Baye 9e Chapter 08 TB

Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
Chapter 08
Managing in Competitive, Monopolistic, and Monopolistically Competitive
Markets
Multiple Choice Questions
1. You are the manager of a firm that produces output in two plants. The demand for your
firm's product is P = 78 − 15Q, where Q = Q1 + Q2. The marginal costs associated with
producing in the two plants are MC1 = 3Q1 and MC2 = 2Q2. How much output should be
produced in plant 1 in order to maximize profits?
A. 1
B. 2
C. 3
D. 4
Answer: A
Learning Objective: 08-08
Topic: Monopoly
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 03 Hard
producing in the two plants are MC1 = 3Q1 and MC2 = 2Q2. What price should be charged to
maximize profits?
A. $20.5
B. $40.5
C. $60.5
D. $80.5
Answer: B
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
8-1
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producing in the two plants are MC1 = 3Q1 and MC2 = 2Q2. What price should be charged in
order to maximize revenues?
A. $39
B. $47
C. $52
D. $56
Answer: A
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
4. Which of the following is true under monopoly?

A. Profits are always positive.
B. P > MC.
C. P = MR.
D. All of the choices are true for monopoly.
Answer: B
Topic: Monopoly
Blooms: Understand
AACSB: Knowledge Application
Difficulty: 02 Medium
5. You are the manager of a firm that sells its product in a competitive market at a price of
$50. Your firm's cost function is C = 40 + 5Q2. The profit-maximizing output for your firm is:
A. 4/5.
B. 10.
C. 5.
D. 45.
Answer: C
Topic: Perfect Competition
Blooms: Apply
8-2
$50. Your firm's cost function is C = 40 + 5Q2. Your firm's maximum profits are:
A. 125.
B. 250.
C. 100.
D. 85.
Answer: D
Blooms: Apply
7. You are the manager of a monopoly that faces a demand curve described by P = 230 −
20Q. Your costs are C = 5 + 30Q. The profit-maximizing output for your firm is:
A. 4.
B. 5.
C. 6.
D. 7.
Answer: B
Topic: Monopoly
Blooms: Apply
20Q. Your costs are C = 5 + 30Q. The profit-maximizing price is:
A. 150.
B. 90.
C. 130.
D. 110.
Answer: C
Topic: Monopoly
Blooms: Apply
8-3
20Q. Your costs are C = 5 + 30Q. Your firm's maximum profits are:
A. 495.
B. 475.
C. 480.
D. 415.
Answer: A
Topic: Monopoly
Blooms: Apply
A. 3
B. 6
C. 9
D. 12
Answer: B
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
producing in the two plants are MC1 = 2Q1 and MC2 = 4Q2. What price should be charged to
maximize profits?
A. 60
B. 66
C. 70
D. 76
Answer: B
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
8-4
producing in the two plants are MC1 = 2Q1 and MC2 = 4Q2. What price should be charged in
order to maximize revenues?
A. 6
B. 2
C. 24
D. 60
Answer: D
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
13. In a competitive industry with identical firms, long-run equilibrium is characterized by:
A. P = AC.
B. P = MC.
C. MR = MC.
D. All of the statements associated with this question are correct.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
14. Which of the following is true?

A. A monopolist produces on the inelastic portion of its demand.
B. A monopolist always earns an economic profit.
C. The more inelastic the demand, the closer marginal revenue is to price.
D. In the short run, a monopoly will shut down if P < AVC.
Answer: D
Topic: Monopoly
Blooms: Analyze
Difficulty: 03 Hard
8-5
A. 4.
B. 5.
C. 10.
D. 15.
Answer: B
Blooms: Apply
A. 36.
B. 60.
C. 40.
D. 80.
Answer: C
Blooms: Apply
17. You are the manager of a monopoly that faces a demand curve described by P = 85 − 5Q.
Your costs are C = 20 + 5Q. The profit-maximizing output for your firm is:
A. 6.
B. 5.
C. 7.
D. 8.
Answer: D
Topic: Monopoly
Blooms: Apply
8-6
Your costs are C = 20 + 5Q. The profit-maximizing price is:
A. 45.
B. 55.
C. 60.
D. 50.
Answer: A
Topic: Monopoly
Blooms: Apply
Your costs are C = 20 + 5Q. The revenue-maximizing output is:
A. .85.
B. 9.
C. 10.
D. None of the preceding answers is correct.
Answer: D
Topic: Monopoly
Blooms: Analyze
Difficulty: 03 Hard
A. 10.
B. 20.
C. 30.
D. 40.
Answer: A
Blooms: Apply
8-7
A. 250.
B. 400.
C. 450.
D. 500.
Answer: A
Blooms: Apply
Your costs are C = 10 + 3Q. The profit-maximizing output for your firm is:
A. 3.
B. 4.
C. 5.
D. 6.
Answer: D
Topic: Monopoly
Blooms: Apply
Your costs are C = 10 + 3Q. The profit-maximizing price is:
A. 20.
B. 27.
C. 33.
D. 55.
Answer: C
Topic: Monopoly
Blooms: Apply
8-8
Your costs are C = 10 + 3Q. Your firm's maximum profits are:
A. 0.
B. 66.
C. 120.
D. 170.
Answer: D
Topic: Monopoly
Blooms: Apply
Your costs are C = 10 + 3Q. The revenue-maximizing output is:
A. 10/63.
B. 5.
C. 6.3.
Answer: C
Topic: Monopoly
Blooms: Analyze
Difficulty: 03 Hard

B. P > minimum of ATC.
C. P = MR.
Answer: D
Topic: Monopoly
Blooms: Understand
8-9
27. In the long run, monopolistically competitive firms:
A. charge prices equal to marginal cost.
B. have excess capacity.
C. produce at the minimum of average total cost.
D. have excess capacity and produce at the minimum of average total cost.
Answer: B
Topic: Monopolistic Competition
Blooms: Understand
28. If a monopolistically competitive firm's marginal cost increases, then in order to maximize
profits, the firm will:
A. reduce output and increase price.
B. increase output and decrease price.
C. increase both output and price.
D. reduce both output and price.
Answer: A
Blooms: Analyze
29. Which of the following market structures would you expect to yield the greatest product
variety?
A. Monopoly
B. Monopolistic competition
C. Bertrand oligopoly
D. Perfect competition
Answer: B
Blooms: Understand
8-10
30. The primary difference between monopolistic competition and perfect competition is:
A. the ease of entry and exit into the industry.
B. the number of firms in the market.
C. Both A and B are correct.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
31. Which of the following industries is best characterized as monopolistically competitive?

A. Toothpaste
B. Crude oil
C. Agriculture
D. Local telephone service
Answer: A
Blooms: Understand
32. Which of the following is an example of monopoly?

