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Problem SET 5 - ABC

Principles of Economics (Trường Đại học Kinh tế Thành phố Hồ Chí Minh)

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PROBLEM SET 5
1. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in
town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells
meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the following
statements is true?
A) Meatball prices will be less than marginal cost.
B) Meatball prices will equal marginal cost.
C) Meatball prices will exceed marginal cost.
D) Meatball prices will be a function of supply and demand and will therefore oscillate around marginal
costs.
ANSWER: C
2. Which of the following statements is (are) true of a monopoly? (i) A monopoly has the ability to set
the price of its product at whatever level it desires. (ii) A monopoly's total revenue will always increase
when it increases the price of its product. (iii) A monopoly can earn unlimited profits.
A) (i) only
B) (ii) only
C) (i) and (ii)
D) (ii) and (iii)
ANSWER: A
3. Which of the following is an example of a barrier to entry?(i) A key resource is owned by a single
firm.(ii) The costs of production make a single producer more efficient than a large number of
producers.(iii) The government has given the existing monopoly the exclusive right to produce the good.
A) (i) and (ii)
B) (ii) and (iii)
C) (i) only
D) All of the above are examples of barriers to entry.
ANSWER: D
4. Because monopoly firms do not have to compete with other firms, the outcome in a market with a
monopoly is often
A) not in the best interest of society.
B) one that fails to maximize total economic well-being.

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C) inefficient.
D) All of the above are correct.
ANSWER: D
5. Allowing an inventor to have the exclusive rights to market her new invention will lead to(i) a product
that is priced higher than it would be without the exclusive rights.(ii) desirable behavior in the sense that
inventors are encouraged to invent.(iii) higher profits for the inventor.
A) (i) and (ii)
B) (ii) and (iii)
C) (i) and (iii)
D) (i), (ii), and (iii)
ANSWER: D
6. A natural monopolist's ability to price its product is
A) constrained by the market demand curve.
B) constrained by market supply.
C) not affected by market demand.
D) enhanced by regulatory control of the government.
ANSWER: A
7. Refer to Figure 15-3. A profit-maximizing monopoly's total revenue is equal to
A) P3 × Q2.
B) P2 × Q4.
C) (P3 ? P0) × Q2.
D) (P3 ? P0) × Q4.
ANSWER: A
8. Refer to Figure 15-3. A profit-maximizing monopoly's total cost is equal to
A) (P1 ? P0) × Q2.
B) P0 × Q1.
C) P0 × Q2.
D) P0 × Q3.
ANSWER: C
9. Refer to Figure 15-3. A profit-maximizing monopoly's profit is equal to
A) P3 × Q2.

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B) P2 × Q4.
C) (P3 ? P0) × Q2.
D) (P3 ? P0) × Q4.
ANSWER: C
10. Refer to Figure 15-3. Profit on a typical unit sold for a profit-maximizing monopoly would equal
A) P2 ? P1.
B) P2 ? P0.
C) P3 ? P2.
D) P3 ? P0.
ANSWER: D
11. What is the monopolist's profit under the following conditions? The profit-maximizing price charged
for goods produced is $12. The intersection of the marginal revenue and marginal cost curves occurs
where output is 10 units and marginal cost is $6. Average total cost for 10 units of output is $5.
A) $60
B) $70
C) $100
D) $120
ANSWER: B
12. Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its marginal
revenue is $4 per unit, its marginal cost is $4 per unit, and its average total cost is $3 per unit. What can
we conclude about this monopolist?
A) The monopolist is currently maximizing profits and its total profits are $200.
B) The monopolist is currently maximizing profits and its total profits are $250.
C) The monopolist is not currently maximizing its profits; it should produce more units and charge a
lower price to maximize profit.
D) The monopolist is not currently maximizing its profits; it should produce fewer units and charger a
higher price to maximize profit.
ANSWER: B
13. The economic inefficiency of a monopolist can be measured by the
A) number of consumers who are unable to purchase the product because of its high price.
B) excess profit generated by monopoly firms.

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C) poor quality of service offered by monopoly firms.

