Econ 200 / Fall 2016 / Cullen NAME: ___________________________________ Exam 3
SECTION I: Multiple Choice [2 pts each]
_____ 1. If the marginal revenue of the last widget the firm produces is $50 and its marginal cost is $35, a firm should:
A. reconsider past production decisions.
B. decrease production.
C. increase production.
D. hold production constant.
Answer: C. increase production.
_____ 2. A perfectly competitive firm facing a price of $10 decides to produce 100 widgets. If its marginal cost of producing the last widget is $12 and it is seeking to maximize profit, the firm should:
A. produce more widgets.
B. produce fewer widgets.
C. continue producing 100 widgets.
D. shut down.
Answer: A. produce more widgets.
_____ 3. The supply curve of a perfectly competitive firm is:
A. the marginal cost curve only if price exceeds average variable cost.
B. the marginal cost curve only if price exceeds average total cost.
C. the average total cost curve only if price exceeds average variable cost.
D. nonexistent.
Answer: A. the marginal cost curve only if price exceeds average variable cost.
_____ 4. Refer to the table above. The maximum of profit that the perfectly competitive firm represented by the above data could earn is:
A. $25.
B. $35.
C. $45.
D. $55.
Answer: D. $55.
_____ 5. A perfectly competitive firm in the long run:
A. can earn positive or negative economic profits.
B. can earn negative accounting profits as long as economic profits are positive.
C. makes zero economic profits.
D. makes zero accounting profits.
Answer: C. makes zero economic profits.
_____ 6. Refer to the graph above. If the market price falls below P1 the firm will:
A. shut down.
B. produce Q1 in the short-run but shut down in the long-run.
C. produce Q3, earning a profit.
D. produce Q2, breaking even.
Answer: A. shut down.
______7. Refer to the graph above. If the market price is P4 the firm will produce:
A. Q2 and incur a loss.
B. Q3 and break even.
C. Q3 and earn a profit.
D. Q4 and earn a profit.
Answer: C. Q3 and earn a profit.
_____ 8. Refer to the graph above depicting a perfectly competitive firm. When maximizing profit, the total profit earned by the firm represented is:
A. $220.
B. $275.
C. $330.
D. $605.
Answer: A. $220
_____ 9. Refer to the graph above. Suppose that market price is $3. Given this price, a perfectly competitive firm should:
A. continue to produce in the short-run but shut down in the long-run.
B. continue to produce in both the short-run and the long-run.
C. shut down in the short-run but continue production in the long-run.
D. shut down immediately.
Answer: D. shut down immediately.
_____ 10. Refer to the graph above. If the firm is producing 450 units of output, profit is equal to:
A. $38.
B. -$30.
C. $0.
D. $30.
Answer is D
_____ 11. The existence of economic losses induces firms to:
A. exit an industry, which shifts the market supply curve to the left and increases market price.
B. enter an industry, which shifts the market supply curve to the right and decreases market price.
C. enter an industry, which shifts the market supply curve to the left and decreases market price.
D. exit an industry, which shifts the market supply curve to the right and decreases market price.
Answer: A. exit an industry, which shifts the market supply curve to the left and increases market price.
_____ 12. Refer to the graph above depicting a perfectly competitive firm. When the industry is in long-run competitive equilibrium:
A. the price of the product will be $6.
B. the firm will produce 100 units of output.
C. the firm will earn economic profits of $300 per day.
D. the marginal cost of production will be $3.
Answer: B. the firm will produce 100 units of output.
_____ 13. Marginal revenue is not equal to price for a monopolist because:
A. the monopolist’s demand curve is below its marginal revenue curve.
B. total revenue increases as output increases.
C. the monopolist sets price equal to marginal cost.
D. the monopolist must lower the price of all units in order to sell more.
Answer: D. the monopolist must lower the price of all units in order to sell more.
_____ 14. For a monopolist, the price of the product:
A. equals the marginal revenue.
B. is less than the marginal revenue.
C. exceeds the marginal revenue.
D. equals the marginal cost.
Answer: C. exceeds the marginal revenue.
