ECN 212 Exam 2

Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 14-1. At Q = 1,000, the firm's profits equal -$200. $3,000. $1,000. $4,000.

$1000 The firm sells its output at $12 per unit, so Total Revenue = P*Q = $12*1,000 = $12,000. Average total cost (when producing 1,000 units) is $11, so Total Costs = ATC*Q = $11*1,000 = $11,000. The firms profit is then $12,000-$11,000 = $1,000.

A monopolist faces the following demand curve: Quantity Price 1 $15 2 $12 3 $9 4 $6 5 $3 Suppose the monopolist has total fixed costs equal to $5 and a variable cost equal to $4 per unit for all units produced. What is the total profit if she operates at her profit-maximizing price $1 $9 $7 $11

$11 We can see that the inverse demand function is P = 18 - 3Q. Then marginal revenue is 18-6Q. Since variable cost is constant it equals marginal cost. At the optimal output MR = MC, so 18-6Q=4. Then 6Q = 14 Since output is discrete Q = 2. (You can check that producing 3 units generates less profit) For Q=2 price is $12, so revenue is $24. Total cost of producing 2 units is $5 + 2*$4 = $13. Therefore profit is 24 - 13 = $11.

The table represents a demand curve faced by a firm in a competitive market. Quantity. Total Revenue 0. $0 1 $13 2 $26 3 $39 4 $52 For this firm, the marginal revenue is

$13 Marginal Revenue (MR) is the change in total revenue/change in quantity. For example, if we are sell 2 units, we get $26, if we sell a 3 units we get $39, so MR = ($39- $26)/(3-2). Then the marginal revenue is $39-$26=$13. Note that in a perfectly competitive market MR=P

A profit-maximizing monopolist charges a price of $12. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6. Average total cost for 10 units of output is $5. What is the monopolist's profit? $70 $120 $100 $60

$70 The optimal output is determined by the equality of marginal revenue and marginal product. In this case it is 10. Therefore the monopolists revenue is 10*$12 = $120. Total costs are 10 * ATC = 10 * $5 = $50. Profit is then $120 - $50 = $70.

Arizona United Inc. and Sunny Town Ltd. operate in a competitive market. Arizona United Inc. sells 800 units and its total revenue is $120,000. Sunny Town Ltd. sells 650 units, what is its total revenue? 110,000 97,500 90,000 122,50

$97,500 Price=total revenue/quantity, replacing values price=$120,000/800=$150. Then Sunny Town Ltd.'s total revenue is 650*$150=$97,500.

Suppose market demand for a product is given by the equation P = 20 - Q. For this market demand curve, marginal revenue is MR = 20 - 2Q. If the marginal cost of producing this good is 0, what quantity would a profit-maximizing monopolist produce? Q = 5 Q = 2 Q = 10 Q = 0

10 Qty The profit maximizing output for this monopolist will happen when MR = MC. Then, 20 - 2Q = 0 and so Q = 10.

A monopolist that produces a patented drug faces the following demand curve: Quantity. Price 0 $20 1 $18 2 $16 3 $14 4 $12 5 $10 6 $8 Suppose marginal cost is constant at $10 per unit. The monopolist's patent expires. If the market is now a Perfectly Competitive Market, what will be the new equilibrium price and quantity? 14, 3 12, 4 8, 6 10, 5

10, 5

A monopolistically competitive firm faces the following demand curve for its product: Price ($)40 36 32 28 24 20 16 12 8 4 Quantity 4 10 16 22 28 34 40 46 52 58 The firm has total fixed costs of $100 and a constant marginal cost of $25 per unit. The firm will maximize profit with the production of 4 units of output. 16 units of output. 10 units of output. 22 units of output.

16 units of output.

Quantity. Price 0 $600 1 $550 2 $500 3 $450 4 $400 5 $350 6 $300 7 $250 8 $200 Suppose marginal cost is constant at $350 per unit. The monopolist's profit-maximizing level of output is (find the output level where MC<=MR) 6 5 4 3

3 Units Total revenue (when producing 2 units) is $500*2=$1,000. Total revenue (when producing 3 units) is $450*3=$1,350. Marginal revenue (when producing 3 units) is $1,350 - $1,000=$350. When producing less than 3 units, marginal revenue is larger than $350, and it is smaller when producing more than 3 units.

