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1. Bob's Ice Cream Parlor has the following cost and revenue…

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Bob's Ice Cream Parlor has the following cost and revenue characteristics at its current level of output: Price=$8, average variable cost=$6, and average fixed cost =$4. Bob's firm is:

A) Making a loss of $2 per unit and should shut down.
B) Making zero economic profit.
C) Making a profit of $2 per unit and should expand.
D) Making a loss of $2 per unit, but should continue operating.
E) Making a profit of $2 per unit but should cut output.

Suppose there is a permanent increase in the demand for energy saving light bulbs. In the perfectly competitive market, the most likely result would be:

A) higher price in the short run because of greater sales volume, and even higher prices later on as plant sizes are increased.
B) higher price in the short run, followed by large long run price increases as the inventory is depleted.
C) higher prices in the short run, then an increase in the number of new entrants in the long run that would cause price to decline.
D) lower prices in the short run because of higher sales, but higher prices in the long run as the inventory is depleted.
E) what do light bulbs have to do with supply and demand?

Assume the market for beef is perfectly competitive. Beef producers are currently earning a zero economic profit. If consumers switch from beef to chicken, which of the following is most likely to occur?

A) Beef producers will incur economic losses in both the short run and the long run.
B) Beef producers will incur economic losses in the short run. Some producers will exit the industry until those remaining beef producers are earning a zero economic profit.
C) Beef producers will incur economic losses in the short run. Some producers will exit the industry until those remaining beef producers are earning an economic profit.
D) Beef producers will earn economic profits in the short run and there will be no additional adjustments in the long run.

Which of the following is true for profit-maximizing firms in perfectly competitive, monopolistically competitive, and monopoly industries?

A) MR = MC
B) MR < P
C) P = MC
D) P = min(ATC)
E) all of the above

Here is the information on the hourly costs for Chip's Pizza Palace, a perfectly competitive firm. Pizzas currently sell for $10. What is Chip's short-run profit-maximizing output per hour?

Output Total cost

(pizzas per hour) (dollars per hour)

0 10

1 12

2 16

3 21

4 30

5 45

A) 0
B) 2
C) 3
D) 4
E) 5

If P = $8 and MC = $5 + 0. 2Q, the competitive firm's profit-maximizing level of output is:

A) 5
B) 10
C) 0.2
D) 8
E) 15

A firm will earn normal profits when price:

A) equals average fixed cost.
B) equals average variable cost.
C) equals average total cost.
D) exceeds minimum average total cost.
E) is below marginal cost.

Which of the following statements is TRUE?

A) If the market price is P1, the firm will earn economic profits.
B) If the market price is P2, the firm will incur a loss equal to fixed cost.
C) If the market price is P2, the firm will be at the point of shutdown.
D) If the market price is P3, the firm will earn normal profits.
E) If the market price is P4, the firm will operate in the short run, but suffer economic losses.

Credit Check, Inc., offers credit checking services to credit card companies and retailers. The following relation exists between the number of credit checks performed and total costs in this viciously competitive market:

Total Output Total Cost

0 $ 150

1,000 600

2,000 1,060

3,000 1,540

4,000 2,040

5,000 2,565

6,000 3,115

How many credit checks would the firm perform at industry prices of $510 per thousand? (hint: remember P=MC rule)

A) Q = 2,000
B) Q = 3,000
C) Q = 4,000
D) Q = 5,000
E) Q = 6,000

10.

Nature's Best, ***** ***** asparagus to canners located throughout the Mississippi River valley. Like several grain and commodity markets, the market for asparagus is perfectly competitive. Marginal cost per ton of asparagus is: MC = $1.50 + $0.0005Q. Calculate the industry price necessary for the firm to supply 1,000 pounds.

A) P = $2.00
B) P = $1.50
C) P = $3.00
D) P = $1.00
E) P = $2.50

11.

Fuel costs have risen quickly during recent years as consumption, refining and production costs have risen sharply. Supply and demand conditions in the perfectly competitive domestic crude oil market are: QS = -60 + 2P (Supply) QD = 90 - P (Demand) where Q is quantity in millions of barrels per day, and P is price per barrel.Determine the equilibrium industry price/output combination.

A) P = $20, Q = 40
B) P = $10, Q = 40
C) P = $50, Q = 10
D) P = $40, Q = 55
E) P = $50, Q = 40

12.

You are the manager of a firm that sells its product in a competitive market at a price of $45. Your firm's cost function is C = 27 + 4.5Q². The profit-maximizing output for your firm is

A) 3.
B) 9.
C) 2.
D) 7.
E) 5.

13.

In a market characterized by monopolistic competition, the entry of another firm

A) Shifts the typical firm's demand curve left, causing prices to fall and output per firm to rise
B) Shifts the typical firm's demand curve right, causing prices and output per firm to rise
C) Shifts the typical firm's demand curve left, causing prices and output per firm to rise
D) Shifts the typical firm's demand curve right, causing prices and output per firm to fall
E) Shifts the typical firm's demand curve left, causing prices and output per firm to fall

14.

