Problem 1: Perfect Competition, Monopolistic Competition, and Monopoly

In order to answer the following questions, you may want to draw graphs into the diagram below, where you already see the average total cost curve (ATC) of a typical firm. The market demand function (not drawn into the graph) is QD = 16 P .

a.) Given is the market demand function QD = 16 P. The inverse demand function, P(Q), is then

P = 16 0.25Q

A

P = 16 0.5Q

B

P = 16 Q

C

P = 16 2 Q

D

There is no inverse market demand function because QD is linear

E

b.) What is the (absolute value of) elasticity of demand associated with a decrease in price from P=13 to P=11?

4.33

A

1

B

Infinity

C

3

D

2

E

c.) Which value has the point price elasticity of demand at P=6?

0.5

A

0.6

B

1

C

4

D

60

E

d.) If price decreases from P=13 to P=11, how big is the decrease in total revenue that is due to the decrease in price?

2

A

4

B

6

C

8

D

10

E

e.) If price decreases from P=13 to P=11, how big is the increase in total revenue that is due to the increase in quantity?

22

A

33

B

66

C

44

D

55

E

f.) In the diagram, you see the firm's ATC function. Which marginal cost function fits the ATC best in terms of the relationship between MC and ATC?

MC = 1+ 1/4Q3

A

MC = 2 + 2Q2

B

MC = 4

C

MC = 1 + 4Q

D

MC = 1+ Q

E

g.) Assume that the firm has the total cost function TC Fixed Cost, what is the firm's marginal cost function?

MC = 1+ 1/4Q2

A

MC = 2 + 2Q2

B

MC = 4

C

MC = 1 + 4Q

D

MC = 1+ Q

E

h.) Assume that the firm has the total cost function TC =1/2 Q2 + Q + Fixed Cost, Which statement is true?

The following questions assume that the firm is operating under perfect competition.

i.) Before answering the next question, keep in mind: In economics, if no consumer can be served anymore at extra costs that are lower than the extra consumer's willingness to pay, then economists speak of allocative efficiency. Similarly, if firms operate at the least possible cost (i.e. minimum of ATC), then economists speak of production efficiency. Assuming that the supply curve of the individual firm is P = 1+ Q and the market price is P=8.5, which statement is true?

The firm operates in a short-run equilibrium.

A

The firm's total cost is 56.25

B

The firm must anticipate market entry.

C

In terms of production efficiency, the firm produces inefficiently.

D

All of the above statements are true.

E

j.) What will be the market price in the long-run equilibrium?

6.5

A

6

B

5.5

C

5

D

4.5

E

As fixed costs go up, marginal costs go down.

A

As fixed costs go up, marginal costs go up.

B

As fixed costs go up, marginal costs stay the same.

C

As fixed costs go up, average variable costs go up.

D

None of the above statements is true.

E

k.) How many firms will operate in the long-run equilibrium?

10

A

5

B

2

C

3.33

D

4

E

l.) Which of the following statements is true? In the long-run equilibrium, the producer surplus is equal to

Profit

A

Fixed cost

B

Total variable cost

C

Zero

D

Consumer surplus

E

The following questions assume that the firm is a monopolist.

m.) What is the monopolist's marginal revenue function?

MR = 16 0.5Q

A

MR = 16 Q

B

MR = 16 2Q

C

MR = 8 0.5Q

D

MR = 8 Q

E

n.) After drawing the monopolist's marginal revenue function into the diagram, which (absolute) value has the point price elasticity of demand where MR=0?

0

A

1

B

2

C

3

D

4

E

o.) Assume that the monopolist operates at MC = 1+ Q, what is the monopolist's supply function?

P = 1+ Q

A

P = Q + 0.5 Q2

B

P = 16 - Q

C

P =11

D

The monopolist does not have a supply function.

E

p.) Assume that the monopolist operates at MC= 1+Q, what is the equilibrium price and quantity, {Price, Quantity}?

{Price=6, Quantity=5}

A

{Price=13, Quantity=3}

B

{Price=11, Quantity=5}

C

{Price=10, Quantity=6}

D

{Price=12, Quantity=4}

E

q.) In economics, if no consumer can be served anymore at extra costs that are lower than the extra consumer's willingness to pay, then economists speak of allocative efficiency. Similarly, if firms operate at the least possible cost (i.e. minimum of ATC), then economists speak of production efficiency. Keeping this in mind, assume that the monopolist operates at MC= 1+Q, which statement concerning efficiency is true?

Both allocation and production efficiency is given

A

Neither production nor allocation efficiency is given

B

Allocation efficiency is given, but not production efficiency

C

Production efficiency is given, but not allocation efficiency

D

This answer cannot be answered without additional information

E

r.) Assume that the monopolist operates at MC= 1+Q, how big is the society's welfare?

100

A

75

B

68

C

50

D

40

E