# EC1000 Practice Problem Sets

EC1000 Practice Problem Sets

Math Review                                                                                                     p.2

Limits, Alternatives, and Choices                                                               p.4

The Market System                                                                                        p.6

Supply & Demand                                                                                            p.8

Elasticity                                                                                                               p.11

Production Costs                                                                                              p.14

Perfect Competition                                                                                       p.18

Monopoly                                                                                                           p.23

Monopolistic Competition                                                                           p.27

# Math Review

1. (a) The population of Mountainland was 45.7million in 2008 and 46.3 million in 2009. What was the percentage change (rate of growth) in population from 2008 to 2009? (b) The rural population of Mountainland was 18.3 million in 2008 and 17.7 million in 2009. What was the percentage change? (c) The data below show Mountainland’s real GDP (real output produced) for the period 2008-2010. Calculate the rate of growth in real GDP in (i) 2008-9 and (ii) 2009-10.

 Year Real GDP (in billion \$) 2008 5.6 2009 5.7 2010 5.5

1. You are interested in buying a book that cost £30 but discover that its price has increased by 20%. What is the book’s new price?

1. For each of the following pairs of variables, explain (i) whether there is likely to be a positive or negative relationship between them, and (ii) which is the dependent and which is the independent variable.

(a) income and saving

(b) number of DVDs purchased and price of DVDs

(c) level of salary and number of years of working experience

(d) the temperature and the number of swimmers on the beach

1. The following table contains data on the relationship between saving and income. Rearrange these data into a meaningful order and graph them on the accompanying grid. What is the slope of the line?  The vertical intercept?  Interpret the meaning of both the slope and the intercept.  Write the equation which represents this line.  What would you predict saving to be at the \$12,500 level of income?

 Income (per year)` Saving (per year) \$15,000 0 10,000 5,000 20,000 \$1,000 -500 500 0 1,500

1. Construct a table from the following data shown on the accompanying graph. Which is the

dependent variable and which the independent variable?  Summarize the data in

equation form.

1. Suppose that C = a + bY, where C = consumption, a = consumption at zero income, b= slope, and Y = income.
2. Are C and Y positively related or are they negatively related?
3. If graphed, would the curve for this equation slope upward or downward?
4. Are the variables C and Y inversely related or directly related?
5. What is the value of C if a =10, b =.50, and Y = 200?
6. What is the value of Y if C = 100, a = 10, and b = .25?

1. In the accompanying graph, is the slope of curve AA’ positive or negative? Does the slope

increase or decrease as we move along the curve from A to A’?  Answer the same two questions

for curve BB’.

# Limits, Alternatives, and Choices

1. Economic reasoning of cost-benefit analysis is based on the premise that:
2. All decisions or actions are costless
3. Only financial decisions or actions have a cost associated with them
4. People act irrationally most of the time
5. All decisions and actions have a cost associated with them

1. The role of the entrepreneur in society is to:
2. bring the factors of production together and take the risks of producing.
3. provide capital to the firm which the management combines with labor.
4. control the land upon which all production takes place to get the most rent.
5. work with other elected officials to determine what goods are produced.

1. If an economy is being “productively efficient,” then that means the economy is:
2. producing the products most wanted by society.
3. fully employing all economic resources.
4. maximizing the returns to factors of production.
5. using the least costly production techniques.

1. The production possibilities curve represents:
2. the maximum amount of labor and capital available for production.
3. combinations of goods and services among which consumers are indifferent.
4. maximum combinations of products available with fixed resources and technology.
5. the maximum rate of growth of capital and labor in an economy.

1. A point inside the production possibilities curve is:
2. attainable and the economy is efficient.
3. unattainable, but the economy is inefficient.
4. attainable, but the economy is inefficient.
5. unattainable and the economy is efficient.

1. If an economy that produces capital and consumer goods is operating at a point on its production possibilities curve, this indicates that:
2. it is achieving full employment but not full production.
3. it is achieving full production but not full employment.
4. more capital goods can be produced only at the cost of some consumer goods.
5. the economy is incapable of achieving significant economic growth.

