Exam #3 Practice Questions
Monopoly, market power, market structures, long run dynamics, business strategy, pricing strategies.
1. A local gym offers discounted membership rates to college students during the summer months, but charges the regular full price during the school year. This pricing approach suggests that the gym believes student customers are:
a. more price sensitive during the school year than in the summer.
b. less price sensitive during the summer than during the school year.
c. less price sensitive than non-student members.
d. equally likely to join regardless of the time of year or the price.
2. A farmer is deciding how many crates of strawberries to bring to the local farmers market. Each additional crate earns some extra revenue, but also increases transportation and labor costs. To make the optimal decision, the farmer should continue bringing more crates as long as each additional crate:
a. helps the farmer move toward the highest possible total revenue.
b. results in a wider difference between the selling price and average cost per crate.
c. reduces the farmer’s average cost per crate to a minimum.
d. brings in more revenue than the cost it adds.
3. A new bakery opens in a neighborhood where several other bakeries already operate. Initially, the bakery can only adjust how many employees it schedules and how much flour it orders each week, but cannot yet change its storefront or expand to new locations. Over time, however, it may consider moving to a larger space or other bakeries may enter or leave the market. This illustrates that in the short run, businesses face _____, and in the long run, _____.
a. a fluctuating number of rivals; the number of rivals stays the same
b. a fixed group of competitors; the market can see entry or exit by other firms
c. changes in every cost; no costs are flexible
d. only permanent costs; all costs eventually become fixed
4. A street in a city is lined with dozens of small food carts, all selling identical hot dogs for the same price. Each vendor is free to enter or leave the market, and no single cart can charge more than others without losing all its customers. This market setup suggests that in such an environment:
a. vendors try to block others from entering the street.
b. there are only a handful of vendors allowed to sell.
c. vendors focus on branding their hot dogs to stand out.
d. each vendor accepts the market price and has no control over it.
5. Lena owns the only coffee kiosk inside a national park, giving her a monopoly in that location. She currently serves a number of cups per day such that her marginal revenue equals her marginal cost. If Lena decides to reduce the number of cups she serves each day, she:
a. will be able to raise the price per cup.
b. will make more profit than before.
c. will cause her marginal revenue to fall.
d. will be unable to change her price due to competition.
6. A boutique clothing store is running a promotion to increase sales. When the manager lowers the price of dresses to attract more customers, she notices two things: first, more dresses are sold, and second, the lower price reduces the revenue earned per dress. The change in marginal revenue from selling an additional dress captures both the _____ effect and the _____ effect.
a. cost; revenue
b. output; discount
c. discount; cost
d. revenue; sales
7. A popular online tax software offers a free trial to new users. However, once users begin entering their tax information, they realize that transferring their partially completed return to another service would require starting over from scratch. As a result, most users stick with the software even when faced with added fees. This situation demonstrates that:
a. the company shifts production methods depending on how many customers use the software.
b. users avoid the software because it constantly introduces new and confusing updates.
c. the software lures users in with a low starting price, but then charges them to activate the features.
d. users find it difficult or costly to switch to an alternative service after beginning the process.
8. Two ice cream trucks are allowed to operate along a long lakeside boardwalk. One truck is already stationed near one end of the boardwalk and serves customers walking from nearby parking lots. A second vendor is now deciding where to park her truck to attract as many customers as possible. To maximize her share of customers, she should choose:
a. a spot far away from the first truck, near the opposite end of the boardwalk.
b. a central location halfway along the boardwalk.
c. a position close to the first truck but tilted toward the direction with heavier foot traffic.
d. a place that divides the boardwalk evenly between the two trucks, capturing customers in between.
