08 11 December 2018 Questions and Answers

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08 11 December 2018, questions and answers
Bachelor of Science in Management Accounting (Pontifical and Royal University of

Santo Tomas, The Catholic University of the Philippines)
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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
Chapter 08 AACSB: Analytical Thinking

Difficulty: 03 Hard
Managing in Competitive, Monopolistic,
and Monopolistically Competitive Markets
4. Which of the following is true under monopoly?
A. Profits are always positive.
Multiple Choice Questions B. P > MC.
C. P = MR.
1. You are the manager of a firm that produces output D. All of the choices are true for monopoly.
in two plants. The demand for your firm's product is
P = 78 − 15Q, where Q = Q1 + Q2. The marginal Answer: B
Learning Objective: 08-01
costs associated with producing in the two plants are Topic: Monopoly
MC1 = 3Q1 and MC2 = 2Q2. How much output Blooms: Understand
should be produced in plant 1 in order to maximize AACSB: Knowledge Application
profits? Difficulty: 02 Medium
A. 1
B. 2 5. You are the manager of a firm that sells its product
C. 3 in a competitive market at a price of $50. Your firm's
D. 4 cost function is C = 40 + 5Q2. The profit-maximizing
output for your firm is:
Answer: A
A. 4/5.
Topic: Monopoly B. 10.
Blooms: Apply C. 5.
AACSB: Analytical Thinking D. 45.
Difficulty: 03 Hard
Answer: C
2. You are the manager of a firm that produces output Topic: Perfect Competition
in two plants. The demand for your firm's product is Blooms: Apply
P = 78 − 15Q, where Q = Q1 + Q2. The marginal AACSB: Analytical Thinking
costs associated with producing in the two plants are Difficulty: 02 Medium
MC1 = 3Q1 and MC2 = 2Q2. What price should be
6. You are the manager of a firm that sells its product
charged to maximize profits?
in a competitive market at a price of $50. Your firm's
A. $20.5
cost function is C = 40 + 5Q2. Your firm's maximum
B. $40.5
profits are:
C. $60.5
A. 125.
D. $80.5
B. 250.
Answer: B C. 100.
Learning Objective: 08-08 D. 85.
Topic: Monopoly
Blooms: Apply Answer: D
AACSB: Analytical Thinking Learning Objective: 08-03
Difficulty: 03 Hard Topic: Perfect Competition
Blooms: Apply
3. You are the manager of a firm that produces output AACSB: Analytical Thinking
in two plants. The demand for your firm's product is Difficulty: 02 Medium
P = 78 − 15Q, where Q = Q1 + Q2. The marginal
costs associated with producing in the two plants are
7. You are the manager of a monopoly that faces a
MC1 = 3Q1 and MC2 = 2Q2. What price should be
demand curve described by P = 230 − 20Q. Your
charged in order to maximize revenues?
costs are C = 5 + 30Q. The profit-maximizing output
A. $39
for your firm is:
B. $47
A. 4.
C. $52
B. 5.
D. $56
C. 6.
Answer: A D. 7.
Topic: Monopoly Answer: B
Blooms: Apply Learning Objective: 08-03
8-1
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Topic: Monopoly 11. You are the manager of a firm that produces
Blooms: Apply output in two plants. The demand for your firm's
AACSB: Analytical Thinking
Difficulty: 02 Medium
product is P = 120 − 6Q, where Q = Q1 + Q2. The
marginal costs associated with producing in the two
plants are MC1 = 2Q1 and MC2 = 4Q2. What price
8. You are the manager of a monopoly that faces a should be charged to maximize profits?
demand curve described by P = 230 − 20Q. Your A. 60
costs are C = 5 + 30Q. The profit-maximizing price B. 66
is: C. 70
A. 150. D. 76
B. 90.
C. 130. Answer: B
D. 110. Learning Objective: 08-08
Topic: Monopoly
Answer: C Blooms: Apply
Learning Objective: 08-03 AACSB: Analytical Thinking
Topic: Monopoly Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytical Thinking 12. You are the manager of a firm that produces
Difficulty: 02 Medium output in two plants. The demand for your firm's
product is P = 120 − 6Q, where Q = Q1 + Q2. The
9. You are the manager of a monopoly that faces a marginal costs associated with producing in the two
demand curve described by P = 230 − 20Q. Your plants are MC1 = 2Q1 and MC2 = 4Q2. What price
costs are C = 5 + 30Q. Your firm's maximum profits should be charged in order to maximize revenues?
are: A. 6
A. 495. B. 2
B. 475. C. 24
C. 480. D. 60
D. 415.
Answer: D
Answer: A Learning Objective: 08-08
Learning Objective: 08-03 Topic: Monopoly
Topic: Monopoly Blooms: Apply
Blooms: Apply AACSB: Analytical Thinking
AACSB: Analytical Thinking Difficulty: 03 Hard
13. In a competitive industry with identical firms,

10. You are the manager of a firm that produces long-run equilibrium is characterized by:
output in two plants. The demand for your firm's A. P = AC.
product is P = 120 − 6Q, where Q = Q1 + Q2. The B. P = MC.
marginal costs associated with producing in the two C. MR = MC.
plants are MC1 = 2Q1 and MC2 = 4Q2. How much D. All of the statements associated with this question
output should be produced in plant 1 in order to are correct.
maximize profits?
A. 3 Answer: D
B. 6 Learning Objective: 08-05
Topic: Perfect Competition
C. 9
Blooms: Remember
D. 12
Answer: B
Topic: Monopoly
Blooms: Apply
Difficulty: 03 Hard
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AACSB: Knowledge Application AACSB: Analytical Thinking

Difficulty: 01 Easy Difficulty: 02 Medium
14. Which of the following is true? 17. You are the manager of a monopoly that faces a
A. A monopolist produces on the inelastic portion of demand curve described by P = 85 − 5Q. Your costs
its demand. are C = 20 + 5Q. The profit-maximizing output for
B. A monopolist always earns an economic profit. your firm is:
C. The more inelastic the demand, the closer A. 6.
marginal revenue is to price. B. 5.
D. In the short run, a monopoly will shut down if P < C. 7.
AVC. D. 8.
Answer: D Answer: D
Learning Objective: 08-06 Learning Objective: 08-03
Topic: Monopoly Topic: Monopoly
Blooms: Analyze Blooms: Apply
AACSB: Analytical Thinking AACSB: Analytical Thinking
Difficulty: 03 Hard Difficulty: 02 Medium
15. You are the manager of a firm that sells its 18. You are the manager of a monopoly that faces a
product in a competitive market at a price of $40. demand curve described by P = 85 − 5Q. Your costs
Your firm's cost function is C = 60 + 4Q2. The profit- are C = 20 + 5Q. The profit-maximizing price is:
maximizing output for your firm is: A. 45.
A. 4. B. 55.
B. 5. C. 60.
C. 10. D. 50.
D. 15.
Answer: A
Answer: B
Topic: Monopoly
Blooms: Apply
Blooms: Apply
19. You are the manager of a monopoly that faces a
16. You are the manager of a firm that sells its demand curve described by P = 85 − 5Q. Your costs
product in a competitive market at a price of $40. are C = 20 + 5Q. The revenue-maximizing output is:
Your firm's cost function is C = 60 + 4Q2. Your A. .85.
firm's maximum profits are: B. 9.
A. 36. C. 10.
B. 60. D. None of the preceding answers is correct.
C. 40.
Answer: D
D. 80.
Answer: C Topic: Monopoly
Learning Objective: 08-03 Blooms: Analyze
Topic: Perfect Competition AACSB: Analytical Thinking
Blooms: Apply Difficulty: 03 Hard
20. You are the manager of a firm that sells its

