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Cambodian Mekong University

Is the University that cares for the value of Education

Date: 10 February 2006

From: Ban Thero, CMU’s Economic Lecturer

To: All Students – EC101: Economics Thinking

Subject: Additional Practicing Questions and Problems

In order to improve more understanding about economics, particularly Economics Thinking, I – your lecturer, would strongly encourage you all fully participate and practice the given questions and problems.

The more practice exercises, the more understanding and mastering you gain and the more clever you are. Some of these will be included for final exam at the end of the term. You – students, have plenty of times practicing them at home. So it would be very helpful and meaningful f or preparation and examination.

If you have any problem regarding this matter do not hesitate to contact me.

All the best regards,

Thero Ban

CHAPTER 08

# 1

Imports are the goods and services

a. that we sell to people in any other country.

b. that we buy with our incomes.

c. that we sell to people in south-east Asia and in the United States.

d. and services that we buy from people in other countries.

# 2

The goods and services that we sell to people in other countries are called

a. exports.

b. exported capital goods.

c. capital goods.

d. trade goods and services.

# 3

International trade benefits

a. neither the exporting country nor the importing country.

b. the exporting country and the importing country.

c. only the exporting country.

d. only the importing country.

# 4

Australia _______ goods and services in which it has a comparative advantage and _______ goods and services in which it does not have a comparative advantage.

a. imports, exports

b. exports, imports

c. imports, imports

d. exports, exports

# 5

If Country A and Country B have divergent opportunity costs but Country A has an absolute advantage in the production of all goods.

a. Country A will have a comparative advantage in the production of all goods.

b. Country A will not gain from trade.

c. Country B could not gain from trading with Country A.

d. Country A will not have a comparative advantage in the production of all goods.

# 6

The balance of trade is

a. always positive.

b. always negative.

c. the value of exports minus the value of imports.

d. always equal to zero.

# 7

Protection is

a. a necessary prerequisite to free trade.

b. more prevalent in Australia now than it was 25 years ago.

c. necessary when the balance of trade is negative.

d. the restriction of international trade.

# 8

A tariff is a tax that is imposed by the _______ when a good crosses an international boundary.

a. exporting country

b. exporting firm

c. importing country

d. importing firm

# 9

The number of cars entering the country of Beta from the country of Alpha are restricted to 1,000 per week. Car imports into Beta are restricted by a

a. tariff.

b. restraining monopoly.

c. protection barrier.

d. non-tariff barrier.

# 10

A tariff raises the price of the imported good

a. to the point that only local goods are purchased.

b. by a higher percentage than the tariff.

c. and its local substitutes.

d. only.

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# 1

If the country of Epsilon does not have a comparative advantage in the production of paper products, then the price of paper products in the absence of trade

a. is higher in Epsilon than in the rest of the world.

b. depends on the quantity of paper products that Epsilon exports.

c. is the same in Epsilon and the rest of the world.

d. is higher in the rest of the world than in Epsilon.

# 2

If Australia has a comparative advantage in the production of wheat, then the price of wheat in the absence of trade

a. is lower in Australia than in the rest of the world.

b. depends on the quantity of wheat that Australia exports.

c. is the same in Australia and the rest of the world.

d. is lower in the rest of the world than in Australia.

# 3

The country of Delta has a comparative advantage in the production of biscuits. International trade will bring

a. gains to the Delta biscuit producers.

b. losses to the Delta biscuit producers and consumers.

c. gains to the Delta biscuit consumers.

d. losses to the Delta biscuit producers.

# 4

A country that engages in international trade has _______ when it was self-sufficient.

a. a larger set of consumption possibilities than

b. the same set of consumption possibilities as

c. higher prices for the goods in which it does not have a comparative advantage than

d. lower prices for the goods in which it has a comparative advantage than

# 5

A tariff on tea imports will benefit

a. domestic producers of tea.

b. foreign consumers of tea.

c. foreign producers of tea.

d. domestic consumers of tea.

# 6

A tariff on tea imports will hurt

a. domestic consumers of tea.

b. government revenues of the tea exporting countries.

c. foreign consumers of tea.

d. domestic producers of tea.

# 7

A tariff

a. always produces a deadweight loss.

b. produces an increase in government revenue equal to the loss in consumer surplus.

c. never produces a deadweight loss because the government increases its revenue.

d. sometimes produces a deadweight loss.

# 8

A tariff on textiles

a. decreases the volume of imports and increases the volume produced locally.

b. increases the volume of imports and the volume produced locally.

c. increases the volume of imports and decreases the volume produced locally.

d. decreases the volume of imports and the volume produced locally.

# 9

Arguments in favour of protection include all of the following except

a. a fairer distribution of income.

b. encouraging competition and restraining monopoly.

c. sustaining the growth of new industries.

d. raising revenue.

# 10

The number of people who gain from a reduction in protection is generally

a. enormous compared to the number who lose.

b. unable to be estimated.

c. the same as the number of people who lose.

d. much smaller than the number of people who lose.

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Use this figure to answer questions :1, 2, 3 and 4

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# 1

The figure shows the market for printers in Australia. If Australia does not trade with the rest of the world, the price of printers in Australia is _______ and the quantity of printers produced and sold is __________ a month.

a. $200; 15,000

b. $200; 7,000

c. $300; zero

d. $250; 10,000

# 2

The figure illustrates the market for printers in Australia. The figure shows that Australia

a. does not have a comparative advantage in the production of printers.

b. does have a comparative advantage in the production of printers.

c. will produce more printers if it trades internationally.

d. always produces printers at a higher price than the world price.

# 3

The figure illustrates the market for printers in Australia. If Australia trades freely with the rest of the world, then each month Australia will import ________ printers and Australian consumers will buy ______ printers.

a. 15,000; 15,000

b. 7,000; 10,000

c. 8,000; 15,000

d. 10,000; 10,000

# 4

The figure illustrates the market for printers in Australia. If Australia trades freely with the rest of the world, the price of a printer in Australia will be

a. $250.

b. $200.

c. less than $200.

d. between $200 and $250.

# 5

The country of Gamma has a comparative advantage in the production of snowshoes. If Gamma starts trading with the rest of the world, Gamma consumers of snowshoes will have a _______ consumer surplus and Gamma producers of snowshoes will have a _______ producer surplus.

a. smaller; larger

b. larger; smaller

c. larger; larger

d. smaller; smaller

Use this figure to answer questions: 6, 7, 8 and 9

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# 6

The figure shows the demand for blue jeans in Australia and the supply of Australian-made blue jeans. The world price of blue jeans is $30 a pair. If the Australian government imposes a tariff of $5 on a pair of blue jeans, the quantity of Australian-made blue jeans supplied

a. remains at 100 pairs a day.

b. increases to 325 pairs a day.

c. increases to 400 pairs a day.

d. increases to 250 pairs a day.

# 7

The figure shows the demand for blue jeans in Australia and the supply of Australian-made blue jeans. The world price of blue jeans is $30 a pair. If the Australian government imposes a tariff of $5 on a pair of blue jeans, the quantity of blue jeans imported decreases to

a. 400 pairs a day.

b. 250 pairs a day.

c. 325 pairs a day.

d. 150 pairs a day.

