ECON 2510 Practice for Exam 2 with Elaine Peterson

Use separate sheets of paper as needed to answer. Please be sure to put your name on your answer sheets and the part of the exam you are answering and the number of the question you are answering.

Part I (10 points):

1. A firm has fixed costs of $500 and other costs as indicated in the table below.
a) Complete the table.

Total Product

Total Fixed Cost

Total Variable Cost

Total Cost

Average Fixed Cost

Average 
Variable Cost

Average 
Total 
Cost

Marginal Cost

0

 

 

 

 

 

 

 

1

 

340

 

 

 

 

 

2

 

 

1060

 

 

 

 

3

 

 

 

 

240

 

 

4

 

 

 

 

 

350

 

5

 

 

 

 

 

 

220

Part II (10 points):
1. Fill in the chart below indicating the basic characteristics for each of the industry structures.  

Industry structure

Pure Competition

Pure Monopoly

Monopolistic Competition

Oligopoly

Number of firms

 

 

 

 

Type of Product

 

 

 

 

Control over price

 

 

 

 

Entry conditions

 

 

 

 

Non-price competition

 

 

 

 

Examples

 

 

 

 

  Part III (25 points): Please explain the following briefly:
1. Would a monopolist ever operate on the inelastic portion of the demand curve?
2. How much are economic profits in a monopolisticly competitive firm in the long run?
3. Why might it be desirable to allow a monopoly to continue?
4. Why don’t most oligopolists form cartels in the U.S.?
5. Given the payoff matrix and strategies below, what would be A’s dominant strategy? How do you know?                                                                                                               B’s strategies:

 

A’s

strategies:

 

charge a low price

charge a high price

charge a low price

58 , 55

69 , 50

charge a high price

55 , 59

60 , 57

 


  Part IV (15 points):
1. Suppose a monopolist faces the demand schedule below, has fixed costs of 45, and has constant marginal costs of 10. Calculate total and marginal revenue. What rule does the monopolist use in deciding how many units to produce? What is the profit-maximizing output level and price for this monopolist. What is the level of profits?  

Price

Quantity Demanded

Total Revenue

Marginal Revenue

100

0

 

 

90

1

 

 

80

2

 

 

70

3

 

 

60

4

 

 

50

5

 

 

40

6

 

 

30

7

 

 

20

8

 

 

Part V (20 points) : Choose the best answer.
1. Which of the following would tend to be associated with a strong demand for a resource?
            a) Relatively low marginal product.                                                         b) Relatively low market price of the final good.
            c) Relatively strong marginal product of the resource.                  d) Relatively elastic demand for the good.
            e) Relatively strong diminishing marginal productivity.

2. The larger the number of firms in a market and the weaker the product differentiation, the:
            a) Greater the price elasticity of demand
            b) Smaller the price elasticity of demand
            c) Steeper the demand curve
            d) Steeper the marginal revenue curve
            e) Lower the competition in the market

3. Which of the following are generally regarded as "imperfectly" competitive markets?
            a) Pure competition and monopolistic competition
            b) Pure monopoly and pure competition
            c) Monopolistic competition, oligopoly and pure monopoly
            d) Monopolistic competition and oligopoly
            e) None of the above

4. The most important factor which explains the persistence of pure monopoly over time would be:
            a) Diseconomies of scale                       b) Diminishing returns                            c) Antitrust policy
            d) Advertising                           e) Barriers to entry

Part VI (20 points):
1. Use a diagram and clearly label the axes and curves to depict a natural monopoly without any regulation. Sketch the area of dead weight loss to society. If a regulator were to intervene mark the price and output level they should set. Explain your choice.

2. Use a diagram and clearly label the axes and curves to depict an oligopolistic firm using the kinked demand model of oligopoly. What would happen to price and output if MC were to change slightly? What would happen if MC increased substantially?