Transcript Micro - Unit 3

Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
3. Which of the following statements about a firm’s production function are true?
I. When total product is at its maximum, marginal product is zero.
II. When total product rises, marginal product is rising.
III. When marginal product is greater than average product, average
product is rising.
IV. When marginal product is less than average product, average product is
falling.
A. I and II only
B. II and III only
C. II and IV only
D. I, III and IV only
E. I, II, II and IV
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
3. Which of the following statements about a firm’s production function are true?
I. When total product is at its maximum, marginal product is zero.
II. When total product rises, marginal product is rising.
III. When marginal product is greater than average product, average
product is rising.
IV. When marginal product is less than average product, average product is
falling.
A. I and II only
B. II and III only
C. II and IV only
D. I, III and IV only
E. I, II, II and IV
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
14. Which of the following represents the correct relationship between the demand
curve for a perfectly competitive industry and the demand curve for a perfectly
competitive firm?
PC Industry Demand
A. Downward slope to the right
PC Firm Demand
Downward slope to the right
B. Downward slope to the right
Perfectly elastic
C. Perfectly elastic
Downward slope to the right
D. Perfectly elastic
Perfectly elastic
E. Perfectly inelastic
Perfectly elastic
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
14. Which of the following represents the correct relationship between the demand
curve for a perfectly competitive industry and the demand curve for a perfectly
competitive firm?
PC Industry Demand
A. Downward slope to the right
PC Firm Demand
Downward slope to the right
B. Downward slope to the right
Perfectly elastic
C. Perfectly elastic
Downward slope to the right
D. Perfectly elastic
Perfectly elastic
E. Perfectly inelastic
Perfectly elastic
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
19. Average fixed cost is shown as the distance between:
A. marginal cost and average variable cost.
B. marginal cost and average total cost.
C. average variable cost and average total cost.
D. average total cost and the horizontal axis.
E. marginal cost and the horizontal axis.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
19. Average fixed cost is shown as the distance between:
A. marginal cost and average variable cost.
B. marginal cost and average total cost.
C. average variable cost and average total cost.
D. average total cost and the horizontal axis.
E. marginal cost and the horizontal axis.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
32. Allocative and productive efficiency are possible in which of the following
unregulated market structures?
I. Perfectly competitive
II. Pure monopoly
III. Oligopoly
IV. Monopolistically competitive
A. I only
B. II only
C. III only
D. I and IV only
E. II and IV only
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
32. Allocative and productive efficiency are possible in which of the following
unregulated market structures?
ALLOCATIVE EFFICIENCY: Obtaining
the most consumer satisfaction from
I. Perfectly competitive
available resources. Allocative efficiency
II. Pure monopoly
means that our economy is doing the best
III. Oligopoly
job possible of satisfying unlimited wants
IV. Monopolistically competitive
and needs with limited resources -- that is,
of addressing the problem of scarcity.
A. I only
B. II only
C. III only
D. I and IV only
E. II and IV only
PRODUCTIVE EFFICIENCY: is when the
economy is working on its production
possibility frontier (PPF). This is when
production of one good is achieved at the
lowest cost possible, given the production of
the other good(s).
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
33. Which of the following is true of monopolists who practice price discrimination?
A. They charge all customers the same price.
B. They earn a smaller profit than those who do not practice price
discrimination.
C. They charge customers different prices according to different elasticities
of demand.
D. They produce lower quantities than pure monopolists.
E. They produce the same quantity of output as pure monopolists
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
33. Which of the following is true of monopolists who practice price discrimination?
A. They charge all customers the same price.
B. They earn a smaller profit than those who do not practice price
discrimination.
C. They charge customers different prices according to different elasticities
of demand.
D. They produce lower quantities than pure monopolists.
E. They produce the same quantity of output as pure monopolists
PRICE DISCRIMINATION: Charging
different prices to different buyers for the
same good. This is an age old practice for
suppliers who have achieved some degree of
market control, especially those with a
monopoly.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
34. Characteristics of an oligopolistic market include which of the following?
I. Easy entry and exit of firms
II. Few firms
III. Interdependence among firms
A. I only
B. II only
C. III only
D. II and III only
E. I, II and III
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
34. Characteristics of an oligopolistic market include which of the following?
I. Easy entry and exit of firms
II. Few firms
III. Interdependence among firms
A. I only
B. II only
C. III only
D. II and III only
E. I, II and III
OLIGOPOLY: A market structure
dominated by a small number of large firms,
selling either identical or differentiated
products, and significant barriers to entry
into the industry.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
6. What is the long run equilibrium position for a monopolistically competitive
firm? How does the long run equilibrium position of a monopolistically
competitive firm compare with the long run equilibrium position of a
perfectly competitive firm?
