PRACTICE for FINAL EXAM

Please note: This is just the practice for the final exam only. In THE REAL EXAM (60%), there will be less MULTIPLE CHOICE QUESTIONS (12% in total) and more SHORT-ANSWER QUESTIONS (48% in total). SECTION A 1. Perfectly competitive firms respond to changing market conditions by varying their

a. Price b. Output c. Advertising campaigns d. Product quality

2. Firms in perfect competition are price takers because a. All small firms must take the price set by the largest firm in the market b. Firms take the price that government determines as a fair price c. Each firm is small and goods are perfect substitutes for one another

d. High barriers to entry force firms to compete by charging lower prices than other

firms in the industry

3. The following cost data are for a firm that is selling in a perfectly competitive market:

Quantity Total Cost

0 60

1 70

2 78

3 84

4 92

5 102

6 116

If the price is $6, the profit maximizing firm will produce

a. Q = 2 b. Q = 3 c. Q = 4 d. Shut down

4. Assuming the market price is $21. Given the AVC = 5 + 2Q, how many output would a firm under perfectly competitive market will produce to maximize profit?

a. Shut down b. Q=2 c. Q= 3 d. Q = 4

5. If a perfectly competitive firm is making loss in the short run, some firms will quit the business in

the long run. What do you expect to see with the remaining firms in the market? a. Firms output to increase b. Firms output to decrease c. Firms output to remain the same d. Market supply will increase.

6. A perfect competitive firm has the following demand and cost data.

Q MC

4 100

8 95

12 90

16 94

20 101

24 110

28 121

32 134

36 149

If the price is $90, the firm will

a. Produce 12 outputs b. Produce 16 outputs c. Produce 20 outputs d. Shut down

7. A firm will achieve allocative efficiency at the output where a. Demand intersects with the marginal cost curve b. Demand intersects with the average total cost curve c. Price equals to minimum average total cost d. None of the above

8. For the monopolist firm a. P = MR = AR a. P > MR = AR b. P = AR >MR c. P = MR < AR

9. Which of the following is not true of monopolists? a. Monopolists seek to maximize profits. b. Monopolists can charge any price they want and make a profit c. Monopolists can choose any price on the market demand curve. d. Monopolists can raise price more than 10 percent.

10. Refer to the diagram below The profit-maximizing (or loss-minimizing) price the monopoly will charge is:

a. $ 11 b. $ 16 c. $ 18 d. $ 22

11. Using the information from question 10, how much would be the profit/loss? a. - 34 b. - 119 c. 85 d. 60

12. Using information from question 10, if the government wants to regulate the monopolist

such that the monopolist will achieve allocative efficiency, what is the regulated price?

(assuming that the government is willing to give subsidy) a. Approx $11 b. Approx $14 c. Approx $15 d. Approx $18

13. In the short run, a monopolist's profits: a. are positive because of the monopolist's market power. b. are positive if the monopolist's elasticity of demand is less than 1. c. are positive if the monopolist's selling price is above average variable cost. d. may be positive, negative, or zero.

14. A monopolist's demand curve

a. is horizontal at the market price b. lies above its marginal revenue curve c. is the same as its marginal cost curve d. indicates that the firm must raise price to sell additional units

15. The graph below represents the cost structure of a monopoly. The deadweight loss is represented by the area:

a. abc b. bcde c. bhg d. bhe

16. Which of the following is usually true in the long-run equilibrium under monopolistic competition?

a. Each firm is producing at maximum capacity at the lowest point on their long-run

average cost curve.

b. Each firm is producing with excess capacity at a higher than minimum level of long-run average cost.

c. Each firm is earning positive economic profits and prevent entry through

protective government regulation.

d. Each firm is earning negative economic profits and receive a subsidy from the federal government.

17. Refer to the diagram below

Which of these graphs (A, B, C, or D) describes the situation of a monopolistic competitor in the long run?

a. A b. B c. C d. D

18. A firm in what type of industry is most likely characterised by the following conditions in

the long run? P = ATC, and P > MC. a. Perfect competition b. Monopolistic competition c. Monopoly d. Oligopoly

19. The key feature of an oligopoly is that: a. There are no barriers to entry b. Firms sell a differentiated product c. Firms are independent d. Firms are mutually interdependent

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20. The act of jointly planning price and output by business firms is called: a. Friendship b. Price leadership c. Collusion d. Game Theory

21. Consider the following game. Two companies are considering having promotion or

no promotion. What is the Nash Equilibrium?

Company B

Promotion No Promotion

Promotion 25 15

20 30

Company A No Promotion 40 30

10 25

a. Both will have promotion b. Company A will have promotion and company B will not. c. Company B will have promotion and company A will not. d. Neither company will have promotion.

22. Refer to the diagram below. The optimal equilibrium output is at the point:

P MSC

B

MPC

1

C 2 A

4

D 3

MPB

MSB Qty a. A b. B c. C d. D

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23. Refer to the diagram in question 22, if the market equilibrium is at point A, what is

the area of the deadweight loss a. 1 b. 1+2+3 c. 1+2+3+4 d. 4

24. Mary is enjoying the view of the Hanoi opera house and she does not need to pay for that. This is an example of:

a. Rivalry b. Non-rivalry c. Excludability d. Non-excludability

25. What is a free rider problem? a. Some people can get into the bus during the busy hours without buying the ticket b. John is getting a free ride to the university in his friends car. c. Mark won a free trip to Australia for being the best staff of the year d. Consumers will not pay for the goods because the goods are non-excludable.

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SECTION B

QUESTION 1:

A firm operating in a perfectly competitive market has the following cost data (where Q = total output and TC = total cost). Assuming fixed cost is $200 and this firm is typical of all firms in the market.

Q MC TVC AVC TC ATC

4 100

8 95

12 90

16 94

20 101

24 110

28 121

32 134

36 149

REQUIRED:

(a) Calculate TVC, AVC, TC, ATC at each quantity above. (round up to 2 decimal places)

(b) If the market price is $110, determine the firms profit maximising output and price

in the short run. What would be the profit or loss? Explain and show your

calculations.

(c) Sketch this firm's short run supply curve, indicating the relevant numerical values of price and output.

(d) Discuss the economic efficiency of a monopolistically competitive firm in the long run. Is there any deadweight loss?

(e) Explain how firms under monopolistic competition will earn normal profit in the long

run. Illustrate with diagrams.

(f) Define negative production externality and positive consumption externality. Give

examples. Illustrate on the diagrams the equilibrium output and socially optimal

output associated with negative production externality or positive consumption externality.

QUESTION 2:

A monopoly has the following demand and cost equations as given below, where Q = output or quantity demanded, P = price and TC = Total Cost

P = 60 Q

TC = 10 + Q2

REQUIRED:

(a) Based on the equations above, determine the short run profit maximizing (loss minimizing) output, price and total profit (loss) for this monopoly.

(b) Suppose the government were to impose a price ceiling on this monopoly to achieve

allocative efficiency. Illustrate using the diagram with some brief explanation.

CALCULATION GUIDE Elasticity

% Q % X

Q

X 2 X1

(arc or mid-point formula)

X Q2 Q1

Revenue

TR = P Q

MR TR

AR TR

Q

Q

Production Curves

MP Q TP AP Q TP

L L L L L L

Cost Curves

TC = TFC + TVC

TC

AC = ATC Q

AVC

TVC

AFC

TFC

Q Q

MC TC TVC Q Q

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