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					                                   Practice Test 3 Microeconomics
       Name:__________________________________ClassTime:______________________

Directions: For each of the following questions provide the solution in the space provided. There
is only one correct solution to each question.

_____1.      Which of the following is not an assumption of the theory of perfect competition?
      a. There are many sellers and many buyers, none of which is large in relation to total sales or
         purchases.
      b. Each firm produces and sells a differentiated product.
      c. Buyers and sellers have all relevant information with respect to prices, product quality,
         and sources of supply.
      d. There is easy entry and exit.
       ANS: B

_____2.       The theory of perfect competition generally assumes that
      a. sellers act independently of other sellers, but buyers do not act independently of other
         buyers.
      b. buyers act independently of other buyers, but sellers do not act independently of other
         sellers.
      c. buyers and sellers act independently of other buyers and sellers.
      d. neither buyers nor sellers act independently of other buyers and sellers.
       ANS: C

_____3.       In the theory of perfect competition,
      a. sellers of the product are not influenced by other sellers and therefore have virtually
         complete control over the production and pricing of their product.
      b. buyers of the product may have a preference as to whom they purchase from based on
         brand loyalty.
      c. buyers and sellers of the product know everything that there is to know about the product.
      d. it can be quite expensive for a firm to enter this type of market, but once the firm is
         established, it will be a profitable venture.
       ANS: C

_____4.      Does a real-world market have to meet all the assumptions of the theory of perfect
      competition before it is considered a perfectly competitive market?
      a. No, probably no real-world market meets all the assumptions of the theory of perfect
         competition. All that is necessary is that a real-world market behave as if it satisfies all the
         assumptions.
      b. Yes, if a real-world market does not meet the assumptions, then it cannot be considered a
         perfectly competitive market.
      c. Yes, unless it is a new market such as the computer market. New markets are not held to
         the same assumptions as old, more established markets.
      d. No, but it does have to meet the assumption of producing and selling a homogeneous
         product. It does not have to fully meet the other assumptions.
       ANS: A



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_____5.         A "price taker" is a firm that
      a.   does not have the ability to control the price of the product it sells.
      b.   does have the ability, although limited, to control the price of the product it sells.
      c.   can raise the price of the product it sells and still sell some units of its product.
      d.   sells a differentiated product.
      e.   none of the above
      ANS: A

_____6.        The demand curve for a perfectly competitive firm
      a.   is downward sloping.
      b.   is upward sloping.
      c.   is perfectly horizontal.
      d.   is perfectly vertical.
      e.   may be downward or upward sloping, depending upon the type of product offered for sale.
      ANS: C

_____7.        The market demand curve in a perfectly competitive market is
      a.   downward sloping.
      b.   upward sloping.
      c.   perfectly horizontal.
      d.   perfectly vertical.
      e.   downward or upward sloping depending upon the type of product offered for sale.
      ANS: A

_____8.        The perfectly competitive firm will seek to produce the output level for which
      a.   average variable cost is at a minimum.
      b.   average total cost is at a minimum.
      c.   average fixed cost is at a minimum.
      d.   marginal cost equals marginal revenue.
      ANS: D

_____9.        Marginal revenue is
      a.   total revenue divided by the quantity of output.
      b.   total profit minus total costs.
      c.   the change in total output brought about by using an additional unit of a variable input.
      d.   the change in total revenue brought about by selling an additional unit of the good.
      e.   the change in total revenue minus the change in total costs.
      ANS: D

_____10.        A perfectly competitive firm will increase its production as long as
      a.   total revenue is less than total cost.
      b.   the total revenue curve is rising.
      c.   marginal revenue is greater than marginal cost.
      d.   the marginal revenue curve is rising.
      ANS: C




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_____11.      For a perfectly competitive firm, profit maximization or loss minimization occurs at the
      output at which
      a. MR = MC.
      b. MR = AVC.
      c. P = ATC.
      d. MR = ATC.
       ANS: A

       Exhibit 8-3

            (1)             (2)                    (3)
           Price        Quantity Sold           Total Cost
            $10             40                    $374
            $10             41                    $376
            $10             42                    $380
            $10             43                    $385
            $10             44                    $390
            $10             45                    $400
            $10             46                    $412
            $10             47                    $425

_____12.       Refer to Exhibit 8-3. What quantity of output would the profit-maximizing firm produce?
      a.   41 units
      b.   42 units
      c.   43 units
      d.   45 units
      e.   none of the above
       ANS: D

_____13.       Refer to Exhibit 8-3. What is the gain in profit from producing 45 units of the product
      rather than producing 42 units?
      a. $40
      b. $30
      c. $10
      d. $20
      e. $0
       ANS: C

