FA1314 Class Exercises

Week 7

Part 1: Multiple-Choice Questions

1. A "price taker" is a firm that ___________________.

A. sells a differentiated product
B. can raise the price of the product it sells and still sell some units of its product
C. does have the ability, although limited, to control the price of the product it sells
D. does not have the ability to control the price of the product it sells

2. A perfectly competitive firm faces a ___________________ demand curve.

A. unit-elastic C. perfectly elastic
B. downward-sloping D. perfectly inelastic

3. The perfectly competitive firm will generally produce at the point where
___________________ in order to maximise their profit.
MC=MR
A. marginal cost equals marginal revenue
B. average total cost is at a minimum RM2 RM3
C. average variable cost is at a minimum P VS ATC
D. average fixed cost is at a minimum

4. In the short run, the best strategy for a perfectly competitive firm is to ___________________.
A. shut down its operation if price ever falls below average total cost
B. shut down its operation if price falls between average total cost and average variable
cost
C. produce and sell its product as long as price is greater than average variable cost
D. none of the above P>ATC

5. In short-run equilibrium, the perfectly competitive firm may be making

___________________ economic profits.
A. zero C. positive Breakeven= TC=AC
B. negative D. any of the above

6. Which of the following statements about a perfectly competitive firm is necessarily FALSE?
A. There are few complements to the firm's product.
B. There are few substitutes for the firm's product.
C. The firm equalises marginal revenue and marginal cost.
D. The firm sells a product that is identical in the eyes of buyers to any other product
sold in the industry.

7. Consider the following data: equilibrium price = RM10, quantity of output produced = 100
units, average total cost = RM8, and average variable cost = RM7. What will the firm do and
why?
A. Continue to produce in the short run, because price is greater than average variable
cost.
P=10 P greater than AVC
AVC=7
 B. Continue to produce in the short run, because firms are always stuck with having to
produce in the short run.
C. Shut down in the short run, because it is taking a loss of RM200.
D. Shut down in the short run, because average variable cost is less than average total
cost.

8. Which of the following statements is NOT an assumption made on perfect competition?

A. There are many sellers and buyers.
B. Buyers and sellers have all relevant information with respect to prices, product quality
and sources of supply.
C. There is easy entry and exit. identical
D. Each firm produces and sells a differentiated product.

MC=MR P=MR
9. The profit maximising output level for a perfectly competitive firm is always where
_________________.
A. P = MC C. MC = ATC
B. P = AVC D. MC = AVC

10. In a perfectly competitive market, firm Y that raises its price when its competitors do not, as
a result, firm Y _________________.
A. gains market share
B. sells no goods
C. must have a differentiated product
D. must have a relatively high cost and therefore must raise price to compensate

11. The marginal revenue curve of a perfectly competitive firm _________________.

A. is horizontal at the market price
B. lies below the firm’s demand curve
C. increases at an increasing rate as output expands
D. is downwards sloping as price must be reduced to sell more output

12. A perfectively competitive firm will shut down when price is below the minimum of a(n)
_________________.
A. marginal cost curve
B. average total cost curve P<AVC
C. average fixed cost curve
D. average variable cost curve

13. A monopolist demand curve is _____________________.

A. unitary elastic
B. perfectly elastic One seller in market
C. perfectly inelastic
D. identical to the industry demand curve
14. At the price of RM20, a monopoly firm’s marginal revenue and marginal cost is equal to 10
units of output. At the same output, the price on the demand curve and average total cost is
RM25 and RM21 respectively. Thus, the total profit is ___________________.
A. RM20
B. RM40 P=20
C. RM210 Produce=10 units
D. RM250 TR-TC=P
RM250-RM210=RM40

15. An industry with a large number of firms, differentiated products, and free entry and exit is
called _____________.
A. perfect competition C. oligopoly firms
B. monopolistic competition D. monopoly

16. In monopolistic competition, the price is determined by the _____________.

A. buyer C. market
B. seller D. government

17. Monopolistic competition means ________________ producing ________________ goods.

A. few firms; standardized
B. few firms; differentiated
C. many firms; standardized
D. many firms; differentiated

18. Which of the following statements is FALSE?

A. The monopolistic competitor is a price taker.
B. The monopolistic competitor faces a downward sloping demand curve.
C. The monopolistic competitor produces a product that differs slightly from the
products of other firms in the industry.
D. The monopolistic competitor produces an output at which price is greater than
marginal cost.

