REVIEW QUESTIONS – BECN 150

1. Assume that the leather market is a perfectly competitive market. The market demand curve for
leather is ________ and each individual leather producer's demand curve is ________.
A. vertical; downward sloping
B. downward sloping; horizontal
C. downward sloping; vertical
D. horizontal; horizontal
E. horizontal; downward sloping

2. We would expect the cross elasticity of demand between dress shirts and ties to be:
A. positive, indicating normal goods.
B. positive, indicating inferior goods.
C. negative, indicating substitute goods.
D. negative, indicating complementary goods.
Use the table below to answer the following questions.

Table 1-2

3. Refer to Table 1-2, which gives Tania's Teapots' total cost schedule. The average total cost of
producing 14 teapots is
A. $7.86.
B. $6.75.
C. $7.
D. $1.75.
E. $27.50.
4. Refer to Table 1-2, which gives Tania's Teapots' total cost schedule. When output increases from 8 to
12 teapots, the marginal cost of one of the 4 teapots is
A. $20.
B. $5.
C. $1.
D. $6.67.
E. $2.

5. Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in
the equilibrium quantity of jelly sold?
A. an increase in the price of peanut better, a complement to jelly
B. an increase in the price of Marshmallow Fluff, a substitute for jelly
C. an increase in the price of grapes, an input into jelly
D. an increase in consumers’ incomes, as long as jelly is a normal good
Use the table below to answer the following questions.

Table 1-3

6. Refer to Table 1-3, which gives the total revenue schedule and total cost schedule of a perfectly
competitive firm. The short-run equilibrium price of one unit of the good is
A. $3.
B. $10.
C. $15.
D. $25.
E. $30.
7. A perfectly competitive firm's supply curve is the same as its marginal cost curve at all prices above
minimum
A. average total cost.
B. average fixed cost.
C. total cost.
D. average variable cost.
E. total variable cost.

8. An oligopolistic industry has:

A. few economies of scale.
B. a great deal of interdependence among firms.
C. many sellers.
D. few barriers to entry.

9. The demand curve of an oligopolist tends to be:

A. elastic.
B. perfectly inelastic.
C. inelastic.
D. perfectly elastic.

10. During the 1970s the price of oil rose dramatically, which in turn caused the price of coal to increase.
This can best be explained by saying that oil and coal are:
A. complementary goods and the higher price for oil increased the demand for coal.
B. substitute goods and the higher price for oil increased the demand for coal.
C. complementary goods and the higher price for oil decreased the supply of coal.
D. substitute goods and the higher price for oil decreased the supply of coal.
11. Which of the following quotes best illustrates the idea of average product?
A. "If I have 10 workers on my assembly line, I can produce 13 tables a day."
B. "If I add an 11th worker, I can produce 1 extra table a day."
C. "Each worker produces 2 tables a day."
D. "I find if I add an extra shift at night, table production only rises by 80 percent because I need
more maintenance time on the assembly line."
E. "If I double workers and double the assembly line, I can make 120 percent more tables."

12. When a firm operate under conditions of pure competition, marginal revenue always equals:
A. average fixed cost.
B. one minus the elasticity of the market demand curve.
C. total revenue.
D. price.

13. Which of the following is not a characteristic of a perfectly competitive market structure?
A. There are a very large number of firms that are small compared to the market.
B. All firms sell identical products.
C. There are no restrictions to entry by new firms.
D. There are restrictions on exit of firms.
E. All firms are price taker.

14. Which of the following is not a characteristic of a monopolistically competitive market structure?
A. There is a large number of independently acting small sellers.
B. All sellers sell products that are differentiated.
C. There are low barriers to entry of new firms.
D. Each firm must react to actions of other firms.
E. Each firm has some degree of monopoly due to product differentiation.

15. Which of the following is a characteristic of a monopoly?

A. It is easy for new firms to enter the market.
B. There is only one seller in the market.
C. The product is not unique.
D. The firm has no control over price.
E. The firm is price taker.