product in a competitive market at a price of $60.
Your firm's cost function is C = 50 + 3Q2. The profit-
maximizing output for your firm is:
A. 10.
B. 20.
C. 30.
D. 40.
Answer: A
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Learning Objective: 08-03 24. You are the manager of a monopoly that faces a
Topic: Perfect Competition demand curve described by P = 63 − 5Q. Your costs
Blooms: Apply
are C = 10 + 3Q. Your firm's maximum profits are:
Difficulty: 02 Medium A. 0.
B. 66.
21. You are the manager of a firm that sells its C. 120.
product in a competitive market at a price of $60. D. 170.
Your firm's cost function is C = 50 + 3Q2. Your
firm's maximum profits are: Answer: D
A. 250. Topic: Monopoly
B. 400. Blooms: Apply
C. 450. AACSB: Analytical Thinking
D. 500. Difficulty: 02 Medium
Answer: A
Learning Objective: 08-03 25. You are the manager of a monopoly that faces a
Topic: Perfect Competition demand curve described by P = 63 − 5Q. Your costs
Blooms: Apply are C = 10 + 3Q. The revenue-maximizing output is:
AACSB: Analytical Thinking A. 10/63.
B. 5.
C. 6.3.
22. You are the manager of a monopoly that faces a D. None of the preceding answers is correct.
demand curve described by P = 63 − 5Q. Your costs
are C = 10 + 3Q. The profit-maximizing output for Answer: C
your firm is: Topic: Monopoly
A. 3. Blooms: Analyze
B. 4. AACSB: Analytical Thinking
C. 5. Difficulty: 03 Hard
D. 6.
26. Which of the following is true under monopoly?
Answer: D
A. Profits are always positive.
Topic: Monopoly B. P > minimum of ATC.
Blooms: Apply C. P = MR.
AACSB: Analytical Thinking D. None of the preceding answers is correct.
Answer: D
23. You are the manager of a monopoly that faces a Learning Objective: 08-01
Topic: Monopoly
demand curve described by P = 63 − 5Q. Your costs Blooms: Understand
are C = 10 + 3Q. The profit-maximizing price is: AACSB: Knowledge Application
A. 20. Difficulty: 02 Medium
B. 27.
C. 33.
D. 55.
Answer: C
Topic: Monopoly
Blooms: Apply
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27. In the long run, monopolistically competitive 31. Which of the following industries is best
firms: characterized as monopolistically competitive?
A. charge prices equal to marginal cost. A. Toothpaste
B. have excess capacity. B. Crude oil
C. produce at the minimum of average total cost. C. Agriculture
D. have excess capacity and produce at the minimum D. Local telephone service
of average total cost.
Answer: A
Answer: B Learning Objective: 08-01
Learning Objective: 08-05 Topic: Monopolistic Competition
Topic: Monopolistic Competition Blooms: Understand
Blooms: Understand AACSB: Knowledge Application
AACSB: Knowledge Application Difficulty: 02 Medium
32. Which of the following is an example of
28. If a monopolistically competitive firm's marginal monopoly?
cost increases, then in order to maximize profits, the A. Shoe industry in the United States
firm will: B. Local utility industry in a small town
A. reduce output and increase price. C. Newspaper industry in New York City
B. increase output and decrease price. D. Bread industry in New York City
C. increase both output and price.
Answer: B
D. reduce both output and price.
Answer: A Topic: Monopoly
Learning Objective: 08-03 Blooms: Understand
Topic: Monopolistic Competition AACSB: Knowledge Application
Blooms: Analyze Difficulty: 02 Medium
33. Differentiated goods are a feature of a:
A. perfectly competitive market.
29. Which of the following market structures would B. monopolistically competitive market.
you expect to yield the greatest product variety? C. monopolistic market.
A. Monopoly D. monopolistically competitive market and
B. Monopolistic competition monopolistic market.
C. Bertrand oligopoly
D. Perfect competition Answer: B
Answer: B Topic: Monopolistic Competition
Learning Objective: 08-01 Blooms: Remember
Topic: Monopolistic Competition AACSB: Knowledge Application
Blooms: Understand Difficulty: 01 Easy
AACSB: Knowledge Application
34. Firms have market power in:
A. perfectly competitive markets.
30. The primary difference between monopolistic B. monopolistically competitive markets.
competition and perfect competition is: C. monopolistic markets.
A. the ease of entry and exit into the industry. D. monopolistically competitive markets and
B. the number of firms in the market. monopolistic markets.
C. Both A and B are correct.
D. None of the preceding answers is correct. Answer: D
Topic: Monopoly
Answer: D
Blooms: Remember
Topic: Monopolistic Competition
Difficulty: 01 Easy
Blooms: Remember
Difficulty: 01 Easy
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35. There is no market supply curve in: 38. Which of the following features is common to
A. a perfectly competitive market. both perfectly competitive markets and
B. a monopolistically competitive market. monopolistically competitive markets?
C. a monopolistic market. A. Firms produce homogeneous goods.
D. monopolistically competitive and monopolistic B. There is free entry.
markets. C. Long-run profits are zero.
D. There is free entry and long-run profits are zero.
Answer: D
Learning Objective: 08-07 Answer: D
Topic: Monopoly Learning Objective: 08-01
Blooms: Understand Topic: Monopolistic Competition
AACSB: Knowledge Application Blooms: Remember
Difficulty: 02 Medium AACSB: Knowledge Application
Difficulty: 01 Easy
36. Suppose that initially the price is $50 in a

perfectly competitive market. Firms are making zero 39. The source(s) of monopoly power for a monopoly
economic profits. Then the market demand shrinks may be:
permanently, some firms leave the industry, and the A. economies of scale.
industry returns to a long-run equilibrium. What will B. economies of scope.
be the new equilibrium price, assuming cost C. patents.
conditions in the industry remain constant? D. All of the statements associated with this question
A. $50 are correct.
B. $45
Answer: D
C. Lower than $50, but exact value cannot be known Learning Objective: 08-02
without more information. Topic: Monopoly
D. Larger than $45, but exact value cannot be known Blooms: Understand
without more information. AACSB: Knowledge Application
Answer: A
Topic: Perfect Competition 40. Economies of scale exist whenever:
Blooms: Analyze A. average total costs decline as output increases.
AACSB: Analytical Thinking B. average total costs increase as output increases.
Difficulty: 03 Hard C. average total costs are stationary as output
37. Which of the following statements concerning increases.
monopoly is NOT true? D. average total costs increase as output increases
A. A market may be monopolistic because there are and average total costs are stationary as output
some legal barriers. increases.
B. A monopoly has market power. Answer: A
C. A monopoly is always undesirable. Learning Objective: 08-02
D. There is some deadweight loss in a monopolistic Topic: Monopoly
market. Blooms: Remember
Answer: C Difficulty: 01 Easy
Blooms: Understand
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41. The number of efficient plants compatible with A. $12.5 per unit
domestic consumption of the refrigerator industry in B. $6.25 per unit
Sweden is 0.7. Which of the following implications C. $31.25 per unit
is (are) correct? D. $18.75 per unit
A. In the absence of imports, the refrigerator industry
Answer: C
in Sweden is monopolistic. Learning Objective: 08-08
B. The refrigerator industry in Sweden is perfectly Topic: Monopoly
competitive. Blooms: Apply
C. The refrigerator industry in Sweden is AACSB: Analytical Thinking
monopolistically competitive. Difficulty: 03 Hard
D. None of the preceding answers is correct.
45. Which of the following is a correct representation
Answer: A of the profit maximization condition for a monopoly?
Learning Objective: 08-01 A. P = MR
Topic: Monopoly
Blooms: Understand
B. MC = MR
AACSB: Knowledge Application C. P = ATC + MR
Difficulty: 02 Medium D. MR = MC + ATC
Answer: B
42. A monopoly has two production plants with cost Learning Objective: 08-01
functions C1 = 50 + 0.1Q12 and C2 = 30 + 0.05Q22. Topic: Monopoly
The demand it faces is Q = 500 − 10P. What is the Blooms: Understand
condition for profit maximization? Difficulty: 02 Medium
A. MC1(Q1) = MC2(Q2) = P(Q1 + Q2).
B. MC1(Q1) = MC2(Q2) = MR(Q1 + Q2).
C. MC1(Q1 + Q2) = MC2(Q1 + Q2) = P (Q1 + Q2). 46. Let the demand function for a product be Q = 100
D. MC1(Q1 + Q2) = MC2(Q1 + Q2) = MR (Q1 + Q2). − 2P. The inverse demand function of this demand
function is:
Answer: B A. Q = 100 + 2P.
Learning Objective: 08-08 B. P = 50 − 0.5Q.
Topic: Monopoly C. P = 50 + 0.5Q.
Blooms: Apply
Answer: B
43. A monopoly has two production plants with cost Topic: Monopoly
Blooms: Apply
functions C1 = 50 + 0.1Q12 and C2 = 30 + 0.05Q22.
The demand it faces is Q = 500 − 10P. What is the Difficulty: 02 Medium
profit-maximizing level of output?
A. Q1 = 62.5; Q2 = 125.
B. Q1 = 125; Q2 = 62.5.
C. Q1 = Q2 = 125.
D. Q1 = Q2 = 62.5.
47. A linear demand function exhibits:
Answer: A A. constant demand elasticity.
Topic: Monopoly
B. more elastic demand as output increases.
Blooms: Apply C. less elastic demand as output increases.
AACSB: Analytical Thinking D. insufficient information to determine.
Difficulty: 03 Hard
Answer: C
44. A monopoly has two production plants with cost Topic: Monopoly
functions C1 = 50 + 0.1Q12 and C2 = 30 + 0.05Q22. Blooms: Remember
The demand it faces is Q = 500 − 10P. What is the AACSB: Knowledge Application
profit-maximizing price? Difficulty: 01 Easy
48. Which of the following is NOT a basic feature of

