly competitive market?
Average total costs of production are maximized.
Economic profits are positive.
→
Maximum technical efficiency is achieved.
Average variable costs of production are maximized.
Competition drives costs down to their bare minimum—the hallmark of economic efficiency. This is illustrated by the
tendency of perfectly competitive firms' prices to be driven down to the level of minimum average costs.
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Refer to Figure 23.1 for a perfectly competitive firm. In the long run, this firm would stay in this market only if the market
price was equal to or higher than
$5.
$10.
→
$15.
$20.
In the long run, a firm should stay in business only if economic profit is greater or equal to zero. This happens when
price is greater than or equal to the minimum average total cost ($15).
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Marginal cost pricing means that a firm
→
Produces up to the output where P = MC for a given market price.
Lowers market price to marginal cost for a given output.
Lets marginal cost rise to the market price for a given output.
Produces up to the output level at which MC = 0 for a given market price.
The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce
question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost
(marginal cost).
Which of the following is not a characteristic of a perfectly competitive market?
Zero economic profit in the long run.
Perfect information.
Homogeneous products.
→
High barriers.
A perfectly competitive industry has several distinguishing characteristics, including many firms, identical products,
and low entry barriers. Because of the low entry barriers, perfectly competitive firms will earn zero economic profit in
the long run.
The exit of firms from a market, ceteris paribus,
Shifts the market supply curve to the right.
→
Reduces the economic losses of remaining firms in the market.
Increases the equilibrium output in the market.
Shifts the market demand curve to the left.
If economic losses exist in an industry, firms will want to exit. As they do, the market supply curve will shift to the left
and cause the market price to increase until profits are normal.
To maximize profits, a competitive firm will seek to expand output until
Total revenue equals total cost.
The elasticity of demand equals 1.
→
Price equals marginal cost.
Price equals $0.
If an extra unit brings in more revenue than it costs to produce, it is adding to total profit. Total profits must increase in
this case. Hence a competitive firm wants to expand the rate of production whenever price exceeds MC.
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A profit-maximizing producer seeks to
Maximize profit per unit.
Minimize marginal cost.
Minimize average total costs.
→
Maximize total profit.
The short-run goal of every producer is to find the rate of output that maximizes profits.
Which of the following is an investment decision in a competitive market?
The shutdown decision.
The rate of output to produce.
→
Entry or exit.
The price to charge.
An investment decision is the decision to build, buy, or lease plants and equipment, or to enter or exit an industry.
For a perfectly competitive market, long-run equilibrium is characterized by all of the following but which one?
P = MR.
P = MC.
P = minimum ATC.
→
P = maximum ATC.
If the short-run equilibrium is profitable, other firms will want to enter the industry. As they do, market price will fall until
it reaches the level of minimum ATC.
Economic losses are a signal to producers
That they are using resources in the most efficient way.
→
That they are not using resources in the best way.
That consumer demand is being satisfied.
That consumers are content with the allocation of resources.
Because competitive firms always strive to produce at the rate of output at which price equals marginal cost, the price
signal the consumer gets in a competitive market is an accurate reflection of opportunity cost. As such, it offers a
reliable basis for making choices about the mix of output and allocation of resources.
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Which of the following is characteristic of a perfectly competitive market?
A small number of firms.
Exit of small firms when profits are high for large firms.
→
Zero economic profit in the long run.
Marginal revenue lower than price for each firm.
A perfectly competitive industry has several distinguishing characteristics, including many firms, identical products,
and low entry barriers. Because of the low entry barriers, perfectly competitive firms will earn zero economic profit in
the long run.
The exit of firms from a market, ceteris paribus,
Shifts the market supply curve to the right.
Has no effect on the economic losses of remaining firms in the market.
→
Increases the equilibrium price in the market.
Shifts the market demand curve to the left.
If economic losses exist in an industry, firms will want to exit. As they do, the market supply curve will shift to the left
and cause the market price to increase until profits are normal.
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Refer to Figure 23.2 for a perfectly competitive firm. This firm will maximize profits by producing the level of output that
corresponds to point
A.
B.
→
C.
D.
A competitive firm maximizes total profit at the output rate where MR is equal to MC—point C.
Which of the following is not a barrier to entry?
Patents.
Well-established brand loyalty.
Control of distribution outlets.
→
Perfect information.
Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation.
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When economic losses exist in the cereal market, for example, this is an indication that
→
The goods and services that society is giving up (the opportunity cost) are more valuable than the
cereal being produced.
Society's scarce resources are being used in the best way.
Not enough firms are producing cereal (assuming that the market is perfectly competitive).
The WHAT to produce question is being answered efficiently.
If economic losses exist in an industry (P < ATC), firms will want to exit. As they do, the market supply curve will shift
to the left and cause the market price to increase. The price signal (increase) will indicate to consumers that the
opportunity cost was initially greater than the consumer's willingness to pay.
There is an inherent tendency of a monopoly industry to
Lower prices and increase output.
→
Inhibit productivity advances.
Increase innovation.
Use minimum average cost pricing.
Because a monopoly does not face competitive pressures from other firms, there is a tendency of a monopoly to block
or be resistant to productivity advances.
