Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

Chapter 08
Managing in Competitive, Monopolistic, and Monopolis

MultipleChoiceQuestions

1.Youarethemanagerofafirmthatproducesoutputintwoplants.Thedemandforyour
firm'sproductisP=7815Q,whereQ=Q1+Q2.Themarginalcostassociatedwith
producinginthetwoplantsareMC1=3Q1andMC2=2Q2.Howmuchoutputshouldbe
producedinplant1inordertomaximizeprofits?
A.1
b.2
c.3
d.4

Difficulty:Hard

2.Youarethemanagerofafirmthatproducesoutputintwoplants.Thedemandforyour
firm'sproductisP=7815Q,whereQ=Q1+Q2.Themarginalcostassociatedwith
producinginthetwoplantsareMC1=3Q1andMC2=2Q2.Whatpriceshouldbechargedto
maximizeprofits?
a.$20.5
B.$40.5
c.$60.5
d.$80.5

Difficulty:Hard

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

3.Youarethemanagerofafirmthatproducesoutputintwoplants.Thedemandforyour
firm'sproductisP=7815Q,whereQ=Q1+Q2.Themarginalcostassociatedwith
producinginthetwoplantsareMC1=3Q1andMC2=2Q2.Whatpriceshouldbechargedin
ordertomaximizerevenues?
A.$39
b.$47
c.$52
d.$56

Difficulty:Hard

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

4.Whichofthefollowingistrueundermonopoly?
a.Profitsarealwayspositive
B.P>MC
c.P=MR
d.Alloftheabovearetrueformonopoly

Difficulty:Medium

5.Youarethemanagerofafirmthatsellsitsproductinacompetitivemarketatapriceof
$50.Yourfirm'scostfunctionisC=40+5Q2.Theprofitmaximizingoutputforyourfirmis
a.4/5
b.10
C.5
d.45

Difficulty:Medium

6.Youarethemanagerofafirmthatsellsitsproductinacompetitivemarketatapriceof
$50.Yourfirm'scostfunctionisC=40+5Q2.Yourfirm'smaximumprofitsare
a.125
b.250
c.100
D.85

Difficulty:Medium

7.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=23020Q.
YourcostsareC=5+30Q.Theprofitmaximizingoutputforyourfirmis
a.4
B.5
c.6
d.7

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

8.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=23020Q.
YourcostsareC=5+30Q.Theprofitmaximizingpriceis
a.150
b.90
C.130
d.110

Difficulty:Medium

9.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=23020Q.
YourcostsareC=5+30Q.Yourfirm'smaximumprofitsare
A.495
b.475
c.480
d.415

Difficulty:Medium

10.Youarethemanagerofafirmthatproducesoutputintwoplants.Thedemandforyour
firm'sproductisP=1206Q,whereQ=Q1+Q2.Themarginalcostassociatedwith
producinginthetwoplantsareMC1=2Q1andMC2=4Q2.Howmuchoutputshouldbe
producedinplant1inordertomaximizeprofits?
a.3
B.6
c.9
d.12

Difficulty:Hard

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

11.Youarethemanagerofafirmthatproducesoutputintwoplants.Thedemandforyour
firm'sproductisP=1206Q,whereQ=Q1+Q2.Themarginalcostassociatedwith
producinginthetwoplantsareMC1=2Q1andMC2=4Q2.Whatpriceshouldbechargedto
maximizeprofits?
a.60
B.66
c.70
d.76

Difficulty:Hard

12.Youarethemanagerofafirmthatproducesoutputintwoplants.Thedemandforyour
firm'sproductisP=1206Q,whereQ=Q1+Q2.Themarginalcostassociatedwith
producinginthetwoplantsareMC1=2Q1andMC2=4Q2.Whatpriceshouldbechargedin
ordertomaximizerevenues?
a.6
b.2
c.24
D.60

Difficulty:Hard

13.Inacompetitiveindustrywithidenticalfirms,longrunequilibriumischaracterizedby
a.P=AC
b.P=MC
c.MR=MC
D.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

14.Whichofthefollowingistrue?
a.Amonopolistproducesontheinelasticportionofitsdemand
b.Amonopolistalwaysearnsaneconomicprofit
c.Themoreinelasticthedemand,theclosermarginalrevenueistoprice
D.IntheshortrunamonopolywillshutdownifP<AVC

Difficulty:Hard

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

15.Youarethemanagerofafirmthatsellsitsproductinacompetitivemarketatapriceof
$40.Yourfirm'scostfunctionisC=60+4Q2.Theprofitmaximizingoutputforyourfirmis
a.4
B.5
c.10
d.15

Difficulty:Medium

16.Youarethemanagerofafirmthatsellsitsproductinacompetitivemarketatapriceof
$40.Yourfirm'scostfunctionisC=60+4Q2.Yourfirm'smaximumprofitsare
a.36
b.60
C.40
d.80

Difficulty:Medium

17.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=855Q.
YourcostsareC=20+5Q.Theprofitmaximizingoutputforyourfirmis
a.6
b.5
c.7
D.8

Difficulty:Medium

18.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=855Q.
YourcostsareC=20+5Q.Theprofitmaximizingpriceis
A.45
b.55
c.60
d.50

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

19.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=855Q.
YourcostsareC=20+5Q.Therevenuemaximizingoutputis
a..85
b.9
c.10
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

20.Youarethemanagerofafirmthatsellsitsproductinacompetitivemarketatapriceof
$60.Yourfirm'scostfunctionisC=50+3Q2.Theprofitmaximizingoutputforyourfirmis
A.10
b.20
c.30
d.40

Difficulty:Medium

21.Youarethemanagerofafirmthatsellsitsproductinacompetitivemarketatapriceof
$60.Yourfirm'scostfunctionisC=50+3Q2.Yourfirm'smaximumprofitsare
A.250
b.400
c.450
d.500

Difficulty:Medium

22.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=635Q.
YourcostsareC=10+3Q.Theprofitmaximizingoutputforyourfirmis
a.3
b.4
c.5
D.6