a monopolistically competitive industry?
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A. There are many buyers and sellers in the industry. 52. Which of the following is (are) basic feature(s) of
B. Each firm in the industry produces a differentiated a perfectly competitive industry?
product. A. Buyers and sellers have perfect information.
C. There is free entry and exit into the industry. B. There are no transaction costs.
D. Each firm owns a patent on its product. C. There is free entry and exit in the market.
D. All of the statements associated with this question
Answer: D
are correct.
Topic: Monopolistic Competition Answer: D
Blooms: Understand Learning Objective: 08-01
AACSB: Knowledge Application Topic: Perfect Competition
Difficulty: 02 Medium Blooms: Remember
49. In the long run, monopolistically competitive Difficulty: 01 Easy
firms produce a level of output such that:
A. P > MC. 53. In the long run, perfectly competitive firms
B. P = ATC. produce a level of output such that:
C. ATC > minimum of average costs. A. P = MC.
D. All of the statements associated with this question B. P = minimum of AC.
are correct. C. P = MC and P = minimum of AC.
Answer: D
Learning Objective: 08-05 Answer: C
Topic: Monopolistic Competition Learning Objective: 08-01
Blooms: Understand Topic: Perfect Competition
AACSB: Knowledge Application Blooms: Understand
Difficulty: 02 Medium AACSB: Knowledge Application
50. Chris raises cows and produces cheese and milk 54. A monopoly has produced a product with a
because he enjoys: patent for the last few years. The patent is going to
A. economies of scale. expire. What will likely happen to the demand for the
B. economies of scope. patent-holder's product when the patent runs out?
C. cost complementarity. A. Demand will increase.
D. None of the preceding answers is correct. B. Demand will decline.
C. Nothing.
Answer: B
Topic: Monopoly
Answer: B
Blooms: Understand
Topic: Monopoly
Blooms: Analyze
51. What contributes to the existence of multiproduct Difficulty: 02 Medium
firms?
A. Economies of scale 55. A monopoly has produced a product with a patent
B. Economies of scope for the last few years. The patent is going to expire.
C. Cost complementarity What will happen after the patent expires?
D. Economies of scope and cost complementarity A. The incumbent will leave the market.
B. The incumbent will retain its status as a monopoly
Answer: D
but produce at a lower price.
Topic: Monopoly C. Some firms will enter the industry.
Blooms: Remember D. None of the preceding answers is correct.
Difficulty: 01 Easy Answer: C
Topic: Monopoly
Blooms: Analyze
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AACSB: Analytical Thinking 59. You are a manager in a perfectly competitive

Difficulty: 02 Medium market. The price in your market is $14. Your total
cost curve is C(Q) = 10 + 4Q + 0.5Q2. What will
56. You are a manager in a perfectly competitive happen in the long run if there is no change in the
market. The price is $14. Your total cost curve is demand curve?
C(Q) = 10 + 4Q + 0.5Q2. What level of output should A. Some firms will leave the market eventually.
you produce in the short run? B. Some firms will enter the market eventually.
A. 5 C. There will be neither entry nor exit from the
B. 8 market.
C. 10 D. None of the preceding answers is correct.
D. 15
Answer: B
Answer: C Learning Objective: 08-05
Learning Objective: 08-03 Topic: Perfect Competition
Topic: Perfect Competition Blooms: Analyze
AACSB: Analytical Thinking Difficulty: 02 Medium
60. A perfectly competitive firm faces a:
57. You are a manager in a perfectly competitive A. perfectly elastic demand function.
market. The price in your market is $14. Your total B. perfectly inelastic demand function.
cost curve is C(Q) = 10 + 4Q + 0.5Q2. What price C. demand function with unitary elasticity.
should you charge in the short run? D. None of the preceding answers is correct.
A. $12
B. $14 Answer: A
C. $16 Learning Objective: 08-01
D. $18 Topic: Perfect Competition
Blooms: Understand
Answer: B AACSB: Knowledge Application
Learning Objective: 08-03 Difficulty: 02 Medium
Blooms: Apply
61. A firm has a total cost function of C(Q) = 50 +
Difficulty: 01 Easy 10Q1/2. The firm experiences:
A. economies of scale.
B. constant returns to scale.
58. You are a manager in a perfectly competitive
C. diseconomies of scale.
market. The price in your market is $14. Your total
cost curve is C(Q) = 10 + 4Q + 0.5Q2. What level of
are correct, depending on the quantity.
profits will you make in the short run?
A. $20 Answer: A
B. $40 Learning Objective: 08-02
C. $60 Topic: Monopoly
D. $80 Blooms: Analyze
Answer: B Difficulty: 03 Hard
Blooms: Apply 62. A firm can produce two products with the cost
AACSB: Analytical Thinking function C(Q1, Q2) = 10 + 5Q1 + 5Q2 − 0.2Q1Q2. The
Difficulty: 02 Medium firm enjoys:
A. economies of scale in the two products separately.
B. economies of scope.
C. cost complementarity.
D. economies of scale in the two products separately
and cost complementarity.
Answer: C
Topic: Monopoly
Blooms: Analyze
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AACSB: Analytical Thinking 66. You are a manager for a monopolistically

