MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 1

Perfectly Competitive Markets

1) A perfectly competitive firm faces a demand curve that is
A) horizontal. B) vertical. C) perpendicular to the quantity axis. D) perfectly inelastic. Answer: A

2) Which of the following is a characteristic of a firm in a perfectly competitive market?

A) The firm cannot make a profit in the short run because it is too small a part of the total market.
B) The firm can make a profit in the long run but not in the short run.
C) The firm can sell as much as it wants without having to lower its price.
D) The firm must lower its price in order to increase quantity demanded. Answer: C

3) If a perfectly competitive firm raises the price it charges to consumers, which of the following is the most likely
outcome?
A) The firm's revenue will not change because some consumers will refuse to pay the higher price.
B) The firm will not sell any output.
C) The firm's total revenue will increase only if the demand for its product is inelastic.
D) The firm's total revenue will increase only if the demand for its product is elastic. Answer: B

4) A perfectly competitive firm has to charge the same price as every other firm in the market. Therefore, the firm
A) faces a perfectly inelastic demand curve. B) is not able to make a profit in the short run.
C) is a price taker. D) faces a perfectly elastic supply curve. Answer: C

5) Which of the following is not an assumption of perfectly competitive markets?

A) There are many sellers and many buyers, all of which are small relative to the market.
B) Each firm produces a similar but not identical product.
C) There are no barriers to new firms entering the market.
D) The products sold by all firms in the market are identical. Answer: B

6) In a perfectly competitive market the term "price taker" applies to Answer: A

A) sellers and buyers. B) firms but not buyers.
C) buyers but not sellers. D) only the smallest sellers and buyers.

7) The price a perfectly competitive firm receives for its output

A) is determined by the interaction of the firm and all of the consumers who buy from the firm.
B) is determined by the interaction of all sellers and all buyers in the firm's market.
C) will not change in response to changes in market demand and supply because the firm is a price taker.
D) will be lowered by the firm in order to sell more output. Answer: B

8) Firms that are price takers

A) must lower their prices to increase sales.
B) are able to sell a fixed quantity of output at the market price.
C) can raise their prices as a result of a successful advertising campaign.
D) are able to sell all their output at the market price. Answer: D

9) Firms in perfect competition are price takers because

A) one firm determines the price that all other firms in the industry will charge.
B) consumers have enough market power to set prices.
C) firms accept the price determined by the government.
D) each firm is too small relative to the market to be able to influence price. Answer: D

10) To maximize profit, a perfectly competitive firm Answer: C

A) should sell the quantity of output determined by the interaction between industry demand and supply.
B) should sell the quantity of output that results in a value for total revenue that is equal to total cost.
C) should produce the quantity of output that results in the greatest difference between total revenue and total cost.
D) should produce the quantity of output that results in the greatest difference between marginal revenue and marginal cost.

11) For a perfectly competitive firm, average revenue is equal to

A) marginal cost. B) the market price. C) total revenue. D) average fixed cost. Answer: B
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 2
12) If the market price is $40, the average revenue of selling five units is
A) $8. B) $20. C) $40. D) $200. Answer: C

13) If the market price is $40 in a perfectly competitive market, the marginal revenue from selling the fifth unit is
A) $8. B) $20. C) $40. D) $200. Answer: C

14) For a firm in a perfectly competitive market, price is

A) equal to both average revenue and marginal revenue.
B) equal to average revenue but greater than marginal revenue.
C) greater than marginal revenue but less than average revenue.
D) less than both average revenue and marginal revenue. Answer: A

15) Marginal revenue is

A) total revenue divided by the total quantity of output.
B) the change in profit divided by the change in the quantity of output.
C) the change in total revenue divided by the change in total cost.
D) the change in total revenue divided by the change in the quantity of output. Answer: D

16) In a graph that illustrates a perfectly competitive firm, marginal revenue is

A) a diagonal line that lies below the firm's demand curve.
B) a line that intersects the firm's demand curve from below at its lowest point.
C) a line that intersects the firm's average total cost curve from below at its lowest point.
D) the same as the firm's demand curve. Answer: D

17) The marginal revenue curve for a perfectly competitive firm

A) is downward-sloping. B) is the same as its demand curve.
C) is perfectly inelastic. D) is the same as its marginal cost curve. Answer: B

18) Producing where marginal revenue equals marginal cost is equivalent to producing where
A) average total cost equals average revenue. B) average fixed cost is minimized.
C) total revenue is equal to total cost. D) total profit is maximized. Answer: D

19) A perfectly competitive firm's marginal revenue

A) is greater than price. B) is less than price because a firm must lower its price to sell more.
C) is equal to price. D) may be either greater or less than price, depending on the quantity sold.

