Questions for Competitive Markets

Type I: True/False question (give a brief explanation)

1. For a firm operating in a perfectly competitive industry, total revenue, marginal revenue,
and average revenue are all equal.
2. In competitive markets, firms that raise their prices are typically rewarded with larger
profits.
3. A firm operating in a perfectly competitive industry will continue to operate in the short
run but earn losses if the market price is less than that firm’s average total cost but greater
than the firm’s average variable cost.
4. A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed
costs of production.
5. In a long-run equilibrium where firms have identical costs, it is possible that some firms
in a competitive market are making a positive economic profit.
6. All firms maximize profits by producing an output level where marginal revenue equals
marginal cost; for firms operating in perfectly competitive industries, maximizing profits
also means producing an output level where price equals marginal cost.
7. A firm operating in a perfectly competitive industry will shut down in the short run but
earn losses if the market price is less than that firm’s average variable cost.
8. In the short run, a firm should exit the industry if its marginal cost exceeds its marginal
revenue.
9. The supply curve of a firm in a competitive market is the average variable cost curve
above the minimum of marginal cost.
10. The short-run supply curve in a competitive market must be more elastic than the long-
run supply curve.

Type II: Discussion questions

1. List and describe the characteristics of a perfectly competitive market.
2. Why would a firm in a perfectly competitive market always choose to set its price
equal to the current market price? If a firm set its price higher the current market
price, what effect would this have on the market?
3. Use a graph to demonstrate the circumstances that would prevail in a competitive
market where firms are earning economic profits. Can this scenario be maintained in
the long run? Explain your answer.

4. A firm in the perfectly competitive market has a total cost function

TC=Q2 +180Q+14400. The market price is 1200.
a. What is the quantity that this firm maximize its profits? Compute this profit.
b. What are the quantity and price where the firm is break-even (earn zero profit).
c. What are the quantity and price where the firm shut-downs?
d. Draw a figure showing the supply curve of this firm.
 Questions for Monopoly
Type I: True/False question (give a brief explanation)
1. Even with market power, monopolists cannot achieve any level of profit they desire
because they will sell lower quantities at higher prices.
2. Copyrights and patents are examples of barriers to entry that afford firms monopoly
pricing powers.
3. Like competitive firms, monopolies choose to produce a quantity in which marginal
revenue equals marginal cost.
4. A monopolist does not have a supply curve because the firm’s decision about how much
to supply is impossible to separate from the demand curve it faces.
5. A monopoly creates a deadweight loss to society because it earns both short-run and
long-run positive economic profits.
6. A monopoly creates a deadweight loss to society because it produces less output than the
socially efficient level.
7. The government may choose to do nothing to reduce monopoly inefficiency because the
“fix” may be worse than the problem.
8. A natural monopoly has economies of scale for most if not all of its range of output.
9. Declining average total cost with increased production is one of the defining
characteristics of a natural monopoly.
10. For a monopoly, marginal revenue is often greater than the price they charge for their
good.
11. A monopolist produces where P > MC = MR
12. A monopolist’s supply curve is vertical.
13. The socially efficient quantity is found where the demand curve intersects the marginal
cost curve.
14. Government intervention always reduces monopoly deadweight loss.
Type II: Discussion questions
 1. In the market for "home heating" consumers typically have several options (e.g.,
electricity, heating fuel, natural gas, propane, etc.), yet we often think of firms in this
industry as behaving like monopolists. Discuss the context in which your electricity
provider is a monopolist. Is this characterization universally applicable? Explain your
answer.
2. Explain how a profit-maximizing monopolist chooses its level of output and the price of
its goods.
3. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the
deadweight loss from taxation?
4. What is the deadweight loss due to profit-maximizing monopoly pricing under the
following conditions: The price charged for goods produced is $10. The intersection of
the marginal revenue and marginal cost curves occurs where output is 100 units and
marginal revenue is $5. The socially efficient level of production is 110 units. The
demand curve is linear and downward sloping, and the marginal cost curve is constant.
5. What are the four ways that government policymakers can respond to the problem of
monopoly?.
6. In many countries, the government chooses to "internalize" the monopoly by owning
monopoly providers of goods and services. (In some cases these firms are "nationalized,"
and the government actually buys or confiscates firms that operate in monopoly markets).
What would be the advantages and disadvantages of such an approach to ensure that the
"best interest of society" is promoted in these markets? Explain your answer.
7.A monopolist has a total cost function TC=0.5 Q 2+ 10Q+100 and the demand curve P=70-Q
a. What is the fixed cost?
b. What is the marginal revenue function?
c. What are the quantity and price that the monopolist maximize its profit? Compute this
profit.
d. Compute CS, PS, NSB, and the deadweight loss in this case. Draw the figure to
represent it.
e. What are the quantity and price that the monopolist maximize its revenue?
8.A Monopolist has TC=Q2 +50 Q+ 200 and the demand curve P=50-0.5Q
a. What are the quantity and price that the monopolist maximize its profit? Compute this profit.
b. Compute CS, PS, NSB, and the deadweight loss in this case. Draw the figure to represent it.
c.If the government impose the lump-sum tax T=50. Compute price, quantity and profit of
monopolists?
d.If the government imposes the quanity tax t=30/product. Compute price, quantity and profit of
monopolists?