Part I

Multiple choice questions

1. In a perfectly competitive market, how many sellers are there? a. One b. Few c.
Many d. None
2. What is a characteristic of a perfectly competitive market? a. Product differentiation
b. Barriers to entry c. Homogeneous products d. Monopoly power
3. In a perfectly competitive market, what is the degree of control over the price by an
individual firm? a. Complete control b. Limited control c. No control d. Variable control
4. What is the demand curve faced by a firm in a perfectly competitive market? a.
Downward-sloping b. Upward-sloping c. Horizontal d. Vertical
5. How does a firm maximize profit in a perfectly competitive market in the short run?
a. By producing where marginal cost equals marginal revenue b. By producing where
average total cost is minimized c. By producing where marginal cost is minimized d. By
producing where total revenue is maximized
6. In a pure monopoly, how many sellers dominate the entire market? a. Many b. Few
c. One d. None
7. What is the key characteristic of a pure monopoly? a. Homogeneous products b.
Product differentiation c. Barriers to entry d. Perfect competition
8. How does a monopolist determine the price of its product? a. Set by market forces b.
Determined by industry standards c. It is equal to marginal cost d. It has the power to set
the price
9. What is the demand curve faced by a pure monopolist? a. Downward-sloping b.
Upward-sloping c. Horizontal d. Vertical
10. In a pure monopoly, what is the relationship between price and marginal revenue?
a. Price equals marginal revenue b. Price is greater than marginal revenue c. Price is less
than marginal revenue d. Price and marginal revenue are unrelated
11. How do monopolies impact consumer choice and variety compared to perfectly
competitive markets? a. Increase consumer choice b. Decrease consumer choice c. Have
no impact on consumer choice d. Provide perfect variety

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 12. What is the level of competition in a pure monopoly market? a. Fierce competition b.
Limited competition c. No competition d. Perfect competition
13. In a monopolistic competitive market, what is the level of control over price by an
individual firm? a. Complete control b. Limited control c. No control d. Variable control
14. How do monopolistic competitors differentiate their products from those of their
rivals? a. By offering identical products b. By lowering prices c. Through advertising and
branding d. By engaging in price wars
15. What is the role of advertising in monopolistic competition? a. Unnecessary b.
Discouraged c. Limited to government regulations d. Common to differentiate products
16. How does entry and exit typically occur in an oligopoly market? a. Free entry and exit
b. Restricted entry and exit c. Government-regulated entry and exit d. Monopolistic entry
and exit
17. How does product differentiation typically occur in an oligopoly? a. Through perfect
substitutes b. By offering identical products c. Through branding and advertising d. No
product differentiation
18. What is the behavior of firms in an oligopoly market regarding pricing decisions? a.
Independent pricing decisions b. Coordinated pricing decisions c. Random pricing
decisions d. No pricing decisions

Part II

1. A firm's total cost function is given by the equation: TC = 4000 + 5Q + 10Q2

(a) Write an expression for each of the following cost concepts:
a. Total Fixed Cost
b. Average Fixed Cost
c. Total Variable Cost
d. Average Variable Cost
e. Average Total Cost
f. Marginal Cost
g. Determine the quantity that minimizes average total cost. Demonstrate that the
predicted relationship between marginal cost and average cost holds.
2. Kid’s Nursery is a small company that has a subcontract to produce instructional
materials for disabled children in public school districts. The owner rents several small
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 rooms in an office building for Birr 600 a month and has leased computer equipment that
costs Birr 480 a month as shown in the table below.
a. Fill in the missing values in the table
b. What is the average variable cost for the month if 6 instructional modules are
produced?

3. A perfectly competitive firm has a cost function of C=Q2+20Q+700 and the equilibrium
price is 100. Find
a. The profit maximizing level of output
b. The maximum level of profit
4. Suppose the price of a product of a firm that operates under perfectly competitive market
is $10. The cost of production is TC = Q3 – 21Q2 + 49Q+100. What is the profit
maximizing output level?
5. Suppose the price of a perfectly competitive firm’s product is $10. The cost of production
is TC = Q3 – 21Q2 + 49Q+100. What is the profit maximizing output level?
6. A perfectly competitive firm produces Q1 units of item 1 & Q2 units of item 2 with TC =
30 Q1 + 30 Q2 – 4 Q1 Q2, Demand for product 1: P1 = 26 – 2Q1 and Demand for product
2: P2 = 42 – 4Q2
a. Determine the profit-maximizing output levels for this multi-product firm?
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 b. P1, P2?
c. TR?
d. TC?
e. Profit?
7. A monopoly firm faces the following average revenue (demand) curve: P = 100 - 0.01Q
where Q is weekly production and P is price, measured in cents per unit. The firm’s cost
function is given by C = 50Q + 30,000. Assuming the firm maximizes profits,
a. What is the level of production, price, and total profit per week?
b. If the government decides to levy a tax of 10 cents per unit on this product, what will be the
new level of production, price, and profit?
8. A monopolist with the cost function C=1/2Q2 faces a demand curve Q=12-P.
a. What will be its equilibrium price and quantity?
b. If for some reason the firm behaves as if it were in a perfectly competitive industry,
what will the equilibrium price and quantity?
c. How much money will the firm require to forgo monopoly profits and behave
competitively instead?

9. The following table shows the demand curve facing a monopolist who produces at a constant
marginal cost of Birr 9.

a. Calculate the firm’s marginal revenue curve, profit maximizing output and price?
b. What would the equilibrium price and quantity be in a competitive industry?