Table 12-1
Apples Market Price Total Revenue Average Marginal
(pounds) per Pound (TR) Revenue (AR) Revenue (MR)
0 $3 $0 ----- -----
100
150
200
250
300
350
400
Table 12-1 lists the various pounds (lbs.) of apples that Margie Stattler can sell. Assume that Margie operates in a
perfectly competitive market. Answer: C
20) Refer to Table 12-1. What is Margie's total revenue if she sells 250 pounds of apples?
A) $250 B) $500 C) $750 D) There is not enough information to determine Margie's total revenue.

21) Refer to Table 12-1. How many pounds of apples should Margie sell to maximize her profit?
A) 300 pounds B) 400 pounds
C) This cannot be determined without knowing Margie's total or marginal production costs.
D) This can be determined only when all of the values for market price, total revenue, average revenue and marginal
revenue are given.
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 3
22) At the profit-maximizing level of output for a perfectly competitive firm,
A) price equals marginal cost.
B) average revenue equals average variable cost and price equals marginal cost.
C) marginal revenue equals marginal cost and average total cost equals average fixed cost.
D) price equals average revenue and marginal cost equals average variable cost. Answer: A

19) If a perfectly competitive apple farm's marginal revenue exceeds the marginal cost of the last bushel of apples
sold, what should the farm do to maximize its profit?
A) determine what the total revenue and total cost of production are B) increase output
C) decrease output D) lower its price to sell more Answer: B

20) A perfectly competitive apple farm produces 1,000 bushels of apples at a total cost of $36,000. The price of
each bushel is $50. Calculate the firm's short-run profit or loss.
A) loss of $14,000 B) profit of $14,000 C) profit of $50,000
D) There is insufficient information to answer the question. Answer: B

Figure 12-1
21) Refer to Figure 12-1. If the firm is producing 500 units,
A) it is making a profit. B) it is making a loss.
C) it should maintain its output to maximize profit.
D) it should increase its output to maximize profit.

22) Refer to Figure 12-1. If the firm is producing 500 units, what is the
amount of its profit or loss?
A) profit of $280 B) loss equivalent to the area A
C) profit equivalent to the area A
D) There is insufficient information to answer the question.

23) Refer to Figure 12-1. If the firm is charging a price of $12 per unit
A) it breaks even. B) it is making a profit. C) it is selling 700 units. D) it is not selling any output.

1) Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost
(TC) and average total cost (ATC). Which of the following equations is equal to a firm's profit?
A) P – ATC B) (P × Q) – TC C) (P × Q) - (P × ATC) D) P – TC Answer: B

3) If price = marginal cost at the output produced by a perfectly competitive firm and the firm is earning an
economic profit, then
A) marginal revenue is less than price. B) average total cost is at a minimum.
C) total revenue equals total cost. D) price exceeds average total cost. Answer: D

4) What is always true at the quantity where a firm's average total cost equals average revenue?
A) The firm's revenue is maximized. B) The firm's profit is maximized.
C) The firm breaks even. D) Marginal cost equals marginal revenue. Answer: C

5) Profit is the difference between

A) marginal revenue and marginal cost. B) total revenue and variable cost.
C) total revenue and total explicit cost. D) total revenue and total cost. Answer: D

8) A firm will break even when

A) P = ATC. B) P > ATC. C) P < AVC. D) P = AVC. Answer: A

9) A firm will make a profit when

A) P > AVC. B) P > ATC. C) P = ATC. D) P = MC. Answer: B

16) A perfectly competitive firm will maximize its profit at the rate of output where the vertical distance between
its total revenue and total cost is the largest. This is the same rate of output where
A) average total cost equals marginal revenue. B) marginal revenue equals marginal profit.
C) marginal revenue equals marginal cost. D) marginal revenue equals average revenue.
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 4
1) In the short run, a firm that is operating at a loss has two options. These options are
A) to reduce output or reduce its variable costs. B) to go out of business or declare bankruptcy.
C) to shut down temporarily or continue to produce.
D) to adopt new technology or change the size of its physical plant. Answer: C
Table 12-2
Average Total
Quantity Total Cost Cost Marginal Cost
0 $10.00 ----- -----
1 15.00 $15.00 $5.00
2 17.50 8.75 2.50
3 22.50 7.50 5.00
4 30.00 7.50 7.50
5 40.00 8.00 10.00
6 52.50 8.75 12.50
7 67.50 9.64 15.00
8 85.00 10.63 17.50
9 105.00 11.67 20.00
Arnie sells basketballs in a perfectly competitive market. Table 12-2 summarizes Arnie's output per day (Q), total
cost (TC), average total cost (ATC) and marginal cost (MC).
6) Refer to Table 12-2. What price (P) will Arnie charge and how much profit will he earn if the market price of
basketballs is $12.50?
A) Price and profit cannot be determined from the information given. B) P = $12.50; profit = $52.50
C) P = $12.50; profit = $22.50 D) P = $20; profit = $75.00.

