Name:    Firm Theory

Knowledge - Multiple Choice (1 mark each)
Identify the best choice that best completes the statement or answers the question.

You may wish to use this tool to help you answer some of the questions.

1.

Marginal revenue (MR) may be defined as the:
 a. change in average revenue associated with the sale of one more unit of output b. change in product price associated with the sale of one more unit of output c. change in total revenue associated with the sale of one more unit of output d. difference between product price and average cost

2.

Fixed costs (AFC) per unit:
 a. Are not influenced by production levels b. Do not vary c. Will continuously fall as more and more is produced d. Are items like labour, materials, and taxes

3.

Which of the following is true?
 a. A firm’s total cost (TC) will not always rise with production b. A firm’t total variable costs (TVC) will fall at first, but then rise as more and more is produced. c. Total costs per unit (ATC) have a minimum level, because variable costs will fall then rise. d. Total cost per unit (ATC) will continuously fall as more is produced and a firm benefits from economies of scale

4.

The behaviour of a firm’s average variable cost curve (AVC) is explained by:
 a. Economies of scale b. Law of supply and demand c. None of these is correct d. Economies of scale, then diminishing returns

5.

If a business in a perfectly competitive industry is confronted with a price of \$5, its marginal revenue:
 a. may be either greater or less than \$5 b. will be less than \$5 c. will also be \$5 d. will be greater than \$5

6.

The profit-maximizing rule of producing to where MR=MC applies:
 a. only to perfectly competitive businesses b. to businesses in all types of industries c. only when the business is a "price-taker", and can’t influence the price at all d. only to monopolies

7.

A perfectly competitive business' demand curve is a:
 a. straight line parallel to the quantity axis b. upward-sloping straight line reflecting the constant value of price as output increases c. straight line parallel to the price axis d. downward-sloping straight line reflecting the law of demand

8.

A perfectly competitive business reaches its lowest possible breakeven point where:
 a. normal profits are zero b. price equals average total cost c. the total revenue line equals the average variable cost line d. marginal cost intersects the average variable cost curve

9.

Which of the following is a major limitation to the theory of perfectly competitive markets?
 a. externalities usually don’t apply to small businesses b. effeciency and a small production scale often don’t co-exist c. perfectly competitive firms don’t make any profit d. government involvement limits the number of firms in most industries, in effect creating barriers to entry

10.

In the long run for a perfectly competitive firm, resources are distributed in a way that maximizes the overall satisfaction of consumers and the efficient use of resources when production occurs at the point at which:
 a. P=MC=ATC (price equals marginal cost) b. MC=AVC (marginal cost intersects average variable cost) c. P=AVC (price is equal to average variable cost) d. P=AR (price is equal to average revenue)

11.

A monopolisticly competitive firm’s marginal revenue curve is just like a monopoly’s in that it:
 a. is downward-sloping and lies below the demand curve b. is downward-sloping and coincides with the demand curve c. does not exist because the business is a price-maker d. coincides with the demand curve and is parallel to the horizontal axis

12.

A monopolisticly competitive firm maximizes short-run profits by:
 a. setting price equal to marginal cost b. setting the price at the point where average revenue equals marginal cost c. producing at the the quantity of output where marginal revenue equals marginal cost d. equating demand and average revenue

13.

If an oligopolist is faced with a marginal revenue curve that has a gap in it, we may assume that:
 a. none of these answers are correct. b. it is selling a differentiated product c. its demand curve is kinked d. it is colluding with its rivals to maximize joint profits

14.

The kinked demand curve indicates a situation in which an oligopolist will be:
 a. eager to lower price b. eager to either raise or lower prices c. interested in maintaining the going price even as costs change d. willing to raise price

15.

Which one of the following is usually considered a societal benefit of a monopoly?
 a. economies of scale b. price discrimination c. higher profits d. the monopoly can control price through supply

16.

Because of the market conditions of a monopoly, it can:
 a. get away with collusion b. choose both the quantity produced and the price consumers are willing to pay c. form a perfectly competitive partnership to maximize efficiency d. discriminate between market segments and set separate prices for each to maximize profits

17.

Which of the following market structures almost always experiences some economic profits in the long-run?
 a. Perfect Competition b. Monopolistic Competition c. Oligopoly d. None of the above

18.

Which of the following is true about game theory?
 a. The views of Adam Smith are correct and complete as they apply to monopolistic markets b. In a monopolistic market created by collusion, once the colluding equalibrium point is reached, firms have an incentive to cheat c. Collusion (or cooperating) is not in the best interests of individual firms in the long run, competition is better d. When firms collude society is better off

19.

Which of the following is NOT a market condition for a Monopoly?
 a. Many buyers b. Only one seller c. No substitutes exist d. There are very few barriers to entry

20.

Assume the XYZ Corporation is producing 20 units of output.  It is selling this output in a perfectly competitive market at \$10 per unit.  Its fixed costs are \$100 and its average variable cost is \$3 at 20 units of output.  On the basis of this information we can say that the corporation is making TOTAL economic profits of how much money?
 a. \$97 b. \$40 c. \$140 d. \$17 per unit

Below is revenue and cost data for a monopoly:

 Price Quantity Produced TotalRevenue Total Cost 6.50 3.00 19.50 5.00 6.00 4.00 24.00 6.00 5.50 5.00 27.50 6.50 4.85 6.00 29.10 7.50 4.35 7.00 30.45 9.00 3.90 8.00 31.20 11.00 3.50 9.00 31.50 14.00

21.