19. The demand curve facing a monopolistic competitor seller will be _____________ than the
demand curve facing a perfectly competitive firm, because the price elasticity of demand for
the monopolistic competitor firm's product is _____________ than that for the perfectly
competitive firm.
A. steeper; greater C. steeper; less
B. flatter; greater D. flatter; less

20. Which of the following is the best example of a monopoly?

A. A local power utility. C. A departmental store.
B. A fast-food restaurant. D. A wheat farmer.
21. Suppose Firm X is a monopolist and is receiving positive economic profits. What prevents
other firms from directly competing away the profits?
A. High barriers to entry. C. Low barriers to entry.
B. Antitrust laws. D. Diseconomies of scale.

22. Which of the following is NOT a potential barrier to entry for a monopolist?
A. Economies of scale. C. Exclusive ownership of an input.
B. Discrimination. D. Copyright.

23. For a monopoly, the profit maximisation point is where_______________.

A. average total cost (ATC) equal to demand curve
B. marginal revenue (MR) equal to demand curve
C. marginal revenue (MR) equal to marginal cost (MC)
D. marginal revenue (MR) equal to average total cost (ATC)

24. When a firm charges each customer the maximum price that the customer is willing to pay,
the firm is _______________.
A. engaging in third degree price discrimination
B. engaging in second degree price discrimination
C. engaging in perfect price discrimination
D. None of the above

25. Which of the following should NOT be considered price discrimination?

A. The issuing of discount tickets to week-end travellers.
B. Airlines offering super-saver fares to everyone.
C. Movies offering cheap midnight show.
D. Senior citizen's discounts.
 Part 2: Essay Questions

1. What is the shape of the demand curve faced by a perfectly competitive firm? Why?
In perfect competition, the seller faces a horizontal demand curve at the equilibrium market price.
-If a perfect competitive seller tries to charge a price above the market-determined equilibrium price, no one will purchase, no one will
purchase from him.
-The seller also has no incentive to charge a lower price than the equilibrium price because it can sell all it wants at the
market-determined equilibrium price.
This is because:
1)he is selling a homogeneous product,
2)his supply is small in relation to the total market supply,and
2. The following diagram shows a profit-maximizing firm in monopolistically competitive market.

(a) Identify the profit-maximizing output and price

output=10
Price= RM15
MC=MR

(b) Calculate the total revenue and total cost at the equilibrium output.
total revenue= 10x RM15=RM150
Total cost= 10x RM13=RM130

(c) Find the amount of profit.

Profit= TR-TC=RM150-RM130=RM20

(d) Is this a long-run equilibrium or short-run equilibrium? Justify.

Short-run
because in long run their can't make profit

This is a short-run equilibrium because the firm is earning economic profit. A monopolistic firm will not earn economic profit
but only break even in the long-run (Breakeven=>TR=TC)
 Berbezaan can write side by side
3. Distinguish the demand curves faced by a perfectly competitive firm and a monopolistic competitive
firm.

4. Complete the below table.

Characteristics Perfect Monopoly Monopolistic Oligopoly

Competition Competition
Number of sellers
Large One Many Few

Types of products Homogenous/ unique/ Differentiated Homogenous/

identical no close substitute Differentiated

Entry barriers
No/ Low Low High
Very high

Control over
Less Some
price None More

Profit
MR=MC MR=MC MR=MC
maximisation MR=MC

Short-run Economic loss, Economic loss, Economic loss,

Economic loss,
equilibrium economic profit or economic profit or
economic profit or economic profit or
breakeven breakeven breakeven
breakeven
Long-run
Breakeven due to Economic profit due Breakeven due to Economic profit due
equilibrium free entry and exit free entry and exit to barriers to entry
to barriers to entry

Examples Maxis, digit

Apple , orange, TNB, Indal water , celcom
vegetable