Deck 8: Perfect Competition and Monopoly

Question 1

The perfectly competitive firm can raise the price of their product because they are able differentiate their product from all others.

Answer 1

False

Question 2

Under perfect competition, there are many small firms, and the individual firm takes the market price as a given.

Answer 2

True

Question 3

Market conditions for the perfectly competitive firm can produce four possible short-run results including normal profit, greater than normal profit, operating loss, or cessation of operations.

Answer 3

True

Question 4

In a market that is characterized by free exit, profit serves the function of causing some firms to leave when it is less than normal.

Question 5

In a market that is characterized by free entry and exit, profit serves the function of drawing new firms into the industry when it is greater than normal and causing some firms to leave when it is less than normal.

Question 6

In the short run, as long as SMC = MR = P, if price is greater than average variable cost, the firm should shut down.

Question 7

The demand curve for the homogeneous product of a perfectly competitive industry is determined by the preferences of consumers.

Question 8

Because there are many buyers in the market willing to pay the going price, the firm will raise the price to increase their total revenue.

Question 9

Since, over the long run, there would be no output produced if a firm's owners did not receive at least a normal return on investment, normal profit is considered to be a cost of production.

Question 10

The demand curve of the perfectly competitive firm is a straight horizontal line at the market price of its product, and this price, P_e, is the industry equilibrium price.

Question 11

The demand curve of the perfectly competitive firm is equal to its average revenue curve.

Question 12

As long as the output of an individual firm in a perfectly competitive market is very small with respect to the total industry market for the product, the individual firm has no control over the price it charges for its product.

Question 13

Under perfect competition, even though there are many small firms, the individual firm has some influence over the market price.

Question 14

In the long run, because of the entry and exit of firms in the marketplace, a perfectly competitive firm can expect only normal profits.

Question 15

In a market that is characterized by free entry and exit, profit serves the function of drawing new firms into the industry when it is less than normal and causing some firms to leave when it is greater than normal.

Question 16

The demand curve of the perfectly competitive firm is a horizontal line.

Question 17

In a market that is characterized by free entry, profit serves the function of drawing new firms into the industry when it is greater than normal.

Question 18

The demand curve of the perfectly competitive firm is equal to its marginal revenue curve.

Question 19

In the short run, as long as SMC = MR = P, if price is greater than average variable cost, the firm should continue to operate.

Question 20

An equilibrium price is one that equates quantity demanded in a market with quantity supplied so that there is no surplus or shortage of the product traded.

Question 21

Suppose that the firm has the following short run cost data and that B is the only variable input and the price of B is fixed. Using the following table, what is the firm's best short run output if it has no choice but to sell its product at the prevailing market price of $1.50?

A) 200
B) 500
C) 700
D) 800
E) 900

Question 22

Suppose that the firm has the following short run cost data and that B is the only variable input and the price of B is fixed. Using the following table, what is the firm's best short run output if it has no choice but to sell its product at the prevailing market price of $.65?

A) 50
B) 125
C) 175
D) 215
E) 245

Question 23

A monopoly would never be in a shut down situation like a firm in as purely competitive market.

Question 24

Because a monopoly is the only firm in an industry, it can never operate at a loss.

Question 25

The short-run supply curve of the perfectly competitive firm is that portion of its marginal cost curve SMC) which lies between AVC and SAC.

Question 26

The lack of entry into a monopolistic market may also lead to inefficiency in production, since there is no assurance that the monopoly firm's profit-maximizing output will occur in an optimum-sized plant.

Question 27

The short-run supply curve of the perfectly competitive firm is that portion of its marginal cost curve SMC) which lies above AVC.

Question 28

In the short run, the monopoly firm just like the firm under perfect competition) can temporarily choose to cease production.

Question 29

Using the above short run cost data, find the amount of profit the firm would make at the profit maximizing output.

A) none - the firm would shut down
B) $57.83
C) $60.25
D) -$57.83
E) -$60.25

Question 30

In the long run, the perfectly competitive firm will maximize profit by adjusting plant size so that the short run average cost is equal to the long run average cost.

Question 31

Market conditions for the perfectly competitive firm can produce all of the following short-run results EXCEPT:

A) greater than normal price.
B) normal profit.
C) greater than normal profit.
D) operating loss.
E) cessation of operations.

Question 32

In a market that is characterized by free entry and exit, profit serves the function of:

A) drawing new firms into the industry when profit is greater than normal.
B) drawing new firms into the industry when profit is lower than normal.
C) causing some firms to leave when profit is greater than normal.
D) causing some firms to enter when profit is lower than normal.
E) compensating owners with a higher than normal rate of return on investment.

Question 33

Using the above short run cost data, find the amount of profit the firm would make at the profit maximizing output.

A) none - the firm would shut down
B) $550.00
C) $625.00
D) -$525.00
E) -$650.00

Question 34

Given that a monopoly market structure consists of only one firm, then the market demand curve is the firm's demand curve and there is easy entry over the long run.

