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In its near-closing section Bygones and Margins, the text chapter emphasizes that if a firm is setting its price and output according to MR = MC principles, it will disregard Fixed Cost.

QUIZ: Multiple Choice

1. If a firm's Marginal Revenue exceeds its Marginal Cost, Maximum-profit rules require that firm to (1) increase its output in both perfect and imperfect competition; (2) increase its output in perfect but not necessarily in imperfect competition; (3) increase its output in imperfect but not necessarily in perfect competition; (4) decrease its output in both perfect and imperfect competition; (5) increase price, not output, in both perfect and imperfect competition.

2. Whenever a firm's demand curve is horizontal or "perfectly elastic," then (1) the firm cannot be operating under conditions of perfect competition; (2) the profit-maximizing rule of MR-equal-to-MC does not apply; (3) price and Marginal Revenue-must be one and the same; (4) price and Marginal Cost must be one and the same; (5) none of the above is necessarily correct.

3. A basic difference between the firm in perfect (or pure) competition and the monopoly firm, according to economic analysis, is this: (1) The perfect competitor can sell as much as he wishes at some given price, whereas the monopolist must lower his price whenever he wishes to increase the amount of his sales by any significant amount;

(2) the monopolist can always charge a price that brings him a substantial profit, whereas the perfect competitor can never earn such a profit; (3) the elasticity of demand facing the monopolist is a higher figure than the elasticity of demand facing the perfect competitor; (4) the monopolist seeks to maximize profit, whereas the perfect competitor's rule is to equate price and Average Cost; (5) none of the above.

4. "Oligopoly" means (1) the same thing as imperfect competition; (2) a situation in which the number of competing firms is large but the products differ slightly; (3) a situation in which the number of competing firms is small;

(4) that particular condition of imperfect competition which is just removed from monopoly, regardless of the number of firms or type of product: (5) none of these.

5. When a monopoly firm seeking to maximize its profits has reached its "equilibrium position," then (1) price must be less than Marginal Cost; (2) price must be equal to Marginal Cost; (3) price must he greater than Marginal Cost; (4) price may be equal to or below Marginal Cost, but not above it; (5) none of the above is necessarily correct since equilibrium does not require any particular relation between price and Marginal Cost.

6. To explain why imperfect competition is far more prevalent than perfect competition, the text lays considerable emphasis upon the following: (1) the fact that Marginal Revenue is less than price; (2) the tendency of Marginal Cost to continue to fall over substantial levels of output produced; (() the disposition of firms to try to maximize the profit they can gain from sales; (4) the tendency of Marginal Cost to rise after some particular level of output produced has been reached; (5) the fact that large firms now typically produce many different products, thus squeezing smaller firms out of their markets.

7. Among the five statements below, one must be false with respect to any firm operating under conditions of imperfect competition. Which one? (1) The number of competing sellers offering similar (although differentiated) products can be large. (2) Other firms may sell products

which are identical or almost identical with this firm's product. (3) The number of competing sellers offering similar (although differentiated) products can be small. (4) The firm's Marginal Revenue will be less than the price it obtains. (5) The demand curve facing the firm can be perfectly horizontal.

8. A level of output for a firm at which Marginal Cost had risen to equality with price would (1) be a profit-maximizing output level in both pure (or perfect) competition and imperfect competition; (2) be a profit-maximizing output level in pure (or perfect) competition but not in imperfect competition; (3) not be a profit-maximizing output level either in perfect or in imperfect competition; (4) be a profit-maximizing output level in imperfect competition but not in pure (or perfect) competition; (5) definitely be a profit-maximizing output level in imperfect competition, but might or might not be in pure (or perfect) competition.

9. A firm in conditions of imperfect competition which finds itself at an output level where Marginal Cost has risen to equality with price, and which wants to maximize its profit, ought to (1) increase its output; (2) change (either increase or decrease) its price but not its output; (3) maintain both price and output at their present levels; (4) increase its price; (5) perhaps do any of the above—information furnished is insufficient to tell.

10. The essence of the general rule for maximizing profits given in the text chapter is that a firm should set its price, or its output, as follows: set its (1) price at a level where the excess over the minimum-possible level of Average Cost is at its maximum; (2) output at a level where the extra production cost resulting from the last unit produced just equals the extra revenue brought in by that last unit; (3) price at the highest level which the traffic will bear; (4) price at a level just equal to Marginal Cost (assuming that Marginal Cost would rise with any increase in output); (5) output at a level where Average Cost is at a minimum.

11. A firm would be designated as a monopoly, according to the definition conventionally used by economists, in any situation where (1) the firm's Marginal Revenue exceeds the price it charges at all levels of output (other than the first unit sold); (2) the firm's Marginal Revenue is less than the price it charges at all levels of output (other than the first unit sold); (3) the firm has at least some degree of control over the price that it can charge; (4) the profit earned by the .firm significantly exceeds the competitive rate of return, after proper allowance has been made for risk undertaken; (5) there is no other firm selling a close substitute for the product of this firm.

12. The Marginal Revenue (MR) associated with any given point on a firm's demand curve will be related to the elasticity of demand at that point (with respect to price) as follows:

(1) When demand is inelastic, MR will be negative in value;

(2) when demand is elastic, MR will be negative in value;

(3) when demand is inelastic, MR will be zero in value; (4)

when demand is elastic, MR will be zero in value; (5) .VR of monopoly or imperfect competition. The AR line is Aver-is always positive in value (although below price) regardless age Revenue—in other words, it is price obtainable per unit. of elasticity, except at the point or region of unit elasticity.

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