Economic Questions

ECON 1102 Test 4 (120414)

ECON 1102: Test 4

Do all 40 questions

Use the table below, which gives the demand for a monopolist’s output, to answer questions 1, 2 and 3.





(dollars per unit)

1 8

2 7

3 6

4 5

5 4

6 3


1) Between which two quantities is marginal revenue equal to 2?

A) 4 and 5

B) 3 and 4

C) 2 and 3

D) 1 and 2


2) Between which two quantities is demand inelastic?

A) 6 and 5

B) 5 and 4

C) 4 and 3

D) 3 and 2


3) What is the marginal revenue when output is increased from 5 to 6 units?

A) $18

B) $4

C) $3

D) -$2


4) A single-price monopoly

A) charges all consumers the lowest price that they want to pay for each unit purchased.

B) produces less output than it would if it could price discriminate.

C) eliminates all the consumer surplus.

D) creates a smaller deadweight loss than it would if it could price discriminate.

5) A single-price monopolist determines

A) its output but not its price.

B) its price but not its output.

C) both its output and its price.

D) neither its output nor its price.


6) In monopolistic competition, the presence of a large number of firms making a differentiated product

means that

A) each firm has some ability to effect the price of its particular good or service.

B) each firm must charge the same price.

C) the price is established by agreements among the different firms.

D) each firm must produce the same quantity.


7) Firms in monopolistic competition have rivals that

A) match their price increases.

B) match their price decreases.

C) agree on a common price.

D) set their prices according to the demand curves they face.





ECON 1102 Test 4 (120414)

8) When firms in monopolistic competition are making an economic profit, firms will

A) enter the industry, and demand will increase for the original firms.

B) exit the industry, and demand will increase for the firms that remain.

C) exit the industry, and demand will decrease for the firms that remain.

D) enter the industry, and demand will decrease for the original firms.


9) Firms in monopolistic competition charge prices that are ________ those of the other firms in the market.

A) close to

B) very different from

C) the same as

D) completely unrelated to


10) A monopolistically competitive firm has ________ power to set the price of its product because


A) no; there are no barriers to entry

B) some; there are barriers to entry

C) no; of product differentiation

D) some; of product differentiation


11) Monopolistically competitive firms and perfectly competitive firms are alike because both types of firms

I. face downward sloping demand curves.

II. have marginal revenue curves that lie beneath their demand curves.

III. can make only zero economic profit in the long run.

A) I and II

B) I and III

C) III only

D) I only


12) Dole Co. operates in a monopolistically competitive market. Which of the following characterizes Dole

Co.’s market?

A) Dole Co. supplies a small portion of the market’s output.

B) Dole Co.’s product is slightly different from its competitors.

C) Dole Co. faced no barrier to entry when it decided to enter its market.

D) All of the above describe Dole Co.’s market.


The figure below shows the situation facing Smart Digit, Inc., a firm in monopolistic competition that

produces calculators. Use this figure to answer questions 13, 14 and 15.



13) What is the firm’s profit-maximizing price?

A) $12

B) $10

C) $8

D) $4



ECON 1102 Test 4 (120414)


14) What is the firm’s economic profit per day?

A) zero

B) between $1 and $700

C) between $701 and $900

D) more than $901


15) The firm’s markup is ________ per calculator.

A) zero

B) $2

C) $4

D) $6


The figure below shows the demand curve for Gap jackets (D), and Gap’s marginal revenue curve (MR),

marginal cost curve (MC), and average total cost curve (ATC). Use this figure to answer questions 16 to 20.




16) Gap maximizes its profit if it sells ________ jackets per day.

A) 100

B) 64

C) 129

D) 133


17) Gap maximizes its profit if it charges ________ per jacket.

A) $130

B) $80

C) $115

D) $100


18) What is Gap’s economic profit?

A) zero

B) $5,000

C) -$5,000

D) -$1,160


19) The market for jackets ________ in long-run equilibrium, and there is ________ for new firms to enter.

A) is; no incentive

B) is; an incentive

C) is not; an incentive

D) is not; no incentive


20) What is Gap’s excess capacity?

A) 32 jackets per day

B) zero

C) 4 jackets per day

D) 132 jackets per day



ECON 1102 Test 4 (120414)


21) Expenditures on advertising ________.

A) can lower average total cost if the advertising increases the quantity sold by a large enough amount

B) cannot lower average total cost because when a firm advertises it increases its costs

C) always lower average total cost because whenever a firm advertises, it increases the quantity sold

D) are variable costs so do not affect the average total cost


22) The loss of efficiency that occurs in monopolistic competition has to be weighed against the gain of

A) higher wages for employees.

B) an increase in employment.

C) greater product variety.

D) reduced environmental damage.


