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The Costs of Production

1 Which of the following is an implicit cost?

a salaries paid to owners who work for the firm

b interest on money borrowed to finance equipment purchases

c cash payments for raw materials

d foregone rent on office space owned and used by the firm

ANSWER: dforegone rent on office space owned and used by the firm

SECTION: 1 OBJECTIVE: 1

2 Samantha has been working for a law firm and earning an annual salary of $90,000 She decides to open her own practice Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a

$35,000 salary for a secretary/bookkeeper Samantha will cover her start-up expenses

by cashing in a $20,000 certificate of deposit on which she was earning annual

interest of $1,000 Assuming that there are no additional expenses, Samantha’s annualimplicit costs will equal

d All of the above are correct

ANSWER: bmaximize profits

4 The difference between accounting profit and economic profit relates to

a the manner in which revenues are defined

b how total revenue is calculated

c the manner in which costs are defined

d the price of the good in the market

ANSWER: c the manner in which costs are defined

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6 Which of the following could explain why the total product curve shifted in this diagram?

a A reduction in capital equipment available to the firm

b Labor skills have become rusty and outdated in the firm

c The firm has developed new technology in their production facility

d The firm is now receiving a higher price for its product

ANSWER: c The firm has developed new technology in their production facility

7 As Al’s Radiator Co continues to add workers, while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery When this occurs, Al’s Radiator Co encounters

a economies of scale

b diseconomies of scale

c increasing marginal returns

d diminishing marginal returns

ANSWER: ddiminishing marginal returns

8 Which of the following costs of publishing a book is a fixed cost?

a author royalties of 5% per book

b costs of paper and binding

c shipping and postage

d composition, typesetting, and jacket design

ANSWER: dcomposition, typesetting, and jacket design

9 Which of the following is the best example of a variable cost?

a monthly payments for hired labor

b property tax payments

c monthly rent payments for a warehouse

d pension payments to retired workers

ANSWER: amonthly payments for hired labor

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10 Smith Tire Co has total fixed costs of $100,000 per year The firm’s average variable cost is $80 for 10,000 tires At that level of output, the firm’s average total costs equal

Total Variable Cost Total Fixed Cost Total Cost

13 If marginal cost is greater than average total cost then

a profits are increasing

b economies of scale are becoming greater

c average total cost remains constant

d average total cost is increasing

ANSWER: daverage total cost is increasing

b the marginal cost curve intersects those curves

c wages are the lowest

d the slope of total cost is the smallest

ANSWER: bthe marginal cost curve intersects those curves

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15 If Franco’s Pizza Parlor knows that the marginal cost of the 500th pizza is $3.00 and that the average total cost of making 499 pizzas is $3.30, then

a average costs are rising at Q = 500

b average costs are falling at Q = 500

c total costs are falling at Q = 500

d average variable costs must be falling

ANSWER: baverage costs are falling at Q = 500

16 When the marginal product of labor falls, the marginal cost of output

a falls, then rises

a a technological advance resulting in increased productivity

b higher property taxes charged by the municipal government

c increased wages to attract additional computer operators

d a reduction in subsidies from the state government

ANSWER: aa technological advance resulting in increased productivity

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c means that a doubling of plant size will double output.

d requires a change in the size of plant and therefore is a short-run consideration.ANSWER: arequires a change in the size of operations and therefore is a long-run

consideration

20 Since the 1980s, Wal-Mart stores have appeared in almost every community in

America Wal-Mart buys their goods in large quantities and therefore at cheaper prices Wal-Mart also locates its stores where land prices are low, usually outside of the community business district Many customers shop at Wal-Mart because of low prices and free parking Local retailers, like the neighborhood drug store, often go out

of business because they lose customers This story demonstrates that

a consumers are boycotting local retailers whose prices are relatively higher

b there are diseconomies of scale in retail sales

c there are economies of scale in retail sales

d there are diminishing returns to producing and selling retail goods

ANSWER: c there are economies of scale in retail sales

21 Some reasons that firms may experience diseconomies of scale include that

a the firm is too small to take advantage of specialization

b large management structures may be bureaucratic and inefficient

c if there are too many employees, the work place becomes crowded and people become less productive

