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Market Structures, Perfect Competition, Monopoly, and Things Between Review Questions for AP Economics

By — McGraw-Hill Professional
Updated on Mar 2, 2011

The study guides for these review questions can be found at:

Questions

  1. For a competitive firm, what is the most important thing to consider in deciding whether to shut down in the short run?
    1. Compare AVC to MR.
    2. Compare TR to TC.
    3. Do not produce if the TFC is not covered by revenue.
    4. Produce the highest quantity demanded regardless of price.
    5. Compare Pto ATC.
  2. Which characteristic is likely a part of a monopoly market but not of monopolistic competition?
    1. Differentiated products
    2. Patents and copyrights
    3. Possibility of profit in the short run
    4. Dead weight loss exists
    5. None of the above
  3. If the perfectly competitive price is currently above minimum ATC, we can expect which of the following events in the long run?
    1. Price rises as firms enter the industry.
    2. Market equilibrium quantity rises as firms exit the industry.
    3. Nothing, the industry is currently in longrun equilibrium.
    4. Profits fall as the market price rises.
    5. Price falls as firms enter the industry.
  4. Which of these situations is not an example of price discrimination?
    1. Brent works nights so he chooses to buy bread at 7 a.m. rather than at 7 p.m.
    2. Bob and Nancy each receive a "$1 off" coupon in the mail, but Bob redeems it while Nancy does not.
    3. Katie buys 12 Cokes for $3 and Josh buys one Coke at a time for $1.
    4. Velma likes to go to the movies at the lower afternoon matinee price and Rosemary would rather pay more for the evening show.
    5. 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.
  5. 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.

  6. If these firms do not collude, the outcome will be:
    1. Both firms maintain the status quo.
    2. Both firms advertise.
    3. Firm Xadvertises and Firm Ymaintains the status quo.
    4. Firm Yadvertises and Firm Xmaintains the status quo.
  7. Dead weight loss occurs in
    1. monopolistic competition as P> MC.
    2. monopoly markets because P> MC.
    3. oligopoly markets because P> MC.
    4. all of the above.
    5. none of the above.

Answers and Explanations

    Answers and Explanations

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. B—For each firm, choosing the costly advertising campaign is the dominant strategy. This is an example of the prisoners' dilemma.
  6. D—Allocative inefficiency and dead weight loss in anymarket structure is when P> MC.
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