1. ECO 550 Week 4 Quiz 3
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Question 1
1. Assume that the world price of Good A is $8 per unit while its domestic price is $6, and the
marginal cost incurred by domestic producers for producing one unit of Good A is $5. If the
government imposes a tax of $3 per unit on domestic producers, which of the following
situations will be observed?
The tax will increase the price of Good A in the domestic market.
The tax will increase the world price of Good A.
The tax will decrease the profit earned by domestic producers.
The tax will decrease the price of Good A in the domestic market.
Question 2
1. The long-run supply curve of a perfectly competitive market is a:
an upward rising step function.
a downward sloping step function.
a vertical line at the market price.
a horizontal line at the market price.
Question 3
1. When the existing firms in a competitive industry have different operating costs:
the highest-cost firm in operation breaks even, while the low cost firms will earn profit.
the highest-cost firm in operation breaks even, while the low cost firms leave the industry.
the low cost firms earn a larger profit than the high-cost firms.
the highest-cost firms will incur a deadweight loss.

2. Question 4
1. Which of the following conditions define a perfectly competitive market?
The transaction costs are very high.
Information is available to participants at a high cost.
The product is homogenous.
There are limited number of buyers and sellers.
Question 5
1. If there are only a few producers of substitutes for Good X, a merger between producers of
Good X and any one of them could significantly _____ for Good X.
decrease the elasticity of demand.
increase the elasticity of supply.
decrease the elasticity of supply.
increase the elasticity of demand.
Question 6
1. Refer to Table 5-1. Suppose initially 3,200 units are demanded at a price of $3 per unit. What
will be the quantity of output supplied by each type of firm in the market?
The following table gives the average cost of production for three different categories of firms
producing the same product.
Table 5-1
Type of firms
No. of firms
Average Cost per unit
Equilibrium output
A
350

3. $3
10 units
B
400
$6
10 units
C
550
$10
10 units
Type A and Type B will jointly supply 3,000 units while Type C will supply 200 units.
Type A firms will supply 3,000 units, while the remaining 200 units will be supplied by Type B.
Type A firms will supply the entire 3,200 units, while Type B and Type C firms will not enter
the market.
Type A and Type B will each supply 1,600 units, Type C will not enter the market.
Question 7
1. If the long-run market supply curve is perfectly elastic, a decrease in variable cost will:
shift the supply curve upward to a higher market-clearing price level.
shift the supply curve downward to a lower market-clearing price level.
shift the supply curve to the right to a higher market-clearing output.
shift the supply curve to the left to a lower market-clearing output.
Question 8
1. Which of the following conditions define the short-run for any industry?
Firms do not incur a fixed cost.

4. Firms incur both fixed as well as variable costs.
Firms can easily enter and leave the market.
Firms can enter but cannot leave the market.
Question 9
1. Suppose beer producers in Munich became aware of the low price of one barrel of beer in the
domestic market relative to that in the United States. What will be the impact of this price
difference?
Beer production in Munich will decline.
Price of beer in the domestic market will increase.
Beer production in the U.S. will increase.
Beer consumption in the domestic market will increase.
Question 10
1. In a perfectly competitive market, the demand curve faced by each firm is:Answer
highly inelastic.
perfectly elastic.
perfectly inelastic.
less elastic.
Question 11
1. Assume that the government of a nation rations the crude oil available to car owners each
month which reduces the overall demand for petroleum. However, the nation continues to import
oil from the world market. Which of the following will be observed in the oil market?
The world price of petroleum would decline.
The domestic price of petroleum would decline.
The domestic price of petroleum would increase.
The world price of petroleum will remain unaffected.

5. Question 12
1. Suppose the cost of raw materials used by the cotton industry rises to a larger extent
compared to the increase in demand in the market. Which of the following situations will arise?
The incidence of the higher cost will fall completely on the consumers.
The incidence of the higher cost will fall completely on the high cost firms.
The incidence of the higher cost will fall completely on the low cost firms.
The incidence of the higher cost will fall partially on the consumers and partially on the sellers.
Question 13
1. Which of the following situations resulted from the North American Free Trade Agreement
(NAFTA)?
The cost of tortillas in Mexico decreased.
Corn export to the U.S. from Mexico declined.
Corn export to the U.S. from Mexico increased.
The cost of tortillas in the U.S. increased.
Question 14
1. Refer to Figure 5-3. What will be the shape of the long-run supply curve of land suitable for
corn farming?
In the figure given below, D1 and D2 represent the demand curves for land before and after the
ethanol program respectively. SRS is the short-run supply curve of land.
Figure 5-3
Answer
The long-run supply curve of land suitable for corn farming will be perfectly inelastic.
The long-run supply curve of land suitable for corn farming will be perfectly elastic.
The long-run supply curve of land suitable for corn farming will be less elastic than the short-run
supply curve.
The long-run supply curve of land suitable for corn farming will be more elastic than the short-
run supply curve.