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

23.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=635Q.
YourcostsareC=10+3Q.Theprofitmaximizingpriceis
a.20
b.27
C.33
d.55

Difficulty:Medium

24.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=635Q.
YourcostsareC=10+3Q.Yourfirm'smaximumprofitsare
a.0
b.66
c.120
D.170

Difficulty:Medium

25.YouarethemanagerofamonopolythatfacesademandcurvedescribedbyP=635Q.
YourcostsareC=10+3Q.Therevenuemaximizingoutputis
a.10/63
b.5
C.6.3
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

26.Whichofthefollowingistrueundermonopoly?
a.Profitsarealwayspositive
b.P>minimumofATC
c.P=MR
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

27.Inthelongrun,monopolisticallycompetitivefirms:
a.Chargepricesequaltomarginalcost
B.Haveexcesscapacity
c.Produceattheminimumofaveragetotalcost
d.Haveexcesscapacityandproduceattheminimumofaveragetotalcost

Difficulty:Easy

28.Ifamonopolisticallycompetitivefirm'smarginalcostincreases,theninordertomaximize
profitsthefirmwill
A.Reduceoutputandincreaseprice
b.Increaseoutputanddecreaseprice
c.Increasebothoutputandprice
d.Reducebothoutputandprice

Difficulty:Medium

29.Whichofthefollowingmarketstructureswouldyouexpecttoyieldthegreatestproduct
variety?
a.Monopoly
B.MonopolisticCompetition
c.BertrandOligopoly
d.PerfectCompetition

Difficulty:Easy

30.TheprimarydifferencebetweenMonopolisticCompetitionandPerfectCompetitionis
a.Theeaseofentryandexitintotheindustry
b.Thenumberoffirmsinthemarket
c.Allofthestatementsassociatedwiththisquestionarecorrect
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

31.Whichofthefollowingindustriesisbestcharacterizedasmonopolisticallycompetitive?
A.Toothpaste
b.Crudeoil
c.Agriculture
d.Localtelephoneservice

Difficulty:Medium

32.Whichofthefollowingisanexampleofmonopoly?
a.ShoeindustryintheUnitedStates
B.Localutilityindustryinasmalltown
c.NewspaperindustryinNewYorkCity
d.BreadindustryinNewYorkCity

Difficulty:Medium

33.Differentiatedgoodsareafeatureofa:
a.Perfectlycompetitivemarket
B.Monopolisticallycompetitivemarket
c.Monopolisticmarket
d.Monopolisticallycompetitivemarketandmonopolisticmarket

Difficulty:Easy

34.Firmshavemarketpowerin:
a.Perfectlycompetitivemarkets
b.Monopolisticallycompetitivemarkets
c.Monopolisticmarkets
D.Monopolisticallycompetitivemarketsandmonopolisticmarkets

Difficulty:Easy

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

35.Thereisnomarketsupplycurveina
a.Perfectlycompetitivemarket
b.Monopolisticallycompetitivemarket
c.Monopolisticmarket
D.Monopolisticallycompetitiveandmonopolisticmarkets

Difficulty:Medium

36.Supposethatinitiallythepriceis$50inaperfectlycompetitivemarket.Firmsaremaking
zeroeconomicprofits.Thenthemarketdemandshrinkspermanentlyandsomefirmsleave
theindustryandtheindustryreturnsbacktoalongrunequilibrium.Whatwillbethenew
equilibriumprice,assumingcostconditionsintheindustryremainconstant?
A.$50
b.$45
c.Lowerthan$50butexactvaluecannotbeknownwithoutmoreinformation
d.Largerthan$45butexactvaluecannotbeknownwithoutmoreinformation

Difficulty:Hard

37.WhichofthefollowingstatementsconcerningmonopolyisNOTtrue?
a.Amarketmaybemonopolisticbecausetherearesomelegalbarriers
b.Amonopolyhasmarketpower
C.Amonopolyisalwaysundesirable
d.Thereissomedeadweightlossinamonopolisticmarket

Difficulty:Medium

38.Whichofthefollowingfeaturesiscommontobothperfectlycompetitivemarketsand
monopolisticallycompetitivemarkets?
a.Firmsproducehomogeneousgoods
b.Thereisfreeentry
c.Longrunprofitsarezero
D.Thereisfreeentryandlongrunprofitsarezero

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

39.Thesource(s)ofmonopolypowerforamonopolymaybe:
a.Economiesofscale
b.Economiesofscope
c.Patents
D.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

40.Economiesofscaleexistwhenever:
A.Averagetotalcostsdeclineasoutputincreases
b.Averagetotalcostsincreaseasoutputincreases
c.Averagetotalcostsarestationaryasoutputincreases
d.Averagetotalcostsincreaseasoutputincreasesandaveragetotalcostsarestationaryas
outputincreases

Difficulty:Easy

41.Thenumberofefficientplantscompatiblewithdomesticconsumptionoftherefrigerator
industryinSwedenis0.7.Whichofthefollowingimplicationsis(are)correct?
A.Intheabsenceofimports,therefrigeratorindustryinSwedenismonopolistic
b.TherefrigeratorindustryinSwedenisperfectlycompetitive
c.TherefrigeratorindustryinSwedenismonopolisticallycompetitive
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

42.AmonopolyhastwoproductionplantswithcostfunctionsC1=50+0.1Q12andC2=30
+0.05Q22.ThedemanditfacesisQ=50010P.Whatistheconditionforprofit
maximization?
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)
d.MC1(Q1+Q2)=MC2(Q1+Q2)=MR(Q1+Q2)

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

43.AmonopolyhastwoproductionplantswithcostfunctionsC1=50+0.1Q12andC2=30
+0.05Q22.ThedemanditfacesisQ=50010P.Whatistheprofitmaximizinglevelof
output?
A.Q1=62.5;Q2=125
b.Q1=125;Q2=62.5
c.Q1=Q2=125
d.Q1=Q2=62.5

Difficulty:Hard

44.AmonopolyhastwoproductionplantswithcostfunctionsC1=50+0.1Q12andC2=30
+0.05Q22.ThedemanditfacesisQ=50010P.Whatistheprofitmaximizingprice?
a.$12.5perunit
b.$6.25perunit
C.$31.25perunit
d.$18.75perunit

