Econ quiz Chapter 8

1. Beta industries manufactures floppy disks that a consumer perceive as identical to those produced by numerous other
manufactures. Recently, Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy
disks. The estimated cost function is C= 10+Q^2. What is the optimal level of output to maximize profits?

Ans. 5 units Solution: C= 10+2Q > 2Q=10 > 5

2. The model of monopolistic competition has been criticized because of excess capacity. This implies that:

Ans. These are barriers to entry*

3. Which of the ff. industries is best characterized as monopolistically competitive?

Ans. Toothpaste
4. Suppose you are monopolist operating two plants at different locations. Both plants produce the same product; Q1 is the
quantity produced at plant 1, and Q2 is the quantity produced at plant 2. You are the ff. inverse demand function: P=1000-2Q,
where:
C1= 25+2Q2/1; C2= 20+ 2Q2/2. What are your marginal revenue and marginal cost functions?
Ans. MR= 1000-4Q
MC1= 4Q; MC2= 8Q
5. You are a manager for a monopolistically competitive firm. From experience, the profit-maximizing level of output of your
firm is 100 units. However, it is expected that prices of other close substitutes will fall in the near future. How should you
adjust your level of production in response to this change?
Ans. Produce less than 100 units
6. A natural monopoly may be beneficial to the consumer because
Ans. The company can obtain economies of scale
7. Which one of the ff. would act as barrier to entry to a new form trying to enter a market?
Ans. Branding
8. Firms have market power in:
Ans. Monopolistic Market
9. Which of the following is an artificial barrier to entry? Ans. Government issue of patents
10. In order to maximize profits (or minimize losses) a firm should produce at that output level in which
Ans. Marginal revenue= marginal cost
11. In a perfectly competitive market
Ans. There are so many firms selling output in the market that no one individual firm has the ability to control the
market price.
12. Which of the ff. is not a condition of monopolistic competition?
Ans. Indefinitely inelastic demand curve*
13. All the following are requirements of perfectly competitive market except:
Ans. Selling firms maximize sales
14. A monopoly has produced a product with a patent for the last few years. The patent is going to expire. What will happen after
the patent expires?
Ans. Some firms will enter the industry
15. Which of the ff. is incompatible with perfect competition?
Ans. Marginal cost= average price
16. Beta industries manufactures floppy disks that a consumer perceive as identical to those produced by numerous other
manufactures. Recently, Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy
disks. The estimated cost function is C= 10+Q^2. What is the firm’s marginal cost?
Ans. 2Q
17. Compute the marginal revenue when the price elasticity of demand is -0.20.
Ans. -4P, meaning marginal revenue is negative and 4 times greater than price
18. Suppose you are monopolist operating two plants at different locations. Both plants produce the same product; Q1 is the
quantity produced at plant 1, and Q2 is the quantity produced at plant 2. You are the ff. inverse demand function: P=1000-2Q,
where: C1= 25+2Q2/1; C2= 20+ 2Q2/2. What are the maximum profits?
Ans. 31,250
19. One of sources of monopoly power for a monopoly may be:
Ans. Patents
20. The top four firms in the industry have 10 percent, 8 percent, 8 percent and 6 percent of the market. The four-firm concetration
ratio of this market is: Ans. 32
21. Suppose the marginal costs, and therefore the market supply, for ketchup in Laguna is given by P=Q/2+1. The market demand
is given by Q=20-4P. If there is monopoly in the ketchup market the price and the quantity produced is:
Ans. P= 11/3, Q=4
22. Suppose you are monopolist operating two plants at different locations. Both plants produce the same product; Q1 is the
quantity produced at plant 1, and Q2 is the quantity produced at plant 2. You are the ff. inverse demand function: P=1000-2Q,
where:
C1= 25+2Q2/1; C2= 20+ 2Q2/2. To maximize profits, how mych should you produce at plant 1? At plant 2?
Ans. 62.5;125
23. You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 +
4Q + 0.5 Q2. What will happen in the long-run if there is no change in the demand curve? Ans. Some firms will enter the
market eventually
24. Seaside industries currently spends 5 percent of its sales on advertising, suppose that the elasticity of advertising for seaside is
0.5. Determine the optimal profit margin over price (P-MC)/P.
Ans. 10 percent