A firm can take advantage of economies of scale through
→
Investment decisions to increase capacity.
A production decision to increase capacity.
Investment decisions to reduce capacity.
A production decision to increase output.
Economies of scale occur when a firm can reduce its long-run average total costs by increasing the size (scale) of its
plants and equipment. Therefore the investment (long-term) decision to increase capacity can contribute to this
phenomenon.
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In Table 24.1, marginal revenue at the profit-maximizing level of output is
$150.00
$250.00
→
$300.00
$550.00
The profit-maximizing output level is where MR is equal to MC at four units of output and MR = MC = $300.00.
Which of the following does not contribute to a firm maintaining a monopoly?
A patent.
Exclusive control of important resources.
Mergers and acquisitions.
→
The presence of many close substitutes for its product.
Barriers to entry help a monopoly maintain its market power. Examples of barriers include patents, control over key
inputs, acquisition of competitors, franchise rights, and economies of scale. The presence of many close substitutes
actually reduces the ability to maintain a monopoly.
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In Table 24.1, according to the profit maximization rule, at the profit-maximizing level of output marginal, cost is
$200.
$250.
→
$300.
$350.
Profit is maximized at the output level where the difference between revenue and cost is greatest (where MR is equal
to MC). This occurs at three units of output and MC is equal to $300.
Compared with a competitive market with the same cost and market demand circumstances, a monopolist has
→
Less pressure to reduce costs and less reason to improve quality.
Less pressure to reduce costs and more reason to improve quality.
More pressure to reduce costs and less reason to improve quality.
More pressure to reduce costs and more reason to improve quality.
Because of barriers to entry into the monopoly market, there is no squeeze on profits and thus no pressure to reduce
costs or improve product quality.
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In Figure 24.1, the profit-maximizing monopolist will charge a price of
J.
L.
C.
→
A.
At the output level where MR is equal to MC, the price consumers are willing and able to pay according to the
demand curve is A.
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According to the text, one argument in favor of concentration of market power is that
Market power increases incentives for innovation and invention.
Market power provides for greater investment in research and development.
The exercise of market power provides a more desirable mix of output.
→
Large firms can sometimes produce more efficiently than small firms because of economies of scale in
production.
A large firm with economies of scale can produce goods at a lower unit (average) cost than a small firm. If such
economies of scale exist, we could attain greater efficiency (higher productivity) by permitting firms to grow to marketdominating size.
In Table 24.1, according to the profit maximization rule, at the profit-maximizing level of output, marginal revenue is
→
$300.
$200.
$100.
$250.
Profit is maximized at the output level where the difference between revenue and cost is greatest (where MR is equal
to MC). This occurs at three units of output and a MR equal to $300.
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In Figure 24.2, total revenue at the profit-maximizing rate of output is
→
$22.00.
$6.40.
$4.00.
$16.00.
Total revenue is equal to price times quantity, which will be $22.
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Monopolists are price
Takers, as are competitive firms.
Takers, but competitive firms are price makers.
→
Makers, but competitive firms are price takers.
Makers, as are competitive firms.
Competitive firms must charge the market price because of the perfectly elastic demand curve that they face. On the
other hand, monopolists are price makers in that the firm chooses the profit-maximizing output and then charges the
price that consumers are willing and able to pay.
For a monopolist, marginal revenue equals
Price.
Price times quantity.
The change in quantity divided by the change in total revenue.
→
The change in total revenue divided by the change in quantity.
Marginal revenue for any firm can be calculated by dividing the change in total revenue by the change in quantity.
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In Table 24.1, according to the profit maximization rule, at the profit-maximizing level of output, total revenue is
$900.
→
$1,200.
$650.
$950.
Profit is maximized at the output level where the difference between revenue and cost is greatest (where MR is equal
to MC). This occurs at three units of output, and total revenue is equal to $1,200 (3 × $400).
Which of the following is likely to occur if a monopoly suddenly loses its ability to deny potential competitors entry into
the market?
→
The market price of the product will fall.
The total market quantity of output produced will fall.
Profits for the market will increase.
The industry demand curve for the product will shift.
If a monopoly loses its ability to deny potential competitors entry into the market, more firms will enter the market
(supply increases), prices will fall, and economic profits will decrease.
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Which of the following is a barrier to entry in a monopoly market?
Economic profits greater than zero for the monopolist.
A rising long-run average total cost curve.
→
A patent on a new product.
A vertical supply curve.
Examples of barriers to entry include patents, monopoly franchises, regulation, economies of scale, and control of key
inputs.
Economies of scale over the entire range of market output
Lead to higher levels of competition.
Become a low barrier to entry, preventing a market from being contestable.
Mean that as the size of a firm increases, its minimum average total costs rise.
→
Mean that the long-run average total cost curve is downward-sloping.
Economies of scale are reductions in average costs (downward-sloping ATC) that come about through increases in
the size (scale) of plants and equipment.
In the long run, an oligopolist is most likely to
→
Experience economic profits because of barriers to entry.
Experience zero economic profits because barriers to entry do not exist in the long run.
Produce at the most technically efficient output level due to long-run competition.
