uestion 1. Long distance telephone service has become a competitive m

1. Long distance telephone service has become a competitive market. The average cost per call
is $0.05 a
minute, and it’s declining. The likely reason for the declining price for long distance service is:
a. Governmental pressure to lower the price
b. Reduced demand for long distance service
c. Entry into this industry pushes prices down
d. Lower price for a barrel of crude oil
e. Increased cost of providing long distance service
2. All of the following are true for both competition and monopolistic competition in the long run,
except
one of them. Which is it?
a. P = M C
b. P = A C
c. Economic profits become zero in the long-run
d. The barriers to entry and exit are relatively easy
e. None of the above is an exception
3. In pure competition:
a. the optimal price-output solution occurs at the point where marginal revenue is equal to
price
b. a firm’s demand curve is represented by a horizontal line
c. a firm is a price-taker since the products of every producer are perfect substitutes for the
products of every other producer
d. a and b only
e. a, b, and c
A firm in pure competition would shut down when:
a. price is less than average total cost
b. price is less than average fixed cost
c. price is less than marginal cost
d. price is less than average variable cost
5. All of the following are mechanisms which reduce the adverse selection problem except
____.
a.
b.
c.
d.
e.
warranties from established enterprises with non-redeployable assets
high interest rates
large collateral requirements
brand names and product-specific promotions and retail displays
higher prices in repeat customer transactions
6. An “experience good” is one that:
a. Only an expert can use
b. Has undetectable quality when purchased

c. Can be readily experienced simply by touching or tasting
d. Improves with age, like a fine wine
e. All of the above
7. Unique Creations has a monopoly position in magnometers. If the marginal cost for a
magnometer is $50
and the price elasticity for magnometers is -4, what is the optimal monopoly price?
Hint: P (1 +1/E) = MC.
a. $37.50
b. $41.25
c. $66.67
d. $75.00
e. $82.50
8. Declining cost industries
a. have upward rising AC curves.
b. have upward rising demand curves.
c. have ?-shaped total costs.
d. have diseconomies of scale.
e. have marginal cost curves below their average cost curve.
9. In the case of pure monopoly:
a. one firm is the sole producer of a good or service which has no close substitutes
b. the firm’s profit is maximized at the price and output combination where marginal cost
equals marginal revenue
c. the demand curve is always elastic
d. a and b only
e. a, b, and c
10. A monopoly will always produce less than a purely competitive industry, ceteris paribus.
a. true
b. false
11. When the cross elasticity of demand between one product and all other products is low, one
is generally
referring to a(n) ____ situation.
a.

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