B-BAE (Sep 2019)

Tutorial 7
1. Data response

(a) Under what market structure do family bakeries produce? Explain your answer.
(b) Explain what is meant by a loss leader.
(c) Apart from loss leaders, how else have supermarkets attracted customers away from family bakeries?
(d) What advantages do supermarkets have over family bakeries in the sale of bread?
(e) What disadvantages would consumers experience as a result of more bakeries closing?

2. Objective question
2.1 In a competitive market, no single producer can influence the market price because
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a. many other sellers are offering a product that is essentially identical.
b. consumers have more influence over the market price than producers do.
c. government intervention prevents firms from influencing price.
d. producers agree not to change the price.

2.2 Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal
revenue of $8.00. What would be the firm's total revenue if it instead produced and sold 4 units of output?
a. $4.00 b. $8.00 c. $32.00 d. $64.00

2.3 Suppose a firm in a competitive market received $1,000 in total revenue and had a marginal revenue
of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units
were sold?
a. $5 and 50 b. $5 and 100 c. $10 and 50 d. $10 and 100

2.4 When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit
a. is negative (accounting losses). b. is positive.
c. is also zero. d. could be positive, negative or zero.

2.5 Refer to Figure 14-1. When price rises from P2 to P3, the firm finds that
a. marginal cost exceeds marginal revenue at a production level of Q2.
b. if it produces at output level Q3 it will earn a positive profit.
c. expanding output to Q4 would leave the firm with losses.
d. it could increase profits by lowering output from Q3 to Q2.

2.6 Refer to Figure 14-1. When price falls from P3 to P1, the firm finds that
a. fixed cost is higher at a production level of Q1 than it is at Q3.
b. it should produce Q1 units of output.
c. it should produce Q3 units of output.
d. it should shut down immediately.

2.7 Refer to Figure 14-1. When price rises from P3 to P4, the firm finds that
a. fixed costs are lower at a production level of Q4.
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b. it can earn a positive profit by increasing production to Q4.
c. profit is still maximized at a production level of Q3.
d. average revenue exceeds marginal revenue at a production level of Q4.

2.8 Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its
shrimp harvesting boat. The annual loan payment is $25,000 and the boat has a market (salvage) value
that exceeds its outstanding loan balance. Prior to the 2001 shrimp harvesting season, Shrimp Galore's
accountant predicted that at expected market prices for shrimp, Shrimp Galore would have a net loss of
$75,000 dollars after paying all 2001 expenses (including the annual loan payment). In this case, Shrimp
Galore should
a. produce nothing and experience a loss of $25,000.
b. produce nothing and experience a loss of $75,000.
c. continue to operate because expected profits will rise in the future.
d. continue to operate even though it predicts a loss of $75,000.

2.9 A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has
average revenue of $9 and average total cost of $7. It follows that the firm's
a. average total cost curve intersects the marginal cost curve at an output level of less than 200 units.
b. average variable cost curve intersects the marginal cost curve at an output level of less than 200 units.
c. profit is $400.
d. All of the above are correct.

2.10 If a competitive firm is currently producing a level of output at which marginal revenue exceeds
marginal cost, then
a. a one-unit increase in output will increase the firm's profit.
b. a one-unit decrease in output will increase the firm's profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.

Scenario 14-2
Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost
equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.

2.11 Refer to Scenario 14-2. At Q = 1,000, the firm's profit amounts to

a. $-200. b. $1,000. c. $3,000. d. $4,000.

2.12 Refer to Scenario 14-2. At Q = 999, the firm's total cost amounts to
a. $10,985. b. $10,990. c. $10,995. d. $10,999.

2.13 Refer to Scenario 14-2. At Q = 999, the firm's profit amounts to

a. $993. b. $997. c. $1,003. d. $1,007.

2.14 Refer to Scenario 14-2. To maximize its profit, the firm should
a. increase its output. b. continue to produce 1,000 units.
c. decrease its output, but continue to produce. d. shut down.

2.15 Which of these curves is the competitive firm's short-run supply curve?
a. The average variable cost curve above marginal cost.
the marginal cost curve of the firm is the supply curve
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even in the short-run, a firm will not supply at a price
below its minimum average variable cost. That is, in
the short-run, a firm must try to cover its’ Variable cost
at least.
b. The average total cost curve above marginal cost.
c. The marginal cost curve above average variable cost.
d. The average fixed cost curve.
= opportunity cost
2.16 Suppose you bought a ticket to a football game for $30, and that you place a $35 value on seeing
the game. If you lose the ticket, then what is the maximum price you should pay for another ticket?
a. $5 b. $30 c. $35 d. $65

2.17 The following table gives the average total cost of production for various levels of output for a
competitive firm:

Q 0 1 2 3 4 5
ATC -- 10 8 7 8 10

If the firm's fixed cost of production is $3 and the market price is $10, how many units should the firm
produce to maximize its profit?
a. 1 b. 2 c. 3 d. 4

2.18 Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an
average cost of production equal to $5, and is earning $240 economic profit in the short run. What is the
current market price?
a. $9 b. $10 c. $11 d. $12

2.19 A corporation has been steadily losing money on one of its product lines. The factory used to
produce that product cost $20 million to build 10 years ago. The firm is now considering an offer to buy
that factory for $15 million. Which of the following statements about the decision to sell or not to sell is
correct?
a. The firm should turn down the purchase offer because the factory cost more than $15 million to build.
b. The $20 million spent on the factory is a sunk cost, and that should not affect the decision.
c. The $20 million spent on the factory is an implicit cost, which should be included in the decision.
d. The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.

