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1. An industry comprised of 40 firms, none of which has more than 3 percent of the total market for a differentiated product is an example of:
A. monopolistic competition.
B. oligopoly.
C. pure monopoly.
D. pure competition.

A. monopolistic competition.

2. An industry comprised of a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions is called:
A. monopolistic competition.
B. oligopoly.
C. pure monopoly.
D. pure competition.

B. oligopoly.

3. 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

4. Which of the following statements is correct?
A. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.
B. The demand curve for a purely competitive firm is downsloping, but the demand curve for a purely competitive industry is perfectly elastic.
C. The demand curves are downsloping for both a purely competitive firm and a purely competitive industry.
D. The demand curves are perfectly elastic for both a purely competitive firm and a purely competitive industry.

A. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.

5. Marginal revenue is the:
A. change in product price associated with the sale of one more unit of output.
B. change in average revenue associated with the sale of one more unit of output.
C. difference between product price and average total cost.
D. change in total revenue associated with the sale of one more unit of output.

D. change in total revenue associated with the sale of one more unit of output.

6. Suppose you find that the price of your product is less than minimum AVC. You should:
A. minimize your losses by producing where P = MC.
B. maximize your profits by producing where P = MC.
C. close down because, by producing, your losses will exceed your total fixed costs.
D. close down because total revenue exceeds total variable cost.

C. close down because, by producing, your losses will exceed your total fixed costs.

7. Refer to the above diagram. To maximize profit or minimize losses this firm will produce:
A. K units at price C.
B. D units at price J.
C. E units at price A.
D. E units at price B.

C. E units at price A.

8. Refer to the above diagram. At the profit-maximizing output, total revenue will be:
A. 0AHE.
B. 0BGE.
C. 0CFE.
D. ABGE.

A. 0AHE.

9. Refer to the above diagram. At the profit-maximizing output, the firm will realize:
A. a loss equal to BCFG.
B. a loss equal to ACFH.
C. an economic profit of ACFH.
D. an economic profit of ABGH.

D. an economic profit of ABGH.

10. Refer to the above diagram. At P2, this firm will:
A. produce 44 units and realize an economic profit.
B. produce 44 units and earn only a normal profit.
C. produce 68 units and earn only a normal profit.
D. shut down in the short run.

B. produce 44 units and earn only a normal profit.

11. Refer to the above diagram. At P1, this firm will produce:
A. 47 units and break even.
B. 47 units and realize an economic profit.
C. 66 units and earn only a normal profit.
D. 24 units and earn only a normal profit.

B. 47 units and realize an economic profit.

12. Refer to the above diagram. At P4, this firm will:
A. shut down in the short run.
B. produce 30 units and incur a loss.
C. produce 30 units and earn only a normal profit.
D. produce 10 units and earn only a normal profit.

A. shut down in the short run.

13. Refer to the above diagram. At P3, this firm will:
A. produce 14 units and realize an economic profit.
B. produce 62 units and earn only a normal profit.
C. produce 40 units and incur a loss.
D. shut down in the short run.

C. produce 40 units and incur a loss.

14. If product price is $60, the firm will:
A. shut down.
B. produce 4 units and realize a $120 economic profit.
C. produce 6 units and realize a $100 economic profit.
D. produce 3 units and incur a $40 loss.

C. produce 6 units and realize a $100 economic profit.

15. If product price is $45, the firm will:
A. shut down.
B. produce 4 units and realize a $120 economic profit.
C. produce 5 units and realize a $15 economic profit.
D. produce 6 units and realize a $100 economic profit.

C. produce 5 units and realize a $15 economic profit.

16. If product price is $25, the firm will:
A. shut down and incur a $90 loss.
B. shut down and incur a $50 loss.
C. produce 3 units and incur a $65 loss.
D. produce 4 units and realize a $10 economic profit.

B. shut down and incur a $50 loss.

17. The marginal cost column reflects:
A. the law of diminishing returns.
B. the law of diminishing marginal utility.
C. diseconomies of scale.
D. economies of scale.

A. the law of diminishing returns.

18. At 6 units of output, total fixed cost is ____ and total cost is ____
A. $25; $50.
B. $50; $300.
C. $100; $200.
D. $150; $300.

D. $150; $300.

19. If the market price for this firm's product is $87, it will produce:
A. 9 units at an economic profit of zero.
B. 6 units at a loss of $90.
C. 9 units at an economic profit of $281.97.
D. 8 units at an economic profit of $130.72.