_____14.       The perfectly competitive firm will produce in the
      a.   short run if price is below average variable cost.
      b.   long run if price is below average variable cost.
      c.   short run if price is below average total cost but above average variable cost.
      d.   long run if price is below average total cost but above average variable cost.
       ANS: C




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_____15.      Consider the following data: equilibrium price = $7.50, quantity of output produced =
      100 units, average total cost = $9, and average variable cost = $8. What will the firm do and why?
      a. Shut down in the short run, because price is below average variable cost.
      b. Shut down in the short run, because it will be taking a loss of $50.
      c. Continue to produce in the short run, because price is greater than average variable cost.
      d. Continue to produce in the short run, because firms are always stuck with having to
          produce in the short run.
      e. none of the above
       ANS: A

_____16.     If firms are earning zero economic profits, they must be producing at an output level at
      which
      a. price equals marginal cost.
      b. price equals average total cost.
      c. price equals average variable cost.
      d. marginal revenue equals marginal cost.
      e. none of the above
       ANS: B

_____17.        Why must profits be zero in long-run competitive equilibrium?
      a.   If profits are not zero, firms will enter or exit the industry.
      b.   If profits are not zero, firms will produce higher-quality goods.
      c.   If profits are not zero, marginal revenue will rise.
      d.   If profits are not zero, marginal cost will rise.
       ANS: A

_____18.      Which of the following is an assumption of the theory of monopoly?
      a.   There are extremely high barriers to entry.
      b.   There are many sellers.
      c.   The product has a number of close substitutes.
      d.   The product is of extremely high quality.
       ANS: A

_____19.        Which of the following is an example of a legal barrier to entry?
      a.   a public franchise
      b.   a patent
      c.   exclusive ownership of a scarce resource
      d.   a and b
      e.   a, b, and c
       ANS: D

_____20.        A natural monopoly exists when
      a.   a monopolist produces a product, the main component of which is a natural resource.
      b.   economies of scale are so large that only one firm can survive and achieve low unit costs.
      c.   a firm is the exclusive owner of a key resource necessary to produce the firm’s product.
      d.   there are no close substitutes for a firm's product.
       ANS: B


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_____21.      A price searcher/maker is
      a. a person who actively seeks out the best price for a product that he or she wishes to buy.
      b. a firm that seeks out buyers who are willing to pay the price that the seller is asking for the
         product.
      c. a firm that has the ability to control to some degree the price of the product it sells.
      d. actually any firm or consumer, because each market "player" searches for the best price at
         which it can sell or buy.
       ANS: C

_____22.        In maximizing profits, a single-price monopolist will charge a price that is
      a.   less than marginal cost.
      b.   equal to marginal cost.
      c.   greater than marginal cost.
      d.   There is not enough information to answer the question.
       ANS: C

_____23.      If a monopolist wishes to sell an additional unit of the good, then
      a. it must raise its price to signal consumers that its product is now a more important part of
         their budget, and they will purchase more.
      b. like a competitive firm, it can simply make more output available and not lower price.
      c. it must lower price.
      d. it can raise price and not worry that sales will decrease.
      e. a and d
       ANS: C

_____24.       A monopolist can sell 15,000 units at a price of $100 per unit. Lowering price by $1
      raises the quantity demanded by 500 units. What is the change in total revenue resulting from this
      price change?
      a. $34,500
      b. $12,500
      c. $65,500
      d. -$35,500
       ANS: A

_____25.       If a monopolist is earning profits, then price is greater than
      a.   average total cost.
      b.   marginal revenue.
      c.   average variable cost.
      d.   marginal cost.
       ANS: A




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_____26.       In a monopolistically competitive industry,
      a.   each firm in the industry produces a slightly differentiated product.
      b.   there are barriers to entry.
      c.   there are barriers to exit.
      d.   there are few sellers.
       ANS: A

_____27.     The monopolistic competitor faces a __________ demand curve and therefore is a price
      __________.
      a. downward-sloping; searcher/taker.
      b. horizontal; taker.
      c. downward-sloping; taker.
      d. horizontal; searcher/taker.
       ANS: A

_____28.       Compared to a monopolistic competitor, a monopolist produces a good with __________
      substitutes and so has a __________ elastic demand curve.
      a. fewer; more
      b. fewer; less
      c. more; more
      d. more; less
       ANS: B

