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Mr. Weiss

Mr. Weiss. APE/Honors Economics – Test Study Questions – Micro – Unit 3. 3. Which of the following statements about a firm’s production function are true? I. When total product is at its maximum, marginal product is zero. II. When total product rises, marginal product is rising.

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Mr. Weiss

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  1. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 3. Which of the following statements about a firm’s production function are true? I. When total product is at its maximum, marginal product is zero. II. When total product rises, marginal product is rising. III. When marginal product is greater than average product, average product is rising. IV. When marginal product is less than average product, average product is falling. A. I and II only B. II and III only C. II and IV only D. I, III and IV only E. I, II, II and IV

  2. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 3. Which of the following statements about a firm’s production function are true? I. When total product is at its maximum, marginal product is zero. II. When total product rises, marginal product is rising. III. When marginal product is greater than average product, average product is rising. IV. When marginal product is less than average product, average product is falling. A. I and II only B. II and III only C. II and IV only D. I, III and IV only E. I, II, II and IV

  3. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 14. Which of the following represents the correct relationship between the demand curve for a perfectly competitive industry and the demand curve for a perfectly competitive firm? PC Industry DemandPC Firm Demand A. Downward slope to the right Downward slope to the right B. Downward slope to the right Perfectly elastic C. Perfectly elastic Downward slope to the right D. Perfectly elastic Perfectly elastic E. Perfectly inelastic Perfectly elastic

  4. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 14. Which of the following represents the correct relationship between the demand curve for a perfectly competitive industry and the demand curve for a perfectly competitive firm? PC Industry DemandPC Firm Demand A. Downward slope to the right Downward slope to the right B. Downward slope to the right Perfectly elastic C. Perfectly elastic Downward slope to the right D. Perfectly elastic Perfectly elastic E. Perfectly inelastic Perfectly elastic

  5. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 19. Average fixed cost is shown as the distance between: A. marginal cost and average variable cost. B. marginal cost and average total cost. C. average variable cost and average total cost. D. average total cost and the horizontal axis. E. marginal cost and the horizontal axis.

  6. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 19. Average fixed cost is shown as the distance between: A. marginal cost and average variable cost. B. marginal cost and average total cost. C. average variable cost and average total cost. D. average total cost and the horizontal axis. E. marginal cost and the horizontal axis.

  7. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 32. Allocative and productive efficiency are possible in which of the following unregulated market structures? I. Perfectly competitive II. Pure monopoly III. Oligopoly IV. Monopolistically competitive A. I only B. II only C. III only D. I and IV only E. II and IV only

  8. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 32. Allocative and productive efficiency are possible in which of the following unregulated market structures? I. Perfectly competitive II. Pure monopoly III. Oligopoly IV. Monopolistically competitive A. I only B. II only C. III only D. I and IV only E. II and IV only ALLOCATIVE EFFICIENCY: Obtaining the most consumer satisfaction from available resources. Allocative efficiency means that our economy is doing the best job possible of satisfying unlimited wants and needs with limited resources -- that is, of addressing the problem of scarcity. PRODUCTIVE EFFICIENCY: is when the economy is working on its production possibility frontier (PPF). This is when production of one good is achieved at the lowest cost possible, given the production of the other good(s).

  9. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 33. Which of the following is true of monopolists who practice price discrimination? A. They charge all customers the same price. B. They earn a smaller profit than those who do not practice price discrimination. C. They charge customers different prices according to different elasticities of demand. D. They produce lower quantities than pure monopolists. E. They produce the same quantity of output as pure monopolists

  10. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 33. Which of the following is true of monopolists who practice price discrimination? A. They charge all customers the same price. B. They earn a smaller profit than those who do not practice price discrimination. C. They charge customers different prices according to different elasticities of demand. D. They produce lower quantities than pure monopolists. E. They produce the same quantity of output as pure monopolists PRICE DISCRIMINATION: Charging different prices to different buyers for the same good. This is an age old practice for suppliers who have achieved some degree of market control, especially those with a monopoly.