# 8

The figure shows the demand for blue jeans in Australia and the supply of Australian-made blue jeans. The world price of blue jeans is $30 a pair. If the Australian government imposes a tariff of $5 on a pair of blue jeans, the government's tariff revenue is

a. $1,625 a day.

b. $1,250 a day.

c. $2,000 a day.

d. $750 a day.

# 9

The figure shows the demand for blue jeans in Australia and the supply of Australian-made blue jeans. The world price of blue jeans is $30 a pair. If the Australian government decides to eliminate the tariff on blue jeans Australian producers will produce _______ blue jeans and imports of blue jeans will _______.

a. fewer; increase

b. fewer; decrease

c. more; increase

d. fewer; increase

# 10

As the Australian government lowers the tariff on imported cars, the quantity of cars imported will ____________, the quantity of Australian-made cars supplied will __________, the quantity of cars bought by Australians will _____________, and the price of a car in Australia will _______________.

a. increase; increase; increase; increase

b. decrease; increase; decrease; increase

c. increase; decrease; increase; decrease

d. decrease; increase; increase; decrease

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# 1

The figure shows Hilda's budget line. Hilda buys only cauliflower (Qc) and geraniums (Qg). The price of a cauliflower is $2 and the price of a geranium is $4. If Hilda's income increases by $20, the price of cauliflower decreases by $1, and the price of geraniums increases by $1, the equation of her new budget line is __________________.

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a. Qg = 4 - 0.2Qc

b. Qc = 12 - 0.2Qg

c. Qg = 60 - 5Qc

d. Qg = 12 - 0.2Qc

# 2

The figure illustrates Sally's preferences and her budget line when her income is $15. If the price of an orange increases by $0.50 and the price of an apple increases by $0.50, Sally's marginal rate of substitution at her new best affordable consumption point is ___________.

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a. 3/4

b. 3/8

c. 2/3

d. 4/3

# 3

Sue is at a point on her indifference curve where her marginal rate of substitution is greater than the relative price of the goods she buys. At Sue's new best affordable consumption point, she buys _______ of the good that is measured on the _______-axis.

a. more, x

b. the same quantity, x

c. more, y

d. less, x

# 4

The figure shows Elijah's indifference curves for turkey and liver. He is currently at point a. The price of liver decreases. The move from point ____ to point _______ is the substitution effect and the move from point ______ to point ______ is the income effect.

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a. a, b, b, c

b. a, d, d, b

c. a, e, e, c

d. a, c, c, b

# 5

Dan's grandfather earned a lower wage rate than Dan does and worked more hours a week than Dan does. Dan works fewer hours because the ______ is less than the _______.

a. substitution effect, income effect

b. price effect, income effect

c. income effect, substitution effect

d. marginal effect, income effect

# 6

Peter likes bagels and soft drink and spends all his income each week on them. The price of a bagel is $2 and the price of soft drink is $1 a can. At his best affordable consumption point, Peter buys 3 bagels and 4 cans of soft drink. Now the price of soft drink falls to $0.50 a can. If Peter's indifference curves have the regular shape, he will most likely buy ___________________.

a. fewer bagels and more soft drink

b. more bagels and less soft drink

c. more bagels and more soft drink

d. more soft drink but an unknown number of bagels

# 7

Tom spends all his income on comics and cola. The price of a comic is $4 and the price of a can of cola is $1. If the quantity of cola is plotted on the y-axis, then ________ 4.

a. Tom's real income in terms of cola is

b. Tom's marginal rate of substitution is

c. the relative price of cola is

d. both Tom's marginal rate of substitution and the relative price of cola are

# 8

Rosie consumes only coffee and sandwiches and is at her best affordable consumption point. Now the price of a cup of coffee doubles and at the same time Rosie's income increases by the amount that allows her to continue buying the same amounts of coffee and sandwiches. Rosie now buys _____ cups of coffee and _____________ sandwiches.

a. fewer, fewer

b. the same number of, more

c. fewer, more

d. the same number of, the same number of

# 9

Wendy spends $30 a week on movies and magazines. The price of a movie is $8 and the price of a magazine is $2 and Wendy sees 3 movies a week and buys 3 magazines. The price of a magazine increases to $4 and Wendy's brother gives her $6 a week so that she can still see 3 movies a week and buy 3 magazines. In this situation, Wendy will see _________ movies and buy _________ magazines.

a. 3, 3

b. less than 3, more than 3

c. more than 3, fewer than 3

d. less than 3, less than 3

# 10

Sue consumes only sandwiches and soft drink and is at her best affordable consumption point. Suppose that sandwiches are plotted on the x-axis. Now the price of a sandwich halves. The substitution effect is that Sue substitutes ___________ for ___________. The income effect is that Sue ______________.

a. sandwiches, soft drink, buys more of both goods

b. sandwiches, soft drink, buys less of both goods

c. soft drink, sandwiches, buys less soft drink and more sandwiches

d. soft drink, sandwiches, buys more soft drink and fewer sandwiches

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Chapter 09

# 1

An institution that hires factors of production and then organizes those factors to produce and sell goods and services is a

a. firm.

b. wholesale firm.

c. retail firm.

d. profitable firm.

# 2

An employee who does not work diligently unless constantly supervised and believes that he is underpaid is an example of

a. inefficient hiring practices.

b. marginal returns to work.

c. the law of diminishing returns.

d. the principle-agent problem.

# 3

Limited liability means that the owners have legal liability

a. for the values of their shares and bonds.

b. for all the firm's losses.

c. only for the value of their shares.

d. to pay the creditors in the event of bankruptcy.

# 4

Equity capital

a. increases when bonds are sold.

b. is greater in partnerships than in corporations.

c. is the owner's stake in a business.

d. is a capital gain.

# 5

The amount of money that is paid on the maturity date of a bond is called the

a. coupon payment.

b. maturity value.

c. redemption value.

d. present value.

# 6

Tony invests $100 today at an interest rate of 10 per cent a year. At the end of the year, he will have $110. The present value of Tony's investment is

a. $10.

b. $110.

c. $100.

d. equal to his capital gain.

# 7

The conversion of the future amount of money to its value today is called

a. interest calculation.

b. present value.

c. discounting.

d. implicit discounting.

# 8

The economic depreciation of a piece of capital is part of the _______ of using the capital.

a. marginal cost

b. average cost

c. opportunity cost

d. sunk cost

# 9

Kay's Keyboarding company buys a new computer which Kay uses for word-processing. Kay pays _______ for its use.

a. an explicit rental rate

b. an amount equal to the purchase price

c. an implicit rental rate

d. an amount equal to the present value

# 10

A sunk cost

a. is a cost that will be incurred in the future.

b. is a firm's current operating cost.

c. is a cost that has already been incurrred.

d. can be eliminated.

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# 1

Firms exist because of

a. scarcity.

b. command systems.

c. the principal-agent problem.

d. incentive systems.

# 2

Phil's Dry Cleaners cannot increase its output unless Phil buys some additional dry cleaning equipment. Phil's Dry Cleaners method of production is

a. technologically efficient.

b. economically efficient.

c. both economically efficient and technologically efficient.

d. marginal efficient.

# 3

When a firm uses specialised resources to produce a range of goods and services and does so at a lower average cost than individual firms can produce that range of goods and services, the firm experiences

a. economies of scope.

b. economies of scale.

c. a larger market for its goods and services.

d. an increase scale of output.

