BEEB1013 PRINCIPLES OF ECONOMICS A171

SCHOOL OF ECONOMICS, FINANCE AND BANKING

FIRST SEMESTER 2017/2018
BEEB1013 PRINCIPLES OF ECONOMICS
EXERCISE 4

1. The price at which a perfectly competitive firm sells its product is determined by
A. the individual seller based on his costs of production and his profit margin.
B. all sellers and buyers of the product.
C. the buyers of the product, because there are so many sellers that they cannot agree on a price.
D. the government, because there are so many buyers and sellers of the product that together they cannot
agree on the price.

2. In the theory of perfect competition, the assumption of easy entry into and exit from the market implies
A. positive economic profits in the long run.
B. losses in the long-run equilibrium.
C. zero economic profits in the long run.
D. zero economic profits in both the short run and the long run.

3. In perfect competition, the elasticity of demand for the product of a single firm is
A. zero because the firm produces a unique product.
B. zero because many other firms produce identical products.
C. infinite because the firm produces a unique product.
D. infinite because many other firms produce identical products.

4. Consumers do not have a strong preference for the output of one seller over that of another in a perfectly
competitive market because:
A. there a large number of firms in the market.
B. the firms sell a standardized product.
C. there are no barriers to entry.
D. an individual firm has control over price.

5. Which of the following is true regarding perfect competition?

I. The firms are price takers.
II. Marginal revenue equals the price of the product.
III. Established firms have no advantage over new firms.
A. I and II
B. II and III
C. I, II and III
D. I only

6. A perfectly competitive firm has a total revenue curve that is

A. upward sloping with an increasing slope.
B. downward sloping with a constant slope.
C. upward sloping with a decreasing slope.
D. upward sloping with a constant slope.

7. Assume Dell Computer Company operates in a perfectly competitive market producing 5,000 computers per
day. At this output level, price exceeds this firm's marginal cost. To maximize profits, Dell should
A. make no adjustments as they are already maximizing their profits.
B. increase their output.
C. decrease their output.
D. stop producing since it is earning a loss.

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8. Table 1

Refer to Table 1. Assume that fruit baskets are sold in a perfectly competitive market. The market price of a
fruit basket is $22. To maximize profits, Exotic Fruit should sell ________ fruit baskets and their profit is
________.
A. three; $5
B. four; $7
C. five; $14
D. six; $14

9. Consider the following data: equilibrium price = $9, quantity of output produced = 1,000 units, average total
cost = $7, and average variable cost $5. Given this, total revenue is __________, total cost is __________,
and total fixed cost is __________.
A. $6,000; $8,000; $1,000
B. $9,000; $7,000; $5,000
C. $10,000; $8,000; $3,000
D. $9,000; $7,000; $2,000

10. Jerry's Quarry sells building stone in a perfectly competitive market. At its current level of building stone
production, Jerry's Quarry has marginal costs equal to $45, and AVC is rising. If the market price of building
stone is $50, Jerry's Quarry should:
A. decrease its level of building stone production.
B. continue producing its current level of production.
C. increase its production of building stone.
D. shut down and produce no building stone.

11. Consider the following data: equilibrium price = $8.50, quantity of output produced = 100 units, average total
cost = $10, and average variable cost = $9. What will the firm do and why?
A. Shut down in the short run, because price is below average variable cost.
B. Shut down in the short run, because it will be taking a loss of $100.
C. Continue to produce in the short run, because price is greater than average variable cost.
D. Continue to produce in the short run, because firms are always stuck with having to produce in the short
run.

12. A perfectly competitive firm is producing at the point where its marginal cost equals its marginal revenue. If the
firm boosts its output, its total revenue will ________ and its profit will ________
A. rise; rise
B. rise; fall
C. fall; rise
D. fall; fall

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13. If a profit-maximizing firm in a perfectly competitive market is currently producing the output where (price -
average variable cost) > average fixed cost, the firm is:
A. making a positive economic profit.
B. making a zero economic profit.
C. suffering an economic loss.
D. none of the above

14. Suppose Robin's Clock Works produces in a perfectly competitive market. Suppose the average total cost of
clocks is $95, the average variable cost of clocks is $90, and the price of clocks is $85. If the firm is producing
the level of output where marginal cost equals price, then in the short run the firm:
A. should shut down.
B. should continue to produce since total revenue exceeds total variable cost.
C. is earning a positive economic profit.
D. can increase profit by increasing output.