_____ 15. Refer to the table above that shows the demand schedule for a product sold by a monopolist. Marginal revenue is negative:
A. when price is $10.
B. when price is above $10.
C. when price is below $10.
D. for every price.
Answer is B
Answer: B. when price is above $10.
_____ 16. Refer to the graph above. If the firm seeks to maximize profit, it should set a price equal to:
A. $10.
B. $ 8.
C. $ 6.
D. $ 4.
Answer: D. $ 4.
_____ 17. Refer to the graph above. The maximum possible total profit this monopolist who charges only one price can earn is:
A. $ 0.
B. $ 60.
C. $120.
D. $240.
Answer: B. $ 60.
_____ 18. Refer to the graph above. The profit-maximizing monopolist would be:
A. making a normal return.
B. sustaining a loss.
C. making zero economic profits.
D. making economic profits.
Answer: D. making economic profits.
_____ 19. Refer to the graph above. If this monopolist sets the price to maximize profit it will earn economic profit of:
A. $1,600 per day.
B. $2,400 per day.
C. $4,800 per day.
D. $7,200 per day.
Answer: B. $2,400 per day.
_____ 20. Refer to the graph above. If the monopoly firm maximizes profit, it will produce:
A. 15 units of output and charge a price of $3.50 per unit.
B. 15 units of output and charge a price of $2.00 per unit.
C. 25 units of output and charge a price of $2.50 per unit.
D. 30 units of output and charge a price of $2.00 per unit.
Answer: B. 15 units of output and charge a price of $2.00 per unit.
_____ 21. A monopolistic competitive industry has:
A. a few firms producing identical products.
B. many firms producing differentiated products.
C. many firms producing identical products.
D. a few firms producing differentiated products.
Answer: C. many firms producing identical products
_____ 22. If a monopolistically competitive firm is earning economic profits in the short-run, then:
A. these profits will persist in the long-run because of the firm’s limited monopoly power.
B. these profits will be eliminated in the long-run as new firms enter the industry.
C. its output will increase in the long-run.
D. price will be driven down to minimum average total cost in the long-run.
Answer: B. these profits will be eliminated in the long-run as new firms enter the industry.
_____ 23. For a monopolistic competitor:
A. P = ATC in long-run equilibrium.
B. P > ATC in long-run equilibrium.
C. P = MR in long-run equilibrium.
D. P = MC in long-run equilibrium.
Answer: = MC in long-run equilibrium.
_____ 24. As firms leave a monopolistically competitive industry that is sustaining economic losses:
A. the demand curve shifts to the right for the remaining firms in the industry.
B. the demand curve shifts to the left for the remaining firms in the industry.
C. total quantity demanded increases for the industry.
D. the market supply curve shifts to the right.
Answer: A. the demand curve shifts to the right for the remaining firms in the industry.
_____ 25. Refer to the graph above. If this monopolistically competitive firm maximizes profit it will:
A. charge $45 per dress.
B. charge $78 per dress.
C. charge $85 per dress.
D. shutdown because it cannot cover its opportunity costs.
Answer: A. charge $45 per dress.
_____ 26. Refer to the graph above of a monopolistically competitive firm. If the firm maximizes profit, it will earn:
A. zero economic profit this year.
B. $320,000 economic profit this year.
C. $84,000 economic profit this year.
D. $56,000 economic profit this year.
Answer: A. zero economic profit this year.
_____ 27. Refer to the graph above of a monopolistically competitive firm. In the long-run:
A. marginal cost will fall for firms that remain as other firms exit the industry.
B. average total cost will rise for firms that remain as other firms enter the industry.
C. demand will fall for firms that remain as other firms enter the industry.
D. demand will rise for firms that remain as other firms exit the industry.
Answer: C. demand will fall for firms that remain as other firms enter the industry.
