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Chap. 12: MANAGERIAL DECISIONS FOR FIRMS WITH MKT POWER
12-1
Which of the following is a characteristic of a monopoly market?
a.
one firm is the only supplier of a product for which there are no close substitutes
b.
entry into the market is blocked c.
the firm can influence market price
d.
all of the above
12-2
In a monopoly market,
a.
other firms have no incentive to enter the market.
b.
profits will always be positive because the firm is the only supplier in the market.
c.
the demand facing the firm is downward-sloping because it is the market demand.
d.
a and b e.
none of the above
12-3
A monopolist
a.
can raise its price without losing any sales because it is the only supplier in the market.
b.
can earn a greater than normal rate of return in the long run.
c.
always charges a price that is higher than marginal revenue.
d.
both a and b e. both b and c
12-4
A firm with market power
a.can increase price without losing all sales. b. faces a downward-sloping demand curve.
c.
is the only seller in a market. d. both a and b e. all of the above
12-5
One method of measuring the extent of a firm's market power is
a.
the Lerner index. b.
price elasticity of demand for the firm's product.
c.
income elasticity of demand for the firm's product. d. both a and b
e.
all of the above
12-6
In a monopolistically competitive market,
a.
firms are small relative to the total market. b.
c.
there is easy entry and exit in the market. d.
no firm has any market power.
a and b e.
a and c
12-7
Which of the following would indicate a relatively large amount of market power?
a.
Highly price elasticity demand b.Low cross-price elasticity with other products
c.
Low Lerner index d.
all of the above e.
none of the above
12-8
A monopolistic competitor is similar to a monopolist in that
a.
both have market power.
b.
both earn positive economic profit in the long run.
c.
both produce the output at which long-run average cost is at a minimum.
d.
a and b e.
all of the above
12-9
Refer to the following table showing a monopolist’s demand schedule:
Price
$50
40
20
10
Quantity
300
600
800
1,000
What is marginal revenue for a price decrease from $50 to $40?
a.
$9,000 b.
$24,000 c.
$30 d. $20 e. $40
12-10 If price falls from $20 to $10, then
a.MR = $10, and demand is inelastic. b.MR = $10, and demand is elastic.
c. MR = $30, and demand is elastic. d. MR = $30, and demand is inelastic. e. none of above
12-11 Refer to the following figure showing demand and marginal revenue for a monopoly.
At any price above $______ demand is elastic.
a.
$5 b. $10 c. $15 d. $20 e. zero
12-12 If production costs are constant and equal to $10 (i.e., LAC = LMC = $10), what price will the
monopoly charge?
a.
$5 b. $10 c. $15 d. $20 e. $25
12-13 In a monopolistically competitive market,
a.
a firm has market power because it produces a differentiated product.
b.
a firm earns economic profits in the long run because it has market power.
c.
there are a large number of firms.
d.
both a and b e. both a and c
12-14 Monopolistic competition is similar to perfect competition in that:
a.
there are a large number of firms b.
firms earn economic profits in the long run
c.
firms face downward-sloping demand curves
d.
both a and b all of the above
12-15 A monopoly is producing a level of output at which price is $80, marginal revenue is $40,
average total cost is $100, marginal cost is $40, and average fixed cost is $10. In order to
maximize profit, the firm should
a.
produce more. b. keep output the same.
c.
produce less. d. shut down.
12-16 The following figure shows the demand and cost curves facing a firm with market power in the
short run.
The profit-maximizing level of output is
a.
60 units. b.
70 units c.
80 units d.
12-17 The firm will sell its output at a price of
a.
$2. b. $3. c. $3.75. d.
$5. e.
12-18
90 units. e.
100 units.
$6.
The firm earns profits of
a.
$ 75. b. $120. c. $150. d.$180. $300.
12-19
The above graph shows the demand and cost conditions facing a price-setting firm. When output
is 50 units, what will happen to total revenue if the firm sells another unit of output?
a.
Total revenue will increase $13.50. b. Total revenue will increase $11.00.
c.
Total revenue will increase $9.00. d. Total revenue will increase $6.00.
e.
none of the above
12-20 The firm will produce _____ units of output and charge a price of _____.
a.
40, $8 b.
50, $9 c.
60, $10 d.
50, $6 e.
none of the above
12-21 What is the maximum amount of profit the firm can earn?
a
$180 b.
$80 c.$60 d. $120 e. none of the above
12-22 A monopolist will maximize profit by producing the level of output at which
a.
the firm's total revenue exceeds total cost by the largest amount.
b.
marginal revenue equals marginal cost.
c.
the last unit of output produced adds the same amount to total revenue as to total cost.
d.
both a and b e. all of the above
12-23 A profit-maximizing firm with market power will always produce a level of output where
a.
demand is elastic.
b.
demand is inelastic.
c.
price is greater than average total cost.
d.
marginal revenue is greater than average total cost.
12-24 A firm with market power is producing a level of output at which price is $8, marginal revenue is $5,
average variable cost is $6, and marginal cost is $10. In order to maximize profit, the firm should
a.
e.
decrease price. b.increase price. c.
shut down.
keep price the same. d. increase output.
