Chapter 7 Monopoly and Monopolistic Competition
MULTIPLE CHOICE
1. At the profit-maximizing level of output for the monopolist:
a.
total revenue is equal to total cost
b.
total costs are minimized
c.
total revenue is maximized
d.
marginal revenue is equal to marginal cost
e.
average revenue is equal to average cost
2. In the model of monopoly, there:
a.
are many firms producing differentiated products
b.
are a few firms producing undifferentiated products
c.
are a few firms producing differentiated products
d.
are many firms producing undifferentiated products
e.
is one firm producing a highly differentiated product
3. So long as price exceeds average variable cost, in the model of monopoly, the firm
maximizes profits by producing where:
a.
the difference between marginal revenue and marginal cost is maximized
b.
marginal revenue equals price
c.
the difference between price and marginal cost is maximized
d.
price equals marginal cost
e.
marginal cost equals marginal revenue
4. In the model of monopoly, firms produce a:
a.
standardized product with considerable control over price
b.
differentiated product with considerable control over price
c.
standardized product with no control over price
d.
differentiated product with no control over price
e.
standardized or differentiated product with some control over price
5. For the Minnie Mice Company, the elasticity of demand is −6 and the profit-maximizing
price is 30. If MC is marginal cost and AVC is average variable cost, then:
a.
MC = 25
b.
AVC = 25
c.
MC = 30
d.
AVC = 36
e.
MC = 36
6. For the Mickey Mice Company, the price elasticity of demand is −3, average cost is $15,
and marginal cost is $30. Mickey’s profit-maximizing price is:
a.
$10.00
b.
$20.00
c.
$22.50
d.
$30.00
e.
$45.00
7. The Frank Failing Company has an average variable cost of $8, average fixed cost of $16,
marginal cost of $12, and elasticity of demand −3. Frank should:
a.
shut down
b.
charge $8
c.
charge $16
d.
charge $18
e.
charge $36
8. If Harry Doubleday’s price elasticity of demand is −2 and its profit-maximizing price is $6,
then its:
a.
average cost is $3.00
b.
average cost is $0.33
c.
marginal cost is $3.00
d.
marginal cost is $0.33
e.
average cost is $5.67
9. My Big Banana (MBB) has a monopoly in Middletown on large banana splits. The demand
for this delicacy is given by Q = 80 − P. MBB’s costs are given by TC = 40 + 2Q + 2Q2. Its
maximum monopoly profit is:
a.
$267
b.
$467
c.
$627
d.
$672
e.
$674
10. Bathworks has exclusive rights to sell its perfumes. The demand for its perfumes faced by
Bathworks is given by Q = 250 − 0.5P. Bathworks’s costs are given by TC = 50Q + 5.5Q2.
Its maximum monopoly profit is:
a.
$6,750
b.
$7,050
c.
$7,500
d.
$7,750
e.
$8,750
11. Cal’s Cab Company (CCC) has a taxi monopoly in Wen Kroy. The demand for taxi
services in Wen Kroy is given by Q = 1,500 − P. CCC’s costs are given by TC = 100
− Q2 + 5Q3. Its maximum monopoly profit is:
a.
$0
b.
$5,500
c.
$6,600
d.
$7,700
e.
$9,900
12. Craig’s Red Sea Restaurant is the only restaurant in Columbia, South Carolina, that sells
Ethiopian food. The demand for Ethiopian food is given by Q = 25 − P. Craig’s costs are
given by TC = 25 + Q + 5Q2. Its maximum monopoly profit is:
a.
−$1
b.
$21
c.
$22
d.
$24
e.
$26
13. If a monopolist faces a constant-elasticity demand curve given by Q = 202,500P-3 and has
total costs given by TC = 10Q, its profit-maximizing level of output is:
a.
50
b.
60
c.
75
d.
100
e.
120
14. If a monopolist faces a constant-elasticity demand curve given by Q = 400P −2 and has total
costs given by TC = 0.625Q2, its profit-maximizing level of output is:
a.
0
b.
2
c.
4
d.
6
e.
8
15. Joe’s T-shirts has costs given by TC = $100 + 3Q, where Q is the number of shirts. If Joe
charges $5 each, the percentage markup for 100 shirts is:
a.
20 percent
b.
25 percent
c.
33 percent
d.
50 percent
e.
67 percent
16. Harriet Quarterly wants a 25 percent return on the $100 of assets she has in her company.
Her average variable costs are $50 per unit, and she has no fixed costs. If she sells 10 units,
what price should she charge?
a.
$52.50
b.
$62.50
c.
$75.00
d.
$87.50
e.
$125.00
17. When producing 10 units, Jean has total variable costs of $100, total fixed costs of $100,
and assets of $100. She wants a return of 10 percent. What price should she charge?
a.
$11
b.
$21
c.
$30
d.
$210
e.
$300
18. A firm with no costs producing Q units and charging price P gets a return of r on total assets
of A if P equals:
a.
rA
b.
(1 + r)A
c.
