Question 1

You are a manager in a perfectly competitive market. The price is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q². What level of output should you produce in the short run?

Accepted Answer

In a perfectly competitive market, the manager will produce the level of output where price (P) equals marginal cost (MC).

The marginal cost is the derivative of the total cost with respect to quantity (Q):

MC = dC/dQ = 4 + 0.5S1U1P12S1S1P0

Setting MC equal to the price of $14:

4 + 0.5S1U1P12S1S1P0 = 14

0.5S1U1P12S1S1P0 = 10

Solving for S1S1P0:

S1S1P0 = 20

Substituting back into the MC equation:

MC = 4 + 0.5(20) = 14

This means that the manager should produce 10 units in the short run to maximize profit.

Question 2

A monopoly has two production plants with cost functions C₁ = 50 + 0.1Q₁² and C₂ = 30 + 0.05Q₂². The demand it faces is Q = 500 - 10P. What is the profit-maximizing price?

Accepted Answer

To find the profit-maximizing price, we need to first find the quantity that the monopoly will produce. This can be found by equating the marginal cost of production for both plants to the market price: MC1 = 0.1Q₁ + 0.1² + 50 = 10 MC2 = 0.05Q₂ + 0.05² + 30 = 10 (We know the market price is $10 because 500 - 10P = Q = MC1 = MC2) Solving for Q₁ and Q₂, we get: Q₁ = 450 Q₂ = 100 Therefore, the total quantity produced by the monopoly is 550. To find the profit-maximizing price, we need to find the point on the demand curve where marginal revenue (MR) equals marginal cost (MC), and then set the price accordingly. First, we need to find the equation for MR. Since the demand curve is linear, we know that: P = 50 - 0.1Q MR = ΔTR/ΔQ = P + Q(ΔP/ΔQ) = P + Q(-0.1) = 50 - 0.2Q Setting MR equal to MC and solving for Q, we get: 50 - 0.2Q = 10 Q = 200 Therefore, the profit-maximizing quantity is 200 units. To find the profit-maximizing price, we can use the demand equation: Q = 500 - 10P 200 = 500 - 10P P = $30 Therefore, the profit-maximizing price is $30 per unit, which corresponds to choice C.

Question 3

A monopoly has produced a product with a patent for the last few years. The patent is going to expire. What will likely happen to the demand for the patent-holder's product when the patent runs out?

Accepted Answer

When the patent runs out, other firms will be able to produce the same product, leading to increased competition and a decline in demand for the patent-holder's product. Consumers will have more options to choose from, potentially driving prices down and reducing the market share of the patent holder.

Question 4

Which of the following statements concerning monopoly is NOT true?

Accepted Answer

While economists generally view monopolies as undesirable, it is not necessarily true that a monopoly is always undesirable. In some cases, a natural monopoly (where it is most efficient for production to be concentrated in the hands of a single firm) may be desirable for consumers and society as a whole.

Question 5

In the long run, perfectly competitive firms produce a level of output such that:

Accepted Answer

In the long run, perfectly competitive firms aim to maximize profit by producing where marginal cost (MC) equals marginal revenue (MR), which is also equal to the market price (P). At the same time, firms need to ensure that they are operating at the minimum of average cost (AC) to ensure efficiency. Therefore, in the long run, perfectly competitive firms produce at the point where P = MC = minimum of AC.

Question 6

The source(s) of monopoly power for a monopoly may be:

Accepted Answer

All of the options listed (economies of scale, economies of scope, and patents) can be sources of monopoly power for a monopoly.

Question 7

Which of the following is NOT a basic feature of a monopolistically competitive industry?

Accepted Answer

Owning a patent on its product is not a basic feature of a monopolistically competitive industry. Monopolistically competitive industries have many buyers and sellers, produce differentiated products, and have free entry and exit into the industry.

Question 8

The number of efficient plants compatible with domestic consumption of the refrigerator industry in Sweden is 0.7. Which of the following implications is(are) correct?

Accepted Answer

The number of efficient plants compatible with domestic consumption is less than 1, which indicates that the industry is not perfectly competitive. The absence of imports suggests that there are no foreign competitors, which further supports the conclusion that the industry is not perfectly competitive. Therefore, the correct answer is A.

Question 9

In the long run, monopolistically competitive firms produce a level of output such that:

Accepted Answer

In the long run, monopolistically competitive firms produce at a level where price (P) is greater than marginal cost (MC), indicating some degree of market power and the ability to set prices above production costs. They also produce where price equals average total cost (ATC), ensuring they are not making economic profits or losses in the long run. Additionally, because they do not produce at the minimum of the average cost curve due to product differentiation and market power, their ATC is higher than the minimum average costs. This combination of conditions reflects the unique characteristics of monopolistic competition, where firms have some control over pricing but face competition that drives economic profits to zero in the long run.

Question 10

A monopoly has produced a product with a patent for the last few years. The patent is going to expire. What will happen after the patent expires?

