ECON

Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $15 $5 0 1 14 5 2 2 13 5 5 3 12 5 9 4 11 5 14 5 10 5 20 6 9 5 27 What is the average total cost when Q=5? a. $ 5 b. $ 4 c. $ 3 d. $ 2 e. $ 1

Answer: a. Average total cost is equal to total cost divided by the number of units of output: ATC = TC/Q. The table gives us Q, but it does not give TC directly. TC = TFC + TVC. When Q = 5, TFC = $5 and TVC = $20. Thus when Q = 5, TC = $5 + $20 = $25. Dividing by the quantity of 5, we have ATC = $25/5 = $5.

Why does monopoly lead to deadweight loss? a. The loss in consumer surplus is greater than the monopoly profits. b. The monopoly is more efficient than a group of competitive firms would be. c. The monopoly produces a quantity at which marginal revenue is negative. d. The monopoly charges a price that is equal to marginal cost. e. All of the above.

Answer: a. Choice (c) is incorrect; a profit-maximizing monopoly will produce a quantity at which marginal revenue is positive. Choice (d) is also incorrect. A perfectly competitive firm charges a price equal to MC, but a monopoly's price is greater than marginal cost. Choice (a) is correct: The deadweight loss of monopoly comes about because the monopolist charges a higher price. This robs consumers of an amount of consumer surplus that is greater than the amount of profit gained by the monopoly.

Assume that the income elasticity of demand for picture frames is 0.6. This means that a. picture frames are normal goods. b. the demand for picture frames is inelastic. c. picture frames are inferior goods. d. all of the above are true. e. (a) and (b) only are true.

Answer: a. The income elasticity of demand is the percentage change in quantity, divided by the percentage change in income. For a normal good, an increase in income will lead to an increase in demand (i.e., a rightward shift in the demand curve). Thus for a normal good, when the percentage change in income is positive, the percentage change in quantity will also be positive. When we divide a positive by a positive, the quotient is positive. Thus the income elasticity is positive for a normal good. It is negative for an inferior good.

In a natural monopoly, the average-total-cost curve is downward sloping, throughout the entire relevant range of output. This means that a. marginal cost is always less than average total cost. b. marginal cost is always equal to average total cost. c. marginal cost is always greater than average total cost. d. all of the above are true!!!!! e. not enough information has been given to answer the question

Answer: a. When marginal anything is less than its average counterpart, the average will be decreasing. If ATC is always decreasing, then it must be true that MC is always less than ATC.

Consumer surplus is represented graphically by a. the vertical distance between price and average total cost. b. the area between the supply curve and the demand curve. c. the area between the demand curve and the price line. d. the area of the deadweight-loss triangle. e. all of the above (!).

Answer: c. Consumer surplus is the difference between the maximum amount that the consumer is willing to pay, and the amount that the consumer actually has to pay. In other words, consumer surplus is the difference between total utility and total expenditure. Total utility is the area under the demand curve, and total expenditure is the area under the price line. Thus consumer surplus is the area of the triangle that is below the demand curve but above the price line.

Profit per unit of output is equal to a. (price minus average total cost) multiplied by quantity. b. average total cost. c. price minus average total cost. d. price. e. price times quantity.

Answer: c. Profit is equal to total revenue minus total cost: Profit = TR - TC. To get profit per unit, or average profit, we divide both sides of this equation by the quantity of output: Profit/Q = TR/Q - TC/Q. To understand TR/Q, we must remember that TR = (P)(Q). Thus TR/Q = (P)(Q)/Q = P: revenue per unit, or average revenue, is equal to price. TC/Q is average total cost. Thus profit per unit is equal to price minus average total cost.

Profit per unit of output is a. price. b. average total cost. c. average variable cost. d. price minus average variable cost. e. price minus average total cost.

Answer: e. Profit is equal to total revenue minus total cost: Profit = TR - TC. If we divide both sides of this equation by the number of units, we get profit per unit: Profit/Q = TR/Q - TC/Q. TC/Q is known as average total cost, and TR/Q, or average revenue, is equal to the price. Thus, profit per unit is equal to price minus average total cost.

For ABC Corporation, at a quantity of 50, average variable cost is $10. When the quantity increases to 51, average variable cost remains at $10. This indicates that a. Marginal cost is greater than average variable cost. b. Marginal cost is equal to average variable cost. c. Marginal cost is less than average variable cost. d. Average fixed cost is equal to average variable cost. e. Average total cost is equal to average variable cost.

Answer: b. When marginal anything is equal to its average counterpart, the average is constant. In this question, when quantity increases, average variable cost does not change. In other words, average variable cost is constant over the range described in this question. That means that average variable cost must be equal to marginal cost.

. If there is an increase in the price of bacon, the consumers of bacon will be harmed. What is our best measure of the dollar value of the damage to bacon consumers? a. The increase in marginal utility. b. The decrease in quantity. c. The decrease in consumer surplus. d. The change in the total amount of money spent on bacon. e. The increase in price.

Answer: c.

What kind of curve could this be? | |______________ |______________ a. An average-fixed-cost curve. b. A marginal-revenue curve for a monopolist. c. A total-revenue curve. d. A total-fixed-cost curve. e. (c) and (d).

Answer: d. An average-fixed-cost curve is always downward sloping, which means that choice (a) is incorrect. A marginal-revenue curve for a monopolist is also downward sloping, so that choice (b) is also incorrect. A total-revenue curve for a perfectly competitive firm is an upward-sloping straight line. A total-revenue curve for a monopoly will slope upward at first, but will eventually slope downward. Thus choice (c) is also incorrect. But choice (d) is correct: Total fixed cost does not change when quantity changes, which means that total fixed cost is graphed as a horizontal line.

Which of the following is restricted by the antitrust laws? a. Price fixing. b. Interlocking directorates. c. Tie-in sales. d. Attempting to monopolize. e. All of the above.

Answer: e.

Which of the following is necessary for a firm to increase its profits by engaging in price discrimination? a. The firm must be a monopoly. b. The firm must have some way of distinguishing among its customers, to tell which ones have demand that is more elastic and which ones have demand that is less elastic. c. It must be difficult or impossible for customers to re-sell to other customers. d. All of the above. e. (b) and (c) only.

Answer: e. A firm can increase its profits if it charges a relatively higher price to those with less elastic demand, and a relatively lower price to those with more elastic demand. But this can only take place if the firm has some way of distinguishing high-elasticity buyers from low-elasticity buyers. Thus choice (b) is correct. Choice (c) is also correct. If the high-elasticity buyers (who are charged the lower price) are easily able to re-sell to the low-elasticity buyers, then no one will buy at the higher price, and the price-discrimination scheme will break down. However, choice (a) is not correct. In order to increase profits by engaging in price discrimination, a firm cannot be perfectly competitive, but it does not necessarily have to be a monopoly. Monopolistically competitive and oligopolistic firms could also engage in price discrimination.

Total fixed cost a. increases as quantity increases. b. is a constant. c. decreases as quantity increases. d. is equal to marginal cost divided by quantity. e. does not exist on Halloween.

Answer: b. By definition, fixed costs are the costs that do not change, when the level of output changes. Thus, total fixed cost is a constant (i.e., TFC does not change when the level of output changes).

Profit per unit of output is equal to a. (price minus average total cost) multiplied by quantity. b. average total cost. c. price minus average total cost. d. price. e. price times quantity.

Answer: c. Profit is equal to total revenue minus total cost: Profit = TR -TC. If we divide both sides of this equation by Q, to get per-unit values, we have Profit/Q = Profit Per Unit = TR/Q - TC/Q. TC/Q is called average total cost. TR is equal to price multiplied by quantity. Thus, TR/Q = P. Therefore, profit per unit is equal to price minus average total cost.

Peanut butter and jelly are complements. This implies that a. the income elasticity of demand for each of these goods is negative. b. the own-price elasticity of demand for each of these goods is negative. c. the cross-price elasticity of demand for these goods is positive. d. the income elasticity of demand for each of these goods is positive. e. the cross-price elasticity of demand for these goods is negative.

Answer: e. The cross-price elasticity of demand for peanut butter with respect to the price of jelly is the percentage change in demand for peanut butter, divided by the percentage change in the price of jelly. If the two goods are complements, then an increase in the price of jelly will lead to a decrease in the demand for peanut butter. Thus, the change in the price of jelly is of one sign, and the change in demand for peanut butter is of the opposite sign. If we divide them to get the cross-price elasticity, we get a negative number.

. In 1911, the Standard Oil and American Tobacco cases tested whether these companies had violated the antitrust laws. What happened in these cases? a. Both firms were found guilty, and both were broken into smaller pieces. b. American Tobacco was broken into smaller pieces, but Standard Oil was found not guilty. c. Standard Oil was broken into smaller pieces, but American Tobacco was found not guilty. d. Both firms were found not guilty. e. All of the above!

Answer: a

Trucking and commercial airlines are examples of industries that a. were substantially deregulated in the 1970s and 1980s. b. are natural monopolies. c. are perfectly competitive. d. were transformed when a huge firm was broken up, as a result of an antitrust action. e. all of the above.

Answer: a.

The Jensen farm is a perfectly competitive firm. The market price of Jensen's output is $9 per unit. At its current level of output, the firm's marginal cost is $7 per unit and its average total cost is $6 per unit. On the basis of this information, what should the firm do? a. The firm should increase its output. b. The firm should not change its output. c. The firm should decrease its output, but still produce a positive amount. d. The firm should shut down. e. All of the above.