7) Refer to Table 12-2. What will Arnie's output be and how much profit will he earn if the market price of
basketballs is $5.00?
A) Q = 1; profit = -$10. B) Q = 3; profit = -$7.50
C) Q = 0; profit = -$10.00 D) Price and profit cannot be determined from the information given.

Figure 12-2
Figure 12-2 shows the demand, marginal cost (MC) and average total cost (ATC) curves for Jason's House of
Apples.
12) Refer to Figure 12-2. To maximize his profit, Jason should produce the rate
of output indicated by point
A) a. B) b. C) e. D) d. Answer: D

13) Refer to Figure 12-2. Jason is currently producing 20 thousand pounds of

apples. To maximize his profit Jason should
A) keep production at 20 thousand pounds.
B) increase production to the output rate indicated by point d.
C) increase production to the output rate indicated by point e.
D) decrease production to the output rate indicated by point a.

14) Refer to Figure 12-2. Which of the following statements is true?

A) Jason should produce where MC equals $3 (point d) where he will minimize his losses.
B) Jason should produce where the distance between MC and his demand curve is greatest (point b).
C) Jason cannot earn a profit from selling any number of apples.
D) Jason should produce where MC equals $3 (point d) where he will maximize his profit. Answer: D

15) Refer to Figure 12-2. If Jason maximizes his profit he will produce the output rate indicated by point ________
and his average profit will equal ________.
A) d; $3 minus ATC at point d B) b; $3 minus ATC at point b C) e; $3 minus ATC at point e D) a; $3

2) If a firm shuts down it

A) will suffer a loss equal to its fixed costs. B) will produce nothing but must pay its variable costs.
C) will produce nothing but must pay its fixed and variable costs.
D) will earn enough revenue to cover its variable costs but not all of its fixed costs. Answer: A
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 5
4) If a firm shuts down in the short run it will
A) break even. B) declare bankruptcy.
C) suffer a loss equal to its variable costs. D) suffer a loss equal to its fixed costs. Answer: D
Figure 12-3
Figure 12-3 illustrates the cost curves of a perfectly competitive firm.

17) Refer to Figure 12-3. If the market price is P1

A) The firm will experience a loss and raise its price to P2. The firm will then
break even.
B) The firm will break even by producing a quantity of Q2.
C) The firm will experience a loss since price is less than ATC.
D) The firm may make a profit if it can increase the demand for its product.

18) Refer to Figure 12-3. If the market price is P3 the firm

A) will break even. B) will make a profit.
C) will earn enough revenue to cover its variable costs but not its fixed costs. D) will produce a quantity of Q1.

19) Refer to Figure 12-3. If the market price is P2 the firm

A) will break even and produce a quantity of Q2. B) will make a profit and produce a quantity of Q2.
C) will make a profit and produce a quantity of Q1. D) will make a profit and produce a quantity of Q3.

Figure 12-4
20) Refer to Figure 12-4. Suppose the firm produces 4,000 units. What does
the shaded area labeled A represent?
A) total variable cost B) profit
C) total fixed cost D) total revenue

21) Refer to Figure 12-4. Suppose the market price is $120. Which of the
following is true?
A) The firm earns a profit equal to the area A.
B) The firm earns a profit equal to the area A + B.
C) The firm suffers a loss equal to the area A. D) The firm will break even.

22) Refer to Figure 12-4. Suppose the firm produces 4,000 units. What does the shaded area labeled B represent?
A) the firm's economic loss B) total variable cost C) average variable cost D) total fixed cost

11) The supply curve of a perfectly competitive firm in the short run is Answer: C
A) the firm's average variable cost curve.
B) the portion of the firm's marginal cost curve below the minimum point of the average variable cost curve.
C) the portion of the firm's marginal cost curve above the minimum point of the average variable cost curve.
D) the portion of the firm's marginal cost curve above the minimum point of the average total cost curve.

