Economics Chapter 7 Test Review

Questions and Answers

What is pure competition?

A theoretical market structure with very large numbers and identical products

A theoretical market structure with very large numbers, identical products, freedom of entry and exit, and perfect knowledge by all buyers and sellers of market conditions

A theoretical market structure with identical products, very large numbers, and freedom of entry and exit (correct)

A theoretical market structure with identical products, and freedom of entry and exit

The term market structure refers to?

The profit-maximizing behavior of firms that use marginal analysis.

The nature and degree of competition among firms in the same industry. (correct)

The theoretical characteristics of firms in different industries.

The theoretical characteristics of firms in the same industry.

What is industry?

It is the competitive side of the market.

It is the theoretical side of the market.

It is the demand side of the market.

It is the supply side of the market. (correct)

Why is pure competition important?

Economists use it to evaluate less-competitive market structures. Signup and view all the answers

How do monopolistic competitors try to make their products stand out?

They use nonprice competition such as advertising. Signup and view all the answers

How does the profit-maximizing behavior of a monopolistic competitor compare to that of perfect competitors, oligopolies, and monopolies?

They all try to find the level of output where their marginal cost is equal to their marginal revenue. Signup and view all the answers

What is oligopoly?

It is a market structure in which a very few large sellers dominate the industry. Signup and view all the answers

Name one form of collusion.

Price fixing Signup and view all the answers

What type of monopoly is based on ownership of a manufacturing method or other scientific process?

Technological monopoly Signup and view all the answers

How do monopolies maximize profits?

They equate marginal cost with marginal revenue. Signup and view all the answers

Which of the following do economists use to classify markets?

All of the above Signup and view all the answers

The market structure called perfect competition is best described as _______.

theoretical Signup and view all the answers

What condition differentiates a market of pure competition from one of monopolistic competition?

Products Signup and view all the answers

If a shoe company pays a professional athlete to wear shoes it makes, it is an example of _______.

nonprice competition Signup and view all the answers

Which market structure is defined by a single producer?

Monopoly Signup and view all the answers

When would a market failure occur?

When any of the requirements for a competitive market are lacking Signup and view all the answers

Having too few public goods is evidence of?

A market failure. Signup and view all the answers

A decrease in _ tends to reduce the efficient use of resources.

Competition; scarce Signup and view all the answers

What does it mean when resources are immobile?

This means that land, capital, labor, and entrepreneurs do not, or will not, move to markets where they can earn higher returns. Signup and view all the answers

What is an example of a public good?

Highways Signup and view all the answers

Why are spillover effects, or externalities, symptoms of market failures?

Their costs and benefits are not reflected in the market prices that buyers pay. Signup and view all the answers

What is an example of a way to deal with spillovers?

Taxing harmful spillovers Signup and view all the answers

Why do state and local governments pay for the cost of primary and secondary public education?

Primary and secondary education has so many positive spillover effects. Signup and view all the answers

If Project A's ratio of benefits to costs is 1.5, and Project B's ratio is 4, which project should be funded?

B Signup and view all the answers

Whenever we want to deal with positive or negative spillovers, involvement from _______ is necessary.

Government Signup and view all the answers

Which statement is most accurate?

Markets can sometimes fail. Signup and view all the answers

Which of the following can cause market failure?

Not enough information Signup and view all the answers

A plant in a small town closes, leaving hundreds of people unemployed. There are jobs available at a similar plant in another state, but many of the unemployed workers are unwilling to move or cannot afford to move. An economist might use this example to _______.

Define resource immobility Signup and view all the answers

What happens when some of the costs or benefits associated with production and consumption fall on someone other than the producers or consumers of a product?

There are unintended effects or spillovers. Signup and view all the answers

What do externalities indicate?

A market failure Signup and view all the answers

Which of these is NOT a way the government can help maintain competitive markets?

Creating new businesses to compete with monopolies Signup and view all the answers

What is a trust?