1. Explain how (if at all) each of the following affects the location of a country’s

production possibilities curve:

1. The quality of education increases.
2. The number of unemployed workers increases.
3. A new technique improves the efficiency of extracting copper from ore.
4. A devastating earthquake destroys numerous production facilities.
5. Society prefers to produce more of one of the two goods and less of the other.

1. Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts):
 Type of Productions Production Alternatives A B C D E Automobiles 0 2 4 6 8 Forklifts 30 27 21 12 0

1. Show these data graphically. Upon what specific assumptions is this production possibilities curve based?
2. If the economy is at point C, what is the cost of one more automobile? Of one more forklift? Explain how the production possibilities curve reflects the law of increasing opportunity costs.
3. If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 forklifts, what could you conclude about its use of available resources?
4. What would production at a point outside the production possibilities curve indicate? What must occur before the economy can attain such a level of production?
5. Suppose improvement occurs in the technology of producing forklifts but not in the technology of producing automobiles. Draw the new production possibilities curve.
6. Now assume that a technological advance occurs in producing automobiles but not in producing forklifts. Draw the new production possibilities curve.
7. Now draw a production possibilities curve that reflects technological improvement in the production of both goods.

# The Market System

1. Capitalism is an economic system that:
1. produces more capital goods than consumer goods.
2. produces more consumer goods than capital goods.
3. gives the government the right to tax individuals and corporations.
4. gives private individuals and corporations the right to own productive resources.

1. Which is characteristic of the market system?
2. unselfish individuals
3. centralized decision-making
4. free enterprise and choice
5. government ownership of the means of production

1. Examples of command economies are:
2. the United States and Japan.
3. Sweden and Norway.
4. Mexico and Brazil.
5. Cuba and North Korea.

1. The French term “laissez-faire” means:
2. there is no free lunch.
3. let consumers and producers make their own choices.
4. circular flow.
5. public ownership.

1. The division of labor means that:
2. labor markets are geographically segmented.
3. unskilled workers outnumber skilled workers.
4. workers specialize in various production tasks.
5. each worker performs a large number of tasks.

1. Which is an example of barter?
2. a person trades a desk for a box of tools
3. a person buys clothes at a used clothing store
4. a gift of tuition money from parents to their children
5. the purchase of stock on the New York Stock Exchange

1. Which is the main problem with the barter system of exchange? Barter:
2. encourages self-interest and selfishness.
3. requires a coincidence of wants.
4. fosters specialization and division of labor.
5. undermines the right to bequeath.

1. The market system is said to be characterized by “consumer sovereignty.” This is because:
2. a large number of consumer goods are produced.
3. the prices of consumer goods are regulated by government.
4. consumer goods are more profitable than investment goods.
5. of the role of consumers in determining what goods are produced.

# Supply & Demand

1. When the price of apples increases, consumers buy more oranges. This situation is an illustration of:
2. the income effect.
3. diminishing marginal utility.
4. the substitution effect.
5. the rationing function of prices.

1. Suppose that goods A and B are complements and the price of good B falls. We would then expect an:
2. increase in the demand for good A and the quantity demanded for good B.
3. increase in the demand for good A and a decrease in the quantity demanded for good B.
4. increase in the quantity demanded of good B and a decrease in the demand for good A.
5. decrease in the demand for goods A and B.

1. What happens to the supply curve when production costs go down?
2. It shifts to the right
3. It shifts to the left
4. There is a movement along the curve
5. Nothing happens

1. Suppose when you are offered \$7.00 per hour to work in the campus library, you choose not to work, but when you are offered \$10.00 per hour, you accept a part-time position. Your behavior can best be explained by the:
2. Law of demand
3. Law of supply
4. Law of increasing marginal cost
5. Circular Flow

1. After a (binding) price ceiling is imposed, which of the following is true:
2. We have a shortage: quantity supplied is larger than quantity demanded.
3. We have a shortage: quantity supplied is smaller than quantity demanded.
4. We have a surplus: quantity supplied is larger than quantity demanded.
5. We have a surplus: quantity supplied is smaller than quantity demanded.

1. For each of the statements below, show what would happen to the demand curve. Would it shift to the right? Would it shift to the left? Would it remain unchanged?
2. What happens to the demand for Nike shoes when the price of Adidas shoes goes up?
3. What happens to the demand for cars when the price of gasoline goes down?
4. What happens to the demand for Aegean Airlines’ tickets when Ryanair’s prices go up?
5. What happens to the demand for bus tickets when consumer incomes go up?
6. What happens to the demand for cars when public transportation becomes cheaper?

1. What effect will each of the following have on the supply of automobile tires?
2. A technological advance in the methods of producing tires.
3. A decline in the number of firms in the tire industry.
4. An increase in the price of rubber used in the production of tires.
5. The expectation that the equilibrium price of auto tires will be lower in the future than it is currently.
6. The levying of a per-unit tax in each auto tire sold.
7. The granting of a 50-cent-per-unit subsidy for each auto tire produced.

1. How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is do price and quantity rise, fall, remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand diagrams to verify your answers.
2. Supply decreases and demand is constant.
3. Demand decreases and supply is constant.
4. Supply increases and demand is constant.
5. Demand increases and supply increases.
6. Demand increases and supply is constant.
7. Supply increases and demand decreases.
8. Demand increases and supply decreases.
9. Demand decreases and supply decreases.

1. Suppose the total demand for wheat and the total supply of wheat per month in Kansas City grain market are as follows:
 Thousands of bushels demanded Price per bushel (\$) Thousands of bushels supplied Surplus (+) or Shortage (-) 85 3.4 72 80 3.7 73 75 4 75 70 4.3 77 65 4.6 79 60 4.9 81

1. Fill in the surplus-shortage column. What is the equilibrium price? What is the equilibrium quantity?
2. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly.  Label equilibrium price P and the equilibrium quantity Q.
3. Suppose that the government establishes a price ceiling of \$3.70 for wheat. Explain carefully the main effects. Demonstrate your answer graphically.
4. Suppose that the government establishes a price floor of \$4.60 for wheat. What will be the main effects of the price floor? Demonstrate your answer graphically.

1. Assume that the demand for a commodity is represented by the equation P = 10 – .2Qd and supply by the equation P = 2 + .2Qs, where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price. Using the equilibrium condition Qs = Qd, solve the equations to determine equilibrium price and quantity. Graph the two equations to substantiate your answers. Finally, calculate the consumer surplus, producer surplus and total surplus.

1. A market is defined by the following equations: Qd = 14 – 2P, and Qs = 2 + 2P,

where P is in \$ and Qd and Qs and quantity demanded and supplied of good Z in tons

per day.

1. Calculate the equilibrium price and quantity.
2. Graph the demand and supply curves and identify equilibrium P and Q.
3. The government imposes a price ceiling at P = \$2. Draw the price ceiling in your diagram. Using the demand and supply equations, calculate the shortage/surplus arising from the price ceiling.
4. The government imposes a price floor at P = \$5. Draw the price floor in your diagram. Using the demand and supply equations, calculate the shortage/surplus arising from the price floor.

1. In the market that is represented by the supply and demand graph below, the government imposed a price floor at 5\$.
1. How much are consumers willing to buy after the price control is imposed?
2. How much are producers willing to supply after the price control is imposed?
3. Is there a shortage or a surplus?
4. What would have been the equilibrium price without the price control?
5. What would have been the equilibrium quantity without the price control?
6. What would have been the producers’ revenue without price controls?
7. Calculate consumer, producer and total surplus before and after the price control. Is there a deadweight loss associated with the price control?

