ECON 201 Final Exam Answers

ECON 201 Final Exam Answers
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Question 1
One defining characteristic of pure monopoly is that:
A. The monopolist is a price taker
B. The monopolist uses advertising
C. . The monopolist produces a product with no close substitutes
D. There is relatively easy entry into the industry, but exit is difficult
Question 2
Which is a barrier to entry?
A. Close substitutes
B. Diseconomies of scale
C. Government licensing
D. Price-taking behavior
Question 3
Other things equal, which reduces competition in an industry?
A. Patent laws
B. Freedom of entry for new firms
C. An increase in the number of producers
D. An increase in the number of buyers
Question 4
The representative firm in a purely competitive industry:
A. Will always earn a profit in the short run
B. May earn either an economic profit or a loss in the long run
C. Will always earn an economic profit in the long run
D. Will earn an economic profit of zero in the long run
Question 5
An example of a monopolistically competitive industry would be:

A. Steel
B. Soybeans
C. Electricity
D. Retail clothing
Question 6
Firms in an industry will not earn long-run economic profits if:
A. Fixed costs are zero
B. The number of firms in the industry is fixed
C. There is free entry and exit of firms in the industry
D. Production costs for a given level of output are minimized
Question 7
Marginal product is:
A. the increase in total output attributable to the employment of one more worker.
B. the increase in total revenue attributable to the employment of one more worker.
C. the increase in total cost attributable to the employment of one more worker.
D. total product divided by the number of workers employed.
Question 8
The law of diminishing returns indicates that:
A. as extra units of a variable resource are added to a fixed resource, marginal product will
decline beyond some point.
B. because of economies and diseconomies of scale a competitive firm’s long-run average total
cost curve will be U-shaped.
C. the demand for goods produced by purely competitive industries is down sloping.
D. beyond some point the extra utility derived from additional units of a product will yield the
consumer smaller and smaller extra amounts of satisfaction.
Question 9
Which of the following is most likely to be a variable cost?
A. fuel and power payments
B. interest on business loans
C. rental payments on IBM equipment
D. real estate taxes
Question 10
If average total cost is declining, then:

A. marginal cost must be greater than average total cost.
B. the average fixed cost curve must lie above the average variable cost curve.
C. marginal cost must be less than average total cost.
D. total cost must also be declining.
Question 11
The selling of stock is debt financing for a corporation.
o True
o False
Question 12
Average fixed costs diminish continuously as output increases.
o True
o False
Question 13
Patents and copyrights were established by the government to reduce oligopoly and monopoly
power.
o True
o False
Question 14
Prices in oligopolistic industries are predicted to fluctuate widely and frequently compared to
other market structures.
• True
• False
Question 15
The positive view of advertising suggests that it contributes to economic efficiency in the
economy.
o True
o False
Question 16
Price fixing is illegal under Section 1 of the Sherman Act.

o True
o False
Question 17
Rent-seeking behavior refers to activities designed to transfer income or wealth to a particular
firm or resource supplier at someone else’s or society’s expense.
o True
o False
Question 18
A purely competitive firm is a price maker, but a monopolist is a price taker.
o True
o False
Question 19
(Exhibit: Short-Run Costs) At the given price, the most profitable level of output occurs at
quantity:
A. N
B. P
C. S
D. T
Question 20
(Exhibit: Short-Run Costs) If the price declines, the minimum quantity of output supplied in the
short run is quantity:
A. O.
B. Q.
C. R.
D. S.
Question 21
(Exhibit: Short-Run Costs) If the price declines, production will continue in the short run, even
though the firm incurs a loss, between quantities:

A. and Q.
B. Q and R.
C. R and S.
D. S and T.
Question 22
(Exhibit: Short-Run Costs) This firm’s supply curve begins at quantity:
A. Q.
B. R.
C. S.
D. T.
Question 23
(Exhibit: Profit Maximization in Monopolistic Competition) A firm in monopolistic competition
will maximize profits by producing the level of output where:
a. P = MC
b. MR = MC
c. P = MR
d. price minus ATC (i.e., economic profit per unit) is the largest.
Question 24
(Exhibit: Profit Maximization in Monopolistic Competition) In the short run, a firm in
monopolistic competition may experience economic profits as shown in Panel (a) as the distance:
a. PS.
b. PS times the quantity 0M.
c. PS times the quantity Q.
d. PT times the quantity Q.
Question 25
(Exhibit: Profit Maximization in Monopolistic Competition) If other firms see economic profits
in the industry, they will enter it, and the demand curve for firms already in the industry will shift
to the ________ ; in the long run, this will result in economic profit _______ and price _______ .

a. right; = 0; = ATC; = minimum ATC
b. right; > 0; > ATC
c. left; < 0; < ATC d. left; = 0; = ATC; > minimum ATC
Question 26
(Exhibit: Profit Maximization in Monopolistic Competition) In monopolistic competition, longrun
equilibrium is characterized by:
a. P > MR.
b. P < MR. c. P = MR. d. profit maximization, which occurs where P = MR = MC. Question 27
(Exhibit: Profit Maximization in Monopolistic Competition) In Panel (a), if the firm raises its
price above P, it will:
a. lose all its customers.
b. still have some customers.
c. not lose any customers.
d. have none of the above occur.
Question 28
(Exhibit: Profit Maximization in Monopolistic Competition) In determining the price in
monopolistic competition:
a. the price to the firm is given by supply and demand for the industry.
b. the firm is a price taker.
c. the firm applies the marginal decision rule.
d. A and B are true.
Question 29
Which of the following is (are) most likely to be produced under conditions resembling perfect
competition – automobiles, beer, corn, diamonds, and eggs. Defend your answer in economic
terms.