Question 35

Even though the monopoly determines its own profit-maximizing output and therefore the appropriate price for its product, it is still at the mercy of market demand for its product.

Question 36

Which of the following is NOT a condition of a perfectly competitive market?

A) A very large number of buyers and sellers.
B) The products are homogeneous.
C) All buyers and sellers have perfect knowledge of market conditions and of any changes in the market conditions that occur.
D) Firms are able to get together and effectively agree on restricting quantity supplied and raising prices.
E) There are no artificial interferences with the activities of the buyers and sellers.

Question 37

In the short run, a purely competitive firm can be expected to shut down if:

A) price is less than short run average cost.
B) price is less than average variable cost.
C) price is less than average fixed cost.
D) total costs exceed total revenue.
E) short-term marginal cost is above average variable cost.

Question 38

In the short run, the monopoly firm just like the firm under perfect competition) can also have only normal profit, or operate at a loss.

Question 39

In the absence of government regulation, a monopoly firm can indefinitely sustain greater than normal profits.

Question 40

As long as the output of an individual firm in a perfectly competitive market is very small with respect to the total market for the product:

A) each individual firm can change price only by a small degree.
B) each individual firm sells a slightly differentiated product.
C) each individual firm takes the price as a "given".
D) firms are able to get together and effectively agree on restricting quantity supplied and raising prices.
E) depending on market conditions, the "given" price may be above or below the industry equilibrium price.

Question 41

A monopoly in the short run will try to produce where:

A) revenue is maximized.
B) costs are minimized.
C) marginal revenue is greater than marginal cost.
D) marginal revenue is equal to marginal cost as long as price is greater than average variable cost.
E) marginal revenue is equal to marginal cost as long as price is greater than short run average cost.

Question 42

The following data pertains to a monopoly firm's demand and costs per quarter. If the total fixed costs are $5,000 per quarter, what will be the firm's maximum profit output?

A) Q = 20,000, P = $8.00
B) Q = 30,000, P = $7.00
C) Q = 40,000, P = $6.00
D) Q = 50,000, P = $5.00
E) Q = 60,000, P = $4.00

Question 43

In the absence of government regulation:

A) a monopoly firm can indefinitely sustain greater than normal profits.
B) a monopoly firm can sustain only normal profits.
C) a monopoly firm will not, even in the short run, sustain a loss.
D) a monopoly firm will not, even in the short run, be forced into a temporary shut down situation.
E) if a monopoly firm remains in business over the long run, it can not be expected to have at least normal profits.

Question 44

Market conditions for a monopoly firm can produce all of the following short-run results EXCEPT:

A) greater than market price.
B) normal profit.
C) greater than normal profit.
D) operating loss.
E) cessation of operations.

Question 45

Complete the following table, assuming that the firm is in the short run and L is the only variable input.

Assuming that the firm operates in a perfectly competitive market and faces a market price of $6 per unit for its product, answer the following:
a. At which of the outputs in the table will it have greatest profit lowest loss)?
b. How much will that profit loss) be?

Question 46

Suppose that the firm has the following short-run cost data and that B is the only variable input and that the price of B is fixed:

a. Complete the table.
b. Find the firm's best short-run output if it has no choice but to sell its product at the prevailing market price of $.65

Question 47

The following data pertains to a monopoly firm's demand and costs per quarter.

If the total fixed costs are $5,000 per quarter, what will be the firm's maximum profit output? How much will profit be at this output level?

Question 48

A monopoly has all of the following features) EXCEPT:

A) a product that is duplicated by other firms.
B) the market demand curve is the firm's demand curve.
C) entry is effectively blocked over the long run.
D) a single seller for the market's product.
E) a product not duplicated by other firms.

Question 49

The short-run supply curve of the perfectly competitive firm:

A) is that portion of its marginal cost curve SMC) which lies above AVC.
B) is that portion of its marginal cost curve SMC) which lies between AVC and SAC
C) is that portion of its marginal cost curve SMC) which lies below AVC.
D) is that portion of its marginal cost curve SMC) which lies above the intersection of MR and SMC.
E) is that portion of its marginal cost curve SMC) which lies between AVC and the intersection of MR and SMC.

Question 50

Given the above data, what profit would the firm make at the profit maximizing output?

A) $2,500
B) $5,000
C) $7,520
D) $10.000
E) None - It would shut down

Question 51

The monopoly determines its own profit-maximizing output and therefore the appropriate price for its product:

A) however, it is still at the mercy of market demand for its product.
B) and can virtually ignore the market demand for its product.
C) thus, it is guaranteed to make a greater than normal profit.
D) thus, it is guaranteed to make a normal profit.
E) thus, it is guaranteed, even in the short run, to never sustain a loss.

Question 52

In a monopoly, if price is lower than average variable cost, then:

A) the monopoly will be operating at a loss.
B) the monopoly will be operating at a profit.
C) the monopoly is in a shut down situation.
D) its operating loss is greater than total fixed cost.
E) its total revenue will be greater than total fixed cost.