C. 9 units at an economic profit of $281.97.

20. If the market price for this firm's product is $68.10, it will produce:
A. 8 units at an economic profit of zero.
B. 6 units at a loss of $90.
C. 9 units at an economic profit of $281.97.
D. 8 units at an economic profit of $130.72.

D. 8 units at an economic profit of $130.72.

21. If the market price for this firm's product is $24, it will produce:
A. 4 units at a loss of $150.
B. 6 units at a loss of $90.
C. 3 units at an economic profit of zero.
D. 4 units at a loss of $138.

D. 4 units at a loss of $138.

22. If the market price for this firm's product is $15, it will produce:
A. 0 units at a loss of $150.
B. 3 units at a loss of $168.
C. 3 units at an economic profit of zero.
D. 4 units at a loss of $138.

A. 0 units at a loss of $150.

1. 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.

2. A constant-cost industry is one in which:
A. a higher price per unit will not result in an increased output.
B. if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
C. the demand curve and therefore the unit price and quantity sold seldom change.
D. the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.

B. if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.

3. The above diagrams show a purely competitive firm producing output q and the industry in which it operates. Which of the following is correct?
A. The diagrams portray neither long-run nor short-run equilibrium.
B. The diagrams portray both long-run and short-run equilibrium.
C. The diagrams portray short-run equilibrium, but not long-run equilibrium.
D. The diagrams portray long-run equilibrium, but not short-run equilibrium.

C. The diagrams portray short-run equilibrium, but not long-run equilibrium.

4. The above diagrams show a purely competitive firm producing output q and the industry in which it operates. In the long run we should expect:
A. firms to enter the industry, market supply to rise, and product price to fall.
B. firms to leave the industry, market supply to rise, and product price to fall.
C. firms to leave the industry, market supply to fall, and product price to rise.
D. no change in the number of firms in this industry.

C. firms to leave the industry, market supply to fall, and product price to rise.

5. The above diagrams show a purely competitive firm producing output q and the industry in which it operates. The predicted long-run adjustments in this industry might be offset by:
A. a decline in product demand.
B. an increase in resource prices.
C. a technological improvement in production methods.
D. entry of new firms into the industry.

C. a technological improvement in production methods.

6. When LCD televisions first came on the market, they sold for at least $1,000 and some for much more. Now many units can be purchased for under $400. These facts imply that:
A. the LCD television industry was once competitive, but is now monopolistic.
B. fewer firms produce LCD televisions than was the case five or ten years ago.
C. the demand curve for LCD televisions has shifted leftward.
D. the LCD television industry is a decreasing-cost industry.

D. the LCD television industry is a decreasing-cost industry.

7. The above diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's total revenue:
A. is $10.
B. is $40.
C. is $400.
D. cannot be determined from the information provided.

C. is $400.

8. The above diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's economic profit:
A. is zero.
B. is $400.
C. is $200.
D. cannot be determined from the information provided.

A. is zero.

9. The term allocative efficiency refers to:
A. the level of output that coincides with the intersection of the MC and AVC curves.
B. minimization of the AFC in the production of any good.
C. the production of the product-mix most desired by consumers.
D. the production of a good at the lowest average total cost.

C. the production of the product-mix most desired by consumers.

10. Under pure competition in the long run:
A. neither allocative efficiency nor productive efficiency are achieved.
B. both allocative efficiency and productive efficiency are achieved.
C. productive efficiency is achieved, but allocative efficiency is not.
D. allocative efficiency is achieved, but productive efficiency is not.

B. both allocative efficiency and productive efficiency are achieved.

11. If for a firm P = minimum ATC = MC, then:
A. neither allocative efficiency nor productive efficiency is being achieved.
B. productive efficiency is being achieved, but allocative efficiency is not.
C. both allocative efficiency and productive efficiency are being achieved.
D. allocative efficiency is being achieved, but productive efficiency is not.

C. both allocative efficiency and productive efficiency are being achieved.

12. In the above diagram by producing output level Q:
A. neither productive nor allocative efficiency are achieved.
B. both productive and allocative efficiency are achieved.
C. allocative efficiency is achieved, but productive efficiency is not.
D. productive efficiency is achieved, but allocative efficiency is not.

B. both productive and allocative efficiency are achieved.

13. In the above diagram at output level Q1:
A. resources are overallocated to this product and productive efficiency is not realized.
B. resources are underallocated to this product and productive efficiency is not realized.
C. productive efficiency is achieved, but resources are underallocated to this product.
D. productive efficiency is achieved, but resources are overallocated to this product.

