Exam III Name: ________________________________________________
1. A monopoly’s marginal cost will
a. be less than the price per unit of its product.
b. be less than its average fixed cost.
c. exceed its marginal revenue.
d. equal its average total cost.
2. A firm is deciding whether to produce or shut down in the short run. Its total costs are $15,000 of
which $5,000 are the total fixed costs of production. The firm should produce in the short run as long
as its total revenues are at least
3. A firm’s average total costs are $60, its total fixed costs are $2000, and its output is 200 units. Its
average variable costs are
4. As firms exit a competitive industry that is not profitable in the short-run (i.e. profits < 0), during the
transition from the short run to the long run, the economic loss of each firm remaining in the industry:
a. decreases and the price falls.
b. decreases and the price rises.
c. increases and the price falls.
d. increases and the price rises.
5. A firm is producing where its marginal costs are at the lowest level. What can one most likely infer
a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it
is competitive and price is at that low level.
b. It is a price-taker who is producing too much.
c. It is a monopolist who is producing the socially optimal quantity.
d. The firm is producing rationally.
6. A single-price monopolist sets price
a. where MR=demand.
b. where supply=demand
c. from the demand curve at the quantity for which MC=MR.
d. where MR=MC.
7. Assume that the Law of Diminishing Marginal Product applies at the current output level of a
competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average
total cost is $20. To maximize profits the firm should:
a. produce the current output level, since average revenue (price) = average cost.
b. produce more since marginal revenue exceeds marginal cost at current output.
c. produce less since marginal revenue is always below average revenue.
d. any of the above is possible, without further information.
8. Which of the following statements is true?
(i) When a competitive firm sells an additional unit of output, its revenue increases by an amount
less than the price.
(ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount
less than the price.
(iii) Average revenue is the same as price for both competitive and monopoly firms.
a. (i) only
b. (iii) only
c. (i) and (ii)
d. (ii) and (iii)
9. If a firm in a competitive market triples the number of units of output sold, then total revenue will
a. more than triple.
b. less than triple.
c. exactly triple.
d. All of the above are potentially true.
10. When a competitive firm makes a decision to shut down, it is most likely that
a. marginal cost is above average variable cost.
b. marginal cost is above average total cost.
c. price is below the minimum of average variable cost.
d. fixed costs exceed variable costs.
Number of figs TC ATC TVC AVC MC
1 $90 $90
11. Table 4 presents the cost schedule for David’s Figs. If David produces three figs, David’s total variable
12. Table 4 presents the cost schedule for David’s Figs. If David produces five figs, David’s marginal costs
e. None of the above.
13. At a price of $20, the marginal revenue of a monopolist is $13. If the marginal cost of production is
$14, what should the monopolist do?
a. Increase its price
b. Decrease its price
c. Keep its price at the same level
d. Shut down
Table 2: Firm costs
14. Refer to Table 2. In a competitive market, Qs=30+10P and Qd=110-10 P. In the long run, we expect
a. Firms to exit
b. Firms to enter
c. No change in the number of firms
d. Not enough information to say
15. Calculate the monopolist’s profit under the following conditions. The intersection of the marginal
revenue and marginal cost curves occurs where output is 20 units. At an output of 20 units, the
monopoly price is $15 per unit, the marginal cost is $8 per unit, and the average variable cost is $6 per
unit, and average fixed cost is $4 per unit.
16. If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal
a. a one-unit decrease in output would increase the firm’s profit.
b. average revenue exceeds marginal cost.
c. the firm is earning a positive profit.
d. All of the above are correct.
17. Firms can have:
1. Accounting profits and economic losses
2. Accounting profits and economic profits
3. Accounting losses and economic losses
4. Accounting losses and economic profits
a. i, ii, and iii
b. only i and iv
c. only ii and iii
d. All of the above
18. A reduction in a monopolist’s fixed costs would
a. possibly increase, decrease or not affect profit-maximizing price and quantity, depending on the
elasticity of demand.
b. decrease the profit-maximizing price and increase the profit-maximizing quantity produced.
c. increase the profit-maximizing price and decrease the profit-maximizing quantity produced.
d. not affect the profit-maximizing price or quantity.
19. A firm’s output is 80 units, its MC is $42, its AVC is $43, and its AFC is $10. ATC is
d. Not enough information
20. Joni’s firm faces a perfectly elastic demand curve at a price of $30 per unit. She has costs represented
by TC = 2000 + 2Q + 0.2Q2
, and MC = 2 + 0.4Q. If Joni maximizes her short-run profits, how much
profit does she earn?
Refer to the following information to answer questions 21 and 22 .
Assume a certain firm is producing 1,000 units of output (so Q = 1,000). At Q = 1,000, the firm’s marginal
cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
21. At Q = 999, the firm’s total cost amounts to
22. At Q = 999, the firm’s profit amounts to
Long Problems – SHOW WORK OR YOU WILL LOSE POINTS!!
1. A monopolist faces demand given by: P 4QD =100−. , and has marginal costs given by:
MC = 10 + .2Q .
a. Draw the demand, marginal revenue and marginal cost curves. Calculate and show how much this
firm will sell and what they will charge.
b. Calculate the producer surplus with monopoly and the consumer surplus with monopoly.
c. How much would be produced if this was a competitive market? What would be the price?
d. Calculate the consumer and producer surplus for a competitive market.
e. Calculate the DWL of the monopoly (if any).