Question

1. A profit-maximizing, monopolistically competitive car wash washes 40 cars per day, and its total cost $200 and currently makes an economic profit of $280. In the long run, everything else equal, the
   a.   car wash will wash less than 40 cars per day.
   b.   car wash will charge more than $12 per wash.
   c.   car wash will need to hire new workers to wash more cars.
   d.   car wash will wash more than 50 cars per day.

2. For a competitive firm, if at least some portion of its short-run average cost curve lies below the price of the product, we can conclude that the firm
   a.  is earning zero economic profits.
   b.  is incurring short-run losses.
   c.  is going to shut down.
   d.  is earning a profit at the profit maximizing output level.

3. If stock exchanges did not exist,
   a.   the economy’s resources could be more efficiently allocated among firms.
   b.   the risk to the investor of buying stocks would be much greater.
   c.   investment banks would no longer play a role in handling stocks.
   d.   there would be no organized way for firms to issue stock.

4. A “specialist” is a
   a.   stockbroker who specializes in the “third market.”
   b.   person who works on the floor of the New York Stock Exchange and specializes in certain stocks.
   c.   stockholder who finds buyers and sellers for specific stocks, but also operates outside of specific stock markets.
   d.   stockbroker who operates only in a particular regional stock market.

5. Suppose that we learn that hotels in Los Angeles generally operate with an average vacancy rate of 15 percent (in other words, 85 percent of the hotel rooms are filled with guests). Given this information about excess capacity, we would judge this market to be
   a.  a perfectly competitive market.
   b.  a monopoly.
   c.  a monopolistically competitive market.
   d.  an oligopoly.

6. A monopolistically competitive firm
   a.   is always a retail establishment.
   b.   has more monopoly power in the long run than does a perfectly competitive firm.
   c.   tries to differentiate its product from competitors’ products.
   d.   faces a perfectly elastic demand curve for its product.

Answer 1

Part 1) In the long run, everything else equal, the car wash will need to hire new workers to wash more cars. This is because given the economic profit the monopolistically competitive firm will expand the level of output.

Part 2) For a competitive firm, if at least some portion of its short run average cost curve lies below the price of the product, we can conclude that the firm is earning a profit at the profit maximizing output level.

Part 3) If stock exchanges did not exist there would be no organized way for firms to issue stocks. Stock market is a place where the firms in need for funds to invest meet with the suppliers of the funds. Firms acquire funds for investment through the issue of stocks to the suppliers of the funds.

Part 4) A specialist is a stockbroker who specializes in the third market.

Part 5) Given the fact that hotels in Los Angeles generally operate with an average vacancy rate of 15 per cent means that the market is monopolistically competitive market. This is because under perfect competition there would be no excess capacity. Under monopoly there is only one supplier and under oligopoly there are few large suppliers which is not the case with hotel industry.

Part 6) A monopolistically competitive firm tries to differentiate its product from competitors’ products.