Which of the following statements is true for both monopolistically competitive and
oligopolistic industries?
A Firms have some degree of control over prices.
B Producers cannot benefit from knowing other firms' plans.
C It is impossible for new firms to enter the industries.
D Collusion and the creation of cartels is common.
Ans A
What is the difference between perfect competition and monopolistic competition?
A) Perfect competition has a large number of small firms while monopolistic competition
does not.
B) In perfect competition, firms produce identical goods, while firms produce
slightly different goods in monopolistic competition
C) Perfect competition has no barriers to entry, while monopolistic competition does.
D) Perfect competition has barriers to entry while monopolistic competition does not.
Ans B
Which of the following market types has all firms selling products so identical that buyers do
not care from which firm they buy?
A) perfect competition
B) oligopoly
C) monopolistic competition
D) monopoly
Answer A
Which of the following market types has the fewest number of firms?
A) perfect competition
B) monopoly
C) monopolistic competition
D) oligopoly
Answer:B
One of the requirements for a monopoly is that
A) small firms cannot produce the product.
B) there are several close substitutes for the product.
C) there is a unique product with no close substitutes.
D) products are high priced.
Answer: C
Both monopoly and monopolistic competition:
a. Maximize profit where MR = MC.
b. Have high concentration ratios.
c.Use advertising to differentiate their product.
d. Have high barriers to entry.
Answer A
A monopolistically competitive firm maximizes profits or minimizes losses in the short run
by:
a. Using marginal cost pricing.
b. Producing output at the level where ATC is minimized.
c. Producing output at the level where price equals ATC.
d. Producing output at the level where MC = MR.
Answer D
Firms face competition when the good they produce
A) is in a market with natural barriers to entry.
B) is unique.
C) is in a market with legal barriers to entry.
D) has a close substitute.
Answer D
Which of the following statements is correct?
A) The market demand and the firm's demand are the same for a monopoly.
B) Monopolies have perfectly inelastic demand for the product sold.
C) Monopolies are guaranteed to earn an economic profit.
D) All of the above are correct.
The pure monopolist obtains equilibrium level of output when
(A) Marginal Revenue = Marginal Cost
(B) Price = Marginal Cost
(C) Price is the lowest
(D) Price is the highest
Answer A
In monopolistic competition, each firm supplies a small part of the market. This occurs
because
A) there are barriers to entry.
B) firms produce differentiated products.
C) there are no barriers to entry.
D) there are a large number of firms.
Answer D
Marginal Cost is less than the Average Cost when Average Cost falls with
(A) an increase in output
(B) a decrease in output
(C) constant output
(D) no change in output
Answer A
Which of the following is different about perfect competition and monopolistic competition?
A) Firms in monopolistic competition compete on their product's price as well as its quality
and marketing.
B) In monopolistic competition, entry into the industry is unblocked.
C) Perfect competition has a large number of independently acting sellers.
D) Only firms in monopolistic competition can earn an economic profit in the short run.
Answer A
Implicit costs are:
A) equal to total fixed costs.
B) comprised entirely of variable costs.
C) "payments" for self-employed resources.
D) always greater in the short run than in the long run.
Answer C
If the short-run average variable costs of production for a firm are rising, then this indicates
that:
A) average total costs are at a maximum.
B) average fixed costs are constant.
C) marginal costs are above average variable costs.
D) average variable costs are below average fixed costs.
Answer C
If a more efficient technology was discovered by a firm, there would be:
A) an upward shift in the AVC curve.
B) an upward shift in the AFC curve.
C) a downward shift in the AFC curve.
D) a downward shift in the MC curve.
Answer D
The total costs are £200 and 10 units are produced. The marginal cost of an 11th unit is
£130. Which of the following is true?
a) The average cost increases from £20 to £30
b) The total costs for 11 units are £70
c) The average cost for 10 units is £130
d) The average cost for 11 units is £130
Answer: A
Avg Cost initially is 20 (200/10)
Extra Unit is produced @130 Marginal Cost So now total 11 unit produced and there Total
Cost is 330 (200+130).
SO AVG COST of 11 units is 30 (330/11)
Assume a monopolist has MC = 10 and no fixed costs. The monopolist faces a demand
curve of P = 100 - 3Q. Find the equilibrium quantity and price.
Answer
Revenue = P·Q = (100 - 3Q) Q = 100Q - 3Q2
Marginal Revenue = 100 - 6Q
Setting MC = MR:
= 100 - 6Q = Q = 15 So P=55
Illustrate the monopoly equilibrium with a numerical example. Suppose for a
monopolist the following demand and total cost function are given. Find out how much
he will produce and what price he will charge Q = 360 – 20 P (demand function)
TC = 6Q + 0.05Q2 (cost function)
First, derive the inverse demand function as under:
Q = 360 – 20P
20P = 360 – Q P = 18 – 0.05 Q ………. (i)
Total revenue (TR)= P. Q = 18Q – 0.05Q^2
Differentiating it with respect to output Q, we can get MR. Thus MR =
MR= ΔTR/ΔQ = Δ (P.Q)/ΔQ = 18 – 0.1Q ...(ii)
Marginal cost can be obtained by differentiating the total function (TC = 6Q + 0.05Q^2).
Thus, we have MC = ΔTC/ΔQ
= 6 + 0.1Q ...(iii)
Since the profits of the monopolist will be maximised when he equates marginal revenue
with marginal cost, setting MR = MC, we have
18 – 0.1Q = 6 + 0.1Q
0.2Q =18 – 6 =12 Q = 12.10/2 = 60
To find out the price, we substitute the value of output Q in the demand function (i) above we
P =18 – 0.05Q
= 18 – 0.05 × 60 = 18 – 3 = 15
To obtain total profits, we calculate total revenue and total cost TR = P.Q = 15 × 60 = 900
TC = 6Q + 0.05Q^2 = 6 × 60 + 0.05 (60)2
= 360 + 5/100 × 3600 = 540
Profit = TR – TC = 900 – 540 = 360
Thus, output (Q) = 60; price (P) = 15 and profits = 360
Suppose price elasticity of demand for the product of a monopolist is – 2.0. Show that
price fixed by him will be twice the marginal cost of production.
Sol: In price-output equilibrium of the monopolist
MR = MC
MR = P [1– 1/ |e|]
MC = P [1–1/ |e|]
If E= -2.0
MC = P [1-1/2] = 1/2P
P = 2MC.
Given the following linear demand and cost functions, show that monopolist will
produce half the output under perfect competition Q = 300 – 2P and TC = 150 + 10Q
TC = 150 + 10Q
MC = dTC /dQ = 10 ………… (i)
Now, the given linear demand function is Q = 300 – 2P
2P = 300 – Q
P = 150 – 0.5Q …………..(ii)
TR = PQ = 150Q – 0.5Q2
MR = dPQ/dQ =150 – Q …………(iii)
Output under perfect competition is determined where MC = P
Thus, under perfect competition.
10 = 150 – 0.5Q
0.5Q = 150 – 10 = 140
Hence, Qpc = 280 ………….. (iv)
In equilibrium under monopoly,
MR=MC
From (iii), we know MR = 150 – Q, and from (i), we know that MC = 10 Thus, in
equilibrium under monopoly
150 – Q = 10 Q = 150 – 10 = 140
Thus, Qm = 140 ...(v)
Comparing (iv) and (v), we find that output under monopoly is half of that produced under
perfect competition.