23) If firms in an industry differentiated their products and made economic profits in the short-run, what

other characteristic would be important to determine if this is an oligopoly or a monopolistically competitive


A) the number of firms in the market

B) the number of close substitutes for the good being produced

C) the number of buyers in the market

D) if the good being sold is a normal or inferior good


24) In ________ market structure, a firm’s output depends ________.

A) an oligopoly; only on its own marginal revenue and marginal cost curves

B) a monopolistically competitive; in part on its competitors’ price and quantity decisions

C) an oligopoly; in part on its competitors’ price and quantity decisions

D) a monopolistically competitive; only on its marginal revenue curve


25) The small town of Narberth has two pizza stores. Which of the following statements are correct?

I. The profits of each store depend on the price of the pizza at the other store.

II. Both stores would increase their profit if they cooperated in setting their prices.

A) I only

B) II only

C) Both I and II

D) Neither I nor II


26) In the market for batteries, the four largest firms earn 90% of the total revenue and there are 35 firms in

the industry. This industry is best described as

A) oligopoly.

B) monopoly.

C) monopolistic competition.

D) perfect competition.


27) In what type of market is a cartel possible?

A) a market in which there are only a few firms and barriers to entry exist

B) a market in which firms sell a homogeneous good

C) a market in which firms sell a differentiated good

D) a market in which there are many firms


28) Once a cartel determines the profit-maximizing price,

A) each firm faces the temptation to cheat by raising its price.

B) each firm faces the temptation to cheat by lowering its price.

C) changes in the output of any member firm will not affect the market price.

D) entry into the industry by rival firms will not affect the profit of the cartel.


29) A market in which firms can enter and leave so easily that firms in the market face competition from

potential entrants is called a

A) contestable market.

B) cartel.

C) limit pricing market.

D) monopolistic competition market.



ECON 1102 Test 4 (120414)









D: $100

F: $80

D: $105

F: $95




D: $110

F: $100

D: $95

F: $85


30) Disney and Fox must decide when to release their next films. The revenues received by each studio

depend in part on when the other studio releases its film. Each studio can release its film at Thanksgiving or

at Christmas. The revenues received by each studio, in millions of dollars, are depicted in the payoff matrix

above. Which of the following statements correctly describes Disney’s strategy given what Fox’s release

choice may be?

A) If Fox chooses a Thanksgiving release, Disney should choose a Christmas release.

B) If Fox chooses a Christmas release, Disney should choose a Thanksgiving release.

C) Disney should release on Thanksgiving regardless of what Fox does.

D) Both answers A and B are correct.


31) Limit pricing is a strategy used by a firm to

A) deter entry.

B) enhance short run profits.

C) raise its prices.

D) lower its costs.


32) Antitrust law is law that

A) does not allow individuals to open trust savings accounts.

B) prohibits competition in certain industries.

C) prohibits certain kinds of market behavior by firms.

D) allows firms under special circumstances to be a monopoly.


33) Southwest Airlines wants to raise $20 million to finance the renovation of their corporate offices, and the

company wishes to raise the funds through direct finance. Which of the following methods could it use?

A) It could issue $20 million in stocks.

B) It could sell $20 million in bonds.

C) It could borrow $20 million from a bank.

D) It could choose either A or B.


34) What is different about buying stocks and buying bonds?

A) A stock can possibly pay dividends forever, but bonds have a fixed number of payments.

B) Differences of opinion about a stock’s future may vary considerably but there is less difference about a

bond’s future.

C) The future growth of a stock is more uncertain than the payments of a bond.

D) All these are differences between stocks and bonds.


35) If a corporate bond with face value of $1,000 has an interest rate of eight percent paid once a year for a

term of 30 years, what is the size of the coupon payment?

A) $1,000

B) $300

C) $80

D) $8





ECON 1102 Test 4 (120414)

36) You have a bond that pays $60 per year in coupon payments. Which of the following would result in an

increase in the price of your bond?

A) Coupon payments on newly-issued bonds rise to $80 per year.

B) The likelihood that the firm issuing your bond will default on debt increases.

C) The price of a share of stock in the company falls.

D) Coupon payments on newly-issued bonds fall to $50 per year.


37) Generally with bond ratings, the lower the rating, the ________ the interest rate an investor will receive

and the ________ the risk that the issuer of the bond will default.

A) higher; higher

B) higher; lower

C) lower; higher

D) lower; lower


38) All of the following would be considered explicit costs of operating a business except

A) rent paid to a landlord.

B) bonuses paid to employees.

C) a normal rate of return for investors.

D) corporate income taxes.


39) What is the present value of $575 in one year if the current rate of interest is 4 percent?

A) $410.71

B) $552.88

C) $598

D) $805


40) If a stock’s dividend is expected to grow at a constant rate of eight percent in the future and it has just

paid a dividend of $1.25 a share, and you have an alternative investment of equal risk that will earn a 12

percent rate of return, what would you be willing to pay per share for this stock?

A) $31.25

B) $1.40

C) $1.25

D) $1.12

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