A. Shoe industry in the United States
B. Local utility industry in a small town
C. Newspaper industry in New York City
D. Bread industry in New York City
Answer: B
Topic: Monopoly
Blooms: Understand
33. Differentiated goods are a feature of a:

A. perfectly competitive market.
B. monopolistically competitive market.
C. monopolistic market.
D. monopolistically competitive market and monopolistic market.
Answer: B
8-11
Blooms: Remember
Difficulty: 01 Easy
34. Firms have market power in:

A. perfectly competitive markets.
B. monopolistically competitive markets.
C. monopolistic markets.
D. monopolistically competitive markets and monopolistic markets.
Answer: D
Topic: Monopoly
Blooms: Remember
Difficulty: 01 Easy
35. There is no market supply curve in:

A. a perfectly competitive market.
B. a monopolistically competitive market.
C. a monopolistic market.
D. monopolistically competitive and monopolistic markets.
Answer: D
Topic: Monopoly
Blooms: Understand
36. Suppose that initially the price is $50 in a perfectly competitive market. Firms are making
zero economic profits. Then the market demand shrinks permanently, some firms leave the
industry, and the industry returns to a long-run equilibrium. What will be the new equilibrium
price, assuming cost conditions in the industry remain constant?
A. $50
B. $45
C. Lower than $50, but exact value cannot be known without more information.
D. Larger than $45, but exact value cannot be known without more information.
Answer: A
Blooms: Analyze
Difficulty: 03 Hard
8-12
37. Which of the following statements concerning monopoly is NOT true?
A. A market may be monopolistic because there are some legal barriers.
B. A monopoly has market power.
C. A monopoly is always undesirable.
D. There is some deadweight loss in a monopolistic market.
Answer: C
Blooms: Understand
38. Which of the following features is common to both perfectly competitive markets and
monopolistically competitive markets?
A. Firms produce homogeneous goods.
B. There is free entry.
C. Long-run profits are zero.
D. There is free entry and long-run profits are zero.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
39. The source(s) of monopoly power for a monopoly may be:

A. economies of scale.
B. economies of scope.
C. patents.
Answer: D
Topic: Monopoly
Blooms: Understand
40. Economies of scale exist whenever:

A. average total costs decline as output increases.
B. average total costs increase as output increases.
C. average total costs are stationary as output increases.
D. average total costs increase as output increases and average total costs are stationary as
output increases.
8-13
Answer: A
Topic: Monopoly
Blooms: Remember
Difficulty: 01 Easy
41. The number of efficient plants compatible with domestic consumption of the refrigerator
industry in Sweden is 0.7. Which of the following implications is (are) correct?
A. In the absence of imports, the refrigerator industry in Sweden is monopolistic.
B. The refrigerator industry in Sweden is perfectly competitive.
C. The refrigerator industry in Sweden is monopolistically competitive.
Answer: A
Topic: Monopoly
Blooms: Understand
42. A monopoly has two production plants with cost functions C1 = 50 + 0.1Q12 and C2 = 30 +
0.05Q22. The demand it faces is Q = 500 − 10P. What is the condition for profit
maximization?
A. MC1(Q1) = MC2(Q2) = P(Q1 + Q2).
B. MC1(Q1) = MC2(Q2) = MR(Q1 + Q2).
C. MC1(Q1 + Q2) = MC2(Q1 + Q2) = P (Q1 + Q2).
D. MC1(Q1 + Q2) = MC2(Q1 + Q2) = MR (Q1 + Q2).
Answer: B
Topic: Monopoly
Blooms: Apply
0.05Q22. The demand it faces is Q = 500 − 10P. What is the profit-maximizing level of
output?
A. Q1 = 62.5; Q2 = 125.
B. Q1 = 125; Q2 = 62.5.
C. Q1 = Q2 = 125.
D. Q1 = Q2 = 62.5.
Answer: A
Topic: Monopoly
8-14
Blooms: Apply
Difficulty: 03 Hard
0.05Q22. The demand it faces is Q = 500 − 10P. What is the profit-maximizing price?
A. $12.5 per unit
B. $6.25 per unit
C. $31.25 per unit
D. $18.75 per unit
Answer: C
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
45. Which of the following is a correct representation of the profit maximization condition for
a monopoly?
A. P = MR
B. MC = MR
C. P = ATC + MR
D. MR = MC + ATC
Answer: B
Topic: Monopoly
Blooms: Understand
46. Let the demand function for a product be Q = 100 − 2P. The inverse demand function of
this demand function is:
A. Q = 100 + 2P.
B. P = 50 − 0.5Q.
C. P = 50 + 0.5Q.
Answer: B
Topic: Monopoly
Blooms: Apply
8-15
47. A linear demand function exhibits:

A. constant demand elasticity.
B. more elastic demand as output increases.
C. less elastic demand as output increases.
D. insufficient information to determine.
Answer: C
Topic: Monopoly
Blooms: Remember
Difficulty: 01 Easy
48. Which of the following is NOT a basic feature of a monopolistically competitive industry?

A. There are many buyers and sellers in the industry.
B. Each firm in the industry produces a differentiated product.
C. There is free entry and exit into the industry.
D. Each firm owns a patent on its product.
Answer: D
Blooms: Understand
49. In the long run, monopolistically competitive firms produce a level of output such that:
A. P > MC.
B. P = ATC.
C. ATC > minimum of average costs.
Answer: D
Blooms: Understand
8-16
50. Chris raises cows and produces cheese and milk because he enjoys:
C. cost complementarity.
Answer: B
Topic: Monopoly
Blooms: Understand
51. What contributes to the existence of multiproduct firms?

A. Economies of scale
B. Economies of scope
C. Cost complementarity
D. Economies of scope and cost complementarity
Answer: D
Topic: Monopoly
Blooms: Remember
Difficulty: 01 Easy
52. Which of the following is (are) basic feature(s) of a perfectly competitive industry?

