1.
When MR < MC for a firm, a firm should
A) reduce its level of output.
B) stay at the same level of output.
C) stop producing.
D) increase output, unless P < AVC.
2.
When a firm is earning zero economic profits,
A) accounting profit is zero.
B) total revenue is greater than total cost.
C) P = ATC.
D) P is greater than ATC.
3.
Each firm in a perfectly competitive industry is
A) producing a unique product.
B) relatively large.
C) a price taker.
D) a price setter.
4.
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See the above figure which illustrates a perfectly competitive firm. What happens to the firm’s optimal level of output if the price it receives for its product increases from P2 to P3?
A) Output stays the same.
B) Output decreases.
C) Output increases.
D) There is not enough information provided to know what happens to output.
5.
See the above figure which illustrates a perfectly competitive firm. If price is equal to P4, the firm will
A) earn positive economic profits.
B) incur an economic loss.
C) earn zero economic profits.
D) shut down.
6.
An important difference between a perfectly competitive firm and a monopolist is
A) a monopolist usually uses more capital (K) compared to perfect competition
B) the shape of the demand curve each faces
C) the goals of the owners of the firms
D) a monopolist normally produces a service, while a perfect competitor normally produces a good
7.
All of the following are true about a monopolist EXCEPT
A) the demand curve for its product is perfectly elastic.
B) it produces a product with no close substitutes.
C) its demand curve is the same as the market demand for the industry.
D) it is a single seller of a good or service.
8.
Which of the following would NOT be a barrier to entry for a particular market?
A) Ownership of a patent
B) Low cost of obtaining initial capital
C) The presence of economies of scale
D) Government regulation
9.
Economies of scale will lead to only one firm in the industry because
A) by increasing output a firm is able to lower the cost per unit and change lower prices driving smaller firms out of business.
B) one firm has an average cost curve, which has shifted below the average cost curves of its competitors.
C) there are governmental entry restrictions.
D) of government licensing.
10.
A natural monopoly usually arises when
A) there are diseconomies of scale in an industry.
B) the government allows unrestricted access to a market.
C) there are large economies of scale relative to the industry’s demand.
D) companies band together to form a larger company.
11.
To sell more units, a single-price monopolist must
A) merely produce more units.
B) advertise more.
C) produce the profit maximizing rate of production.
D) lower price.
12.
If a single-price monopolist can sell 5 units at price of $200 per unit and 6 units at a price of $180 per unit, its marginal revenue at an output of 6 is
A) $-20
B) $20
C) $180
D) $1080
E) $80
13.
A single-price monopolist is maximizing profit at an output rate of 1,500 units per month. At this output rate, the price that its customers are willing and able to pay is $12 per unit, average total cost is $8 per unit, and marginal cost is $7 per unit. It may be concluded that at this monthly output rate, marginal revenue is _____ and the monopolist earns economic profits of ______ per month.
A) $7 per unit, $6,000 per month
B) $7 per unit, $7,500 per month
C) $8 per unit, $6,000 per month
D) $8 per unit, $7,500 per month
E) $12 per unit, $6,000 per month
F) $12 per unit, $7,500 per month
14.
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Suppose the (inverse) demand function for a single-price monopoly is P = 350 – 2Q. This means that the marginal revenue function for the monopolist is MR = 350 – 4Q. Assume the marginal cost function is given by MC = 3Q. These functions are pictured above. Find the Q* that themonopoly will produce. Hint: Q* is found be setting MR = MC.
A) Q* = 87.5
B) Q* = 50
C) Q* = 70
D) Q* = 100
15.
Now find the P* price that the monopolist will charge. This is found by finding the height of the demand curve (willingness to pay) at the Q* quantity you found in the previous question.
A) P* = 175
B) P* = 150
C) P* = 250
D) P* = 210
16.
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Suppose we were to label this P* Q* combination as point “M”. Which of the following pictures shows the correct location for point “M” for thismonopoly?
A) Picture A
B) Picture B
C) Picture C
D) Picture D
17.
Suppose that the market described in problem #14 was perfectly competitive instead of a monopoly, but assume the production costs are the same. Recall that in perfect competition, the last unit is sold at the output level where P = MC. This is the competitive equilibrium intersection of supply and demand. Find the competitive price and quantity in this market. Hint: the competitive market would have a higher quantity and lower price compared to monopoly.
A) P* = 200, Q* = 70
B) P* = 200, Q* = 100
C) P* = 210, Q* = 70
D) P* = 210, Q* = 100
E) P* = 220, Q* = 80
F) P* = 220, Q* = 110
G) P* = 230, Q* = 90
H) P* = 230, Q* = 120
18.
Comparing problems #14 and #15 to problem #17, find the deadweight loss created by this monopoly. Hint: This is a tough problem. Remember that you’re comparing the result of the monopoly to the competitive market. Drawing a graph similar to the point M and point C graph in your notes will help, but you’ll have to label with some numbers first to find the area.
A) Monopoly DWL = $400
B) Monopoly DWL = $600
C) Monopoly DWL = $1,000
D) Monopoly DWL = $1,500
E) Monopoly DWL = $2,100
F) Monopoly DWL = $2,500
19.
Suppose the (inverse) demand function for a single-price monopoly is P = 720 – 2Q. This means that the marginal revenue function for the monopolist is MR = 720 – 4Q. Assume the marginal cost function is given by MC = 2Q. If the ATC at the profit maximizing level of output is ATC = $253, then what is the profit earned by the profit maximizing monopolist?
A) Profit = $57,600
B) Profit = $64,800
C) Profit = $27,540
D) Profit = $19,260
E) Profit = $30,360
F) Profit = $40,860
20.
Which of the following is NOT necessary in order for a monopolist to practice effective price discrimination?
A) The marginal cost of providing the same good to different groups of buyers must be different.
B) The monopolist must be able to segregate its market into different submarkets.
C) The buyers in various markets must face different price elasticities of demand.
D) The monopolist must have a downward sloping demand curve.
21.
In the long run, both monopolistically competitive and perfectly competitive firms attain
A) lowest cost production.
B) positive economic profits.
C) zero economic profits.
D) productive efficiency.
22.
In the long run, a perfectly competitive market produces at ________, whereas the monopolistic competitive firm does not.
A) the output at which the lowest average total cost of production is reached
B) an output level at which positive economic profits exist
C) zero economic profits
D) the point at which MR = MC=ATC
23.
The most significant difference between perfect competition and monopolistic competition is that
A) in a perfectly competitive market products are differentiated, while in a monopolistically competitive market products are homogeneous.
B) in a perfectly competitive market products are homogeneous, while in a monopolistically competitive market products are differentiated.
C) in a perfectly competitive market there is a large number of sellers, while in a monopolistically competitive market there is a small number of sellers.
D) in a perfectly competitive market there is a small number of sellers, while in a monopolistically competitive market there is a large number of sellers.