12) A perfectly competitive firm's short-run supply curve is Answer: B

A) upward sloping and is the portion of the marginal cost curve that lies above the average total cost curve.
B) upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve.
C) perfectly elastic at the market price. D) horizontal at the minimum average total cost.

13) The minimum point on the average variable cost curve is called
A) the shutdown point. B) the break-even point.
C) the loss minimizing point. D) the point of diminishing returns. Answer: A

14) If a perfectly competitive firm's total revenue is less than its total variable cost, the firm
A) should raise its price above its average variable cost.
B) should continue to produce and increase its demand.
C) should stop production by shutting down temporarily.
D) should adopt new technology in order to lower its costs of production. Answer: C
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 6
Figure 12-5
16) Refer to Figure 12-5. The firm's short-run supply curve is its
A) marginal cost curve.
B) marginal cost curve from b and above.
C) marginal cost curve from c and above.
D) marginal cost curve from d and above.

17) Refer to Figure 12-5. Total revenue at the profit-maximizing level of output is
A) $1,200. B) $2,500. C) $4,800. D) $6,000.

18) Refer to Figure 12-5. The total cost at the profit-maximizing output level equals
A) $4,800. B) $3,300. C) $2,500. D) $1,800.

19) Refer to Figure 12-5. At the profit-maximizing output level, the firm earns
A) zero economic profit.B) a profit of $600. C) a profit of $1,200. D) a profit of $2,700.

1) In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue covers its
A) explicit plus its implicit costs. B) fixed costs. C) implicit costs. D) explicit costs.
Figure 12-6
3) Refer to Figure 12-6. Which panel best represents the perfectly competitive organic produce market in which
some firms are experiencing short-run losses, and consumers are
displaying an increased preference for organic produce?
A) Panel A B) Panel B C) Panel C D) Panel D

4) Refer to Figure 12-6. Which panel best represents the perfectly

competitive organic produce market's transition to the long run when
some firms in the market are earning economic profits?
A) Panel A B) Panel B C) Panel C D) Panel D

5) Refer to Figure 12-6. Which panel best represents the perfectly

competitive organic produce market in which some firms are earning
short-run economic profits, and the Surgeon General announces that
switching from non-organic produce to organic produce will add 5 years
to the average life span of consumers?
A) Panel A B) Panel B C) Panel C D) Panel D

6) Refer to Figure 12-6. Which panel best represents the perfectly competitive organic produce market in which
firms are breaking even, economically, organic produce is considered a normal good, and the average income level
of consumers is rising?
A) Panel A B) Panel B C) Panel C D) Panel D

7) In a perfectly competitive industry, in the long-run equilibrium

A) the typical firm is producing at the output where its long-run average total cost is not minimized.
B) the typical firm is earning an accounting profit greater than its implicit costs.
C) the typical firm earns zero profit. D) the typical firm is maximizing its revenue. Answer: C

17) If a firm in a perfectly competitive industry experiences persistent losses, in the long run it should
A) shut down temporarily and wait for market conditions to change. B) exit the industry.
C) raise its price to cover average total cost.
D) continue to operate if it can raise the demand for its product through advertising and quality improvements.

Figure 12-7
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 7

The graphs in Figure 12-7 represent the perfectly competitive market demand and supply curves for the apple
industry and demand and cost curves for a typical firm in the industry.

19) Refer to Figure 12-7. Which of the following statements is true?

A) The current market price is $3 but the firm will be able to increase the price in the future.
B) The current market price is $3 but the price will fall in the long-run as a result of a decrease in demand.
C) The current market price is $3 but the price will fall in the long-run as new firms enter the market.
D) The current market price is $3 but the price will increase in the future as the market demand increases.

20) Refer to Figure 12-7. Which of the following statements is true?

A) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. New firms
will enter the market and shift the market supply curve to the left.
B) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit, but it would
earn a greater profit if it produced at the lowest point on the ATC curve.
C) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. New firms
will enter the industry; as a result, the firm will be forced to exit the industry in the long run.
D) The firm will produce 30 thousands pounds of apples in the short run and earn an economic profit. In the long
run the firm will break even.

21) Refer to Figure 12-7. The graphs depicts a short run equilibrium. How will this differ from the long-run
equilibrium? (Assume this is a constant-cost industry.)
A) Fewer firms will be in the market in the long run than in the short run.
B) The price will be higher in the long run than in the short run.
C) The market supply curve will be further to the left in the long run than in the short run.
D) The firm's profit will be lower in the long run than in the short run.

