a situation in which the number of competing firms is large

Assignment 5Part I.Multiple-choice questions1. The term oligopoly refers to: a. general rubric for imperfect competition. b. a situation in which the number of competing firms is large but the products differslightly. c. a situation in which the number of competing firms is small but greater than one. d. the form of imperfect competition in which firms act like a monopoly, regardless ofthe number of firms or type of product. 2. Under which of the following conditions could a firm successfully price discriminate?a. b. c. d. the good is in high demand. consumers have especially high income. the industry is perfectly competitiveno possibility of resale. 3. Monopoly exists whenever: a. there is only one seller of a particular product. b. a seller has some degree of control over the price he or she can charge. c. the profit earned by the seller exceeds the amount that should properly be earned asinterest on money invested, plus an allowance for the risk undertaken. d. a seller manages to maintain his or her position through successful advertising. 4. If a firm’s marginal revenue exceeds its marginal cost, maximum-profit rules require thatthe firm: a. b. c. d. e. increase its output in both perfect and imperfect competition. increase its output in perfect but not necessarily in imperfect competition. increase its output in imperfect but not necessarily in perfect competition. decrease its output in both perfect and imperfect competition. increase price, not output, in both perfect and imperfect competition. 5. Marginal revenue could equal price for a profit-maximizing firm: a. b. c. d. only when an industry is an oligopoly. only when an industry is a monopoly. if increased sales are associated with higher prices along a demand curve. whenever firms are able to differentiate their products and gain some control overprice. e. only when an industry is perfectly competitive. 16. Monopoly power results in: a. b. c. d. a lower quantity than if the industry was perfectly competitive. a higher price than if the industry was perfectly competitive. a lower price than if the industry was perfectly competitive. both a and b. 7. A concentration ratio describes the: a. b. c. d. e. percentage of total industry sales accounted for by the largest four to eight firms. percentage of total industry sales accounted for by the smallest four to eight firms. degree of regulatory power that government policy-makers have over an industry. degree of decision-making power that the owners of a firm have. significance of antitrust policy in a particular industry. Use the figure below, which shows the current cost and demand information for amonopolist selling widgets, to answer questions 8 through 10. 8. The profit-maximizing output level for this monopolist is: a. b. c. d. OA. OB. OC. OD. 9. The profit-maximizing price for the monopolist to charge is: a. b. c. d. $1. 00 per widget. $1. 50 per widget. $3. 00 per widget. $5. 00 per widget. 210. At the optimal level of output and price, the firm will: a. b. c. d. e. earn economic profits. break even, in an economic sense. make losses, but continue producing in the short run. be right at the shutdown point. shut down in the short run. 11. Which of the following are possible sources of imperfectly competitive markets?a. b. c. d. Legal barriers to entry. Perceived product differentiation. Tariff protection from foreign competition. All of the above. 12. OPEC represents a market structure most accurately represented by: a. b. c. d. the pure monopoly model. a collusive oligopoly model with incomplete market coverage. the duopoly model. perfect competition. 13. If a profit-maximizing monopoly has reached its equilibrium position, then price: a. b. c. d. must be less than marginal cost. must be equal to marginal cost. must be greater than marginal cost. may be equal to or below marginal cost, but not above it. 14. Price discrimination is a technique used by firms who want to: a. capture the deadweight loss to monopoly. b. capture additional consumer surplus by charging different prices to differentconsumers. c. relinquish producer surplus by charging different prices to different consumers. d. increase producer surplus by buying their inputs from the lowest-price provider. 15. Collusive oligopoly produces prices and quantities very similar to those produced by: a. perfect monopoly. b. monopolistic competition. c. perfect competition. 