Question

1. In long-run monopolistic competition,

a) all firms will produce an identical product

b) entry or exit will shift the demand curve until all firms earn zero profit

c) firms might earn positive profits since strategic barriers prevent new firms from entering

d) entry or exit will shift the supply curve until all firms earn zero profit

e) firms may operate at a loss if the tax advantage are sufficiently large

2. What is the profit maximizing output level for a monopolistic competitive firm facing demand of P=50-2q, constant marginal costs of $10 and fixed costs are $50?

a) 19 units

b)10 units

c) 30 units

d) 25 units

e) 20 units

3. What is the profit maximizing price for a monopolistically competitive firm facing demand of P=50-2q, constant marginal costs of $10 and fixed costs of $50?

a) $50

b) $10

c) $2

d) $20

e) $30

4. What is the maximum profit that can be earned by a monopolistically competitive firm facing demand of P=50-2q, constant marginal costs of $10 and fixed costs of $50?

a) $150

b) $100

c) $500

d) $200

e) $300

5. How much deadweight loss will be created by a monopolistically competitive firm facing demand of P=50-2q, content marginal costs of $10 and fixed costs of $50?

a) $100

b) $300

c) $150

d) $50

e) $200

6. Which of the following is NOT true regarding perfect competition and monopolistic competition?

a) firms in each market structure operate in the long-run where LRAC and demand are tangent

b) there are no barriers to entry or exit in either type of competition

c) all of the answers are true

d) firms in each market structure operate at optimal scale

e) firms in each market structure earn zero profits in the long-run

7. Which characteristic of a monopolistically competitive market implies that firms will be unable to earn a profit in the long-run?

a) monopolistically competitive firms are able to earn a long-run profit

b) there are no barriers to entry

c) firms face a downward sloping demand curve

d) few sellers, many buyers

e) output is differentiated

8. In short-run monopolistic competition a firm maximizes its profit by selecting an output at which

a) marginal revenue exceeds marginal cost

b) marginal revenue equals marginal cost

c) total revenue equals total cost

d) marginal revenue equals average total cost

e) marginal revenue equals average variable cost

9. Which of the following is NOT true of a firm operating in a monopolistically competitive market in the long-run?

a) the firm produces less than optimal scale

b) the demand curve facing the firm is tangent to the marginal cost curve

c) the firm sets a price above the minimum average cost

d) the firm operates with excess capacity

e) all of the answers are true

Answer 1

1. b) entry or exit of the firm will shift the demand curve until all firms earn zero profits. This is because firms earn supernormal profits which attract new players in the market which leads to more competition and demand curve of the old players shifts to the left. new players enter till firms earn normal profits.

2. b) profit max level output is 10

profit maximum condition is MR =MC. Here P= 50-2q , MC = 10  so TR = Pq = (50-2q)q = 50q-2q2

therefore MR = TR/q = 50 - 4q

so for profit maximum MR = MC therfore 50 - 4q = 10 q = 10

3. e) profit max price is 30 . as q= 10 from above so P = 50 - 2q P = 50 -20 = 30

4. A) 150

profit = TR -TC PQ - ( Variable cost + fixed cost) 30*10- ( 10*10 + 50) 300 - 150 = 150

Variable cost = MC = 10 = 10 Q THEREFORE 10*10 = 100