Exam 2 Review Questions

***Study How to find MARGINAL and Average COST’s, Prices and learn how to Maximize Profits and
Minimize Costs that can be a confusing topic in the different industries….Please read the Topics
Questionnaire Professor Welch made for us before you read this. That should help you focus in areas
here that matter. This covers everything and We only need to cover what is mentioned on his review
list. This exam seems it will be based heavily on knowledge of the Different industries that make up
our economy in Lectures. ** On the Exam- when reading questions look for KEY words.

MR = Change in TR/ Change in Q

1) What has resulted from the rise in the participation of women in the labor force?
a. Households produce less for themselves and demand more from the market.
2) Households supply labor, capital, land, and entrepreneurial ability to _____.
a. Resource markets
3) What is the most valuable resource sold by most Households?
a. Labor
4) What is a supplier to the Resource market?
a. Household
5) An increase in farm productivity and the demand for factory labor in the United States led to what?
a. workers becoming more specialized but less self-sufficient.
6) A key difference between households today and those in the 19th century is that households today have:
a. increased their reliance on markets for goods and services.
7) A higher opportunity cost of working in the household has led to an increase in female labor force
participation.
8) On which of the following factors does the utility maximization of households depend?
a. Subjective goals that are different for each household.
9) In 2014, almost two-thirds of the personal income received by U.S. households came from:
a. wages and salaries
10) In 2014, U.S. households spent the majority of their personal income on:
a. services.
11) Which of the following is an example of a cash transfer?
a. Disability benefits.
12) Firms:
a. are economic units formed by profit-seeking entrepreneurs who combine labor, capital, and
natural resources to produce goods and services.
13) Sole Proprietorship: (71% of all firms, 4% of all Bus. Sales)
a. the most common type of business.
14) A Partnership: (10% of all US firms/business and 15% of all Bus. Sales)
a. is the least common form of U.S. business.
15) Corporation: (19% of all US businesses, 81% of all business sales)
a. Most influential, legal entity established through articles of incorporation, advantage of limited
liability. Has a life apart from its owners meaning it can be taxed, sued, and even charged with
a crime as if it were a person.
b. Drawbacks:
i. Reduced power/influence of any one person to a vote per share.
ii. Double tax, corporate profits and stockholder income tax.
16) Realized Capital Gain:
a. any increase in the market price of a share that occurs between the time the share is
purchased and the time it is sold.
17) S Corporation:
a. Hybrid corporation, benefits of LLC but profits only taxed once on shareholders income tax
return.
b. 100 shareholders max, and no foreign shareholders.

18) Cooperative or “Co-op”:

a. An organization or group consisting of people who pool their resources to buy and sell more
efficiently than they could individually.
b. The government grants most cooperatives tax-exempt status.
19) Consumer Co-op:
a. is a retail business owned and operated by some or all of its customers in order to reduce
costs.
b. operate college book stores, credit unions, electric power facilities, health plans, apartment
buildings, and grocery stores.
20) Producer Co-op:
a. producers join forces to buy supplies and equipment and to market their output. Each
producer’s objective is to reduce costs and increase profits.
21) Households try to maximize utility and firms try to:
a. maximize profits.
22) An entrepreneur's reward (profit) is calculated as:
a. the difference between the sales revenue and the cost of production, which includes the
opportunity cost of the entrepreneur's time.
23) Which is the most important form of business organization in terms of total sales?
a. Corporation (produces the highest percentage of business sales revenue which means more
taxes)
24) A _____ is a retail business owned and operated by some or all of its customers in order to
reduce costs.
a. consumer cooperative
25) Which of the following exemplifies a producer cooperative?
a. A group of pomegranate producers pooling resources to advertise their products.
26) Which of the following is true of the Industrial Revolution?
a. led to the development of large-scale factory production.
27) Which of the following is a disadvantage of a sole proprietorship?
a. Unlimited liability
28) What is an advantage of corporations?
a. Corporations can survive even if ownership changes hands.
b. LLC
c. Easy to raise funds
29) An S Corp. advantage over Corp.:
a. reduces the impact of double taxation for its shareholders to a single tax on shareholders tax
returns
30) Which of the following is true of cooperatives?
a. Usually granted tax exemption by Gov’t.
31) Which of the following is an example of a consumer cooperative?
 a. Students operating college bookstores where members receive discounts on their purchases.

32) Which of the following is true of household production?

a. It helps avoid high taxes unlike most market transactions.

33) Households with a _____ are more likely to perform household chores such as sweeping and
cooking.
a. lower opportunity cost of time
34) Antitrust laws:
a. Prohibitions against price fixing and other anticompetitive practices
35) Natural monopoly:
a. One firm that can supply the entire market at a lower per-unit cost than could two or more
firms
36) Private goods:
a. A good, such as pizza, that is both rival in consumption and exclusive
37) Fiscal policy
a. The use of government purchases, transfer payments, taxes, and borrowing to influence
economy-wide variables such as inflation, employment, and economic growth
38) Monetary policy
a. Regulation of the money supply to influence economy-wide variables such as inflation,
employment, and economic growth
39) Why does the government regulate natural monopolies because?
a. Because the tend to charge higher prices than would be optimal for the economy.
40) An externality is:
a. a cost or a benefit that falls on a Third Party and is ignored by buyers and sellers involved in the
market transaction.
41) What is one example of market failure that provides an economic rationale for government
intervention in markets?
a. Natural Monopoly
42) Which of the following is true of governments?
a. Governments safeguard private property through police protection and enforce contracts
through a judicial system.
43) The price of public output is determined _____.
a. according to the ability to pay of the consumers
44) Public goods are _____.
a. nonexclusive and nonrival in consumption
45) Private goods are _____.
a. Exclusive and rival in consumption
46) Which of the following is a step that the government takes to control negative externalities?
a. Setting emission norms for all motor vehicles.
47) Which of the following goals does the government achieve by using taxation?
a. The redistribution of wealth.
48) What are deducted from paychecks to support Social Security and Medicare?
a. Payroll taxes
49) What does The structure of a tax depend on?
a. the ability-to-pay tax principle and the benefits-received tax principle.
50) Proportional Taxation:
a. When taxpayers at all income levels pay the same percentage of their income in taxes.
Therefore, it is also called a flat tax.
51) Merchandise Trade Balance:
a. The value during a given period of a country’s exported goods minus the value of its
imported goods
52) Balance of payments:
a. A record of all economic transactions during a given period between residents of one country
and residents of the rest of the world
53) Foreign exchange:
a. Foreign money needed to carry out international transactions
b. Used to determine foreign currency exchange rates in Foreign Exchange Markets.
c. Foreign Exchange Rates are determined by Supply and Demand of the currencies.
54) Quotas:
a. A legal limit on the quantity of a particular product that can be imported or exported
55) Why does International trade occur?
a. because the opportunity cost of producing specific goods varies across countries.
56) What is A nation's balance of payments?
a. the record of all economic transactions between its residents and residents of the rest of the
world.
57) Explicit costs:
i. Opportunity cost of resources employed by a firm that takes the form of cash payments.
ii. Actual Cash payments for resources
58) Explicit Cost Examples:
a. Wage payments
b. Monthly Payments/Bills
c. Funds used to purchase a new machine.
59) Implicit costs:
a. A firm’s opportunity cost of using its own resources or those provided by its owners without a
corresponding cash payment
b. implicit costs require no cash payment and no entry in the firm’s accounting statement, which
records its revenues, explicit costs, and accounting profit.
60) What is Economic Profit?
a. The difference between Total Revenue and Total Cost including both explicit and implicit
costs.
61) Accounting profit:
a. A firm’s total revenue minus its explicit costs.
b. Any accounting profit in excess (>) of a normal profit IS an Economic profit.

