JonnyKay

Under which type of market structure are the production and pricing alternatives of a firm most affected by the decisions of its competitors?

A) Oligopoly.

B) Monopolistic competition.

C) Perfect competition.

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An oligopoly market structure is characterized by a small number of firms producing similar or differentiated products, with a high degree of interdependence among competitors. Each firm’s optimal price and output are strongly affected by the pricing and output decisions of its competitors.

JonnyKay

Monopolistic competition differs from pure monopoly in that:

A) monopolistic competitors are price takers and monopolists are not.

B) monopolistic competitors have low barriers to entry and monopolists do not.

C) monopolists maximize profits and monopolistic competitors do not.

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Another name for monopolistic competition is a competitive price searcher market. Monopolistic competition refers to a large number of independent sellers, each produces a differentiated product, each market has a low barrier to entry, and each producer faces a downward sloping demand curve.

JonnyKay

Which of the following regarding monopolistic competition is most accurate?

A) Zero barriers to entry and exit exist.

B) Each firm produces a differentiated product.

C) There are very few independent sellers.

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Other characteristics of monopolistic competition (also known as competitive price searcher markets) are: a large number of independent sellers, low barriers to entry, and an elastic downward sloping demand curve.

JonnyKay

Which of the following is most accurate for a price-taker firm in long-run equilibrium when there are no barriers to entry?

A) P = MC = ATC = MR.

B) P = AVC = MR.

C) TC = TR = MC.

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For a price-taker firm, long-run equilibrium is where P = MC = ATC. For price taking firms, P = MC. Competition eliminates economic profits in the long run so that P = ATC.

JonnyKay

Assume that a perfectly competitive firm produces 10 units of a good and sells them each for a price (P) equal to $15. If the marginal cost (MC) of the 10th unit is $15 and the average total cost (ATC) is $13, economic profit for the firm is closest to:

A) $0.

B) $120.

C) $20.

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When MR = MC = P, economic profit equals TR – TC. In this case, TR = $150 = 10 × $15 and TC = $130 = 10 × ATC = 10 × $13. So, economic profit is $20 = $150 − $130.

JonnyKay

A competitive firm will tend to expand its output as long as marginal:

A) revenue is greater than marginal cost.

B) revenue is greater than the average cost.

C) cost is less than average cost.

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All firms will continue to expand production until marginal revenue = marginal cost.

JonnyKay

When a firm operates under conditions of perfect competition, marginal revenue always equals:

A) price.

B) total cost.

C) average variable cost.

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When a firm operates under conditions of perfect competition, marginal revenue always equals price. This is because, in perfect competition, price is constant (a horizontal line) so that marginal revenue is constant.

chunty

In the long-run, a firm operating under perfect competition will:

A) produce a quantity where marginal revenue is less than marginal cost.

B) face a vertical demand curve.

C) generate zero economic profit.

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A firm operating under conditions of perfect competition will generate zero economic profit in the long run. Firms may generate economic profits in the short run, but due to the lack of entry barriers, new competitors will enter the market and prices will adjust downward until economic profits become zero.

chunty

A firm operating under perfect competition will experience economic losses when which of the following conditions exists?

A) Marginal cost is less than average total cost.

B) Market price is less than average total cost.

C) Marginal revenue is greater than average total cost.

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Under perfect competition, a firm will experience economic losses when its selling price is less than average total cost.

chunty

A profit maximizing firm will expand output as long as marginal revenue is:

A) greater than average fixed cost.

B) less than marginal cost.

C) greater than marginal cost.

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A purely competitive firm will tend to expand its output so long as the market price (marginal revenue) is greater than marginal cost. In the short term and long term, profit is maximized when P = MC.