1.The profit maximizing output level for a perfectly competitive firm is where A) P = MC. B) P = AVC. C) MC = ATC. D) MC = AVC. E) MC = AFC.

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1 Test 4 Econ 3144 Name Fall 2001 Dr. Rupp 21 Multiple Choice Questions (52.5 points) & 5 Discussion Questions (52 points) This formula may be useful: MR = P(1 1/ E p ). 1.The profit maximizing output level for a perfectly competitive firm is where A) P = MC. B) P = AVC. C) MC = ATC. D) MC = AVC. E) MC = AFC. Use the following to answer question 2: Price MC AVC P* AFC Q* Quantity 2. At a price of P*, in the above graph, the profit maximizing level of output is A) Q*. B) above Q*. C) below Q*. D) where MC equals AVC. E) where MC equals AFC. 3. If a firm's demand curve falls below its AVC curve, then A) the firm should shut down. B) the firm should operate in the short run but not the long run. C) set price = marginal cost. D) the firm should operate in the long run but not in the short run. 4. If the demand curve falls below the ATC curve but lies above AVC, then A) the firm should shut down. B) the firm should operate in the short run but not the long run. C) set price = marginal cost. D) the firm should operate in the long run but not in the short run. Page 1

2 5. Which of the following is not a condition for perfect competition? A) prices are free to adjust B) the goods offered by sellers are largely the same C) barriers to entry exist D) firms can change output and not affect price E) individuals can increase demand and not affect price Use the following to answer question 6: $/Q TC TR O A B C D Quantity 6. In the above diagram profit is maximized at point A) A. B) B. C) C. D) D. 7. Producer surplus for the industry is given by A) the area above the supply curve but below the price. B) the area below the supply curve. C) the area below the demand curve but above the price. D) the area below the demand curve but above the supply curve. 8. The perfectly competitive firm has ATC = 10/Q + Q, MC = 2Q, and TC = 10 + Q 2. If the profit maximizing output is 2, how much are fixed cost? A) 0. B) 4. C) 7. D) 10. E) 14. Page 2

3 Monopoly Section: 9. In the long-run profit maximizing monopolists make A) zero economic profits. B) positive economic profits. C) negative economic profits. D) positive or zero economic profits. E) positive, negative or zero economic profits. Use the following figure to answer questions 10-13: (this figure will not appear) 10. In the above diagram the profit maximizing output level is A) A. B) B. C) C. D) In the above diagram, the profit maximizing price level is A) 1. B) 2. C) 3. D) 4. Page 3

4 12. In the diagram on the previous page the profit maximizing firm is A) making positive economic profit. B) making zero economic profit. C) making negative economic profit. D) it cannot be determined. 13. If the owner of the firm is a profit maximizer, the firm should A) continue to operate. B) shutdown immediately. C) operate only in the short run. D) shutdown in the short run and operate in the long run. 14. If a firm could perfectly price discriminate A) the marginal revenue curve would be the same as the demand curve. B) the marginal revenue curve would lie below the demand curve. C) the marginal revenue curve would not exist. D) the marginal revenue curve would lie above the demand curve. 15. The demand equation is P = 50 - Q. The marginal revenue equation for a single price monopolist is A) 25 - Q. B) 50-2Q. C) 50 - Q. D) (50 Q)/Q. 16. In second-degree price discrimination one would expect A) people who buy a lot to pay a lower price. B) people who pay relatively little to pay a lower price. C) that the monopolist cannot earn economic profits. D) people who cut coupons to pay a lower price. 17. A profit maximizing monopolist faces the following information: P = $4, MR = $2, MC = $1.50. The firm should A) shut down. B) increase output. C) decrease output. D) stay at its current level of output. 18. A profit maximizing monopolist faces the following information: P = $10, MR = $5, ATC = $6, MC = $5. The firm should A) shut down. B) increase output. C) decrease output. D) stay at its current level of output. Page 4

5 19. Proctor and Gamble is the sole seller of Crest toothpaste. Does Proctor and Gamble have a monopoly? A) Yes. B) No. 20. A group of producers that get together and agree to reduce output in an effort to raise the price and hence profits is called: A) a monopoly. B) an oligopoly. C) a free rider. D) a cartel. 21. Which of the following is an example of the Hurdle Model of price discrimination: A) Sam s Club offers a lower price for customers willing to buy a case of soup. B) Carmike 12 offers a lower price to children 12 and under. C) Bayer sells Cipro to the U.S. Government at 95 cents for the first 100 million pills, 85 cents for the second 100 million pills, and 75 cents for the third 100 million pills. D) Northwest Airlines offers a lower price for customers buying tickets 30 days in advance, including a Saturday night stay and not traveling on Sunday. Discussion Questions Section 1. Use the following table for a perfectly competitive firm to answer the following questions: a) At a price of $32, will this firm produce in the short run? If yes, how many units of output will it produce? (4 points) b) At a price of $32, will this firm produce in the short run? If yes, how many units of output will it produce? (4 points) c) What is the profit (or loss) at price of $32 in the short run? (4 points) d) How much are fixed cost? (2 points) Q ATC AVC MC Page 5

6 2. A perfectly competitive firm has the cost curves: MC = 2 + 4Q and AVC = 2 + 2Q. a) How many units of output (if any) will it produce at a market price of $14? (4 points) b) What level of fixed cost will this firm earn zero economic profit? (4 points) c) Lightly shade the region of producer surplus on your graph. (4 points) d) How much is the producer surplus? (2 points) 3. Suppose that two firms (A & B) comprise the entire industry. They have an identical short-run marginal cost curves: MC A = 4 + Q and MC B = 4 + Q. Find the industry supply curve? (4 pts.) 4. A monopolist has the following demand curve: P = 80 Q and total cost curve: TC = 16 + Q 2. The marginal cost curve is: MC = 2Q. a) Find the monopolist s profit maximizing output. (4 points) Page 6

7 b) Find the monopolist s profit maximizing price. (4 points) c) How much profit will the monopolist earn? (4 points) d) Lightly shade the region of consumer surplus on your graph below (4 points) e) How much is the consumer surplus? (2 points) 5. Demand for movies for children is estimated to have a constant price elasticity of 4. If the marginal cost per child is $2, what is the profit maximizing children s price? (2 points) I have neither given nor received aid on this examination. (signature) Page 7

8 Answer Key -- test4 1. A 2. A 3. A 4. B 5. C 6. C 7. A 8. D 9. D 10. A 11. D 12. B 13. A 14. A 15. B 16. A 17. B 18. D 19. B 20. D 21. D Page 8

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