62) Economic profit:

a. A firm’s total revenue minus its explicit and implicit costs
63) Normal profit:
a. A firm’s accounting profit when all resources earn their opportunity cost.
b. Normal Profit is equal to implicit cost.
64) The table below gives information on the total revenue earned and the various costs incurred by Jupiter
Apparel Inc. What is the firm's taxable income based on?

a. an accounting profit of $200,000.

65) Variable resources:
a. Any resource that can be varied in the short run to increase or decrease production
66) Fixed resources:
a. Any resource that cannot be varied in the short run
67) Short run:
a. A period during which at least one of a firm’s resources is fixed
b. Output can be changed in the short run only by adjusting variable resources.
68) Long run:
a. A period during which all resources under the firm’s control are variable
69) Production function:
a. The relationship between resources employed and a firm’s total product
70) Marginal product:
a. The change in total product when a particular resource increases by one unit, all other
resources constant
71) Law of diminishing marginal returns
a. As more of a variable resource is added to a given amount of other resources, marginal
product eventually declines and could become negative.
b. When more and more of a variable resource is added to a given amount of a fixed resource,
the resulting change in output will eventually diminish and could become negative.
c. When there are negative marginal returns, the total product falls but is not necessarily
negative.
72) The change in output due to a one-unit change in labor usage, the level of usage of other inputs
remaining unchanged, is called:
a. the marginal product of labor.
73) According to the law of diminishing marginal returns, as more of a variable input is combined with
fixed amounts of other resources, _____.
a. the additions to output will eventually decrease.
74) Once decreasing marginal returns set in a production process, _____ declines.
a. marginal product

75) fixed cost:

a. Any production cost that is independent of the firm’s rate of output
76) Marginal Cost:
a. Change in total cost resulting from a one-unit change in output.
77) When a firm experiences decreasing marginal returns, _____.
a. the marginal cost of output increases
78) Variable cost:
 a. Any production cost that changes as the rate of output changes
b. When no labor is employed, output is zero, as is variable cost
79) Total cost: TC = VC+FC
a. The sum of fixed cost and variable cost.
80) Average Fixed Cost (AFC) = FC / output
81) Fixed Cost:
a. positive in the short run even if no output is produced.
82) The total cost is:
a. the sum of fixed cost and variable cost.
83) Increasing marginal cost is associated with:
a. decreasing marginal product.
84) The rising marginal cost curve intersects:
a. the minimum points of both the average variable cost and average total cost curves.

85)
86) If average variable cost is falling, we know that:
a. marginal cost is definitely less than average variable cost.
87) Economies of scale:
a. Forces that reduce a firm’s average cost as the scale of operation expands in the long run
88) Economists assume that the goal of a firm is to:
a. Maximize Profits
89) Firms that strive and thrive in an industry are those that are more profitable than other firms.
90) What are explicit costs:
a. Actual Cash payments such as rent, monthly bill payments.
b. Wages paid to employees
91) The general health insurance policy bought by a firm for its employees is an example of the firm's:
a. Explicit costs
92) Implicit Costs:
a. represent a firm's opportunity costs of using its own resources or those provided by its owners
without a corresponding cash payment.
93) Economies of Scale:
a. Forces that reduce a firm’s average cost as the scale of operation expands in the long run
94) Diseconomies of Scale:
95) Forces that may eventually increase a firm’s average cost as the scale of operation expands in the long
run.

96) Long-run Average Cost Curve:

 a. connects portions of the three short-run average cost curves that are lowest for each output
rate.
b. A curve that indicates the lowest average cost of production at each rate of output when the
size, or scale, of the firm varies.
c. The cost curve that shows the lowest per-unit cost of producing any given level of output.
d. Aka the Planning Curve
97) Economies of Scale are forces that cause a reduction in a firm's average cost as the scale of operation
increases in the long run.
98) Diseconomies of Scale are forces that cause a firm's average cost to increase as the scale of operation
increases in the long run.
a. The long-run average cost of a firm increases as the size of the firm increases, then the firm is
experiencing.
99) What is one way in which firms can achieve economies of scale?
a. Increasing the scale of operation.
100) How can a firm experience diseconomies of scale?
a. a lack of coordination between different divisions of the firm.
101) Diseconomies of scale result from a larger firm size, whereas diminishing marginal returns result from
using more variable resources in a firm of a given size.
102) In the long run, for any output level, a firm can select a plant size that will allow it to minimize
average total cost.

103)
a. Represents economies of scale from output of Zero - A
b. Represents Constant Average Cost from output A-B
c. Diseconomies of Scale from output B and on
d. Output A represents the Firms point of Minimum Efficiency.