A monopolist faces the following demand curve: Quantity Price 0 $20 1 $18 2 $16 3 $14 4 $12 5 $10 6 $8 Suppose marginal cost is constant at $8 per unit. The monopolist's profit-maximizing level of output is (find the output level where MC<=MR) 5 units. 4 units. 3 units. 6 units.

3 units. Total revenue (when producing 2 units) is $16*2=$32. Total revenue (when producing 3 units) is $14*3=$42. Marginal revenue (when producing 3 units) is $42 - $32=$10. When producing less than 3 units, marginal revenue is larger than $8, and it is smaller when producing more than 3 units.

A monopoly maximizes profits... At the price that equals fixed cost At the price that equals average cost At the quantity that makes total revenue equal to average cost At the quantity that makes marginal revenue equal to marginal

At the quantity that makes marginal revenue equal to marginal

Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million. What will these two companies do if they behave as individual profit maximizers? Neither company will advertise. One company will advertise, the other will not. There is no way of knowing without knowing how many customers are stolen through advertising. Both companies will advertise.

Both companies will advertise.

In the long run a company that produces and sells pizzas incurs total costs of $1,050 when output is 90 pizzas and $1,200 when output is 100 pizzas. The pizza company exhibits economies of scale because average total cost is falling as output rises. economies of scale because total cost is rising as output rises. diseconomies of scale because average total cost is rising as output rises. diseconomies of scale because total cost is rising as output rises.

Diseconomies of scale because the average total cost is rising as output rises, when Q=90: ATC=1050/90=11.67; when Q=100: ATC=1200/100=12 so as the output increases the per unit cost increases!

The length of the short run can never exceed 5 years. True or False ?

False

Total cost is the amount a firm receives for its output, and total revenue is the market value of the inputs a firm uses in production. True or False?

False

The barriers to entry in a monopolistic competitive industry are... low impossible to achieve high dictated by law

Low

Which of the following statements is correct? Monopolistic competition is similar to oligopoly because both market structures are characterized by strategic interaction between firms in the market. Monopolistic competition is similar to perfect competition because both market structures are characterized by differentiated products. Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers. Monopolistic competition is similar to perfect competition because both market structures are characterized by perfectly elastic demand curves for firms.

Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers.

To be successful, a cartel must find a way to encourage members to produce more than they would otherwise produce. agree on the prices charged by each member, but they need not agree on amounts produced. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. agree on the total level of production and on the amount produced by each member.

agree on the total level of production and on the amount produced by each member.

One key difference between an oligopoly market and a competitive market is that oligopolistic firms can affect the profit of other firms in the market by the choices they make while firms in competitive markets do not affect each other by the choices they make. are price takers while competitive firms are not. sell their product at a price equal to marginal cost while competitive firms do not. sell completely unrelated products while competitive firms do not.

can affect the profit of other firms in the market by the choices they make while firms in competitive markets do not affect each other by the choices they make.

Monopolies use their market power to charge prices that equal minimum average total cost. dump excess supplies of their product on the market. charge a price that is higher than marginal cost. increase the quantity sold as they increase price.

charge a price that is higher than marginal cost.

If a competitive firm is selling 500 units of its product at a price of $8 per unit and earning a positive profit, then its total cost is less than $4,000. All of the answers are correct. its average revenue is greater than $8. its marginal revenue is less than $8

its total cost is less than $4,000. Profits=Total revenue - Total costs, if profits are positive, then total revenue > total costs. Total revenue = units sold * price, replacing values Total revenue = 500 * $8 = $4,000. Hence total costs < $4,000.

The quantity sold by a monopoly is... less than in a competitive market the same as in a competitive market free larger than in a competitive market

less than in a competitive market

In a competitive market, no single producer can influence the market price because consumers have more influence over the market price than producers do. government intervention prevents firms from influencing price. producers agree not to change the price. many other sellers are offering a product that is essentially identical

many other sellers are offering a product that is essentially identical.

Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million. If these two companies collude and agree upon the best joint strategy, both companies will advertise. neither company will advertise. Brown Inc. will advertise but PM Inc. will not. PM Inc. will advertise but Brown Inc. will not.

neither company will advertise.

