UNIT 4 PRACTCE TEST

Directions: Do this test quickly and skip the questions you do not know the answers
to. This will allow you to isolate the topics that you need to devote the most time to
studying and give us more time in class to review them.
1. In which of the following industry structures is the entry of new firms the most difficult?
A. pure monopoly
B. oligopoly
C. monopolistic competition
D. pure
competition
2. An industry comprised of a very large number of sellers producing a standardized product is
known as:
A. monopolistic competition.
B. oligopoly.
C. pure monopoly.
D. pure
competition.
3. Which of the following is not a characteristic of pure competition?
A. price strategies by firms
B. a standardized product C. no barriers to entry
D. a larger
number of sellers
4. Which of the following is not a basic characteristic of pure competition?
A. considerable nonprice competition
B. no barriers to the entry or exodus of
firms
C. a standardized or homogeneous product
D. a large number of buyers and
sellers
In answering the next question(s), assume a graph in which dollars are measured on
the vertical axis and output on the horizontal axis.
5. Refer to the above information. For a purely competitive firm, total revenue:
A. graphs as a straight, upsloping line.
B. is a straight line, parallel to the
vertical axis.
C. is a straight line, parallel to the horizontal axis.
D. graphs as a straight, downsloping
line.
6. Refer to the above information. For a purely competitive firm, marginal revenue:
A. graphs as a straight, upsloping line.
B. is a straight line, parallel to the
vertical axis.
C. is a straight line, parallel to the horizontal axis.
D. graphs as a straight, downsloping
line.
7. Refer to the above information. For a purely competitive firm:
A. marginal revenue will graph as an upsloping line.
B. the demand curve will lie above the marginal revenue curve.
C. the marginal revenue curve will lie above the demand curve.
D. the demand and marginal revenue curves will coincide.
8. Price is constant or given to the individual firm selling in a purely competitive market
because:
A. the firm's demand curve is downsloping.
B. of product differentiation reinforced by
extensive advertising.
C. each seller supplies a negligible fraction of total supply. D. there are no good substitutes for its
product.
9. For a purely competitive seller, price equals:
A. average revenue.
B. marginal revenue.
C. total revenue divided by
output.
D. all of these.

10. A perfectly elastic demand curve implies that the firm:

A. must lower price to sell more output.
B. can sell as much output as it chooses at the existing price.
C. realizes an increase in total revenue which is less than product price when it sells an extra
unit.
D. is selling a differentiated (heterogeneous) product.
11. A purely competitive firm should produce in the short run if its total revenue is sufficient to
cover its:
A. total variable costs.
B. total costs.
C. total fixed costs.
D. marginal costs.
12. If a firm is confronted with economic losses in the short run, it will decide whether or not to
produce by comparing:
A. marginal revenue and marginal cost.
B. price and minimum average
variable cost.
C. total revenue and total cost.
D. total revenue and total fixed cost.

13. Curve (1) in the above diagram

A. total cost curve.
C. marginal revenue curve.
14. Curve (2) in the above diagram
A. total cost curve.
C. marginal revenue curve.
15. Curve (3) in the above diagram
A. total cost curve.
C. marginal revenue curve.
16. Curve (4) in the above diagram
A. total cost curve.
C. marginal revenue curve.

is a purely competitive firm's:

B. total revenue curve.
D. total economic profit curve.
is a purely competitive firm's:
B. total revenue curve.
D. total economic profit curve.
is a purely competitive firm's:
B. total revenue curve.
D. total economic profit curve.
is a purely competitive firm's:
B. total revenue curve.
D. total profit curve.