# 4

Lucinda starts a business consulting company. She makes all the business decisions and bears the risk of running the business. Lucinda expects to receive

a. normal profit.

b. revenue greater than her opportunity cost.

c. economic profit.

d. revenue greater than the capital investment.

# 5

Total revenue minus total costs when the opportunity cost of production is included in total cost is equal to _______ profit.

a. normal

b. opportunity

c. economic

d. entrepreneurial

# 6

The opportunity cost of production

a. is zero when the firm makes economic profit.

b. decreases when economic depreciation increases.

c. is the sum of best alternatives forgone when production takes place.

d. is zero when the firm makes normal profit.

# 7

Felicity's Flower shop buys a van for $15,000. The conventional depreciation allowance on a van is 5 per cent a year. At the end of the first year, the market value of the van is $14,000. The depreciation cost in the first year is ___________ according an accountant and __________according to an economist.

a. $1,000; $750

b. $750; $750

c. $750; $1,000

d. $1,000; $1,000

# 8

Andy wants to purchase a golden retriever. Andy buys newspapers to read the classified advertisements and he buys dog magazines to check out the locations of golden retriever breeders. Andy has incurred the _______ costs of making a purchase.

a. buying

b. private

c. transaction

d. market

# 9

Economies of scale exist when the cost per unit produced

a. increases when output increases.

b. increases when input increases.

c. decreases when output increases.

d. decreases when output decreases.

# 10

_______ coordinate most of our economic activity because firms can _______.

a. Firms and markets; organise efficient team production

b. Markets; have a principal-agent problem

c. Firms and not markets; organise efficient team production

d. Firms and markets; reap economies of scale

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# 1

What is the present value of a bond that has a redemption value at the end of 3 years of $1,000 and a coupon payment of $100 a year? The interest rate is 8 per cent a year.

a. less than $1,000

b. $1,300

c. $1,051

d. $1,000

# 2

If the interest rate is 5 per cent a year, what is the present value of $1,000 to be received in two years?

a. $907

b. $1,102

c. $1,000

d. $952

# 3

If the present value of $1,000 received one year from now is $909, what is the interest rate?

a. 10 per cent a year

b. 90 per cent a year

c. 11 per cent a year

d. 9 per cent a year

# 4

Phil plans to borrow $30,000 and to open a business. Three banks offer Phil a loan with different repayment plans: At Bank A, Phil would pay $3,000 at the end of year 1 and year 2 and $30,000 at the end of year 3. At Bank B, Phil would pay $1,000 at the end of year 1 and year 2 and $34,500 at the end of year 3. At Bank C, Phil would pay $11,000 at the end of the next 3 years. At which bank will Phil take a loan?

a. C

b. B or C

c. A

d. A or B

# 5

Wanda owns a desktop publishing company. Wanda can purchase a computer for $5,000 or rent it for $600 a year. Wanda buys the computer and pays an implicit rental rate of

a. $600 a year.

b. $5,600 a year.

c. zero because Wanda purchases the computer.

d. $5,000 a year.

# 6

Flora's Flower Shop bought a new van for $16,000. Today, the market price of this van is $7,000. Over the years, Flora's accountant has depreciated the van by $10,000. The economic depreciation of the van is

a. $9,000.

b. $7,000.

c. $16,000.

d. $10,000.

# 7

Fred owns a music store. He purchased a tape recorder several years ago that still works but has no resale value. He paid $150 for the tape recorder. The cost of a new CD player is $250. According to Fred's accountants, depreciation on his tape recorder is $100. The sunk cost of the tape recorder is

a. $150.

b. $250.

c. $350.

d. $100.

# 8

The table shows four methods for producing 25 zobs a day. Of the four methods, ____________ technologically inefficient.

[pic]

a. method B is

b. methods A and C are

c. method D is

d. methods A and B are

# 9

In 1996, Jo was offered a job as the football coach at an annual salary of $50,000. Jo rejects the coaching job and opens a retail sports shop. In 1996, the sports shop has a total revenue of $75,000. In 1997, Jo was offered a job as the football coach at an annual salary of $60,000 but Jo decides to remain in business at the sports shop. In 1997, the sports shop has a total revenue of $80,000. Other things remaining the same, between 1996 and 1997, Jo's economic profit

a. decreased.

b. changed but it might have increased or decreased.

c. remained the same.

d. increased.

# 10

The table shows four methods for producing 25 zobs a day. If the cost of a worker is $10 a day and the cost of capital is $10 a day, the economically efficient method of producing zobs is ___________.

[pic]

a. A

b. B, C, or D

c. C

d. B

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Chapter 10

# 1

In economics, the short run is the period of time in which ______________ and the long run is the period of time in which ______________.

a. some inputs are fixed, all inputs are variable

b. some inputs are variable, all inputs are fixed

c. all inputs are variable but technology is fixed, technology is variable

d. all inputs are fixed, all inputs are variable

# 2

Use the graph to help you answer the question: Which of the following statements is true?

[pic]

a. When marginal product exceeds average product, average product is rising.

b. When average product is rising, marginal product is rising.

c. When average product exceeds marginal product, marginal product is rising.

d. When marginal product is falling, average product is falling.

# 3

Diminishing marginal returns start when as output increases,

a. marginal product begins to decrease.

b. total product reaches a maximum.

c. average product reaches a maximum.

d. average product begins to decrease.

# 4

Use the graph to help you answer the question: Which of the following statements is true?

[pic]

a. If marginal product equals average product, average product is a maximum.

b. If marginal product equals average product, marginal product is a maximum.

c. If marginal product exceeds average product, marginal product rises.

d. If average product equals marginal product, average product is a minimum.

# 5

If marginal cost is below

a. average variable cost, then average variable cost is falling.

b. average total cost, then marginal cost is rising.

c. average total cost, then average variable cost is falling.

d. average variable cost, then marginal cost is falling.

# 6

If marginal cost exceeds average variable cost, then

a. average variable cost is rising.

b. average total cost is at a minimum.

c. average total cost is rising.

d. average fixed cost is rising.

# 7

The marginal cost curve passes through the

a. minimum points of the average total cost curve and the average variable cost curve.

b. minimum points of the average total cost curve and the average fixed cost curve.

c. minimum points of the average variable cost curve and the average fixed cost curve.

d. maximum points of the total cost curve and the total variable cost curve.

# 8

When a firm experiences increasing returns to scale, its

long-run average cost curve slopes downward.

short-run marginal cost curve slopes downward.

short-run average total cost curve slopes downward.

long-run average cost curve slopes upward.

# 9

A firm experiences ___________ when its ___________ downward at larger outputs.

a. economies of scale; long-run average cost curve slopes

b. diminishing marginal returns; average total cost curve shifts

c. economies of scale; average total cost curve slopes

d. diminishing marginal returns; long-run average cost curve slopes

# 10

The firm's production function is the relationship between the _________ and ____________.

a. maximum output possible; the quantities of all inputs

b. possible range of maximum output; the quantity of variable inputs

c. output produced; the quantities of all inputs

d. maximum output possible; the quantity of variable inputs

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# 1

The table gives the output that Terry's T Shirts can produce when it has 1 sewing machine. An increase in the number of workers from 1 a day to 2 a day increases average product from ___________T shirts a day and marginal product of labour is _______T shirts per worker.