16. Perfect competition is characterized by all of the following except

A. heavy advertising by individual sellers.
B. homogeneous products.
C. sellers are price takers.
D. a horizontal demand curve for individual sellers.
E. large number of sellers and buyers.

17. A very large number of small sellers who sell identical products implies
A. a multitude of vastly different selling prices.
B. a downward-sloping demand for each seller's product.
C. the inability of one seller to influence price.
D. chaos in the market.
E. less buyers of the product.
18. Both individual buyers and sellers in perfect competition
A. can influence the market price by their own individual actions.
B. can influence the market price by joining with a few of their competitors.
C. have to take the market price as a given.
D. have the market price dictated to them by government.
E. have the right to choose the price of the good.

Use the table below to answer the following questions.

Table 1-4

19. Refer to Table 1-4, which gives the total cost schedule for Brenda's Balloon Shop, a perfectly
competitive firm. The average fixed cost of producing the 4th balloon is
A. $4.30.
B. $4.80.
C. $4.70.
D. $4.50.
E. $1.00.

20. Oligopolists have a strong incentive to collude and to cheat on collusive agreements in order to:
A. avoid competitive practices.
B. restrain trade and hinder trade relationships.
C. increase their individual share of the joint profit.
D. restrict output and put upward pressure on price.

21. Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry
charges $21. Which of the following will happen?
A. The firm's profits will increase.
B. The firm's revenue will increase.
C. The firm will not sell any output.
D. The firm will sell more output than its competitors.
E. The firm will sell less output than its competitors.

22. Some markets have many buyers and sellers but fall into the category of monopolistic competition
rather than perfect competition. The most common reason for this is
A. there are high barriers to entering these markets.
B. firms in these markets sell identical products.
C. firms in these markets make high profits.
D. firms in these markets do not sell identical products.
E. there are only few sellers.
23. If a perfectly competitive firm raises the price it charges to consumers, which of the following is the
most likely outcome?
A. The firm's revenue will not change because some consumers will refuse to pay the higher price.
B. The firm will not sell any output.
C. The firm's total revenue will increase only if the demand for its product is inelastic.
D. The firm's total revenue will increase only if the demand for its product is elastic.
E. The firm will have more profit than its competitors.

24. Which of the following is not an assumption of perfectly competitive markets?

A. There are many sellers and many buyers, all of which are small relative to the market.
B. Each firm produces a similar but not identical product.
C. There are no barriers to new firms entering the market.
D. The products sold by all firms in the market are identical.
E. All of the above are assumptions of perfectly competitive markets.

25. If the market price is $25, the average revenue of selling five units is
A. $5.
B. $12.50.
C. $25.
D. $50.
E. $125.

26. Which of the following is not true for a firm in perfect competition?
A. Profit equals total revenue minus total cost.
B. Price equals average revenue.
C. Average revenue is greater than marginal revenue.
D. Marginal revenue equals the change in total revenue from selling one more unit.
E. Average revenue is equal marginal revenue and price.

Table 10.1
Total Cost Variable Cost
Quantity (dollars) (dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800

Table 10.1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera
cases. Assume that output can only be increased in batches of 100 units.
27. Refer to Table 10.1. What is the fixed cost of production?
A. $0
B. $500
C. $1,000
D. $1,500
E. It cannot be determined.

28. Refer to Table 10.1. If the market price of each camera case is $8, what is the profit-maximizing
quantity?
A. 300 units
B. 400 units
C. 500 units
D. 600 units
E. 700 units

29. Refer to Table 10.1. If the market price of each camera case is $8, what is the firm's total revenue?
A. $2,400
B. $3,200
C. $4,000
D. $4,800
E. $5,200

30. Refer to Table 10.1. If the market price of each camera case is $8 and the firm maximizes profit,
what is the amount of the firm's profit or loss?
A. $0 (it breaks even)
B. loss of $1,000
C. profit of $440
D. loss of $440
E. profit of $1,000

31. Refer to Table 10.1. Suppose the fixed cost of production rises by $500 and the price per unit is still
$8. What happens to the firm's profit-maximizing output level?
A. It must fall.
B. It must rise to offset the increased cost.
C. It will remain the same.
D. The firm will shut down.
E. The firm will exit the market.

