Unit 4 Imperfect Competition

Duration: 2hrs.

CHAPTER 4

Note: Please retain the original question numbers as it is in your answer sheet.

277. Product differentiation is an essential part of which type of

market structure?

(A) oligopoly

(B) monopoly

(C) monopolistic competition

(D) natural monopoly

(E) perfect competition

278. A firm with a natural monopoly may be required by law to

set prices either on or relatively close to the costs that the firm incurred
to make the good or service. This idea is known as

(A) the average cost pricing rule

(B) the ability to pay rule

(C) an antitrust law

(D) law of diminishing marginal returns

(E) economies of scale

 279. A monopolistic competition refers to

(A) extensive economies of scale and higher cost-efficiency

when there is only one firm for the entire demand of a product

(B) many small firms offering a differentiated product with

easy entry into the market

(C) a market structure with a small number of interdependent

large firms producing a standardized product

(D) the most competitive market structure

(E) the least competitive market structure

280. An oligopoly refers to

(A) a single firm offering the product and achieving

economies of scale

(B) the market structure where a firm has the most pricing
power

(C) a small number of interdependent firms, high barriers to

entry, and significant pricing power

(D) many small firms offering a differentiated product with

easy entry into the market

(E) the market structure where a firm has the least pricing
power

281. All of the following are part of a monopolistic competition

market structure EXCEPT

(A) differentiated products

(B) deadweight loss

 (C) economic profits in the short run

(D) economic profits in the long run

(E) many firms

282. A movie theater offers tickets to the general public for $10.
Students can buy tickets for $8. This is an example of

(A) deadweight loss

(B) variable costs

(C) price discrimination

(D) market power

(E) fixed costs

283. A monopoly refers to

(A) the least competitive market structure

(B) the most competitive market structure

(C) a market structure with a small number of interdependent

large firms producing a standardized product

(D) extensive economies of scale and higher cost-efficiency

when there is only one firm for the entire demand of a product

(E) the most competitive market structure

284. Which of the following BEST reflects an example of an

oligopoly?

(A) when there is only one company that is free to set the
market price
 (B) when there are two to three companies competing against
each other, causing a very low price

(C) when a company gets a patent and is legally the only

company that can fulfill a certain service

(D) when there are many small companies competing against

one another, keeping the price high

(E) when there are a few companies who work together to

maintain a higher market price

285. A company recently found a vaccine, and it now has a patent

for it for 10 years. Why is this an example of a natural monopoly?

(A) because the company will allow other companies to

produce it as well immediately, making the monopoly legal

(B) because there is only one company on the market and it

achieved this through non-market means

(C) because the company will be incentivized to provide a

very low price

(D) because there is only one company in the market, but the
company achieved this through regular market means

(E) because the company receives financial incentives from

the government whenever it gets a patent

286. Why is the demand for fruit less price elastic than the
demand for a boat?

(A) Consumption of fruit is greater.

(B) A boat is an inferior good.

(C) There are more suppliers of fruit than boat manufacturers.

 (D) Fruit takes up less of a consumer’s budget.

(E) all of the above

287. All of the following are long-run production decisions

EXCEPT

(A) an auto-repair shop decides to increase the size of its

garage

(B) a school decides to hire more teaching assistants because

of an increase in the school population

(C) a firm increases the number of its plants

(D) a school decides to add more classrooms and a new

performing arts center

(E) a firm decides to close 5 percent of its plants

288. The difference between a monopoly and a monopolistic

competition is

(A) differentiated products

(B) economies of scale

(C) long-term pricing power

(D) government regulation

(E) the size of the market

289. If a monopoly and a perfect competition have the same costs,

the monopoly will always

(A) charge a lesser price than the perfect competition

 (B) produce the same quantity as the perfect competition

(C) charge a higher price than the perfect competition and

produce less

(D) charge a higher price than the perfect competition and

produce more

(E) none of the above

290. No barriers to entry or exit, many firms, and a standardized

product are characteristics of which type of market structure?

(A) monopolistic competition

(B) oligopoly

(C) natural monopoly

(D) monopoly

(E) perfect competition

291. The market for smartphones may be considered a

monopolistic competition rather than a perfect competition because

(A) there is product differentiation

(B) there is no product differentiation

(C) profits in the long run decrease as more firms enter the
market

(D) they are price takers

(E) all of the above

 292. The services of natural gas, water, and electricity brought
into the household are best consigned to which market structure?

(A) monopolistic competition

(B) oligopoly

(C) perfect competition

(D) natural monopoly

(E) monopoly

293. If the price of cigarettes, a normal good, is in equilibrium,

which choice will result in a price increase for cigarettes?

(A) consumer income to decrease

(B) consumer expectations to remain the same

(C) the price of tobacco to increase

(D) the government to decrease regulations

(E) the price of tobacco to decrease

294. Which of the following is a trait of monopolistic

competition?

(A) a market where all of the products are the same

(B) a market where there is only one producer

(C) companies in that market do not maintain shared capacity

(D) a market where companies make more than normal profit

in the long run
 (E) a market where there are few barriers to entry

295. Which pricing and output choices would a monopolist

select?

(A) Output should be MR = MC and P > MC.

(B) Output should be MR = MC and P = MC.

(C) Output should be MR > MC and P > MC.

(D) Output should be MR < MC and P > MC.

(E) Output should be MR = MC and P < TRC.

296. Which market structures have ease of entry and exit in the
long run?

(A) perfect competition and monopoly

(B) perfect competition and monopolistic competition

(C) monopolistic competition and oligopoly

(D) oligopoly and natural monopoly

(E) all market structures

297. The government is needed to step in and regulate an electric

natural monopoly. Which of the following actions will ensure
allocative efficiency?

(A) Regulate the natural monopoly to the point where P <

MC.

(B) Regulate the natural monopoly to the point where P >

MC.
 (C) Regulate the natural monopoly to the point where P =
MC.

(D) Regulate the natural monopoly to the point where P >

TFC.

(E) none of the above

298. An airline may identify a specific group of people and

charge them a different rate. This is known as

(A) a monopolistic competition

(B) price discrimination

(C) diseconomies of scale

(D) constant returns to scale

(E) illegal by current federal laws

299. Price discrimination might be successful if

(A) the firm can prevent resale to other consumers and

identify and separate groups of consumers

(B) the firm does not have a monopoly on the pricing power
of the good or service

(C) the firm has a monopoly on pricing power but cannot

prevent resale to other consumers

(D) the firm does not have economies of scale

(E) the firm is operating within government regulations

300. Suppose you pick up the latest edition of The Economist and
read that company Z, a producer of cigarettes, recently purchased 8 out
of the 10 biggest farms that produce tobacco. Since you are a very
good AP Economics student, you realize immediately that company Z
is attempting to

(A) increase profits

(B) establish an oligopoly through collusive pricing

(C) maximize profits where marginal revenue equals marginal

cost

(D) establish a monopoly through majority control of a factor

of production

(E) none of the above

Use the following graph to answer question 301.

 301. The graph represents a short-run monopolistic equilibrium.
The shaded area represents

(A) surplus

(B) shortage

(C) profit

(D) price ceiling

(E) price floor

302. In the long run, monopolistically competitive firms break

even because of

(A) government regulations

(B) price ceilings

(C) no entry or exit barriers

(D) exit of firms from the market

(E) non-price competition

303. Game theory fits best with which market structure?

(A) monopolistic competition

(B) perfect competition

(C) monopoly

(D) oligopoly

(E) natural monopoly

 304. Price leadership fits best with which type of market
structure?

(A) monopoly

(B) natural monopoly

(C) perfect competition

(D) oligopoly

(E) monopolistic competition

305. Implicit costs are

(A) direct, purchased, out-of-pocket costs

(B) costs that change with the level of output

(C) indirect costs or opportunity costs

(D) total variable costs divided by output

(E) none of the above

306. If a cartel comes into existence, the most likely outcome

would be that

(A) economic profits will be balanced among all cartel

members

(B) each cartel member would attempt to cheat by producing

more

(C) there is allocative efficiency

(D) prices will be established through the market forces of

supply and demand
 (E) advertising will push consumers to one firm or the other

307. Monopoly deadweight loss is caused by

(A) P > MC

(B) P = MC

(C) MC = MB

(D) MC > MB

(E) none of the above

308. If price equals marginal revenue, which equals marginal

cost, which equals average total cost, all in the long run, which type of
market structure would this be?

(A) monopolistic competition

(B) monopoly

(C) natural monopoly

(D) oligopoly

(E) perfect competition

309. All of the following are characteristic of an oligopoly

EXCEPT

(A) price taking

(B) collusive behavior

(C) barriers to entry

(D) cheating on other firm members to produce more

 (E) a few large firms

310. Jet Inc. is a car-making company that operates in a market

that has a very inelastic demand curve. Barriers to entering the market
are high, and the price is higher than the marginal cost in the long run.
Which of the following is this most likely an example of ?

(A) monopolistic competition

(B) perfect competition

(C) both A and B

(D) imperfect competition

(E) an atomistic market

Use the following graph to answer question 311.

311. For the firm in this graph, marginal revenue is

(A) constantly decreasing

(B) constantly increasing

(C) the same at every output level

(D) increasing rapidly, then decreasing, then negative

(E) increasing at a constant rate, then decreasing

312. If P = ATC, then

(A) economic profit is zero

(B) accounting profit is zero

 (C) normal profit is unattainable

(D) firms are operating inefficiently

(E) all of the above

313. Since the monopolist has many barriers to entry and no

competition, he or she has price-setting ability. This is also known as

(A) purchasing power

(B) profit maximization

(C) market power

(D) efficiency

(E) none of the above

314. Firms engaged in a monopolistically competitive market

have some market power because

(A) the firms have few competitors

(B) the firms have differentiated products

(C) the government restricts the use of patents for the firms
through antitrust legislation

(D) advertising allows the firms to set any price they wish

(E) none of the above

315. When the government grants a patent to a firm, the market

for the patented product becomes a(n)

(A) monopoly
 (B) oligopoly

(C) cartel

(D) monopolistic competition

(E) pure competition

316. Economies of scale refers to

(A) an increase in ATC as quantity increases

(B) a decrease in ATC as quantity increases

(C) a decrease in ATC as quantity decreases

(D) a firm maximizing profit through dominance of the

market

(E) sensitivity to the determinants of supply and demand and

price level

Refer to the following graph, which reflects the market for a soda
manufacturer, to answer questions 317–319.
 317. What is the soda manufacturer’s economic profit if it has a
monopoly?

(A) $800

(B) $1,000

(C) $400

(D) $600

(E) $0

318. Which areas on the chart reflect the deadweight loss caused
by the monopoly?

(A) the triangle bounded by points A, B, and (200, $2)

(B) the triangle bounded by points A, B, and (200, $2) AND

the triangle bounded by point B, ($2, 200), and the point where
MR = MC
 (C) the rectangle containing point A and (0, $2)

(D) the rectangle containing point A and (0, $0)

(E) the triangle containing the area between D and MR but

above MC

319. If the soda price and quantity shifted from point A to point
B, this would indicate

(A) demand for soda increased

(B) economies of scale

(C) other soda manufacturers entered the market

(D) decreased price competition

(E) diseconomies of scale

320. A few laptop manufacturers are competing in a market. The

laptops have slightly different styles and similar prices. The laptop
manufacturers earn economic profits in the long run. The market is
a(n)

(A) oligopoly

(B) monopoly

(C) perfect competition

(D) monopolistic competition

(E) none of the above

321. Several oil companies form an industry organization that sets

the price of a barrel of oil. This is NOT
 (A) a monopoly

(B) a cartel

(C) collusion

(D) an oligopoly

(E) market power

322. An agricultural community has four banana farms, five plum

farms, six grape farms, and seven apple farms. Demand is likely the
MOST price elastic for which fruit?

(A) apples

(B) bananas

(C) plums

(D) grapes

(E) not enough information

323. Many farms are selling peanuts. The peanuts are not
differentiated and the peanut farms are not earning an economic profit.
Demand for a peanut farm is likely

(A) elastic

(B) perfectly elastic

(C) inelastic

(D) perfectly inelastic

(E) downward sloping

 324. An auto manufacturer needs to reduce costs in the short run.
It can make any of these decisions EXCEPT

(A) lay off 10 percent of the auto workers

(B) shut down 5 percent of its plants

(C) order smaller quantities of metal and rubber

(D) shut down a production line

(E) refinance corporate bonds

325. A price increase in product B resulted in a price increase for

product C. Product C is most likely a(n)

(A) inferior good

(B) complementary good

(C) normal good

(D) substitute good

(E) factor of production

326. A toy manufacturer adds an employee and average cost

decreases. It continues to add more employees. At first, average cost
decreases even further, but with even more employees average cost
begins to rise. This reflects

(A) economies of scale

(B) diseconomies of scale

(C) constant economies of scale

(D) the U-shaped average cost curve

 Micro Unit 4 Problem Set Question Bank

1. Explain why demand equals marginal revenue for perfectly competitive firms but marginal
revenue is less than the demand curve for non price-discriminating monopolists. (____/3)

2. Suppose a pure monopolist is faced with the demand schedule shown below. Answer the following
questions.
Price QD TR MR
$11 0
$10 1
$9 2
$8 3
$7 4
$6 5
$5 6
$4 7
$3 8
$2 9
$1 10
a. Calculate the total revenue and marginal revenue for the table above (_____/2)
b. Assume that the marginal cost and average total cost for this monopoly is $5. What is the profit
maximizing price and quantity. How did you get your answer (_____/2)
c. Calculate the total cost and total profit (or loss) at the profit maximizing quantity (_____/2)
d. Use the total revenue test to identify the elastic and inelastic ranges of the demand curve. (_____/2)

3. Draw a natural monopoly. Identify the profit maximizing quantity, the socially optimal quantity,
and the fair return quantity. Use the graph to explain why the government often regulates monopolies
(____/5)

4. Draw a price discriminating monopoly. Identify the profit maximizing quantity and shade in the
area of profit. Use the graph to explain why there is no deadweight loss or consumer surplus (____/5)

5. Complete the following regarding a monopolistically competitive markets.

a. Draw the graph for a monopolistically competitive firm earning economic profits in the short run.
(_____/1)
b. What will happen to the demand and profit in the long-run. Explain why this will occur (_____/2)
c. Draw a graph for a monopolistically competitive firm in the long-run. (____/1)