M NO L O PO ISTICC M O PETITIO N 1 ) The key characteristics of a monopolistically competitive market structure include A) many small (relative to the total

market) sellers acting independently. B) all sellers sell a homogeneous product. C) barriers to entry are strong. D) sellers have no incentive to advertise their products. 2 ) Which of the following characteristics is common to monopolistic competition and perfect competition? A) Firms produce identical products. B) Entry barriers into the industry are low. C) Each firm faces a downward -sloping demand curve. D) Firms take market prices as given. 3 ) The key characteristics of a monopolistically competitive market structure include A) few sellers. B) sellers selling similar but differentiated products. C) high barriers to entry. D) sellers acting to maximize revenue. 4 ) Which of the following is true for a firm with a downward -sloping demand curve for its product? A) Price, average revenue, and marginal revenue are all equal. B) Price, average revenue, and marginal revenue are all different. C) Price equals average revenue but is greater than marginal revenue . D) Price equals average revenue but is less than marginal revenue. 5 ) A monopolistically competitive firm will A) charge the same price as its competitors do. B) always produce at the minimum efficient scale of production. C) have some control over its price because its product is differentiated . D) produce an output level that is productively and allocatively efficient. 6 ) For a monopolistically competitive firm, marginal revenue A) equals the price. B) is greater than the price. C) is less than the price. D) and price are unrelated. 7 ) What is the profit-maximizing rule for a monopolistically competitive firm? A) to produce a quantity that maximizes market share B) to produce a quantity that maximizes total revenue C) to produce a quantity such that marginal revenue equals marginal cost D) to produce a quantity such that price equals marginal cost 8 ) A monopolistically competitive firm maximizes profit where A) price = marginal revenue. B) price > marginal cost. C) marginal revenue > average revenue. D) total revenue > marginal cost.

Figure 13-3

Figure 1 3 -3 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches. 9 ) Refer to Figure 13-3. If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged? A) P0 B) P1 C) P2 D) P3 1 0 ) Refer to Figure 13-3.What is the area that represents the total revenue made by the firm? A) 0 P0 aQa B) 0 P1 bQa C) 0 P2 cQa D) 0 P3 dQa 1 1 ) Refer to Figure 13-3.What is the area that represents the total variable cost of production? A) 0 P0 aQa B) 0 P1 bQa C) P0 abP1 D) P1 bdP3 1 2 ) Refer to Figure 13-3.What is the area that represents the total fixed cost of production? A) 0 P1 aQa B) P0 adP3 C) P1 bdP3 D) That information cannot be determined from the graph. 1 3 ) Refer to Figure 13-3.What is the area that represents the loss made by the firm? A) the area P0 adP3 B) the area P1 bcP2 C) the area P0 acP2 D) the area P2 cdP3 1 4 ) Refer to Figure 13-3. Should the firm represented in the diagram continue to stay in business despite its losses? A) No, it should shut down. B) Yes, its total revenue covers its variable cost . C) No, it is not able to cover its fixed cost. D) Yes, it should increase its revenue by raising its price.

Figure 13-4

1 5 ) Refer to Figure 13-4. The candy store represented in the diagram is currently selling Qa units of candy at a price of Pa. Is this candy store maximizing its profit and if it is not, what would you recommend to the firm? A) Yes, it is maximizing its profit by charging the highest price possible. B) No, it is not; since its marginal cost is constant, it should produce and sell as much candy as it can. It should sell Qd units at a price of Pd. C) No, it is not; it should lower its price to Pc and sell Qc units. D) No, it is not; it should lower its price to Pb and sell Qb units. Figure 13-5

