ECO 101.

Introduction Microeconomics Dr Saima Khan (SaKn)

Problem Set 7 – Market Structures

Name: ID:

Sec: Date:

Instructions
• There are a total of TEN (10) questions in this paper.
• You are not required to submit this problem set. This is for your own
practice for the Final Exam.
• Solutions MAY be provided closer to exam date. Solve by yourself instead
of waiting for solutions.

Question 1 (2 marks)

(a) In the short run, a profit maximizing firm will produce additional units of a product
as long as

(a) price at least covers average fixed cost

(b) total revenue is increasing.

(c) elasticity of demand is infinite.

(d) price at least covers average variable cost.

Justify your answer:

ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

Question 2 (7 marks)

10 24

The figure above shows the cost and revenue curves for one firm in a perfectly
competitive market. Each of the dotted lines on the vertical axis measures $1;
some values on the horizontal axis are marked.
(a) The firm will produce ________ units of output because (1)

(b) The firm will charge a price of ________ because: (1)

(c) Identify and label the Demand curve in the diagram above. (1)
(d) Based on the demand curve you have shown above, what happens if the firm
decides to charge $16.5 for the above good. Why? (2)

(e) When this firm produces the quantity of output that maximizes its profit, the
information in the graph indicates that its (economic) profit equals (1)

(f) Say all firms in this market are earning a positive profit like the firm shown
here. Using the above graph, can you identify the Long Run Price & Quantity
for this firm? (1)
ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

Question 3 (3 marks)

Consider a perfectly competitive firm in the following position: the firm produces
4000 units, the market price is $1, fixed costs are equal to $5000, variable costs
equal $900, and marginal cost equals $1.10. In order to maximize profit in the short
run the firm should

(a) reduce output

(b) increase output

(c) shutdown

(d) increase the market price

(e) not change output

Justify your answer:

ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

Question 4 (4 marks)

If the perfectly competitive market price is P1, then the firm above is:

(a) making an economic loss and should continue producing in the

long run.

(b) making an economic loss and should continue producing in the

short run.

(c) breaking-even and should continue producing in the long run.

(d) making an economic profit and should shut down in the short run.

(e) making an economic profit and should continue producing.

Justify your answer:

ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

Question 5 (3 marks)

In the diagram below, the shutdown price and output are:

(a) A and 5.

(b) B and 4.

(c) C and 3.

(d) D and 2.

Justify your answer:

Question 6 (5 marks)

Say firms in a perfectly competitive market are earning abnormal profit in the short
run. “In the long run, the industry supply curve will shift leftwards, thus increasing
price. This will continue until P=ATC.”

Do you agree?

Justify by drawing on the diagrams presented below. Label curves appropriately,

adding any new curves you may deem necessary. Clearly give titles for each graph.
ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

Fig 1: _______________ Fig 2: _____________

Question 7 (3 marks)

The marginal cost curve is also the supply curve for the Monopolist. Do you agree?
Explain using a labelled diagram.

Justify your answer:

ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

Question 8 (3 marks)

In the short run, a monopolist with a loss of $50, along with marginal revenue of
$20, and marginal cost of $15, should
(a) shutdown.
(b) expand output and raise price.
(c) expand output and cut price.
(d) cut output and raise price.

Show working

Question 9 (13 marks)

A monopolist faces an upward sloping MC curve and a downward sloping market

demand curve.
(a) Say that this is a single price (b) Say that this is a Monopoly doing
monopoly. Draw and label its first degree price discrimination.
marginal revenue curve. Make sure Draw and label its marginal revenue
you label all curves and axis. (2) curve. Make sure you label all curves
and axis. (2)

(c) In the diagram, label price(s) charged and quantity produced (2)
(i) For the single price monopoly.
(ii) For the monopolist doing perfect price discrimination.
ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

(d) In the diagrams above, shade the area showing consumer surplus. (2)
(i) For the single price monopoly, label the consumer surplus as CSSP.
(ii) For the price discriminating monopoly, label the consumer surplus as
CSPD.
(e) Based on your answer to (c), when are consumer’s better off – when there is a
single price monopoly or when the monopolist does first degree price
discrimination? (2)

(f) In terms of Total Surplus, which type of Monopoly is better for society.
Explain using a diagram which shows both monopoly types in one diagram.
(5)
ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

Question 10 (6 marks)

The figure above shows the cost and revenue curves for a monopolistically
competitive food cart (Rahim Burgers) selling burgers and fries. Answer the
following questions using the graph above.

(a) The price charged by Rahim burgers will be (2)

(a) $2 (b) $1 (c) $3 (d) $4

(b) The economic profit made by Rahim Burgers is: (2)

(a) between $50.01 and $100 per day.

(b) $0.

(c) Between $0 and $50 per day.

(d) greaterthan$100.01perday.
ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

Justify your answer:

(c) In the diagram below, draw the Long Run equilibrium for Rahim Burgers. (2)

More Practice Questions

1. A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of
output where the price on the demand curve is $38. At this output, average total cost is $15.
What is the total profit earned?
a. $225
b. $570
c. $19
d. $285
e. $345

Explain with the aid of a diagram.

2. When a monopolistically competitive firm's demand curve shifts leftward, what happens to
its 14) marginal revenue curve?
ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

(a) It disappears.
(b) Nothing, the marginal revenue curve is unchanged.
(c) It shifts leftward.
(d) It shifts rightward.
(e) None of the above is correct because the effect on the marginal revenue curve depends on
whether the demand was initially elastic or inelastic.

Explain with the aid of a diagram.

3. Which of the following is true? In the above figure, if the market is

(a) a monopoly, output will beQ3 and price will be P3.

(b) perfect competition, output will be Q3 and price will be P3.
(c) perfect competition, output will be Q1 and price will be P1.
(d) a monopoly, output will beQ1 and price will be P3.
(e) perfect competition, output will be Q2 and price will be P2.
ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

4. The above figure shows the market demand curve for long-distance telephone calls. Suppose
the marginal cost of a long-distance telephone call is 2¢ a minute for a call no matter how
many minutes of calls are made and there are 3 firms in the industry. If the firms in the
industry
operate as perfect competitors, there are ________ minutes of calls made per hour.

(a) between 0 and 3 million

(b) more than 3 million and less than or equal to 5 million
(c) more than 5 million and less than or equal to 7 million
(d) more than 9 million
(e) more than 7 million and less than or equal to 9 million
ECO 101. Introduction Microeconomics Dr Saima Khan (SaKn)

5. The figure above shows the market demand curve and the ATC curve for a firm. If all firms in 29)
the market have the sameATC curve, the lowest price at which a firm could stay in business in
the long run is ________ per unit and the quantity demanded in the market at that price is
________ units per hour.

A) $20; 2,000

B) $10; 4,000

C) $20; 8,000

D) $10; 8,000

E) $20; 4,000