Chapter 8: Monopoly and Monopolistic Competition

MULTIPLE CHOICE

1.

If a monopolist faces a constant-elasticity demand curve given by Q =

–3

202,500P and has total costs given by TC = 10Q, its profit-maximizing level of output is:

a.

b.

c.

d.

e.

50.

60.

75.

100.

120.

ANS: B

DIF: Moderate

REF: 259

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

If a monopolist faces a constant-elasticity demand curve given by Q = 400P –

2 and has total costs given by TC = 0.625Q2, its profit-maximizing level of output is:

2.

a.

b.

c.

d.

e.

0.

2.

4.

6.

8.

ANS: C

DIF: Moderate

REF: 259

TOP: Pricing and Output Decisions in Monopoly

3.

a.

b.

c.

d.

e.

MSC: Applied

At the profit-maximizing level of output for the monopolist:

total revenue is equal to total cost.

total costs are minimized.

total revenue is maximized.

marginal revenue is equal to marginal cost.

average revenue is equal to average cost.

ANS: D

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Factual

4.

For the Minnie Mice Company, the elasticity of demand is –6, and the profitmaximizing price is 30. If MC is marginal cost and AVC is average variable cost, then:

a.

MC = 25.

b.

AVC = 25.

c.

MC = 30.

d.

AVC = 36.

e.

MC = 36.

ANS: A

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

5.

Bathworks has exclusive rights to sell its perfumes. The demand for its

perfumes faced by Bathworks is given by Q = 250 – 0.5P. Bathworks’s costs are given by TC

= 50Q + 5.5Q2. Its maximum monopoly profit is:

a.

b.

c.

d.

e.

$6,750.

$7,050.

$7,500.

$7,750.

$8,750.

a.

b.

c.

d.

e.

$6,750.

$7,050.

$7,500.

$7,750.

$8,750.

ANS: A

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

6.

Craig’s Red Sea Restaurant is the only restaurant in Columbia, South

Carolina, that sells Ethiopian food. The demand for Ethiopian food is given by Q = 25 – P.

Craig’s costs are given by TC = 25 + Q + 5Q2. Its maximum monopoly profit is:

a.

b.

c.

d.

e.

–$1.

$21.

$22.

$24.

$26.

ANS: A

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

7.

My Big Banana (MBB) has a monopoly in Middletown on large banana

splits. The demand for this delicacy is given by Q = 80 – P. MBB’s costs are given by TC =

40 + 2Q + 2Q2. Its maximum monopoly profit is:

a.

b.

c.

d.

e.

$267.

$467.

$627.

$672.

$674.

ANS: B

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

8.

For the Mickey Mice Company, the price elasticity of demand is –3, average

cost is $15, and marginal cost is $30. Mickey’s profit-maximizing price is:

a.

$10.00.

b.

$20.00.

c.

$22.50.

d.

$30.00.

e.

$45.00.

ANS: E

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

9.

Cal’s Cab Company (CCC) has a taxi monopoly in Wen Kroy. The demand

for taxi services in Wen Kroy is given by Q = 1,500 – P. CCC’s costs are given by TC = 100 –

Q2 + 5Q3. Its maximum monopoly profit is:

a.

b.

c.

d.

e.

$0.

$5,500.

$6,600.

$7,700.

$9,900.

ANS: E

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

10.

So long as price exceeds average variable cost, in the model of monopoly, the

firm maximizes profits by producing where:

a.

the difference between marginal revenue

and marginal cost is maximized.

b.

marginal revenue equals price.

c.

the difference between price and marginal

cost is maximized.

d.

price equals marginal cost.

e.

marginal cost equals marginal revenue.

ANS: E

DIF: Moderate

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Conceptual

11.

If Harry Doubleday’s price elasticity of demand is –2, and its profitmaximizing price is $6, then its:

a.

average cost is $3.00.

b.

average cost is $0.33.

c.

marginal cost is $3.00.

d.

marginal cost is $0.33.

e.

average cost is $5.67.

ANS: C

DIF: Moderate

REF: 262

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

12.

The Frank Failing Company has an average variable cost of $8, average fixed

cost of $16, marginal cost of $12, and elasticity of demand –3. Frank should:

a.

shut down.

b.

charge $8.

c.

charge $16.

d.

charge $18.

e.

charge $36.

ANS: D

DIF: Moderate

REF: 262

TOP: Pricing and Output Decisions in Monopoly

13.

a.

b.

c.

d.

e.

In the model of monopoly, firms produce a:

standardized product with considerable

control over price.

differentiated product with considerable

control over price.

standardized product with no control over

price.

differentiated product with no control over

price.

standardized or differentiated product with

some control over price.

ANS: B

DIF: Easy

REF: 264

TOP: Pricing and Output Decisions in Monopoly

14.

a.

b.

c.

d.

e.

