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An oligopolistic industry is one in which
A. a large number of small firms sell differentiated products.
B. a large number of small firms sell a homogeneous product.
C. a few large firms dominate the market for a standardized product.
D. a few large firms dominate the market for a differentiated product.
E. a few large firms dominate the market for a standardized or a differentiated
2. Marginal cost
A. declines as long as output increases.
B. initially rises as output is increased, but then begins to decline when the point of
diminishing returns is reached.
C. is defined as the difference between total cost and total variable cost. .
D. intersects both the average variable cost and the average total cost curves at their
3. Individual firms in a purely competitive industry do not advertise because
A. these firms do not make long-run profits.
B. the market demand curve cannot be increased.
C. the quantity of the product demanded is very large.
D. they produce a standardized (homogeneous) product.
E. None of the above – purely competitive firms advertise extensively.
4. Which of the following is correct? (Marginal Product = MP; Marginal Cost = MC)
A. When MP rising is MC is falling, and when MP is falling MC is rising.
B. When MP is rising MC is rising, and when MP is falling MC is falling.
C. When MP is at its maximum MC is at its maximum, and when MP is at its minimum MC
is at its minimum.
D. There is no relationship between Marginal Product and Marginal Cost.
5. Price is constant or “given” to the individual firm selling in a purely competitive market because
A. there are no good substitutes for this firm’s product.
B. each seller supplies a negligible fraction of the differentiated product sold in this
C. each seller supplies a negligible fraction of the standardized (homogeneous) product
sold in this market.
D. each purely competitive firm extensively advertises, thus the consumer has perfect knowledge of this market.
6. When a purely competitive firm produces 10 units of output, its average total cost is $20 and its average variable cost is $15. From this information it can be concluded that
A. this data is valid in the short run.
B. this firm’s total fixed cost for 12 units is $50
C. this firm’s average fixed cost for 10 units is $5.
D. Both A and C are correct
E. All of the above are correct.
7. Normal profits
A. are zero under pure competition in the long run.
B. are greater than the opportunity cost to the firm.
C. are necessary to keep a firm in the industry in the long run.
D. are not included in the firm’s economic costs of production.
8. Fixed costs
A. exist even if the firm produces zero output.
B. decrease continuously as the firm produces more output.
C. increase as the firm produces more output.
D. are equal to total variable costs minus total costs.
E. Both A and B are correct.
9. The basic characteristic of the short run is that
A. it is no more than two years in duration.
B. the firm does not have sufficient time to reduce its output to zero.
C. the firm does not have sufficient time to change the size of its plant.
D. the firm does not have sufficient time to change the amounts of any resources it
10. Suppose the total revenue for a firm is $16,000. Explicit costs are $14,000 and normal profit
is $5,000. Which of the following is correct?
A. Accounting and economic profit both equal $2,000.
B. Accounting and economic profit both equal -$3,000.
C. Accounting profit equals $2,000 while economic profit equals $0.
D. Accounting profit equals -$2,000 while economic profit equals -$3,000.
E. Accounting profit equals $2,000 while economic profit equals -$3,000.
11.A purely competitive firm’s short-run supply curve is
A. perfectly elastic at minimum average total cost.
B. upward sloping and equal to the portion of the marginal cost curve which lies above
the average total cost curve.
C. upward sloping and equal to the portion of the marginal cost curve which lies above the average variable cost curve.
D. upward sloping and equal to the portion of the marginal cost curve which lies
between the average variable cost curve and the average total cost curve.
12. Average variable costs
A. decrease continuously as output increases.
B. exist only in the long run.
C. equal average total costs minus average fixed costs.
D. are of no concern to the firm.
13.“I’m losing money, but with my investment in equipment I can’t afford to shut down at this time.” If this entrepreneur is attempting to maximize profits/minimize losses, his behavior is
A. irrational since fixed costs are eliminated when a firm closes down in the short run.
B. irrational since closing the plant is necessary to eliminate all losses in the short run.
C. rational if the firm is covering all its fixed costs in the short run.
D. rational if the firm is covering all its variable costs in the short run.
14. Marginal product
A. is always less than average product.
B. diminishes continuously as a firm increases production.
C. may increase, then diminish, and ultimately become negative as a firm increases
D. may initially increase, then diminish, but never becomes zero or negative as a firm
15.Diseconomies of scale arise primarily because
A. the short-run average total cost curve rises when marginal product is increasing.
B. beyond some point marginal product declines as additional units of a variable
resource (e.g., labor) are added to a fixed resource (e.g., capital).
