Question 1

Answer the question on the basis of the following demand and cost data for a specific firm. $ \quad$$ \quad$$ \quad$$ \quad$$\text { Demand Data }$ $ \quad$$ \quad$$ \quad$ $\text { Cost Data }$
$\begin{array}{|c|c|c|c|c|}
\hline&&(3)&\text { Total } \
\text { (1) } & \text { (2) } & \text { Quantit } & \text { Output } & \text { Total } \
\text { Price } & \text { Price } & \text { Y} & & \text { Cost }\
\hline \$ 50 & \$ 35 & 2 & 2 & \$ 45 \
\hline 45 & 30 & 3 & 3 & 55 \
\hline 40 & 25 & 4 & 4 & 70 \
\hline 35 & 20 & 5 & 5 & 90 \
\hline 30 & 15 & 6 & 6 & 115 \
\hline 25 & 10 & 7 & 7 & 145 \
\hline 20 & 5 & 8 & 8 & 180 \
\hline
\end{array}$ If columns 1 and 3 are this firm's demand schedule, maximum economic profit will be

Accepted Answer

To find the maximum economic profit, we need to find the quantity at which marginal revenue (MR) equals marginal cost (MC). From the demand schedule, we can derive the following table:
$\begin{array}{|c|c|c|c|c|}
\hline &&
\text {Demand} &&
\text {Total Revenue} \
\text{Output} & \text{Price} & \text{Quantity} & \text{Total Revenue} &\text{Change}\
\hline 2 & 50 & 6 & 300 & \
\hline 3 & 45 & 9 & 405 & 105 \
\hline 4 & 40 & 12 & 480 & 75 \
\hline 5 & 35 & 15 & 525 & 45 \
\hline 6 & 30 & 18 & 540 & 15 \
\hline 7 & 25 & 21 & 525 & -15 \
\hline 8 & 20 & 24 & 480 & -45 \
\hline
\end{array}$
From this table, we can see that the marginal revenue for each additional unit is a constant $-5$. To find the marginal cost, we need to calculate the change in total cost for each unit of output:

$\begin{array}{|c|c|c|c|c|}
\hline &&
\text {Output} &&
\text {Total Cost} \
\text{Quantity} & \text{Price} & \text{Change} & \text{Total Cost} &\text{Marginal Cost}\
\hline 2 & 35 & & 45 & \
\hline 3 & 30 & 10 & 55 & 10 \
\hline 4 & 25 & 15 & 70 & 5 \
\hline 5 & 20 & 20 & 90 & 5 \
\hline 6 & 15 & 25 & 115 & 5 \
\hline 7 & 10 & 30 & 145 & 5 \
\hline 8 & 5 & 35 & 180 & 5 \
\hline
\end{array}$
We can see that the marginal cost is a constant $5$ for all units of output. Therefore, the profit-maximizing quantity is the one where $MR = MC$, which is at an output of 5 units. At this output level, price is $35$ and total cost is $90$, so the economic profit will be $35\times 5 - 90 = 175 - 90 = 85$. However, we need to subtract the fixed cost of $45$, so the maximum economic profit is $85 - 45 = 40$. Therefore, the correct answer is $\boxed{\text{(D) } \$90}$.

Question 2

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 shift

Accepted Answer

When new firms enter a monopolistically competitive market, the market becomes more competitive, and the demand faced by existing firms will decrease, as consumers have more options to choose from. Due to increased competition, existing firms will have to reduce their prices, causing the demand curve to become more elastic. The left shift of the demand curve indicates that the quantity demanded at each price level has decreased; the increased elasticity of the demand curve means that consumers are relatively more responsive to price changes. This increased competition results in reduced economic profits for existing firms.

Question 3

A monopolistically competitive firm is producing at a short-run output level where average total cost is $10.00, marginal cost is $5.00, marginal revenue is $6.00, and price is $12.00. In the short run, the firm should

Accepted Answer

In the short run, the firm should increase the level of output because:
- MR > MC: The marginal revenue ($6.00) received from selling an additional unit of output is greater than the marginal cost ($5.00) of producing it. By increasing output, the firm can earn additional profit.
- P > ATC: The price ($12.00) is greater than the average total cost ($10.00), so each unit sold contributes positively to the firm's profit. 
Therefore, the firm should increase production to increase profit in the short run.