A. Buyers and sellers have perfect information.
B. There are no transaction costs.
C. There is free entry and exit in the market.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
8-17
53. In the long run, perfectly competitive firms produce a level of output such that:
A. P = MC.
B. P = minimum of AC.
C. P = MC and P = minimum of AC.
Answer: C
Blooms: Understand
54. A monopoly has produced a product with a patent for the last few years. The patent is
going to expire. What will likely happen to the demand for the patent-holder's product when
the patent runs out?
A. Demand will increase.
B. Demand will decline.
C. Nothing.
Answer: B
Topic: Monopoly
Blooms: Analyze
55. 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?
A. The incumbent will leave the market.
B. The incumbent will retain its status as a monopoly but produce at a lower price.
C. Some firms will enter the industry.
Answer: C
Topic: Monopoly
Blooms: Analyze
8-18
56. You are a manager in a perfectly competitive market. The price is $14. Your total cost
curve is C(Q) = 10 + 4Q + 0.5Q2. What level of output should you produce in the short run?
A. 5
B. 8
C. 10
D. 15
Answer: C
Blooms: Apply
57. 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 + 0.5Q2. What price should you charge in the short
run?
A. $12
B. $14
C. $16
D. $18
Answer: B
Blooms: Apply
Difficulty: 01 Easy
Your total cost curve is C(Q) = 10 + 4Q + 0.5Q2. What level of profits will you make in the
short run?
A. $20
B. $40
C. $60
D. $80
Answer: B
Blooms: Apply
8-19
Your total cost curve is C(Q) = 10 + 4Q + 0.5Q2. What will happen in the long run if there is
no change in the demand curve?
A. Some firms will leave the market eventually.
B. Some firms will enter the market eventually.
C. There will be neither entry nor exit from the market.
Answer: B
Blooms: Analyze
60. A perfectly competitive firm faces a:

A. perfectly elastic demand function.
B. perfectly inelastic demand function.
C. demand function with unitary elasticity.
Answer: A
Blooms: Understand
61. A firm has a total cost function of C(Q) = 50 + 10Q1/2. The firm experiences:
B. constant returns to scale.
C. diseconomies of scale.
D. All of the statements associated with this question are correct, depending on the quantity.
Answer: A
Topic: Monopoly
Blooms: Analyze
Difficulty: 03 Hard
8-20
62. A firm can produce two products with the cost function C(Q1, Q2) = 10 + 5Q1 + 5Q2 −
0.2Q1Q2. The firm enjoys:
A. economies of scale in the two products separately.
C. cost complementarity.
D. economies of scale in the two products separately and cost complementarity.
Answer: C
Topic: Monopoly
Blooms: Analyze
63. "Monopolistic competition is literally a kind of competition. Hence, there is no

deadweight loss in a monopolistically competitive market."
A. The statement is by definition correct but empirically incorrect.
B. The statement is correct.
C. The statement is incorrect.
Answer: C
Blooms: Understand
64. Eric provides cheese (H) and milk (M) to the market with the following total cost
function: C(H, M) = 10 + 0.4H2 + 0.2M2. The prices of cheese and milk in the market are $2
and $5 respectively. Assume that the cheese and milk markets are perfectly competitive. What
output of cheese maximizes profits?
A. 2
B. 2.5
C. 5
D. 10
Answer: B
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
8-21
65. Eric provides cheese (H) and milk (M) to the market with the following total cost
function: C(H, M) = 10 + 0.4H2 + 0.2M2. The prices of cheese and milk in the market are $2
output of milk maximizes profits?
A. 1.25
B. 12.5
C. 15
D. 20
Answer: B
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
66. 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?
A. Produce more than 100 units.
B. Produce less than 100 units.
C. Produce 100 units.
D. Insufficient information to decide.
Answer: B
Blooms: Analyze
67. Which of the following statements is NOT correct about monopoly?

A. A monopolist generally faces a downward-sloping demand curve.
B. Monopolists always make positive profits in the long run.
C. A monopoly may make negative profits in the short run.
D. There is no close substitute for a monopoly's product.
Answer: B
Topic: Monopoly
Blooms: Understand
8-22
firm's product is P = 20 − Q, where Q = Q1 + Q2. The marginal costs associated with
producing in the two plants are MC1 = 2 and MC2 = 2Q2. How much output should be
A. 1
B. 4
C. 8
D. 11
Answer: C
Topic: Monopoly
Blooms: Apply
firm's product is P = 20 − Q, where Q = Q1 + Q2. The marginal costs associated with
producing in the two plants are MC1 = 2 and MC2 = 2Q2. What is the profit-maximizing price
that the firm should charge?
A. $8
B. $9
C. $11
D. $12
Answer: C
Topic: Monopoly
Blooms: Apply

A. P > ATC
B. P > MC
C. P = MR
D. P = ATC
Answer: B
Topic: Monopoly
Blooms: Understand
8-23
A. 3.
B. 5.
C. 6.
D. 10.
Answer: D
Blooms: Apply
Difficulty: 01 Easy
72. You are the manager of a monopoly that faces an inverse demand curve described by P =
200 − 15Q. Your costs are C = 15 + 20Q. The profit-maximizing price is:
A. $20.
B. $110.
C. $135.
D. $290.
Answer: B
Topic: Monopoly
Blooms: Apply
73. Which of the following industries is best characterized as monopolistically competitive?

A. Cereal
B. Crude oil
C. Wheat
D. Local electricity service
Answer: A
Blooms: Understand
8-24
74. Differentiated goods are NOT a feature of a:

D. perfectly competitive market and monopolistic market.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
75. One of the sources of monopoly power for a monopoly may be:

A. diseconomies of scale.
B. differentiated products.
C. patents.
D. free entry and exit.
Answer: C
Topic: Monopoly
Blooms: Remember
Difficulty: 01 Easy
76. Let the demand function for a product be Q = 50 − 5P. The inverse demand function of
this demand function is:
A. Q = 25 + P
B. P = 10 − 0.2Q
C. P = 10 + 0.2Q
D. P = 50 − 0.2Q
Answer: B
Topic: Monopoly
Blooms: Apply
8-25
77. A firm has a total cost function of C(Q) = 75 + 25Q1/2. The firm experiences:
B. diseconomies of scale.
C. constant returns to scale.
Answer: A
Topic: Monopoly
Blooms: Analyze
A. P > AC.
B. P < MC.
C. MR = MC.
D. MR < P.
Answer: C
Blooms: Understand
Difficulty: 01 Easy
A. $192.
B. $228.
C. $348.
D. $576.
Answer: B
Blooms: Apply
80. In the long run, monopolistically competitive firms charge prices:

A. equal to marginal cost.
B. below marginal cost.
C. equal to the minimum of average total cost.
D. above the minimum of average total cost.
Answer: D
8-26
Blooms: Understand
81. There is a market supply curve in a:

D. perfectly competitive market and monopolistically competitive market.
Answer: A
Topic: Monopoly
Blooms: Understand
Difficulty: 01 Easy
82. Which of the following features is common to both perfectly competitive markets and
monopolistically competitive markets?
A. Firms produce homogeneous goods.
B. Prices are equal to marginal costs in the long run.
C. Long-run profits are zero.
D. Prices are above marginal costs in the long run.
Answer: C
Blooms: Understand
Difficulty: 03 Hard
83. Consider a monopoly where the inverse demand for its product is given by P = 200 − 5Q.
Based on this information, the marginal revenue function is:
A. MR(Q) = 400 − 2.5Q.
B. MR(Q) = 400 − 10Q.
C. MR(Q) = 200 − 10Q.
D. MR(Q) = 200 − 2.5Q.
Answer: C
Topic: Monopoly
Blooms: Apply
Difficulty: 01 Easy
8-27
Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profit-
maximizing combination of output and price, deadweight loss is:
A. $32.
B. $64.
C. $128.
D. cannot be determined with the given information.
Answer: A
Topic: Monopoly
Blooms: Analyze
Difficulty: 3 Hard
maximizing combination of output and price, consumer surplus is:
A. $32.
B. $64.
C. $128.
D. cannot be determined with the given information.
Answer: B
Topic: Monopoly
Blooms: Analyze
maximizing combination of output and price, monopoly profit is:
A. $32.
B. $64.
C. $92.
D. $128.
Answer: C
Topic: Monopoly
Blooms: Apply
8-28
87. Suppose perfectly competitive market conditions are characterized by the following
inverse demand and inverse supply functions: P = 100 − 5Q and P = 10 + 5Q. The demand
curve facing an individual firm operating in this market is:
A. P = 100 − 5Q.
B. a horizontal line at $9.
C. a horizontal line at $55.
D. P/N = (100 − 5Q)/N, where N is the total number of firms in the competitive market.
Answer: C
Blooms: Apply
88. Which of the following is true about where a profit-maximizing monopoly will produce
on a linear demand curve when it has positive marginal costs?
A. It will produce output on the inelastic portion of the demand curve.
B. It will produce output where MR < 0.
C. It will produce output where MR = 0.
D. It will produce output on the elastic portion of the demand curve.
Answer: D
Topic: Monopoly
Blooms: Understand
89. Suppose a monopolist knows the own price elasticity of demand for its product is −3 and
that its marginal cost of production is constant MC(Q) = 10. To maximize its profit, the
monopoly price is:
A. $1.50 per unit.
B. $6.67 per unit
C. $10 per unit.
D. $15 per unit.
Answer: D
Topic: Monopoly
Blooms: Apply
8-29
90. Compute the marginal revenue when the price elasticity of demand is −0.25.
A. −3P, meaning marginal revenue is negative and 3 times greater than price.
B. 3P, meaning marginal revenue is positive and 3 times greater than price.
C. −0.33P, meaning that marginal revenue is negative and one-third of the price.
D. −0.25P, meaning that marginal revenue is negative and one-fourth of the price.
Answer: A
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
91. Suppose that a monopolistically competitive market is at the long-run equilibrium. Based

on this information, which of the following conclusions is NOT true?
A. P > MC.
B. Deadweight loss is zero.
C. P = ATC > minimum of ATC.
D. Firms' profits are zero.
Answer: B
Blooms: Understand
92. The first-order conditions for a monopoly to maximize profits are:

A. dR(Q)/dQ = dC(Q)/dQ.
B. MR(Q) = MC(Q).
C. d(Q)/dQ = 0.
Answer: D
Topic: Monopoly
Blooms: Apply
8-30
Difficulty: 03 Hard
93. Consider firms operating in an industry where the own price elasticity of demand is
infinite; that is, EQ,P = −. Use this information to determine the type of industry in which
these firms operate and the optimal advertising-to-sales ratio.
A. Perfectly competitive industry and 0
B. Monopolistically competitive industry and 
C. Perfectly competitive industry and 
D. Monopolistic industry and 0
Answer: A
Topic: Optimal Advertising Decision
Blooms: Apply
94. SeaSide Industries currently spends 5 percent of its sales on advertising. Suppose that the
elasticity of advertising for Seaside is 0.2. Determine the optimal profit margin over price (P
− MC)/P.
A. 4 percent
B. 10 percent
C. 25 percent
Answer: C
Blooms: Apply
Difficulty: 03 Hard
95. Which of the following is a strategy(ies) used by firms in monopolistically competitive

industries to convince consumers that their product is better than their rivals' products?
A. Comparative advertising
B. Niche marketing
C. Equity marketing
D. Comparative advertising or niche marketing
Answer: D
Topic: Monopoly
Blooms: Remember
8-31
Difficulty: 01 Easy
96. Which of the following conditions must hold to ensure that profits are, in fact, at a
maximum?
A. d(MC(Q))/dQ > 0
B. d(MC(Q))/dQ < 0
C. d2(Q)/dQ2 < 0
D. d(MC(Q))/dQ > 0 and d2(Q)/dQ2 < 0
Answer: D
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
97. The second-order condition for a firm maximizing its profit operating in a

monopolistically competitive market is:
A. −(d2C(Q)/dQ2) < 0.
B. (d2R (Q)/dQ2) − (d2C(Q)/dQ2) < 0.
C. (d2R (Q)/dQ2) = (d2C(Q)/dQ2).
D. (dMR/dQ) > (dMC/dQ).
Answer: B
Blooms: Apply
98. The first-order condition for a firm maximizing its profit operating in a monopolistically
competitive market is:
A. (dMR/dQ) = (dMC/dQ).
B. P − (dC(Q)/dQ) = 0.
C. (dR(Q)/dQ) − (dC(Q)/dQ) = 0.
D. (dMR/dQ) < (dMC/dQ).
Answer: C
Blooms: Apply
8-32
99. The second-order condition for a monopoly maximizing its profit is:
A. (d2R(Q)/dQ2) − (d2C(Q)/dQ2) < 0.
B. (d2R(Q)/dQ2) − (d2C(Q)/dQ2) = 0.
C. (dMR/dQ) < (dMC/dQ).
D. (d2R(Q)/dQ2) − (d2C(Q)/dQ2) < 0 or (dMR/dQ) < (dMC/dQ).
Answer: D
Topic: Monopoly
Blooms: Apply
100. The first-order condition for a monopoly maximizing its profit is:

A. P − (dC(Q)/dQ) = 0.
B. (dR(Q)/dQ) − (dC(Q)/dQ) = 0.
C. (dR(Q)/dQ) − (dC(Q)/dQ) < 0.
D. (d2R(Q)/dQ2) − (d2C(Q)/dQ2) < 0.
Answer: B
Topic: Monopoly
Blooms: Apply
101. The second-order condition for a firm maximizing its profits operating in a perfectly
competitive market is:
A. (d2/dQ2) < 0.
B. − (d2C(Q)/dQ2) < 0.
C. − (dMC/dQ) < 0.
Answer: D
Blooms: Apply
8-33
102. The first-order conditions for profit maximization in a perfectly competitive market are:
A. P − (dC(Q)/dQ) = 0.
B. (dR(Q)/dQ) − (d2C(Q)/dQ2) < 0.
C. P − (d2C(Q)/dQ2) = 0.
D. P > (dC(Q)/dQ).
Answer: A
Blooms: Apply
103. You are the manager of a firm that sells its product in a competitive market with market
(inverse) demand given by P = 50 − 0.5Q. The market equilibrium price is $50. Your firm's
cost function is C = 40 + 5Q2. Your firm's marginal revenue is:
A. $50.
B. MR(Q) = 10Q.
C. MR(Q) = 50 − Q.
D. There is insufficient information to determine the firm's marginal revenue.
Answer: A
Blooms: Understand
104. You are the manager of a firm that sells its product in a monopolistically competitive
market with (inverse) demand given by P = 50 − 0.5Q. Your firm's cost function is C = 40 +
5Q2. Your firm's marginal revenue is:
A. P = 50 − 0.5Q.
B. P = 50 − Q.
C. P = 100 − Q.
Answer: B
Blooms: Apply
8-34
105. You are the manager of a monopoly firm with (inverse) demand given by P = 50 − 0.5Q.
Your firm's cost function is C = 40 + 5Q2. Your firm's marginal revenue is:
A. P = 50 − 0.5Q.
B. P = 100 − Q.
C. P = 50 − Q.
Answer: C
Topic: Monopoly
Blooms: Apply
106. Which of the following formulas correctly measures the profit of a monopoly?

A.  = TR − TC
B.  = (P − ATC)Q
C.  = (P − AVC)Q
D.  = TR − TC and  = (P − ATC)Q
Answer: D
Topic: Monopoly
Blooms: Understand
107. Which of the following is true under monopolistic competition in the short run?
A. Profits are always zero.
B. P > MC.
C. P = MR.
D. All of the choices are true in monopolistic competition.
Answer: B
Blooms: Understand
8-35
108. Which of the following is true under monopolistic competition in the long run?
A. Profits are always zero.
B. P > MC.
C. P = MR.
D. All of the choices are true in monopolistic competition.
Answer: A
Blooms: Understand
109. Which of the following is true under perfect competition?

B. P > MC.
C. P = MR.
D. All of the choices are true for perfect competition.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
A. P > min ATC.
B. P < AVC.
C. MR = MC = min ATC.
D. MR < P.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
8-36
111. In a monopoly where the marginal revenue and price are, respectively, given by $10 and
$20, the price elasticity of demand is:
A. −1.
B. −2.
C. −0.5.
D. Cannot be determined based on the information in the question.
Answer: B
Blooms: Analyze
Difficulty: 03 Hard
112. In a monopoly where the marginal revenue and price are, respectively, given by $0.50
and $2, the price elasticity of demand is:
A. −0.75.
B. −1
C. −5/4
D. −4/3.
Answer: D
Blooms: Analyze
Difficulty: 03 Hard
A. 1
B. 2
C. 3
D. 4
Answer: B
Topic: Monopoly
Blooms: Apply
8-37
Difficulty: 03 Hard
114. In a monopoly where the marginal revenue and price are, respectively, given by $3 and
$6, the price elasticity of demand is:
A. −0.5.
B. −1
C. −1.5
D. −2.
Answer: D
Blooms: Analyze
Difficulty: 03 Hard
115. Clark Industries currently spends 5 percent of its sales on advertising. Suppose that the
elasticity of advertising for Clark is 0.25. Determine the optimal profit margin over price (P −
MC)/P.
A. 15 percent.
B. 20 percent.
C. 25 percent.
Answer: B
Blooms: Apply
Difficulty: 03 Hard
116. Compute the marginal revenue when the price elasticity of demand is −0.10.
A. −9P, meaning marginal revenue is negative and 9 times greater than price.
B. 9P, meaning marginal revenue is positive and 9 times greater than price.
C. −3P, meaning marginal revenue is negative and 3 times greater than price.
D. 3P, meaning marginal revenue is positive and 3 times greater than price.
Answer: A
Topic: Monopoly
Blooms: Apply
8-38
Difficulty: 03 Hard
maximizing combination of output and price, deadweight loss is:
A. $30.
B. $50.
C. $80.
D. Cannot be determined with the given information.
Answer: B
Topic: Monopoly
Blooms: Analyze
Difficulty: 03 Hard
118. John provides cheese (H) and milk (M) to the market with the following total cost
function C(H, M) = 8 + 0.5H2 + 0.1M2. The prices of cheese and milk in the market are $3
output of milk maximizes profits?
A. 10
B. 20
C. 30
D. 40
Answer: B
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
119. Suppose that initially the price is $20 in a perfectly competitive market. Firms are
making zero economic profits. Then the market demand shrinks permanently, some firms
leave the industry, and the industry returns to a long-run equilibrium. What will be the new
equilibrium price, assuming cost conditions in the industry remain constant?
A. $20
B. $16
C. Lower than $20 but exact value cannot be known without more information.
D. Larger than $20 but exact value cannot be known without more information.
Answer: A
Blooms: Analyze
Difficulty: 03 Hard
8-39
120. A monopoly has two production plants with cost functions C1 = 40 + 0.2 Q12 and C2 = 50
+ 0.1 Q22. The demand it faces is Q = 480 − 5P. What is the profit-maximizing level of
output?
A. Q1 = 50; Q2 = 100
B. Q1 = 60; Q2 = 120.
C. Q1 = Q2 = 75
D. Q1 = Q2 = 100
Answer: B
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
121. A monopoly has two production plants with cost functions C1 = 40 + 0.2Q12 and C2 = 50
+ 0.1Q22. The demand it faces is Q = 480 − 5P. What is the profit-maximizing price?
A. $40 per unit
B. $45 per unit
C. $50 per unit
D. $60 per unit
Answer: D
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
5Q. Your costs are C = 10 + 5Q. The revenue-maximizing output is:
A. 2.5.
B. 5.
C. 8.
Answer: C
Topic: Monopoly
Blooms: Analyze
Difficulty: 03 Hard
8-40
2Q. Your costs are C = 20 + 2Q. The revenue-maximizing output is:
A. 1.5.
B. 3.
C. 4.
Answer: D
Topic: Monopoly
Blooms: Analyze
Difficulty: 03 Hard
Essay Questions
124. Pic Industries produces plastic toothpicks that it sells to distributors in the Southwest.
During the early 1990s, the price of the plastic it uses to produce toothpicks fell by 46 percent,
due to a local glut of recycled plastic containers. Assuming that the market for plastic
toothpicks most closely resembles that of perfect competition and that other firms in the
industry do not experience similar cost savings in the short run, what impact would this have
on the profit-maximizing output, price, and profits of Pic Industries?
Answer:
Other things equal, the fall in the price of plastic would shift Pic's marginal cost curve to the right. To maximize
profits, Pic should increase its output. Since other firms in the industry do not enjoy the reduction in marginal
costs, the market supply curve would not change and the market price of toothpicks would remain unchanged.
Pic Industries would enjoy higher profits in the short run.
Blooms: Analyze
8-41
125. Beta Industries manufactures floppy disks that consumers perceive as identical to those
produced by numerous other manufacturers. Recently, Beta hired an econometrician to
estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost
function is C = 20 + 2Q2.
a. What are the firm's fixed costs?
b. What is the firm's marginal cost?
Now suppose other firms in the market sell the product at a price of $10.
c. How much should this firm charge for the product?
d. What is the optimal level of output to maximize profits?
e. How much profit will be earned?
f. In the long run, should this firm continue to operate or shut down? Why?
Answer:
a. Fixed costs = 20.
b. Marginal costs = 4Q.
c. P = $10.
d. The firm should produce such that MC = P, i.e., 4Q = 10. This implies that Q = 2.5 units.
e. Profits are ($10)(2.5) − 20 − 2(2.5)2 = −$7.5.
f. Since the firm is earning losses, in the long run it will shut down if the market conditions do not change.
Blooms: Evaluate
126. Keds–the traditional maker of white canvas tennis shoes–was near oblivion in the early
1980s because competitors like Nike, Reebok, Adidas, and Brooks took away many of its
customers. If you were at the helm of Keds, what would you have done to turn the company
around?
Answer:
The market for tennis shoes is one that approximates that of monopolistic competition. Thus, a sensible strategy
for Keds would have been for Keds to increase variety in terms of color and style, while keeping to a simple,
comfortable canvas design. At the same time, it could increase advertising to emphasize the price and color
advantages of its canvas design over the competition. In fact, this is precisely what Keds did, and as a result sales
increased by tenfold from 1982 to 1988. By differentiating its product from competitors, it was able to amass
some short-run profits. (See Laura Jereski, "Back in the Game," Forbes, October 31, 1988.)
Blooms: Evaluate
8-42
127. Manufacturers of laundry detergent and dishwashing soap reinvest a relatively large