(1 + r)A/Q
d.
rA/Q
e.
rAQ
19. To maximize profit, the firm must:
a.
mark up average variable costs
b.
mark up marginal costs
c.
mark up average fixed costs
d.
set the markup equal to −1/(
+ 1)
e.
b and d
20. If
is the elasticity of demand, a profit maximizer sets a markup price of:
a.
MC[1/(1 + 1/
)]
b.
MC[1/(1 − 1/
)]
c.
AC[1/(1 −
)]
d.
AC[1/(1 − 1/
)]
e.
1/(1 −
)
21. If elasticity of demand is −2, marginal cost is $4, and average cost is $6, a profit-
maximizing markup price is:
a.
$4
b.
$6
c.
$8
d.
$10
e.
$12
22. If the profit-maximizing markup price is marginal cost times 2, the elasticity of demand
must be:
a.
−0
b.
−1/2
c.
−1
d.
−4/3
e.
−2
23. If the demand curve is horizontal, the price elasticity used to calculate the profit-maximizing
price is:
a.
−10
b.
−5
c.
−0
d.
−1
e.
infinity
24. If price P, unit costs C, and quantity Q are known, the markup of markup-cost pricing is:
a.
(PQ − CQ)/Q
b.
P − C/Q
c.
(P − C)/Q
d.
(P − C)/C
e.
1 − (P − C)/Q
25. A chemical company can produce Q units of a chemical H, with marginal costs of MC = 9 +
Q, and can distribute the chemical at marketing marginal costs of MC = 1. The demand for
H is given by P = 30 − 1.5Q. If an external market exists where H can be bought or sold
without marketing expenses for $13, how much H should the firm produce?
a.
0 units
b.
4 units
c.
5 units
d.
7 units
e.
10 units
26. If C is total cost, Q is quantity, P is price, and A is total assets, the target return r is defined
by:
a.
(PQ − C)/A
b.
[1 − (P − C)/Q]A
c.
[1 − (P − C)Q]A
d.
(P − C)Q/A
e.
1 − (P − C)Q/A
27. Jack O. Trades produces joint products A and B with linear demands DA > DB. Given MRB is
marginal revenue for B and MCB is marginal cost of B, Jack’s total marginal revenue curve
changes slope at the quantity where:
a.
MRB = MCB
b.
DB = MCB
c.
MRB = DB
d.
MRB = 0
e.
DB = 0
28. When a producer of joint goods refuses to sell all of one good, the producer:
a.
is not rational
b.
must destroy some of the high-demand good
c.
must destroy some of the low-demand good
d.
must give away some of the high-demand good
e.
must give away some of the low-demand good
29. A producer refuses to sell some of one joint product. MRA is the marginal revenue for a low-
demand good. If the producer were to sell all its production, what would be true of MRA?
a.
MRA = demand for A
b.
MRA = 0
c.
MRA = marginal cost of A
d.
MRA < 0
e.
MRA = 1
30. A widget firm has production marginal costs of MC = 100 + Q, where Q is the number of
widgets produced, and marginal marketing (to the public) costs of MC = 5Q. If public
demand generated marginal revenue of MR = 400 − 4Q and there is an external market
where widgets can be bought or sold for $200 without marketing costs, how many widgets
should production make?
a.
0
b.
30
c.
50
d.
100
e.
as many as possible
31. If revenues from selling quantities x and y of jointly produced goods X and Y were TRX =
100 − xy + 2x and TRY = 500 − xy + 3y, then marginal revenue with respect to X would be:
a.
−2 − y
b.
−y
c.
−x(2y + 5)
d.
−(2y + 5)
e.
2(1 − y)
32. If revenues from selling quantities x and y of jointly produced goods X and Y were TRX =
300 − xy + 50x and TRY = 1,000 − xy + 2y, and 10 units of y were produced, then marginal
revenue with respect to X would be:
a.
$10
b.
$20
c.
$30
d.
$40
e.
$50
33. For a producer of joint products X and Y with total costs CX and CY, an isocost curve:
a.
isolates CX and CY separately
b.
shows points where CX = CY
c.
shows points where cost curves are tangent
d.
shows points where CX /CY is constant
e.
shows points where CX + CY is constant
34. For a producer of joint products X and Y with total revenue and RY, an isorevenue curve:
a.
isolates RX and RY separately
b.
shows points where RX = RY
c.
shows points where revenue curves are tangent
d.
shows points where RX /RY is constant
e.
shows points where RX + RY is constant
35. A producer of two fixed proportion outputs A and B, producing QA = QB with marginal
revenues MRA and MRB, should equate marginal cost to:
a.
the maximum (MRA, MRB)
b.
the minimum (MRA, MRB)
c.
