Economic cost can best be defined as:

A. any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers.

B. any contractual obligation to labor or material suppliers.

C. a payment that must be made to obtain and retain the services of a resource.

D. all costs exclusive of payments to fixed factors of production.

C. a payment that must be made to obtain and retain the services of a resource.
Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?

A. Payments of wages to its office workers.

B. Rent paid for the use of equipment owned by the Schultz Machinery Company.

C. Use of savings to pay operating expenses instead of generating interest income.

D. Economic profits resulting from current production.

C. Use of savings to pay operating expenses instead of generating interest income.
Which of the following is most likely to be an implicit cost for Company X?

A. Forgone rent from the building owned and used by Company X.

B. Rental payments on IBM equipment.

C. Payments for raw materials purchased from Company Y.

D. Transportation costs paid to a nearby trucking firm.

A. Forgone rent from the building owned and used by Company X.
4. Production costs to an economist:

A. consist only of explicit costs.

B. reflect opportunity costs.

C. never reflect monetary outlays.

D. always reflect monetary outlays.

B. reflect opportunity costs.
5. What do wages paid to factory workers, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?

A. None are either implicit or explicit costs.

B. All are opportunity costs.

C. All are implicit costs.

D. All are explicit costs.

B. All are opportunity costs.
6. To the economist, total cost includes:

A. explicit and implicit costs.

B. neither implicit nor explicit costs.

C. implicit, but not explicit, costs.

D. explicit, but not implicit, costs.

A. explicit and implicit costs.
7. Implicit and explicit costs are different in that:

A. explicit costs are opportunity costs; implicit costs are not.

B. implicit costs are opportunity costs; explicit costs are not.

C. the latter refer to nonexpenditure costs and the former to monetary payments.

D. the former refer to nonexpenditure costs and the latter to monetary payments.

D. the former refer to nonexpenditure costs and the latter to monetary payments.
8. Accounting profits equal total revenue minus:

A. total explicit costs.

B. total implicit costs.

C. total economic costs.

D. economic profits.

A. total explicit costs.
9. An explicit cost is:

A. omitted when accounting profits are calculated.

B. a money payment made for resources not owned by the firm itself.

C. an implicit cost to the resource owner who receives that payment.

D. always in excess of a resource’s opportunity cost.

B. a money payment made for resources not owned by the firm itself.
10. Accounting profits are typically:

A. greater than economic profits because the former do not take explicit costs into account.

B. equal to economic profits because accounting costs include all opportunity costs.

C. smaller than economic profits because the former do not take implicit costs into account.

D. greater than economic profits because the former do not take implicit costs into account.

D. greater than economic profits because the former do not take implicit costs into account.
11. Which of the following statements applies to a purely competitive producer?

A. It will not advertise its product.

B. In long-run equilibrium it will earn an economic profit.

C. Its product will have a brand name.

D. Its product is slightly different from those of its competitors.

A. It will not advertise its product.
12. A purely competitive seller is:

A. both a “price maker” and a “price taker.”

B. neither a “price maker” nor a “price taker.”

C. a “price taker.”

D. a “price maker.”

C. a “price taker.”
13. Which of the following is not a characteristic of pure competition?

A. Price strategies by firms.

B. A standardized product.

C. No barriers to entry.

D. A larger number of sellers.

A. Price strategies by firms.
14. Which of the following is not a basic characteristic of pure competition?

A. Considerable nonprice competition.

B. No barriers to the entry or exit of firms.

C. A standardized or homogeneous product.

D. A large number of buyers and sellers.

A. Considerable nonprice competition.
15. The demand schedule or curve confronted by the individual, purely competitive firm is:

A. relatively elastic, that is, the elasticity coefficient is greater than unity.

B. perfectly elastic.

C. relatively inelastic, that is, the elasticity coefficient is less than unity.

D. perfectly inelastic.

B. perfectly elastic.
16. Which of the following is characteristic of a purely competitive seller’s demand curve?

A. Price and marginal revenue are equal at all levels of output.

B. Average revenue is less than price.

C. Its elasticity coefficient is 1 at all levels of output.

D. It is the same as the market demand curve.

A. Price and marginal revenue are equal at all levels of output.
17. In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.