B. resources are underallocated to this product and productive efficiency is not realized.

14. In the above diagram at output level Q2:
A. resources are overallocated to this product and productive efficiency is not realized.
B. resources are underallocated to this product and productive efficiency is not realized.
C. productive efficiency is achieved, but resources are underallocated to this product.
D. productive efficiency is achieved, but resources are overallocated to this product.

A. resources are overallocated to this product and productive efficiency is not realized.

15. Allocative efficiency occurs whenever:
A. consumer surplus is maximized.
B. it is impossible to produce a net benefit for society by changing the combination of goods and services produced.
C. firms have maximized their profits.
D. it is impossible to make someone in society better off without making someone else worse off.

B. it is impossible to produce a net benefit for society by changing the combination of goods and services produced.

16. In long-run equilibrium, purely competitive markets:
A. minimize total cost.
B. maximize the sum of consumer surplus and producer surplus.
C. yield economic profits to most sellers.
D. inevitably degenerate into monopoly in increasing cost industries.

B. maximize the sum of consumer surplus and producer surplus.

17. Entrepreneurs in purely competitive industries:
A. have no incentive to innovate because in the long run they will earn no economic profits.
B. innovate to lower operating costs and generate short-run economic profits.
C. utilize pricing strategies to generate short-run economic profits.
D. rarely try to innovate because of a lack of financial resources.

B. innovate to lower operating costs and generate short-run economic profits.

18. Creative destruction is:
A. the process by which large firms buy up small firms.
B. the process by which new firms and new products replace existing dominant firms and products.
C. a term coined many years ago by Adam Smith.
D. is applicable to planned economies, but not to market economies.

B. the process by which new firms and new products replace existing dominant firms and products.

19. (Consider This) Which of the following statements is true about U.S. firms?
A. Over half are bankrupt within the first two years after starting up.
B. Over half are bankrupt within the first five years after starting up.
C. Nearly 65 percent last 10 years or more.
D. The life expectancy of a U.S. firm is approximately 22 years.

B. Over half are bankrupt within the first five years after starting up.

20. (Last Word) The entry of generic drugs into a previously monopolized pharmaceutical market will:
A. discourage the development of new drugs.
B. increase efficiency by increasing consumer surplus.
C. create inefficiency by introducing chemically-inferior medications.
D. not affect the market price because pharmaceutical firms are "price takers."

B. increase efficiency by increasing consumer surplus.

1. Which of the following is correct?
A. Both purely competitive and monopolistic firms are "price takers."
B. Both purely competitive and monopolistic firms are "price makers."
C. A purely competitive firm is a "price taker," while a monopolist is a "price maker."
D. A purely competitive firm is a "price maker," while a monopolist is a "price taker."

C. A purely competitive firm is a "price taker," while a monopolist is a "price maker."

2. Pure monopolists may obtain economic profits in the long run because:
A. of advertising.
B. marginal revenue is constant as sales increase.
C. of barriers to entry.
D. of rising average fixed costs.

C. of barriers to entry.

3. Which of the following best approximates a pure monopoly?
A. the foreign exchange market
B. the Kansas City wheat market
C. the only bank in a small town
D. the soft drink market

C. the only bank in a small town

4. Large minimum efficient scale of plant combined with limited market demand may lead to:
A. natural monopoly.
B. patent monopoly.
C. government franchise monopoly.
D. shared monopoly.

A. natural monopoly.

5. 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.

6. Refer to the above diagram for a pure monopolist. If the monopolist is unregulated, it will maximize profits by charging:
A. a price above P3 and selling a quantity less than Q3.
B. price P3 and producing output Q3.
C. price P2 and producing output Q2.
D. price P1 and producing output Q1.

B. price P3 and producing output Q3.

7. Refer to the above diagram for a pure monopolist. Suppose a regulatory commission is created to determine a legal price for the monopoly. If the commission seeks to provide the monopolist with a "fair return," it will set price at:
A. P1.
B. P3.
C. P2.
D. P4.

A. P1.

8. Refer to the above diagram for a pure monopolist. If a regulatory commission seeks to achieve the socially optimal allocation of resources to this line of production, it will set a price of:
A. P1.
B. P3.
C. P2.
D. P4.

