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

Question 1

Which of the following is true?

A) A monopolist produces on the inelastic portion of its demand.
B) A monopolist always earns an economic profit.
C) The more inelastic the demand, the closer marginal revenue is to price.
D) In the short run, a monopoly will shut down if P < AVC.

Answer 1

D

Question 2

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 120 - 6Q, where Q = Q₁ + Q₂. The marginal costs associated with producing in the two plants are MC₁ = 2Q₁ and MC₂ = 4Q₂. What price should be charged in order to maximize revenues?

A) 6
B) 2
C) 24
D) 60

Answer 2

D

Question 3

There is no market supply curve in:

A) a perfectly competitive market.
B) a monopolistically competitive market.
C) a monopolistic market.
D) monopolistically competitive and monopolistic markets.

Answer 3

D

Question 4

Which of the following is an example of monopoly?

A) Shoe industry in the United States
B) Local utility industry in a small town
C) Newspaper industry in New York City
D) Bread industry in New York City

Question 5

Differentiated goods are a feature of a:

A) perfectly competitive market.
B) monopolistically competitive market.
C) monopolistic market.
D) monopolistically competitive market and monopolistic market.

Question 6

The primary difference between monopolistic competition and perfect competition is:

A) the ease of entry and exit into the industry.
B) the number of firms in the market.
C) Both the ease of entry and exit into the industry and the number of firms in the market are correct.
D) None of the answers is correct.

Question 7

In the long run, monopolistically competitive firms:

A) charge prices equal to marginal cost.
B) have excess capacity.
C) produce at the minimum of average total cost.
D) have excess capacity and produce at the minimum of average total cost.

Question 8

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 120 - 6Q, where Q = Q₁ + Q₂. The marginal costs associated with producing in the two plants are MC₁ = 2Q₁ and MC₂ = 4Q₂. How much output should be produced in plant 1 in order to maximize profits?

A) 3
B) 6
C) 9
D) 12

Question 9

Suppose that initially the price is $50 in a perfectly competitive market. Firms are making zero economic profits. Then the market demand shrinks permanently, some firms leave the industry, and the industry returns to a long-run equilibrium. What will be the new equilibrium price, assuming cost conditions in the industry remain constant?

A) $50
B) $45
C) Lower than $50, but exact value cannot be known without more information.
D) Larger than $45, but exact value cannot be known without more information.

Question 10

Firms have market power in:

A) perfectly competitive markets.
B) monopolistically competitive markets.
C) monopolistic markets.
D) monopolistically competitive markets and monopolistic markets.

Question 11

If a monopolistically competitive firm's marginal cost increases, then in order to maximize profits, the firm will:

A) reduce output and increase price.
B) increase output and decrease price.
C) increase both output and price.
D) reduce both output and price.

Question 12

Which of the following is true under monopoly?

A) Profits are always positive.
B) P > MC.
C) P = MR.
D) All of the choices are true for monopoly.

Question 13

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 78 - 15Q, where Q = Q₁ + Q₂. The marginal costs associated with producing in the two plants are MC₁ = 3Q₁ and MC₂ = 2Q₂. What price should be charged to maximize profits?

A) $20.5
B) $40.5
C) $60.5
D) $80.5

Question 14

Which of the following market structures would you expect to yield the greatest product variety?

A) Monopoly
B) Monopolistic competition
C) Bertrand oligopoly
D) Perfect competition

Question 15

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 78 - 15Q, where Q = Q₁ + Q₂. The marginal costs associated with producing in the two plants are MC₁ = 3Q₁ and MC₂ = 2Q₂. How much output should be produced in plant 1 in order to maximize profits?

A) 1
B) 2
C) 3
D) 4

Question 16

Which of the following industries is best characterized as monopolistically competitive?

A) Toothpaste
B) Crude oil
C) Agriculture
D) Local telephone service

Question 17

Which of the following is true under monopoly?

A) Profits are always positive.
B) P > minimum of ATC.
C) P = MR.
D) None of the answers is correct.

Question 18

In a competitive industry with identical firms, long-run equilibrium is characterized by:

A) P = AC.
B) P = MC.
C) MR = MC.
D) All of the statements associated with this question are correct.

Question 19

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 120 - 6Q, where Q = Q₁ + Q₂. The marginal costs associated with producing in the two plants are MC₁ = 2Q₁ and MC₂ = 4Q₂. What price should be charged to maximize profits?

A) 60
B) 66
C) 70
D) 76

Question 20

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 78 - 15Q, where Q = Q₁ + Q₂. The marginal costs associated with producing in the two plants are MC₁ = 3Q₁ and MC₂ = 2Q₂. What price should be charged in order to maximize revenues?