3Part II. Problem-solving questions16. Suppose the demand for Botox, a drug to treat some eye conditions, is p = 775 – 375Q(Q in million vials) and the monopolistic drug seller’s marginal cost is constant at $25(MC = 25). What are the monopoly’s profit maximizing price and quantity (Thisquestion is adapted from Perloff, 2012, pp. 375-376)? (Please do NOT include wordsor “$” in your answer. Round your answer to two decimal places unless it is aninteger. )Answers: Price: $_____________Quantity: _____________ million17. Refer to the graph below. a. If we express the demand curve as P = 8 – bQ, what is b?b. At what level of output does average cost fall to its minimum level?c. What price would clear the market if output were set at this minimum AC level?d. What would profit be when output were at the minimum AC level?e. At what output would profit be maximized?f. What is marginal revenue at this output?g. What is marginal cost at this output?h. What is average cost at this output?(Assume it’s 20 cents above the minimum AC level. )i. What is price at this output?j. What is total profit at this output?(Please do NOT include words like “units” or “$” in your answer. Round youranswers to TWO decimal places. )4Your answer: a. __________c. __________e. __________g. __________i. __________b. __________d. __________f. __________h. __________j. ___________18. Here is a consulting opportunity for you. Refer to the table below. Casea. b. c. d. e. PriceMarginal Quantity TotalRevenue of Output Revenue$8. 005. 00$4. 004. 001. 002. 502. 002. 002,0001,0004,000 $ 8,00010,00010,000TotalCost$4,000FixedCostAverage MarginalCostCost$2,0001,000$4 . 00$3 . 00At minimum level2,0004,0001. 802. 003. 00Answer2. 002. 002. 00What would you recommend in each of the five cases listed in this table? In each case,the firm in question is a monopoly and wants to maximize its profits (or minimize itslosses). Enough information is supplied in each case, though you may have to fill insome of the blank spaces in the table to do your job. Hint: There is one “nonsense case,”in which the figures are inconsistent and cannot be correct. Ferreting out such acircumstance could lead you to tell your client to do a better job in picturing either his orher market or cost structure. Answer for each case by putting one of the numbers 1 through 5 from the code listbelow into the extreme right-hand column of the table. (The same number should notbe used for more than one question. )1 = Firm is now at correct position. 2 = Firm should increase price and reduce quantity produced and sold. 3 = Firm should reduce price and increase quantity produced and sold. 4 = Firm should shut down operations because loss at best possible operating positionexceeds fixed cost. 5 = A nonsense case—the figures supplied are inconsistent and could not all be correct. (Please answer with number 1 to 5. )Your answer: a. __________ (1/2/3/4/5) b. __________ (1/2/3/4/5)c. __________ (1/2/3/4/5) d. __________ (1/2/3/4/5)e. __________ (1/2/3/4/5)519. In the section of the text headed “Marginal Principle: Let Bygones Be Bygones,” it isemphasized that a firm, in setting output and price according to MR = MC, willdisregard fixed cost. This does not mean that fixed cost can be ignored completely,maximum profits could be negative, for example, if fixed costs were too large. Nonetheless, in the determination of the profit-maximizing production/sales point,marginal revenue and marginal cost are the critical parameters. a. b. c. d. e. Suppose that a monopolist’s fixed costs increase, perhaps because a flat tax is leviedagainst the firm’s property. Would this tax raise the firm’s AC curve? (yes / no)Would the tax affect the monopolist’s variable cost, or the AVC curve? (yes / no)Would the tax affect the monopolist’s marginal cost curve? (yes / no)If the MC curve were unaffected, should such a flat tax change the maximum-profitoutput? (Presumably the tax would not affect output demand, so it would have noeffect on marginal revenue. ) (yes / no / no, unless the firm is forced out of business)If the tax did not affect MC, MR, or maximum- profit output, would the price bechanged? (yes / no)(Please answer with the specified words in parenthesis. )Your answer: a. __________b. __________c. __________d. __________e. __________Part III. Essay(s)20. List the continuum of market structures from perfectly competitive at one extreme tomonopoly at the other. List examples of industries in the “real world” that you believefit into these categories, and support your categorizations with evidence from thechapter. 6