Chapter 8
104) What is a Perfectly Competitive Market characterized by?
a. many buyers and sellers, a standardized product, and free entry and exit.
b. buyers and sellers are fully informed about the price and availability of all resources and
products.
c. No individual has control of the market price.
d. Buyers and Sellars have NO Barriers to enter or leave the market
e. Buyers and Sellers want to Maximize profit
f. There are to many buyers and sellers to take control of the market.
105) Examples of Perfectly Competitive Markets:
a. Markets for basic commodities such as wheat, corn, and livestock.
b.
106) In a Perfect Competition Market:
a. a firm is so small relative to the size of the market that the firm's decision about how much to
produce has no effect on the market price.
107) Price Taker:
a. a firm that faces a given market price and whose actions have no effect on the market price.
108) What is an Explanation for WHY Sellers are Price Takers in a Perfectly Competitive market?
a. There are many small sellers, and so the market process generates an equilibrium price that
cannot be influenced by any one seller.
109) In a Perfectly Competitive market, the Market Demand curve is:
a. downward sloping
110) In a Perfectly Competitive market an Individual firm's Demand curve is:
a. horizontal
111) Characteristic of the demand curve facing/for a Perfectly Competitive firm is:
a. perfectly elastic.

112)

a. The market equilibrium price and quantity for eggs is:

i. $3.5 and 25 dozen
b. The Individual firm's Demand Curve is:
i. D-2 (graph 2, Horizontal line at $3.5)
c. The individual firm:
i. can sell whatever quantity of eggs it wants to at the market price.
113) A firm Maximizes Economic Profit by finding the quantity at which total revenue exceeds total cost by
the greatest amount.
114) Each firm tries to maximize economic profit. Economic Profit =:
a. the difference between Total Revenue - Total Cost.
115) To Maximize total profit in the short run, a Perfectly Competitive Firm must find:
a. the Quantity produced at which Total Revenue > Total Cost by the greatest amount.
116) In a Perfectly Competitive Market, each firm tries to Maximize Profit by:
a. controlling its quantity supplied.
117) The Total Revenue earned by a firm can be calculated by:
a. Total Output Produced by firm - MULTIPLIED - Market Price of a product.
118) Suppose the total revenue earned by a producer of corn always increases by $8 when output
increases by 1 bushel.
Describe the revenue Curve:
a. straight line through the origin.
119) The table shows the Short-run Revenue and Costs for a perfectly competitive firm that produces
wheat. What is the Total Revenue when the firm sales 4 bushels of wheat per day? 4/day x $4 = $16

120) What is true of a perfectly competitive market?

a. Marginal Revenue = Market price.
b. It guarantees both Allocative Efficiency and Productive Efficiency in the long run.
121) The Profit-Maximizing rate of output for a firm in a Perfectly Competitive market is found where:
a. Price = Marginal Cost.
122) The table shows the Short-Run Revenue and Costs for a Perfectly Competitive firm that produces
wheat.
a. What is the Marginal Cost at 2 bushels of wheat per day? MC = $4

b.
123) If Marginal Revenue > Marginal Cost, then a Profit-Maximizing Perfectly Competitive firm should:
a. Increase the Output.
124) When is Profit maximized at the rate of output?
a. Marginal Revenue = Marginal Cost - MR can be > MC
125) If Price is < Marginal Cost, what should Perfectly Competitive firm do in order to Maximize Profit?
a. Decrease Output.
126) In the short run, When will a perfectly competitive firm will shut down?
a. When Total Revenue (TR) is < Total Variable Cost.
127) The table shows the short-run revenue and costs for a perfectly competitive firm that produces wheat.
a. What is The Average Total Cost (ATC) corresponding to 3 bushels of wheat per day?
TC / X # of Units -- $13 / 3 = 4.33
 b.
128) Which of the following is true of the firm?

a.
b. Marginal Revenue (MR) and Average Revenue = $4 at all levels of output produced
c. The firm faces an Economic loss at 3 bushels of wheat produced.
d. firm maximizes profit when it produces 5 Bushels of wheat.

129) A perfectly competitive firm should continue to produce in the short run:
a. as long as Price is > Average Variable Cost.
130) When should A perfectly competitive firm shut down?
a. When its Average Variable Cost is greater than the market price
131) Competitive Firms have NO control over Price
132) What is true of the chart?

a.
b. The shut-down point is at B, when the price (p2) is less than the AVC.
c. The firm's Break-Even point is at point D; when price (p4) is = ATC.
d. The Firm can Earn an economic profit at point E; where Price is greater than ATC.
133) According to the chart above what would a Profit-Maximizing firm produce in short-run equilibrium?
a. Q-5 units of output per period of time at a price of P-5 per unit
134) Describe A perfectly competitive firm's supply curve:
a. that portion of the MC Curve that intersects and rises above the AVC curve.
135) Describe a firms short-run supply curve:
a. Upward sloping curve
136) If there are 100 identical firms in a market, and each firm maximizes profits by producing 50 units of
output, _____ units of output will be produced in the market.
a. 5,000 units
137) The short-run industry supply curve is the:
a. horizontal sum of all the firms' short-run supply curves.
138) Suppose there are 100 firms in a perfectly competitive market. Each firm supplies 100 units of output
when the price is $5 per unit. So, the market supply is _____ units at a price of $5. If each firm supplies
150 units of output when the price is $7 per unit, the market supply is _____ units at a price of $7.
a. 10,000; 15,000
139) In Short-run Equilibrium, under Perfect Competition, _____.
a. economic profit earned by firms can be negative, zero, or positive
140) What is the point of Equilibrium in a perfectly competitive market?
a. at the intersection of the Market Demand and the Market Supply curves.
141) What happens when a typical Perfectly Competitive firm earns an economic profit in the short run?
a. new firms enter the market in the long run