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
6. What is the long run equilibrium position for a monopolistically competitive firm? How does the long run equilibrium position
of a monopolistically competitive firm compare with the long run equilibrium position of a perfectly competitive firm?
A monopolistic competitor in the long run equilibrium operates where price equals average
total cost, so it earns zero economic profit in the long run. This long run equilibrium occurs
because one of the characteristics of monopolistic competition is that firms can easily enter
or leave the industry (free entry). If monopolistic competitors are earning short run
economic profits, more firms will enter the industry. This increases industry supply, lowers
price and eliminates economic profit. On the other hand, if monopolistically competitive
firms are experiencing short run economic losses, firms will leave the industry to seek
economic profits elsewhere or existing firms will cut production. This decreases industry
supply, raises price and restores normal profits in the long run to the firms remaining in the
industry. The monopolistic competitor faces a downward sloping demand curve because of
product differentiation. The perfect competitor faces a horizontal demand curve because
there is no product differentiation. Because marginal revenue is lower than price and
because profits are maximized where marginal revenue equals marginal cost, the
monopolistically competitive firm is not allocatively efficient. Because price and marginal
revenue are equal, a perfectly competitive firm does operate where P-MC and is allocatively
efficient. The monopolistically competitive firm also does operate at the bottom of its
average total cost curve so it is not productively or allocatively efficient. The perfect
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
7. Why will a firm maximize profits where marginal revenue equals marginal
cost? Under what conditions, if any, will a firm not operate where marginal
revenue equals marginal cost? Explain.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
7. Why will a firm maximize profits where marginal revenue equals marginal
cost? Under what conditions, if any, will a firm not operate where marginal
revenue equals marginal cost? Explain.
When MR is greater than MC, each additional unit of output adds more to
total revenue than total cost, causing losses to decrease or profits to increase.
When MR is less than MC, each unit produced adds more to total cost than
to total revenue, causing profits to decrease or losses to increase. Therefore,
profit maximization occurs where MR = MC.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
8. Consider two firms in a market. Each firm must decide whether to market
a new product. The profit earned from marketing the new product depends
on whether one or both firms market the product. If one firm markets the
product, the firm will earn a profit of $2 million. If both firms market the
product, they split the profits of $3 million.
A. Identify the players, actions and payoffs in this game and construct a
payoff matrix. Call the firms A and B. The first number in each square
should represent the payoff for Firm A.
B. Does Firm A have a dominant strategy in this game? If so, what is it?
C. Does Firm B have a dominant strategy in this game? If so, what it is?
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
8. Consider two firms in a market. Each firm must decide whether to market a new product. The profit earned from marketing
the new product depends on whether one or both firms market the product. If one firm markets the product, the firm will earn a
profit of $2 million. If both firms market the product, they split the profits of $3 million.
A.
B.
C.
Identify the players, actions and payoffs in this game and construct a payoff matrix. Call the firms A and B. The first
number in each square should represent the payoff for Firm A.
Does Firm A have a dominant strategy in this game? If so, what is it?
Does Firm B have a dominant strategy in this game? If so, what it is?
Firm A
B. Firm A has a dominant strategy:
produce
C. Firm B has a dominant strategy:
produce
Firm B
Produce
Produce
1.5, 1.5
Don't
Produce
2, 0
Don't
Produce
0, 2
0, 0
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
9. A firm is operating in a perfectly competitive market where price is equal to
average variable cost in the short run.
A. Draw and correctly label a graph for this firm, indicating each of the
following:
i. Marginal revenue
ii. Average variable cost
iii. Average cost
iv. Marginal cost
v. Price
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
9. A firm is operating in a perfectly competitive market where price is equal to average variable cost in the short run.
A.
Draw and correctly label a graph for this firm, indicating each of the following:
i.
Marginal revenue
ii. Average variable cost
iii. Average cost
iv. Marginal cost
v.
Price
B. Describe the profit situation for the firm. It is
not making a profit.