percentage of their sales revenues on advertising campaigns. Most of these advertisements
that appear on television stress the fact that their product is "New and Improved." Why?
Answer:
The market for many of these products is monopolistically competitive, and thus the tendency is for the firms to
earn long-run economic profits of zero. The firms hope that by continually advertising new and improved
features of their products, they can reap some short-term profits.
Blooms: Analyze
128. Suppose the cost function for your firm is: C = 50 + 4Q + 2Q2.

a. What is the average fixed cost of producing 5 units of output?
b. What is the average variable cost of producing 5 units of output?
c. What are the average total cost and marginal cost of producing 5 units of output?
Answer:
a. AFC(5) = $50/5 = $10.
b. AVC(5) = [4(5) + 2(5)2]/5 = $14.
c. ATC(5) = AVC(5) + AFC(5) = $24; MC(5) = 4 + 4(5) = $24.
Blooms: Apply
Difficulty: 01 Easy
129. U.S. Airways experienced huge losses for several years in the 1990s, yet it continued to
operate its fleets. Why didn't U.S. Airways shut down its operations to avoid the losses?
Answer:
It was covering its variable costs (the cost of fuel, pilots, mechanics, flight attendants, and the like). Had it shut
down its operations, losses would have been even higher, due to the high fixed costs associated with its fleet of
aircraft.
Blooms: Analyze
8-43
130. In 1994 Pentium users around the world learned that their $4.00 pocket calculators could
perform some operations more accurately than their $5,000 desktop computers. It took several
months before Intel–the maker of the chip–agreed to offer its customers replacement chips. In
contrast, Walmart guarantees satisfaction to all customers, with a "no questions asked" return
policy on nearly all of the products it sells. Why do you think these firms employ such
different consumer relations policies?
Answer:
Intel has much more monopoly power than Walmart. Walmart must strive to differentiate itself from competitors
to earn profits, and one way it does so is through its return policy.
Topic: Monopoly
Blooms: Analyze
131. Suppose you are the manager of Alpha Enterprises, a firm that holds a patent that makes
it the exclusive manufacturer of bubble memory chips. Based on the estimates provided by a
consultant, you know that the relevant demand and cost functions for bubble memory chips
are Q = 25 – 0.5P; C = 50 + 2Q.
a. What is the firm's inverse demand function?
b. What is the firm's marginal revenue when producing four units of output?
c. What are the levels of output and price when you are maximizing profits?
d. What will be the level of your profits?
Answer:
a. P = 50 − 2Q.
b. MR(Q) = 50 − 4Q; MR(4) = 50 − 4(4) = $34.
c. Setting MR = MC yields 50 − 4Q = 2, or Q = 12. P = 50 − 2(12) = $26.
d. Profits are ($26)(12) − 74 = $238.
Topic: Monopoly
Blooms: Apply
8-44
132. Suppose you are a 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 face the following inverse demand function: P = 500 – 2Q, where
Q = Q1 + Q2. The cost functions for the two plants are ;
.
a. What are your marginal revenue and marginal cost functions?
b. To maximize profits, how much should you produce at plant 1? At plant 2?
c. What is the price that maximizes profits?
d. What are the maximum profits?
Answer:
a. MR = 500 − 4Q; MC1 = 4Q1; MC2 = 2Q2.
b. Profits are maximized when MC1 = MC2 = MR. This implies Q1 = 31.25 and Q2 = 62.5.
c. Q = 93.75; P = 500 − 2(Q1 + Q2) = 500 − 2(93.75) = $312.50.
d. Maximum profits are $23,392.50.
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
133. Why does the government grant patents to investors? Why does the government give
monopoly power to utility companies?
Answer:
The rationale behind granting monopoly power to a new inventor is based on the following argument: Inventions
take many years and considerable sums of money to develop. Once an invention becomes public information in
the absence of a patent system, other firms could produce the product and compete against the firm that
developed it. In the absence of a patent system, there would be a reduced incentive on the part of firms to
develop new products.
The government gives monopoly power to utility companies because they are assumed to be natural monopolies.
Topic: Monopoly
Blooms: Evaluate
Difficulty: 3 Hard
134. Would you expect an industry to be monopolistically competitive if consumers did not

