Econ201B Unit 2 Exam 2

Refer to the table for a purely competitive producer. The marginal revenue from the third unit of output is:

Marginal Revenue is = (change in total revenue) / (change in quantity of output) (40)

Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic:

Step 1) Identify optimum quantity where MR=MC and price at the demand curve. This is 160 units in this problem and a price of $16 Step 2)At optimum quantity compare AR (which is Price) to ATC. AR = $16 ATC is $13.Economic profit is (AR-ATC) x Q, therefore ($16 - $13) x 160 = our economic profit of $480

Refer to the diagrams, which pertain to monopolistically competitive firms. Longrun equilibrium is shown by:

The correct answer shows normal profit. Low barriers to entry means firms will enter until economic profits go to zero and only normal profits are earned.

Which idea is inconsistent with pure competition?

product differentiation

The test for productive efficiency is that:

the firm is producing at the minimum point of ATC

A price discriminating monopolist will attempt to charge each buyer (or group of buyers):

the maximum price each would be willing to pay.

On the graph, what is the profit-maximizing level of output for a pure monopolist?

the quantity where MR=MC (B)

You have been working for construction companies for a number of years. You enjoy construction work and now want to start your own business building homes. You quit your previous job which earned you $60,000 per year and invested $40,000 from your savings account into your business. Your savings account paid you 1% interest per year. You borrow $1,110,000 from the bank at a 4% rate of interest - your loan is for one year only. You use the money to hire workers and buy the tools, machinery and equipment necessary to build homes. The cost per worker is $20,000 per year. You plan on hiring 40 workers. With 40 workers, your company can build seven custom homes. You must also buy materials - land, wood, nails, etc. Each house requires $50,000 worth of raw materials. You estimate that the average sale on each home will equal $200,000 Based on the above scenario, your accounting profit will be

Accounting profit (or loss) is calculated by Total Revenue - Explicit Costs. Total revenue is $200,000 x 7 homes = $1,400,000. Explicit costs are cost of workers, cost of materials and interest payments on the loan. Workers are $20,000 x 40 = $800,000. Materials equals $50,000 x 7 homes = $350,000 and the interest on the loan is $1,110,000 x .04 = $44,400. You DO NOT include the loan amount of $1,110,000 as you would be double counting..it's in the cost of workers and materials.So...$1,400,000 - ($44,400 + $800,000 + $350,000) =$ 205,600

Refer to the diagram where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If Beta follows a high price policy, and Alpha follows a low price policy:

Beta will realize a $10 million profit and Alpha a $30 million profit.

If all monopolistically competitive firms in the industry have profit circumstances similar to the firm shown:

Economic profits are being made and since we know monopolistic competition has fairly low barriers to entry, other firms will enter as a result.

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Find output where MR=MC this is 4 units for this table of data. At 4 units of output ATC is $49.50. Multiply this amount by the five units to get total costs. ($198.00)

Refer to the graph for a monopolist in short-run equilibrium. This monopolist:

Has a loss per unit equal to DE

Refer to the data. This firm will maximize its profit by producing:

Optimum output is found where MR=MC. If you can't get a perfect equality you get as close as you can to it where MR is greater. (4 units.)

The data refers to a perfectly competitive firm.

Perfectly competitive firms have perfectly elastic demand curves. In other words, price does not change with output. This table shows one of the "imperfectly competitive" market structures. (False)

Refer to the cost table. If the price of the product is $6, what output level will the firm produce?

Recall the three step process. The analysis of this situation tells us 14 is the optimum output...but...we can also see that a $6 price and at 14 unit out output ATC is $11.5 so we're experiencing an economic loss. We need to ensure that AR ($6) is greater than AVC ($4.75 at this quantity) to ensure that we wouldn't shut down and produce zero. $6 is greater than $4.75 so this firm will continue to produce 14 units. (14)

A profit-maximizing monopolist facing the situation shown in the graph below should:

The three step process show us that at optimum output AR<ATC and AVC so this firm would shut down.

Oligopolistic industries are characterized by:

a few dominant firms and substantial entry barriers.

A significant difference between a monopolistically competitive firm and a purely competitive firm is that the:

former sells similar, although not identical, products.

A monopolistically competitive firm has a:

highly elastic demand curve.

As a general rule, oligopoly exists when the firm concentration ratio:

is 40 percent or more.

Monopolistic competition is characterized by a:

large number of firms and low entry barriers.