ECON 1510 PRINCIPLES OF MICROECONOMICS Assignment #2 (Due on Wednesday, 14/12/11 in class)

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INSTRUCTION: Choose the best answer. Show all workings or provide justification for full credit. 1. Adam Smiths theory of the invisible hand can be used to explain: A. Why government is not needed to control the market B. Why the market tends to move away from equilibrium C. Why a shortage results from too high a price D. Why natural price is always higher than the market price 2. Suppose a firm in a purely competitive market produces and sells 8 units of output and has a marginal revenue of $8.00. What would be the firms total revenue if it instead produced and sold 4 units of output? A. $4 B. $8 C. $32 D. $6 3. For a profit maximizing monopolist, A. P > MR = MC. B. P = MR = MC. C. P > MR > MC. D. MR < MC < P.

4. Which area(s) in the above figure indicates producer surplus at the price and quantity that would be set by a singleprice monopoly? A. C + D B. C + D + E C. C + D + F + G D. C + D + F + G + I 1

5. If Pizza Hut raises the price of a slice of pizza from $3.00 to $3.25, the quantity demanded decreases from 1,500 slices per week to 1,300 slices per week. The demand for slices of pizza is ________ and the total revenue received by this Pizza Hut ________. A. elastic decreases B. inelastic decreases C. elastic increases D. inelastic decreases 6. Which of the following is correct about firms in an oligopoly? A. Each firm has complete control over its own selling price. B. All firms independently charge monopoly prices. C. No one firm controls price, but each has an influence on the price. D. There is no competition in oligopoly industries Answer Q7 and Q8 based on the figure below

7. In the above figure, at a price of $5, the firm's output would be _______units and it would ________. A. 12 incur an economic loss B. 5 shutdown C. 16 breakeven D. 12 breakeven 8. In the above figure, at a price of $7, the firm's output would be _______units and it would ________. A. 16 earn an economic profit B. 0 shutdown C. 16 incur an economic loss D. 10 incur an economic loss 9. There are two types of imperfectly competitive markets: A. monopoly and monopolistic competition. B. monopoly and oligopoly. C. monopolistic competition and oligopoly. D. monopolistic competition and cartels. 2

10. If there are 1,000 identical rice farmers who are each willing to supply 200 bushels of rice at $2 per bushel, what price and quantity combination is a point on the market supply curve for rice? A. $2 and 200 bushels B. $2,000 and 1,000 bushels C. $2 and 200,000 bushels D. $2 and 1,000 farmers

11. Sue's Sea Shells is a perfectly competitive firm selling sea shells at the market price of $3.50/dozen. Sue's Sea Shells has fixed costs of $30/day and a daily variable cost schedule in the table above. The profit-maximizing level of output for Sue's Sea Shells is A. 202 dozen sea shells per day. B. 204 dozen sea shells per day. C. 206 dozen sea shells per day. D. 205 dozen sea shells per day 12. Firms in monopolistic competition compete on A. price B. quality C. advertising D. all of the above are correct 13. When comparing perfect competition and monopolistic competition, we find that A. firms in monopolistic competition produce identical products just as do firms in perfect competition B. firms in monopolistic competition face barriers to entry, unlike firms in perfect competition. C. advertising plays a large role in monopolistic competition, unlike in perfect competition. D. firms in monopolistic competition are price takers just as is the case for firms in perfect competition 14. Price discrimination by a monopolist is less effective if A. the good can be resold. B. the good has no substitutes. C. the monopolist can identify buyers by willingness to pay. D. the good cannot be resold. 3

15. A market with a large number of sellers A. can only be a monopolistically competitive market. B. might be a monopolistically competitive or a perfectly competitive market. C. might be a perfectly competitive, monopolistically competitive, oligopoly, or monopoly market. D. can only be a perfectly competitive market
Firm 2 Sell Sell Give away
$3, $3 $1, $4

Give away
$4, $1 $2,$2

Firm 1

16. Two software firms have developed an identical new software application. They are debating whether to sell the application at $30 a copy or give the new application away free and then sell add-ons. The payoff matrix is above and the payoffs are profits in millions of dollars. What is the Nash equilibrium of the game? A. Both Firm 1 and 2 will sell the software application at $30 a copy. B. Both Firm 1 and 2 will give the software application away free. C. Firm 1 will give the application away free and Firm 2 will sell it at $30. D. There is no Nash equilibrium to this game. 17. If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur A. It will shut down in the short run and wait until the price increases sufficiently B. It will exit the industry in the long run C. It will operate at a loss in the short run D. It will minimize its loss by decreasing output so that price exceeds marginal cost.

