ECON 323 final review pt2

For a monopoly, marginal revenue equals: A. the gain from selling an additional unit at the market price less the loss in revenue from lowering the price on the previous units. B. ∆P/∆Q + P. C. P + (∆Q/∆P)Q. D. Q + (∆P/∆Q)P.

A

Government encouragement of monopoly: A. usually leads to lower prices and higher consumer surplus. B. through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market. C. reduces the market power of regulated firms. D. results in the regulated firm producing beyond the competitive output level.

B

Unlike the profit maximization in a perfectly competitive market, a monopolist will NOT choose to produce at the level such that MR = MC.

False: A firm maximizes profits when MR = MC. Unlike for the perfectly competitive market firm, marginal revenue does not equal price for the firm with market power, so P (doesn't) = MC at the profit-maximizing quantity.

T or F? For a monopolist, when market demand becomes more elastic, the optimal markup rises.

False: Falls

T or F? In a perfectly competitive market, firms should remain open and operating in the short run as long as revenue can cover total costs. Firms will shut down if net profits is negative

False: Firms should remain open and operating in the short run as long as revenue can cover variable costs, even if net profit is negative.

T or F? For a firm with market power, the demand curve for its products will have a downward slope. The corresponding marginal revenue curve is the same as that downward sloping demand curve.

False: Marginal revenue is not equivalent to price for a firm facing a downward sloping demand curve.

T or F? the demand curve of an industry in a perfectly competitive market is perfectly elastic.

False: The demand curve facing a firm in a perfectly competitive market is perfectly elastic at the market equilibrium price. The demand curve of the market is not necessarily perfectly elastic.

T or F? In a perfectly competitive market, increasing-cost industries are characterized by long-run average costs that increase with industry output. It is possibly due to competition over a scarce input and will result in an downward sloping long run supply curve.

False: Upward sloping long run supply curve.

The inverse demand for a product is given by P = 400-5Q, where Q measures the number of units and P is the price per unit. Suppose that total cost is T C = 100Q + 2.5Q2 with marginal cost per unit of MC = 100+5Q. Technological innovation reduces total cost to T C = 25Q+2.5Q2 and marginal cost per unit to MC = 25+5Q. Identify equilibrium price and quantity before and after the cost reduction. How does profit change?

If the inverse demand curve is P = 400-5Q, then marginal revenue will be MR = 400-10Q. To find the equilibrium price and quantity in both scenarios, set MR = MC in each case. Before: MR = MC 400-10Q = 100 + 5Q Q = 20 and P = 400-5(20) = $300 Profit = (300 × 20)-[100 × 20 + 2.5(20)2 ] = 6, 000-3, 000 = $3, 000 After: MR = MC 400-10Q = 25 + 5Q Q = 25 and P = 400-5(25) = $275 Profit = (275 × 25)-[100 × 25 + 2.5(25)2 ] = $2812.5

A monopolist serves market A with an inverse demand curve of P = 12 - Q. Another monopolist serves market B with an inverse demand curve of P = 22 - 2Q. Suppose that both monopolists have a constant marginal cost of $2. Calculate the producer surplus earned in each market. Why is producer surplus higher in market B than in market A?

To calculate producer surplus, first find the profit-maximizing price and quantity. In market A, MR = 12-2Q and MC = 2. MR = MC 12-2Q = 2 Q = 5 P = 12-5 = $7 Producer surplus is the area of a rectangle, which equals the difference between price and marginal cost multiplied by the quantity: (7-2)(5) = $25. In market B, MR = 22-4Q and MC = 2. MR = MC 22-4Q = 2 Q = 5 P = 22-2(5) = $12 Producer surplus is the area of a rectangle, which equals the difference between price and marginal cost multiplied by the quantity: (12-2)(5) = $50. Producer surplus in market B is higher than in market A because consumers are less price-sensitive in market B. In other words, the demand curve in market B is less elastic (steeper) than the demand curve in market A.

T or F? In a perfectly competitive market, market supply is the horizontal sum of all individual firms' supply curves.

True

T or F? Markup is the percentage of a firm's price that is greater than its marginal cost.

True

T or F? Product differentiation refers to imperfect substitutability across varieties of a product.

True

T or F? Under perfect competition, a market is composed of many firms producing identical products, with no barriers to entry.

True

Suppose that each firm in a perfectly competitive market has a short-run total cost of T C = 75 + 500Q-5Q2 + 0.5Q3 , where MC = 500-10Q + 1.5Q2 . a. Calculate the output that minimizes the firm's AV C. b. What is the firm's shutdown price?

a. AV C is minimized where AV C = MC. AV C = V C/Q = 500-5Q + 0.5Q^2 AV C = MC 500-5Q + 0.5Q2 = 500-10Q + 1.5Q2 5Q = Q^2 Q = 5 b. To find the shutdown price, evaluate the AV C curve at 5 units of output. AV C = 500-5(5) + 0.5(5)^2 AV C = $487.50

Suppose that there are 1, 000 firms in a perfectly competitive industry, each with a short-run total cost curve given by T C = 800 + 8Q + 0.1Q2 and marginal cost curve given by MC = 8 + 0.2Q. a. What is the profit-maximizing output level for each firm at a market price of $20? b. How much profit does each firm make at a market price of $20? c. Explain whether the industry will expand or contract in the long run.

a. Profit maximization requires P = MC: 20 = 8 + 0.2Q 12 = 0.2Q Q = 60 b. Profit = T R-T C T R = P Q = 2060 = 1, 200 T C = 800 + 8(60) + 0.1(60)^2 = 1, 640 Profit = -440 (If the firm shut down in the short run, its profit would equal -800, or fixed costs.) c. The industry will contract as firms exit the industry because of economic losses.