22) Assume that firms in a perfectly competitive market are earning economic profits. Which of the following
statements describes the change in market price and output as a result of the entry of new firms into this market?
A) The market demand curve shifts to the right, causing price to rise and market output to increase.
B) The market demand curve shifts to the left, causing price to fall and market output to decrease.
C) The short-run market supply curve shifts to the right, causing price to fall and total market output to increase.
D) The short-run market supply curve shifts to the left, causing price to rise and total market output to decrease.

23) A firm could continue to operate for years without ever earning a profit as long as it is producing an output
where
A) MR < ATC. B) ATC > AVC. C) MR > AVC. D) AFC < AVC.

24) A firm would decide to shut down if its production resulted in

A) MR < ATC. B) ATC > AVC. C) AFC > AVC. D) MR < AVC.

1) Which of the following does not hold true for a perfectly competitive firm in long-run equilibrium?
A) Its economic profit will be zero. B) It will minimize average total cost.
C) It will charge a price equal to marginal cost. D) Marginal cost will be minimized.

2) A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency
mean?
A) Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.
B) Each firm produces up to the point where all scale economies are exhausted.
C) Production occurs at the lowest average total cost.
D) Firms use an input combination that minimizes cost and maximizes output.
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 8
5) Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of
producing the last unit. This condition is referred to as
A) productive efficiency. B) constant returns to scale.
C) allocative efficiency. D) perfectly competitive efficiency.

6) Which of the following describes a difference between allocative efficiency and productive efficiency in a
perfectly competitive market?
A) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved only in the short run.
B) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved in the short run and the
long run.
C) Allocative efficiency is achieved only in the short run. Productive efficiency is achieved only in the long run.
D) Allocative efficiency is achieved in the short run and the long run. Productive efficiency is achieved only in the long run.

1) Explain two different ways to determine the profit-maximizing level of output for a firm in a perfectly
competitive market.
Answer: One way is using total revenue and total cost. The profit maximizing level of output is where the
difference between total revenue and total cost is the greatest. Another way is using marginal revenue and
marginal cost. The profit maximizing level of output is where marginal revenue equals marginal cost

2) Fill in the columns in the following table and use the values in the table to determine the profit-maximizing
level of output.

Total Marginal
Revenue Total Cost Revenue Marginal
Quantity (TR) (TC) Profit (MR) Cost (MC)
0 0 3
1 5 5
2 10 6
3 15 8
4 20 11
5 25 15
6 30 21
7 35 30
8 40 42
9 45 60
10 50 85

Answer:
Total Marginal
Revenue Total Cost Revenue Marginal
Quantity (TR) (TC) Profit (MR) Cost (MC)
0 0 3 -3 --- ---
1 5 5 0 5 2
2 10 6 4 5 1
3 15 8 7 5 2
4 20 11 9 5 3
5 25 15 10 5 4
6 30 21 9 5 6
7 35 30 5 5 9
8 40 42 -2 5 12
9 45 60 -15 5 18
10 50 85 -35 5 25

The profit-maximizing level of output is 5 units.

 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 9
3) If firms do not earn economic profits in a competitive equilibrium, why would the firms choose to stay in
business?
Answer: When firms earn no economic profit but earn a normal profit, they earn precisely as much as they could
have earned by investing their time and money elsewhere. In other words, each producer is able to earn sufficient
accounting profits to cover the opportunity cost of invested factors (time and money) and to continue operating.
The source of the confusion stems from the difference between accounting and economic profits.

4) What is the difference between "shutting down temporarily" and "exiting the industry"?
Answer: The difference between the two has to do with fixed costs. In the short run a firm cannot avoid its fixed
costs. When price falls so low that the firm can no longer cover its variable costs of production with the revenue it
earns from selling its product it should shut down temporarily and wait for economic conditions to improve. In the
long run, all costs are variable. If total revenue cannot cover all costs the firm will exit the industry.

5) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per day and her costs are
as follows:

Output per Day Total Cost

0 $20
1 32
2 37
3 48
4 61
5 75
6 92
7 113
8 136

Suppose the current equilibrium price in the teapot market is $10. To maximize profit, how many teapots will
Veronica produce, what price will she charge, and how much profit (or loss) will she make? Draw a graph to
illustrate your answer. Your graph should include Veronica's demand, ATC, AVC, MC, and MR curves, the price she
is charging, the quantity she is producing, and the area representing her profit (or loss).
Answer: Veronica will produce 2 teapots per day. She will charge the market price of $10. She will make a profit
of $-17 (a loss of $17).

