Quiz 3

Question 1

Suppose a monopoly firm faces a downward sloping demand curve described by the equation: P = 100 - 2Q. Suppose also that it can produce additional units of output at a constant marginal cost of 40 and that total fixed costs are 1000. Under these demand and cost conditions, the firm maximises profits by producing:

1. 50 units of output
2. 20 units of output
3. 40 units of output
4. 15 units of output
5. 10 units of output

Answer 1

4. 15 units of output

Question 2

Using the same information about demand and cost conditions provided in the previous question, and again assuming that the firm maximises profits, we can decide that the firm will set its price at:

1. 70
2. 80
3. 0
4. 20
5. 60

Answer 2

1. 70

Question 3

If a firm is a price-taker and it can earn economic profits (above-normal profits) we can deduce that the firm must be operating at a rate of production for which:

1. P > MC
2. P > MR
3. P > ATC
4. all of the above
5. none of the above

Answer 3

3. P > ATC

Question 4

If a firm faces a downward-sloping demand curve, it maximises profits by operating at the point where:

1. MC = P
2. MR = P
3. P = AR
4. all of the above
5. none of the above

Answer 4

5. none of the above

Question 5

For a monopoly firm, a limit pricing strategy is designed to:

1. limit the price paid for labour and capital inputs
2. deter the entry of new competitors
3. ensure that short-run profits are maximised
4. ration output when conditions of excess demand prevail

Answer 5

2. deter the entry of new competitors

Question 6

A perfectly competitive industry is characterised by:

1. a large number of small firms
2. homogeneous (identical) products
3. no significant entry barriers to the industry
4. all of the above
5. none of the above

Answer 6

4. all of the above

Question 7

Long-run equilibrium in a monopolistically competitive industry is characterised by:

1. P = MC
2. P = ATC
3. P = MR
4. all of the above
5. none of the above

Answer 7

2. P = ATC

Question 8

For a profit maximising firm in a perfectly competitive market, the decision to shut down production in the short run us made when:

1. P < ATC
2. P < AFC
3. P < MC
4. P < AVC
5. none of the above

Answer 8

4. P < AVC

Question 9

If the representative firm in a perfectly competitive market incurs losses, which of the following conditions must hold in the short run:

1. MC > P
2. MC > AR
3. ATC > P
4. MC > MR
5. all of the above

Answer 9

3. ATC > P

Question 10

The individual demand curve for a perfectly competitive firm is:

1. horizontal at the prevailing market price
2. vertical with respect to price
3. downward sloping with respect to price
4. upward-sloping with respect to price
5. equivalent to the market demand curve

Answer 10

1. horizontal at the prevailing market price