Figure 1 3 -5 shows cost and demand curves for a monopolistically competitive producer of iced -tea. 16) Refer to Figure 13-5. to answer the following questions. a. What is the profit-maximizing output level? b. What is the profit-maximizing price? c. At the profit-maximizing output level, how much profit will be realized? d. Does this graph most likely represent the long run or the short run? Why? Answer: a. The profit-maximizing output level is 2 2 . b. The profit maximizing price is $ 1 6 . c. The profit is $ 8 8 . d. Since the firm is making a profit, this most likely represents the short run. 1 7 ) A monopolistically competitive industry that earns economic profits in the short run will A) continue to earn economic profits in the long run. B) experience the entry of new rival firms into the industry in the long run. C) experience the exit of existing firms out of the industry in the long run. D) experience a rise in demand in the long run. 1 8 ) A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following except A) new rivals entering the market. B) a decrease in demand for its product. C) demand for the firms product becomes more elastic. D) a decrease in the number of rival products.

1 9 ) Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because A) new entrants into the market are more likely to have cutting edge products. B) as the firm raises its price in the long run, it will lose some customers to new entrants in the market. C) some of its customers have switched to purchasing the products of new entrants in the market. D) its costs of production rises. 2 0 ) A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until A) the original firm is driven into bankruptcy. B) the firms demand curve is perfectly elastic. C) the firms demand curve is tangent to its average total cost curve. D) the firm exits the market. 2 1 ) In the long run, what happens to the demand curve facing a monopolistically competitive firm that is earning short-run profits? A) The demand curve will shift to the left and became more elastic. B) The demand curve will shift to the left and became less elastic. C) The demand curve will shift to the right and became more elastic. D) The demand curve will shift to the right and became less elastic. 2 2 ) If a typical monopolistically competitive firm is making short -run losses, then A) other more competitive firms will enter the market. B) as some firms leave, the remaining firms will experience an increase in the demand for their products. C) as some firms leave, the demand for the products of the remaining firms will become more elastic. D) the industry will eventually cease to exist. Figure 13-6

2 3 ) Refer to Figure 13-6. What is the monopolistic competitors profit maximizing output? A) Q1 units B) Q2 units C) Q3 units D) Q4 units 2 4 ) Refer to Figure 13-6. What is the monopolistic competitors profit maximizing price? A) P1 B) P2 C) P3 D) P4

2 5 ) Refer to Figure 13-6. The firm represented in the diagram A) makes zero economic profit. B) makes zero accounting profit. C) should exit the industry. D) should expand its output to take advantage of economies of scale. 2 6 ) Refer to Figure 13-6. What is the allocatively efficient output for the firm represented in the diagram? A) Q1 units B) Q2 units C) Q3 units D) Q4 units 2 7 ) Refer to Figure 13-6. What is the productively efficient output for the firm represented in the diagram? A) Q1 units B) Q2 units C) Q3 units D) Q4 units 2 8 ) Refer to Figure 13-6. The diagram depicts a firm A) in a constant cost industry. B) in an increasing cost industry. C) in long run equilibrium. D) that is making short run losses. 2 9 ) Refer to Figure 13-6. What is the amount of excess capacity? A) Q4 - Q3 units B) Q4 - Q2 units C) Q3 - Q2 units D) Q3 - Q1 units 3 0 ) If a monopolistically competitive firm breaks even, the firm A) is earning an accounting profit and will have to pay taxes on that profit. B) is earning zero accounting and zero economic profit. C) should advertise its product to stimulate demand. D) should expand production. 3 1 ) How does the long run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry? A) A firm in monopolistic competition will earn economic profits but a firm in perfect competition earns zero profit. B) A firm in monopolistic competition will charge a price higher than the average cost of production but a firm in perfect competition charges a price equal to the average cost of production. C) A firm in monopolistic competition does not take full advantage of its economies of scale but a firm in perfect competition produces at the lowest average cost possible . D) A firm in monopolistic competition produces an allocatively efficient output level while a firm in perfect competition produces a productively efficient output level. 3 2 ) Long-run equilibrium under monopolistic competition is similar to that under perfect competition in that A) firms produce at the minimum point of their average cost curves. B) price equals marginal cost. C) firms earn normal profits. D) price equals marginal revenue.