d average fixed costs begin to rise again

ANSWER: blarge management structures may be bureaucratic and inefficient

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22 A local bagel company plans to keep and maintain its bagel factory, which is estimated

to last 25 years All cost decisions it makes during the 25-year period

a are short-run decisions

b are long-run decisions

c involve only maintenance of the factory

d are zero, since the cost decisions were made at the beginning of the business.ANSWER: aare short-run decisions

d slope downward for low output levels and upward for high output levels

ANSWER: bbe horizontal

24 Which of the following explains why long-run average cost at first decreases as output increases?

a diseconomies of scale

b less-efficient use of inputs

c fixed costs becoming spread out over more units of output

d gains from specialization of inputs

ANSWER: dgains from specialization of inputs

25 The total cost to the firm of producing zero units of output is

a zero in both the short run and the long run

b its fixed cost in the short run, zero in the long run

c its fixed cost in both the short run and the long run

d its variable cost in both the short run and the long run

ANSWER: bits fixed cost in the short run, zero in the long run

Chapter 14

Firms in Competitive Markets

1 One of the defining characteristics of a perfectly competitive market is

a a small number of sellers

b a large number of buyers and a small number of sellers

c a standardized product

d significant advertising by firms to promote their products

ANSWER: c a standardized product

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2 Which of the following firms is the closest to being a perfectly competitive firm?

a a hot dog vendor in New York

b Microsoft Corporation

c Ford Motor Company

d the campus bookstore

ANSWER: aa hot dog vendor in New York

3 Java Joe sells 200 cups of coffee each day in a perfectly competitive market at the market price of $1.00 per cup If Java Joe independently decreased its price per cup to

$0.75,

a its sales would rise to 250 cups

b its revenues would decrease

c its revenues would remain constant at $200

d the market price would fall to $0.75 as other sellers match Java Joe’s price

ANSWER: bits revenues would decrease

4 If the market elasticity of demand for potatoes is –.3, then the individual farmer’s elasticity of demand

a is also –.3

b depends on how large a crop she produces

c will range between –.3 and –1.0

d will be infinite

ANSWER: dwill be infinite

5 Perfect competition may be defined as competition

a among price-taking sellers

b among buyers with perfect information about the market

c among sellers of high-quality products

d in a market where prices adjust quickly to the long-run equilibrium

ANSWER: acompetition among price-taking sellers

6 Free entry means that

a there are no costs of entering into an industry

b no legal barriers prevent a firm from entering an industry

c a firm’s marginal cost is zero

d a firm has no fixed costs in the short run

ANSWER: bno legal barriers prevent a firm from entering an industry

d increase quantity to 16 units

ANSWER: dincrease quantity to 16 units

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Unit Marginal Marginal

Quantity Cost Revenue

d There is not sufficient data to determine firm profitability

ANSWER: dThere is not sufficient data to determine firm profitability

9 Cold Duck Airlines flies between Tacoma and Portland The company leases planes on

a year-long contract at a cost that averages $600 per flight Other costs (fuel, flight attendants, etc.) amount to $550 per flight Currently, Cold Duck’s revenues are

$1,000 per flight All prices and costs are expected to continue at their present levels

If it wants to maximize profit, Cold Duck Airlines should

a drop the flight immediately

b continue the flight

c continue flying until the lease expires and then drop the run

d drop the flight now but renew the lease if conditions improve

ANSWER: c continue flying until the lease expires and then drop the run

10 Raiman’s Shoe Repair also produces custom-made shoes When Mr Raiman produces

12 pairs a week, the MC of the twelfth pair is $84, and the MR of that unit is $70 What would you advise Mr Raiman to do?

a shut down

b produce more custom-made shoes

c decrease the price

d produce fewer custom-made shoes

ANSWER: dproduce fewer custom-made shoes

11 Carla’s Candy Store is maximizing profits by producing 1,000 pounds of candy per day If Carla’s fixed costs unexpectedly increase and the market price remains

constant, then the profit-maximizing level of output

a is less than 1,000 pounds

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12 The firm will make the most profits if it produces that quantity of output for which

a marginal cost equals average cost

b profit per unit is greatest

c marginal revenue equals total revenue

d marginal revenue equals marginal cost

ANSWER: dmarginal revenue equals marginal cost

a Joe’s Garage will break even

b Joe’s Garage will shut down immediately

c Joe’s will lose money in the short run, but stay in business

d the market price will fall in the short run

ANSWER: bJoe’s Garage will shut down immediately

b the demand curves for firms will shift downward

c the demand curves for firms will become more elastic

d profits will rise

ANSWER: dprofits will rise

16 A sunk cost is one that

a changes as the level of output changes in the short run

b was paid in the past and will not change regardless of the present decision

c should determine the rational course of action in the future

d has the most impact on profit-making decisions

ANSWER: bwas paid in the past and will not change regardless of the present decision.SECTION: 2 OBJECTIVE: 4

