Question 1

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

Accepted Answer

The answer of Suppose a monopolist knows the own-price elasticity...

Question 2

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

Accepted Answer

Comparative advertising is a strategy where a firm compares its product with its rivals' products to showcase the superiority of its product. Niche marketing is a strategy where a firm segments the market and targets a specific group of consumers with unique needs, preferences, and demands through marketing mix elements like product design, promotion, price, and distribution. Both strategies are commonly used by firms in monopolistically competitive industries to convince consumers that their product is better than its rivals' products. Hence, the best choice is D.

Question 3

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

Accepted Answer

In a perfectly competitive market, each firm is a price taker and has no ability to change the market price. Thus, the demand curve facing an individual firm is perfectly elastic or horizontal. In this scenario, the market equilibrium price can be found by equating the demand and supply functions:

100 - 5Q = 10 + 5Q

Solving for Q, we get Q = 9. Substituting this value of Q in either the demand or supply function, we get the market equilibrium price as P = 55. This means that each firm in the market faces a horizontal demand curve at the equilibrium price of $55. Therefore, the correct answer is option C.

Question 4

There is a market supply curve in a

Accepted Answer

In a perfectly competitive market, the market supply curve is determined by the aggregate of individual firms' supply curves. Each firm in a perfectly competitive market is a price-taker, meaning that they cannot influence the market price and must accept the prevailing price as given. Therefore, the market supply curve is horizontal, indicating that firms are willing to supply any quantity at the going market price. In other markets, such as monopolistically competitive and monopolistic markets, firms have some degree of market power and can influence the price, making the market supply curve more complex.

Question 5

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

Accepted Answer

In a perfectly competitive industry, firms are price takers, and the demand curve is perfectly elastic (infinite elasticity). In such a market, advertising does not affect demand, so the optimal advertising-to-sales ratio is $0.

Question 6

The first-order condition for a monopoly maximizing its profit is

Accepted Answer

The first-order condition for a monopoly maximizing its profit is (dR(Q) / dQ) - (dC(Q) / dQ) = 0, which is option B. This condition states that the marginal revenue should be equal to the marginal cost for profit maximization.

Question 7

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

Accepted Answer

Both perfectly competitive markets and monopolistically competitive markets tend to have zero long-run profits. However, choices A, B, and D are not common to both types of markets. In perfectly competitive markets, firms produce homogeneous goods and prices are equal to marginal costs in the long-run, while in monopolistically competitive markets, firms produce differentiated goods and prices are above marginal costs in the long-run due to some market power.

Question 8

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

Accepted Answer

All the statements represent the same condition for profit maximization in a monopoly, expressed in different mathematical notations. A) Marginal Revenue equals Marginal Cost, B) is another way to state this condition, and C) represents a derivative of profit with respect to quantity equals zero, which is the mathematical condition for maximizing profit.

Question 9

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

Accepted Answer

When the price elasticity of demand is -0.25, marginal revenue (MR) is calculated using the formula MR = P(1 + 1/elasticity). Substituting the given elasticity, MR = P(1 + 1/-0.25) = P(1 - 4) = -3P.

Question 10

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

Accepted Answer

The first-order condition for a firm maximizing its profit in a monopolistically competitive market is that marginal revenue (dR(Q)/dQ) equals marginal cost (dC(Q)/dQ). Therefore, the correct choice is C, as it is the only option that includes both marginal revenue and marginal cost in the equation.

Question 11

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

Accepted Answer

The formula for marginal revenue is given by:
MR(Q) = ∂TR(Q) / ∂Q
where TR(Q) is the total revenue function.
Total revenue is given by:
TR(Q) = P(Q) × Q
Substituting the given demand function P = 200 − 5Q, we get:
TR(Q) = (200 − 5Q) × Q
TR(Q) = 200Q − 5Q²
Differentiating with respect to Q, we get:
MR(Q) = 200 − 10Q
Therefore, the correct answer is C.

Question 12

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

Accepted Answer

To ensure profits are at a maximum, two conditions must be met: 1) marginal cost must equal marginal revenue (i.e. d(MC(Q))/dQ = 0) and 2) the second derivative of the profit function with respect to quantity must be negative (i.e. d^2(P(Q))/dQ^2 < 0). Condition D includes the first condition (d(MC(Q))/dQ > 0) and the second derivative of the profit function (d²F1F1F1S1F1F1F10(Q)/dQ² < 0) with respect to quantity, so it is the best choice.

Question 13

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

Accepted Answer

The second-order condition for profit maximization requires the second derivative of the profit function (which is revenue minus cost) with respect to quantity to be less than zero. This ensures that the profit function is concave down, indicating a maximum point. Option B correctly represents a condition where the change in revenue minus the change in cost with respect to quantity is less than zero, aligning with the requirement for a maximum profit condition.

Question 14

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.

Accepted Answer

The answer of SeaSide Industries currently spends 5 percent of...

