DPU Optimal Production for Competitive & Monopolies Firms Exm Practice

TRUE/FALSE AND MULTIPLE CHOICE: For each question below, select the best answer. For True and False questions, use columns [A] and [B] respectively. Place you answers on the answer sheet on page 4 (2 pts. each) 1. a. b. c. d. e. When the firm’s long run average costs are constant, the firm is in the increasing returns to scale region of production the firm is in the decreasing returns to scale region of production the firm is in the constant returns to scale region of production the firm’s LRMC equals its LRAC both (c) and (d) are correct 2. a. b. c. d. To be a “natural monopoly” a firm must control an essential natural resource input be very large have falling LRAC throughout the range of the market have falling LRMC throughout the range of the market 3. a. b. c. d. e. Cartels usually fall apart because limited information on the part of members of the cartel entry of new rivals members cheat by giving secret discounts insufficient profits compared to independent operations none of the above 4. The Rule of Rational Life describes optimal production for competitive and monopolies firms. True (a) or False (b)? 5. a. b. c. d. The optimal employment of an input occurs when the input’s MRP is greater than its price MRP is less than its price MRP is equal to its price none of the above 6. a. b. c. d. One reason economists object to monopoly is monopolies produce more than QSO to maximize profits monopolies always produces the technically efficient output level monopoly profits end up increasing the wealth of the rich at the expense of the poor monopolies price their products lower than competitive firms 7. If the average total cost of a product is $10 per unit, average variable costs is $3per unit and the price of the product is $5 per unit, the firm is losing $15 per unit produced. True (a) or False (b)? 8 If we want to understand the major portion of today’s economic activity in an industrial economy, we should look at a. perfect competition and pure monopoly b. perfect competition and oligopoly c. oligopoly and monopolistic competition d. monopolistic competition and monopoly 0 9. A competitive market for a public good will not produce the allocatively efficient level of output (Q SO) because of the free rider effect. True (a) or False (b)? 10. If the demand curve of a competitive firm is tangent to the low point on the AVC curve (i.e., at P SH), the firm’s profits are the same whether it shuts down or produces. True (a) or False (b)? 11. 12. a. b. c. d. e. A rational student would go on to college after high school if his/her extra lifetime earnings arising from getting a college degree is greater than the opportunity costs of getting the degree. True (a) or False (b)? When the Law of Diminishing Returns applies, this causes MPL to rise (with greater employment of labor) MPL to fall (with greater employment of labor) MRPL to fall (with greater employment of labor) MRPL to rise (with greater employment of labor) both (b) and (c) above are correct 13. a. b. c. d. The SR market supply curve for a competitive industry is obtained by horizontally summing the SRMC curves (above AVC) of all firms in the industry vertically summing the supply curves of firms in the industry horizontally summing the demand curves of all firms in the industry both (a) and (c) above are correct 14. a. b. c. d. A firm’s demand for labor is it’s MRPL curve MPL curve MR curve none of the above 15. a. b. c. d. One reason economists object to monopoly is monopolies produce above the allocatively efficient (socially optimal) level monopolies have no supply curve monopolists are polluters monopolists produce below the allocatively efficient (socially optimal) level 16. a. b. c. d. The geometric description of SR marginal cost is the area under the SR total cost curve area between the SR total cost curve and the SR total revenue curve slope of the SR total profit curve slope of the SR total cost curve 17. a. b. c. d. Public goods are both excludable and depletable excludable but non-depletable depletable but non-excludable non-excludable and non-depletable 18. a. b. c. d. e. Profit can be maximized for a competitive firm only when SRMC is equal to average cost total cost price marginal revenue both (c) and (d) are correct 1 19. a. b. c. d. Maureen left her teaching job, which paid $20,000 per year, and invested $20,000 of her retirement fund (which was earning 10 percent interest) in a new real estate business. Her accountant predicted a profit of $50,000. Her husband, an economist, reported her profit to be $10,000 $22,000 $28,000 $50,000 20. With negative externalities in a competitive market, the competitive output is larger than QSO. True (a) or False (b)? 21. When positive externalities exist in a competitive market, the competitive output is larger than QSO. True (a) or False (b)? 