9. An airline offers two options for its economy passengers: a standard ticket that includes free checked baggage and early boarding, and a budget version where travelers must pay extra for bags and board last. The airline sells the same seat at two prices depending on which option the traveler chooses. This is an example of what kind of price discrimination?
a. the hurdle method
b. group pricing
c. segmentation valuation
d. quantity discounts
10. Priya runs a tutoring business and earns $80,000 in annual revenue. She pays $20,000 in rent, $15,000 in wages, and $5,000 for materials. She left a job that paid her $30,000 per year and used $10,000 of her savings, which could have earned 5% interest annually. When calculating her accounting profit versus her economic profit, the key difference is that economic profit accounts for:
a. fixed costs
b. marginal costs
c. explicit financial costs
d. implicit opportunity costs
11. A ride-hailing company dominates transportation in a small city. But recently, a fleet of rentable electric scooters was introduced, offering a convenient alternative for short trips. As more people begin to use the scooters, the ride-hailing company considers reducing its prices. This is an example of how:
a. the ride-hailing firm may gain customers from the scooter market, increasing its profit.
b. the firm can cut costs by replacing drivers with scooters.
c. the firm may lose riders to the new option unless it adjusts prices downward.
d. new substitutes increase satisfaction and allow firms to charge even higher prices.
12. A company holds a patent on a unique type of smart thermostat, allowing it to be the sole producer and seller of the product. To increase sales, it lowers the price, but this also means it earns less revenue on units that could have been sold at the original price. This implies that for a monopolist, marginal revenue is generally:
a. equal to price.
b. greater than price.
c. less than price.
d. equal to average revenue.
13. Maria operates a food truck in Austin. She earns $300,000 in total annual revenue. Each year, she spends $50,000 on food supplies, $180,000 on employee wages, and $20,000 on truck maintenance and fuel. She left a corporate job that paid $60,000 annually to run the food truck. What was Maria’s economic _____ and by how much?
a. profit; $10,000
b. losses; $10,000
c. losses; $30,000
d. profit; $30,000
14. A local gym offers discounted memberships to college students, while charging higher rates to the general public. This is an example of:
a. hurdle method price discrimination.
b. group pricing based on observable characteristics.
c. price discrimination by output level.
d. a monopoly charging a single price to all users.
15. A pharmaceutical company holds a 20-year patent on a life-saving medication, which prevents other companies from producing a generic version. Due to this protection, it remains the sole provider of the drug and charges a price well above the cost of production. This situation illustrates how barriers to entry allow a monopoly to:
a. earn an economic profit in the long run.
b. operate where price is less than marginal cost in the long run.
c. avoid considering fixed costs when setting long-run output.
d. produce the socially optimal quantity where price equals marginal cost.
16. A growing number of food delivery startups begin operating in a city where only a few firms previously served customers. As more delivery companies enter the market offering similar services, each existing firm's customer base shrinks. This results in:
a. a shift to the right of each individual firm's demand curve.
b. a shift to the left of each individual firm's demand curve.
c. an upward shift of each individual firm's ATC curve.
d. a shift to the left of each individual firm's supply curve.
17. A city experiences a surge in demand for home cleaning services after a popular influencer promotes professional cleaning on social media. Initially, existing companies see an increase in customers and raise prices. What is likely to happen in the long run?
a. in the long run, new firms will enter the market.
b. there will be a short-run increase in the number of firms, but in the long run, the number of firms will return to the original level.
c. firms will leave the market in the long run.
d. firms will shut down, but they will not leave the industry in the long run.
18. A custom soap company currently sells 40 bars of soap at a price of $5 each. To increase sales to 41 bars, the company lowers its price to $4.95. What is the marginal revenue of selling the 41st bar?
a. $4.95
b. $2.95
c. $0.05
d. $198.00
19. A monopolist faces the demand curve P = 50 – Q and marginal revenue MR = 50 – 2Q. If marginal cost is constant at 10, what is the monopoly's profit-maximizing output and price?
a. Q = 10, P = 40
b. Q = 20, P = 30
c. Q = 15, P = 35
d. Q = 5, P = 45
20. A local bakery launches a promotional campaign showcasing its use of organic, locally sourced ingredients. As a result, more customers become interested in the bakery’s products, and loyal customers become less sensitive to price changes. As an economist, how would you describe the ideal impact of the campaign on the bakery’s demand curve?
a. The firm demand curve shifts right and becomes more elastic.
b. The firm demand curve shifts right and becomes less elastic.
c. The firm demand curve shifts left and elasticity remains unchanged.
d. The firm demand curve shifts left and becomes less elastic.
