EXAM 3A-- ECONOMICS 202 -- PROFESSOR ALLEN -- FALL 2002
1. According to your text and a study of aggregate profit data by economists Duca and VanHoose, the U.S.
economy is less competitive today than it was in the 1970s.
2. When a group of firms collude to set the highest common price they believe they can charge without new firms
seeking to enter the industry in search of relatively high profits, this is called:
a. a monopoly; b. monopolistic competition; c. the limit-pricing model; d. price discrimination; e. none above
3. An association of producers in an industry that agree to set common prices and output quotas to prevent
competition is known as:
a. a monopoly; b. monopolistic competition; c. an oligopoly; d. a cartel; e. none above.
4. An example of a barrier to entry in monopolistic competition is:
a. economies of scale; b. exclusive government franchise to sell; c. patent; d. all above; e. none above
5. In perfect competition both producers and consumers are assumed to be price-takers.
6. In perfect competition the industry demand curve is downward sloping, but the typical firm’s demand curve
is horizontal at the market price and the products of all sellers are perfect substitutes for the products of all
other sellers.
7. Ignoring the shut-down option, the perfectly competitive firm’s profit maximizing rule is:
Produce the quantity where:
a. P = ATC; b. MC = P; c. ATC = MR; d. MC = AVC; e. none above.
8. In the short-run the perfectly competitive firm should shut down if:
a. if TR < TVC; b. TFC = (TC - TVC); c. TR < MR; d. MR < MC; e. none above
9. In the short-run the monopolist should shut down if:
a. if AVC > P; b. TFC > TVC; c. TR < AVC; d. MR < MC; e. none above
10. In the long-run the monopolist will go out of business if:
a. if P < ATC; b. TR < TC; c. P < (AFC + AVC); d. all above; e. none above
11. If a monopoly is producing where MC = 100 and MR = 80, it is producing too much and should raise its price
and lower its output to maximize its profits.
12. When a monopolistically competitive firm is in long-run equilibrium:
a. Economic profits = 0; b. it earns a normal profit; c. it earns an accounting profit; d. all above; e. none above.
13. Assume the following information about a perfectly competitive firm.
Q = 10; MC = 8; ATC = 8; TR = 100. This firm is earning a positive economic profit but it should ______ its
output in order to maximize its economic profit.
a. increase; b. decrease; c. not change; d. not enough info to know what it should do regarding its output
14. Suppose a perfectly competitive, constant-cost, industry is in the long-run equilibrium. Assume further this
equilibrium is disturbed by a decrease in the price of an important input. After this industry attains the new
long-run equilibrium, economic profits will be zero, there will be more firms in the industry, and the market
price will be the same as that which existed before the equilibrium was disturbed.
15. When long-run equilibrium in perfect competition (constant-cost) is disturbed, the primary force that moves
it to a new long-run equilibrium is:
a. a change in technology
d. the law of diminishing returns
b. the entry / exit of resources into / from the industry
e. all of the above.
c. changes in input prices
16. We conclude that perfect competition is “efficient” because in long-run equilibrium:
a. dead-weight loss = 0
c. all possible mutually beneficial exchanges have occurred.
b. Total Market Surplus is maximized.
d. all of the above.
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17. In the long-run in perfect competition and in monopolistic competition P = MC, but in monopoly = P > MC.
18. Long-run economic profits are always zero in perfect competition but are always positive in monopoly.
19. In the long-run in perfect competition P = ATCMIN, but in both monopoly and in monopolistic competition
in the long-run P > ATCMIN.
20. If MC > 0, the profit-maximizing monopoly always produces and charges a price in the elastic range of its
demand function.
21. In which of the following must normal profits be positive in the long-run:
a. perf. comp; b. monopoly; c. monop. comp.; d. oligopoly; e. all above.
22. In which of the following can accounting profits be negative in the short-run:
a. perf. comp; b. monopoly; c. monop. comp.; d. oligopoly; e. all above.
ANSWER THE NEXT 6 QUESTIONS WITH REFERENCE TO THE ADJACENT DIAGRAM OF A PROFITMAXIMIZING PERFECTLY COMPETITIVE FIRM IN THE SHORT RUN
23. At P = 10, Q = ____?
a. L; b. R; c. S; d. T; e. not enuf info to know.
24. If P = 6 and Q = S, economic profits are negative but
the loss would be less at Q = ____.
a. zero; b. L; c. R; d. T; e. none above.
25. At P = 10 and Q = Y, economic profits:
a. = 0; b. > 0; c. < 0; d. not enuf info to know.
26. At what prices will resources exit this industry
in the long run?
a. 10 & 6; b. 8 & 6; c. 6 & 4; d. 6; e. 4
27. If P = 4, this firm will shut-down in the short-run.
28. Assume Y = 20 and at Y AVC = $9. If this firm were to
shut down economic profits =:
a. zero; b. - 20; c. 20; d. -180; e. none above.
Answer the next 3 questions with reference to the adjacent
diagram of a perfectly competitive industry.
29. If a price ceiling is set at G, Total Producer Surplus = :
a. FHR; b. FGN; c. FHMN; d. GWLN e. none above
30. If a price ceiling were set at G, the dead-weight loss =:
a. zero; b. HKLR; c. NLR; d. NMR; e. GKLRN.
31. Assume a price floor at K. As compared to equilibrium
with no price controls how much of Total Consumer
Surplus has been converted to Producer Surplus?
a. GHMN b. HKLR; c. MLR; d. HKLM; e. NMR.
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32. If neither demand nor supply is perfectly elastic or perfectly inelastic, effective price floors always decrease
Total Market Surplus and Total Consumer Surplus, but they do not always increase Total Producer
Surplus.
ANSWER THE NEXT 3 QUESTIONS WITH REFERENCE TO THE FOLLOWING DIAGRAM OF A SINGLE-PRICE
MONOPOLIST THAT BEHAVES CONSISTENT WITH THE
PROFIT-MAXIMIZING RULE.
33. This firm’s economic profits are > 0, but this
is possible only in the short-run because in the
long-run the entry of new firms will compete these
profits down to zero.
34. If this firm produces 10 units more than the
profit maximizing quantity, the marginal economic
profit on each of these 10 units will be negative.
35. If this firm were to charge the price that maximized
total revenue, economic profits would be positive,
but not maximized.
36. The classic case against monopoly concludes that monopoly causes prices to be higher and quantity to be
smaller than if the industry were perfectly competitive.
37. In the classic case against monopoly the “dead-weight loss” occurs because the reduction in Total
Consumer Surplus is greater than the increase in the monopolist’s Total Producer Surplus thereby
reducing Total Market Surplus.
38. A prominent feature of monopolistic competition is nonprice competition.
39. Which of the following set of features characterizes oligopoly.
a.
large number of small firms, all firms are price-takers, homogeneous product, no barriers to entry, no
collusion among sellers, perfect information among all participants.
b.
large number of small firms, all firms are price searchers, differentiated product, no barriers to entry, no
collusion among sellers.
c.
few large firms dominate the market and sometimes there are several small fringe firms, product
homogeneous or differentiated, barriers to entry, mutual interdependence among firms.
d.
single seller, no good substitutes therefore its product is unique, barriers to entry,
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Game theory is a tool used to study decision-making by oligopolists. Using the procedure discussed in class
when we studied the “prisoner’s dilemma” type of game, consider the following matrix of profit payoffs.
Assume the game is played only once and the participants are unable to communicate with each other.
ANSWER THE NEXT QUESTION BASED UPON THIS TABLE
FIRM X's Prices
$20
$19
X: 2500
X: 3000
Z: 2500
Z: 1000
X: 1000
X: 1500
Z: 3000
Z: 1500
$20
FIRM Z's
Prices
$19
40. The best (dominant) strategy for Firm X and for Firm Z, respectively, is to set price at:
a. 20 and 20; b. 20 and 19; c. 19 and 20; d. 19 and 19; e. there is no single best price for either X or Z.
Ex 3 Key
F02
WHITE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
ANS
B
C
D
E
A
A
B
A
A
D
A
D
A
B
B
D
B
B
A
A
E
E
D
C
A
C
A
B
B
C
D
A
B
A
B
A
A
A
C
D