Difficulty: 02 Medium competitive firm. From experience, the profit-
63. "Monopolistic competition is literally a kind of maximizing level of output of your firm is 100 units.
competition. Hence, there is no deadweight loss in a However, it is expected that prices of other close
monopolistically competitive market." substitutes will fall in the near future. How should
A. The statement is by definition correct but you adjust your level of production in response to
empirically incorrect. this change?
B. The statement is correct. A. Produce more than 100 units.
C. The statement is incorrect. B. Produce less than 100 units.
D. None of the preceding answers is correct. C. Produce 100 units.
D. Insufficient information to decide.
Answer: C
Answer: B
Blooms: Understand
Blooms: Analyze
64. Eric provides cheese (H) and milk (M) to the 67. Which of the following statements is NOT
market with the following total cost function: C(H, correct about monopoly?
M) = 10 + 0.4H2 + 0.2M2. The prices of cheese and A. A monopolist generally faces a downward-sloping
milk in the market are $2 and $5 respectively. demand curve.
Assume that the cheese and milk markets are B. Monopolists always make positive profits in the
perfectly competitive. What output of cheese long run.
maximizes profits? C. A monopoly may make negative profits in the
A. 2 short run.
B. 2.5 D. There is no close substitute for a monopoly's
C. 5 product.
D. 10
Answer: B
Topic: Monopoly Blooms: Understand
Blooms: Apply AACSB: Knowledge Application
Difficulty: 03 Hard
65. Eric provides cheese (H) and milk (M) to the 68. You are the manager of a firm that produces
market with the following total cost function: C(H, output in two plants. The demand for your firm's
M) = 10 + 0.4H2 + 0.2M2. The prices of cheese and product is P = 20 − Q, where Q = Q1 + Q2. The
milk in the market are $2 and $5 respectively. marginal costs associated with producing in the two
Assume that the cheese and milk markets are plants are MC1 = 2 and MC2 = 2Q2. How much
perfectly competitive. What output of milk output should be produced in plant 1 in order to
maximizes profits? maximize profits?
A. 1.25 A. 1
B. 12.5 B. 4
C. 15 C. 8
D. 20 D. 11
Answer: B Answer: C
Topic: Monopoly Topic: Monopoly
Blooms: Apply Blooms: Apply
Difficulty: 03 Hard Difficulty: 02 Medium
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69. You are the manager of a firm that produces AACSB: Analytical Thinking
output in two plants. The demand for your firm's Difficulty: 02 Medium
product is P = 20 − Q, where Q = Q1 + Q2. The
marginal costs associated with producing in the two 73. Which of the following industries is best
plants are MC1 = 2 and MC2 = 2Q2. What is the characterized as monopolistically competitive?
profit-maximizing price that the firm should charge? A. Cereal
A. $8 B. Crude oil
B. $9 C. Wheat
C. $11 D. Local electricity service
D. $12
Answer: A
Topic: Monopoly Blooms: Understand
Blooms: Apply AACSB: Knowledge Application
74. Differentiated goods are NOT a feature of a:
70. Which of the following is true under monopoly? A. perfectly competitive market.
A. P > ATC B. monopolistically competitive market.
B. P > MC C. monopolistic market.
C. P = MR D. perfectly competitive market and monopolistic
D. P = ATC market.
Answer: B Answer: D
Topic: Monopoly Topic: Monopolistic Competition
Blooms: Understand Blooms: Remember
AACSB: Knowledge Application AACSB: Knowledge Application
Difficulty: 02 Medium Difficulty: 01 Easy
71. You are the manager of a firm that sells its 75. One of the sources of monopoly power for a
product in a competitive market at a price of $60. monopoly may be:
Your firm's cost function is C = 33 + 3Q2. The profit- A. diseconomies of scale.
maximizing output for your firm is: B. differentiated products.
A. 3. C. patents.
B. 5. D. free entry and exit.
C. 6.
Answer: C
D. 10. Learning Objective: 08-02
Topic: Monopoly
Answer: D
Blooms: Remember
Difficulty: 01 Easy
Blooms: Apply
Difficulty: 01 Easy 76. Let the demand function for a product be Q = 50
72. You are the manager of a monopoly that faces an − 5P. The inverse demand function of this demand
inverse demand curve described by P = 200 − 15Q. function is:
Your costs are C = 15 + 20Q. The profit-maximizing A. Q = 25 + P
price is: B. P = 10 − 0.2Q
A. $20. C. P = 10 + 0.2Q
B. $110. D. P = 50 − 0.2Q
C. $135. Answer: B
D. $290. Learning Objective: 08-04
Topic: Monopoly
Answer: B Blooms: Apply
Topic: Monopoly Difficulty: 02 Medium
Blooms: Apply
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81. There is a market supply curve in a:

77. A firm has a total cost function of C(Q) = 75 + A. perfectly competitive market.
25Q1/2. The firm experiences: B. monopolistically competitive market.
A. economies of scale. C. monopolistic market.
B. diseconomies of scale. D. perfectly competitive market and monopolistically
C. constant returns to scale. competitive market.
are correct. Answer: A
Topic: Monopoly AACSB: Knowledge Application
Blooms: Analyze Difficulty: 01 Easy
82. Which of the following features is common to
both perfectly competitive markets and
78. In a competitive industry with identical firms, monopolistically competitive markets?
long-run equilibrium is characterized by: A. Firms produce homogeneous goods.
A. P > AC. B. Prices are equal to marginal costs in the long run.
B. P < MC. C. Long-run profits are zero.
C. MR = MC. D. Prices are above marginal costs in the long run.
D. MR < P.
Answer: C
Topic: Perfect Competition Blooms: Understand
Blooms: Understand AACSB: Knowledge Application
AACSB: Knowledge Application Difficulty: 03 Hard
Difficulty: 01 Easy
79. You are the manager of a firm that sells its 83. Consider a monopoly where the inverse demand
product in a competitive market at a price of $48. for its product is given by P = 200 − 5Q. Based on
Your firm's cost function is C = 60 + 2Q2. Your this information, the marginal revenue function is:
firm's maximum profits are: A. MR(Q) = 400 − 2.5Q.
A. $192. B. MR(Q) = 400 − 10Q.
B. $228. C. MR(Q) = 200 − 10Q.
C. $348. D. MR(Q) = 200 − 2.5Q.
D. $576.
Answer: C
Topic: Perfect Competition Blooms: Apply
AACSB: Analytical Thinking Difficulty: 01 Easy
84. Consider a monopoly where the inverse demand
80. In the long run, monopolistically competitive for its product is given by P = 50 − 2Q. Total costs
firms charge prices: for this monopolist are estimated to be C(Q) = 100 +
A. equal to marginal cost. 2Q + Q2. At the profit-maximizing combination of
B. below marginal cost. output and price, deadweight loss is:
C. equal to the minimum of average total cost. A. $32.
D. above the minimum of average total cost. B. $64.
C. $128.
Answer: D D. cannot be determined with the given information.
Topic: Monopolistic Competition Answer: A
Blooms: Understand Learning Objective: 08-05
AACSB: Knowledge Application Topic: Monopoly
Difficulty: 02 Medium Blooms: Analyze
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Difficulty: 3 Hard 88. Which of the following is true about where a

profit-maximizing monopoly will produce on a linear
85. Consider a monopoly where the inverse demand
demand curve when it has positive marginal costs?
for its product is given by P = 50 − 2Q. Total costs
A. It will produce output on the inelastic portion of
for this monopolist are estimated to be C(Q) = 100 +
the demand curve.
2Q + Q2. At the profit-maximizing combination of
B. It will produce output where MR < 0.
output and price, consumer surplus is:
C. It will produce output where MR = 0.
A. $32.
D. It will produce output on the elastic portion of the
B. $64.
demand curve.
C. $128.
D. cannot be determined with the given information. Answer: D
Answer: B Topic: Monopoly
Topic: Monopoly AACSB: Knowledge Application
Blooms: Analyze Difficulty: 02 Medium
89. Suppose a monopolist knows the own price
86. Consider a monopoly where the inverse demand elasticity of demand for its product is −3 and that its
for its product is given by P = 50 − 2Q. Total costs marginal cost of production is constant MC(Q) = 10.
for this monopolist are estimated to be C(Q) = 100 + To maximize its profit, the monopoly price is:
2Q + Q2. At the profit-maximizing combination of A. $1.50 per unit.
output and price, monopoly profit is: B. $6.67 per unit
A. $32. C. $10 per unit.
B. $64. D. $15 per unit.
C. $92.
Answer: D
D. $128. Learning Objective: 08-04
Topic: Monopoly
Topic: Monopoly Difficulty: 02 Medium
Blooms: Apply
Difficulty: 02 Medium 90. Compute the marginal revenue when the price
elasticity of demand is −0.25.
87. Suppose perfectly competitive market conditions A. −3P, meaning marginal revenue is negative and 3
are characterized by the following inverse demand times greater than price.
and inverse supply functions: P = 100 − 5Q and P = B. 3P, meaning marginal revenue is positive and 3
10 + 5Q. The demand curve facing an individual firm times greater than price.
operating in this market is: C. −0.33P, meaning that marginal revenue is negative
A. P = 100 − 5Q. and one-third of the price.
B. a horizontal line at $9. D. −0.25P, meaning that marginal revenue is
C. a horizontal line at $55. negative and one-fourth of the price.
D. P/N = (100 − 5Q)/N, where N is the total number
Answer: A
of firms in the competitive market. Learning Objective: 08-04
Topic: Monopoly
Topic: Perfect Competition Difficulty: 03 Hard
Blooms: Apply
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91. Suppose that a monopolistically competitive 94. SeaSide Industries currently spends 5 percent of
market is at the long-run equilibrium. Based on this its sales on advertising. Suppose that the elasticity of
information, which of the following conclusions is advertising for Seaside is 0.2. Determine the optimal
NOT true? profit margin over price (P − MC)/P.
A. P > MC. A. 4 percent
B. Deadweight loss is zero. B. 10 percent
C. P = ATC > minimum of ATC. C. 25 percent
D. Firms' profits are zero. D. None of the preceding answers is correct.
Answer: B Answer: C
Topic: Monopolistic Competition Topic: Optimal Advertising Decision
Blooms: Understand Blooms: Apply
AACSB: Knowledge Application AACSB: Analytical Thinking
Difficulty: 02 Medium Difficulty: 03 Hard
92. The first-order conditions for a monopoly to 95. Which of the following is a strategy(ies) used by
maximize profits are: firms in monopolistically competitive industries to
A. dR(Q)/dQ = dC(Q)/dQ. convince consumers that their product is better than
B. MR(Q) = MC(Q). their rivals' products?
C. d(Q)/dQ = 0. A. Comparative advertising
D. All of the statements associated with this question B. Niche marketing
are correct. C. Equity marketing
D. Comparative advertising or niche marketing
Answer: D
Learning Objective: 08-03 Answer: D
Topic: Monopoly Learning Objective: 08-02
Blooms: Apply Topic: Monopoly
AACSB: Analytical Thinking Blooms: Remember
Difficulty: 03 Hard AACSB: Knowledge Application
Difficulty: 01 Easy
93. Consider firms operating in an industry where the
own price elasticity of demand is infinite; that is, EQ,P 96. Which of the following conditions must hold to
= −. Use this information to determine the type of ensure that profits are, in fact, at a maximum?
industry in which these firms operate and the optimal A. d(MC(Q))/dQ > 0
advertising-to-sales ratio. B. d(MC(Q))/dQ < 0
A. Perfectly competitive industry and 0 C. d2(Q)/dQ2 < 0
B. Monopolistically competitive industry and  D. d(MC(Q))/dQ > 0 and d2(Q)/dQ2 < 0
C. Perfectly competitive industry and 
D. Monopolistic industry and 0 Answer: D
Learning Objective: 08-08 Blooms: Apply
Topic: Optimal Advertising Decision AACSB: Analytical Thinking
Blooms: Apply Difficulty: 03 Hard
97. The second-order condition for a firm
maximizing its profit operating in a monopolistically
competitive market is:
A. −(d2C(Q)/dQ2) < 0.
B. (d2R (Q)/dQ2) − (d2C(Q)/dQ2) < 0.
C. (d2R (Q)/dQ2) = (d2C(Q)/dQ2).
D. (dMR/dQ) > (dMC/dQ).
Answer: B
Blooms: Apply
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Difficulty: 02 Medium Blooms: Apply