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17 A corporation has been steadily losing money on one of its product lines The factory used to produce that brand cost $20 million to build 10 years ago The firm now is considering an offer to buy that factory for $15 million Which of the following

statements about the decision to sell or not to sell is correct?

a The firm should turn down the purchase offer because the factory cost more than

18 The short-run market supply curve in a perfectly competitive industry

a shows the total quantity supplied by all firms at each possible price

b is perfectly inelastic at the market price

c is perfectly elastic at the market price

a more firms will enter the market

b some firms will exit from the market

c the equilibrium price per tire will rise

d average total costs will fall

ANSWER: amore firms will enter the market

20 If all firms have the same costs of production, then in long-run equilibrium,

a price exceeds all firms’ average cost

b price exceeds all firms’ marginal cost

c some firms have positive profits

d all firms have zero profits and just cover their opportunity costs

ANSWER: dall firms have zero profits and just cover their opportunity costs

21 When market conditions in a competitive industry are such that firms cannot cover their production costs, then

a the firms will suffer long-run economic losses

b the firms will suffer short-run economic losses that will be exactly offset by long-runeconomic profits

c some firms will go out of business, causing prices to rise until the remaining firms can cover their production costs

d all firms will go out of business, since consumers will not pay prices that enable firms to cover their production costs

ANSWER: c some firms will go out of business, causing prices to rise until the remaining firms can cover their production costs

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22 The market price in a perfectly competitive industry in short-run equilibrium is $3 andthe minimum average cost for all firms is $2.50 In the long run, we would expect an increase in

a each firm’s output

b the number of firms

c each firm’s profit

d each firm’s average costs

ANSWER: bthe number of firms

23 If occupational safety laws were changed so that firms no longer had to take expensivesteps to meet regulatory requirements, we should expect that

a the demand for the products of this industry would increase

b the market price of the products of this industry would decrease in the short run but not in the long run

c the firms in the industry would make a long-run economic profit

d competition would force producers to pass the lower production costs on to

consumers in the long run

ANSWER: dcompetition would force producers to pass the lower production costs on to consumers in the long run

24 The textile industry is composed of a large number of small firms In recent years, these firms have suffered economic losses and many sellers have left the industry Economic theory suggests that these conditions will

a shift the demand curve outward so that price will rise to the level of production cost

b cause the remaining firms to collude so that they can produce more efficiently

c cause the market supply to decline and the price of textiles to rise

d cause firms in the textile industry to suffer long-run economic losses

ANSWER: c cause the market supply to decline and the price of textiles to rise

25 In a perfectly competitive market, the horizontal sum of all the individual firms’ supplycurves is

a zero

b equal to the industry profits

c the market supply curve

d a horizontal line

ANSWER: c the market supply curve

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Chapter 15

Monopoly

1 Monopolies use their market leverage to

a charge prices that equal minimum average total cost

b attain normal profits in the long run

c restrict output and increase price

d dump excess supplies of their product on the market

ANSWER: c restrict output and increase price

2 If government officials break a natural monopoly up into several smaller firms, then

a competition will force firms to attain economic profits rather than accounting profits

b competition will force firms to produce surplus output, which drives up price

c the average costs of production will increase

d the average costs of production will decrease

ANSWER: c the average costs of production will increase

3 Sizable economic profits can persist over time under monopoly if the monopolist

a produces that output where average total cost is at a maximum

b is protected by barriers to entry

c operates as a price taker rather than a price maker

d realizes revenues that exceed variable costs

ANSWER: bis protected by barriers to entry

4 Most markets are not monopolies in the real world because

a firms usually face downward-sloping demand curves

b supply curves slope upward

c price is usually set equal to marginal cost by firms

d there are reasonable substitutes for most goods

ANSWER: dthere are reasonable substitutes for most goods

5 Patents grant

a permanent monopoly status to creators of scientific inventions

b permanent monopoly status to creators of any intellectual property

c temporary monopoly status to creators of scientific inventions

d temporary monopoly status to creators of any intellectual property

ANSWER: c temporary monopoly status to creators of scientific inventions

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6 If a monopolist can sell 7 units when the price is $3 and 8 units when the price is $2, then marginal revenue of selling the eighth unit is equal to