Answer: a. A firm will only consider shutting down if it is suffering losses. Since profit per unit is equal to price minus average total cost, a firm will only consider shutting down if its price is less than average total cost. In this question, P = $9 and ATC = $6. Thus the firm is earning positive economic profits of $(9-6) = $3 per unit, and it will not want to shut down; this means that choice (d) is incorrect. The condition for profit maximization for any firm is that the firm should produce and sell the quantity at which marginal revenue is equal to marginal cost. In the special case of a perfectly competitive firm, another way to state the condition is that firm should produce and sell the quantity at which price is equal to marginal cost. Here, P = $9 and MC = $7. This means that the firm is not at its profit-maximizing level of output, so that choice (b) is incorrect. Instead, this firm is in a position where, if it were to produce and sell one more unit, its profits would increase by $(9-7) = $2. Thus the firm should increase its output.

Which of the following industries best fits the definition of perfect competition? a. Soybean farming. b. Personal-computer operating systems. c. Commercial aircraft manufacturing. d. Clothing retailing. e. All of the above.

Answer: a. A perfectly competitive industry has a large number of producers, each of which is small relative to the market. Also, the firms produce homogeneous output, and there is free entry and exit. All of these characteristics hold in many agricultural markets. The market for personal-computer operating systems is a near-monopoly. The commercial-aircraft market is a duopoly, with two large firms. The clothing-retailing market is monopolistically competitive.

The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $15 $5 $ 0 1 14 5 2 2 13 5 5 3 12 5 9 4 11 5 14 5 10 5 20 6 9 5 27 What is the average total cost when Q=5? a. $ 5 b. $ 4 c. $ 3 d. $ 2 e. $ 1

Answer: a. Average total cost (or total cost per unit of output) is calculated by dividing total cost by the number of units of output: ATC = TC/Q. Here, we are asked to find ATC when Q=5, so we already have the denominator. To find the numerator, TC, we need to recall that total cost is the sum of total fixed cost and total variable cost: TC = TFC + TVC. When Q=5, TFC=$5 and TVC=$20. This means that total cost is equal to $(5+20) = $25. If we insert this value for total cost into the equation for average total cost, we have ATC = $25/5 = $5. When Q=5, the average total cost is $5 per unit

Flimflam Corporation has an upward-sloping long-run average-total-cost curve. This means that Flimflam Corporation has a. decreasing returns to scale. b. constant returns to scale. c. increasing returns to scale. d. all of the above. e. none of the above.

Answer: a. If, when all of a firm's inputs increase by the same percentage, the firm's output increases by less than that percentage, we say that the firm is experiencing decreasing returns to scale. If all of the firm's inputs increase by some percentage, then the firm's costs will increase by that same percentage. However, if output increases by a smaller percentage, then cost per unit (i.e., average total cost) will be larger at the higher level of output. This means that the long-run average-total-cost curve will slope upward as we go from left to right across the diagram, from a smaller quantity to a larger quantity.

Monopolistically competitive industries have a tendency to move toward zero economic profits. Perfectly competitive industries also have a tendency to move toward zero economic profits. Which of the characteristics of these industries is responsible for this tendency? a. The industry is characterized by free entry and exit. b. The industry has many firms. c. The firms produce differentiated products. d. Each firm in the industry is small relative to the market. e. (b) and (d).

Answer: a. In an industry with free entry, if the existing firms are making positive economic profits, new firms will enter the industry. This will put downward pressure on price until the industry gets to zero economic profits. In an industry with free exit, if the existing firms are suffering economic losses, some of the existing firms will eventually go out of business. This will put upward pressure on price until the industry gets to zero economic profits

The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $10 $ 4 $ 0 1 9 4 2 2 8 4 3 3 7 4 5 4 6 4 8 5 5 4 13 6 4 4 21 What is the marginal cost of the third unit (i.e., the marginal cost of going from Q=2 to Q=3)? a. $2 b. $3 c. $4 d. $5 e. $6

Answer: a. Marginal cost is the change in total cost associated with producing one additional unit. Since fixed costs do not change, marginal cost is also the change in total variable cost associated with producing one additional unit. In this question, when quantity increases from 2 to 3, total variable cost increases from $3 to $5, for a change of $(5 - 3) = $2. Thus, the marginal cost of the third unit is $2.

The marginal revenue for good A is greater than zero. This means that a. demand for good A is elastic. b. demand for good A is unit elastic. c. for good A, the percentage change in quantity demanded is equal to the percentage change in price. c. an increase in the price of good A will lead to an increase in total revenue for the sellers of good A. d. (b) and (c).

Answer: a. Marginal revenue is the additional revenue that the firm receives when it sells one additional unit: MR = ΔTR/ΔQ. If marginal revenue is to be greater than zero, then it must be true that the numerator and denominator of this expression have to be of the same sign. When the firm sells an additional unit of output, ΔQ is positive. Thus for MR to be greater than zero, ΔTR must be greater than zero. When Q increases, if we are on a demand curve that obeys the Law of Demand, P must decrease. By itself, the increase in Q will tend to increase TR, but by itself the decrease in P will tend to decrease TR. Thus the net effect on TR will depend on the relative sizes of the change in Q and the change in P. If TR is to increase, it must be true that the increase in Q is relatively larger than the decrease in P. This will be true if demand is elastic. When demand is elastic, the percentage change in quantity demanded is greater than the percentage change in price.

The marginal revenue for good A is positive. What does this imply about the demand for good A? a. Demand for good A is elastic. b. Demand for good A is unit-elastic. c. Demand for good A is inelastic. d. Good A is an inferior good. e. Good A is a complement with Good B.

Answer: a. Marginal revenue is the change in total revenue associated with selling one additional unit. If marginal revenue is positive, then an increase in quantity demanded has to be associated with an increase in total revenue. As we move from left to right along a demand curve, there are two influences on total revenue. One is the change in price: As price decreases, total revenue will decrease, all else equal. The other is the quantity: As quantity demanded increases, total revenue will increase, all else equal. If total revenue is to increase, the increase in quantity demanded must be relatively larger than the decrease in price. This will be true when demand is elastic.

Rank the four market structures in terms of market power, from most market power to least market power. (In other words, the first in the list will be the market structure in which the firm(s) have the most market power, and the last in the list will be the market structure in which the firm(s) have the smallest amount of market power.) a. monopoly, oligopoly, monopolistic competition, perfect competition b. perfect competition, monopolistic competition, oligopoly, monopoly c. monopoly, monopolistic competition, perfect competition, oligopoly d. monopolistic competition, oligopoly, monopoly, perfect competition e. oligopoly, monopoly, perfect competition, monopolistic competition

Answer: a. Monopolies have the greatest possible amount of market power, because they face the entire market demand curve. Oligopolies have at least the potential to have a substantial amount of market power, especially if they do not compete aggressively against each other. Monopolistically competitive firms have some market power because they sell differentiated products. However, the amount of market power for a monopolistically competitive firm is likely to be small, because the firm is only one of a large number of firms in the market. A perfectly competitive firm has zero market power, which is the smallest possible amount of market power.

Which of the following statements is supported by the Prisoner's Dilemma model? a. The firms in a cartel may have difficulty in sustaining collusion for very long, because the firms have an incentive to cheat on the cartel. b. A monopoly firm is protected by barriers to entry. c. The tendency in a perfectly competitive industry is toward zero economic profit. d. Firms in a monopolistically competitive industry have market power, because they produce differentiated products. e. Sirius Black suffered very bad treatment at the hands of the Dementors.

Answer: a. The Prisoner's Dilemma model shows that, under certain conditions, the firms that are part of a cartel agreement will try to cheat on the agreement by secretly offering price discounts to customers, in an attempt to increase market share. If enough firms do this, then the cartel will break down

The long-run average-total-cost curve for Herculean Corporation is downward-sloping. This indicates that Herculean Corporation has a. increasing returns to scale. b. constant returns to scale. c. decreasing returns to scale. d. season tickets for the Izzone. e. cholera

Answer: a. The long-run ATC curve is found by allowing all inputs to increase by some percentage. This includes the inputs that would be fixed in the short run. Thus, in this long-run analysis, all inputs are variable, and there aren't any fixed costs. Increasing returns to scale means that, when a firm increases all of its inputs by some percentage, output will increase by more than that percentage. If all inputs are increased by the same percentage, then the firm's costs will increase by that percentage. Thus, as quantity increases, costs are going up less rapidly than output. Since average total cost is total cost divided by the number of units of output, a firm with increasing returns to scale will have a downward-sloping long-run ATC curve.

The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $15 $5 $ 0 1 14 5 2 2 13 5 5 3 12 5 9 4 11 5 14 5 10 5 20 6 9 5 27 What is the firm's profit-maximizing quantity of output? a. 5 b. 4 c. 3 d. 2 e. 1

Answer: a. The profit-maximizing quantity is the quantity at which marginal revenue is equal to marginal cost: MR = MC. We can find MR by following the procedure developed for #16, above, and we can find MC by following the procedure developed for #15. On this basis, we find that the marginal revenue of the fifth unit is $6, and the marginal cost of the fifth unit is also $6. Thus the profit-maximizing quantity is 5

The next three questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $15 $5 0 1 14 5 2 2 13 5 5 3 12 5 9 4 11 5 14 5 10 5 20 6 9 5 27 What is the firm's profit-maximizing quantity of output? a. 5 b. 4 c. 3 d. 2 e. 1

Answer: a. The profit-maximizing quantity of output is the quantity at which marginal revenue is equal to marginal cost. In the discussion of the preceding question, we saw how to calculate marginal revenue. The marginal revenue of the fifth unit is $(50 - 44) = $6. Marginal cost is calculated by taking the change in total variable cost: MC = ΔTVC/ΔQ. The marginal cost of the fifth unit is $(20 - 14) = $6. Thus MR = MC when Q = 5. This firm will maximize its profits by producing and selling 5 units of output.

The price of good A increases. As a result of the price increase, there is a decrease in the total revenue received by sellers of good A. What does this imply about the own-price elasticity of demand for good A? a. Demand is elastic. b. Demand is unit elastic. c. Demand is inelastic, but not perfectly inelastic. d. Demand is perfectly inelastic. e. Not enough information has been given to answer the question.

