Question

1) If a price that a perfectly competitive firm is able to get is above its average variable cost but below its average total cost then

a. The firm will suffer economic losses and should shut down immediately

b. The firm will be able to earn economic profit as soon as it can increase the size of its factory

c. The firm will suffer economic losses but should continue to operate

d. None of the above

2) In the short run, if price falls, the firm will respond by

a. Shutting down regardless of how high its variable costs are

b. Equating average variable cost to marginal revenue

c. Reducing along its marginal cost curve as long as marginal revenue exceeds average variable cost

d. None of the above

3) Suppose a competitive firm is in equilibrium then the price of one of its inputs falls. What will happen?

a. The firm will hire more of the lower priced input

b. The firm will produce more output

c.The firm cost curves will downward

d. All of the above

4. A competitive industry will be in a long run equilibrium when

a. Each firm in the industry is earning zero economic profit

b. No entry or exit occurs

c.The total quantity produced at the prevailing price equals the total quantity consumers want to purchase

d. All of the above

5. In an increasing cost competitive industry, if prices rises above its long run equilibrium level which of the following will occur as the industry adjusts to a new long equilibrium ?

a. Firms will exit the industry

b. Economic profits will exits

c. Input prices will rise only when firms leave the industry

d. Price will return to its original level

6.The marginal revenue curve of a monopolist lies below the demand curve ( in the absence of price discrimination) becaus

a. The demand curve is unit elastic

b. The monopolist must lower price on all units sold in order to sell additional units

c. The monopolist is a price taker

d. The marginal revenue curve coincides with the average revenue curve

7. The demand curve for a monopolist's slopes downward because

a. Profit per unit declines

b. Demand elasticity is greater than one in the portion of the demand curve where the monopolist operates

c.It price discriminates

d. It faces the market demand curve

8. If a monopolist's is operating in the elastic portion of its demand curve then

a. An increase in price will increase total revenue

b. An increase in price will decrease total revenue

c. Marginal revenue is negative

d. An increase in price will leave total revenue unchanged

9. Marginal revenue is negative when

a. The demand curve is downward sloping

b. Demand curve is elastic

c. Demand curve is inelastic

d. Demand is unit elastic

10. The lerner index

a. Measures the monopoly power as the markup of price over average cost

b. Measures the monopoly power as the markup of price over marginal cost

c. Measures the market share of a firm

d. Measures the market capitalization of a firm

11. Compared to a competitive industry, ceteris paribus a standard monopoly firm

a. Sells more units and charges a higher price

b. Sells the same amount of units but at a higher price

c. Does not try to maximize profits as do firms in competitive industry

d. Restricts output and charges a higher price

12. A monopoly will produce the efficient rate of output if it

a. Engages in perfect price discrimination

b. Engages in no price discrimination

c. Engages in third degree price discrimination

d. Is regulates and average cost pricing is enforced

13. Which of the following types of mergers directly reduces the number of competitors in an industry?

a. Congolomerate

b. Horizontal

c. Vertical

d. Bivariate

14. Why do gas stations near airport often charge more for gasoline ?

a. They have higher costs

b. They are inconvenient

c. They face a smaller elasticity of demand

d. They must pay the airport agency for space

15. The deadweight loss due to monopoly restriction of output occurs over units of output

a. For which the willingness to pay would be greater than MC but don't get produces

b. For which the willingness to pay is greater than MC and do not get produced

c. Up until the profit maximizing level of output

d. For which the willingness to pay is less than MC but don't get produced

16. First degree discrimination

a. Is perfect because consumers benefit the most

b. Is called first degree because it does not apply to resale of products

c. Is also known as perfect price discrimination

d. Is the easiest form of price discrimination

Answer 1

1) If a price that a perfectly competitive firm is able to get is above its average variable cost but below its average total cost then the firm will suffer economic losses but should continue to operate. This is perhaps because the firm will be able to cover the variable cost from the revenue it is earning. Losses are justified as long as its existence is able to generate enough to cover for the cost of operations.

2) In the short run, if price falls, the firm will respond by reducing along its marginal cost curve as long as marginal revenue exceeds average variable cost. Price is equal to marginal revenue and a fall in price is equivalent to fall in marginal revenue. Hence firm will reduce production along its MR.

3) Suppose a competitive firm is in equilibrium then the price of one of its inputs falls. What will happen? All of the above. This is because it is encouraged to hire more inputs and will be producing more with same cost of production.

4. A competitive industry will be in a long run equilibrium when each firm in the industry is earning zero economic profit. This condition is necessary because if there is profit or loss firms will continue to enter so that the process of entry or exit will never stop. Firms will stop entering only when there are no economic profits.

5. In an increasing cost competitive industry, if prices rises above its long run equilibrium level which of the following will occur as the industry adjusts to a new long equilibrium ? Economic profits will exits

6.The marginal revenue curve of a monopolist lies below the demand curve ( in the absence of price discrimination) becaus the monopolist must lower price on all units sold in order to sell additional unit

7. The demand curve for a monopolist's slopes downward because demand elasticity is greater than one in the portion of the demand curve where the monopolist operates

8. If a monopolist's is operating in the elastic portion of its demand curve then an increase in price will decrease total revenue

9. Marginal revenue is negative when the demand curve is downward sloping

10. The lerner index measures the monopoly power as the markup of price over marginal cost

11. Compared to a competitive industry, ceteris paribus a standard monopoly firm restricts output and charges a higher price

12. A monopoly will produce the efficient rate of output if it engages in perfect price discrimination

13. Which of the following types of mergers directly reduces the number of competitors in an industry? Horizontal

14. Why do gas stations near airport often charge more for gasoline ? They face a smaller elasticity of demand

15. The deadweight loss due to monopoly restriction of output occurs over units of output for which the willingness to pay would be greater than MC but don't get produces

16. First degree discrimination is also known as perfect price discrimination