98. The first-order condition for a firm maximizing
its profit operating in a monopolistically competitive 102. The first-order conditions for profit
market is: maximization in a perfectly competitive market are:
A. (dMR/dQ) = (dMC/dQ). A. P − (dC(Q)/dQ) = 0.
B. P − (dC(Q)/dQ) = 0. B. (dR(Q)/dQ) − (d2C(Q)/dQ2) < 0.
C. (dR(Q)/dQ) − (dC(Q)/dQ) = 0. C. P − (d2C(Q)/dQ2) = 0.
D. (dMR/dQ) < (dMC/dQ). D. P > (dC(Q)/dQ).
Answer: C Answer: A
Topic: Monopolistic Competition Topic: Perfect Competition
Difficulty: 02 Medium Difficulty: 02 Medium
99. The second-order condition for a monopoly 103. You are the manager of a firm that sells its
maximizing its profit is: product in a competitive market with market
A. (d2R(Q)/dQ2) − (d2C(Q)/dQ2) < 0. (inverse) demand given by P = 50 − 0.5Q. The
B. (d2R(Q)/dQ2) − (d2C(Q)/dQ2) = 0. market equilibrium price is $50. Your firm's cost
C. (dMR/dQ) < (dMC/dQ). function is C = 40 + 5Q2. Your firm's marginal
D. (d2R(Q)/dQ2) − (d2C(Q)/dQ2) < 0 or (dMR/dQ) < revenue is:
(dMC/dQ). A. $50.
Answer: D B. MR(Q) = 10Q.
Learning Objective: 08-03 C. MR(Q) = 50 − Q.
Topic: Monopoly D. There is insufficient information to determine the
Blooms: Apply firm's marginal revenue.
Difficulty: 02 Medium Answer: A
100. The first-order condition for a monopoly Blooms: Understand
maximizing its profit is: AACSB: Knowledge Application
A. P − (dC(Q)/dQ) = 0. Difficulty: 02 Medium
B. (dR(Q)/dQ) − (dC(Q)/dQ) = 0.
C. (dR(Q)/dQ) − (dC(Q)/dQ) < 0. 104. You are the manager of a firm that sells its
D. (d2R(Q)/dQ2) − (d2C(Q)/dQ2) < 0. product in a monopolistically competitive market
Answer: B with (inverse) demand given by P = 50 − 0.5Q. Your
Learning Objective: 08-03 firm's cost function is C = 40 + 5Q2. Your firm's
Topic: Monopoly marginal revenue is:
Blooms: Apply A. P = 50 − 0.5Q.
B. P = 50 − Q.
C. P = 100 − Q.
D. There is insufficient information to determine the
101. The second-order condition for a firm firm's marginal revenue.
maximizing its profits operating in a perfectly
competitive market is: Answer: B
A. (d2/dQ2) < 0. Learning Objective: 08-03
B. − (d2C(Q)/dQ2) < 0. Blooms: Apply
C. − (dMC/dQ) < 0. AACSB: Analytical Thinking
D. All of the statements associated with this question Difficulty: 02 Medium
are correct.
Answer: D
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105. You are the manager of a monopoly firm with AACSB: Knowledge Application
(inverse) demand given by P = 50 − 0.5Q. Your Difficulty: 02 Medium
firm's cost function is C = 40 + 5Q2. Your firm's
marginal revenue is: 109. Which of the following is true under perfect
A. P = 50 − 0.5Q. competition?
B. P = 100 − Q. A. Profits are always positive.
C. P = 50 − Q. B. P > MC.
D. There is insufficient information to determine the C. P = MR.
firm's marginal revenue. D. All of the choices are true for perfect competition.
Answer: C Answer: C
Topic: Monopoly Topic: Perfect Competition
Blooms: Apply Blooms: Remember
AACSB: Analytical Thinking AACSB: Knowledge Application
106. Which of the following formulas correctly 110. In a competitive industry with identical firms,
measures the profit of a monopoly? long-run equilibrium is characterized by:
A.  = TR − TC A. P > min ATC.
B.  = (P − ATC)Q B. P < AVC.
C.  = (P − AVC)Q C. MR = MC = min ATC.
D.  = TR − TC and  = (P − ATC)Q D. MR < P.
Answer: D Answer: C
Topic: Monopoly Topic: Perfect Competition
Blooms: Understand Blooms: Remember
AACSB: Knowledge Application AACSB: Knowledge Application
107. Which of the following is true under 111. In a monopoly where the marginal revenue and
monopolistic competition in the short run? price are, respectively, given by $10 and $20, the
A. Profits are always zero. price elasticity of demand is:
B. P > MC. A. −1.
C. P = MR. B. −2.
D. All of the choices are true in monopolistic C. −0.5.
competition. D. Cannot be determined based on the information in
the question.
Answer: B
Learning Objective: 08-03 Answer: B
Topic: Monopolistic Competition Learning Objective: 08-04
Blooms: Understand Topic: Optimal Advertising Decision
AACSB: Knowledge Application Blooms: Analyze
Difficulty: 02 Medium AACSB: Analytical Thinking
Difficulty: 03 Hard
108. Which of the following is true under