Demand in a monopolistically competitive market is typically... perfectly inelastic perfectly elastic inelastic elastic

elastic . A monopolistically competitive firm faces an elastic demand curve, because there are many firms producing substitutes goods.

A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market faces a downward-sloping demand curve for its product. chooses its profit-maximizing quantity where marginal revenue equals marginal cost. can earn profits in the long run. sells its product in a highly-concentrated market.

faces a downward-sloping demand curve for its product.

In a competitive market with identical firms, an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run. firms cannot earn positive economic profit in either the short run or long run. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

Which of the following firms is the closest to being a perfectly competitive firm? a wheat farmer in Kansas Apple, Inc. DeBeers diamond wholesalers the New York Yankees

a wheat farmer in Kansas

The Wacky Widget company has total fixed costs of $100,000 per year. The firm's average variable cost is $5 for 10,000 widgets. At that level of output, the firm's average total costs equal $100 $150 $10 $15

$15 Average variable cost = Variable cost/Q, then Variable cost = Average variable cost *Q. The Variable cost is 5*10,000=50,000 Total cost is fixed cost + variable cost = 100,000 + 50,000 = 150,000 Average total cost is total cost/total output = 150,000/10,000=15

The following table provides information on the price, quantity, and average total cost for a monopoly. Price. Quantity Average Total Cost $24 0 --- $18 5 $14.00 $12 10 $11.00 $6 15 $10.67 $0 20 $11.00 At what price will the monopolist maximize his profit? (find the corresponding price to the output level where MC<=MR) $24 $6 $12 $18

$18 Profit = revenue - total cost = P*Q - ATC*Q = (P - ATC) * Q It's easy to calculate for each possible Q, and see that it is maximized at Q=5. Therefore price is $18.

Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, total revenue will be $4,200. $2,400. $2,000. We do not have enough information to answer the question.

$2,400 Total revenue=quantity*price, then Price=total revenue/quantity, replacing values Price=$1,800/150=$12. If it sells 200 units, then total revenue will be 200*$12=$2,400.

Consider the following demand and cost information for a monopoly. Quantity Price Total Cost 0 $30 $3 1 $25 $7 2 $20 $12 3 $15 $18 4 $10 $25 To maximize profit, the monopolist sets price at $10. $15. $25. $20

$20

Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing quantity is 40 units, the profit-maximizing price is $160, and the marginal cost of the 40th unit is $120. If the good were produced in a perfectly competitive market, the equilibrium quantity would be 50, and the equilibrium price would be $150. The demand curve and marginal cost curves are linear. What is the value of the deadweight loss created by the monopolist? 400 $200 $40 $100

$200 The deadweight loss is (($160 - $120) * (50 - 40))/2 = ($40 * 10)/2 = $200

When a certain monopoly sets its price at $8 it sells 64 units. When the monopoly sets its price at $10 it sells 60 units. The marginal revenue for the firm over this range is $11. $44. $33. $22.

$22 Marginal revenue equals the increment in revenue for the additional units sold Revenue when selling 10 units = (10*60) = 600 Revenue when selling 8 units = (8*64) = 512 Marginal revenue = 600 - 512 = 88

Quantity. Total Cost 0 $4 1 $10 2 $16 3 $21 4 $24 5 $35 6 $48 What is the lowest price at which this firm would operate in the short run? $8. $7. $5. $6.

$5 The firm would operate in the short run as long as price is above average variable cost. Calculating average variable cost at each quantity we can see that its minimum is achieved at $5 (when q=4). Therefore the minimum price at which the firm would operate in the short run is $5.

Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year. Refer to Scenario 14-4. At the end of the first year of operating his new business, Victor's accountant reported an accounting profit of $150,000. What was Victor's economic profit? $50,000 -$150,000 $25,000 -$25,000

-$25,000 Victor's opportunity cost of opening his business is the value of opportunities lost. If Victor had not opened his business he could have invested the money and earn $100,000, as well as earned $75,000 from his job. Therefore his opportunity cost is $175,000. Victor's accounting profit is $150,000, but his opportunity cost is $175,000. Then his economic profit is: $150,000 - $175,000 = -$25,000

In the short run, a market consists of 100 identical firms. The market price is $8, and the total cost to each firm of producing various levels of output is given in the table below. What will total quantity supplied be in the market? Quantity. Total Costs 0 $1 1 $7 2 $14 3 $22 4 $31 5 $41 400 units 200 units 500 units 300 units

300 Units If the price is $8, individual firms will produce until price equals marginal cost. The marginal cost of producing the 3rd unit is $8, so all firms will produce 3 units. Therefore market output will be 3*100=300 units.