3 3 ) Is a monopolistically competitive firm productively efficient? A) No, because it does not produce at minimum average total cost . B) Yes, because it produces where marginal cost equals marginal revenue. C) No, because price is greater than marginal cost. D) Yes, because price equals average total cost. 3 4 ) Is a monopolistically competitive firm allocatively efficient? A) No, because it does not produce at minimum average total cost. B) Yes, because it produces where marginal cost equals marginal revenue. C) No, because price is greater than marginal cost . D) Yes, because price equals average total cost. 3 5 ) If a firm has excess capacity, it means A) that the firm expends too much of its resources on advertising its product without seeing an appreciable increase in sales. B) that the firm is not producing its minimum efficient scale of output. C) that the firms long-run average cost of producing a given quantity exceeds its short-run cost of producing that same quantity. D) that the firms quantity supplied exceeds its quantity demanded. Figure 13-12

36) Refer to Figure 13-12 to answer the following questions. a. What is the productively efficient output? b. What is the allocatively efficient output? c. What is the amount of excess capacity? d. Suppose the firm is currently producing 1 4 units. What happens if it increases output to 1 7 units? O IG PO Y L O L 37) An oligopolistic industry is characterized by all of the following except A) existence of entry barriers. B) the possibility of reaping long run economic profits. C) firms pursuing aggressive business strategies, independent of rivals strategies. D) production of standardized products. 3 8 ) An oligopoly firm is similar to a monopolistically competitive firm in that A) both firms face the prisoners dilemma. B) both operate in a market in which there are entry barriers. C) both firms have market power. D) both firms are in industries characterized by an interdependent firm. 3 9 ) Which of the following is the best example of an oligopolistic industry? A) the beef market B) the pharmaceutical industry C) public education D) the beauty products industry

4 0 ) A characteristic found only in oligopolies is A) break even level of profits. B) interdependence of firms. C) independence of firms. D) products that are slightly different. 4 1 ) The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called A) Nash equilibrium. B) the prisoners dilemma. C) game theory. D) dominant strategy equilibrium. 4 2 ) A dominant strategy A) is one that is the best for a firm, no matter what strategies other firms use . B) is one that a firm is forced into following by government policy. C) involves colluding with rivals to maximize joint profits. D) involves deciding what to do after all rivals have chosen their own strategies. 4 3 ) A Nash equilibrium is A) reached when an oligopolys market demand and supply intersect. B) reached when each player chooses the best strategy for himself and for the group. C) reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group. D) an equilibrium comprising non-dominant strategies only. 4 4 ) What is a prisoners dilemma? A) a game that involves no dominant strategies B) a game in which prisoners are stumped because they cannot communicate with each other C) a game in which players act in rational, self-interested ways that leave everyone worse off D) a game in which players collude to outfox authorities

Table 14-1

4 5 ) Refer to Table 14-1. Is there a dominant strategy for Godrickporter and if so, what is it? A) No, its outcome depends on what Star Connections does. B) Yes, Godrickporter should increase its advertising spending. C) Yes, Godrickporter should reduce its advertising spending. D) Yes, Godrickporters dominant strategy is to collude with Star Connections. 4 6 ) Refer to Table 14-1. Is there a dominant strategy for Star Connections and if so, what is it? A) No, its outcome depends on what Godrickporter does. B) Yes, Star Connections should increase its advertising spending. C) Yes, Star Connections should reduce its advertising spending. D) Yes, Star Connections dominant strategy is to collude with Godrickporter.