Answer: a. Total revenue is equal to price multiplied by quantity: TR = (P)(Q). Thus, by itself, an increase in price will lead to an increase in total revenue. However, an increase in price will also lead to a decrease in quantity demanded. By itself, the decrease in quantity demanded will lead to a decrease in total revenue. Thus the net effect on total revenue will depend on the relative size of the price change and the change in quantity demanded. When demand is elastic, the change in quantity demanded is relatively larger than the change in price. Thus if demand is elastic, the decrease in quantity demanded will have a larger effect on total revenue than the increase in price. When demand is elastic, an increase in price will lead to a decrease in total revenue.

In Grand Fenwick, the government imposes a price ceiling in the market for szczygys. The price ceiling is below the equilibrium price of szczgys, and the law is enforced. As a result, the quantity that is actually bought and sold will decrease. The decrease in the quantity bought and sold will be larger if a. the elasticity of supply is larger. b. the elasticity of supply is smaller. c. the elasticity of demand is larger. d. the elasticity of demand is smaller. e. pigs could fly.

Answer: a. When a price ceiling is enforced at a price that is lower than the equilibrium price, the buyers will move down and to the right along their demand curves. The quantity demanded will be larger than it would have been at the equilibrium. On the other hand, the sellers will move down and to the left along their supply curves. The quantity supplied will be smaller than it would have been at the equilibrium. Thus the quantity demanded will be larger than the quantity supplied. This means there will be a shortage. But the increase in the quantity demanded does not have any effect on the quantity that is actually bought and sold. In this situation, the quantity actually bought and sold is determined by the quantity supplied. The decrease in the quantity that is actually bought and sold will be larger if the supply elasticity is larger.

At its current level of output, the demand for the output of Josephson Corporation is inelastic. What does this imply? a. Marginal revenue is negative. b. Marginal revenue is positive. c. If quantity were to increase, total revenue would increase. d. The firm could increase its profits by reducing price and increasing output. e. (a) and (d) are both correct.

Answer: a. When demand is inelastic, the percentage change in quantity demanded is smaller than the percentage change in price. Thus when price decreases, and quantity demanded increases, and we move downward and to the right along the demand curve, the decrease in price is relatively larger than the increase in quantity demanded. As a result, total revenue will decrease as we go downward and to the right along a demand curve. Marginal revenue is the change in total revenue, as a result of an increase in quantity. Thus when total revenue is decreasing, marginal revenue is negative. When marginal revenue is negative, demand is inelastic. When marginal revenue is positive, demand is elastic. When marginal revenue is zero, demand is unit elastic.

Under the assumptions that we developed in class, the consumer's optimal purchase rule is to consume the quantity at which a. marginal utility is equal to price. b. marginal utility is equal to average utility. c. marginal revenue is equal to marginal cost. d. marginal revenue is equal to price. e. price is equal to average total cost.

Answer: a. Whenever an economic agent wants to do the best he/she/it can, the way to do so is to find the quantity at which marginal benefit is equal to marginal cost. In the case of the individual consumer, the marginal benefit from buying and consuming is called "marginal utility". The marginal cost of buying and consuming is the price of the good. Thus, the consumer's optimal choice is to consume the quantity at which MU = P.

. In our discussion of consumer demand, we assumed that the individual consumer is unable to have an effect on the market price. We also assumed that the individual consumer has diminishing marginal utility, and that marginal utility is measured in dollars of willingness to pay. Under these circumstances, if the consumer wants to do the best he/she can, a. the individual consumer's demand curve will be a horizontal line. b. the individual consumer's demand curve will be the downward-sloping marginal-utility curve. c. the individual consumer does not have a unique, well-defined demand curve. d. the individual consumer's demand curve will be a downward-sloping straight line, and its slope will be exactly twice as great as the slope of the marginal-utility curve. e. we have no way of knowing what the individual consumer will do, since we assume that consumers are irrational.

Answer: b. At any given price, the consumer will do his/her best by consuming the quantity at which marginal utility is equal to price. When price changes, the consumer will continue to choose a quantity at which MU=P. Thus, each time we announce a different price, we can find the consumer's quantity demanded by using the marginal-utility curve. Therefore, the marginal-utility curve is the consumer's demand curve. Since the marginal-utility curve slopes downward, it follows that the individual consumer's demand curve also slopes downward.

Monopolistically competitive industries have a tendency to move toward zero economic profits. Perfectly competitive industries also have a tendency to move toward zero economic profits. Which of the characteristics of these industries is responsible for this tendency? a. The industry has many firms. b. The industry is characterized by free entry and exit. c. The firms produce differentiated products. d. Each firm in the industry is small relative to the market. e. (a) and (d).

Answer: b. Choices (a) and (d) are characteristics of both perfectly competitive and monopolistically competitive industries. However, these are not the reasons why these industries have a tendency to move toward zero economic profits. The zero-profit condition comes from free entry and exit. If there is free entry and if the existing firms are making positive economic profits, new firms will enter, and this will push down the price until the industry has returned to zero economic profits. If there is free exit and if the existing firms are suffering economic losses, then some firms will eventually exit the industry, and this will push the price upward until the industry has returned to zero economic profits.

Which of the following statements about a cartel is true? a. Cartels are the little boxes from which schoolchildren drink their chocolate milk. b. A cartel occurs when a group of oligopolistic firms colludes, for the purpose of increasing profits. c. Cartels are encouraged by the antitrust laws in the United States. d. Cartels are usually very stable, because there is no incentive for any of the cartel members to cheat on the cartel. e. Jimmy Cartel was the 39th President of the United States.

Answer: b. Choices (a) and (e) are attempts to inject a little bit of lighthearted mirth into the exam, and it is hoped that everyone can see that neither of these would be the correct answer. Choice (c) is the exact opposite of the truth—in fact, the antitrust laws discourage cartel formation, by making cartels illegal. Choice (d) is also incorrect. Fortunately, cartels often break down because firms have an incentive to cheat on the cartel agreement. Choice (b) fits with the definition of a cartel.

Consumer surplus is represented graphically by a. the vertical distance between price and average total cost. b. the area between the demand curve and the price line. c. the area between the supply curve and the demand curve. d. the area of the deadweight-loss triangle. e. an abstract painting by Piet Mondrian.

Answer: b. Consumer surplus is the difference between (a) the maximum amount that the consumer is willing to pay, which is represented graphically by the area under the demand curve, and (b) the amount that the consumer actually pays, which is represented graphically by the area under the price line. Thus consumer surplus is represented graphically by the area that is under the demand curve, but above the price line.

Grippotz Corporation is a perfect competitor. The market price for a unit of Grippotz's output is $10. The firm's marginal cost is $10, its average total cost is $12, and its average variable cost is $8. This suggests that a. the firm should shut down. b. the firm is suffering losses, but it should continue to produce in the short run. c. the firm could increase its profits by expanding output. d. the firm is making zero profits. e. the firm is making positive profits.

Answer: b. For a perfectly competitive firm, profit is maximized at the quantity at which price is equal to marginal cost. In this question, the perfectly competitive firm's price is indeed equal to its marginal cost. Thus, if the firm is to be in business at all, it is producing the profit-maximizing quantity. However, the price is less than average total cost, which means that the firm is suffering losses. This raises the question of whether the firm should shut down. However, the firm should only shut down in the short run if price is also less than average variable cost. In this case, price is greater than average variable cost, so that the firm should continue to produce in the short run.

Zuckerman Corporation is a perfect competitor. The market price for a unit of Zuckerman's output is $10. The firm's marginal cost is $10, its average total cost is $12, and its average variable cost is $8. This suggests that the firm a. is making positive economic profits. b. is suffering economic losses, but should continue to produce in the short run. c. is making zero economic profits. d. should shut down in the short run. e. could increase its profits by expanding output.

Answer: b. If a perfectly competitive firm is in business at all, it will maximize profit by producing and selling the quantity at which price is equal to marginal cost. In this question, the firm's price is the same as its marginal cost. This means that, if the firm is in business, it is maximizing profit. Thus, it cannot increase its profits by expanding its output, so choice (e) is incorrect. However, the firm's ATC is greater than its price. Since profit per unit is P - ATC, the firm is suffering economic losses. This raises the question of whether the firm should shut down. If price is less than average variable cost, the firm should indeed shut down in the short run. However, P > AVC, so the firm should continue to produce in the short run.

In a perfectly competitive industry, positive economic profits are being earned. This can be expected to lead to a sequence of events. Which of the following is the best description of this sequence? a. Firms exit the industry; price rises; firms continue to earn positive economic profits indefinitely. b. New firms enter the industry; price falls; zero economic profits are restored. c. Firms exit the industry; price rises; zero economic profits are restored. d. New firms enter the industry; price falls; economic profits become negative; firms continue to earn negative economic profits indefinitely. e. Economic profits occur on even-numbered days and economic losses happen on odd-numbered days, except that zero economic profits occur on the 17th of each month.

Answer: b. If the existing firms in a perfectly competitive industry are making positive economic profits, potential entrants will want to enter the industry. One of the characteristics of a perfectly competitive industry is free entry and exit, so that these potential entrants will indeed be able to enter the industry. As a result of the entry of new firms into the industry, the market supply curve will shift to the right. This will lead to a decrease in the equilibrium price. The price will fall until the firms are making zero economic profits. At that point, new firms will no longer have an incentive to enter the industry.

Over the last several decades, the percentage of the Michigan adult population with a college degree a. has stayed about the same, and is about the same as the percentage in the U.S. as a whole. b. has increased, but remains below the percentage in the U.S. as a whole. c. has increased, and is about the same as the percentage in the U.S. as a whole. d. has stayed about the same, and remains below the percentage in the U.S. as a whole. e. has increased, and remains above the percentage in the U.S. as a whole.