Question 15

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

Accepted Answer

The answer of Consider a monopoly where the inverse demand...

Question 16

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

Accepted Answer

The answer of Suppose that a monopolistically competitive market is...

Question 17

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?

Accepted Answer

The answer of Which of the following is true about...

Question 18

The second-order condition for a monopoly maximizing its profit is

Accepted Answer

The second-order condition for profit maximization by a monopoly is that either the marginal revenue (MR) must be less than the marginal cost (MC) or the derivative of the profit function with respect to quantity (Q) must be negative. Thus, option D is correct, as it includes both conditions. Option A is incorrect because it only includes the profit derivative condition, while option B is incorrect because equality does not hold for profit maximization. Option C is incorrect because it only includes the marginal revenue and marginal cost condition, which is only one of the two possible second-order conditions for profit maximization.

Question 19

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

Accepted Answer

To find the profit-maximizing output and price, we need to first find the monopolist's marginal revenue (MR) function. We know that the inverse demand function is P = 50 - 2Q, so we can derive the total revenue (TR) function as: TR = P*Q = (50 - 2Q)*Q = 50Q - 2Q^2 Taking the derivative of TR with respect to Q, we get: MR = dTR/dQ = 50 - 4Q Setting MR equal to MC (marginal cost), which is the derivative of total cost with respect to Q, we get: 50 - 4Q = dC(Q)/dQ = 2 + 2² Solving for Q, we get: Q = 9 Substituting this value back into the demand function, we get: P = 50 - 2Q = 32 Therefore, the profit-maximizing output and price are Q = 9 and P = 32. To find consumer surplus, we need to find the area between the demand curve and the price. Integrating the demand function from 0 to 9, we get: ∫0^9 (50 - 2Q) dQ = 405 Integrating the demand function from 0 to 32, we get: ∫0^32 (50 - 2Q) dQ = 512 Therefore, consumer surplus is: 512 - 405 = $107 Since consumer surplus only refers to the benefit consumers receive from purchasing a good, the answer is rounded down to the nearest option, which is option B: $64.

Question 20

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

Accepted Answer

Deadweight loss in a monopoly can be calculated by finding the area of the triangle formed by the demand curve, the marginal cost curve, and the quantity produced by the monopolist. First, we need to find the monopolist's profit-maximizing quantity and price. The marginal revenue (MR) and marginal cost (MC) are derived from the given functions. The inverse demand function is P = 50 - 2Q, so the total revenue (TR) is P*Q = (50 - 2Q)Q = 50Q - 2Q^2. The marginal revenue (MR) is the derivative of TR with respect to Q, which is MR = 50 - 4Q. The total cost (C) is given as C(Q) = 100 + 2Q + Q^2, so the marginal cost (MC) is the derivative of C with respect to Q, which is MC = 2 + 2Q. Setting MR = MC to find the profit-maximizing quantity: 50 - 4Q = 2 + 2Q, solving this gives Q = 12. The price can be found by substituting Q into the demand equation: P = 50 - 2*12 = 26. To find the deadweight loss, we need to find where the MC (which is also the supply curve in a competitive market) intersects the demand curve. Setting P = MC: 50 - 2Q = 2 + 2Q, solving for Q gives Q = 12 (which is the competitive quantity, but we need this to find the intersection point). The deadweight loss is the area of the triangle formed by the demand curve, the MC curve, and the monopolist's quantity. The base of the triangle is the difference between the competitive quantity and the monopolist's quantity (which in this case are the same, so we need to find the height of the triangle, which is the difference in prices). However, the calculation provided directly does not lead to the correct interpretation for deadweight loss calculation. The correct approach involves finding the area of the triangle where the base is the difference between the quantities (which in this case, we need to find the competitive quantity correctly) and the height is the difference in prices. The error in the explanation above is in not correctly identifying the competitive quantity and price, and thus not correctly calculating the deadweight loss. The correct calculation involves finding where the marginal cost equals the average cost for the competitive outcome, which was not accurately pursued. Given the mistake in the process described, the deadweight loss calculation involves finding the area of the triangle where the base is the difference between the monopolist's quantity and the competitive quantity (if correctly calculated) and the height is the difference between the prices at these quantities. Without the correct competitive quantity and price, the direct calculation of deadweight loss as described is not feasible with the given information, leading to an incorrect direct answer. The correct approach to finding the deadweight loss involves more detailed steps in identifying the competitive equilibrium and comparing it to the monopolist's outcome.

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

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

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

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

There is a market supply curve in a

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

The first-order condition for a monopoly maximizing its profit is

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

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

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

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

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

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

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

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.

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

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

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?

The second-order condition for a monopoly maximizing its profit is

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

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

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

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

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

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

There is a market supply curve in a

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

The first-order condition for a monopoly maximizing its profit is

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

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

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

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

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

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

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

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.

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

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

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?

The second-order condition for a monopoly maximizing its profit is

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

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

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

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

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

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