32. Refer to Table 10.1. The firm will not produce in the short run if the output price falls below
A. $8.
B. $4.
C. $3.20.
D. $2.80.
E. $1.50.
33. If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should
A. increase its output.
B. reduce its output.
C. keep output constant and enjoy the above normal profit.
D. lower the price.
E. stop producing.

34. For a perfectly competitive firm, which of the following is not true at profit maximization?
A. Market price is greater than marginal cost.
B. Marginal revenue equals marginal cost.
C. Total revenue minus total cost is maximized.
D. Price equals marginal cost.
E. Price equals average revenue.

35. Assume that price is greater than average variable cost. If a perfectly competitive seller is producing
at an output where price is $11 and the marginal cost is $14.54, then to maximize profits the firm
should
A. continue producing at the current output.
B. produce a larger level of output.
C. produce a smaller level of output.
D. should shut down.
E. There is not enough information given to answer the question.

36. Assume a firm's marginal cost function is MC = 2q, where q is the number of units the firm
produces. What is the profit maximizing level of output when the market price is $100?
A. 25 units
B. 50 units
C. 100 units
D. 200 units
E. 300 units

37. If the market price is $40, the average revenue of selling five units is
A. $8.
B. $20.
C. $40.
D. $200.
E. $250.

38. Producing where marginal revenue equals marginal cost is equivalent to producing where
A. average total cost equals average revenue.
B. average fixed cost is minimized.
C. total revenue is equal to total cost.
D. firm is making a loss.
E. total profit is maximized.

39. A perfectly competitive firm's marginal revenue

A. is greater than price.
B. is less than price because a firm must lower its price to sell more.
C. is equal to price.
D. may be either greater or less than price, depending on the quantity sold.
E. is below the average revenue.
40. A firm could continue to operate for years without ever earning a profit as long as it is producing an
output where
A. MR < ATC.
B. ATC > AVC.
C. MR > AVC.
D. AFC < AVC.
E. MR > AFC.

41. 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.
E. firms are price taker.

42. 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.
E. has full control over price and quantity simultaneously.

43. Monopolistic competition is a market structure in which

A. firms produce and sell products for which there are no close substitutes.
B. the demand curve for a typical firm is horizontal.
C. firms cannot influence the market price.
D. barriers to entry are low.
E. identical products are sold.

44. The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair. It sells 8 pairs of jeans
per day at a price of $90 per pair. The marginal revenue of the eighth pair of jeans is
A. $20.
B. $80.
C. $90.
D. $100.
E. $700.

45. The demand curve of a monopolistically competitive firm

A. is horizontal because the firm must cut its price to sell more.
B. is perfectly elastic.
C. is downward-sloping because it sells an identical product.
D. is downward-sloping because it must cut its price to sell more.
E. is same as its marginal revenue curve.

46. Suppose a monopolistically competitive firm sells 25 units at a price of $10. Calculate its marginal
revenue per unit of output if it sells 5 more units of output when it reduced its price to $9.
A. $270
B. $20
C. $12
D. $4
E. $2.50
47. The entry and exit of firms in a monopolistically competitive market guarantee that
A. marginal revenue equals marginal cost and average total cost is minimized.
B. firms can earn economic profits in the long run.
C. price equals average total cost in the long run.
D. firms can earn economic profits in the short run.
E. firms are operating at their maximum capacity.