_____ 28. Monopolistically competitive firms:
A. can earn economic profits or losses in both the short-run and the long-run.
B. can earn either profits or losses in the short-run, but earn zero economic profits in the long-run.
C. earn economic profits in the short-run but zero economic profits in the long-run.
D. earn zero economic profits in both the short-run and the long-run.
Answer: A. can earn economic profits or losses in both the short-run and the long-run.
SECTION II: Short Answer
- Using a market model (ONLY), clearly show the perfectly competitive market outcome (price & quantity) and compare that with the monopoly outcome (price & quantity). Clearly identify the deadweight loss that results from the monopoly. What is allocative efficiency? On your model, clearly show why monopoly firms are NOT allocatively efficient. [10 pts]
Answer
The monopoly is less than that of perfectly competitive output, and the price of the monopoly is higher than that of perfectly competitive market.
Allocative efficiency refers to an output level whereby the price is equal to the marginal cost of production. The price that consumers are ready to pay equals to the marginal utility they receive. Monopolies are allocative inefficient since they have the capability and can increase price to reduce consumer surplus.
Monopolies sets its price of Pm which is allocative inefficient since at output Qm, MC is less than price.
- Clearly describe perfect price discrimination. Using a market model, show how a perfectly price discriminating monopolist is more efficient than a monopolist who does not price discriminate. Why might consumers not like perfect price discrimination? [5 pts]
Answer
Perfect price discrimination refers to the process where firms split the market into each discrete consumer and charge the consumers the price; they are able and willing to pay. The market demand curve coincides with the marginal revenue curve; therefore the monopolist is capable of to produce until the point where the price of the product and minimal cost are equal and hence increase in profits. Perfect price discrimination results in a transfer of money to firms from consumers, and hence inequality results between consumers and firms.
- Clearly describe and show using a market model and a firm’s individual cost curves model how the market demand curve (D) and the firm’s individual demand curve (d) are different in monopolistically competitive markets. Which is one is more elastic, and why? [5 pts]
Answer
The firm’s demand curve slopes downwards in monopolistically competitive markets whereas, in perfect competition, the demand curve of individual firms is perfectly elastic; this is because firms have power in the market. The firms can raise prices without any loss of their customers.
- What are some examples of barriers to entry/exit? Describe at least 3. [6 pts]
Answer
- Patent right. Denotes to a legal barrier to replicating a product of a particular firm.
- Geographical barriers. Refers to inaccessibility to the best location, thus limits entry to new firms.
- Economies of scale. The existing firms have benefited from low average costs because of their size.
- Using both a market model and an individual firm’s set of cost curves, show a monopolistically competitive firm that is earning positive economic profits in the short run. Then, show and clearly describe what will happen in the long run. [10 pts]
Answer
In the short run, the demand curve slopes downwards; thus, even if a firm raises its price above its competitors, customers will still be available. MR lies below the demand curve. To sell more, the firm must lower the cost resulting in MR from extra sales being lesser than the price and thus increase in economic profit.
The presence of economic profits in the short run will lead to the entry of firms in the long run. The demand curve and marginal revenue curve facing a firm will shift to the left when new firms enter the market. Finally, this shift yields a profit-maximizing solution where economic profit is zero, where D2 is tangent to the point of average total cost curve (point A)
- Using both a market model and an individual firm’s set of cost curves, show a perfectly competitive firm that is earning losses in the short run. Then, show and clearly explain the long run adjustment process that will occur. [10 pts]
Answer
The firm makes a loss in the short run because average costs are above the average revenue curve.
Since firms in the industry are losing money, the supply curve below shifts to the left and the process continues throughout since firms suffer from losses. Afterwards, the supply curve shifts to S2 while price rises to P2, and finally, economic profits return to zero.
- For each of the market structures we studied (perfect competition, monopolistic competition, oligopoly and monopoly) give an example of a real-world industry that would fall under each classification. [4 pts]
Answer
Oligopoly – automobile companies.
Monopoly – Polaroid company which exclusively owned instant film technology.
Perfect competition – Foreign exchange markets.