FINAL EXAM

MANAGERIAL ECONOMICS

TEST I. MULTIPLE CHOICE

Instructions: Encircle the letter of the correct answer.

1. A firm in a perfectly competitive industry will maximize profits in the short

run at the rate of output at which the difference between the __________and
the ____________is the greatest.
a. Price; average revenue.
b. Total revenue; total cost.
c. Price; marginal revenue.
d. Price; average total cost.
e. Total revenue; marginal revenue.

2. Which of the following is characteristic of monopolistic competition?

a. Standardized output between firms.
b. Relatively easy entry into the industry by firms.
c. The absence of either advertising or the use of brand names.
d. Recognition of the interdependence of firms.
e. A relatively small number of firms.
8. At the profit-maximizing quantity, what price should a monopolist charge?

a. 7
3. An industry (or market) characterized by the presence of only a few firms b. 9
in the industry is called: c. 2
a. monopolistic. d. 3
b. perfectly competitive. e. 6
c. monopolistically competitive.
d. anarchic. 9. What is the profit-maximizing output level for a monopolist?
e. oligopolistic. a. 4
b. 5
4. When it is said that a firm in an industry characterized by perfect c. 2
competition can sell all that it wants to at the market-determined price, the d. 3
demand curve is said to be: e. 6
a. (relatively) inelastic.
b. diminishing elastic. 10. At the profit-maximizing quantity, what is the average total cost?
d. perfectly elastic. a. 4
d. perfectly inelastic. b. 5
e. (relatively) elastic. c. 2
d. 3
5. Firms in perfectly competitive markets base their production decisions on e. 6
the assumption that
11. [Refer to the diagram above]. At the profit-maximizing quantity, what is
a. marginal cost is constant.
b. they can raise their price without lowering total revenue. the firm’s total cost?
c. price is greater than the average total cost.
a. 24
d. they can sell by the quantity of output at the going price.
b. 20
e. marginal cost is rising.
c. 16
d. 30
6. The market supply curve for a perfectly competitive industry is formed by e. 42
horizontally summing the:
a. marginal cost curve for each firm in the industry. 12. [Refer to the diagram above]. At the profit-maximizing quantity, what is
b. marginal revenue curve for each firm in the industry. the firm’s total revenue?
c. average total cost curve for each firm in the industry. a. 32
d. total revenue curve for each firm in the industry. b. 36
e. total cost curve for each firm in the industry. c. 28
d. 42
7. An increase in demand in a monopoly market results in: e. 20
a. an increase in price.
b. a reduction in production. 13. [Refer to the diagram above]. What is the firm’s total profits?
c. a leftward shift of the marginal cost curve.
d. a movement up and along the demand curve. a. 32
e. a rightward shift of the marginal cost curve. b. 36
c. 28
d. 42
e. 20
14. Price discrimination occurs in markets characterized by: TEST III. True or False. Write True if the statement is true and False otherwise.
a. monopoly. 2 POINTS EACH
b. monopolistic competition.
c. cartels. 1. Monopolistic firms, just like monopoly, has a marginal revenue that is
d. oligopoly. always greater than the price of the product.
e. all the other responses are correct. 2. Competitive firms earn zero economic profits in the long run because they
perform badly compared to other types of firms in the market.
15. A perfect price discriminator is one who: 3. Firms in an oligopoly market take the price as given by market conditions of
a. maximizes profits by setting price equal to marginal cost. supply and demand.
b. charges all customers the highest price that any one customer would pay. 4. The price charged by an oligopolist is always higher than the price in a
c. charges three different prices. competitive but lower than the price charged in monopoly.
d. sells goods at a price above the suggested retail selling price. 5. Entry into a monopoly type of market is difficult but possible.
e. charges each individual customer the highest possible price which the 6. Price discrimination is the practice of charging different prices to different
customer is willing to pay. customers due to differences in the costs of production.
7. The less elastic the demand for the monopolist’s product, the more
Test II. PROBLEM SETS available are good substitutes and the greater the degree of market power.
8. Of all the firms with market power, a monopolistic competitive firm has the
1. From the following payoff matrix, where the payoffs are profits or losses of least.
the two firms, determine the following: 9. In a game theory, the dominant strategy is the best strategy of the player
no matter what the opponent does.
a. Whether Firm A has a dominant strategy 10. The demand curve faced by a monopolistic firm is less elastic than the
b. Whether Firm B has a dominant strategy. demand faced by only a single firm in the market.
c. The Optimal strategy of each player.
d. The Nash Equilibrium if there is one.
TEST IV. IDENTIFICATION
FIRM B
1. For each of the following characteristics, say whether it describes a
Low Price High Price perfectly competitive firm, a monopolistically competitive firm, both, or
neither.
____________a. Charges a price equal to marginal cost.
1,000 5,000
Low Price ____________b. Has marginal revenue equal to price.
2,000 -3,000
____________c. Faces barriers to entry.
FIRM A 3,000 6,000 ____________d. Produces a product that is identical to that of its competitor.
High Price ____________e. Produces where marginal revenue equals marginal cost.
-1,000 4,000 ____________f. Earns zero economic profit in the long run.
____________g. Has a downward sloping demand curve.
____________h. Has excess capacity.
____________i. Produced a heterogeneous product.
____________j. Has little influence over the price of its output.
2. A large share of the world’s supply of diamonds comes from Russia and
South Africa. Suppose that the marginal cost of mining diamonds is constant 2. For each of the following characteristics, say whether it describes a
at $1,000 per diamond, and the demand for diamonds is described by the monopoly firm, a monopolistically competitive firm, both, or neither.
following schedule: ____________a. Has excess capacity
____________b. Has marginal revenue equal to price.
PRICE QUANTITY ____________c. Faces barriers to entry.
____________d. Produces a product that is identical to that of its competitor.
$8,000 5,000 ____________e. Produces where marginal revenue is greater than marginal
7,000 6,000 cost.
6,000 7,000 ____________f. Earns zero economic profit in the long run.
5,000 8,000 ____________g. Has a downward-sloping demand curve.
4,000 9,000 ____________h. Charges a price greater than marginal cost.
3000 10,000 ____________i. Has a markup over the price.
2,000 11,000 ____________j. Produced a product without close substitutes.
1,000 12,000 ____________k. Is a price taker.

A. If there were many suppliers of diamonds, what would be the price

and quantity?
B. If there were only one supplier of diamonds, what would be the price
and quantity?
C. If Russia and South Africa formed a cartel, what would be the price
and quantity? If the countries split the market evenly, what would be South
Africa’s production and profit? What would happen to South Africa’s profit if it
increased production by 1,000 while Russia stuck to the cartel agreement?
D. Use your answer to part (c) to explain why cartel agreements are
often unsuccessful.