MRA, which should equal MRB
d.
the horizontal sum of MRA and MRB
e.
the vertical sum of MRA and MRB
36. Fred Stickwick produces fixed proportion goods A and B, with QA = QB, marginal costs MC,
and marginal revenues MRA and MRB. If demand for A is greater than demand for B, Fred
should only:
a.
produce B to the quantity where MRB = 0
b.
sell B to the quantity where MRB = 0 if MRA is still > MC
c.
produce B to the quantity where MRB = MC
d.
sell B to the quantity where MRB = MC
e.
produce B to the quantity where MRB = MRA
37. A producer of fixed proportion goods X and Y (Q = QX = QY) has marginal costs and
revenues of MC = 12Q, MRX = 54 − 6QX, MRY = 126 − 12QY. The producer should produce
how many units?
a.
3
b.
5.25
c.
6
d.
8.25
e.
10
38. If John produces joint products A and B and refuses to sell all the A he produces, then:
a.
A is a high-demand good
b.
A is a low-demand good
c.
A is a high-cost good
d.
A is a low-cost good
e.
John is definitely not profit maximizing
39. In the model of monopolistic competition, firms produce a:
a.
standardized product with considerable control over price
b.
differentiated product with considerable control over price
c.
standardized product with no control over price
d.
differentiated product with no control over price
e.
differentiated product with some control over price
40. So long as price exceeds average variable cost, in the model of monopolistic competition, a
firm maximizes profits by producing where:
a.
the difference between marginal revenue and marginal cost is maximized
b.
marginal cost equals marginal revenue
c.
marginal revenue equals price
d.
the difference between price and marginal cost is maximized
e.
price equals marginal cost
41. In the model of monopolistic competition, there can be short-run:
a.
losses or profits, but there must be profits in long-run equilibrium
b.
profits, but there must be losses in long-run equilibrium
c.
losses or profits, but there must be losses in long-run equilibrium
d.
losses or profits, but there must be neither profits nor losses in long-run
equilibrium
e.
losses, but there must be profits in long-run equilibrium
42. Firms that produce similar, slightly differentiated products are called a(n):
a.
oligarchy
b.
oligopoly
c.
cabal
d.
cartel
e.
product group
43. If a firm in a monopolistically competitive industry is profit maximizing, it should choose
its level of advertising such that the marginal revenue of an additional dollar of advertising:
a.
is equal to the elasticity of its demand curve minus 1
b.
is exactly $1
c.
increases revenues by $1
d.
is equal to 1 plus the elasticity of its demand curve
e.
is equal to the elasticity of its demand curve
44. Consider Fred, who is employed by a national tire store and who earns a commission selling
tires. He earns 25 percent of his gross sales revenue as a bonus. Fred’s objective is to
maximize:
a.
total profits for the store
b.
total revenues for the store
c.
marginal revenue from sales
d.
the difference between marginal revenues and marginal cost for the store
e.
the number of customers he waits on per day
45. The ABC Company estimates that a newspaper advertising campaign would cost $25,000
and would generate $35,000 in new revenues. The firm should begin this campaign as long
as:
a.
price elasticity of demand is at least 2.5 (in absolute value)
b.
price elasticity of supply is 1
c.
price elasticity of demand is at least 1.4 (in absolute value)
d.
marginal cost of production is no more than $25,000
e.
price elasticity of supply is 1.4
46. A supplier of fur coats estimates that the price elasticity of demand for its coats is −3.75.
The firm has determined that an additional $100,000 in advertising would generate
$275,000 in additional revenues. You would advise the firm to:
a.
advertise, since the marginal revenues are greater than the cost of advertising
b.
spend only $50,000 on advertising, since the marginal revenue from an additional
dollar of advertising is less than $3.75
c.
abandon the advertising plan, since the demand elasticity is greater than 1 (in
absolute value)
d.
abandon the advertising plan, since the marginal revenue from an additional dollar
of advertising is less than $3.75
e.
advertise, since the fur coats are a luxury item
47. Firms advertise in order to:
a.
build brand loyalty
b.
appeal to the price-sensitive consumers
c.
increase the demand elasticities of their loyal customers
d.
shift the market supply curve to the left
e.
shift the market demand curve to the left
48. Firms offer promotions in order to:
a.
build brand loyalty
b.
appeal to the price-sensitive consumers
c.
increase the demand elasticities of their loyal customers
d.
shift the market supply curve to the left
e.
shift the market demand curve to the left
49. A monopsonist faces a market labor supply curve w = 40 + 2L, where w is the wage rate and
L is the number of workers employed. If the firms labor demand curve is w = 200 − L, what
is the optimal wage rate and quantity of labor employed?
a.
w = 146.7 and L = 53.3
b.
w = 168 and L = 32
c.
w = 104 and L = 32
d.
w = 40 and L = 160
e.
w = 32 and L = 168
50. A monopsonist faces a market labor supply curve w = 20 + L, where w is the wage rate and
L is the number of workers employed. If the firms labor demand curve is w = 200 − 4L,
what is the optimal wage rate and quantity of labor employed?
a.
w = 50 and L = 30
b.
w = 56 and L = 36
c.
w = 80 and L = 30
d.
w = 104 and L = 32
e.
none of the above