value variety in the market? Explain.
Answer:
If consumers did not value variety in the market, then firms in a "monopolistically competitive market" would
produce homogeneous goods. That is, the market would be perfectly competitive rather than monopolistically
competitive.
Blooms: Understand
8-45
135. What is the primary facet of monopolistic competition that does not allow for the
presence of long-run profits? If firms are making short-run profits in a monopolistically
competitive industry, what will eventually occur that will cause long-run economic profits to
be zero?
Answer:
The driving force of zero long-run profits is free entry, which allows new firms to come in to compete for the
positive profits. Since this entry stops only when the profits return to zero, this ensures the long-run economic
profits are zero.
Blooms: Understand
136. Regardless of the economic environment, every firm will maximize profits by operating
at the minimum point of its average total cost curves. Is this statement true or false? Explain.
Answer:
False. To maximize profits, firms set MR = MC. The only market environment in which this necessarily implies
production at the minimum of average costs is in long-run equilibrium under perfect competition. In the short
run, even perfectly competitive firms may produce at an output different from minimum average costs.
Blooms: Analyze
Difficulty: 03 Hard
137. What market can you think of, besides that for VCRs, that has shown short-run profits
but, over time, has seen profits disappear due to entry?
Answer:
The market for IBM-compatible personal computers.
Blooms: Understand
8-46
Your total cost curve is C(Q) = 10 + 2Q + .5Q2.
a. What level of output should you produce in the short run?
b. What price should you charge in the short run?
c. Will you make any profits in the short run?
d. What will happen in the long run?
e. How would your answer change if your costs were C(Q) = 80 + 5Q + 30Q2?
Answer:
a. Setting price equal to marginal cost implies $35 = 2 + Q. The short-run output level is Q = 33.
b. $35 per unit.
c. Profits are ($35)(33) − [10 + 2(33) + .5(33)2] = $534.5.
d. New firms will enter and price will be lowered until profit is zero.
e. With this cost function, short-run output falls to Q = .5, but price remains at $35. In the short run, profits are −
$72.5. The firm will shut down in the long run in the absence of a change in market conditions.
Blooms: Analyze
Difficulty: 03 Hard
139. You are the manager of a firm that has an exclusive license to produce your product. The
inverse market demand curve is P = 900 – 1.5Q. Your cost function is C(Q) = 2Q +
Q2. Determine the output you should produce, the price you should charge, and your profits.
Answer:
Here, MR = 900 − 3Q and MC = 2 + 2Q. Setting MR = MC yields 900 − 3Q = 2 + 2Q. Solving for Q gives us Q
= 179.6. Inserting this into the inverse demand function yields P = 900 − 1.5(179.6) = $630.60. Your maximum
profits are thus PQ − C(Q) = ($630.60)(179.6) − [2(179.6) + (179.6)2] = $80,640.40.
Topic: Monopoly
Blooms: Apply
140. Monsanto, the maker of Nutrasweet, owned the patent to aspartame, the official name of
the sweetener. In 1987 Monsanto's patent expired in Europe, allowing other firms to produce
aspartame under other brand names. What impact do you think this had on the market for
aspartame and Monsanto's profits?
Answer:
When the patent expired in Europe, new firms entered the market to produce aspartame under other names. Most
likely, there was some brand loyalty, and consumers probably did not view these new products as perfect
substitutes for Nutrasweet. Consequently, the market for aspartame probably moved from monopoly to
monopolistic competition, and Monsanto's profits fell as a result of the increased entry.
Topic: Monopoly
Blooms: Analyze
8-47
141. If a monopolist has an own price demand elasticity of −.8, is it maximizing profits?
Explain.
Answer:
No. An inelastic demand implies negative marginal revenue. Since profit maximization requires marginal
revenue to equal marginal cost, the firm is producing too much output (marginal cost cannot be negative).
Topic: Monopoly
Blooms: Analyze
142. You are a monopolist with the following cost and demand conditions: P = 100 – 2Q and
C(Q) = 50 + Q2.
a. Determine the profit-maximizing output and price.
b. Graph this solution.
c. Show your profits and the deadweight loss to society in your graph.
d. Determine the actual amount of deadweight loss.
Answer:
a. Equating MR and MC yields 100 − 4Q = 2Q. Solving for Q yields Q = 16 2/3. By plugging this back into the
inverse demand equation, we get P = $66 2/3.
100
MC
66 2/3
50 Deadweight Loss
33 1/3
MR D
16 2/3 25 Q
b. See the accompanying figure.

c. See the accompanying figure.
d. Under perfect competition, market equilibrium is where the demand curve intersects industry marginal cost.
Thus, the competitive price is $50, and the quantity is 25 units. The deadweight triangle in the accompanying
figure is.5(66.67 − 33.33)(25 − 16.67) = $138.86.
Topic: Monopoly
Blooms: Analyze
Difficulty: 03 Hard
8-48
143. You are the manager of a monopolistically competitive firm. The present demand curve
you face is P = 100 – 4Q. Your cost function is C(Q) = 50 + 8.5Q2.
a. What level of output should you choose to maximize profits?
b. What price should you charge?
c. What will happen in your market in the long run? Explain.
Answer:
a. Setting MR = MC yields Q = 4.
b. P = 100 − 4(4) = $84 per unit.
c. Profits are 84(4) − [50 + 8.5(16)] = $150. Since profits are greater than zero, new firms will be attracted to the
industry until profits fall to zero.
Blooms: Analyze
144. Would you expect the demand for a monopolistically competitive firm's product to be
more or less elastic than that for a monopolist's product? Explain.
Answer:
In general, the demand for a monopolistically competitive firm's product should be more elastic than that for a
monopolist's product because there are close substitutes for the former but not for the latter. The existence of
close substitutes makes a monopolistically competitive firm's quantity demanded more responsive to price.
Blooms: Understand
145. You are the manager of a monopolistically competitive firm. The inverse demand for
your product is given by P = 200 – 10Q and your marginal cost is MC = 5 + Q.
a. What is the profit-maximizing level of output?
b. What is the profit-maximizing price?
c. What are the maximum profits?
d. What do you expect to happen to the demand for your product in the long run? Explain.
Answer:
a. Setting MR = MC yields 200 − 20Q = 5 + Q, or Q = 9.29.
b. P = 200 − 10(9.29) = $107.1.
c. This part will be hard for most students. Total cost is the integral of marginal cost: or C(Q) = 5Q + Q 2/2 + FC.
Thus, profits are $905.36 − FC.
d. If fixed costs are lower than $905.36, the positive profits will induce entry. In the long run, this will decrease
the demand for your product.
Blooms: Analyze
8-49
146. Genentech owns a patent on tissue plasminogen activator (TPA), which is an enzyme

