ECONONE

ECONONE ReviewerEverything is either TRUE or FALSE.Part I.

1. The profit maximizing condition in a competitive market is when Price is Equal to Average Cost.2. In perfect competition, the production decisions of one firm will not affect the overall supply.

3. In perfect competition, goods are heterogenous.

4. The demand curve is horizontal because prices by firms are dictated by the market.

5. Firms have no market power because there are numerous buyers and sellers.For 6-10, refer to the graph 1 and 2.

P

S

C

MC

ATC

H

A AR

AVC

B

I

G

C

J

F

D

Q 0

E q Graph 1

Graph 26. The level of cost per unit produced is 0B.

7. The Profit-Maximizing Output can be attained at point H.

8. Total Revenue is AHE0.

9. Profit is AHIB.

10. Fixed Cost is BIJC.

Part II1. The profit-maximizing condition for monopolists is MR = MC.

2. Relative to a perfectly competitive market, monopolies tend to charge higher prices and lesser quantities, thereby decreasing social welfare.3. In discriminating price to maximize its profits, monopolists divide the market according to differences in consumer income elasticity of demand, charging higher prices for the inelastic part of the market, and lower prices for the more elastic prices of the market.

4. Scale barriers are barriers to entering the market with a monopolist which entail that the size of the operation is too big for regular firms to engage.

5. Monopolies are all bad in all markets.

For 6-10, Refer to the Graph 3.

P

MC

ATC

F

AVC

A

C

E

I

G

H

D

0 B

Q

Graph 3

MR

6. The Profit-Maximizing Condition can be found at point H.7. At the point of maximum profit, price is the level 0C.

8. Maximum profit is AFEC.

9. Total Cost is GHB0.

10. Total Variable Cost is GHB0.

Part III.1. The profit-maximizing condition is P=MC.

2. In a monopolistically competitive market structure, each firm has their own demand curve which implies that the brand the firm is selling has its own market or clientele.

3. The decisions of one firm can influence the overall market supply.

4. In a monopolistic competition, firms sell completely identical products.

5. In this market structure, firms are generally price takers.

For 6-10, refer to Graph 4P A

C

MC ATC

F

B

H

E

Do

D1

0 G

Q

MR

Graph 46. If the demand curve is D0, maximum profit is BACF.

7. If the Demand Curve is D1, maximum profit is BFEH.

8. A reason why D0 shifts to D1 is the exit of firms from the market.9. The profit-maximizing level of price is 0A.

10. Total Cost at D1 is HEG0.

Part IV. 1. An oligopoly involves very few price-taking firms.

2. A cartel is an agreement by firms of the same industry to set the price and quantities to be sold.3. The member of a cartel with the most incentive to cheat is the one with the largest marginal revenue.

4. The Cournot-Nash Equilibrium requires that all firms must undertake the same action so as to achieve a higher level of equilibrium.

5. In the model of oligopoly that involves an industry leader, the leader is most likely to be the one with the lowest MC.

6. When oligopolistic firms act independently, they tend to pursue their own interest causing them to go bankrupt because they set the prices too low.

7. An Output Reaction Function follows the form that the output of a firm is dependent on the output of its rivals.

For 8-10,

B

C

MC

E ATC

A

MC

F ATC

G

D

MR

0

Q

Q

8. If the marginal cost is on MC, the firms profit is BAEC.

9. A firm will lose market power if he sets his price at 0B

10. If the marginal costs in on MC, Total Cost is 0AEQ