CRC Homework 6 Econ 304
Spring 2009 (75 points total) R Le
(Chapters 15, 16, 17, and 18)
1. This homework is a team activity. You may either work cooperatively with at
most two other classmates to complete this homework, or do it all by yourself.
2. This homework covers the materials in Chapters 15, 16, 17, and 18.
3. If you are:
- an onground student, you are to mark your answers on a scantron (Form
882-E), and submit the marked scantron in class on the due date.
- an online student, you are to type your answers in an "answer file" that I
create for your use, and post your completed, saved file in Desire to Learn
4. To do this homework well, first try to do the problems in the Study Guide and
the old homework sets posted in the supporting website.
5. If you are asked to draw straight lines, use a ruler. Doing so will help you
quickly find the answers on the graphs.
6. Read the questions carefully and answer them all.
7. Start this homework as soon as it is assigned. Ask me if you have any
questions. Do not wait until the last minute because I may not be available to
help you then.
Questions Find the letter that corresponds to the best answer.
1. Young Johnny inherited the only local cable TV company in town after his father
passed away. The company is completely unregulated by the government and is
therefore free to operate as it wishes. Assuming that Johnny understands the true
power of his new monopoly, he is probably most excited about which of the following
(i) He will be able to set the price of cable TV service at whatever level he wishes.
(ii) The customers will be forced to purchase cable TV service at whatever price he
wants to set.
(iii) He will be able to achieve any profit level that he desires.
a. a. (i) only
b. b. (ii) only
c. c. (i) and (iii)
d. d. All of the above are correct.
2. Natural monopolies differ from other forms of monopoly because they
a. are not subject to barriers to entry.
b. are not regulated by government.
c. generally don't make a profit.
d. are generally not worried about competition eroding their monopoly position in
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3. Drug companies are allowed to be monopolists in the drugs they discover in order to
a. allow drug companies to charge a price that is equal to their marginal cost.
b. discourage new firms from entering the drug market.
c. encourage research.
d. allow the government to earn patent revenue.
4. When a monopolist increases the number of units it sells, there are two effects on
revenue. They are the
a. demand effect and the supply effect.
b. output effect and the price effect.
c. competitive effect and the monopoly effect.
d. competition effect and the cost effect.
Quantity Price Total Revenue Average Revenue Marginal Revenue
1 35 35
2 64 32 29
5 23 11
7 17 -1
9 99 11 -13
10 80 8
5. Refer to the table above, which of the following statements is true?
a. If the monopolist sells 8 units of its product, the total revenue it will receive from
the sale is $112.
b. If the monopolist wants to maximize its revenue, it should sell 6 units.
c. Assume this monopolist's marginal cost is constant at $12. The quantity of
output (Q) it will produce is 4 units and the price (P) it will charge is $6.
d. All of the above.
6. The profit-maximization problem for a monopolist differs from that of a competitive
firm in which of the following ways?
a. A competitive firm maximizes profit at the point where marginal revenue equals
marginal cost; a monopolist maximizes profit at the point where marginal
revenue exceeds marginal cost.
b. A competitive firm maximizes profit at the point where average revenue equals
marginal cost; a monopolist maximizes profit at the point where average
revenue exceeds marginal cost.
c. For a competitive firm, marginal revenue at the profit-maximizing level of
output is equal to marginal revenue at all other levels of output; for a
monopolist, marginal revenue at the profit-maximizing level of output is
smaller than it is for larger levels of output.
d. For a profit-maximizing competitive firm, thinking at the margin is much more
important than it is for a profit-maximizing monopolist.
P (HWR6) Page 2 of 7
500 1,500 2,500 3,500 4,500 Q
1,000 2,000 3,000 4,000 5,000
7. Refer to the graph above, which of the following statements is false?
a. To maximize profit, the monopoly should produce and sell 2,000 units.
b. At the profit-maximizing output level, the firm would charge a price of $120.
c. At the profit-maximizing output level, the firm would earn a profit of $80,000.
d. At the profit-maximizing output level, marginal cost equals $40.
8. Suppose when a monopolist produces 50 units its average revenue is $8 per unit,
its marginal revenue is $4 per unit, its marginal cost is $4 per unit, and its average
total cost is $3 per unit. What can we conclude about this monopolist?
a. The monopolist is currently maximizing profits and its total profits are $200.
b. The monopolist is currently maximizing profits and its total profits are $250.
c. The monopolist is not currently maximizing its profits; it should produce more
units and charge a lower price to maximize profit.
d. The monopolist is not currently maximizing its profits; it should produce fewer
units and charger a higher price to maximize profit.
9. The deadweight loss that arises from a monopoly is a consequence of the fact that
a. price is higher than the socially-optimal price.
b. price equals marginal revenue.
c. price is the same as average revenue.
d. maximizes profit where marginal revenue equals marginal cost.
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P ($) MC
D = AR
1,000 3,000 5,000 Q (units)
2,000 4,000 6,000
10. The above graph shows the marginal cost (MC) curve of a monopoly.
The monopoly's demand curve can be graphed using the following data:
P $280 $80
Q 1,000 6,000
Which of the following statements is true?
a. The profit-maximizing output level is 2,000 units.
b. The profit-maximizing price is $240.
c. The deadweight loss caused by the monopoly is equal to $40,000.
d. All of the above.