2.20 A monopoly's marginal cost will

a. be less than its average fixed cost. b. be less than the price per unit of its product.
c. exceed its marginal revenue. d. equal its average total cost.

2.21 A fundamental source of monopoly market power arises from

a. perfectly elastic demand. b. perfectly inelastic demand.
c. barriers to entry. d. availability of "free" natural resources, such as water or air.

2.22 Drug companies are allowed to be monopolists in the drugs they discover in order to
a. allow drug companies to charge a price that is equal to their marginal cost.
b. discourage new firms from entering the drug market.
c. encourage research.
d. allow the government to earn patent revenue.

2.23 Which of the following items is a primary source of barriers to entry?

a. The costs of production make a single firm more efficient than a large number of firms.
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b. A single firm hires all the people who have the management skills that are important in the industry.
c. Contracts among firms prohibit them from competing with one another in the production and sale of
certain products.
d. All of the above are correct.

2.24 When a firm operates under conditions of monopoly, its price is

a. not constrained. b. constrained by marginal cost.
c. constrained by demand. d. constrained only by its social agenda.

2.25 A monopolist's average revenue is always

a. equal to marginal revenue. b. greater than the price of its product.
c. equal to the price of its product. d. less than the price of its product.

2.26. For a monopolist, marginal revenue is

a. positive when the demand effect is greater than the supply effect.
b. positive when the monopoly effect is greater than the competitive effect.
c. negative when the price effect is greater than the output effect.
d. negative when the output effect is greater than the price effect.

2.27 What is the monopolist's profit under the following conditions? The profit-maximizing price
charged for goods produced is $12. The intersection of the marginal revenue and marginal cost curves
occurs where output is 10 units and marginal cost is $6. Average total cost for 10 units of output is $5.
a. $60 b. $70 c. $100 d. $120

2.28 For a monopoly, the level of output at which marginal revenue equals zero is also the level of output
at which
a. average revenue is zero. b. profit is maximized.
c. total revenue is maximized. d. marginal cost is zero.

2.29 A monopolist can sell 200 units of output for $36.00 per unit. Alternatively, it can sell 201 units of
output for $35.80 per unit. The marginal revenue of the 201st unit of output is
a. $-4.20. b. $-0.20. c. $4.20. d. $35.80.

2.30 A monopolist faces the following demand curve:

Price $51 $47 $42 $36 $29 $21 $12

Quantity Demanded 1 2 3 4 5 6 7

The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-
maximizing level of production?
a. 2 units b. 3 units c. 4 units d. 5 units

2.31 A reduction in a monopolist's fixed costs would

a. decrease the profit-maximizing price and increase the profit-maximizing quantity produced.
b. increase the profit-maximizing price and decrease the profit-maximizing quantity produced.
c. not effect the profit-maximizing price or quantity.
d. possibly increase, decrease or not effect profit-maximizing price and quantity, depending on the
elasticity of demand.
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2.32 The following table provides information on the price, quantity, and average cost for a monopoly.
At what price will the firm maximize its profit?
P 5 4 3 2 1 0
Q 0 4 8 12 16 20
ATC -- 1 0.75 0.75 0.81 0.9

a. $1 b. $2 c. $3 d. $4

2.33 The economic inefficiency of a monopolist can be measured by the

a. number of consumers who are unable to purchase the product because of its high price.
b. excess profit generated by monopoly firms.
c. poor quality of service offered by monopoly firms.
d. deadweight loss.

2.34 Consider a profit-maximizing monopoly pricing under the following conditions. The profit-
maximizing price charged for goods produced is $12.The intersection of the marginal revenue and
marginal cost curves occurs where output is 10 units and marginal cost is $6. The socially efficient level
of production is 12 units. The demand curve and marginal cost curves are linear. What is the deadweight
loss?
a. $4 b. $6 c. $12 d. $16

2.35. In which of the following markets is economic profit driven to zero in the long run?
a. Oligopoly b. Monopoly c. Perfect competition d. Cartels

2.36. As a group, oligopolists would always be better off if they would act collectively
a. as if they were each seeking to maximize their own individual profits.
b. in a manner that would prohibit collusive agreements.
c. as a single monopolist.
d. as a single perfectly competitive firm.

2.37 A perfectly competitive firm has total cost function as follow:

TC ($) = 2Q2 + 36Q + 72
a. What are the firm’s break-even output and price?
b. If the market price is $48, should the firm produce? Why?
c. If the market price is $72, what are the firm’s output, producer surplus and profit? What is the
firm’s supply function?
d. Present the above results in a graph.

2.38 A monopoly faces a demand function as follow:

D: P ($) = 64 - 4Q
The firm’s total cost function is given by: TC ($) = 2Q2 + 4Q + 12
a. Determine quantity, price and profit of the firm.
b. Compute the deadweight loss in this case.
c. If government imposes a specific tax as 12$ per unit on this firm, price and quantity change?
Analyze tax incidence in this case.
d. Present the above results in a graph.

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3. Essays
Compare and contrast oligopoly and monopolistic competition.
• Discuss the similarities and differences between the two market structures.
• Concentrate on how firms behave in the two market structures.

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