George has marginal cost of $.50 per unit

7 What is George’s profit-maximizing level of output?

9 If a monopolist’s marginal costs shift up by $1.00, then

a the monopoly price will rise by $1

b the monopoly price will rise by more than $1

c the monopoly price will rise by less than $1

d there is no change in the monopoly price and profits fall

ANSWER: c the monopoly price will rise by less than $1

10 If a monopolist has zero marginal costs it will produce

a the output at which total revenue is maximized

b in the range in which marginal revenue is still increasing

c at the point at which marginal revenue is at a maximum

d in the range in which marginal revenue is negative

ANSWER: athe output at which total revenue is maximized

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11 The supply curve for the monopolist

a is horizontal

b is vertical

c is a 45-degree line

d does not exist

ANSWER: ddoes not exist

Consider the following demand and cost information for a monopoly

Quantity Price Total Cost

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16 Suppose potatoes were produced in Canada by many, many firms in perfect

competition In Belgium, only one firm produces potatoes for the Belgium market Suppose further that for the competitive firms and the monopoly minimum ATC is the same We would expect that in Belgium the price of potatoes is and

potatoes are produced and sold than in Canada

c false; the monopolist is a price taker

d true; consumers in a monopoly market have no substitutes to turn to when the monopolist raises prices

ANSWER: afalse; price increases will mean fewer sales, and lower costs will mean higher profits (or smaller losses)

c produce a large quantity of waste

d have no incentive to produce at their minimum ATC

ANSWER: dhave no incentive to produce at their minimum ATC

19 Concerning public utilities, the stated reason for resorting to regulation of a

monopoly, rather than promoting competition through antitrust, is that the industry inquestion is believed to be a

20 Splitting up a monopoly is often justified on the grounds that

a consumers prefer dealing with small firms

b small firms have lower costs

c competition is inherently efficient

d nationalization is a less-preferred option

ANSWER: c competition is inherently efficient

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21 The first major piece of antitrust legislation was the

22 The task of economic regulation is to

a protect monopoly profits

b approximate the results of the competitive market

c replace competition with government ownership

d increase competition within the market

ANSWER: bapproximate the results of the competitive market

23 Which of the following is an example of price discrimination?

a Nabisco provides cents-off coupons for its products

b Amtrak offers a lower price for weekend travel compared to weekday rates on the same routes

c Hotel rates for AAA members are lower than for nonmembers

ANSWER: dAll of the above are correct

24 A monopolist that practices perfect price discrimination

a creates no deadweight loss

b charges one group of buyers a higher price than another group, such as offering a student discount

c produces the same monopoly level of output as when a single price is charged

d charges some customers a price below marginal cost because costs are covered by the high-priced buyers

ANSWER: acreates no deadweight loss

25 A monopolist’s profits with price discrimination will be

a lower than if the firm charged a single, profit-maximizing price

b the same as if the firm charged a single, profit-maximizing price

c higher than if the firm charged just one price because the firm will capture more consumer surplus

d higher than if the firm charged a single price because the costs of selling the good will be lower

ANSWER: c higher than if the firm charged just one price because the firm will capture more consumer surplus

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2 Which of the following is a characteristic of oligopoly but NOT perfect competition?

a advertising and sales promotion

b profit maximization according to the MR = MC rule

c firms being price takers rather than price makers

d horizontal demand curve and marginal revenue curve

ANSWER: aadvertising and sales promotion

3 Imperfectly competitive firms are characterized by

a horizontal demand curves

b standardized products

c a large number of small firms

d price making ability

ANSWER: dprice making ability

4 A firm in a monopolistically competitive market is similar to a monopolist in the sense that it

a must overcome significant barriers to entry

b faces a downward-sloping demand curve

c has no barriers to entry or exit

d it is only one seller of the good

ANSWER: bfaces a downward-sloping demand curve

5 The U.S market for locomotives is divided between two producers: General Electric has 70 percent of the market and General Motors has 30 percent This market is an example of