12-25 A monopolist which suffers losses in the short run will
a.
continue to operate as long as total revenue covers fixed cost.
b.
raise price in order to eliminate losses.
c.
exit in the long run if there is no plant size that will result in economic profit that is
greater than or equal to zero. d. both a and b e. both a and c
12-26 Suppose that a profit-maximizing monopolist has a plant of the optimal size and is producing a
level of output at which price is $30, average total cost is $55, and average fixed cost is $40. The
firm should
a.
operate in the short run. b.
shut down in the short run.
c.
exit the market in the long run. d.
continue to operate in the long run.
e.
both a and c
12-31 A firm with market power will maximize profit by hiring the amount of an input at which the
a.
last unit of the input hired adds the same amount to total revenue as to total cost.
b.
additional revenue from the last unit of the input hired exceeds the additional cost of the
last unit by the largest amount.
c.
last unit of the input hired adds the same amount to total output as to total cost.
d.
additional output from the last unit of the input hired exceeds the additional cost of the
last unit by the largest amount.
12-32 A monopolist is currently hiring 5,000 units of labor. At this level, the marginal revenue of
output is $10, the (fixed) wage rate is $300, and the marginal product of labor is 50. In order to
maximize profit, the firm should
a.
keep the level of employment the same because the firm is earning a profit of $100,000.
b.
hire more labor because the next unit of labor increases profit by $500.
c.
hire more labor because the next unit of labor increases profit by $200.
d.
hire less labor because the last unit of labor added more to total cost ($300) than to total
revenue ($10).
12-33 A firm facing a downward sloping demand curve is producing a level of output at which price is
$7, marginal revenue is $5, and average total cost, which is at its minimum value, is $3. In order
to maximize profit, the firm should
a.
decrease price. b.keep price the same. c.decrease output.
d.
increase price. e.
both c and d
12-34 A monopolist is producing a level of output at which price is $65, marginal revenue is $35,
average total cost is $35, and marginal cost is $50. In order to maximize profit, the firm should
a.
keep output the same. b.produce less. c.produce more.
d.
decrease price. e.
both c and d
12-35 Refer to the following table which gives the demand and cost data for a price-setting firm:
Price
$ 20
19
18
17
16
15
Output
7
8
9
10
11
12
Total Cost
$36
45
54
63
72
81
What is the profit-maximizing price?
a.
$19 b. $18 c. $17 d. $16 e. $15
12-36 What is the maximum amount of profit that this firm can earn?
a.
$104 b.$105 c. $106 d.$107 e. $108
12-37
The figure above shows the demand and cost curves facing a price-setting firm. What is marginal
revenue when output is 100 units?
a.
$10 b. $20 c. $25 d. $30 e. $35
12-38
At what output is marginal revenue $20?
a.
100 units b.
200 units c.
300 units d.
400 units e.
500 units
12-39. The profit-maximizing (or loss-minimizing) level of output is ______
a.
100 b. 200. c. 300. D 400. E. 500
12-46 If a monopolist is producing a level of output at which demand is inelastic, then
a.
the firm is not maximizing profit.
b.
marginal revenue is positive.
c.
total revenue will decrease if the firm produces more output.
d.
both a and b e. both a and c
12-47 Refer to the following table that gives the demand facing a monopolist:
Price
$20
15
10
5
Quantity
20
40
65
70
How much does the 28th unit of output add to total revenue?
a.
$2 b. $10 c. $20 d. $200 e. none of the above
12-48 If a firm earns profits of $250 by producing 40 units of output, the firm charges a price of _____
and has total costs of ______.
a.
$15, $250 b. $15, $350 c. $20, $150 d. $600, $450
e.
none of the above
12-49 Refer to the following table that gives the demand facing a monopolist:
Price
$20
15
10
5
Quantity
20
40
65
70
Demand is __________ between 65 and 70 units of output because marginal revenue in that
range is ______.
a.
elastic, $50 b. elastic, $100 c. inelastic, negative d.
inelastic, positive
12-50 A manger of a firm with market power faces the marginal revenue product and average revenue
product curves shown below. The firm incurs weekly fixed costs of $1,800. The firm employs a
single variable input, labor, which costs $600 per worker each week.
Given the above, the 14th worker hired adds $_______ to the firm's total revenue each week.
a.
$200 per week b.
$400 per week
c.
$500 per week d.
$700 per week e.
$900 per week
12-51 A manger of a firm with market power faces the marginal revenue product and average revenue
product curves shown below. The firm incurs weekly fixed costs of $1,800. The firm employs a
single variable input, labor, which costs $600 per worker each week.
Given the above, in order to maximize profit, the manager should hire ________ workers per
week.
a.
9 b.
10 c. 12 d. 18
12-52 A manger of a firm with market power faces the marginal revenue product and average revenue
product curves shown below. The firm incurs weekly fixed costs of $1,800. The firm employs a
single variable input, labor, which costs $600 per worker each week.
Given the above, in profit-maximizing (or loss-minimizing) equilibrium, the firm's total variable
costs are
a.