Difficulty:Hard

45.Whichofthefollowingisacorrectrepresentationoftheprofitmaximizationconditionfor
amonopoly?
a.P=MR
B.MC=MR
c.P=ATC+MR
d.MR=MC+ATC

Difficulty:Easy

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

46.LetthedemandfunctionforaproductbeQ=1002P.Theinversedemandfunctionof
thisdemandfunctionis:
a.Q=100+2P
B.P=500.5Q
c.P=50+0.5Q
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

47.Alineardemandfunctionexhibits:
a.Constantdemandelasticity
b.Moreelasticdemandasoutputincreases
C.Lesselasticdemandasoutputincreases
d.Insufficientinformationtodetermine

Difficulty:Easy

48.Whichofthefollowingisnotabasicfeatureofamonopolisticallycompetitiveindustry?
a.Therearemanybuyersandsellersintheindustry
b.Eachfirmintheindustryproducesadifferentiatedproduct
c.Thereisfreeentryandexitintotheindustry
D.Eachfirmownsapatentonitsproduct

Difficulty:Medium

49.Inthelongrun,monopolisticallycompetitivefirmsproducealevelofoutputsuchthat
a.P>MC
b.P=ATC
c.ATC>minimumofaveragecosts
D.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

50.Chrisraisescowsandproducescheeseandmilkbecauseheenjoys:
a.Economiesofscale
B.Economiesofscope
c.Costcomplementarity
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

51.Whatcontributestotheexistenceofmultiproductfirms?
a.Economiesofscale
b.Economiesofscope
c.Costcomplementarity
D.Economiesofscopeandcostcomplementarity

Difficulty:Easy

52.Whichofthefollowingis(are)basicfeature(s)ofaperfectlycompetitiveindustry?
a.Buyersandsellershaveperfectinformation
b.Therearenotransactioncosts
c.Thereisfreeentryandexitinthemarket
D.Allofthestatementassociatedwiththisquestionarecorrect

Difficulty:Easy

53.Inthelongrun,perfectlycompetitivefirmsproducealevelofoutputsuchthat:
a.P=MC
b.P=minimumofAC
C.P=MCandP=minimumofAC
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

Usethefollowinginformationtoanswerquestions54and55.
Amonopolyhasproducedaproductwithapatentforthelastfewyears.Thepatentisgoing
toexpire.

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

54.Whatwilllikelyhappentothedemandforthepatentholder'sproductwhenthepatent
runsout?
a.Demandwillincrease
B.Demandwilldecline
c.Nothing
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

55.Whatwillhappenafterthepatentexpires?
a.Theincumbentwillleavethemarket
b.Theincumbentwillretainitsstatusasamonopolybutproduceatalowerprice
C.Somefirmswillentertheindustry
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

56.Youareamanagerinaperfectlycompetitivemarket.Thepriceis$14.Yourtotalcost
curveisC(Q)=10+4Q+0.5Q2.Whatlevelofoutputshouldyouproduceintheshortrun?
a.5
b.8
C.10
d.15

Difficulty:Medium

57.Youareamanagerinaperfectlycompetitivemarket.Thepriceinyourmarketis$14.
YourtotalcostcurveisC(Q)=10+4Q+0.5Q2.Whatpriceshouldyouchargeintheshort
run?
a.$12
B.$14
c.$16
d.$18

Difficulty:Easy

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

58.Youareamanagerinaperfectlycompetitivemarket.Thepriceinyourmarketis$14.
YourtotalcostcurveisC(Q)=10+4Q+0.5Q2.Whatlevelofprofitswillyoumakeinthe
shortrun?
a.$20
B.$40
c.$60
d.$80

Difficulty:Medium

59.Youareamanagerinaperfectlycompetitivemarket.Thepriceinyourmarketis$14.
YourtotalcostcurveisC(Q)=10+4Q+0.5Q2.Whatwillhappeninthelongrunifthereis
nochangeinthedemandcurve?
a.Somefirmswillleavethemarketeventually
B.Somefirmswillenterthemarketeventually
c.Therewillbeneitherentrynorleave
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

60.Aperfectlycompetitivefirmfacesa:
A.Perfectlyelasticdemandfunction
b.Perfectlyinelasticdemandfunction
c.Demandfunctionwithunitaryelasticity
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

61.AfirmhasatotalcostfunctionofC(Q)=50+10Q1/2.Thefirmexperiences
A.Economiesofscale
b.Constantreturnstoscale
c.Diseconomiesofscale
d.Allofthestatementsassociatedwiththisquestionarecorrectdependingonthequantity

Difficulty:Hard

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

62.AfirmcanproducetwoproductswiththecostfunctionC(Q1,Q2)=10+5Q1+5Q2
0.2Q1Q2.Thefirmenjoys:
a.Economiesofscaleinthetwoproductsseparately
b.Economiesofscope
C.Costcomplementarity
d.Economiesofscaleinthetwoproductsseparatelyandcostcomplementarity

Difficulty:Medium

63."Monopolisticcompetitionisliterallyakindofcompetition.Hence,thereisno
deadweightlossinamonopolisticallycompetitivemarket."
a.Thestatementisbydefinitioncorrectbutempiricallyincorrect
b.Thestatementiscorrect
C.Thestatementisincorrect
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

64.Ericprovidescheese(H)andmilk(M)tothemarketwiththefollowingtotalcostfunction
C(H,M)=10+0.4H2+0.2M2.Thepriceofcheeseandmilkinthemarketare$2and$5
respectively.Assumethatthecheeseandmilkmarketsareperfectlycompetitive.Whatoutput
ofcheesemaximizesprofits?
a.2
B.2.5
c.5
d.10

Difficulty:Hard

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

65.Ericprovidescheese(H)andmilk(M)tothemarketwiththefollowingtotalcostfunction
C(H,M)=10+0.4H2+0.2M2.Thepriceofcheeseandmilkinthemarketare$2and$5
respectively.Assumethatthecheeseandmilkmarketsareperfectlycompetitive.Whatoutput
ofmilkmaximizesprofits?
a.1.25
B.12.5
c.15
d.20

Difficulty:Hard

66.Youareamanagerforamonopolisticallycompetitivefirm.Fromexperience,theprofit
maximizinglevelofoutputofyourfirmis100units.However,itisexpectedthatpricesof
otherclosesubstituteswillfallinthenearfuture.Howshouldyouadjustyourlevelof
productioninresponsetothischange?
a.Producemorethan100units
B.Producelessthan100units
c.Produce100units
d.Insufficientinformationtodecide

Difficulty:Medium

67.Whichofthefollowingstatementsisnotcorrectaboutmonopoly?
a.Amonopolistgenerallyfacesadownwardslopingdemandcurve
B.Monopolistsalwaysmakepositiveprofitsinthelongrun
c.Amonopolymaymakenegativeprofitsintheshortrun
d.Thereisnoclosesubstituteforamonopoly'sproduct

Difficulty:Easy

Usethefollowinginformationtoanswerquestions68and69:
Youarethemanagerofafirmthatproducesoutputintwoplants.Thedemandforyourfirm's
productisP=20Q,whereQ=Q1+Q2.Themarginalcostassociatedwithproducinginthe
twoplantsareMC1=2andMC2=2Q2.

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

68.Howmuchoutputshouldbeproducedinplant1inordertomaximizeprofits?
a.1
b.4
C.8
d.11

Difficulty:Medium

69.Whatistheprofitmaximizingpricethatthefirmshouldcharge?
a.$8
b.$9
C.$11
d.$12

Difficulty:Medium

70.Whichofthefollowingistrueundermonopoly?
a.P>ATC
B.P>MC
c.P=MR
d.P=ATC

Difficulty:Easy

71.Youarethemanagerofafirmthatsellsitsproductinacompetitivemarketatapriceof
$60.Yourfirm'scostfunctionisC=33+3Q2.Theprofitmaximizingoutputforyourfirmis
a.3
b.5
c.6
D.10

Difficulty:Easy

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

72.YouarethemanagerofamonopolythatfacesaninversedemandcurvedescribedbyP=
20015Q.YourcostsareC=15+20Q.Theprofitmaximizingpriceis
a.$20
B.$110
c.$135
d.$290

Difficulty:Medium

73.Whichofthefollowingindustriesisbestcharacterizedasmonopolisticallycompetitive?
A.Cereal
b.Crudeoil
c.Wheat
d.Localelectricityservice

Difficulty:Easy

74.Differentiatedgoodsarenotafeatureofa
a.Perfectlycompetitivemarket
b.Monopolisticallycompetitivemarket
c.Monopolisticmarket
D.Perfectlycompetitivemarketandmonopolisticmarket

Difficulty:Easy

75.Oneofthesourcesofmonopolypowerforamonopolymaybe
a.Diseconomiesofscale
b.Differentiatedproducts
C.Patents
d.Freeentryandexit

Difficulty:Easy

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

76.LetthedemandfunctionforaproductbeQ=505P.Theinversedemandfunctionof
thisdemandfunctionis:
a.Q=25+P
B.P=100.2Q
c.P=10+0.2Q
d.P=500.2Q

Difficulty:Medium

77.AfirmhasatotalcostfunctionofC(Q)=75+25Q1/2.Thefirmexperiences
A.Economiesofscale
b.Diseconomiesofscale
c.Constantreturnstoscale
d.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

78.Inacompetitiveindustrywithidenticalfirms,longrunequilibriumischaracterizedby
a.P>AC
b.P<MC
C.MR=MC
d.MR<P

Difficulty:Easy

79.Youarethemanagerofafirmthatsellsitsproductinacompetitivemarketatapriceof
$48.Yourfirm'scostfunctionisC=60+2Q2.Yourfirm'smaximumprofitsare
a.$192
B.$228
c.$348
d.$576

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

80.Inthelongrun,monopolisticallycompetitivefirmschargeprices
a.Equaltomarginalcost
b.Belowmarginalcost
c.Equaltotheminimumofaveragetotalcost
D.Abovetheminimumofaveragetotalcost

Difficulty:Medium

81.Thereisamarketsupplycurveina
A.Perfectlycompetitivemarket
b.Monopolisticallycompetitivemarket
c.Monopolisticmarket
d.Perfectlycompetitivemarketandmonopolisticallycompetitivemarket

Difficulty:Easy

82.Whichofthefollowingfeaturesiscommontobothperfectlycompetitivemarketsand
monopolisticallycompetitivemarkets?
a.Firmsproducehomogeneousgoods
b.Pricesareequaltomarginalcostsinthelongrun
C.Longrunprofitsarezero
d.Pricesareabovemarginalcostsinthelongrun

Difficulty:Hard

83.ConsideramonopolywheretheinversedemandforitsproductisgivenbyP=2005Q.
Basedonthisinformation,themarginalrevenuefunctionis
a.MR(Q)=4002.5Q
b.MR(Q)=40010Q
C.MR(Q)=20010Q
d.MR(Q)=2002.5Q

Difficulty:Easy

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

84.ConsideramonopolywheretheinversedemandforitsproductisgivenbyP=502Q.
TotalcostsforthismonopolistareestimatedtobeC(Q)=100+2Q+Q2.Attheprofit
maximizingcombinationofoutputandprice,deadweightlossis
A.$32
b.$64
c.$128
d.Cannotbedeterminedwiththegiveninformation

Difficulty:Hard

85.ConsideramonopolywheretheinversedemandforitsproductisgivenbyP=502Q.
TotalcostsforthismonopolistareestimatedtobeC(Q)=100+2Q+Q2.Attheprofit
maximizingcombinationofoutputandprice,consumersurplusis
a.$32
B.$64
c.$128
d.Cannotbedeterminedwiththegiveninformation

Difficulty:Medium

86.ConsideramonopolywheretheinversedemandforitsproductisgivenbyP=502Q.
TotalcostsforthismonopolistareestimatedtobeC(Q)=100+2Q+Q2.Attheprofit
maximizingcombinationofoutputandprice,monopolyprofitis
a.$32
b.$64
C.$92
d.$128

