ABSE 203
Frederick University
Dr. Tanova
December 2010
Quiz # 2
I.
Basic literacy. Circle the letter of the alternative that best answers or completes each
question. Each question counts 3 points.
1. If a profit maximizing firm in perfect competition is earning zero economic profit:
a) it should leave the business;
b) marginal cost is higher than average cost;
c) price is equal to average variable cost;
d) none of the above.
2. The demand curve of the perfectly competitive firm is equal to:
a) its marginal revenue curve;
b) its supply curve;
c) its average cost curve;
d) all of the above.
3. Which of the following is consistent with long-run equilibrium in a monopoly market:
a) AC are minimized;
b) MC < MR;
c) prices cannot be lowered without driving the firm out of the industry;
d) MC < P
4. As compared to the pure monopoly with the same cost structure, the perfectly competitive
industry produces:
а) more output;
b) less output;
c) the same output, but sell it at a higher price;
d) more output, but sell it at a higher price.
5. Which of the following is an accurate argument in support of monopoly:
a) it restricts output and raises prices;
b) it provides greater incentives to pursue R&D;
c) it maximizes profits;
d) all of the above.
6. In comparing perfect competition with monopoly, which one of the following statements
is true:
a) monopolies always earn profits, while perfectly competitive firms rarely do.
b) in the short run, firms in both market structures attempt to minimize AFC;
c) in the long run, firms in both market structures produce at minimum AC;
d) profits in perfect competition will be reduced in the long-run by the entry of new
firms, but long-run monopoly profits are protected by entry barriers.
7. The firm in a perfectly competitive market is a price taker. This designation as a price taker is
based on the assumption that
a) the firm has some but not complete control over its product price;
b) there are so many buyers and sellers that any individual firm cannot affect the market;
c) there is easy entry into or exit from the market;
d) all of the above.
8. Suppose that the demand curve for the XYZ Co. is perfectly elastic. We can conclude:
a) that the firm operates in a perfectly competitive market;
b) that the firm can sell all it wants to at the established market price;
c) that the firm is a price-taker;
d) all of the above.
9. A competitive firm's demand curve is determined by:
a) firm demand and firm supply.
b) the price set by the individual firm.
c) market demand and market supply.
d) the MC curve above average variable cost.
10. In the long-run for a competitive industry:
a) all factors of production are variable so that firms are free to enter or leave the market.
b) all inputs are fixed for the industry as a whole.
c) firms can earn more than normal accounting profits if demand is high.
d) profits serve as a signal for entry which does not happen for other market structures
(such as monopolies, oligopolies, or monopolistically competitive firms).
11. The demand curve that confronts a monopolistically competitive firms is:
a) less elastic than the demand curve that confronts the industry.
b) perfectly inelastic because of numerous substitutes for the firm's product.
c) less elastic than the demand curve facing a perfectly competitive firm.
d) perfectly elastic in the long-run, driving economic profits to zero.
12. The important difference between the characteristics of perfectly competitive and
monopolistically competitive markets is that firms in monopolistically competitive industries:
a) have a downward sloping and relatively inelastic demand (as compared to market
demand.)
b) do not try to maximize profits by producing where MR = MC.
c) sell similar but not identical products.
d) have substantial barriers to deter the entry of competing firms while perfectly
competitive firms do not.
13. One of the identifying characteristics of oligopoly is rigid prices. When economists state that
prices are rigid with respect to oligopolistic industries, they mean that:
a) prices are set by the market rather than the firm or, in other words, the firm is a pricetaker rather than a price-setter.
b) the oligopolist sets product prices so that profits are maximized at all times.
c) prices are less responsive to changes in demand in oligopolies than in perfectly competitive
markets.
d) prices are less responsive to changes in costs, either input prices or technology, than in
perfectly competitive markets.
14. In a monopolistically competitive industry, a firm in long-run equilibrium will be operating
where price is:
a) greater than average total cost (ATC) but equal to marginal cost (MC).
b) greater than ATC and greater than MC.
c) equal to both ATC and MC.
d) greater than MC but equal to ATC.
15. As a budding young economist you are called in to consult with a friend of yours who has just
started his own business producing and selling cherries. He tells you that in the past year, he
has attempted to maximize his profits by decreasing his price below the market price. He
currently sells his cherries for €1 a pound which is just equal to his ATC and his MC (the
market price is €1.50 a pound). You do a study of the cherry industry and find that there are a
very large number of cherry producers who are all quite small relative to the market. Further,
you find that the cost of starting a cherry orchard is relatively small. What would you suggest
that your friend do to maximize profits?
a) increase price to the market price but decrease his output.
b) increase price to the market price and increase his output.
c) decrease price further in an attempt to gain more market share.
d) shut down since he is just barely covering his cost at the present output level.
16. The differences between a monopoly firm and a perfectly competitive firm include all of the
following except:
a) the demand curve for the monopoly is downward sloping and for the perfectly competitive firm
is horizontal.
b) MR<P for the monopoly and equal to price for the perfectly competitive firm.
c) marginal cost is upward sloping for a monopoly firm and horizontal for a perfectly competitive
firm.
d) in the short-run, the monopoly will produce such that P > MC while perfectly competitive
firms will produce such that P = MC.
II.
Analysis. Each case counts 5 points.
17. Congratulations! You are appointed as an economic consultant to a profit maximizing firm
that is currently described by the graph below. Indicate on the graph:
a) the level of the profit maximizing output;
b) the level of the profit maximizing price;
c) the size of the firm’s profit;
 indicate the market structure.
 Classify the firm’s profit (economic profit, economic loss; normal profit)
260
240
220
MC
200
180
AC
160
p
140
120
100
AVC
80
60
MR
40
20
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
q
18. A natural monopoly in water supply in a town is presented on the graph below:
Show on the graph
a) Profit maximizing output and price
b) The monopoly profit
c) loss of consumer surplus, transferred to monopoly;
d) deadweight loss of consumer surplus;
e) deadweight loss of producer surplus.
40
P 39
38
37
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19
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3
2
1
0
0
1
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9
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11
Q
19. True or false: "Although property taxes and taxes on profit may not influence investment
decisions (long run), these taxes do influence production decisions (short run)”.
2 points for a correct answer
bonus 10 points for a complete explanation of the answer