Question 4

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. $ \quad$$ \quad$$ \quad$$ \quad$   $\text { Cost Data }$    $ \quad$$ \quad$$ \quad$  $\text { Demand Data }$ 
$\begin{array}{|c|c|c|c}
\begin{array}{c}
\text { Total } \
\text { Output }
\end{array} & \begin{array}{c}
\text { Total } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Quantity } \
\text { Demanded }
\end{array} & \text { Price } \
\hline 0 & \$ 25 & 0 & \$ 60 \
\hline 1 & 40 & 1 & 55 \
\hline 2 & 45 & 2 & 50 \
\hline 3 & 55 & 3 & 45 \
\hline 4 & 70 & 4 & 40 \
\hline 5 & 90 & 5 & 35 \
\hline 6 & 115 & 6 & 30 \
\hline
\end{array}$ If the firm sells 3 units of output, marginal revenue will be

Accepted Answer

To find the marginal revenue (MR) of the third unit, we must first find the total revenue (TR) of the firm at a quantity of 3 units. From the demand data, we know that the price at a quantity of 3 units is $45. Thus, TR at Q=3 is:

TR = P x Q = $45 x 3 = $135.

To find MR, we must calculate the change in total revenue resulting from a one-unit increase in output. In other words, MR=ΔTR/ΔQ. The change in total revenue resulting from a one-unit increase in output from 3 units to 4 units is:

ΔTR = TR4 - TR3 = (P4 x Q4) - (P3 x Q3) = ($40 x 4) - ($45 x 3) = $160 - $135 = $25.

Therefore, MR at Q=3 is:

MR = ΔTR/ΔQ = $25 / (4 - 3) = $25.

Thus, the best choice is B, $35.

Question 5

A monopolistically competitive firm is operating at a short-run level of output where price is $21, average total cost is $15, marginal cost is $13, and marginal revenue is $13. In the short run this firm should

Accepted Answer

The firm is maximizing profit in the short run because marginal cost equals marginal revenue.

Question 6

In monopolistic competition, a firm has a limited degree of "price-making" ability. This means that the profit-maximizing firm will

Accepted Answer

In monopolistic competition, firms have some degree of market power and can differentiate their product from competitors. This allows them to set prices above marginal cost in order to maximize their profits. However, they still face competition from other firms in the market, so their ability to set prices is limited. Thus, the profit-maximizing firm in monopolistic competition will set price above marginal cost, but not too high as to drive away customers.

Question 7

Assume that in a monopolistically competitive industry, firms are earning economic profit. This situation will

Accepted Answer

In a monopolistically competitive industry, firms have some degree of market power to set prices above their marginal cost. If firms are earning economic profit, it signals to potential entrants that there is an opportunity for profit in the market. As a result, new firms will enter the industry, leading to an increase in the supply of the product and a decrease in the market price. This will cause a reduction in the profits of existing firms. Therefore, option B is the best choice. Option A is incorrect as there is no incentive for firms to expand production in the short run. Option C is incorrect as firms differentiate their products to create a perceived unique value to consumers. Option D is incorrect as monopolistically competitive firms do not necessarily produce at an allocatively efficient level.

Question 8

In the long run, the economic profits for a monopolistically competitive firm will be

Accepted Answer

In the long run, monopolistically competitive firms earn zero economic profits due to the entry of new firms, similar to purely competitive firms.

Question 9

Answer the question based on the demand and cost schedules for a monopolistically competitive firm given in the table below. $\begin{array} { | c | c | c | c | } 
\hline \text { Price } & \begin{array} { c } 
\text { Quntity } \
\text { Dennded }
\end{array} & \begin{array} { c } 
\text { Total } \
\text { Cost }
\end{array} & \text { Output } \
\hline \$ 20 & 1 & \$ 10 & 1 \
\hline 18 & 2 & 20 & 2 \
\hline 16 & 3 & 29 & 3 \
\hline 14 & 4 & 36 & 4 \
\hline 12 & 5 & 40 & 5 \
\hline 10 & 6 & 42 & 6 \
\hline
\end{array}$ At the profit-maximizing level of output, marginal revenue is

Accepted Answer

At the profit-maximizing level of output, marginal revenue equals marginal cost. The marginal cost from producing the 5th unit is $4 (from $36 to $40), and the marginal revenue from selling the 5th unit is also $4 (from $16 to $12).