Accepted Answer

When the patent of a product expires, other firms can legally enter the market and produce the same product, reducing the monopolist's market share. Therefore, some firms will enter the industry, leading to increased competition and potentially lower prices for consumers. The monopolist may also need to adapt to the competition and innovate their product to maintain their market share. Choice A is incorrect because if the incumbent were to leave the market, it would no longer be a monopoly. Choice B is unlikely because the monopolist's ability to maintain high prices is dependent on restricting entry into the market, which is not possible once the patent expires.

Question 11

A linear demand function exhibits:

Accepted Answer

A linear demand function typically shows less elastic demand as output increases because the slope of the demand curve is constant, but the percentage change in quantity demanded relative to the percentage change in price (elasticity) decreases as one moves down the curve.

Question 12

What contributes to the existence of multiproduct firms?

Accepted Answer

Multiproduct firms exist mainly due to the economies of scope and cost complementarity. Economies of scope occur when the cost of producing two or more products together is lower than the cost of producing them separately. Cost complementarity occurs when the inputs for producing one product can also be used to produce another product, reducing overall costs for the firm. Both of these factors lead to greater efficiency and profitability for the firm, making the existence of multiproduct firms beneficial. Economies of scale can also play a role in the existence of multiproduct firms, but they are not the primary factor.

Question 13

Chris raises cows and produces cheese and milk because he enjoys:

Accepted Answer

Economies of scope refer to the cost savings achieved by producing multiple products together rather than separately. In this case, Chris is producing both cheese and milk from his cows, which demonstrates economies of scope. A is incorrect because economies of scale refer to cost savings achieved by producing more of a single product. C is incorrect because cost complementarity refers to the cost savings achieved by producing two products whose production processes have complementary costs. D is incorrect because there is a correct answer.

Question 14

A monopoly has two production plants with cost functions C₁ = 50 + 0.1Q₁² and C₂ = 30 + 0.05Q₂². The demand it faces is Q = 500 - 10P. What is the condition for profit maximization?

Accepted Answer

The condition for profit maximization is that the marginal cost (MC) of each plant should be equal to the marginal revenue (MR) of the total output (Q). This occurs when the total cost (TC) is minimized for a given level of output. Therefore, the correct condition is: MC₁(Q₁) = MC₂(Q₂) = MR(Q₁ + Q₂). Option B correctly represents this condition.

Question 15

Let the demand function for a product be Q = 100 - 2P. The inverse demand function of this demand function is:

Accepted Answer

The inverse demand function expresses price as a function of quantity demanded. To find the inverse demand function for Q = 100 - 2P, solve for P:
Q = 100 - 2P
2P = 100 - Q
P = 50 - 0.5Q
Therefore, the inverse demand function is P = 50 - 0.5Q, which is option B.

Question 16

Which of the following features is common to both perfectly competitive markets and monopolistically competitive markets?

Accepted Answer

The answer of Which of the following features is common...

Question 17

Economies of scale exist whenever:

Accepted Answer

Economies of scale occur when the average total cost of a product decreases as the production of the product increases. This is because fixed costs related to production, such as rent and salaries, can spread over a larger number of units, reducing the average cost per unit. As a result, the company can produce more units for a lower cost.

Question 18

Which of the following is a correct representation of the profit maximization condition for a monopoly?

Accepted Answer

The profit maximization condition for a monopoly is where MC=MR. This means that the firm will produce at the level where marginal revenue is equal to marginal cost in order to maximize its profits.

Question 19

Which of the following is(are) basic feature(s) of a perfectly competitive industry?

Accepted Answer

A perfectly competitive industry requires all of the features listed, including perfect information, no transaction costs, and free entry and exit in the market.

Question 20

A monopoly has two production plants with cost functions C₁ = 50 + 0.1Q₁² and C₂ = 30 + 0.05Q₂². The demand it faces is Q = 500 - 10P. What is the profit-maximizing level of output?

Accepted Answer

To find the profit-maximizing level of output, we first determine the total cost and revenue functions. The total cost (TC) is the sum of the costs of both plants: TC = CS1 + CS2 = 50 + 0.1QS1 + 30 + 0.05QS2. The demand function is Q = 500 - 10P, which can be rearranged to find the price as a function of quantity: P = 50 - 0.1Q. Total revenue (TR) is P*Q, which becomes (50 - 0.1Q)Q. To maximize profit, we set marginal cost (MC) equal to marginal revenue (MR). Since the cost functions of the plants differ, we allocate production to the more efficient plant (with lower marginal cost) first. Plant 2 has a lower marginal cost (0.05 per unit) than Plant 1 (0.1 per unit), so we maximize output from Plant 2 before using Plant 1. The correct allocation that maximizes profit given the constraints and cost structures is QS1 = 62.5 and QS2 = 125, as it balances the marginal costs with the overall demand and price structure efficiently.

Quiz 8: Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

You are a manager in a perfectly competitive market. The price is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q2. What level of output should you produce in the short run?

A monopoly has two production plants with cost functions C1 = 50 + 0.1Q12 and C2 = 30 + 0.05Q22. The demand it faces is Q = 500 - 10P. What is the profit-maximizing price?