Question 1

Jackson operates in a perfectly competitive market. As a price-taker, he:

Accepted Answer

As a price-taker in a perfectly competitive market, Jackson cannot affect the price of a good in the market. The market sets the price and he must accept it in order to sell his product.

Question 2

Perfect competition is characterized by:

Accepted Answer

In perfect competition, there are many firms selling a similar yet distinct product. However, none of them have enough market power to influence the price. This means that the price is "set" by the market instead of any one firm. Therefore, answer C is correct. Control of a common resource (A) is a characteristic of a common pool resource, not perfect competition. Quality competition (B) can exist in any market structure, including perfect competition.

Question 3

If a California grape wholesaler operates in a perfectly competitive market, that wholesaler will have a _____ share of the market, and consumers will consider their grapes and their competitors' grapes to be _____.

Accepted Answer

In a perfectly competitive market, there are many small firms that have a small market share. Their products are considered identical or homogeneous by consumers, so there is no product differentiation. Therefore, consumers will consider the wholesaler's grapes and its competitors' grapes to be identical.

Question 4

Which statement BEST describes a condition for the existence of a perfectly competitive market?

Accepted Answer

The existence of a perfectly competitive market requires firms to produce an identical product. This means that consumers cannot differentiate between the products of different firms and therefore cannot be influenced by branding or advertising. It also means that firms cannot differentiate their products in order to charge a higher price, as all products are considered equivalent in the eyes of the consumer.

Question 5

The market for breakfast cereals is dominated by four producers: Kellogg's, General Mills, Post Foods, and Quaker. The market contains hundreds of similar types of cereals, such as Fruit Loops, Cornflakes, and Rice Krispies, that are seen by buyers as different products. This situation violates the perfect competition assumption of:

Accepted Answer

The situation described violates the assumption of an identical product, as there are hundreds of similar types of cereals that are perceived as different by buyers.

Question 6

_____ firms have the MOST market power.

Accepted Answer

Monopolistic firms have the most market power because they are the sole providers of a product or service, allowing them to set prices without direct competition.

Question 7

A market characterized by a single producer would be considered:

Accepted Answer

A monopoly is a market structure where one firm dominates the market and has the power to set prices and output levels. In this scenario, there is only one producer in the market, hence the market is clearly a monopoly.

Question 8

A market characterized by many producers producing a similar yet differentiated product would be considered:

Accepted Answer

A market characterized by many producers producing a similar yet differentiated product is known as a monopolistically competitive market. In such a market, each firm has a degree of market power due to product differentiation, but there are many firms competing in the market. This type of market structure is different from a monopoly, duopoly, and oligopoly, which each have their own specific characteristics.

Question 9

Because monopoly firms can set their prices above marginal cost, they:

Accepted Answer

Monopoly firms face a downward-sloping demand curve, meaning they can sell additional units only by lowering their prices. Unlike perfectly competitive firms, which are price takers, monopolies have market power to set prices but must lower them to increase sales.

Question 10

Samantha has a monopoly in the retail of ski-doos. She can sell five units per week at a price of $21,000 each, but to sell her full weekly capacity of six units, she must charge $20,000 each. The quantity effect of selling the sixth ski-doo is:

Accepted Answer

The quantity effect of selling the sixth ski-doo is the additional revenue generated from selling one more unit, which is $20,000 (the price at which the sixth unit is sold).

Question 11

Samantha has a monopoly in the retail of ski-doos. She can sell five units per week at a price of $21,000 each, but to sell her full weekly capacity of six units, she must charge $20,000 each. The price effect of selling the sixth ski-doo is:

Accepted Answer

The price effect of selling the sixth ski-doo involves not only the lower price of the sixth unit but also the reduced price on the initial five units. Originally, 5 units sold at $21,000 each would generate $105,000. Selling 6 units at $20,000 each generates $120,000. The difference in total revenue from the 5th to the 6th unit is $15,000 ($120,000 - $105,000), but since the 6th unit itself brings in $20,000, the price effect (the revenue lost on the initial units due to the price drop) is $5,000 ($20,000 - $15,000), hence a negative effect of -$5,000.

Question 12

Mr. Parker sells 10 bottles of wine per week at $50 per bottle. He can sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity effect of the sale of an additional bottle would be _____, whereas the price effect of the sale of an additional bottle would be _____.

Accepted Answer

The answer of Mr. Parker sells 10 bottles of wine...

Question 13

For a monopolist, a downward-sloping demand curve ensures that _____.

Accepted Answer

A monopolist's downward-sloping demand curve means that to sell more units, the price must decrease. This leads to marginal revenue (MR) being less than the price (P) because the additional revenue generated by selling one more unit is less than the price at which that unit is sold, due to the need to lower the price on all units sold to sell that additional unit.

Question 14

The demand curve for a monopoly is:

Accepted Answer

Monopolies face the industry demand curve directly because they are the sole provider of a good or service in the market, unlike in competitive markets where demand is split among various firms.

Question 15

James operates a monopoly hiking gear store in the woodland trails near his home in the Ozarks. He is currently producing at an output level where marginal revenue equals marginal cost. If James were to reduce his output, he:

Accepted Answer

In a monopoly, reducing output allows the monopolist to charge a higher price due to the downward-sloping demand curve.

Question 16

If Penelope, a monopolist, is producing a quantity where MC = P, then profit:

Accepted Answer

The answer of If Penelope, a monopolist, is producing a...

Question 17

If Penelope, a monopolist, is producing a quantity where MC> MR, then profit:

Accepted Answer

When MC > MR, the monopolist is producing beyond the profit-maximizing level of output. This means that the last unit produced is costing more to make than it can be sold for. To increase profit, Penelope should decrease production to the point where MC = MR. Therefore, option D is the best choice. Option A is incorrect because maximizing profit requires producing at the point where MC = MR, not where MC > MR. Option B is incorrect because MC = P only holds in the case of perfect competition, not monopoly. Option C is incorrect because increasing production beyond the profit-maximizing quantity would lead to a further increase in MC, leading to an even lower MR and thus lower profits.

Question 18

If Penelope, a monopolist, is producing a quantity where MC < MR, then profit:

Accepted Answer

When MC (Marginal Cost) is less than MR (Marginal Revenue), increasing production will lead to higher profits until MC equals MR, which is the profit-maximizing condition for a monopolist.

Question 19

If a monopolist is producing a quantity that generates MC = MR, then profit:

Accepted Answer

When a monopolist is producing a quantity that generates MC = MR, it means that the marginal revenue earned from selling an additional unit of the good is equal to the marginal cost of producing that unit. This is the point at which the monopolist maximizes profit, since any further increase or decrease in production would result in a decline in profit. Therefore, the answer is (A) is maximized.

Question 20

Suppose that the Uncle Sam Cap Company is a profit-maximizing firm with market power in the production of football caps. The firm sells its football caps for $25 each. From this information, we can assume that the Uncle Sam Cap Company produces a level of output at which:

Accepted Answer

For a profit-maximizing firm with market power, the firm will produce where marginal cost (MC) equals marginal revenue (MR), and since the firm has market power, MR is less than the price ($25). Therefore, MC must be less than $25.

Quiz 14: Market Structure and Market Power