Part one

Explain the following.

1. Compared with a perfectively competitive market a monopoly is inefficient because

a. it raises the market price above marginal cost and produces a smaller output.

b. it produces a greater output but charges a lower price.

c. it produces the same quantity while charging a higher price.

d. all surplus goes to the producer.

e. it leads to a smaller producer surplus but greater consumer surplus.

2. The demand curve of a monopolist typically

slopes downward to the right.

slopes upward to the right.

is a horizontal line.

can be shifted by the monopolist because of his economic power.

is the same as that faced by a competitive firm.

3. The ability of a firm to influence the market price of a good by influencing the total quantity of the good sold is known as

monopoly.

market power.

legal monopoly.

patent.

copyright.

4. A monopoly is distinguished from a firm operating under any other market structure in the following way:

the monopoly charges a price higher than its average revenue.

the monopoly can choose its output level.

the monopoly can choose its level of cost.

the monopoly does not produce at a profit-maximizing level of output.

the monopoly has a demand curve which is identical to the market demand curv

5. A single-price monopolist maximizes profit by producing an output where

a. its marginal revenue equals marginal cost equals the market price.

b. its marginal revenue exceeds marginal cost.

c. its marginal revenue equals marginal cost but is less than the market price.

d. its marginal revenue equals marginal cost but is greater than the market price.

e. its marginal revenue is less than marginal cost.

6. While firms in a perfectly competitive industry make zero economic profit in the long run, a monopolist could makea.a positive economic profit.

b.an economic loss.

c.a declining economic profit.

d.an increasing economic profit.

e.also a zero economic profit.

7. You are the manager of a firm that sells its product in a competitive market at a price of $250. Your firm's cost function is C = 30 + 5Q2. The profit-maximizing output for your firm is

25.

10.

8.45.

7.07.

None of the above.

8. The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because

the market price is determined (through regulation) by the government

the firm supplies a different good than its rivals

the firm's output is a small fraction of the entire industry's output

the short run market price is determined solely by the firm's technology

the demand curve for the industry's output is downward sloping

9. Which of the following is true regarding a perfectly competitive firm?

The firm can charge a lower price than its competitors and thereby sell more output and increase its profits.

The firm always earns a normal profit.

The firm's marginal revenue continually decreases.

The firm's minimum efficient scale is small relative to the market demand.

None of the above.

10. A price-taking firm faces a

perfectly inelastic demand.

downward-sloping marginal revenue curve.

downward-sloping supply curve.

perfectly elastic demand.

downward-sloping demand curve.

11. If a competitive firm produces an output where its average total cost is $40, and marginal revenue and marginal cost are $50, in the short run this firm

maximizes profit but makes only a normal profit.

maximizes profit and makes an economic profit.

can still increase profit.

has a declining profit.

makes an economic loss.

12. If current output is less than the profit-maximizing output, then the next unit produced

will decrease profit.

will increase cost more than it increases revenue.

will increase revenue more than it increases cost.

will increase revenue without increasing cost.

may or may not increase profit.

13. Which one of the following statements describes a market that is monopolistically competitive?

The presence of significant barriers to entry.

The products produced by the firms are identical.

Many firms compete by making similar but slightly different products.

There is a small number of large firms.

The product produced by one firm has no close substitutes.

14. A market structure where a small number of firms compete occurs in

perfect competition.

monopolistic competition.

the worldwide market for wheat, corn, and rice.

oligopoly.

monopoly.

15. You are the manager of a monopoly that faces an inverse demand curve described by P = 528 - 12Q. Your costs are

C = 124 + 48Q. The profit-maximizing price is

$20.

$48.

$240.

$288.

None of the above

16. Which one of the following is a potential source of monopoly power?

Cost complementarities.

The patent system.

Economies of scope.

All are potential sources of monopoly power.

None of the above.

17. Which of the following is a correct representation of a profit-maximizing monopoly earning positive economic profits?

P = MR = MC, and P > AVC.

ATC = MR, and P > AVC.

MC = MR, and P > ATC.

P = MC, and P > ATC.

None of the above

18. Which of the following is true regarding the long-run equilibrium relationship between price and costs in a perfectly competitive and monopolistically competitive industry?

P = MC.

P

P = average costs.

P > average costs.

None of the above

19. The implication of the long-run equilibrium in the competitive industry is that

resources are allocated efficiently.

price of the product is the lowest price possible.

there is no incentive for firms to enter or leave the industry.

All of the above.

None of the above.

20. Monopoly, as compared to perfect competition (with a given cost structure), is predicted to result in

the same output and a higher price.

a greater output and a higher price.

a smaller output and a higher price.

a smaller output with the same price.

the same output and the same price.

Two.

1). The market demand function for a good is given by Q = D(p) = 800 ? 50p. For each firm that produces the good the total cost function is TC(Q) = 4Q+( Q2/2) . Recall that this means that the marginal cost is MC(Q) = 4 + Q. Assume that firms are price takers.

(a) What is the efficient scale of production and the minimum of average cost for each firm?