  11. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 34. Characteristics of an oligopolistic market include which of the following? I. Easy entry and exit of firms II. Few firms III. Interdependence among firms A. I only B. II only C. III only D. II and III only E. I, II and III

  12. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 34. Characteristics of an oligopolistic market include which of the following? I. Easy entry and exit of firms II. Few firms III. Interdependence among firms A. I only B. II only C. III only D. II and III only E. I, II and III OLIGOPOLY: A market structure dominated by a small number of large firms, selling either identical or differentiated products, and significant barriers to entry into the industry.

  13. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 6. What is the long run equilibrium position for a monopolistically competitive firm? How does the long run equilibrium position of a monopolistically competitive firm compare with the long run equilibrium position of a perfectly competitive firm?

  14. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 6. What is the long run equilibrium position for a monopolistically competitive firm? How does the long run equilibrium position of a monopolistically competitive firm compare with the long run equilibrium position of a perfectly competitive firm? A monopolistic competitor in the long run equilibrium operates where price equals average total cost, so it earns zero economic profit in the long run. This long run equilibrium occurs because one of the characteristics of monopolistic competition is that firms can easily enter or leave the industry (free entry). If monopolistic competitors are earning short run economic profits, more firms will enter the industry. This increases industry supply, lowers price and eliminates economic profit. On the other hand, if monopolistically competitive firms are experiencing short run economic losses, firms will leave the industry to seek economic profits elsewhere or existing firms will cut production. This decreases industry supply, raises price and restores normal profits in the long run to the firms remaining in the industry. The monopolistic competitor faces a downward sloping demand curve because of product differentiation. The perfect competitor faces a horizontal demand curve because there is no product differentiation. Because marginal revenue is lower than price and because profits are maximized where marginal revenue equals marginal cost, the monopolistically competitive firm is not allocatively efficient. Because price and marginal revenue are equal, a perfectly competitive firm does operate where P-MC and is allocatively efficient. The monopolistically competitive firm also does operate at the bottom of its average total cost curve so it is not productively or allocatively efficient. The perfect competitor does operate at the bottom of its average total cost curve.

  15. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 7. Why will a firm maximize profits where marginal revenue equals marginal cost? Under what conditions, if any, will a firm not operate where marginal revenue equals marginal cost? Explain.

  16. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 7. Why will a firm maximize profits where marginal revenue equals marginal cost? Under what conditions, if any, will a firm not operate where marginal revenue equals marginal cost? Explain. When MR is greater than MC, each additional unit of output adds more to total revenue than total cost, causing losses to decrease or profits to increase. When MR is less than MC, each unit produced adds more to total cost than to total revenue, causing profits to decrease or losses to increase. Therefore, profit maximization occurs where MR = MC.

  17. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 8. Consider two firms in a market. Each firm must decide whether to market a new product. The profit earned from marketing the new product depends on whether one or both firms market the product. If one firm markets the product, the firm will earn a profit of $2 million. If both firms market the product, they split the profits of $3 million. • Identify the players, actions and payoffs in this game and construct a payoff matrix. Call the firms A and B. The first number in each square should represent the payoff for Firm A. • Does Firm A have a dominant strategy in this game? If so, what is it? • Does Firm B have a dominant strategy in this game? If so, what it is?

  18. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 8. Consider two firms in a market. Each firm must decide whether to market a new product. The profit earned from marketing the new product depends on whether one or both firms market the product. If one firm markets the product, the firm will earn a profit of $2 million. If both firms market the product, they split the profits of $3 million. • Identify the players, actions and payoffs in this game and construct a payoff matrix. Call the firms A and B. The first number in each square should represent the payoff for Firm A. • Does Firm A have a dominant strategy in this game? If so, what is it? • Does Firm B have a dominant strategy in this game? If so, what it is? B. Firm A has a dominant strategy: produce C. Firm B has a dominant strategy: produce

  19. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 9. A firm is operating in a perfectly competitive market where price is equal to average variable cost in the short run. • Draw and correctly label a graph for this firm, indicating each of the following: • Marginal revenue • Average variable cost • Average cost • Marginal cost • Price

  20. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 9. A firm is operating in a perfectly competitive market where price is equal to average variable cost in the short run. • Draw and correctly label a graph for this firm, indicating each of the following: • Marginal revenue • Average variable cost • Average cost • Marginal cost • Price B. Describe the profit situation for the firm. It is not making a profit. C. If industry price decreases, explain in the short run how this will affect the firm shown in your graph. Price will decrease and equal marginal cost below average variable cost. The firm will shut down.