18. The above figure illustrates that if this country wishes to move from its current production point (labelled Current) and have 10 more tons of food, it can do this by producing A. 10 more tons of clothing. B. 10 fewer tons of clothing. C. 5 more tons of clothing. D. 5 fewer tons of clothing. 19. A monopolist faces the following demand curve:
Price $8 $7 $6 $5 $4 $3 $2 $1 Quantity Demanded 300 400 500 600 700 800 900 1,000

The monopolist has fixed costs of $1,000 and has a constant marginal cost of $2 per unit. If the monopolist were able to perfectly price discriminate, how many units would it sell? A. 400. B. 500. C. 900. D. 4,200.

20. In the above figure, a perfectly competitive firm will produce A. 0 units. B. 5 units. C. 15 units D. 20 units

21. Prime Pharmaceuticals has developed a new asthma medicine, for which they have a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. If Prime Pharmaceuticals could practice perfect price discrimination, then which of the following is true? A. It would produce and sell 16 million inhalers. B. Inhalers would sell for $5 each. C. Inhalers would sell for $2 each. D. None of the above answers are correct

22. How should a natural monopoly be regulated under the social interest theory of regulation? A. by allowing a price that maximizes the profit of the natural monopoly B. by using a marginal cost pricing rule C. by setting price equal to the average cost of production D. by subsidizing other producers to compete with the monopoly 23. Suppose a firm has a monopoly on the sale of widgets and faces a downward-sloping demand curve. When selling the 100th widget, the firm will always receive A. less marginal revenue on the 100th widget than it received on the 99th widget. B. more average revenue on the 100th widget than it received on the 99th widget. C. more total revenue on the 100 widgets than it received on the first 99 widgets. D. a lower average cost per unit at 100 units output than at 99 units of output. 24. Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. A. (ii) only B. (iii) only C. (i) and (ii) D. (ii) and (iii) 25. Which of the following may eliminate some or all of the inefficiency that results from monopoly pricing? A. The government can regulate the monopoly. B. The monopoly can be prohibited from price discriminating. C. The monopoly can be forced to operate at a point where its marginal revenue is equal to its marginal cost. D. None of the above would eliminate any inefficiency associated with a monopoly 26. Suppose a firm in a competitive market received $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold? A. $5 and 50 B. $5 and 100 C. $10 and 50 D. $10 and 100

27. When price is greater than marginal cost for a firm in a competitive market, A. marginal cost must be falling. B. the firm must be minimizing its losses. C. there are opportunities to increase profit by increasing production. D. the firm should decrease output to maximize profit. Answer Q28 and Q29 based on the following information: Imagine a small town in which only two residents, Tony and Jill, own wells that produce safe drinking water. Each week Tony and Jill work together to decide how many gallons of water to pump, to bring the water to town, and to sell it at whatever price the market will bear. To keep things simple, suppose that Tony and Jill can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below

28. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? A. 70 B. 90 C. 110 D. 120 29. Suppose the town enacts new antitrust laws that prohibit Tony and Jill from operating as a monopolist. What will be the new price of water? A. $3 B. $4 C. $5 D. $6

30. When a monopolist increases the amount of output that it produces and sells, its average revenue A. increases and its marginal revenue increases. B. increases and its marginal revenue decreases. C. decreases and its marginal revenue increases. D. decreases and its marginal revenue decreases 31. A perfectly competitive firm is charging the market price of $18 to sell its product. The firm is producing and selling the profit-maximizing quantity of 50 units at this price. Its average total cost is $17 and its average variable cost is $15. Which of the following statements is then TRUE? A. This firm should shut down now. B. The firm is earning an economic profit of $50. C. At this current level of production, the firm's marginal cost is $17. D. At this current level of production, the firm's marginal cost is $15. 32. Suppose a monopoly can sell 10 units of output for $21. In order to sell 11 units of output, the price must fall to $20. What is the marginal revenue of the 11th unit? A. $20 B. $10 C. $1 D.$41 33. Which of the following would be an example of a monopolistically competitive industry with differentiation by style or type? A. cucumbers B. electric power C. cotton D. running shoes 34. Monopolies ________ fair and ________ efficient. A. are never; are always B. might be; are always C. might be; might be D. are always; are not 35. In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium outcome is one in which A. both individuals confess. B. neither individual confesses. C. neither individual follows a dominant strategy. D. one confesses and the other does not. 36. In today's U.S. economy, which of the following industries is best described as a monopoly? A. fast food restaurants B. pharmaceuticals C. accounting services D. hair salons 9

37. All of the following curves are U-shaped except for A. average variable cost. B. long-run average total cost. C. average total cost. D. average fixed cost. 38. The kinked demand curve model applies to a situation of A. tacit collusion. B. output quotas designed to produce monopoly pricing. C. antitrust enforcement. D. perfect competition. 39. A price ceiling imposed on a monopoly A. can enhance the market power of the monopolist. B. always creates a surplus. C. always creates a shortage. D. can increase total surplus 40. The demand curve for a monopoly is A. horizontal because the demand is perfectly elastic. B. downward sloping. C. undefined because it is the only supplier in the market. D. upward sloping.

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