Econ 2: Test 4 (Micro)

Multiple Choice
Identify the choice that best completes the statement or answers the question.
____

1. Which of the following statements is true?

a. Costs are always explicit, never implicit.
b. Costs are always implicit, never explicit.
c. George runs a stationery shop; he paid Frank $5,000 for the carpet he installed in the shop.
The $5,000 for carpet is an implicit cost.
d. An implicit cost is a cost that represents the value of resources used in production for
which no actual monetary payment is made.
e. none of the above

____

2. Five months ago Wilson opened up a health club. Which of the following is an implicit cost related to the
health club?
a. Wilson paid $120 for an outside laundry service to clean the towels used at the club.
b. Wilson paid $100 for the pest control exterminator to spray the health club.
c. Wilson previously worked as an accountant, earning $3,000 a month.
d. Wilson usually eats four hamburgers a day, priced at $3 each.

____

3. Which of the following is true?

a. Economists calculate only economic profit, and accountants calculate only accounting
profit.
b. Economic profit is always greater than accounting profit.
c. Accounting profit is the difference between total revenue and explicit costs.
d. Economic profit is the difference between total revenue and implicit costs.

____

4. Which of the following statements is false?

a. Money must change hands before a cost can be incurred.
b. No monetary payment takes place when an implicit cost is incurred.
c. Costs may be either explicit costs or implicit costs.
d. Cost implies that a sacrifice has been made.

____

5. Economic profit is the difference between total revenue and

a. explicit costs.
b. implicit costs.
c. sunk costs.
d. the sum of explicit and implicit costs.

____

6. Consider the following information about a business Diane opened last year: price = $5, quantity sold =
12,000; implicit cost = $17,000; explicit cost = $40,000. What was Diane's economic profit?
a. $20,000
b. $3,000
c. $6,000
d. $43,000
e. There is not enough information provided to answer this question.

____

7. A person who does not ignore a sunk cost increases the probability that
a. the past will influence the future.
b. the future will influence the past.
c. the future will be like the past.
d. there will be no future.
e. the future will be like the present.

____

8. Real-world markets that approximate the four assumptions of the theory of perfect competition include
a. some agricultural markets.
b. the soft drink market.
c. the stock market.
d. a and c
e. a, b, and c

____

9. The theory of perfect competition generally assumes that

a. sellers act independently of other sellers, but buyers do not act independently of other
buyers.
b. buyers act independently of other buyers, but sellers do not act independently of other
sellers.
c. buyers and sellers act independently of other buyers and sellers.
d. neither buyers nor sellers act independently of other buyers and sellers.

____ 10. In the theory of perfect competition,

a. sellers of the product are not influenced by other sellers and therefore have virtually
complete control over the production and pricing of their product.
b. buyers of the product may have a preference as to whom they purchase from based on
brand loyalty.
c. buyers and sellers of the product know everything that there is to know about the product.
d. it can be quite expensive for a firm to enter this type of market, but once the firm is
established, it will be a profitable venture.
____ 11. Perfectly competitive industries are
a. difficult to enter because there are already so many producers in the industry.
b. not particularly appealing or attractive to enter because there tend to be so many buyers
that it is difficult to deal with them.
c. relatively easy to enter but not so easy to exit from.
d. a and b
e. none of the above
____ 12. A "price taker" is a firm that
a. does not have the ability to control the price of the product it sells.
b. does have the ability, although limited, to control the price of the product it sells.
c. can raise the price of the product it sells and still sell some units of its product.
d. sells a differentiated product.
e. none of the above
____ 13. The demand curve for a perfectly competitive firm
a. is downward sloping.
b. is upward sloping.
c. is perfectly horizontal.
d. is perfectly vertical.
e. may be downward or upward sloping, depending upon the type of product offered for sale.

