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Managerial Economics Analysis Problems Cases 8th Edition Truett Test Bank
Managerial Economics Analysis Problems Cases 8th Edition Truett Test Bank
True-False Questions:
1. Under perfect competition, there are many small firms, and the
individual firm takes the market price as a given.
2. Under perfect competition, even though there are many small firms, the
individual firm has some influence over the market price.
3. Because there are many buyers in the market willing to pay the going
price, the firm will raise the price to increase their total revenue.
4. The perfectly competitive firm can raise the price of their product
because they are able differentiate their product from all others.
5. In a market that is characterized by free entry and exit, profit serves the
function of drawing new firms into the industry when it is greater than
normal and causing some firms to leave when it is less than normal.
6. In a market that is characterized by free entry and exit, profit serves the
function of drawing new firms into the industry when it is less than
normal and causing some firms to leave when it is greater than normal.
9. Since, over the long run, there would be no output produced if a firm's
owners did not receive at least a normal return on investment, normal
profit is considered to be a cost of production.
10. In the long run, because of the entry and exit of firms in the marketplace,
a perfectly competitive firm can expect only normal profits.
14. The demand curve of the perfectly competitive firm is equal to its
marginal revenue curve.
15. The demand curve of the perfectly competitive firm is equal to its
average revenue curve.
17. The demand curve of the perfectly competitive firm is a horizontal line.
18. Market conditions for the perfectly competitive firm can produce four
possible short-run results including normal profit, greater than normal
profit, operating loss, or cessation of operations.
21. The short-run supply curve of the perfectly competitive firm is that
portion of its marginal cost curve (SMC) which lies above AVC.
22. The short-run supply curve of the perfectly competitive firm is that
portion of its marginal cost curve (SMC) which lies between AVC and
SAC.
23. In the long run, the perfectly competitive firm will maximize profit by
adjusting plant size so that the short run average cost is equal to the long
run average cost.
24. Given that a monopoly market structure consists of only one firm, then
the market demand curve is the firm’s demand curve and there is easy
entry over the long run.
25. Even though the monopoly determines its own profit-maximizing output
and therefore the appropriate price for its product, it is still at the mercy
of market demand for its product.
26. In the short run, the monopoly firm (just like the firm under perfect
competition) can also have only normal profit, or operate at a loss.
27. In the short run, the monopoly firm (just like the firm under perfect
competition) can temporarily choose to cease production.
28. Because a monopoly is the only firm in an industry, it can never operate
at a loss.
31. The lack of entry into a monopolistic market may also lead to
inefficiency in production, since there is no assurance that the monopoly
firm's profit-maximizing output will occur in an optimum-sized plant.
3. In a market that is characterized by free entry and exit, profit serves the
function of:
a. drawing new firms into the industry when profit is
greater than normal.
b. drawing new firms into the industry when profit is
lower than normal.
c. causing some firms to leave when profit is greater
than normal.
d. causing some firms to enter when profit is lower
than normal.
e. compensating owners with a higher than normal rate
of return on investment.
4. Market conditions for the perfectly competitive firm can produce all of
the following short-run results EXCEPT:
a. greater than normal price.
b. normal profit.
c. greater than normal profit.
d. operating loss.
e. cessation of operations.
Correct Answer: A Page 351 – Profit Max Under Perfect Comp Difficulty: M
5. In the short run, a purely competitive firm can be expected to shut down
if:
a. price is less than short run average cost.
b. price is less than average variable cost.
c. price is less than average fixed cost.
d. total costs exceed total revenue.
e. short-term marginal cost is above average variable
cost.
Correct Answer: B Page 353 – Profit Max Under Perfect Comp Difficulty: M
Chapter 8 - Perfect Competition and Monopoly 203
6. Suppose that the firm has the following short run cost data and that B is
the only variable input and the price of B is fixed. Using the following
table, what is the firm’s best short run output if it has no choice but to
sell its product at the prevailing market price of $.65?
