Part I. Multiple Choice Questions- please circle the correct answer. 1. A firm w

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Part I. Multiple Choice Questions- please circle the correct answer.

1. A firm will have monopoly power if

A. it is the sole producer of its product

B. it has a market share of at least 25%.

C. it can set its price

D. it is making high profits.

2. All of the following are examples of unfair competition, except

A. Restricting supply to retailers who agree to take a complete range of items.

B. A monopoly charging excessive prices because of lack of competition.

C. Market sharing; where a group of firms agree to share a market and fix prices in their favor

D. A firm taking out a patent for a drug it has invented

3. Assume the demand curve for compact discs slopes downwards, and the supply curve slopes upwards. If the price of CD players decreases, then:

A. The equilibrium price of compact discs will fall

B. The equilibrium price of compact discs will rise

C. The equilibrium price of compact discs will stay the same

D. None of the above are correct

4. The value of price elasticity of demand:

A. Depends on the units that are used to measure quantities

B. Has the same value as the slope of the demand curve

C. Depends on the units that are used to measure prices

D. Does not depend on the units in which quantity and price are measure

5. Demand for a good is likely to be more elastic

A. The smaller the fraction of consumer income absorbed by the good

B. In the short run than in the long run

C. The greater the number of available substitute for the good

D. The more broadly defined the good

6. Why is the demand curve for the output of a perfectly competitive firm perfectly elastic?

A. Because the market demand curve is perfectly elastic

B. Because many other firms produce a perfect substitute for this firm’s output

C. Because the firm earns a normal rate of return

D. Because there is no entry or exit in the short run

E. Because the firm’s supply curve is perfectly elastic

7. In the long run, which of the following does a perfectly competitive firm have NO control over?

A. Its capital-labor mix

B. The price of the output it sells

C. The number of worker it hires

D. Its production technology

E. All of the above

8. Zero economic profit means the firm’s revenue

A. Equals zero

B. Is lower than that of similar firms

C. Just covers the firm’s labor cost

D. Just covers all costs, including opportunity cost

E. Is not high enough to incur a tax bill

9. Marginal cost typically

A. Decrease as output increases

B. First increase then decrease as output increases

C. Increase as output increases

D. First decrease then increase as output increases

E. Have no set pattern

10. Which of the following statements is true

A. The profit-maximizing perfectly competitive firm will produce up to the point where the price of its output is just equal to short-run marginal cost

B. The marginal cost curve of a perfectly competitive firm is the firm’s short-run supply curve

C. The profit-maximizing output level for all firms is the output level where marginal revenue equals marginal cost

D. There is some price below which the firm will shut down its operations and simply bear losses equal to fixed costs even if price is above marginal cost.

E. All of the above

11. Which of the following is a characteristic of a perfectly competitive market?

A. Firms are price setters.
B. There are few sellers in the market.
C. Firms can exit and enter the market freely.
D. All of the above are correct

E. None of the above is correct

12. Fill in the blanks from the list below (A - E)

For a competitive firm, the level of output that maximizes profits is when MR (marginal revenue) ________MC (Marginal Cost), and for monopolist it is when MR ______ MC

A. Equals, is less than

B. Is less than, equals

C. Is greater than, equals

D. Equals, equals

E. Equals, is greater than

13. If the price of gasoline is $2.0 and the price elasticity of demand is 0.5, how much will a 10 % reduction in the quantity placed on the market increase the price?

A. There will be 22% increase in the price

B. There will be 5% increase in the price

C. There will be 10 % increase in price

D. There will be 20% increase in price

E. None of the above

14. In the long run, a profit-maximizing firm will choose to exit a market when

A. Fixed costs exceed sunk costs.
B. Average fixed cost is rising.
C. Revenue from production is less than total costs.
D. Marginal cost exceeds marginal revenue at the current level of production.

15. “Consumers understandably like lower prices, but they should understand there is a great difference between a lower price produced by government price ceiling and a lower price that comes about through normal market channels, one benefits the consumer, the other may not.”

A. This statement is not true, Consumers are benefited when the government lowers the price and the consumers are benefited when businesses lower the price.

B. This is because when the government forces prices down, there is a shortage and reduction in total surplus. Lower prices through markets don’t create shortage but they do benefit consumers.

C. This is because the government forces prices down, there is a surplus and reduction in total surplus. Lower prices through markets don’t create surpluses but they do benefit consumers

D. This is because when markets force the prices down, there is a shortage and reduction in total surplus. Lower prices through government actions don’t create shortages but they do benefit consumers

E. None of the above

Explanation / Answer

A). In general, different countries there are different laws to consider monopoy power. In U.S mostly the consensus followed is the market power of 25% or more is considered monopoly power.

b). Taking out a pantent for a drug invented is not unfair competition. Rest all the three are, where they have the efficiency or potential to reduce prices or atleast remain stable but to increase profits, unfair competition is practiced.

c). As the price of CD players fall, being a complementary good, the demand for CD's would increase as now people would be buying more of CD players, hence demand curve of CD's shift to right and the equilibrium price rises.

d). The value of price elasticity of demand does not consider the units in which price and quantity are measured as the price elasticity of demand is the ratio and in ratios no units are considered as they get cancelled out.

e). The greater the number of substitutes available for a good, the more elastic is the demand. Close substitutes make a consumer's choice flexible. If the price of one good increases, another good with same characterstics can fulfill the demand at a lower cost would be preferred over. For example, pepsodent and colgate or coke and pepsi.

f). In perfect competition the goods produced are perfectly homogeneous because of which goods are perfect substitutes of each other and hence the demand curve become perfectly elastic, any change in price would bring about a great change in demand curve.

g).Zero economic profit means the firm covers all costs including opportunity costs.

h).Marginal cost curve is a U-shaped curve first first decreases as the number of output increases and then increases with the increased output as in thr short run the firms have atleast one fixed factor of production and the production limits come to its exhaustive limits.

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