ECO/365

PRINCIPLES OF MICROECONOMICS

The Latest Version A+ Study Guide

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ECO 365 Week 4 Apply: The Microeconomics of

Product Markets Homework
Review the Week 4 The Microeconomics of
Product Markets Quiz in preparation for this
assignment.

Complete the Week 4 The Microeconomics of

Product Markets Homework in McGraw-Hill
Connect®. These are randomized questions.

Note: You have only one attempt available to

complete assignments. Grades must be transferred
manually to eCampus by your instructor. Don't
worry, this might happen after the due date.
Materials

The table below presents the average and marginal cost

of producing cheeseburgers per hour at a roadside diner.

Cheeseburger Production Costs

Quantity(burgers per hour) Average Variable Cost
(dollars) Average Total Cost (dollars) Marginal Cost
(dollars)
0 ———
10 $1.00$6.60$1.00
20 0.70 3.50 0.40
30 0.70 2.57 0.70
40 0.78 2.18 1.00
50 0.88 2.00 1.30
60 1.07 2.00 2.00
70 1.34 2.14 3.00
80 1.74 2.44 4.50
90 2.23 2.86 6.20
100 2.81 3.37 8.00

a. At a quantity of 40 cheeseburgers per hour, the average

total cost of production is falling and the marginal cost
of cheeseburger production is rising .

b. At a quantity of 60 cheeseburgers per hour, the average

variable cost of production is rising and the average total
cost of cheeseburger production is at a minimum .

A business owner makes 50 items by hand in 40 hours.

She could have earned $20 an hour working for someone
else. Her total explicit costs are $200. If each item she
makes sells for $15, her economic profit equals:

Instructions: Enter your answer as a whole number. If

you are entering a negative number be sure to include a
negative sign (-) in front of that number.
A young Thomas Edison produces and sells 20 light
bulbs a week in his dorm room. The parts for each light
bulb cost $2.00. He sells each light bulb for $5.00.
General Electric offers Thomas an executive job that
pays $50.00 a week. Thomas’s weekly economic profit
from making light bulbs is equal to:

Instructions: Enter your answer as a whole number.

Which of the following costs is an explicit cost for you?

•
You spend your time running your own business even
though a large corporation offered you a generous
contract.
•
You raise cattle on your family-owned farm even though
you could sell your land to a developer.
•
You hire a worker who could have received the same
wage working for your competitor.
•
You decide to use an extra room for your business that
you could have rented out to your neighbor.

Barney decides to quit his job as a corporate accountant,

which pays $10,000 a month, and goes into business for
himself as a certified public accountant.
He runs his business from his converted garage
apartment, which he could rent out for $300 a month if
he wasn’t using it as a home office. He must purchase
office supplies worth $75 a month, and his monthly
electricity bill has increased by $50 now that he is
working out of his home office.
After six months of working from home, Barney has
earned an average of $12,000 per month.
Instructions: Enter your answers as a whole number.

a. What are Barney’s average monthly accounting

profits?

b. What are Barney’s average monthly economic profits?

Barney decides to quit his job as a corporate accountant,

which pays $10,000 a month, and goes into business for
himself as a certified public accountant.
He runs his business from his converted garage
apartment, which he could rent out for $300 a month if
he wasn’t using it as a home office. He must purchase
office supplies worth $75 a month, and his monthly
electricity bill has increased by $50 now that he is
working out of his home office.
After six months of working from home, Barney has
earned an average of $12,000 per month.
Instructions: Enter your answers as a whole number.

a. What are Barney’s monthly explicit costs?

b. What are Barney’s monthly implicit costs?

c. What are Barney’s monthly economic costs?

Which of the following is an implicit cost of owning and

operating a farm?
•
The money paid for repairing a tractor
•
The money received for crops grown during the growing
season
•
The money a farmer could earn by working for someone
else
•
The money paid for fertilizer each growing season

Variable costs are

rev: 06_26_2018
Multiple Choice
•
costs that change with the amount of output a firm
produces.
•
sunk costs.
•
the change in total cost associated with the production of
an additional unit of output.
•
costs that change every day.
If all resources used in the production of a product are
increased by 20% and total output increases by 20%,
then the firm must be experiencing
rev: 06_26_2018
Multiple Choice
•
economies of scale.
•
diseconomies of scale.
•
increasing average total costs.
•
constant returns to scale.