6) To maximize profit, a firm will produce the level of output where MR = MC. If a firm actually makes a profit
depends on the relationship of price to average total cost. What are the three possible relationships between
price and average total cost that determine if a firm will make a profit, experience a loss, or break even?
Answer: If P > ATC, the firm makes a profit.
If P < ATC, the firm experiences a loss.
If P = ATC, the firm breaks even.

7) Werner & Sons is a manufacturer of three-ring binders operating in a perfectly competitive industry. Table 12-4
shows the firm's cost schedule.
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 10
Table 12-4

Average
Quantity Variable Marginal Average
Total Cost Variable
(cases) Cost Cost Total Cost
Cost
0 $0 $76
1 30 106
2 50
3 134
4 140
5 160
6 114
7 150
8 190
9 316

Use the table to answer the following questions.

a. Complete Table 12-4 by filling in the blank cells.
b. Werner is selling in a perfectly competitive market at a price of $40. What is the profit maximizing or loss-
minimizing output?
c. Calculate the firm's profit or loss.
d. Should the firm continue to produce in the short run? Explain.
e. If the firm's fixed costs were $30 higher what would be the profit-maximizing output level in the short run?
Indicate whether the output level will increase, decrease or remain unchanged compared to your answer in b.
f. Suppose fixed cost remains at $76. If the price of three-ring binders falls to $20 what is the profit-maximizing
or loss-minimizing output?
g. Calculate the profit or loss. Should the firm continue to produce in the short run? Explain your answer.
h. Suppose the fixed cost remains at $76. What price corresponds to the shut-down point?
i. Suppose the fixed cost remains at $76. What price corresponds to the break-even point?
Answer:
a.
Average
Quantity Variable Marginal Average
Total Cost Variable
(cases) Cost Cost Total Cost
Cost
0 $0 $76 -- -- $76
1 30 106 $30 $30 106
2 50 126 20 25 63
3 58 134 8 19.33 44.67
4 64 140 6 16 35
5 84 160 20 16.8 32
6 114 190 30 19 31.67
7 150 226 36 21.43 32.29
8 190 266 40 23.75 33.25
9 240 316 50 26.67 35.11

b. Quantity = 8 units.
c. Profit = $54.
d. Yes, it is earning an economic profit.
e. The profit-maximizing output will not change since marginal cost is not affected by changes in fixed cost.
f. Quantity = 5 units.
g. Loss = $60. Yes, it is loss-minimizing.
h. The shut-down point corresponds to a price of $16 and an output of 4 units.
i. The break-even point occurs at a price $31.67 and an output of 6 units.
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 11
Figure 12-8

8) Refer to Figure 12-8. The figure above shows the cost curves of a perfectly competitive firm in the coffee
market. Use the graph in Figure 12-8 to answer the following questions. Assume the market price is $3 per pound.
a. What is the lowest price at which the coffee grower will supply output in the short run?
b. In the diagram draw the firm's demand curve (label this "MR" for marginal revenue).
c. What is the firm's profit-maximizing output?
d. Is the firm earning a profit or a loss? Identify the area in the graph that represents the firm's profit or loss.
e. Explain how entry or exit will occur in the market to ensure that firms will break even in the long run.
Answer:
a. $1.50 per pound. This represents the lowest point on the AVC curve, or the shut-down point.
b. See the figure below.
c. 225. This is the output where price (MR) equals MC.
d. The firm is earning a profit. See the figure below.
e. Above normal profits attract new entrants into the
industry, which will shift the industry supply curve to the right
and decrease the market price. This entry stops when all economic
profits are eliminated and price equals average total cost.

9) Central Grocery in New Orleans is famous for its muffaletta, a large round sandwich filled with deli meats and
topped with a tangy olive salad. Suppose the following table represents cost and revenue data for Central
Grocery. Fill in the columns for TR, MR, MC, ATC, and profit. If Central Grocery wants to maximize profits, what
price should it charge for a muffaletta, what quantity should it sell, and what will be the amount of its total profit?

Total Marginal Average

Muffalettas Price Revenue Revenue Total Cost Marginal Total Cost
Sold per Day (P) (TR) (MR) (TC) Cost (MC) (ATC) Profit
0 $15 $12
1 14 18
2 13 20
3 12 21
4 11 23
5 10 26
6 9 30
7 8 35
8 7 42
9 6 52
10 5 78
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 12
Answer:
Total Marginal Average
Muffalettas Price Revenue Revenue Total Cost Marginal Total Cost
Sold per Day (P) (TR) (MR) (TC) Cost (MC) (ATC) Profit
0 $15 $0 --- $12 --- --- -$12
1 14 14 $14 18 $6 $18.00 -4
2 13 26 12 20 2 10.00 6
3 12 36 10 21 1 7.00 15
4 11 44 8 23 2 5.75 21
5 10 50 6 26 3 5.20 24
6 9 54 4 30 4 5.00 24
7 8 56 2 35 5 5.00 21
8 7 56 0 42 7 5.25 14
9 6 54 -2 52 10 5.70 2
10 5 50 -4 78 16 7.80 -28
To maximize profits, Central Grocery should produce the quantity where MR = MC, which is 6 muffalettas. The
price is therefore $9, and the total profit is $54 - 30 = $24.

Monopoly
1. A monopoly is a firm that is the only seller of a good or service that does not have
A) a patent. B) a close complement. C) a barrier to entry. D) a close substitute. Answer: D

2. 8) A firm that is the only seller of a good or service that does not have a close substitute is called
A) a monopoly. B) an oligopolist. C) a market maker. D) a price maker. Answer: A

3. To have a monopoly in an industry there must be

A) barriers to entry so high that no other firms can enter the industry.
B) a patent or copyright giving the firm exclusive rights to sell a product for 20 years.
C) an inelastic demand for the industry's product.
D) a public franchise, making the monopoly the exclusive legal provider of a good or service. Answer: A

4. There are several types of barriers to entry that can create a monopoly. Which of the following barriers is the
result of government action?
A) network externalities B) public franchise C) economies of scale D) control of a key resource

5. To be a natural monopoly a firm must

A) control a key resource input.
B) have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms.
C) have significant network externalities. D) be very large relative to the total market. Answer: B

6. A monopoly firm's demand curve

A) is the same as the market demand curve. B) is perfectly inelastic.
C) is more inelastic than the demand curve for the product.
D) is inelastic at high prices and elastic at lower prices.

7. Which of the following is true for a monopolist?

A) Being the only seller in the market, the monopolist faces a perfectly inelastic demand curve.
B) Being the only seller in the market, the monopolist faces a perfectly elastic demand curve.
C) Being the only seller in the market, the monopolist faces the market demand curve.
D) Being the only seller in the market, the monopolist faces a downward sloping demand curve that lies below the
marginal revenue curve. Answer: C

8. A price maker is
A) a person who actively seeks out the best price for a product that he or she wishes to buy.
B) a firm that has some control over the price of the product it sells.
C) a firm that is able to sell any quantity at the highest possible price.
D) a consumer who participates in an auction where she announces her willingness to pay for a product.
Answer: B
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 13
9. Firms that face downward-sloping demand curves for their output in the product market are called
A) price takers. B) price dictators. C) monopolists. D) price makers. Answer: D
Figure 15-1
10. Refer to Figure 15-1. Which of the following statements about the firm
depicted in the diagram is true?
A) The fact that this firm is a natural monopoly is shown by the continually
declining long-run average total cost as output rises.
B) The fact that this firm is a natural monopoly is shown by the continually
declining market demand curve as output rises.
C) The fact that this firm is a natural monopoly is shown by the continually
declining marginal revenue curve as output rises.
D) The fact that this firm is a natural monopoly is shown by the fact that
marginal cost lies below the long-run average total cost where the firm
maximizes its profits.

Figure 15-2
11. Refer to Figure 15-2. If the monopolist charges price P* for output Q*, in
order to maximize profit or minimize loss in the short run, it should
A) continue to produce because price is greater than average variable cost.
B) shut down because price is greater than marginal cost.
C) shut down because price is less than average total cost.
D) continue to produce because a monopolist always earns a profit.

12. To maximize profit a monopolist will produce where

A) marginal revenue is equal to marginal cost. B) demand for its product is unit-elastic.
C) revenue per unit is maximized. D) average total cost is equal to average revenue.

13. If a monopolist's marginal revenue is $35 per unit and its marginal cost is $25, then
A) to maximize profit the firm should increase output.
B) to maximize profit the firm should decrease output.
C) to maximize profit the firm should continue to produce the output it is producing.
D) Not enough information is given to say what the firm should do to maximize profit. Answer: A

14. If a monopolist's price is $50 at 63 units of output and marginal revenue equals marginal cost and average
total cost equals $43, then the firm's total profit is
A) $3,150. B) $2,709. C) $441. D) $7. Answer: C

Table 15-1
Quantity per
Price per Case Total Cost
Day (cases)
1 $16 $7.00
2 15 9.50
3 14 11.00
4 13 12.00
5 12 14.50
6 11 17.50
7 10 21.00
8 9 25.00
9 8 30.00
10 7 35.50

