MD ECON 103 – Given that resources can be allocated

Subject: Economics / General Economics
Question
1- Given that resources can be allocated by the government, the market, a random process, or on a first-come first-serve basis, which of the following statements is true?

a. The market system is not entirely fair but it creates incentives to increase supplies and I improve standards of living.

b. The random process of allocation allows individuals to acquire purchasing power and enhances the value of the resources that they own.

c. Since the government system does not distinguish between those who have income and those that do not, government allocation of resources is the most efficient.

d. There will be no shortages under the first-come first-serve basis of allocation.

e. A random process of allocation is fair in the sense that everyone gains and there are no losers.

2- Under perfect competition, at the profit maximizing level of output:

a. price is greater than marginal revenue.

b. price is equal to marginal revenue.

c. marginal revenue is equal to zero.

d. the marginal revenue curve is downward sloping.

e. the average revenue curve is upward sloping.

3- The ordering of market structures from most market power to least market power (where market power is the ability to set its own price) is:

a. monopoly, monopolistic competition, oligopoly, perfect competition.

b. perfect competition, monopolistic competition, oligopoly, monopoly.

c. oligopoly, monopoly, monopolistic competition, perfect competition.

d. monopoly, oligopoly, monopolistic competition, perfect competition.

e. monopoly, perfect competition, monopolistic competition, oligopoly.

4- An industry which has no barriers to entry, no product promotion strategy, a standardized product, and a very large number of firms operating within it, is said to have:

a. a monopoly market structure.

b. perfect competition.

c. Monopsonistic competition.

d. monopolistic competition.

e. an oligopoly market structure.

5- In a perfectly competitive industry, the price of good A is $2. If a firm in this industry decides to increase its price to $2.50, it will:

a. realize an increase in profits of $.50 per unit.

b. be able to increase the quantity sold.

c. be unable to sell any quantity of good A that is produced.

d. lose some of its customers in the market.

e. experience a decrease in profits of $.50 per unit.

6- Monopoly is a market structure in which:

a. there are significant barriers to the entry of new firms.

b. the firms face a perfectly elastic demand curve.

c. there are a large number of close substitutes for the good.

d. a homogeneous product is sold.

e. the firms are price takers.

7- Steve is about to start up a business in a monopolistically competitive market. Which of the following can he expect?

a. He can expect market entry to be difficult as there exist entry barriers.

b. He can expect to enjoy a huge market power.

c. He can expect to face a highly inelastic demand curve.

d. He can expect to find close substitutes of the product he is planning to produce.

e. He can expect to face an infinitely elastic demand curve.

8- Which of the following characteristics distinguishes oligopoly from other market structures?

a. Firms operating in an oligopoly are independent of each other.

b. Firms operating in an oligopoly are interdependent.

c. Oligopoly is the simplest of all the other market structures.

d. An oligopolist does not face a downward-sloping demand curve.

e. Entry into an oligopolistic market is easier than entry into a monopolistically competitive market.

9- The demand curve faced by a perfectly competitive firm is:

a. perfectly inelastic.

b. relatively elastic.

c. unit elastic.

d. perfectly elastic.

e. relatively inelastic.

10- When a firm incurs negative economic profit, it should:

a. hire more laborers to make the business activity profitable.

b. transfer the resources from current use to other alternative uses.

c. purchase additional raw materials to produce more output.

d. transfer the resources from alternative uses to the current activity.

e. continue to operate with the same resources.

11- The model of perfect competition best applies to markets with:

a. a few firms selling identical products.

b. a few firms selling differentiated products.

c. many firms selling differentiated products.

d. many firms selling identical products.

e. significant barriers to entry and exit.

12- If a perfectly competitive firm’s price increases, then:

a. the marginal-cost curve will shift up.

b. the demand curve faced by the firm will shift to the left.

c. marginal cost will fall as output declines.

d. the marginal-revenue curve for the firm will shift up.

e. the marginal-cost curve for the firm will shift down.

13- Perfect competition provides one model in which there are many firms with no barriers to entry. If perfect competition as a model lies on one extreme, the model that lies on the opposite extreme is:

a. monopolistic competition.

b. oligopoly.

c. monopoly.

d. imperfect competition.

e. oligopolistic competition.