142) If firms under perfect competition earn positive economic profits in the short run, which of the
following will occur in the long run?
a. Some firms will enter the industry, increasing the market supply and driving down market price
until economic profits are eliminated, and there is no additional motive for entry.
143) What is a likely result of a Short – Run Loss?
a. some sellers will be forced to leave the industry and shift the market supply curve leftward.
144) What kind of profits will a Perfectly Competitive Firm earn in the Long Run?
a. Zero – Economic Profits
145) In a perfectly competitive market, a firm operating in the long run is forced by competition to adjust its
scale of operation until average cost is minimized.
146) What is true of the long-run equilibrium for firms and an industry in perfect competition?
a. Firms produce output where Price equals Marginal Cost.
b. This corresponds to the point where the Marginal Cost curve intersects the Long-run Average
Cost curve.
147) If a perfectly competitive firm experiences a permanent increase in demand, ____.
a. market supply increases but the equilibrium price remains the same in the long run
148) In a perfectly competitive market, what is a result in a decrease in demand?
a. Some firms are forced out of business.
149) What curve shows the relationship between price and quantity supplied once/after firms fully adjust
to any short-term economic profit or loss resulting from a change in demand?
a. Long-run Industry supply curve
150) What kind of industry features a Horizontal Long-run supply curve?
a. A Constant-cost industry.
151) What is true of a Constant Cost industry?
a. Each firm's long-run average cost curve does not shift as industry output changes.
b. Each firm's per-unit costs are independent of the number of firms in an industry
152) Constant-Cost Industry:
a. An industry that can expand or contract without affecting the long-run per-unit cost of
production;
153) Example of Constant Cost industry:
a. output in the pencil industry can expand without bidding up the prices of wood, rubber,
graphite, and metal, because the pencil industry uses such a tiny share of the market supply of
these resources.
154) The long-run supply curve of firms in an increasing cost industry is:
a. upward sloping.
155) Increasing-cost industries:
a. An industry that faces higher per-unit production costs as industry output expands in the long
run; --- the long-run industry supply curve slopes upward
156) Allocative Efficiency:
a. Each firm produces the output most preferred by consumers; marginal benefit equals marginal
cost.
157) Productive Efficiency:
a. Each firm employs the least-cost combination of inputs; minimum average cost in the long run.

158) Producer Surplus: (Benefit)

a. A bonus for producers in the short run; the amount by which total revenue from production
exceeds variable cost.
159) Social welfare:
a. The overall well-being of people in the economy; maximized when the marginal cost of
production equals the marginal benefit to consumers.
160) What will ensure that each firm produces at the minimum point of its long-run average cost curve in a
perfectly competitive market?
a. The Entry and Exit of Firms in the Market
161) Where does Allocative efficiency occur?
a. when firms produce an output where Marginal Benefit equals Marginal Cost.
162) What is The difference between the maximum amount buyers are Willing and Able to pay for each unit
of a good and / VS the amount buyers actually pay called?
a. Consumer Surplus.

163)
 a. List the Points that represent the Consumer Surplus:
i. P2, P3, E
b. List the Points that represent Producer Surplus:
i. P1, P2, E, F
164) What is maximized when the marginal cost of production equals the marginal benefit to consumers?
a. Social Welfare.

Chapter 9
165) What are Characteristics of a Monopolized market?
a. A Sole supplier, No close substitutes.
b. Barriers to enter market
c. A monopolist has the exclusive right to supply a good or service if it has a patent on the good
or service.
166) Patent:
a. A legal barrier to market entry that grants the patent holder the exclusive right to sell a product
for 20 years from the date the patent application is filed.

167) Innovation:
a. The process of turning an invention into a marketable product as soon as the patent
application is filed.

168) What is true of a license?

a. It can be a source of market power for a firm.
169) What is the source of Monopoly Power for a Firm with economies of scale?
a. the ability to supply a product at a lower average cost per unit than two or more firms, each
producing less.
170) What is a barrier to entry in a market?
a. Economies of scale.
171) A Natural Monopoly
a. Occurs when a single firm has a cost advantage over smaller potential entrants (small corps.
businesses).
172) How did De Beers maintain a near monopoly by creating a barrier to entry in the market for diamonds?
a. De Beers bought most of the world's supply of rough diamonds.
173) Professional sports leagues often try to block the formation of competing leagues by making players
sign long-term contracts and seeking the exclusive use of sports stadiums and arenas. In this case, the
source of monopoly power arises from what?
a. control over essential resources.
174) What is the shape of the demand curve facing a monopolist?
a. It is downward sloping.
175) The demand curve faced by a monopolist is the same as the:
a. Market Demand Curve
176) For a Monopolist Marginal Revenue is LESS than Average Revenue.
177) A Similarity between a Monopoly firm and a Perfectly Competitive firm?
a. The Demand curve for each = Average Revenue Curve (ARC) for both firms.
178) For a monopolist, Marginal Revenue is:
a. less than price.
179) A difference between monopoly and perfect competition?
a. A perfectly competitive firm's marginal revenue equals price, while a monopolist's marginal
revenue is less than price.
180) Monopoly:
a. MR < Price
b. Has NO Supply Curve
181) The supply curve for a monopolist:
a. cannot be constructed.
182) Perfect Competition:
a. MR = Price
183) When the price of a good is $100, a monopolist can sell 5 units. To sell a 6th unit, price must fall to $95.
The monopolist's marginal revenue from selling the 6th unit is _____.
a. $70
b. because (6 x 95)-(100 x 5) = 70
184) When the price is $10, a monopolist can sell 100 units of a good. In order to sell 101 units, the price
must _____, given the marginal revenue from selling the 101st unit is −$91.
a. fall to $9
185) When is a Monopolist's Marginal Revenue is ZERO?
a. total revenue is at a maximum
186) When is a Monopolist's Total Revenue at a maximum?
a. When its Marginal Revenue is ZERO
187) At the rate of output where a Monopolist's Marginal Revenue equals ZERO, the Price Elasticity of
Demand for the monopolist's product is EQUAL to what?
a. ONE
188) In order to increase total revenue, a profit-maximizing monopolist should never expand output to the:
a. Inelastic portion of the demand curve for a good.
189) Suppose a monopolist's MR equals MC at an output of 100. If price is $250 and the average cost of
producing this level of output is $50, Then what is the monopolist's profit?
a. $20,000
190) Where is the point a Monopolist's Profit-Maximizing level of output occurs?
a. MR = MC
191) What is Likely result of A firm that is the ONLY seller in a market?
a. It is likely to charge a price that is Limited by Consumer Demand
192) For a monopolist producing output at a level where profit is maximized, _____.
a. price exceeds marginal cost
193) When would a Monopoly Firm shut down in the short run?
a. price falls below the average variable cost.
194) A Monopolist is likely to shut down in the short run if:
a. the average variable cost curve is above the average revenue curve at all output rates.
195) What is likely to Ensure that a Monopolist earns positive economic profits in the long run?
a. High barriers that block new entry.
196) The following image shows the average revenue, the marginal revenue, and marginal cost curves in a
constant-cost industry.
 a.

b. In a Perfectly Competitive industry, what area represents the Consumer Surplus?

i. A-D-P2
c. In a Monopoly, what area represents the Consumer Surplus.
i. A-B-P1
d. For a Monopoly Where does Profit Maximization occur?
i. Point C
e. If the chart represented a Monopoly what could be said about the market?
i. Society will be better off if output is expanded beyond Q1.
f. What area would represent a monopolist's economic profit?
i. P1-B-C-P2
197) Output level produced by a Profit-maximizing monopolist:
a. is less than the level that would maximize social welfare.
198) When the marginal benefit that consumers derive from a good equals the marginal cost of producing
that good, that market is said to be efficient and to maximize social welfare.

