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Final Review Questions, Part 2

1) Taleh left his previous job as a university professor and started his own consulting business.
He previously earned $50,000 per year, but he now pays himself $35,000 per year while he is
building the new business. What is the economic cost of the time he contributes to the new
A) $5,000 per year
B) zero
C) $85,000 per year
D) $15,000 per year
2) In the long run, which of the following is considered a variable cost?
A) Expenditures for wages
B) Expenditures for research and development
C) Expenditures for raw materials
D) Expenditures for capital machinery and equipment
E) all of the above
3) The supply curve for a competitive firm is
A) its entire MC curve.
B) the upward-sloping portion of its MC curve.
C) its MC curve above the minimum point of the AVC curve.
D) its MC curve above the minimum point of the ATC curve.
E) its MR curve.
4) At the current level of output, long-run marginal cost is $75 and long-run average cost is $50.
This implies that:
A) there are neither economies nor diseconomies of scale.
B) there are economies of scale.
C) there are diseconomies of scale.
D) the cost-output elasticity is greater than one.
5) Several years ago, Alcoa was effectively the sole seller of aluminum because the firm owned
nearly all of the aluminum ore reserves in the world. This market was not perfectly competitive
because this situation violated the:
A) price-taking assumption.
B) homogeneous product assumption.
C) free entry assumption.
D) A and B are correct.
E) A and C are correct.

6) Consider the following diagram where a perfectly competitive firm faces a price of $40.

Refer to the figure above. What is the firms profit at the output of 60?
A) zero.
B) positive.
C) negative
D) cannot be determined from the information above
7) A monopolist faces the following demand curve, marginal revenue curve, total cost curve and
marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
How much profit does the monopolist earn?
A) $4512.50
B) $4987.50
C) $475.00
D) $5.00

8) A monopolist has set her level of output to maximize profit. The firm's marginal revenue is
$20, and the price elasticity of demand is -3.0. The firm's profit maximizing price is
A) $0
B) $30
C) $40
D) $10
E) This problem cannot be answered without knowing the marginal cost.

9) Monopoly power results from the ability to

A) set price equal to marginal cost.
B) equate marginal cost to marginal revenue.
C) set price above average variable cost.
D) set price above marginal cost.
10) DVDs can be produced at a constant marginal cost of $10 per disk, and Roaring Lion Studios
is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20
per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the Lerner indices for
these two movies?
A) Both equal one.
B) 2 and 3, respectively
C) 0.5 and 0.67, respectively
D) 1 and 2, respectively

11) Consider the following diagram

In moving from the competitive level of output and price to the monopoly level of output and
price, the monopolist is able to add to producer surplus:
A) the area BCEF.
B) the area BCEF less the area GFH.
C) the area BCEH.
D) the area BCEH less the area GFH.
E) none of the above

12) Consider the following diagram. The revenue and cost curves in the diagram below are those
of a natural monopoly.

If the monopolist is not regulated, the price will be set at __________.

A) P1
B) P2
C) P3
D) P4
E) none of the above
13) Under which of the following scenarios is it most likely that monopoly power will be
exhibited by firms?
A) When there are few firms in the market and the demand curve faced by each firm is relatively
B) When there are many firms in the market and the demand curve faced by each firm is
relatively inelastic.
C) When there are few firms in the market and the demand curve faced by each firm is relatively
D) When there are many firms in the market and the demand curve faced by each firm is
relatively elastic.

14) Which of the following is true in long-run equilibrium for a firm in monopolistic
A) MC = ATC.
B) MC > ATC.
C) MC < ATC.
D) Any of the above may be true.
15) A monopolistically competitive firm in short-run equilibrium:
A) will make negative profit (lose money).
B) will make zero profit (break-even).
C) will make positive profit.
D) Any of the above are possible.

16) Why don't some firms in monopolistic competition earn losses in the long run?
A) The firms have enough monopoly power to ensure they always earn profits.
B) Free entry allows enough firms to remain in the market and maintain the critical mass of firms
required to attract customers.
C) Free exit implies that any unprofitable firms leave the market in the long run.
D) In the long run, firms will build enough brand loyalty among customers to ensure a profitable
level of sales.
17) In comparing the Cournot equilibrium with the competitive equilibrium,
A) both profit and output level are higher in Cournot.
B) both profit and output level are higher in the competitive equilibrium.
C) profit is higher, and output level is lower in the competitive equilibrium.
D) profit is higher, and output level is lower in Cournot.
18) A firm's demand curve is given by P = 500 - 2Q. The firm's current price is $300 and the
firm sells 100 units of output per week.
a. Calculate the firm's elasticity of demand.
b. Assuming that the firm's marginal cost is zero, is the firm maximizing profit?
19) Baxby Postcards Company operates in a highly competitive market, with postcards currently
selling for $12 each. Finnegan's total and marginal cost curves are:
TC = 60,000 + 0.002Q2
MC = 0.003Q
where Q is measured in thousand box bundles per year.
a. Calculate Baxby profit maximizing quantity. Is the firm earning a profit?
b. Analyze Baxbys position in terms of the shutdown condition. Should the company operate
or shut down in the short run?