MSC: Applied

MSC: Conceptual

In the model of monopoly, there:

are many firms producing differentiated

products.

are a few firms producing undifferentiated

products.

are a few firms producing differentiated

products.

are many firms producing undifferentiated

products.

is one firm producing a highly differentiated

a.

are many firms producing differentiated

products.

are a few firms producing undifferentiated

products.

are a few firms producing differentiated

products.

are many firms producing undifferentiated

products.

is one firm producing a highly differentiated

product.

b.

c.

d.

e.

ANS: E

DIF: Easy

REF: 264

TOP: Pricing and Output Decisions in Monopoly

MSC: Conceptual

15.

A firm with no costs producing Q units and charging price P gets a return of r

on total assets of A if P equals:

a.

rA.

b.

(1 + r)A.

c.

(1 + r)A/Q.

d.

rA/Q.

e.

rAQ.

ANS: D

MSC: Factual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

16.

If price P, unit costs C, and quantity Q are known, the markup of markupcost pricing is:

a.

(PQ – CQ)/Q.

b.

P – C/Q.

c.

(P – C)/Q.

d.

(P – C)/C.

e.

1 – (P – C)/Q.

ANS: D

MSC: Factual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

17.

Harriet Quarterly wants a 25% return on the $100 of assets she has in her

company. Her average variable costs are $50 per unit, and she has no fixed costs. If she sells

10 units, what price should she charge?

a.

$52.50.

b.

$62.50.

c.

$75.00.

d.

$87.50.

e.

$125.00.

ANS: A

MSC: Applied

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

18.

Joe’s T-shirts has costs given by TC = $100 + 3Q, where Q is the number of

shirts. If Joe charges $5 each, the percentage markup for 100 shirts is:

a.

20%.

b.

25%.

c.

33%.

d.

50%.

e.

67%.

ANS: B

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

MSC: Applied

19.

When producing 10 units, Jean has total variable costs of $100, total fixed

costs of $100, and assets of $100. She wants a return of 10%. What price should she charge?

a.

$11.

b.

$21.

c.

$30.

d.

$210.

e.

$300.

ANS: B

MSC: Applied

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

20.

If C is total cost, Q is quantity, P is price, and A is total assets, the target

return r is defined by:

a.

(PQ – C)/A.

b.

[1 – (P – C)/Q]A.

c.

[1 – (P – C)Q]A.

d.

(P – C)Q/A.

e.

1 – (P – C)Q/A.

ANS: A

MSC: Conceptual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

21.

If elasticity of demand is –2, marginal cost is $4, and average cost is $6, a

profit-maximizing markup price is:

a.

$4.

b.

$6.

c.

$8.

d.

$10.

e.

$12.

ANS: C

DIF: Easy

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Applied

22.

If the demand curve is horizontal, the price elasticity used to calculate the

profit-maximizing price is:

a.

–10.

b.

–5.

c.

–0.

d.

–1.

e.

infinity.

ANS: E

DIF: Easy

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

23.

a.

b.

c.

d.

e.

ANS: B

MSC: Conceptual

If ç is the elasticity of demand, a profit maximizer sets a markup price of:

MC[1/(1 + 1/η)].

MC[1/(1 – 1/η)].

AC[1/(1 – η)].

AC[1/(1 – 1/η)].

1/(1 – η).

DIF: Moderate

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Factual

24.

If the profit-maximizing markup price is marginal cost times 2, the elasticity

of demand must be:

a.

–0.

b.

–1/2.

c.

–1.

d.

–4/3.

e.

–2.

ANS: E

DIF: Moderate

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

25.

a.

b.

c.

d.

e.

MSC: Applied

To maximize profit, the firm must:

mark up average variable costs.

mark up marginal costs.

mark up average fixed costs.

set the markup equal to –1/(η + 1).

b and d

ANS: E

DIF: Difficult

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Conceptual

26.

If revenues from selling quantities x and y of jointly produced goods X and Y

were TRX = 300 – xy + 50x and TRY = 1,000 – xy + 2y, and 10 units of y were produced, then

marginal revenue with respect to X would be:

a.

$10.

b.

$20.

c.

$30.

d.

$40.

e.

$50.

ANS: C

DIF: Easy

REF: 273

TOP: The Multiple-Product Firm: Demand Interrelationships

MSC: Applied

27.

If revenues from selling quantities x and y of jointly produced goods X and Y

were TRX = 100 – xy + 2x and TRY = 500 – xy + 3y, then marginal revenue with respect to X

would be:

a.

–2 – y.

b.

–y.

c.

–x(2y + 5).

d.

–(2y + 5).

e.

2(1 – y).

ANS: E

DIF: Easy

REF: 273

TOP: The Multiple-Product Firm: Demand Interrelationships

MSC: Applied

28.

If John produces joint products A and B and refuses to sell all the A he

produces, then:

a.

