1.

For each of the following characteristics, say whether it

describes a monopoly firm, a monopolistically competitive
firm, both, or neither.

a) Faces a downward-sloping demand curve.

b) Has marginal revenue less than price.
c) Faces the entry of new firms selling similar products.
d) Earns economic profit in the long run.
e) Equates marginal revenue and marginal cost.
f) Produces the socially efficient quantity of output.
A. Faces a downward sloping demand curve: BOTH
Both types of firms face a downward sloping demand curve, as
with increase in price people will always demand a lower
quantity of that good (based on the universal law of demand).

B. Has a marginal revenue less than price : BOTH

Price is measured by the demand curve, and for both types,
marginal revenue curve lies below the demand curve, indicating
that any quantity level, price charged is higher than the marginal
revenue earned.
C. Faces the entry of new firms selling similar products:
Monopolistically Competitive Firm
Monopoly firm faces no competition. Monopolistically
competitive market structure however, has the characteristic of
slightly differentiated and similar product, which allows new
firms to enter (until zero profit condition is reached in the long
run ).

D. Earns economic profit in the long run: Monopoly Firm

Since, under monopolistically competitive firm structure, new
firms can enter in the long run, demand faced by each firm
decreases, thereby resulting in 0 profit in long run. Monopoly
firm, however, faces no competition.
E. Equates marginal revenue and marginal cost for profit
maximization: BOTH
This is the profit maximizing condition for firms under both types of
market structure.

F. Produces the socially efficient quantity of output: NEITHER

Both firms have some seller power, and so they can always manipulate
and adjust prices in a way such that socially efficient level of output is
not reached. Also, with theory of perfectly competitive markets, we
know that socially efficient level occurs where price charged equals the
marginal cost (such that no mark up exists), while there, price lies
above the marginal cost and so, quantity of output always lies below
the efficient level.
2.Sparkle is one of the many firms in the market for toothpaste, Which
is in long-run equilibrium.
A. Draw a diagram showing prakle’s demand curve, marginal-revenue
vurve, average-total-cost curve, and marginal-cost curve. Lebel
sparkle’s profit-maximizing output and price.
 What is sparkle’s profit? Explain.

 Sparkle'sprofit is zero, because at quantity QM, price

equals average total cost.
 On your diagram, show the consumer surplus derived
from the purchase of sparkle toothpaste. Also show the
deadweight loss relative to the efficient level of output.
 The consumer surplus from the purchase of Sparkle
toothpaste is areas A + B. The efficient level of output
occurs where the demand curve intersects the marginal-
cost curve, at QC. The deadweight loss is area C, the
area above marginal cost and below demand, from QM
to QC.
If the government forced sparkle to produce the
efficient level of output, what would happen to the
firm? What would happen to the sparkle’s
curtomer?
 If the government forced Sparkle to produce the
efficient level of output, the firm would lose
money because average total cost would exceed
price, so the firm would shut down. If that
happened, Sparkle's customers would earn no
consumer surplus.
3. Sleek sneakers Co. is the one of many firms in the market for shoes.
a) Assume that seek is currently earning short-run economic profit. On a
correctly labeled diagram, show sleek’s profit-maximizing output and
price, as well as the area representing profit.
b) What happens to lseek’s price, output and profit in the long run?
Explain this change in words and show it on new diagram.
 In the long run, firms will enter, shifting the demand for Sleek’s product
to the left. Its price and output will fall. Firms will enter until profits are
equal to zero.
c) Suppose that over time consumers become more focused on
stylistic differences among shoe brands. How would this
change in attitudes affect each firm’s price elasticity of
demand? In the long run, how will this change in demand affect
sleek’s price, output, and profit?
As consumers become more focused on the stylistic differences
in brands, they will be less focused on price. This will make the
demand for each firm’s products more price inelastic. The
demand curves may become relatively steeper, allowing Sleek
to charge a higher price. If these stylistic features cannot be
copied, they may serve as a barrier to entry and allow Sleek to
earn profit in the long run.
At the profit-maximizing price you identified in
part (c), is Sleek’s demand curve elastic or
inelastic? Explain.
 A firm in monopolistic competition produces
where marginal revenue is greater than zero. This
means that firm must be operating on the elastic
portion of its demand curve.
Leadbelly Co. sells pencils in a perfectly competitive product market and
hires workers in a perfectly competitive labor market. Assume that the
market wage rate for worker is $150 per day.
a) What rule should leadbelly follow to hire the profit-maximizing level of
out amount of labor?
Answer :
Leadbelly should hire workers up to the point where MRP
is equal to the wage of $150 per day.
Any the profit-maximizing level of output, the
marginal product of the last worker hired is 30
boxes of pencil per day. Calculate the price of a
box of pencils.
 Since MRP is equal to $150 at the profit-maximizing
level of output, and MRP = MP X P, the price of pencils
must be $5 per box.
 Draw a diagram of the labor market for pencil workers (as in
Figure 4 of this chapter) next to the diagram of the labor supply
and demand for Leadbelly Co. (as in Figure 3). Label the
equilibrium wage and quantity of labor for both the market and
the firm. How are these diagrams related?
 The market wage is
determined in the labor
market ($150 per day). The
firm takes this wage as given
and chooses its level of labor
where VMP is equal to $150
per day.
Suppose some workers switch to in the growing computer
industry. On the side-by-side diagrams from part (c ), show how
this change affects the equilibrium wage and quantity of labor for
both pencil market for leadbelly. How does this change affect the
marginal product of labor at leadbelly?
 The decrease in the supply of labor will raise the equilibrium wage
rate. The increase in wage will reduce the profit-maximizing level of
labor hired. The value of marginal product of workers will rise to the
level of the new wage.
5. Answer Question 8 on p381.
Policymakers sometimes propose laws requiring firms to give workers certain fringe benefits, such as health insurance
or paid parental leave. Let’s consider the effects of such a policy on the labor market.

a. Suppose that a law required firms to give each worker $3 of fringe benefits for every hour that the worker is
employed by the firm. How does this law affect the marginal profit that a firm earns from each worker at a given cash
wage? How does the law affect the demand curve for labor? Draw your answer on a graph with the cash wage on the
vertical axis.