week 7 & week 8 problems and quiz- economics

week_7_problem_sets_questions xweek_7_quiz_questions x

ECO 500: Week Seven Problem Sets

1. The widget industry is perfectly competitive. The industry demand and supply functions for widgets are given below.

Qd = 424 – 40P

Qs = 40 + 8P

a. What is the equilibrium price and quantity for the industry?

b. If the government establishes a price floor of $9, explain what will result in terms of excess demand or supply.

c. If the government establishes a price ceiling of $6, explain what will result in terms of excess demand or supply.

d. Assume the supply curve shifts to

Qs’ = 34 + 12P

What is the new equilibrium price and quantity?

e. Assume in addition to the supply curve shifting, the demand curve shifts to

Qd’ = 484 – 38P

What happens to equilibrium price and output?

2. Below is a table with total data for a firm in a perfectly competitive industry.

Quantity

Total Cost

0

100

10

220

15

300

20

360

25

450

30

600

35

770

40

960

a. What is the marginal cost and average total cost for the firm at each level of output?

b. If the prevailing market price is $34 per unit, how many units will be produced and sold? What are the profits per unit? What are total profits?

c. Is the industry in long run equilibrium at this price? If not, what do you expect to happen to price over time?

3. Jones Company operates within a monopolistically competitive industry. The estimated demand for its products is given by the following inverse demand function

P = 1760 – 12Q

It finance department has estimated its total cost function as

TC = 24,000 + 5 Q – 15 Q2 + 0.333 Q3

a. What is the level of output that maximizes short run profits? Hint: Profit is maximized when MR=MC

b. What is the profit maximizing price?

c. What are total profits?

d. What is the effect of an increase in fixed costs of $5000 on equilibrium price and output?

4. Ajax, Inc. is a monopolist. The estimated demand function for its product is

Qd = 120 – 0.8P + 12Y + 4A

Where Qd denotes quantity demanded, P denotes price, Y denotes personal income (in thousands of dollars), and A denotes advertising expenditures in hundreds of dollars.

Ajax’s marginal cost function is given as

MC = 21 + 4Q

Assume Y equals 3 and A equals 3 and fixed costs equal $1000

a. What is the inverse demand function? (The equation demand equation in the form
P = a – bQd)?

b. What is the profit maximizing price and quantity of output for Ajax, assuming it is an unregulated monopoly? What are its profits?

c. If fixed costs increase to $1200, what will happen to equilibrium price and quantity?

1. In a competitive market, the market-determined price is $6

0

. For a typical firm producing 100 units of output, short-run marginal cost is constant at $65, average total cost is $95, and average fixed cost is $30. Is this firm making the profit-maximizing decision? If not, what should it do?

No, it is not making the profit maximizing decision. In the short run, it should reduce its rate of production until its marginal cost is equal to $60.
	Yes, it is making the profit-maximizing decision.
No, it is not making the profit maximizing decision. In the short run, it should increase its rate of production until its marginal cost is equal to $60.
No, the firm is not making the profit maximizing decision. It should shut down in the short run to minimize losses.

2. If price exceeds average costs for a typical firm in a perfectly competitive industry, ____ firms will enter the industry, supply will ____, and price will be driven ____.

no new; remain the same; up

more; decrease; down

more; decrease; up

more; increase; down

3. The perfectly competitive firm

faces a downward-sloping demand function

can influence market price only in a downward direction

cannot earn any economic profits in the short run because it faces a horizontal demand curve

makes its profit-maximizing decision only on the basis of output

4. A firm reaches its “shutdown point” when

average total cost equals price at the profit-maximizing level of output.

average variable cost equals price at the profit-maximizing level of output.

average fixed cost equals price at the profit-maximizing level of output.

marginal cost equals price at the profit-maximizing level of output.

5. Which of the following statements is not a characteristic of a perfectly competitive market?

Large number of firms in the industry

Outputs of the firms are perfect substitutes for one another

Limited information is available to all market participants

Ease of entry into the market

6. In a competitive market, the market-determined price is $25. For a typical firm producing 10,000 units of output, the firm’s average cost reaches its minimum value of $25. Is this firm making the profit-maximizing decision? If not, what should the firm do?

Yes, it is making the profit-maximizing decision.

No, it is not making the profit-maximizing decision. In the short run, it should reduce its rate of production because its marginal cost is not equal to $25.

No, it is not making the profit-maximizing decision. In the short run, it should increase its rate of production because its marginal cost is not equal to $25.

No, it is not making the profit-maximizing decision. In the short run, it should reduce its rate of production until its average variable cost is equal to $12.

7. When price is greater than average variable cost but less than average total cost at the profit-maximizing level of output, a firm should

continue to produce the level of output at which marginal revenue equals marginal cost.

increase output to minimize its losses.

reduce output to the level at which price equals average variable cost to minimize its losses.

shut down to minimize its losses.

8. Assume a monopoly has the following demand schedule:

Price……..Quantity
$

20

………….200
$15………….300
$10………….500
$5……………700

What can you say about the price elasticity of demand along the demand curve between $15 and $20?

Demand is price elastic.

Demand is price inelastic.

Demand is unitary elastic.

There is not enough information to tell.

9. The following are the inverse demand curve and MR curves for a monopolistically competitive firm. 
P = 1000 – 2Q   
MR = 1000 – 4Q

Where P is the price of the product and Q is the level of production.
For the 200th unit of Q, MR is equal to _______ and demand is price ____________.

200, elastic

-200, inelastic

600, elastic

-600, inelastic

10. In the long run, firms in a monopolistically competitive industry will

earn substantial economic profits.

tend to just cover costs, including normal profits.

seek to increase the scale of operations.

seek to reduce the scale of operations.

13. Which of the statements below concerning barriers to entry is FALSE?

They restrict entry into industries in which positive economic profits are being made.

They are somewhat lessened by the existence of patents.

They may be due to legal impediments such as licenses.

They may be due to a single firm controlling access to a natural resource or production process.

12. In comparing monopoly to a competitive market, which of the following is FALSE?

Market price will be higher under monopoly.

Equilibrium quantity will be higher under perfect competition.

Consumers will be worse off with the monopoly.

Employment will be higher under monopoly.

13. ZZZ, Inc. operates in a monopolistically competitive industry. Its demand curve can be written as P = 160 – Q and its short run total cost curve is equal to TC = 1000 + Q^2. What is the rate of output that maximizes ZZZ, Inc.’s short run profits?

40

0

53

20

14. Which of the following statements is correct?

Barriers to entry do not affect the industry structure.

Barriers to entry affect the competitiveness of an industry because they determine whether or not typical firms in an industry will face new competition if they are earning above normal returns on investment.

Barriers to entry are highest for monopolistic competition.

Barriers to entry can be achieved only through government mandate.

15. All of the following are possible characteristics of a monopoly except

there is a single firm.

the firm is a price taker.

the firm produces a unique product.

the existence of some advertising.