112. In a monopoly where the marginal revenue and
monopolistic competition in the long run?
price are, respectively, given by $0.50 and $2, the
A. Profits are always zero.
price elasticity of demand is:
B. P > MC.
A. −0.75.
C. P = MR.
B. −1
D. All of the choices are true in monopolistic
C. −5/4
competition.
D. −4/3.
Answer: A Answer: D
Topic: Monopolistic Competition Topic: Optimal Advertising Decision
Blooms: Understand Blooms: Analyze
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AACSB: Analytical Thinking 116. Compute the marginal revenue when the price
Difficulty: 03 Hard elasticity of demand is −0.10.
A. −9P, meaning marginal revenue is negative and 9
113. You are the manager of a firm that produces times greater than price.
output in two plants. The demand for your firm's B. 9P, meaning marginal revenue is positive and 9
product is P = 96 − 15Q, where Q = Q1 + Q2. The times greater than price.
marginal costs associated with producing in the two C. −3P, meaning marginal revenue is negative and 3
plants are MC1 = 6Q1 and MC2 = 3Q2. How much times greater than price.
output should be produced in plant 2 in order to D. 3P, meaning marginal revenue is positive and 3
maximize profits? times greater than price.
A. 1
Answer: A
B. 2
C. 3 Topic: Monopoly
D. 4 Blooms: Apply
Answer: B Difficulty: 03 Hard
Topic: Monopoly
Blooms: Apply 117. Consider a monopoly where the inverse demand
AACSB: Analytical Thinking for its product is given by P = 80 − 2Q. Total costs
Difficulty: 03 Hard for this monopolist are estimated to be C(Q) = 100 +
20Q + Q2. At the profit-maximizing combination of
114. In a monopoly where the marginal revenue and output and price, deadweight loss is:
price are, respectively, given by $3 and $6, the price A. $30.
elasticity of demand is: B. $50.
A. −0.5. C. $80.
B. −1 D. Cannot be determined with the given information.
C. −1.5
Answer: B
D. −2. Learning Objective: 08-05
Topic: Monopoly
Answer: D Blooms: Analyze
Topic: Optimal Advertising Decision Difficulty: 03 Hard
Blooms: Analyze
Difficulty: 03 Hard 118. John provides cheese (H) and milk (M) to the
market with the following total cost function C(H,
M) = 8 + 0.5H2 + 0.1M2. The prices of cheese and
115. Clark Industries currently spends 5 percent of its milk in the market are $3 and $4 respectively.
sales on advertising. Suppose that the elasticity of Assume that the cheese and milk markets are
advertising for Clark is 0.25. Determine the optimal perfectly competitive. What output of milk
profit margin over price (P − MC)/P. maximizes profits?
A. 15 percent. A. 10
B. 20 percent. B. 20
C. 25 percent. C. 30
D. None of the preceding answers is correct. D. 40
Answer: B Answer: B
Topic: Optimal Advertising Decision Topic: Monopoly
Difficulty: 03 Hard Difficulty: 03 Hard
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119. Suppose that initially the price is $20 in a 122. You are the manager of a monopoly that faces a
perfectly competitive market. Firms are making zero demand curve described by P = 80 − 5Q. Your costs
economic profits. Then the market demand shrinks are C = 10 + 5Q. The revenue-maximizing output is:
permanently, some firms leave the industry, and the A. 2.5.
industry returns to a long-run equilibrium. What will B. 5.
be the new equilibrium price, assuming cost C. 8.
conditions in the industry remain constant? D. None of the preceding answers is correct.
A. $20
Answer: C
B. $16 Learning Objective: 08-03
C. Lower than $20 but exact value cannot be known Topic: Monopoly
without more information. Blooms: Analyze
D. Larger than $20 but exact value cannot be known AACSB: Analytical Thinking
without more information. Difficulty: 03 Hard
Answer: A 123. You are the manager of a monopoly that faces a

Learning Objective: 08-05 demand curve described by P = 10 − 2Q. Your costs
Blooms: Analyze
are C = 20 + 2Q. The revenue-maximizing output is:
AACSB: Analytical Thinking A. 1.5.
Difficulty: 03 Hard B. 3.
C. 4.
120. A monopoly has two production plants with cost D. None of the preceding answers is correct.
functions C1 = 40 + 0.2 Q12 and C2 = 50 + 0.1 Q22.
The demand it faces is Q = 480 − 5P. What is the Answer: D
profit-maximizing level of output? Learning Objective: 08-03
Topic: Monopoly
A. Q1 = 50; Q2 = 100 Blooms: Analyze
B. Q1 = 60; Q2 = 120. AACSB: Analytical Thinking
C. Q1 = Q2 = 75 Difficulty: 03 Hard
D. Q1 = Q2 = 100
Answer: B Essay Questions
Topic: Monopoly 124. Pic Industries produces plastic toothpicks that it
Blooms: Apply
sells to distributors in the Southwest. During the
Difficulty: 03 Hard early 1990s, the price of the plastic it uses to produce
toothpicks fell by 46 percent, due to a local glut of
recycled plastic containers. Assuming that the market
121. A monopoly has two production plants with cost
for plastic toothpicks most closely resembles that of
functions C1 = 40 + 0.2Q12 and C2 = 50 + 0.1Q22. The
perfect competition and that other firms in the
demand it faces is Q = 480 − 5P. What is the profit-
industry do not experience similar cost savings in the
maximizing price?
short run, what impact would this have on the profit-
A. $40 per unit
maximizing output, price, and profits of Pic
B. $45 per unit
Industries?
C. $50 per unit
D. $60 per unit Answer:
Answer: D
Other things equal, the fall in the price of plastic would shift
Learning Objective: 08-08 Pic's marginal cost curve to the right. To maximize profits, Pic
Topic: Monopoly should increase its output. Since other firms in the industry do
Blooms: Apply not enjoy the reduction in marginal costs, the market supply
AACSB: Analytical Thinking curve would not change and the market price of toothpicks
Difficulty: 03 Hard would remain unchanged. Pic Industries would enjoy higher
profits in the short run.
Blooms: Analyze
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125. Beta Industries manufactures floppy disks that 127. Manufacturers of laundry detergent and
consumers perceive as identical to those produced by dishwashing soap reinvest a relatively large
numerous other manufacturers. Recently, Beta hired percentage of their sales revenues on advertising
an econometrician to estimate its cost function for campaigns. Most of these advertisements that appear
producing boxes of one dozen floppy disks. The on television stress the fact that their product is "New
estimated cost function is C = 20 + 2Q2. and Improved." Why?
a. What are the firm's fixed costs?
b. What is the firm's marginal cost? Answer:
Now suppose other firms in the market sell the The market for many of these products is monopolistically
competitive, and thus the tendency is for the firms to earn long-
product at a price of $10. run economic profits of zero. The firms hope that by continually
c. How much should this firm charge for the product? advertising new and improved features of their products, they
d. What is the optimal level of output to maximize can reap some short-term profits.
profits? Learning Objective: 08-02
e. How much profit will be earned? Topic: Monopolistic Competition
Blooms: Analyze
f. In the long run, should this firm continue to operate AACSB: Analytical Thinking
or shut down? Why? Difficulty: 02 Medium
Answer:
a. Fixed costs = 20.
b. Marginal costs = 4Q.
128. Suppose the cost function for your firm is: C =
c. P = $10. 50 + 4Q + 2Q2.
d. The firm should produce such that MC = P, i.e., 4Q = 10. a. What is the average fixed cost of producing 5 units
This implies that Q = 2.5 units. of output?
e. Profits are ($10)(2.5) − 20 − 2(2.5)2 = −$7.5. b. What is the average variable cost of producing 5
f. Since the firm is earning losses, in the long run it will shut
down if the market conditions do not change.
units of output?
Learning Objective: 08-03 c. What are the average total cost and marginal cost
Learning Objective: 08-06 of producing 5 units of output?
Blooms: Evaluate Answer:
AACSB: Analytical Thinking a. AFC(5) = $50/5 = $10.
Difficulty: 02 Medium b. AVC(5) = [4(5) + 2(5)2]/5 = $14.
c. ATC(5) = AVC(5) + AFC(5) = $24; MC(5) = 4 + 4(5) = $24.
126. Keds–the traditional maker of white canvas Topic: Perfect Competition
Blooms: Apply
tennis shoes–was near oblivion in the early 1980s AACSB: Analytical Thinking
because competitors like Nike, Reebok, Adidas, and Difficulty: 01 Easy
Brooks took away many of its customers. If you were
at the helm of Keds, what would you have done to
turn the company around? 129. U.S. Airways experienced huge losses for
several years in the 1990s, yet it continued to operate
Answer: its fleets. Why didn't U.S. Airways shut down its
The market for tennis shoes is one that approximates that of operations to avoid the losses?
monopolistic competition. Thus, a sensible strategy for Keds
would have been for Keds to increase variety in terms of color
and style, while keeping to a simple, comfortable canvas design. Answer:
At the same time, it could increase advertising to emphasize the It was covering its variable costs (the cost of fuel, pilots,
price and color advantages of its canvas design over the mechanics, flight attendants, and the like). Had it shut down its
competition. In fact, this is precisely what Keds did, and as a operations, losses would have been even higher, due to the high
result sales increased by tenfold from 1982 to 1988. By fixed costs associated with its fleet of aircraft.
differentiating its product from competitors, it was able to Learning Objective: 08-06
amass some short-run profits. (See Laura Jereski, "Back in the Topic: Perfect Competition
Game," Forbes, October 31, 1988.) Blooms: Analyze
Topic: Monopolistic Competition Difficulty: 02 Medium
Blooms: Evaluate
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130. In 1994 Pentium users around the world learned 132. Suppose you are a monopolist operating two
that their $4.00 pocket calculators could perform plants at different locations. Both plants produce the
some operations more accurately than their $5,000 same product; Q1 is the quantity produced at plant 1,
desktop computers. It took several months before and Q2 is the quantity produced at plant 2. You face
Intel–the maker of the chip–agreed to offer its the following inverse demand function: P = 500 –
customers replacement chips. In contrast, Walmart 2Q, where Q = Q1 + Q2. The cost functions for the
guarantees satisfaction to all customers, with a "no two plants are ; .
questions asked" return policy on nearly all of the a. What are your marginal revenue and marginal cost
products it sells. Why do you think these firms functions?
employ such different consumer relations policies? b. To maximize profits, how much should you
produce at plant 1? At plant 2?
Answer: c. What is the price that maximizes profits?
Intel has much more monopoly power than Walmart. Walmart
must strive to differentiate itself from competitors to earn d. What are the maximum profits?
profits, and one way it does so is through its return policy.
Learning Objective: 08-02 Answer:
Topic: Monopoly a. MR = 500 − 4Q; MC1 = 4Q1; MC2 = 2Q2.
Blooms: Analyze b. Profits are maximized when MC1 = MC2 = MR. This implies
AACSB: Analytical Thinking Q1 = 31.25 and Q2 = 62.5.
Difficulty: 02 Medium c. Q = 93.75; P = 500 − 2(Q1 + Q2) = 500 − 2(93.75) = $312.50.
d. Maximum profits are $23,392.50.
Topic: Monopoly
131. Suppose you are the manager of Alpha Blooms: Apply
Enterprises, a firm that holds a patent that makes it AACSB: Analytical Thinking
the exclusive manufacturer of bubble memory chips. Difficulty: 03 Hard
Based on the estimates provided by a consultant, you
know that the relevant demand and cost functions for
bubble memory chips are Q = 25 – 0.5P; C = 50 + 133. Why does the government grant patents to
2Q. investors? Why does the government give monopoly
a. What is the firm's inverse demand function? power to utility companies?
b. What is the firm's marginal revenue when
producing four units of output? Answer:
The rationale behind granting monopoly power to a new
c. What are the levels of output and price when you inventor is based on the following argument: Inventions take
are maximizing profits? many years and considerable sums of money to develop. Once
d. What will be the level of your profits? an invention becomes public information in the absence of a
patent system, other firms could produce the product and
Answer: compete against the firm that developed it. In the absence of a
a. P = 50 − 2Q. patent system, there would be a reduced incentive on the part of
b. MR(Q) = 50 − 4Q; MR(4) = 50 − 4(4) = $34. firms to develop new products.
c. Setting MR = MC yields 50 − 4Q = 2, or Q = 12. P = 50 − The government gives monopoly power to utility companies
2(12) = $26. because they are assumed to be natural monopolies.
d. Profits are ($26)(12) − 74 = $238. Learning Objective: 08-02
Topic: Monopoly Blooms: Evaluate
AACSB: Analytical Thinking Difficulty: 3 Hard
134. Would you expect an industry to be