Face a straight demand curve.
Oligopoly markets have high barriers to entry; therefore it is likely that profits will persist in the long run.
Which of the following may not characterize an oligopoly?
A few firms.
Substantial market power.
High barriers to entry.
→
Many firms.
An oligopoly is a market with a few firms that are protected by high barriers to entry and have substantial market
power.
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High training costs help firms maintain
Contestable markets.
Cartels.
Government regulation.
→
Barriers to entry.
If consumers need training (at significant cost) to switch to a new product, new competitors face significant barriers to
entry—the cost of retraining staff.
The goal of an oligopoly is to maximize
→
Market share to achieve long-run economic profit.
Short-run profit to achieve long-run maximum revenue.
Short-run profit to achieve long-run market share.
Profit in the short run and to minimize cost in the long run.
Oligopolies' joint, or collective, interest is in maximizing industry profit. The individual interest of each oligopolist,
however, is to maximize its own share of sales and profit.
How might an oligopolist increase total revenue without changing price?
Reduce output.
Reduce marketing efforts.
→
Through nonprice competition.
Reduce costs.
The goal of nonprice competition is to influence demand. Advertising is an effective way to enhance market power by
changing consumer tastes without changing prices.
A firm cannot maintain above-normal profits over the long run
Without the existence of a cartel.
→
Unless barriers to entry exist.
Unless predatory pricing occurs.
Without retaliation occurring.
Above-normal profits encourage entry into the market by profit-motivated entrepreneurs. In order for the profits to be
maintained, barriers to entry must exist.
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Oligopolistic behavior includes
→
Tacit collusion.
High concentration ratios.
High barriers to entry.
Independent pricing.
Tacit collusion is most easily and effectively accomplished in an oligopoly market because there are only a few firms
that strive to maximize profits, which can be accomplished if the firms act in unison to set prices and output. Yet each
firm will be motivated by its own self-interest.
Suppose the larger firm of a duopoly has sales of $400 million and the smaller firm has sales of $100 million. The market
share of the larger firm is
→
80 percent.
40 percent.
20 percent.
10 percent.
Total market sales are equal to $500 ($400 + $100), and therefore the largest firm has 80 percent ($400/$500) of the
market share.
If an oligopolist is going to change its price or output, its initial concern is
→
The response of its competitors.
A change in its cost structure.
The concentration ratio.
The response of the Federal Trade Commission.
The initial concern of firm when it decreases its price is how responsive consumers will be to the change; however,
how much an oligopolist's sales increase depends on the response of rival oligopolists.
In which of the following market structures are entry barriers the highest?
Perfect competition.
Monopolistic competition.
Oligopoly.
→
Monopoly.
Although oligopolies are protected by barriers to entry, the monopoly market typically has the highest barriers to entry.
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The number of firms in an oligopoly must be
Four.
Large enough so that firms cannot coordinate.
→
Small enough so that one firm's decisions have a significant impact on the decisions of the other firms
in the industry.
Small enough so that revenues are large enough to support advertising expenditures.
An oligopoly is a market with a few firms that are protected by high barriers to entry and have substantial market
power. As the number of firms in the market increases, the market will become closer to either a monopolistically or a
perfectly competitive market.
Suppose there are three firms in a market. The largest firm has sales of $50 million, and each of the other two firms has
sales of $25 million. The Herfindahl-Hirschman Index of this industry is
2,500.
→
3,750.
2,550.
3,125.
The HHI is equal to the sum of the scares of the market share of each firm in the industry. Therefore if you take the
square of 50 percent and add it to the square of 25 percent multiplied by 2 (because there are 2 firms with 25 percent
market share), you will get an HHI of 3,750.
Open and explicit agreements concerning pricing and output shares transform an oligopoly into a
Monopoly.
→
Cartel.
Differentiated oligopoly.
Perfectly competitive firm.
The most explicit form of coordination among oligopolists is price-fixing, which occurs when firms in an oligopoly
explicitly agree to charge a uniform (monopoly) price.
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Market power is the ability of a firm to
Advertise.
Act as a price taker.
→
Control the price and quantity supplied.
Increase the number of substitute goods.
Firms in an oligopoly have market power because they can influence the price of their products; in perfectly
competitive markets sellers have no control over price.
Which of the following may not characterize an oligopoly?
A few firms.
→
No market power.
High barriers to entry.
Substantial control over price.
An oligopoly is a market with a few firms that are protected by high barriers to entry and have substantial market
power.
Given the payoff matrix in Table 25.1, if the probability of rivals reducing their price even though you don't is 10 percent,
what is the expected payoff for Company ABC not cutting prices?
$0.
$5.
→
-$500.
-$5,000.
The expected value of a choice here is equal to the sum of the probability of rivals lowering their prices times the size
of the loss from leaving your price unchanged and the probability of neither rival changing its price. In this case, ((.10
× $-5,000) + (.90 × $0)), which is -$500.
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If a firm in an oligopoly expands its market share at prevailing prices, its competitors
→
Lose market share.
Increase their market share.
Ignore the expansion.
Increase their profits.
Given a certain level of demand, rivals will lose market share if one firm expands sales at the prevailing market price.
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