A is a high-demand good.

b.

A is a low-demand good.

c.

A is a high-cost good.

d.

A is a low-cost good.

e.

John is definitely not profit maximizing.

a.

b.

c.

d.

e.

A is a high-demand good.

A is a low-demand good.

A is a high-cost good.

A is a low-cost good.

John is definitely not profit maximizing.

ANS: B

DIF: Easy

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Factual

29.

A producer of two fixed proportion outputs A and B, producing QA = QB

with marginal revenues MRA and MRB, should equate marginal cost to:

a.

the maximum (MRA, MRB).

b.

the minimum (MRA, MRB).

c.

d.

MRA, which should equal MRB.

the horizontal sum of MRA and MRB.

e.

the vertical sum of MRA and MRB.

ANS: E

DIF: Easy

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Factual

30.

A producer of fixed proportion goods X and Y (Q = QX = QY) has marginal

costs and revenues of MC = 12Q, MRX = 54 – 6QX, MRY = 126 – 12QY . The producer

should produce how many units?

a.

3.

b.

5.25.

c.

6.

d.

8.25.

e.

10.

ANS: C

DIF: Easy

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

31.

a.

b.

c.

d.

e.

MSC: Applied

When a producer of joint goods refuses to sell all of one good, the producer:

is not rational.

must destroy some of the high-demand

good.

must destroy some of the low-demand good.

must give away some of the high-demand

good.

must give away some of the low-demand

good.

ANS: C

DIF: Moderate

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

32.

A producer refuses to sell some of one joint product. MRA is the marginal

revenue for a low-demand good. If the producer were to sell all its production, what would be

true of MRA?

a.

MRA = demand for A.

b.

c.

d.

e.

MRA = 0.

MRA = marginal cost of A.

MRA < 0.

MRA = 1.

ANS: D

DIF: Moderate

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

33.

Fred Stickwick produces fixed proportion goods A and B, with QA = QB,

marginal costs MC, and marginal revenues MRA and MRB. If demand for A is greater than

demand for B, Fred should only:

a.

produce B to the quantity where MRB = 0.

b.

sell B to the quantity where MRB = 0 if

MRA is still > MC.

c.

produce B to the quantity where MRB =

MC.

sell B to the quantity where MRB = MC.

d.

e.

produce B to the quantity where MRB =

MRA.

ANS: B

DIF: Difficult

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

34.

Jack O. Trades produces joint products A and B with linear demands DA >

DB. Given MRB is marginal revenue for B and MCB is marginal cost of B, Jack’s total

marginal revenue curve changes slope at the quantity where:

a.

MRB = MCB.

b.

DB = MCB.

c.

d.

MRB = DB.

MRB = 0.

e.

DB = 0.

ANS: D

DIF: Difficult

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

35.

isocost curve:

a.

MSC: Conceptual

For a producer of joint products X and Y with total costs CX and CY, an

isolates CX and CY separately.

b.

shows points where CX = CY .

c.

d.

shows points where cost curves are tangent.

shows points where CX /CY is constant.

e.

shows points where CX + CY is constant.

ANS: E

DIF: Easy

REF: 278

TOP: Output of Joint Products: Variable Proportions

MSC: Factual

36.

For a producer of joint products X and Y with total revenue and RY, an

isorevenue curve:

a.

isolates RX and RY separately.

b.

shows points where RX = RY .

c.

d.

shows points where revenue curves are

tangent.

shows points where RX /RY is constant.

e.

shows points where RX + RY is constant.

a.

isolates RX and RY separately.

b.

shows points where RX = RY .

c.

d.

shows points where revenue curves are

tangent.

shows points where RX /RY is constant.

e.

shows points where RX + RY is constant.

ANS: E

DIF: Easy

REF: 278

TOP: Output of Joint Products: Variable Proportions

MSC: Factual

37.

A monopsonist faces a market labor supply curve w = 20 + L, where w is the

wage rate and L is the number of workers employed. If the firm’s labor demand curve is w =

200 – 4L, what is the optimal wage rate and quantity of labor employed?

a.

w = 50 and L = 30.

b.

w = 56 and L = 36.

c.

w = 80 and L = 30.

d.

w = 104 and L = 32.

e.

None of the above.

ANS: A

MSC: Applied

DIF: Easy

REF: 281

TOP: Monopsony

38.

A monopsonist faces a market labor supply curve w = 40 + 2L, where w is the

wage rate and L is the number of workers employed. If the firm’s labor demand curve is w =

200 – L, what is the optimal wage rate and quantity of labor employed?

a.

w = 146.7 and L = 53.3.

b.

w = 168 and L = 32.

c.

w = 104 and L = 32.

d.

w = 40 and L = 160.

e.

w = 32 and L = 168.

ANS: C

MSC: Applied

39.

a.

b.

c.

d.

e.