C. P2.

9. Refer to the above diagram for a pure monopolist. If a regulatory commission sets the price to achieve the socially optimal allocation of resources, it will have to:
A. tax the monopolist P3P1 per unit to prevent the monopolist from realizing an economic profit.
B. subsidize the monopolist or the monopolist will go bankrupt in the long run.
C. subsidize the monopolist P1P4 per unit to allow the monopolist to break even.
D. tax the monopolist P1P2 per unit to prevent the monopolist from realizing an economic profit.

B. subsidize the monopolist or the monopolist will go bankrupt in the long run.

10. The profit-maximizing price for the monopolist will be:
A. $5.00.
B. $2.90.
C. $3.35.
D. $4.50.

D. $4.50.

11. The profit-maximizing monopolist will realize a:
A. profit of $8.50.
B. profit of $7.50.
C. profit of $16.
D. loss of $14.

C. profit of $16.

12. Refer to the above diagram. At the profit-maximizing level of output, total revenue will be:
A. NM times 0M.
B. 0AJE.
C. 0EGC.
D. 0EHB.

B. 0AJE.

13. Refer to the above diagram. At the profit-maximizing level of output, total cost will be:
A. NM times 0M.
B. 0AJE.
C. 0CGC.
D. 0BHE.

D. 0BHE.

14. Refer to the above diagram. At the profit-maximizing level of output, the firm will realize:
A. an economic profit of ABHJ.
B. an economic profit of ACGJ.
C. a loss of GH per unit.
D. a loss of JH per unit.

A. an economic profit of ABHJ.

15. A pure monopolist is selling 6 units at a price of $12. If the marginal revenue of the seventh unit is $5, then:
A. price of the seventh unit is $10.
B. price of the seventh unit is $11.
C. price of the seventh unit is greater than $12.
D. firm's demand curve is perfectly elastic.

B. price of the seventh unit is $11.

16. In the short run, a monopolist's economic profits:
A. are always positive because the monopolist is a price-maker.
B. are usually negative because of government price regulation.
C. are always zero because consumers prefer to buy from competitive sellers.
D. may be positive or negative depending on market demand and cost conditions.

D. may be positive or negative depending on market demand and cost conditions.

17. Under which of the following situations would a monopolist increase profits by lowering price (and increasing output):
A. if it discovered that it was producing where MC = MR
B. if it discovered that it was producing where its MC curve intersects its demand curve
C. if it discovered that it was producing where MC < MR
D. under none of these circumstances because a monopolist would never lower price

C. if it discovered that it was producing where MC < MR

18. Refer to the above diagrams. Firm A is a:
A. pure competitor and Firm B is a pure monopoly.
B. pure competitor, as is Firm B.
C. pure monopoly and Firm B is a pure competitor.
D. pure monopoly, as is Firm B.

A. pure competitor and Firm B is a pure monopoly.

19. Refer to the above diagrams. The demand for Firm B's product is:
A. perfectly elastic over all ranges of output.
B. perfectly inelastic over all ranges of output.
C. elastic for prices above $4 and inelastic for prices below $4.
D. inelastic for prices above $4 and inelastic for prices below $4.

C. elastic for prices above $4 and inelastic for prices below $4.

20. Economic profit in the long run is:
A. possible for both a pure monopoly and a pure competitor.
B. possible for a pure monopoly, but not for a pure competitor.
C. impossible for both a pure monopolist and a pure competitor.
D. only possible when barriers to entry are nonexistent.

B. possible for a pure monopoly, but not for a pure competitor.

21. Which of the following statements is correct?
A. The pure monopolist will maximize profit by producing at that point on the demand curve where elasticity is zero.
B. In seeking the profit-maximizing output the pure monopolist underallocates resources to its production.
C. The pure monopolist maximizes profits by producing that output at which the differential between price and average cost is the greatest.
D. Purely monopolistic sellers earn only normal profits in the long run.

B. In seeking the profit-maximizing output the pure monopolist underallocates resources to its production.

22. Confronted with the same unit cost data, a monopolistic producer will charge:
A. the same price and produce the same output as a competitive firm.
B. a higher price and produce a larger output than a competitive firm.
C. a higher price and produce a smaller output than a competitive firm.
D. a lower price and produce a smaller output than a competitive firm.

C. a higher price and produce a smaller output than a competitive firm.

23. Comparing a pure monopoly and a purely competitive firm with identical costs, we would find in long-run equilibrium that the pure monopolist's:
A. price, output, and average total cost would all be higher.
B. price and average total cost would be higher, but output would be lower.
C. price, output, and average total cost would all be lower.
D. price and output would be lower, but average total cost would be higher.