# Elasticity

1. When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. In this range of prices, demand for this product is:
1. inelastic
2. cross-elastic
3. unitary elastic

1. The price of a product fell from \$4 to \$3, and the quantity purchased increased by 25%. What is the elasticity of the demand?
2. 5
3. 75
4. 875
5. 25

1. As the manager of a ski resort, you want to increase the number of lift tickets sold by 8%. Your staff economist has determined that the price elasticity of demand for lift tickets is 2. To increase sales by the desired amount, you should change the price of a lift ticket by:
2. -1%
3. 2%
4. 4%
5. -4%

1. A price increase of bread by 20%, leads to a reduction in quantity demanded by 5%. A price increase of salmon by 10% leads to a reduction in quantity demanded by 10%. Which of the following statements is the best at explaining the difference in their elasticities:
2. More narrowly defined goods tend to have larger elasticities than broad categories
3. More narrowly defined goods tend to have smaller elasticities than broad categories
4. The demand for necessities is less elastic than the demand for luxuries
5. The demand for necessities is more elastic than the demand for luxuries
6. Demands tend to become more elastic in the long run.

1. Which of the following describes the total revenue test?
2. An increase in price always leads to higher revenue
3. An increase in price always leads to lower revenue
4. An increase in price leads to higher revenue only when the demand is inelastic
5. An increase in price leads to higher revenue only when the demand is elastic

1. If in the short run the demand for mass transit is inelastic and in the long run the demand is elastic, then a price:
2. increase will decrease total revenue in the short run but increase total revenue in the long run.
3. increase will increase total revenue in the short run but decrease total revenue in the long run.
4. decrease will increase total revenue in the short run but decrease total revenue in the long run.
5. decrease will decrease total revenue in the short run and decrease total revenue in the long run.

1. How would the following changes in price affect total revenue? That is, would total revenue increase, decline, or remain unchanged?
2. Price falls and demand is inelastic.
3. Price falls and demand is elastic.
4. Price falls and demand is of unit elasticity.
5. Price rises and demand is inelastic.
6. Price rises and demand is elastic.
7. Price rises and demand is of unit elasticity.

1. Suppose the cross elasticity of demand for products A and B is +3.6 and products C and D is -5.4. What can you conclude about how products A and B are related? Products C and D?

1. A 15% increase in income leads to a 10% increase in demand for good A and 20% increase in demand for good B. Explain which of the two goods is income elastic and which is income inelastic. Which of the two goods is a necessity and which a luxury good?

1. A 10% increase in the price of a particular good gives rise to an 8% decrease in quantity bought. What is the price elasticity of demand?

1. Suppose the price of apples goes from \$20 to \$22 a box. In direct response, Goldsboro Farms supplies 1200 boxes of apples instead of 1000 boxes. Compute the coefficient of price elasticity (midpoint approach) for Goldsboro’s supply. Is its supply elastic, or is it inelastic?

1. Graph the accompanying demand data, and then use the midpoint formula for Ed to determine price elasticity of demand for each of the four possible \$1 price changes. What can you conclude about the relationship between the slope of a curve and its elasticity?  Calculate total-revenue data from the demand schedule above.  Graph total revenue below your demand curve.  Explain the relationship between price elasticity and total revenue.

 Product Price (\$) Quantity Demanded 5 1 4 2 3 3 2 4 1 5

# Production Costs

1. Suppose that a firm produces 200,000 units a year and sells them all for \$10 each. The explicit costs of production are \$1,500,000 and the implicit costs of production are \$300,000. The firm has an accounting profit of:
2. \$500,000 and an economic profit of \$200,000
3. \$400,000 and an economic profit of \$200,000
4. \$300,000 and an economic profit of \$400,000
5. \$200,000 and an economic profit of \$500,000

1. According to the law of diminishing marginal returns, eventually:
2. output must fall and then rise as additional units of input are employed.
3. additional inputs will no longer generate average output.
4. the additional output generated by additional units of an input will diminish.
5. the additional inputs necessary to produce an additional unit of output will diminish.