monopolistically competitive if consumers did not
value variety in the market? Explain.
Answer:
If consumers did not value variety in the market, then firms in a
"monopolistically competitive market" would produce
homogeneous goods. That is, the market would be perfectly
competitive rather than monopolistically competitive.
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Blooms: Understand 138. You are a manager in a perfectly competitive

AACSB: Knowledge Application market. The price in your market is $35. Your total
cost curve is C(Q) = 10 + 2Q + .5Q2.
a. What level of output should you produce in the
short run?
135. What is the primary facet of monopolistic
b. What price should you charge in the short run?
competition that does not allow for the presence of
c. Will you make any profits in the short run?
long-run profits? If firms are making short-run profits
d. What will happen in the long run?
in a monopolistically competitive industry, what will
e. How would your answer change if your costs were
eventually occur that will cause long-run economic
C(Q) = 80 + 5Q + 30Q2?
profits to be zero?
Answer:
Answer: a. Setting price equal to marginal cost implies $35 = 2 + Q. The
The driving force of zero long-run profits is free entry, which short-run output level is Q = 33.
allows new firms to come in to compete for the positive profits. b. $35 per unit.
Since this entry stops only when the profits return to zero, this c. Profits are ($35)(33) − [10 + 2(33) + .5(33)2] = $534.5.
ensures the long-run economic profits are zero. d. New firms will enter and price will be lowered until profit is
Learning Objective: 08-01 zero.
Topic: Monopolistic Competition e. With this cost function, short-run output falls to Q = .5, but
Blooms: Understand price remains at $35. In the short run, profits are −$72.5. The
AACSB: Knowledge Application firm will shut down in the long run in the absence of a change in
Difficulty: 02 Medium market conditions.
136. Regardless of the economic environment, every Topic: Perfect Competition
firm will maximize profits by operating at the Blooms: Analyze
minimum point of its average total cost curves. Is this Difficulty: 03 Hard
statement true or false? Explain.
Answer: 139. You are the manager of a firm that has an

False. To maximize profits, firms set MR = MC. The only exclusive license to produce your product. The
market environment in which this necessarily implies
inverse market demand curve is P = 900 – 1.5Q.
production at the minimum of average costs is in long-run
equilibrium under perfect competition. In the short run, even Your cost function is C(Q) = 2Q + Q2. Determine the
perfectly competitive firms may produce at an output different output you should produce, the price you should
from minimum average costs. charge, and your profits.
Topic: Perfect Competition Answer:
Blooms: Analyze Here, MR = 900 − 3Q and MC = 2 + 2Q. Setting MR = MC
AACSB: Analytical Thinking yields 900 − 3Q = 2 + 2Q. Solving for Q gives us Q = 179.6.
Difficulty: 03 Hard Inserting this into the inverse demand function yields P = 900 −
1.5(179.6) = $630.60. Your maximum profits are thus PQ −
C(Q) = ($630.60)(179.6) − [2(179.6) + (179.6)2] = $80,640.40.
137. What market can you think of, besides that for Learning Objective: 08-03
Topic: Monopoly
VCRs, that has shown short-run profits but, over
Blooms: Apply
time, has seen profits disappear due to entry? AACSB: Analytical Thinking
Answer:
The market for IBM-compatible personal computers.
Blooms: Understand
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140. Monsanto, the maker of Nutrasweet, owned the

patent to aspartame, the official name of the P
sweetener. In 1987 Monsanto's patent expired in
Europe, allowing other firms to produce aspartame 100
under other brand names. What impact do you think
MC
this had on the market for aspartame and Monsanto's
66 2/3
profits?
50 Deadweight Loss
Answer:
When the patent expired in Europe, new firms entered the 33 1/3
market to produce aspartame under other names. Most likely,
there was some brand loyalty, and consumers probably did not
view these new products as perfect substitutes for Nutrasweet. MR D
Consequently, the market for aspartame probably moved from 16 2/3 25 Q
monopoly to monopolistic competition, and Monsanto's profits
fell as a result of the increased entry.
Learning Objective: 08-05 b. See the accompanying figure.
Topic: Monopoly c. See the accompanying figure.
Blooms: Analyze d. Under perfect competition, market equilibrium is where the
AACSB: Analytical Thinking demand curve intersects industry marginal cost. Thus, the
Difficulty: 02 Medium competitive price is $50, and the quantity is 25 units. The
deadweight triangle in the accompanying figure is.5(66.67 −
33.33)(25 − 16.67) = $138.86.
141. If a monopolist has an own price demand Learning Objective: 08-03
elasticity of −.8, is it maximizing profits? Explain. Learning Objective: 08-05
Topic: Monopoly
Answer: Blooms: Analyze
No. An inelastic demand implies negative marginal revenue. AACSB: Analytical Thinking
Since profit maximization requires marginal revenue to equal Difficulty: 03 Hard
marginal cost, the firm is producing too much output (marginal
cost cannot be negative).
Learning Objective: 08-04 143. You are the manager of a monopolistically
Topic: Monopoly competitive firm. The present demand curve you face
Blooms: Analyze is P = 100 – 4Q. Your cost function is C(Q) = 50 +
8.5Q2.
a. What level of output should you choose to
maximize profits?
142. You are a monopolist with the following cost b. What price should you charge?
and demand conditions: P = 100 – 2Q and C(Q) = 50 c. What will happen in your market in the long run?
+ Q2. Explain.
a. Determine the profit-maximizing output and price.
Answer:
b. Graph this solution. a. Setting MR = MC yields Q = 4.
c. Show your profits and the deadweight loss to b. P = 100 − 4(4) = $84 per unit.
society in your graph. c. Profits are 84(4) − [50 + 8.5(16)] = $150. Since profits are
d. Determine the actual amount of deadweight loss. greater than zero, new firms will be attracted to the industry
Answer: until profits fall to zero.
a. Equating MR and MC yields 100 − 4Q = 2Q. Solving for Q Learning Objective: 08-03
yields Q = 16 2/3. By plugging this back into the inverse Learning Objective: 08-05
demand equation, we get P = $66 2/3. Topic: Monopolistic Competition
Blooms: Analyze
8-22

