EC1000 Study Questions

Fall 2012

Introduction to mathematics
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 Mountainlands 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

2. You are interested in buying a book that cost 30 but discover that its
price has increased by 20%. What is the books new price?
3. 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
4. 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

5. 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.

6. Suppose that C = a + bY, where C = consumption, a = consumption at zero income, b=

slope, and Y = income.
a. Are C and Y positively related or are they negatively related?
b. If graphed, would the curve for this equation slope upward or downward?
c. Are the variables C and Y inversely related or directly related?
d. What is the value of C if a =10, b =.50, and Y = 200?
e. What is the value of Y if C = 100, a = 10, and b = .25?
7. 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.

Chapter1Limits,alternativesandchoices
1. Indicate whether each of the following statements applies to microeconomics or
macroeconomics:
a. The unemployment rate in the United States was 5.2 percent in January 2005.
b. A U.S. software firm discharged 15 workers last month and transferred the
work to India.
c. An unexpected freeze in central Florida reduced the citrus crop and caused the
price of oranges to rise.
d. U.S. output, adjusted for inflation, grew by 4.4 percent in 2004.
e. Last week Wells Fargo Bank lowered its interest rate on business loans by onehalf of 1 percentage point.
f. The consumer price index rose by 2.7 percent in 2004.
3

2. (a) What is societys economizing problem? (b) What is the meaning of opportunity cost? (c)
How does the concept of opportunity cost relate to the definition of economics? (d) Which of
the following decisions would entail the greatest opportunity cost: Allocating a square block in
the heart of New York City for a surface parking lot or allocating a square block at the edge of a
typical suburb for such a lot? Explain.
3. Below is a production possibilities table for consumer goods (automobiles) and capital goods
(forklifts):
TypeofProduction

Automobiles
Forklifts

ProductionAlternatives
A

0
30

2
27

4
21

6
12

8
0

a. Show
these
data

graphically. Upon what specific assumptions is this production possibilities curve

based?
b. 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.
c. 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?
d. 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?
4. Explain how (if at all) each of the following affects the location of a countrys production
possibilities curve:
a. The quality of education increases.
b. The number of unemployed workers increases.
c. A new technique improves the efficiency of extracting copper from ore.
d. A devastating earthquake destroys numerous production facilities.
e. Society prefers to produce more of one of the two goods and less of the other.
5. (a) What are economic resources? (b) What categories do economists use to classify them?
(c) Why resources are also called factors of production? (d) Why are they called inputs? (e)
Provide examples in your answers.
6. (a) Why isnt money considered a capital resource in economics? (b) Why is entrepreneurial
ability considered a category of economic resources, distinct from labor? (c) What are the
major functions of the entrepreneur?
7. Referring to the table in Question 3, suppose improvement occurs in the technology of
producing forklifts but not in the technology of producing automobiles. Draw the new
production possibilities curve. Now assume that a technological advance occurs in producing
automobiles but not in producing forklifts. Draw the new production possibilities curve. Now
draw a production possibilities curve that reflects technological improvement in the production
of both goods.
8. (a) In what way does capital differ from the other factors of production? (b) Using diagrams
and the production possibilities model, explain why a decision to produce more capital goods
today can result in greater economic growth in the future.
4

9. (a) Using a diagram, explain the law of increasing opportunity costs. (b)
Draw diagrams and use examples to illustrate the difference between
constant and increasing opportunity costs. (c) Explain the reasoning behind
the law of increasing opportunity costs.
10. Referring to the production possibilities model, explain how the slope of the PPC is related
to the concept of opportunity cost.
Chapter 2 The market system and the circular flow
1. What are the main characteristics of a market economy?
2. Explain the five fundamental questions that must be answered by any economy.
3. (a) What are the two kinds of markets and the two groups of decision-makers in the circular
Flow model? (b) Explain the two flows in the circular flow model. (c) Explain how
both groups of decision-makers are both buyers and sellers. (d) Why is this model
appropriate for illustrating a market economy?