C. of the difficulties involved in managing and coordinating a large business enterprise.
D. firms must be large both absolutely and relative to the market in order to employ the
most efficient productive techniques available.
16.In the short run a firm’s output
A. cannot be increased or decreased.
B. may be altered by changing the size of its plant and equipment.
C. can vary as a result of new firms entering or leaving the industry.
D. can vary as a result of using a fixed amount of plant and equipment more or less
E. both B and C are correct.
17. The market demand “curve” for a purely competitive firm is ____________ while the demand “curve” for the purely competitive industry/market is ____________.
A. downward sloping; perfectly elastic
B. perfectly elastic; downward sloping
C. downward sloping; perfectly inelastic
D. perfectly inelastic; downward sloping
18.The long-run average total cost curve for some industries have an extended range of constant returns to scale. This implies that
A. neither economies of scale nor diseconomies of scale exist in this industry.
B. this industry is comprised of a very large number of small firms.
C. this industry is comprised of a very small number of very large firms.
D. both relatively small and relatively large firms coexist in this industry.
19. The defining characteristics of a purely monopolistic market are
A.many suppliers, unique product, and easy entry.
B.many suppliers, differentiated products, and easy entry.
C.single supplier, product with close substitutes, and barriers to entry.
D.single supplier, unique product, and barriers to entry.
20. Farmer Jones produces and sells soy beans in a purely competitive market. If there is no change in his costs of production and the price of soy beans falls, in the short run Farmer Jones should
A. increase production to offset the decrease in price.
B. stop producing soy beans if the new price is less than marginal revenue.
C. continue growing soy beans only if the new price covers average total costs.
D. continue growing soy beans only if the new price covers average fixed costs.
E. continue growing soy beans only if the new price covers average variable costs.
21. Assume that a purely competitive firm is producing where MR = MC = $14. Additionally, data for this firm shows that MC = AVC at $16 and MC = ATC at $20. On the basis of this information, this firm should
A. close down in the short run to minimize losses.
B. realize an economic profit of $6 per unit of output.
C. minimize economic losses by producing in the short run.
D. maximize economic profits by producing in the short run.
22. If a firm’s average total costs of production increase as the firm increases its output in the long run, we can conclude that
A. economies of scale are being encountered.
B. the firm is in the stage of increasing returns.
C. the firm is in the stage of diminishing returns.
D. diseconomies of scale are being encountered.
23. The American restaurant industry would be described as ____________ while the restaurant industry in the single-diner town of Timbuktu would be described by the economist as ___________.
A. purely competitive; monopolistically competitive.
B. a pure monopoly; monopolistically competitive.
C. monopolistically competitive; a pure monopoly.
D. monopolistically competitive; purely competitive.
24. Which of the following is a long run adjustment?
A. Starbucks extends the hours its stores are open by 2 hours per day.
B. A foreign owned automobile manufacturer opens a new plant in the U.S.
C. Mariano’s supermarket hires four additional workers for its deli department.
D. A local bakery lets two of its current employees go. (i.e., reduces its workforce)
E. All of the above are long run adjustments.
25. If economic profits are being earned in a purely competitive industry in the short-run, in the long run?
A. the economic profits will continue to exist.
B. new firms will enter the industry and the economic profits will be eliminated.
C. existing firms will leave the industry and economic profits will be eliminated.
D. the firms in this industry will increase their output in order to increase their economic
26.An industry which consists of 75 firms, none of which has more than 0.5 percent of total market sales, and produces a differentiated product is operating in
A. pure competition.
B. monopolistic competition.
D. pure monopoly.
E. either A or B – this industry can be operating in pure competition and can be operating in
27. If a firm must always sell its product at the market price and it wants to earn as much profit
as possible, it should
A. produce the quantity of output at which marginal cost is minimized.
B. keep marginal cost lower than price, so profits will be greater than zero.
C. produce the quantity of output at which marginal cost has risen to equality with price.
D. try to sell all the output it can produce so that its fixed costs are spread across the largest possible number of units.