The ability of Intel to spread product development cost

over a larger number of units of output arises from
rev: 06_26_2018
Multiple Choice
•
constant returns to scale.
•
diseconomies of scale.
•
minimum efficient scale.
•
economies of scale.

Marginal cost can be defined as the change in

rev: 06_26_2018
Multiple Choice
•
average variable cost resulting from the production of an
additional unit of output.
•
total fixed cost resulting from the production of an
additional unit of output.
•
average total cost resulting from the production of an
additional unit of output.
•
total cost resulting from the production of an additional
unit of output.

Suppose that you could either prepare your own tax

return in 15 hours or hire a tax specialist to prepare it for
you in 2 hours. You value your time at $11 an hour; the
tax specialist will charge you $55 an hour. The
opportunity cost of preparing your own tax return is
rev: 06_26_2018
Multiple Choice
•
$40.
•
$55.
•
$110.
•
$165.
A firm encountering economies of scale over some range
of output will have a
rev: 06_26_2018
Multiple Choice
•
rising long-run average total cost curve.
•
constant long-run average cost curve.
•
falling long-run average total cost curve.
•
rising, then falling, then rising long-run average total cost
curve.
If marginal cost exceeds average total cost in the short
run, then which is likely to be true?
rev: 06_26_2018
Multiple Choice
•
Marginal cost is less than average variable cost.
•
Average variable cost is decreasing.
•
Average total cost is less than average variable cost.
•
Average total cost is increasing.

Imagine that a firm expands the size of its plant,

doubling its total cost of production but more than
doubling its output. This situation is known as
rev: 06_26_2018
Multiple Choice
•
a violation of the law of diminishing returns.
•
constant returns to scale.
•
diseconomies of scale.
•
economies of scale.

If you know that when a firm produces 8 units of output,

average fixed cost is $12.50 and average variable cost is
$81.25, then the average total cost associated with this
output level is
rev: 06_26_2018
Multiple Choice
•
$93.75.
•
$880.00.
•
$97.78.
•
$750.00.

Implicit costs are

rev: 06_26_2018
Multiple Choice
•
opportunity costs of using owned resources.
•
composed entirely of variable costs.
•
always greater in the short run than in the long run.
•
equal to total fixed costs.
If the long-run average total cost curve for a firm is
horizontal in a relevant range of production, then it
indicates that there
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Multiple Choice
•
isn’t a minimum efficiency scale.
•
are constant returns to scale.
•
are economies of scale.
•
are diseconomies of scale.

To an economist, the economic costs associated with the

use of resources include
rev: 06_26_2018
Multiple Choice
•
explicit, but not implicit, costs.
•
implicit, but not explicit, costs.
•
neither implicit nor explicit costs.
•
explicit and implicit costs.

Use the following information to answer the next

question.
Harvey quit his job at State University where he earned
$45,000 a year. He figures his entrepreneurial talent or
forgone entrepreneurial income to be $5,000 a year. To
start the business, he cashed in $100,000 in bonds that
earned 10% interest annually to buy a software company,
Extreme Gaming. In the first year, the firm sold 11,000
units of software at $75 each. Of the $75, $55 goes for
the costs of production, packaging, marketing, employee
wages and benefits, and rent on a building.
The explicit costs of Harvey’s firm in the first year were
rev: 06_26_2018
Multiple Choice
•
$655,000.
•
$150,000.
•
$605,000.
•
$825,000.

If you know that total fixed cost is $200, total variable

cost is $600, and total product is 4 units, then average
total cost must be
rev: 06_26_2018
Multiple Choice
•
$200.
•
$800.
•
$3,200.
•
$250.

Answer the next question on the basis of the following

information.

TFC = Total Fixed Cost

MC = Marginal Cost
TVC = Total Variable Cost
Q = Quantity of Output
P = Product Price
Select the marginal cost.
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Multiple Choice
•
P−QChange  in QP−QChange  in Q
•
Change   in TFcChange   in QChange   in TFcChange   in 
Q
•
Change   in TVCQChange   in TVCQ
•
Change  in TVCChange  in Q

Monetary payments a firm makes to pay for resources

are called
rev: 06_26_2018
Multiple Choice
•
normal profit.
•
explicit costs.
•
opportunity costs.
•
implicit costs.

Answer the next question on the basis of the following

data.

