Managerial Economics Analysis Problems Cases 8th Edition Truett Test Bank

Managerial Economics Analysis
Problems Cases 8th Edition Truett Test

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Chapter 8 – Perfect Competition and Monopoly:
The Limiting Cases
True-False Questions:
1. Under perfect competition, there are many small firms, and the
individual firm takes the market price as a given.
True Page 347 – Perfect Competition Difficulty: E
2. Under perfect competition, even though there are many small firms, the
individual firm has some influence over the market price.
False Page 347 – Perfect Competition Difficulty: E
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.
True Page 347 – Function of Profit Difficulty: E
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.
False Page 347 – Function of Profit Difficulty: M

Chapter 8 - Perfect Competition and Monopoly 197
7. In a market that is characterized by free entry, profit serves the function

of drawing new firms into the industry when it is greater than normal.
8. In a market that is characterized by free exit, profit serves the function of

causing some firms to leave when it is less 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.
True Page 348 – Normal Profit Difficulty: M
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.
True Page 348 – Normal Profit Difficulty: M
11. The demand curve for the homogeneous product of a perfectly

competitive industry is determined by the preferences of consumers.
True Page 348 – Market Demand Difficulty: E
12. An equilibrium price is one that equates quantity demanded in a market

with quantity supplied so that there is no surplus or shortage of the
product traded.
True Page 349 – Market Demand Difficulty: M
13. As long as the output of an individual firm in a perfectly competitive

market is very small with respect to the total industry market for the
product, the individual firm has no control over the price it charges for
its product.
True Page 350 –Demand of the Firm Difficulty: M

198 Chapter 8 - Perfect Competition and Monopoly
14. The demand curve of the perfectly competitive firm is equal to its
marginal revenue curve.
True Page 350 –Demand of the Firm Difficulty: M
15. The demand curve of the perfectly competitive firm is equal to its
average revenue curve.
True Page 350 – Demand of the Firm Difficulty: M
16. The demand curve of the perfectly competitive firm is a straight

horizontal line at the market price of its product, and this price, Pe, is the
industry equilibrium price.
True Page 350 – Demand of the Firm Difficulty: M
17. The demand curve of the perfectly competitive firm is a horizontal line.
True Page 350 – Demand of the Firm Difficulty: E
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.
True Page 351 – Profit Maximization Difficulty: M
19. In the short run, as long as SMC = MR = P, if price is greater than

average variable cost, the firm should continue to operate.
True Page 353 – Profit Maximization Difficulty: E
20. In the short run, as long as SMC = MR = P, if price is greater than

average variable cost, the firm should shut down.
False Page 353 – Profit Maximization Difficulty: E
21. The short-run supply curve of the perfectly competitive firm is that
portion of its marginal cost curve (SMC) which lies above AVC.
True Page 353 – Short Run Supply Curve Difficulty: E

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.
False Page 353 – Short Run Supply Curve Difficulty: M
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.
True Page 355 – Long Run Under Perfect Comp. Difficulty: M
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.
False Page 359 – Monopoly Difficulty: E
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.
True Page 359 – Monopoly Difficulty: D
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.
False Page 361 – Profit Maximization Difficulty: M

29. A monopoly would never be in a shut down situation like a firm in as

purely competitive market.
False Page 361 – Profit Maximization Difficulty: M
30. In the absence of government regulation, a monopoly firm can

indefinitely sustain greater than normal profits.
True Page 361 – Monopoly in the Long Run Difficulty: M
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.
True Page 362 – Monopoly in the Long Run Difficulty: D

Multiple Choice Questions:

1. Which of the following is NOT a condition of a perfectly competitive
market?
a. A very large number of buyers and sellers.
b. The products are homogeneous.
c. All buyers and sellers have perfect knowledge of
market conditions and of any changes in the market
conditions that occur.
d. Firms are able to get together and effectively agree
on restricting quantity supplied and raising prices.
e. There are no artificial interferences with the
activities of the buyers and sellers.
Correct Answer: D Page 347 – Perfect Competition Difficulty: M
2. As long as the output of an individual firm in a perfectly competitive

market is very small with respect to the total market for the product:
a. each individual firm can change price only by a
small degree.
b. each individual firm sells a slightly differentiated
product.
c. each individual firm takes the price as a "given".
d. firms are able to get together and effectively agree
on restricting quantity supplied and raising prices.
e. depending on market conditions, the "given" price
may be above or below the industry equilibrium
price.
Correct Answer: C Page 347 – Perfect Competition Difficulty: M

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.
Correct Answer: A Page 347 – Perfect Competition Difficulty: E
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
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
Correct Answer: B Page 353 – Profit Maximization Difficulty: D
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
Correct Answer: E Page 353 – Profit Maximization Difficulty: M

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?
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.
b. $550.00
c. $625.00
d. –$525.00
e. –$650.00
Correct Answer: A Page 353 – Profit Maximization Difficulty: M

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
b. $1,312.50
c. $2,548.63
d. –$1,425.86
e. –$2,351.27
Correct Answer: A Page 353 – Profit Maximization Difficulty: M
11. The short-run supply curve of the perfectly competitive firm:

a. is that portion of its marginal cost curve (SMC)
which lies above AVC.
b. is that portion of its marginal cost curve (SMC)
which lies between AVC and SAC
c. is that portion of its marginal cost curve (SMC)
which lies below AVC.
d. is that portion of its marginal cost curve (SMC)
which lies above the intersection of MR and SMC.
e. is that portion of its marginal cost curve (SMC)
which lies between AVC and the intersection of MR
and SMC.
Correct Answer: A Page 353 – Short Run Supply Curve Difficulty: E
12. A monopoly has all of the following feature(s) EXCEPT:

a. a product that is duplicated by other firms.
b. the market demand curve is the firm's demand curve.
c. entry is effectively blocked over the long run.
d. a single seller for the market's product.
e. a product not duplicated by other firms.
Correct Answer: A Page 359 – Monopoly Difficulty: M

13. The monopoly determines its own profit-maximizing output and

therefore the appropriate price for its product:
a. however, it is still at the mercy of market demand
for its product.
b. and can virtually ignore the market demand for its
product.
c. thus, it is guaranteed to make a greater than normal
profit.
d. thus, it is guaranteed to make a normal profit.
e. thus, it is guaranteed, even in the short run, to never
sustain a loss.
Correct Answer: A Page 359 – Monopoly Difficulty: D
14. A monopoly in the short run will try to produce where:

a. revenue is maximized.
b. costs are minimized.
c. marginal revenue is greater than marginal cost.
d. marginal revenue is equal to marginal cost as long as
price is greater than average variable cost.
e. marginal revenue is equal to marginal cost as long as
price is greater than short run average cost.
Correct Answer: D Page 361 – Short Run Monopoly Difficulty: M
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.
Correct Answer: A Page 361 – Short Run Monopoly Difficulty: E

16. If a monopoly is producing with a normal profit, then:

a. it will be operating at a point where its long run
average cost will be at a minimum.
b. it will be operating at a point that lies on the falling
portion of long run average cost.
c. it will be operating at a point where its long run
average cost will be increasing.
d. it will be operating at a point where its short run
average cost will be at a minimum.
e. it will be operating at a point where its marginal
revenue will exceed its marginal cost.
Correct Answer: B Page 363 – Long Run Monopoly Difficulty: M
17. In a monopoly, if price is lower than average variable 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 fixed cost.
Correct Answer: C Page 361 – Long Run Monopoly Difficulty: M
18. In the absence of government regulation:

a. a monopoly firm can indefinitely sustain greater
than normal profits.
b. a monopoly firm can sustain only normal profits.
c. a monopoly firm will not, even in the short run,
sustain a loss.
d. a monopoly firm will not, even in the short run, be
forced into a temporary shut down situation.
e. if a monopoly firm remains in business over the
long run, it can not be expected to have at least
normal profits.
Correct Answer: A Page 361 – Long Run Monopoly Difficulty: M

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
Correct Answer: B Page 361 – Profit Maximization Difficulty: M
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.
Correct Answer: A Page 362 – Long Run Monopoly Difficulty: D

22. If a monopoly produces where marginal revenue is equal to marginal

cost then:
a. if short run average cost is less than price, the
monopoly will have a normal profit.
b. if short run average cost is equal to price, the
c. the monopoly is guaranteed to make a normal
profit.
d. if short run average cost is greater than price, the
e. if average variable cost is greater than price, the
monopoly will have be operating at a loss.
Correct Answer: B Page 362 – Long Run Monopoly Difficulty: D

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:

SMC MPB
0 0 --- ---
50 10 0.5 125
125 20
175 30
215 40
245 50
265 60
a. Complete the table.

b. Find the firm's best short-run output if it has no choice but
to sell its product at the prevailing market price of $.65
Solution:
a. Given that B is the only variable input and the price of B
(PB) is fixed:
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
At that same output, we can solve for total variable cost

since:
TVC = B( PB ) = (10)(2.5) = 25.00
TFC = STC − TVC = 125 − 25 = 100
We can now complete the table as follows:

SMC MPB
0 0 --- --- 100
0.5 5
50 10 5 0.5 125
0.33 7.5
125 20 6.25 0.4 150
0.5 5
175 30 5.83 0.43 175
0.63 4
215 40 5.38 0.47 200
0.83 3
245 50 4.9 0.51 225
1.25 2
265 60 4.42 0.57 250
b. It would be best for the firm to operate at an output of 215.

If it increased its output to 245, MC > MR, or .83 > .65, and
marginal profit would be negative.
To determine profit at Q = 215:

T = TR − TC = P  Q − TC
T = 215 (.65) − 200
T = 139 .75 − 200
T = −60 .25
Profit at the profit maximizing output is a loss of $ 60.25.

However, the firms should continue to operate in the short
run, since TFC = $100, or alternately since price is greater
than average variable cost (.65 > .47).
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:

SMC MPB
0 0 --- ---
200 2 2 900
500 4
700 6
800 8
900 10
1000 12
a. Complete the table.

b. Find the firm's best short-run if it has no choice but to sell
its product at the prevailing market price of $1.50.
Solution:
a. Given that B is the only variable input and the price of B
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:
At that same output, we can solve for total variable cost

since:
TVC = B( PB ) = (200)(2) = 400
TFC = STC − TVC = 900 − 400 = 500
We can now complete the table as follows:

SMC MPB
0 0 --- --- 500
2 100
200 2 100 2 900
1.33 150
500 4 125 1.6 1300
2 100
700 6 116.67 1.71 1700
2.67 75
800 8 106.25 1.88 2100
4 50
900 10 95 2.11 2500
5 25
1000 12 83.33 2.9 2900
b. It would be best for the firm to operate at an output of 500.

If it increased its output to 700, MC > MR, or 2.00 > 1.50,
and marginal profit would be negative.
To determine profit at Q = 500:

T = TR − TC = P  Q − TC
T = 500 (1.5) − 1300
T = 750 − 1300
T = −550
Profit at the profit maximizing output is a loss of $ 550.00.

However, because the loss exceeds the fixed cost, the firm
would be losing less money if it shut down and paid just its
fixed costs. Or, alternately, the firm should shut down
because price is less than average variable cost (1.50 <
1.60).
3. Determine whether the following perfectly competitive firm should

produce output in the short run or temporarily shut down, given:
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
P = MR = 100 MC = SMC = 125 - Q
100 = 125 - Q
Q = 25
AVC = TVC/Q = (125Q -.5Q2)/Q = 125 - .5Q
At the profit maximizing output level of 25 units per month:
AVC = 125 - .5(25) = 125 - 12.5 = 112.5
As MR of $100 is below AVC of $112.5 at the profit maximizing

output level of 25 units per month, the firm should shut down.
To determine profit:
T = TR - TC = PxQ - TC = 100(25) - [1000 + 125(25) -.5(25)2]

= 2500 -(1000 + 3125 - 312.5)
= 2500 - 3812.5 = -1,312.5
Profit at the profit maximizing output is a loss of $1,312.5. Yes,

this is in keeping with our previous decision because the loss
exceeds the fixed cost, and therefore the firm would be losing less
money if it shut down and paid just its fixed costs.
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
The firm will maximize profit by producing as close to the point

where MR = MC but MR is not less than MC. This point is where
Q = 30,000 units and P = $7.00.
Total profit = TR - TC = TR - (fixed + variable cost)

= $210,000 - ($200,000 + $5,000)

= $210,000 - $205,000 = $5,000
Profit is $5,000 per quarter.
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
Assuming that the firm operates in a perfectly competitive market and

faces a market price of $25 per unit for its product, answer the
following:
a. At which of the outputs in the table will it have greatest profit

(lowest loss)?
b. How much will that profit (loss) be?

Solution:
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.
6. Complete the following table, assuming that the firm is in the short run
and L is the only variable input.
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
Assuming that the firm operates in a perfectly competitive market and

faces a market price of $6 per unit for its product, answer the following:
a. At which of the outputs in the table will it have greatest profit

(lowest loss)?
b. How much will that profit (loss) be?
Solution:
MPL SMC
1200 --- --- --- 0 0
100 5
2200 6 5 100 2 200
180 2.78
3200 2.14 3.57 140 4 560
200 2.5
14200 1.25 3.13 160 6 960
80 6.25
4200 1.07 3.57 140 8 1120
40 12.5
6200 1 4.17 120 10 1200
30 16.67
7200 0.95 4.76 105 12 1260
a. Profit maximizing output level is 960, since beyond this point SMC
> MR.
b. T = TR - TC = PxQ - TC = 10(960) - 4200 = 9600 - 4200 = 5400

Maximum profit is $5,400
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
11 150 750 350
200 2000 850 2.25

3
9 250 1000
4
8 2400
5
350 2450 3
6 400 1750 1350
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
a. The firm would seek to produce at 250 customers per month

at a price of $9.00 each. Increasing production to 300
customers per month would decrease profit since for this
change, marginal cost of $4.00 would be greater than
marginal revenue of $3.00.
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:
a. How many tons of pea gravel should he sell per month?

b. What price should he charge per ton and how much will his
total monthly profit contribution from pea gravel sales?
Solution:
a. Profit maximized where MR = MC
50 - .2Q = 15
-.2Q = -35
Q = 175
He should sell 175 tons per month.
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
The price per ton of pea gravel should be $32.50
Profit contribution is:

(P - AVC)Q = (32.50 - 15)175 = 17.5(175) = 3,062.5
Profit contribution would be $3,062.50 per month.
Problems Requiring Calculus:

1. Determine whether the following perfectly competitive firm should
produce output in the short run or temporarily shut down, given:
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

To determine profit at 25 units of output per month:

TVC .5Q 2
T = −1000 − 25Q + .5Q 2 AVC = = 125Q −
Q Q
T = −1000 − 25(25) + .5(25) 2
AVC = 125 − .5Q
T = −1000 − 625 + 312.5
AVC = 125 − .5(25)
T = −1312.5
AVC = 125 − 12.5
AVC = 112.5

Alternatively:
Profit is maximized (or loss minimized) where MR = MC

P = MR = 100 TVC
AVC =
dTC Q
MC = SMC = = 125 − Q
dQ (125Q − .5Q 2 )
AVC =
100 = 125 − Q Q
Q = 25 AVC = 125 − .5Q
AVC = 125 − .5(25)
AVC = 125 − 12.5
AVC = 112.5

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

2. Suppose that a firm is operating under highly competitive market

conditions and that the going price for its product is P = $300. If the
firm's short run total cost function is:
STC = 5000 - 250Q + 12.5Q2
then what is the firm's profit maximizing output?
Solution:
Profit is maximized where dT/dQ = 0
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
Profit is maximized at an output level of 22 units per time period.
Alternatively:
Profit is maximized where MR = MC
P = MR = 300
dTC
MC = SMC = = −250 + 25Q
dQ
300 = −250 + 25Q
− 25Q = −550
Q = 22
Profit is maximized at an output level of 22 units per time period.

3. Suppose that a firm is operating under highly competitive market

conditions and that the going price for its product is P = $300.
a. If the firm's short run total cost function is:
TC = 100 + 100 Q + 5Q 2 + 13 Q 3
then, what is the firm's profit maximizing output?
b. At the level of output obtained in part a, how much profit

will the firm have?
Solution:
a.
Profit is maximized where M = 0
T = TR − TC = P  Q − TC
(
T = 300Q − 100 + 100Q + 5Q 2 + 13 Q 3 )
T = 300Q − 1000 − 100Q − 5Q 2 − 13 Q 3
T = −100 + 200Q − 5Q 2 − 13 Q 3
d
M = = 200 − 10Q − Q 2
dQ
200 − 10Q − Q 2 = 0
− Q 2 − 10Q + 200 = 0
(−Q − 20)(Q − 10) = 0
− 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
4. Suppose that a typical firm in a perfectly competitive industry has the

following long run total cost function:
LTC
LAC = = 54Q − 2.4Q 2 + .03Q 3
Q
If this function remains stable, what will be the long-run price for
the firm's product?
Solution:
The long-run equilibrium price will be where P = minimum LAC
LTC
LAC = = 54 − 2.4Q + .03Q 2
Q
We find minimum LAC where:

dLAC
= −2.4 + .06Q
dQ
− 2.4 + .06Q = 0
.06Q = 2.4
Q = 40
LAC = 54 − 2.4(40) + .03(40) 2
LAC = 54 − 96 + 48
LAC = 6
The long-run price for the firm's product will be $6.00

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:
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
To find price at 300 units of output:
P = 100 - .1Q = 100 - .1(300) = 100 - 30 = 70
Profit is maximized at a price of $70.00 per unit and an output level

of 300 units per time period.
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.
The firm has the following total cost function:
TC = 200,000 + 2000Q - 5.5Q2 + 2Q3
At what price and quantity will the firm maximize profits?