22. a. b. c. d. If doubling the quantity of all inputs doubles the quantity of output, the firm is experiencing increasing returns to scale decreasing returns to scale constant returns to scale increasing costs per unit of output 23. Oligopoly occurs when a few firms dominate a single market. True (a) or False (b)? 24. a. b. c. d. New firms entering a competitive industry will cause the price of the product to fall, due to an increase in supply rise, due to an increase in supply fall, due to an increase in demand (a) and (c) above are both correct 25. a. b. c. d. A perfectly competitive industry in long run equilibrium is described as “technologically efficient” because firms produce at the low point on their LRAC curve competitive industries produce at the socially optimal level of output (QSO) firms earn more than the cost of capital firms are not profitable 26. a. b. c. d. If a firm shuts down in the short run, its losses are equal to SRTC (SRTC – VC) Zero (b) and (c) above are both correct 27. a. b. c. d. One reason economists object to monopoly is monopolies overproduce to maximize profits monopolies always produce the technically efficient output level monopolies may not produce the technically efficient output level none of the above 28. a. b. When decreasing returns to scale are present LRAC declines as output expands the government feels responsible for breaking up the firm 2 c. d. firms always make handsome profits LRAC increases as output expands 29. a. b. c. d. In a perfectly competitive industry the firm can affect prices but the industry cannot the industry can affect prices but the firm cannot neither the firm nor the industry can affect prices both the firm and the industry can affect prices 30. a. b. c. d. A monopolistically competitive industry is characterized by one firm selling several products many firms selling the same product many firms selling slightly different products one firm selling one product Multiple Choice Answer Sheet Question # Answer Question # 1 16 2 17 3 18 4 19 5 20 6 21 7 22 8 23 9 24 10 25 11 26 Answer 3 12 27 13 28 14 29 15 30 MARKET ANALYSIS: (worth 4 points apiece) – show impact on P and Q 1. Natural Gas Market: Due to persistent shortages, Congress eliminates the price cap on natural gas 2. Economy Car Market: The U.S. economy goes into an extended recession 3. Corn Market: Government raises the support price on corn from $5.00 to $6.00 per bushel when the going price is $7.00 per bushel 4 4. Legal Cannabis Market in Illinois: Illinois raises the sales tax on cannabis from 5% to 10% 5. Used Car Market: new car dealers raise the prices of new cars ESSAY: Answer each question completely. (1 pts. each) (1) (2) (3) (4) Use Figure One on page 8 to answer (1). In the short run (with No firms), what is the competitive: a) market output? _____________________ b) firm’s output? _______________________ c) market price? _______________________ d) firm’s total profits? ____________________ e) firm’s “shutdown” price (PSH)? __________ Use Figure Two on page 8 to answer (2). In the long run competitive equilibrium: f) what is the competitive firm’s output? ____________________________________ g) what is the competitive industry’s price? __________________________________ h) what is the competitive firm’s profits in this long run equilibrium? ______________ Use Figure Three on page 9 to answer (3). In the short run: i) what is the monopolist’s output? ___________________________ j) what is the monopolist’s price? ____________________________ k) what is the monopolist’s profits-per-unit? _______________ Use Figure Four on page 9 to answer (4). In the long run: l) what is the monopolist’s price? _________________ m) what is the monopolist’s output? ________________ 5 (5). n) what is the monopolist’s total profits? ____________ o) what is the monopolist’s technically efficient level of output? ______________ Use Figure Five below to answer the following questions regarding an increase in the minimum wage from $7.25 to $9.50 per hour. (5 pts.) When the minimum wage is 7.25 per hour, answer the following questions: a.. what is the wage being paid to these workers? b. what is the number of workers with jobs? ____________ ____________ When the minimum wage is $9.50 per hour, answer the following questions: c. what is the wage being paid to these workers? ____________ d. what the number of workers with jobs? ____________ e. what is the number of workers unemployed? ____________ S $9.50 FIGURE FIVE $8.50 $7.25 D 200 250 300 450 Q FIGURE ONE Competitive Shortrun 6 SRMC $4 S(No) $4 ATC 3 3.50 3 2 2.50 2 1 1.50 1 AVC D 500 1000 1500 Q (millions) 100 200 MARKET 400 500 600 800 FIRM FIGURE TWO Competitive Longrun $24 LRMC LRAC 22 20 18 16 14 12 10 200 400 600 800 1000 1200 1400 FIGURE THREE Monopoly in the Shortrun 7 1600 q 1000 q SRMC $50 ATC 45 40 AVC 35 30 25 20 15 D 10 150 200 250 300 350 400 450 500 Q (millions) MR FIGURE FOUR Monopoly in the Longrun LRMC $18 16 14 12 LRAC 10 8 6 4 D 2 100 200 300 400 500 550 600 MR 8 650 Q (millions)

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