Output of X Input of B APB AVC STC
SMC MPB
0 0 --- ---
50 10 0.5 125
125 20
175 30
215 40
245 50
265 60
a. 50
b. 125
c. 175
d. 215
e. 245
7. Using the above short run cost data, find the amount of profit the firm
would make at the profit maximizing output.
a. none – the firm would shut down
b. $57.83
c. $60.25
d. –$57.83
e. –$60.25
8. Suppose that the firm has the following short run cost data and that B is
the only variable input and the price of B is fixed. Using the following
table, what is the firm’s best short run output if it has no choice but to
sell its product at the prevailing market price of $1.50?
Output of X Input of B APB AVC STC
SMC MPB
0 0 --- ---
200 2 2 900
500 4
700 6
800 8
900 10
1000 12
a. 200
b. 500
c. 700
d. 800
e. 900
9. Using the above short run cost data, find the amount of profit the firm
would make at the profit maximizing output.
a. none – the firm would shut down
b. $550.00
c. $625.00
d. –$525.00
e. –$650.00
10. Given the following data for a perfectly competitive firm, what is the
amount of profit the firm will make at the profit maximizing output?
P = MR = $100
TC = 1,000 + 125Q - .5Q2
SMC = 125 - Q
Q = units produced per month
TFC = $1000
a. none – the firm would shut down
b. $1,312.50
c. $2,548.63
d. –$1,425.86
e. –$2,351.27
15. Market conditions for a monopoly firm can produce all of the following
short-run results EXCEPT:
a. greater than market price.
b. normal profit.
c. greater than normal profit.
d. operating loss.
e. cessation of operations.
19. The following data pertains to a monopoly firm's demand and costs per
quarter. If the total fixed costs are $5,000 per quarter, what will be the
firm's maximum profit output?
Quantity Sold Unit Price Total Variable Cost
Q P TVC
0 $10.00 0
10,000 $9.00 100,000
20,000 $8.00 160,000
30,000 $7.00 200,000
40,000 $6.00 280,000
50,000 $5.00 390,000
60,000 $4.00 520,000
70,000 $3.00 670,000
80,000 $2.00 840,000
a. Q = 20,000, P = $8.00
b. Q = 30,000, P = $7.00
c. Q = 40,000, P = $6.00
d. Q = 50,000, P = $5.00
e. Q = 60,000, P = $4.00
20. Given the above data, what profit would the firm make at the profit
maximizing output?
a. $2,500
b. $5,000
c. $7,520
d. $10.000
e. None – It would shut down
21. In a monopoly, if price is greater than average variable cost but less than
short-run average cost, then:
a. the monopoly will be operating at a loss.
b. the monopoly will be operating at a profit.
c. the monopoly is in a shut down situation.
d. its operating loss is greater than total fixed cost.
e. its total revenue will be greater than total cost.
Problems:
1. Suppose that the firm has the following short-run cost data and that
B is the only variable input and that the price of B is fixed:
50 10 0.5 125
125 20
175 30
215 40
245 50
265 60
AVC =
1
(PB )
APB
At Q = 50, we have APB as :
50
APB = =5
10
and we have :
AVC = .5 =
1
(PB )
5
PB = (.5)(5) = 2.50
Chapter 8 - Perfect Competition and Monopoly 211
2. Suppose that the firm has the following short-run cost data and that B is
the only variable input and that the price of B is fixed:
200 2 2 900
500 4
700 6
800 8
900 10
1000 12
Solution:
AVC =
1
(PB )
APB
At Q = 200, we have APB as :
200
APB = = 100
2
and we have :
AVC = 2 =
1
(PB )
100
PB = (2)(100) = 200
(PB) is fixed:
Chapter 8 - Perfect Competition and Monopoly 213
P = MR = $100
TC = 1,000 + 125Q - .5Q2
SMC = 125 - Q
Where Q = units produced per month
If the firm does not operate, it will lose its $1,000 of fixed costs.
What profit or loss will the firm have if it operates where MR =
SMC? Does this profit or loss check with your decision on whether
to produce or temporarily shut down?
Solution:
Profit is maximized (or loss minimized) where MR = MC
100 = 125 - Q
Q = 25
To determine profit:
4. The following data pertains to a monopoly firm's demand and costs per
quarter.
Quantity Sold Unit Price Total Variable Cost
Q P TVC
0 $10.00 0
10,000 $9.00 100,000
20,000 $8.00 160,000
30,000 $7.00 200,000
40,000 $6.00 280,000
50,000 $5.00 390,000
60,000 $4.00 520,000
70,000 $3.00 670,000
80,000 $2.00 840,000
If the total fixed costs are $5,000 per quarter, what will be the firm's
maximum profit output? How much will profit be at this output level?
Solution:
In order to answer the question we need to compare MC and MR and in
order to do that, we must complete the following table.
P Q TR TVC
Arc MR Arc MC
10 0 0 0
9 10
9 10,000 90,000 100,000
7 6
8 20,000 160,000 160,000
5 4
7 30,000 210,000 200,000
3 8
6 40,000 240,000 280,000
1 11
5 50,000 350,000 390,000
-1 13
4 60,000 240,000 520,000
-3 15
3 70,000 210,000 670,000
-5 17
2 80,000 160,000 840,000
5. Complete the following table, assuming that the firm is in the short run
and L is the only variable input.
TC AFC AVC APL Input of L TPL = Output
MPL SMC
--- --- --- 0 0
20
1140 45 12 1 20
36 6.67
8.57 2 56
7.5 3 96
8.57 28 4
8
7.5 5 120
6 40
7.14 11.43 21 6
Solution:
TC AFC AVC APL Input of L TPL = Output
MPL SMC
900 --- --- --- 0 0
20 12
1140 45 12 20 1 20
36 6.67
1380 16.07 8.57 28 2 56
40 6
1620 9.38 7.5 32 3 96
16 15
1860 8.04 8.57 28 4 112
8 30
2100 7.5 10 24 5 120
6 40
2340 7.14 11.43 21 6 126
a. Profit maximizing output level is 112, since beyond this point SMC
> MR.
b. T = TR - TC = P x Q - TC = 25(112) - 1860 = 2800 - 1860 =
940
Maximum profit is $940.
218 Chapter 8 - Perfect Competition and Monopoly
6. Complete the following table, assuming that the firm is in the short run
and L is the only variable input.
TC AFC AVC APL Input of L TPL = Output
MPL SMC
--- --- --- 0 0
100
2200 6 5 2 200
180 2.78
3.57 4 560
3.13 6 960
3.57 140 8
40
1 10 1200
30 16.67
0.95 4.76 105 12
a. Profit maximizing output level is 960, since beyond this point SMC
> MR.
Chapter 8 - Perfect Competition and Monopoly 219
3. Complete the revenue and cost data in the following table, assuming
that the firm is a monopoly that has been allowed to set its own price
for its home monitoring service. (Q refers to the number of consumers,
and the revenue and cost data are per month.)
P Q TR STC AVC TVC
MR MC
12 1200 300
a. What output and price will the firm choose? Explain why,
relating your answer to the general condition for profit
maximization.
b. How much profit will the firm have at its maximum?
Solution:
P Q TR STC AVC TVC
MR MC
12 100 1200 700 3 300
9 1
11 150 1650 750 2.33 350
7 2
10 200 2000 850 2.25 450
5 3
9 250 2250 1000 2.4 600
3 4
8 300 2400 1200 2.67 800
1 5
7 350 2450 1450 3 1050
-1 6
6 400 2400 1750 3.38 1350
220 Chapter 8 - Perfect Competition and Monopoly
b. To determine profit:
At 250 units per month of output:
T = TR - TC = 2250 - 1000 = 1250
Monthly profit would be $1,250
7. Ralph Quarry has the only company in Laredo, Texas that makes pea gravel.
He believes that pea gravel batching and delivery costs can be viewed as
constant at $15 per ton sold. If he estimates the monthly demand in his
market area to be given by the demand curve Q = 500 - 10P, so that MR =
50 - .2Q:
b. To find price,
Q = 500 - 10P
10P = 500 - Q
P = 50 - .1Q
At Q = 175, P = 50 - .1(175) = 50 - 17.5 = 32.5
P = $100
TC = 1,000 + 125Q - .5Q2
Where:
Q = units produced per month
If the firm does not operate, it will lose its $1,000 of fixed costs. What
profit or loss will the firm have if it operates where MR = SMC? Does
this profit or loss check with your decision on whether to produce or
temporarily shut down?