Answer: b. In 1960, about 7% of Michigan adults had a Bachelor's degree or more, and about 8% of adults in the entire United States had a Bachelor's degree or more. By 2009, those fractions had risen to about 25% for Michigan and 28% for the entire U.S. Thus the Michigan population has a considerably higher degree of educational attainment than it had a few decades ago, but it continues to lag behind the national average.

Which of the following is/are necessary for a firm to increase its profits by engaging in price discrimination? a. The owners of the firm must hate some of their customers. b. The firm must have some way of distinguishing among its customers, to tell which ones have demand that is more elastic and which ones have demand that is less elastic. c. It must be easy for customers to re-sell to other customers. d. All of the above. e. (b) and (c) only.

Answer: b. In order to engage in price discrimination successfully, a firm can't be perfectly competitive (i.e., it must have some ability to control its price). It must also be able to distinguish among its customers in terms of the elasticity of their demand, so that choice (b) is correct. Also, it must be difficult for customers to re-sell.

The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $15 $5 $ 0 1 14 5 2 2 13 5 5 3 12 5 9 4 11 5 14 5 10 5 20 6 9 5 27 What is the marginal revenue of the fourth unit (i.e., the marginal revenue associated with going from Q=3 to Q=4)? a. $ 10 b. $ 8 c. $ 6 d. $ 4 e. $ 0

Answer: b. Marginal revenue is the additional revenue that the firm receives when it sells one more unit of output: MR = ΔTR/ΔQ. For this question, we are asked for the marginal revenue associated with increasing output from 3 to 4. Thus ΔQ = (4-3) = 1, so that all that we really need to do is to find the change in total revenue. Total revenue is equal to price multiplied by quantity: TR = (P)(Q). When Q=3, P=$12, so that total revenue is ($12)(3) = $36. When Q=4, P=$11, so that total revenue is ($11)(4) = $44. Subtracting the total revenue when Q=3 from the total revenue when Q=4, we find that the marginal revenue of the fourth unit is $(44 - 36) = $8.

. Assume that the individual consumer is unable to affect the market price. The individual consumer's demand curve is the same as a. the total-utility curve. b. the marginal-utility curve. c. the average-total-cost curve. d. the marginal-revenue curve. e. the average-utility curve

Answer: b. The consumer's optimal choice is to buy and consume the quantity at which marginal utility is equal to price. If the price changes, the consumer will continue to buy the quantity at which MU = P. Thus, every time the price changes, the quantity demanded can be identified by a point on the MU curve. That is why the MU curve is the consumer's demand curve.

The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $10 $ 4 $ 0 1 9 4 2 2 8 4 3 3 7 4 5 4 6 4 8 5 5 4 13 6 4 4 21 . What is the firm's profit-maximizing quantity of output? a. 5 b. 4 c. 3 d. 2 e. 1

Answer: b. The profit-maximizing quantity of output is the quantity at which marginal revenue is equal to marginal cost. Following the procedures described in the discussion of the last few questions, we can find that MR = MC = $3 at a quantity of 4. Thus, the profit-maximizing quantity is 4.

In East Lansing, Michigan, the "50/50" policy states that establishments that serve alcoholic beverages must not derive more than 50% of their total revenues in any month from alcoholic beverages. The managers of XYZ Bar and Grill believe that the demand for alcoholic beverages is inelastic. Halfway through the month, the managers of XYZ discover that their alcohol sales have accounted for more than 50% of their revenues. Thus they need to reduce their revenues from alcoholic beverages. Based on their beliefs about the demand elasticity, what should they do? a. Increase the prices of their alcoholic beverages. b. Decrease the prices of their alcoholic beverages. c. There is nothing they can do to reduce their alcohol revenues. They are doomed. d. Leave the prices of their alcoholic beverages unchanged. e. Not enough information has been given to answer the question.

Answer: b. This firm needs to reduce its revenues, and they believe that demand is inelastic. Total revenue is equal to price multiplied by quantity: TR = (P)(Q). When demand is inelastic, the percentage change in price is larger than the percentage change in quantity demanded. Thus when price decreases, and quantity demanded increases, and we move downward and to the right along the demand curve, the decrease in price is relatively larger than the increase in quantity demanded. As a result, total revenue will decrease as we go downward and to the right along a demand curve. If a firm wants to reduce its total revenues, and if the firm believes that demand is inelastic, the firm should reduce the price it charges.

The glimbrach industry has many firms, each of which is small relative to the market. Also, each firm in the glimbrach industry makes a product that is slightly different from the products of the other firms in the industry. Also, the glimbrach industry is characterized by free entry and exit. What kind of industry is this? a. perfectly competitive. b. monopolistically competitive. c. oligopolistic. d. monopolistic. e. purple.

Answer: b. Two of the three characteristics of monopolistic competition are the same as the corresponding characteristics of perfect competition. The thing that distinguishes monopolistic competition from perfect competition is that monopolistically competitive firms have differentiated products, whereas perfectly competitive firms have homogeneous products.

Economic cost is _________ accounting cost, and economic profit is ________ accounting profit. a. greater than, greater than. b. greater than, less than. c. less than, greater than. d. less than, less than. e. all of the above!!!!

Answer: b. We define economic cost to include the full opportunity cost of being in business. The full opportunity cost includes the accounting costs, but it also includes the "normal" rate of return. Economic profit is total revenue minus economic cost, and accounting profit is total revenue minus accounting profit. Thus, if economic cost is greater than accounting cost, economic profit must be less than accounting profit.

In a perfectly competitive industry, positive economic profits are being earned. This can be expected to lead to a sequence of events. Which of the following is the best description of this sequence? a. Firms exit the industry; price rises; firms continue to earn positive economic profits forever. b. New firms enter the industry; price falls; zero economic profits are restored. c. Firms exit the industry; price rises; zero economic profits are restored. d. New firms enter the industry; price falls; economic profits become negative; firms continue to earn negative economic profits indefinitely. e. Economic profits occur on even-numbered days and economic losses happen on odd-umbered days, except that zero economic profits occur on the 17th of each month.

Answer: b. We define economic profits in such a way that they are a guide to action. If economic profits are zero, firms are earning enough to stay in business, but there is no incentive for new firms to enter the industry. However, if economic profits are positive, there is an incentive for new firms to enter the industry. The market supply curve is the sum of the supply curves of the individual firms. If more firms enter the industry, the market supply will increase (i.e., the market supply curve will shift to the right). When this occurs, the equilibrium price in the market will decrease. The price will continue to fall until the firms are once again earning zero economic profits.

In alphabetical order, the four market structures are monopolistic competition, monopoly, oligopoly, and perfect competition. Rank them in order of the degree of market power, from the market structure with the largest degree of market power to the market structure with the smallest degree of market power. a. Perfect competition, monopoly, monopolistic competition, oligopoly. b. Monopoly, oligopoly, monopolistic competition, perfect competition. c. Monopoly, perfect competition, monopolistic competition, oligopoly. d. Monopoly, monopolistic competition, oligopoly, perfect competition. e. Perfect competition, monopolistic competition, oligopoly, monopoly

Answer: b. When a firm has some ability to control the price, we say that the firm has market power. A monopoly has the maximum possible amount of market power, because it does not have any competitors. At the other end of the spectrum, a perfectly competitive firm has no market power at all, because the perfectly competitive firm must take the market price as given. Because of their large size, oligopoly firms may have a very large amount of market power, especially if they collude with each other. Monopolistically competitive firms are characterized by product differentiation. This gives monopolistically competitive firms a small amount of market power. However, the market power of a monopolistically competitive firm is limited, because there are many other firms in the market.

For any firm for which price is greater than or equal to average variable cost (regardless of market structure), profits will be maximized when the firm chooses to produce and sell the quantity at which a. total revenue is maximized. b. marginal revenue is equal to marginal cost. c. price is equal to average total cost. d. price is equal to marginal cost. e. Justin Verlander hits the outside corner with his slider.

Answer: b. Whenever anyone maximizes anything, the maximizing quantity is always the quantity at which the marginal benefit is equal to the marginal cost. In the case of a business firm that wants to maximize profit, the marginal benefit is called "marginal revenue" and the marginal cost is called "marginal cost". For a perfectly competitive firm, price is equal to marginal revenue. This means that, at the profit-maximizing quantity for a perfectly competitive firm, price is equal to marginal cost. However, this is not true for other types of firm. Thus choice (d) is not correct.

For any firm for which price is greater than or equal to average variable cost (regardless of market structure), profits will be maximized when the firm chooses to produce and sell the quantity at which a. total revenue is maximized. b. marginal revenue is equal to marginal cost. c. price is equal to average total cost. d. price is equal to marginal cost. e. average total cost is minimized.

Answer: b. Whenever anyone maximizes anything, the maximizing quantity is always the quantity at which the marginal benefit is equal to the marginal cost. In the case of a business firm that wants to maximize profit, the marginal benefit is called "marginal revenue" and the marginal cost is just "marginal cost". For a perfectly competitive firm, price is equal to marginal revenue. This means that, at the profit-maximizing quantity for a perfectly competitive firm, price is equal to marginal cost. However, this is not true for other types of firm. Thus choice (d) is not correct.

The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $10 $ 4 $ 0 1 9 4 2 2 8 4 3 3 7 4 5 4 6 4 8 5 5 4 13 6 4 4 21 What is the average total cost when Q=4? a. $1 b. $2 c. $3 d. $4 e. $5

Answer: c. Average total cost is equal to total cost divided by quantity: ATC = TC/Q. In turn, total cost is equal to total fixed cost plus total variable cost: TC = TFC + TVC. In this question, when Q=4, TFC = $4 and TVC = $8. Thus, total cost is $4 + $8 = $12. Dividing by the quantity of 4, we have $12/4 = $3.