4 7 ) Refer to Table 14-2. Suppose pricing PlayStations is a repeated game in which Wal-Mart and Target will be selling the game system in competition over a long period of time. In this case, what is the most likely outcome? A) a noncooperative equilibrium in which each firm charges the high price B) a cooperative equilibrium in which each firm charges the high price C) a noncooperative equilibrium in which each firm charges the low price D) a cooperative equilibrium in which each firm charges the low price 4 8 ) There is much evidence to suggest that airlines are more likely to match price cuts than price increases. Which of the following best explains this evidence? A) The law of demand which states that an increase in price leads to a decrease in quantity demanded. B) No one airline wants to be the first to renege on a tacit collusive agreement in which all airlines implicitly agree to match price cuts but not price increases. C) An airline fears that if it does not match a price cut, its sales may fall considerably but if it does not match a price increase, it will be able to attract customers away from its rivals. D) Airlines have different costs of production and therefore it is more difficult to agree on a price increase than on a price decrease. 4 9 ) A member of a cartel like O PEC has an incentive to A) argue for larger production quotas for each member o f the cartel. B) agree to a low cartel production level and then produce more than its quota. C) abide by its individual production quota. D) support equal production quotas for each member. Table 14-3

5 0 ) Refer to Table 14-3. Is there a dominant strategy for Saudi Arabia and, if so, what is it? A) Yes, the dominant strategy is to produce a high output. B) Yes, the dominant strategy is to produce a low output. C) No, there is no dominant strategy. D) Yes, it has a dominant strategy depending on what Nigeria does. 5 1 ) Refer to Table 14-3. Is there a dominant strategy for Nigeria and, if so, what is it? A) Yes, it has a dominant strategy depending on what Saudi Arabia does. B) No, there is no dominant strategy. C) Yes, the dominant strategy is to produce a low output. D) Yes, the dominant strategy is to produce a high output. 5 2 ) Refer to Table 14-3. What is the Nash equilibrium in this game? A) In the Nash equilibrium both Saudi Arabia and Nigeria produce a low output and earn a profit of $ 1 0 0 million and $ 2 0 million respectively. B) In the Nash equilibrium both Saudi Arabia and Nigeria produce a high output and earn a profit of $ 6 0 million and $ 2 0 million respectively. C) In the Nash equilibrium Saudi Arabia produces a low output and earns a profit of $ 8 0 million and Nigeria produces a high output and $ 3 0 million respectively. D) There is no Nash equilibrium.

5 3 ) Refer to Table 14-3. Which of the following statements is true? A) The Nash equilibrium is a noncooperative, dominant strategy equilibrium . B) The Nash equilibrium is a cooperative equilibrium. C) The Nash equilibrium is a collusive equilibrium. D) There is no Nash equilibrium in this game because each party pursues its dominant strategy.

EX TERNA LITIES 5 4 ) An externality is A) a benefit realized by the purchaser of a good or service. B) a cost paid for by the producer of a good or service. C) a benefit or cost experienced by someone who is not a producer or consumer of a good or service. D) anything that is external or not relevant to the production of a good or service. 5 5 ) Conceptually, the efficient level of carbon emissions is the level for which A) the marginal benefit of reducing carbon emissions is maximized. B) the marginal cost of reducing carbon emissions is minimized. C) the marginal benefit of reducing carbon emissions is equal to the cost of reducing carbon emissions. D) the marginal benefit of reducing carbon emissions is minimized and the marginal cost of reducing carbon emissions is maximized. 5 6 ) What is a market failure? A) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost. B) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost. C) It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event. D) It refers to a breakdown in a market economy because of widespread corruption in government. 5 7 ) Which of the following activities create a negative externality? A) cleaning up the sidewalk on your block B) graduating from college C) repainting the house you live in to improve its appearance D) keeping a junked car parked on your front lawn 5 8 ) A negative externality exists if A) there are price controls in a market. B) there are quantity controls in a market. C) the marginal social cost of producing a good or service exceeds the private cost. D) the marginal private cost of producing a good or service exceeds the social cost. 5 9 ) Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities? A) the private cost of production B) the social cost of production C) the external cost of production D) the explicit cost of production