Refer to the information. For a purely competitive firm, total revenue graphs as a:

A. straight, upsloping line.

B. straight line, parallel to the vertical axis.

C. straight line, parallel to the horizontal axis.

D. straight, downsloping line.

A. straight, upsloping line.
18. In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.

Refer to the information. For a purely competitive firm, marginal revenue graphs as a:

A. straight, upsloping line.

B. straight line, parallel to the vertical axis.

C. straight line, parallel to the horizontal axis.

D. straight, downsloping line.

C. straight line, parallel to the horizontal axis.
19. In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.

Refer to the information. For a purely competitive firm:

A. marginal revenue will graph as an upsloping line.

B. the demand curve will lie above the marginal revenue curve.

C. the marginal revenue curve will lie above the demand curve.

D. the demand and marginal revenue curves will coincide.

D. the demand and marginal revenue curves will coincide.
20. If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:

A. may be either greater or less than $5.

B. will also be $5.

C. will be less than $5.

D. will be greater than $5.

B. will also be $5.
21. Price is constant to the individual firm selling in a purely competitive market because:

A. the firm’s demand curve is downsloping.

B. of product differentiation reinforced by extensive advertising.

C. each seller supplies a negligible fraction of total supply.

D. there are no good substitutes for its product.

C. each seller supplies a negligible fraction of total supply.
22. Which of the following distinguishes the short run from the long run in pure competition?

A. Firms can enter and exit the market in the long run but not in the short run.

B. Firms attempt to maximize profits in the long run but not in the short run.

C. Firms use the MR = MC rule to maximize profits in the short run but not in the long run.

D. The quantity of labor hired can vary in the long run but not in the short run.

A. Firms can enter and exit the market in the long run but not in the short run.
23. The primary force encouraging the entry of new firms into a purely competitive industry is:

A. normal profits earned by firms already in the industry.

B. economic profits earned by firms already in the industry.

C. government subsidies for start-up firms.

D. a desire to provide goods for the betterment of society.

B. economic profits earned by firms already in the industry.
24. In a purely competitive industry:

A. there will be no economic profits in either the short run or the long run.

B. economic profits may persist in the long run if consumer demand is strong and stable.

C. there may be economic profits in the short run but not in the long run.

D. there may be economic profits in the long run but not in the short run.

C. there may be economic profits in the short run but not in the long run.
25. Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm:

A. minimizes losses by producing at the minimum point of its AVC curve.

B. maximizes profits by producing where MR = ATC.

C. should close down immediately.

D. should continue producing in the short run but leave the industry in the long run if the situation persists.

D. should continue producing in the short run but leave the industry in the long run if the situation persists.
26. Which of the following is true concerning purely competitive industries?

A. There will be economic losses in the long run because of cut-throat competition.

B. Economic profits will persist in the long run if consumer demand is strong and stable.

C. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.

D. There are economic profits in the long run but not in the short run.

C. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
27. If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then:

A. the selling price for this firm is above the market equilibrium price.

B. new firms will enter this market.

C. some existing firms in this market will leave.

D. there must be price fixing by the industry’s firms.

B. new firms will enter this market.
28. Long-run competitive equilibrium:

A. is realized only in constant-cost industries.

B. will never change once it is realized.

C. is not economically efficient.

D. results in zero economic profits.

D. results in zero economic profits.
29. We would expect an industry to expand if firms in that industry are:

A. earning normal profits.

B. earning economic profits.

C. breaking even.

D. earning accounting profits.

B. earning economic profits.
30. Which of the following statements is correct?

A. Economic profits induce firms to enter an industry; losses encourage firms to leave.

B. Economic profits induce firms to leave an industry; profits encourage firms to leave.

C. Economic profits and losses have no significant impact on the growth or decline of an industry.

D. Normal profits will cause an industry to expand.

A. Economic profits induce firms to enter an industry; losses encourage firms to leave.
31. Suppose a purely competitive, increasing-cost industry is in long-run equilibrium. Now assume that a decrease in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price:

A. and industry output will be less than the initial price and output.

B. will be greater than the initial price, but the new industry output will be less than the original output.

C. will be less than the initial price, but the new industry output will be greater than the original output.

D. and industry output will be greater than the initial price and output.

A. and industry output will be less than the initial price and output.
32. For an imperfectly competitive firm:

A. total revenue is a straight, upsloping line because a firm’s sales are independent of product price.

B. the marginal revenue curve lies above the demand curve because any reduction in price applies to all units sold.

C. the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.

D. the marginal revenue curve lies below the demand curve because any reduction in price applies only to the extra unit sold.