B. price and average total cost would be higher, but output would be lower.

24. Refer to the above diagrams. With the industry structure represented by diagram:
A. (A) there will be only a normal profit in the long run, while in (B) an economic profit can persist.
B. (A) price exceeds marginal cost, resulting in allocative inefficiency.
C. (B) price equals marginal cost, resulting in allocative efficiency.
D. (B) equilibrium price and quantity will be e and h, respectively.

A. (A) there will be only a normal profit in the long run, while in (B) an economic profit can persist.

25. Refer to the above diagrams. With the industry structure represented by diagram:
A. (B) there will be allocative efficiency.
B. (A) economic profit can persist in the long run.
C. (B) output will be less than in diagram (A).
D. (B) output will be the same as in diagram (A).

C. (B) output will be less than in diagram (A).

26. There is some evidence to suggest that X-inefficiency is:
A. absent whenever two or more producers are competing with one another.
B. not encountered in either competitive or monopolistic firms.
C. more likely to occur in monopolistic firms than in competitive firms.
D. more likely to occur in competitive firms than in monopolistic firms.

C. more likely to occur in monopolistic firms than in competitive firms.

27. Which of the following conditions is not required for price discrimination?
A. Buyer with different elasticities must be physically separate from each other.
B. The good or service cannot be profitably resold by original buyers.
C. The seller must be able to segment the market, that is, to distinguish buyers with different elasticities of demand.
D. The seller must possess some degree of monopoly power.

A. Buyer with different elasticities must be physically separate from each other.

28. (Consider This) Children are charged less than adults for admission to professional baseball games but are charged the same prices as adults at the concession stands. Which of the following conditions of price discrimination explain why this occurs?
A. The seller must have some monopoly power; that is, it must be able to set the product price.
B. The seller must be able to identify buyers by group characteristics such as age or income.
C. Groups must have different elasticities of demand for the product.
D. The items cannot be bought by people in the low-price group and transferred to members of the high-price group.

D. The items cannot be bought by people in the low-price group and transferred to members of the high-price group.

1. 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

2. 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.

3. 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

4. The price elasticity of a monopolistically competitive firm's demand curve varies:
A. inversely with the number of competitors and the degree of product differentiation.
B. directly with the number of competitors and the degree of product differentiation.
C. directly with the number of competitors, but inversely with the degree of product differentiation.
D. inversely with the number of competitors, but directly with the degree of product differentiation.

C. directly with the number of competitors, but inversely with the degree of product differentiation.

5. The monopolistically competitive seller maximizes profit by producing at the point where:
A. total revenue is at a maximum.
B. average costs are at a minimum.
C. marginal revenue equals marginal cost.
D. price equals marginal revenue.

C. marginal revenue equals marginal cost.

6. Excess capacity refers to the:
A. amount by which actual production falls short of the minimum ATC output.
B. fact that entry barriers artificially reduce the number of firms in an industry.
C. differential between price and marginal costs which characterizes monopolistically competitive firms.
D. fact that most monopolistically competitive firms encounter diseconomies of scale.

A. amount by which actual production falls short of the minimum ATC output.

7. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing output for this firm will be:
A. 100.
B. 160.
C. 180.
D. 210.

B. 160.

8. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic:
A. loss of $320.
B. profit of $480.
C. profit of $280.
D. profit of $600.

B. profit of $480.

9. If all monopolistically competitive firms in the industry have profit circumstances similar to the firm shown above:
A. new firms will enter the industry.
B. some firms will exit the industry.
C. all firms will exit the industry.
D. no firms will exit the industry.

B. some firms will exit the industry.

10. Refer to the above diagram for a monopolistically competitive firm. Long-run equilibrium price will be:
A. above A.
B. EF.
C. A.
D. B.

C. A.

11. In long-run equilibrium monopolistic competition entails:
A. an efficient allocation of resources.
B. an overallocation of resources due to inadequate capacity.
C. an underallocation of resources due to excess capacity.
D. production at the minimum attainable average total cost.

C. an underallocation of resources due to excess capacity.

12. Refer to the above data. If columns (1) and (3) of the demand data shown above are this firm's demand schedule, the profit-maximizing price will be:
A. $9.
B. $7.
C. $11.
D. $6.

A. $9.

13. Refer to the above data. If columns (1) and (3) of the demand data shown above are this firm's demand schedule, economic profit will be:
A. $10.
B. $19.
C. $6.
D. $8.

D. $8.

14. 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.