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6 The cigarette industry consists of large firms that compete vigorously by advertising heavily, which is directed at creating fantasy and image Economists would

characterize this industry as

7 Cartels in the United States are

a legal if price is competitively determined

b legal if all firms in the industry agree to the terms of the cartel

c legal if all conditions of the cartel are made public

a avoid pricing high when the other prices low

b select high prices and defend that selection because, in the long run, their profits are higher than if they competed by lowering prices

c end up mistaking the other’s intentions, which results in low prices and low profit for both in the long run

d end up colluding with the other to form a cartel

ANSWER: aavoid pricing high when the other prices low

9 There will be a greater tendency for cheating to take place with a cartel if

a the number of firms in the market is relatively small

b the firms produce standardized products

c the costs of production differ among firms

d economic profits are being earned by the cartel

ANSWER: c the costs of production differ among firms

10 Which of the following would be most likely to contribute to the breakdown of a cartel

in a natural resource (e.g., bauxite) market?

a high prices

b low price elasticity of demand

c high compatibility of member interests

d unequal member ownership of the natural resources

ANSWER: dunequal member ownership of the natural resources

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12 An oligopoly would tend to restrict output and drive up price if

a barriers to entering the industry are negligible

b firms engage in informative advertising

c firms produce a standardized product

d firms collude and behave like a monopoly

ANSWER: dfirms collude and behave like a monopoly

13 The application of game theory to economics allows us to understand firm behavior in some forms of oligopoly Game theory suggests that in a two-firm industry, each firm will

a avoid pricing high when the other prices low

b select high prices and defend that selection because, in the long run, their profits are higher than if they competed by lowering prices

c end up mistaking the other’s intentions, which results in low prices and low profit for both in the long run

d end up colluding with the other to form a cartel

ANSWER: aavoid pricing high when the other prices low

14 In the prisoner’s dilemma,

a the prisoners easily collude in order to achieve the best possible payoff for both

b only one player has a dominant strategy

c playing the dominant strategy leads to a better payoff for one prisoner than would jointly selecting a different strategy

d each player has a dominant strategy

ANSWER: deach player has a dominant strategy

15 A dominant strategy is one that

a makes every player better off

b makes at least one player better off without hurting the competitiveness of any other player

c increases the total payoff for the player

d is best for the player, regardless of what strategy other players follow

ANSWER: dis best for the player, regardless of what strategy other players follow

16 An equilibrium occurs in a game when

a price equals marginal cost

b quantity supplied equals quantity demanded

c all independent strategies counterbalance all dominant strategies

d all players follow a strategy that they have no incentive to change

ANSWER: dall players follow a strategy that they have no incentive to change

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17 The players in a two-person game are choosing between Strategy X and Strategy Y If the second player chooses Strategy X, the first player’s best outcome is also to select

X If the second player chooses Strategy Y, the first player’s best outcome is to select

X For the first player, Strategy X is called a

a Matt’s dominant strategy is to charge a low price

b Brian’s dominant strategy is to charge a high price

c The dominant strategy for both Brian and Matt is to charge a low price

d Matt’s dominant strategy is to charge a high price

ANSWER: aMatt’s dominant strategy is to charge a low price

19 Brian and Matt own the only two bicycle repair shops in town Each must choose between a low price for repair work and a high price The yearly economic profits from each strategy are indicated in the table The upper right side of each rectangle shows Brian’s profits; the lower left side shows Matt’s profits Which of the following statements is correct for a one-trial game?

a The market equilibrium price is the high price

b A market equilibrium price cannot be established unless Brian and Matt collude

c A market equilibrium price cannot be established without repeated trials

d The equilibrium price is the low price

ANSWER: dThe equilibrium price is the low price

20 After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline due, in part, to

a the low elasticity of demand for oil in the short run

b the large number of buyers from each member nation

c surging demand for oil in the early 1980s

d the greater long-run elasticity of demand for oil

ANSWER: dthe greater long-run elasticity of demand for oil

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21 Which of the following would make cheating on a collusive agreement more likely?

