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BAM 223 Unit 3 Examination -If a perfectly competitive firm

BAM 223 Principles of Economics Unit 3 Examination Multiple Choice Questions (Enter your answers on the enclosed answer sheet)1. If a perfectly competitive firm raises the price it charges to consumers, which of the followingis the most likely outcome?a.b.c.d. The firm’s total revenue will increase only if the demand for its product is elastic.The firm’s total revenue will increase only if the demand for its product is inelastic.The firm will not sell any output.The firm’s revenue will not change because some consumers will refuse to pay the higherprice. 2. In a perfectly competitive market the term “price taker” applies to:a.b.c.d. sellers and buyersbuyers but not sellersfirms but not buyersonly the smallest sellers and buyers 3. Assume that price is greater than average variable cost. If a perfectly competitive seller isproducing at an output where price is $11 and the marginal cost is $14.54, then to maximizeprofits the firm should:a.b.c.d. produce a smaller level of outputcontinue producing at the current outputThere is not enough information given to answer the questionproduce a larger level of output Table 9-4Quantity Average Fixed Cost Average Variable Cost Marginal Cost 20 $40 $18 $18 40 20 14 10 60 13.1 16 20 80 10 22 40 100 8 30 62 1206.614090Table 9-4 shows the short-run cost data of a perfectly competitive firm. Assume that outputcan only be increased in batches of 20 units.4. Refer to Table 9-4. If the market price is $45, the firm:a.b.c.d. 165 will suffer a loss of $200will break evenwill earn profit of $1,840earn a profit of $3,600 BAM 223 Principles of Economics Unit 3 Examination 5. Ben’s Peanut Shoppe suffers a short-run loss. Ben will not choose to shut down if his business’ totalrevenue exceeds his:a.b.c.d. capital costsfixed costimplicit costsvariable cost Figure 9-17 The graphs in Figure 9-17 represent the perfectly competitive market demand and supply curves for theapple industry and demand and cost curves for a typical firm in the industry.6. Refer to Figure 9-17. The graphs depict a short run equilibrium. How will this differ from the long-runequilibrium? (Assume this is a constant-cost industry.)a.b.c.d. Fewer firms will be in the market in the long run than in the short run.The firm’s profit will be lower in the long run than in the short run.The price will be higher in the long run than in the short run.The market supply curve will be further to the left in the long run than in the short run. 7. Assume that firms in a perfectly competitive market are earning economic profits. Which of thefollowing statements describes the change in market price and output as a result of the entry of newfirms into this market?a. The short-run market supply curve shifts to the right, causing price to fall and total market outputto increase.b. The short-run market supply curve shifts to the left, causing price to rise and total market outputto decrease.c. The market demand curve shifts to the right, causing price to rise and market output to increase.d. The market demand curve shifts to the left, causing price to fall and market output to decrease. 166 BAM 223 Principles of Economics Unit 3 Examination 8. If the long-run average cost curve is U-shaped, the optimal scale of production from society’sviewpoint isa.b.c.d. where maximum economic profit is earned by producers.one which guarantees economic profit.the minimum efficient scale.where firm profit is large enough to finance research and development. Figure 9-20 9. Refer to Figure 9-20. If the market price is P1, what is the allocatively efficient output level?a.b.c.d. Q0Q1Q2There is no allocatively efficient output level because the firm is making a loss. 10. In Walnut Creek, California, there are three very popular supermarkets: Safeway, WholeFoods and Lunardi’s. While Safeway remains open twenty-four hours a day, Whole Foods andLunardi’s close at 9 pm. Which of the following statements is true?a.b.c.d. 167 SafewaySafewaySafewaySafeway can ignore the pricing decisions of the other two supermarkets.probably has a higher markup to compensate for its higher cost of production.is a monopoly all day because it produces a service that has no close substitutes.has a monopoly at midnight but not during the day. BAM 223 Principles of Economics Unit 3 Examination 11. Peet’s Coffee and Teas produces some flavorful varieties of Peet’s brand coffee. Is Peet’s amonopoly?a. :FT1FFUTJTUIFPOMZTVQQMJFSPG1FFUTDPGGFFJOBNBSLFUXIFSFUIFSFBSFIJHICBSSJFSTUPentry.b. No, Peet’s is not a monopoly because there are many branches of Peet’s.c. No, although Peet’s coffee is a unique product, there are many different brands of coffeethat are very close substitutes.d. :FTUIFSFBSFOPTVCTUJUVUFTUP1FFUTDPGGFF 12. What is the difference between a public franchise and a public enterprise?a. A public franchise grants a firm the right to be the sole legal provider of a good or service.A public enterprise refers to a service that is provided directly to consumers through thegovernment.b. A public franchise is a firm owned by the government. A public enterprise is owned by thepublic through its holdings of shares of stock in the enterprise.c. Both refer to a service provided directly to consumers through the government, but “publicfranchise” is a term more commonly used in the United States while “public enterprise” ismore commonly used in European countries.d. A public franchise refers to a service that is provided directly to consumers through thegovernment. A public enterprise grants a firm the right to be the sole legal provider of agood or service. 13. When the government makes a firm the exclusive legal provider of a good or service, it grantsthe firm a:a.b.c.d. network externalitypublic franchisequotacopyright 14. Compared to perfect competition, the consumer surplus in a monopoly is:a.b.c.d. 168 unchanged because price and output are the sameeliminatedhigher because price is higher and output is the samelower because price is higher and output is lower BAM 223 Principles of Economics Unit 3 Examination 15. The Sherman Act prohibited:a.b.c.d. collusive price agreements among rival sellersselling below average total costmarginal cost pricingsetting price above marginal cost 16. If the demand curve for a firm is downward-sloping, its marginal revenue curve:a.b.c.d. is horizontalwill lie below the demand curvewill lie above the demand curveis the same as the demand curve 17. Monopolistic competition is a market structure in which:a.b.c.d. barriers to entry are lowfirms cannot influence the market pricethe demand curve for a typical firm is horizontalfirms produce and sell products for which there are no close substitutes 18. A monopolistically competitive firm maximizes profit in the short run by producing where priceis:a.b.c.d. 169 greater than marginal costless than marginal revenueless than average revenueless than marginal cost BAM 223 Principles of Economics Unit 3 Examination Figure 11-7 Figure 11-7 shows short-run cost and demand curves for a monopolistically competitive firm in thefootwear market.19. Refer to Figure 11-7. Which of the following statements describes the best course of action forthe firm depicted in the diagram?a.b.c.d. TheTheTheThe firmfirmfirmfirm shouldshouldshouldshould minimize its losses by producing Qy units and charging a price of P1.minimize its losses by producing Qy units and charging a price of P2.exit the industry because its price is less than its average total cost.minimize its losses by producing Qy units and charging a price of P0. 20. Which of the following is not a characteristic of a monopolistically competitive firm in long-runequilibrium?a.b.c.d. Price is equal to marginal cost.Marginal revenue is equal to marginal cost.The firm has excess capacity.Price is equal to average revenue. 21. An example of business fixed investment spending is:a.b.c.d. 170 a purchase of a bond by General Electric Corporation$200 million of unsold cars at a car dealershipa purchase of a home by a householda purchase of a computer by an accounting firm BAM 223 Principles of Economics Unit 3 Examination 22. “Household production” refers to:a.b.c.d. goods and services people produce for themselveshome-based craft businessesthe home building sector of the economythe manufacturing of durable household products 23. If the GDP deflator is 142, by how much have prices changed since the base year?a.b.c.d. increased by 142%decreased by 4.2%increased by 42%increased by 58% 24. Under what circumstances would the GDP deflator be less than 100 after the base year?a. The GDP deflator will be less thanb. The GDP deflator will be less thanrelative to the base year.c. There are no circumstances underd. The GDP deflator will be less than 100 if there has been deflation relative to the base year.100 if there has been inflation of less than 2% per yearwhich the GDP deflator could be less than 100?100 if there has been inflation relative to the base year. 25. The value of what a U.S.-owned McDonald’s produces in South Korea is included in the U.S.________ and the South Korean ________.a.b.c.d. 171 GDP; GDPGDP; GNPGNP; GNPGNP; GDP

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