D) deadweight loss.
ANSWER: D
14. Price discrimination requires the firm to
A) separate customers according to their willingness to pay.
B) differentiate between different units of its product.
C) engage in arbitrage.
D) use coupons.
ANSWER: A
15. Price discrimination
A) forces monopolies to charge a lower price as a result of government regulation.
B) is an attempt by a monopoly to prevent some customers from purchasing its product by charging a
high price.
C) is an attempt by a monopoly to increases its profit by selling the same good to different customers at
different prices.
D) increases the consumer surplus associated with a monopolistic market.
ANSWER: C
16. In a market that is characterized by imperfect competition,
A) firms are price takers.
B) there are always a large number of firms.
C) there are at least a few firms that compete with one another.
D) the actions of one firm in the market never have any impact on the other firms' profits.
ANSWER: C
17. There are two types of imperfectly competitive markets:
A) monopoly and monopolistic competition.
B) monopoly and oligopoly.
C) monopolistic competition and oligopoly.
D) monopolistic competition and cartels.
ANSWER: C
18. When an industry has many firms, the industry is

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A) an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the
firms sell identical products.
B) an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell
identical products.
C) monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive if
the firms sell identical products.
D) perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive if
the firms sell identical products.
ANSWER: C
19. The cigarette industry consists of large firms that compete vigorously through advertising which is
directed at creating fantasy and image. Economists would characterize this industry as
A) perfectly competitive.
B) monopolistically competitive.
C) an oligopoly.
D) a monopoly.
ANSWER: C
20. An oligopoly is a market in which
A) there are only a few sellers, each offering a product similar or identical to the products offered by
other firms in the market.
B) firms are price takers.
C) the actions of one seller in the market have no impact on the other sellers' profits.
D) there are many price-taking firms, each offering a product similar or identical to the products offered
by other firms in the market.
ANSWER: A
21. One key difference between an oligopoly market and a competitive market is that oligopolistic firms
A) are price takers while competitive firms are not.
B) can affect the profit of other firms in the market by the choices they make while firms in competitive
markets do not affect each other by the choices they make.
C) sell completely unrelated products while competitive firms do not.
D) sell their product at a price equal to marginal cost while competitive firms do not.
ANSWER: B

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22. Refer to Table 16-1. What is the concentration ratio in Industry A?

A) 24%
B) 55%
C) 66%
D) 82%
ANSWER: B
23. Refer to Table 16-1. What is the concentration ratio in Industry B?
A) 5%
B) 46%
C) 85%
D) 95%
ANSWER: C
24. Refer to Table 16-1. Which industry has the highest concentration ratio?
A) Industry A
B) Industry B
C) Industry C
D) Industry D
ANSWER: B
25. The U.S. market for locomotives is divided between two producers: General Electric has 70 percent
of the market and General Motors has 30 percent. This market is an example of
A) monopolistic competition.
B) a collusive monopoly.
C) a duopoly.
D) a cartel.
ANSWER: C
26. As a group, oligopolists would always be better off if they would act collectively
A) as if they were each seeking to maximize their own individual profits.
B) in a manner that would prohibit collusive agreements.
C) as a single monopolist.
D) as a single perfectly competitive firm.
ANSWER: C

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27. As a group, oligopolists would always earn the highest profit if they would
A) produce the perfectly competitive quantity of output.
B) produce more than the perfectly competitive quantity of output.
C) charge the same price that a monopolist would charge if the market were a monopoly.
D) operate according to their own individual self-interests.
ANSWER: C
28. In order to be successful, a cartel must
A) find a way to encourage members to produce more than they would otherwise produce.
B) agree on the total level of production for the cartel, but they need not agree on the amount produced
by each member.
C) agree on the total level of production and on the amount produced by each member.
D) agree on the prices charged by each member, but they need not agree on amounts produced.
ANSWER: C
29. Which of these situations produces the largest profits for oligopolists?
A) The firms reach a Nash equilibrium.
B) The firms reach the monopoly outcome.
C) The firms reach the competitive outcome.
D) The firms produce a quantity of output that lies between the competitive outcome and the monopoly
outcome.
ANSWER: B
30. OPEC can be classified as a (i) group whose concern is to control production levels of oil.(ii) cartel.
(iii) resale price maintenance group.
A) (i) and (ii)
B) (ii)and (iii)
C) (i) and (iii)
D) (i), (ii), and (iii)
ANSWER: A
31. Imagine that two oil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil fields. Under
the fields is a common pool of oil worth $48 million. Drilling a well to recover oil costs $2 million per
well. If each company drills one well, each will get half of the oil and earn a $22 million profit ($24
million in revenue - $2 million in costs). Assume that having X percent of the total wells means that a

