Business Costs and Production8

Practice What You Know

Bob runs a small family restaurant. How would you describe the monthly rent he pays on the building?

A. Explicit cost, variable costB. Explicit cost, fixed costC. Implicit cost, variable costD. Implicit cost, fixed cost

Practice What You Know

Which of the following is an example of an implicit cost?

A. Wages paid to employeesB. Cost of food deliveryC. The opportunity cost of the owner’s timeD. Monthly insurance premiums

Practice What You Know

Suppose the wage rate that a company pays its workers increases. In terms of the cost equations, which of the following is true?

A. TC will increase, but ATC will decreaseB. TVC will increase, but AVC will decreaseC. The MC curve will become hill-shapedD. The TFC and AFC will not change

Practice What You Know

Total output with seven workers is Q = 70.Total output with eight workers is Q = 82.What is the marginal product of the eighth worker?

A. 12B. 10C. 82D. 8

Firms in a Competitive Market9

Practice What You Know

Steve runs a competitive sandwich shop. Right now, he is producing output at a level where MR > MC. To increase his profits, Steve should

A. Try to use more capital in his productionB. Try to use more labor in his productionC. Produce less outputD. Produce more output

Practice What You Know

If a competitive industry is making positive economic profits, what will eventually happen in this industry?

A. The market supply will shift to the leftB. The market supply will shift to the rightC. The market demand will shift to the leftD. The market demand will shift to the right

Practice What You Know

Suppose a competitive firm is faced with a price in the short run that is below ATC but above AVC. In the short run, this firm should

A. Shut downB. Exit the industryC. Raise the price of the goodD. Produce at the output level where MR =

MC

Practice What You Know

What do you suppose is one of the main reasons that competitive firms all earn zero economic profits in the long run?

A. Each firm has a lot of market powerB. Firms all want to earn zero profitsC. Free entry and exit in the industryD. The cost curves are U-shaped

Practice What You Know

A competitive firm will shut down and produce output level Q = 0 if

A. Price < min (ATC)B. min (AVC) < Price < min (ATC)C. Price < min (AVC)D. P = MR

Understanding Monopoly

10

Practice What You Know

Which of the following firms will most likely be a natural monopoly?

A. A grocery storeB. A cable TV companyC. A gas stationD. A barbershop

Practice What You Know

Which of the following most accurately describes a patent?

A. An incentive to innovateB. A profit-sharing mechanismC. A redistribution of wealthD. An original invention

Practice What You Know

What is true for a profit-maximizing monopoly?A. P = MR = MCB. P = MR > MCC. P > MR = MCD. P > MR > MC

Practice What You Know

What is the reason for monopoly deadweight loss (relative to perfect competition)?

A. The monopolist faces a downward sloping demand curve

B. People boycott monopolies more oftenC. The monopolist sells less output at a

higher priceD. The monopolist has no competitors

Practice What You Know

A monopolist will have negative profits and exit the industry in the long run if:

A. A new competitor enters the industryB. Demand becomes more elasticC. Price < ATCD. A monopolist never has negative profits

Price Discrimination

11

Practice What You Know

Which of the following goods or services is most likely to be sold successfully by a firm at different prices?

A. Economics textbooksB. HaircutsC. Candy barsD. University apparel

Practice What You Know

A general rule for price discriminating with two consumers groups is to charge a ______ price to the inelastic group and to charge a ______ price to the elastic group.

A. high; lowB. low; highC. positive; negativeD. negative; positive

Practice What You Know

What market and pricing structure has the least amount of consumer surplus?

A. Perfect competitionB. Pure monopoly (single price)C. A price discriminating monopoly that

charges two different pricesD. A monopolist that engages in perfect

price discrimination

Practice What You Know

Why might one consumer group (A) have a more elastic demand (and be more price sensitive) than another group (B) of consumers?

A. Group (A) may have less incomeB. Group (A) may have lower tastes and

preferences for the goodC. Both of the above could be trueD. None of the above

Monopolistic Competition and Advertising

12

Practice What You Know

Which of the following is true about monopolistic competition?

A. It results in higher prices than monopoly

B. It results in higher prices than perfect competition

C. It results in lower quantity than monopoly

D. It is more economically efficient than perfect competition

Practice What You Know

Which of the following industries fits most closely with the model of monopolistic competition?

A. Automobile productionB. FarmingC. Diamond miningD. Fast-food restaurants

Practice What You Know

What is true about the long run equilibrium for firms in a monopolistically competitive industry?

A. MR < MC, P < min(ATC)B. P = MR = MC = min(ATC)C. P = ATC, P > MC, P > min(ATC)D. P > ATC, P = MC

Practice What You Know

Which of the following is true about product differentiation?

A. More differentiation means products are more substitutable for each other

B. More differentiation leads to greater differences in price

C. More differentiation leads to converging prices

D. Differentiation lowers firm profits

Oligopoly and Strategic Behavior

13

Practice What You Know

Which of the following is most likely to become an oligopoly industry?

A. An industry without entry barriersB. An industry where economies of scale

are very smallC. An industry with sizeable network

effectsD. An industry with hundreds of

competitors

Practice What You Know

Which of the following is true about oligopoly?

A. Oligopolies are illegal in the United States

B. All oligopoly industries will try to collude

C. Oligopoly industries generally have a high concentration ratio

D. Firms in an oligopoly act independently from other firms in the oligopoly

Practice What You Know

Why do cartel deals tend not to last?A. Each firm in the cartel has a

dominant strategy to be uncooperative and defect from the cartel agreement

B. Cartel profits are lower than competitive profits

C. Cartels create more competitionD. Firms know that cartels are often

illegal so they break the deal to escape

Practice What You Know

What is an example of a good with a positive network effect?

A. An online multiplayer gameB. A fast-food burgerC. A dry-cleaning serviceD. A cable TV subscription

Practice What You Know

How can a pure strategy Nash equilibrium be accurately described?

A. It is always the overall best outcomeB. It’s an outcome in which neither

player wants to change strategiesC. It can only be reached by collusionD. One exists in all games