14- Which of the following will be the best example of a monopoly firm?

a. The US Bank

b. The Bank of America

c. National City Bank

d. The Federal Reserve

e. Washington Mutual Funds Bank

15- Why is each firm in a monopolistically competitive industry considered as a “mini” monopoly?

a. There is a large number of sellers in the market

b. Each firm in monopolistic competition is a price taker

c. The product of each firm is unique in some way or the other

d. Each firm faces a perfectly elastic demand curve

e. There exists a large number of close substitutes of the products

16-Accountants include ________ cost as part of a firm’s costs, while economists include _________ costs.

a) explicit; non-explicit

b) explicit and implicit; implicit

c) explicit; explicit and implicit

17-Which of the following is an example of something that economists would consider a cost but accountants would not?

a. the wages paid to the employees of a firm

b. the wages that the owner of a firm could have earned in some alternative job

c. rent paid to a business landlord

18-In the short run, ________ factors of production are fixed, while in the long run ________ of them are.

d. some; none

e. all; none

f. none; at least some

19-Which of the following is a long run adjustment?

g. a firm hires two new workers

h. the number of professional baseball teams increases by two

i. GM buys more steel for its auto plants in Michigan

20-Which of the following is the best example of a perfectly competitive firm?

j. DeBeers Diamond Company

k. Your local cable T.V. company

l. Jones’s wheat farm in eastern Washington.

21-For the perfectly competitive firm marginal revenue is equal to

m. the change in total revenue from selling one more unit of a good

n. the market price of the good being sold

o. both (a) and (b) are correct

22-At a price of $20, the marginal revenue of a monopolist is $6. if the marginal cost of production is $4, what should the monopolist do in order to maximize profits?

p. increase its price

q. decrease its price

r. keep its price at the same level

23-An entrepreneur is a person who commits time and money to a business:

s. only if it is certain that the business will be profitable

t. without any assurance that it will be profitable

u. and is always successful at the business enterprises they start

24-For a monopolistically competitive firm, the firm’s demand curve is

v. downward sloping

w. horizontal

x. upward sloping

25-Which one of the following is the best example of an oligopolistic industry:

y. automobiles

z. wheat growers

aa. public utilities

B-TRUE/FALSE –ANSWER ANY 12 OF THE FOLLOWING:

1- A firm maximizes its profit at a level of output, where the additional revenue earned by selling an extra unit of the output is equal to the additional cost borne for producing that extra unit of the output.

2- The market power enjoyed by a particular producer depends on the number of firms in the industry.

3- Each firm under perfect competition charges different prices for their products.

4- In monopolistic competition there are no brands, all the producers produce only identical, generic products.

5- Entry of new firms to the industry lowers the economic profit of the existing firms.

6-Diminishing marginal returns occur only in the long run.

7-If average variable cost is increasing, marginal cost must also be increasing.

8-A U-shaped long run average cost curve implies that a firm faces only diseconomies of scale.

9-Firms earning negative profits in the short run should always shut down.

10-The long run supply curve is upward sloping in a constant cost industry.

11-Not having a monopolist in an industry is always preferable to having a monopolist in that industry.

12-Government regulation of natural monopoly causes its average cost curve to shift downward.

13-Some firms in monopolistically competitive markets differentiate their products by their physical characteristics.

14-In the long run, monopolistically competitive firms charge consumers higher prices than monopoly firms.

15-A dominant strategy is one that is best no matter what the other players do.

C –SHORT QUESTIONS-ANSWER ANY 6 OF THE FOLLOWIN

1-What are the factors of production and what role do they play in Economics?

2-A natural monopoly occurs when there are large-scale economies in production, so the market can support only one firm. In the light of the above statement, please explain the concept of controlling market power and anti-trust and regulation. How does the government use anti-trust policies to break up some dominant firms? Cite examples to support your answer.

3-What is the difference between fixed costs in the short run and in the long run? Why does it make sense for unprofitable firms to stay in business?

4-Why do perfectly competitive firms make zero economic profit in the long run?

5-Explain why a monopolist must lower its quantity relative to a competitive market to maximize its profits.

6-How do barriers to entry create market power? Why does the government grant patents to companies that research new drugs?

7-Why does entry into markets decrease firm profits and what is “monopolistic” about monopolistic competition?

8- What is a cartel? Why is price-fixing illegal in the United States?

D-CASE QUESTIONS- A Dream Job?

Assume that you are a budding chef, and you want to change careers to run a gourmet food truck – the job of your dreams. You use Chapter 7 from Everything Economics as a guide to help you to decide whether to quit your current job. Assume that your current job pays $16,000 per year. Answer the questions below.

1. What types of items would make up your fixed costs? Assume that these total $6,000 per year.

2. What types of items would make up your variable costs? Assume that these total $8,000 per year.

3. What is your opportunity cost?

4. Assume a total sales revenue of $24,000 – what is your accounting profit?

5. What is your economic profit?

6. Will you quit your job to start running the food truck?

7. What other decision factors are left out of this problem?

E-ESSAY QUESTION

Monopolies- Meyer describes the good, the bad and the ugly aspects of monopolies. Describe each of these. In thinking about the Economist article about the internet monopolies, can you recognize any of these good, bad and ugly aspects of monopolies with respect to the internet giants that you deal with as a consumer?

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