15. In which of these continuums of degrees of competition (highest to lowest) is oligopoly properly placed?
A. pure competition, oligopoly, pure monopoly, monopolistic competition
B. oligopoly, pure competition, monopolistic competition, pure monopoly
C. monopolistic competition, pure competition, pure monopoly, oligopoly
D. pure competition, monopolistic competition, oligopoly, pure monopoly

D. pure competition, monopolistic competition, oligopoly, pure monopoly

16. Oligopolistic industries are characterized by:
A. a few dominant firms and substantial entry barriers.
B. a few dominant firms and no barriers to entry.
C. a large number of firms and low entry barriers.
D. a few dominant firms and low entry barriers.

A. a few dominant firms and substantial entry barriers.

17. The copper, aluminum, cement, and industrial alcohol industries are examples of:
A. interproduct competition.
B. homogeneous oligopoly.
C. monopolistic competition.
D. differentiated oligopoly.

B. homogeneous oligopoly.

18. Oligopoly is more difficult to analyze than other market models because:
A. the number of firms is so large that market behavior cannot be accurately predicted.
B. the marginal cost and marginal revenue curves of an oligopolist play no part in the determination of equilibrium price and quantity.
C. of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.
D. unlike the firms of other market models, it cannot be assumed that oligopolists are profit maximizers.

C. of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.

19. Refer to the above data. The four-firm concentration ratio for the above industry is:
A. 100 percent.
B. indeterminate, since we don't know which four firms are included.
C. 80 percent.
D. 20 percent.

C. 80 percent.

20. Refer to the above data. The Herfindahl Index for the above industry is:
A. 1,600.
B. 1,800.
C. 18,000.
D. 80.

B. 1,800.

21. Refer to the above data. Suppose that firms in this industry split up such that there were 100 firms, each with a one percent market share. The four-firm concentration ratio and the Herfindahl Index respectively would be:
A. 100 percent and 10,000.
B. 4 percent and 4.
C. 100 percent and 16.
D. 4 percent and 100.

D. 4 percent and 100.

22. Game theory:
A. is the analysis of how people (or firms) behave in strategic situations.
B. is best suited for analyzing purely competitive markets.
C. reveals that mergers between rival firms are self-defeating.
D. reveals that price-fixing among firms reduces profits.

A. is the analysis of how people (or firms) behave in strategic situations.

23. If Beta commits to a high-price policy, Alpha will gain the largest profit by:
A. also adopting a high-price policy.
B. adopting a low-price policy.
C. adopting a low-price policy, but only if Beta agrees to do the same.
D. engaging in non-price competition only.

B. adopting a low-price policy.

24. With independent pricing the outcome of this duopoly game will gravitate to cell:
A. A.
B. B.
C. C.
D. D.

A. A.

25. If Alpha and Beta engage in collusion, the outcome of the game will be at cell:
A. A.
B. B.
C. C.
D. D.

D. D.

26. Refer to the above diagram. Equilibrium output is:
A. j.
B. h.
C. g.
D. f.

C. g.

27. Refer to the above diagram. Equilibrium price is:
A. e.
B. d.
C. c.
D. b.

B. d.

28. Refer to the above diagram. This firm's demand and marginal revenue curves are based on the assumption that:
A. the firm has no immediate rivals.
B. rivals will match both a price increase and a price decrease.
C. rivals will match a price increase, but ignore a price decrease.
D. rivals will ignore a price increase, but match a price decrease.

D. rivals will ignore a price increase, but match a price decrease.

29. Refer to the above diagram. In equilibrium the firm:
A. is realizing an economic profit of ad per unit.
B. should close down in the short run.
C. is incurring a loss.
D. is realizing an economic profit of bd per unit.

A. is realizing an economic profit of ad per unit.

30. Cartels are difficult to maintain in the long run because:
A. they are illegal in all industrialized countries.
B. individual members may find it profitable to cheat on agreements.
C. it is more profitable for the industry to charge a lower price and produce more output.
D. entry barriers are insignificant in oligopolistic industries.

B. individual members may find it profitable to cheat on agreements.

31. If the several oligopolistic firms that comprise an industry behave collusively, the resulting price and output will most likely resemble those of:
A. bilateral monopoly.
B. pure monopoly.
C. monopolistic competition.
D. pure competition.

B. pure monopoly.

32. Other things equal, cartels and similar collusive arrangements are easier to establish and maintain:
A. when there are ample opportunities for the firms to make secret price concessions to selected buyers.
B. during periods of business-cycle stability and full employment.
C. when the demand and cost conditions of the participating firms differ substantially.
D. when the number of firms is relatively large.

