FINAL EXAM 4: Pricing & Output Decisions: Perfect Competition and

Monopoly

Multiple-Choice Questions

1) Which of the following markets comes closes to the model of perfect

competition?
A) Automobile industry B) Information Technology industry
C) Aerospace industry D) Agriculture

2) A feature of Perfect Competition is

A) use of non-price competition by firms. B) mutual interdependence
among firms.
C) unique products. D) standardized products.

3) Which of the following characteristics is most important in differentiating

between perfect competition and all other types of markets?
A) whether or not the product is standardized
B) whether or not there is complete market information about price
C) whether or not firms are price takers
D) All of the above are equally important.

4) Demand facing an individual, perfectly competitive firm is:

A) perfectly inelastic at the quantity the firm chooses to produce.
B) perfectly inelastic at the quantity determined by market forces.
C) perfectly elastic at the price the firm chooses to charge.
D) perfectly elastic at the price determined by market forces.

5) In perfect competition:
A) The firm’s demand curve is relatively inelastic
B) The firm’s demand curve is relatively inelastic
C) The firm’s demand curve is perfectly elastic
D) The firm’s demand curve is perfectly inelastic

6) For a demand curve that is horizontal, the marginal revenue curve:

A) will be to the right of the demand curve and half as steep.
B) will be to the left of the demand curve and half as steep.
C) will be to the right of the demand curve and twice as steep.
D) will be the same as the demand curve

7) According to the shutdown rule, a firm should produce no output in the

short run if:
A) price is below minimum average total cost.
B) price is above minimum average total cost.
C) total revenues are lower than total fixed costs.
D) price is below minimum average variable costs.
8) Which of the following conditions would definitely cause a perfectly
competitive company to shut down in the short run?
A) P < MC B) P = MC < AC C) P < AVC D) P = MR

9) A normal profit is:

A) revenues minus opportunity cost only.
B) revenues minus accounting costs only.
C) a zero accounting profit.
D) revenues minus accounting and opportunity costs.

10) If a perfectly competitive firm incurs an economic loss, it should:

A) shut down immediately.
B) try to raise its price.
C) shut down in the long run.
D) shut down if this loss exceeds variable cost.

11) A perfectly competitive firm sells 15 units of output at the going market
price of $10.
Suppose its average fixed cost is $15 and its average variable cost is $8.
Its contribution
margin (i.e. contribution to fixed cost) is
A) $30.
B) $150.
C) $105.
D) Cannot be determined from the above information.

12) Mars Inc. produces 100,000 boxes of Snickers bars which sell for $4 a
box. If variable
costs are $3 per box, and it has $150,000 fixed operating costs, in the
short run, it
should:
A) shut down as fixed costs are not being covered.
B) keep producing as profits are $50,000.
C) keep producing as variable costs are being met.
D) keep producing as total costs are being recovered

13) In perfect competition, if firms enter the market in the long run.
A) total supply will increase causing market price to increase.
B) total supply will decrease causing market price to decrease.
C) total supply will decrease causing market price to increase.
D) total supply will increase causing market price to decrease.
14) 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 ATC.
C) greater than MC and minimum ATC, but equal to MR.
D) equal to MR, MC and minimum to ATC.

15). The principle marginal revenue equal-marginal-cost rule for maximizing

profit:
A) Does not apply to firms in the monopoly or oligopolistic industries
B) Applies only for firm in perfect competition but not in monopolistic
competition
C) Applies to new firms but not to existing firms in an industry
D) Applies to all the firms in all industries

16) Assume a profit maximizing firm's short-run cost is TC = 700 + 60Q. If its
demand curve is P = 300 - 15Q, what should it do in the short run?
A) shut down
B) continue operating in the short run even though it is losing money
C) continue operating because it is earning an economic profit
D) Cannot be determined from the above information.

17) Assume a perfectly competitive firm's short-run cost is TC = 100 + 160Q

+ 3Q2. If the
market price is $196, what should it do?
A) produce 5 units and continue operating
B) produce 6 units and continue operating
C) produce zero units (i.e., shut down)
D) Cannot be determined from the above information.

18) Which of the following is false? A monopolist

A) will sell less at a higher price
B) has a marginal revenue that is less than the price.
C) will produce where MR = MC.
D) is a price taker

19) A firm that seeks to maximize its revenue is most likely to adhere to
which of the following?
A) MR = MC B) MR =0 C) MR =P D) MR < MC

20) If a monopoly wants to maximize it profit, it should

A) produce in the range where its average costs are declining.
B) produce in the range where its demand curve is elastic.
C) produce in the range where its marginal costs are declining.
D) produce in the range where its marginal costs are less than its average
costs.
Analytical Question

Market price is $50. The firm's marginal cost curve is given by: MC = 10 +
2Q.
Find the profit-maximizing output for the firm.

Reference:
Chapter 8 - Pricing & Output Decisions: Perfect Competition and Monopoly
Keat, Paul and Philip K.Y. Young (2003). Managerial Economics: Economic
Tools for Today’s Decision Makers.