6 0 ) Private costs A) are borne by producers of a good while social costs are borne by government. B) are borne by consumers of a good while social costs are borne by government. C) are borne by producers of a good while social costs are borne by society at large . D) are borne by producers of a good while social costs are borne by those who cannot afford to purchase the good. 6 1 ) If you burn your trash in the back yard in spite of regulations against it, then you are A) acting economically irrationally and creating a social cost. B) avoiding the private costs associated with disposing your trash some other way and creating a social cost. C) acting rationally and creating a positive externality. D) saving landfill space and creating a social benefit. 6 2 ) Which of the following is an example of a positive externality? A) banning the sale of candy in elementary schools B) planting trees along a sidewalk which add beauty and creates shade C) forbidding the use of cell phones in public D) prohibit street parking in all residential neighborhoods 6 3 ) A positive externality causes A) the marginal social benefit to be equal to the marginal private cost of the last unit produced. B) the marginal social benefit to be less than the marginal private cost of the last unit produced. C) the marginal social benefit to exceed the marginal private cost of the last unit produced. D) the marginal private benefit to exceed the marginal social cost of the last unit produced. Figure 5-2

6 4 ) Refer to Figure 5-2. The efficient output level is A) Qd. B) Qb. C) Qa. D) Qb - Qd.

6 5 ) Refer to Figure 5-2. The private profit maximizing quantity for the firm is A) Qa. B) Qb. C) Qb - Qd. D) Qd.

6 6 ) Refer to Figure 5-2. The deadweight loss due to the externality is represented by the area A) abc. B) abf. C) abd. D) ade. 6 7 ) Refer to Figure 5-2. The size of marginal external costs can be determined by A) S2 + S1 at each output level. B) S2 - S1 at each output level. C) the supply curve S2 . D) the supply curve S1 . 6 8 ) Refer to Figure 5-2. The marginal benefit of the last unit produced is represented by the price A) Pa. B) Pb. C) Pc. D) Pf. 6 9 ) Refer to Figure 5-2. The true marginal cost of the last unit produced is represented by the price A) Pa. B) Pb. C) Pc. D) Pf.

Figure 5-3

7 0 ) Refer to Figure 5-3. The efficient output level is A) Qm. B) Qn. C) Qo. D) Qo - Qm. 7 1 ) Refer to Figure 5-3. The private profit maximizing output level is A) Qm. B) Qn. C) Qo. D) Qo - Qm.

7 2 ) Refer to Figure 5-3. The size of marginal external benefits can be determined by A) the demand curve D2 . B) D2 + D1 at each output level C) D2 - D1 at each output level. D) the demand curve D1 .

7 3 ) Refer to Figure 5-3. In the absence of any government intervention, the private market A) under produces by Qo - Qm units. B) over produces by Qo - Qm units. C) over produces by Qn - Qm units. D) under produces by Qn - Qm units. 7 4 ) Refer to Figure 5-3. The deadweight loss due to the externality is represented by the area A) mso. B) msn. C) nso. D) mtn. 7 5 ) Refer to Figure 5-3. At the competitive market equilibrium, for the last unit produced, A) the size of the external cost is Pm - Po. B) the size of the external benefit is Pm - Po. C) the size of the external cost is Pn - Po. D) the size of the external benefit is Pn - Po. 7 6 ) Economists argue that the level of pollution should be A) reduced completely to zero because by definition, it is a negative external effect. B) ignored because it has always been present since the beginning of history. C) reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society. D) best determined by elected officials who can speak on behalf of the public. Figure 5-4

7 7 ) Refer to Figure 5-4. The marginal cost of reducing pollution curve is the same curve as A) the supply of pollution reduction curve. B) the demand for pollution reduction curve. C) the negative externality curve. D) the value of pollution reduction curve. 7 8 ) Refer to Figure 5-4. The marginal benefit of reducing pollution curve is the same curve as A) the supply of pollution reduction curve. B) the demand for pollution reduction curve. C) the positive externality curve. D) the external benefit curve. 7 9 ) Refer to Figure 5-4. What is the incremental cost of increasing the quantity of pollution reduction from QB to QE units? A) PE B) the value of the area QBBEQE C) PE QE D) the value of the area BEF