15. If your firm is producing a good at a level where marginal revenue equals marginal cost, and price is less than
average variable cost, then in the short run your firm should:
A. shut down and suffer a loss equal to your fixed costs.
B. continue to produce, but increase output.
C. continue to produce the same amount.
D. continue to produce, but decrease output.

16. Figure 1

Figure 1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the
firm is currently producing the profit maximizing output level, its total variable cost is:
A. $12,500.
B. $14,300.
C. $19,800.
D. $27,000.

17. Figure 1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the
firm is currently producing the profit maximizing output level, the firm's profit is:
A. $7,200.
B. $9,000.
C. $27,000.
D. $36,000.

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18. Table 2
Output (Q) Total Fixed Cost Total Variable Cost
0 20 0
1 20 5
2 20 7
3 20 10
4 20 15
5 20 21

Table 2 shows the cost structure of a firm in a perfectly competitive market. If the market price is $3,
A. the firm suffers a loss and is better off shutting down.
B. the firm suffers a loss but is better off producing the output level where MR=MC.
C. the market price is greater than the minimum average variable cost.
D. none of the above

19. Costs increase with output in an increasing-cost industry because:

A. input prices increase as the industry competes for scarce resources.
B. firms may be forced to use less productive inputs.
C. the firms become monopolies.
D. Both A and B are correct.

20. Assume a constant-cost industry that is initially in long-run competitive equilibrium. An increase in demand will
cause a(n) __________ in prices and profits, and as a result, firms will __________ the industry, causing the
market supply curve to shift __________, which, in turn, will eventually cause the equilibrium price to be
__________ before
A. decrease; exit; leftward; lower than
B. increase; enter; rightward; higher than
C. decrease; exit; rightward; higher than
D. increase; enter; rightward; the same as

21. An industry in which one firm can supply the entire market at a lower price than can two or more firms is called
a
A. legal monopoly.
B. natural monopoly.
C. single-price monopoly.
D. price-discriminating monopoly.

22. A monopoly
A. faces a perfectly elastic demand curve.
B. does not need to take account of demand because it's the only seller.
C. raises the price of its product by increasing the quantity sold.
D. raises the price of its product by decreasing the quantity sold.

23. When natural or legal forces work to protect a firm from potential competitors, the market is said to have
________.
A. non-competitive supply
B. non-competitive entry
C. barriers to entry
D. restricted competition

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24. For a monopolist, marginal revenue is less than price because

A. the revenue gain from the last unit sold is offset by a revenue loss on the units that previously had been
sold at a higher price.
B. the revenue gain from the last unit sold is offset by further gains in price on units not sold at all.
C. total revenue always decreases as output increases.
D. the price does not have to be lowered on all previous units sold

25. At a price of $20, the marginal revenue of a monopolist is $12. If the marginal cost of production is $10, what
should the monopolist do in order to maximize profits?
A. Increase its price.
B. Decrease its price.
C. Keep its price at the same level.
D. not enough information to solve

26. Table 3

Refer to Table 3, which shows the relationship between the prices that Gladys charges for a product and the
quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fourth
unit of output is:
A. $3
B. $6
C. $10
D. $24

27. Which of the following is ALWAYS true for a single-price monopolist in equilibrium?
A. P > MC
B. P > MR
C. MR = MC
D. All of the above are always true.

28. Figure 2

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Figure 2 shows a monopolist's demand curve. If the monopolist were to maximize its total revenue, it would
produce ________ units of output and charge a price of ________.
A. 3; $5
B. 4; $4
C. 5; $3
D. 6; $2

29. Table 4
Price Quantity Sold(units) Total Cost
$10 10 $80
9 20 100
8 30 130
7 40 170
6 50 230
5 60 300
4 70 380

Refer to Table 4. A monopolist that seeks to maximize profits will sell __________ units and charge a per-unit
price of __________.
A. 20; $9
B. 40; $7
C. 50; $6
D. 10; $10

30. Which of the following is true for a profit maximizing monopolist?

A. Marginal cost is always less than average total cost.
B. In the long run, the firm's economic profit equals zero.
C. In the short run, the firm will shut down if its marginal cost is less than its average variable cost.
D. In the short run, the firm can earn an economic profit even if its marginal cost is less than its average
variable cost.

