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Econ 142 Principles of Microeconomics Fall 2011 Handout 8 1. Which of the following is incorrect regarding monopolistic competition?

In monopolistic competition a. The firm will charge a P > MC b. In the long run the firms profits will be competed away by entering firms c. The firms P is also its MR d. It is easy to enter the market as a seller 2. Market power is the ability to _____ and it is _____ related to elasticity. a. Charge a P > ATC; inversely b. Charge a P > MR; positively c. Charge a P > MC; positively d. None of the above 3. Consider the following three statements regarding market structures? I. Charge a P > MC II. Earn profits in the long run Firms demand curve is downward sloping

III.

Which of the following is a correct statement? a. Statements I and II describe monopoly; Statement III does not b. Statements I and III describe monopolistic competition; Statement II does not c. Statement I describes perfect competition d. All of the above are correct

Use the information in the following graph to answer the next three questions. The letters refer to the points, not any curve or line. (Assume the points line up perfectly: For example, point E is aligned horizontally with point Z and aligned vertically with point S.)

MC Curve

B W X Y C Z E

ATC Curve

D A

4. The difference in output (Q) between how much a monopolist would produce if he was allowed to price/produce the way he wanted to, and how much he would produce if forced at act like a perfectly competitive firm, is a. the distance between point R and point T b. the distance between point R and point S c. the distance between point S and point T d. not shown on this graph 5. The difference in price (P) between what a monopolist would charge if he was allowed to price/produce the way he wanted to, and how much he would charge if forced at act like a perfectly competitive firm, is a. the distance between point W and point Z b. the distance between point W and point Y c. the distance between point W and point X d. not shown on this graph

6. The three points that create the triangle that would represent the deadweight loss caused by a monopolist are a. points B, D, C b. points E, C, D c. points A, E, D d. points A, E, C Use the following table to answer the next 6 questions. Fill in the table as you need to. You may not need every cell filled in! DO NOT WORRY about filling in any cell with in it.

Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

P
32 31 30 29 28 27 26 25 24 23 22 21 20 19 18

TR 31.0 60.0

MR -31.0 27.0

TC 20.0 32.0 46.0 50.0 52.0

ATC -32.0 20.0 15.3 12.5 10.4 8.8 7.9 7.4 7.6

MC -12.0 8.0 6.0 2.0 2.0 9.0 15.0

112.0 23.0 156.0 19.0 192.0 15.0 220.0 11.0 240.0 7.0 252.0

81.0 96.0 116.0 144.0 160.0

8.1

11.1 12.9

28.0 36.0

7. Which of the following statements is correct? a. The table could represent a monopolist b. The table could not represent a perfectly competitive firm c. The table could represent a monopolistically competitive firm d. Actually, all of the above are correct 8. Assume this firm is a monopolist and wants to maximize its profits. The level of output the firm will choose will be a. 8 b. 10 c. 13 d. 14

9. At the level of output identified in the preceding question, which comes closest to what would be the value of consumer surplus? a. 60 b. 70 c. 35 d. 50 10. Now assume this firm is a monopolist but the firm is required to act like a perfectly competitive firm with regard to pricing and output. Now the level of output this firm will choose will be a. 11 b. 12 c. 13 d. 14 11. Based on your answer to the preceding question, which comes closest to the value of consumer surplus if the firm was forced to act like a perfectly competitive firm? a. 50 b. 110 c. 72 d. 96 12. Knowing what you know about 1) market power, 2) elasticity, and 3) substitutes, which of the following represents the correct order if we ranked all four market structures in order from firms having the most market power to the least market power? a. Perfect competition; monopolistic competition; oligopoly; monopoly b. Oligopoly; monopoly; monopolistic competition; perfect competition c. Monopoly; oligopoly; monopolistic competition; perfect competition d. Monopolistic competition; oligopoly; perfect competition; monopoly 13. Which of the following represents the final condition we would see in a monopolistically competitive market after all firms have entered that want to enter the market? a. P > ATC = MC = MR b. P = MR = MC = ATC c. P = ATC > MR = MC d. None of the above

14. Consider the following three statements regarding market structures I. Earn excess profits in the short run but not in the long run II. Earn excess profits in the long run III. Firms demand curve is horizontal

Which of the following is a correct statement? a. Statement I describes monopolistic competition b. Statements I and II describe both monopoly and monopolistic competition c. Statements I and III describe monopolistic competition d. All of the above are correct Use the information in the following graph to answer the next five questions. The letters refer to the points, not any curve or line.

A F G H E J D B C

15. The point that represent the price a monopolist would charge if he/she was allowed to price the way he/she wanted to (in order to maximize profits) is a. point J b. point H c. point G d. point F

16. The point that represents the level of output that a monopolist would produce if he/she was forced to act like a perfectly competitive firm is a. point K b. point L c. point M d. not on this graph 17. The three points that create the triangle that would represent the deadweight loss caused by a monopolist are a. points B, D, C b. points E, B, D c. points A, E, C d. points A, E, B 18. The four points that represent the profits that this monopolist would be earning if he/she prices the way he/she wants to (to maximize profits) would be a. points A, F, G, B b. points A, F, H, E c. points A, F, J, D d. not on this graph 19. The point that represents the price that a monopolist would charge it is were forced to act like a perfectly competitive firm is a. point F b. point G c. point H d. point J

Use the following table to answer the next 7 questions. Fill in the table as you need to. You may not need every cell filled in! DO NOT WORRY about filling in any cell with in it.

Q 1 3 5 7 9 11 13 15 17 19 21 23 25

P 51 49 47 45 43 41 39 37 35 33 31 29 27

TR 51 147

MR -48 44 36 32

451 555 595 651 675

20 12 8

TC 86 126 155 179 195 231 286 360 468 608 774 957 1250

ATC 86.0 31 25.6

MC -20 14.5 8 18

PROFIT --

220 195

22 27.6 37 50 54 83 91

20. Which of the following statements is correct? a. The table could represent a monopolist b. The table could represent a perfectly competitive firm c. The table could not represent a monopolistically competitive firm d. None of the above is correct 21. Assume this firm is a monopolist and wants to maximize its profits. The level of output the firm will choose will be a. 9 b. 13 c. 17 d. 21 22. At the level of output identified in question 21, what would be the value of consumer surplus? a. 64 b. 78 c. 82 d. 96

23. Now assume this firm is a monopolist but the firm is required to act like a perfectly competitive firm with regard to pricing and output. Now the level of output this firm will choose will be a. 11 b. 15 c. 19 d. 23 24. Based on your answer to question 23, what would be the value of consumer surplus if the firm was forced to act like a perfectly competitive firm? a. 80 b. 95 c. 105 d. 130 25. Now go back to this firm behaving as a monopolist, and maximizing its profits the way it wants to. What is the measure of deadweight loss that will be produced? a. 11 b. 18 c. 20 d. 36 26. Last question for this table, assume now that this firm is a monopolistically competitive firm and that all other firms have entered, and this firm is earning zero profits (or ALMOST zero profits). What is the level of output that comes closest to the zero-profit level of output? a. 11 b. 15 c. 19 d. 23 27. The practice of charging each customer exactly the price that he or she is willing to pay is known as a. First degree price discrimination b. Third degree price discrimination c. Product differentiation d. Collusion 28. Which of the following is correct regarding monopolistic competition? In monopolistic competition a. The firms price is also its marginal revenue b. The firm will charge a price > MR c. The firm will charge a price = MC d. At the point where P = ATC other firms will enter the market