Which of the following is represented by a horizontal line? a. An average-fixed-cost curve. b. A marginal-revenue curve for a monopolist. c. A marginal-revenue curve for a perfectly competitive firm. d. A total-revenue curve. e. An average-total-cost curve for a natural monopolist.

Answer: c. Choices (a), (b), and (e) all refer to curves that are downward-sloping. Choice (d) refers to a total-revenue curve, which is upward-sloping. However, the marginal-revenue curve for a perfectly competitive firm is a horizontal line, given by the price. Since a perfectly competitive firm takes the price as given, the price is a constant from the perspective of the firm. This means that every unit sold by the firm will bring in the same amount of additional revenue. Therefore, marginal revenue is constant.

. If there is a decrease in the price of DVD players, the consumers of DVD players will benefit. What is our best measure of the dollar value of the benefit to consumers? a. The decrease in marginal utility. b. The increase in quantity. c. The increase in consumer surplus. d. The change in the total amount of money spent on DVD players. e. The decrease in price.

Answer: c. Consumer surplus is the difference between the maximum amount that consumers are willing to pay (represented by the demand curve) and the amount they actually have to pay (represented by the price line). If the price of DVD players were to decrease, there would be an increase in consumer surplus, for two reasons. Consumer surplus would increase because the quantity demanded would increase, and it would also increase because the consumers would receive more surplus from every unit that is consumed.

Consumer surplus is represented graphically by a. the vertical distance between price and average total cost. b. the area between the supply curve and the demand curve. c. the area between the demand curve and the price line. d. the area of the deadweight-loss triangle. e. all of the above (!).

Answer: c. Consumer surplus is the difference between the maximum amount that the consumer is willing to pay and the amount that he/she actually pays. The maximum amount that the consumer is willing to pay is represented by the demand curve. The amount that the consumer actually pays is given by the price. Thus, if we add up the consumer surplus over all units that are consumed, the result can be represented graphically by the area under the demand curve, but above the price line.

For Schneider Corporation, marginal revenue is less than average revenue. This implies that a. the firm is a perfect competitor. b. the firm's average revenue is greater than price. c. the firm faces a downward-sloping demand curve. d. the firm will produce the quantity at which marginal cost is equal to price. e. (a) and (d).

Answer: c. For any kind of firm, the average-revenue curve is the same as the demand curve, which shows the relationship between price and quantity demanded. Thus, average revenue is equal to price, which means that choice (b) is incorrect. For a perfectly competitive firm, the demand curve and average-revenue curve are a horizontal line, and they are also equal to marginal revenue. Thus, a firm for which MR < AR cannot be a perfect competitor, so choice (a) is incorrect. Choice (d) is also incorrect, because only a perfect competitor will choose the quantity at which marginal cost is equal to price. Choice (c) is correct. This can be seen by remembering the relationships between marginal and average. If marginal is less than average, then average must be decreasing. In the case of a downward-sloping demand curve, average revenue must be decreasing. Thus, marginal revenue is less than average revenue for a downward-sloping demand curve.

. Which of the following statements is/are true, regarding state and local taxes as a percentage of the Michigan economy? a. State and local taxes are a much higher percentage of the economy in Michigan than in the rest of the United States. b. The percentage of the economy devoted to state and local taxes has increased substantially in the last 40 years. c. The percentage of the economy devoted to state and local taxes has decreased substantially in the last 40 years. d. (a) and (b) are both correct. e. Good data on state and local taxes are not available.

Answer: c. In the early 1970s, state and local taxes were about 13% of personal income in Michigan. In recent years, the figure has been below 11% of personal income. That decrease is equivalent to nearly $8 billion per year. To put that in some perspective, the budget for higher education in Michigan is less than $2 billion per year.

The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $15 $5 $ 0 1 14 5 2 2 13 5 5 3 12 5 9 4 11 5 14 5 10 5 20 6 9 5 27 What is the marginal cost of the third unit (i.e., the marginal cost of going from Q=2 to Q=3)? a. $ 2 b. $ 3 c. $ 4 d. $ 5 e. $ 6

Answer: c. Marginal cost is the additional cost necessary to produce one additional unit of output. In other words, marginal cost is the change in total cost, divided by the change in the number of units: MC = ΔTC/ΔQ. However, the change in total cost is exactly the same as the change in total variable cost, because total fixed cost does not change when quantity changes. Thus MC = ΔTVC/ΔQ. For this question, we are given TVC. When Q increases from 2 to 3, TVC increases from $5 to $9. Thus the marginal cost of the third unit is $(9-5) = $4.

. Zugzwang Corporation is a perfect competitor. The market price for a unit of Zugzwang's output is $6. At its current level of output, the firm's marginal cost is $5, its average total cost is $6, and its average variable cost is $4. This suggests that a. the firm should shut down. b. the firm is suffering losses, but it should continue to produce in the short run. c. the firm could increase its profits by increasing output. d. the firm could increase its profits by reducing output. e. the firm is making positive profits.

Answer: c. Profit per unit is equal to price minus average total cost. In this question, price and average total cost are both equal to $6. Thus the firm is making zero economic profits, which are good enough to stay in business. Therefore, choices (a) and (b) are incorrect. The next thing to check is the relationship between price and marginal cost. A perfectly competitive firm will maximize profit by producing and selling the quantity at which P = MC. In this case, P = $6, but MC = $5. Thus the firm is not maximizing profit. Instead, the firm could increase profit by increasing output. If the firm produces one additional unit of output, its revenue will increase by $6 and its cost will increase by only $5, so that its profit will increase by $1.

Which of the following can be analyzed with the Prisoners' Dilemma model? a. The effect of free entry and exit on profits in a perfectly competitive industry. b. The mark-up over marginal cost in a monopoly. c. The choices of the firms in a cartel. d. Regulation of a natural monopoly. e. The shape of the average-total-cost curve.

Answer: c. The Prisoner's Dilemma shows how, under certain circumstances, the firms in an oligopoly will have an incentive to cheat on a cartel agreement. As a result of this, the cartel will break down, even though the members of the cartel could have been collectively better off if they had been able to find a way to abide by the cartel agreement. (Although this would have been good for the firms, it would have been bad for consumers, and for society.)

For Neville Longbottom, total utility and marginal utility can be measured in dollars of willingness to pay. Neville's total-utility schedule for tins of broomstick wax is: Quantity Total Utility Marginal Utility 0 $ 0 -- 1 6 2 11 3 15 4 18 5 20 The current market price of a tin of broomstick wax is $4. How many tins will Neville buy? a. 1 b. 2 c. 3 d. 4 e. 5

Answer: c. The consumer's optimal choice is the quantity at which marginal utility is equal to price. This question specifies that the price is $4. Thus, we have to find the quantity at which marginal utility is $4. Marginal utility is the change in total utility associated with consuming one additional unit. Thus, to find marginal utility, we subtract the total utility at one quantity from the total utility at the next-higher quantity. When quantity increases from 2 to 3, total utility increases from $11 to $15. Thus, the marginal utility of the third unit is $(15-11) = $4.

For Clarence Gideon, marginal utility can be measured in dollars of willingness to pay. Clarence's marginal-utility schedule for trips to the movie theater this month is given by: Quantity Marginal Utility 0 -- 1 $12 2 10 3 8 4 6 5 4 6 2 The current market price of a movie ticket is $8. How many movie tickets will Clarence buy this month? a. 1 b. 2 c. 3 d. 4 e. 5

Answer: c. The consumer's optimal purchase rule is to produce and sell the quantity at which marginal utility is equal to price. In this question, P = $8 (at any quantity) and MU = $8 at a quantity of three. Thus the consumer in this question will choose to buy and consume a quantity of three

The juzbloop industry is perfectly competitive. The firms in the industry are earning zero economic profits, and the consumers have $100 of consumer surplus. But then Mr. Snodgrass buys up all of the competitive firms, and establishes a monopoly in the juzbloop industry. The monopoly has economic profits of $25, and consumer surplus is reduced from $100 to $25. What is the deadweight loss associated with monopolization of the industry? a. $100 b. $75 c. $50 d. $25 e. zero

Answer: c. The deadweight loss from monopoly is the difference between the consumers' loss from monopoly and the producers' gain from monopoly. The consumers' loss is measured by the loss of consumer surplus. In this case, monopoly causes consumer surplus to decrease from $100 to $25. Thus the loss of consumer surplus is $(100 - 25) = $75. Economic profits are zero under competition, and $25 under monopoly. Thus the producers' gain from monopoly is $25, and the deadweight loss is $(75 - 25) = $50.

For good Z, the demand curve is given by Qd = 20 - P. Another way to write the same relationship is to say P = 20 - Qd. The supply curve is given by Qs = P. When the market is at equilibrium, what is the value of consumer surplus? (Hint: To solve this problem, you will need to calculate the area of a triangle.) a. $ 10 b. $ 20 c. $ 50 d. $100 e. $200

Answer: c. To solve this problem, we first have to find the equilibrium price and quantity. We have an equation for demand and an equation for supply. At equilibrium, Qs = Qd. If we substitute the demand equation and the supply equation into the equilibrium equation, we have 20 - P = P. Adding P to both sides of this equation gives us 20 = 2P. If we then divide both sides by 2, we have P = $10. Substituting P = $10 into the demand equation or the supply equation, we find that the equilibrium quantity is 10. Consumer surplus is the area of the triangle that is beneath the demand curve, but above the price line. The base of this triangle is the equilibrium quantity, which is 10. The height of the triangle is the difference between the price, which is $10, and the vertical intercept of the demand curve, which is $20. That difference is $10. Thus we want to calculate the area of a triangle with base of 10 and height of $10. The formula for the area of a triangle is ½bh, where b is the base and h is the height. Thus the area of the consumer-surplus triangle is ½ (10)($10) = $50.