11. One key difference between an oligopoly market and a competitive market is that
a. are price takers while competitive firms are not.
b. can affect the profit of other firms in the market by the choices they make while
firms in competitive markets do not affect each other by the choices they make.
c. sell completely unrelated products while competitive firms do not.
d. sell their product at a price equal to marginal cost while competitive firms do
12. In markets characterized by oligopoly,
a. the oligopolists earn the highest profit when they cooperate and behave like a
b. collusive agreements will always prevail.
c. collective profits are always lower with cartel arrangements than they are
without cartel arrangements.
d. pursuit of self-interest by profit-maximizing firms always maximizes collective
profits in the market.
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13. In a duopoly situation, the logic of self-interest results in a total output level that
a. equals the output level that would prevail in a competitive market.
b. equals the output level that would prevail in a monopoly.
c. exceeds the monopoly level of output, but falls short of the competitive level of
d. falls short of the monopoly level of output.
14. In order to be successful, a cartel must
a. find a way to encourage members to produce more than they would otherwise
b. agree on the total level of production for the cartel, but they need not agree on
the amount produced by each member.
c. agree on the prices charged by each member, but they need not agree on
d. agree on the total level of production and on the amount produced by each
15. Suppose a market is initially perfectly competitive with many firms selling an identical
product. Over time, however, suppose the merging of firms results in the market
being served by only three or four firms selling this same product. As a result, we
a. an increase in market output and an increase in the price of the product.
b. an increase in market output and an decrease in the price of the product.
c. a decrease in market output and an increase in the price of the product.
d. a decrease in market output and a decrease in the price of the product.
16. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company
advertises, the two companies split the market and earn $50 million each. If they both
advertise, they again split the market, but profits are lower by $10 million since each
company must bear the cost of advertising. Yet if one company advertises while the
other does not, the one that advertises attracts customers from the other. In this case,
the company that advertises earns $60 million.
Which of the following statements is true?
a. If the two companies behave as individual profit maximizers, they both will
b. The dominant strategy for each company is to advertise regardless of whether
the other company advertises.
c. Congress passed a law that banned cigarette advertising on television. If
cigarette companies are profit maximizers, it is likely that neither company
opposed the ban on advertising.
d. All of the above.
17. In a monopolistically competitive industry, firms set price
a. above marginal cost since each firm is a price setter.
b. always a fraction of marginal cost since each firm is a price setter.
c. equal to marginal cost since each firm is a price taker.
d. below marginal cost since each firm is a price taker.
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18. A profit-maximizing firm in a monopolistically competitive market differs from a firm in
a perfectly competitive market because the firm in the monopolistically competitive
a. is characterized by market-share maximization.
b. faces a downward-sloping demand curve for its product.
c. faces a horizontal demand curve at the market clearing price.
d. has no barriers to entry.
19. A monopolistically competitive firm chooses
a. the quantity of output to produce, but the market determines price.
b. the price, but competition in the market determines the quantity.
c. price, but output is determined by a cartel production quota.
d. the quantity of output to produce and the price at which it will sell its output.
20. The free entry and exit of firms in a monopolistically competitive market guarantees
a. both economic profits and economic losses disappear in the long run.
b. both economic profits and economic losses can persist in the long run.
c. economic profits, but not economic losses, can persist in the long run.
d. economic losses, but not economic profits, can persist in the long run.
21. In the long run, a firm in a perfectly competitive market operates
a. at its efficient scale and a monopolistically competitive firm operates at efficient
b. at its efficient scale and a monopolistically competitive firm operates with
c. with excess capacity and a monopolistically competitive firm operates with
d. with excess capacity and a monopolistically competitive firm operates at its
22. Which of the following best illustrates the concept of "derived demand?"
a. An increase in the wages of auto workers will lead to an increase in the
demand for robots in automobile factories.
b. An automobile producer's decision to supply more minivans results from a
decrease in the demand for station wagons.
c. An automobile producer's decision to supply more cars will lead to an increase
in the demand for automobile production workers.
d. An increase in the price of gasoline will lead to an increase in the demand for
23. If the demand for cars falls, what will happen to the price of cars and to the demand
curve for automotive workers?
a. Car price will fall and the demand for automotive workers will shift to the right.
b. Car price will fall and the demand for automotive workers will shift to the left.
c. Car price will rise and the direction of the shift in the demand for automotive
workers is ambiguous.
d. Car price will rise and the demand for automotive workers will remain
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24. Diane's Auto World installs tires on automobiles, light trucks, and sport utility vehicles.
She is a profit-maximizing business owner whose firm operates in a competitive
market. The marginal cost of installing a tire is $10. The marginal productivity of the
last worker that Diane hired was 2 tires per hour. What is the maximum hourly wage
that Diane was willing to pay the last worker hired?
d. There is insufficient information to answer this question.
25. Which of the following statements is correct?
a. The value of the marginal product curve is the labor demand curve for
competitive, profit-maximizing firms.
b. A competitive, profit-maximizing firm hires workers up to the point where the
value of the marginal product of labor equals the wage.
c. By hiring labor up to the point where the value of the marginal product of labor
equals the wage, the firm is producing where price equals marginal cost.
d. All of the above are correct.
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