ANS: D

Competition

MSC: Factual

40.

a.

b.

c.

d.

e.

DIF: Easy

REF: 281

TOP: Monopsony

In the model of monopolistic competition, there can be short-run:

losses or profits, but there must be profits in

long-run equilibrium.

profits, but there must be losses in long-run

equilibrium.

losses or profits, but there must be losses in

long-run equilibrium.

losses or profits, but there must be neither

profits nor losses in long-run equilibrium.

losses, but there must be profits in long-run

equilibrium.

DIF: Easy

REF: 283

TOP: Monopolistic

In the model of monopolistic competition, firms produce a:

standardized product with considerable

control over price.

differentiated product with considerable

control over price.

standardized product with no control over

price.

differentiated product with no control over

price.

differentiated product with some control

over price.

a.

standardized product with considerable

control over price.

differentiated product with considerable

control over price.

standardized product with no control over

price.

differentiated product with no control over

price.

differentiated product with some control

over price.

b.

c.

d.

e.

ANS: E

Competition

MSC: Factual

41.

a.

b.

c.

d.

e.

DIF: Easy

REF: 283

TOP: Monopolistic

Firms that produce similar, slightly differentiated products are called a(n):

oligarchy.

oligopoly.

cabal.

cartel.

product group.

ANS: E

Competition

MSC: Factual

DIF: Easy

REF: 283

TOP: Monopolistic

42.

So long as price exceeds average variable cost, in the model of monopolistic

competition, a firm maximizes profits by producing where:

a.

the difference between marginal revenue

and marginal cost is maximized.

b.

marginal cost equals marginal revenue.

c.

marginal revenue equals price.

d.

the difference between price and marginal

cost is maximized.

e.

price equals marginal cost.

ANS: B

Competition

MSC: Conceptual

DIF: Moderate

REF: 284

TOP: Monopolistic

43.

The ABC Company estimates that a newspaper advertising campaign would

cost $25,000 and would generate $35,000 in new revenues. The firm should begin this

campaign as long as:

a.

price elasticity of demand is at least 2.5 (in

absolute value).

b.

price elasticity of supply is 1.

c.

price elasticity of demand is at least 1.4 (in

absolute value).

d.

marginal cost of production is no more than

$25,000.

e.

price elasticity of supply is 1.4.

ANS: C

Expenditures

MSC: Applied

DIF: Moderate

REF: 286

TOP: Advertising

44.

A supplier of fur coats estimates that the price elasticity of demand for its

coats is –3.75. The firm has determined that an additional $100,000 in advertising would

generate $275,000 in additional revenues. You would advise the firm to:

a.

advertise, because the marginal revenues are

greater than the cost of advertising.

b.

spend only $50,000 on advertising, because

the marginal revenue from an additional

dollar of advertising is less than $3.75.

c.

abandon the advertising plan, because the

demand elasticity is greater than 1 (in

absolute value).

a.

advertise, because the marginal revenues are

greater than the cost of advertising.

spend only $50,000 on advertising, because

the marginal revenue from an additional

dollar of advertising is less than $3.75.

abandon the advertising plan, because the

demand elasticity is greater than 1 (in

absolute value).

abandon the advertising plan, because the

marginal revenue from an additional dollar

of advertising is less than $3.75.

advertise, because the fur coats are a luxury

item.

b.

c.

d.

e.

ANS: D

Expenditures

MSC: Applied

DIF: Moderate

REF: 286

TOP: Advertising

45.

If a firm in a monopolistically competitive industry is profit maximizing, it

should choose its level of advertising such that the marginal revenue of an additional dollar of

advertising:

a.

is equal to the elasticity of its demand curve

minus 1.

b.

is exactly $1.

c.

increases revenues by $1.

d.

is equal to 1 plus the elasticity of its demand

curve.

e.

is equal to the elasticity of its demand

curve.

ANS: E

Expenditures

MSC: Factual

46.

a.

b.

c.

DIF: Easy

REF: 287

TOP: Advertising

Firms advertise in order to:

build brand loyalty.

appeal to the price-sensitive consumers.

increase the demand elasticities of their

loyal customers.

shift the market supply curve to the left.

shift the market demand curve to the left.

d.

e.

ANS: A

DIF: Easy

REF: 288

TOP: Advertising, Price Elasticity, and Brand Equity: Evidence on Managerial Behavior

MSC: Factual

47.

a.

b.

c.

d.

e.

Firms offer promotions in order to:

build brand loyalty.

appeal to the price-sensitive consumers.

increase the demand elasticities of their

loyal customers.

shift the market supply curve to the left.

shift the market demand curve to the left.

ANS: B

DIF: Easy

REF: 288

TOP: Advertising, Price Elasticity, and Brand Equity: Evidence on Managerial Behavior

MSC: Factual

MULTIPLE CHOICE

1.