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

87.Supposeaperfectlycompetitivemarketconditionsarecharacterizedbythefollowing
inversedemandandinversesupplyfunctions:P=1005QandP=10+5Q.Then,the
demandcurvefacinganindividualfirmoperatinginthismarketis
a.P=1005Q
b.Ahorizontallineat$9
C.Ahorizontallineat$55
d.P/N=(1005Q)/N,whereNisthetotalnumberoffirmsinthecompetitivemarket

Difficulty:Medium

88.Whichofthefollowingistrueaboutwhereaprofitmaximizingmonopolywillproduce
onalineardemandcurvewhenithaspositivemarginalcosts?
a.Itwillproduceoutputontheinelasticportionofthedemandcurve
b.ItwillproduceoutputwhereMR<0
c.ItwillproduceoutputwhereMR=0
D.Itwillproduceoutputontheelasticportionofthedemandcurve

Difficulty:Medium

89.Supposeamonopolistknowstheownpriceelasticityofdemandforitsproductis3and
thatitsmarginalcostofproductionisconstantMC(Q)=10.Tomaximizeitsprofit,the
monopolypriceis
a.$1.50perunit
b.$6.67perunit
c.$10perunit
D.$15perunit

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

90.Computethemarginalrevenuewhenthepriceelasticityofdemandis0.25.
A.3P,meaningmarginalrevenueisnegativeand3timeslessthanprice
b.3P,meaningmarginalrevenueispositiveand3timesgreaterthanprice
c.0.33P,meaningthatmarginalrevenueisnegativeandonethirdoftheprice
d.0.25P,meaningthatmarginalrevenueisnegativeandonefourthoftheprice

Difficulty:Hard

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

91.Supposethatamonopolisticallycompetitivemarketisatthelongrunequilibrium.Based
onthisinformationwhichofthefollowingconclusionisNOTtrue?
a.P>MC
B.Deadweightlossiszero
c.P=ATC>minimumofATC
d.Firms'profitsarezero

Difficulty:Medium

92.Thefirstorderconditionsforamonopolytomaximizeprofitsare
a.dR(Q)/dQ=dC(Q)/dQ
b.MR(Q)=MC(Q)
c.d(Q)/dQ=0
D.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

93.Considerfirmsoperatinginanindustrywheretheownpriceelasticityofdemandis
infinite;thatis,EQ,P=.Usethisinformationtodeterminethetypeofindustryinwhich
thesefirmsoperateandtheoptimaladvertisingtosalesratio.
A.Perfectlycompetitiveindustryand$0
b.Monopolisticallycompetitiveindustryand$
c.Perfectlycompetitiveindustryand$
d.Monopolisticindustryand$0

Difficulty:Medium

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

94.SeaSideIndustriescurrentlyspends5percentofitssalesonadvertising.Supposethatthe
elasticityofadvertisingforSeasideis0.2.Determinetheoptimalprofitmarginoverprice(P
MC)/P.
a.4percent
b.10percent
C.25percent
d.Noneofthecomputationsassociatedwiththisquestionarecorrect

Difficulty:Hard

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

95.Whichofthefollowingisastrategy(ies)usedbyfirmsinmonopolisticallycompetitive
industriestoconvinceconsumersthattheirproductisbetterthanitsrivals'products?
a.Comparativeadvertising
b.Nichemarketing
c.Equitymarketing
D.Comparativeadvertisingornichemarketing

Difficulty:Easy

96.Whichofthefollowingconditionsmustholdtoensurethatprofitsare,infact,ata
maximum?
a.d(MC(Q))/dQ>0
b.d(MC(Q))/dQ<0
c.d2(Q)/dQ2<0
D.d(MC(Q))/dQ>0andd2(Q)/dQ2<0

Difficulty:Hard

97.Thesecondorderconditionforafirmmaximizingitsprofitoperatingina
monopolisticallycompetitivemarketis
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)

Difficulty:Medium

EssayQuestions

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

98.PicIndustriesproducesplastictoothpicksthatitsellstodistributorsintheSouthwest.
Duringtheearly1990s,thepriceoftheplasticitusestoproducetoothpicksfellby46percent,
duetoalocalglutofrecycledplasticcontainers.Assumingthatthemarketforplastic
toothpicksmostcloselyresemblesthatofperfectcompetitionandthatotherfirmsinthe
industrydonotexperiencesimilarcostsavingsintheshortrun,whatimpactwouldthishave
ontheprofitmaximizingoutput,price,andprofitsofPicIndustries?
Otherthingsequal,thefallinthepriceofplasticwouldshiftPic'smarginalcostcurvetothe
right.Tomaximizeprofits,Picshouldincreaseitsoutput.Sinceotherfirmsintheindustrydo
notenjoythereductioninmarginalcosts,themarketsupplycurvewouldnotchangeandthe
marketpriceoftoothpickswouldremainunchanged.PicIndustrieswouldenjoyhigherprofits
intheshortrun.

99.BetaIndustriesmanufacturesfloppydisksthatconsumersperceiveasidenticaltothose
producedbynumerousothermanufacturers.Recently,Betahiredaneconometricianto
estimateitscostfunctionforproducingboxesofonedozenfloppydisks.Theestimatedcost
functionis
.
a.Whatarethefirm'sfixedcosts?
b.Whatisthefirm'smarginalcost?
Nowsupposeotherfirmsinthemarketselltheproductatapriceof$10
c.Howmuchshouldthisfirmchargefortheproduct?
d.Whatistheoptimallevelofoutputtomaximizeprofits?
e.Howmuchprofitwillbeearned?
f.Inthelongrun,shouldthisfirmcontinuetooperateorshutdown?Why?
a.Fixedcosts=20
b.Marginalcosts=4Q
c.P=$10
d.ThefirmshouldproducesuchthatMC=P,i.e.4Q=10.ThisimpliesthatQ=2.5units
e.Profitsare($10)(2.5)202(2.5)2=$7.5
f.Sincethefirmisearninglosses,inthelongrunitwillshutdownifthemarketconditionsdo
notchange

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

100.Kedsthetraditionalmakerofwhitecanvastennisshoeswasnearoblivionintheearly
1980sbecausecompetitorslikeNike,Reebok,Adidas,andBrookstookawaymanyofits
customers.IfyouwereatthehelmofKeds,whatwouldyouhavedonetoturnthecompany
around?
Themarketfortennisshoesisonethatapproximatesthatofmonopolisticcompetition.Thus,
asensiblestrategyforKedswouldhavebeentoforKedstoincreasevarietyintermsofcolor
andstyle,whilekeepingtoasimplecomfortablecanvasdesign.Atthesametime,itcould
increaseadvertisingtoemphasizethepriceandcoloradvantagesofitscanvasdesignoverthe
competition.Infact,thisispreciselywhatKedsdid,andasaresultsalesincreasedbytenfold
from1982to1988.Bydifferentiatingitsproductfromcompetitors,itwasabletoamasssome
shortrunprofits.(SeeLauraJereski,"BackintheGame,"Forbes,October31,1988).

101.Manufacturersoflaundrydetergentanddishwashingsoapreinvestarelativelylarge
percentageoftheirsalesrevenuesonadvertisingcampaigns.Mostoftheseadvertisements
thatappearontelevisionstressthefactthattheirproductis"NewandImproved."Why?
Themarketformanyoftheseproductsismonopolisticallycompetitive,andthusthetendency
isforthefirmstoearnlongruneconomicprofitsofzero.Thefirmshopethatbycontinually
advertisingnewandimprovedfeaturesoftheirproducts,theycanreapsomeshortterm
profits.

102.Supposethecostfunctionforyourfirmis:
.
a.Whatistheaveragefixedcostofproducing5unitsofoutput?
b.Whatistheaveragevariablecostofproducing5unitsofoutput?
c.Whataretheaveragetotalcostandmarginalcostofproducing5unitsofoutput?
a.AFC(5)=$50/5=$10
b.AVC(5)=[4(5)+2(5)2]/5=$14
c.ATC(5)=AVC(5)+AFC(5)=$24;MC(5)=4+4(5)=$24

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

103.U.S.Airwaysexperiencedhugelossesforseveralyearsinthe1990s,yetitcontinuedto
operateitsfleets.Whydidn'tU.S.Airwaysshutdownitsoperationstoavoidthelosses?
Itwascoveringitsvariablecosts(thecostoffuel,pilots,mechanics,flightattendants,andthe
like).Haditshutdownitsoperations,losseswouldhavebeenevenhigher,duetothehigh
fixedcostsassociatedwithitsfleetofaircraft.

104.In1994Pentiumusersaroundtheworldlearnedthattheir$4.00pocketcalculatorcould
performsomeoperationsmoreaccuratelythantheir$5,000desktopcomputers.Ittookseveral
monthsbeforeIntelthemakerofthechipagreedtoofferitscustomersreplacementchips.
Incontrast,WalMartguaranteessatisfactiontoallcustomers,witha"noquestionsasked"
returnpolicyonnearlyalloftheproductsitsells.Whydoyouthinkthesefirmsemploysuch
differentconsumerrelationspolicies?
IntelhasmuchmoremonopolypowerthanWalmart.Walmartmuststrivetodifferentiate
itselffromcompetitorstoearnprofits,andonewayitdoessoisthroughitsreturnpolicy.

105.SupposeyouarethemanagerofAlphaEnterprisesafirmthatholdsapatentthatmakes
ittheexclusivemanufacturerofbubblememorychips.Basedontheestimatesprovidedbya
consultant,youknowthattherelevantdemandandcostfunctionsforbubblememorychips
are
;
.
a.Whatisthefirm'sinversedemandfunction?
b.Whatisthefirm'smarginalrevenuewhenproducing4unitsofoutput?
c.Whatarethelevelsofoutputandpricewhenyouaremaximizingprofits?
d.Whatwillbethelevelofyourprofits?
a.P=502Q
b.MR(Q)=504Q;MR(4)=504(4)=$34
c.SettingMR=MCyields504Q=2,orQ=12.P=502(12)=$26
d.Profitsare($26)(12)74=$238

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

106.Supposeyouareamonopolistoperatingtwoplantsatdifferentlocations.Bothplants
producethesameproduct;

isthequantityproducedatplant1,and

isthequantity

producedatplant2.Youfacethefollowinginversedemandfunction:

,where

.Thecostfunctionsforthetwoplantsare
;
a.Whatareyourmarginalrevenueandmarginalcostfunctions?
b.Tomaximizeprofits,howmuchshouldyouproduceatplant1?Atplant2?
c.Whatisthepricethatmaximizesprofits?
d.Whatarethemaximumprofits?

a.MR=5004Q;MC1=4Q1;MC2=2Q2
b.ProfitsaremaximizedwhenMC1=MC2=MR.ThisimpliesQ1=31.25andQ2=62.5
c.Q=93.75;P=5002(Q1+Q2)=5002(93.75)=$312.50
d.Maximumprofitsare$23,392.50

107.Whydoesthegovernmentgrantpatentstoinvestors?Whydoesthegovernmentgive
monopolypowertoutilitycompanies?
Therationalebehindgrantingmonopolypowertoanewinventorisbasedonthefollowing
argument.Inventionstakemanyyearsandconsiderablesumsofmoneytodevelop.Oncean
inventionbecomespublicinformationintheabsenceofapatentsystem,otherfirmscould
producetheproductandcompeteagainstthefirmthatdevelopedit.Intheabsenceofapatent
system,therewouldbeareducedincentiveonthepartoffirmstodevelopnewproducts.The
governmentgivesmonopolypowertoutilitycompaniesbecausetheyareassumedtobea
naturalmonopoly.

108.Wouldyouexpectanindustrytobemonopolisticallycompetitiveifconsumersdidnot
valuevarietyinthemarket?Explain.
Ifconsumersdidnotvaluevarietyinthemarket,thenfirmsina"monopolistically
competitivemarket"wouldproducehomogeneousgoods.Thatis,themarketwouldbe
perfectlycompetitiveratherthanmonopolisticallycompetitive.