lOMoARcPSD|6537232
Difficulty: 02 Medium 146. Genentech owns a patent on tissue plasminogen

activator (TPA), which is an enzyme that helps the
144. Would you expect the demand for a body break down blood clots. TPA is particularly
monopolistically competitive firm's product to be valuable to cardiac patients, since it often allows
more or less elastic than that for a monopolist's heart problems to be treated with medication rather
product? Explain. than surgery. Recently, however, firms in the medical
Answer:
industry have come under fire from some members
In general, the demand for a monopolistically competitive firm's of Congress and the press for charging high prices
product should be more elastic than that for a monopolist's and earning monopoly profits. Do you think cardiac
product because there are close substitutes for the former but patients would benefit if the government stripped
not for the latter. The existence of close substitutes makes a Genentech and other pharmaceutical firms of their
monopolistically competitive firm's quantity demanded more
responsive to price.
patents? Explain.
Topic: Monopolistic Competition Answer:
Blooms: Understand In the short run, eliminating the patent might allow other firms
AACSB: Knowledge Application to enter and lower the price to cardiac patients. In the long run,
Difficulty: 02 Medium however, it is not at all clear that cardiac patients would benefit.
Absent patent protection, firms like Genentech would be
unwilling to invest the substantial sums in R&D that are
145. You are the manager of a monopolistically required to develop products like TPA. The monopoly profits
competitive firm. The inverse demand for your earned by Genentech are its reward for developing the new
product is given by P = 200 – 10Q and your marginal product, and taking away that reward would likely harm cardiac
cost is MC = 5 + Q. patients in the long run.
a. What is the profit-maximizing level of output? Learning Objective: 08-05
Topic: Monopoly
b. What is the profit-maximizing price? Blooms: Evaluate
c. What are the maximum profits? AACSB: Analytical Thinking
d. What do you expect to happen to the demand for Difficulty: 03 Hard
your product in the long run? Explain.
Answer: 147. You are the general manager of TU Modems
a. Setting MR = MC yields 200 − 20Q = 5 + Q, or Q = 9.29. Inc., and your accounting department has provided
b. P = 200 − 10(9.29) = $107.1. you with the following information about the total
c. This part will be hard for most students. Total cost is the
integral of marginal cost: or C(Q) = 5Q + Q2/2 + FC. Thus,
cost of producing three potential quantities of a
profits are $905.36 − FC. commercial-grade modem:
d. If fixed costs are lower than $905.36, the positive profits will 100,000 150,000 200,000
induce entry. In the long run, this will decrease the demand for Units Units Units
your product.
Materials $ 250,000 $ 375,000 $ 500,000
Learning Objective: 08-05 Depreciation 900,000 900,000 900,000
Topic: Monopolistic Competition Labor 10,000 15,000 20,000
Blooms: Analyze Total costs $1,160,000 $1,290,000 $1,420,000
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The market is saturated with modems, and your sales Difficulty: 02 Medium
department has been able to identify only one
potential buyer of your modems. This customer has
numerous options and as a result is only willing to 149. The XYZ Company produces output using labor
pay $300 per modem for an order of 100,000 (which it purchases on an as-needed basis in the
modems. You must decide whether to sign a contract market for unskilled workers at a wage of $5 per
under these terms or simply shut down your hour) and one machine (which it is obligated to lease
operations. What is your optimal decision? at a rental rate of $300 per hour). The planning
horizon precludes XYZ from renting or purchasing
Answer: any additional machines, as the current machine has a
The only costs relevant for making this decision are your capacity of 80 units of output per hour, which
variable costs of producing 100,000 units. These relevant costs exceeds the projected demand for the firm's product.
include materials ($250,000) and labor ($10,000). The
depreciation reflects a charge for expenditures already made,
The firm has no alternative use for the machine it
and thus this amount will be lost regardless of your decision. By leases, and the contract precludes it from subleasing
signing the contract, your revenues increase by $30,000,000 and it to another party. The company currently employs
your variable costs increase by only $260,000. You should sign one worker who produces 10 units of output per
the contract because doing so adds $29,740,000 to your bottom hour. A recent report from the engineering
line that you will not get if you shut down your operation.
department reveals that, given the plant's current
Topic: Perfect Competition capacity, two workers could produce 20 units of
Blooms: Evaluate output per hour, three workers could produce 30 units
AACSB: Analytical Thinking of output per hour, and four workers could produce a
Difficulty: 03 Hard total of 40 units of output per hour.
a. Complete the following table:
148. A monopolist estimates that the own price Hourly Cost Data, XYZ Company
elasticity of demand for its product is −4.5 and its Output Variable Marginal Average
advertising elasticity of demand is 1.5. Assuming Cost Cost Variable Cost
these elasticities are constant, what fraction of the 0
firm's revenues should the firm "reinvest" in 10
advertising to maximize profits? 20
Answer:
30
To find the profit-maximizing advertising-to-sales ratio, we 40
simply plug EQ,P = −4.5 and EQ,A = 1.5 into the formula for the b. Suppose that XYZ can sell up to 40 units of output
per hour at a price of $.60 per unit but cannot even
optimal advertising-to-sales ratio: get a penny for units produced in excess of 40 units
. Thus, the firm's optimal advertising-to-sales ratio is 33.33 per hour. How much output should XYZ produce
percent–to maximize profits, the firm should spend one-third of each hour in order to maximize profits?
its revenues on advertising. c. At what price would XYZ find it profitable to shut
Learning Objective: 08-08 down its operation?
Topic: Optimal Advertising Decision
Blooms: Apply
Answer:
a. See table below:
Average
Output Variable Cost Marginal Cost
Variable Cost
0 0 — —
10 1 × $5 = $5 VC/Q = $0.50 VC/Q = $5/10 =
20 2 × $5 = $10 VC/Q = $0.50 VC/Q = $10/20
30 3 × $5 = $15 VC/Q = $0.50 VC/Q = $15/30
40 4 × $5 = $20 VC/Q = $0.50 VC/Q = $20/40
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lOMoARcPSD|6537232
b. 40 units, since MB = $0.60 > MC = $0.50 for all units below

40, and MB = 0 for units produced in excess of 40.
c. Part (b) revealed that if the firm operates, it should produce
40 units. It should shut down if the profits from operating are
less than the profits it would earn by shutting down. The
calculations are:
i. Profits if the firm operates and charges a price of P for 40
units: 40P − 300 − 20.
ii. Profits if the firm shuts down: −$300. Shut down if −$300 >
40P − 300 − 20.
iii. Solving for P gives us: "Shut down if P < $0.50."
Blooms: Analyze
Difficulty: 03 Hard
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08 11 December 2018, questions and answers

Bachelor of Science in Management Accounting (Pontifical and Royal University of

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Chapter 08 AACSB: Analytical Thinking

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

13. In a competitive industry with identical firms,

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

AACSB: Knowledge Application AACSB: Analytical Thinking

20. You are the manager of a firm that sells its

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

36. Suppose that initially the price is $50 in a

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

48. Which of the following is NOT a basic feature of

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

AACSB: Analytical Thinking 59. You are a manager in a perfectly competitive

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

AACSB: Analytical Thinking 66. You are a manager for a monopolistically

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

81. There is a market supply curve in a:

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Difficulty: 3 Hard 88. Which of the following is true about where a

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Difficulty: 02 Medium Blooms: Apply

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

108. Which of the following is true under

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Answer: A 123. You are the manager of a monopoly that faces a

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

134. Would you expect an industry to be

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets