Ch009_4e - Answers to Text Questions and Problems Answers...

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Answers to Text Questions and Problems Answers to Review Questions 1. The pure monopolist, the oligopolist, and the monopolistically competitive firm all face downward-sloping demand curves. LO: 1 AACSB: Analytical Skills Bloom’s: Understanding 2. False. A firm with market power is one that faces a downward-sloping demand curve for its product. This implies that a firm can choose its price, but then the quantity it sells is determined by the demand curve. Similarly, a firm can choose the quantity it wants to produce and sell, but the demand curve then shows the price at which the firm can sell its product. LO: 2 AACSB: Analytical Skills Bloom’s: Understanding 3. Without patent or copyright protection, firms would have little incentive to incur the costs needed to develop new products. The gains from encouraging new product development generally outweigh the inefficiency of higher prices. LO: 2 AACSB: Analytical Skills Bloom’s: Application 4. In order to sell more units of a good, a monopolist must cut the price on all units in order to expand sales. A perfectly competitive firm can, by contrast, sell any number of additional units at the (constant) market price. LO: 4 AACSB: Analytical Skills Bloom’s: Application 5. False. The natural monopolist, like any other monopolist, sets price above marginal cost. However, for the natural monopolist marginal cost is less than average cost and average cost may exceed price at the profit-maximizing level of output. Thus, it is not necessarily the case that a natural monopolist earns a positive economic profit. LO: 7 AACSB: Analytical Skills Bloom’s: Application
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Answers to Problems 1. As shown in the following table, Volvo’s greater production volume gives it substantially lower average production cost, and this advantage helps explain why Volvo’s market share has in fact been growing relative to Saab’s. Saab Volvo Annual production 50,000 200,000 Fixed cost $1,000,000,000 $1,000,000,000 Variable cost $500,000,000 $2,000,000,000 Total cost $1,500,000,000 $3,000,000,000 Average cost per car $30,000 $15,000 LO: 3 AACSB: Analytical Skills Bloom’s: Application 2. True/False questions a. False. The industry demand curve is downward sloping in both cases, but from the individual perfectly competitive firm’s point of view, the demand curve is horizontal. Because the individual firm is too small to affect the market price, it can sell as many units as it wishes at that price.
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Ch009_4e - Answers to Text Questions and Problems Answers...

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