Solution:
T = TR − TC = P Q − TC
T = 100Q − (1000 + 125Q − .5Q 2 )
T = 100Q − 1000 − 125Q + .5Q 2
T = −1000 − 25Q + .5Q 2
dT
= −25 + Q
dQ
− 25 + Q = 0
Q = 25
Alternatively:
To determine profit:
T = TR − TC = P Q − TC
T = 100(25) − 100 + 125(25) − .5(25) 2
T = 2500 − (1000 + 3125 − 312.5)
T = 2500 − 3812.5
T = −1312.5
Solution:
T = TR − TC = P Q − TC
T = 300Q − (500 − 250Q + 12.5Q 2 )
T = 300Q − 5000 + 250Q − 12.5Q 2
T = −5000 + 550Q − 12.5Q 2
dT
= 550 − 25Q
dQ
550 − 25Q = 0
− 25Q = −550
Q = 22
Alternatively:
P = MR = 300
dTC
MC = SMC = = −250 + 25Q
dQ
300 = −250 + 25Q
− 25Q = −550
Q = 22
TC = 100 + 100 Q + 5Q 2 + 13 Q 3
then, what is the firm's profit maximizing output?
− Q − 20 = 0
Q − 10 = 0
− Q = 20
Q = 10
Q = −10
No economic meaning
Profit is maximized where output is equal to 10 units per time period.
b. From Part a:
T = −100 + 200Q − 5Q 2 − 13 Q 3
T = −1000 + 200(10) − 5(10) 2 − 13 (10) 3
T = −1000 + 2000 − 500 − 333.33
T = 2000 − 1833.33
T = 166.67 or profit = $166.67
Chapter 8 - Perfect Competition and Monopoly 225
If this function remains stable, what will be the long-run price for
the firm's product?
Solution:
LTC
LAC = = 54 − 2.4Q + .03Q 2
Q
5. The following demand curve has been estimated for a monopoly firm:
Q = 1000 - 10P
where Q is the quantity sold per month and P is the price charged
by the firm. If the marginal cost of the firm is constant at $40.00
per unit, at what price and quantity will the firm maximize profits?
Solution:
Profit is maximized where MR = MC
MC = 40
dTR
MR =
dQ
TR = P Q
Q = 1000 − 10 P
10 P = 1000 − Q
P = 100 − .10Q
TR = (100 − .10Q)Q
TR = 100Q − .10Q 2
dTR
MR = = 100 − .20Q
dQ
100 − .2Q = 40
− .2Q = −60
Q = 300
6. The following demand curve has been estimated for a monopoly firm:
Q = 6680 - 0.4P
where Q is the quantity sold per month and P is the price charged
by the firm.
MR = dTR/dQ TR = PxQ
Q = 6680 - .4P
.4P = 6680 - Q
P = 16700 - 2.5Q
TR = (16700 - 2.5Q)Q
= 16700Q - 2.5Q2
MR = dTR/dQ = 16700 - 5Q
therefore:
16700 - 5Q = 2000 - 11Q + 6Q2
-6Q2 + 6Q + 14700 = 0
Dividing by 6:
-Q2 + Q + 2450 = 0
-Q + 50 = 0 Q + 49 = 0
Q = 50
AUTHOR'S NOTE: At this point the students who are not the
world's best factorers will use the quadratic equation. Rather
than stare at the problem for the entire class period, I
encourage them to use the quadratic when they do not quickly
see a factor solution. Only one or two students a semester will
factor this correctly. However, most students who use the
quadratic will reach a correct solution in a very short time.
The quadratic solution is detailed below.
Chapter 8 - Perfect Competition and Monopoly 229
− 6Q 2 + 6Q + 14700 = 0
− b b 2 − 4ac
Q=
2a
− 6 (−6) 2 − 4(−6)(14700)
Q=
2(−6)
− 6 36 − 352800
Q=
− 12
− 6 352836
Q=
− 12
− 6 594
Q=
− 12
588
Q= = −49 no economic meaning
− 12
− 600
Q= = 50
− 12
To find price at 50 units of output: