Market Structures, Perfect Competition, Monopoly, and Things Between Review Questions for AP Economics
The study guides for these review questions can be found at:
- Perfect Competition Review for AP Economics
- Monopoly Review for AP Economics
- Monopolistic Competition Review for AP Economics
- Oligopoly Review for AP Economics
- For a competitive firm, what is the most important thing to consider in deciding whether to shut down in the short run?
- Compare AVC to MR.
- Compare TR to TC.
- Do not produce if the TFC is not covered by revenue.
- Produce the highest quantity demanded regardless of price.
- Compare Pto ATC.
- Which characteristic is likely a part of a monopoly market but not of monopolistic competition?
- Differentiated products
- Patents and copyrights
- Possibility of profit in the short run
- Dead weight loss exists
- None of the above
- If the perfectly competitive price is currently above minimum ATC, we can expect which of the following events in the long run?
- Price rises as firms enter the industry.
- Market equilibrium quantity rises as firms exit the industry.
- Nothing, the industry is currently in longrun equilibrium.
- Profits fall as the market price rises.
- Price falls as firms enter the industry.
- Which of these situations is not an example of price discrimination?
- Brent works nights so he chooses to buy bread at 7 a.m. rather than at 7 p.m.
- Bob and Nancy each receive a "$1 off" coupon in the mail, but Bob redeems it while Nancy does not.
- Katie buys 12 Cokes for $3 and Josh buys one Coke at a time for $1.
- Velma likes to go to the movies at the lower afternoon matinee price and Rosemary would rather pay more for the evening show.
- Jason and Jen go to a popular nightclub. Because it is "Ladies Night" Jen pays no cover charge, but Jason must pay to enter the club.
- If these firms do not collude, the outcome will be:
- Both firms maintain the status quo.
- Both firms advertise.
- Firm Xadvertises and Firm Ymaintains the status quo.
- Firm Yadvertises and Firm Xmaintains the status quo.
- Dead weight loss occurs in
- monopolistic competition as P> MC.
- monopoly markets because P> MC.
- oligopoly markets because P> MC.
- all of the above.
- none of the above.
Two competing firms are deciding whether to launch a huge costly advertising campaign or maintain the status quo. Use the following matrix showing the profits of this duopoly to respond to question 5.
Answers and Explanations
- A—The firm only operates if the total revenue is at least as great as total variable cost. On a per unit basis, the firm must receive a P= MR that is at least as great as AVC. Since firms pay TFC regardless of production, they are not a factor in whether you should shut down. Choices B, C, and E are wrong because TC and ATC include the fixed costs. Choice D is incorrect because it might not be the profitable strategy, but is irrelevant to the shutdown decision.
- B—Monopoly has barriers to entry (i.e., patents) and the monopolistic competitive firm does not. Choices A, C, and D are true of monopolistic competition and monopoly.
- E—With P> ATC, you should recognize that positive economic profits exist. Firms enter and price falls toward the break-even point so any mention of exit or rising prices can be eliminated. Entry also increases the market quantity of the good produced.
- A—If Brent chooses to buy his bread early in the morning rather than in the evening, this is not price discrimination. The other choices describe buying in bulk, redeeming a coupon, or paying a lower price because of the time in which one consumes the good. The nightclub example is price discrimination based upon gender.
- B—For each firm, choosing the costly advertising campaign is the dominant strategy. This is an example of the prisoners' dilemma.
- D—Allocative inefficiency and dead weight loss in anymarket structure is when P> MC.
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