A monopolist that produces a patented drug faces the following demand curve: Quantity. Price 0 $20 1 $18 2 $16 3. $14 4 $12 5 $10 6 $8 Suppose marginal cost is constant at $5 per unit. Refer to Table 15-18 The monopolist's profit-maximizing level of output is (find the output level where MC<=MR) 5 6 4 3

4 Units Total revenue (when producing 4 units) is $12*4=$48. Total revenue (when producing 3 units) is $14*3=$42. Marginal revenue (when producing 4 units) is $48 - $42=$6 . When producing less than 4 units, marginal revenue is larger than $5, and it is smaller when producing more than 4 units.

Quantity Price Total Cost 0 $600 $300 1 $550 $375 2 $500 $475 3 $450 $600 4 $400 $850 5 $350 $1,250 6 $300 $1,800 The monopolist's profit-maximizing level of output is (find the output level where MC<=MR) 6 3 4 5

4 Units Marginal revenue equals the increment in revenue for the additional units sold Revenue when selling 4 units = (4*$400) = $1,600 Revenue when selling 3 units = (3*$450) = $1,350 Marginal revenue when selling 4 units = $1,600 - $1,350 = $250 Marginal cost equals the increment in costs for the additional units sold Marginal cost when selling 4 units = $850 - $600 = $250 Marginal revenue equals marginal cost when selling 4 units

A monopolist faces the following demand curve: Price. Quantity $51. 1 $47 2 $42 3 $36 4 $29 5 $21 6 $12 7 Refer to Table 15-5. The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-maximizing level of production? 4 units 3 units 5 units 2 units

4 units

Suppose a monopolist has a demand curve that can be expressed as P=90-Q. The monopolist's marginal revenue curve can be expressed as MR=90-2Q. The monopolist has constant marginal costs and average total costs of $10. Refer to Scenario 1. The profit-maximizing monopolist will produce an output level of 80 units. 40 units. 20 units. 10 units

40 units. 10 =90 -2Q 2Q = 80 Q=40

Suppose that a firm in a competitive market faces the following revenues and costs: Quantity. Total Revenue. Total Cost 0. $0 $3 1 $6 $5 2 $12 $8 3 $18 $12 4 $24 $17 5. $30 $23 6 $36 $30 7 $42 $38 The firm should not produce an output level beyond 4 units. 6 units. 5 units. 7 units.

5 units calculating profits, as Total Revenue - Total Cost, for each quantity we can show that it is maximized at q=5. Therefore the firm should not produce more than 5 units.

A monopolist faces the following demand curve: Quantity Price 0 $20 1 $18 2 $16 3 $14 4 $12 5 $10 6 $8 Suppose marginal cost is constant at $8 per unit. The firm depicted in the table is selling a prescription drug for which it had a patent, but the patent has expired. As new firms enter the market and sell the generic version of this drug competitively, what quantity will be sold? 6 units 4 units 3 units 5 units

6 units As firms enter and the market becomes competitive the price will equal the marginal cost. Therefore, for a price of $8, 6 units will be demanded and sold.

Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its marginal revenue is $4 per unit, its marginal cost is $4 per unit, and its average total cost is $3 per unit. What can we conclude about this monopolist? The monopolist is not currently maximizing its profits; it should produce more units and charge a lower price to maximize profit. The monopolist is not currently maximizing its profits; it should produce fewer units and charger a higher price to maximize profit. The monopolist is currently maximizing profits, and its total profits are $200. The monopolist is currently maximizing profits, and its total profits are $250.

The monopolist is currently maximizing profits, and its total profits are $250. The monopolist is maximizing profits given that it's marginal revenue equals the marginal cost. Profit = Revenue - Total Cost Revenue is AR*Q = $8 * 50 = $400 Total Cost is ATC*Q = $3 * 50 = $150 Therefore profit = $400 - $150 = $250

A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet browser into its Windows operating system, to be sold as one unit. This practice is known as predation. tying. retail maintenance. wholesale maintenance.

