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1
Practice Exam 2
Note there are 6 parts however the number of <=
span
style=3D'font-size:150%'>points for each part varies so you should allocat=
e =
more time to those parts worth more points.
<=
/span>
The first part is worth 10 points.
You can fill in the table on the exam with a brie=
f =
description of what you expect for each industry =
structure type for each of the characteristics.
2
1.
A firm has fixed
costs of $500 and other =
costs
as indicated
3
TC =3D TF=
C +
TVC so also<=
span
style=3D'font-family:"Arial Narrow";font-size:183%;color:red'> TVC =3D =
TC -
TFC
![](3D"slide0362_image001.gif")
and TC/Q =3D=
TFC/Q +
TVC/Q
and since: ATC =3D TC/Q
AFC =3D TFC/Q
AVC =3D TVC/Q
means ATC =
=3DAFC +
AVC
Marginal Cost =3D
=
D Total Costs
![](3D"slide0362_image002.gif")
=
D Quantity=
=3D
=
D Variable Costs<=
/span>
![](3D"slide0362_image003.gif")
=
D Quantity=
4
![](3D"slide0363_image005.gif")
5
![](3D"slide0364_image007.gif")
6
![](3D"slide0365_image009.gif")
7
![](3D"slide0366_image011.gif")
8
![](3D"slide0367_image013.gif")
9
![](3D"slide0368_image015.gif")
10
![](3D"slide0369_image017.gif")
11
![](3D"slide0370_image019.gif")
12
![](3D"slide0371_image021.gif")
13
![](3D"slide0372_image023.gif")
14
![](3D"slide0373_image025.gif")
15
![](3D"slide0374_image027.gif")
16
![](3D"slide0375_image029.gif")
17
![](3D"slide0376_image031.gif")
18
Part II is worth 10 points.
You can fill in the table on the exam with a brief description of what you = expect for each indu= stry
structure type for each of the characteristics.
You can fill in the table on the exam with a brief description of what you = expect for each indu= stry
structure type for each of the characteristics.
19
1. Fill in the chart=
below
indicating the basic
characteristics for each of the industry structures.
![](3D"slide0303_image033.gif")
20
1. Fill in the chart=
below
indicating the basic
characteristics for each of the industry structures.
![](3D"slide0304_image035.gif")
21
1. Fill in the chart=
below
indicating the basic
characteristics for each of the industry structures.
![](3D"slide0306_image037.gif")
22
1. Fill in the chart=
below
indicating the basic
characteristics for each of the industry structures.
![](3D"slide0307_image039.gif")
23
1. Fill in the chart=
below
indicating the basic
characteristics for each of the industry structures.
![](3D"slide0308_image041.gif")
24
Practice Exam 2&#=
13;
Part III
The second part is worth 25 points.
Since there are 5 questions this means each <=
span
style=3D'font-size:150%'>question is worth 5 points.
You should briefly explain your answe=
rs.
25
1. Would a monopolis=
t ever
operate on the inelastic portion of the demand curve?
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26
1. Would a monopolis=
t ever
operate on the inelastic portion of the demand curve?
<= br> Not usually since= on the inelastic portion of the demand curve MR is negative. However, a regulated monopolist may = be pressured to produce more output eve= n though this reduces profits.
<= br> Not usually since= on the inelastic portion of the demand curve MR is negative. However, a regulated monopolist may = be pressured to produce more output eve= n though this reduces profits.
27
=
2. How much are econ=
omic
profits in a monopolisticly competitive firm in the long run?=
28
2. How much are econ=
omic
profits in a monopolisticly competitive firm in the long run?
=
Zero, since when profits > 0 this leads to entry.=
As new competitors produce close substitutes this reduces demand until it is just tan= gent to ATC.
=
Zero, since
As new competitors produce close substitutes this reduces demand until it is just tan= gent to ATC.
29
RECALL:
30
![](3D"slide0313_image042.gif")
D
MR
MC
<=
b>P3
<=
b>=3D A3
ATC
![3D"Text](3D"slide0313_image043.gif")
Price and Costs
Q3
![](3D"slide0313_image044.gif")
=
PRICE
AND OUTPUT IN
=
MONOPOLISTIC
COMPETITION
Quantity
![](3D"slide0313_image045.gif")
Long-Run Equilibrium
Normal
Profit=
3;
Only<=
/b>
![](3D"slide0313_image046.gif")
31
MONOPOLISTIC
COMPETITION
• Not Productively Efficient
¹
Minimum ATC
• Not Allocatively Efficient
Price ¹ MC
• Excess Capacity
Graphically…
![](3D"slide0314_image047.jpg")
=
32
![](3D"slide0315_image048.gif")
D
MR
MC
<=
b>P3
<=
b>=3D A3
ATC
![3D"Text](3D"slide0315_image049.gif")
Price and Costs
Q3
![](3D"slide0315_image050.gif")
Quantity
Long-Run Equilibrium
![](3D"slide0315_image051.gif")
Price is Not=
=3D Minimum&=
#13;
![](3D"slide0315_image052.gif")