Output Total Cost

0 $10
1 20
2 28
3 38
4 53
5 73
6 98
The average variable cost of producing 3 units of output
is
rev: 06_26_2018
Multiple Choice
•
$12.67.
•
$9.33.
•
$10.00.
•
$38.00.

The table below shows Ali’s monthly costs of producing

wheat. Suppose the current market price of wheat is
$56.00 per bushel.

Ali's Wheat Production Costs

Quantity (bushels) AVC (dollars) ATC (dollars) MC
(dollars)
0 ———
500 $40.00 $240.00 $40.00
1,00035.0085.0030.00
1,50030.0063.3320.00
2,00030.0055.0030.00
2,50031.0051.0035.00
3,00032.6749.3341.00
3,50034.8649.1548.00
4,00037.5050.0056.00
4,50040.5751.6765.00
5,00044.0054.0075.00

Instructions: Enter your answers as a whole number. If

you are entering any negative numbers be sure to include
a negative sign (-) in front of those numbers.

a. If the market price is $56.00 per bushel of wheat, and

Ali chooses to produce wheat, how much will he produce
per month to maximize his profits in the short run?
b. Calculate Ali’s monthly profits (express a loss as a
negative number) if he chooses to produce the profit-
maximizing quantity of wheat at a price of $56.00.

c. Assume that the market price of wheat falls to $35.00

per bushel. How much wheat will Ali choose to produce
per month in order to maximize his profits in the short
run?

d. Calculate Ali’s monthly profits (express a loss as a

negative number) if he chooses to produce the profit-
maximizing quantity of wheat at a price of $35.00.

e. If the market price of wheat instead falls to $20.00 per

bushel, how much wheat will Ali choose to produce per
month in order to maximize his profits in the short run?
What are the likely reason(s) that the market for
electricity is not perfectly competitive? Select all that
apply.

Instructions: You must make a selection for each option.

Click once to place a check mark for correct answers and
click twice to empty the box for wrong answers.
• There are few sellers in the market
• Electricity is not a standardized (homogeneous)
product
• It is difficult to enter or exit the industry as a supplier
• There are few buyers in the market.

Which of the following markets is most likely to be

perfectly competitive?
•
The market for Saturday matinees at the movie theater
•
The market for Three Musketeers candy bars
•
The market for touring motorcycles
•
The market for mushrooms

Which of the following is not a necessary characteristic

of a perfectly competitive industry?
rev: 06_26_2018
Multiple Choice
•
The industry or market demand is highly elastic.
•
There are so many firms that none can influence market
price.
•
Consumers see no difference between the product of one
firm and that of another.
•
Firms can easily enter or exit the industry.
Bobby decides to sell lemonade on a hot summer day. If
Bobby sells 20 glasses of lemonade for $0.20 per cup,
and his average total cost is $0.17, what are Bobby's
economic profits for the day?
•
$0.60
•
$0.20
•
$0.80
•
$0.00

Use the following graph to answer the next question.

At the profit-maximizing level of output, the profit

earned by the perfectly competitive firm is given by the
area
rev: 06_26_2018
Multiple Choice
•
0AHE.
•
ACFH.
•
BCFG.
•
ABGH

Assume a perfectly competitive constant-cost industry is

initially at long-run equilibrium. Now suppose that a
decrease in market demand occurs. After all the long-run
adjustments have been completed, the new equilibrium
price
rev: 06_26_2018
Multiple Choice
•
will be less than the initial price, but the new output will
be greater.
•
will be the same as the initial price, and the output will
be less.
•
will be greater than the initial price, but the new output
will be less.
•
and industry output will be less than the initial price and
output.

A constant-cost industry is one in which

rev: 06_26_2018
Multiple Choice
•
the long-run supply curve is perfectly inelastic.
•
the long-run supply curve is upward sloping.
•
the long-run supply curve is perfectly elastic.
•
the long-run supply curve is downward sloping.

The marginal revenue curve faced by a perfectly

competitive firm
rev: 06_26_2018
Multiple Choice
•
is horizontal at the market price.
•
is downward sloping, because price must be reduced to
sell more output.
•
lies below the firm's demand curve.
•
has all of these characteristics.
The representative firm in a perfectly competitive
industry
rev: 06_26_2018
Multiple Choice
•
will always earn an economic profit in the short run.
•
will always earn an economic profit in the long run.
•
may earn either an economic profit or a loss in the long
run.
•
will earn a normal profit in the long run

In perfect competition, each additional unit of output that

a firm sells will yield a marginal revenue that is
rev: 06_26_2018
Multiple Choice
•
equal to price.
•
less than price.
•
greater than price.
•
equal to average total cost.

