1 ECON 21 (Summer 212 Sections 7 and 8) Exam #3C Answer Key Multiple Choice Questions: (3 points each) 1. I am taking of the exam. C. Version C 2. is a market structure in which there is one single seller of a unique good (with no close substitutes ) and in which there are barriers to entry which prevent rival firms from entering the market A. Monopoly B. Monopolistic Competition C. Perfect Competition D. None of the above answers are correct. 3. Consider a firm in a perfectly competitive market with: output price of $17.45 per unit; AVC $14.85; and ATC $ In the short run, this firm should A. shut down, since their maximum profit is negative. B. produce a positive quantity, even though their maximum profit is negative. C. produce a positive quantity, since they can earn a positive profit. D. produce a negative quantity, so that they can avoid their fixed costs. 4. Consider the three market structures of a Perfectly Competitive Market, a Monopolistically Competitive Market, and a Monopoly Market. A firm could expect to possibly earn a positive profit in the Long Run if they were operating in which of these market structures? A. A Monopoly Market. B. A Perfectly Competitive Market. C. A Monopolistically Competitive Market. 5. Consider the market for pencils. Suppose that between 25 and 212 the value of the Herfindahl-Hirschman Index for this industry increased from (1,876.8) to (2,312.9). This change would directly suggest that in recent years A. total joint profits of all pencil producers have decreased. B. Fixed Costs of Production for each individual pencil producer have increased. C. the pencil industry has become less competitive. D. the pencil industry has become more competitive. 6. According to the Inverse Elasticity Pricing Rule, when maximizing profit a firm must be operating in a way such that 1 is equal to p A. ATC AVC. P B. Q ATC AFC. P. C. MC D. P MC. P
2 7. Brian produces shoes in a perfectly competitive market. During the month of June he: produced 8 shoes, sold each pair of shoes at a price of $3 per pair, had fixed costs of $2,5, and earned a total profit of $( 75). In the long run, we should expect that Brian would A. choose to produce more than 8 units per month, so that he could produce at a point with lower Average Total Costs of production. B. charge less than $3 per pair of shoes, so that he could increase his revenues by increasing the quantity of output which he sells. C. likely want to exit this industry. For questions 8 through 1, consider a firm operating in a monopolistically competitive market with costs of production and facing demand as illustrated below. 1 $ MC(q) 6 ATC(q) 5.1 ATC =3.9 Demand 2 quantity 2, 2,5 4,2 3,6 MR(q) 3, In order to maximize profit, this firm should produce/sell units of output. A. 2, B. 2,5 C. 3,325 D. 3,6 9. When choosing the level of output and setting the price which maximize profit, the profit of this firm is A. $1,8. B. $4,. C. $12,. D. $14,4. 1. In the Long Run this firm should A. expect demand for their product to decrease. B. expect new firms to enter the market. C. completely exit the industry, since their maximum Short Run profit is zero.
3 11. Producer s Surplus is equal to A. Revenue us Variable Costs of Production. B. Profit us Total Costs of Production. C. Profit divided by Fixed Costs of Production. For questions 12 through 15, consider a firm in a perfectly competitive market with Short Run costs of production as illustrated below: 7.2 $ MC(q) ATC(q) AVC(q) 6.2 ATC AVC 2.9 MC 2. 3,4 5,945 8,56 9, 9,45 quantity 11, If this firm were to realize a Producer s Surplus of $16,87, then it would earn a profit of A. $. B. $5,25. C. $16,87 (since Profit and Producer s Surplus are synonymous). D. $28, If the per unit price of output in this market were $6.2, then this firm would A. want to shut-down and produce zero units of output in the Short Run. B. choose to sell a quantity of output which would generate Revenue of $55,8. C. want to exit the industry in the Long Run. 14. For which of the following prices would this firm choose to produce more than 5,945 but fewer than 8,56 units of output? A. $2.5. B. $4.3. C. $5.. D. More than one (perhaps all) of the above answers are correct. 15. This firm would want to shut-down in the Short Run if and only if price were A. greater than $2.9 but less than $5.5. B. less than $5.5. C. less than $2.9. D. less than $2..
4 16. If a firm in a perfectly competitive market chooses to decrease its quantity sold by 25%, then its Total Revenue will A. decrease, but by less than 25%. B. decrease by exactly 25%. C. decrease, but by more than 25%. D. increase by exactly 25%. 17. Bruce sells bathing suits. He offers customers a 2% discount if they show him a valid driver s license which indicates that they are over the age of 65 at the time of the purchase. This behavior by Bruce is an example of A. 1 st Degree Price Discriation (or Perfect Price Discriation). B. 2 nd Degree Price Discriation (or Menu Pricing). C. 3 rd Degree Price Discriation (or Segmented Pricing). D. 65 th Degree Price Discriation (or Geriatric Pricing). 18. Consider a monopolist who is charging a price of $2 for each unit of output sold. At this price, they are able to sell 15, units of output. Their Marginal Costs of Production at this level of output are equal to $12. Finally, price elasticity of demand is equal to From this information alone, this monopolist A. appears to be maximizing profit, but is not able to earn a positive profit. B. appears to be maximizing profit, and is able to earn a positive profit. C. appears to be maximizing profit, but may or may not be earning a positive profit. D. is clearly not maximizing profit. For questions 19 and 2, consider a market for which in 2, 26, and 212 market shares and squared values of market shares were as reported in the two tables below. Year Share of Share of 2 nd Share of 3 rd Share of 4 th Share of 5 th Share of 6 th Year Share of Share of 2 nd Share of 3 rd Share of 4 th Share of 5 th Share of 6 th 2 1, , , The value of the Four Firm Concentration Ratio (C4) in this market in 2 was. A. 1 B. 85 C. 42 D According to the Herfindahl-Hirschman Index this industry was most competitive in and was least competitive in. A. 2; 212. B. 26; 212. C. 212; 2. D. 212; 26.
5 21. Consider a monopolist who sells output in two different market segments ( Segment A and Segment B ). If restricted to charging a common constant per unit price in both segments, the seller would charge $4 per unit of output, and sell 5, units in Segment A and 7,5 units in Segment B. If allowed to practice Third Degree Price Discriation (or Segmented Pricing ) the firm would choose to still charge a price of $4 and sell 5, units in Segment A, but would now charge a price of only $16 and sell 14,8 units of output in Segment B. Comparing the outcome under Third Degree Price Discriation to the outcome without price discriation, it follows that in this scenario A. the profit of the monopolist is smaller under Third Degree Price Discriation. B. Total Social Welfare is larger under Third Degree Price Discriation. C. consumers in market Segment B are worse off under Third Degree Price Discriation. 22. In a perfectly competitive market in the Long Run A. the typical firm will be operating at its efficient scale of production. B. the market supply curve will typically be downward sloping. C. most firms will be earning a positive Profit and be realizing a negative Producer s Surplus. 23. If a monopolist faces demand that can be characterized by the linear inverse demand function 1 P D ( q) 2 5 q, then it follows that Marginal Revenue is given by the function A. MR ( q) 1 (i.e., Marginal Revenue is a constant, equal in value to the one price at which market demand is unit elastic). 1 B. ( q) 2 q (which is a linear function with the same vertical intercept that is MR 25 twice as steep). 1 C. MR( q) 2 1, q (which is a linear function with the same vertical intercept that is half as steep). D. None of the above answers are correct (since more information is needed in order to detere the functional form of Marginal Revenue). 24. A firm operating in a perfectly competitive market in the short run will A. should always choose to shut down and produce zero units of output whenever its maximum profit negative. B. always choose to produce a positive quantity of output. C. always earn a profit exactly equal to zero. D. None of the above answers are correct. 25. Allerca Lifestyle Pets (the company which produces the world s first scientifically proven hypoallergenic cats) was discussed in lecture as an example of a firm that A. was able to realize very low Average Total Costs of Production because of significant Economies of Scale. B. undertook a deliberate action in order to maintain its market power over time. C. is able to easily engage in First Degree Price Discriation. D. chooses to remain in an industry in the Long Run, even though profit is negative.
6 For Questions 26 through 3, consider a monopolist facing demand and with marginal costs of production as illustrated below. Further, if this monopolist is restricted to charging a common price for every unit of output sold, Marginal Revenue would be as illustrated by the curve labeled MR(q). $ a b MC(q) 6.75 c f 4.4 i 2.1 j d g h e k Demand quantity 1,7 4,675 2,52 MR(q) 3, When charging the same price for every unit sold, increasing quantity from 2,2 to 2,4 would A. decrease both Total Revenue and Total Costs. B. increase both Total Revenue and Total Costs. C. increase Total Costs but decrease Total Revenue. D. increase Total Revenue but decrease Total Costs. 27. Again suppose that this monopolist charges the same price for every unit sold, to maximize profit, A. they should sell 1,7 units, each at a price of $4.4. B. they should sell 1,7 units, each at a price of $9.8. C. they should sell 2,52 units, each at a price of $2.1. D. they should sell 3,115 units, each at a price of $ Still supposing that the firm charges the same price for every unit sold, when maximizing profit A. the profit of the Monopolist is equal to areas (c)+(d)+(f)+(g)+(i)+(j). B. Consumers Surplus is equal to areas (a)+(b). C. there is a Deadweight Loss equal to area (k). D. More than one (perhaps all) of the above answers are correct. 29. If this monopolist is able to engage in First Degree Price Discriation (or Perfect Price Discriation ), they would maximize profit by selling units of output. A. 1,7 B. 2,52 C. 3,115 D. 4, Compared to a situation in which the firm must charge the same price for every unit of output sold, if the monopolist is able to engage in First Degree Price Discriation A. Total Social Welfare is increased by areas (e)+(h). B. Producer s Surplus is increased by areas (c)+(d) (h). C. Consumers Surplus is increased by area (e).
7 31. The short run supply curve of a firm in a perfectly competitive market is A. the portion of the Average Variable Cost Curve which lies above the Average Total Cost curve. B. the portion of the Marginal Cost curve which lies above the Average Variable Cost Curve. C. a horizontal line at the prevailing market price. D. a vertical line at the efficient scale of production. 32. Which of the following best describes the outcome of excess capacity which results in a monopolistically competitive market? A. When maximizing profit, firms produce more output than is socially desirable, resulting in a positive Deadweight-Loss from too much trade. B. The amount of output which is produced by a typical firm is less than the output level which would imize Average Total Costs of production. C. In order to maximize joint profits, monopolistically competitive firms will attempt to coordinate their actions and collectively produce the same quantity of output which a monopolist would choose to produce. D. Long Run profits in such an industry will remain positive, since the firm is easily able to prevent new entrants from entering the market. 33. Webb sells cotton candy in a perfectly competitive market. He hires a business consultant to analyze his company s financial records. The consultant recommends that he slightly decrease his production. The consultant must have concluded that at his current level of output Webb s A. Marginal Cost is less than price. B. Marginal Cost is greater than price. C. Marginal Revenue is less than price. D. Total Revenues are less than Fixed Costs.
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