If a monopolist faces a constant-elasticity demand curve given by Q =

–3

202,500P and has total costs given by TC = 10Q, its profit-maximizing level of output is:

a.

b.

c.

d.

e.

50.

60.

75.

100.

120.

ANS: B

DIF: Moderate

REF: 259

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

If a monopolist faces a constant-elasticity demand curve given by Q = 400P –

2 and has total costs given by TC = 0.625Q2, its profit-maximizing level of output is:

2.

a.

b.

c.

d.

e.

0.

2.

4.

6.

8.

ANS: C

DIF: Moderate

REF: 259

TOP: Pricing and Output Decisions in Monopoly

3.

a.

b.

c.

d.

e.

MSC: Applied

At the profit-maximizing level of output for the monopolist:

total revenue is equal to total cost.

total costs are minimized.

total revenue is maximized.

marginal revenue is equal to marginal cost.

average revenue is equal to average cost.

ANS: D

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Factual

4.

For the Minnie Mice Company, the elasticity of demand is –6, and the profitmaximizing price is 30. If MC is marginal cost and AVC is average variable cost, then:

a.

MC = 25.

b.

AVC = 25.

c.

MC = 30.

d.

AVC = 36.

e.

MC = 36.

ANS: A

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

5.

Bathworks has exclusive rights to sell its perfumes. The demand for its

perfumes faced by Bathworks is given by Q = 250 – 0.5P. Bathworks’s costs are given by TC

= 50Q + 5.5Q2. Its maximum monopoly profit is:

a.

b.

c.

d.

e.

$6,750.

$7,050.

$7,500.

$7,750.

$8,750.

a.

b.

c.

d.

e.

$6,750.

$7,050.

$7,500.

$7,750.

$8,750.

ANS: A

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

6.

Craig’s Red Sea Restaurant is the only restaurant in Columbia, South

Carolina, that sells Ethiopian food. The demand for Ethiopian food is given by Q = 25 – P.

Craig’s costs are given by TC = 25 + Q + 5Q2. Its maximum monopoly profit is:

a.

b.

c.

d.

e.

–$1.

$21.

$22.

$24.

$26.

ANS: A

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

7.

My Big Banana (MBB) has a monopoly in Middletown on large banana

splits. The demand for this delicacy is given by Q = 80 – P. MBB’s costs are given by TC =

40 + 2Q + 2Q2. Its maximum monopoly profit is:

a.

b.

c.

d.

e.

$267.

$467.

$627.

$672.

$674.

ANS: B

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

8.

For the Mickey Mice Company, the price elasticity of demand is –3, average

cost is $15, and marginal cost is $30. Mickey’s profit-maximizing price is:

a.

$10.00.

b.

$20.00.

c.

$22.50.

d.

$30.00.

e.

$45.00.

ANS: E

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

9.

Cal’s Cab Company (CCC) has a taxi monopoly in Wen Kroy. The demand

for taxi services in Wen Kroy is given by Q = 1,500 – P. CCC’s costs are given by TC = 100 –

Q2 + 5Q3. Its maximum monopoly profit is:

a.

b.

c.

d.

e.

$0.

$5,500.

$6,600.

$7,700.

$9,900.

ANS: E

DIF: Easy

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

10.

So long as price exceeds average variable cost, in the model of monopoly, the

firm maximizes profits by producing where:

a.

the difference between marginal revenue

and marginal cost is maximized.

b.

marginal revenue equals price.

c.

the difference between price and marginal

cost is maximized.

d.

price equals marginal cost.

e.

marginal cost equals marginal revenue.

ANS: E

DIF: Moderate

REF: 261

TOP: Pricing and Output Decisions in Monopoly

MSC: Conceptual

11.

If Harry Doubleday’s price elasticity of demand is –2, and its profitmaximizing price is $6, then its:

a.

average cost is $3.00.

b.

average cost is $0.33.

c.

marginal cost is $3.00.

d.

marginal cost is $0.33.

e.

average cost is $5.67.

ANS: C

DIF: Moderate

REF: 262

TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

12.

The Frank Failing Company has an average variable cost of $8, average fixed

cost of $16, marginal cost of $12, and elasticity of demand –3. Frank should:

a.

shut down.

b.

charge $8.

c.

charge $16.

d.

charge $18.

e.

charge $36.

ANS: D

DIF: Moderate

REF: 262

TOP: Pricing and Output Decisions in Monopoly

13.

a.

b.

c.

d.

e.

In the model of monopoly, firms produce a:

standardized product with considerable

control over price.

differentiated product with considerable

control over price.

standardized product with no control over

price.

differentiated product with no control over

price.

standardized or differentiated product with

some control over price.

ANS: B

DIF: Easy

REF: 264

TOP: Pricing and Output Decisions in Monopoly

14.

a.

b.

c.

d.

e.