8 0 ) Refer to Figure 5-4. What is the incremental benefit of increasing the quantity of pollution reduction from QB to QE units? A) PF B) PF QE C) the value of the area BEF D) the value of the area QBBFQE 8 1 ) Refer to Figure 5-4. Which of the following statements is true? A) At QE the benefits of reducing pollution outweighs the cost of pollution reduction. B) At QB society is under allocating resources to pollution reduction. C) The optimal quantity of pollution reduction is QB. D) The optimal quantity of pollution reduction is QE. 8 2 ) The Coase theorem states that A) government intervention is always needed if externalities are present. B) assigning property rights is the only thing the government should do in a market economy. C) if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities. D) a free market equilibrium is the best solution to address externalities. 8 3 ) Why does the government subsidize the purchase of college education but not the purchase of hamburgers? PU BLICG O &C M O RESO RC O DS O M N U ES 8 4 ) A product is considered to be rivalrous if A) you can keep those who did not pay for the item from enjoying its benefits. B) you cannot keep those who did not pay for the item from enjoying its benefits. C) your consumption of the product reduces the quantity available for others to consume . D) it is jointly owned by all members of a community. 8 5 ) A product is considered to be nonexcludable if A) you can keep those who did not pay for the item from enjoying its benefits. B) you cannot keep those who did not pay for the item from enjoying its benefits. C) your consumption of the product reduces the quantity available for others to consume. D) it is jointly owned by all members of a community. 8 6 ) Which of the following displays these two characteristics: rivalry and nonexcludability? A) a public good B) a private good C) a quasi-public good D) a common resource 8 7 ) Which of the following is an example of a product that is nonexcludable and rivalrous? A) free concert (with limited seating) in a park B) national defense C) automobiles D) flu vaccinations 8 8 ) In economics, the term free rider refers to A) a person who evades taxes. B) a supervisor who delegates menial time-consuming activities to others. C) one who volunteers her services. D) one who waits for others to produce a good and then enjoys its benefits without paying for it.

8 9 ) Private producers have no incentive to provide public goods because A) the government subsidy granted is usually insufficient to enable private producers to make a profit. B) production of huge quantities of public goods entails huge fixed costs. C) they cannot avoid the tragedy of the commons. D) once produced, it will not be possible to exclude those who do not pay for the good. 9 0 ) The tragedy of the commons refers to the phenomenon where A) individuals are free riders. B) people overuse a common resource. C) people do not internalize an externality. D) there is rivalry in consumption. Figure 5-7

9 1 ) Refer to Figure 5-7. The current market equilibrium output is partly the result of overfishing. In that case, what does S1 represent? A) the private marginal benefit of harvesting salmon B) the social marginal benefit of harvesting salmon C) the private marginal cost of harvesting salmon D) the social marginal cost of harvesting salmon 9 2 ) Refer to Figure 5-7. The current market equilibrium output is partly the result of overfishing. In that case, what does S2 represent? A) the private marginal benefit of harvesting salmon B) the social marginal benefit of harvesting salmon C) the private marginal cost of harvesting salmon D) the social marginal cost of harvesting salmon 9 3 ) Refer to Figure 5-7. Identify the area that shows the deadweight loss from overfishing. A) egh B) ekh C) efh D) eghk 9 4 ) Determine if each of the products below displays any of the following characteristics: (i) rivalry (ii) nonrivalry (ii) excludability (iv) nonexcludability. a. a freeway during peak commute hours b. an online college course c. infectious disease prevention d. open source software such as Linux e. a movie showing at Century Theatres