Questions and Answers of Economics Principles and Policy

5. Critically evaluate and explain: LO2a. In monopolistically competitive industries, economic profits are competed away in the long run; hence, there is no valid reason to criticize the performance
4. “Competition in quality and service may be just as effective as price competition in giving buyers more for their money.”Do you agree? Why? Explain why monopolistically competitive firms
3. “Monopolistic competition is monopolistic up to the point at which consumers become willing to buy closesubstitute products and competitive beyond that point.”Explain. LO2
2. Compare the elasticity of a monopolistic competitor’s demand with that of a pure competitor and a pure monopolist.Assuming identical long-run costs, compare graphically the prices and outputs
1. How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly?Explain fully what product differentiation may involve. Explain how the entry of
4. A shift of the marginal-cost curve from MC2 to MC1 in graph(b) would:a. increase the “going price” above P0.b. leave price at P0 but reduce this firm’s total profit.c. leave price at P0 but
3. By matching a price cut, this firm’s rivals can:a. increase their market shares.b. increase their marginal revenues.c. maintain their market shares.d. lower their total costs.
2. The D2e segment of the demand curve D2eD1 in graph (b) implies that:a. this firm’s total revenue will fall if it increases its price above P0.b. other firms will match a price increase above
1. Suppose Q0 in this figure represents annual sales of 5 million units for this firm. The other two firms in this three-firm industry sell 3 million and 2 million units, respectively. The Herfindahl
4. Which of the following pairs are both “competitionlike elements” in monopolistic competition?a. Price exceeds MR; standardized product.b. Entry is relatively easy; only a normal profit in the
3. The firm represented by Figure 11.1c is:a. making a normal profit.b. incurring a loss.c. producing at the same level of output as a purely competitive firm.d. producing a standardized product.
2. Price exceeds ATC in:a. graph (a) only.b. graph (b) only.c. graphs (a) and (b) only.d. graphs (a), (b), and (c).
1. Price exceeds MC in:a. graph (a) only.b. graph (b) only.c. graphs (a) and (b) only.d. graphs (a), (b), and (c).
8. (Appendix) Utilize additional game-theory terminology and applications.
7. Contrast the potential positive and negative effects of advertising.
6. Compare the incentives and obstacles to collusion among oligopolists.
5. Relate why the demand curve of an oligopolist may be kinked.
4. Discuss how game theory relates to oligopoly.
3. Describe the characteristics of oligopoly.
2. Explain why monopolistic competitors earn only a normal profit in the long run.
1. List the characteristics of monopolistic competition.
5. Suppose you have been tasked with regulating a single monopoly firm that sells 50-pound bags of concrete. The firm has fixed costs of $10 million per year and a variable cost of$1 per bag no
4. A new production technology for making vitamins is invented by a college professor who decides not to patent it.Thus, it is available for anybody to copy and put into use.The TC per bottle for
Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. Note that output is measured as the number of bottles of
2. Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers. The first group is described by the demand and revenue data that you developed for problem 1.
1. Suppose a pure monopolist is faced with the demand schedule shown below and the same cost data as the competitive producer discussed in problem 4 at the end of Chapter 8. Calculate the missing
11. LAST WORD How was De Beers able to control the world price of diamonds even though it produced only 45 percent of the diamonds? What factors ended its monopoly? What is its new strategy for
10. It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to
9. Explain verbally and graphically how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between (a) socially optimal (marginalcost)pricing and (b)
8. U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. Explain why
7. Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a text.Will the author and the publisher want to charge the same price for the text?
6. Critically evaluate and explain each statement: LO3a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers
5. Assume that a pure monopolist and a purely competitive firm have the same unit costs. Contrast the two with respect to (a) price, (b) output, (c) profits, (d) allocation of resources, and (e)
4. Use the demand schedule at the top of the next page to calculate total revenue and marginal revenue at each quantity.Plot the demand, total-revenue, and marginal-revenue curves, and explain the
3. How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference?Why is the pure
2. Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly.Which barriers, if any, do you feel give rise to monopoly that is socially
1. “No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist.” Do you agree? Explain. How might you use Chapter 4’s
4. At this monopolist’s profit-maximizing output:a. price equals marginal revenue.b. price equals marginal cost.c. price exceeds marginal cost.d. profit per unit is maximized.