Solution:
MC = dTC/dQ = 2000 - 11Q + 6Q2
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
(SEE AUTHOR'S NOTE BELOW)

Dividing by 6:
-Q2 + Q + 2450 = 0
(-Q + 50)(Q + 49) = 0
-Q + 50 = 0 Q + 49 = 0
-Q = -50 Q = -49 (no economic meaning)
Q = 50
P = 16700 - 2.5Q = 16700 - 2.5(50) = 16700 - 125 = 16575
Profit is maximized at a price of $16,575 per unit and an output

level of 50 units per time period.
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.
− 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
P = 16700 - 2.5Q = 16700 - 2.5(50) = 16700 - 125 = 16575
Profit is maximized at a price of $16,575 per unit and an output

level of 50 units per time period.

Managerial Economics Analysis Problems Cases 8th Edition Truett Test Bank

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Managerial Economics Analysis Problems Cases 8th Edition Truett Test Bank

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Managerial Economics Analysis

Problems Cases 8th Edition Truett Test

True Page 347 – Perfect Competition Difficulty: E

False Page 347 – Perfect Competition Difficulty: E

False Page 347 – Perfect Competition Difficulty: E

False Page 347 – Perfect Competition Difficulty: E

True Page 347 – Function of Profit Difficulty: E

False Page 347 – Function of Profit Difficulty: M

7. In a market that is characterized by free entry, profit serves the function

True Page 347 – Function of Profit Difficulty: E

8. In a market that is characterized by free exit, profit serves the function of

True Page 348 – Function of Profit Difficulty: E

True Page 348 – Normal Profit Difficulty: M

True Page 348 – Normal Profit Difficulty: M

11. The demand curve for the homogeneous product of a perfectly

True Page 348 – Market Demand Difficulty: E

12. An equilibrium price is one that equates quantity demanded in a market

True Page 349 – Market Demand Difficulty: M

13. As long as the output of an individual firm in a perfectly competitive

True Page 350 –Demand of the Firm Difficulty: M

True Page 350 –Demand of the Firm Difficulty: M

True Page 350 – Demand of the Firm Difficulty: M

16. The demand curve of the perfectly competitive firm is a straight

True Page 350 – Demand of the Firm Difficulty: M

True Page 350 – Demand of the Firm Difficulty: E

True Page 351 – Profit Maximization Difficulty: M

19. In the short run, as long as SMC = MR = P, if price is greater than

True Page 353 – Profit Maximization Difficulty: E

20. In the short run, as long as SMC = MR = P, if price is greater than

False Page 353 – Profit Maximization Difficulty: E

True Page 353 – Short Run Supply Curve Difficulty: E

False Page 353 – Short Run Supply Curve Difficulty: M

True Page 355 – Long Run Under Perfect Comp. Difficulty: M

False Page 359 – Monopoly Difficulty: E

True Page 359 – Monopoly Difficulty: D

True Page 361 – Profit Maximization Difficulty: E

True Page 361 – Profit Maximization Difficulty: E

False Page 361 – Profit Maximization Difficulty: M

29. A monopoly would never be in a shut down situation like a firm in as

False Page 361 – Profit Maximization Difficulty: M

30. In the absence of government regulation, a monopoly firm can

True Page 361 – Monopoly in the Long Run Difficulty: M

True Page 362 – Monopoly in the Long Run Difficulty: D

Multiple Choice Questions:

Correct Answer: D Page 347 – Perfect Competition Difficulty: M

2. As long as the output of an individual firm in a perfectly competitive

Correct Answer: C Page 347 – Perfect Competition Difficulty: M

Correct Answer: A Page 347 – Perfect Competition Difficulty: E

Correct Answer: B Page 353 – Profit Maximization Difficulty: D

Correct Answer: E Page 353 – Profit Maximization Difficulty: M

Correct Answer: B Page 353 – Profit Maximization Difficulty: D

Correct Answer: A Page 353 – Profit Maximization Difficulty: M

Correct Answer: A Page 353 – Profit Maximization Difficulty: M

11. The short-run supply curve of the perfectly competitive firm:

Correct Answer: A Page 353 – Short Run Supply Curve Difficulty: E

12. A monopoly has all of the following feature(s) EXCEPT:

Correct Answer: A Page 359 – Monopoly Difficulty: M

13. The monopoly determines its own profit-maximizing output and

Correct Answer: A Page 359 – Monopoly Difficulty: D

14. A monopoly in the short run will try to produce where:

Correct Answer: D Page 361 – Short Run Monopoly Difficulty: M

Correct Answer: A Page 361 – Short Run Monopoly Difficulty: E

16. If a monopoly is producing with a normal profit, then:

Correct Answer: B Page 363 – Long Run Monopoly Difficulty: M