1. The market price for wheat is $5. If a farmer’s marginal cost is $7, the farmer should produce ______ (more/less) output.
2. The shutdown point occurs if price falls below___________________(total/variable) cost.
3. A(n) _____________ (oligopoly/monopoly) is a firm that is a lone seller of a product with no close substitutes.
4. For a monopoly firm, marginal revenue (MR) is _______ (greater/less) than price.
5. To maximize profits, a monopoly firm picks the quantity at which ___ (marginal revenue/average revenue) equals _____ (marginal cost/average cost)
6. ___ ____ (Game Theory/ Consumer Theory) is a method for analyzing strategic behavior of oligopoly firms.
7. The entry of the second firm under monopolistic competition structure of market shifts the demand curve of the first firm to the _____ (right/left).
8. A perfect competitor will face a demand curve for its product that is ________ (horizontal/downward sloping) at the market price.
9. A monopolistically competitive firm just breaks even in the __ (long-run/short-run)
10. For a market with four firms, each with 25% market share, the Herfindahl Hirschman Index (HHI) is equal to _____ (2,500/100)
    Section B: True/False Questions (1 point each question)
11. Firms in a market that is perfectly competitive produce goods and services that are perfect substitutes of each other. (True/False)
12. In a monopoly, the firm is the industry. (True/False)
13. A firm in a perfect competition is free to set price at whatever level it pleases. (True/False)
14. Natural monopolies typically have high fixed costs, so only one firm is able to serve the market at an economic profit. (True/False)
15. If price is less than average variable cost (P < AVC), a firm should shut down. (True/False)
16. First class mail service in the United States would be an example of natural monopoly. (True/False)
17. The profit maximizing point for a perfectly competitive firm will be where fixed costs = fixed revenues. (True/False)
18. If a monopolistically competitive firm raises its price too high, it should expect to lose business. (True/False)
19. A market structure with a few firms that dominate the market is known as oligopoly. (True/False)
20. Perfectly competitive markets are not the most efficient type of markets. (True/False)

Section C: Multiple Choice Questions (1 point each question)

1. If a firm under perfect competition decreases its output
   a) The market price will decrease
   b) The market price will remain unaffected
   c) The market price will increase
   d) All of the above
2. By producing the quantity of output where marginal revenue (MR) equals marginal cost MC), a firm will
   a) Maximize total revenues
   b) Maximize economic profits
   c) Minimize costs
   d) Minimize revenues
3. The demand curve faced by the monopoly firm
   a) Is the same as the industry curve
   b) Slopes downwards to the right
   c) Shows that in order to sell more, the firm must lower price
   d) All of the above

Quantity (Q) 0 1 2 3 4 5 6
Total Revenue (TR) $0 $30 $60 $90 $120 $150 $180

1. In the above table, the price of the product is:
   a) $30
   b) $150
   c) $147
   d) $180
2. The more cell phones in use, the more valuable they become to consumers. Which of the following terms best ascribes to that assertion?
   a) Patent
   b) Network externalities
   c) Control of a key resource
   d) Natural monopoly
3. The figure above shows short-run cost curves for a perfectly competitive firm. If the price of the product is $8, in the short run, the firm will
   a) Incur an economic loss.
   b) Earn an economic profit.
   c) Break even.
   d) All of the above.
4. In the above figure, if the price is P1, the firm is
   a) Breaking even
   b) Incurring an economic loss.
   c) Making an economic profit
   d) None of the above
5. Refer to the graph above. Which point corresponds to a natural monopoly serving this market and breaking even?
   a) Point A
   b) Point B
   c) Either point A or point B are associated with a natural monopoly breaking even.
   d) Neither point A nor point B is associated with a natural monopoly breaking even.
6. What is the definition of market power?
   a) Market power is the same as inefficiency as measured by the amount of deadweight loss from a monopoly.
   b) Market power is the ability of a firm to eliminate competition.
   c) Market power is the ability of one firm to control other firms in the market.
   d) Market power is the ability of a firm to charge a price greater than marginal cost.
7. Which of the following is an example of legal (government) barrier to entry?
   a) Patent
   b) Copyright
   c) Public franchise
   d) All of the above
8. If a monopoly firm can sell 10 units for $15 each or 11 units for $14 each, what is the marginal revenue (MR) of the 11th unit?
   $154
   $150
   $14
   $4
9. Refer to the graph above. What is firm’s profit when it sells six subscriptions per month?
   e) None of the above; there is insufficient information to answer the question.
   f) $90
   g) $42
   h) $27
10. Refer to the graph above. What is firm’s economic profit when it sells six subscriptions per month?
    a) $90
    b) $72
    c) $42
    d) $18
11. Which type of barrier to entry is the granting of a patent or copyright to an individual or firm considered?
    a) Entry blocked by government action
    b) Entry blocked by externalities
    c) Entry blocked by economies of scale
    d) Entry blocked by natural or technical constraints