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company will collect X percent of the total revenue.31. REFER TO SCENARIO 16-2. If Big Petro Inc.
were to drill a second well, what would its profit be if Gargantuan Gas did not drill a second well?
A) $22 million
B) $24 million
C) $26 million
D) $28 million
ANSWER: D
32. Scenario 16-2 Imagine that two oil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil
fields. Under the fields is a common pool of oil worth $48 million. Drilling a well to recover oil costs $2
million per well. If each company drills one well, each will get half of the oil and earn a $22 million
profit ($24 million in revenue - $2 million in costs). Assume that having X percent of the total wells
means that a company will collect X percent of the total revenue. Refer to Scenario 16-2. If Big Petro
Inc. were to drill a second well and Gargantuan Gas also drilled a second well, what would Big Petro
Inc's profit be?
A) $16 million
B) $18 million
C) $20 million
D) $22 million
ANSWER: C
33. Scenario 16-2 Imagine that two oil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil
fields. Under the fields is a common pool of oil worth $48 million. Drilling a well to recover oil costs $2
million per well. If each company drills one well, each will get half of the oil and earn a $22 million
profit ($24 million in revenue - $2 million in costs). Assume that having X percent of the total wells
means that a company will collect X percent of the total revenue. Refer to Scenario 16-2. Gargantuan
Gas's dominant strategy would lead to what sort of well-drilling behavior?
A) Gargantuan Gas will never drill a second well.
B) Gargantuan Gas will always drill a second well.
C) Gargantuan Gas will drill a second well only if Big Petro Inc. drills a well.
D) Gargantuan Gas will drill a second well only if Big Petro Inc. does not drill a well.
ANSWER: B
34. Antitrust laws in general are used to

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A) prevent oligopolists from acting in ways that make markets less competitive.
B) encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
C) encourage frivolous lawsuits among competitive firms.
D) encourage all firms to cut production levels and cut prices.
ANSWER: A
35. Assume that Peach Computers has entered into a resale price maintenance agreement with Computer
Super Stores Inc. (CSS Inc.) but not with CompuMart. In this case,
A) the wholesale price of Peach computers will be different for CSS Inc. than it is for CompuMart.
B) Peach computers will never increase profits by having a resale price maintenance agreement with all
retail outlets that sell its products.
C) CompuMart will benefit from customers who go to CSS Inc. for information about different
computers.
D) CSS Inc. will sell Peach computers at a lower price than CompuMart.
ANSWER: C
36. Refer to Table 16-3. If there is only one digital cable TV company in this market, what price would
it charge for a premium digital channel subscription to maximize its profit?
A) $40
B) $60
C) $80
D) $100
ANSWER: B
37. Refer to Table 16-3. Assume that there are two digital cable TV companies operating in this market.
If they are able to collude on the price and quantity of subscriptions to sell, what price (P) will they
charge, and how many subscriptions (Q) will they sell collectively?
A) P = $40, Q = 12,000
B) P = $60, Q = 9,000
C) P = $80, Q = 6,000
D) P = $100, Q = 3,000
ANSWER: B
38. Refer to Table 16-3. Assume that there are two profit-maximizing digital cable TV companies
operating in this market. Further assume that they are able to collude on the price and quantity of

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premium digital channel subscriptions to sell. As part of their collusive agreement they decide to take an
equal share of the market. How much profit will each company make?
A) $40,000
B) $170,000
C) $480,000
D) $540,000
ANSWER: B
39. Refer to Table 16-3. Assume that there are two profit-maximizing digital cable TV companies
operating in this market. Further assume that they are not able to collude on the price and quantity of
premium digital channel subscriptions to sell. How many premium digital channel cable TV
subscriptions will be sold altogether when this market reaches a Nash equilibrium?
A) 3,000
B) 6,000
C) 9,000
D) 12,000
ANSWER: D
40. Refer to Table 16-3. Assume that there are two profit-maximizing digital cable TV companies
operating in this market. Further assume that they are not able to collude on the price and quantity of
premium digital channel subscriptions to sell. What price will premium digital channel cable TV
subscriptions be sold at when this market reaches a Nash equilibrium?
A) $40
B) $60
C) $80
D) $100
ANSWER: A
41. Refer to Table 16-3. Assume that there are two profit-maximizing digital cable TV companies
operating in this market. Further assume that they are not able to collude on the price and quantity of
premium digital channel subscriptions to sell. How much profit will each firm earn when this market
reaches a Nash equilibrium?
A) $0
B) $140,000

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C) $170,000
D) $220,000
ANSWER: B
42. Suppose a market is initially perfectly competitive with many firms selling an identical product.
Over time, however, suppose the merging of firms results in the market being served by only three or
four firms selling this same product. As a result, we would expect
A) an increase in market output and an increase in the price of the product.
B) an increase in market output and an decrease in the price of the product.
C) a decrease in market output and an increase in the price of the product.
D) a decrease in market output and a decrease in the price of the product.
ANSWER: C
43. The theory of oligopoly provides another reason that free trade can benefit all countries because (i)
as the number of firms within a given market increases, the price of the good falls. (ii) increased
competition leads to smaller deadweight losses. (iii) profit increases with the level of competition for
oligopoly firms.
A) (i) only
B) (ii) only
C) (i) and (ii)
D) (i), (ii), and (iii)
ANSWER: C
44. Refer to Table 16-8. Pursuing its own best interests, Firm A will concede that cigarette smoke causes
lung cancer
A) only if Firm B concedes that cigarette smoke causes lung cancer.
B) only if Firm B does not concede that cigarette smoke causes lung cancer.
C) regardless of whether Firm B concedes that cigarette smoke causes lung cancer.
D) None of the above. In pursuing its own best interests, Firm A will in no case concede that cigarette
smoke causes lung cancer.
ANSWER: D
45. Refer to Table 16-8. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will
be
A) $-5 and $-50, respectively.

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B) $-10 and $-10, respectively.

C) $-20 and $-15, respectively.
D) $-50 and $-5, respectively.
ANSWER: B
46. Monopolistic competition differs from perfect competition because in monopolistically competitive
markets
A) a.there are barriers to entry.
B) b.all firms can eventually earn economic profits.
C) c.each of the sellers offers a somewhat different product.
D) d.strategic interactions between firms is vitally important.
ANSWER: C
47. A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly
competitive market because the firm in the monopolistically competitive market
A) a.is characterized by market-share maximization.
B) b.has no barriers to entry.
C) c.faces a downward-sloping demand curve for its product.
D) d.faces a horizontal demand curve at the market clearing price.
ANSWER: C
48. In monopolistically competitive markets, free entry and exit suggests that
A) a.the market structure will eventually be characterized by perfect competition in the long run.
B) b.all firms earn zero economic profits in the long run.
C) c.some firms will be able to earn economic profits in the long run.
D) d.some firms will be forced to incur economic losses in the long run.
ANSWER: B
49. If firms in a monopolistically competitive market are earning positive profits, then
A) a.firms will likely be subject to regulation.
B) b.barriers to entry will be strengthened.
C) c.some firms must exit the market.
D) d.new firms will enter the market.
ANSWER: D
50. In the long run, a firm in a perfectly competitive market operates

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A) a.at its efficient scale and a monopolistically competitive firm operates at efficient scale.
B) b.at its efficient scale and a monopolistically competitive firm operates with excess capacity.
C) c.with excess capacity and a monopolistically competitive firm operates with excess capacity.
D) d.with excess capacity and a monopolistically competitive firm operates at its efficient scale.
ANSWER: B
51. Refer to Figure 17-2. Which of the graphs shown would be consistent with a firm in a
monopolistically competitive market that is earning a positive profit?
A) a.Panel a
B) b.Panel b
C) c.Panel c
D) d.Panel d
ANSWER: C
52. Refer to Figure 17-2. Which of the graphs shown would be consistent with a firm in a
monopolistically competitive market that is doing its best but still losing money?
A) a.Panel a
B) b.Panel b
C) c.Panel c
D) d.Panel d
ANSWER: B
53. Refer to Figure 17-2. Which of the graphs depicts a monopolistically competitive firm in long-run
equilibrium?
A) a.Panel a
B) b.Panel b
C) c.Panel c
D) d.None of the above is correct.
ANSWER: D
54. Refer to Figure 17-4. Panel (a) shows a profit-maximizing monopolistically competitive firm that is
A) a.earning zero economic profit.
B) b.likely to exit the market in the long run.
C) c.producing its efficient scale of output.
D) d.not maximizing its profit.

