Question 1

You are the manager of a firm that sells its product in a competitive market at a price of $60.Your firm's cost function is C = 33 + 3Q².The profit-maximizing output for your firm is:

Accepted Answer

The answer of You are the manager of a firm...

Question 2

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

Accepted Answer

Economies of scale occur when an increase in output leads to a lower average cost per unit. The given cost function C(Q) = 75 + 25Q suggests that as Q (quantity produced) increases, the total cost increases at a constant rate (25 per unit of Q), indicating that the average cost decreases as production increases, which is characteristic of economies of scale.

Question 3

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

Accepted Answer

The answer of A firm can produce two products with...

Question 4

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?

Accepted Answer

To maximize profits, the producer should set the output level where marginal cost equals marginal revenue. Using the cost function provided, we can find the marginal cost of producing cheese:

MC(H) = 0.4S1U1P12S1S1P0

The marginal revenue of producing cheese is the price of cheese, which is $2.

Setting MC(H) = MR = $2:

0.4S1U1P12S1S1P0 = 2

Simplifying:

S1U1P12S1S1P0 = 5

Since the demand in the market is perfectly competitive, we can assume that P0 = 1. Therefore:

S1U1P12S1 = 5

To find the optimal output level of cheese, we need to solve for H:

H = S1U1P12 = 2.5

Therefore, the optimal output level of cheese is 2.5. The answer is B.

Question 5

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

Accepted Answer

The inverse demand function is found by solving the demand function for P. Starting with Q = 50 - 5P, we rearrange to get P on one side: 5P = 50 - Q, then divide by 5 to isolate P: P = 10 - 0.2Q, which matches choice B.

Question 6

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?

Accepted Answer

To find the profit-maximizing price, we first need to determine the quantity that maximizes profit. The total quantity produced, Q, is the sum of quantities produced in both plants: Q = Q1 + Q2. Given the demand function P = 20 - Q and the marginal costs MC1 = 2 and MC2 = 2Q2, we equate marginal revenue (MR) to marginal cost (MC) for each plant. For a linear demand curve, MR = 20 - 2Q. Setting MR equal to MC for each plant and solving for Q1 and Q2 gives us the quantities that maximize profit. Since MC1 is constant and MC2 increases with Q2, we find the optimal Q by equating MR to the sum of MCs. Without the specific calculations here, the key is recognizing that the firm's profit maximization involves setting MR equal to the aggregate MC, and then using the demand function to find the corresponding price. Given the information and the options provided, the correct calculation leads to a profit-maximizing price of $11, which corresponds to the equilibrium where the firm's total marginal cost equals its marginal revenue, taking into account the output levels from both plants.

Question 7

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 8

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:

Accepted Answer

To find the profit-maximizing price, first, we need to determine the quantity where marginal revenue (MR) equals marginal cost (MC). The inverse demand curve is P = 200 - 15Q, so the total revenue (TR) is P*Q = (200 - 15Q)Q = 200Q - 15Q^2. The marginal revenue (MR) is the derivative of TR with respect to Q, which is MR = 200 - 30Q. The total cost (TC) is C = 15 + 20Q, so the marginal cost (MC) is the derivative of TC with respect to Q, which is MC = 20. Setting MR equal to MC to find the profit-maximizing quantity: 200 - 30Q = 20, solving for Q gives Q = 6. Substituting Q = 6 back into the inverse demand equation to find the price: P = 200 - 15*6 = 200 - 90 = $110.

Question 9

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

Accepted Answer

The statement is incorrect. Monopolistic competition may still result in a deadweight loss due to product differentiation and the pricing power that some firms may have in the market. Additionally, monopolistic competition may also result in excess capacity, leading to inefficiencies and ultimately a deadweight loss for the society.

Question 10

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?

Accepted Answer

If prices of close substitutes are expected to fall in the near future, it means that consumers will have more options to choose from and may switch to those substitutes instead of your firm's product. As a result, the demand for your product may decrease, and you may not be able to sell as many units as before. In order to maintain profits, it would be wise to produce less than 100 units to match the expected decrease in demand. By reducing output, the firm can maintain a higher price for its product and maximize profits. Therefore, producing less than 100 units is the best choice.

Question 11

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:

Accepted Answer

The answer of You are the manager of a firm...

Question 12

Differentiated goods are NOT a feature of a:

Accepted Answer

The answer of Differentiated goods are NOT a feature of...

Question 13

In the long run,monopolistically competitive firms charge prices:

Accepted Answer

In monopolistically competitive markets, firms have some degree of market power and can set prices above marginal cost. However, the extent to which they can do so is limited by competition. Firms will tend to set prices just above their average total cost in order to earn a positive profit in the long run. Therefore, the correct answer is (D) above the minimum of average total cost.