C. the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.
33. When a firm is on the inelastic segment of its demand curve, it can:

A. increase total revenue by reducing price.

B. decrease total costs by decreasing price.

C. increase profits by increasing price.

D. increase total revenue by more than the increase in total cost by increasing price.

C. increase profits by increasing price.
34.

Refer to the diagram. If price is reduced from P1 to P2, total revenue will:

A. increase by A – C.

B. increase by C – A.

C. decrease by A – C.

D. decrease by C – A.

B. increase by C – A.
35.

Refer to the diagram. The quantitative difference between areas A and C for reducing the price from P1 to P2 measures:

A. marginal cost.

B. marginal revenue.

C. monopoly price.

D. a welfare or efficiency loss.

B. marginal revenue.
36. Answer the question on the basis of the demand schedule shown below:

Refer to the data. The marginal revenue obtained from selling the third unit of output is:

A. $6.

B. $1.

C. $2.

D. $5.

C. $2.
37. Answer the question on the basis of the demand schedule shown below:

Refer to the data. At the point where 3 units are being sold, the coefficient of price elasticity of demand:

A. cannot be estimated.

B. suggests that the market is purely competitive.

C. is less than unity (one).

D. is greater than unity (one).

D. is greater than unity (one).
38. Monopolistic competition means:

A. a market situation where competition is based entirely on product differentiation and advertising.

B. a large number of firms producing a standardized or homogeneous product.

C. many firms producing differentiated products.

D. a few firms producing a standardized or homogeneous product.

C. many firms producing differentiated products.
39. Monopolistic competition is characterized by a:

A. few dominant firms and low entry barriers.

B. large number of firms and substantial entry barriers.

C. large number of firms and low entry barriers.

D. few dominant firms and substantial entry barriers.

C. large number of firms and low entry barriers.
40. Under monopolistic competition, entry to the industry is:

A. completely free of barriers.

B. more difficult than under pure competition but not nearly as difficult as under pure monopoly.

C. more difficult than under pure monopoly.

D. blocked.

B. more difficult than under pure competition but not nearly as difficult as under pure monopoly.
41. Monopolistic competition resembles pure competition because:

A. both industries emphasize nonprice competition.

B. in both instances firms will operate at the minimum point on their long-run average total cost curves.

C. both industries entail the production of differentiated products.

D. barriers to entry are either weak or nonexistent.

D. barriers to entry are either weak or nonexistent.
42. Which of the following is not a basic characteristic of monopolistic competition?

A. The use of trademarks and brand names.

B. Recognized mutual interdependence.

C. Product differentiation.

D. A relatively large number of sellers.

B. Recognized mutual interdependence.
43. Nonprice competition refers to:

A. competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts.

B. price increases by a firm that are ignored by its rivals.

C. advertising, product promotion, and changes in the real or perceived characteristics of a product.

D. reductions in production costs that are not reflected in price reductions.

C. advertising, product promotion, and changes in the real or perceived characteristics of a product.
44. The restaurant, legal assistance, and clothing industries are each illustrations of:

A. countervailing power.

B. homogeneous oligopoly.

C. monopolistic competition.

D. pure monopoly.

C. monopolistic competition.
45. If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes:

A. the likelihood of realizing economic profits in the long run would be enhanced.

B. individual firms would now be operating at outputs where their average total costs would be higher.

C. the industry would more closely approximate pure competition.

D. the likelihood of collusive pricing would increase.

C. the industry would more closely approximate pure competition.
46. Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because:

A. of product differentiation and consequent product promotion activities.

B. monopolistically competitive firms cannot realize an economic profit in the long run.

C. the number of firms in the industry is larger.

D. monopolistically competitive producers use strategic pricing strategies to combat rivals.

A. of product differentiation and consequent product promotion activities.
47. A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from:

A. the likelihood of collusion.

B. high entry barriers.

C. product differentiation.

D. mutual interdependence in decision making.

C. product differentiation.
48. A significant difference between a monopolistically competitive firm and a purely competitive firm is that the:

A. former does not seek to maximize profits.

B. latter recognizes that price must be reduced to sell more output.

C. former sells similar, although not identical, products.

D. former’s demand curve is perfectly inelastic.

C. former sells similar, although not identical, products.
49. A monopolistically competitive industry combines elements of both competition and monopoly. It is correct to say that the competitive element results from:

A. a relatively large number of firms and the monopolistic element from product differentiation.

B. product differentiation and the monopolistic element from high entry barriers.

C. a perfectly elastic demand curve and the monopolistic element from low entry barriers.

D. a highly inelastic demand curve and the monopolistic element from advertising and product promotion.

A. a relatively large number of firms and the monopolistic element from product differentiation.
50. Monopolistically competitive and purely competitive industries are similar in that:

A. both are assured of short-run economic profits.

B. both produce differentiated products.

C. the demand curves facing individual firms are perfectly elastic in both industries.

D. there are few, if any, barriers to entry.

D. there are few, if any, barriers to entry.
51. The monopolistic competition model assumes that:

A. allocative efficiency will be achieved.

B. productive efficiency will be achieved.

C. firms will engage in nonprice competition.

D. firms will realize economic profits in the long run.

C. firms will engage in nonprice competition.
52. Use your basic knowledge and your understanding of market structures to answer this question. Which of the following companies most closely approximates a monopolistic competitor?

A. Subway Sandwiches.

B. Pittsburgh Plate Glass.

C. Ford Motor Company.

D. Microsoft.

A. Subway Sandwiches.
53. A monopolistically competitive firm has a:

A. highly elastic demand curve.

B. highly inelastic demand curve.

C. perfectly inelastic demand curve.

D. perfectly elastic demand curve.

A. highly elastic demand curve.
54. The monopolistically competitive seller’s demand curve will become more elastic the:

A. more significant the barriers to entering the industry.

B. greater the degree of product differentiation.

C. larger the number of competitors.

D. smaller the number of competitors.

C. larger the number of competitors.
55. The larger the number of firms and the smaller the degree of product differentiation the:

A. greater the divergence between the demand and the marginal revenue curves of the monopolistically competitive firm.

B. larger will be the monopolistically competitive firm’s fixed costs.

C. less elastic is the monopolistically competitive firm’s demand curve.

D. more elastic is the monopolistically competitive firm’s demand curve.

D. more elastic is the monopolistically competitive firm’s demand curve.
56. The demand curve of a monopolistically competitive producer is:

A. less elastic than that of either a pure monopolist or a pure competitor.

B. less elastic than that of a pure monopolist, but more elastic than that of a pure competitor.

C. more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.

D. more elastic than that of either a pure monopolist or a pure competitor.

C. more elastic than that of a pure monopolist, but less elastic than that of a pure competitor
57. A monopolistically competitive firm’s marginal revenue curve:

A. is downsloping and coincides with the demand curve.

B. coincides with the demand curve and is parallel to the horizontal axis.

C. is downsloping and lies below the demand curve.

D. does not exist because the firm is a “price maker.”

C. is downsloping and lies below the demand curve.
58. Answer the question on the basis of the following demand and cost data for a specific firm:

Demand data Cost Data
1 2 3 Total
Price Price Quantity Output Cost
$11.00 10.00 6 6 $61
$9.99 8.85 7 7 62
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

Refer to the data. If columns (1) and (3) of the demand data shown are this firm’s demand schedule, the profit-maximizing level of output will be:

A. 12 units.

B. 8 units.

C. 10 units.

D. 9 units.

B. 8 units.
59. Answer the question on the basis of the following demand and cost data for a specific firm:

Demand data Cost Data
1 2 3 Total
Price Price Quantity Output Cost
$11.00 10.00 6 6 $61
$9.99 8.85 7 7 62
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

Refer to the data. If columns (1) and (3) of the demand data shown are this firm’s demand schedule, the profit-maximizing price will be:

A. $9.

B. $7.

C. $11.

D. $6.

A. $9.
60. Answer the question on the basis of the following demand and cost data for a specific firm:

Demand data Cost Data
1 2 3 Total
Price Price Quantity Output Cost
$11.00 10.00 6 6 $61
$9.99 8.85 7 7 62
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

Refer to the data. If columns (1) and (3) of the demand data shown are this firm’s demand schedule, economic profit will be:

A. $10.

B. $19.

C. $6.

D. $8.

D. $8.
61. Answer the question on the basis of the following demand and cost data for a specific firm:

Demand data Cost Data
1 2 3 Total
Price Price Quantity Output Cost
$11.00 10.00 6 6 $61
$9.99 8.85 7 7 62
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

Refer to the data. Suppose that entry into the industry changes this firm’s demand schedule from columns (1) and (3) shown to columns (2) and (3). Economic profit will:

A. fall by $10.

B. fall to $6.

C. increase by $10.

D. decline to zero.

D. decline to zero.
62. Answer the question on the basis of the following demand and cost data for a specific firm:
Demand data Cost Data
1 2 3 Total
Price Price Quantity Output Cost
$11.00 10.00 6 6 $61
$9.99 8.85 7 7 62
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

Refer to the data. Suppose that entry into this industry changes this firm’s demand schedule from columns (1) and (3) shown to columns (2) and (3). We can conclude that this industry is:

A. a pure monopoly.

B. purely competitive.

C. a constant cost industry.

D. monopolistically competitive.

D. monopolistically competitive.
63. Answer the question on the basis of the following demand and cost data for a specific firm:

Demand data Cost Data
1 2 3 Total
Price Price Quantity Output Cost
$11.00 10.00 6 6 $61
$9.99 8.85 7 7 62
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

Refer to the data. With the demand schedule shown by columns (2) and (3), in long-run equilibrium:

A. price will equal average total cost.

B. total cost will exceed total revenue.

C. marginal cost will exceed price.

D. price will equal marginal revenue.

A. price will equal average total cost.
64. An important similarity between a monopolistically competitive firm and a purely competitive firm is that:

A. both face perfectly elastic demand schedules.

B. economic profit tends toward zero for both.

C. both realize productive efficiency.

D. both realize allocative efficiency.

B. economic profit tends toward zero for both.
65. An important similarity between a monopolistically competitive firm and a pure monopolist is that both:

A. realize an economic profit in the long run.

B. achieve allocative efficiency.

C. face demand curves that are less than perfectly elastic.

D. achieve productive efficiency.

C. face demand curves that are less than perfectly elastic.
66. The less elastic a monopolistic competitor’s long-run demand curve, the:

A. less its excess capacity.

B. higher its price relative to that of a pure competitor having the same cost curves.

C. higher its long-run profits.

D. lower its average total cost at its equilibrium level of output.

B. higher its price relative to that of a pure competitor having the same cost curves.
67.

Refer to the diagram for a monopolistically competitive producer. The firm is:

A. minimizing losses in the long run.

B. minimizing losses in the short run.

C. realizing a normal profit in the long run.

D. about to leave the industry.

C. realizing a normal profit in the long run.
68.

Refer to the diagram for a monopolistically competitive producer. This firm is experiencing:

A. a shortage of production capacity.

B. excess capacity of CD.

C. excess capacity of DE.

D. diseconomies of scale.

C. excess capacity of DE.
69.

Refer to the diagram for a monopolistically competitive producer. If this firm were to realize productive efficiency, it would:

A. also realize an economic profit.

B. incur a loss.

C. also achieve allocative efficiency.

D. have to produce a smaller output.

B. incur a loss.
70. In the long run a monopolistically competitive firm:

A. earns an economic profit.

B. produces where P = ATC.

C. produces where MR exceeds MC.

D. achieves allocative efficiency.

B. produces where P = ATC.
71. Monopolistically competitive industries are inefficient because:

A. they realize diseconomies of scale.

B. advertising costs retard technological advance and product development.

C. they are overpopulated with firms whose plants are underutilized.

D. monopolistically competitive sellers engage in misleading advertising.

C. they are overpopulated with firms whose plants are underutilized.
72. The economic inefficiencies of monopolistic competition may be offset by the fact that:

A. advertising expenditures shift the average cost curve upward.

B. available capacity is fully utilized.

C. resources are optimally allocated to the production of the product.

D. consumers have increased product variety.

D. consumers have increased product variety.
73. A significant benefit of monopolistic competition compared with pure competition is:

A. less likelihood of X-inefficiency.

B. improved resource allocation.

C. greater product variety.

D. stronger incentives to achieve economies of scale.

C. greater product variety.
74. Product variety is likely to be greater in:

A. monopolistic competition than in pure competition.

B. pure competition than in monopolistic competition.

C. homogeneous oligopoly than in monopolistic competition.

D. homogeneous oligopoly than in differentiated oligopoly.

A. monopolistic competition than in pure competition.
75. Which of the following is correct?

A. The excess capacity problem diminishes as the monopolistically competitive firm’s demand curve becomes less elastic.

B. The excess capacity problem means that monopolistically competitive firms typically produce at some point on the rising segment of their average total cost curve.

C. The greater the degree of product variation, the lesser is the excess capacity problem.

D. The greater the degree of product variation, the greater is the excess capacity problem.

D. The greater the degree of product variation, the greater is the excess capacity problem.
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