Practice Multiple Choices for Final Exam (FALL 2014)
For Sections 5 and 6
Chapters 6 – 12
1. Bette’s Breakfast, a perfectly competitive eatery, sells its “Breakfast Special” (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $5.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should
a. shut down immediately.
b. continue producing in the short and long run.
c. continue producing in the short run, but plan to go out of business in the long run.
d. raise her prices above the perfectly competitive level.
e. lower her output.
2. The ________ elastic a firm’s demand curve, the greater its ________.
a. less; monopoly power
b. less; output
c. more; monopoly power
d. more; costs
e. None of the above
3. Suppose a market with a Cournot structure has five firms and a market price elasticity of demand equal to -2. What is a Cournot firm’s Lerner Index?
4. In long-run equilibrium a perfectly competitive firm will operate where the price is:
a. greater than MR but equal to MC and minimum ATC.
b. greater than MR and MC, but equal to minimum AFC.
c. greater than MC and minimum ATC, but equal to MR.
d. equal to MR, MC and minimum to ATC.
e. equal to MR, MC and minimum to AFC.
5. In a constant-cost industry, price always equals
a. LRMC and minimum LRAC.
b. LRMC and LRAC, but not necessarily minimum LRAC.
c. minimum LRAC, but not LRMC.
d. LRAC and minimum LRMC.
e. minimum LRAC and minimum LRMC
6. The long-run supply curve in a constant-cost industry is linear and
e. could have any constant slope.
7. In the model of perfect competition, there:
a. are many firms producing differentiated products
b. are a few firms producing undifferentiated products
c. are a few firms producing differentiated products
d. are many firms producing undifferentiated products
e. is one firm producing a highly differentiated product
8. Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity.
a. higher; larger
b. lower; larger
c. higher; smaller
d. lower; smaller
e. none of these
9. When a firm has the power to establish its price,
a. P = MR.
b. P = MC.
c. P > MR.
d. P < MR.
10. When MR = MC,
a. marginal profit is maximized.
b. total profit is maximized.
c. marginal profit is positive.
d. total profit is zero.
11. When the slope of the total revenue curve is equal to the slope of the total cost curve
a. monopoly profit is maximized.
b. marginal revenue equals marginal cost.
c. the marginal cost curve intersects the total average cost curve.
d. the total cost curve is at its minimum.
e. Both A and B
12. In a certain industry, the supply curve of any firm is q = p/2. If a firm produces 6 units of output, what are its total variable costs?
There is not enough information given to determine total variable costs.
13. Which of the following is NOT true for monopoly?
a. The profit maximizing output is the one at which marginal revenue and marginal cost are equal.
b. Average revenue equals price.
c. The profit maximizing output is the one at which the difference between total revenue and total cost is largest.
d. At the profit maximizing output, price equals marginal cost.
14. A market with few entry barriers and with many firms that sell differentiated products is
a. purely competitive.
b. a monopoly.
c. monopolistically competitive.
15. If price P, unit costs C, and quantity Q are known, the markup of markup-cost pricing is:
(PQ – CQ)/Q.
P – C/Q.
(P – C)/Q.
(P – C)/C.
1 – (P – C)/Q.
16. The maximum price that a consumer is willing to pay for each unit bought is the ________ price.
c. consumer surplus
17. Second-degree price discrimination is the practice of charging
a. the reservation price to each customer.
b. different prices for different quantity blocks of the same good or service.
c. different groups of customers different prices for the same products.
d. each customer the maximum price that he or she is willing to pay.
18. Producer surplus equals
a. total revenue minus total variable cost.
b. total revenue minus the sum of all marginal cost.
c. profit plus fixed cost.
d. only a. and b.
e. All of the above.
19. For most residential telephone service, people pay a monthly fee to have a hookup to the telephone company’s line plus a fee for each call actually made. Under this pricing scheme, the telephone company is using
a. limit pricing.
b. a two-part tariff.
c. second-degree price discrimination.
d. two stage price discrimination.
e. Consumer-self selection
20. When consumers can purchase a set of goods as a bundle or separately, then the seller is engaging in:
21. Transfer prices are needed when:
firms purchase raw materials from other firms.
consumers sell goods and services to one another.
markets must be simulated within firms.
products are bundled and sold as a package.
firms charge different prices to customers where there are no differences in production costs.
22. Season ticket holders for the St. Louis Rams received a surprise when they read the applications forms to renew their season tickets. In order to get their season ticket to the Rams’ home games, they also had to buy tickets to the preseason games. Many season ticket holders grumbled about this practice as an underhanded way for the St. Louis Rams to get more money from its season ticket holders. This practice is an example of:
a. peak-load pricing.
b. intertemporal price discrimination.
c. two-part tariff.
e. Both A and B are correct
23. A producer of two fixed proportion outputs A and B, producing QA = QB with marginal revenues MRA and MRB, should equate marginal cost to:
the maximum (MRA, MRB).
the minimum (MRA, MRB).
MRA, which should equal MRB.
the horizontal sum of MRA and MRB.
the vertical sum of MRA and MRB.
24. When Exxoff Oil Corporation offers discounts based on credit card records of gas quantities purchased, they are practicing:
first-degree price discrimination.
second-degree price discrimination.
third-degree price discrimination.
25. If a firm supplies separable markets with price elasticities h1 and h2, it should set prices P1 and P2 so that:
P1h1 = P2h2.
P1 /h1 = P2 /h2.
P1(1 + 1/h1) = P2 (1 + 1/h2).
P1/(1 – 1 /h1) = P2 / (1 – 1/h2).
P1 = 1 – 1/h1 and P2 = 1 – 1/h2.
