MICRO ECONOMICS
REVIEW FOR TEST No. 3 Chapters 7,8,9,& 10
Answers to Practice Test # 3 - MicroEconomics
Directions: It’s not enough to just take this practice test. Go back to your notes and to all the
self-tests. Make sure to cover the How, Why and What of all required concepts. And for extra
credit, don’t forget to log on to http://samarreine.com/EconLatestTopics.html and read the top
articles (pertinent to recent class discussions), listed under the heading “Today’s Topics.”
1. Who practices rent seeking? Why is it worth it for them?
Monopolies and oligopolies do.
2. Which market structure possesses perfectly elastic demand?
The only price taker, perfect competition.
3. Which two characteristics most typify perfect competition?
Homogeneous product and many sellers.
4. Which price would an oil company charge?
Since it’s perfectly competitive, then it would charge the equilibrium price.
5. Monopolies possess:
a. Inelastic Demand
b. Elastic Demand
c. A combination of elastic and inelastic, where elastic is greater
d. A combination of elastic and inelastic, where inelastic is greater
6. If explicit costs = $200,000 and implicit costs = $50,000, with total revenues = $150,000, then
economic profits are:
a. $150,000 b. -$50,000 c. -$100,000
7. Second degree price discrimination is about purchasing each product at a different price.
False, this is perfect price discrimination.
8. What does second degree price discrimination help a business achieve?
Economies of scale.
9. Market monopolies exist due to patents and public franchises. If not then what does?
No, this is government monopoly. Market monopolies have market barriers, which are
economies of scale and exclusive ownership of a scarce resource.
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10. The Law of Demand exists due to (circle all that apply):
a. Law of diminishing marginal utility
b. Income Effect
c. Law of Supply
d. Value of currency
e. Substitution Effect
11. Oligopolies are mutually interdependent because (circle all that apply):
a. Sellers can track each other’s strategies and success
b. Buyers have only few companies to choose from
c. There isn’t much variety
d. Sellers cannot form a cartel
12. Which of the following determines the price of a product? Circle all that apply.
a. Supply and Demand
b. Marginal utility
c. Fiscal policy
d. Average Total Cost
e. Price elasticity of demand
f. Income taxes
13. Diseconomies of scale exist when the ATC of a product or service increases with production.
Which cost-industry is this? Increasing-cost industry.
14. What happens to the equilibrium price in a decreasing-cost industry after an increase in
demand? It eventually settles below the original.
15. There is no price discrimination with co-payments for medicine (within the same plan). True
16. If MR > MC for a business, then this firm must produce more until they become equal.
If MC > MR for a business, then this firm must produce less until they become equal.
If MR = MC for a business, then this firm must leave production as is.
17. All four market structures maximize profits by producing at the level of MR = MC. True
18. What is economies of scale?
From Gale Encyclopedia of Small Business:
Economies of scale refer to economic efficiencies that result from carrying out a process
(such as production or sales) on a larger and larger scale. The resulting economic efficiencies are
usually measured in terms of the unit costs incurred as the volume of the relevant operation
increases. "Scale economies can be present in nearly every function of a business, including
manufacturing, purchasing, research and development, marketing, service network, sales force
utilization, and distribution," wrote Michael E. Porter, author of Competitive Strategy. "Scale
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economies may relate to an entirely functional area, as in the case of a sales force, or they may stem
from particular operations or activities that are part of a functional area."
Many small business operations are of insufficient size to utilize economies of scale to major
strategic advantage, though there are instances in which even smaller businesses can use such
economic efficiencies to gain an edge over startup competitors. Indeed, John Pearson and Joel
Wisner noted in Industrial Management that "since company productivity is generally defined as a ratio
of output to input (for example, revenues divided by costs) management strategies for improving
productivity have usually included some form of cost-reduction effort," of which economies of scale
is often an essential element. In other words, even the smallest company can make itself healthier by
improving its economy of scale. In competitive terms, however, small businesses often find that
economies of scale are most visible as a weapon utilized by their larger competitors as a barrier to
market entry.
As noted above, the concept of economies of scale has been used in a wide range of business
operations, including sales and marketing, Most often, however, discussions of economies of scale
have centered around manufacturing, equipment, and facility management areas. Howard J. Weiss
and Mark E. Gershon, authors of Production and Operations Management, separated economies of scale
into two types—construction and operations. "The construction economy of scale is that
construction costs rise less than proportionately to building size," they wrote. The operating
economy of scale, meanwhile, is based on the idea that "for any given facility size, there is an
optimal operating level that minimizes the cost per unit…. Consider the fact that two plants will
require a duplication of resources, whereas one large plant may not. This is the operating economy
of scale."
But researchers have also distinguished economies of scale by other criteria. Pearson and Wisner
separated economies of scale into "learning" and "volume" segments. "Learning economies of scale
include labor and organizational production and planning advancements that accrue with time
throughout the company's transformation process," they explained. "A company's learning curve
provides an opportunity to identify and forecast supply costs, transformation costs, and finished
product costs. Learning curves identify the rate a business has historically reduced the real, valueadded, per-unit cost of its products. The ability of a company to continue this cost-reduction trend
gives an indication of the adequacy of existing production cost-cutting or value-enhancing
procedures and proposals. If a company cannot continue to cut product costs or increase value
sufficiently over the long run while maintaining satisfactory levels of quality, it stands a good chance
of being priced out of the industry by competitors."
Volume economies of scale, meanwhile, are described by Pearson and Wisner as episodes wherein
increases in product capacity produce lower unit costs by making additions to plant, equipment,
labor force, or other facilities. While these additions to capacity generally produce upturns in fixed
costs, these added production expenses are covered by improvements in per unit costs.
19. Delta belongs to this market structure: oligopoly, and Sony to this one: monopolistic
competition.
20. Oligopolies do not produce homogenous products. False, sure they can.
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21. Price elasticity of oligopolies is greater than that of monopolistic competition. No, smaller.
22. How can monopolies go out of business?
If demand for their product is too low or if the ATC > Price.
23. Perfectly competitive firms lower their prices in order to increase their sales.
No, they always charge the equilibrium price.
24. Monopolistically competitive firms cannot become dominant ones.
Yes, they can. See notes on this issue.
25. How many market structures seek to charge a price that is higher than their marginal cost?
All of them.
26. Which are the 3 richest per-capita economies in the world?
Look it up.
27. What is the most significant barrier to entry for an oligopoly?
Economies of scale.
28. Cartels maximize their profits by fixing their prices, and setting a quota ceiling.
29. Most firms approximate (resemble) oligopolies. If not then which do they approximate? State
why. False, most are monopolistically competitive because of its characteristics.
30. If ATC = $12, MR = $16, Quantity Demanded = 1000 units, then is this company making a
profit?
a. Yes, its profits = $4,000 ($16 - $12 * 1000)
b. Yes, its profits = $10,000
c. No, its losses = -$2000
d. No, its losses = -$6000
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