1. Say you are the owner of a restaurant and you face an increase in consumer demand. Which of the following factors of production can NOT be adjusted in the immediate short-run (within two weeks)?
2. Quantity of labor (number of workers)
3. Quantity of raw material (foodstuffs used in the kitchen)
4. Total space available for meal preparation and seating
5. All of the above

1. At what point does marginal product equal average product?
2. where average product is equal to its minimum value
3. where average product is equal to its maximum value
4. where marginal product is equal to its minimum value
5. where marginal product is equal to its maximum value

1. If you know that with 8 units of output, average fixed cost is \$12.50 and average variable cost is \$81.25, then total cost at this output level is:
2. \$93.75
3. \$97.78
4. \$750
5. \$880

1. A firm has fixed costs of \$5,000. Its average variable cost is \$2.00. At an output of 5,000 units its average total cost is:
2. \$2.50
3. \$3.00
4. \$3.50
5. \$4.00

1. The revenue of your neighborhood restaurant is 10,000\$ per month. The owners spend 3,000\$ on the raw materials, 500\$ on electricity, 1,000\$ on rent and 1,500\$ on labor costs. The 2 owners also spend a significant amount of time and effort to run their business. They could have been making 1,000\$ each if they spent the same time and effort while working elsewhere, over the same amount of time.
2. The sum of the restaurant’s explicit costs is:
3. The sum of the restaurant’s implicit costs is:
4. The restaurant’s accounting profit is:
5. The restaurant’s economic profit is:
6. Would it make economic sense to shut down the restaurant?

1. Indicate how each of the following would shift the (a) marginal-cost curve, (b) average-variable cost curve, (c) average-fixed-cost curve, and (d) average-total-cost curve of a manufacturing firm. In each case specify the direction of the shift.
2. A reduction in business property taxes
3. An increase in the nominal wages of production workers
4. A decrease in the price of electricity
5. An increase in insurance rates on plant and equipment
6. An increase in transportation costs

1. A firm’s fixed cost is 300\$. The marginal cost of each of the first 100 units is 1\$. After that, it is 2\$ per unit. If it produces a total of 350 units, how much is its total cost?

1. Compare and contrast the causes of the U-shape of the short run and long run ATC curves.

1. Complete the following table by calculating marginal product and average product from the data given. Plot total, marginal, and average product and explain in detail the relationship between each pair of curves. Explain why marginal product first rises, then declines, and ultimately becomes negative.

 Inputs of Labor Total Product Marginal Product Average Product 0 0 – 1 15 2 34 3 51 4 65 5 74 6 80 7 83 8 82

1. A firm has fixed costs of 60\$ and variable costs as indicated in the table below. Complete the table.
 Total Product Total Fixed Cost Total Variable Cost Total Cost Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost 0 0 1 45 2 85 3 120 4 150 5 185 6 225 7 270 8 325 9 390 10 465

1. Graph total fixed cost, total variable cost, and total cost.  Explain how the law of diminishing returns influences the shapes of the total variable-cost and total cost curves.
2. Graph AFC, AVC, ATC, and MC.  Explain the derivation and shape of each of these four curves and their relationships to one another.  Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and ATC curves at their minimum points.

# Pure Competition

1. In pure competition, marginal revenue is:
2. equal to total revenue.
3. less than product price.
4. equal to product price.
5. greater than product price.

1. A profit-maximizing firm in the short run will expand output:
2. until marginal cost begins to rise.
3. until total revenue equals total cost.
4. until marginal cost equals average variable cost.
5. as long as marginal revenue is greater than marginal cost.

1. In the graph below, the area:
2. 0CGH represents the firm’s total cost.
3. ACGE represents the firm’s total profit.
4. 0AEH represents the firm’s total profit.
5. BCGF represents the firm’s fixed costs of production.

1. The graph below shows a profit-maximizing purely competitive firm operating in the short run. Which area in the graph represents the amount the firm can save by continuing to produce in the short run rather than closing down immediately?
2. 0beg
3. 0cdg
4. acdf
5. abef

1. In long-run equilibrium a purely competitive firm will operate where price is:
2. greater than MR but equal to MC and minimum ATC.
3. greater than MR and MC, but equal to minimum ATC.
4. greater than MC and minimum ATC, but equal to MR.
5. equal to MR, MC, and minimum ATC.