$12,000. b.
$6,000. c.
$600. d.$400. e. none of the above
12-53 Given the above, the maximum profit the firm can earn is _____________.
a.
$4,800 per week. b.
$3,000 per week.
c.
$2,400 per week. d.
$1,800 per week. e.
-$1,800 per week.
12-54 Given the above, suppose the weekly wage rate increases to $1,400 per worker. The firm would
hire _______ workers and earn a profit of _______ per week.
a.
6 ; $8,400 b.
6 ; $6,000 c.
6 ; $2,400
d.
6 ; $4,800 e.
0 ; $1,800
12-55 All of the following could be a barrier to entry EXCEPT:
a.
a government franchise. b.
decreasing long-run average cost.
c.
patents. d.
switching costs. e.
rising LMC.
12-56 A monopolistically competitive industry is in the process of moving toward long-run equilibrium.
This period the product of a typical firm has more substitutes than last period. This means that
a.
there was entry into the industry.
b.
a typical firm will produce more this period.
c.
a typical firm's profits will fall this period.
d.
both a and c
e.
all of the above
12-57 If a monopolistically competitive market is in long-run equilibrium, each firm
a.
charges a price which is higher than long-run marginal cost.
b.
earns economic profits.
c.
produces that level of output at which long-run average cost is minimum.
d.
all of the above
e.
none of the above
12-58 A monopolistic competitor is producing a level of output at which price is $200, marginal
revenue is $100, average total cost is $210, marginal cost is $100, and average variable cost is
$180. In order to maximize profit, the firm should
a.
increase output.
b.
keep output the same.
c.
decrease output.
d.
shut down.
12-59 A monopolistic competitor is currently producing 2,000 units of output; price is $100, marginal
revenue is $80, average total cost is $130, marginal cost is $60, and average variable cost is $60.
The firm should
a.
raise price because the firm is losing money.
b.
keep the price the same because the firm is producing at minimum average variable cost.
c.
raise price because the last unit of output decreased profit by $30.
d.
lower price because the next unit of output increases profit by $20.
12-60 In a monopolistically competitive industry in long-run equilibrium
a.
each firm is making a normal profit.
b.
each firm is producing the output at which long-run average cost is at its minimum point.
c.
price equals marginal cost for each firm.
d.
all of the above
e.
none of the above
12-61 If firms in a monopolistically competitive industry are making an economic profit,
a.
new firms will enter the industry.
b.
economic profit will fall in future periods.
c.
price is higher than marginal cost.
d.
all of the above
e.
none of the above
Fill-in-the-Blank
12-1F This question refers to the following demand schedule for a monopoly firm:
a.
b.
Price
Quantity
$15
100
$10
200
$5
300
Between 100 and 200 units of sales, the elasticity of demand is ________ and marginal
revenue is $________.
Between 200 and 300 units of sales, the elasticity of demand is ________ and marginal
revenue is $________.
12-2F Fill in the blanks:
a.
A monopoly can raise its price without ______________________, because it has
________________________.
b.
Two related ways to measure the extent of a firm’s market power are
______________________________ and ___________________________________.
c.
Monopolistically competitive firms will have their economic profit competed away in the
long run because of
____________________________________________________________. They will
however earn ____________________ in the long run.
d.
A firm with market power will produce at a loss in the short run only if
_____________________________. If this condition is met and the firm does produce at
a loss, the firm will lose ____________(more, less) than its total fixed costs. In the long
run, this firm will leave the industry if _______________________________.
12-3F The following graph shows demand and marginal revenue for a monopoly.
a.
b.
c.
At any price above $_______ and quantity below ________ demand will be elastic.
Marginal revenue is ____________ over this range.
At any price below $_______ and quantity above ________ demand will be inelastic.
Marginal revenue is _____________ over this range.
Demand is unitary elastic at a price of $______ and quantity of ________. Marginal
revenue is _____________ at this price-quantity combination.
12-4F Answer the following questions concerning a firm with market power:
a.
A monopoly will increase its usage of a variable input if _________________________
exceeds ______________________.
b.
A monopoly will decrease its usage of a variable input if _________________________
exceeds _________________________.
c.
A monopoly will hire zero amount of a variable input if the wage rate is above
_________________________.
12-5F The following schedule shows demand and total cost for a firm with market power:
Price
Quantity
Total Cost
$30
10
$200
29
11
208
28
12
217
27
13
227
26
14
238
25
15
250
24
16
263
a.
To maximize profit firm should produce ______ units of output and charge a price of $_______.
b.
At this level of output the firm earns a profit of $________.
c.
The last unit of output produced and sold adds $________ to revenue and $________ to cost.
d.
One more unit of output beyond the profit-maximizing level of output would add
$________ to revenue and $________ to cost, thereby ___________ profit by
$________.
12-6F The following figure shows demand, marginal revenue, and short-run costs for a price-setting
firm.
a.
b.
To maximize profit the firm should produce an output of ________ and set a price of
$_______.
At this level of output total revenue is $________, total cost is $________, and the firm
earns a profit of $________.