Tying Tying occurs when a supplier makes the sale of one product (the tying product) conditional upon the purchase of another (the tied product). In this example, Windows is the tying product and the tied product is its Internet browser.

Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off season, Bill should (hint: check the condition under which the firm will stay in business vs shut down in the short run) operate his business as long as he rents all 10 boats each month. operate his business as long as he rents at least 7 boats per month. raise the price he charges per boat rental. operate his business as long as he rents at least 1 boat per month.

operate his business as long as he rents at least 1 boat per month. The firm will operate as long as average revenue is greater than average variable cost. Given that the market is competitive, average revenue equals price at $200. Average variable cost is $50 per boat. Therefore as long as he rents at least 1 boat per month the business should stay in operation.

When a market is monopolistically competitive, the typical firm in the market is likely to experience a positive profit in the short run and in the long run. zero profit in the short run and in the long run . zero profit in the short run and a positive or negative profit in the long run positive or negative profit in the short run and a zero profit in the long run.

positive or negative profit in the short run and a zero profit in the long run.

In game theory, a dominant strategy is a strategy that must appear in every game. ! the best strategy for a player to follow, regardless of the strategies followed by other the best strategy for a player to follow only if other players are cooperative a strategy that leads to one player's interests dominating the interests of the other players.

the best strategy for a player to follow, regardless of the strategies followed by other

A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that All of the above are correct. the firm is currently maximizing its profit. the profits of the firm are negative. firms are likely to leave this market in the long run.

the firm is currently maximizing its profit.

Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing the quantity at which market price exceeds Mr. McDonald's marginal cost of production by the greatest amount. to produce the quantity at which average fixed cost is minimized. the quantity at which market price is equal to Mr. McDonald's marginal cost of production. to produce the quantity at which average variable cost is minimized.

the quantity at which market price is equal to Mr. McDonald's marginal cost of production. In competitive markets, marginal revenue is equal to the market price. The firms choose the profit maximizing output such that MR=MC (Marginal Revenue=Marginal Costs), so in this case P=MC.

Suppose that a firm in a competitive market faces the following revenues and costs: Quantity. Total Revenue. Total Cost 0 $0 $5 1 $8 $9 2 $16 $14 3 $24. $20 4 $32 $27 5. $40 $35 If the firm produces 3 units of output, the firm is maximizing profit. total revenue is greater than variable cost. marginal cost is $4. marginal revenue is less than marginal cost.

total revenue is greater than variable cost. Total revenue (when producing 3 units) is $24. Variable cost is Total Cost - Fixed Cost = $20 - $5 = $15. Therefore total revenue is greater than variable cost. Regarding the other options: Marginal cost is $20 - $14 = $6 Marginal revenue is greater than Marginal cost @Q=3 --> MR= $24 and MC =$6 The profit maximizing output is where MR=MC, so that would be Q=5 units

For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which profit is maximized. total revenue is maximized. marginal cost is zero. average revenue is zero.

total revenue is maximized. If marginal revenue is positive (negative) producing the marginal unit increases (decreases) total revenue. Therefore total revenue is maximized when marginal revenue is zero.

If a firm operating in a competitive industry shuts down in the short run, it can avoid paying fixed costs. variable costs. total costs. The firm must pay all its costs, even if it shuts down.

variable cost

If a firm produces nothing, _____ costs are zero, and the firm will incur _____ costs. variable; fixed fixed; variable fixed and variable; no opportunity; variable

variable; fixed

Niang owns a coffee shop. Which of the following costs would be included by an economist but not an accountant? cost of coffee beans wages Niang could earn giving music lessons employee wages rent for the coffee shop

wages Niang could earn giving music lessons

f the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's elasticity of demand will be infinite. depends on how large a crop the farmer produces. will also be -0.3. will range between -0.3 and -1.0.

will be infinite. If the market is perfectly competitive, the market demand curve and the market supply curve will determine the market price. The individual firm (e.g., farmer) takes the equilibrium price as given, so it faces a perfectly elastic demand. Therefore the individual elasticity of demand will be infinite

Which of the following would be most likely to have monopoly power? a gas station your local natural gas company a department store a newspaper

your local natural gas company