____ 14. In the theory of perfect competition,

a. the market demand curve is horizontal.
b. the single firm's demand curve is horizontal.
c. the single firm's demand curve is downward sloping.
d. the market demand curve is downward sloping.
e. b and d
____ 15. A perfectly competitive firm will increase its production as long as
a. total revenue is less than total cost.
b. the total revenue curve is rising.
c. marginal revenue is greater than marginal cost.
d. the marginal revenue curve is rising.
____ 16. The perfectly competitive firm maximizes profit at the output where
a. price equals marginal cost.
b. marginal revenue equals marginal cost.
c. average variable cost equals average fixed cost.
d. a and b
e. all of the above
____ 17. Which of the following is an assumption of the theory of monopoly?
a. There are extremely high barriers to entry.
b. There are many sellers.
c. The product has a number of close substitutes.
d. The product is of extremely high quality.
____ 18. The theory of monopoly assumes that the monopoly firm
a. faces a downward-sloping supply curve that is the same as its marginal revenue curve.
b. faces a downward-sloping demand curve.
c. produces more than the perfectly competitive firm under identical demand and cost
conditions.
d. produces a product for which there are many close substitutes.
e. none of the above
____ 19. Which of the following is the best example of a monopoly?
a. a local public utility
b. a fast-food restaurant
c. a department store
d. a wheat farmer
____ 20. Public franchises, patents, and government licenses are examples of __________ barriers to entry.
a. social
b. legal
c. cultural
d. geographic
____ 21. If a perfectly competitive firm and a single-price monopolist face the same demand and cost curves, then the
competitive firm will produce a
a. greater output and charge a lower price than the monopolist.
b. greater output but charge the same price as the monopolist.
c. greater output and charge a higher price than the monopolist.
d. smaller output and charge a lower price than the monopolist.
e. smaller output and charge a higher price than the monopolist.

____ 22. Which of the following is not an assumption of the theory of monopolistic competition?
a. There are high barriers to entry.
b. There are many sellers and few buyers.
c. Each firm in the industry produces and sells a homogeneous product.
d. a and b
e. all of the above
____ 23. Which of the following is one of the assumptions upon which the theory of monopolistic competition is built?
a. There are many sellers.
b. There are few buyers.
c. It is difficult to enter the industry.
d. Each firm in the industry produces a homogeneous product.
____ 24. In a monopolistically competitive industry,
a. each firm in the industry produces a slightly differentiated product.
b. there are barriers to entry.
c. there are barriers to exit.
d. there are few sellers.
____ 25. Which of the following is a primary difference between price searchers and price takers?
a. Price searchers maximize profits, but price takers do not.
b. Price searchers have to cut their price to sell additional output, but price takers do not.
c. The market demand for goods produced by price searchers is downward sloping, while the
market demand for goods produced by price takers is horizontal.
d. Profit-maximizing price searchers will expand output to the quantity where marginal
revenue equals marginal cost, but price takers will not.
____ 26. In competitive price-taker markets, firms
a. can sell all of their output at the market price.
b. produce differentiated products.
c. can influence the market price by altering their output level.
d. are large relative to the total market.
____ 27. When we say that a firm is a price taker, we are indicating that the
a. firm takes the price established in the market then tries to increase that price through
advertising.
b. firm can change output levels without having any significant effect on price.
c. demand curve faced by the firm is perfectly inelastic.
d. firm will have to take a lower price if it wants to increase the number of units that it sells.
____ 28. When price is greater than marginal cost for a firm in a competitive market,
a. marginal cost must be falling.
b. the firm must be minimizing its losses.
c. there are opportunities to increase profit by increasing production.
d. the firm should decrease output to maximize profit.