3. This pure monopolist:a. charges the highest price that it could achieve.b. earns only a normal profit in the long run.c. restricts output to create an insurmountable entry barrier.d. restricts
2. The area labeled “Economic profit” can be found by multiplying the difference between P and ATC by quantity. It also can be found by:a. dividing profit per unit by quantity.b. subtracting
1. The MR curve lies below the demand curve in this figure because the:a. demand curve is linear (a straight line).b. demand curve is highly inelastic throughout its full length.c. demand curve is
5. Distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government-regulated monopoly
4. Describe why a monopolist might prefer to charge different prices in different markets.
3. Discuss the economic effects of monopoly.
2. Explain how a pure monopoly sets its profitmaximizing output and price.
1. List the characteristics of pure monopoly.
3. There are 300 purely competitive farms in the local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $24 for every $300 invested. What is their percentage
2. A firm in a purely competitive industry is currently producing 1000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced
1. A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent.This firm is earning $5.50 on every $50 invested by its founders. What
9. LAST WORD How does a generic drug differ from its brandname, previously patented equivalent? Explain why the price of a brand-name drug typically declines when an equivalent generic drug becomes
8. “Ninety percent of new products fail within two years—so you shouldn’t be so eager to innovate.” Do you agree? Explain why or why not. LO6
7. The basic model of pure competition reviewed in this chapter finds that in the long run all firms in a purely competitive industry will earn normal profits. If all firms will only earn a normal
6. Suppose that purely competitive firms producing cashews discover that P exceeds MC. Will their combined output of cashews be too little, too much, or just right to achieve allocative efficiency?
5. In long-run equilibrium, P 5 minimum ATC 5 MC. Of what significance for economic efficiency is the equality of P and minimum ATC? The equality of P and MC? Distinguish between productive
4. Using diagrams for both the industry and a representative firm, illustrate competitive long-run equilibrium. Assuming constant costs, employ these diagrams to show how (a) an increase and (b) a
3. How do the entry and exit of firms in a purely competitive industry affect resource flows and long-run profits and losses? LO3
2. Relate opportunity costs to why profits encourage entry into purely competitive industries and how losses encourage exit from purely competitive industries. LO2
1. Explain how the long run differs from the short run in pure competition. LO1
4. When P 5 MC 5 lowest ATC for individual firms, in the market:a. consumer surplus necessarily exceeds producer surplus.b. consumer surplus plus producer surplus is at a maximum.c. producer surplus
3. The equality of P, MC, and minimum ATC:a. occurs only in constant-cost industries.b. encourages entry of new firms.c. means that the “right goods” are being produced in the“right ways.”d.
2. At this firm’s profit-maximizing output:a. total revenue equals total cost.b. it is earning an economic profit.c. allocative, but not necessarily productive, efficiency is achieved.d.
1. We know the firm is a price taker because:a. its MC curve slopes upward.b. its ATC curve is U-shaped.c. its MR curve is horizontal.d. MC and ATC are equal at the profit-maximizing output.
6. Discuss creative destruction and the profit incentives for innovation.
5. Show how long-run equilibrium in pure competition produces an efficient allocation of resources.
4. Explain the differences between constant-cost, increasing-cost, and decreasing-cost industries.
3. Explain how the entry and exit of firms affects resource flows and long-run profits and losses.
2. Describe why profits encourage entry into a purely competitive industry and losses result in firms exiting the industry.