Question 10

Answer the question based on the demand and cost schedules for a monopolistically competitive firm given in the table below. $\begin{array} { | c | c | c | c | } 
\hline \text { Price } & \begin{array} { c } 
\text { Quntity } \
\text { Dennded }
\end{array} & \begin{array} { c } 
\text { Total } \
\text { Cost }
\end{array} & \text { Output } \
\hline \$ 20 & 1 & \$ 10 & 1 \
\hline 18 & 2 & 20 & 2 \
\hline 16 & 3 & 29 & 3 \
\hline 14 & 4 & 36 & 4 \
\hline 12 & 5 & 40 & 5 \
\hline 10 & 6 & 42 & 6 \
\hline
\end{array}$ What will be the economic profit or loss for this monopolistically competitive firm at the profit-maximizing level of output?

Accepted Answer

The profit-maximizing level of output is where marginal revenue equals marginal cost. From the table, we can calculate that the marginal cost for each unit is as follows:

MC of 2nd unit = (TC of 2nd unit - TC of 1st unit)/(2nd unit output - 1st unit output) = (20-10)/(2-1) = $10
MC of 3rd unit = (TC of 3rd unit - TC of 2nd unit)/(3rd unit output - 2nd unit output) = (29-20)/(3-2) = $9
MC of 4th unit = (TC of 4th unit - TC of 3rd unit)/(4th unit output - 3rd unit output) = (36-29)/(4-3) = $7
MC of 5th unit = (TC of 5th unit - TC of 4th unit)/(5th unit output - 4th unit output) = (40-36)/(5-4) = $4
MC of 6th unit = (TC of 6th unit - TC of 5th unit)/(6th unit output - 5th unit output) = (42-40)/(6-5) = $2

The marginal revenue can be calculated as follows:

MR of 2nd unit = (TR of 2nd unit - TR of 1st unit)/(2nd unit output - 1st unit output) = (18-20)/(2-1) = -$2
MR of 3rd unit = (TR of 3rd unit - TR of 2nd unit)/(3rd unit output - 2nd unit output) = (16-18)/(3-2) = -$2
MR of 4th unit = (TR of 4th unit - TR of 3rd unit)/(4th unit output - 3rd unit output) = (14-16)/(4-3) = -$2
MR of 5th unit = (TR of 5th unit - TR of 4th unit)/(5th unit output - 4th unit output) = (12-14)/(5-4) = -$2
MR of 6th unit = (TR of 6th unit - TR of 5th unit)/(6th unit output - 5th unit output) = (10-12)/(6-5) = -$2

Since the marginal cost is higher than the marginal revenue for all units of output, this firm will not produce any units of output. Therefore, the economic profit will be zero. However, the total revenue at the profit-maximizing level of output can be calculated as follows:

TR at 5th unit output = $12 x 5 = $60
TC at 5th unit output = $40

Therefore, the total revenue at the profit-maximizing level of output is $60 and the total cost is $40, resulting in a profit of $20. Hence, the answer is C.

Question 11

The graph depicts a monopolistically competitive firm.  At the profit-maximizing level of short-run output, this monopolistically competitive firm will be making a profit of

Accepted Answer

At the profit-maximizing level of output, a firm in monopolistic competition produces where marginal revenue (MR) equals marginal cost (MC) and sets a price that exceeds its average variable cost (AVC). From the graph, we can see that the profit-maximizing output level is where MR intersects MC at Q = 8. At this output level, the price is $75 and the average cost is $50. Therefore, the profit per unit is $25. The total profit earned by the firm is the profit per unit multiplied by the quantity produced, which is 25 × 8 = $200. Adding the fixed cost of $325, the total profit is $525. Therefore, the answer is D.

Question 12

Answer the question based on the demand and cost schedules for a monopolistically competitive firm given in the table below. $\begin{array} { | c | c | c | c | } 
\hline \text { Price } & \begin{array} { c } 
\text { Quntity } \
\text { Dennded }
\end{array} & \begin{array} { c } 
\text { Total } \
\text { Cost }
\end{array} & \text { Output } \
\hline \$ 20 & 1 & \$ 10 & 1 \
\hline 18 & 2 & 20 & 2 \
\hline 16 & 3 & 29 & 3 \
\hline 14 & 4 & 36 & 4 \
\hline 12 & 5 & 40 & 5 \
\hline 10 & 6 & 42 & 6 \
\hline
\end{array}$ What output quantity will the monopolistically competitive firm produce to maximize profits?

Accepted Answer

The monopolistically competitive firm will produce an output quantity of 5 to maximize profits. This is because at an output quantity of 5, the firm's marginal revenue is equal to its marginal cost.