A perfectly competitive firm's output is currently such

that its marginal revenue is $5 and marginal cost is $4.
Assuming profit maximization, the firm should
rev: 06_26_2018
Multiple Choice
•
cut price and increase output.
•
leave price unchanged and increase output.
•
raise price and decrease output.
•
leave price unchanged and decrease output.

Productive efficiency refers to

rev: 06_26_2018
Multiple Choice
•
production at a level where P = MC.
•
maximizing profits by producing where MR = MC.
•
setting TR = TC.
•
cost minimization, where P = minimum ATC.
An industry in which the firm’s cost structures do not
vary with changes in production will have a long-run
supply curve that
rev: 06_26_2018
Multiple Choice
•
is perfectly elastic.
•
is perfectly inelastic.
•
slopes upward.
•
slopes downward.

A perfectly competitive firm does not try to sell more of

its product by lowering its price below the market price
because
rev: 06_26_2018
Multiple Choice
•
this would be considered unethical price chiseling.
•
its demand curve is inelastic, so total revenue will
decline.
•
its competitors would not permit it.
•
it can sell all it wants to at the market price.

An industry in which its firms’ cost structures do not

vary with changes in production is referred to as a
rev: 06_26_2018
Multiple Choice
•
fixed-price industry.
•
price-controlled industry.
•
constant-cost industry.
•
price-taking industry.

In perfect competition, if the market price of the product

is initially higher than the minimum average total cost
faced by the firms, then
rev: 06_26_2018
Multiple Choice
•
some firms will exit the industry and the industry supply
will decrease.
•
some firms will exit the industry and the industry supply
will increase.
•
other firms will enter the industry and the industry
supply will decrease.
•
other firms will enter the industry and the industry
supply will increase.

Use the following graph to answer the next question.

To maximize profits, the perfectly competitive firm

should produce output at
rev: 06_26_2018
Multiple Choice
•
K.
•
A.
•
C.
•
B.

Which idea is inconsistent with perfect competition?

rev: 06_26_2018
Multiple Choice
•
price-taking behavior
•
a large number of buyers and sellers
•
freedom of entry or exit for firms
•
product differentiation

In perfect competition, the demand faced by a single firm

is perfectly
rev: 06_26_2018
Multiple Choice
•
inelastic, because many other firms produce the same
standardized product.
•
elastic, because many other firms produce the same
standardized product.
•
inelastic, because the firm produces a differentiated
product.
•
elastic, because the firm produces a differentiated
product.

Which of the following is true under conditions of

perfect competition?
rev: 06_26_2018
Multiple Choice
•
There are differentiated products.
•
The market demand curve is perfectly elastic.
•
No single firm can influence the market price.
•
Each individual firm has the ability to set its own price.

Use the following graphs for a perfectly competitive

market in the short run to answer the next question.

The graphs suggest that in the long run, assuming no

changes in the given information,
rev: 06_26_2018
Multiple Choice
•
buyers will leave the industry.
•
more buyers will come to the market.
•
some firms will exit from this industry.
•
new firms will enter the industry.

A perfectly competitive firm will be willing to produce

even at a loss in the short run, as long as
rev: 06_26_2018
Multiple Choice
•
the loss is smaller than its marginal costs.
•
price exceeds marginal costs.
•
the loss is smaller than its total variable costs.
•
the loss is smaller than its total fixed costs.
Which of the following suppliers is most likely to be a
monopolist?
•
A lettuce farmer
•
A cereal producer
•
A shirt producer
•
A water company

If a monopolist is able to increase the amount of product

she sells from 400 to 420 units by lowering the price of
that product from $50 to $45, her marginal revenue is:
•
$-55.
•
$55.
•
$1,100.
•
$-1,100.

The table below shows the marginal revenue and costs

for a monopolist.

Demand, Costs, and Revenues

Price (dollars) Quantity DemandedMarginal Revenue
(dollars) Marginal Cost (dollars) Average Total Cost
(dollars)
$130 200 $110 $25 $139.00
120 300 90 32 103.30
110 400 70 40 87.50
100 500 50 50 80.00
90 600 30 62 77.00
80 700 10 77 77.00
What is the monopolist's profit at the profit-maximizing
level of output?
•
$10,000
•
$80,000
•
$0
•
$50,000

In many large U.S. cities, taxicab companies operate as

near monopolies because of_____.
rev: 05_15_2018
Multiple Choice
•
economies of scale
•
strategic pricing
•
licenses
•
patents

One feature of pure monopoly is that the firm is _____.

rev: 05_15_2018
Multiple Choice
•
one of several producers of a product
•
a price maker
•
a producer of products with close substitutes
•
a price taker
A nondiscriminating pure monopoly must decrease the
price on all units of a product to sell more units. This
explains why _____.
rev: 05_15_2018
Multiple Choice
•
there are barriers to entry in pure monopoly
•
total revenues are greater than total costs at the profit
maximizing level of output
•
a pure monopoly’s marginal revenue curve is below its
demand curve
•
a pure monopoly has a perfectly elastic demand curve

Barriers to entry _____.

rev: 05_15_2018
Multiple Choice
•
are typically the result of wrongdoing on the part of a
firm
•
usually result in perfect competition
•
exist in economic theory but not in the real world
•
are characteristic of pure monopoly

A nondiscriminating pure monopoly is generally viewed

as being _____.
rev: 05_15_2018
Multiple Choice
•
productively efficient, but not allocatively efficient
•
both productively and allocatively efficient
•
neither productively nor allocatively efficient
•
allocatively efficient, but not productively efficient

What is one difference between a firm in a perfectly

competitive industry and a firm in a monopolistically
competitive industry?
•
A monopolistically competitive firm does not choose a
level of output where marginal cost is equal to marginal
revenue.
•
A monopolistically competitive firm faces competition
from firms producing close substitutes.
•
A monopolistically competitive firm is guaranteed to
make more than normal profits in the long run.
•
A monopolistically competitive firm does not face a
downward-sloping demand curve.
Which of the following is a barrier to entry?
rev: 05_15_2018
Multiple Choice
•
Close substitutes
•
Infrastructure costs
•
Buyers’ incomes
•
Diminishing marginal returns

Which of the following is an example of an oligopolistic

market with a standardized product?
•
The market for automobiles
•
The market for aluminum
•
The market for breakfast cereal
•
The market for jewelry

Pure monopoly refers to_____.

rev: 05_15_2018
Multiple Choice
•
a single firm producing a product for which there are no
close substitutes
•
a large number of firms producing a differentiated
product
•
a standardized product being produced by many firms
•
any market in which the demand curve to the firm is
downward sloping

The demand curve faced by a nondiscriminating pure

monopoly is _____.
rev: 05_15_2018
Multiple Choice
•
horizontal
•
more elastic than the demand curve faced by a perfectly
competitive firm
•
the same as the industry's demand curve
•
derived by vertically summing the buyers’ individual
demand curves
Which of the following statements is correct?
rev: 05_15_2018
Multiple Choice
•
Both perfectly competitive and monopolistic firms are
price takers.
•
A perfectly competitive firm is a price maker, while a
pure monopoly is a price taker.
•
A perfectly competitive firm is a price taker, while a pure
monopoly is a price maker.
•
Both perfectly competitive and monopolistic firms are
price makers.

Many people believe that pure monopolies charge any

price they want to without affecting sales. Instead, the
output level for a profit-maximizing pure monopoly
occurs where ____.
rev: 05_15_2018
Multiple Choice
•
average total cost equals average revenue
•
marginal revenue equals average cost
•
marginal cost equals average revenue
•
marginal revenue equals marginal cost

Which of the following best represents the pricing

behavior of firms in a monopolistically competitive
industry?
•
Looking Over Your Shoulder Handbag Co. chooses the
price it charges by estimating what its rivals are most
likely to do and then taking their responses into
consideration.
•
Unykdrugs, Inc. produces where its marginal revenue is
equal to its marginal cost and prices on its downward-
sloping demand curve such that the market for its
product clears, knowing it will not face competition due
to patents it holds on its products.
•
Stay*Put Clothespins takes the market price of
clothespins as given and produces the amount of
clothespins where marginal revenue equals marginal
cost.
•
Teen Angle Hardware looks for a niche to sell its
hardware products to teens but finds it difficult to earn
anything more than normal profits due to other hardware
stores also looking for niches.
A pure monopoly will generate an economic profit
whenever ____.
rev: 05_15_2018
Multiple Choice
•
total revenue is equal to total cost
•
total revenue is greater than total cost
•
total revenue is less than total cost
•
price is greater than average variable cost

Which of the following best represents the pricing

behavior of firms in an oligopolistic market?
•
Teen Angle Hardware looks for a niche to sell its
hardware products to teens but finds it difficult to earn
anything more than normal profits due to other hardware
stores also looking for niches.
•
Stay*Put Clothespins takes the market price of
clothespins as given and produces the amount of
clothespins where marginal revenue equals marginal
cost.
•
Looking Over Your Shoulder Handbag Co. chooses the
price it charges by estimating what its rivals are most
likely to do and then taking their responses into
consideration.
•
Unykdrugs, Inc. produces where its marginal revenue is
equal to its marginal cost and prices on its downward-
sloping demand curve such that the market for its
product clears, knowing it will not face competition due
to patents it holds on its products.

In the long run, the economic profits for a

monopolistically competitive firm will be
rev: 05_15_2018
Multiple Choice
•
the same as the profits for a purely competitive firm.
•
slightly more than the profits of a purely competitive
firm.
•
the same as the profits for a monopolist.
•
slightly less than the profits of a monopolist.

In which industry is monopolistic competition most

likely to be found?
rev: 05_15_2018
Multiple Choice
•
agriculture
•
retail trade
•
mining
•
utilities

A pure monopoly most likely results in productive

inefficiency because at the profit-maximizing level of
output _____.
rev: 05_15_2018
Multiple Choice
•
ATC is not at its minimum level
•
MC is not at its minimum level
•
P is greater than AVC
•
MR is not zero
A monopolistically competitive firm has a
rev: 05_15_2018
Multiple Choice
•
perfectly inelastic demand curve.
•
perfectly elastic demand curve.
•
highly elastic demand curve.
•
highly inelastic demand curve.

Oligopolies are considered to be:

•
both productively efficient, but not allocatively efficient.
•
both allocatively and productively efficient.
•
neither allocatively nor productively efficient.
•
both allocatively efficient, but not productively efficient.

rev: 05_24_2018

A monopolistically competitive firm's marginal revenue

curve
rev: 05_15_2018
Multiple Choice
•
coincides with the demand curve and is parallel to the
horizontal axis.
•
does not exist because the firm is a "price maker."
•
is downward-sloping and coincides with the demand
curve.
•
is downward-sloping and lies below the demand curve.

In which set of market models are there the most

significant barriers to entry?
rev: 05_15_2018
Multiple Choice
•
monopolistic competition and pure monopoly
•
oligopoly and pure monopoly
•
monopolistic competition and pure competition
•
oligopoly and monopolistic competition
Under monopolistic competition, entry to the industry is
rev: 05_15_2018
Multiple Choice
•
completely free of barriers.
•
more difficult than under pure monopoly.
•
blocked.
•
more difficult than under pure competition but not nearly
as difficult as under pure monopoly.

Use the following graph for a monopolistically

competitive firm to answer the next question.

Marginal revenue and marginal cost intersect at point

rev: 05_15_2018
Multiple Choice
•
a.
•
d.
•
b.
•
c.

In an oligopolistic market there are

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Multiple Choice
•
few sellers.
•
many sellers.
•
many buyers.
•
few buyers.

Monopolistic competitive firms are productively

inefficient because production occurs where
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Multiple Choice
•
marginal cost is not at its lowest.
•
average total cost is not at its lowest.
•
price is greater than marginal revenue.
•
marginal cost is less than price.
In which market model is there mutual interdependence?
rev: 05_15_2018
Multiple Choice
•
pure competition
•
oligopoly
•
monopolistic competition
•
pure monopoly

Suppose some firms exit an industry characterized by

monopolistic competition. We would expect the demand
curve of a firm already in the industry to
rev: 05_15_2018
Multiple Choice
•
shift to the left.
•
remain the same since entering firms serve other
customers in the market.
•
become less elastic.
•
shift to the right.

If monopolistically competitive firms in an industry are

making an economic profit, then new firms will enter the
industry and the product demand facing existing firms
will
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Multiple Choice
•
increase.
•
become less elastic.
•
decrease.
•
not be affected.

In the long run, the representative firm in monopolistic

competition tends to have
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Multiple Choice
•
economic profits
•
excess capacity.
•
a perfectly elastic demand curve.
•
no product differentiation.