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ANSWER: A
55. Refer to Figure 17-4. Which of the panels shown could illustrate the short-run situation for a
monopolistically competitive firm?
A) a.Panel a
B) b.Panel b
C) c.Panel c
D) d.All of the above are correct.
ANSWER: D
56. Refer to Figure 17-4. Panel (b) is consistent with a firm in a monopolistically competitive market
that is
A) a.not in long-run equilibrium.
B) b.in long-run equilibrium.
C) c.producing its efficient scale of output.
D) d.earning a positive economic profit.
ANSWER: A
57. When existing firms lose customers and profits due to entry of a new competitor, a
A) a.predatory-pricing externality occurs.
B) b.consumption externality occurs.
C) c.business-stealing externality occurs.
D) d.product-variety externality occurs.
ANSWER: C
58. When a new firm enters a monopolistically competitive market, the individual demand curves faced
by all existing firms in that market will
A) a.shift to the left.
B) b.shift to the right.
C) c.shift in a direction that is unpredictable without further information.
D) d.remain unchanged. It is the supply curve that will shift.
ANSWER: A
59. Refer to Figure 17-5. This figure depicts a situation in a monopolistically competitive market. What
price will the monopolistically competitive firm charge in this market?
A) a.$60

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B) b.$70
C) c.$75
D) d.$80
ANSWER: D
60. Refer to Figure 17-5. This figure depicts a situation in a monopolistically competitive market. How
much consumer surplus will be derived from the purchase of this product at the monopolistically
competitive price?
A) a.$200.00
B) b.$312.50
C) c.$400.00
D) d.$800.00
ANSWER: A
61. Refer to Figure 17-5. This figure depicts a situation in a monopolistically competitive market. How
much profit will the monopolistically competitive firm earn in this situation?
A) a.A $10 profit.
B) b.A $20 profit.
C) c.A $200 profit.
D) d.No profit, since monopolistically competitive firms never earn economic profit.
ANSWER: C
62. Refer to Figure 17-5. This figure depicts a situation in a monopolistically competitive market. How
much output will the monopolistically competitive firm produce in this situation?
A) a.20 units
B) b.25 units
C) c.40 units
D) d.No output, since producing in this situation will result in a loss for the firm.
ANSWER: A
63. Your company has recently requested that you travel to Dhaka, Bangladesh, to work on negotiations
for a new factory to be located in one of the port cities. Your travel agent provides a list of several
hundred local hotels, and a Sheraton. In this case, the Sheraton brand-name is likely to be used as a
signal of
A) a.perceived differences that are not likely to exist among your various options.

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B) b.quality when quality cannot be easily judged.

C) c.inefficiency in markets characterized by recognizable brand names.
D) d.the quality of general lodging accommodations in Dhaka.
ANSWER: B
64. A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an example
of a case in which
A) a.brand name identity increases the effectiveness of markets.
B) b.brand name identity can be detrimental to the profitability of a firm.
C) c.advertising is ineffective in salvaging perceptions of product quality.
D) d.advertising cannot be used to establish brand loyalty.
ANSWER: B
65. Firm A produces and sells in a market that is characterized by highly differentiated consumer goods.
Firm B produces and sells industrial products. Firm C produces and sells an agricultural commodity.
Which firm is likely to spend the greatest portion of its total revenue on advertising?
A) a.Firm A
B) b.Firm B
C) c.Firm C
D) d.There is no reason to believe that any one of the three firms would spend a greater portion of its
total revenue on advertising than the other two firms.
ANSWER: A

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