199) The “mcb” Triangle in the graph is called the Deadweight Loss of Monopoly because it is a loss to
consumers but a gain to nobody.
 a.
b. Deadweight Loss of Monopoly:
i. Net loss to society when a firm with market power restricts output and increases the
price.
ii. In the chart Dead weight loss is Shown in the Area “M-B-C”
iii. results from the allocative inefficiency arising from the higher price and reduced output
of a monopoly.
200) Society would be better off if Output exceeded the Monopolist’s Profit-Maximizing Quantity (PMQ),
because the Marginal Benefit of more output is greater than its Marginal Cost.

201) A monopolist produces:

a. less output than a perfectly competitive firm and charges a higher price.
202) When does Allocative inefficiency arise in a Monopoly?
a. When it produces less output than a Perfectly Competitive firm and charges a Higher price.
203) The deadweight or social loss of a monopoly:
a. arises as monopolists restrict output and increase prices.
204) Why might A monopolist keep prices below the profit-maximizing level?
a. because of government intervention and scrutiny.
205) Rent seeking can be described as:
a. any activity undertaken by firms to influence public policy in a way that increases their income.
206) An example of rent-seeking behavior would be:
a. lobbying legislators for drafting favorable business legislation.
207) Firms with monopoly power in the product market are likely to leverage their power in the resource
market, reduce the earnings of specialized resources, and charge higher prices.
208) To practice price discrimination, a firm must:
a. have different groups of customers with different price elasticities of demand.
209) Describe price discrimination:
 a. Selling the same good or service for different prices to different consumers for reasons
unrelated to cost.
210) Example of price discrimination:
a. Charging lower admission prices to movies from senior citizens.
211) A firm is be able to increase its profits by charging different prices for the same product to different
groups of consumers if:
a. consumers who pay a lower price are not able to resell the product to those who are willing to
pay a higher price.
212) Suppose there are two groups of consumers that a monopolist can identify. Which of the following
forms of price discrimination would increase profit relative to charging each group the same price?
a. Charging the group with the Higher Price Elasticity a LOWER price and charging the group with
the Lower Price Elasticity a HIGHER price.
213) Profit Earned by a price-discriminating monopolist rises when what happens?
a. A Monopolist charges a lower price to consumers with Inelastic Demand than to consumers
with Elastic demand.
214) More Examples of Price Discrimination:
a. Airlines charge business-class passengers much more than they charge coach-class passengers.
b. The Las Vegas monorail charges $1 to locals who have a Nevada driver's license and $5 to those
who do not have a local driver's license.
215) A perfectly discriminating monopolist charges:
a. the same price for each unit of output sold.

216) The following image shows a perfectly discriminating monopolist who is able to produce at constant
average and marginal costs of production and faces the demand curve D1. The demand curve D2
intersects the MC curve at point B. What area shows the monopolist's economic profit? R-P-A

a.
b. For the perfectly discriminating monopolist, _____.
i. D1 is also the Marginal Revenue Curve and A is the point of equilibrium
 Chapter 10
217) A Monopolistically Competitive Firm does NOT Benefit from barriers to entry.
a. Because it is earning a profit it can expect strong competition.
218) In Monopolistic Competition:
a. there are many close substitutes for the products offered by each firm.
219) In Perfect competition:
a. the product is a commodity, meaning it’s identical across producers, such as a bushel of wheat
or an ounce of gold.
220) In Monopolistic competition:
a. the product differs somewhat among sellers, as with the difference between one rock radio
station and another, or one convenience store and another.
b. Sellers can differentiate their products in four basic ways
i. Physical Differences:
1. The most obvious way products differ is in their physical appearance and their
qualities.
ii. Locations: Spatial differentiation
1. The number and variety of locations where a product is available is another type
of differentiation. Some products seem to be available everywhere, including
online; finding other products requires some search and travel.
iii. Services:
1. Products also differ in terms of their accompanying services. For example, some
products are delivered to your door, Others to your phone, tv or computer. Then
Some provide guidance or assistance of all forms. Some Provide Money Back
other have NO refunds.
iv. Product Image:
1. The image the producer tries to foster in the customer’s mind. Producers try to
create and maintain brand loyalty through product promotion and advertising.
221) What is true of Monopolistic competition?
a. Firms under monopolistic competition can enter or leave the market with ease in the long run.
b. Firms that operate in a Mono- Competitive markets are Price Makers.
222) What can serve as a product differentiation tool in the hands of sellers in a monopolistically
competitive market?
a. The package design By Physical Differentiation
223) What is an example that exemplifies the Spatial Differentiation used by firms under monopolistic
competition to differentiate their product in the market? Look for signs of Availability
a. A diamond jeweler offering products online and at retail stores situated at convenient
locations.
224) An example of product differentiation based on Services offered by firms in a monopolistically
competitive market?
a. A cash back guarantee offered by a watch manufacturer in case of manufacturing defects.
225) What is true of the Profit-Maximizing level of output selected by a Monopolistically Competitive firm in
the short run?
a. Output is set in the short run where marginal cost equals marginal revenue.
226) What is true of a monopolistically competitive firm in the short run?
a. As long as price exceeds average variable cost, the firm loses less in the short run by producing
than by shutting down.
227) Similarity: Like a Perfect Competitor, a Monopolistic Competitor:
 a. earns ZERO economic profit in the long run.
228) What is true about Long-run profits for monopolistically competitive firms?
a. Monopolistically competitive firms always experience zero economic profit in the long run.