[pic]

a. 8 to 18; 9

b. 0 to 18; 18

c. 8 to 9; 1

d. 8 to 9; 10

# 2

Diminishing marginal returns begin when the ____________ is employed.

[pic]

a. second worker

b. third worker

c. fourth worker

d. fifth worker

# 3

Use the graph to help you answer the question: When marginal product is a maximum, average product is _____________.

[pic]

a. a maximum

b. decreasing

c. increasing

d. equal to marginal product

# 4

The table gives the output that Terry's T Shirts can produce when it has 1 sewing machine. When 4 workers are employed,

[pic]

a. marginal product equals average product.

b. marginal product exceeds average product.

c. marginal product is less than average product.

d. average product is a maximum.

# 5

The table gives the cost of producing T shirts. Total fixed cost is _____________ and the marginal cost of increasing production from 5 to 6 T shirts an hour is ______________.

[pic]

a. $10; $8

b. $18; $10

c. $5; $0

d. $15; $5

# 6

The table gives the cost of producing T shirts. When 5 T shirts are produced, average fixed cost is _____________ and average variable cost is ______________.

[pic]

a. $2.00, $8.50

b. $5.00, $3.00

c. $2.00, $6.40

d. $10.00, $8.50

# 7

If total fixed cost increases, then the average total cost curve ___________ and the marginal cost curve _________________.

a. does not shift; shifts upward

b. does not shift; does not shift

c. shifts upward; does not shift

d. shifts upward; shifts upward

# 8

The output range over which average product is increasing is the output range over which ______________.

a. average total cost is decreasing

b. average fixed cost is decreasing

c. average variable cost is decreasing

d. marginal cost is decreasing

# 9

An increase in the quantity of fixed inputs shifts the average total cost curve ___________ if _________________ exist.

a. downward; diseconomies of scale

b. upward; constant returns to scale

c. downward; economies of scale

d. upward; economies of scale

# 10

If all inputs are increased by 5 per cent and output increases by 8 per cent, then all the following are true except __________.

a. the long-run average cost curve slopes downward

b. the firm experiences economies of scale

c. the long-run average cost curve shifts downward

d. the firm experiences increasing returns to scale

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# 1

Diminishing marginal returns occur when ____________.

a. the number of workers increase faster than the amount of capital equipment

b. the firm hires cheap less-skilled workers in place of expensive high-skilled workers

c. the marginal product of an additional worker is less than the marginal product of the previous worker hired

d. more and more workers have to share the same capital equipment

# 2

The output at which average product is a maximum is the same output at which ________ is a minimum.

a. average variable cost

b. average fixed cost

c. average total cost

d. marginal cost

# 3

Average total cost minus average variable cost ___________ as output increases because _____________ as output increases.

a. decreases; average fixed cost decreases

b. decreases and then increases; marginal cost initially decreases and then increases

c. decreases; marginal returns diminish

d. decreases; economies of scale are present

# 4

The output at which average total cost is a minimum is _____________than the output at which _______________ is a minimum.

a. greater; average variable cost

b. the same as; average variable cost

c. less than; average variable cost

d. the same as; marginal product

# 5

If marginal cost exceeds average total cost and output increases, average total cost ________ and average variable cost _____________.

a. increases; increases

b. increases; decreases

c. decreases; increases

d. decreases; decreases

# 6

If as output increases marginal cost exceeds average variable cost but is less than average total cost, average total cost ________ and average variable cost _____________.

a. decreases; increases

b. increases; decreases

c. decreases; decreases

d. increases; increases

# 7

The vertical distance between the total variable cost curve and the total cost curve _____________ as output increases; the vertical distance between average variable cost curve and the average total cost curve _____________ as output increases.

a. is constant; becomes smaller

b. increases; remains constant

c. increases; becomes smaller at first but then increases

d. decreases; remains constant

# 8

As output increases, total cost minus total fixed cost _____________.

a. increases more slowly as marginal returns increase and then more quickly as marginal returns diminish

b. decreases as marginal returns diminish and then remains constant

c. increases more slowly as marginal returns diminish and then more quickly as marginal returns increase

d. is constant

# 9

If the average total cost of producing 20 sweaters an hour falls when the firm doubles all its inputs, then all of the following are true except

a. the firm moves along its short-run average total cost curve.

b. the short-run average total cost curve shifts downward.

c. the long-run average cost curve slopes downward.

d. the firm experiences economies of scale.

# 10

If decreasing returns to scale are present and the firm __________ all its inputs, its output ___________.

a. doubles; less than doubles

b. increases; increases by the same percentage

c. doubles; more than doubles

d. halves; more than halves

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Chapter 11

# 1

In perfect competition,___________________.

a. there are many firms that sell similar products

b. firms in the industry have advantages over firms that plan to enter the industry

c. only firms know their competitors' prices

d. there are many buyers

# 2

In perfect competition, each firm

a. produces as much as it can.

b. faces a perfectly inelastic demand for its product.

c. is a price taker.

d. can influence the price that it charges.

# 3

A firm's economic profit is zero,when

a. its economic profit equals its total cost.

b. it maximises its profit.

c. its total cost equals its total revenue.

d. it produces the maximum output.

# 4

A competitive firm's total revenue minus its total cost equals its __________.

a. normal profit

b. economic profit

c. opportunity cost

d. profit

# 5

In perfect competition in the short run, firms ___________ but in perfect competition in the long run, firms make ___________.

a. make economic losses; positive economic profits

b. can incur economic losses; zero economic profit

c. make positive economic profits; positive economic profits

d. can incur economic losses; positive economic profits

# 6

In perfect competition, the firm's marginal revenue

a. is less than its average revenue.

b. equals its average revenue.

c. exceeds the price it charges.

d. equals its normal profit.

# 7

When a competitive firm produces the profit-maximising output and it is at its shutdown point, the firm's

a. marginal cost is less than its average variable cost.

b. total revenue equals its total variable cost.

c. marginal revenue equals its average fixed cost.

d. total revenue is less than its total variable cost.

# 8

The quantity supplied by all firms in a competitive industry at each price when the plant size of each firm and the number of firms remains the same is

a. the long-run industry supply curve.

b. the short-run industry supply curve.

c. the horizontal supply curve at the market price.

d. the vertical supply curve at the shutdown point.

# 9

The presence of external economies _______ each firm's average costs as the industry output _______ and the presence of external diseconomies _______ each firm's average costs as industry output _______.

a. raises; increases; lowers; increases

b. lowers; increases; raises; increases

c. lowers; decreases; lowers; increases

d. lowers; increases; raises; decreases

# 10

The _______ how the quantity supplied by an industry changes as the market price changes when firms have made all possible adjustments.

a. individual firms' supply curves show

b. long-run industry supply curve shows

c. short-run industry supply curve shows

d. individual firms' marginal cost curves show

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# 1

In perfect competition, a firm maximises its economic profit if it produces the output at which

a. economic profit equals zero in the short run.

b. total revenue equals total cost.

c. average revenue equals average cost.

d. price equals marginal cost.