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

109.Whatistheprimaryfacetofmonopolisticcompetitionthatdoesnotallowforthe
presenceoflongrunprofits?Iffirmsaremakingshortrunprofitsinamonopolistically
competitiveindustry,whatwilleventuallyoccurthatwillcauselongruneconomicprofitsto
bezero?
Thedrivingforceofzerolongrunprofitsisfreeentry,whichallowsnewfirmstocometo
competeforthepositiveprofits.Sincethisentrystopsonlywhentheprofitsreturntozero,
thisensuresthelongruneconomicprofitsarezero.

110.Regardlessoftheeconomicenvironment,everyfirmwillmaximizeprofitsbyoperating
attheminimumpointofitsaveragetotalcostcurve.Isthisstatementtrueorfalse?Explain.
False.Tomaximizeprofits,firmssetMR=MC.Theonlymarketenvironmentinwhichthis
necessarilyimpliesproductionattheminimumofaveragecostsisinlongrunequilibrium
underperfectcompetition.Intheshortrun,evenperfectlycompetitivefirmsmayproduceat
anoutputdifferentfromminimumaveragecosts.

111.Whatmarketcanyouthinkof,besidesthatforVCRs,thathasshownshortrunprofits
but,overtime,hasseenprofitsdisappearduetoentry?
ThemarketforIBMcompatiblepersonalcomputers.

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

112.Youareamanagerinaperfectlycompetitivemarket.Thepriceinyourmarketis$35.
Yourtotalcostcurveis
.
a.Whatlevelofoutputshouldyouproduceintheshortrun?
b.Whatpriceshouldyouchargeintheshortrun?
c.Willyoumakeanyprofitsintheshortrun?
d.Whatwillhappeninthelongrun?
e.Howwouldyouranswerchangeifyourcostswere

a.Settingpriceequaltomarginalcostimplies$35=2+Q.TheshortrunoutputlevelisQ=
33
b.$35perunit
c.Profitsare($35)(33)[10+2(33)+.5(33)2]=$534.5
d.Newfirmswillenterandpricewillbelowereduntilprofitiszero
e.Withthiscostfunction,shortrunoutputfallstoQ=.5,butpriceremainsat$35.Inthe
shortrun,profitsare$72.5.Thefirmwillshutdowninthelongrunintheabsenceofa
changeinmarketconditions

113.Youarethemanagerofafirmthathasanexclusivelicensetoproduceyourproduct.The
inversemarketdemandcurveis
.Yourcostfunctionis
.
Determinetheoutputyoushouldproduce,thepriceyoushouldcharge,andyourprofits.
Here,MR=9003QandMC=2+2Q.SettingMR=MCyields9003Q=2+2Q.Solving
forQgivesusQ=179.6.InsertingthisintotheinversedemandfunctionyieldsP=900
1.5(179.6)=$630.60.YourmaximumprofitsarethusPQC(Q)=($630.60)(179.6)
[2(179.6)+(179.6)2]=$80,640.40.

114.Monsanto,themakerofNutrasweet,ownedthepatenttoaspartame,theofficialnameof
thesweetener.In1987Monsanto'spatentexpiredinEurope,allowingotherfirmstoproduce
aspartameunderotherbrandnames.Whatimpactdoyouthinkthishadonthemarketfor
aspartameandMonsanto'sprofits?
WhenthepatentexpiredinEurope,newfirmsenteredthemarkettoproduceaspartameunder
othernames.Mostlikely,thereissomebrandloyaltyandconsumersprobablydonotview
thesenewproductsasperfectsubstitutesforNutrasweet.Consequently,themarketfor
aspartameprobablymovedfrommonopolytomonopolisticcompetition,andMonsanto's
profitsfellasaresultoftheincreasedentry.

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

115.Ifamonopolisthasanownpricedemandelasticityof.8,isitmaximizingprofits?
Explain.
No.Aninelasticdemandimpliesnegativemarginalrevenue.Sinceprofitmaximization
requiresmarginalrevenuetoequalmarginalcost,thefirmisproducingtoomuchoutput
(marginalcostcannotbenegative).

116.Youareamonopolistwiththefollowingcostanddemandconditions:

and

.
a.Determinetheprofitmaximizingoutputandprice
b.Graphthissolution
c.Showyourprofitsandthedeadweightlosstosocietyinyourgraph
d.Determinetheactualamountofdeadweightloss
a.EquatingMRandMCyields1004Q=2Q.SolvingforQyieldsQ=162/3.Byplugging
thisbackintotheinversedemandequation,wegetP=$662/3
Figure819

b.SeeFigure819
c.SeeFigure819
d.Underperfectcompetition,marketequilibriumiswherethedemandcurveintersects
industrymarginalcost.Thus,thecompetitivepriceis$50,andthequantityis25units.The
deadweighttriangleinFigure819is.5(66.6733.33)(2516.67)=$138.86

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

117.Youarethemanagerofamonopolisticallycompetitivefirm.Thepresentdemandcurve
youfaceis
.Yourcostfunctionis
a.Whatlevelofoutputshouldyouchoosetomaximizeprofits?
b.Whatpriceshouldyoucharge?
c.Whatwillhappeninyourmarketinthelongrun?Explain.

a.SettingMR=MCyieldsQ=4
b.P=1004(4)=$84perunit
c.Profitsare84(4)[50+8.5(16)]=$150.Sinceprofitsaregreaterthanzero,newfirmswill
beattractedtotheindustryuntilprofitsfalltozero

118.Wouldyouexpectthedemandforamonopolisticallycompetitivefirm'sproducttobe
moreorlesselasticthanthatforamonopolist'sproduct?Explain.
Ingeneral,thedemandforamonopolisticallycompetitivefirm'sproductshouldbemore
elasticthanthatofamonopolist'sproductbecausethereareclosesubstitutesfortheformer
butnotforthelatter.Theexistenceofclosesubstitutesmakesamonopolisticallycompetitive
firm'squantitydemandedmoreresponsivetoprice.