A) $39
B) $47
C) $52
D) $56

Question 21

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) 5
B) 8
C) 10
D) 15

Question 22

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?

A) $12.5 per unit
B) $6.25 per unit
C) $31.25 per unit
D) $18.75 per unit

Question 23

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?

A) Demand will increase.
B) Demand will decline.
C) Nothing.
D) None of the answers is correct.

Question 24

Which of the following statements concerning monopoly is NOT true?

A) A market may be monopolistic because there are some legal barriers.
B) A monopoly has market power.
C) A monopoly is always undesirable.
D) There is some deadweight loss in a monopolistic market.

Question 25

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

A) P = MC.
B) P = minimum of AC.
C) P = MC and P = minimum of AC.
D) None of the answers is correct.

Question 26

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

A) economies of scale.
B) economies of scope.
C) patents.
D) All of the statements associated with this question are correct.

Question 27

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

A) There are many buyers and sellers in the industry.
B) Each firm in the industry produces a differentiated product.
C) There is free entry and exit into the industry.
D) Each firm owns a patent on its product.

Question 28

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?

A) In the absence of imports, the refrigerator industry in Sweden is monopolistic.
B) The refrigerator industry in Sweden is perfectly competitive.
C) The refrigerator industry in Sweden is monopolistically competitive.
D) None of the answers is correct.

Question 29

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

A) P > MC.
B) P = ATC.
C) ATC > minimum of average costs.
D) All of the statements associated with this question are correct.

Question 30

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?

A) The incumbent will leave the market.
B) The incumbent will retain its status as a monopoly but produce at a lower price.
C) Some firms will enter the industry.
D) None of the answers is correct.

Question 31

A linear demand function exhibits:

A) constant demand elasticity.
B) more elastic demand as output increases.
C) less elastic demand as output increases.
D) insufficient information to determine.

Question 32

What contributes to the existence of multiproduct firms?

A) Economies of scale
B) Economies of scope
C) Cost complementarity
D) Economies of scope and cost complementarity

Question 33

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

A) economies of scale.
B) economies of scope.
C) cost complementarity.
D) None of the answers is correct.

Question 34

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?

A) MC₁(Q₁) = MC₂(Q₂) = P(Q₁ + Q₂).
B) MC₁(Q₁) = MC₂(Q₂) = MR(Q₁ + Q₂).
C) MC₁(Q₁ + Q₂) = MC₂(Q₁ + Q₂) = P (Q₁ + Q₂).
D) MC₁(Q₁ + Q₂) = MC₂(Q₁ + Q₂) = MR (Q₁ + Q₂).

Question 35

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

A) Q = 100 + 2P.
B) P = 50 - 0.5Q.
C) P = 50 + 0.5Q.
D) None of the answers is correct.

Question 36

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

A) Firms produce homogeneous goods.
B) There is free entry.
C) Long-run profits are zero.
D) There is free entry and long-run profits are zero.

Question 37

Economies of scale exist whenever:

A) average total costs decline as output increases.
B) average total costs increase as output increases.
C) average total costs are stationary as output increases.
D) average total costs increase as output increases and average total costs are stationary as output increases.

Question 38

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

A) P = MR
B) MC = MR
C) P = ATC + MR
D) MR = MC + ATC

Question 39

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

A) Buyers and sellers have perfect information.
B) There are no transaction costs.
C) There is free entry and exit in the market.
D) All of the statements associated with this question are correct.

Question 40

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?

A) Q₁ = 62.5; Q₂ = 125.
B) Q₁ = 125; Q₂ = 62.5.
C) Q₁ = Q₂ = 125.
D) Q₁ = Q₂ = 62.5.

Question 41

One of the sources of monopoly power for a monopoly may be:

A) diseconomies of scale.
B) differentiated products.
C) patents.
D) free entry and exit.

Question 42

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

A) $20
B) $40
C) $60
D) $80

Question 43

Which of the following industries is best characterized as monopolistically competitive?

A) Cereal
B) Crude oil
C) Wheat
D) Local electricity service

Question 44

Differentiated goods are NOT a feature of a:

A) perfectly competitive market.
B) monopolistically competitive market.
C) monopolistic market.
D) perfectly competitive market and monopolistic market.

Question 45

A firm can produce two products with the cost function C(Q₁, Q₂) = 10 + 5Q₁ + 5Q₂ - 0.2Q₁Q₂. The firm enjoys:

A) economies of scale in the two products separately.
B) economies of scope.
C) cost complementarity.
D) economies of scale in the two products separately and cost complementarity.