28. When average variable cost is increasing, which of the following must be true?
A. Average total cost must be increasing.
B. Average fixed cost must be increasing.
C. Marginal cost must be above the average variable cost.
D. Both A and C are correct.
E. All of the above are correct.
29. When technology advances, thus improving the purely competitive firm’s productivity,
the firm will most likely experience
A. a decrease in average fixed costs.
B. an increase in average variable costs.
C. a decrease in marginal costs and an increase in supply.
D. an increase in marginal costs and an increase in supply.
30. It is most difficult for new firms to enter which of the following market structures?
A. pure competition
B. monopolistic competition
D. pure monopoly
31. The most important goal of the purely competitive firm is to
A. minimize costs.
B. maximize total revenue.
C. maximize average (per unit) profits.
D. maximize total normal profits.
E. maximize total economic profits.
32. If the total variable cost of 9 units of output is $90 and the total variable cost of 10 units of output is $120, then
A. the average variable cost of 10 units is $10.
B. the average fixed cost of 10 units is $3.
C. the marginal cost of the tenth unit is $30.
D. the firm is operating in the range of increasing marginal returns.
33. Marginal product is
A. the change in total output when the firm employs an additional unit of a fixed resource.
B. the change in total output when the firm employs an additional unit of one of its variable
C. the increase in total output when the firm employs fewer resources.
D. the change in the physical appearance of a product when a new model of the
product is developed.
E. Both A and B are correct.
34. The basic difference between the "short run" and the "long run" is that:
A. all costs are fixed in the short run, but all costs are variable in the long run.
B. economies of scale are present in the short run, but not in the long run.
C. the law of diminishing returns applies in the long run, but not in the short run.
D. at least one resource is fixed in the short run, while all resources are variable in
the long run.
E. at least one resource is variable in the short run, while all resources are fixed in
the long run.
35. If you own and operate a small bakery, which of the following would be a variable cost in the short run?
A. your normal profit
B. interest on business loans
C. annual lease payment for use of the building
D. baking supplies (flour, salt, etc.)
E. Both A and D are variable costs.
36. If a purely competitive firm closes down in the short run
A. its losses will be zero.
B. it will earn a normal profit.
C. it will take a loss equal to its fixed costs.
D. it will take a loss equal to its variable costs.
E. it will take a loss equal to its marginal cost.
37. An example of an implicit cost to a farmer growing wheat on 100 acres of land that he owns (and has been in his family for 50 years) is the amount of money he
A. would receive if he rented the land to someone else.
B. must pay a part-time farm worker who is not a family member.
C. spends on fuel (gasoline or diesel fuel) for his farm equipment.
D. must pay a trucking company to transport his harvested wheat to the market.
E. All of the above are examples of implicit costs.
38. The purely competitive firm faces a demand schedule that is
A. perfectly inelastic because there are no good substitutes for the firm's product.
B. perfectly elastic because each seller supplies a negligible fraction of total supply.
C. of unit elasticity throughout since a standardized product is being produced..
D. downward sloping and product differentiation is reinforced by extensive
39. The implicit economic, or opportunity, cost of attending school
A.is the same for all people.
B.is higher for people with greater earnings potential.
C.is higher for teenagers than for people in their 30s.
D.depends only on the amount of tuition charged by the school.
40. One of the economies of scale experienced by the Mauna Loa Macadamia Nut Farm is
A. production of a large output.
B. use of nut shells as fuel.
c. the small size of their farm.
D. good weather on the Big Island.
E. managerial inefficiencies because of its large size.
41. If all firms producing a product in a perfectly competitive market are required to adopt antipollution devices that increase their costs of production, one would expect:
A. the market demand for the product to fall.
B. the market supply curve to shift to the left.
C. the long run economic profits of the individual firms to fall
D. the short run economic profits of the individual firms to remain unchanged
42. Product differentiation can be
A. an actual difference in one product versus another.
B. due to consumers’ perception of product differentiation due to brand names.
C. both A and B.
D. None of the above – all products are identical.
43. Fixed costs
A. exist even if the firm produces zero output.
B. are equal to total variable costs minus total costs.
C. decrease continuously as the firm produces more output.
D. increase continuously as the firm produces more output.
44. In pure competition, the marginal revenue of a firm always equals
A. marginal cost.
B. average total cost.
C. average variable cost.
D. the price of the product.
E. None of the above.
Fill- In-The-Blank: In the space provided to the left of each description place the name of the economic concept being described. There is only one correct term for each description.
_________________ 1. Cause of increasing long-run average total cost
_________________ 2. Total Revenue – (Explicit + Implicit Costs)
_________________ 3. Fire Insurance Premium
_________________ 4. The amount the entrepreneur could earn elsewhere
_________________ 5. Market structure where one firm produces a unique product
_________________ 6. Change in total variable cost as output changes by one unit
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