Practice_Ch10_ - Chapter 10 Practice Test Pure Monopoly 1....

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Chapter 10 Practice Test Pure Monopoly 1. At a monopolist’s current output, ATC = $10, P = $11, MC = $8 and MR = $7. This firm is realizing: a. an economic profit that could be increased by producing more output b. an economic profit that could be increased by producing less output c. an economic loss that could be increased by producing more output d. an economic loss than could be increased by producing less output Answer: b Feedback: The firm is realizing a profit of $1 per unit—the difference between price and average total cost. However, marginal cost exceeds marginal revenue, so total profit could increase by cutting back output. 2. Use the following diagram to answer the next question. Refer to the diagram. At output q 2 : a. marginal revenue exceeds marginal cost by the greatest amount b. demand is inelastic c. profit is maximized d. marginal revenue is zero Answer: d Feedback: Total revenue is maximized at output q 2 ; the last unit of output neither increases nor decreases total revenue. Since marginal revenue is zero at this point, profit is not being maximized unless marginal cost is also zero. Further, demand is unit elastic at this point. 3. A pure monopolist is selling 8 units at a price of $50. If the marginal revenue of the ninth unit is $23, then: a. the price of the ninth unit is $23 b. the price of the ninth unit is $47 c. the price of the ninth unit is $52 d. the firm’s demand curve is inelastic at a price of $50 Answer: b Feedback: At the $50 price, 8 units are sold for total revenue of $400. Since the ninth unit adds revenue of $23, total revenue at nine units is $423. $423 divided by nine is $47, the price at which nine units are sold.
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4. In long run equilibrium, both a competitive firm and a monopolistic firm: a. earn zero economic profits b. set price equal to marginal revenue c. produce at minimum average total cost d. produce the output at which marginal revenue equals marginal cost Answer: d Feedback: For any firm, maximum profits are obtained by producing the output at which marginal revenue equals marginal cost. In long run equilibrium, competitive firms will earn zero economic profits but monopoly firms will likely earn positive economic profits. 5. Use the following diagram to answer the next question: Refer to the diagram. This nondiscriminating monopolist will produce: a. M units at price A and make a profit b. N units at price B and earn zero profits c. M units at price C and incur a loss d. Q units at price J and earn zero profits Answer: a Feedback: Maximum profits are obtained by producing M units, at which point marginal revenue equals marginal cost. Referring to the demand curve, these M units will be sold at price A. The firm makes a profit because price exceeds average total cost at this price/quantity combination. 6. A profit-maximizing, nondiscriminating monopolist will set its price:
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This note was uploaded on 02/22/2011 for the course ECON 2023 taught by Professor Meier during the Spring '11 term at St. Petersburg College.

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Practice_Ch10_ - Chapter 10 Practice Test Pure Monopoly 1....

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