that helps the body break down blood clots. TPA is particularly valuable to cardiac patients,
since it often allows heart problems to be treated with medication rather than surgery.
Recently, however, firms in the medical industry have come under fire from some members
of Congress and the press for charging high prices and earning monopoly profits. Do you
think cardiac patients would benefit if the government stripped Genentech and other
pharmaceutical firms of their patents? Explain.
Answer:
In the short run, eliminating the patent might allow other firms to enter and lower the price to cardiac patients. In
the long run, however, it is not at all clear that cardiac patients would benefit. Absent patent protection, firms
like Genentech would be unwilling to invest the substantial sums in R&D that are required to develop products
like TPA. The monopoly profits earned by Genentech are its reward for developing the new product, and taking
away that reward would likely harm cardiac patients in the long run.
Topic: Monopoly
Blooms: Evaluate
Difficulty: 03 Hard
147. You are the general manager of TU Modems Inc., and your accounting department has
provided you with the following information about the total cost of producing three potential
quantities of a commercial-grade modem:
100,000 Units 150,000 Units 200,000 Units
Materials $ 250,000 $ 375,000 $ 500,000
Depreciation 900,000 900,000 900,000
Labor 10,000 15,000 20,000
Total costs $1,160,000 $1,290,000 $1,420,000
The market is saturated with modems, and your sales department has been able to identify
only one potential buyer of your modems. This customer has numerous options and as a result
is only willing to pay $300 per modem for an order of 100,000 modems. You must decide
whether to sign a contract under these terms or simply shut down your operations. What is
your optimal decision?
Answer:
The only costs relevant for making this decision are your variable costs of producing 100,000 units. These
relevant costs include materials ($250,000) and labor ($10,000). The depreciation reflects a charge for
expenditures already made, and thus this amount will be lost regardless of your decision. By signing the contract,
your revenues increase by $30,000,000 and your variable costs increase by only $260,000. You should sign the
contract because doing so adds $29,740,000 to your bottom line that you will not get if you shut down your
operation.
Blooms: Evaluate
Difficulty: 03 Hard
8-50
148. A monopolist estimates that the own price elasticity of demand for its product is −4.5
and its advertising elasticity of demand is 1.5. Assuming these elasticities are constant, what
fraction of the firm's revenues should the firm "reinvest" in advertising to maximize profits?
Answer:
To find the profit-maximizing advertising-to-sales ratio, we simply plug EQ,P = −4.5 and EQ,A = 1.5 into the
formula for the optimal advertising-to-sales ratio: .

Thus, the firm's optimal advertising-to-sales ratio is 33.33 percent–to maximize profits, the firm should spend
one-third of its revenues on advertising.
Blooms: Apply
149. The XYZ Company produces output using labor (which it purchases on an as-needed
basis in the market for unskilled workers at a wage of $5 per hour) and one machine (which it
is obligated to lease at a rental rate of $300 per hour). The planning horizon precludes XYZ
from renting or purchasing any additional machines, as the current machine has a capacity of
80 units of output per hour, which exceeds the projected demand for the firm's product. The
firm has no alternative use for the machine it leases, and the contract precludes it from
subleasing it to another party. The company currently employs one worker who produces 10
units of output per hour. A recent report from the engineering department reveals that, given
the plant's current capacity, two workers could produce 20 units of output per hour, three
workers could produce 30 units of output per hour, and four workers could produce a total of
40 units of output per hour.
a. Complete the following table:
Hourly Cost Data, XYZ Company
Output Variable Cost Marginal Cost Average Variable Cost
0
10
20
30
40
b. Suppose that XYZ can sell up to 40 units of output per hour at a price of $.60 per unit but
cannot even get a penny for units produced in excess of 40 units per hour. How much output
should XYZ produce each hour in order to maximize profits?
c. At what price would XYZ find it profitable to shut down its operation?
Answer:
a. See table below:

8-51
Average
Output Variable Cost Marginal Cost
Variable Cost
0 0 — —
10 1 × $5 = $5 VC/Q = $0.50 VC/Q = $5/10 = $0.50

VC/Q =
20 2 × $5 = $10 VC/Q = $10/20 = $0.50
$0.50
VC/Q =
30 3 × $5 = $15 VC/Q = $15/30 = $0.50
$0.50
VC/Q =
40 4 × $5 = $20 VC/Q = $20/40 = $0.50
$0.50
b. 40 units, since MB = $0.60 > MC = $0.50 for all units below 40, and MB = 0 for units produced in excess of
40.
c. Part (b) revealed that if the firm operates, it should produce 40 units. It should shut down if the profits from
operating are less than the profits it would earn by shutting down. The calculations are:
i. Profits if the firm operates and charges a price of P for 40 units: 40P − 300 − 20.
ii. Profits if the firm shuts down: −$300. Shut down if −$300 > 40P − 300 − 20.
iii. Solving for P gives us: "Shut down if P < $0.50."
Blooms: Analyze
Difficulty: 03 Hard
8-52

Baye 9e Chapter 08 TB

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Multiple Choice Questions

4. Which of the following is true under monopoly?

14. Which of the following is true?

26. Which of the following is true under monopoly?

31. Which of the following industries is best characterized as monopolistically competitive?

32. Which of the following is an example of monopoly?

33. Differentiated goods are a feature of a:

34. Firms have market power in:

35. There is no market supply curve in:

39. The source(s) of monopoly power for a monopoly may be:

40. Economies of scale exist whenever:

47. A linear demand function exhibits:

48. Which of the following is NOT a basic feature of a monopolistically competitive industry?

51. What contributes to the existence of multiproduct firms?

52. Which of the following is (are) basic feature(s) of a perfectly competitive industry?

60. A perfectly competitive firm faces a:

63. "Monopolistic competition is literally a kind of competition. Hence, there is no

67. Which of the following statements is NOT correct about monopoly?

70. Which of the following is true under monopoly?

73. Which of the following industries is best characterized as monopolistically competitive?

74. Differentiated goods are NOT a feature of a:

75. One of the sources of monopoly power for a monopoly may be:

80. In the long run, monopolistically competitive firms charge prices:

81. There is a market supply curve in a:

91. Suppose that a monopolistically competitive market is at the long-run equilibrium. Based

92. The first-order conditions for a monopoly to maximize profits are:

95. Which of the following is a strategy(ies) used by firms in monopolistically competitive

97. The second-order condition for a firm maximizing its profit operating in a

100. The first-order condition for a monopoly maximizing its profit is:

106. Which of the following formulas correctly measures the profit of a monopoly?

109. Which of the following is true under perfect competition?

127. Manufacturers of laundry detergent and dishwashing soap reinvest a relatively large

128. Suppose the cost function for your firm is: C = 50 + 4Q + 2Q2.

134. Would you expect an industry to be monopolistically competitive if consumers did not

b. See the accompanying figure.

146. Genentech owns a patent on tissue plasminogen activator (TPA), which is an enzyme

formula for the optimal advertising-to-sales ratio: .

10 1 × $5 = $5 VC/Q = $0.50 VC/Q = $5/10 = $0.50

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