a situation in which the number of competing firms is large

Assignment 5
Part I.Multiple-choice questions
1. The term oligopoly refers to:
a. general rubric for imperfect competition.
b. a situation in which the number of competing firms is large but the products differ
slightly.
c. a situation in which the number of competing firms is small but greater than one.
d. the form of imperfect competition in which firms act like a monopoly, regardless of
the number of firms or type of product.
2.

Under which of the following conditions could a firm successfully price discriminate?
a.
b.
c.
d.

the good is in high demand.
consumers have especially high income.
the industry is perfectly competitive
no possibility of resale.

3. Monopoly exists whenever:
a. there is only one seller of a particular product.
b. a seller has some degree of control over the price he or she can charge.
c. the profit earned by the seller exceeds the amount that should properly be earned as
interest on money invested, plus an allowance for the risk undertaken.
d. a seller manages to maintain his or her position through successful advertising.
4. If a firm’s marginal revenue exceeds its marginal cost, maximum-profit rules require that
the firm:
a.
b.
c.
d.
e.

increase its output in both perfect and imperfect competition.
increase its output in perfect but not necessarily in imperfect competition.
increase its output in imperfect but not necessarily in perfect competition.
decrease its output in both perfect and imperfect competition.
increase price, not output, in both perfect and imperfect competition.

5. Marginal revenue could equal price for a profit-maximizing firm:
a.
b.
c.
d.

only when an industry is an oligopoly.
only when an industry is a monopoly.
if increased sales are associated with higher prices along a demand curve.
whenever firms are able to differentiate their products and gain some control over
price.
e. only when an industry is perfectly competitive.

1

6.

Monopoly power results in:
a.
b.
c.
d.

a lower quantity than if the industry was perfectly competitive.
a higher price than if the industry was perfectly competitive.
a lower price than if the industry was perfectly competitive.
both a and b.

7. A concentration ratio describes the:
a.
b.
c.
d.
e.

percentage of total industry sales accounted for by the largest four to eight firms.
percentage of total industry sales accounted for by the smallest four to eight firms.
degree of regulatory power that government policy-makers have over an industry.
degree of decision-making power that the owners of a firm have.
significance of antitrust policy in a particular industry.

Use the figure below, which shows the current cost and demand information for a
monopolist selling widgets, to answer questions 8 through 10.

8. The profit-maximizing output level for this monopolist is:
a.
b.
c.
d.

OA.
OB.
OC.
OD.

9. The profit-maximizing price for the monopolist to charge is:
a.
b.
c.
d.

$1.00 per widget.
$1.50 per widget.
$3.00 per widget.
$5.00 per widget.

2

10. At the optimal level of output and price, the firm will:
a.
b.
c.
d.
e.

earn economic profits.
break even, in an economic sense.
make losses, but continue producing in the short run.
be right at the shutdown point.
shut down in the short run.

11. Which of the following are possible sources of imperfectly competitive markets?
a.
b.
c.
d.

Legal barriers to entry.
Perceived product differentiation.
Tariff protection from foreign competition.
All of the above.

12. OPEC represents a market structure most accurately represented by:
a.
b.
c.
d.

the pure monopoly model.
a collusive oligopoly model with incomplete market coverage.
the duopoly model.
perfect competition.

13. If a profit-maximizing monopoly has reached its equilibrium position, then price:
a.
b.
c.
d.

must be less than marginal cost.
must be equal to marginal cost.
must be greater than marginal cost.
may be equal to or below marginal cost, but not above it.

14. Price discrimination is a technique used by firms who want to:
a. capture the deadweight loss to monopoly.
b. capture additional consumer surplus by charging different prices to different
consumers.
c. relinquish producer surplus by charging different prices to different consumers.
d. increase producer surplus by buying their inputs from the lowest-price provider.
15. Collusive oligopoly produces prices and quantities very similar to those produced by:
a. perfect monopoly.
b. monopolistic competition.
c. perfect competition.