17. Refer to the above diagram. Other things equal, an increase of product price would be shown
as:
A. an increase in the steepness of curve (3), an upward shift in curve (2), and upward shift in
curve (1).
B. a decrease in the steepness of curve (3), a downward shift in curve (2), and an upward shift in
curve (1).
C. an downward shift in curve (4) and an upward shift in curve (1), with no changes in lines (2)
and (3).
D. an upward shift in line (2) only.
18. In the short run the individual competitive firm's supply curve is that segment of the:
A. average variable cost curve lying below the marginal cost curve.
B. marginal cost curve lying above the average variable cost curve.
C. marginal revenue curve lying below the demand curve.
D. marginal cost curve lying between the average total cost and average variable cost curves.
19. In the long run a pure monopolist will maximize profits by producing that output at which
marginal cost is equal to:
A. average total cost.
B. marginal revenue.
C. average variable cost.
D. average cost.
20. Economic profit in the long run is:
A. possible for both a pure monopoly and a pure competitor.
B. possible for a pure monopoly, but not for a pure competitor.
C. impossible for both a pure monopolist and a pure competitor.
D. only possible when barriers to entry are nonexistent.
21. If at the MC = MR output, AVC exceeds price:
A. new firms will enter this industry.
B. the firm should produce the MC = MR output and realize an economic profit.
C. the firm should shut down in the short run.
D. the firm should expand its plant.

Answer the next questions on the basis of the following cost data for a firm selling in
a purely competitive market:

22. Refer to the above data. If the market price for the firm's product is $12, the competitive
firm will produce:
A. 4 units at a loss of $109.
B. 4 units at an economic profit of $31.75.
C. 8 units at a loss of $48.80.
D. zero units at a loss of $100.
23. Refer to the above data. If the market price for the firm's product is $32, the competitive firm
will produce:
A. 8 units at an economic profit of $16.
B. 5 units at a loss of $10.
C. 8 units at a loss equal to the firm's total fixed cost.
D. 7 units at an economic profit of $41.50.
24. Refer to the above data. If the market price for the firm's product is $28, the competitive firm
will:
A. produce 4 units at a loss of $17.40.
B. produce 7 units at a loss of $14.00.
C. close down in the short run.
D. produce 6 units at a loss of $23.80.

25. Refer to the above diagram. This firm will earn only a normal profit if product price is:
A. P1.
B. P2.
C. P3.
D. P4.
26. Refer to the above diagram. The firm will realize an economic profit if price is:
A. P1.
B. P2.
C. P3.
D. P4.
27. Refer to the above diagram. The firm will produce at a loss if price is:
A. less than P1.
B. P2.
C. P3.
D. P4.
28. Refer to the above diagram. The firm will shut down at any price less than:
A. P1.
B. P2.
C. P3.
D. P4.
29. Refer to the above diagram. The firm's supply curve is the segment of the:
A. MC curve above its intersection with the AVC curve.
B. MC curve above its
intersection with the ATC curve.
C. AVC curve above its intersection with the MC curve.
D. ATC curve above its
intersection with the MC curve.
30. If the price of product Y is $25 and its marginal cost is $18:
A. Y is being produced with the least-cost combination of resources.
B. society will realize a net gain if less of Y is produced.
C. resources are being underallocated to Y.
D. resources are being overallocated to Y.
31. Pure monopoly means:
A. any market in which the demand curve to the firm is downsloping.
B. a standardized product being produced by many firms.
C. a single firm producing a product for which there are no close substitutes.
D. a large number of firms producing a differentiated product.

32. Refer to the above diagram. This firm is selling in:

A. a market in which there are an extremely large number of other firms producing the same
product.
B. an imperfectly competitive market.
C. a market in which demand is elastic at all prices.
D. a purely competitive market.
33. Refer to the above diagram. Demand is relatively elastic:
A. in the P2P1 price range. B. in the 0P1 price range. C. in the P2P4 price range. D. only at price P2.
34. Refer to the above diagram. Demand is relatively inelastic:
A. at price P3.
B. at any price below P2.
C. in the P2P4 price range. D. in
the P2P3 range.