26. What is one difference between the Cournot and Stackelberg models?
a. In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm sets its output level first.
b. In Stackelberg, both firms make output decisions simultaneously, and in Cournot, one firm sets its output level first.
c. In Cournot, a firm has the opportunity to react to its rival.
d. Profits are zero in Cournot and positive in Stackelberg.
27. In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the output and
a. total cost.
b. average variable cost.
c. total fixed cost.
d. the number of buyers.
e. average fixed cost
28. If Gulfstream and Bombardier, both producers of upscale jet airplanes, were to collude rather than compete, consumers could expect:
higher prices and lower quantities offered for sale.
lower prices and lower quantities offered for sale.
higher prices and higher quantities offered for sale.
each firm to cheat on the cartel agreement.
one firm to emerge as the price leader in the oligopoly.
29. A market where there are only a few sellers is known as:
30. The result for the seller of being able to practice price discrimination will be:
a. higher profits.
b. lower demand elasticity.
c. lower quantity sold.
d. cost minimization.
31. The correct expression for cost plus pricing is:
a. Price = Cost (1 + profit margin
b. Price = Cost + profit margin.
c. Price = Cost (1 + markup).
d. Price = Cost + (1 + markup).
32. Transfer pricing is a method used to:
a. determine whether a firm should make or buy a component product.
b. determine the correct value of a product as it moves from one stage of production toanother.
c. minimize a multinational firm’s tax liabilities.
d. All of the above.
33. A profit-maximizing firm continues to operate even though it is losing money. It sells its product at a price of $100.
Average total cost is less than $100.
Average fixed cost is less than $100.
Marginal cost is increasing.
Average variable cost is less than $100.
Marginal cost is decreasing.
34. Game theory is useful for understanding oligopoly behavior because:
there are so many firms in an oligopoly that all are price takers.
firms must differentiate their products if they are to remain in business.
firms recognize that because there are only a few firms mutual interdependence is important.
without it firms would not be able to maintain cartel agreements.
it allows firms to develop greater monopoly power.
35. The following diagram represents the market for paperback books. What is market supply equation?
P = 15 – Qs
P = Qs
P = 15 + Qs
Not enough information
36. Which of the following relationships implies that a firm’s short-run cost function is linear?
a. MC = AC
b. MC = AVC
c. AC = AFC + AVC
d. MC > AC
37. When a firm experiences increasing returns to scale
a. its AFC will decrease.
b. its AFC will increase.
c. its AC will increase.
d. its AC will decrease.
38. Changes in the Short Run total costs result from changes in only:
a. Variable costs
b. Fixed costs
d. Total fixed costs
39. Lot’s Wife Manufacturing produces rear- view video systems for buses. The firm’s cost function is TC = 2,000 + 120Q. If the systems sell for $145, what is the break – even rate of production?
e. None of the above.
40. Lerner Index (LI) is a measure of market power. What is the expression forLerner Index?
a. LI = (P-MC)/C
b. LI = (P-MC)/P
c. LI = -1/Nh
d. b and c
e. All of the above.
41. A firm has a division that produces chemical Y, whose average total costsare ATC = 50 + 2Q (where Q is the quantity of Y), and a marketing divisionthat adds its own average total costs of ATC = 20 + 3Q. There is no externalmarket price of Y. The transfer price of Y should be:
c. $50 + 4Q.
42. In a Cournot duopoly, we find that Firm 1’s reaction function is Q1 = 50 – 0.5Q2, and Firm 2’s reaction function is Q2 = 75 – 0.75Q1. What is the Cournot equilibrium outcome in this market?
a. Q1 = 20 and Q2 = 60
b. Q1 = 20 and Q2 = 20
c. Q1 = 60 and Q2 = 60
d. Q1 = 60 and Q2 = 20
43. The reservation prices, in dollars, for three classes of demanders (A, B, and C) for two restaurants (1 and 2) are given in the following table. What is the maximum revenue that can be generated by setting a bundled price for the two restaurants?
44. Bundling is effective when the demands for the bundled products are ________ and ________ correlated.
a. different; negatively
b. different; positively
c. similar; negatively
d. similar; positively
e. identical; perfectly
45. The price elasticity of demand for nursery products is -10. The advertising elasticity of demand is 0.4. Using the “Rule of Thumb for Advertising,” the profit maximizing level of advertising will be set at ________ of total revenue.
a. 0.25 percent
b. 0.4 percent
c. 4 percent
d. 40 percent
46. If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:
d. indeterminate from the given information.
47. To maximize profit, the firm must:
a. mark up average variable costs.
b. mark up total fixed costs.
c. mark up average fixed costs.
d. set the markup equal to −1/(h+ 1).
48. If revenues from selling quantities x and y of jointly produced goods X and Y were TRX = 300 − xy + 50x and TRY = 1,000 − xy + 2y, and 10 units of y were produced, then marginal revenue with respect to X would be:
49. Refer to the accompanying matrix. Which of the following is a Nashequilibrium?
a. Company A chooses Strategy 1 and Company B chooses Strategy 1.
b. Company A chooses Strategy 1 and Company B chooses Strategy 2.
c. Company A chooses Strategy 2 and Company B chooses Strategy 2.
d. Company A chooses Strategy 2 and Company B chooses Strategy 1.
e. None of the above.
50. A lower east-side cinema charges $3.00 per ticket for children under 12 years of age and $5.00 per ticket for anyone 12 years of age or older. The firm has estimated that the price elasticity of demand for tickets purchased by those 12 years of age or older is -1.5. What is the elasticity of demand for tickets purchased for children under 12 years of age if prices are optimal?