Quiz Over Monopoly And Market!

1.

Which of the following are barriers to entry?

A.

Economies of scale
B.

Patents and copyrights
C.

Control of resources
D.

All of the above

Correct Answer
D. All of the above

Explanation
The correct answer is "All of the above" because all three options listed - economies of scale, patents and copyrights, and control of resources - can act as barriers to entry in a market. Economies of scale refer to the cost advantages that large companies have over smaller ones, making it difficult for new entrants to compete. Patents and copyrights provide legal protection for innovative products or ideas, giving the owner exclusive rights and preventing others from entering the market. Control of resources, such as access to essential raw materials or distribution networks, can also create barriers to entry by limiting the ability of new firms to compete effectively.

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2.

A major difference between a monopolist and a perfectly competitive firm is that

A.

The monopolist is certain to earn economic profits
B.

The monopolist charges the highest possible price that he can
C.

The monopolist engages in marginal cost pricing
D.

The monopolist's marginal revenue curve lies below its demand curve

Correct Answer
D. The monopolist's marginal revenue curve lies below its demand curve

Explanation
The correct answer is that the monopolist's marginal revenue curve lies below its demand curve. This means that the monopolist must lower the price in order to sell more units, resulting in a downward-sloping marginal revenue curve. In contrast, a perfectly competitive firm faces a horizontal demand curve, meaning that its marginal revenue is equal to the price of the product. This difference in marginal revenue curves is a key distinction between monopolists and perfectly competitive firms.

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3.

For a monopolist

A.

Marginal revenue equals price
B.

Marginal revenue equals average revenue
C.

Marginal revenue is less than the price
D.

Marginal revenue is greater than the price

Correct Answer
C. Marginal revenue is less than the price

Explanation
A monopolist faces a downward-sloping demand curve, meaning that in order to sell more units of their product, they must lower the price. As a result, the marginal revenue they earn from selling an additional unit is less than the price at which they sell it. This is because in order to sell that additional unit, the monopolist must lower the price for all units sold, resulting in a decrease in total revenue. Therefore, the marginal revenue for a monopolist is always less than the price.

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4.

Suppose a monopolist's costs and revenue are as follows: ATC=$50.00; MC= $35.00; MR=$45.00; P= $55.00. The firm should

A.

Not change output or price
B.

Decrease output and increase price
C.

Shut down
D.

Increase output and decrease price

Correct Answer
D. Increase output and decrease price

Explanation
The correct answer is to increase output and decrease price. This is because the marginal cost (MC) is less than the price (P), indicating that the firm can increase its profit by producing more units. Additionally, the marginal revenue (MR) is greater than the marginal cost (MC), meaning that each additional unit produced will generate more revenue than it costs to produce. By increasing output, the firm can take advantage of economies of scale and decrease the average total cost (ATC), allowing it to lower the price and attract more customers.

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5.

A firm will shut down in the short run when

A.

Price is below average total costs at all possible rates of output
B.

Is it making a loss
C.

Price is below marginal cost at all possible rates of output
D.

Price is below average variable costs at all possible rates of output

Correct Answer
D. Price is below average variable costs at all possible rates of output

Explanation
In the short run, a firm will shut down when the price is below average variable costs at all possible rates of output. This means that the firm is unable to cover its variable costs, such as labor and raw materials, with the revenue it generates from selling its products. In this situation, the firm would incur a loss for every unit it produces and sells. Therefore, it is more cost-effective for the firm to shut down and minimize its losses rather than continue operating.

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6.

A firm will continue to product in the short run even though economic profits are negative as long as

A.

It has fixed obligations to pay
B.

It earned positive economics profits last year
C.

The amount of the loss is no greater than the amount of fixed cost
D.

MC=MR

Correct Answer
C. The amount of the loss is no greater than the amount of fixed cost

Explanation
In the short run, a firm may continue to produce even with negative economic profits if the amount of the loss is not greater than the amount of fixed costs. This is because fixed costs are expenses that the firm must pay regardless of their level of production. By continuing to produce, the firm can at least cover its fixed costs and minimize losses. However, if the loss exceeds the fixed costs, it would be more beneficial for the firm to shut down production and minimize further losses.

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7.

A perfectly competitive firm faces a market clearing price of $150 per unit. Average variable costs are at the minimum value of $200 per unit at an output rate of $100 units. Marginal cost equals $150 per unit at an output of 75 units. It can be conducted that the short run profit maximizing output rate is

A.

0 units because price is less than average variable costs
B.

75 units at which the firm earns zero economic profits per unit sold
C.

75 units at which the firm earns $50 in economic profits per unit sold
D.

100 units because marginal cost equals average variable costs

Correct Answer
A. 0 units because price is less than average variable costs

8.

For a firm in a perfectly competitive industry, which of the following is true?

A.

MR=P
B.

AFC=ATC
C.

MR
D.

AVC=ATC

Correct Answer
A. MR=P

Explanation
In a perfectly competitive industry, the firm is a price taker, meaning it cannot influence the market price. Therefore, the marginal revenue (MR) earned by the firm is equal to the price (P) it receives for each unit sold. This is because in a perfectly competitive market, the firm can sell as much as it wants at the prevailing market price, without affecting the price. Thus, the statement "MR=P" is true in a perfectly competitive industry.

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9.

When price and marginal cost are equal for a perfectly competitive firm, the firm is

A.

Earning negative economic profit
B.

Minimizing average total cost
C.

Maximizing economic profit
D.

Maximizing total revenue

Correct Answer
C. Maximizing economic profit

Explanation
When the price and marginal cost are equal for a perfectly competitive firm, the firm is maximizing economic profit. This means that the firm is producing at a level where its marginal cost is equal to the price it receives for its product. By producing at this level, the firm is able to maximize its profits because it is not incurring any additional costs beyond what it can earn from selling its products. This is the point where the firm is operating most efficiently and effectively in terms of profit maximization.

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10.

A firm is a competitive industry faces of the following short-run cost and revenue conditions. ATC=$8; AVC =$4 and MR=MC=$6. This firm should

A.

Shut down
B.

Continue to operate at the same price and output level in the short run
C.

Expand production and keep price constant
D.

Decrease production and raise its price

Correct Answer
B. Continue to operate at the same price and output level in the short run

Explanation
Based on the given information, the firm's average total cost (ATC) is $8, average variable cost (AVC) is $4, and marginal revenue (MR) is equal to marginal cost (MC) at $6. In the short run, a firm should continue to operate at the same price and output level when MR is equal to MC. This is because producing at this level allows the firm to cover all its variable costs and make a contribution towards its fixed costs. Therefore, shutting down or expanding production would not be the optimal decision in this scenario.

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11.

Suppose a perfectly competitive firm faces the following short-run cost and revenue conditions: ATC= $12.00, AVC= $8.00; MC= $12.00; MR=$10.00 The firm should

A.

Change nothing
B.

Decrease output
C.

Increase output
D.

Increase price

Correct Answer
B. Decrease output

Explanation
The firm should decrease output because the marginal cost (MC) is greater than the marginal revenue (MR). This means that the cost of producing an additional unit of output is higher than the revenue generated from selling that unit. By decreasing output, the firm can reduce costs and improve profitability.

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