31. Monopolies earn an economic profit in the long run because there
A. are close substitutes for the product.
B. is a barrier to entry.
C. is inelastic demand from consumers.
D. is free entry and exit.

32. A major difference between a single-price monopolist and a perfectly competitive firm is that the
A. monopolist can maximize profit by setting the price of the output where demand is inelastic.
B. monopolist can always increase its profits by increasing the price of its output.
C. monopolist's marginal revenue is less than price.
D. monopolist is guaranteed to earn an economic profit.

33. If a monopoly firm produces the quantity of output at which MR = MC, and charges a price greater than
average total cost, it necessarily
A. minimizes the difference between total fixed cost and total variable.
B. maximizes the difference between total fixed cost and total variable cost.
C. maximizes total revenue.
D. earns profit.

34. For a monopoly firm, marginal revenue equals marginal cost at 100 units (of output). At 100 units, price is
above marginal cost. It follows that the monopoly firm
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A. earns profits.
B. faces some close substitutes for its product.
C. faces no substitutes for its product.
D. is not resource-allocative efficient.

35. In the long run, the main reason that a monopolist can earn positive economic profits while a perfectly
competitive firm cannot is:
A. monopolists enjoy greater economies of scale.
B. there are no barriers to entry in a perfectly competitive market.
C. the monopolist faces an inelastic demand for its product.
D. perfectly competitive firms face greater opportunity costs.

36. Which of the following is true in the long run for both monopoly and perfectly competitive industries?
A. There are low barriers to entry.
B. Firms can earn positive economic profits in the long run.
C. Firms produce at levels that are economically efficient.
D. Firms will go out of business if they cannot charge a price that is at least equal to average total cost.

37. Figure 3

Suppose that Figure 3 shows a monopolist's demand curve, marginal revenue, and its costs. At the profit
maximizing output level, the monopolist's profit would be:
A. $730.
B. $570.
C. $320.
D. $150.

38. Suppose that Figure 3 shows an industry's market demand, its marginal revenue, and the production costs of a
representative firm. If the industry was perfectly competitive, it would produce a quantity of:
A. 30 units.
B. 50 units.
C. 60 units.
D. There is no sufficient information.

39. Price discrimination takes place when a firm

A. charges the same price for all the units of its product that it sells.
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B. charges different prices for different units of its product.

C. is discriminated against by consumers.
D. None of the above answers is correct.

40. Which of the following is necessary for a monopolist to price discriminate between groups?
A. The groups are easily identifiable.
B. The groups have different willingness to pay.
C. A customer from one group cannot resell to a customer in another group.
D. All of the above conditions are necessary for the monopolist to price discriminate.

SECTION B

1. Suppose that Andy sells basketballs in the perfect competitive market. His output per day and costs are as
follows:

Output per Day Total Cost ($)

0 10.00
1 20.50
2 24.50
3 28.50
4 34.00
5 43.00
6 55.50
7 72.00
8 93.00
9 119.00

a) Suppose the current equilibrium price in the basketball market is $12.50. To maximize profit,
(i) how many basketballs will Andy produce, what price will he charge, and how much profit (or loss) will
he make?
(ii) draw a graph to illustrate your answer in (i).

b) Suppose the equilibrium price of basketballs falls to $6.00.

(i) how many basketballs will Andy produce, what price will he charge, and how much profit (or loss) will
he make?
(ii) draw a graph to illustrate your answer in (i).

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2. A monopoly firm faces demand and cost situation in producing good X as shown in the following table:

Price Quantity Total Revenue Marginal Revenue Total Cost Marginal Cost
$20 15,000 $330,000
19 20,000 365,000
18 25,000 405,000
17 30,000 450,000
16 35,000 500,000
15 40,000 555,000

a) Fill in the remaining values in the table.

b) If the firm wants to maximize profits, what price should be charged, and how many of good X should he sell?
How much profits (or loss) will the firm make?
c) Draw a graph to illustrate your answer. The graph should include: the firms demand, ATC, AVC, MC, and
MR curves, the price and quantity, and the profit (or loss).