# 2

The short-run industry supply curve

a. shows the total revenue at each possible market price.

b. shows the marginal revenue at each possible market price.

c. is vertical at the quantity at which the firm will shut down.

d. is horizontal at the price at which the firm will shut down.

# 3

If firms in a competitive industry are making ______________, then there is __________ for firms to _________ the industry.

a. zero economic profits; an incentive; exit

b. economic losses; no incentive; exit

c. normal profits; an incentive; enter

d. positive economic profits; an incentive; enter

# 4

Today, firms in a perfectly competitive industry are making an economic profit. In the long run, firms will ________ the industry until all firms in the industry are _______.

a. exit; producing at the minimum point on their long-run average cost curve.

b. exit; covering only their total fixed costs.

c. enter; making zero normal profit.

d. enter; making zero economic profit.

# 5

A firm's goal is to maximise

a. normal profit.

b. opportunity profit.

c. opportunity costs.

d. economic profit.

# 6

If a firm's marginal revenue is less than its marginal cost,

a. the firm should shut down.

b. normal profit will decrease if the firm produces less.

c. economic profit will increase if the firm produces less.

d. economic profit will decrease if the firm produces less.

# 7

If a firm can increase its economic profit by increasing its shop size, _______ and its marginal cost curve will shift _______.

a. the long-run average cost curve will shift upward; leftward

b. the long-run average cost curve will shift downward; rightward

c. the firm will move along its long-run average cost curve; rightward

d. the long-run average cost curve will shift downward; rightward

# 8

Industry supply and industry demand determine

a. industry output but not market price.

b. each firm's costs.

c. market price and industry output.

d. market price but not industry output.

# 9

A perfectly competitive firm will shut down temporarily if

a. the price is less than the avergae cost of producing the good.

b. the marginal cost of producing the good is less than minimum average variable cost.

c. the market price is less than average variable cost of producing the good.

d. the price is less than the marginal cost of producing the the good.

# 10

If, in the short run, firms in a competitive industry make positive economic profits, _____________ and the price will __________ until firms are making _____________.

a. firms will increase their output; rise; maximum profits

b. firms will increase output; fall; zero economic profit

c. firms will enter the industry; fall; zero economic profit

d. firms will enter the industry; fall; economic losses

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# 1

Sadie's Cleaning Services is a perfectly competitive firm that currently cleans 20 offices an evening. Sadie's marginal cost exceeds the price it charges. Sadie's could increase its profit if it cleaned _______________.

a. fewer than 20 offices an evening

b. more than 20 offices an evening

c. more than 20 offices an evening and charged a higher price

d. 20 offices an evening but increased its price

# 2

The table shows the total cost incurred by Sue's Coat Shop. If the market price of a coat is $250, Sue's will maximise profit by selling ________ coats a day.

[pic]

a. 8

b. 11

c. 9

d. 7

# 3

Tammy sells woolen hats in a perfectly competitive market. The marginal cost of producing 1 hat is $12. The marginal cost of producing a second hat is $14 and the marginal cost of producing a third hat is $16. The market price of a hat is $14. To maximise profit, Tammy produces ________ a day.

a. 2 hats

b. as many hats as possible

c. 3 hats

d. 1 hat

# 4

The figure shows Mollie's Mugs' costs of producing mugs. The mug market is perfectly competitive. If the market price of a mug falls to $5 and Mollie's shuts down temporarily, its total variable cost is ___________ and it incurs an economic loss of ______________.

[pic]

a. $0 a week, $300 a week

b. $8 a week, $800 a week

c. $5 a week, $8 a week

d. $500 a week, $800 a week

# 5

If the market price in a perfectly competitive industry exceeds the firm's minimum average variable cost, then the firm's total revenue will always exceed its __________________.

a. total variable cost

b. opportunity cost

c. total cost

d. total fixed cost

# 6

The figure illustrates the short-run costs of Paul's Picture Frames Inc. The picture frame market is perfectly competitive and the market price is $7 a frame. Paul produces _______ frames each week, makes _______ of total revenue, and makes zero_______ profit.

[pic]

a. 100; $700; economic

b. 70; $280; normal

c. 70; $280; economic

d. 100; $700; normal

# 7

The donut market is perfectly competitive. The figure shows the costs of a typical donut producer. In the short run, the donut producer's supply curve is the curve running from point ____.

[pic]

a. b to point e

b. d to point e

c. c to point e

d. a to point e

# 8

When some firms exit an industry in which firms incur economic losses, the short-run industry supply curve shifts _______, the market price _______, and each firm's economic loss _______.

a. leftward; increases; decreases

b. rightward; decreases; decreases

c. rightward; increases; increases

d. leftward; decreases; decreases

# 9

The industry that produces zangs is in long-run equilibrium. Then the demand for zangs decreases permanently. As a result, firms will _________________. Some firms will _______ the industry, and the industry supply curve will shift _______.

a. incur economic losses; exit; leftward

b. make normal profits; exit; leftward

c. make economic profits; enter; rightward

d. incur economic losses; exit; rightward

# 10

In a perfectly competitive market, the demand curve facing the firm is

a. the same as its average revenue curve.

b. the same as its total revenue curve.

c. the same as its marginal cost curve.

d. always upward sloping.

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# 1

The market for lawn services is perfectly competitive. Larry's Lawn Service cannot increase its total revenue by raising its price because _________________.

a. the demand for Larry's services is perfectly inelastic

b. the demand for Larry's services is perfectly elastic

c. Larry's supply of lawn services is inelastic

d. Larry's supply of lawn services is perfectly inelastic

Use this table to answer questions: 2, 3 and 4

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# 2

The first table shows the market demand schedule for CDs, and the second table shows the cost structure of each firm. The CD market is perfectly competitive, there are 100 identical firms, and each firm's total fixed costs are $200 a week. What is the market price of a CD and how many CDs are produced and sold?

a. $9.00, 20,000

b. $8.50, 24,000

c. $9.50, 15,000

d. $10.00, 10,000

# 3

The first table shows the market demand schedule for CDs, and the second table shows the cost structure of each firm. The CD market is perfectly competitive, there are 100 identical firms, and each firm has a total fixed costs of $200 a week. In the short run, what is the output of each firm and the economic profit that it makes in a week?

a. 150, -$255

b. 200, $0

c. 250, $375

d. 100, $300

# 4

The first table shows the market demand schedule for CDs, and the second table shows the cost structure of each firm. The CD market is perfectly competitive, there are 100 identical firms, and each firm has a total fixed cost of $200. In the long run, what is the number of firms in the industry and the market price of a CD?

a. 100, $9.50

b. 50, $10.00

c. 150, $8.50

d. 200, $10.00

Use this figure to answer questions: 5 and 6 [pic]

# 5

The figure shows the costs for the typical grower in the perfectly competitive turnip industry. Currently, the price of a turnip is $1.00. In the long run, the industry supply of turnips will

a. increase and the turnip grower's economic profit will increase.

b. increase and the turnip grower's economic profit will decrease.

c. increase and so will the industry demand for turnips.

d. decrease and the price of a turnip will fall to $0.75.