Chapter 3 Demand, supply, market equilibrium, consumer and producer surplus

1. (a) Explain the law of demand. (b) Why does a demand curve slope downward? (Use the
concepts of income and substitution effects in your answer.) (c) How is a market
demand curve derived from individual demand curves?
2. (a) What are the determinants of demand? (b) What happens to the demand curve when any
of these determinants change? (c) Distinguish between a change in demand and a change in
quantity demanded, noting the cause(s) of each.
3. What effect will each of the following have on the demand for small automobiles such as the
Mini Cooper and Smart car?
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of small autos remaining the
same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate the price of small autos will greatly come down in the near
future.
e. The price of gasoline substantially drops.
4. (a) Explain the law of supply. (b) Why does the supply curve slope upward? (c) How is the
market supply curve derived from the supply curves of individual producers?
5. (a) What are the determinants of supply? (b) What happens to the supply curve when any of
these determinants change? (c) Distinguish between a change in supply and a change in
quantity supplied, noting the causes(s) of each.
6. What effect will each of the following have on the supply of automobile tires?
a. A technological advance in the methods of producing tires.
5

b. A decline in the number of firms in the tire industry.

c. An increase in the price of rubber used in the production of tires.
d. The expectation that the equilibrium price of auto tires will be lower in the future
than it is currently.
e. A decline in the price of large tires used for semi-trucks and earth hauling rigs (with
no change in the price of auto tires).
f. The levying of a per-unit tax in each auto tire sold.
g. The granting of a 50-cent-per-unit subsidy for each auto tire produced.
7. Consider the following two statements. (a) In the corn market, demand often exceeds supply
and supply sometimes exceeds demand. (b) The price of corn rises and falls in response to
changes in supply and demand. In which of these two statements, (a) or (b), are the terms
supply and demand used correctly? Explain.
8. Suppose the total demand for wheat and the total supply of wheat per month in the Kansas
City grain market are as follows:
Thousands
of bushels
demanded

Price
per
bushel

Thousand
of bushels
supplied

Surplus (+)
or
shortage (-)

85
80
75
70
65
60

$3.40
3.70
4.00
4.30
4.60
4.90

72
73
75
77
79
81

_____
_____
_____
_____
_____
_____

a. What is the equilibrium price? What is the equilibrium quantity? Fill in the
surplus-shortage column and use it to explain why your answers are correct.
b. 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.
c. Why will $3.40 not be the equilibrium price in this market? Why not $4.90?
Surpluses drive prices up; shortages drive them down. Do you agree?
9. 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.
a. Supply decreases and demand is constant.
b. Demand decreases and supply is constant.
c. Supply increases and demand is constant.
d. Demand increases and supply increases.
e. Demand increases and supply is constant.
f. Supply increases and demand decreases.
g. Demand increases and supply decreases.
h. Demand decreases and supply decreases.
10. For each stock in the stock market, the number of shares sold daily
equals the number of shares purchased. That is, the quantity of each firms
shares demanded equals the quantity supplied. So, if this equality always
occurs, why do the prices of stock shares ever change?
6

11. The ceiling of a room is its upper surface and the floor is its lower
surface. Yet in demand and supply analysis we have the reverse: a ceiling
lies below the equilibrium price and a floors lies above it (if they are to be
effective). Using diagrams, explain why this is so.
12. Refer to the table in Question 8. Suppose that the government
establishes a price ceiling of $3.70 for wheat. What might prompt the
government to establish this price ceiling? Explain carefully the main
effects. Demonstrate your answer graphically. Next, suppose that the
government establishes a price floor of $4.60 for wheat. Why might the
government do this? What will be the main effects of the price floor?
Demonstrate your answer graphically.
13. 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. Now determine equilibrium quantity. Graph
the two equations to substantiate your answers.
14. 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 tonnes per day. (a)
Calculate the equilibrium price and quantity. (b) Graph the demand and supply curves and
identify equilibrium P and Q. (c) The government imposes a price ceiling at P = $2. Draw the
price ceiling in your diagram. (d) Using the demand and supply equations, calculate the
shortage/surplus arising from the price ceiling.
15. Suppose the market defined in question 14 is an agricultural product market in which the
government imposes a price floor at P = $5. (a) Using a diagram draw the price floor. (b)
Using the demand and supply equations, calculate the shortage/surplus arising from the price
floor.
16. (a) Explain the meaning of consumer surplus and producer surplus. (b)
Draw a demand and supply graph and identify the areas of consumer
surplus and producer surplus. (c) Given the demand curve, what impact will
an increase in supply have on the amount of consumer surplus shown in
your diagram? Explain why. (d) Given the supply curve, what will be the
impact on producer surplus of an increase in demand?
17. Use the ideas of consumer surplus and producer surplus to explain why
economists say competitive markets are efficient. Why are belowequilibrium levels of output, or above-equilibrium levels of output
inefficient?
18. What do economists mean when they say that price floors and ceilings stifle the rationing
function of prices and distort resource allocation?
19. Using the demand and supply equations in Question 13 and your results for equilibrium
price and quantity, calculate (a) consumer surplus and (b) producer surplus arising a market
equilibrium.
7