  21. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 3. A retail industry is perfectly competitive and in long run equilibrium. • The wholesale price increases. Explain what happens initially to the retail industry’s output and price. • In reaction to the changes above, the government imposes a retail price ceiling on the product at its original price level. What will be the effect of the price ceiling on the quantity demanded and supplied in the retail industry? • Given the effect of the price ceiling on the typical firm’s profits, will firms in the retail industry have an incentive to enter or exit this industry in the long run? Explain.

  22. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 3. A retail industry is perfectly competitive and in long run equilibrium. • The wholesale price increases. Explain what happens initially to the retail industry’s output and price. • An increase in factor input prices increases the cost of production and shifts the industry supply curve to the left (upward) • Equilibrium quantity decreases and • Equilibrium price increases

  23. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 3. A retail industry is perfectly competitive and in long run equilibrium. • B. In reaction to the changes above, the government imposes a retail price ceiling on the product at its original price level. What will be the effect of the price ceiling on the quantity demanded and supplied in the retail industry? • The quantity demanded is greater (movement along the demand curve) • There is movement along the supply curve (decrease in the quantity supplied) • What happens in i and ii creates a disequilibrium situation, which could be identified as a shortage or excess demand. The price ceiling has changed an equilibrium situation into one of disequilibrium.

  24. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 3. A retail industry is perfectly competitive and in long run equilibrium. • C. Given the effect of the price ceiling on the typical firm’s profits, will firms in the retail industry have an incentive to enter or exit this industry in the long run? Explain. • Since originally the industry was in long run equilibrium, the increase in costs coupled with the price ceiling results in losses (not merely a decrease in profits) • The losses will drive firms out of the industry (firms will exit)

  25. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 6. In the country of Lola, sugar had always been produced in a perfectly competitive industry until a dictator seized power and monopolized the production of sugar. • Draw a graph that shows the output and price the monopolist would choose to maximize profits. • The people of Lola revolt, imprison the dictator and repeal the law restricting the number of sellers of sugar. • B. Explain two conditions that might lead to an increase in the number of sugar sellers after the repeal of the law. • C. Describe how an individual seller would determine the profit maximizing output level of sugar if the sugar industry were perfectly competitive. • D. Given your answers in Parts A and C, is the repeal of the law likely to make the sugar industry more efficient? In your explanation, be sure to include an explanation of economic efficiency.

  26. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 6. In the country of Lola, sugar had always been produced in a perfectly competitive industry until a dictator seized power and monopolized the production of sugar. • Draw a graph that shows the output and price the monopolist would choose to maximize profits.

  27. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 • 6. In the country of Lola, sugar had always been produced in a perfectly competitive industry until a dictator seized power and monopolized the production of sugar. • The people of Lola revolt, imprison the dictator and repeal the law restricting the number of sellers of sugar. • B. Explain two conditions that might lead to an increase in the number of sugar sellers after the repeal of the law. • Conditions that might lead to an increase in the number of sellers: • Reduction barriers to entry • Profits that were earned by the monopolist • Returning property rights to original workers

  28. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 6. In the country of Lola, sugar had always been produced in a perfectly competitive industry until a dictator seized power and monopolized the production of sugar. The people of Lola revolt, imprison the dictator and repeal the law restricting the number of sellers of sugar. C. Describe how an individual seller would determine the profit maximizing output level of sugar if the sugar industry were perfectly competitive. An individual will determine the profit-maximizing output by equating marginal revenue to marginal cost (MC = MR). For a competitive firm, price equals marginal revenue (P = MR). Price is determined in the market or industry and is not determined by the individual seller. This is called being a price taker.

  29. Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 3 6. In the country of Lola, sugar had always been produced in a perfectly competitive industry until a dictator seized power and monopolized the production of sugar. D. Given your answers in Parts A and C, is the repeal of the law likely to make the sugar industry more efficient? In your explanation, be sure to include an explanation of economic efficiency. Under perfect competition, the industry is operating more efficiently. Economic efficiency includes having P = MC (allocative efficiency) and P = min ATC (productive efficiency).

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