21. A government agency observes that ride-sharing platforms are dominating local transportation markets, sometimes leading to higher prices and limited driver options. In response, the agency enacts rules to prevent anti-competitive practices and also introduces safety regulations to protect consumers. This policy strategy is based on the idea that governments can maximize social benefits by:
a. restricting prices and reducing costs.
b. encouraging market power and fostering research.
c. reducing competition and encouraging market power.
d. encouraging competition and minimizing harm from market power.
22. Rafael is the only vendor allowed to rent beach umbrellas along a popular tourist shoreline. He currently rents out 15 umbrellas at $25 each. To rent out a 16th umbrella, he lowers the price to $24 for all rentals. What is the marginal revenue of the 16th umbrella?
a. $1
b. $9
c. $16
d. $24
23. A dairy farmer in Wisconsin sells milk to a national distributor. The price of milk is set by the overall market, and many other farms produce the same quality milk. If this farmer operates in a perfectly competitive market, they will have a _____ share of the market, and customers will view their milk and competitors’ milk as _____.
a. large; identical
b. small; identical
c. small; differentiated
d. large; differentiated
24. Angela is considering starting a photography studio. She expects to earn $150,000 in revenue in her first year. Her explicit financial costs (including rent, equipment, and wages) will total $90,000. To open the studio, she must leave her job as a marketing assistant, where she currently earns $50,000 per year. She would also have to invest $50,000 from her savings, which currently earns her 4% annually in a savings account. What is Angela’s economic profit or loss in her first year?
a. a loss of $52,000
b. a profit of $10,000
c. a profit of $8,000
d. a loss of $8,000
25. A small local coffee roaster begins labeling its beans as single-origin, organic, and sustainably farmed, with personalized packaging. This branding strategy increases customer loyalty and allows the company to charge more than large supermarket brands. From the perspective of consumers, what does this successful product differentiation mean?
a. the product may be different, but price remains the key factor in purchase decisions.
b. there are different prices charged by different sellers, but the product is the same.
c. rival sellers produce different but equally desirable products.
d. the output of rival sellers is not a good substitute for this coffee roaster’s product.
26. A furniture company is considering whether to purchase the lumber mill that supplies its wood. By doing so, the company would control a key input in its production process. However, some managers argue that outsourcing from multiple suppliers might lead to more innovation and efficiency. This decision represents a trade-off between:
a. reduced costs of production; increased sales
b. greater efficiency in market power; reduced incentives for innovation
c. pushing hold-up problems onto rivals; reducing incentives for growth over time
d. eliminating the bargaining power of customers and suppliers; providing incentives for efficiency and profit
27. In a large city, dozens of independent food trucks serve a variety of international cuisines. While each one offers a unique menu and flavor, they all compete for the same lunchtime customers. This type of market, where there are many sellers and noticeable differences among products, is best described as:
a. a perfectly competitive market.
b. a monopoly.
c. an oligopoly.
d. a monopolistically competitive market.
28. A software company sells licenses for its design program. Using detailed user data, it is able to charge each customer exactly what they are willing to pay for the product. No two users pay the same price. As a result, the company captures the full willingness to pay from every buyer. This strategy is an example of perfect price discrimination, and it means that:
a. it produces the efficient quantity of output.
b. there is no producer surplus.
c. the producer surplus is equal to the monopoly profit.
d. the government will impose an average cost pricing rule on the monopoly.
29. At a local supermarket, customers can choose from over 30 brands of breakfast cereal. Each brand offers different flavors, packaging, health claims, and prices, but they all compete for the same consumer demand at breakfast. This wide variety and competition among brands suggest that the cereal market is:
a. a perfectly competitive market.
b. a monopoly.
c. an oligopoly.
d. a monopolistically competitive market.
30. In the streaming video industry, most viewers choose between just a few major platforms such as Netflix, Disney+, and Amazon Prime Video. Each service offers unique content, but they are aware of one another’s pricing and content strategies. This type of market structure is best described as:
a. perfect competition.
b. monopoly.
c. oligopoly.
d. monopolistic competition.
31. A bakery tracks how much it spends to produce different amounts of bread each day. At first, as output increases, the cost per loaf falls. But beyond a certain level of daily production, the bakery’s ovens become overcrowded and workers get in each other’s way, raising the cost per loaf. This behavior reflects the U-shape of the average cost curve because _____ dominates at low production levels, and _____ dominates at high levels.
a. diminishing marginal product; the spread effect
b. the spread effect; diminishing marginal product
c. comparative advantage; absolute advantage
d. absolute advantage; comparative advantage
32. A publisher offers two versions of an e-book: one is full price with instant download, and the other is discounted but requires readers to wait 48 hours and watch ads during setup. The company avoids offering discounts based on age or profession. Why might the publisher use this hurdle method instead of group pricing?
a. The publisher wants to make the purchase process more difficult for all customers.
b. The publisher assumes that customers willing to clear the hurdle value the product more.
c. The publisher believes that hurdles increase demand by creating anticipation.
d. The publisher lacks access to a reliable characteristic like age or profession to segment groups.
33. A firm’s demand curve is given by P = 20 – Q, and its marginal revenue curve is MR = 20 – 2Q. The firm faces a constant marginal cost of MC = 4. What is the profit-maximizing quantity and price for this monopolist?
a. Q = 8, P = 12
b. Q = 6, P = 14
c. Q = 4, P = 16
d. Q = 10, P = 10
e. None of these are correct
34. A monopolist faces the demand curve P = 30 – Q and has a marginal revenue curve of MR = 30 – 2Q. The marginal cost for the firm is constant at MC = 0. What is the profit-maximizing price and quantity?
a. Q = 15, P = 15
b. Q = 10, P = 20
c. Q = 5, P = 25
d. Q = 10, P = 10
e. None of these are correct
35. A successful brand name helps a firm maintain long-run monopoly profits primarily because:
a. it lowers marginal costs.
b. it acts as a barrier to entry by building consumer loyalty.
c. it eliminates the need for marketing.
d. it improves product standardization.
36. Economic costs include:
a. only explicit financial costs.
b. only fixed costs and variable costs.
c. both accounting costs and opportunity costs.
d. historical investment costs.
37. Two regional airline companies decide to merge in order to consolidate routes and reduce operating costs. While the number of competitors in the market decreases, the merged firm can now offer more direct flights and improve efficiency. Such a merger benefits society primarily when it leads to:
a. increased market power.
b. a larger number of sellers in the market.
c. cost savings.
d. decreased market demand.
38. A small craft brewery relies on a single regional supplier for specialty hops. Over time, the supplier gains market power by becoming the exclusive distributor of that hop variety in the area. The supplier raises the price of hops, increasing costs for the brewery. According to the Five Forces framework, how does this affect the brewery’s profitability?
a. Suppliers with market power can charge higher prices on inputs the company needs to purchase, reducing the company's profits.
b. Suppliers with market power can charge higher prices on output the company needs to sell, raising the company's profits.
c. Suppliers with market power charge lower prices on inputs the company needs to purchase, raising the company's profits.
d. Suppliers with market power charge lower prices on output the company needs to sell, reducing the company's profits.
39. A car manufacturer invests heavily in custom robotic equipment designed to fit only one supplier’s unique parts. If the relationship with that supplier ends, the equipment would be nearly worthless for other production lines. This type of investment is an example of:
a. increasing the manufacturer’s bargaining power.
b. contractually obligating the supplier to continue the relationship.
c. an asset that is worth more only within a specific business relationship.
d. a training program shared across multiple sellers.
40. A local artist is negotiating the sale of one of her paintings at an art fair. She starts by quoting a price that reflects the time and materials spent, as well as her desired profit. Meanwhile, a potential buyer counters with a lower offer based on their own budget. This interaction illustrates that a seller bargains to sell _____, and a buyer bargains to buy _____.
a. the highest possible quantity; the lowest quantity
b. more than any rival; the desired quantity
c. a quantity that disadvantages rivals; to put the seller at a loss
d. at a higher price; at a lower price
41. According to Porter’s Five Forces framework, an industry is likely to be less profitable when:
a. suppliers and buyers have little bargaining power.
b. barriers to entry are high.
c. there are many substitute products available.
d. few firms compete for market share.
Solutions:
1. A local gym offers discounted membership rates to college students during the summer months, but charges the regular full price during the school year. This pricing approach suggests that the gym believes student customers are:
a. more price sensitive during the school year than in the summer.
b. more price sensitive during the summer than during the school year.
c. less price sensitive than non-student members.
d. equally likely to join regardless of the time of year or the price.
2. A farmer is deciding how many crates of strawberries to bring to the local farmers market. Each additional crate earns some extra revenue, but also increases transportation and labor costs. To make the optimal decision, the farmer should continue bringing more crates as long as each additional crate:
a. helps the farmer move toward the highest possible total revenue.
b. results in a wider difference between the selling price and average cost per crate.
c. reduces the farmer’s average cost per crate to a minimum.
d. brings in more revenue than the cost it adds.
3. A new bakery opens in a neighborhood where several other bakeries already operate. Initially, the bakery can only adjust how many employees it schedules and how much flour it orders each week, but cannot yet change its storefront or expand to new locations. Over time, however, it may consider moving to a larger space or other bakeries may enter or leave the market. This illustrates that in the short run, businesses face _____, and in the long run, _____.
a. a fluctuating number of rivals; the number of rivals stays the same
b. a fixed group of competitors; the market can see entry or exit by other firms
c. changes in every cost; no costs are flexible
d. only permanent costs; all costs eventually become fixed
4. A street in a city is lined with dozens of small food carts, all selling identical hot dogs for the same price. Each vendor is free to enter or leave the market, and no single cart can charge more than others without losing all its customers. This market setup suggests that in such an environment:
a. vendors try to block others from entering the street.
b. there are only a handful of vendors allowed to sell.
c. vendors focus on branding their hot dogs to stand out.
d. each vendor accepts the market price and has no control over it.
5. Lena owns the only coffee kiosk inside a national park, giving her a monopoly in that location. She currently serves a number of cups per day such that her marginal revenue equals her marginal cost. If Lena decides to reduce the number of cups she serves each day, she:
a. will be able to raise the price per cup.
b. will make more profit than before.
c. will cause her marginal revenue to fall.
d. will be unable to change her price due to competition.
6. A boutique clothing store is running a promotion to increase sales. When the manager lowers the price of dresses to attract more customers, she notices two things: first, more dresses are sold, and second, the lower price reduces the revenue earned per dress. The change in marginal revenue from selling an additional dress captures both the _____ effect and the _____ effect.
a. cost; revenue
b. output; discount
c. discount; cost
d. revenue; sales
7. A popular online tax software offers a free trial to new users. However, once users begin entering their tax information, they realize that transferring their partially completed return to another service would require starting over from scratch. As a result, most users stick with the software even when faced with added fees. This situation demonstrates that:
a. the company shifts production methods depending on how many customers use the software.
b. users avoid the software because it constantly introduces new and confusing updates.
c. the software lures users in with a low starting price, but then charges them to activate the features.
d. users find it difficult or costly to switch to an alternative service after beginning the process.
8. Two ice cream trucks are allowed to operate along a long lakeside boardwalk. One truck is already stationed near one end of the boardwalk and serves customers walking from nearby parking lots. A second vendor is now deciding where to park her truck to attract as many customers as possible. To maximize her share of customers, she should choose:
a. a spot far away from the first truck, near the opposite end of the boardwalk.
b. a central location halfway along the boardwalk.
c. a position close to the first truck but tilted toward the direction with heavier foot traffic.
d. a place that divides the boardwalk evenly between the two trucks, capturing customers in between.
9. An airline offers two options for its economy passengers: a standard ticket that includes free checked baggage and early boarding, and a budget version where travelers must pay extra for bags and board last. The airline sells the same seat at two prices depending on which option the traveler chooses. This is an example of what kind of price discrimination?
a. the hurdle method
b. group pricing
c. segmentation valuation
d. quantity discounts
10. Priya runs a tutoring business and earns $80,000 in annual revenue. She pays $20,000 in rent, $15,000 in wages, and $5,000 for materials. She left a job that paid her $30,000 per year and used $10,000 of her savings, which could have earned 5% interest annually. When calculating her accounting profit versus her economic profit, the key difference is that economic profit accounts for:
a. fixed costs
b. marginal costs
c. explicit financial costs
d. implicit opportunity costs
11. A ride-hailing company dominates transportation in a small city. But recently, a fleet of rentable electric scooters was introduced, offering a convenient alternative for short trips. As more people begin to use the scooters, the ride-hailing company considers reducing its prices. This is an example of how:
a. the ride-hailing firm may gain customers from the scooter market, increasing its profit.
b. the firm can cut costs by replacing drivers with scooters.
c. the firm may lose riders to the new option unless it adjusts prices downward.
d. new substitutes increase satisfaction and allow firms to charge even higher prices.
12. A company holds a patent on a unique type of smart thermostat, allowing it to be the sole producer and seller of the product. To increase sales, it lowers the price, but this also means it earns less revenue on units that could have been sold at the original price. This implies that for a monopolist, marginal revenue is generally:
a. equal to price.
b. greater than price.
c. less than price.
d. equal to average revenue.
13. Maria operates a food truck in Austin. She earns $300,000 in total annual revenue. Each year, she spends $50,000 on food supplies, $180,000 on employee wages, and $20,000 on truck maintenance and fuel. She left a corporate job that paid $60,000 annually to run the food truck. What was Maria’s economic _____ and by how much?
a. profit; $10,000
b. losses; $10,000
c. losses; $30,000
d. profit; $30,000
14. A local gym offers discounted memberships to college students, while charging higher rates to the general public. This is an example of:
a. hurdle method price discrimination.
b. group pricing based on observable characteristics.
c. price discrimination by output level.
d. a monopoly charging a single price to all users.
15. A pharmaceutical company holds a 20-year patent on a life-saving medication, which prevents other companies from producing a generic version. Due to this protection, it remains the sole provider of the drug and charges a price well above the cost of production. This situation illustrates how barriers to entry allow a monopoly to:
a. earn an economic profit in the long run.
b. operate where price is less than marginal cost in the long run.
c. avoid considering fixed costs when setting long-run output.
d. produce the socially optimal quantity where price equals marginal cost.
16. A growing number of food delivery startups begin operating in a city where only a few firms previously served customers. As more delivery companies enter the market offering similar services, each existing firm's customer base shrinks. This results in:
a. a shift to the right of each individual firm's demand curve.
b. a shift to the left of each individual firm's demand curve.
c. an upward shift of each individual firm's ATC curve.
d. a shift to the left of each individual firm's supply curve.
17. A city experiences a surge in demand for home cleaning services after a popular influencer promotes professional cleaning on social media. Initially, existing companies see an increase in customers and raise prices. What is likely to happen in the long run?
a. in the long run, new firms will enter the market.
b. there will be a short-run increase in the number of firms, but in the long run, the number of firms will return to the original level.
c. firms will leave the market in the long run.
d. firms will shut down, but they will not leave the industry in the long run.
18. A custom soap company currently sells 40 bars of soap at a price of $5 each. To increase sales to 41 bars, the company lowers its price to $4.95. What is the marginal revenue of selling the 41st bar?
a. $4.95
b. $2.95
c. $0.05
d. $198.00
19. A monopolist faces the demand curve P = 50 – Q and marginal revenue MR = 50 – 2Q. If marginal cost is constant at 10, what is the monopoly's profit-maximizing output and price?
a. Q = 10, P = 40
b. Q = 20, P = 30
c. Q = 15, P = 35
d. Q = 5, P = 45
20. A local bakery launches a promotional campaign showcasing its use of organic, locally sourced ingredients. As a result, more customers become interested in the bakery’s products, and loyal customers become less sensitive to price changes. As an economist, how would you describe the ideal impact of the campaign on the bakery’s demand curve?
a. The firm demand curve shifts right and becomes more elastic.
b. The firm demand curve shifts right and becomes less elastic.
c. The firm demand curve shifts left and elasticity remains unchanged.
d. The firm demand curve shifts left and becomes less elastic.