229) What is a possible reason for zero economic profit earned by a monopolistically competitive firm in the
long run?
a. Low barriers to entry.
230) A firm in a Monopolistically Competitive industry is likely to earn ZERO economic profit in the long run
if:
a. enough firms enter the industry.
231) In the long run, a monopolistically competitive firm will:
a. produce less than a perfectly competitive firm.
232) The difference between a firm's Profit-Maximizing Quantity and the Quanity that Minimizes Average
Cost is called:
a. excess capacity.
233) Excess Capacity:
a. Results from Productive Inefficiency
b. The difference between a firm’s profit-maximizing quantity and the quantity that minimizes
average cost; firms with excess capacity could reduce average cost by increasing quantity
234) Difference:
a. Unlike Perfectly Competitive firms, firms in a Monopolistically competitive industry are Neither
allocatively nor productively efficient. WHY?
i. Since monopolistically competitive firms do not produce the quantity where , they are,
by definition, not allocatively efficient and therefore create deadweight loss.
ii. The marginal social value of increased output would exceed its marginal cost, so greater
output would increase social welfare.
iii. Since monopolistically competitive firms are not producing at Minimum Average Cost,
they are also not productively efficient.
235) A Monopolistically Competitive firm with Excess Capacity can reduce its Average Cost of Production by:
a. increasing the quantity of output produced.
236) The figure below shows the marginal cost, average total cost, demand, marginal revenue curves for a
firm in monopolistic competition. Assume that the cost curves of a perfectly competitive firm are
identical to the cost curves of a monopolistically competitive firm shown here. The average revenue for
the perfectly competitive firm is $6.

a.
b. What is the The Profit-Maximizing Output for the monopolistically competitive firm?
i. 30,000
c. What is The Profit-Maximizing Price for the monopolistically competitive firm?
 i. $8
d. What can be said of the monopolistically competitive firm in the short run?
i. The firm earns a profit of $45,000. (Learn How to calculate this from the graph) I’m not
sure how yet.
e. The perfectly competitive firm sells its product at a price of _____ per unit.
i. $6
f. The Profit-Maximizing output of the perfectly competitive firm is _____.
i. 40,000
g. What is true of the Monopolistically & Perfectly competitive firms, depicted in the figure, in the
long run?
i. Neither the perfectly competitive firm nor the monopolistically competitive firm earns
economic profits.
237) In Some Oligopolies, such as steel or oil, the product is identical, or undifferentiated, across producers.

238) Undifferentiated Oligopoly:

a. An oligopoly that sells a commodity, or a product that does not differ across suppliers, such as
an ingot of steel or a barrel of oil.
b. The more similar the products, the greater the interdependence among firms in the industry.
c. because steel ingots are essentially identical, steel producers are VERY sensitive to each other’s
pricing. Even a small rise in one producer’s price sends customers to rivals.
239) In other oligopolies, such as automobiles or breakfast cereals, the product is differentiated across
producers such as Toyota Camry VS Honda Accord
240) Differentiated Oligopoly:
a. An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast
cereal.
b. with differentiated oligopoly, such as the auto industry, producers are NOT quite as sensitive
about each other’s prices.
241) Similarity:
As with Monopolistic competitors, oligopolists differentiate their products through….
a. 1) physical qualities
b. 2) sales locations
c. 3) services offered with the product
d. 4) the image of the product established in the consumer’s mind.
242) Oligopoly is a market structure characterized by a _____ number of firms that behave _____.
a. small; interdependently
b. The lower the barriers to entry into an oligopoly, the more the oligopolists behave like perfect
competitors.
243) Identify a statement that is true of an oligopoly.
a. Any change in the price of a product by an oligopoly firm may prompt a reaction from its rivals.
244) A Market Structure characterized by a very few firms who behave interdependently is known as:
a. An oligopoly. (particularly Undifferentiated Olig..)
245) Products sold by a Differentiated oligopoly:
a. Automobiles.
b. Cigarettes.
 c. Breakfast cereal.
246) Products sold by an Undifferentiated oligopoly:
a. A barrel of oil.
b. ingot of steel.
247) What could lead to an Oligopoly?
a. Some form of barrier to entry.
248) Example of barrier to entry for new firms in an oligopoly market?
a. Control over an essential resource.
249) If a firm's minimum efficient scale is relatively large compared to industry output, then:
a. only a few firms are needed to satisfy industry demand.
250) What is a possible effect of costly advertisement campaigns by a new firm to promote a new product in
a market dominated by well established brands?
a. Costly advertising campaigns may cripple a new firm if the product fails.
251) New firms may find it difficult to enter an oligopoly industry if:
a. the total investment required to reach the minimum efficient scale is high.
252) If firms in an oligopolistic industry face high fixed costs, then:
a. competition is likely to be low.
253) Oligopolies compete with existing rivals and try to block new entry by:
a. offering a variety of products.
254) Oligopoly:
a. a state of limited competition, in which a market is shared by a small number of producers or
sellers.
b. The lower the barriers to entry into an oligopoly, the more the oligopolists behave like perfect
competitors.
255) Monopoly:
a. the exclusive possession or control of the supply of or trade in a commodity or service.
256) Suppose Nelson & Robinson, a renowned manufacturer of herbal products, introduces 16 new varieties
of facial cleansers and shower gels within the same year. What is a possible result of this action?
a. allow the company to crowd out new entrants in the market.
257) Competition in an oligopolistic industry is likely to be high if:
a. the cost incurred to get to the minimum efficient scale is low.
258) Price leader:
a. A firm whose price is matched by other firms in the market as a form of tacit collusion.
259) Collusion:
a. An agreement among firms to increase economic profit by dividing the market and fixing the
price
260) Cartel:
a. A group of firms that agree to coordinate their production and pricing decisions to reap
monopoly profit.
b. A cartel acts like a monopolist
c. success depends on barriers that block the entry of new firms or at least require new entrants
to join the cartel.
d. biggest problem in keeping a cartel together is the powerful temptation to cheat on the
agreement.
e. Cartel firms can increase profits by Cheating and offering extra services to charge higher prices.
f. Maximizes Profit when MR = MC
261) Game theory:
 a. An approach that analyzes oligopolistic behavior as a series of strategic moves and
countermoves by rival firms
262) Prisoner’s dilemma:
a. A game that shows why players have difficulty cooperating even though they would benefit
from cooperation
263) Payoff matrix:
a. In game theory, a table listing the payoffs that each player can expect from each move based
on the actions of the other player
264) Dominant-strategy equilibrium:
a. In game theory, the outcome achieved when each player’s choice does not depend on what
the other player does
265) Duopoly:
a. A market with only two suppliers; a special type of Oligopoly market structure
266) Nash equilibrium
a. A situation in which a firm, or a player in game theory, chooses the best strategy given the
strategies chosen by others; no participant can improve his or her outcome by changing
strategies even after learning of the strategies selected by other participants
267) What correctly defines a cartel?
a. A group of firms that agree to coordinate their production and pricing decisions to reap
monopoly profits.
268) In comparison to a competing firm, a colluding firm:
a. charges a higher price.
269) Which of the following is one of the problems encountered by the Organization for Petroleum
Exporting Countries (OPEC) oil cartel?
a. There has been considerable CHEATING by OPEC members on their quantity allocations.
270) It is easier for firms to form and maintain a cartel when:
a. there are greater barriers to entry.
271) Which of the following can allow oligopoly firms to reap monopoly profit?
a. Formation of cartels.
272) The figure below shows the demand, marginal revenue, and marginal cost curves for a cartel.

a.
b. The cartel sets the price at _____ per unit.
i. $9
c. The cartel maximizes profits by allocating _____ units of output among its members.
i. 40,000
 d. The marginal cost for each cartel member at the profit maximizing level of output equals
_____.
i. $5
e.
f.
273) Which of the following makes it difficult to form a cartel?
a. A large number of firms in an industry.
274) A firm whose price is matched by other firms in the market as a form of Tacit collusion is called:
a. a price leader.
275) Which of the following is a possible reason for price leadership, as a means of collusion, to be less
effective?
a. High level of product differentiation among sellers.

276) Identify a statement that is true of price leadership.

a. A price leader may lose business if other firms do not follow its pricing decisions.
277) Compared to Perfect competition, in an Oligopolistic market _____.
a. both price and profits are normally higher
278) What do Oligopolies enjoy that Perfect competition doesn’t due to the efficiency arising from the
economies of scale of its large firms.
a. Oligopolies enjoy higher profits
279) An oligopoly firm that enjoys huge brand loyalty will:
a. Earn long-run economic profit.
280) Antitrust policy:
a. Government regulation aimed at preventing monopoly and fostering competition in markets
where competition is desirable
281) Social regulation:
a. Government regulation aimed at improving health and safety
b. Example:
i. Health Care Reform
ii. Medicaid, Medicare
282) What is true of an unregulated natural monopoly?
a. A natural monopoly can serve the entire market at a lower average cost than two or more
smaller firms that split the market and compete against each other.
283) An unregulated natural monopoly will set output at the point where:
a. the marginal revenue curve intersects the marginal cost curve and will set price at the demand
curve.
284) What is the problem with allowing a natural monopolist to maximize profits?
a. the resulting price-output combination will be inefficient in terms of social welfare.
285) What refers to the dominant firm's attempt to drive rivals out of business by temporarily setting price
below cost or reducing price only in certain markets?
a. Predatory pricing
286) The ability of a firm to maintain its price above the competitive level without losing all its customers to
rival firms is termed _____.
a. market power
287) Suppose government regulators required a natural monopoly to charge a price equal to the marginal
cost of the last unit produced. Which of the following would then be true?
a. The natural monopoly would be allocatively efficient but would suffer economic losses.
288) Suppose a regulatory agency overseeing a natural monopoly wants to secure a low price for consumers
without subsidizing the monopoly.
a. At the same time, the firm needs to be sustained at zero economic profit. Which of the
following would allow the agency to accomplish this?
i. Setting price equal to average cost.
289) Forcing a Natural Monopolist to produce where price equals marginal cost results in:
a. an economic loss for the monopolist.

290) Figure 15.1 shows the demand curve, marginal revenue curve, average cost curve, and marginal cost
curve for a natural monopoly.

a.
b. An unregulated monopolist will earn a profit shown by the area _____.
i. P-B-C-D
c. If the government orders a monopolist to produce the level of output that is efficient, the
monopolist will:
i. produce at point E, where the marginal cost curve intersects the demand curve.
d. If the government forces the natural monopolist to produce the level of output that is efficient,
consumer surplus will be equal to:
i. the area AEF, which is more than the consumer surplus in an unregulated market.
e. If the government forces a monopolist to produce the level of output that is efficient, the
monopolist will:
i. suffer a loss shown by the area FEJG.
291) Figure 15.2 shows the demand curve, marginal revenue curve, average cost curve, and marginal cost
curve for a natural monopoly.
 a.
b. What would allow the monopolist operating in a regulated market to earn a normal profit?
i. The Price-output combination corresponding to point H
c.
d. A
e. A
f. a
292) In fair-return pricing, _____.
a. a firm earns zero economic profit
293) Which of the following is the most challenging regulatory dilemma facing a regulatory agency?
a. Whether to set price equal to marginal cost or to set a break-even price.
294) Economic Regulation:
a. Aims to control the price, output, the entry of new firms, and the quality of service in
industries where Monopoly appears inevitable.
b. To balance Economy through Public Policy involving Big business.
295) Examples of Economic Regulation:
a. Maintaining a minimum price for a good.
b. Preventing a firm from setting up business in a town.
c. Requiring a minimum amount of goods to be produced in a given year.
296) What is NOT an example of economic regulation?
a. Restricting the use of hazardous materials without proper protection.
297) An example of a regulation that serves special interests?
a. The Civil Aeronautics Board (CAB) protecting existing airlines from competition by rejecting
every single application for new entry into interstate airline markets over the life of the CAB.
298) Economic regulation is in the public interest because it:
a. promotes social welfare.
299) Deregulation of the airlines industry has resulted in:
a. lower airline fares and a considerable increase in the number of passengers.
300) What is true of the special-interest theory of regulation?
a. Well-organized producer groups expect to profit from economic regulation and are able to
persuade public officials to impose restrictions that existing producers find attractive, such as
limiting entry of new firms or competition by existing firms.
301) Even when the initial intent of a legislation is in the consumer interest, producers' political power and
strong stake in the regulatory outcome lead them to manipulate regulating agencies.
a. This is referred to as _____.
 i. the capture of regulatory agencies
302) Capture Theory of Regulation:
a. Producer’s political power and strong stake in the regulatory outcome lead them, in effect, to
“capture” the regulating agency and prevail on it to serve producer interests.
303) More than 100 trades and occupations now face licensing requirements by state or local governments.
a. Example:
i. the alleged problem of “cutthroat” competition among taxi drivers led to regulations
that eliminated price competition and restricted the number of taxis in most large
metropolitan areas.
304) What outlaws attempts to monopolize, or cartelize, markets in which competition is desirable?
a. Antitrust policy

