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1、Managerial Economics 7e (Keat)Chapter 8 Pricing and Output Decisions: Perfect Competition and Monopoly (Appendices 8A and 8B)Multiple-Choice Questions1) Which of the following markets comes closes to the model of perfect competition?A) automobile industryB) information technology industryC) aerospac
2、e industryD) agricultureAnswer: DDiff: 12) A feature of perfect competition isA) use of non-price competition by firms.B) mutual interdependence among firms.C) unique products.D) standardized products.Answer: DDiff: 13) Which is a required characteristic of a perfectly competitive industry?A) There
3、are few firms so that none can influence market price.B) Products are highly differentiated.C) Barriers to entry are high.D) None of the aboveAnswer: DDiff: 14) Which of the following characteristics is most important in differentiating between perfect competition and all other types of markets?A) w
4、hether or not the product is standardizedB) whether or not there is complete market information about priceC) whether or not firms are price takersD) All of the above are equally important.Answer: CDiff: 25) Demand facing an individual, perfectly competitive firm isA) perfectly inelastic at the quan
5、tity the firm chooses to produce.B) perfectly inelastic at the quantity determined by market forces.C) perfectly elastic at the price the firm chooses to charge.D) perfectly elastic at the price determined by market forces.Answer: D5) Suppose that a perfectly competitive industry is in long-run equi
6、librium, and demand increases. Explain the short- and long-run effects on the firm and the industry.Answer: Short run: An increase in demand raises equilibrium price and quantity. Existing firms produce more (because the higher price means that MR二MC at a higher quantity) and earn positive economic
7、profits.Long run: Positive profits attract new firms into the industry. The increase in supply reduces price and further increases quantity. Firms continue to enter until economic profits return to zero, and there is no further incentive for entry.6) Market price is $50. The firm!s marginal cost cur
8、ve is given by MC = 10 + 2Q.a. Find the profit-maximizing output for the firm.b. At this output, is the firm making a profit? Explain your answer.Answer:c. 50= 10 + 2QQ* = 20d. It is impossible to say without further information. We know that at a quantity of 20, the firm will maximize profit or min
9、imize loss, but without information on total costs, we cannot tell if there is a profit or loss.7) A monopolist has demand and cost curves given by:QD = 1000 - 2PTC = 5,000 + 50Qa. Find the monopolists profit-maximizing quantity and price.b. Find the monopolists profit.Answer:c. MR = 500 - QMC = 505
10、0 = 500 - QQ* 二 450P* = $275d. Profit = 275 * 450 - 5,000 - 50 * 450 = $96,2508) A monopolist has demand and cost curves given by:QD = 10,000 - 20P TC= 1,000+ 10Q + .05Q2a. Find the monopolists profit-maximizing quantity and price.b. Find the monopolists profit.Answer:c. MR = 500-0.1 QMC= 10 + 0.1Q1
11、0 + 0.1Q = 500-0.1 QQ* = 2,450P* = $377.50d. Profit =(377.50) * 2450 - 1,000 - 10 * 2450 - 0.05(2450)2 = $599,2509) True, false, or uncertain? Any firm that is not covering fixed costs should shut down in the short run.Answer: False. Fixed costs are sunk and should have no effect on short-run decisi
12、ons. If a firm is not covering variable costs, it should shut down, because those costs are avoidable.10) A perfectly competitive firm has the cost function TC = 1000 + 2Q + 0.1 Q2. What is the lowest price at which this firm can break even?Answer:MC = 2 + 0.2QAC = (1000/Q) + 2 + 0.1QSet MC = AC. fo
13、r minimum AC, or 2 + 0.2Q =(1000/Q) + 2 + 0.1Q, or Q = 100, and at thatpoint, AC = $22. This is the lowest price at which the firm can break even.11) Describe the difference in market structure between monopoly and oligopoly.Answer: Monopoly has only one producer because the product is unique, or ha
14、s no close substitutes, or government gives it the exclusive authority to produce and sell that product.Oligopoly has relatively few large firms producing standardized or differentiated products, but for which entry into or exit from the industry is very difficult, so that they are mutually interdep
15、endent in their pricing-output decisions.12) Explain the difference between economic and normal profits.Answer: Normal profit is the amount of profit necessary to insure that a firm continues to operate in the long run, and it is based on the profit that could be earned in its next best alternative
16、activity. It is equal to the sum of its accounting cost and opportunity cost. Economic profit is the amount of profit above normal profit: profit in excess of what could be earned in its next best alternative activity.13) Describe the process by which the competitive market establishes a price at wh
17、ich all firms are just earning normal profits.Answer: Above normal profits will entice new firms to enter the industry, thereby driving down market price and firm profits until they reach the normal level, after which no additional firms enter the industry. Below normal profits will cause some firms
18、 to exit the industry, thereby raising market price and firm profits until the normal level is reestablished, and no further firms exit the industry.14) A monopolists demand function is P = 1624 - 4Q, and its total cost function isTC = 22,000 + 24Q -4Q2 + 1/3 Q3, where Q is output produced and sold.