. In Industry X, there are many firms, and each of the firms is small relative to the market. The industry is characterized by product differentiation. In addition, the industry is characterized by free entry and exit. What kind of industry is Industry X? a. A monopoly. b. An oligopoly. c. A monopolistically competitive industry. d. A perfectly competitive industry. e. All of the above, except on alternate Mondays, when none of the above would be the correct answer.

Answer: c. When an industry has many firms, each of which is small relative to the market, and when the industry is characterized by free entry and exit, it could be either perfectly competitive or monopolistically competitive. The key difference between perfect competition and monopolistic competition is whether the industry is characterized by product differentiation. If the industry has differentiated products, in addition to the other characteristics described above, then it is monopolistically competitive

If there is an increase in the price of dishwashing liquid, the consumers of dishwashing liquid will be harmed. What is our best measure of the dollar value of the harm to consumers? a. The increase in marginal utility. b. The decrease in quantity. c. The decrease in consumer surplus. d. The change in the total amount of money spent on dishwashing liquid. e. The increase in price.

Answer: c. When price increases, consumers are worse off for two reasons. First, an increase in price will lead to a decrease in quantity demanded. In other words, consumers will consume fewer units when the price increases. It is not possible to derive any surplus from a unit that is not consumed. The other reason why consumers are worse off is that, on the units that are consumed, there is less consumer surplus. The loss of consumer surplus is our best way of measuring the harm to the consumer.

This table shows Alexander's total utility from jumbo burgers: Quantity Total Utility 0 $ 0 1 $ 7 2 $ 13 3 $ 18 4 $ 22 5 $ 25 The price of a jumbo burger is $5. How many jumbo burgers should Alexander buy? a. 1 b. 2 c. 3 d. 4 e. 5

Answer: c. Whenever anyone maximizes anything, the maximizing quantity is always the quantity at which the marginal benefit is equal to the marginal cost. In the case of a consumer who wants to maximize consumer surplus, marginal benefit is called "marginal utility" and marginal cost is the price. Thus the consumer's best choice is to buy and consume the quantity at which marginal utility is equal to price. We know that the price is $5 per burger; thus to answer this question, we need to find marginal utility. Marginal utility is the change in total utility from consuming one additional unit. When quantity increases from 2 to 3, total utility increases from $13 to $18, for a change of $5. In other words, the marginal utility of the third unit is $5, which is equal to the price. The consumer should buy and consume three burgers.

Which of the following describes a monopoly? a. The monopolist faces a downward-sloping demand curve. b. The monopolist is protected by barriers to entry. c. There are no close substitutes for the monopolist's output. d. All of the above. e. (a) and (c) only.

Answer: d. A monopoly firm is the only firm in the market. Thus the demand curve facing the monopoly firm is exactly the same as the market demand curve, so that choice (a) is correct. Choices (b) and (c) are also parts of our definition of a monopoly. Without barriers to entry, monopolies would not be able to maintain themselves for any substantial period of time. Also, if there are close substitutes for a firm's output, we would say that the firm is not truly a monopoly, but one of a group of sellers in a market characterized by product differentiation.

The demand curve facing Colossal Corporation is a downward-sloping straight line. On the basis of this information, we can say that a. the firm is not a perfectly competitive firm. b. the MR curve is also downward sloping, and it is twice as steep as the demand curve. c. Colossal Corporation will charge a price that is greater than marginal cost. d. all of the above are true. e. (a) and (b) only.

Answer: d. A perfectly competitive firm takes the market price as given, which means that the demand curve for the output of an individual perfectly competitive firm is a horizontal line. For any other type of market structure, the demand curve for the firm's output slopes downward. Thus choice (a) is correct. Choice (b) is also correct. The relationship described in choice (b) is just a mathematical relationship, but it helps us in drawing the demand and marginal-revenue curves for firms that are not perfectly competitive. Any firm (regardless of market structure) will maximize profits by producing and selling the quantity at which marginal revenue is equal to marginal cost. In this case, the MR curve is below the demand curve. The firm will charge a price given by the demand curve. Thus P>MR, and MR=MC, which means that P>MC, so that choice (c) is also correct.

The short-run supply curve of a perfectly competitive firm is given by a. the average-total-cost curve. b. the marginal-cost curve. c. the marginal-cost curve if price is equal to or greater than average total cost; for prices less than average total cost, quantity supplied is zero. d. the marginal-cost curve if price is equal to or greater than average variable cost; for prices less than average variable cost, quantity supplied is zero. e. none of the above, because a perfectly competitive firm does not have a unique, well-defined supply curve.

Answer: d. A perfectly competitive firm will maximize profit by producing and selling the quantity at which price is equal to marginal cost. The firm has no control over price, but prices can change for a variety of reasons. If the price changes, the firm's profit-maximizing quantity will change, but it will still go to the quantity at which price is equal to marginal cost. Thus at any price that is high enough for the firm to be in business at all, we can find the quantity supplied by consulting the marginal-cost curve. This means that the supply curve is partly described by the marginal-cost curve. However, if price falls far enough, the firm will go out of business. In the short run, the firm will shut down if price is less than average variable cost. Thus choice (d) provides the complete description of the short-run supply curve of a perfectly competitive firm.

Which of the following statements is/are true regarding average total cost (ATC)? a. ATC = AVC + AFC. b. ATC is minimized at the quantity at which MC = ATC. c. ATC is total cost divided by the quantity of output. d. All of the above. e. (a) and (b) only.

Answer: d. Choice (c) is the most basic definition of average total cost. More generally, average things are always calculated by dividing a total by a number of units. Choice (a) is also correct: Total cost (TC) is equal to the sum of total variable cost (TVC) and total fixed cost (TFC): TC = TVC + TFC. If we divide both sides of this equation by quantity, we find that TC/Q = TVC/Q + TFC/Q, which means that ATC = AVC + AFC. Finally, choice (b) is also correct. When MC<ATC, ATC is decreasing. When MC>ATC, ATC is increasing. When MC = ATC, ATC is constant. When a variable is constant, it could either be at its minimum or at its maximum. In this context, we are dealing with the minimum point of the ATC curve.

Economic cost is _________ accounting cost, and economic profit is ________ accounting profit. a. less than, greater than. b. less than, less than. c. greater than, greater than. d. greater than, less than. e. all of the above!!!!

Answer: d. Economic cost is defined to include the full opportunity cost of being in business, and not merely the explicit, out-of-pocket costs. Thus economic cost is greater than accounting cost. Economic profit is equal to total revenue minus economic cost, and accounting profit is equal to total revenue minus accounting cost. Since economic cost is greater than accounting cost, it follows that economic profit is less than accounting profit.

Marginal cost is currently equal to average variable cost (AVC) but less than average total cost (ATC). This means that a. AVC and ATC are both increasing. b. AVC and ATC are both decreasing. c. AVC is at its minimum value, but ATC is increasing. d. AVC is at its minimum value, but ATC is decreasing. e. AVC has a rare glandular condition that causes obesity.

Answer: d. For any set of marginal and average values, we have the following relationships: If marginal is greater than average, average is rising; if marginal is equal to average, average is constant; if marginal is less than average, average is falling. Thus, if marginal cost is equal to average variable cost, average variable cost must be constant (i.e., at its minimum value). If marginal cost is less than average total cost, then average total cost must be decreasing.

The short-run supply curve for a perfectly competitive firm is a. the marginal-revenue curve. b. the average-variable-cost curve. c. the marginal-cost curve for prices equal to or greater than average total cost. If price is less than average total cost, the quantity supplied is zero. d. the marginal-cost curve for prices equal to or greater than average variable cost. If price is less than average variable cost, the quantity supplied is zero. e. none of the above. The perfectly competitive firm does not have a unique, well-defined supply curve.

Answer: d. If a firm is in business at all, it will maximize profit by choosing to produce and sell the quantity at which marginal revenue is equal to marginal cost. This is true for any firm, regardless of market structure. In the special case of a perfectly competitive firm, price is equal to marginal revenue. Thus, the perfectly competitive firm will choose the quantity at which marginal cost is equal to price. This means that, if a perfectly competitive is in business at all, its supply curve is given by its MC curve. However, if price falls below average variable cost, the firm should shut down in the short run.

The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $10 $ 4 $ 0 1 9 4 2 2 8 4 3 3 7 4 5 4 6 4 8 5 5 4 13 6 4 4 21 What is the marginal revenue of the fifth unit (i.e., the marginal revenue associated with going from Q=4 to Q=5)? a. $7 b. $5 c. $3 d. $1 e. - $1

Answer: d. Marginal revenue is the change in total revenue from selling one additional unit. Total revenue is equal to price multiplied by quantity. When Q=4, the price is $6, so that total revenue is ($6)(4) = $24. When Q=5, the price is $5, so that total revenue is ($5)(5) = $25. Thus, when quantity increases from four to five, total revenue increases from $24 to $25, so that the marginal revenue of the fifth unit is $(25 - 24) = $1.

Which of the following statements is/are true, regarding a firm that is maximizing profits? c. Marginal revenue is equal to marginal cost. d. The total-revenue curve is parallel to the total-cost curve. c. The vertical distance between the total-revenue curve and the total-cost curve is maximized. d. All of the above. e. None of the above.

Answer: d. Our favorite way of describing the firm's profit-maximizing quantity is that the firm chooses the quantity at which marginal revenue is equal to marginal cost. Thus, choice (a) is true. However, choices (b) and (c) are also true, because they are merely different ways of saying the same thing. Marginal revenue is the slope of the total-revenue curve, and marginal cost is the slope of the total-cost curve. Thus, when marginal revenue is equal to marginal cost, the slope of the total-revenue curve is equal to the slope of the total-cost curve, which means that those two curves are parallel to each other. The vertical distance between the total-revenue curve and the total-cost curve is maximized at the quantity at which the two curves are parallel.

