ECON 221: Principles of Microeconomics Name: ________________________

Prof. Jaishankar Raman November 15th, 1999


Answer the following multiple choice questions. ( 2 points each)

_____1. Which of the following industries most closely approximates pure competition?

A) agriculture B) farm implements

C) clothing D) steel

_____2. In which of the following market structures is there clear-cut mutual interdependence with respect to price-output policies?

A) pure monopoly B) oligopoly

C) monopolistic competition D) pure competition

_____3. In which of the following industry structures is the entry of new firms the most difficult?

A) pure monopoly B) oligopoly

C) monopolistic competition D) pure competition

_____4. The marginal revenue curve of a purely competitive firm:

A) lies below the firm's demand curve.

B) increases at an increasing rate as output expands.

C) is horizontal at the market price.

D) is downsloping because price must be reduced to sell more output.

_____5. Which of the following is not a barrier to entry?

A) patents B) X-inefficiency

C) economies of scale D) ownership of essential resources

_____6. Because the monopolist's demand curve is downsloping:

A) MR will equal price.

B) price must be lowered to sell more output.

C) the elasticity coefficient will increase as price is lowered.

D) its supply curve will also be downsloping.

_____7. A purely competitive firm will be willing to produce at a loss in the short run provided:

A. the loss is no greater than its total variable costs.

B. the loss is no greater than its marginal costs.

C. the loss is no greater than its total fixed costs.

D. price exceeds marginal revenue.

_____8. Which of the following is not characteristic of monopolistic competition?

A) relatively large numbers of sellers

B) product differentiation

C) production at minimum ATC in the long-run

D) relatively easy entry to the industry


_____9. In long-run equilibrium a monopolistically competitive producer achieves:

A) neither "productive efficiency" nor "allocative efficiency."

B) both "productive efficiency" and "allocative efficiency."

C) "productive efficiency," but not "allocative efficiency."

D) "allocative efficiency," but not "productive efficiency."

_____10. Oligopolistic industries are characterized by:

A) a few dominant firms and substantial entry barriers.

B) a few dominant firms and no barriers to entry.

C) a large number of firms and low entry barriers.

D) a few dominant firms and low entry barriers.


_____11. "Mutual interdependence" means that each Oligopolistic firm:

A) faces a perfectly elastic demand for its product.

B) must consider the reactions of its rivals when it determines its price policy.

C) produces a product identical to those of its rivals.

D) produces a product similar but not identical to the products of its rivals.

_____12. Concentration ratios measure the:

A) geographic location of the largest corporations in each industry.

B) degree to which product price exceeds marginal cost in various industries.

C) percentage of total sales accounted for by the four largest firms in the industry.

D) number of firms in an industry.


_____13. Suppose firm X implements a new process for extracting copper from copper-bearing ore. This is an example of:

A) product innovation. B) process innovation.

C) economics of scale. D) the inverted-U theory.

_____14. In the inverted-U theory:

A) process innovation and product innovation are inversely related.

B) technological change is inversely related to scientific discovery.

C) As a percentage of firms' sales, R&D expenditures rise continuously with the degree of industry concentration.

D) none of the above are true.


_____15. The theory of creative destruction was advanced many years ago by:

A) Rocky Balboa. B) John Maynard Keynes.

C) Joseph Schumpeter. D) Adam Smith.

Answer the following questions. To receive full credit, show all your calculations clearly.


1. a) What are the three type of prices that a regulated monopoly can be allowed to charge? Explain each one of them. ( 3 points)


Socially Optimal Price, P = MC. It is the most desirable from the consumers point of view, it is the competitive equilibrium price.


Fair Return Price: P = ATC. At this price the monopolist will be breaking even.


Monopoly Price: MR = MC. It is the non competitve price. Under regulation, this price is not desirable.



b) What are the requirements for a monopolist to achieve price discrimination? ( 3 points)

Monopoly Power

Market Segregation and

No Resale of products


2. Why do firms in a Monopolistic market spend funds on product development and advertising, when they know it increases their costs? ( 3 points)


Firms spend money on advertizing and product develpoment, because it will increase the sale of their product in the market. Monopolistic markets are characterised by product differentiation and hence the firms try to create a different product.


3. Draw a graph showing a purely competitive firm that is experiencing profits. ( 4 points)

Refer to the graph on page 475 for an answer.



4. Calculate the Herfindahl index for the following industries. Specify which is the most competitive and the least competitive using the index. ( 5 points)

Market share of firms are:

Industry A: 75, 25

Industry B: 50, 25, 20, 5

Industry C: 20, 20, 30, 5, 10, 15


Hefindahl index: Industry A = 6250 (least competitive)

B = 3550

C = 2050 ( Most Competitive)

5. Consider the following data for a purely competitive firm. ( 6 points)


0 600 0 0 0

1 600 200 800 200

2 600 150 450 100

3 600 140 340 120

4 600 145 295 160

5 600 160 280 220

6 600 180 280 280

7 600 205 291 360

8 600 232 314 460

9 600 276 342 580


a) If the Price is $280, calculate the profit maximizing quantity of output. Calculate the profit or loss at this level of output. Will this firm produce this level of output?

If the price is $280, the equilibrium output would be 6.

TR is $1680, TC is $1680. Firm will break even and will produce at this level.

b) If the price is $120, calculate the profit maximizing quantity of output. Calculate the profit or loss at this level of output. Will this firm produce this level of output?

Equilibrium output is 3. TR is $360 and TC is $1070.

Loss is $660 and fixed cost is $600.

Firm will not produce this output. It is the shut down case.



6. Consider the following payoff matrix for two Oligopolistic firms. They have an option of charging a high price or a low price.



Low Price A

High Price


Low Price A: $100

B: $100 A: $90

B: $200


High Price A: $200

B: $90 A: $150

B: $150


a) If A and B decide to collude, what is the likely payoff? ( 1 point)


With Collusion, they will charge a HIGH Price. The payoff is $150 each.


b) What is the outcome if both firms do not collude? ( 4 points)


Without collusion, they will charge a low price.


7. Discuss whether each of the market structures achieve productive and allocative efficiency? ( 6 points)


Pure competition acheives Productive and Allocative efficiency.

The other market structures do not acheive both types of efficiency.


8. Consider the following cost conditions for a pure monopolist.

Quantity Price MR ATC MC

1 $32 32 $48 $48

2 29 26 30 12

3 26 20 23.34 10

4 23 14 21 14

5 20 8 20 16

6 17 2 19.5 17

7 14 -4 19.28 18

8 11 -10 18.68 18.5

9 8 -16 18.72 19

a) Calculate the profit maximizing level of output for this monopolist? Calculate the profits for this firm. ( 3 points)


Using MR = MC, the equilibrium quaantity is 4. The firm makes a profit of $8.

b) If this monopolist was regulated, Calculate the price at which the monopolist will break even? ( 2 points)

The breakeven price is when P = ATC, this happens at Q = 5. P = $20 and ATC = $20.