3

Part II. Problem-solving questions
16. Suppose the demand for Botox, a drug to treat some eye conditions, is p = 775 – 375Q
(Q in million vials) and the monopolistic drug seller’s marginal cost is constant at $25
(MC = 25). What are the monopoly’s profit maximizing price and quantity (This
question is adapted from Perloff, 2012, pp. 375-376)? (Please do NOT include words
or “$” in your answer. Round your answer to two decimal places unless it is an
integer.)
Answers: Price:
$_____________
Quantity: _____________ million

17. Refer to the graph below.

a.
If we express the demand curve as P = 8 – bQ, what is b?
b.
At what level of output does average cost fall to its minimum level?
c.
What price would clear the market if output were set at this minimum AC level?
d.
What would profit be when output were at the minimum AC level?
e.
At what output would profit be maximized?
f.
What is marginal revenue at this output?
g.
What is marginal cost at this output?
h.
What is average cost at this output?(Assume it’s 20 cents above the minimum AC level.)
i.
What is price at this output?
j.
What is total profit at this output?
(Please do NOT include words like “units” or “$” in your answer. Round your
answers to TWO decimal places.)

4

Your answer:

a. __________
c. __________
e. __________
g. __________
i. __________

b. __________
d. __________
f. __________
h. __________
j. ___________

18. Here is a consulting opportunity for you. Refer to the table below.
Case

a.
b.
c.
d.
e.

Price

Marginal Quantity Total
Revenue of Output Revenue

$8.00
5.00

$4.00
4.00

1.00
2.50

2.00
2.00

2,000
1,000
4,000 $ 8,000
10,000
10,000

Total
Cost

$4,000

Fixed
Cost

Average Marginal
Cost
Cost

$2,000
1,000

$4 .00

$3 .00

At minimum level

2,000
4,000

1.80
2.00
3.00

Answer

2.00
2.00
2.00

What would you recommend in each of the five cases listed in this table? In each case,
the firm in question is a monopoly and wants to maximize its profits (or minimize its
losses). Enough information is supplied in each case, though you may have to fill in
some of the blank spaces in the table to do your job. Hint: There is one “nonsense case,”
in which the figures are inconsistent and cannot be correct. Ferreting out such a
circumstance could lead you to tell your client to do a better job in picturing either his or
her market or cost structure.
Answer for each case by putting one of the numbers 1 through 5 from the code list
below into the extreme right-hand column of the table. (The same number should not
be used for more than one question.)
1 = Firm is now at correct position.
2 = Firm should increase price and reduce quantity produced and sold.
3 = Firm should reduce price and increase quantity produced and sold.
4 = Firm should shut down operations because loss at best possible operating position
exceeds fixed cost.
5 = A nonsense case—the figures supplied are inconsistent and could not all be correct.
(Please answer with number 1 to 5.)
Your answer:
a. __________ (1/2/3/4/5) b. __________ (1/2/3/4/5)
c. __________ (1/2/3/4/5) d. __________ (1/2/3/4/5)
e. __________ (1/2/3/4/5)

5

19. In the section of the text headed “Marginal Principle: Let Bygones Be Bygones,” it is
emphasized that a firm, in setting output and price according to MR = MC, will
disregard fixed cost. This does not mean that fixed cost can be ignored completely;
maximum profits could be negative, for example, if fixed costs were too large.
Nonetheless, in the determination of the profit-maximizing production/sales point,
marginal revenue and marginal cost are the critical parameters.
a.
b.
c.
d.
e.

Suppose that a monopolist’s fixed costs increase, perhaps because a flat tax is levied
against the firm’s property. Would this tax raise the firm’s AC curve? (yes / no)
Would the tax affect the monopolist’s variable cost, or the AVC curve? (yes / no)
Would the tax affect the monopolist’s marginal cost curve? (yes / no)
If the MC curve were unaffected, should such a flat tax change the maximum-profit
output? (Presumably the tax would not affect output demand, so it would have no
effect on marginal revenue.) (yes / no / no, unless the firm is forced out of business)
If the tax did not affect MC, MR, or maximum- profit output, would the price be
changed? (yes / no)

(Please answer with the specified words in parenthesis.)
Your answer:
a. __________
b. __________
c. __________
d. __________
e. __________
Part III.

Essay(s)

20. List the continuum of market structures from perfectly competitive at one extreme to
monopoly at the other. List examples of industries in the “real world” that you believe
fit into these categories, and support your categorizations with evidence from the
chapter.

6