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3. If a firm's demand curve is horizontal, then the firm's marginal revenue is:
A) less than the price of the product.
B) equal to the price of the product.
C) greater than the price of the product.
D) greater than, equal to, or less than the price of the product, depending on the particular
circumstances.
E) not determinable from the above information.
Answer: B
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
4. If you are the only mechanic in town which of the following is true about your demand curve?
A) You don’t have one, it is all about supply.
B) it will be a downward sloping curve.
C) it will be a straight line.
D) it will be an upward sloping curve.
E) None of the above.
Answer: B
Difficulty: Medium
Topic: Simple Application
Bloom’s: Application
AACSB: Reflective Thinking
5. In the situation of imperfect competition, the relation between market price P and marginal
revenue MR for each supplying firm is that:
A) P is less than MR at all or most output levels.
B) P is greater than MR at all or most output levels.
C) P is the same as MR at all output levels.
D) P is either less than MR at particular output levels or the same as MR.
E) none of the above, since P is not related to MR.
Answer: B
Difficulty: Medium
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
8. If a monopoly is attempting to maximize profits, which of the following, if any, should it attempt
to do?
A) Maximize revenues.
B) Maximize profit per unit.
C) Select that output at which average total cost is at a minimum.
D) Select that output at which average fixed cost is at a minimum.
E) None of the above.
Answer: E
Difficulty: Hard
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
9. Which of the following statements concerning the monopolist with the cost and demand curves
shown in the figure below is true?
P d
ATC
MC = AVC
d
A B C Q
MR
A) At output B, the firm is minimizing losses in the short run; in the long run it should shut
down.
B) At output C, P = MC, and the firm is maximizing profits.
C) At output A, the firm is maximizing profits; however, in the long run the firm should go out
of business.
D) At output B, the firm should shut down in the short run.
E) None of the above are true.
Answer: C
Difficulty: Hard
Topic: Simple Application
Bloom’s: Application
AACSB: Reflective Thinking
10. To maximize profits or minimize losses (if the firm produces), a firm must be sure it is producing
at an output where:
A) total revenue is greater than average cost.
B) total revenue is equal to average cost.
C) marginal revenue is greater than marginal cost.
D) marginal revenue is equal to marginal cost.
E) none of the above is correct.
Answer: D
Difficulty: Medium
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
11. A monopoly finds that, at its present level of output and sales, marginal revenue equals $5 and
marginal cost is $4.10. Which of the following will maximize profits?
A) Leave price and output unchanged.
B) Increase price and leave output unchanged.
C) Increase price and decrease output.
D) Decrease price and increase output.
E) Decrease price and leave output unchanged.
Answer: D
Difficulty: Medium
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Analytic
Table 9-1
P Q
$5 8
$4 12
$3 17
$2 22
$1 27
12. Consider the demand curve given in Table 9-1. If the imperfectly competitive firm is able to
produce at any output level, then the price and quantity which maximize total revenue are:
A) P = 5; q = 8
B) P = 4; q = 12.
C) P = 3; q = 17.
D) P = 2; q = 22.
E) P = 1; q = 27.
Answer: C
Difficulty: Medium
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Analytic
13. Suppose an imperfect competitor faces the demand curve defined in Table 9-1, and its MC is
constant at $2.00. If the firm is able to produce at any output level, then it maximizes profits at:
A) P = 5; q = 8
B) P = 4; q = 12.
C) P = 3; q = 17.
D) P = 2; q = 22.
E) none of the above if fixed costs are less than $1.00.
Answer: B
Difficulty: Medium
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Analytic
14. If the firm described in the previous question has no fixed costs, its profits are:
A) $48.
B) $54.
C) $24.
D) $4.
E) -$12
Answer: C
Difficulty: Hard
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Analytic
15. Imperfect competition does not mean “no competition. Many firms have rivals but are still in an
imperfect competition industry. A rival wants to do which of the following:
A) increase profits.
B) increase market share.
C) advertise to shift out their demand curve.
D) all of the above.
E) none of the above.
Answer: D
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
16. Which of the following eliminates the possibility of perfect competition in a market?
A) The industry faces a downward sloping demand curve.
B) Individual firms face downward sloping demand curves.
C) Firms face decreasing returns to scale.
D) Firms display constant returns to scale.
E) The market lacks product differentiation.
Answer: B
Difficulty: Easy
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
17. Two possible reasons for the existence of an imperfectly competitive market are:
A) product differentiation and free trade.
