Theory of the Firm – Unit Review Questions
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Note #1: This does not include price discrimination and several ideas from the beginning of
the unit (e.g. calculating costs, etc.)
Note #2: This only a supplement to the Microeconomics study guide. Be sure that you
understand all of the key concepts from that study guide prior to the summative assessment.
EQUATIONS/FORMULAS
1. Allocative efficiency
2. Productive efficiency
3. Abnormal (economic profit)
4. Economic Costs
5. Normal profit
6. Loss
7. Profit-maximizing level of output
8. Loss-minimizing level of output
9. Shut-down price
10. Break-even point
11. AC
12. AR
13. MR
14. TR
15. TC
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COMPETITION TYPES
Use the following letters to answer each Q:
 PC
= perfect competition
 MC = monopolistic competition
 O
= oligopoly
 M
= monopoly
16. Product differentiation
17. No product differentiation
18. Productive efficiency in long run
19. Allocative efficiency in long run
20. Guarantees allocative efficiency in short run
21. Guarantees productive efficiency in short run
22. Only normal profit in long run
23. Abnormal profit possible in long run
24. Non-price competition
25. Price competition
26. No barriers to entry
27. High barriers to entry
28. Entry to industry is blocked
29. Illegal in most countries
30. CR4 = 50%
31. CR4 = 0%
32. CR1 = 100%
33. CR1 = 84%
34. Price is constant
35. Price is often rigid but can move up or down if marginal costs reach certain points
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36. Marginal and average revenue is consistently negatively (downward) sloping
37. All producers and consumers have a perfect knowledge of the market
38. Advertising is used
39. Brand loyalty occurs
40. Patents are obtained
41. A large number of sellers
42. A small number of sellers dominate the market
43. One seller dominates
44. Price takers
45. Price makers
46. A cartel
47. A diagram of a cartel looks like this diagram
48. Kinked demand curve
49. Perfectly elastic demand curve
50. Can lose money in the short run
51. 1 that is most associated with wheat sold in Central Asia
52. 1 that is most associated with shampoo sold in London
53. 1 that is most associated with selling of jiaozi in Guangzhou
54. 1 that is most associated with internet searches outside of China
55. 1 that is most associated with automobile production in Japan
56. 1 that is most associated with providing electricity in Guangzhou
57. 1 that is most associated with selling socks in Guangzhou
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DEFINITIONS
Define the following terms:
58. normal profit
59. abnormal (economic) profit
60. oligopoly
61. natural monopoly
62. allocative efficiency
63. Productive efficiency
64. formal collusion
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65. consumer surplus
66. producer surplus
67. tacit collusion
68. non-collusive oligopoly
69. satisficing
70. Revenue maximization
71. Growth maximization
72. Corporate social responsibility
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73. Increasing returns to scale
74. Decreasing returns to scale
75. Diminishing marginal returns
76. Economies of scale
DIAGRAMS
Draw & be able to explain the following diagrams. Answer the associated Qs (if asked)
77. Total revenue for (a) perfectly competitive firm and (b) for monopoly/monopolistic
competition/oligopoly.
a. Be able to draw each curve with and without total costs included.
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78. Simple diagram of allocative efficiency for a perfectly competitive market.
79. Natural monopoly (how is it similar to & different than a regular monop. diagram?)
80. Where on a monopoly/monopolistic competition’s AR curve is PED elastic, unit elastic,
and inelastic?
81. Perfectly competitive firm at or below shut-down price
82. Perfectly competitive firm above shut-down price but below break-even point
83. Perfectly competitive firm at or above break-even point
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84. Perfectly competitive industry’s supply/demand curve next to an individual firm’s
demand curve.
85. Perfectly competitive firm making abnormal profit or taking a loss in the short run
86. Monopoly (and/or monopolistically competitive firm and/or cartel) making abnormal
profit in the short run (or long run for a monopoly)
87. Monopoly (and/or monopolistically competitive firm and/or cartel) operating at a loss in
the short (or long run for a monopoly)
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88. Oligopoly w/kinked demand curve
a. Why elastic above price? (Consequences if price is set here?)
b. Why inelastic below price? (Consequences if price is set here?)
89. Long run equilibrium in perfect competition (showing normal profit). Also, be able to
demonstrate where efficiencies should be located.)
90. Long run equilibrium in monopolistic competition (shows normal profit) Also, be able to
demonstrate where efficiencies should be located.
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