Question 46

A firm has a total cost function of C(Q) = 75 + 25Q^1/2. The firm experiences:

A) economies of scale.
B) diseconomies of scale.
C) constant returns to scale.
D) All of the statements associated with this question are correct.

Question 47

A firm has a total cost function of C(Q) = 50 + 10Q^1/2. The firm experiences:

A) economies of scale.
B) constant returns to scale.
C) diseconomies of scale.
D) All of the statements associated with this question are correct, depending on the quantity.

Question 48

You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q². What will happen in the long run if there is no change in the demand curve?

A) Some firms will leave the market eventually.
B) Some firms will enter the market eventually.
C) There will be neither entry nor exit from the market.
D) None of the answers is correct.

Question 49

Eric provides cheese (H) and milk (M) to the market with the following total cost function: C(H, M) = 10 + 0.4H² + 0.2M². The prices of cheese and milk in the market are $2 and $5 respectively. Assume that the cheese and milk markets are perfectly competitive. What output of milk maximizes profits?

A) 1.25
B) 12.5
C) 15
D) 20

Question 50

Let the demand function for a product be Q = 50 - 5P. The inverse demand function of this demand function is:

A) Q = 25 + P
B) P = 10 - 0.2Q
C) P = 10 + 0.2Q
D) P = 50 - 0.2Q

Question 51

Eric provides cheese (H) and milk (M) to the market with the following total cost function: C(H, M) = 10 + 0.4H² + 0.2M². The prices of cheese and milk in the market are $2 and $5 respectively. Assume that the cheese and milk markets are perfectly competitive. What output of cheese maximizes profits?

A) 2
B) 2.5
C) 5
D) 10

Question 52

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 20 - Q, where Q = Q₁ + Q₂. The marginal costs associated with producing in the two plants are MC₁ = 2 and MC₂ = 2Q₂. How much output should be produced in plant 1 in order to maximize profits?

A) 1
B) 4
C) 8
D) 11

Question 53

Which of the following statements is NOT correct about monopoly?

A) A monopolist generally faces a downward-sloping demand curve.
B) Monopolists always make positive profits in the long run.
C) A monopoly may make negative profits in the short run.
D) There is no close substitute for a monopoly's product.

Question 54

You are a manager for a monopolistically competitive firm. From experience, the profit-maximizing level of output of your firm is 100 units. However, it is expected that prices of other close substitutes will fall in the near future. How should you adjust your level of production in response to this change?

A) Produce more than 100 units.
B) Produce less than 100 units.
C) Produce 100 units.
D) Insufficient information to decide.

Question 55

Which of the following is true under monopoly?

A) P > ATC
B) P > MC
C) P = MR
D) P = ATC

Question 56

A perfectly competitive firm faces a:

A) perfectly elastic demand function.
B) perfectly inelastic demand function.
C) demand function with unitary elasticity.
D) None of the answers is correct.

Question 57

"Monopolistic competition is literally a kind of competition. Hence, there is no deadweight loss in a monopolistically competitive market."

A) The statement is by definition correct but empirically incorrect.
B) The statement is correct.
C) The statement is incorrect.
D) None of the answers is correct.

Question 58

You are the manager of a firm that produces output in two plants. The demand for your firm's product is P = 20 - Q, where Q = Q₁ + Q₂. The marginal costs associated with producing in the two plants are MC₁ = 2 and MC₂ = 2Q₂. What is the profit-maximizing price that the firm should charge?

A) $8
B) $9
C) $11
D) $12

Question 59

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

A) $12
B) $14
C) $16
D) $18

Question 60

You are the manager of a monopoly that faces an inverse demand curve described by P = 200 - 15Q. Your costs are C = 15 + 20Q. The profit-maximizing price is:

A) $20.
B) $110.
C) $135.
D) $290.

Question 61

Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q². At the profit-maximizing combination of output and price, deadweight loss is:

A) $32.
B) $64.
C) $128.
D) cannot be determined with the given information.

Question 62

Suppose that a monopolistically competitive market is at the long-run equilibrium. Based on this information, which of the following conclusions is NOT true?

A) P > MC.
B) Deadweight loss is zero.
C) P = ATC > minimum of ATC.
D) Firms' profits are zero.

Question 63

Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q². At the profit-maximizing combination of output and price, consumer surplus is:

A) $32.
B) $64.
C) $128.
D) cannot be determined with the given information.

Question 64

Which of the following is a strategy(ies) used by firms in monopolistically competitive industries to convince consumers that their product is better than their rivals' products?

