Question

Managerial Economics (BUSS 330)


Section I: Circle the letter of the best response

1) If a firm sells its output in a market that is characterized by one sellers and difficult entry and exit, then the firm is a :
A) Monopolist.
B) Perfect Competitive.
C) Oligopoly.
D) Monopolistic Competitor.


2) If a firm sells its output on a market characterized by a many sellers and many buyers of a differentiated product, then the firm is a:
A)Monopolist.
B) Perfectly Competitive.
C) Monopolistic Competitor.
D) Oligopoly

3) A perfectly competitive firm in the long run:
A) Makes a loss.
B) Makes normal profit.
C) Earns positive economic profit.
D) None of the above.

4) A monopolist produces 14,000 units of output and charges $14 per unit. Its MR is $10, its MC is $10, its ATC is $12 and AVC is $9, then this firm
A) Is making economic loss.
B) Is making economic profit.
C) Should shut down.
D) Decrease output to reduce losses.

5) In Q4 above, in order to maximize its profit, the monopolist should produce where:

A) ATC equals price.
B) MR equals MC.
C) MC equals price.
D) AVC equals price.

6) In Q4 above, at the optimal level of output, average fixed cost equals:

A) $1.
B) $2.
C) $3.
D) $5.

7) Which of the following industries is most likely to be a perfect competitive?

A) The automobile industry.
B) A grocery shop.
C) A local telephone company.
D) A restaurant.

8) Which of the following is a form of non-price competition:

A) Advertising.
B) Quality of service.
C) Product quality.
D) All of the above.

9) According to the kinked demand curve model, a firm will assume that rival firms will:
A) Match price cuts but not price increases.
B) Keep their prices constant.
C) Keep their rates of production constant.
D) Match price increases but not price cuts.

10) In an monopolistic competitive industry, firms can earn positive economic profits
A) In the short run but not in the long run.
B) In the short run and in the long run.
C) In the long run but not in the short run.
D) None of the above.

11) IATA (the International Air Transport Association) is an example of :

A) Perfectly competitive firms.
B) An oligopoly.
C) Monopoly.
D) Price leadership model.

12) In which of the following markets a firm has full market power :
A) Monopoly.
B) Perfect competition.
C) Monopolistic competition.
D) Oligopoly.

13) Under price leadership model:

A) All firms but the dominant are price takers.
B) Other firms follow the price increase by the leader.
C) the dominant firm sets the price.
D) All of the above.

14) Which of the following constitute price discrimination

A) A department store has a 25% sale.
B) A Japanese car is sold in Saudi Arabia lower than in Jordan.
C) STC charges higher call rates during day time.
D) An Economic textbook is sold cheaper in USA than in Egypt.

Andrea’s Day Spa began to offer a relaxing aromatherapy treatment. The firm asks you how much to charge to maximize profits. The demand curve for the treatments is given by the first two columns in the following table; its total costs are given in the third column. Answer the following questions accordingly (Q15-Q18).
Price Quantity TC
$25.00 0 $100
$24.00 10 $250
$23.00 20 $420
$22.00 30 $600
$21.00 40 $780
$20.00 50 $970
$19.00 60 $1,170


15) Total fixed costs in the above table is:
A) Zero
B) $130
C) $100
D) $10

16) Total Revenue of producing 30 units of output is:
A) $435
B) $660
C) $600
D) $180

17) In order to maximize profit, the above firm should produce where:
A) Price = Marginal cost
B) Price = Average Total Cost
C) Marginal Revenue = Marginal Cost
D) Profit is zero.

18) The profit maximization price in the above table is:
A) $24
B) $21
C) $22
D) $25

Section II: True/ False Questions
Indicate whether each of the following statements is True or False

19) A competitive firm that is losing should immediately close out.
A) True
B) False

20) A pure monopoly does not have to worry about suffering losses because it has the power to set prices at any level it desires.
A) True
B) False

21) In the long run monopolistic competition like perfect competition, will earn zero economic profit.
A) True
B) False

22) In an oligopoly, the firm that has the largest market share will also be the price leader.
A) True
B) False

23) The Kinked demand curve means competitors will follow price decrease but not price increase.
A) True
B) False

24) In order to have a successful price discrimination, markets should have different elasticity and there must be market segmentation.
A) True
B) False

25) Cinemas by charging higher prices during weekends and lower rates during week days is practicing a first degree price discrimination.
A) True
B) False

26) Second degree price discrimination involves differential prices charged by blocks of services, like electricity companies who charge different unit price (per kilowatt of electricity) based on the rate of consumption.

A) True
B) False

27) The monopolist can earn profit in the long run due to high barriers to entry.
A) True B) False

28) Perfect competitive firm is a price maker.
A) True B) False

29 ) The three telecommunication companies in Saudi Arabiacan be described as oligopoly.
A) True B) False
30 ) Cheating can threaten formal or informal agreements of cartel.
A) True B) False










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Answer 1

1. A monopoly is the market structure that is characterized by one seller selling all the market output and difficult entry and exit barriers.

Thus, Option A is the correct answer.

2. Monopolistic competition is the market structure characterized by a large number of sellers and buyers. Note that while perfect competition also has a large number of buyers and sellers, they sell a homogenous product in the market. On the other hand, firms in monopolistic competition sell products that are similar but differentiated from each other.

Thus, Option C is the correct answer.

3. All the firms in a perfectly competitive market are in zero profit or a normal economic profit situation. At the equilibrium, all firms are making zero normal profits and there is no entry or exit of the firms from the market.

Thus, Option B is the correct answer.

4. Given output (Q) = 14,000 units

Price per unit (P) = $14 per unit

MR = $10

MC = $10

ATC = $12

AVC = $9

Note that a firm is in equilibrium at an output corresponding to which MR = MC

You can see that the firm is already in equilibrium at the given output. The firm will breakeven at the point where it can recover at least its AVC. i.e. The firm will continue to produce at the point where it is making a loss maximum up to its fixed costs.  

You can see that corresponding to 10,000 units of production:

ATC = $12

AVC = $9

P = $14 per unit

Here P>ATC or The firm can recover its fixed costs and also able to recover $2 part of its variable cost.

Thus, in this case, the firm is making an economic loss but won't shut down.

Option A is the correct answer.