1. Pure competition produces a socially optimal allocation of resources in the long run because:
2. marginal cost equals marginal revenue.
3. marginal revenue equals price.
4. marginal cost equals average total cost.
5. marginal cost equals price.

1. Use the following demand schedule to determine total and marginal revenues for each possible level of sales:
 Product Price (\$) Quantity Demanded Total Revenue (\$) Marginal Revenue (\$) 2 0 2 1 2 2 2 3 2 4 2 5
1. What can you conclude about the structure of the industry in which this firm is operating?
2. Graph the demand, total revenue, and marginal revenue curves for this firm.
3. Why do the demand and marginal revenue curves coincide?

1. Assume the following cost data are for a purely competitive producer:
 Total Product Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost 0 – – – – 1 60 45 105 45 2 30 42.5 72.5 40 3 20 40 60 35 4 15 37.5 52.5 30 5 12 37 49 35 6 10 37.5 47.5 40 7 8.57 38.57 47.14 45 8 7.5 40.63 48.13 55 9 6.67 43.33 50 65 10 6 46.5 52.5 75

1. At a product price of \$56, will this firm produce in the short run? Why or why not?  If it is preferable to produce, what will be the profit maximizing or loss minimizing output?  What economic profit or loss will the firm realize per unit of output?

1. Answer the same questions assuming product price is 26\$, \$32, \$38, \$41, and \$46. In the table below, complete the short-run supply schedule for the firm and indicate the profit or loss incurred at each output. Now assume there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the same cost data as shown here. Calculate the industry supply schedule.
 Price Quantity supplied, individual firm Profit (+) or Loss (-) Quantity supplied, 1500 firms 26 32 38 41 46 56 66

1. c) Suppose the market demand data for the product are as follows:
 Price Total Quantity Demanded 26 17,000 32 15,000 38 13,500 41 12,000 46 10,500 56 9,500 66 8,000

What will be the equilibrium price?  What will be the equilibrium output for the industry?  For each firm?  What will profit or loss be per unit?  Per firm?  Will this industry expand or contract in the long run?

1. Using diagrams for both the industry and a representative firm, illustrate competitive

long-run equilibrium.  Assuming constant costs employ these diagrams to show how

(a) an increase and (b) a decrease in market demand will upset that long-run

equilibrium. Trace graphically and describe verbally the adjustment processes by which

long-run equilibrium is restored.

1. In long-run equilibrium, P=minimum ATC = MC. (a) Of what significance for economic efficiency is the equality of P and minimum ATC? (b) The equality of P and MC? Distinguish between productive efficiency and allocative efficiency in your answer.

# Monopoly

1. You buy a firm that is a monopolist in its market, and then you hire an economist to estimate the elasticity of demand at the point where the previous owner was producing. The economist finds that you are facing an inelastic demand, and tells you that the previous owner shouldn’t have chosen that level of production and prices. What should you do?
2. Reduce price and produce more to increase your revenue
3. Increase price and produce less to increase your revenue
4. Produce the same, but raise your prices.
5. Produce the same, but lower your prices.

1. In Sweden, the state has a monopoly on alcohol retail sales, in order to control alcohol consumption. This is an example of which of the following common barriers of entry?
2. Natural monopoly (large fixed costs)
3. Government regulation
4. Predatory pricing
5. Other aggressive tactics

1. What is the main reason behind the monopoly power of De Beers?
2. Economies of scale
3. Government regulation
4. Sole ownership of resources
5. Inelastic demand

1. Which of the following aggressive tactics describes the term “predatory pricing”?
2. A large company slashes its prices, often below cost, to force smaller businesses (that cannot afford to run losses) to get out of the market
3. A monopolist lobbies for more stringent regulation that will increase the cost of entry for potential competitors
4. A single coal company buys out all coal mines in the country
5. Don Corleone makes you a deal you cannot refuse

1. Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot the demand, total-revenue, and marginal-revenue curves and explain therelationships between them. Explain why the marginal revenue of the fourth unit of output is \$3.50, even though its price is \$5.00. Use the total-revenue test for price elasticity to designate the elastic and inelastic segments of your graphed demand curve.  What generalization can you make regarding the relationship between marginal revenue and elasticity of demand? Suppose the marginal cost of successive units of output were zero.  What output would the profit-seeking firm produce?  Finally, use your analysis to explain why a monopolist would never produce in the inelastic region of demand.

 Price in \$ Quantity Demanded 7 0 6.5 1 6 2 5.5 3 5 4 4.5 5 4 6 3.5 7 3 8 2.5 9

1. The graph below shows the demand, marginal revenue, and marginal cost of a monopolist. Note that the marginal cost here is constant and equal to 3\$. Assume the fixed cost is 5\$. What is the monopolist’s total cost and profit when he produces at the optimal point.

1. The graph below shows the demand, marginal revenue, marginal cost, and average total cost of a monopolist. What is the quantity produced, and what is the price charged? Assume that the ATC at the quantity that maximizes profit is equal to 4. Calculate the economic profit.

1. In the table below, complete the MC, TC, AFC, AVC, ATC columns. Then calculate TR, MR and profit. Which quantity maximizes the profit of the firm in the short run? What is the maximum possible profit? Will the firm stay in the market in the short run? How about the long run?

 COSTS REVENUE & PROFIT Q TFC MC TVC TC AFC AVC ATC P MR TR Profit 0 0 10 1 4 2 8 2 5 7 3 10 6 4 17 5 5 25 3 6 35 1

1. Why do governments usually regulate monopolies? Explain how price regulation may improve the performance of monopolies. Distinguish between (a) marginal cost pricing (socially optimal pricing) and (b) fair-return pricing (average total cost pricing). (c) What is the “dilemma of regulation”?

# Monopolistic Competition

1. Which set best describes the basic features of monopolistic competition?
2. easy entry, few firms, and standardized products
3. barriers to entry, few firms, and differentiated products
4. easy entry, many firms, and differentiated products
5. barriers to entry, many firms, and standardized products

1. A monopolistically competitive industry is like a purely competitive industry in that:
2. each industry produces a standardized product.
3. nonprice competition is a feature in both industries.
4. neither industry has significant barriers to entry.
5. firms in both industries face a horizontal demand curve.

1. The monopolistically competitive seller’s demand curve will become more elastic the:
2. larger the number of competitors.
3. more significant the barriers to entry.
4. greater the degree of product differentiation.
5. smaller the number of competitors.

1. Refer to the graph below. This monopolistically competitive firm is:
2. making economic profit in the long run.
3. earning only normal profit in the long run.
4. making economic profit in the short run.
5. earning only normal profit in the short run.

1. If monopolistically competitive firms in an industry are making an economic profit, then:
2. new firms will enter the industry and product demand will increase for the existing firms.
3. firms will exit the industry and product demand will decrease for the firms that remain.
4. firms will exit the industry and product demand will increase for the firms that remain.
5. new firms will enter the industry and product demand will decrease for the existing firms.

1. In the long run, a representative firm in a monopolistically competitive industry will typically:
2. have an elasticity of demand that will be less than it was in the short run.
3. have a larger number of competitors than it will in the short run.
4. produce a level of output at which marginal cost and price are equal.
5. earn a normal profit, but not an economic profit.

1. In long-run equilibrium, a profit-maximizing firm in a monopolistically competitive industry will produce the quantity of output where:
2. AC = P, MR = MC = P
3. AC < P, MR + MC < P
4. AC < P, MR = MC = P
5. AC = P, MR = MC < P

1. In long-run equilibrium, a monopolistically competitive firm achieves:
2. productive and allocative efficiency.
3. productive efficiency but not allocative efficiency.
4. allocative efficiency but not productive efficiency.
5. neither allocative efficiency nor productive efficiency.

1. Economist A argues that grocery stores are a perfectly competitive market, since there are so many of them, and they are competing against each other. According to economist A, the free entry and exit in the market implies that P=MC. Economist B argues that they are a classic case of monopolistic competition, as no grocery store can sell as much as it wants at the market price. According to economist B, the product is differentiated by location and quality of service. Who is right?

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