The demand curve facing Colossal Corporation is a downward-sloping straight line. On the basis of this information, we can say that a. the firm is not a perfectly competitive firm. b. the MR curve is also downward sloping, and it is twice as steep as the demand curve. c. Colossal Corporation will charge a price that is greater than marginal cost. d. all of the above are true. e. (a) and (b) only.

Answer: d. Perfectly competitive firms are the only firms that take the market price as given. Thus perfectly competitive firms are the only firms for which the demand curve is a horizontal line. Firms in every other market structure will have at least some market power, which means that they will face a downward-sloping demand curve. Thus choice (a) is correct. If the demand curve is a downward-sloping straight line, the marginal-revenue curve will also be downward sloping, and the slope of the MR curve will be exactly twice as great as the slope of the D curve. Thus choice (b) is also correct. Finally, choice (c) is also correct. A perfectly competitive firm is the only type of firm for which P=MC at the profit-maximizing quantity of output. A firm in any other type of market structure will charge a price that is greater than marginal cost.

For Slatttery Corporation, marginal cost is currently equal to average variable cost (AVC) but less than average total cost (ATC). This means that a. AVC and ATC are both increasing. b. AVC and ATC are both decreasing. c. AVC is at its minimum value, but ATC is increasing. d. AVC is at its minimum value, but ATC is decreasing. e. AVC has a rare glandular condition that causes all sorts of weird behavior.

Answer: d. Regardless of whether we are talking about cost, or revenue, or anything else, we have the following relationships between marginal and average: If marginal is greater than average, average is increasing; if marginal is equal to average, average is constant; if marginal is less than average, average is decreasing. In this question, MC = AVC. That means that AVC is constant, which means that AVC is at its minimum value. Also, MC<ATC. That means that ATC is decreasing.

If a consumer follows the optimal purchase rule that we derived in class and in Chapter 7 of the textbook, the consumer will a. choose to buy and consume the quantity at which marginal utility is equal to price. b. maximize consumer surplus. c. maximize the difference between total utility and total expenditure. d. do all of the above. e. do the Hokey Pokey, because that's what it's all about.

Answer: d. The consumer's goal is to do as well as he/she can. This means that he/she will maximize the difference between the total amount that he/she is willing to pay and the amount that is actually paid. The maximum amount that the consumer is willing to pay is total utility, and the amount actually paid is total expenditure. Thus choice (c) is correct. Consumer surplus is defined as the difference between total utility and total expenditure, so that choice (b) is also correct. Whenever anyone maximizes anything, the maximizing quantity is always the quantity at which the marginal benefit is equal to the marginal cost. In the case of the consumer, the marginal benefit from consuming one additional unit is marginal utility, and the marginal cost of buying one additional unit is the price of the good. Thus choice (a) is also correct.

The froblump industry is perfectly competitive. The firms in the industry are earning zero economic profits, and the consumers have $100 of consumer surplus. But then Draco Malfoy buys up all of the competitive firms, and establishes a monopoly in the froblump industry. The monopoly has economic profits of $50, and consumer surplus is reduced to $25. What is the deadweight loss associated with monopolization of the industry? a. $100 b. $75 c. $50 d. $25 e. zero

Answer: d. The deadweight loss of monopoly is our measure of the extent to which society is worse off under monopoly than under perfect competition. It is equal to the difference between the loss of consumer surplus (which is the harm done to consumers by monopoly) and the monopoly profit (which is the gain to producers from monopoly). In this question, the loss of consumer surplus is $75, and the monopoly profit is $50. Thus, the deadweight loss is $(75-50) = $25.

Which of the following statements is/are true, regarding a firm that is maximizing profits? a. Marginal revenue is equal to marginal cost. b. The total-revenue curve is parallel to the total-cost curve. c. The vertical distance between the total-revenue curve and the total-cost curve is maximized. d. All of the above. e. None of the above.

Answer: d. The firm's goal is to do as well as it can, by maximizing profit. This means that the firm will maximize the difference between total revenue and total cost. Choices (b) and (c) follow from this. Whenever anyone maximizes anything, the maximizing quantity is always the quantity at which the marginal benefit is equal to the marginal cost. In the case of the business firm that wants to maximize profit, the marginal benefit from selling one additional unit is called marginal revenue, and the marginal cost of producing one additional unit is simply called marginal cost. Thus choice (a) is also correct.

Fladbromps are an inferior good. This means that a. the demand for fladbromps is inelastic. b. the demand for fladbromps is elastic. c. the income elasticity of demand for fladbromps is positive. d. the income elasticity of demand for fladbromps is negative. e. (a) and (d) are both correct. Jones Corporation is a monopolist. The firm's marginal costs increase (i.e., its entire marginal-cost curve shifts upward). How will the firm change its price and quantity as a result? a. Jones Corp. will reduce price and increase quantity. b. Jones Corp. will reduce price and decrease quantity. c. Jones Corp. will increase price and leave quantity unchanged. d. Jones Corp. will increase price and increase quantity. e. Jones Corp. will increase price and reduce quantity.

Answer: d. The income elasticity of demand is the percentage change in quantity, divided by the percentage change in income. This is positive for normal goods, and negative for inferior goods. Choices (a) and (b) have to do with the own-price elasticity of demand, which is distinct from the income elasticity of demand. Answer: e. The firm will maximize profits by choosing to produce and sell the quantity at which marginal revenue is equal to marginal cost. If the entire marginal-cost curve shifts upward, then MR and MC will be equal at a lower quantity. (This is because the MR curve slopes downward.) Because the profit-maximizing quantity is lower, the price must be higher. (This is because the monopolist faces the entire market demand curve, which is downward sloping.) Answer: e. The firm will maximize profits by choosing to produce and sell the quantity at which marginal revenue is equal to marginal cost. If the entire marginal-cost curve shifts upward, then MR and MC will be equal at a lower quantity. (This is because the MR curve slopes downward.) Because the profit-maximizing quantity is lower, the price must be higher. (This is because the monopolist faces the entire market demand curve, which is downward sloping.)

In a perfectly competitive industry, positive economic profits are being earned. This can be expected to lead to a sequence of events. Which of the following is among the events that will occur? a. New firms will enter the industry. b. Market supply will increase. c. The market equilibrium price will decrease until zero economic profits are restored. d. All of the above. e. None of the above.

Answer: d. The level of economic profit is the signal that tells us whether new firms should enter a perfectly competitive industry. If economic profit is positive, then new firms will enter. Since the market supply curve is the sum of the supply curves of the individual firms, an increase in the number of firms will mean that market supply will increase. In other words, the market supply curve will shift to the right. Whenever there is an increase in market supply, the market equilibrium price will decrease. The price will continue to fall until the economic profits have been eliminated. When there are no longer any economic profits, new firms will no longer want to enter the industry.

In the 1970s and 1980s, a number of important industries were deregulated. Which of the following was/were among the deregulated industries? a. Passenger airlines. b. Trucking. c. Railroads. d. All of the above. e. (b) and (c) only.

Answer: d. The railroad industry was first regulated in the 1880s. Then trucking and passenger airlines were regulated in the 1930s. However, it eventually became apparent that these regulatory regimes were not having the intended effect of benefiting consumers by keeping prices down. This realization led to a wave of deregulation, by which these industries became more competitive. (Note that the process of deregulation applied to regulations regarding price and entry into the industry. These industries are still subject to health and safety regulations.)

Which of the following statements is/are true regarding average total cost (ATC)? a. ATC = AVC + AFC. b. ATC is minimized at the quantity at which MC = ATC. c. ATC is total cost divided by the quantity of output. d. All of the above. e. (a) and (c) only.

Answer: d. Total cost is equal to total variable cost plus total fixed cost: TC = TVC + TFC. If we divide both sides of this equation by the quantity to get average values, we find that ATC = AVC + AFC. In the case of our standard short-run cost curves, the ATC curve begins with a downward-sloping portion, in which MC<ATC. Then, the ATC curve reaches its minimum, at a quantity at which MC=ATC. Finally, the ATC curve slopes upward, with MC>ATC

The demand curve facing Colossal Corporation is a downward-sloping straight line. The slope of the demand curve is -1 (i.e., minus one). What can we say about the slope of the firm's marginal-revenue curve (MR)? a. The slope of the MR curve is also -1. b. The MR curve is a horizontal line. c. The slope of the MR curve is -0.5. d. The slope of the MR curve is -2. e. Not enough information has been given to answer the question.

Answer: d. When a demand curve is a downward-sloping straight line, the marginal-revenue curve is also a straight line, and its slope is exactly twice as great as the slope of the demand curve. Thus, if the slope of the demand curve is -1, the slope of the MR curve is -2.

At its current scale of operations, Surfeit Corporation has decreasing returns to scale. This indicates that the long-run average-total-cost curve for Surfeit Corporation is a. downward sloping. b. a horizontal line. c. at its minimum point. d. upward sloping. e. all of the above!!!!!!!!

Answer: d. When we think about returns to scale, we are in a long-run analysis, in which all inputs are variable. The thought experiment involves increasing all inputs by the same percentage, and seeing what happens to output. When a firm has decreasing returns to scale, the increase in output is smaller than the increase in all inputs. For example, if a firm increases all of its inputs by 20%, and if output only increases by 10%, we would say that the firm has decreasing returns to scale. In this example, if all inputs increase by 20%, then the firm's costs will increase by 20%. But if its costs increase by 20% and its output only increases by 10%, the firm's cost per unit (or average total cost) will increase. Thus for a firm with decreasing returns to scale, the long-run ATC curve is an upward-sloping line.

In alphabetical order, the four market structures are monopolistic competition, monopoly, oligopoly, and perfect competition. Rank them in order of the degree of market power, from the market structure with the least degree of market power to the market structure with the greatest degree of market power. a. Perfect competition, monopoly, monopolistic competition, oligopoly. b. Monopoly, oligopoly, monopolistic competition, perfect competition. c. Stuhldreher, Miller, Crowley, Layden. d. Monopoly, monopolistic competition, oligopoly, perfect competition. e. Perfect competition, monopolistic competition, oligopoly, monopoly.