Price ¹=
MC
=
MONOPOLISTIC
COMPETITION
=
AND
EFFICIENCY
33
3. Why might it be desirable to allow a monopoly to continue?
34
<=
span
style=3D'font-size:82%;color:black;mso-color-index:1'>3. Why might it be
desirable to allow a monopoly to continue?
<= br> 2 reasons
1)Some people believe allowing temporary monopolies in the case of patents & copyrights helps give an incentive for = creativity & i= nventiveness.
2) If it’s a natural monopoly<= /i> it will be <= span style=3D'font-size:82%;color:black;mso-color-index:1'>more <= /span>efficient (lower ATC), although you may want = to regulate it.
<= br> 2 reasons
1)Some people believe allowing temporary monopolies in the case of patents & copyrights helps give an incentive for = creativity & i= nventiveness.
2) If it’s a natural monopoly<= /i> it will be <= span style=3D'font-size:82%;color:black;mso-color-index:1'>more <= /span>efficient (lower ATC), although you may want = to regulate it.
35
4. Why don’t most oligopolists form cartels in the U.S.?
36
4. Why don’t most oligopolis=
ts form cartels in the U.S.?
It’s illegal in= the U.S. (Sherman Antitrust = Act of 1890).
It’s illegal in= the U.S. (Sherman Antitrust = Act of 1890).
37
=
5. Given the payoff =
matrix
and strategies below, what would be A’s dominant strategy? How do you know?
38
=
5. Given the payoff =
matrix
and strategies below, what would be A’s dominant strategy? How do you know?
![](3D"slide0322_image054.gif")
39
=
5. Given the payoff =
matrix
and strategies below, what would be A’s dominant strategy? How do you know?
![](3D"slide0323_image055.gif")
If A chooses “charge a low price&=
#8221;
they will get either
58 or 69 in profits. If A chooses “charge a high price” they will get either =
55 or
60 in profits. If they
cannot collude with B they will choose “charge a low price” since 58>55 and 6=
9 >
60 thus “charg=
e a low price” is their dominant
strategy.
40
Notice
there are several questions asked in this <=
span
style=3D'font-size:150%'>problem be sure to answer them all.
Part IV is worth 15 points.
41
1. Suppose a monopolist faces =
the
demand schedule below, h=
as fixed costs of 45, and has constant marginal costs of 10. Calculate total and <=
/span>marginal revenue.=
What rule does the monopolist use
in deciding how many units to produce? What is the profit‑maximizing output level and pr=
ice
for this monopolist?<=
span
style=3D'mso-spacerun:yes'> What is the level of profits?
42
![](3D"slide0326_image057.gif")
43
![](3D"slide0327_image059.gif")
44
![](3D"slide0329_image061.gif")
45
1. Suppose a monopolist faces t=
he
demand schedule below, =
has fixed costs of 45, and has constant
marg=
inal
costs of 10. Calculate total and marginal revenue.
What rule does the monopolist use in deciding how many units to produce?
Produce = as long as MR>=3DMC
What is the profit-maximizing output level and price for this monopolist? Note in the table MR=3DMC=3D10 at 5 units of output.
What is the level of profits?
Profits= =3D TR - TC. TR=3D250 from table. TC=3DFC+VC, in this case FC=3D45 & VC=3D 5x10
so TC=3D= 95 and profits=3D 250-95=3D = 155
Produce = as long as MR>=3DMC
What is the profit-maximizing output level and price for this monopolist? Note in the table MR=3DMC=3D10 at 5 units of output.
What is the level of profits?
Profits= =3D TR - TC. TR=3D250 from table.
so TC=3D= 95 and profits=3D 250-95=3D = 155
46
Since there are 4 questions this means each =
question is worth 5 points.
You should choose the best answer.
You can just circle your choice on the exam if =
you wish.
Part V is worth 20 points.
47
&=
#13;
1. Which of=
the
following would tend to be associated with a stro=
ng
demand for a resource?
a) Relatively low marginal product.
b) Relatively low market price of the final good.
c) Relatively strong marginal product of the resource.
d) Relatively elastic demand for the good.
e) Relatively strong diminishing marginal productivity.
a) Relatively low marginal product.
b) Relatively low market price of the final good.
c) Relatively strong marginal product of the resource.
d) Relatively elastic demand for the good.
e) Relatively strong diminishing marginal productivity.
48
&=
#13;
1. Which of=
the
following would tend to be associated with a stro=
ng
demand for a resource?
a) Relatively low marginal product.
b) Relatively low market price of the final good.
c) Relatively strong marginal product of the resource.
d) Relatively elastic demand for the good.
e) Relatively strong diminishing marginal productivity.
a) Relatively low marginal product.
b) Relatively low market price of the final good.
c) Relatively strong marginal product of the resource.
e) Relatively strong diminishing marginal productivity.
49
&=
#13;
2. The larg=
er the
number of firms in a market and the weaker the product differentiation,
the:
a) Greater the price elasticity of demand
b) Smaller the price elasticity of demand
c) Steeper the demand curve
d) Steeper the marginal revenue curve
e) Lower the competition in the market
<= br> <= /div>
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a) Greater the price elasticity of demand
b) Smaller the price elasticity of demand
c) Steeper the demand curve
d) Steeper the marginal revenue curve
e) Lower the competition in the market
<= br> <= /div>
50
&=
#13;
2. The larg=
er the
number of firms in a market and the weaker the product differentiation,
the:
a) Greater the price elasticity of demand
b) Smaller the price elasticity of demand
c) Steeper the demand curve
d) Steeper the marginal revenue curve
e) Lower the competition in the market
<= br> <= /div>
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a) Greater the price elasticity of demand
b) Smaller the price elasticity of demand
c) Steeper the demand curve
d) Steeper the marginal revenue curve
e) Lower the competition in the market
<= br> <= /div>
51
&=
#13;
3. Which of=
the
following are generally regarded as "imperfectly" competitive
markets?
a) Pure competition and monopolistic competition
b) Pure monopoly and pure competition
c) Monopolistic competition, oligopoly and pure monopoly
d) Monopolistic competition and oligopoly
e) None of the above
a) Pure competition and monopolistic competition
b) Pure monopoly and pure competition
c) Monopolistic competition, oligopoly and pure monopoly
d) Monopolistic competition and oligopoly
e) None of the above
52
&=
#13;
3. Which of=
the
following are generally regarded as "imperfectly" competitive
markets?
a) Pure competition and monopolistic competition
b) Pure monopoly and pure competition
c) Monopolistic competition, oligopoly and pur= e <= u>monopoly
d) Monopolistic competition and oligopoly
e) None of the above
a) Pure competition and monopolistic competition
b) Pure monopoly and pure competition
c) Monopolistic competition, oligopoly and pur= e <= u>monopoly
d) Monopolistic competition and oligopoly
e) None of the above
53
&=
#13;
<=
span
style=3D'font-size:91%;color:black;mso-color-index:1'>4. The most important
factor which explains the persistence of pure monopoly over time w=
ould
be:
a) Diseconomies of scale
b) Diminishing returns
c) Antitrust policy
d) Advertising
e) Barriers to entry
a) Diseconomies of scale
b) Diminishing returns
c) Antitrust policy
d) Advertising
e) Barriers to entry
54
&=
#13;
<=
span
style=3D'font-size:91%;color:black;mso-color-index:1'>4. The most important
factor which explains the persistence
of pure monopoly over time would be:=
a) Diseconomies of scale
b) Diminishing returns
c) Antitrust policy
d) Advertising
e) Ba= rriers to entry
<= br>
a) Diseconomies of scale
b) Diminishing returns
c) Antitrust policy
d) Advertising
e) Ba= rriers to entry
<= br>
55
Since
there are 2 questions this means each question is worth 10 points.
You should label your graphs clearly.
Part VI is worth 20 points.
56
1. Use a diagram and
clearly label the axes and curves to depict a natural monopoly
without any regulation. =
Sketch the area of dead weight loss to <=
/span> society. If a regulator we=
re to
intervene mark the=
price
and output level they should
set. Explain your choice.=
57
UNREGULATED NATURAL MONOPOLY
![](3D"slide0337_image062.gif")
![](3D"slide0337_image063.gif")
![](3D"slide0337_image064.gif")
![](3D"slide0337_image065.gif")
Q
![](3D"slide0337_image066.gif")
D
MR
MC
ATC
P
<=
![if !ppt]>![3D"Text](3D"slide0337_image067.gif")
![](3D"dsld0337_imag=)
![](3D"slide0337_image069.gif")
![](3D"slide0337_image070.gif")
![](3D"slide0337_image071.gif")
![](3D"slide0337_image072.gif")
![](3D"slide0337_image073.gif")
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fee=3D(ATC-MC)xQ<=
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style=3D'font-size:183%;color:#006600;display:none'>
#consumers
Q
D
MR