1. Explain how the long run differs from the short run in pure competition.
4. Assume that the cost data in the top table of the next column are for a purely competitive producer: LO3a. At a product price of $56, will this firm produce in the short run? If it is preferable
3. Karen runs a print shop that makes posters for large companies.It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are
2. A purely competitive wheat farmer can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns, because some are better suited for wheat production than others.
1. A purely competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for all
8. LAST WORD If a firm’s current revenues are less than its current variable costs, when should it shut down? If the firm decides to shut down, should we expect that decision to be final? Explain
7. “That segment of a competitive firm’s marginal-cost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm.” Explain using a graph and
6. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR 5 MC rule
5. Consider a firm that has no fixed costs and which is currently losing money. Are there any situations in which it would want to stay open for business in the short run?If a firm has no fixed
4. “Even if a firm is losing money, it may be better to stay in business in the short run.” Is this statement ever true? Under what condition(s)? LO3
3. Use the demand schedule to the right to determine total revenue and marginal revenue for each possible level of sales: LO2a. What can you conclude about the structure of the industry in which this
2. Strictly speaking, pure competition is relatively rare. Then why study it? LO2
1. Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly.Under which of these market classifications does each of the following most
4. Suppose P4 is $10, P5 is $15, Q4 is 8 units, and Q5 is 10 units.This firm’s:a. supply curve is elastic over the Q4–Q5 range of output.b. supply curve is inelastic over the Q4–Q5 range of
3. At P4:a. this firm has no economic profit.b. this firm will earn only a normal profit and thus will shut down.c. MR4 will be less than MC at the profit-maximizing output.d. the profit-maximizing
2. An increase in price from P3 to P5 would:a. shift this firm’s MC curve to the right.b. mean that MR5 exceeds MC at Q3 units, inducing the firm to expand output to Q5.c. decrease this firm’s
1. Which of the following might increase product price from P3 to P5?a. An improvement in production technology.b. A decline in the price of a substitute good.c. An increase in the price of a
4. Suppose price declined from $131 to $100. This firm’s:a. marginal-cost curve would shift downward.b. economic profit would fall to zero.c. profit-maximizing output would decline.d. total cost
3. In maximizing profits at 9 units of output, this firm is adhering to which of the following decision rules?a. Produce where MR exceeds MC by the greatest amount.b. Produce where P exceeds ATC by
2. At a price of $131 and 7 units of output:a. MR exceeds MC, and the firm should expand its output.b. total revenue is less than total cost.c. AVC exceeds ATC.d. the firm would earn only a normal
1. Curve MR is horizontal because:a. product price falls as output increases.b. the law of diminishing marginal utility is at work.c. the market demand for this product is perfectly elastic.d. the
4. Explain why a competitive firm’s marginal cost curve is the same as its supply curve.
3. Convey how purely competitive firms maximize profits or minimize losses in the short run.
2. List the conditions required for purely competitive markets.
1. Give the names and summarize the main characteristics of the four basic market models.
4. There are economies of scale in ranching, especially with regard to fencing land. Suppose that barbed-wire fencing costs$10,000 per mile to set up. How much would it cost to fence a single
3. You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $500,000 per month, and you have contractual labor obligations of $1
2. Imagine you have some workers and some handheld computers that you can use to take inventory at a warehouse.There are diminishing returns to taking inventory. If one worker uses one computer, he
1. Gomez runs a small pottery firm. He hires one helper at$12,000 per year, pays annual rent of $5000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested
11. LAST WORD What is a sunk cost? Provide an example of a sunk cost other than one from this book. Why are such costs irrelevant in making decisions about future actions?
10. Use the concepts of economies and diseconomies of scale to explain the shape of a firm’s long-run ATC curve. What is the concept of minimum efficient scale? What bearing can the shape of the
9. Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the accompanying figure. What plant size will the firm choose in producing( a ) 50, ( b ) 130, ( c
8. Indicate how each of the following would shift the(1) marginal-cost curve, (2) average-variable-cost curve,(3) average-fixed-cost curve, and (4) average-total-cost curve of a manufacturing firm.

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