ECO 561 Week 3 Knowledge Check
1 . A purely- or perfectly-competitive firm would be characterized by which of the following?
A. Large number of firms, price taker, free entry and exit, and standardized product
B. Large number of firms, price maker, free entry and exit, and a differentiated product
C. Small number of firms, price maker, limited entry and exit, and a standardized product
D. One firm, price maker, limited entry and exit, and a unique product
2 . For a purely-competitive firm, price must be
A. equal to marginal revenue and average revenue
B. greater than marginal revenue and average revenue
C. greater than marginal revenue, and equal to average revenue
D. less than both marginal revenue and average revenue
3 . What will excessive or economic profits induce for a firm in any industry structure?
A. entry into the market
B. exit from the market
C. equilibrium in the market
D. greater demand in the market
4 . A pure-monopoly firm’s demand curve is also the market demand curve. This kind of firm may successfully engage in price discrimination to increase its total profit if it
A. engages in rent-seeking behaviors to prevent possible price challenges from firms in other industries
B. segregates its market into clearly definable groups of consumers with different elasticity of demand, and prevents buyers in one market segment from reselling to buyers in another market segment.
C. determines that consumers are relatively sensitive to price changes along its envisioned range of price differentials (price elastic)
D. determines that demand for its goods or services is relatively insensitive along its envisioned range of differential prices (price inelastic)
5 . Oligopolies are characterized by a small number of firms where the top three firms hold the majority of the market. If in an oligopoly market, firm A is almost twice as big as firm B and firm C then
A. firm A is perfectly free to price however it chooses, since it is by far the most dominant firm in the market
B. firm C has to beware of pricing collusion by A and B to avoid being picked off in a price war
C. firms A, B, and C will tend to use non-price strategies to maintain their profits or market share.
D. firms B and C will try to observe non-price strategies taken by firm A and follow similar strategies to maintain their profits.
6 . In a monopolistic competition industry, if one firm appreciably increased its price from the existing equilibrium price, which of the following outcomes would most likely ensue?
A. It would likely suffer a significant decrease in its market share, because its competitors would be unlikely to deviate from the established equilibrium price.
B. The firm would stand to gain much additional revenue if its competitors did not follow suit by raising their prices.
C. Any gain or loss in the firm’s revenue from increasing its price would depend on the price elasticity of demand: The more elastic the demand, the higher the revenue potential from a price increase.
D. It would probably see no change in its revenue position as its competitors would raise their prices accordingly.
7 . Which factor characterizes the competitive relationship between firms in an oligopoly market structure?
A. Total independence of action-reaction
B. Interdependence: what one firm does—in setting prices, determining production levels, investing in R & D, and so forth—can significantly affect other firms’ competitive positions.
C. Despite the relatively small number of oligopoly firms, the action(s) of any one firm have little direct effect on the decisions of its competitors.
D. The common practice of collusive price-setting.
8 . Unregulated (natural) monopolies maintain their status through a variety of measures. Whether any particular measure can effectively constrain new firms from entering the market depends on
A. proprietary technology, exclusive ownership of resources, or government licenses.
B. the number and size of the firm(s) attempting to enter the market
C. the willingness of suppliers and distributors doing business with the monopoly firm to boycott potential entrants
D. the amount of revenue loss the monopoly is willing to accept to undersell potential competitors
9 . Regulated monopolies are empowered by public authority for which specific reason?
A. The provision of a good or service that, if left to the free market system, would require additional government regulation to prevent negative externalities to consumers as well as the public.
B. The need to avoid the unnecessary use of duplicate resources that could be more efficiently employed by a single supplier to meet the needs of the broadest range of consumers.