119.Youarethemanagerofamonopolisticallycompetitivefirm.Theinversedemandfor
yourproductisgivenby
,andyourmarginalcostis
.
a.Whatistheprofitmaximizinglevelofoutput?
b.Whatistheprofitmaximizingprice?
c.Whatarethemaximumprofits?
d.Whatdoyouexpecttohappentothedemandforyourproductinthelongrun?Explain
a.SettingMR=MCyields20020Q=5+Q,orQ=9.29
b.P=20010(9.29)=$107.1
c.Thispartwillbehardformoststudents.Totalcostistheintegralofmarginalcost:orC(Q)
=5Q+Q2/2+FC.Thus,profitsare$905.36FC
d.Iffixedcostsarelowerthan$905.36,thepositiveprofitswillinduceentry.Inthelongrun,
thiswilldecreasethedemandforyourproduct

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

120.Genentechownsapatentontissueplasminogenactivator(TPA),whichisanenzyme
thathelpsthebodybreakdownbloodclots.TPAisparticularlyvaluabletocardiacpatients,
sinceitoftenallowsheartproblemstobetreatedwithmedicationratherthansurgery.
Recently,however,firmsinthemedicalindustryhavecomeunderfirebysomemembersof
Congressandthepressforcharginghighpricesandearningmonopolyprofits.Doyouthink
cardiacpatientswouldbenefitifthegovernmentstrippedGenentechandotherpharmaceutical
firmsoftheirpatents?Explain.
Intheshortrun,eliminatingthepatentmightallowotherfirmstoenterandlowerthepriceto
cardiacpatients.Inthelongrun,however,itisnotatallclearthatcardiacpatientswould
benefit.Absentpatentprotection,firmslikeGenentechwouldbeunwillingtoinvestthe
substantialsumsinR&DthatarerequiredtodevelopproductslikeTPA.Themonopoly
profitsearnedbyGenentechareitsrewardfordevelopingthenewproduct,andtakingaway
thatrewardwouldlikelyharmcardiacpatientsinthelongrun.

121.YouarethegeneralmanagerofTUmodemsInc.,andyouraccountingdepartmenthas
providedyouwiththefollowinginformationaboutthetotalcostofproducingthreepotential
quantitiesofacommercialgrademodem:

Themarketissaturatedwithmodems,andyoursalesdepartmenthasbeenabletoidentify
onlyonepotentialbuyerofyourmodems.Thiscustomerhasnumerousalternativeoptions
andasaresultisonlywillingtopay$300permodemforanorderof100,000modems.You
mustdecidewhethertosignacontractunderthesetermsorsimplyshutdownyour
operations.Whatisyouroptimaldecision?
Theonlycostsrelevantformakingthisdecisionareyourvariablecostsofproducing100,000
units.Theserelevantcostsincludematerials($250,000)andlabor($10,000).Thedepreciation
reflectsachargeforexpendituresalreadymade,andthusthisamountwillbelostregardless
ofyourdecision.Bysigningthecontract,yourrevenuesincreaseby$30,000,000andyour
variablecostsincreasebyonly$260,000.Youshouldsignthecontractbecausedoingsoadds
$29,740,000toyourbottomlinethatyouwillnotgetifyoushutdownyouroperation.

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

122.Amonopolistestimatedthattheownpriceelasticityofdemandforitsproductis4.5and
itsadvertisingelasticityofdemandis1.5.Assumingtheseelasticitiesareconstant,what
fractionofthefirm'srevenuesshouldthefirm"reinvest"inadvertisingtomaximizeprofits?
Tofindtheprofitmaximizingadvertisingtosalesratio,wesimplyplugEQ,P=4.5andEQ,A
=1.5intotheformulafortheoptimaladvertisingtosalesratio:
.
Thus,thefirm'soptimaladvertisingtosalesratiois33.33percenttomaximizeprofits,the
firmshouldspendonethirdofitsrevenuesonadvertising.

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

123.TheXYZcompanyproducesoutputusinglabor(whichitpurchasesonanasneeded
basisinthemarketforunskilledworkersatawageof$5perhour)andonemachine(whichit
isobligatedtoleaseatarentalrateof$300perhour).TheplanninghorizonprecludesXYZ
fromrentingorpurchasinganyadditionalmachines,asthecurrentmachinehasacapacityof
80unitsofoutputperhour,whichexceedstheprojecteddemandforthefirm'sproduct.The
firmhasnoalternativeuseforthemachineitleases,andthecontractprecludesitfrom
subleasingittoanotherparty.Thecompanycurrentlyemploysoneworkerwhoproduces10
unitsofoutputperhour.Arecentreportfromtheengineeringdepartmentrevealsthat,given
theplant'scurrentcapacity,twoworkerscouldproduce20unitsofoutputperhour,three
workerscouldproduce30unitsofoutputperhour,andfourworkerscouldproduceatotalof
40unitsofoutputperhour.
a.Completethefollowingtable

b.SupposethatXYZcansellupto40unitsofoutputperhouratapriceof$.60perunitbut
cannotevengetapennyforunitsproducedinexcessof40unitsperhour.Howmuchoutput
shouldXYZproduceeachhourinordertomaximizeprofits?
c.AtwhatpricewouldXYZfinditprofitabletoshutdownitsoperation?

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Chapter 08 - Managing in Competitive, Monopolistic, and Monopolistically

a.HourlyCostData,XYZCompany

b.40units,sinceMB=$0.60>MC=$0.50forallunitsbelow40,andMB=0forunits
producedinexcessof40
c.Part(b)revealedthatifthefirmoperates,itshouldproduce40units.Itshouldshutdownif
theprofitsfromoperatingarelessthantheprofitsitwouldearnbyshuttingdown.The
calculationsare:
i.Profitsifthefirmoperatesandchargesapriceof"P"for40units:40P30020
ii.Profitsifthefirmshutsdown:$300.Shutdownif$300>40P30020
iii.SolvingforPgivesus:"ShutdownifP<$0.50

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