A group of firms designed to restrict competition or to control prices Signup and view all the answers

What is the Sherman Act?

America's first significant law against monopolies Signup and view all the answers

What is price discrimination?

The practice of selling the same product to different consumers at different prices if it lessens competition Signup and view all the answers

What type of regulatory power does the Federal Trade Commission (FTC) have?

It can issue cease-and-desist orders to keep companies from using unfair business practices Signup and view all the answers

Not all monopolies are bad. Sometimes it is better to regulate a monopoly rather than break it up if?

It can be demonstrated that a monopoly can benefit from economies of scale. Signup and view all the answers

Why was the Consumer Financial Protection Bureau (CFPB) created?

To prevent another situation like the millions of low-quality home mortgages that were a major cause of the 2008-2009 Great Recession Signup and view all the answers

How much of our lives are affected by government regulation?

Virtually everything in our lives Signup and view all the answers

Zoning is an example of?

Local government regulation. Signup and view all the answers

Why did the U.S. economy slowly become a modified free enterprise economy?

It happened because people wanted it that way. Signup and view all the answers

Which would an economist say best describes a 'trust'?

An illegal combination Signup and view all the answers

Which of the following is a benefit for monopolies?

Economies of scale Signup and view all the answers

The government does not try to eliminate all monopolies. Why?

Not all monopolies are bad. Signup and view all the answers

By promoting transparency, the government can improve _______.

Market efficiency Signup and view all the answers

What level of government is most closely associated with zoning?

Local Signup and view all the answers

Study Notes

Pure Competition

Defined as a theoretical market structure with identical products, very large numbers of firms, and freedom of entry and exit.
Economists use this concept to evaluate less-competitive market structures.

Market Structure

Refers to the nature and degree of competition among firms in the same industry.
Classifications can involve the number of firms, size of firms, and type of products offered.

Industry and Competition

Industry represents the supply side of the market.
Monopolistic competitors utilize nonprice competition like advertising to differentiate their products.

Oligopoly

A market structure dominated by a few large sellers, where they may engage in collusion, such as price fixing.
Monopolistic competitors, oligopolies, and monopolies seek to equate marginal cost with marginal revenue to maximize profits.

Monopolies

Defined by a single producer and can arise in different forms, such as technological, geographic, or government monopolies.
Monopolies maximize profits by equating marginal cost with marginal revenue.

Market Failures

Occur when any basic requirements for competitive markets are lacking.
Evidence includes insufficient public goods and immobility of resources leading to unemployment.

Externalities and Spillover Effects

Represented by costs or benefits affecting third parties not involved in the market transaction.
Government engagement is vital when addressing negative externalities through taxation.

Public Goods

Goods like highways that are available for public use and funded through government spending.
Lack of mobility in resources can hinder efficient market operation.

Government Role in Markets

Regulatory powers include preventing monopoly formation, managing anti-competitive practices, and ensuring fair market practices.
The FTC can issue cease-and-desist orders to prevent unfair business practices.

Consumer Protection

Established agencies like the Consumer Financial Protection Bureau arose from historical economic crises to protect consumers from predatory practices.

Zoning and Local Regulation

Zoning serves as a form of local government regulation to control land usage.
Most facets of life are influenced by government regulations focusing on major industries.

Benefits and Costs of Monopolies

Monopolies may leverage economies of scale, which can be beneficial, but are often regulated to prevent exploitation of market power.

Trust and Market Combinations

A trust is a group of firms that collectively restrict competition or control prices, leading to illegal combinations.
The Sherman Act was a pivotal law aimed at addressing monopolistic practices in the U.S.

Market Dynamics

The U.S. economy has evolved into a modified free enterprise economy, largely due to consumer demands and political choices regarding economic structure.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Prepare for your Economics Chapter 7 test with this comprehensive review of key concepts on market structures, including pure competition. This quiz features essential questions that will help reinforce your understanding of theoretical market conditions. Perfect for revision and self-assessment!