a Greater ease of observing other firms’ prices

b A reduction in the number of sellers in the market

c A greater resulting impact on the market price

d More frequent shifts in market demand

ANSWER: dMore frequent shifts in market demand

22 In order to prove that a firm has engaged in predatory pricing, the Justice Departmentmust show that the firm’s price is below

a average variable cost

b average total cost

c total cost

d other firms’ prices

ANSWER: aaverage variable cost

24 The primary purpose of antitrust legislation is to

a protect small businesses

b protect the competitiveness of U.S businesses

c protect the prices of American-made products

d ensure firms earn only a fair profit

ANSWER: bprotect the competitiveness of U.S businesses

25 A law that encourages market competition by prohibiting firms from gaining or

exercising excessive market power is

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Chapter 17

Monopolistic Competition

1 Because monopolistically competitive firms produce differentiated products, each firm

a faces a demand curve that is horizontal

b faces a demand curve that is vertical

c has no control over product price

d has some control over product price

ANSWER: dhas some control over product price

2 Which of the following conditions distinguishes monopolistic competition from perfect competition?

a number of sellers

b freedom of entry and exit

c small size firms

a decrease and become more elastic

b decrease and become less elastic

c increase and become more elastic

d increase and become less elastic

ANSWER: adecrease and become more elastic

4 When a monopolistically competitive firm raises its price,

a quantity demanded falls to zero

b quantity demanded declines, but not to zero

c the market supply curve shifts outward

d quantity demanded remains constant

ANSWER: bquantity demanded declines, but not to zero

5 There are several reasons why demand curves may become more elastic Among them are

a the market becomes more monopolistic and cross elasticities approach zero

b the goods become less differentiated and more firms enter the industry

c consumers have fewer substitutes and firms drop out of the industry

d industry demand increases and consumers increase spending

ANSWER: bthe goods become less differentiated and more firms enter the industry

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6 Which of the following is a characteristic of oligopoly or monopolistic competition, but

not perfect competition?

a advertising and sales promotion

b profit maximization according to the MR = MC rule

c firms being price takers rather than price makers

d horizontal demand and marginal revenue curves

ANSWER: aadvertising and sales promotion

7 Product differentiation allows the firm to

a raise price and lower quantity demanded

b raise price without suffering a substantial loss of sales

c shift the market demand curve to the left

d decrease barriers to entry

ANSWER: braise price without suffering a substantial loss of sales

8 The maximum total short run economic profit, or minimum loss, for the

monopolistically competitive firm in this figure is

9 The firm in this figure is monopolistically competitive It illustrates

a the shut-down case

b a long-run economic profit

c a short-run economic profit

d a short-run loss

ANSWER: c a short-run economic profit

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10 At the profit-maximizing, or loss-minimizing, output level, the firm in this figure has total costs approximately equal to

a will increase its profits if it raises its price and reduces its production level

b will increase its profits if it lowers its price and expands its production level

c is maximizing profits

d will increase its profits if it raises its prices and expands its production level.ANSWER: dwill increase its profits if it raises its price and expands its production level.SECTION: 1 OBJECTIVE: 2

12 Cecilia’s Café is a monopolistic competitor If Cecilia’s is currently producing at the output level where her average total cost is minimized and the café is earning

economic profits, then in the long run output will

a decrease and average total cost will increase

b decrease and average total cost will decrease

c remain unchanged as Cecilia’s is doing the best it can

d increase and average total costs will decrease

ANSWER: adecrease and average total cost will increase

13 In the long run, freedom of entry into a market forces a to charge a price equal to average total cost, but average total cost exceeds its minimum level

a perfectly competitive firm

b monopolistically competitive firm

a Firms produce more output than is socially desirable

b The output produced by a typical firm is less than what would occur at the

minimum point on its ATC curve

c Due to product differentiation, firms choose output levels where P > ATC

d Firms keep some surplus output on hand in case there is a shift in the demand for their product

ANSWER: bThe output produced by a typical firm is less than what would occur at the minimum point on its ATC curve

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15 Which of the following individuals quoted below is least likely to argue that excess capacity in monopolistically competitive industries is a waste of resources?

a “An automobile is transportation, nothing else.”

b “Tomatoes or no tomatoes The choice of toppings on a burger can be important to

a consumer these days when individualism is increasingly important to people.”

c “Gasoline is gasoline no matter what the brand name.”

d “I take the airline that will get me from A to B at the lowest price.”