21. A government agency observes that ride-sharing platforms are dominating local transportation markets, sometimes leading to higher prices and limited driver options. In response, the agency enacts rules to prevent anti-competitive practices and also introduces safety regulations to protect consumers. This policy strategy is based on the idea that governments can maximize social benefits by:
a. restricting prices and reducing costs.
b. encouraging market power and fostering research.
c. reducing competition and encouraging market power.
d. encouraging competition and minimizing harm from market power.
22. Rafael is the only vendor allowed to rent beach umbrellas along a popular tourist shoreline. He currently rents out 15 umbrellas at $25 each. To rent out a 16th umbrella, he lowers the price to $24 for all rentals. What is the marginal revenue of the 16th umbrella?
a. $1
b. $9
c. $16
d. $24
23. A dairy farmer in Wisconsin sells milk to a national distributor. The price of milk is set by the overall market, and many other farms produce the same quality milk. If this farmer operates in a perfectly competitive market, they will have a _____ share of the market, and customers will view their milk and competitors’ milk as _____.
a. large; identical
b. small; identical
c. small; differentiated
d. large; differentiated
24. Angela is considering starting a photography studio. She expects to earn $150,000 in revenue in her first year. Her explicit financial costs (including rent, equipment, and wages) will total $90,000. To open the studio, she must leave her job as a marketing assistant, where she currently earns $50,000 per year. She would also have to invest $50,000 from her savings, which currently earns her 4% annually in a savings account. What is Angela’s economic profit or loss in her first year?
a. a loss of $52,000
b. a profit of $10,000
c. a profit of $8,000
d. a loss of $8,000
25. A small local coffee roaster begins labeling its beans as single-origin, organic, and sustainably farmed, with personalized packaging. This branding strategy increases customer loyalty and allows the company to charge more than large supermarket brands. From the perspective of consumers, what does this successful product differentiation mean?
a. the product may be different, but price remains the key factor in purchase decisions.
b. there are different prices charged by different sellers, but the product is the same.
c. rival sellers produce different but equally desirable products.
d. the output of rival sellers is not a good substitute for this coffee roaster’s product.
26. A furniture company is considering whether to purchase the lumber mill that supplies its wood. By doing so, the company would control a key input in its production process. However, some managers argue that outsourcing from multiple suppliers might lead to more innovation and efficiency. This decision represents a trade-off between:
a. reduced costs of production; increased sales
b. greater efficiency in market power; reduced incentives for innovation
c. pushing hold-up problems onto rivals; reducing incentives for growth over time
d. eliminating the bargaining power of customers and suppliers; providing incentives for efficiency and profit
27. In a large city, dozens of independent food trucks serve a variety of international cuisines. While each one offers a unique menu and flavor, they all compete for the same lunchtime customers. This type of market, where there are many sellers and noticeable differences among products, is best described as:
a. a perfectly competitive market.
b. a monopoly.
c. an oligopoly.
d. a monopolistically competitive market.
28. A software company sells licenses for its design program. Using detailed user data, it is able to charge each customer exactly what they are willing to pay for the product. No two users pay the same price. As a result, the company captures the full willingness to pay from every buyer. This strategy is an example of perfect price discrimination, and it means that:
a. it produces the efficient quantity of output.
b. there is no producer surplus.
c. the producer surplus is equal to the monopoly profit.
d. the government will impose an average cost pricing rule on the monopoly.
29. At a local supermarket, customers can choose from over 30 brands of breakfast cereal. Each brand offers different flavors, packaging, health claims, and prices, but they all compete for the same consumer demand at breakfast. This wide variety and competition among brands suggest that the cereal market is:
a. a perfectly competitive market.
b. a monopoly.
c. an oligopoly.
d. a monopolistically competitive market.
30. In the streaming video industry, most viewers choose between just a few major platforms such as Netflix, Disney+, and Amazon Prime Video. Each service offers unique content, but they are aware of one another’s pricing and content strategies. This type of market structure is best described as:
a. perfect competition.
b. monopoly.
c. oligopoly.
d. monopolistic competition.