C. If industry price decreases, explain in the
short run how this will affect the firm shown in
your graph. Price will decrease and equal
marginal cost below average variable cost. The
firm will shut down.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
3. A retail industry is perfectly competitive and in long run equilibrium.
A. The wholesale price increases. Explain what happens initially to the retail
industry’s output and price.
B. In reaction to the changes above, the government imposes a retail price
ceiling on the product at its original price level. What will be the effect of
the price ceiling on the quantity demanded and supplied in the retail
industry?
C. Given the effect of the price ceiling on the typical firm’s profits, will firms
in the retail industry have an incentive to enter or exit this industry in the
long run? Explain.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
3. A retail industry is perfectly competitive and in long run equilibrium.
A. The wholesale price increases. Explain what happens initially to the retail
industry’s output and price.
i.
An increase in factor input prices increases the cost of production and
shifts the industry supply curve to the left (upward)
ii. Equilibrium quantity decreases and
iii. Equilibrium price increases
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
3. A retail industry is perfectly competitive and in long run
equilibrium.
B. In reaction to the changes above, the government
imposes a retail price ceiling on the product at its
original price level. What will be the effect of the price
ceiling on the quantity demanded and supplied in the
retail industry?
i.
The quantity demanded is greater (movement along
the demand curve)
ii. There is movement along the supply curve (decrease in
the quantity supplied)
iii. What happens in i and ii creates a disequilibrium
situation, which could be identified as a shortage or
excess demand. The price ceiling has changed an
equilibrium situation into one of disequilibrium.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
3. A retail industry is perfectly competitive and in long run equilibrium.
C. Given the effect of the price ceiling on the typical firm’s profits, will firms
in the retail industry have an incentive to enter or exit this industry in the
long run? Explain.
i.
ii.
Since originally the industry was in long run equilibrium, the increase in
costs coupled with the price ceiling results in losses (not merely a
decrease in profits)
The losses will drive firms out of the industry (firms will exit)
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
6. In the country of Lola, sugar had always been produced in a perfectly
competitive industry until a dictator seized power and monopolized the production
of sugar.
A. Draw a graph that shows the output and price the monopolist would choose to
maximize profits.
The people of Lola revolt, imprison the dictator and repeal the law restricting the
number of sellers of sugar.
B. Explain two conditions that might lead to an increase in the number of sugar
sellers after the repeal of the law.
C. Describe how an individual seller would determine the profit maximizing output
level of sugar if the sugar industry were perfectly competitive.
D. Given your answers in Parts A and C, is the repeal of the law likely to make the
sugar industry more efficient? In your explanation, be sure to include an
explanation of economic efficiency.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
6. In the country of Lola, sugar had always been produced in a perfectly
competitive industry until a dictator seized power and monopolized the
production of sugar.
A. Draw a graph that shows the output and price the monopolist would
choose to maximize profits.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
6. In the country of Lola, sugar had always been produced in a perfectly
competitive industry until a dictator seized power and monopolized the
production of sugar.
The people of Lola revolt, imprison the dictator and repeal the law restricting
the number of sellers of sugar.
B. Explain two conditions that might lead to an increase in the number of
sugar sellers after the repeal of the law.
Conditions that might lead to an increase in the number of sellers:
i. Reduction barriers to entry
ii. Profits that were earned by the monopolist
iii. Returning property rights to original workers
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
6. In the country of Lola, sugar had always been produced in a perfectly
competitive industry until a dictator seized power and monopolized the
production of sugar.
The people of Lola revolt, imprison the dictator and repeal the law restricting
the number of sellers of sugar.
C. Describe how an individual seller would determine the profit maximizing
output level of sugar if the sugar industry were perfectly competitive.
An individual will determine the profit-maximizing output
by equating marginal revenue to marginal cost
(MC = MR). For a competitive firm, price equals
marginal revenue (P = MR). Price is determined in the
market or industry and is not determined by the
individual seller. This is called being a price taker.
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
6. In the country of Lola, sugar had always been produced in a perfectly
competitive industry until a dictator seized power and monopolized the production
of sugar.
D. Given your answers in Parts A and C, is the repeal of the law likely to make the
sugar industry more efficient? In your explanation, be sure to include an
explanation of economic efficiency.
Under perfect competition, the industry is operating more efficiently. Economic
efficiency includes having P = MC (allocative efficiency) and P = min ATC
(productive efficiency).
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3
Mr.
Weiss
APE/Honors Economics – Test Study Questions – Micro – Unit 3