The government of a small developing country has granted exclusive rights to Linden Enterprises for the
production of plastic syringes. Table 15-1 shows the cost and demand data for this government protected
monopolist.
15. Refer to Table 15-1. What is the profit-maximizing quantity and price for the monopolist?
A) Quantity = 8 cases, Price = $9 B) Quantity = 7 cases, Price = $10
C) Quantity = 9 cases, Price = $8 D) Quantity = 10 cases, Price = $7 Answer: B
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 14
16. Refer to Table 15-1. What is the amount of profit that the firm earns?
A) $34.50 B) $42 C) $47 D) $49 Answer: D

Figure 15-3
Figure 15-3 shows the cost and demand curves for a monopolist.

17. Refer to Figure 15-3. The profit-maximizing output and price for
the monopolist are
A) output = 62; price = $24. B) output = 62; price = $18.
C) output = 83; price = $22. D) output = 104; price = $20.80.

18. Refer to Figure 15-3. The monopolist's total revenue is

A) $1,116. B) $1,488. C) $1,726.40 D) $1,826.

19. Refer to Figure 15-3. The monopolist's total cost is

A) $1,116. B) $1,240. C) $1,660. D) $1,726.40.

20. Refer to Figure 15-3. The monopolist earns a profit of

A) $0. B) $170. C) $248. D) $372. Answer: C

21. The most profitable price for a monopolist is

A) the highest price a consumer is willing to pay for the monopolist's product.
B) the price at which demand is unit-elastic. C) a price that maximizes the quantity sold.
D) the price for which marginal revenue equals marginal cost. Answer: D

22. The ability of a firm to charge a price greater than marginal cost is called
A) monopoly power. B) price-making power. C) cost-plus pricing. D) market power. Answer: D

23. The only firms that do not have market power are
A) firms in industries with low barriers to entry. B) firms that do not advertise their products.
C) firms in perfectly competitive markets. D) firms that sell identical products. Answer: C

Table 15-2

Marginal
Price Quantity Total Revenue Revenue Total Cost Marginal Cost
$17 3 $51 ----- $56 -----
16 4 64 $13 63 $7
15 5 75 11 71 8
14 6 84 9 80 9
13 7 91 7 90 10
12 8 96 5 101 11

Assume Table 15-2 gives the monthly demand and costs for subscriptions to basic cable for Comcast, a cable
television monopoly in Philadelphia.

24. Refer to Table 15-2. If Comcast wants to maximize its profits, what price (P) should it charge and how many
cable subscriptions per month (Q) should it sell?
A) P = $12; Q = 8 B) P = $14; Q = 6 C) P = $16; Q = 4 D) P = $15: Q = 5 Answer: B

25. Refer to Table 15-2. If Comcast maximizes its profits how much profit will it earn?
A) $84 B) $40 C) $4 D) Comcast will break even. Answer: C

26. What is the difference between a monopoly's marginal revenue curve and a perfect competitor's marginal
revenue curve?
Answer: A monopoly's marginal revenue curve lies entirely below its market demand curve and is downward-
sloping but a perfect competitor's marginal revenue curve is the same as its demand curve which is horizontal at
the prevailing market price.
 MOSTAFA NOR-EL DIN Micro-Economic (revision ch 7) English section (1) 15
Figure 15-4

Figure 15-4 reflects the cost and revenue structure for a monopoly that has been in business for a very long time.

13) Refer to Figure 15-4. Use the figure above to answer the following questions.
a. Identify the curves labeled A and B. Identify the curve which contains both point Y and point Z. Identify the
curve which contains both point V and point W.
b. What is the profit-maximizing quantity and what price will the monopolist charge?
c. What area represents total revenue at the profit-maximizing output level?
d. What area represents total cost at the profit-maximizing output level?
e. What area represents profit?
f. What is the profit per unit (average profit) at the profit-maximizing output level?
g. If this industry was organized as a perfectly competitive industry, what would be the profit-maximizing price
and quantity?
h. What area represents the deadweight loss as a result of a monopoly?
Answer:
a. A = Demand curve; B = Marginal revenue curve; The curve which contains both points Y and Z = Marginal cost
curve; The curve which contains both points V and W = Average total cost curve.
b. Quantity = Q2 units; Price = P3
c. Area 0P3XQ2
d. Area 0P0VQ2
e. Area P0P3XV
f. P3 - P0
g. Quantity = Q4 and Price = P2
h. The triangle XYZ