B) constant returns to scale and a lack of market regulation.
C) increasing returns to scale and barriers to free entry.
D) a lack of market segmentation and "U" shaped marginal cost curves.
E) none of the above.
Answer: C
Difficulty: Medium
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
19. If a firm finds out that its marginal revenue is greater than its marginal cost, it should:
A) increase production and sales.
B) decrease production and sales.
C) encourage the entry of other firms into the market.
D) keep raising its selling price till marginal revenue equals marginal cost.
E) change nothing because profits are maximized.
Answer: A
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
24. In perfect competition, how is the market price related to marginal revenue for each supplying
firm?
A) P is the same as MR at all output levels.
B) P is less than MR at all (or most) output levels.
C) P is greater than MR at all (or most) output levels.
D) P is either greater than MR or less than MR at particular output levels, but never the same as
MR.
E) None of the above.
Answer: A
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
25. In the short run, under imperfect competition, a firm that wishes to maximize profits or minimize
losses should produce that output which:
A) equates marginal cost with marginal revenue.
B) equates marginal cost with price.
C) corresponds to the lowest point on the average variable cost curve.
D) corresponds to the lowest point on the average total cost curve.
E) equates average cost with price.
Answer: A
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
27. If a firm finds that its marginal revenue exceeds its marginal cost, then the maximum profit rules
require the firm to:
A) increase its output in perfect, but not necessarily in imperfect competition.
B) increase its output in imperfect, but not necessarily in perfect competition.
C) increase its output in both perfect and imperfect competition.
D) decrease its output in both perfect and imperfect competition.
E) do none of the above.
Answer: C
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
28. If a monopoly is attempting to maximize profits, which of the following should it attempt to do?
A) Maximize revenues.
B) Maximize profit per unit.
C) Select that output at which average total cost is at a minimum.
D) Set price equal to total cost.
E) None of the above.
Answer: E
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
29. If the price of a monopoly firm is located on the inelastic portion of its demand curve, to
maximize profits it should necessarily:
A) increase output and decrease price.
B) decrease output and increase price.
C) increase output and increase price.
D) not change output or price.
E) do none of the above.
Answer: B
Difficulty: Hard
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
30. The demand curve facing an imperfect competitor is given in Table 9-2. If the firm is able to
produce at any output level, then the price and quantity which maximize total revenue are:
A) P = 9; q = 8.
B) P = 8; q = 12.
C) P = 7; q = 16.
D) P = 6; q = 20.
E) P = 5; q = 22.
Answer: D
Difficulty: Medium
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Analytic
31. The demand curve facing an imperfect competitor is given in Table 9-2. MC is constant at $3.50.
If the firm is able to produce at any output level, then it maximizes profits at:
A) P = 9; q = 8.
B) P = 8; q = 12.
C) P = 7; q = 16.
D) P = 6; q = 20.
E) P = 5; q = 22.
Answer: C
Difficulty: Medium
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Analytic
32. A rational firm will only seek to maximize total revenue if:
A) it faces a totally inelastic demand curve.
B) its marginal cost curve falls and then rises.
C) its average costs are falling.
D) it is a perfect monopoly.
E) its variable costs are zero.
Answer: E
Difficulty: Hard
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
Figure 9-1
33. Which of the following points in Figure 9-1 can be used to identify a profit maximizing
monopolist's production and the price it charges?
A) Ql, Pl
B) Q2, P2
C) Q3, P3
D) Q2, P4
E) Q2, P3
Answer: B
Difficulty: Easy
Topic: Graphical Analysis
Bloom’s: Application
AACSB: Analytic
34. Which of the following points in Figure 9-1 can be used to identify production and price in a
perfectly competitive industry?
A) Q1,P1.
B) Q2,P2.
C) Q3,P3.
D) Q2,P4.
E) Q2,P3.
Answer: C
Difficulty: Easy
Topic: Graphical Analysis
Bloom’s: Application
AACSB: Analytic
35. The difference in consumer surplus between a monopoly market and a perfectly competitive one
illustrated by Figure 9-1 is represented by area:
A) P5P1A.
B) P2P3CB.
C) P3P4DC.
D) Q1ABQ2.
E) None of the above.
Answer: B
Difficulty: Medium
Topic: Graphical Analysis
Bloom’s: Application
AACSB: Analytic
37. Which of the following describe the relationship between price elasticity of demand and marginal
revenue?