# 6

The figure shows the costs for the typical grower in the perfectly competitive turnip industry. Currently, the price of a turnip is $1.00. The demand for turnips decreases permanently. The trunip industry experiences neither external economies nor external diseconomies. In the long run, the price of a turnip ________________________.

a. increases and so will the industry demand for turnips

b. decreases and turnip grower's will make normal profit

c. increases and the turnip grower's economic profit will increase

d. decreases to below $0.75 and turnip grower's will make normal profit

# 7

The apple industry is perfectly competitive and is in long-run equilibrium. Now a disease kills 50 per cent of the apple orchards. In the short run, the price of a bag of apples __________ and the remaining apple growers make ____________ profits. In the long run, the ______________________.

a. remains the same; normal; orchards will be replanted and growers will make normal profits

b. increases; normal; price of apples will return to their original level

c. increases; normal; orchards will be replanted and economic profit will return to zero

d. increases; positive economic; orchards will be replanted and economic profit will return to zero

# 8

If the long-run industry supply in a perfectly competitive industry is upward sloping, then the industry experiences ______________ and as the industry expands the price ________________.

a. external economies; rises

b. external diseconomies; rises

c. external economies; falls

d. external diseconomies; falls

# 9

Initially, a competitive industry that has 1,000 firms is in long-run equilibrium. Then 100 firms in the industry adopt a new technology that reduces the average cost of producing the good. In the short run, the price __________, firms with the new technology make __________ profits, and firms with the old technology _______________.

a. remains the same; positive economic; make normal profit

b. falls; positive economic; incur economic losses

c. remains the same; positive economic; incur economic losses

d. remains the same; normal; incur economic losses

# 10

A competitive industry is in long-run equilibrium. Some firms in the industry adopt new technology that reduces the average total cost of producing the good. In the long run, the price is __________, firms with the new technology make __________ profits, and firms with the old technology _______________.

a. constant; economic; make normal profit

b. lower; normal; switch to the new technology or exit the industry

c. constant; normal; exit the industry

d. lower; normal; exit the industry

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Chapter 12

# 1

A monopoly occurs when

a. close substitutes exist.

b. a barrier to entry into the industry exists.

c. only franchises exist.

d. only natural barriers to entry exist.

# 2

When natural or legal forces work to protect a firm from competition, the market is said to have

a. non-competitive supply.

b. restricted competition.

c. non-competitive entry.

d. barriers to entry.

# 3

The granting of a patent, copyright, public franchise, or government licence

a. stimulates competition in the arts.

b. reduces prices.

c. creates a natural monopoly.

d. creates a legal monopoly.

# 4

When one firm can supply the entire market at a lower price than two or more firms can, then ________________ exists.

a. a legal monopoly

b. a natural monopoly

c. a market in which many firms make identical products

d. a government monopoly

# 5

When Dominant Pizza is willing to sell a pizza to a student who lives in a college at a lower price than it is willing to sell the identical pizza to a student who lives a block away from the university, the pizza firm is

a. incurring a loss on college sales.

b. unfair.

c. practising price discrimination.

d. eliminating all competition.

# 6

A monopoly that sells every unit of its output at the same price is a

a. unit-price monopoly.

b. single-price monopoly.

c. legal monopoly.

d. natural monopoly.

# 7

Consumer surplus is the

a. opportunity cost of a good minus its value.

b. price of a good minus the value the consumer places on it.

c. price of a good minus its opportunity cost.

d. value the consumer places on a good minus its price.

# 8

Producer surplus is equal to

a. the opportunity cost of producing the good minus the consumer's value of the good.

b. the opportunity cost of producing the good minus the marginal cost.

c. the producer's revenue minus the value of the good.

d. the producer's revenue minus the opportunity cost of production.

# 9

Deadweight loss measures the inefficiency of the market as the loss of

a. producer surplus only.

b. consumer surplus minus producer surplus.

c. consumer surplus only.

d. consumer surplus and producer surplus.

# 10

The activity of creating a monopoly from which an economic profit can be made is called __________________.

a. scalping

b. rent seeking

c. a natural monopoly

d. price discrimination

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# 1

Which of the following firms is most likely to be a monopoly?

a. computer store

b. local electricity company

c. shoe store

d. local fast-food restaurant

# 2

A patent creates a monopoly by restricting

a. the number of complements.

b. demand.

c. entry.

d. prices.

# 3

When the demand for a good or service limits the quantity that can be sold to a output which one firm can supply at a lower price than two or more firms can, then the ________________.

a. firms are protected from competition by a legal barrier

b. firm is a single-price monopoly

c. firm is a natural monopoly

d. good that the industry produces has close substitutes

# 4

Firms that can price discriminate between customers do so to

a. increase employment.

b. support lower-income families.

c. maximise profits.

d. increase supply.

# 5

A single-price monopolist will produce the output at which

a. demand is inelastic.

b. marginal revenue is zero.

c. marginal revenue equals marginal cost.

d. demand is perfectly inelastic.

# 6

When a monopoly perfectly price discriminates, there is _______________.

a. an increase in supply

b. no producer surplus

c. no consumer surplus

d. a large consumer surplus

# 7

A perfect price discriminating monopoly produces

a. an output at which marginal revenue exceeds marginal cost.

b. the same quantity as a single-price monopoly.

c. the same quantity of output as a perfectly competitive industry.

d. a larger ouput than a perfectly competitive industry.

# 8

A single-price monopoly causes a deadweight loss because it

a. maximises marginal revenue.

b. restricts demand.

c. restricts output.

d. increases marginal cost.

# 9

The maximum amount a rent seeker would pay for a monopoly is the

a. market price.

b. monopoly's normal profit.

c. monopoly's economic profit.

d. deadweight loss.

# 10

A firm experiences economies of scope when an increase in _____________ decreases _____________.

a. the production of a good; average variable cost

b. the production of a good; average total cost

c. the range of goods produced; average total cost

d. the range of goods produced; average fixed cost

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# 1

Suppose that a monopoly is currently producing the quantity at which marginal revenue exceeds marginal cost. The monopoly can increase its profit by

a. lowering its price and increasing its output.

b. shutting down.

c. lowering its price and decreasing its output.

d. raising its price and decreasing its output.

Use the graph to answer questions 2, 3 and 4

[pic]

# 2

Donna owns the only dog grooming salon on Lonely Island. The figure shows the dog grooming market. Donna is a single-price monopoly that operates on the _______ part of the _______ curve.

a. inelastic; supply

b. elastic; supply

c. inelastic; demand

d. elastic; demand

# 3

Donna owns the only dog grooming salon on Lonely Island. The figure shows the dog grooming market. Donna is a single-price monopoly that maximizes profit by charging _______ per grooming. Her profit will be _______________.

a. $20; $0 a day

b. $10; $50 a day

c. $30; $80 a day

d. $17; $160 a day

# 4

Donna owns the only dog grooming salon on Lonely Island. If Donna can price discriminate between dog owners who are seniors and those who are not, her economic profit will be _______ per day.

a. $0

b. greater than $80

c. less than $80

d. $50

# 5

If a monopoly can price discriminates between two groups, then the group with the _______ demand will be charged the _______ price.

a. unit elastic; lower

b. more elastic; higher

c. less elastic; lower

d. less elastic; higher

# 6

A perfect price discriminating monopoly produces the same output as a

a. single-price monopoly but charges higher prices.

b. perfectly competitive firm.

c. perfectly competitive industry.

d. perfectly competitive industry but charges lower prices.