MSC: Applied

MSC: Conceptual

In the model of monopoly, there:

are many firms producing differentiated

products.

are a few firms producing undifferentiated

products.

are a few firms producing differentiated

products.

are many firms producing undifferentiated

products.

is one firm producing a highly differentiated

a.

are many firms producing differentiated

products.

are a few firms producing undifferentiated

products.

are a few firms producing differentiated

products.

are many firms producing undifferentiated

products.

is one firm producing a highly differentiated

product.

b.

c.

d.

e.

ANS: E

DIF: Easy

REF: 264

TOP: Pricing and Output Decisions in Monopoly

MSC: Conceptual

15.

A firm with no costs producing Q units and charging price P gets a return of r

on total assets of A if P equals:

a.

rA.

b.

(1 + r)A.

c.

(1 + r)A/Q.

d.

rA/Q.

e.

rAQ.

ANS: D

MSC: Factual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

16.

If price P, unit costs C, and quantity Q are known, the markup of markupcost pricing is:

a.

(PQ – CQ)/Q.

b.

P – C/Q.

c.

(P – C)/Q.

d.

(P – C)/C.

e.

1 – (P – C)/Q.

ANS: D

MSC: Factual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

17.

Harriet Quarterly wants a 25% return on the $100 of assets she has in her

company. Her average variable costs are $50 per unit, and she has no fixed costs. If she sells

10 units, what price should she charge?

a.

$52.50.

b.

$62.50.

c.

$75.00.

d.

$87.50.

e.

$125.00.

ANS: A

MSC: Applied

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

18.

Joe’s T-shirts has costs given by TC = $100 + 3Q, where Q is the number of

shirts. If Joe charges $5 each, the percentage markup for 100 shirts is:

a.

20%.

b.

25%.

c.

33%.

d.

50%.

e.

67%.

ANS: B

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

MSC: Applied

19.

When producing 10 units, Jean has total variable costs of $100, total fixed

costs of $100, and assets of $100. She wants a return of 10%. What price should she charge?

a.

$11.

b.

$21.

c.

$30.

d.

$210.

e.

$300.

ANS: B

MSC: Applied

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

20.

If C is total cost, Q is quantity, P is price, and A is total assets, the target

return r is defined by:

a.

(PQ – C)/A.

b.

[1 – (P – C)/Q]A.

c.

[1 – (P – C)Q]A.

d.

(P – C)Q/A.

e.

1 – (P – C)Q/A.

ANS: A

MSC: Conceptual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

21.

If elasticity of demand is –2, marginal cost is $4, and average cost is $6, a

profit-maximizing markup price is:

a.

$4.

b.

$6.

c.

$8.

d.

$10.

e.

$12.

ANS: C

DIF: Easy

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Applied

22.

If the demand curve is horizontal, the price elasticity used to calculate the

profit-maximizing price is:

a.

–10.

b.

–5.

c.

–0.

d.

–1.

e.

infinity.

ANS: E

DIF: Easy

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

23.

a.

b.

c.

d.

e.

ANS: B

MSC: Conceptual

If ç is the elasticity of demand, a profit maximizer sets a markup price of:

MC[1/(1 + 1/η)].

MC[1/(1 – 1/η)].

AC[1/(1 – η)].

AC[1/(1 – 1/η)].

1/(1 – η).

DIF: Moderate

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Factual

24.

If the profit-maximizing markup price is marginal cost times 2, the elasticity

of demand must be:

a.

–0.

b.

–1/2.

c.

–1.

d.

–4/3.

e.

–2.

ANS: E

DIF: Moderate

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

25.

a.

b.

c.

d.

e.

MSC: Applied

To maximize profit, the firm must:

mark up average variable costs.

mark up marginal costs.

mark up average fixed costs.

set the markup equal to –1/(η + 1).

b and d

ANS: E

DIF: Difficult

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Conceptual

26.

If revenues from selling quantities x and y of jointly produced goods X and Y

were TRX = 300 – xy + 50x and TRY = 1,000 – xy + 2y, and 10 units of y were produced, then

marginal revenue with respect to X would be:

a.

$10.

b.

$20.

c.

$30.

d.

$40.

e.

$50.

ANS: C

DIF: Easy

REF: 273

TOP: The Multiple-Product Firm: Demand Interrelationships

MSC: Applied

27.

If revenues from selling quantities x and y of jointly produced goods X and Y

were TRX = 100 – xy + 2x and TRY = 500 – xy + 3y, then marginal revenue with respect to X

would be:

a.

–2 – y.

b.

–y.

c.

–x(2y + 5).

d.

–(2y + 5).

e.

2(1 – y).

ANS: E

DIF: Easy

REF: 273

TOP: The Multiple-Product Firm: Demand Interrelationships

MSC: Applied

28.

If John produces joint products A and B and refuses to sell all the A he

produces, then:

a.