19、a. At what level of output and sales (Q) and price (P) will total profits be maximized? b. At what level of output and sales (Q) and price (P) will total revenue be maximized? c. At what price (P) should the monopolist shut down?Answer:a. Total Profits are maximized where MR = MC, and MR = dTR/dQ, w
20、ith TR = P(Q), and MC = dTC/dQ. TR = 1624Q -4Q2, so MR = 1624- 8Q. MC = 24 - 8Q + Q2.MR = MC is 1624 - 8Q = 24 - 8Q + Q2, or 1600 = Q2, and Q = 40. With Q = 40, P = 1464. b. Total Revenue is maximized when MR = 0, or 1624 - 8Q = 0, or Q = 203 with P = 203. c. Shut down would occur whenever price(P)
21、is less than average variable cost (AVC), or below P = A VC, or 1624 - 4Q = 24 - 4Q + 1/3 Q2, or 1600 =1/3 Q2, or Q2 = 4800, or Q = 69 (approximately). When Q = 69, P = 1348, so any price below 1348 would cause the firm to shut down since it is not covering its variable costs.15) What are the limita
22、tions in using break-even analysis?Answer: It requires the use of linear cost and revenue functions; it isnt applicable if the functions are non-linear. It assumes that there are fixed costs, which means the analysis can be applied only to short-run operations. It cant handle multiple product situat
23、ions, unless the product mixes are constant. It cant be used to determine profit-maximizing levels of operations.16) What is the Degree of Operating Leverage?Answer: It is an elasticity formula which calculates the percentage change in profit resulting from some percentage change in the level of ope
24、ration (output and sales).17) How can break-even analysis be used to project the level of operation needed to achieve a targeted profit level?Answer: The targeted level of profit can be factored into the break-even equation as a fixed cost, and then determine the level of output and sales at which t
25、he operating costs plus fixed costs plus desired profit would just equal sales revenue: Q =(TFC + Desired Profit)/(P - AVC), where Q = output, TFC = total fixed cost, P = sales price, and AVC = average variable cost.Diff: 26) In perfect competitionA) the firm*s demand curve is relatively elastic.B)
26、the Erms demand curve is relatively inelastic.C) the 行rms demand curve is perfectly elastic.D) the firms demand curve is perfectly inelastic.Answer: CDiff: 27) For a demand curve that is horizontal, the marginal revenue curveA) will be to the right of the demand curve and half as steep.B) will be to
27、 the left of the demand curve and half as steep.C) will be to the right of the demand curve and twice as steep.D) will be the same as the demand curve.Answer: DDiff: 38) According to the shutdown rule, a firm should produce no output in the short run ifA) price is below minimum average total cost.B)
28、 price is above minimum average total cost.C) total revenues are lower than total fixed costs.D) price is below minimum average variable costs.Answer: DDiff: 39) Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run?A) P MCB) P = MC AC
29、C)P MC.C) charge higher prices.D) All of the aboveAnswer: DDiff: 224) Which of the following correctly completes this statement? The monopolists marginal revenueA) will be greater than price.B) will be less than price.C) will be equal to price.D) will be greater than total revenues.Answer: BDiff: 12
30、5) At the point at which P=MC, suppose that a perfectly competitive firms MC = $100, itsA VC = $80 and its AC = $110. This firm shouldA) shut down immediately.B) continue operating in the short run.C) try to take advantage of economies of scale.D) try to increase its advertising and promotion.Answer
31、: BDiff: 326) When a firm produces at the point where MR = MC, the profit that it is earning is considered to beA) maximum.B) normal.C) above normal.D) Not enough information is provided.Answer: DDiff: 327) When a firm has the power to establish its priceA) P = MR.B)P = MC.C)P MR.D)P ACB) A VC P ACC
32、) P = ACD) P = A VCAnswer: CDiff: 230) A firm that seeks to maximize its revenue is most likely to adhere to which of the following?A) MR = MCB) MR = 0C) MR = PD) MR MRD) P MRAnswer: CDiff: 232) Which of the following is true about a monopoly?A) Its demand curve is generally less elastic than in more competitive markets.B) It will always earn economic profit.C) It will always produce the same as a perfectly competitive firm.D) It will always be subject to government regulation.E) None of the above is true.Answer: ADiff: 3