6. Question 15
1. The short-run supply curve of a perfectly competitive industry with firms having identical
costs is:
a horizontal line at the market price.
a vertical line at the equilibrium output.
an upward rising curve.
a downward sloping step function.
Question 16
2. The demand curve faced by a perfectly competitive firm is:
downward sloping.
the same as the market demand curve.
horizontal.
perfectly inelastic.
Question 17
2. Refer to Table 6-2. Assume that the monopolist sells only health drinks to Group 1 and only
fruit juices to Group 2. What profit will the monopolist earn?
The following table gives the valuations of fruit juices and health drinks by two groups of
consumers in the city of Vanilla. A single producer of both products controls the entire market
for beverages in this city and is considering strategies to bundle one bottle of health drink with
one bottle of fruit juice. Assume that the marginal cost of supplying both varieties is $2 each.
Table 6-2
$35
$10
$31
$14
Question 18

7. 2. A monopolist can:
produce as much or as little as it wants without affecting price.
decide the price that will be charged in the market.
provide discounts below market price to attract more customers.
price its products by considering the possible reactions of future competitors
or firms that produce close substitutes for its output.
Question 19
2. In the small country of Talisman, the liquor industry is monopolized by a single producer
Best Drinks Inc. Best Drinks charges high end customers like 5-star hotels a much higher price
than it charges local pubs. Identify the correct statement from the following.
Best Drinks is aware of the variations in the valuation of its products by different consumer
segments.
Best Drinks minimizes cost by charging different consumers different prices.
Charging different prices for different consumers increases consumer surplus.
Best Drinks charges different prices because its sole objective is sales maximization.
Question 20
2. Which of the following statements is true regarding the difference between a monopolist and
a perfectly competitive firm?
Competitive price is higher than the price charged by a monopolist.
Supply of output is higher in case of a monopoly than if the market is competitive.
A monopoly can choose its price while a competitive firm is a price taker.
A market characterized by competition has a higher deadweight loss.
Question 21
2. Which of the following is a possible explanation for the fall in prices after an industry is
monopolized by combining a group of competitors?
A monopolist faces a downward sloping demand curve. Hence, output expansion leads to lower
prices.

8. A reduction in price increases producer surplus. Hence a monopolist may reduce the price of his
product.
A monopolist may reduce prices to make it difficult for other firms to compete.
A monopolist can increase profits by reducing price when its cost of production declines due to
increased size of the new firm. The fall in price is less than the decline in cost.
Question 22
2. The practice of charging different prices on the basis of varying customer preferences is
known as:
arbitrage.
discounting.
price discrimination.
rationing.
Question 23
2. Tying products can be a profitable strategy for facilitating price discrimination only when:
the demands for the goods are unrelated.
the supply of one of the tied products is low.
the demands for the goods are related.
the market for one of the goods is competitive.
Question 24
2. The peak of the total revenue curve is achieved at the point where:Answer
marginal revenue is the highest.
price is the highest.
marginal revenue is zero.
marginal cost is zero.
Question 25

9. 2. Refer to Figure 6-4. What price will the monopolist charge when its marginal cost shifts from
C to C’?
The following figure depicts the demand, marginal revenue (MR), and marginal cost (MC) for a
monopolist.
Figure 6-4
$20
$16
$15
$9
Question 26
2. Refer to Figure 6-1. Which of the following conclusions can be drawn from this figure?
The following figure shows the demand, marginal revenue, and marginal cost curves for a profit
maximizing monopolist.
Figure 6-1
The monopolist produces at the point where marginal cost is zero.
The monopolist incurs a fixed marginal cost of OC’.
The monopolist charges a price of OP’ and total revenue is OP’D’Q’.
The consumer surplus enjoyed by customers is PC’D”.
Question 27
2. Refer to Figure 6-2. What is the consumer surplus under monopoly?
A group of firms in competitive market produced 20 units of a good when the market price was
$2. They incurred no marginal cost. Eventually they realized the benefits they could get by
teaming up and acting as a monopolist. The following figure shows the demand curve and
marginal revenue curve for this profit maximizing monopolist.
Figure 6-2
$96
$48

10. $36
$72
ANS: B PTS: 1 DIF: Easy NAT: Analytic
Question 28
2. Monopolies exist for each of the following reasons, EXCEPT:
competitors are legally unable to challenge them.
they have control over resources with very few good substitutes.
it is sometimes inefficient to have competition in certain markets.
it increases both producer and consumer surplus.
Question 29
2. X-inefficiency implies:
the practice of using less than the optimal amount of inputs for production.
the practice of using the lowest quantity of input to produce maximum output.
always producing less than the optimal amount of output.
excessive use of inputs relative to best-practice methods.
Question 30
2. When a monopolist’s marginal cost of production is zero:
the deadweight loss is reduced.
production is lower than if marginal cost were positive.
the price charged is higher than if marginal cost were positive.
maximizing profit is same as maximizing revenue.