Choice "d" is correct. The characteristics of monopolistic competition include:
•
Numerous firms with differentiated products.
•
Ease of entry - few barriers.
•
Firms exact some influence over price and market.
•
Non-price competition is frequent and critical.
Choice "a" is incorrect. Monopolistic competition has a few obstacles. A market with no obstacles is in
perfect competition.
Choice "b" is incorrect. Significant obstacles are characteristic of oligopoly.
Choice "c" is incorrect. Significant capital requirements represent a significant barrier to entry, which is
characteristic of oligopoly.
Question 552:
Karen Parker wants to establish an environmental testing company that would specialize in evaluating the quality of water found in rivers and streams. However, Parker has discovered that she needs either certification or approval from five separate local and state government agencies before she can commence business. Also, the necessary equipment to begin would cost several million dollars. However, Parker believes that if she is able to obtain capital resources, she can gain market share from the two major competitors. The large capital outlay necessary for the equipment is an example of a(n):
A. Entry barrier.
B. Minimum efficiency scale.
C. Created barrier.
D. External cost.
Correct Answer: A
Explanation:
Choice "a" is correct. Large capital (money) requirements are the basic example of barriers to entry. A
barrier to entry effectively prevents firms from entering the market to compete against existing firms.
Choice "b" is incorrect. Minimum efficient scale is the output level at which long run average costs are
minimized. Here, Parker has not even been able to enter the industry.
Choice "c" is incorrect. A created barrier is made by firms already in the industry. Here, Parker's barrier
was not created.
Choice "d" is incorrect. An external cost is a cost that the company does not account for, but passes on to
the detriment of society.
Question 553:
Which one of the following statements concerning pure monopolies is correct?
A. The demand curve of a monopolist is perfectly elastic.
B. The price at which a monopolist maximizes its profit is where price equals both marginal cost and marginal revenue.
C. A monopolist's marginal revenue curve lies below its demand curve.
D. The supply curve of a monopolist is perfectly inelastic.
Correct Answer: C
Explanation:
Choice "c" is correct. A monopolist's marginal revenue curve lies below its demand curve.
Choice "a" is incorrect. The demand curve of a monopolist is not perfectly elastic.
Choice "b" is incorrect. A monopolist sets its price higher than marginal revenue.
Choice "d" is incorrect. A monopolist can change the quantity supplied or fix the price but cannot do both
simultaneously. In any case, its supply curve is not perfectly inelastic.
Question 554:
In order to sell at the rate of output in markets controlled by monopolists, price is set where:
A. Price equals marginal cost.
B. Marginal revenue equals marginal cost.
C. Marginal revenue equals average total cost.
D. Price equals average total cost.
Correct Answer: B
Explanation:
Choice "b" is correct. In order to sell at the rate of output in markets controlled by monopolists, the price is
set where marginal revenue equals marginal cost. No matter which model is representative of the industry
in which the firm operates, the firm will maximize profits by producing at MR = MC. The monopolist's price
will be higher than MR.
Choice "a" is incorrect. Price exceeds both MR and MC.
Choices "c" and "d" are incorrect, which are far-out distractors.
Question 555:
A natural monopoly exists because:
A. The firm owns natural resources.
B. Economic and technical conditions permit only one efficient supplier.
C. The government is the only supplier.
D. Other firms are unable to enter the industry.
Correct Answer: B
Explanation:
Choice "b" is correct. A natural monopoly exists when economic and technical conditions permit only one
efficient supplier.
Choice "a" is incorrect. Owning natural resources, even if they are unique, would not create a monopoly.
Substitutes for the resource may be available.
Choice "c" is incorrect. Government control may create a monopoly, but not a natural monopoly. This is a
regulated monopoly.
Choice "d" is incorrect. Barriers to entry help create a monopoly, but the product must be unique.
Question 556:
Which one of the following is not a key assumption of perfect competition?
A. Customers are indifferent about which firm they buy from.
B. The level of a firm's output is small relative to the industry's total output.
C. Each firm can price its product above the industry price.
D. There is freedom of entry into and exit out of the industry.
Correct Answer: C
Explanation:
Choice "c" is correct. A key assumption of perfect competition is that the firm is a "price taker," that is, it
cannot fix the price. Accordingly, it is not true that each firm can price its product above the industry price.