Price
Quantity Total
Revenue Marginal Revenue Total
Cost Marginal
Cost
$17 3 $51 — $56 —
$16 4 64 $13 63 $7
$15 5 75 11 71 8
$14 6 84 9 80 9
$13 7 91 7 90 10
$12 8 96 5 101 11
e)

1. The table above represents the demand and costs that Comcast faces in the provision of cable television. Using the table, the profit-maximizing quantity and price that Comcast will produce and charge is:
   a) 4, and $16
   b) 6, and $14
   c) 8, and $12
   d) 7, and $13
2. What is a prisoner’s dilemma?
   a) a game that involves no dominant strategies
   b) a game in which prisoners are stumped because they cannot communicate with each other
   c) a game in which players act in rational, self-interested ways that leave everyone worse off
   d) a game in which players collude to outfox authorities
3. A dominant strategy
   a) is one that is the best for a firm, no matter what strategies other firms use.
   b) is one that a firm is forced into following by government policy.
   c) involves colluding with rivals to maximize joint profits.
   d) involves deciding what to do after all rivals have chosen their own strategies. Sears
   Walmart Lower Prices Don’t Lower Prices
   Lower Prices S: $5 million
   W: $5 million S: $1 million
   W: $30 million
   Don’t Lower Prices S: $30 million
   W: $1 million S: $20 million
   W: $20 million
4. From the Table above. Sears and Walmart must decide whether to lower their prices, based on the potential economic profits shown in the table above. Which of the following is true?
   a) This situation is not a prisoners’ dilemma.
   b) If Walmart lowers its prices, Sears should keep its prices high.
   c) If Sears lowers its prices and Walmart does not, Sears will earn a $20 million economic profit.
   d) Both Sears and Walmart would jointly be better off if they could each keep their prices high
5. Refer to the payoffs in the table above. Sears and Walmart must decide whether to lower their prices based on the potential profits shown in the table. This game has
   a) a Nash equilibrium: both Sears and Walmart keep prices high.
   b) a Nash equilibrium: both Sears and Walmart lower prices.
   c) a Nash equilibrium: Sears keeps its prices high and Walmart lowers its prices.
   d) no Nash equilibrium
6. Refer to the graph above. If regulators want to achieve economic efficiency, how will they set the monopoly price (P) and quantity (Q)?
   a) At P1, Q1
   b) At P2, Q2
   c) At P3, Q3
   d) None of the above
7. Refer to the graph above. If regulators want to ensure that the owners of the monopoly are able to earn a normal rate of return on their investment, how will they set the monopoly price (P) and quantity (Q)?
   a) At P1, Q1
   b) At P2, Q2
   c) At P3, Q3
   d) None of the above

Section D: Application Question (10 marks)

Firm X  Firm Y  Firm Z

Price $10 $10 $10
Quantity 1,000 1,000 1,000
Total Revenues
Variable Cost $5,000 $5,000 $11,000
Fixed Cost $5,000 $6,000 $5,000
Total Costs
Marginal Cost of 1,000th Unit $10 $10 $10

1. Consider perfectly competitive firms X, Y and Z are in the above situations
   a) Calculate total revenues for Company X, Company Y, Company Z.
   b) Which of the above firms is breaking even?
   c) Which of the above firm(s) is/are making losses in the short-run?
   d) Which of the above firm(s) is/are likely to shut-down its/their operation(s) in the short-run?
   e) What is the reasoning behind your choice of the shutdown firm in d) above?

Sample Solution