Question

I. Multiple Choices (10 Points):

1. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, how will meatball prices compare with marginal cost?

a. Meatball prices will be less than marginal cost.

b. Meatball prices will equal marginal cost.

c. Meatball prices will exceed marginal cost.

d. Meatball prices will be a function of supply and demand and will therefore oscillate around marginal costs.

2. When a monopolist increases the amount of output that it produces and sells, what happens to its average revenue and its marginal revenue?

a. Both its average revenue and its marginal revenue increase.

b. Its average revenue increases, and its marginal revenue decreases.

c. Its average revenue decreases, and its marginal revenue increases.

d. Both its average revenue and its marginal revenue decrease.

3. Which of the following feats is impossible for a monopolist to accomplish?

a. controlling the price of its good

b. charging a higher price and continuing to sell the same quantity

c. operating at a point on the upper half of the demand curve

d. increasing total surplus in a market compared to that in a competitive market

4. A monopoly firm can sell 200 units of output for $36.00 per unit. Alternatively, it can sell 201 units of output for $35.80 per unit. What is the marginal revenue of the 201st unit of output? a. –$35.80

b. –$4.20

c. $4.20

d. $35.80

5. A monopoly firm maximizes its profit by producing 500 units output (so Q = 500). At that level of output, its marginal revenue is $30, its average revenue is $40, and its average total cost is $34. What is the firm’s profit-maximizing price?

a. $30

b. between $30 and $34

c. between $34 and $40

d. $40

6. When a new firm enters a monopolistically competitive market, what will happen to the individual demand curves faced by all existing firms in that market?

a. They will shift to the left.

b. They will shift to the right.

c. They will remain unchanged, but the quantity of demand will increase.

d. They will remain unchanged, but the quantity of demand will decrease

7. As some incumbent firms exit a monopolistically competitive market, what happens to profits of existing firms and product diversity in the market?

a. Profits of existing firms decline and product diversity in the market decreases.

b. Profits of existing firms decline and product diversity in the market increases.

c. Profits of existing firms rise and product diversity in the market decreases.

d. Profits of existing firms rise and product diversity in the market increases.

8. When a firm operates at efficient scale, which of the following explains the characteristic of the average-total-cost-curve?

a. Its average revenue must exceed the minimum of average total cost.

b. Its average revenue must be equal to the minimum of average total cost.

c. The average-total-cost curve must be falling.

d. The average-total-cost curve must be rising.

9. When consumers are exposed to additional choices that result from the introduction of a new product, what do we know?

a. Consumers are likely to have a lower degree of satisfaction

b. A product-variety externality is said to occur.

c. An advertising externality is said to occur.

d. Consumers are likely to experience negative consumption externalities.

10. Firm A produces and sells in a market that is characterized by highly differentiated consumer goods. Firm B produces and sells industrial products. Firm C produces and sells an agricultural commodity. Which firm is likely to spend the greatest portion of its total revenue on advertising?

a. Firm A

b. Firms A and B

c. Firm B

d. Firms B and C

Answer 1

1. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, how will meatball prices compare with marginal cost?

c. Meatball prices will exceed marginal cost.

In this case the distributor is enjoying a super normal profit. If the AR or price is more than the MC, the distributor will get the super normal profit. In case of a monopoly long run equilibrium, the monopolist will enjoy super normal profits at the profit maximising output.

2. When a monopolist increases the amount of output that it produces and sells, what happens to its average revenue and its marginal revenue?

b. Its average revenue increases, and its marginal revenue decreases.

The AR and MR curve of a monopolist is always downward sloping.

3. Which of the following feats is impossible for a monopolist to accomplish?

b. charging a higher price and continuing to sell the same quantity.

As the AR curve is a downward sloping curve, if the monopolist want to sell more, he has to decrease the price. Charging high price and selling the same quantity is not possible.

4. A monopoly firm can sell 200 units of output for $36.00 per unit. Alternatively, it can sell 201 units of output for $35.80 per unit. What is the marginal revenue of the 201st unit of output?

b. –$4.20       MR = (201x35.80) – (200x36) = -4.20

5. A monopoly firm maximizes its profit by producing 500 units output (so Q = 500). At that level of output, its marginal revenue is $30, its average revenue is $40, and its average total cost is $34. What is the firm’s profit-maximizing price?

d. $40 Average revenue itself is the price.

6. When a new firm enters a monopolistically competitive market, what will happen to the individual demand curves faced by all existing firms in that market?

a. They will shift to the left.

The demand of the existing firms will decrease and thereby the demand curves of the existing firms will shift to the left hand side.

7. As some incumbent firms exit a monopolistically competitive market, what happens to profits of existing firms and product diversity in the market?

c. Profits of existing firms rise and product diversity in the market decreases.

8. When a firm operates at efficient scale, which of the following explains the characteristic of the average-total-cost-curve?

b. Its average revenue must be equal to the minimum of average total cost.

9. When consumers are exposed to additional choices that result from the introduction of a new product, what do we know?

b. A product-variety externality is said to occur.

10. Firm A produces and sells in a market that is characterized by highly differentiated consumer goods. Firm B produces and sells industrial products. Firm C produces and sells an agricultural commodity. Which firm is likely to spend the greatest portion of its total revenue on advertising?

a. Firm A. Firm A is monopolistic competition market. Hence advertisement expenses will be more.