Answer: e. A perfectly competitive firm has no market power at all. At the other end of the spectrum, a monopoly has the maximum possible amount of market power, since it faces the entire market demand curve. In between these two extremes, a monopolistically competitive firm has some market power because of product differentiation. However, the market power of the monopolistically competitive firm is likely to be relatively small, because a monopolistically competitive has many sellers. Finally, an oligopoly may have a substantial amount of market power, especially if the firms in the oligopoly collude with each other.

The short-run supply curve for a monopoly firm is a. the marginal-cost curve. b. the average-variable-cost curve. c. the marginal-cost curve for prices equal to or greater than average total cost. If price is less than average total cost, the quantity supplied is zero. d. the marginal-cost curve for prices equal to or greater than average variable cost. If price is less than average variable cost, the quantity supplied is zero. e. none of the above. The monopoly firm does not have a unique, well-defined supply curve.

Answer: e. A supply curve is a graph of a unique relationship between price and quantity supplied. For a monopoly firm, the relationship between price and quantity supplied is not necessarily unique. This is because the precise relationship depends on the exact shape of the demand curve and marginal-revenue curve.

Which of the following is necessary for a firm to increase its profits by engaging in price discrimination? a. The firm must be a monopoly. b. The firm must have some way of distinguishing among its customers, to tell which ones have demand that is more elastic and which ones have demand that is less elastic. c. It must be difficult or impossible for customers to re-sell to other customers. d. All of the above. e. (b) and (c) only.

Answer: e. Both (b) and (c) are conditions for a firm to engage successfully in price discrimination. However, choice (a) is incorrect. If conditions (b) and (c) are met, a monopoly firm would indeed want to engage in price discrimination. However, if (b) and (c) are met, then price discrimination would also be attractive to firms that are monopolistically competitive or oligopolistic.

Which of the following statements is/are true regarding profit? a. Profit = total revenue - total cost b. Profit = (P - ATC)*Q c. Profit is maximized at the quantity at which total revenue is equal to total cost. d. All of the above. e. (a) and (b) only.

Answer: e. Choice (a) is correct, by the definition of profit. Choice (b) is also correct: Profit per unit is equal to P - ATC, and if we multiply profit per unit by Q, the number of units, we get back to profit. However, choice (c) is incorrect. Profit is maximized at the quantity at which marginal revenue is equal to marginal cost.

We say that a perfectly competitive firm is a "price taker". In other words, a perfectly competitive firm takes the market price as given. Which of the following characteristics is/are necessary for a firm to be a price taker? a. The firm is one of many firms in the industry, each of which is small relative to the market. b. The industry is characterized by free entry and exit. c. The firms produce standardized products. d. All of the above. e. (a) and (c) only.

Answer: e. Free entry and exit are indeed characteristics of perfectly competitive industries. However, free entry and exit are not the reason why the perfectly competitive firm is a price taker. For a firm to be a price taker, two things have to be true. First, the firms all have to be small relative to the market, so they do not have any market power as a result of size. Second, the firms have to produce homogeneous output, so they do not have any market power as a result of product differentiation.

The deadweight loss of monopoly is a measure of a. the difference between the amount consumers are willing to pay, and the amount they actually pay. b. the difference between the price charged by a monopoly and the price charged by a perfectly competitive industry. c. the difference between aardvarks and zebras. d. the difference between quantity demanded and quantity supplied. e. the difference between the consumers' loss from monopoly and the producers' gain from monopoly.

Answer: e. If a competitive industry is monopolized, the industry's profits will increase, but consumer surplus will decrease. The loss to consumers is larger than the gain to producers. The difference between the consumers' loss and the producers' gain is the deadweight loss of monopoly

We say that a perfectly competitive firm is a "price taker". In other words, a perfectly competitive firm takes the market price as given. Which of the following characteristics is/are necessary for a firm to be a price taker? a. The firm is one of many firms in the industry, each of which is small relative to the market. b. The industry is characterized by free entry and exit. c. The firms produce homogeneous, undifferentiated products. d. All of the above. e. (a) and (c) only.

Answer: e. If a firm is large relative to the market, it will have market power because of its size. Thus if a firm is to take the market price as given, the firm must be small relative to the market. This means that choice (a) is correct. Also, if a firm produces an output that is differentiated from the outputs of other firms in its market, it will have market power—product differentiation would allow the firm to raise its price without losing all of its customers. Thus if a firm is to take the market price as given, the firm must produce a homogeneous, undifferentiated product. This means that choice (c) is correct. However, choice (b) is not correct. Free entry and exit is a characteristic of a perfectly competitive industry, but free entry and exit are not necessary for a firm to be a price taker. Instead, free entry and exit are the reason why a perfectly competitive industry will tend toward zero economic profit.

The deadweight loss of monopoly is a measure of a. the difference between the amount consumers are willing to pay, and the amount they actually pay. b. the difference between the price charged by a monopoly and the price charged by a perfectly competitive industry. c. the difference between aardvarks and zebras. d. the difference between quantity demanded and quantity supplied. e. the difference between the consumers' loss from monopoly and the producers' gain from monopoly.

Answer: e. If an industry is organized as a monopoly, the monopolist will make more profit than the perfectly competitive firms would have made. However, consumers will be worse off with monopoly than with competition. (The extent to which consumers are worse off is measured by the loss of consumer surplus.) Thus one group in society is better off from monopoly, but another group is worse off. The net effect for society will take into account both the producers' gain and the consumers' loss. As shown in class, the consumers' loss is greater than the producers' gain. We calculate the deadweight loss by subtracting the producers' gain from the consumers' loss.

The change in total cost from producing one additional unit of output is equal to a. the change in total variable cost from producing one additional unit of output. b. the change in total fixed cost from producing one additional unit of output. c. marginal cost. d. all of the above. e. (a) and (c) only.

Answer: e. Marginal cost is defined as the change in total cost from producing one additional unit of output. Total cost is equal to total fixed cost plus total variable cost: TC = TFC + TVC. Therefore, the change in total cost is equal to the change in total fixed cost plus the change in total variable cost: ΔTC = ΔTFC + ΔTVC. However, by definition, the ΔTFC = 0, since total fixed cost does not change. This means that ΔTC = ΔTVC. Thus, if marginal cost is equal to the change in total cost from producing one additional unit of output, marginal cost must also be equal to the change in total variable cost from producing one additional unit of output.

The next three questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $15 $5 0 1 14 5 2 2 13 5 5 3 12 5 9 4 11 5 14 5 10 5 20 6 9 5 27 What is the marginal revenue of the third unit (i.e., the marginal revenue associated with going from Q=2 to Q=3)? a. $ 0 b. $ 4 c. $ 6 d. $ 8 e. $10

Answer: e. Marginal revenue is the change in total revenue associated with selling one additional unit: MR = ΔTR/ΔQ. As we go from one row of the table to the next, ΔQ = 1. Thus to find MR, it is necessary to find the change in TR. Total revenue is equal to price multiplied by quantity: TR = (P)(Q). When Q=2, P = $13, so that TR = ($13)(2) = $26. When Q = 3, P = $12, so that TR = ($12)(3) = $36. Thus the marginal revenue of the third unit is $(36 - 26) = $10.

The change in total cost from producing one additional unit of output is equal to a. the change in total fixed cost from producing one additional unit of output. b. the change in total variable cost from producing one additional unit of output. c. marginal cost. d. all of the above. e. (b) and (c) only.

Answer: e. Marginal things are always calculated by taking the change in total things. Thus choice (c) is correct, because it is a basic definition of marginal cost. Choice (b) is also correct. To see this, remember that total cost is the sum of total variable cost and total fixed cost: TC = TVC + TFC. If we take the change in both sides of this equation, where change is represented by the Greek capital delta, we have ΔTC = ΔTVC + ΔTFC. However, by definition, total fixed cost does not change. Thus ΔTFC = 0, which means that ΔTC = ΔTVC. Choice (a) is not correct, since total fixed cost does not change.

At its current level of output, QRS Corporation is charging a price of $10 per unit. The firm's marginal revenue is $6 per unit, its marginal cost is $4 per unit, and its average total cost is $5 per unit. What can we say about QRS Corporation on the basis of this information? a. The firm is a perfectly competitive firm. b. The firm is maximizing profit. c. The firm is earning negative economic profit. d. The firm should shut down in the short run. e. The firm can increase its profit by increasing its output.

Answer: e. Profit is equal to price minus average total cost. In this question, price is greater than average total cost. Thus, the firm is earning positive profits (choice (c) is incorrect), and it will not consider shutting down (choice (d) is incorrect). This firm's price is greater than its marginal revenue, which means that the firm cannot be a perfect competitor, so choice (a) is incorrect. Firms maximize profits by producing and selling the quantity at which MR = MC. In this case, MR > MC, which means that the firm cannot be maximizing profit. Instead, the firm should increase its output, because this will increase its profit.

The short-run supply curve for a monopoly firm is a. the marginal-cost curve. b. the average-variable-cost curve. c. the marginal-cost curve for prices equal to or greater than average total cost. If price is less than average total cost, the quantity supplied is zero. d. the marginal-cost curve for prices equal to or greater than average variable cost. If price is less than average variable cost, the quantity supplied is zero. e. none of the above. The monopoly firm does not have a unique, well-defined supply curve.

Answer: e. The extent to which a monopoly will mark up the price above marginal cost will depend on the elasticity of demand. Thus, it is possible to identify two firms with the same marginal-cost curves, which produce the same profit-maximizing quantity, but for which the prices will be different. Also, it is possible to identify two firms which charge the same price, but for which the profit-maximizing quantity will be different. Thus, the monopoly does not have a unique, well-defined supply curve