20.
Person

Maximum
price willing
to pay

John

15

George

14

Mary

13

Ann

12

Dimitris

11

Kostas

10

If the six people listed in the table are the only consumers in the market and the equilibrium
price is $11, how much consumer surplus will the market generate?
21.
Person

Minimum
acceptable
price

10

11

12

13

14

15

If the six people listed in the table are the only producers in the market and the equilibrium
price is $12 (not the $8 shown), how much producer surplus will the market generate?

Chapter 4 Elasticity
1. (a) Define each of the four elasticity concepts you have studied in this
chapter and provide their formulas. (b) Which elasticity concepts involve
movements along the demand or supply curves, and which involve shifts of
the curve(s)? Use diagrams to illustrate your answers.
2. Graph the accompanying demand data, and then use the midpoint formula for E d 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? Explain in a
non-technical way why demand is elastic in the northwest segment of the demand curve and
inelastic in the southeast segment.
8

Product
price

Quantity
demanded

$5
4
3
2
1

1
2
3
4
5

3. 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.
4. How would the following changes in price affect total revenue? That is, would total
revenue increase, decline, or remain unchanged?
a. Price falls and demand is inelastic.
b. Price rises and demand is elastic.
c. Price rises and supply is elastic.
d. Price rises and supply is inelastic.
e. Price rises and demand is inelastic.
f. Price falls and demand is elastic.
g. Price falls and demand is of unit elasticity
5. What are the four major determinants of price elasticity of demand? Use those
determinants and your own reasoning in judging whether demand for each of the following
products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest toothpaste;
(d) ketchup; (e) diamond bracelets; (f) Microsoft Windows operating system.
6. (a) What is the most important determinant of the price elasticity of
supply? (b) What is the formula for measuring the price elasticity of supply?
(c) 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
Goldsboros supply. Is its supply elastic, or is it inelastic?
7. 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?
8. The income elasticities of demand for movies, dental services and
clothing have
been estimated to be +3.4, +1, and +0.5, respectively. Interpret these
coefficients. What
does it mean if an income elasticity coefficient is negative?
9. 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?
10. What can you conclude about the relationship of goods A and B in the
following
9

situations?
(a) sales of A increase by 10% in response to a price decrease in B of 15%
(b) sales of B decrease by 10% in response to a price decrease in A of 15%
(c) sales of B remain unchanged in response to a price decrease in A of
15%.
11. Calculate the cross elasticity of demand for each of the cases in
question 10.
12. If the cross elasticity of demand between Coca Cola and Pepsi is 0.7,
how will the demand for Coca Cola change if the price of Pepsi increases by
5%? (Your answer should be in percentage terms and should indicate
whether demand for Coca Cola will increase or decrease.)
13. What is the difference between the slope and the price elasticity of
demand along a straight line demand curve? Use formulas in your answer.
14. A 15% increase in income leads to a 10% increase in demand for good A
and 20% increase in demand for good B. (a) Explain which of the two goods
is income elastic and which is income inelastic. (b) Which of the two goods
is a necessity and which a luxury good?
15. Suppose flooding destroys a substantial portion of this seasons crop.
Explain what is likely to happen to farmers revenues, assuming the demand
for the product they produce is inelastic.
16. The government would like to impose excise taxes on certain goods to
raise tax revenue. Explain how knowledge of price elasticity of demand for
the goods can help it decide which ones it should tax.
Chapter 9 Consumer behavior
1. Explain the concepts of (a) utility, (b) total utility (c) marginal utility. (d) Explain the law of
diminishing marginal utility.
2. (a) Explain the income and substitution effects of an increase in the price
of product B, with no change in the price of product A. (b) How do these two
effects explain the downward sloping demand curve and the law of
demand? (c) Why is the law of diminishing marginal utility an alternative
explanation of the downward sloping demand curve amd the law of
demand?
Chapter 10 The costs of production
1. Explain the difference between the short run and the long run.
2. Explain the law of diminishing marginal returns. Use a diagram showing
the AP and MP curve to illustrate your answer. What is the relationship
between these two curves?

10

3. Distinguish between implicit costs and explicit costs, giving examples of

each. What are some explicit and implicit costs of attending college?
4. Distinguish between accounting profit, economic profit and normal profit.
Why do economists classify normal profit as a cost? Is economic profit a
cost of production?
5. Which of the following are short-run and which are long-run adjustments? (a) Goodys
builds a new restaurant; (b) Acme Steel Corporation hires 200 more production workers; (c) A
farmer increases the amount of fertilizer used on his corn crop; and (d) An Alcoa plant adds a
third shift of workers.
6. 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. What bearing does the law of diminishing returns have on
short-run costs? Be specific. When marginal product is rising, marginal cost is falling. And
when marginal product is diminishing, marginal cost is rising. Illustrate and explain
graphically.
Inputs
labor

of Total
product

0
1
2
3
4
5
6
7
8

0
15
34
51
65
74
80
83
82

Marginal
product

Average
product

____
____
____
____
____
____
____
____
____

____
____
____
____
____
____
____
____
____

7. Why can the distinction between fixed costs and variable costs be made in the short run?
There are no fixed costs in the long run; all costs are variable. Explain.
8. A firm has fixed costs of $60 and variable costs as indicated in the table below. Complete the
table.

Total
product

Total
fixed
cost

0
1
2
3
4
5
6
7
8
9
10

$____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____

Total
variable
cost
$ 0
45
85
120
150
185
225
270
325
390
465

Total
cost
$____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____

Average
fixed
cost
$____
_____
_____
_____
_____
_____
_____
_____
_____
_____
11

Average
variable
cost
$____
_____
_____
_____
_____
_____
_____
_____
_____
_____

Average
total
cost
$____
_____
_____
_____
_____
_____
_____
_____
_____
_____

Marginal
cost
$____
_____
_____
_____
_____
_____
_____
_____
_____
_____

a. 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.
b. 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.
c. Explain how the locations of each of the four curves graphed in question 7b would
be altered if (1) total fixed cost had been $100 rather than $60, and (2) total
variable cost had been $10 less at each level of output.
9. Indicate how each of the following would shift the (a) marginal-cost curve, (b) averagevariable 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.
a. A reduction in business property taxes
b. An increase in the nominal wages of production workers
c. A decrease in the price of electricity
d. An increase in insurance rates on plant and equipment
e. An increase in transportation costs
10. Compare and contrast the causes of the U-shape of the short run and
long run ATC curves.
11. (a) Use the concepts of economies and diseconomies of scale to explain
the shape of a firms long run ATC curve. What is the meaning of minimum
efficient scale? (b) What factors lead to economics of scale and
diseconomies of scale?
12. Suppose a firm has only three possible plant-size options represented by the ATC curves
shown in the accompanying figure. What plant size will the firm choose in producing (a) 50,
(b) 130, (c) 160, and (d) 250 units of output? Draw the firms long-run average-cost curve on
the diagram and describe this curve.

Chapters 11 and 12 Pure competition

1.

What are the four main characteristics of pure competition?

2.

Use the following demand schedule to determine total and marginal revenues for each
possible level of sales:
Product Price ($)

Quantity

Total Revenue ($)

12

Marginal Revenue

($)

Demanded
2

a. What can you conclude about the structure of the industry in which this firm is
operating? Explain.
b. Graph the demand, total-revenue, and marginal-revenue curves for this firm.
c. Why do the demand and marginal-revenue curves coincide?
d. Marginal revenue is the change in total revenue associated with additional units of
output. Explain verbally and graphically, using the data in the table.
3. Assume the following cost data are for a purely competitive producer:

Total
Product

Average
fixed
cost

Average
variable
cost

Average
total
cost

0
1
2
3
4
5
6
7
8
9
10

$60.00
30.00
20.00
15.00
12.00
10.00
8.57
7.50
6.67
6.00

$45.00
42.50
40.00
37.50
37.00
37.50
38.57
40.63
43.33
46.50

$105.00
72.50
60.00
52.50
49.00
47.50
47.14
48.13
50.00
52.50

Marginal
cost
$45
40
35
30
35
40
45
55
65
75

a. 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? Explain. What economic profit or loss will the firm realize per unit of
output?
b. Answer the relevant questions assuming product price is $41.
c. Answer the relevant questions assuming product price is $32.
d. In the table below, complete the short-run supply schedule for the firm (columns 1
and 2) and indicate the profit or loss incurred at each output (column 3).