A is a high-demand good.

b.

A is a low-demand good.

c.

A is a high-cost good.

d.

A is a low-cost good.

e.

John is definitely not profit maximizing.

a.

b.

c.

d.

e.

A is a high-demand good.

A is a low-demand good.

A is a high-cost good.

A is a low-cost good.

John is definitely not profit maximizing.

ANS: B

DIF: Easy

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Factual

29.

A producer of two fixed proportion outputs A and B, producing QA = QB

with marginal revenues MRA and MRB, should equate marginal cost to:

a.

the maximum (MRA, MRB).

b.

the minimum (MRA, MRB).

c.

d.

MRA, which should equal MRB.

the horizontal sum of MRA and MRB.

e.

the vertical sum of MRA and MRB.

ANS: E

DIF: Easy

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Factual

30.

A producer of fixed proportion goods X and Y (Q = QX = QY) has marginal

costs and revenues of MC = 12Q, MRX = 54 – 6QX, MRY = 126 – 12QY . The producer

should produce how many units?

a.

3.

b.

5.25.

c.

6.

d.

8.25.

e.

10.

ANS: C

DIF: Easy

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

31.

a.

b.

c.

d.

e.

MSC: Applied

When a producer of joint goods refuses to sell all of one good, the producer:

is not rational.

must destroy some of the high-demand

good.

must destroy some of the low-demand good.

must give away some of the high-demand

good.

must give away some of the low-demand

good.

ANS: C

DIF: Moderate

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

32.

A producer refuses to sell some of one joint product. MRA is the marginal

revenue for a low-demand good. If the producer were to sell all its production, what would be

true of MRA?

a.

MRA = demand for A.

b.

c.

d.

e.

MRA = 0.

MRA = marginal cost of A.

MRA < 0.

MRA = 1.

ANS: D

DIF: Moderate

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

33.

Fred Stickwick produces fixed proportion goods A and B, with QA = QB,

marginal costs MC, and marginal revenues MRA and MRB. If demand for A is greater than

demand for B, Fred should only:

a.

produce B to the quantity where MRB = 0.

b.

sell B to the quantity where MRB = 0 if

MRA is still > MC.

c.

produce B to the quantity where MRB =

MC.

sell B to the quantity where MRB = MC.

d.

e.

produce B to the quantity where MRB =

MRA.

ANS: B

DIF: Difficult

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

34.

Jack O. Trades produces joint products A and B with linear demands DA >

DB. Given MRB is marginal revenue for B and MCB is marginal cost of B, Jack’s total

marginal revenue curve changes slope at the quantity where:

a.

MRB = MCB.

b.

DB = MCB.

c.

d.

MRB = DB.

MRB = 0.

e.

DB = 0.

ANS: D

DIF: Difficult

REF: 276

TOP: Pricing of Joint Products: Fixed Proportions

35.

isocost curve:

a.

MSC: Conceptual

For a producer of joint products X and Y with total costs CX and CY, an

isolates CX and CY separately.

b.

shows points where CX = CY .

c.

d.

shows points where cost curves are tangent.

shows points where CX /CY is constant.

e.

shows points where CX + CY is constant.

ANS: E

DIF: Easy

REF: 278

TOP: Output of Joint Products: Variable Proportions

MSC: Factual

36.

For a producer of joint products X and Y with total revenue and RY, an

isorevenue curve:

a.

isolates RX and RY separately.

b.

shows points where RX = RY .

c.

d.

shows points where revenue curves are

tangent.

shows points where RX /RY is constant.

e.

shows points where RX + RY is constant.

a.

isolates RX and RY separately.

b.

shows points where RX = RY .

c.

d.

shows points where revenue curves are

tangent.

shows points where RX /RY is constant.

e.

shows points where RX + RY is constant.

ANS: E

DIF: Easy

REF: 278

TOP: Output of Joint Products: Variable Proportions

MSC: Factual

37.

A monopsonist faces a market labor supply curve w = 20 + L, where w is the

wage rate and L is the number of workers employed. If the firm’s labor demand curve is w =

200 – 4L, what is the optimal wage rate and quantity of labor employed?

a.

w = 50 and L = 30.

b.

w = 56 and L = 36.

c.

w = 80 and L = 30.

d.

w = 104 and L = 32.

e.

None of the above.

ANS: A

MSC: Applied

DIF: Easy

REF: 281

TOP: Monopsony

38.

A monopsonist faces a market labor supply curve w = 40 + 2L, where w is the

wage rate and L is the number of workers employed. If the firm’s labor demand curve is w =

200 – L, what is the optimal wage rate and quantity of labor employed?

a.

w = 146.7 and L = 53.3.

b.

w = 168 and L = 32.

c.

w = 104 and L = 32.

d.

w = 40 and L = 160.

e.

w = 32 and L = 168.

ANS: C

MSC: Applied

39.

a.

b.

c.

d.

e.

ANS: D

Competition

MSC: Factual

40.

a.

b.

c.

d.

e.

DIF: Easy

REF: 281

TOP: Monopsony

In the model of monopolistic competition, there can be short-run:

losses or profits, but there must be profits in

long-run equilibrium.

profits, but there must be losses in long-run

equilibrium.

losses or profits, but there must be losses in

long-run equilibrium.

losses or profits, but there must be neither

profits nor losses in long-run equilibrium.

losses, but there must be profits in long-run

equilibrium.

DIF: Easy

REF: 283

TOP: Monopolistic

In the model of monopolistic competition, firms produce a:

standardized product with considerable

control over price.

differentiated product with considerable

control over price.

standardized product with no control over

price.

differentiated product with no control over

price.

differentiated product with some control

over price.

a.

standardized product with considerable

control over price.

differentiated product with considerable

control over price.

standardized product with no control over

price.

differentiated product with no control over

price.

differentiated product with some control

over price.

b.

c.

d.

e.

ANS: E

Competition

MSC: Factual

41.

a.

b.

c.

d.

e.

DIF: Easy

REF: 283

TOP: Monopolistic

Firms that produce similar, slightly differentiated products are called a(n):

oligarchy.

oligopoly.

cabal.

cartel.

product group.

ANS: E

Competition

MSC: Factual

DIF: Easy

REF: 283

TOP: Monopolistic

42.

So long as price exceeds average variable cost, in the model of monopolistic

competition, a firm maximizes profits by producing where:

a.

the difference between marginal revenue

and marginal cost is maximized.

b.

marginal cost equals marginal revenue.

c.

marginal revenue equals price.

d.

the difference between price and marginal

cost is maximized.

e.

price equals marginal cost.

ANS: B

Competition

MSC: Conceptual

DIF: Moderate

REF: 284

TOP: Monopolistic

43.

The ABC Company estimates that a newspaper advertising campaign would

cost $25,000 and would generate $35,000 in new revenues. The firm should begin this

campaign as long as:

a.

price elasticity of demand is at least 2.5 (in

absolute value).

b.

price elasticity of supply is 1.

c.

price elasticity of demand is at least 1.4 (in

absolute value).

d.

marginal cost of production is no more than

$25,000.

e.

price elasticity of supply is 1.4.

ANS: C

Expenditures

MSC: Applied

DIF: Moderate

REF: 286

TOP: Advertising

44.

A supplier of fur coats estimates that the price elasticity of demand for its

coats is –3.75. The firm has determined that an additional $100,000 in advertising would

generate $275,000 in additional revenues. You would advise the firm to:

a.

advertise, because the marginal revenues are

greater than the cost of advertising.

b.

spend only $50,000 on advertising, because

the marginal revenue from an additional

dollar of advertising is less than $3.75.

c.

abandon the advertising plan, because the

demand elasticity is greater than 1 (in

absolute value).

a.

advertise, because the marginal revenues are

greater than the cost of advertising.

spend only $50,000 on advertising, because

the marginal revenue from an additional

dollar of advertising is less than $3.75.

abandon the advertising plan, because the

demand elasticity is greater than 1 (in

absolute value).

abandon the advertising plan, because the

marginal revenue from an additional dollar

of advertising is less than $3.75.

advertise, because the fur coats are a luxury

item.

b.

c.

d.

e.

ANS: D

Expenditures

MSC: Applied

DIF: Moderate

REF: 286

TOP: Advertising

45.

If a firm in a monopolistically competitive industry is profit maximizing, it

should choose its level of advertising such that the marginal revenue of an additional dollar of

advertising:

a.

is equal to the elasticity of its demand curve

minus 1.

b.

is exactly $1.

c.

increases revenues by $1.

d.

is equal to 1 plus the elasticity of its demand

curve.

e.

is equal to the elasticity of its demand

curve.

ANS: E

Expenditures

MSC: Factual

46.

a.

b.

c.

DIF: Easy

REF: 287

TOP: Advertising

Firms advertise in order to:

build brand loyalty.

appeal to the price-sensitive consumers.

increase the demand elasticities of their

loyal customers.

shift the market supply curve to the left.

shift the market demand curve to the left.

d.

e.

ANS: A

DIF: Easy

REF: 288

TOP: Advertising, Price Elasticity, and Brand Equity: Evidence on Managerial Behavior

MSC: Factual

47.

a.

b.

c.

d.

e.

Firms offer promotions in order to:

build brand loyalty.

appeal to the price-sensitive consumers.

increase the demand elasticities of their

loyal customers.

shift the market supply curve to the left.

shift the market demand curve to the left.

ANS: B

DIF: Easy

REF: 288

TOP: Advertising, Price Elasticity, and Brand Equity: Evidence on Managerial Behavior

MSC: Factual

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