Which one of the following is not a key assumption of perfect competition?
Answer(s): C
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.
In order to sell at the rate of output in markets controlled by monopolists, price is set where:
Answer(s): B
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.
A natural monopoly exists because:
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.
Which one of the following statements concerning pure monopolies is correct?
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.
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):
Answer(s): A
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.
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