D. Price equal to marginal cost

EXAM IN MICROECONOMICS

(January, 2009)

VARIANT 1

SOLUTIONS

Section 1. Multiple choice questions

You have 60 minutes to do this part of the exam.

Marking scheme: 1 point for a correct answer, -0.25 for a wrong answer, 0 if the answer has not been given.

1. Compared with firms in a perfectly competitive industry, firms in a monopolistically competitive industry are inefficient because they

A. Make economic profits in the long run

B. Do not lower the product price if input prices fall

C. Restrict their output level to maximize profits

D. Charge the highest price that consumers will pay

E. Waste resources by producing an excess amount of output

Use the information below to answer Questions 2-3:

Suppose that a monopolistic competitor producing an output of 100 units faces the following revenues and costs: Price = $100; marginal revenue = $50; marginal cost = $75, and average total cost = $90.

2. In order to maximize profit, the firm should:

A. Reduce output and raise price.

B. Increase output and raise price.

C. Increase output and lower price.

D. Keep output and price the same.

E. Keep output the same but raise price.

3. At its current output of 100 units, the firm:

A. Realizes a loss of $4,000.

B. Realizes a loss of $2,500.

C. Just breaks even.

D. Earns a profit of $ 1,000.

E. Earns a profit of $2,500.

4. A kinked demand curve, under oligopoly, necessarily implies

A. A gap in the marginal revenue schedule

B. A gap in the marginal cost schedule

C. That price need not be above marginal revenue

D. "Satisficing" rather than optimizing behavior

E. Formal collusion in price determination

5. Which of the following would you NOT expect to characterize a monopolistically competitive industry?

A. Positive short-run profits

B. Zero long run profits

C. Marginal revenue equal to marginal cost

D. Price equal to marginal cost

E. Location used to differentiate products.

6. Which of the following payoff matrices represents the “prisoner’s dilemma” game?

A. (6;2) (1;7)

(5;3) (0;0)

B. (4;4) (3;6)

(6;3) (2;2)

C. (1;1) (3;2)

(2;3) (0;0)

D. (4;4) (2;3)

(3;2) (5;5)

E. (2;2) (4;1)

(1;4) (3;3)

Use the following data for Questions 7 -8.

A monopolistic competitor is in the long-run equilibrium at an output of 5,000. Price is $30, and marginal revenue is $10.

7. The marginal cost of the 5,000th unit of output is:

A. $10.

B. $30.

C. $50,000.

D. $150,000.

E. Equal to the ATC.

8. Average total cost is:

A. At a minimum at $30.

B. Above its minimum point at $30.

C. At a minimum at $10.

D. Above its minimum at $10.

E. Indeterminate without additional information.

9. The diagram above shows the cost and the revenue curves for a monopolistic competitor. Which of the following is correct?

A. The profit maximizing output is OA.

B. The long-run equilibrium price is OT

C. In the long-run the monopolistic competitor will not operate

D. The economic profit earned by the monopolistic competitor is SRMK

E. The long-run average total cost is OS

10. Long-run profit is zero for monopolistic competitors because:

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