A) marginal revenue is positive when demand is elastic.
B) marginal revenue is zero when demand is unit elastic.
C) marginal revenue is negative when demand is inelastic.
D) all of the above.
E) A and C only.
Answer: D
Difficulty: Easy
Topic: Simple Application
Bloom’s: Knowledge
AACSB: Reflective Thinking
38. The marginal cost schedule facing an imperfect competitor is constant at $12. The demand curve
is given in Table 9-3. The profit maximizing output for this firm is:
Table 9-3
P Q
$20 6
$19 7
$18 8
$17 9
$16 10
A) 6 units
B) 7 units
C) 8 units
D) 9 units
E) 10 units
Answer: B
Difficulty: Easy
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Analytic
43. A monopolist and a perfect competitor can both sell 10 units of a good they produce for $5 a
piece. Which of the following is not true?
A) The perfect competitor can sell unit 11 for $5.
B) The perfect competitor's MR curve is a straight line at $5.
C) The monopolist can sell unit 11 for $5.
D) The monopolist has a decreasing marginal revenue curve.
E) None of the above.
Answer: C
Difficulty: Easy
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Analytic
44. A natural monopoly features which of the following up to and including quantities that might be
demanded at the lowest prices?
A) A declining average cost curve.
B) An increasing marginal cost curve.
C) A U shaped average cost curve.
D) An increasing average cost curve.
E) Both A and B.
Answer: A
Difficulty: Easy
Topic: Experience
Bloom’s: Comprehension
AACSB: Reflective Thinking
50. If a profit-maximizing firm, with an increasing average cost curve, finds that it is producing a
level of output at which marginal costs are $100, while marginal revenue is $5, what action
should it take?
A) Raise output.
B) Lower prices.
C) Declare bankruptcy.
D) Decrease output.
E) None of the above.
Answer: D
Difficulty: Easy
Topic: Numerical Analysis
Bloom’s: Application
AACSB: Reflective Thinking
True/False Questions
53. Imperfect competition means that there is only one or two sellers in the market.
Answer: False
Difficulty: Easy
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
55. The output level that maximizes a firm's profits also maximizes the marginal profit on the last
unit produced.
Answer: False
Difficulty: Medium
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
56. If marginal revenue becomes negative, this must mean that the firm's total revenue is declining
with additional output.
Answer: True
Difficulty: Easy
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
57. Under conditions of perfect competition, marginal revenue and price are equal for the individual
firm.
Answer: True
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
58. Since Microsoft is a monopoly, it can change the price of its operating system.
Answer: True
Difficulty: Easy
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
61. Monopolistic competition is categorized as an industry with few sellers and no competition.
Answer: False
Difficulty: Easy
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
63. If a firm has zero marginal costs, then its maximum-profit output is where marginal revenue is
zero.
Answer: True
Difficulty: Medium
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
64. Unlike the curve for a monopolist, the total revenue curve for a single perfect competitor would
be a straight line rising to the right from the origin.
Answer: True
Difficulty: Medium
Topic: Experience
Bloom’s: Comprehension
AACSB: Reflective Thinking
67. Monopolists tend to charge a higher price than the market will bear.
Answer: False
Difficulty: Medium
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
68. Profits are maximized when the rate of change of total revenue equals the rate of change of total
cost.
Answer: True
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
69. A firm should decrease its output if marginal cost is greater than marginal revenue.
Answer: True
Difficulty: Easy
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
72. The output level that maximizes a firm's profits also minimizes marginal costs.
Answer: False
Difficulty: Medium
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
73. The market demand curve and the demand curve facing the firm are the same in all imperfectly
competitive markets.
Answer: False
Difficulty: Hard
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
74. The automobile industry in the United States can best be described as an oligopoly.
Answer: True
Difficulty: Easy
Topic: Experience
Bloom’s: Comprehension
AACSB: Reflective Thinking
75. The slope of the total profit curve is always equal to marginal revenue minus marginal cost.
Answer: True
Difficulty: Hard
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
76. If all firms in an industry sell identical products, then it would never pay to advertise.
Answer: False
Difficulty: Easy
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
79. If marginal cost is constant, then the profit maximizing monopoly output is indeterminant.
Answer: False
Difficulty: Hard
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking
80. Microsoft's Windows product generated monopoly power by exploiting network externalities.
Answer: True
Difficulty: Easy
Topic: Simple Application
Bloom’s: Comprehension
AACSB: Reflective Thinking