A) Comparative advertising
B) Niche marketing
C) Equity marketing
D) Comparative advertising or niche marketing

Question 65

In the long run, monopolistically competitive firms charge prices:

A) equal to marginal cost.
B) below marginal cost.
C) equal to the minimum of average total cost.
D) above the minimum of average total cost.

Question 66

The second-order condition for a firm maximizing its profit operating in a monopolistically competitive market is:

A) -(d²C(Q)/dQ²) < 0.
B) (d²R (Q)/dQ²) - (d²C(Q)/dQ²) < 0.
C) (d²R (Q)/dQ²) = (d²C(Q)/dQ²).
D) (dMR/dQ) > (dMC/dQ).

Question 67

Which of the following conditions must hold to ensure that profits are, in fact, at a maximum?

A) d(MC(Q))/dQ > 0
B) d(MC(Q))/dQ < 0
C) d²π(Q)/dQ² < 0
D) d(MC(Q))/dQ > 0 and d²π(Q)/dQ² < 0

Question 68

In a competitive industry with identical firms, long-run equilibrium is characterized by:

A) P > AC.
B) P < MC.
C) MR = MC.
D) MR < P.

Question 69

You are the manager of a firm that sells its product in a competitive market at a price of $48. Your firm's cost function is C = 60 + 2Q². Your firm's maximum profits are:

A) $192.
B) $228.
C) $348.
D) $576.

Question 70

Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q². At the profit-maximizing combination of output and price, monopoly profit is:

A) $32.
B) $64.
C) $92.
D) $128.

Question 71

Suppose perfectly competitive market conditions are characterized by the following inverse demand and inverse supply functions: P = 100 - 5Q and P = 10 + 5Q. The demand curve facing an individual firm operating in this market is:

A) P = 100 - 5Q.
B) a horizontal line at $9.
C) a horizontal line at $55.
D) P/N = (100 - 5Q)/N, where N is the total number of firms in the competitive market.

Question 72

The first-order conditions for a monopoly to maximize profits are:

A) dR(Q)/dQ = dC(Q)/dQ.
B) MR(Q) = MC(Q).
C) dπ(Q)/dQ = 0.
D) All of the statements associated with this question are correct.

Question 73

SeaSide Industries currently spends 5 percent of its sales on advertising. Suppose that the elasticity of advertising for Seaside is 0.2. Determine the optimal profit margin over price (P - MC)/P.

A) 4 percent
B) 10 percent
C) 25 percent
D) None of the answers is correct.

Question 74

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

A) Firms produce homogeneous goods.
B) Prices are equal to marginal costs in the long run.
C) Long-run profits are zero.
D) Prices are above marginal costs in the long run.

Question 75

Consider firms operating in an industry where the own price elasticity of demand is infinite; that is, Use this information to determine the type of industry in which these firms operate and the optimal advertising-to-sales ratio.

A) Perfectly competitive industry and 0
B) Monopolistically competitive industry and

C) Perfectly competitive industry and

D) Monopolistic industry and 0

Question 76

There is a market supply curve in a:

A) perfectly competitive market.
B) monopolistically competitive market.
C) monopolistic market.
D) perfectly competitive market and monopolistically competitive market.

Question 77

Consider a monopoly where the inverse demand for its product is given by P = 200 - 5Q. Based on this information, the marginal revenue function is:

A) MR(Q) = 400 - 2.5Q.
B) MR(Q) = 400 - 10Q.
C) MR(Q) = 200 - 10Q.
D) MR(Q) = 200 - 2.5Q.

Question 78

Which of the following is true about where a profit-maximizing monopoly will produce on a linear demand curve when it has positive marginal costs?

A) It will produce output on the inelastic portion of the demand curve.
B) It will produce output where MR < 0.
C) It will produce output where MR = 0.
D) It will produce output on the elastic portion of the demand curve.

Question 79

Compute the marginal revenue when the price elasticity of demand is -0.25.

A) -3P, meaning marginal revenue is negative and 3 times greater than price.
B) 3P, meaning marginal revenue is positive and 3 times greater than price.
C) -0.33P, meaning that marginal revenue is negative and one-third of the price.
D) -0.25P, meaning that marginal revenue is negative and one-fourth of the price.

Question 80

Suppose a monopolist knows the own price elasticity of demand for its product is -3 and that its marginal cost of production is constant MC(Q) = 10. To maximize its profit, the monopoly price is:

A) $1.50 per unit.
B) $6.67 per unit.
C) $10 per unit.
D) $15 per unit.