35. Refer to the above diagram. If this somehow was a costless product (that is, the total cost of
any level of output was zero), the firm would maximize profits by:
A. selling the product at the highest possible price at which a positive quantity will be demanded.
B. producing Q1 units and charging a price of P1.
C. producing Q3 units and charging a price of P3.
D. producing Q2 units and charging a price of P2.

36. Refer to the above diagram. To maximize profits or minimize losses this firm should
produce:
A. E units and charge price C.
B. E units and charge price A.
C. M units and charge price N.
D. L units and charge price LK.
37. Refer to the above diagram. At the profit-maximizing level of output, total revenue will be:
A. NM times 0M.
B. 0AJE.
C. 0EGC.
D. 0EHB.
38. Refer to the above diagram. At the profit-maximizing level of output, total cost will be:
A. NM times 0M.
B. 0AJE.
C. 0CGC.
D. 0BHE.
39. Refer to the above diagram. At the profit-maximizing level of output, the firm will realize:
A. an economic profit of ABHJ. B. an economic profit of ACGJ. C. a loss of GH per unit. D. a
loss of JH per unit.
40. If profits are maximized (or losses minimized), which of the following conditions are common
to both unregulated monopoly and to pure competition?
A. MC = P
B. MC = ATC
C. MR = MC
D. P = MR
41. In which one of the following market models is X-inefficiency most likely to be the greatest?
A. pure competition
B. oligopoly
C. monopolistic competition
D. pure monopoly
42. The dilemma of regulation refers to the idea that:
A. the regulated price which achieves allocative efficiency is also likely to result in persistent
economic profits.
B. the regulated price which results in a "fair return" restricts output by more than would
unregulated monopoly.
C. regulated pricing always conflicts with the "due process" provision of the Constitution.
D. the regulated price which achieves allocative efficiency is also likely to result in losses.

43. Monopolistic competition is characterized by a:

A. few dominant firms and low entry barriers.
B. large number of firms and
substantial entry barriers.
C. large number of firms and low entry barriers.
D. few dominant firms and
substantial entry barriers.
44. A significant difference between a monopolistically competitive firm and a purely competitive
firm is that the:
A. former does not seek to maximize profits.
B. latter recognizes that price must be reduced to sell more output.
C. former sells similar, although not identical, products.
D. former's demand curve is perfectly inelastic.
45. The monopolistic competition model assumes that:
A. allocative efficiency will be achieved.
B. productive efficiency will be
achieved.
C. firms will engage in nonprice competition.
D. firms will realize economic profits in
the long run.
46. In the long run, new firms will enter a monopolistically competitive industry:
A. provided economies of scale are being realized.
B. even though losses are incurred in the short run.
C. until minimum average total cost is achieved.
D. until economic profits are zero.
47. Other things equal, if more firms enter a monopolistically competitive industry:
A. the demand curves facing existing firms would shift to the right.
B. the demand curves facing existing firms would shift to the left.
C. the demand curves facing existing firms would become less elastic.
D. losses would necessarily occur.
48. In which of these continuums of degrees of competition (highest to lowest) is oligopoly
properly placed?
A. pure competition, oligopoly, pure monopoly, monopolistic competition
B. oligopoly, pure competition, monopolistic competition, pure monopoly
C. monopolistic competition, pure competition, pure monopoly, oligopoly
D. pure competition, monopolistic competition, oligopoly, pure monopoly
49. Oligopolistic industries are characterized by:
A. a few dominant firms and substantial entry barriers.
B. a few dominant firms and no barriers to entry.
C. a large number of firms and low entry barriers.
D. a few dominant firms and low entry barriers.
50. Concentration ratios measure the:
A. geographic location of the largest corporations in each industry.
B. degree to which product price exceeds marginal cost in various industries.
C. percentage of total sales accounted for by the four largest firms in the industry.
D. number of firms in an industry.
51. Oligopolistic firms engage in collusion to:
A. minimize unit costs of production.
B. realize allocative efficiency, that is, the P = MC level of output.
C. earn greater profits.
D. increase production.

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