Hint: Graph the average cost curve first.

(b) What is the supply function of each firm?

(c) If there are currently 100 firms producing the good, what is the market supply function? What is the short-run competitive equilibrium in this market with 100 firms? What is the profit of each firm?

(d) What is the long-run competitive equilibrium price and quantity in this market?

2). Consider the market of the previous question in the short run (with 100 firms), and assume that the government imposes a tax of $3 per unit.

(a) What would be the new equilibrium quantity supplied after the tax is imposed?

(b) What would be the price consumers pay and the price sellers receive with the tax? Explain how the burden of the tax is shared between consumers and producers.

(c) Compute consumer and producer surplus before and after the tax. How much government revenue is generated by the tax? How large is the deadweight loss?

(d) What would be the long-run equilibrium quantity in this market with the tax? What are the prices that consumers pay and sellers receive? Compare this to the long-run equilibrium without the tax and determine how much of the burden of the tax is borne by consumers and producers.

ii.

Assume a monopolistically competitive car industry.

The demand facing any given producer is given by

Qi = S [(1/N) - (1/30,000)(Pi - PA)]

where Q is the firm's sales

S is the total sales of the industry (size of the market)

N is the number of firms in the industry

Pi is the price charged by the firm itself

PA is the average price charged by the firm 's competitors

The total cost function for producing cars is

C= 750,000,000 + 5000Q

Now, suppose that there are two countries: Home and Foreign. Home has annual sales of 900,000 cars and Foreign has annual sales of 1.6 million. The two countries have the same cost of production.

Derive the PP and CC relationships for Home and determine the equilibrium price and number of firms.(10)

Derive the PP and CC relationships for Foreign and determine the equilibrium price and number of firms.(10)

Now assume no transportation cost and that it is possible for Home and Foreign to trade cars with one another. Derive the PP and CC relationships for this integrated market and determine the equilibrium price and number of firms.(10)

Suppose that the two countries were to integrate their car market with a third country with an annual market for 3.75 million cars. Find the number of firms, the output per firm and the price per car in the new integrated market after trade.

Section iii.

Part II. Answer all of the following questions: 15. This question is concerned with issues related to "tax incidence" (the study of the final burden of a tax after considering all market reactions to it). The figure below depicts the situation in a perfectly competitive market before and after the imposition of an excise tax. An excise tax is a tax on each unit of a good consumed. Initially, the long-run equilibrium price and quantity of the good in question are P, and Q1, respectively. Suppose now that the government levies an excise tax of ST per unit of output. Price N LS P 1 H Quantity When the long-run supply curve (LS) of a good has a positive slope, both consumers and firms pay a portion of the tax. The imposition of the tax shifts the market demand curve inward to D' which causes the price to fall from Pl to P2 (as some firms exit and input prices fall). The (net) price that producers receive will be equal to The price that consumers pay for the good will be equal to Tax revenue to the government will be given by area The total loss of consumer surplus is the area The total loss in producer surplus is the area The deadweight loss of the tax will be given by area (The deadweight loss is the losses of consumer and producer surplus that are not transferred to other parties.) If demand is relatively inelastic and supply is clastic, who (consumers or producers) will pay more of the tax? h) If supply is relatively inelastic and demand is clastic, who will pay more of the tax?4. Assume that a firm's short run cost function is C(q) =100q-4q' +0.2q' +450. What is the firm's short run supply curve?? If price is p=115, how much output does the firm supply? 5. Each firm in a competitive market has a cost function of C(q) = q-q' + q . There are an unlimited number of potential firms in this market. The market demand function is given by Q=24- p . Determine the long run equilibrium price, quantity per firm, market quantity and number of firms. How do these values change is a tax of $1 per unit is collected from each firm? 6. Assume that the inverse demand function for cheese is Q=100-10p and the supply curve is Q=10p. a. [Easy] What are the effects of a specific tax of $1 per unit on the equilibrium quantity and price, government tax revenue, consumer surplus, producer surplus, welfare and DWL? b. [Harder] What are the effects of a specific subsidy (negative specific tax) of $1 per unit on the equilibrium quantity and price, government tax revenue, consumer surplus, producer surplus, welfare and DWL? c. [Hard] The government, instead of a tax or subsidy, imposes a price support (minimum price) of $6. The way this is implemented is via a deficiency payment. This means the government will guarantee producers a price of $6 and the producers choose their output accordingly. They then sell that output to consumers at whatever price consumers are willing to pay for that total output (not $6!!!). The government pays producers the difference between the $6 dollars and the price consumers are willing to pay for all units produced. This payment is called the deficiency payment. What is the quantity supplied, the price that clears the market and the deficiency payment? What effect does this program have on consumer surplus, producer surplus, welfare and deadweight loss? d. [Medium hard] Now instead of any of the policies above, the government imposes a price ceiling of $3. That is it. Price is not allowed to rise above $3. How does equilibrium change (price and quantity)? What effect does this price ceiling have on consumer surplus, producer surplus and deadweight loss