The price for the monopoly at the point of maximum profit will be:
 a. 6.5 b. 6 c. 5.5 d. 4.85 e. 4.35 f. 3.9 g. 3.5

22.

Using the same data for this monopoly, marginal revenue from a price decrease from \$6.00 to \$5.50 is:
 a. \$0.70 b. -\$3.50 c. \$0.875 d. \$3.50 e. None of these answers is correct

 Total Output Price Total Cost Average Cost Marginal Cost 0 20 13.5 1 19 17.5 17.50 2 18 22 11.00

23.

Using the chart above, find the marginal cost from moving from one unit of production to two.
 a. \$6.50 b. 4.5 units c. \$2.25 d. \$4.50

24.

Using the chart above, find the marginal revenue from moving from one unit of production to two.
 a. \$9 b. \$18 c. \$17 d. \$1

Below is a graph for a perfectly competitive firm operating in the widget market. The market graph is shown in the top right corner. Answer the questions that follow.

Pop out this graph by clicking here.

25.

Which of the following is true about the state of the MARKET at point #1 in the graph?
 a. It is the short run b. It is not at equilibrium c. There are barriers to entry d. None of these answers is correct

26.

Which of the following is true about the state of the FIRM at point #1 in the graph?
 a. It is at equilibrium b. It is producing at the most efficient level of production c. It is not maximizing profits d. It is earning economic profits

27.

Which of the following could be true about the state of the MARKET at point #2 in the graph?
 a. Firms have lowered their prices in the market b. New firms entered the industry c. Consumer tastes and preferences changed d. The market experienced a shortage

28.

Which of the following could be true about the state of the FIRM at point #2 in the graph?
 a. This firm lowered prices and the market followed b. This firm must shut down to save money c. This firm should produce more to maximize profit d. This firm is losing money, but not enough to shut down

29.

Which of the following could be true about the state of the MARKET at point #3 in the graph?
 a. The market demand has increased raising price levels b. Less efficient firms reached their shut down point and left, raising market price c. Since no money is being made, more firms will leave, raising market price further and profits will return. d. None of these statements is true

30.

Which of the following could be true about the state of the FIRM at point #3 in the graph?
 a. This firm is making no economic profit but will eventually as this is the short run b. This firm will eventually shut down since it’s not making money c. This is the short run condition for this firm where it is still losing money d. This firm is producing at its long-run maximum profit level of output

Ceteris paribus, The following graph is a comparison between a monopoly and a perfectly competitive firm.  NOTE: It assumes these two firms have the same cost structure. Only revenue-related lines are different.

Answer the questions that follow.

Pop out this graph by clicking here. 31.

Does graph depict a comparison between a perfectly competitive firm and a monopoly in the short run, or in the long run?
 a. Short Run b. Long Run c. Can’t be determined

32.

Which price level represents what the monopoly would sell this product for?

 a. P1 b. P2 c. Not indicated

33.

What is the quantity produced by the monopoly?

 a. Q1 b. Q2 c. Not indicated

34.

Total revenue generated by the monopoly is the shaded area(s):
 a. Orange, Blue, Red, Green b. Blue, Red, Green c. Blue, Red d. Green e. Green, Purple

35.

Total revenue generated by the perfectly competitive firm is the area bounded by the height by width of:
 a. P1 by Q1 b. P1 by Q2 c. P2 by Q1 d. P2 by Q2 e. The answer is not shown

36.

The point of profit maximization for the monopoly occurs where its marginal revenue equals its marginal cost. This occurs at the point:
 a. A b. B c. C d. D e. E

37.

The point of profit maximization for the perfectly competitive firm occurs where its marginal revenue equals its marginal cost. This occurs at the point:
 a. A b. B c. C d. D e. E

38.

The cost per unit at maximum profit for the monopoly is the point:
 a. A b. B c. C d. D e. E

39.

The cost per unit at maximum profit for the prefectly competitive firm is the point:
 a. A b. B c. C d. It is not shown. e. E f. D

40.

The most efficient point of production for either firm is represented by the point:
 a. A b. B c. C d. D e. E f. It is not indicated.

41.

The monopoly at maximum profit will set a price for its product that can be found by looking at the following point on the its demand curve:
 a. A b. B c. C d. D e. E f. It is not shown.

42.

The perfectly competitive firm at maximum profit must accept a market price that can be found by looking at the following point on the its demand curve:
 a. A b. B c. C d. D e. E

43.

If the government forced the monopoly to produce at the point of maximum long-run efficiency like the perfeclty competitive firm, what point on its demand curve would represent this price and output level?
 a. A b. B c. C d. D e. E

44.

Maximum total revenue for the monopoly occurs at:
 a. A point left of Q1 b. Q1 c. Between Q1 and Q2 d. Q2 e. To the right of Q2

45.

Total cost for the monopoly is represented by the shaded area:
 a. Green b. Red c. Blue d. Orange e. Yellow f. Purple g. Blue, Red h. Blue, Red, Green

46.

The consumer surplus for the monopoly is represented by the area coloured:
 a. Orange b. Yellow c. Blue, Red d. Orange, Blue, Yellow e. Can’t be determined

47.

If the monopoly was forced to produced at the sane level of output as the competitive firm, then the consumer surplus would be represented by the area coloured:
 a. Orange b. Yellow c. Blue, Red d. Orange, Blue, Yellow e. Can’t be determined