13

(1)
Price
$26
32
38
41
46
56
66

(2)
Quantity
supplied,
single firm

(3)
Profit (+)
or loss (l)

(4)
Quantity
supplied,
1500 firms

____
____
____
____
____
____
____

$____
____
____
____
____
____
____

____
____
____
____
____
____
____

e. Explain: That segment of a competitive firms marginal-cost curve which lies

above its average-variable-cost curve constitutes the short-run supply curve for the
firm. Illustrate graphically.
f. 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 (column 4).
g. Suppose the market demand data for the product are as follows:

Price
$26
32
38
41
46
56
66

Total
quantity
demanded
17,000
15,000
13,500
12,000
10,500
9,500
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?
4. (a) Use diagrams to explain why in long run equilibrium a purely
competitive firm makes normal profit (zero economic profit), whereas in the
short run it can make an economic profit or loss. (b) Explain verbally (in
words) the role of economic profits or losses in moving from short run to
long run equilibrium. (c) Why does a firm that earns normal profit continue
to remain in business? (Use the concept of normal profit in your answer.)
5. Explain under what conditions a firm that makes losses in the short run
will (i) continue to produce, (ii) shut down.
6. Why is the equality of marginal revenue and marginal cost essential for profit maximization
in all market structures? Explain why price can be substituted for marginal revenue in the MR
= MC rule when an industry is purely competitive.

14

7. 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.
8. (a) Using a diagram, show that the purely competitive firm achieves
productive and allocative efficiency in long run equilibrium. (b) Explain the
meaning of productive and allocative efficiency. (c) Using a diagram show
that the sum of consumer and producer surplus is maximum at competitive
market equilibrium. (d) What do these efficiency conditions tell us about the
use of resources in pure competition in the long run? (e) How do they relate
to societys economizing problem?
9.

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.

Chapter 13 Pure monopoly

1. What are the main characteristics of pure monopoly?
2. Discuss the major barriers to entry into an industry. Explain how each barrier can
foster monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is
socially justifiable?
3. How does the demand curve faced by a purely monopolistic seller differ from that
confronting a purely competitive firm? Why does it differ? Of what significance is the
difference? Why is the pure monopolists demand curve not perfectly inelastic?
4.

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 the relationships 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

Quantity
Demanded

Price

Quantity
Demanded

$7.00
6.50
6.00
5.50
5.00

0
1
2
3
4

$4.50
4.00
3.50
3.00
2.50

5
6
7
8
9

15

5. (a) Draw a diagram to show the (a) profit maximizing position and (b) loss minimizing
position of a pure monopolist. (c) Why can a pure monopolist continue to earn economic profit
in the long run?
6. Using a diagram, show how the how the quantity sold and the price charged by a profitmaximizing monopolist differs from those of a revenue-maximizing monopolist.
7. (a) Assume a monopolistic publisher agrees to pay an author 15 percent of the total revenue
from text sales. Will the author and the publisher want to charge the same price for the text?
(b) Draw a diagram to explain your answer.
8. Using diagrams, compare and contrast perfect competition and monopoly with respect to (a)
price, (b) output, (c) economic profits in the long run, and (d) efficiency (productive and
allocative), using (i) the conditions P=minimum ATC = MC and (ii) the concepts of consumer
and producer surplus.
9.

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?

Chapter 14 Monopolistic competition

1. (a) What are the main characteristics of monopolistic competition? (b)
How do these differ
from pure competition? (b) How do they differ from pure monopoly?
2. (a) Compare and contrast the demand curves and marginal revenue curves facing the firm in
pure competition, monopoly and monopolistic competition. (b) How do the demand curves
differ with respect to price elasticity of demand?
3. (a) Explain fully what product differentiation may involve. (b) Explain the importance of
product differentiation to the monopolistically competitive firm.
4. (a) Using diagrams, compare and contrast the monopolistically
competitive firms equilibrium position in (a) the short run and (b) in the
long run. Can this firm earn economic profit in the long run? Why or why
not?
5 Using a diagram, explain whether the monopolistically competitive firm
achieves productive and/or allocative efficiency in long run equilibrium.
6. Define excess capacity. Why does it arise in monopolistic competition?
Could excess capacity arise in perfect competition? Why or why not?
7. Explain why there is a trade-off between product variety (product
differentiation) and productive efficiency/absence of excess capacity.

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