ANSWERS:

1. C

Ø Ben should make the number of steaks that maximizes his profit. Profit = Total Revenue – Total Cost. Profit is maximized when Ben makes 3 steaks.

2. C

Ø Since there are many firms in monopolistic competition, there is some degree of product differentiation among the firms so that different prices can be charged for similar products.

3. D

Ø A cartel restricts output because the members charge a price higher than the market price in a competitive market.

4. E

Ø Imperfectly competitive firms are allocatively inefficient since they produce where P > MC.

5. A

Ø Natural monopolies exist if it is more efficient for only one firm to exist in a market.

6. D

Ø The socially optimum level of output occurs where P (Demand) = MC. If the government required the firm to produce this amount of output, they would have to subsidize the firm to keep it in the market since AR < ATC.

7. E

Ø Monopolistically competitive firms reach long run equilibrium due to the fact that there are few barriers to entry. If firms are making profits, others will enter the industry in the long run thereby squeezing out profits. Likewise, if firms are making losses, some will leave the industry until the losses disappear.

8. H

Ø A firm produces where MR = MC. In this situation, AR < ATC but AR > AVC. This tells us that the firm should keep producing in the short run since it is covering its variable costs of production. In addition, we know that this is a perfectly competitive firm since MR is horizontal indicating the firm is a price taker.

9. B

Ø P > MR for a monopolist since a non-discriminating monopolist must charge the same price for all units and to sell more units, he must lower the price which applies to all of the previous units.

10. D

Ø If a price of a substitute decreases, the demand for Goldberg Grains will decrease (Demand curve shifts to the left).

Ø If the price of wheat (resource used to make Goldberg Grains) decreases, the supply of Goldberg Grains will increase (Supply curvy shifts to the right).

Ø Therefore, the price of Goldberg Grains will decrease, but the quantity of Goldberg Grains is indeterminate since we do not know the size of the demand and supply curve shifts.

11. C

Ø The key part of price discrimination is that a firm is selling the same good at different prices to different people because different people are willing to pay different amounts. The difference in prices is not because the cost of producing the good or service has changed.

12. B

Ø It is easier to price discriminate when you are selling services rather than goods.

13. B

Ø To profit maximize, the monopolist will produce where MR = MC and charge the corresponding price on the demand curve.

14. C

Ø Economic profit equals total revenue minus total cost. At the profit maximizing level, total revenue equals $10(400) = $4000 and total cost equals $4(400) = $1600. Thus, economic profit = $4000 - $1600 = $2400. You can also obtain this same number by taking the profit per unit ($10 - $4 = $6) times the number of units sold (400 units).

15. D

Ø Since collusion plays a role in an oligopoly, the firms involved must consider the impact of their behavior on other firms.

16. C

Ø Zero economic profit is achieved in the long run simply because few barriers of entry and exit exist thereby causing firms to enter when there are profits and exit when there are losses.

17. B

Ø Economies of scale allow firms to specialize in the areas of labor, management, and capital. This specialization equates into lower costs of production thereby allowing a firm to charge a lower price than a smaller firm.

18. A

Ø Since D > MR for a monopolistically competitive firm, it will charge higher prices and produce less output in the long run than a perfectly competitive firm.

19. C

Ø There is some degree of product differentiation; otherwise they would be price takers instead of price makers.

20. D

Ø In order to determine whether or not a firm should shut down in the short run, we must know whether or not its revenue covers its variable costs. If the firm is bringing in enough revenue to cover its variable costs it should continue to produce in the short run.

21. D

Ø Price would definitely rise, but the effect on quantity is indeterminate since we don’t know the size of the shifts.

22. C

Ø A monopolist produces where MR = MC and charges the corresponding price on the demand curve. Since D > MR, the monopolist will be charging a price that is greater than marginal revenue and, therefore also greater than marginal cost (the cost of producing the last unit).

23.

Ø Oligopoly: A few large firms, mutual interdependence, homogeneous or differentiated products, substantial barriers to entry.

Ø Monopolistic Competition: Many firms, no interdependence, differentiated products, easy entry and exit.

24.

Ø Firms in perfect competition or monopolistic competition will reach a long-run equilibrium due to the small barriers of entry and exit.

Ø Oligopolies or monopolies will earn economic profits in the long run since there are significant barriers to entry.

25.

Ø Pros: Natural monopolies in which one firm can produce at a lower average total cost than would be possible if more firms were in the industry.

Ø Cons: Monopolies are not allocatively nor productively efficient since they produce where P > MC and P > minimum ATC. Monopolies restrict competition, charge a higher price, and restrict output.

26.

Ø Pros: Product differentiation … There are more choices!

Ø Cons: They are not allocatively nor productively efficient since they produce where P > MC and P > minimum ATC.

27.

Ø Productive efficiency means producing using the least-costly methods of production. This occurs when Price (P) = Minimum Average Total Cost (ATC).

28.

Ø Allocative efficiency means producing the goods and services most wanted by society. Price is the value society puts on a good or service. It represents the additional benefit society received from an additional unit of output This occurs when Price (P) = Marginal Cost (MC).

29.

Ø Underallocation of Resources: P > MC.

Ø Overallocation of Resources: P < MC

30.

Ø A natural monopoly is an industry in which economies of scale are so great that a single firm can produce the product at a lower ATC than would be possible if more than one firm were in that industry. Examples of natural monopolies include natural gas, electricity, wireless communications, long-distance phone services, etc.

31.

Ø Socially Optimal Price (MC Pricing): P = MC.

Ø Fair-Return Price (ATC Pricing): P = ATC.

PRACTICE SHORT ESSAY:

A) Since it’s a single airline providing service from City A to City B, the type of market structure is a monopoly. This airline will determine the number of passengers it will carry where MR = MC and it will charge the corresponding price on its demand curve.

B) If fixed costs increase, the firm’s ATC curve will shift up. This will cause the firm to incur losses in the short run.