The theory of monopolistic competition predicts all of the following EXCEPT:

A) when the firm is in long-run equilibrium, the demand curve is tangent to the ATC curve.
B) customers have a large product variety from which to choose.
C) when the industry is in long-run equilibrium, price exceeds marginal cost.
D) if the firm increases its price, demand for its product will drop to zero.
E) in the long run, free entry and exit ensure that each firm earns zero profits.

15.

Why do we consider monopolistically competitive firms to be inefficient?

A) Because they earn positive profits
B) Because they do not operate at the minimum of the ATC curve
C) Because marginal revenue exceeds marginal cost
D) Because they produce more than socially optimal amount of output
E) Because they overcharge consumers

16.

The demand curve faced by a firm in a monopolistically competitive industry is:

A) horizontal.
B) downward sloping.
C) more elastic than the perfectly competitive firm's demand curve.
D) the downward sloping industry demand curve.
E) less elastic than pure monopoly's demand curve.

17.

The ESC store is the sole seller of sweat shirts with the ESC logo. The price of a shirt is $40 for the general public. Market theory tells us that $40 is:

A) equal to marginal cost.
B) less than marginal cost.
C) equal to marginal revenue.
D) greater than marginal revenue.
E) equal to average variable cost.

18.

Which of the following is NOT an argument for how a monopoly could benefit consumers?

A) Network externalities
B) More efficient production may lead to lower prices
C) More consumer surplus
D) More efficient research and development leads to more innovation
E) All are arguments for how monopoly might benefit consumers

19.

In the short run, a monopolist's profits:

A) may be positive, negative, or zero.
B) are positive because of the monopolist's market power.
C) are positive if the monopolist's elasticity of demand is less than 1.
D) are positive if the monopolist's selling price is above average variable cost.
E) are zero.

20.

Just CDs Inc has developed a booming business in the purchase and sale of used CDs and used DVDs. Demand for the local college student market is: P = $6 - $0.00005Q. Fixed costs are nil, and average variable costs are constant at $4 per unit. Calculate the profit-maximizing price/output combination and economic profits if Just CDs enjoys an effective monopoly in the local market. (hint: if AVC are constant, then MC is....?)

A) P = $4, Q = 10,000, Profits = $20,000
B) P = $5, Q = 20,000, Profits = $20,000
C) P = $5, Q = 2,000, Profits = $2,000
D) P = $6, Q = 5,000, Profits = $10,000
E) P = $3, Q = 2,000, Profits = $10,000

21.

You are the manager of The Blue Dragon, a new Chinese Restaurant in town. The restaurant faces an inverse demand curve described by P = 240 - 12Q. Its costs are TC = 32 + 48Q. Find profit-maximizing price.

A) $48.
B) $62.
C) $96.
D) $144.
E) $156.

22.

Compared to the purely competitive firm, a pure monopoly:

A) imposes smaller deadweight loss on the society.
B) produces an equal amount of output, but charges higher prices to cover all costs in the market.
C) is efficient from society's perspective because it has big plants and it uses the newest possible production technology.
D) will always become competitive in the long run because positive economic profits will induce competitors into the market.
E) is able to use barriers to entry and maintain positive economic profits in the long run.

23.

Paradox Dental, Ltd., enjoys a local monopoly in the provision of oral examination services in Tuskegee, Alabama. Total revenue for the standard procedure is:

TR = $250Q - $0.001Q²

Marginal costs for the process are stable at $150 per unit.

Fixed costs are nil. Calculate Paradox Dental's output, price, and profits at the profit-maximizing activity level.

A) Q* = 30,000, P* = $100, profit = $2,000,000
B) Q* = 40,000, P* = $300, profit = $2,500,000
C) Q* = 50,000, P* = $300, profit = $2,000,000
D) Q* = 40,000, P* = $200, profit = $2,200,000
E) Q* = 50,000, P* = $200, profit = $2,500,000

24.

In the problem above, what price and profit levels would prevail based on the assumption that new entry into the local market results in competitive market pricing? (P = MC)

A) P = $150, profit = 0.
B) P = $50, profit = - $200,000.
C) P = $100, profit = $100,000.
D) P = $200, profit = 0.
E) P = $250, profit = 0.

25.

A monopoly has two production plants with cost functions

C₁ = 50 + 0.1 Q₁² and C₂ = 30 + 0.05 Q₂². The demand it faces is Q = 500 - 10 P.

What is the profit maximizing level of output?

A) Q1 = Q2 = 62.5.
B) Q1 = Q2 = 125.
C) Q1 = 125; Q2 = 62.5.
D) Q1 = 62.5; Q2 = 125.
E) Q1 = 50; Q2 = 30.

Submitted: 11 years ago.Category: Multiple Problems

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