Name:

Section:
Student ID:
Quiz 1 Version B
Label your answers properly

1. Firms are ________ with an economic profit of zero, they will ________ in the industry because they _______
be better off in another industry.
a) satisfied, stay, won't
b) unsatisfied, leave, will
c) satisfied, leave, will
d) unsatisfied, stay, won't

2. If a firm makes zero economic profit, then the firm

a) has no incentive to stay in the industry.
b) is better of exiting the industry.
c) it is indifferent between staying and exiting the industry.
d) it will shut down

3. The market demand curve for a perfectly competitive industry is QD = 12 - 2P. The market supply curve is QS = 3 + P. The
market will be in equilibrium if
a. P = 6 and Q = 9.
b. P = 5 and Q = 2.
c. P = 4 and Q = 4.
d. P = 3 and Q = 6.

4. The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
a) $0.
b) $5.
c) $10.
d) $11.

5. The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
a) $0.
b) $5.
c) $10.
d) $11.

6. The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
a) $0.
b) $4.
c) $40.
d) $160.

7. Firms that exhibit price-taking behavior

a) wait for other firms to set price, take it as given, and charge a higher price.
b) have outputs that are too small to influence market price and thus take it as given.
c) take pricing behavior in their own hands.
d) are independently capable of setting price.

8. If the price elasticity of demand is greater than 1, a monopoly's

a) total revenue decreases when the firm lowers its price
b) marginal revenue is negative
c) total revenue increases when the firm lowers its price
d) marginal revenue is zero

9. The monopolist can set a price well above the competitive supply and demand level by...
a) advertising to expand the market.
b) pushing the supply curve as far to the right as it will go.
c) restricting output.
d) using technology to speed production.

10. The marginal revenue curve for a single-price monopoly

a) lies below its demand curve
b) coincides with its demand curve
c) is horizontal
d) lies above its demand curve

11. Which of the following statements about a monopoly is FALSE?

a) A monopoly is the only producer of the good
b) Monopolies have no barriers to entry or exit
c) The good produced by a monopoly has no close substitutes
d) None of the above; that is, all of the above answers are true statements about a monopoly

12. If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the
demand curve for the output of any given firm
a) will be identical to the market demand curve.
b) will be horizontal.
c) will be vertical.
d) cannot be determined from the information given.

13. A firm will shut down in the short run if

a) total fixed costs are too high.
b) total revenue from operating would not cover all costs.
c) total revenue from operating would not cover variable costs.
d) total revenue from operating would not cover fixed costs

14. If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following
must be true at that level of output?
a) p = MC.
b) MR = MC.
c) p ≥ AVC.
d) All of the above.

15. If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
a) earn greater profits than if MR = MC.
b) increase output.
c) decrease output.
d) shut down.

Answer No. A B C D
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Subjective:

Q1. The market for study desks is characterized by perfect competition. Firms and consumers are price takers and in the
long run there is free entry and exit of firms in this industry. All firms are identical in terms of their technological
capabilities. Thus, the cost function as given below for a representative firm can be assumed to be the cost function faced by
each firm in the industry. The total cost and marginal cost functions for the representative firm are given by the following
equations:
TC = 2qs^2 + 5qs + 50
MC = 4qs + 5

Suppose that the market demand is given by:

D = 1025 - 2Q
Note: Q represents market values and q represents firm values. The two are different.
(20 Marks)

a) Determine the equation for average total cost for the firm.

b) What is the long-run equilibrium price in this market?

c) What is the long-run output of each representative firm in this industry?

d) When this industry is in long-run equilibrium, how many firms are in the industry? (Hint: firms are
identically sized).

Now suppose that the number of students increases such that the market demand curve for study desks shifts
out and is given by,
P= 1525 - 2Q

e) In the short run will a representative firm in this industry earn negative economic profits, positive
economic profits, or zero economic profits? (Hint: You can solve this without calculation.)

f) In the long run will a representative firm in this industry earn negative economic profits, positive
economic profits, or zero economic profits? (Hint: again, no calculation required)

g) What will be the new long-run equilibrium price in this industry?

h) At the new long-run equilibrium, what will be the output of each representative firm in the industry?
 i) At the new long-run equilibrium, how many firms will be in the industry?

Now, consider another scenario where technology advancement changes the cost functions of each
representative firm. The market demand is still the original one (before the increase in the number of
students). The new cost functions are:

TC = qs^2 + 5qs + 36
MC = 2qs + 5

j) What will be the new equilibrium price? Is it higher or lower than the original equilibrium price?
Q2. Suppose there is a monopoly that mines diamonds. The marginal revenue and marginal cost functions for this
monopolist are given by the following equations: (10 Marks)

MC = 2 + 2q
MR = 10 -2q

a) Given the above information, write the monopolist’s demand curve for diamonds in y-intercept form?
Assume this demand curve is linear.

b) Given the above information, what is the profit-maximizing level of output for this monopolist?

c) What price should the monopolist charge when it produces the profit maximizing quantity?
Explain your answer.

d) Suppose you know that the monopolist’s total costs can be calculated using the equation

TC = 2+ 2q + q*q.

Given this information, write equations for TFC, TVC, and ATC.
e) Given the above information and the work you have done, now calculate the monopolist’s economic profit.
How much profit/loss does the firm earn? Show how you calculated this answer.