Suppose that a monopolistic competitor producing an output of 100 units faces the following revenues and costs: price = $100; marginal revenue = $50; marginal cost = $75; and the average total cost = $90
the following revenues and costs: price = $100; marginal revenue = $50; marginal cost = $75; and the average total cost = $90
1. In order to maximize profit, the firm should
a. reduce output and raise price
b. increase output and raise price
c. keep output the same but raise price
d. increase output and reduce price
2. At its current output of 100 units, the firm
a. realizes a loss of $4000
b. realizes a loss of $2500
c. earns a profit of $1000
d. earns a profit of $2500
3. If the firm were a competitive firm with price = $100 and the same costs, it should
a. increase output and keep price the same
b. increase output and lower price
c. keep output and price the same
d. keep output the same but raise price
1. Which one of the following explains how the monopolistic competitor differs from the competitive firm?
a. The monopolistic competitor has no demand curve in the traditional sense
b. The monopolistic competitor can earn economic profit for long periods of time
c. The monopolistic competitor charges a price greater than marginal cost
d. The monopolistic competitor exists in an industry without free entry
2. Which one of the following statements is true?
a. Advertising is inherently inefficient because it adds to the costs of production without creating anything of value
b. Advertising is inherently valuable because it increases sales and lowers overall average total cost, which leads to lower prices
c. Advertising is costly, but it also provides benefits in the form of product information
d. Brand names add to the price paid by consumers without providing anything of value
1. Which one of the above diagrams shows a monopolistic competitor in short-run (but not long-run) equilibrium?
2. Which one of the above diagrams shows a monopolistic competitor in long-run equilibrium?
3. Which one of the above diagrams shows a competitive firm in long-run equilibrium?
4. Which one of the above diagrams is MOST likely to represent a monopolist other than a natural monopolist?
5. Which one of the above diagrams shows a competitive industry in long-run equilibrium?
6. Which one of the above diagrams shows a natural monopoly in long-run equilibrium?
If oligopolists engage in collusion and successfully form a cartel, the market outcome is
a. the same as if it were served by a monopoly
b. the same as if it were served by competitive firms
c. the same as if it were served by monopolistically competitive firms
d. more efficient
1. Which one of the following is an example of internalizing an externality?
a. The municipal government offers subsidies to homeowners to offset the cost of beautifying their front yards
b. A restaurant no longer serves imported wine, having decided to offer only domestic wine
c. A beekeeper buys extra hives to expand the business
d. The federal government reduces the income tax deduction for charitable donations
2. Suppose that the last unit of output produced at a paper mill has a value to society of $10 and a social cost of $15, and that the private cost to the company is $10 and the current price is $10. Which one of the following is true?
a. The market is in equilibrium, but a lower output would make society better off
b. The market is in equilibrium, but a higher output would make society better off
c. Output is too low and price is too high for equilibrium
d. Output is too high and price is too low for equilibrium
3. In the presence of technology spillovers, the market tends to _______ and _______ the product relative to society's best interest
a. overproduce, underprice
b. overproduce, overprice
c. underproduce, underprice
d. underproduce, overprice
VI. True or False. If a statement is false, briefly explain why
____ 1. In the presence of a negative externality, the market equilibrium quantity of a commodity is less than the socially optimal quantity
____ 2. "Do unto others as you would have them do unto you" tells people to internalize externalities
____ 3. A corrective tax reduces economic efficiency by distorting taxpayer behavior
____ 4. By offering special tax breaks for spending on research and development, Canadian tax laws internalize the technology spillover externality
____ 5. If studded snow tires cause an estimated $10 damage to the highways per vehicle each year, then the most efficient outcome for society would be to ban the use of studded snow tires
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