Question 14

Which of the following statements is NOT correct about monopoly?

Accepted Answer

Monopolists may not always make positive profits in the long run. They may face competition from substitutes, new firms entering the market, and changes in demand or production costs that can reduce or even eliminate their profits.

Question 15

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

Accepted Answer

In a competitive industry with identical firms, long-run equilibrium is characterized by MC = MR = P = minimum AC. 
Option A and D are incorrect because P can neither be greater than AC nor less than MR in the long-run equilibrium of a perfectly competitive market. Therefore, the only correct choice is C.

Question 16

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

Accepted Answer

Patents grant exclusive rights to the production and sale of a particular product or process, effectively creating a monopoly. This is because no other producers can legally compete with the patent-holder on that product or process. Therefore, patents can be a significant source of monopoly power.

Question 17

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

Accepted Answer

The cereal industry is best characterized as monopolistically competitive because there are many different brands of cereal that are differentiated by factors such as taste, texture, and marketing. While there may be some brand loyalty among consumers, there are also many substitutes available, and barriers to entry are relatively low. Crude oil and wheat are both examples of goods that are typically produced in highly competitive markets, while local electricity service is often provided by regulated monopolies.

Question 18

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?

Accepted Answer

To maximize profits, Eric needs to set the marginal cost (MC) of producing milk equal to the market price of milk. The total cost function for milk is given as $C(M) = 10 + 0.2M$. The marginal cost (MC) is the derivative of the total cost function with respect to M, which is $MC = 0.2$. Since the market price of milk is $5, we set $MC = 5$, but given that MC is constant at $0.2, this step is to illustrate that the profit-maximizing condition in a perfectly competitive market is where price equals marginal cost. However, the calculation provided does not directly lead to the output level because the MC does not change with the level of output due to its constancy. The error in the explanation process suggests reevaluation, but the correct approach involves understanding that profit maximization occurs when marginal revenue (equal to the price in perfect competition, which is $5 for milk) equals marginal cost. The provided cost function and its derivative do not directly lead to solving for the quantity without additional steps involving revenue and cost comparison. The initial explanation mistakenly attempted to equate a constant MC with the price to find quantity, which is not the correct application of the profit maximization principle in this context. The correct output level should be determined by analyzing profit maximization more comprehensively, considering total revenue and total cost, rather than directly equating MC to price due to the oversight in the explanation process.

Question 19

Which of the following is true under monopoly?

Accepted Answer

Under monopoly, the demand curve is downward sloping, which means that in order to maximize profits, the monopolist must produce where marginal revenue (MR) is equal to marginal cost (MC). However, since the monopolist has market power, they are able to charge a price that is greater than their marginal cost. Therefore, choice B, where P > MC, is true under monopoly. Choices A and D are not necessarily true because the monopolist could still be producing at a level where price equals average total cost (ATC) or where price is greater than ATC but less than MC. Choice C is only true at the profit-maximizing output level and is not necessarily true overall.

Question 20

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?

Accepted Answer

To maximize profits, we must equate marginal revenue to marginal cost in each plant. The marginal revenue is given by MR = P(1+1/ε), where ε is the price elasticity of demand. In this case, ε = -1, so MR = 10 - Q/2. For plant 1, we have: MR = MC₁ 10 - Q/2 = 2 Q/2 = 8 Q = 16 Therefore, plant 1 should produce 8 units of output to maximize profits.

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

You are the manager of a firm that sells its product in a competitive market at a price of $60.Your firm's cost function is C = 33 + 3Q².The profit-maximizing output for your firm is:

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

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

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?

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

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?

There is a market supply curve in a:

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:

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

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:

Differentiated goods are NOT a feature of a:

In the long run,monopolistically competitive firms charge prices:

Which of the following statements is NOT correct about monopoly?

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

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

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

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?

Which of the following is true under monopoly?

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

You are the manager of a firm that sells its product in a competitive market at a price of $60.Your firm's cost function is C = 33 + 3Q2.The profit-maximizing output for your firm is:

A firm has a total cost function of C(Q) = 75 + 25Q1/2.The firm experiences:

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

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?

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

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?

There is a market supply curve in a:

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:

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

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:

Differentiated goods are NOT a feature of a:

In the long run,monopolistically competitive firms charge prices:

Which of the following statements is NOT correct about monopoly?

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

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

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

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?

Which of the following is true under monopoly?

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?

You are the manager of a firm that sells its product in a competitive market at a price of $60.Your firm's cost function is C = 33 + 3Q².The profit-maximizing output for your firm is:

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

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

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?

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?

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:

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?