1.Productive efficiency for an individual firm requires that

a.all resources be fully used.

b.MC = P for all goods.

c.the firm be on its LRAC curve.

d.the firm be allocatively efficient.

e.P = ATC for all goods.

2.If the total output of some industry is allocated among its individual firms in such a way that the total cost of producing the industry's output is minimized, we know the industry has achieved

1) full employment of resources;

2) productive efficiency;

3) allocative efficiency.

a.1 only

b.2 only

c.3 only

d.both 1 and 3

e.both 2 and 3

3.Consider two firms, A and B, that are producing the same product but with different average costs. Economists say this situation reflects a problem of

a.unemployed resources.

b.economic inefficiency.

c.productive inefficiency.

d.allocative inefficiency.

e.not necessarily any of the above.

4.An economy will be allocatively efficient if

a.the economy's resources are fully employed.

b.all firms are breaking even.

c.the average cost of production is the lowest possible for all goods produced.

d.price equals marginal cost for all products.

e.the price equals average cost for all goods.

5.An economy will be allocatively efficient if

a.least-cost production techniques are employed by all firms.

b.the marginal costs of all firms in an industry are equal.

c.marginal cost equals price for all goods.

d.the economy's resources are fully employed.

e.imperfectly competitive markets are regulated.

6.If all firms are profit maximizers, then the following is assured:

a.allocative efficiency.

b.each firm is productively efficient.

c.allocative and productive efficiency.

d.that the economy is operating inside the production possibilities boundary.

e.that firms attain the lowest possible average costs.

7.Allocative efficiency is a property of the behaviour of

a.individual firms.

b.all firms in an industry.

c.perfectly-competitive firms.

d.monopolies.

e.the overall economy.

8.Allocative efficiency concerns

a.producing outputs at lowest possible cost.

b.the allocation of resources such that total economic surplus is maximized.

c.encouraging monopoly if it generates innovation.

d.discouraging all monopoly firms.

e.the equitable distribution of resources.

9.We can safely say that each point on a country's production possibilities boundary (PPB) is

a.allocatively efficient.

b.one at which P = MC for all goods.

c.productively efficient.

d.Pareto optimal.

e.not productively efficient.

10.An economy in which there are no market failures and all industries are in a competitive long-run equilibrium is one where

1) allocative efficiency is achieved;

2) the economy is on the production possibilities boundary;

3) there is no incentive for firms to enter or leave industries.

a.1 and 2

b.2 and 3

c.1 and 3

d.1, 2, and 3

e.2 only

11.Consider a monopolistically competitive industry in long-run equilibrium. Will this industry be productively efficient?

a.Yes. Since the firms are in long-run equilibrium, they will all be producing at the minimum of their LRAC curves.

b.Yes. Since the firms are in long-run equilibrium, they will all be operating on their LRAC curves.

c.Yes. In long-run equilibrium, each firm is producing at an output level where price is equal to marginal cost.

d.No. Firms are selling their output at a level where price exceeds marginal cost and thus, by definition, cannot be productively efficient.

e.No. Since firms are selling differentiated products and there is no industry-wide price, we cannot conclude that marginal cost will be equated across all firms.

12.Consider an industry with three profit-maximizing firms producing identical soccer jerseys. At their current levels of output, Firm A has a MC of $22, Firm B has a MC of $26, and Firm C has a MC of $27. Each firm is minimizing its costs for its given level of output. Which of the following statements is definitely true?

a.Each firm and the industry are productively efficient.

b.Each firm is productively efficient but the industry is not.

c.The industry is productively efficient but each firm is not.

d.Each firm is allocatively efficient but the industry is not.

e.Each firm and the industry are allocatively efficient.

13.Consider the efficiency of various market structures and complete the following sentence. The larger the minimum efficient scale of firms, ceteris paribus, the

a.more likely we are to have a concentrated market and allocative inefficiency.

b.less the tendency toward monopoly inefficiency.

c.lower the advantages of large-scale production.

d.greater the number of firms comprising an industry.

e.more likely firms will display productive efficiency.

14.If a perfectly competitive industry was suddenly monopolized without any change in cost conditions,

a.both price and quantity produced would increase.

b.both price and quantity produced would decrease.

c.price would increase and quantity produced would decrease.

d.price would decrease and quantity produced would increase.

e.there would be no change in either price or quantity produced.

15.When comparing a perfectly competitive firm and a (single-price) monopolist, a major difference is that

a.the monopolist produces where MR = MC, but the perfect competitor does not.

b.the perfect competitor achieves productive efficiency, but the monopolist does not.

c.the perfect competitor produces where P = MC, but the monopolist does not.

d.the monopolist achieves allocative efficiency but the perfect competitor does not.

e.the perfect competitor minimizes its costs, but the monopolist does not.

16.In the absence of other market failures, allocative efficiency is achieved in a perfectly competitive industry because

a.firms do not need to maximize profits.

b.the industry produces a level of output such that the marginal cost of production is minimized.

c.the industry produces a level of output such that there are increasing returns to scale.

d.there are barriers to entry.

e.the industry produces a level of output such that the marginal cost to producers equals the marginal benefit to consumers.

17.The deadweight loss of monopoly is

a.its fixed cost.

b.any negative profit due to cyclical decreases in demand.

c.the loss of economic surplus due to the low monopoly output level.

d.the cost of maintaining effective barriers to entry.

e.the extra administrative costs of operating a large firm.

18.Suppose we compare two monopolists with identical cost and demand conditions. Monopolist A charges a single price. Monopolist B engages in price discrimination, charging a different price for different units of the product. Which one of the following statements is correct?

a.B will produce less than A, resulting in a larger deadweight loss.

b.B will generally produce more than A, resulting in less deadweight loss.

c.A will produce less than B, resulting in smaller deadweight loss.

d.A will produce more than B, and there is no deadweight loss.

e.A and B will both produce the same amount.

19.Which of the following is the result of a monopolist's pricing and output behaviour, as compared to a perfectly competitive outcome?

a.a reduction in producer surplus and increase in consumer surplus

b.an increase in both consumer and producer surplus

c.a reduction in both consumer and producer surplus

d.a reduction in the sum of consumer and producer surplus

e.an increase in the sum of consumer and producer surplus

20.When comparing a monopoly equilibrium to a competitive market equilibrium, the consumer suffers two types of losses. They are

a.the deadweight loss due to the output that is produced beyond the competitive level, and the transfer of consumer surplus to the monopolist.

b.the loss of both consumer surplus and producer surplus.

c.a loss of consumer surplus due to the output that is not produced, and the transfer of consumer surplus to the monopolist.

d.the deadweight loss due to the output that is produced and the reduced incentive for innovation by the monopolist.

e.the deadweight loss due to the output that is not produced and the transfer of producer surplus to the monopolist.

21.Which of the following is the definition of producer surplus?

a.the total revenue received by the producer for a good minus the total cost of producing that good

b.the price of a good minus the marginal cost of producing it, summed over the quantity produced

c.the revenue received for a good, minus the cost of producing it

d.the price of a good minus the cost of producing it

e.quantity produced in excess of the allocatively efficient amount

22.Which of the following is the definition of consumer surplus?

a.the difference between the value that consumers place on a good and the payment they make to buy the good, summed over the quantity consumed

b.the total value that consumers place on the quantity consumed of some good

c.the quantity consumed in excess of the allocatively efficient amount

d.the value that consumers place on the last unit consumed of a good

e.the marginal value that consumers place on the last unit consumed of a good

23.Which of the following is an example of an industry that succeeds in formally restricting entry, thereby maintaining prices above competitive levels?

a.transport trucking

b.beef cattle ranching

c.window washing

d.dentistry

e.book publishing

24.In which of the following situations would a natural monopoly exist?

a.a firm has a government charter to be the sole producer of some good

b.a firm is able to operate at the minimum point of its long-run average total cost curve

c.a firm produces a product essential to national security

d.only one firm is supplying a natural resource

e.one firm can most efficiently supply the entire market demand

25.Choose the statement that best describes the dilemma facing the regulator of a natural monopoly.

a.Marginal-cost pricing leads to profit or losses; average-cost pricing results in allocative inefficiency.

b.Marginal-cost pricing will result in allocative inefficiency; average-cost pricing leads to profits or losses.

c.Marginal-cost pricing will result in productive and allocative inefficiency; average-cost pricing will not.

d.Both kinds of regulation have the same implications for allocative efficiency.

e.There is no dilemma.

26.Consider the case of a natural monopoly with falling long-run average costs. If regulation sets the price equal to marginal cost, then

a.the firm would operate at a loss and eventually go out of business.

b.shortages would result.

c.the demand curve would shift to the left.

d.the firm would earn economic profits.

e.the outcome would be allocatively inefficient.

27.Consider a natural monopoly that has declining LRAC over the entire range of the market demand curve. If it is regulated and required to charge a price that is equal to MC, the resulting level of output is

a.allocatively efficient, and profit is earned.

b.allocatively efficient, but the firm must be paid a subsidy or it will eventually go out of business.

c.less than the allocatively efficient level, and profit is zero.

d.less than the allocatively efficient level, but losses occur.

e.greater than the allocatively efficient level, but losses occur.

28.Consider a public utility that is a natural monopoly with falling long-run average costs. If a regulatory agency ordered this firm to price all of its output at marginal cost, then the firm

a.would lose money unless it is subsidized.

b.could incur profits or losses depending on the position of the demand curve and the LRAC curve.

c.would earn profits since the demand curve is perfectly inelastic.

d.would incur losses since the demand curve is perfectly elastic.

e.would have to shut down.

29.If average-cost pricing is imposed on a falling-cost natural monopoly, the result will be

a.exit from the industry in the short run.

b.zero economic profit.

c.economic profits.

d.economic losses.

e.losses and exit from the industry in the long run.

30.If a regulatory agency imposes a lump-sum tax on a monopolist (i.e., a tax that is independent of the level of output) it will reduce the firm's profits because the tax increases

a.the LRAC but not the MC, leaving price and output unchanged.

b.both the LRAC and the MC, leaving price and output unchanged.

c.all costs as it shifts the demand curve to the left.

d.all costs as it shifts the demand curve to the right.

e.price whereas quantity demanded falls.