Use the graph to answer questions 7 and 8

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# 7

The figure shows the demand for and costs of producing Charlene's Chocolates. If Charlene's Chocolates becomes a monopoly and charges one price to all customers, then the consumer surplus is ________.

a. $0

b. $480

c. $240

d. $120

# 8

The figure shows the demand for and costs of producing Charlene's Chocolates. If Charlene's Chocolates becomes a monopoly and charges one price to all customers, it transfers ___________ of _________ to itself and at the same time, it creates a deadweight loss of ____________.

a. $600 a day; producer surplus; $0 a day

b. $720 a day; consumer surplus; $120 a day

c. $120 a day; consumer surplus; $60 day

d. $360 a day; producer surplus; $36 a day

# 9

Rent seeking

a. occurs only when the firm practises perfect price discrimination.

b. increases consumer surplus.

c. increases deadweight loss.

d. results in a larger output than a competitive industry would produce.

# 10

A ________________monopoly is as efficient as a _____________________ if both have the same costs.

a. single-price; perfectly competitive firm

b. perfect price discriminating; single-price monopoly

c. single-price; perfectly competitive industry

d. perfect price discriminating; perfectly competitive industry

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# 1

If the wage rate that a monopoly has to pay for labour services increases, then its marginal cost curve

a. and the demand curve shift rightward.

b. shifts leftward and so does the marginal revenue curve.

c. shifts leftward and the marginal revenue curve does not change.

d. and the marginal revenue and average total cost curves shift rightward.

Use the table to answer questions 2, 3 and 4

[pic]

# 2

The table gives the demand schedule for water bottled by Wanda's Healthy Waters. If Wanda's is a single-price monopoly, what is the range of prices at which it is willing to sell water?

a. $10 a bottle

b. $5 a bottle

c. any price over $5 a bottle

d. any price below $5 a bottle

# 3

The table gives the demand schedule for water bottled by Wanda's Healthy Waters, a single-price monopoly. If the marginal cost is a constant $4 a bottle, Wanda's will produce _______ a day and charge ____ a bottle.

a. 3 bottles; $7

b. 4 bottles; $6

c. 5 bottles; $5

d. 1 bottle; $9

# 4

The table gives the demand schedule for water bottled by Wanda's Healthy Waters, a single-priced monopoly. Wanda's marginal cost is a constant $4 a bottle. Wanda's makes an economic profit of __________a day.

a. $0

b. $9

c. $21

d. $12

# 5

Roxie's Movie Theatre is the only one in town. The table gives the demand schedule for movies. If Roxie's is a single-price monopoly and the marginal cost of showing a movie is $6, Roxie's will charge _______ a movie and will sell ______movie tickets a week.

[pic]

a. $15; 100

b. $9; 300

c. $6; 400

d. $12; 200

Use the table to answer questions 6, 7 and 9

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# 6

Roxie's Movie Theatre has a monopoly and discovers that at $12 a movie, no one is buying movie tickets during weekdays. Roxie's conducts a survey and the table reveals the results of the survey. Roxie decides to price discriminate between weekend and weekday moviegoers. The marginal cost of a showing a movie is $6. Roxie's charges _________ on weekdays and _____ on weekends.

a. $9; $15

b. $6; $15

c. $6; $18

d. $9; $12

# 7

Roxie's Movie Theatre has a monopoly. The marginal cost of a showing a movie is $6. Roxie's charges $12 on the weekend but decides to cut the price on a weekday to $6. By price discriminating, consumer surplus _______________ and Roxie's economic profit ___________ .

a. decreases by $150; increases by $150

b. decreases by $300; increases by $300

c. does not change; increases by $300

d. increases by $150; increases by $300

# 8

If a single-price monopoly can _______________, it can price discriminate and increase _________________________.

a. prohibit the resale of its good, its economic profit

b. give discounts to senior, its efficiency

c. encourage more people to buy its good, its economic profit

d. identify students, consumer surplus

# 9

Roxie's Movie Theatre is a monopoly in a small town. The table gives the demand schedule for movies. As the owner of Roxie's knows everyone in the town, Roxie's considers perfect price discrimination. In this case, with the marginal cost of a showing a movie of $6, Roxie's would charge the last moviegoer ____________ and consumer surplus would be _________ a week.

a. $6; $0

b. $9; $0

c. $9; $900

d. $12; $1,200

# 10

A monopoly might be more beneficial than a perfectly competitive industry if it _________________.

a. has a bigger incentive to innovate

b. spends more on advertising

c. never price discriminates

d. can produce more

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Chapter 13

# 1

Monopolistic competition is a market in which _______ firms produce _______ goods and services.

a. many; similar but slightly different

b. few; identical

c. few; similar but slightly different

d. many; identical

# 2

The Netscape and Explorer browsers are an example of

a. product differentiation.

b. identical products.

c. monopoly industries.

d. perfectly competitive industries.

# 3

A market structure in which a small number of firms compete is called

a. an oligopoly.

b. oligopolistic competition.

c. a monopoly.

d. monopolistic competition.

# 4

If the three-firm concentration ratio is close to zero, then the market is classified as

a. perfect competition.

b. monopolistic competition.

c. oligopoly.

d. monopoly.

# 5

In an oligopoly, the quantity sold by any one producer depends on that producer's price

a. and on the other producers' prices and quantities sold.

b. and product differentiation.

c. and not on any other producer's price.

d. and on the quantity sold by other producers.

# 6

In game theory, strategies include

a. all possible actions of each player.

b. the payoff matrix.

c. all possible actions and payoffs of each player.

d. the winning action of each player.

# 7

A table that shows the payoffs for every possible action by each player for every possible action by the other player is called the

a. payoff matrix.

b. strategy table.

c. strategy matrix.

d. game matrix.

# 8

When each player takes the best possible action given the action of his opponent,

a. both players deny.

b. one player denies and one player confesses.

c. a Nash equilibrium is reached.

d. a competitive equilibrium is reached.

# 9

The outcome of a prisoners' dilemma game is a dominant strategy equilibrium in which

a. one player wins and one player loses.

b. there is no equilibrium.

c. both players win.

d. both players lose.

# 10

A duopoly occurs when

a. one producer of two goods sells the goods in a monopoly market.

b. two producers of two goods compete in an oligopoly market.

c. two producers of a particular good compete in the same market.

d. numerous producers of two goods compete in a competitive market.

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# 1

In oligopoly, the concentration ratio is __________ and firms produce ______ products. In perfect competition, the concentration ratio is ___________ and firms produce _______ products.

a. high; identical or differentiated; zero; identical

b. high; identical or differentiated; zero; similar

c. low; identical; zero; identical

d. low; similar; high; identical

# 2

In monopolistic competition in the long run, firms

a. incur an economic loss and require more capacity.

b. make a normal profit and require more capacity.

c. make an economic profit and have excess capacity.

d. make a normal profit and have excess capacity.

# 3

When a monopolistically competitive firm introduces a new and differentiated product it will

a. face a flatter demand curve than before.

b. face a horizontal demand curve.

c. permanently make an economic profit.

d. temporarily make an economic profit.