Question 13

The graph depicts a monopolistically competitive firm.  This monopolistically competitive firm is earning economic profits in the short run and

Accepted Answer

In the long run, other firms will enter the market, increasing the level of competition and reducing the demand for the product. As a result, the firm's demand curve will shift leftward, leading to lower prices and lower economic profits. Eventually, the firm will only earn normal profits in the long run.

Question 14

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. $ \quad$$ \quad$$ \quad$$ \quad$   $\text { Cost Data }$    $ \quad$$ \quad$$ \quad$  $\text { Demand Data }$ 
$\begin{array}{|c|c|c|c}
\begin{array}{c}
\text { Total } \
\text { Output }
\end{array} & \begin{array}{c}
\text { Total } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Quantity } \
\text { Demanded }
\end{array} & \text { Price } \
\hline 0 & \$ 25 & 0 & \$ 60 \
\hline 1 & 40 & 1 & 55 \
\hline 2 & 45 & 2 & 50 \
\hline 3 & 55 & 3 & 45 \
\hline 4 & 70 & 4 & 40 \
\hline 5 & 90 & 5 & 35 \
\hline 6 & 115 & 6 & 30 \
\hline
\end{array}$ What will the maximum total profits be?

Accepted Answer

The answer of Assume that the short-run cost and demand...

Question 15

Answer the question on the basis of the following demand and cost data for a specific firm. $ \quad$$ \quad$$ \quad$$ \quad$$\text { Demand Data }$ $ \quad$$ \quad$$ \quad$ $\text { Cost Data }$
$\begin{array}{|c|c|c|c|c|}
\hline&&(3)&\text { Total } \
\text { (1) } & \text { (2) } & \text { Quantit } & \text { Output } & \text { Total } \
\text { Price } & \text { Price } & \text { Y} & & \text { Cost }\
\hline \$ 50 & \$ 35 & 2 & 2 & \$ 45 \
\hline 45 & 30 & 3 & 3 & 55 \
\hline 40 & 25 & 4 & 4 & 70 \
\hline 35 & 20 & 5 & 5 & 90 \
\hline 30 & 15 & 6 & 6 & 115 \
\hline 25 & 10 & 7 & 7 & 145 \
\hline 20 & 5 & 8 & 8 & 180 \
\hline
\end{array}$ If columns 1 and 3 are this firm's demand schedule, the profit-maximizing level of output will be

Accepted Answer

The profit-maximizing output is where marginal cost equals marginal revenue. At 4 units, the price is $40, and the total cost is $70, resulting in the highest profit.

Question 16

Answer the question on the basis of the following demand and cost data for a specific firm. $ \quad$$ \quad$$ \quad$$ \quad$$\text { Demand Data }$ $ \quad$$ \quad$$ \quad$ $\text { Cost Data }$
$\begin{array}{|c|c|c|c|c|}
\hline&&(3)&\text { Total } \
\text { (1) } & \text { (2) } & \text { Quantit } & \text { Output } & \text { Total } \
\text { Price } & \text { Price } & \text { Y} & & \text { Cost }\
\hline \$ 50 & \$ 35 & 2 & 2 & \$ 45 \
\hline 45 & 30 & 3 & 3 & 55 \
\hline 40 & 25 & 4 & 4 & 70 \
\hline 35 & 20 & 5 & 5 & 90 \
\hline 30 & 15 & 6 & 6 & 115 \
\hline 25 & 10 & 7 & 7 & 145 \
\hline 20 & 5 & 8 & 8 & 180 \
\hline
\end{array}$ Suppose that entry of firms into the industry changes this firm's demand schedule from columns 1 and 3 to columns 2 and 3. Maximum economic profit will

Accepted Answer

The answer of Answer the question on the basis of...

Question 17

Answer the question on the basis of the following demand and cost data for a specific firm. $ \quad$$ \quad$$ \quad$$ \quad$$\text { Demand Data }$ $ \quad$$ \quad$$ \quad$ $\text { Cost Data }$
$\begin{array}{|c|c|c|c|c|}
\hline&&(3)&\text { Total } \
\text { (1) } & \text { (2) } & \text { Quantit } & \text { Output } & \text { Total } \
\text { Price } & \text { Price } & \text { Y} & & \text { Cost }\
\hline \$ 50 & \$ 35 & 2 & 2 & \$ 45 \
\hline 45 & 30 & 3 & 3 & 55 \
\hline 40 & 25 & 4 & 4 & 70 \
\hline 35 & 20 & 5 & 5 & 90 \
\hline 30 & 15 & 6 & 6 & 115 \
\hline 25 & 10 & 7 & 7 & 145 \
\hline 20 & 5 & 8 & 8 & 180 \
\hline
\end{array}$ In the long run, the number of firms in this monopolistic competitive industry will most likely

Accepted Answer

In a monopolistically competitive market, firms are able to differentiate their products to some extent, which allows them to have some degree of market power. As such, they are able to charge prices that are higher than their marginal costs in the short run. However, in the long run, other firms are able to enter the market and offer similar, differentiated products, which leads to increased competition and decreases the market power of each individual firm.

In this particular scenario, the cost data suggests that this firm is currently operating at a loss in the short run, since its total costs exceed its total revenue at all levels of output. If this trend persists, the firm will be forced to exit the market in the long run. However, if the firm is able to make changes (such as reducing costs or increasing demand) that allow it to operate at a profit, then other firms may be attracted to enter the market as well. This would suggest that the number of firms in the market will most likely increase in the long run, as more firms are able to offer differentiated products and capture a portion of the market. Therefore, the best answer is B: increase.

Question 18

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. $ \quad$$ \quad$$ \quad$$ \quad$   $\text { Cost Data }$    $ \quad$$ \quad$$ \quad$  $\text { Demand Data }$ 
$\begin{array}{|c|c|c|c}
\begin{array}{c}
\text { Total } \
\text { Output }
\end{array} & \begin{array}{c}
\text { Total } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Quantity } \
\text { Demanded }
\end{array} & \text { Price } \
\hline 0 & \$ 25 & 0 & \$ 60 \
\hline 1 & 40 & 1 & 55 \
\hline 2 & 45 & 2 & 50 \
\hline 3 & 55 & 3 & 45 \
\hline 4 & 70 & 4 & 40 \
\hline 5 & 90 & 5 & 35 \
\hline 6 & 115 & 6 & 30 \
\hline
\end{array}$ What output and price levels will maximize the firm's profit in the short run?

Accepted Answer

To maximize profit, the firm should produce where marginal revenue (MR) equals marginal cost (MC) and charge the price corresponding to that output level.

From the demand data, we can calculate the marginal revenue:
\begin{array}{|c|c|c|}
\hline 	ext { Quantity } & 	ext { Price } & 	ext { Total Revenue } \
\hline 0 & \$60 & - \
\hline 1 & 55 & 55 \
\hline 2 & 50 & 100 \
\hline 3 & 45 & 135 \
\hline 4 & 40 & 160 \
\hline 5 & 35 & 175 \
\hline 6 & 30 & 180 \
\hline \end{array}

The marginal revenue for each additional unit sold is as follows:
\begin{array}{|c|c|}
\hline 	ext { Quantity } & 	ext { Marginal Revenue } \
\hline 1 & \$55-\$60=-\$5 \
\hline 2 & \$50-\$55=-\$5 \
\hline 3 & \$45-\$50=-\$5 \
\hline 4 & \$40-\$45=-\$5 \
\hline 5 & \$35-\$40=-\$5 \
\hline 6 & \$30-\$35=-\$5 \
\hline \end{array}

The marginal cost for each additional unit produced is as follows:
\begin{array}{|c|c|}
\hline 	ext { Quantity } & 	ext { Marginal Cost } \
\hline 1 & \$40-\$25 = \$15 \
\hline 2 & \$45-\$40 = \$5 \
\hline 3 & \$55-\$45 = \$10 \
\hline 4 & \$70-\$55 = \$15 \
\hline 5 & \$90-\$70 = \$20 \
\hline 6 & \$115-\$90 = \$25 \
\hline \end{array}

The point where MR intersects MC is at 4 units of output. At that level of output, the price is $40. Therefore, the best choice is 4 units and $40.

Question 19

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

Accepted Answer

When new firms enter the industry, the market becomes more competitive, leading to a decrease in the demand for the products of existing firms as consumers have more options to choose from.

Question 20

In the long run, a representative firm in a monopolistically competitive industry will end up

Accepted Answer

In the long run, firms in a monopolistically competitive market earn zero economic profit due to the entry of new firms, which drives down prices and profits to a normal level.

Quiz 13: Monopolistic Competition