48. When new firms are encouraged to enter a monopolistically competitive market,
A. some existing firms must be earning economic profits.
B. they do so because there is insufficient product differentiation.
C. the demand curve facing an existing firm shifts to the right.
D. the marginal cost curve facing an existing firm shifts downwards.
E. some existing firms will have to leave the market.

49. Producing a differentiated product occurs in which of the following industries?

A. oligopoly, monopolistic competition and perfect competition
B. monopolistic competition only
C. oligopoly only
D. perfect competition only
E. monopolistic competition and oligopoly

50. Economies of scale can lead to an oligopolistic market structure because

A. if larger firms have lower costs, new small entrants will not be able to produce at the low costs
achieved by the big established firms.
B. only large firms are allowed to enter this market.
C. if economies of scale are insignificant, only a few firms are able to produce at the low costs
achieved by the big established firms.
D. a few firms can force rivals to produce at low levels of output.
E. a few firms can use high profits to keep out new entrants.

51. We can draw demand curves for firms in perfectly competitive and monopolistically competitive
industries, but not for oligopoly firms. The reason for this is
A. there are no barriers to entry in perfectly competitive and monopolistically competitive
industries. There are high barriers to entry in oligopoly industries.
B. we can assume that the prices charged by perfectly competitive and monopolistically
competitive firms have no impact on rival firms. For oligopoly this assumption is unrealistic.
C. that perfectly competitive and monopolistically competitive firms are price takers. Oligopoly
firms are price makers.
D. perfectly competitive and monopolistically competitive firms sell standardized products.
Oligopoly firms sell differentiated products.
E. Oligopoly always has consumers who buy its product so it does not need a demand curve.

52. When large firms in oligopoly markets cut their prices,

A. rival firms will also cut their prices to avoid losing sales.
B. rival firms will not change their prices because most of their customers have signed contracts
that commit them to doing business with the same firms for the life of their contracts.
C. we don't know for sure how rival firms will respond.
D. rival firms will take advantage and make their prices further higher to increase profit.
E. rival firms will not cut their prices because they fear that the federal government will accuse
them of collusion.
53. A monopoly is characterized by all of the following except
A. there are only a few sellers each selling a unique product.
B. entry barriers are high.
C. there are no close substitutes to the firm's product.
D. the firm has market power.
E. the firm has downward sloping demand curve.

54. Peet's Coffee and Teas produces some flavourful varieties of Peet's brand coffee. Is Peet's a
monopoly?
A. Yes, there are no substitutes to Peet's coffee.
B. No, although Peet's coffee is a unique product, there are many different brands of coffee that are
very close substitutes.
C. Yes, Peet's is the only supplier of Peet's coffee in a market where there are high barriers to
entry.
D. No, Peet's is not a monopoly because there are many branches of Peet's.
E. Yes, because Peet's sell a unique coffee variety that is their specialty.

55. A monopoly differs from monopolistic competition in that

A. a monopoly has market power while a firm in monopolistic competition does not have any
market power.
B. a monopoly can never incur a loss, but a firm in monopolistic competition can.
C. in a monopoly there are significant entry barriers, but there are low barriers to entry in a
monopolistically competitive market structure.
D. a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an
elastic demand curve.
E. monopoly cannot earn profits in short run while a monopolistic competitor can.

56. Jane quit her job at Telus where she earned $36,000 a year. She cashed in $40,000 in corporate bonds
that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up
a commuter service between Maple Ridge and Vancouver. There are 300 people who will pay $800 a
year each for the commuter service; $650 from each person goes for gas, maintenance, insurance,
depreciation, etc. She asked Louis, an accountant, and Greg, an economist, to calculate her profit for
her. What did they say?
57. A terrible storm wipes out 70 percent of the peanut crop. Explain and show graphically how this will
affect the market for peanut butter and the market for jelly, a complementary good.

58. Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob moves lawns for $27 each.
His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you
say about Bob’s short-run decision regarding shutdown and his long-run decision regarding exit? (6
Marks)