_____29.       Some monopolistic competitors earn positive economic profits in the long run because
      a.   there are high barriers to entry in monopolistic competition.
      b.   they have successfully differentiated their products from their competitors' products.
      c.   there is easy entry and exit.
      d.   b and c
      e.   none of the above
       ANS: B

_____30.      One of the ways in which monopolistic competitors differ from perfect competitors is
      that
      a. perfect competitors produce the quantity of output at which marginal revenue equals
           marginal cost and monopolistic competitors do not.
      b. perfect competitors produce a homogeneous product and monopolistic competitors do not.
      c. there is easy entry and exit for a perfect competitor, but not for a monopolistic competitor.
      d. a and c
      e. b and c
       ANS: B




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_____31.       The demand curve facing a monopolistic competitor will be more elastic than the demand
      curve facing a monopolist because
      a. there are barriers to exit for the monopolist, but not for the monopolistic competitor.
      b. the monopolistic competitor attains resource-allocative efficiency, but the monopolist does
          not.
      c. there are substitute goods for what the monopolistic competitor produces, but not for what
          the monopolist produces.
      d. the monopolist is a price searcher, but the monopolistic competitor is not.
       ANS: C

_____32.     Does the monopolistic competitor exhibit resource-allocative efficiency?
      a. No, because at its chosen quantity of output, price does not equal the lowest possible
         average total cost.
      b. Yes, because at its chosen quantity of output, price equals marginal cost.
      c. No, because at its chosen quantity of output, price is greater than marginal cost.
      d. Yes, because at its chosen quantity of output, price is less than marginal cost.
       ANS: C

_____33.       The monopolistic competitor produces the output at which
      a.   price equals marginal cost.
      b.   marginal revenue equals marginal cost.
      c.   there is resource allocative efficiency.
      d.   average total cost is at a minimum.
       ANS: B

_____34.       In long-run equilibrium, the monopolistic competitor will most likely
      a.   be earning zero economic profit.
      b.   be operating at the lowest point on its average total cost curve.
      c.   be able to sell all it produces at the current price.
      d.   charge a price that is equal to marginal cost.
       ANS: A




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Short Answer: For each question the points are designated and each section is
equally weighted among the questions.

Question 1 Markets  Perfect Competition and Monopoly (50 pts)

Given the following graphs and information answer the following questions (a) – (c)
(1) Q*=10,000 (2) Pmarket = $25 (3) q* = 2000 (4) ATC at q* = 20
-make sure to show work and method for all of the questions.


                                                            P                           MC
                     P           Market                                   Firm
Graphically:                                  S

                 Pmarket                                                                      Dfirm


                                                  D

                                                  Q                                       Q
                                 Q*                                           q*

(a) How many firms are supplying the market?

Recall that Q=q*N  so we can find N=Q/q = 10,000/2,000 = 5




(b) What are the revenues, profits, and costs for the entire market and an individual firm?
Make sure to show your work and method.

Market:
Total Revenue: P*Q = 25 * 10,000 = 250,000
Total Cost: ATC*Q = 20 * 10,000 = 200,000
Total Profit = Q (P – ATC) or TR – TC = 50,000

For Firms simply divide each by 5.

(c) What type of market are the above graphs illustrating? Please explain (talk about the
elasticity of the D-curve for the firm and whether or not they are a price-taker/price-maker).

The firm does not control price. It takes market price as a given and must accept this
market outcome as the price it will receive for its good. So it is perfectly elastic
indicating that it is perfect competition. This goes back to the idea that there are many
sellers and if they did raise price they would lose all demand.




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(d) Show how a monopoly profit maximizes. Please explain how the results differ from that
of a firm in perfect competition.

In the SR – we set price equal to MR and then go up to the demand curve to find the price
we can change. We then compare it to cost on the ATC


Graphically: P
                                           MC ATC


 Profit


                                                  Dmonopoly

                                                  Q
                          MR


In the LR – in the long run firms are not allowed to enter. So as long as ATC or Demand
does not change to erode profits we would expect positive profit in the LR as well.
Recall that in perfect competition we have that firms enter the market and drive LR profit
to 0. This is the main difference in the market. There are no barriers to entry.

(e) From an efficiency standpoint explain why a Monopolist market is less efficient than a
perfectly competitive market.

-The main difference between monopoly and perfect competition there is an
underutilization of resources due the fact that:
(1) QMonoply < QPC and
(2) The prices that are charged in Monopoly is are higher  PMonopoly > PPC
(3) Price exceeds MC in the Monopoly market while in the PC we have price exactly
equal to MC and at the minimum of ATC in the LR. So in a perfectly competitive market
we have 0 economic profit in the LR while in a monopoly market we have (+) profits still
realized.




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