8
Business Costs
and Production
Practice What You Know
Bob runs a small family restaurant. How would
you describe the monthly rent he pays on the
building?
A.
B.
C.
D.
Explicit cost, variable cost
Explicit cost, fixed cost
Implicit cost, variable cost
Implicit cost, fixed cost
Practice What You Know
Which of the following is an example of an
implicit cost?
A.
B.
C.
D.
Wages paid to employees
Cost of food delivery
The opportunity cost of the owner’s time
Monthly insurance premiums
Practice What You Know
Suppose the wage rate that a company pays
its workers increases. In terms of the cost
equations, which of the following is true?
A.
B.
C.
D.
TC will increase, but ATC will decrease
TVC will increase, but AVC will decrease
The MC curve will become hill-shaped
The TFC and AFC will not change
Practice What You Know
Total output with seven workers is Q = 70.
Total output with eight workers is Q = 82.
What is the marginal product of the eighth
worker?
A.
B.
C.
D.
12
10
82
8
9
Firms in a
Competitive
Market
Practice What You Know
Steve runs a competitive sandwich shop.
Right now, he is producing output at a level
where MR > MC. To increase his profits,
Steve should
A.
B.
C.
D.
Try to use more capital in his production
Try to use more labor in his production
Produce less output
Produce more output
Practice What You Know
If a competitive industry is making positive
economic profits, what will eventually happen
in this industry?
A.
B.
C.
D.
The market supply will shift to the left
The market supply will shift to the right
The market demand will shift to the left
The market demand will shift to the right
Practice What You Know
Suppose a competitive firm is faced with a
price in the short run that is below ATC but
above AVC. In the short run, this firm should
A.
B.
C.
D.
Shut down
Exit the industry
Raise the price of the good
Produce at the output level where MR = MC
Practice What You Know
What do you suppose is one of the main
reasons that competitive firms all earn zero
economic profits in the long run?
A.
B.
C.
D.
Each firm has a lot of market power
Firms all want to earn zero profits
Free entry and exit in the industry
The cost curves are U-shaped
Practice What You Know
A competitive firm will shut down and produce
output level Q = 0 if
A.
B.
C.
D.
Price < min (ATC)
min (AVC) < Price < min (ATC)
Price < min (AVC)
P = MR
10
Understanding
Monopoly
Practice What You Know
Which of the following firms will most likely be
a natural monopoly?
A.
B.
C.
D.
A grocery store
A cable TV company
A gas station
A barbershop
Practice What You Know
Which of the following most accurately
describes a patent?
A.
B.
C.
D.
An incentive to innovate
A profit-sharing mechanism
A redistribution of wealth
An original invention
Practice What You Know
What is true for a profit-maximizing monopoly?
A.
B.
C.
D.
P = MR = MC
P = MR > MC
P > MR = MC
P > MR > MC
Practice What You Know
What is the reason for monopoly deadweight
loss (relative to perfect competition)?
A. The monopolist faces a downward sloping
demand curve
B. People boycott monopolies more often
C. The monopolist sells less output at a higher
price
D. The monopolist has no competitors
Practice What You Know
A monopolist will have negative profits and exit
the industry in the long run if:
A.
B.
C.
D.
A new competitor enters the industry
Demand becomes more elastic
Price < ATC
A monopolist never has negative profits
11
Price
Discrimination
Practice What You Know
Which of the following goods or services is
most likely to be sold successfully by a firm at
different prices?
A.
B.
C.
D.
Economics textbooks
Haircuts
Candy bars
University apparel
Practice What You Know
A general rule for price discriminating with two
consumers groups is to charge a ______ price
to the inelastic group and to charge a ______
price to the elastic group.
A.
B.
C.
D.
high; low
low; high
positive; negative
negative; positive
Practice What You Know
What market and pricing structure has the least
amount of consumer surplus?
A. Perfect competition
B. Pure monopoly (single price)
C. A price discriminating monopoly that charges
two different prices
D. A monopolist that engages in perfect price
discrimination
Practice What You Know
Why might one consumer group (A) have a
more elastic demand (and be more price
sensitive) than another group (B) of
consumers?
A. Group (A) may have less income
B. Group (A) may have lower tastes and
preferences for the good
C. Both of the above could be true
D. None of the above
12
Monopolistic
Competition and
Advertising
Practice What You Know
Which of the following is true about
monopolistic competition?
A. It results in higher prices than monopoly
B. It results in higher prices than perfect
competition
C. It results in lower quantity than monopoly
D. It is more economically efficient than
perfect competition
Practice What You Know
Which of the following industries fits most
closely with the model of monopolistic
competition?
A. Automobile production
B. Farming
C. Diamond mining
D. Fast-food restaurants
Practice What You Know
What is true about the long run
equilibrium for firms in a monopolistically
competitive industry?
A. MR < MC, P < min(ATC)
B. P = MR = MC = min(ATC)
C. P = ATC, P > MC, P > min(ATC)
D. P > ATC, P = MC
Practice What You Know
Which of the following is true about
product differentiation?
A. More differentiation means products are
more substitutable for each other
B. More differentiation leads to greater
differences in price
C. More differentiation leads to converging
prices
D. Differentiation lowers firm profits
13
Oligopoly and
Strategic
Behavior
Practice What You Know
Which of the following is most likely to
become an oligopoly industry?
A. An industry without entry barriers
B. An industry where economies of scale are
very small
C. An industry with sizeable network effects
D. An industry with hundreds of competitors
Practice What You Know
Which of the following is true about
oligopoly?
A. Oligopolies are illegal in the United States
B. All oligopoly industries will try to collude
C. Oligopoly industries generally have a high
concentration ratio
D. Firms in an oligopoly act independently
from other firms in the oligopoly
Practice What You Know
Why do cartel deals tend not to last?
A. Each firm in the cartel has a dominant
strategy to be uncooperative and defect
from the cartel agreement
B. Cartel profits are lower than competitive
profits
C. Cartels create more competition
D. Firms know that cartels are often illegal
so they break the deal to escape
Practice What You Know
What is an example of a good with a
positive network effect?
A. An online multiplayer game
B. A fast-food burger
C. A dry-cleaning service
D. A cable TV subscription
Practice What You Know
How can a pure strategy Nash equilibrium
be accurately described?
A. It is always the overall best outcome
B. It’s an outcome in which neither player
wants to change strategies
C. It can only be reached by collusion
D. One exists in all games