Which of the following is a characteristic of

monopolistic competition?
rev: 05_15_2018
Multiple Choice
•
relatively easy entry
•
absence of nonprice competition
•
standardized product
•
a relatively small number of firms

Use the following graph for a monopolistically

competitive firm to answer the next question.

If curve (2) represents ATC and line (3) represents

demand, then curve (1) and line (4) would be
rev: 05_15_2018
Multiple Choice
•
MC and TR, respectively.
•
MC and MR, respectively.
•
AVC and MR, respectively.
•
TC and TR, respectively.

The table below shows the demand and total revenue for
a monopolist. Fill in the "Marginal Revenue" column for
the various prices and quantities.

Instructions: Enter your answers as a whole number.

Demand and Revenues

Price (dollars) Quantity DemandedTotal
Revenue(dollars) Marginal Revenue (dollars)
$50 30 $1,500 —
49 31 1,519$ 19
48 32 1,53617
47 33 1,55115
46 34 1,56413
45 35 1,57511
44 36 1,5849

A pure monopoly will find that marginal revenue _____.

rev: 05_15_2018
Multiple Choice
•
is sometimes greater and sometimes less than price
•
is identical to price
•
exceeds price
•
is less than price
Use the following graphs to answer the next question.
•
Which of the above shows the correct relationship
between demand and marginal revenue for a pure
monopoly?

rev: 05_15_2018
Multiple Choice
•
Graph 3
•
Graph 2
•
Graph 1
•
Graph 4
The figure below shows the average and marginal cost
curves for producing cheeseburgers per hour.

a. At a quantity of 25 cheeseburgers per hour, the average

total cost of production is falling Correctand the
marginal cost of cheeseburger production is rising
Correct.

b. At a quantity of 35 cheeseburgers per hour, the average

variable cost of production is rising Correctand the
average total cost of cheeseburger production is at a
minimum Correct.

Use the following table to answer the next question.

Output ATC Plant 1 ATC Plant 2 ATC Plant 3 ATC

Plant 4
1,500$10 $15 $20 $30
2,0008 12 17 25
2,5009 10 15 20
3,00012 8 13 18
3,50015 6 11 16
4,00018 10 9 14
4,50020 12 7 12
5,00024 15 11 10
5,50029 19 13 8
6,00035 25 15 9

Plant sizes get larger as you move from Plant 1 to Plant

4. In the long run, the firm should use Plant 3’s size for
what level of output?
rev: 06_26_2018
Multiple Choice
•
3,000 to 3,500 units
•
4,000 to 4,500 units
•
5,000 to 5,500 units
•
Less than 3,000 units

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 earns an accounting
profit of __________ and an economic profit of
__________.
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Multiple Choice
•
$1,700,000; $200,000
•
$1,700,000; $500,000
•
$500,000; $1,700,000
•
$500,000; $200,000
Fixed costs of production in the short run
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Multiple Choice
•
cannot be reduced by producing less output.
•
are a function of the level of variable costs.
•
are low in proportion to variable costs in the short run.
•
increase as the firm produces more output.

If a firm is a price taker, then the demand curve for the

firm's product is
rev: 06_26_2018
Multiple Choice
•
unit elastic.
•
perfectly inelastic.
•
equal to the total revenue curve.
•
perfectly elastic.

Use the following graph showing the demand and

marginal revenue curves faced by a pure monopoly to
answer the next question.

If the pure monopoly wants to sell quantity Q1, it should

charge
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Multiple Choice
•
P2.
•
P1.
•
a price not labeled on the graph.
•
0.

Mutual interdependence means that each firm in an

oligopoly
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Multiple Choice
•
depends on the other firms for its inputs.
•
faces a perfectly inelastic demand for its product.
•
considers the reactions of its rivals when it determines its
pricing policy.
•
depends on the other firms for its markets.
Suppose that the market for corn is perfectly competitive.
If corn farmers are currently generating losses, then we
would expect that in the long run the market
rev: 06_26_2018
Multiple Choice
•
supply curve will shift to the left.
•
demand curve will shift to the right.
•
supply curve will shift to the right.
•
demand curve will shift to the left.

Monopolistic competition is characterized by firms

rev: 05_15_2018
Multiple Choice
•
producing differentiated products.
•
making economic profits in the long run.
•
producing where price equals marginal cost.
•
producing at optimal productive efficiency.