Question 1

A chewing gum monopoly can sell 400,000 packages of gum for $0.10 each. If it wants to sell 500,000 packages, its price must be

Accepted Answer

To sell more units (from 400,000 to 500,000), the monopoly must lower the price below $0.10 to increase quantity demanded, according to the law of demand.

Question 2

The monopolist, unlike the perfectly competitive firm, continues to earn an economic profit in the long run because

Accepted Answer

Monopolists can maintain long-term economic profits due to high barriers to entry, which prevent other firms from entering the market and competing away profits.

Question 3

Suppose potatoes were produced in Canada by many, many firms in perfect competition. In Belgium, only one firm produces potatoes for the Belgium market. Suppose as well that for the competitive firms and the monopoly, minimum ATC is the same. We would expect then, that in Belgium the price of potatoes is _____________ and ____________potatoes are produced and sold than in Canada.

Accepted Answer

In a monopoly, prices tend to be higher due to the lack of competition, and output is lower because the monopolist can restrict supply to increase prices.

Question 4

Many firms have implicit and explicit costs. The difference between them is that implicit costs

Accepted Answer

Implicit costs do not involve actual money payments but represent the opportunity costs of using resources owned by the firm for its own production instead of earning income elsewhere.

Question 5

If you, as sole proprietor of a corner grocery store, work 15 hours per day, six days a week but do not take a money wage payment, then the cost to your firm of your labor is your

Accepted Answer

The cost of your labor as a sole proprietor who does not take a money wage is considered your opportunity cost because it represents the value of what you could have earned if you had worked elsewhere. This is an implicit cost, as it is not a direct outlay of cash but rather the foregone income from not taking an alternative employment opportunity.

Question 6

Suppose your accountant told you that the economic profit you made last year was $50,000. You would be pleased because the $50,000 represents your total revenue minus

Accepted Answer

Economic profit is calculated by subtracting both implicit (non-out-of-pocket costs, such as opportunity costs) and explicit (direct, out-of-pocket costs) costs from total revenue.

Question 7

Suppose your accountant told you that the $50,000 you made last year was the total revenue you earned minus both explicit and implicit costs. You would be pleased because that $50,000 represents your

Accepted Answer

Economic profit includes both explicit and implicit costs. If you made $50,000 after accounting for these, it means you earned more than your opportunity costs, indicating an economic profit.

Question 8

Suppose your accountant told you that the $50,000 you made last year was your normal profit. When you asked him what your accounting profit was he replied that it was precisely the same as your normal profit. You wouldn't have to ask what your economic profit was because you know it must be

Accepted Answer

Economic profit is calculated by subtracting both explicit (accounting costs) and implicit (opportunity costs) from total revenue. If your accounting profit, which only subtracts explicit costs, is the same as your normal profit (which includes opportunity costs), it means there are no additional opportunity costs unaccounted for. Therefore, your economic profit, which accounts for both types of costs, would be zero, indicating you are earning exactly what you would in your next best alternative.

Question 9

You developed a new technology for weather stripping windows. Your monopoly in this market turns out to be lucrative. Your total revenue was $75,000 and your total cost-explicit and implicit costs combined-was $25,000. The $50,000 difference representsyour

Accepted Answer

Economic profit includes both explicit and implicit costs. The $50,000 difference between total revenue and the combined explicit and implicit costs represents economic profit.

Question 10

When compared to monopoly and monopolistic competition, the perfectly competitive market structure

Accepted Answer

In a perfectly competitive market, firms produce at the point where price equals marginal cost, which leads to the greatest output at the lowest prices. This is due to the fact that there are many firms, no barriers to entry, and products are homogenous, leading to efficiency and competitive pricing.

Question 11

One reason why a monopolist might be able to provide greater output at lower costs than other market structures is that some monopolists

Accepted Answer

Monopolists can produce high volume output, which allows them to capture economies of scale. This means they can spread their fixed costs over a larger number of units, reducing the average total cost (ATC) per unit. This efficiency is not necessarily related to profit levels, market share manipulation, labor exploitation, or advertising practices directly, but rather to the scale of production.

Question 12

In which situation would a monopolist be maximizing profit when it produces at an output where MR > MC?

Accepted Answer

A monopolist maximizes profit where marginal revenue (MR) equals marginal cost (MC). If MR > MC, the firm can increase profit by producing more, so profit is not maximized in this situation.

Question 13

In the economic world of production, there are either price makers or price takers. By price takers we mean that

Accepted Answer

Price takers are firms that accept the market price as given. They cannot influence the price of the good or service they are selling because their individual production is too small to affect the market price. This is typical in perfectly competitive markets where many firms sell identical products.

Question 14

According to George Stigler, the monopolist is distinguished from other entrepreneurs because of his or her

Accepted Answer

George Stigler distinguished monopolists from other entrepreneurs primarily based on their market position. A monopolist has significant control over the market for a particular product or service, unlike competitors in a more competitive market environment.

Question 15

Aaron gave up a job as a tire rotator that paid $20,000 a year to start his own T-shirt business. The T-shirt company has the following revenues and costs: TR = $60,000; costof hiring employees = $40,000; cost of materials = $8,000; cost of rent and insurance =$6,000. According to these data, Aaron's business made a(n)

Accepted Answer

Aaron's economic profit is calculated by subtracting all explicit and implicit costs from total revenue (TR). Explicit costs here are the costs of hiring employees ($40,000), materials ($8,000), and rent and insurance ($6,000), totaling $54,000. The implicit cost is the forgone salary of $20,000. So, the total costs are $74,000 ($54,000 + $20,000). Subtracting this from the total revenue ($60,000) results in an economic loss of $14,000.

Question 16

We know that in the long run, perfectly competitive firms produce where MR = MC andend up making zero economic profit. The profit-maximizing output level for a monopolist is where

Accepted Answer

A monopolist maximizes profit by producing at the quantity where marginal revenue (MR) equals marginal cost (MC), similar to firms in perfect competition. However, unlike in perfect competition, this does not lead to zero economic profits in the long run for a monopolist due to barriers to entry and lack of perfect substitutes.

Question 17

-In Exhibit K-7, the marginal cost of the fourth unit is

Accepted Answer

The marginal cost of producing an additional unit is the change in total cost that comes from producing one more unit. To find the marginal cost of the fourth unit, you subtract the total cost of producing three units from the total cost of producing four units. The difference is the marginal cost of the fourth unit.

Question 18

-To maximize profit, the monopolist in Exhibit K-7 produces _____ units.

Accepted Answer

A monopolist maximizes profit by producing the quantity where marginal cost equals marginal revenue. In Exhibit K-7, this occurs at 2 units.

Question 19

-The maximum profit in Exhibit K-7 is

Accepted Answer

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Question 20

-To maximize profit, the monopolist in Exhibit K-7 sets price at

Accepted Answer

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Quiz 11: Price and Output in Monopoly, Monopolistic Competition, and Perfect Competition