Question 53

Given the following data for a perfectly competitive firm, what is the amount of profit the firm will make at the profit maximizing output?
P = MR = $100
TC = 1,000 + 125Q - .5Q²
SMC = 125 - Q
Q = units produced per month
TFC = $1000

A) none - the firm would shut down
B) $1,312.50
C) $2,548.63
D) -$1,425.86
E) -$2,351.27

Question 54

Complete the following table, assuming that the firm is in the short run and L is the only variable input.

Assuming that the firm operates in a perfectly competitive market and faces a market price of $25 per unit for its product, answer the following:
a. At which of the outputs in the table will it have greatest profit lowest loss)?
b. How much will that profit loss) be?

Question 55

In a monopoly, if price is greater than average variable cost but less than short-run average cost, then:

A) the monopoly will be operating at a loss.
B) the monopoly will be operating at a profit.
C) the monopoly is in a shut down situation.
D) its operating loss is greater than total fixed cost.
E) its total revenue will be greater than total cost.

Question 56

If a monopoly produces where marginal revenue is equal to marginal cost then:

A) if short run average cost is less than price, the monopoly will have a normal profit.
B) if short run average cost is equal to price, the monopoly will have a normal profit.
C) the monopoly is guaranteed to make a normal profit.
D) if short run average cost is greater than price, the monopoly will have a normal profit.
E) if average variable cost is greater than price, the monopoly will have be operating at a loss.

Question 57

Suppose that the firm has the following short-run cost data and that B is the only variable input and that the price of B is fixed:

a. Complete the table.
b. Find the firm's best short-run if it has no choice but to sell its product at the prevailing market price of $1.50.

Question 58

Complete the revenue and cost data in the following table, assuming that the firm is a monopoly that has been allowed to set its own price for its home monitoring service. Q refers to the number of consumers, and the revenue and cost data are per month.)

3.
PAGEXXX Chapter 8 - Perfect Competition and Monopoly
Chapter 8 - Perfect Competition and Monopoly
a. What output and price will the firm choose? Explain why, relating your answer to the general condition for profit maximization.
b. How much profit will the firm have at its maximum?

Question 59

Determine whether the following perfectly competitive firm should produce output in the short run or temporarily shut down, given:
P = MR = $100
TC = 1,000 + 125Q - .5Q²
SMC = 125 - Q
Where Q = units produced per month
If the firm does not operate, it will lose its $1,000 of fixed costs. What profit or loss will the firm have if it operates where MR = SMC? Does this profit or loss check with your decision on whether to produce or temporarily shut down?

Question 60

If a monopoly is producing with a normal profit, then:

A) it will be operating at a point where its long run average cost will be at a minimum.
B) it will be operating at a point that lies on the falling portion of long run average cost.
C) it will be operating at a point where its long run average cost will be increasing.
D) it will be operating at a point where its short run average cost will be at a minimum.
E) it will be operating at a point where its marginal revenue will exceed its marginal cost.

Question 61

The following demand curve has been estimated for a monopoly firm:
Q = 6680 - 0.4P
where Q is the quantity sold per month and P is the price charged by the firm.
The firm has the following total cost function:
TC = 200,000 + 2000Q - 5.5Q² + 2Q³
At what price and quantity will the firm maximize profits?

Question 62

Suppose that a firm is operating under highly competitive market conditions and that the going price for its product is P = $300.
a. If the firm's short run total cost function is:
then, what is the firm's profit maximizing output?
b. At the level of output obtained in part a, how much profit will the firm have?

Question 63

Determine whether the following perfectly competitive firm should produce output in the short run or temporarily shut down, given:
P = $100
TC = 1,000 + 125Q - .5Q²
Where:
Q = units produced per month
If the firm does not operate, it will lose its $1,000 of fixed costs. What profit or loss will the firm have if it operates where MR = SMC? Does this profit or loss check with your decision on whether to produce or temporarily shut down?

Question 64

Suppose that a typical firm in a perfectly competitive industry has the following long run total cost function:

If this function remains stable, what will be the long-run price for the firm's product?

Question 65

The following demand curve has been estimated for a monopoly firm:
Q = 1000 - 10P
where Q is the quantity sold per month and P is the price charged by the firm. If the marginal cost of the firm is constant at $40.00 per unit, at what price and quantity will the firm maximize profits?

Question 66

Suppose that a firm is operating under highly competitive market conditions and that the going price for its product is P = $300. If the firm's short run total cost function is:
STC = 5000 - 250Q + 12.5Q²
then what is the firm's profit maximizing output?

Question 67

Ralph Quarry has the only company in Laredo, Texas that makes pea gravel. He believes that pea gravel batching and delivery costs can be viewed as constant at $15 per ton sold. If he estimates the monthly demand in his market area to be given by the demand curve Q = 500 - 10P, so that MR = 50 - .2Q:
a. How many tons of pea gravel should he sell per month?
b. What price should he charge per ton and how much will his total monthly profit contribution from pea gravel sales?