C. The public policy of protecting consumers from the excesses of unrestricted, demand-driven pricing.
D. The government’s goal of maintaining artificially low prices for particular goods or services.
10 . Using a significantly greater economy of scale—with attendant lower, long-run average total costs—to restrict the market entry of new competitors
A. can be a successful tactic for established firms regardless of industry type, technology, market dynamics, or nature of the consumer base
B. may not be effective in industries in which dynamic technology-driven changes frequently alter the demand for product design features, performance qualities, and or production methods
C. is more effective in industry structures having low, minimum efficiencies of scale
D. is a tactic seldom employed due to legislation governing unfair trade practices
11 . In technology-intensive oligopolies—characterized by dynamically evolving product design—restricting the entry of additional firms is
A. not possible through customary legal protections, such as patents, because of the wide latitude of possible product alternatives afforded by highly advanced technologies
B. achieved by patenting, the effective use of licensing restrictions, as well as by maintaining sustained advantages in design and production
C. invariably a matter of establishing and maintaining economy of scale to minimize long-run average total cost
D. accomplished by requiring key suppliers of production factors to do business exclusively with firms currently in the industry
12 . Whether the market structure is monopolistic or oligopolistic, a firm may increase consumer demand for its product as an overall portion of market share if
A. the firm acquires or possesses a resource that is difficult or impossible for competitors to imitate—such as a geographic location, technologies, or design and production applications that cannot be replicated
B. it can field an advertising campaign large and convincing enough to persuade large numbers of consumers to purchase its product
C. it repackages its product to appeal to fashion trends
D. the firm restricts distribution of its product to core market areas or demographic groups
13 . One difference between firms already established in a monopolistic competition industry and those attempting to enter it is that
A. existing firms often have established, core-consumer marketing bases, while entrants may have to advertise and otherwise promote themselves to develop market share in the new industry
B. product development is more important than establishing market visibility for firms entering a monopolistic industry
C. cost control is more difficult for incumbent than for entrant firms due to costs of counter marketing
D. established firms may be able to use product differentiation to help distinguish themselves from new competitors
14 . An average firm in an industry characterized by a homogeneous product, relatively low barriers to entry, and a low concentration ratio
A. is unable to make any changes in characteristic product design or services to enlarge its market share
B. has no pricing options but the market equilibrium price
C. can attempt to increase market share through consumer-oriented changes in the design and perceived value of its product(s)
D. has numerous pricing options —frequent discounts, extended sales, and so forth—if it properly uses the strength of its brand-image relative to those of its competitors
15 . A monopolistic firm may operate in a relatively mature market with little likelihood for significant change in technology or process efficiencies. To maximize its profits, such a firm might
A. observe the existing market equilibrium price and concentrate on lowering its break-even point through cost reduction measures
B. consider diversifying its product line by offering modestly-enhanced variants of the same good or service and selling these at prices marginally higher than for its existing product
C. attempt to leverage its existing resources to fund its acquisition of smaller competitors, in hopes of increasing market share and revenue
D. abandon the market altogether, as it really has no effective way of changing the status quo
16 . Production differentiation can effectively be achieved by
A. emphasizing the weaknesses and disadvantages of competing products through comparative advertising, especially in oligopoly markets
B. implementing a broader range of combinations of price and quality than those offered by competitors
C. concentrating exclusively on market segments most likely to recognize differences in product value
D. utilizing consumer satisfaction surveys and other metrics to determine what it is the customer really wants
17 . While mass retail industries have one or several dominant producers, smaller firms have a limited set of nonpricing options. The most feasible of these include
A. attempting to garner increased market share by simultaneously expanding capacity, increasing economy of scale, and discounting prices
B. seeking to differentiate themselves from their larger competitors by appealing to specific niche markets
C. mimicking the advertising, marketing, and other successful non-pricing strategies of the dominant firm(s)
D. attempting to develop markets in related industries rather than trying to compete head-to-head with industry leaders
18 . In monopolistic competition industries, effective product differentiation is illustrated by
A. widespread brand recognition across most, if not all, consumer age and income groups; otherwise, the firm cannot generate sufficient demand to enlarge market share
B. concentrated appeal to consumers in market demographics most likely to want or use the firm’s principal products
C. a balanced combination of innovation, new product development, and intensive marketing
D. having a long-established reputation for distinctly superior product quality
19 . Differentiation strategies vary in degree of effectiveness from one type of market structure to another. For firms other than perfect competition
A. opportunities exist throughout the acquisition, production, sales, and service process to distinguish their products based on perceived quality and consumer appeal
B. the competitive margin is so tight that they cannot afford the costs associated with extensive product or market development
C. selective product development and enhancements which appeal to particular consumer classes can create marketable differences between one firm’s products and another’s
D. the best way of distinguishing the firm’s product is through every-day low pricing
20 . If a firm’s industry devolved from a monopolistic competition into an oligopolistic structure, the firm would discover that
A. clearly distinguishing its products’ unique attributes from those of competitors in an oligopoly market would be more difficult for consumers than in a monopolistic structure
B. quality of maintenance and warranty service would become more important as differentiating attributes in an oligopoly market
C. nothing has changed. It all depends on the individual industry
D. as surviving firms gain market share, they may enjoy lower average costs.
21 . A firm can increase both profit and per-unit profit margin by lowering production costs. To make this a long-term outcome, the firm should
A. acquire factors of production at lower prices, defer planned investments in expansion capital, and downsize its workforce
B. increase productivity through better applications of existing technologies, curtail product development plans, and implement energy conservation programs
C. seek to update existing production technologies for greater future efficiencies, consider alternative energy sources for production, and better retain and develop its human and intellectual capital resources
D. concentrate on improving present levels of productivity through greater process efficiencies, seeking to reinvesting the savings in future R&D programs
22 . A firm’s cost-reduction strategies may span multiple stages, from acquisition of production input factors to product service and maintenance. When seeking to lower cost in the short term, firms should
A. reduce capital indebtedness through refinancing at more favorable long-term interest rates
B. curtail output across the board to reduce variable operating costs
C. streamline and consider alternative methods of production
D. attempt to restructure long-standing contracts with suppliers and distributors, to reduce fixed costs in the short-run
23 . Firms can shift their marginal cost curves to the right, resulting in higher outputs at the same or lower maximum-profit prices. This can be done by
A. eliminating fixed-cost components in the short term
B. reducing average total cost through reorganizing, production and increasing efficiencies in distribution
C. only if demand for the firm’s product(s) shifts to the right: Businesses are always demand driven
D. better product innovation through enhanced research and development
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