Key assumptions of perfect competition include:
A. Customers are indifferent about which firm they buy from.
B. The level of a firm's output is small relative to the industry's total output.
D. There is freedom of entry into and exit out of the industry.
Question 557:
When markets are perfectly competitive, consumers:
A. Have goods and services produced at the lowest cost in the long run.
B. Must choose the brands they buy solely on the basis of informational advertising.
C. Do not receive any consumer surplus unless producers choose to overproduce.
D. Must search for the lowest price for the products they buy.
Correct Answer: A
Explanation:
Choice "a" is correct. Since price is barely sufficient to give a firm a normal profit and stay in business, the
consumer obtains the product at as low a price as is economically feasible. In addition, every firm is forced
to produce at the most efficient output rate.
Choice "b" is incorrect. Brand differentiation is present in monopolistic competition, not perfect competition.
Choice "c" is incorrect. This is a far-out distractor.
Choice "d" is incorrect. Also far out. Individual consumers are also price takers at the market equilibrium
price.
Question 558:
The following table contains ABC Corp.'s quarterly revenues, in thousands, for the past three years. During that time, there were no major changes to ABC's selling strategies and total capital investment.
Which of the following statements best describes the likely cause of the fluctuations in ABC's revenues and the best response to those fluctuations?
A. The fluctuations are from changes in the economy, and ABC should examine its cost structure for potential changes.
B. The fluctuations are from changes in the economy, and ABC should manage its inventories and cash flow to match the cycle.
C. The fluctuations are from the seasonal demand for ABC's products, and ABC should examine its cost structure for potential changes.
D. The fluctuations are from the seasonal demand for ABC's products, and ABC should manage its inventories and cash flow to match the cycle.
Correct Answer: D
Explanation: Choice "d" is correct. Relatively stable demand over a three year period in each of the first three quarters of the year followed by an increase of between 40 and 50 percent in the final quarter of the year over average sales in the first three quarters in each of the three years presented is indicative of seasonal fluctuations in demand for ABC's product that would require appropriate inventory management. Choice "a" is incorrect. The consistent volume levels and fluctuation percentages displayed for the activity in each quarter for each year are indicative of changes in seasonal demand rather than changes in the economy generally. Choice "b" is incorrect. The consistent volume levels and fluctuation percentages displayed for the activity in each quarter for each year are indicative of changes in seasonal demand rather than changes in the economy generally. Choice "c" is incorrect. Relatively stable demand over a three year period in each of the first three quarters of the year followed by an increase of between 40 and 50 percent in the final quarter of the year over average sales in the first three quarters in each of the three years presented is indicative of seasonal fluctuations in demand for ABC's product. The company should be more attentive to the timing of inventory purchases to meet demand, however, rather than the company's overall cost structure.
Question 559:
Which of the following is correct regarding the consumer price index (CPI) for measuring the estimated decrease in a company's buying power?
A. The CPI is measured only once every 10 years.
B. The products a company buys should differ from what a consumer buys.
C. The CPI measures what consumers will pay for items.
D. The CPI is skewed by foreign currency translations.
Correct Answer: B
Explanation: Choice "b" is correct. The consumer price index measures the costs of a market basket of specific goods commonly purchased by consumers. It measures consumer buying power and is not distorted by items generally bought by industry. Choice "a" is incorrect. The Consumer Price Index (CPI) represents monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Choice "c" is incorrect. The Consumer Price Index measures what has been paid for items, not what consumers will pay for items. Choice "d" is incorrect. The Consumer Price Index measures what has been paid by consumers in over eighty urban areas in the United States. The amounts paid are denominated in US dollars and would not be skewed by foreign currency translations.
Question 560:
Gross domestic product includes which of the following measures?
A. The size of a population that must share a given output within one year.
B. The negative externalities of the production process of a nation within one year.
C. The total monetary value of all final goods and services produced within a nation in one year.
D. The total monetary value of goods and services including barter transactions within a nation in one year.
Correct Answer: C
Explanation: Choice "c" is correct. Gross domestic product (GDP) is the total dollar (monetary) value of all new final products and services produced with the economy in a given time period. The emphasis is on the final goods and services. Choice "a" is incorrect. The size of a population that must share a given output within one year is not a part of the GDP calculation. Choice "b" is incorrect. The negative (or positive) externalities of the production process of a nation within one year are not a part of the GDP calculation. In economics, externalities are the effects that the acts of consumers or producers have on each other. Externalities range from technological changes to changes in the range of options available to consumers. Externalities may also be regarded as the unanticipated side effects of courses of action. Choice "d" is incorrect. The total monetary value of goods and services, including barter transactions, is not a part of the GDP calculation. GDP includes only monetary value, not barter value.
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