B. during periods of business-cycle stability and full employment.

33. Advertising can enhance economic efficiency when it:
A. increases brand loyalty.
B. raises entry barriers.
C. increases consumer awareness of substitute products.
D. boosts average total cost.

C. increases consumer awareness of substitute products.

34. Suppose that a particular industry has a four-firm concentration ratio of 85 and a Herfindahl Index of 3,000. Most likely, this industry would achieve:
A. both productive efficiency and allocative efficiency.
B. allocative efficiency but not productive efficiency.
C. neither productive efficiency nor allocative efficiency.
D. productive efficiency but not allocative efficiency.

C. neither productive efficiency nor allocative efficiency.

1. Broadly defined, technological advance:
A. can occur in the short run, long run, or very long run.
B. comprises new and improved goods and services and new and improved ways of producing or distributing them.
C. includes invention, but not innovation or diffusion.
D. includes product innovation, but not process innovation.

B. comprises new and improved goods and services and new and improved ways of producing or distributing them.

2. Technological advance is shown as a(n):
A. movement from a point inside a production possibilities curve to a point on the curve.
B. movement along a production possibilities curve.
C. outward shift of a production possibilities curve.
D. inward shift of a production possibilities curve.

C. outward shift of a production possibilities curve.

3. The successful commercial introduction of a new product, the use of a new method, or the creation of a new form of business enterprise is called:
A. innovation.
B. invention.
C. creative destruction.
D. diffusion.

A. innovation.

4. Which of the following is a true statement?
A. innovation normally follows invention and precedes diffusion.
B. invention normally follows diffusion and precedes innovation.
C. diffusion normally follows invention and precedes innovation.
D. innovation normally follows diffusion and precedes invention.

A. innovation normally follows invention and precedes diffusion.

5. Innovation:
A. is the first discovery of a product or process, rather than its first successful commercial introduction.
B. includes new products, but not new production methods.
C. is also known as diffusion.
D. can either increase or decrease the market share of a large firm, depending on whether it is introduced by the large firm or one of its competitors.

D. can either increase or decrease the market share of a large firm, depending on whether it is introduced by the large firm or one of its competitors.

6. In the United States, research and development spending as a percentage of GDP is:
A. 1.5 to 2.0 percent, which is lower than that of most other industrial countries.
B. 2.5 to 3.0 percent, which is higher than that of most other industrial countries.
C. 4.5 to 5.0 percent, which is lower than that of most other industrial countries.
D. 5.5 to 6.0 percent, which is higher than that of most other industrial countries.

B. 2.5 to 3.0 percent, which is higher than that of most other industrial countries.

7. When economists view technological change as internal to the economy, they mean that it:
A. occurs randomly.
B. occurs accidentally.
C. arises deliberately from the profit motive and competition.
D. arises mainly from government subsidies.

C. arises deliberately from the profit motive and competition.

8. Entrepreneurs:
A. include everyone engaged in R&D work.
B. are located in small enterprises only.
C. differ from other innovators because of the risks entrepreneurs must bear.
D. work exclusively in government and university R&D laboratories.

C. differ from other innovators because of the risks entrepreneurs must bear.

9. New scientific knowledge mainly comes from university and government laboratories, not private firms, because:
A. large corporations do not have funds available to channel toward basic research.
B. government pays scientists higher salaries than do private firms.
C. entrepreneurs find it difficult to secure venture capital to finance innovation.
D. basic scientific principles, as such, cannot be patented and do not always have commercial applicability.

D. basic scientific principles, as such, cannot be patented and do not always have commercial applicability.

10. In exchange for a share of ZYX's profits if it succeeds, Firm ABC provides development funds to newly formed ZYX which is developing an innovative product. ABC funds are called ____________ while ZYX is known as a ____________.
A. venture capital; startup
B. retained earnings; entrepreneurial firm
C. mutual funds; startup
D. transfer payments; entrepreneurial firm

A. venture capital; startup

11. Suppose a firm anticipates that an R&D expenditure of $100 million will result in a new production process that will reduce costs and thus create a one-time added profit of $112 million a year later. The firm's expected rate of return is:
A. 0.12 percent.
B. 112 percent.
C. 12 percent.
D. 2 percent.

C. 12 percent.

12. A profit-maximizing firm should not undertake a R&D project for which the:
A. expected rate of return exceeds its interest-rate cost of funds.
B. interest-rate cost of funds exceeds the expected rate of return.
C. expected returns are in the distant future.
D. the expected returns, though potentially very large, are uncertain.