305) In the United States, What represents an attempt to curb anticompetitive practices such as the creation
of a monopoly, concentration of market power through mergers with competitors, or collusion with
competitors to fix prices or limit entry?
a. Antitrust policy
306) The Sherman Antitrust Act of 1890 prohibits: (Vague and alone was ineffective)
a. Monopolies
b. Monopolization
c. Prohibited Trusts
d. Restraint of Trade
e. Does NOT prohibit:
i. Monopolistic Comp.
ii. Oligopolies
307) What is consistent with the ideas underlying the rule of reason legal doctrine that was established by
the U.S. Supreme Court in the case of U.S. Steel in 1920?
a. Mere size is not an antitrust offense because some firms may acquire a large size and
monopoly position by being particularly efficient at delivering high-quality products at low
prices.
308) One of the problems with antitrust policy is that:
a. it can be used to convert a dispute between a firm and its supplier into a treble damage suit.
309) The growing importance of international markets and the globalization of economic activity have
reduced the importance of antitrust enforcement that focuses on _____.
a. domestic producers
310) Tying contracts:
a. require the buyer of one good to purchase another good from the same seller as part of the
deal.
311) What is illegal under the Clayton Act of 1914?
a. Price discrimination that could lead to the creation of a monopoly.
312) Clayton Act of 1914
a. Outlawed certain anticompetitive practices not prohibited by the Sherman Act, including price
discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the
corporate stock of a competitor
313) Tying contracts:
a. A seller of one good requires a buyer to purchase other goods as part of the deal
314) Interlocking directorates
a. A person serves on the boards of directors of two or more competing firms
315) Which of the following is a clause under the Sherman Act?
 a. All agreements among competing firms to fix prices or restrict output are viewed as per se
illegal, which means that a firm can be proven guilty.
316) What does The Herfindahl–Hirschman Index is used as a measure In an industry?
a. Sales concentration
317) If two firms that split a market equally decide to merge and form a monopoly, the Herfindahl index will
rise by _____ as a result of this merger.
a. 5000
318) Assume there are six firms in the petrochemical industry and their market shares are 30%, 10%, 25%,
15%, 12%, and 8%, respectively. The Herfindahl-Hirschman Index for the industry is _____.
a. 2,058
319) What kind of market makes the value of the Herfindahl-Hirschman Index 10,000?
a. a Monopoly
320) Which of the following statements is true of the Herfindahl index?
a. It gives greater weight to firms with larger market shares.
321) A merger of firms in different and unrelated industries is called:
a. a Conglomerate Merger
322) If a company offering financial services merges with a firm offering wireless telephone services, it will
be considered a _____.
a. conglomerate merger
323) In the 1960s, conglomerate mergers accounted for about four-fifths of all mergers. Such mergers
enable firms to:
a. enjoy the benefits of economies of scope.
324) Hostile takeovers are characterized by:
a. a firm taking over the control of another firm against the wishes of the target firm's
management.
325) In 2011, AT&T, a telecommunications corporation, planned to purchase T-Mobile USA, another
telecommunications corporation, for $39 billion. This would have made it the largest wireless company in
the United States. This would have been an example of a _____.
a. Horizontal merger
326) A merger in which one firm combines with another firm from which it purchases inputs or to which it
sells its output is referred to as a _____.
a. Vertical merger
327) Herfindahl-Hirschman Index, or HHI:
a. A measure of market concentration that squares each firm’s percentage share of the market,
then sums these squares.
b. found by squaring the percentage of market share of each firm in the market and then
summing these squares.
c. Example:
i. if the industry consists of 100 firms of equal size, the HHI is 100 = [100 x (1)^2]. If the
industry is a pure monopoly, its index is 10,000 = [100^2]
ii. 10,000 is the largest possible value of HHI
328) The more firms in the industry and the more equal their size, the smaller the HHI.
329) The courts have interpreted antitrust laws in essentially two different ways.
a. Per Se Illegal:
i. illegal regardless of the economic rationale or consequences. For example, under the
Sherman Act, all agreements among competing firms to fix prices, restrict output, or
otherwise restrain competition are viewed as per se illegal.
b. Rule of Reason:
 i. Before ruling on the legality of a business practice, a court examines why it was
undertaken and what effect it has on competition
330) Consent Decree:
a. The accused party, without admitting guilt, agrees not to do whatever it was charged with if
the government drops the charges

331) Exclusive dealing

a. A supplier prohibits its customers from buying from other suppliers of the product
332) Federal Trade Commission (FTC) Act of 1914
a. Established a federal body to help enforce antitrust laws; run by commissioners assisted by
economists and lawyers
b. AKA --- the FTC
333) Horizontal mergers:
a. A merger in which one firm combines with another that produces the same type of product
334) Vertical mergers:
a. A merger in which one firm combines with another from which it had purchased inputs or to
which it had sold output
335) If competition is viewed as a dynamic process, then firm size should not be a primary concern and
antitrust policy should not necessarily aim at _____.
a. increasing the number of firms in an industry
336) There has been an increase in competition in the U.S. economy during the last 50 years mainly because
of:
a. the deregulation of industries.
337) According to William G. Shepherd, which of the following accounted for the growth in competition in
U.S. industries between 1958 and 2000?
a. Antitrust policy.
338) According to William G. Shepherd's study of U.S. industries, _____.
a. the share of "effectively competitive" industries increased between 1958 and 2000.
339) The first antitrust legislation was passed in the United States during the 1880s in response to:
a. trusts that were formed in the sugar, tobacco, and oil industries.

- Perfect Competition

Monopolistic Profit VS Loss