# 4

In an oligopoly, before a firm cuts its price,

a. the firm must calculate the effects of the reactions of the other firms on its profit.

b. it must set up the market as a game theory model.

c. it must increase advertising.

d. it must have a differentiated product.

# 5

Price wars are an example of

a. tit-for-tat strategy.

b. a monopolistically competitive market.

c. a competitive market.

d. trigger strategy.

# 6

When producers agree to produce less so that they can raise prices and make larger profits, the agreement is called ________________.

a. a collusive agreement

b. a monopoly agreement

c. a pricing agreement

d. an oligopoly agreement

# 7

_______ is a group of firms that have made a collusive agreement.

a. A cartel

b. A strategy

c. A duopoly

d. An oligopoly

# 8

In a repeated game, punishments that result in heavy damages are an incentive for players to adopt the strategies that result in a _______ equilibrium.

a. cooperative

b. strategic

c. competitive

d. Nash

# 9

A firm in a contestable market

a. makes a normal profit.

b. makes an economic revenue.

c. incurs an economic loss.

d. makes an economic profit.

# 10

Limit pricing _______ the market by convincing them that they will ___________________ in the industry.

a. deters potential firms from entering; incur an economic loss

b. deters potential firms from entering; make only normal profit

c. encourages potential firms to enter; make a normal profit

d. encourages potential firms to enter; make an economic profit

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# 1

The following table gives the market share of sales of firms in the retail clothing market in the economy of Thomas. What is the three-firm concentration ratio?

[pic]

a. 100 per cent

b. not enough information to calculate

c. 80 per cent

d. 60 per cent

# 2

The excess capacity in a monopolistically competitive firm

a. decreases as demand for its product decreases.

b. is always the same.

c. increases as the supply of its product decreases.

d. increases as demand for its product decreases.

# 3

If in monopolistic competition in the short run, firms make ______________ profits, then in the long run, new firms will enter the market. The _________ each individual firm's product will __________. In the new long-run equilibrium firms will make _______ profit.

a. normal; demand for; increase; normal

b. economic; supply of; decrease; positive economic

c. economic; supply of; increase; zero economic

d. economic; demand for; decrease; zero economic

# 4

Suppose that firms in monopolistic competition are making positive economic profit. In this case,

a. marginal revenue is greater than price.

b. the demand curve is horizontal.

c. marginal revenue is greater than marginal cost.

d. price is greater than average total cost.

# 5

Kevin and Pat have been arrested by the police during a robbery at a computer store. If convicted, each receive a sentence of 5 years for the robbery. During questioning, the police suspect that Kevin and Pat are responsible for an arson attack on the local bingo hall. If both confess to the arson, each will receive 10 years in jail. If only one confesses, he will receive 4 years and the one who does not confess will receive 18 years. What is the equilibrium for this game?

a. Pat confesses and Kevin does not confess

b. Kevin confesses and Pat does not confess

c. neither confess

d. both confess

# 6

In the Prisoners' Dilemma game, the equilibrium is always a _______ equilibrium.

a. competitive

b. prisoners' dilemma

c. collusive

d. dominant strategy

# 7

The maximum economic profit that can be made by a duopoly that colludes is equal to the

a. normal profit made by an oligopoly.

b. economic profit made by duopolists who cheat.

c. normal profit made by firms in perfect competition.

d. economic profit made by a monopoly.

# 8

In a duopoly with a collusive agreement, a firm's best strategy is to_______ if the other firm_______ and to_______ if the other firm _______.

a. comply; cheats; cheat; complies

b. comply; complies; comply; cheats

c. comply; complies; cheat; cheats

d. cheat; complies; cheat; cheats

# 9

A cartel will make the same economic profit that a monopoly would make if

a. the cartel plays the game once and a tit-for-tat strategy is in place.

b. the game is played once.

c. the cartel spends money on research and development.

d. the game is repeated and a tit-for-tat strategy is in place.

# 10

A firm in monopolistic competition

a. charges a price equal to marginal cost.

b. produces the revenue-maximizing output.

c. charges a price that equals marginal revenue.

d. produces the profit-maximizing output.

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# 1

If 5 firms share the sales of the market equally, the three-firm concentration ratio is _______.

60

3

5

100

Use the figure to answer questions 2 and 3

[pic]

# 2

The figure shows the cost, marginal revenue, and demand curves of Golden Chow, a producer of dog food. The market for dog food is monopolistic competition. In the short run, Golden Chow sells 250 cans of dog food per day and makes _______. Other firms have _____ incentive to enter the industry.

a. an economic profit of $62.50 a day, an

b. normal profit of $125.00 a day, no

c. no profit, no

d. an economic profit of $125.00 a day, an

# 3

The figure shows the cost, marginal revenue, and demand curves of Golden Chow, a producer of dog food. The market for dog food is monopolistic competition. In the long run as new firms enter, Golden Chow cuts its output to 125 cans per day. Its excess capacity is _____________cans per day.

a. 275

b. 0

c. 150

d. 125

# 4

A monopolistic competitive market is

a. inefficient because in the long run, price exceeds marginal cost.

b. efficient when all firms make zero normal profit.

c. is inefficient because firms always make zero economic profit.

d. efficient when all firms are making zero economic profit.

# 5

If in an oligoploy market, a game is played once, consumers face ________. But if the game is played repeatedly, consumers face _______.

a. the same prices as in a competitive market; the same prices as in a monopoly market

b. the same prices as in a monopoly market; the same prices as in a monopoly market

c. lower prices than in a monopoly market; higher prices than in a monopoly market

d. higher prices than in a competitive market; the same prices as in a monopoly market

# 6

Game theory is most useful for determining the outcome when

a. the market structure is oligopoly.

b. monopolistic competition exists.

c. the market is dominated by a monopoly.

d. prison terms are involved.

# 7

If a cartel is maximising total industry profit,

a. there is still an incentive to cheat on the agreement.

b. any effective punishment strategy would have to be a trigger strategy.

c. no incentive exists to practise a tit-for-tat strategy.

d. there is no incentive to cheat on the agreement.

Use the figure to answer questions 8, 9 and 10

[pic]

# 8

Oscar and Felix are the only firms that clean offices in a small town. They agree to operate as a cartel. The table gives the economic profits that each firm can make. If Felix cheats on the agreement but Oscar complies, Felix makes an economic profit of _______ and Oscar makes an economic profit of _______.

a. $7 million; $3 million

b. $6 million; $6 million

c. $4 million; $4 million

d. $3 million; $7 million

# 9

Oscar and Felix are the only firms that clean offices in a small town. They agree to operate as a cartel. The payoff matrix shows the economic profit that each firm can make. If the game is played only once, then

a. Felix and Oscar will each make $4 million profit.

b. Felix will comply and Oscar will make $7 million profit.

c. Felix will cheat and Oscar will make $3 million profit.

d. Felix and Oscar will each make $6 million profit.

# 10

Oscar and Felix are the only firms that clean offices in a small town. They agree to operate as a cartel. The payoff matrix shows the economic profit that each firm can make. If the game is played repeatedly and Felix and Oscar both use a tit-for-tat strategy, then

a. Felix and Oscar will each make $6 million profit.

b. Felix will make $3 million and Oscar will cheat.

c. Felix will make $7 million and Oscar will comply.

d. Felix and Oscar will each make $4 million profit.

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Good Luck!

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