B. interest-rate cost of funds exceeds the expected rate of return.

13. Refer to the above data. The firm's optimal amount of R&D spending is:
A. $20 million.
B. $40 million.
C. $60 million.
D. $80 million.

D. $80 million.

14. Refer to the above data. At $100 million of R&D expenditures, the:
A. marginal cost of R&D exceeds the marginal benefit.
B. marginal benefit of R&D exceeds the marginal cost.
C. expected rate of return from R&D is negative.
D. firm has exceeded its affordable level of R&D.

A. marginal cost of R&D exceeds the marginal benefit.

15. A consumer will buy a new product rather than an existing product:
A. when the MU/P of the new product is less than the MU/P of the existing product.
B. when the substitution of the new product for the old product increases the consumer's total utility.
C. only if the new product has a lower price than the existing product.
D. only if the MU of the new product exceeds the MU of the existing product.

B. when the substitution of the new product for the old product increases the consumer's total utility.

16. Refer to the above diagram which relates to Firm A. Which of the following would shift A's average total cost curve from ATC1 to ATC2?
A. replacement of old equipment with new, more productive equipment embodying technological advance
B. a decrease in the incomes of A's customers
C. a move along A's total product curve (not shown)
D. the increase in the price of one of the major inputs used to produce A's product

A. replacement of old equipment with new, more productive equipment embodying technological advance

17. All of the following increase the expected rate of return on R&D expenditures, except:
A. patents.
B. trademarks.
C. imitation by others.
D. trade secrets.

C. imitation by others.

18. Suppose that Marlen Fisher has legal protection against anyone producing and selling a fishing lure identical to his unique-action "MarFish" lure, whatever the competitor might name the lure. This legal protection is most likely to be a:
A. trademark.
B. restraining order.
C. patent.
D. copyright.

C. patent.

19. Suppose that Marlen Fisher has legal protection against anyone producing and selling a fishing lure specifically named "MarFish." This legal protection is most likely to be a:
A. trademark.
B. restraining order.
C. patent.
D. copyright.

A. trademark.

20. Suppose that Book-Cost Busters (BCB), without authorization, reproduced a best-selling novel and placed it for downloading on the BCB pay-for-use website. This action would violate the publisher's:
A. profit rights.
B. patent.
C. copyright.
D. trademark.

C. copyright.

21. Suppose that a firm's legal staff concludes that a new production process which a firm is developing is patentable. Graphically, this new information would shift the firm's expected rate of return curve on R&D to the:
A. right and reduce its optimal amount of R&D.
B. right and increase its optimal amount of R&D.
C. left and increase its optimal amount of R&D.
D. left and reduce its optimal amount of R&D.

B. right and increase its optimal amount of R&D.

22. Even where imitation is possible, a firm may gain advantage from being the first to introduce an innovative product because of:
A. long-lasting brand-name recognition.
B. a time lag between innovation and imitation by rivals.
C. trade secrets that limit the ability of rivals to imitate the product.
D. all of these.

D. all of these.

23. Which of the following supports the contention that pure competitors have a weak incentive to engage in R&D?
A. Entry to purely competitive industries is easy and thus profit from innovation is quickly competed away.
B. In pure competition, products are already highly differentiated.
C. Most purely competitive industries are increasing-cost industries.
D. Pure competitors are happy to earn only a normal profit.

A. Entry to purely competitive industries is easy and thus profit from innovation is quickly competed away.

24. Economists who contend that oligopolists have a strong incentive to engage in R&D say that:
A. the undistributed profits of oligopolists give them a source of readily available, relatively low cost funds for financing R&D.
B. entry barriers enable oligopolists to sustain the profit it gains from innovation.
C. the large size of oligopolists' R&D departments allows them to use very specialized, expensive R&D equipment and employ teams of specialized researchers.
D. all of these are true.

D. all of these are true.

25. The process by which new firms and new products replace existing dominant firms and products is called:
A. monopolistic competition.
B. the inverted-U process.
C. process innovation.
D. creative destruction.

D. creative destruction.

26. Creative destruction is not automatic because:
A. there are major obstacles to the entry of new innovative firms into concentrated industries.
B. consumer tastes are highly unstable.
C. corporate takeovers increase dynamic competition.
D. large firms rarely are technologically progressive.

A. there are major obstacles to the entry of new innovative firms into concentrated industries.

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