ANSWER: b“Tomatoes or no tomatoes The choice of toppings on a burger can be

important to a consumer these days when individualism is increasingly important to

people.”

16 The traditional view of monopolistic competition holds that this type of industrial structure is inefficient because

a there are too few firms to reach an efficient level of production

b firms do not operate at the output that minimizes average costs

c advertising is not used extensively enough to yield an efficient differentiation of the products

d consumers do not have enough choice among the product varieties available

ANSWER: bfirms do not operate at the output that minimizes average costs

17 Monopolistic competition is considered by some to be inefficient because

a price exceeds marginal cost

b output exceeds capacity output

c long-run profits are positive

ANSWER: aprice exceeds marginal cost

18 Perhaps it’s not a problem at all, but if “too much choice” is a problem for consumers,

it would occur in which market structure(s)?

a perfect competition

b monopoly

c monopolistic competition

d perfect competition and monopolistic competition

ANSWER: c monopolistic competition

19 Which of the following might be an effect of advertising?

a increased product differentiation

b increased total costs of production

c increased demand for the product

20 In the long run under monopolistic competition, when firms advertise,

a they will still earn zero economic profit

b they can earn positive economic profit by increasing market share

c the market price must fall

d the market price must rise

ANSWER: athey will still earn zero economic profit

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21 Advertising

a provides information about products, including prices and seller locations

b has been proven to increase competition and reduce prices compared to markets without advertising

c signals quality to consumers, since firms spend so much money on ads

22 Critics of advertising argue that advertising

a wastes resources because it creates an image without necessarily improving product quality

b advertising lowers barriers to entry into an industry because new firms can more easily establish themselves as competitors

c advertising increases competition by providing information about prices

d advertising encourages monopolization of markets by raising entry barriers too high

ANSWER: aadvertising wastes resources because it creates an image without necessarily improving product quality

23 Many airlines promise “frequent flyer” miles to passengers who fly their airlines regularly This is an example of a firm attempting to create

a price discrimination

b a predatory pricing scheme

c discounting below marginal costs

d brand loyalty

ANSWER: dbrand loyalty

24 One of the reasons that Kodak and Fuji films advertise so much is that

a each hopes to create a natural monopoly

b they are in a perfectly competitive industry where advertising is the difference between economic and normal profits

c they want to develop brand loyalty

d they want to increase price elasticities of demand

ANSWER: c they want to develop brand loyalty

25 If some coffee drinkers continue to buy Maxwell House coffee even when Folger’s coffee is on sale and cheaper, it may be a result of

a irrational consumer behavior

b a high cross elasticity between the two goods

c brand loyalty

d Maxwell House being a monopoly

ANSWER: c brand loyalty

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Chapter 18

The Markets for the Factors of

Production

1 The demand for labor by a particular firm is ultimately derived from

a the productivity of labor

b the productivity of the firm’s other inputs

c demand for the firm’s output

d the market supply of labor

ANSWER: c the demand for the firm’s output

SECTION: INTRO OBJECTIVE: 1

2 If the demand for automobiles increases, which of the following markets would also experience an increase in demand?

a automobile workers

b bicycle manufacturers

c bus drivers

d financial analysts

ANSWER: aautomobile workers

SECTION: INTRO OBJECTIVE: 1

3 Which of the following is an assumption made about a competitive labor market?

a A firm must offer a higher wage rate to attract more labor

b A firm must offer a lower wage rate to attract more labor

c A firm cannot influence the market wage rate

d The labor supply curve facing a firm is relatively inelastic

ANSWER: c A firm cannot influence the market wage rate

SECTION:1 OBJECTIVE: 1

4 If eight workers can manufacture 70 tables per day and nine workers can manufacture

90 tables per day, and if tables can be sold for $10 each, the value of marginal product

of the ninth worker is

5 An increasing marginal product of labor would be most commonly found

a at high levels of employment

b in perfect competition

c at low levels of employment

d when prices are rising

ANSWER: c at low levels of employment

SECTION:1 OBJECTIVE: 1

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