31. A bakery tracks how much it spends to produce different amounts of bread each day. At first, as output increases, the cost per loaf falls. But beyond a certain level of daily production, the bakery’s ovens become overcrowded and workers get in each other’s way, raising the cost per loaf. This behavior reflects the U-shape of the average cost curve because _____ dominates at low production levels, and _____ dominates at high levels.
a. diminishing marginal product; the spread effect
b. the spread effect; diminishing marginal product
c. comparative advantage; absolute advantage
d. absolute advantage; comparative advantage
32. A publisher offers two versions of an e-book: one is full price with instant download, and the other is discounted but requires readers to wait 48 hours and watch ads during setup. The company avoids offering discounts based on age or profession. Why might the publisher use this hurdle method instead of group pricing?
a. The publisher wants to make the purchase process more difficult for all customers.
b. The publisher assumes that customers willing to clear the hurdle value the product more.
c. The publisher believes that hurdles increase demand by creating anticipation.
d. The publisher lacks access to a reliable characteristic like age or profession to segment groups.
33. A firm’s demand curve is given by P = 20 – Q, and its marginal revenue curve is MR = 20 – 2Q. The firm faces a constant marginal cost of MC = 4. What is the profit-maximizing quantity and price for this monopolist?
a. Q = 8, P = 12
b. Q = 6, P = 14
c. Q = 4, P = 16
d. Q = 10, P = 10
e. None of these are correct
34. A monopolist faces the demand curve P = 30 – Q and has a marginal revenue curve of MR = 30 – 2Q. The marginal cost for the firm is constant at MC = 0. What is the profit-maximizing price and quantity?
a. Q = 15, P = 15
b. Q = 10, P = 20
c. Q = 5, P = 25
d. Q = 10, P = 10
e. None of these are correct
35. A successful brand name helps a firm maintain long-run monopoly profits primarily because:
a. it lowers marginal costs.
b. it acts as a barrier to entry by building consumer loyalty.
c. it eliminates the need for marketing.
d. it improves product standardization.
36. Economic costs include:
a. only explicit financial costs.
b. only fixed costs and variable costs.
c. both accounting costs and opportunity costs.
d. historical investment costs.
37. Two regional airline companies decide to merge in order to consolidate routes and reduce operating costs. While the number of competitors in the market decreases, the merged firm can now offer more direct flights and improve efficiency. Such a merger benefits society primarily when it leads to:
a. increased market power.
b. a larger number of sellers in the market.
c. cost savings.
d. decreased market demand.
38. A small craft brewery relies on a single regional supplier for specialty hops. Over time, the supplier gains market power by becoming the exclusive distributor of that hop variety in the area. The supplier raises the price of hops, increasing costs for the brewery. According to the Five Forces framework, how does this affect the brewery’s profitability?
a. Suppliers with market power can charge higher prices on inputs the company needs to purchase, reducing the company's profits.
b. Suppliers with market power can charge higher prices on output the company needs to sell, raising the company's profits.
c. Suppliers with market power charge lower prices on inputs the company needs to purchase, raising the company's profits.
d. Suppliers with market power charge lower prices on output the company needs to sell, reducing the company's profits.
39. A car manufacturer invests heavily in custom robotic equipment designed to fit only one supplier’s unique parts. If the relationship with that supplier ends, the equipment would be nearly worthless for other production lines. This type of investment is an example of:
a. increasing the manufacturer’s bargaining power.
b. contractually obligating the supplier to continue the relationship.
c. an asset that is worth more only within a specific business relationship.
d. a training program shared across multiple sellers.
40. A local artist is negotiating the sale of one of her paintings at an art fair. She starts by quoting a price that reflects the time and materials spent, as well as her desired profit. Meanwhile, a potential buyer counters with a lower offer based on their own budget. This interaction illustrates that a seller bargains to sell _____, and a buyer bargains to buy _____.
a. the highest possible quantity; the lowest quantity
b. more than any rival; the desired quantity
c. a quantity that disadvantages rivals; to put the seller at a loss
d. at a higher price; at a lower price
41. According to Porter’s Five Forces framework, an industry is likely to be less profitable when:
a. suppliers and buyers have little bargaining power.
b. barriers to entry are high.
c. there are many substitute products available.
d. few firms compete for market share.