____ 29. In a competitive price-searcher market, the firms will

a. be able to choose their price, and the entry barriers into the market will be low.
b. be able to choose their price, and the entry barriers into the market will be high.
c. have to accept the market price for their product, and the entry barriers into the market
will be low.
d. have to accept the market price for their product, and the entry barriers into the market
will be high.
____ 30. A profit-maximizing price searcher will expand output to the point where
a. total revenue equals total cost.
b. marginal revenue equals marginal cost.
c. price equals average total cost.
d. price equals marginal cost.
____ 31. When economists talk about a barrier to entry, they are referring to
a. a factor that makes it difficult for potential competitors to enter a market.
b. the opportunity cost of equity capital that is incurred by a firm producing at minimum total
cost.
c. the downward-sloping portion of the long-run average total cost curve.
d. the declining output experienced as additional units of a variable input are used with a
given amount of a fixed input.
____ 32. A monopolist will maximize profits by
a. setting the price at the level that will maximize per-unit profit.
b. producing the output where marginal revenue equals total cost and charging a price along
the demand curve.
c. selling at the price on the demand curve at the output rate where marginal revenue equals
marginal cost.
d. producing at the output rate where price equals marginal cost.
____ 33. In essence, patents grant their owners
a. a property right to new products and production processes that they have developed.
b. the exclusive right to use a newly developed process or product forever.
c. the right to use resources owned by their competitors.
d. an exemption from laws that prohibit price discrimination.
____ 34. Which of the following indicates the major difference between monopolists and competitive price searchers?
a. Monopolists will always be able to make economic profit; competitive price searchers will
not.
b. Barriers to entry are high under monopoly but low in competitive price-searcher markets.
c. Monopolists will face a downward-sloping demand curve; competitive price searchers will
not.
d. Unregulated monopolists will charge prices that exceed marginal cost; competitive price
searchers will not.
____ 35. A firm that is a "pure monopoly" is
a. a seller of a highly advertised and differentiated product in a market with low barriers to
entry in the long run.
b. the only seller of a good for which there are no good substitutes in a market with high
barriers to entry.
c. the only buyer of a unique raw material.
d. the producer of a product subsidized by the government.

Test 4 (Micro)
Answer Section
MULTIPLE CHOICE
1. ANS:
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D
PTS:
Costs of production
C
PTS:
Costs of production
C
PTS:
Costs of production
A
PTS:
Costs of production
D
PTS:
Costs of production
B
PTS:
Costs of production
A
PTS:
Costs of production
D
PTS:
Perfect competition
C
PTS:
Perfect competition
C
PTS:
Perfect competition
E
PTS:
Perfect competition
A
PTS:
Perfect competition
C
PTS:
Perfect competition
E
PTS:
Perfect competition
C
PTS:
Perfect competition
D
PTS:
Perfect competition
A
PTS:
Monopoly
B
PTS:
Monopoly
A
PTS:
Monopoly
B
PTS:
Monopoly
A
PTS:
Monopoly
E
PTS:

DIF: Easy

NAT: Analytic

DIF: Easy

NAT: Analytic

DIF: Moderate

NAT: Analytic

DIF: Moderate

NAT: Analytic

DIF: Moderate

NAT: Analytic

NAT: Analytic

DIF: Moderate
NOT: NEW
DIF: Moderate

DIF: Easy

NAT: Analytic

DIF: Moderate

NAT: Analytic

DIF: Moderate

NAT: Analytic

DIF: Moderate

NAT: Analytic

DIF: Easy

NAT: Analytic

DIF: Moderate

NAT: Analytic

NAT: Analytic

DIF: Moderate
NOT: NEW
DIF: Moderate

DIF: Easy

NAT: Analytic

DIF: Easy

NAT: Analytic

DIF: Moderate

NAT: Analytic

DIF: Easy

NAT: Analytic

DIF: Easy

NAT: Analytic

DIF: Moderate

NAT: Analytic

DIF: Easy

NAT: Analytic

NAT: Analytic

NAT: Analytic

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Monopolistic competition
A
PTS: 1
Monopolistic competition
A
PTS: 1
Monopolistic competition
B
PTS: 1
A
PTS: 1
B
PTS: 1
C
PTS: 1
A
PTS: 1
B
PTS: 1
A
PTS: 1
C
PTS: 1
A
PTS: 1
B
PTS: 1
B
PTS: 1

DIF: Easy

NAT: Analytic

DIF: Easy

NAT: Analytic

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