Tutorial 6: Lecture 6 and 7 – Perfect Competition and Monopoly

Activity 6.1 – Perfect Competition

Do the multiple choice and discussion questions below

Part A: Multiple Choice Questions

1. The characteristics that describe a perfectly competitive industry include

A) many firms selling an identical product.
B) one firm selling to many buyers.
C) many firms selling a slightly differentiated product.
D) a few firms selling to many buyers.
E) None of the above answers is correct.

2. One requirement for an industry to be perfectly competitive is that

A) there are no restrictions on entry into or exit from the market.
B) there are multiple restrictions on entry into or exit from the market.
C) there are many firms selling different products.
D) sellers and buyers have imperfect information about prices.
E) many firms sell slightly different products.

3. To maximize its profit, in the short run a perfectly competitive firm decides
A) what price to charge for its product.
B) what quantity of output to produce.
C) whether to exit the market.
D) whether to increase the size of its plant.
E) how much advertising it should undertake.

4. For a perfectly competitive firm, the price of its good is equal to the firm's marginal revenue
because
A) information about price changes is hard to come by for small sellers.
B) price and marginal revenue are the same economic concepts.
C) individual perfectly competitive firms cannot influence the market price by changing their output.
D) the firm's total revenue cannot be changed by anything the firms can do.
E) there are only a small number of firms in the market.

5. If the wheat industry is perfectly competitive with a market price of $4 per bushel and Farmer
Brown charged $5 per bushel, how many bushels would Farmer Brown sell?
A) some, but fewer than he would at a price of $4
B) more than he would at a price of $4
C) just as many as he would at a price of $4
D) none
E) More information is needed about the prices charged by the other wheat farmers.

6. How does the demand for any one seller's product in perfect competition compare to the
market demand for that product?
A) They are identical.
B) The demand for any one seller is proportionally smaller but otherwise identical to the market
demand.
C) The demand for any one seller's product is perfectly elastic while the market demand curve is
downward sloping.
D) There is no demand for any one seller's competitively sold product.
E) The demand for any one seller's product is not perfectly elastic while the market demand is
perfectly elastic.
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 7. For a perfectly competitive firm, marginal revenue is
A) less than the price.
B) greater than the price.
C) equal to the price.
D) equal to the change in profit from selling one more unit.
E) undefined because the firm's demand curve is horizontal.

8. As a perfectly competitive firm produces more and more of a good, its economic profit
A) constantly increases.
B) constantly decreases.
C) first decreases, then increases.
D) first increases, then decreases.
E) does not change.

9. In a perfectly competitive industry, when a firm is producing so that its total revenue equals
its total cost, the firm is
A) making an economic profit.
B) incurring an economic loss.
C) making zero economic profit.
D) definitely not maximizing its profit.
E) None of the above answers is correct because the relationship between total revenue and total cost
has nothing to do with the firm's profit or loss.

10. For a perfectly competitive firm, profit maximization occurs when output is such that
A) total revenue (TR) is maximized.
B) total cost (TC) is minimized.
C) marginal revenue (MR) = marginal cost (MC).
D) average total cost (ATC) is minimized.
E) total revenue (TR) equals total cost (TC).

11. To increase its profit, a perfectly competitive firm will produce more output when
A) price is greater than average fixed cost.
B) price is greater than marginal cost.
C) marginal cost is less than average total cost.
D) average variable cost is greater than average fixed cost.
E) price is greater than average variable cost.

12. In a perfectly competitive market, the market price is $23. At the current level of output, a
firm has a marginal cost of $28. What should the firm do?
A) produce a larger output to make more profit
B) nothing, it is currently maximizing profit
C) produce less output to make more profit
D) shut down
E) raise the price of its product

13. A perfectly competitive firm is producing at the quantity where marginal cost is $6 and
average total cost is $4. The price of the good is $5. To maximize its profit, this firm should
A) raise its price.
B) lower its price.
C) increase its output.
D) decrease its output.
E) increase the price it charges for its product.

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 14. Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer
decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this
batch of cookies at a market price of $110. To maximize her profit, Jennifer should
A) not produce this additional batch.
B) produce this batch of cookies because they will help lower her average fixed cost.
C) charge $120 for this batch.
D) shut down.
E) produce this batch of cookies because their MR exceeds their MC.

15. The above table has the total revenue and total cost schedule for Omar, a perfectly
competitive grower of rutabagas. When Omar produces 2 bushels of rutabagas, his total profit
equals
A) $0.
B) $20.
C) $28.
D) -$8.
E) $48.

16. The above table has the total revenue and total cost schedule for Omar, a perfectly
competitive grower of rutabagas. Omar's total profit is maximized when he produces
________ bushels of rutabagas.
A) 3
B) 5
C) 6
D) 8
E) 7

17. The above table has the total revenue and total cost schedule for Omar, a perfectly
competitive grower of rutabagas. When Omar maximizes his profit, Omar's profit equals
A) $80.
B) $11.
C) $30.
D) $16.
E) $105.

18. Under which of the following conditions will a profit-maximizing perfectly competitive firm
shut down in the short run?
A) when it is making a normal profit
B) whenever its marginal cost is less than its marginal revenue
C) when the price is less than its minimum average variable cost
D) whenever its total cost is greater than its total revenue
E) when the price is less than its minimum average total cost

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 19. A perfectly competitive firm will continue to operate in the short run when the market price is
below its average total cost if the
A) marginal revenue is greater than marginal cost.
B) price is at least equal to the minimum average variable cost.
C) total fixed costs are less than total revenue.
D) marginal cost is minimized.
E) price is also less than the minimum average variable cost.

20. The largest loss a profit-maximizing perfectly competitive firm can incur in the short run
equals its
A) average variable cost multiplied by output.
B) total fixed cost.
C) marginal cost multiplied by the number of units produced.
D) average total cost multiplied by the number of units produced.
E) total variable cost.

21. A perfectly competitive firm's short-run supply curve is

A) horizontal at the market price.
B) its total cost curve above the AVC.
C) its marginal cost curve below the marginal revenue curve.
D) its marginal cost curve above the AVC curve.
E) its marginal revenue curve below the ATC curve.

22. Which of the following will increase a perfectly competitive seller's short-run supply and shift
the firm's short-run supply curve rightward?
A) an increase in the market price
B) a decrease in average fixed costs
C) a decrease in marginal cost
D) Both answers A and B are correct.
E) Both answers A and C are correct.

23. The above figure shows a perfectly competitive firm. If the market price is more than $20 per
unit, the firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will make zero economic profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will make an economic profit.
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E) might shut down but more information is needed about the fixed cost.

24. The above figure shows a perfectly competitive firm. If the market price is $20 per unit, the
firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will make zero economic profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will make an economic profit.
E) might shut down but more information is needed about the fixed cost.

25. The above figure shows a perfectly competitive firm. If the market price is $15 per unit, the
firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will make zero economic profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will make an economic profit.
E) might shut down but more information is needed about the fixed cost.

26. The above figure shows a perfectly competitive firm. If the market price is $5 per unit, the
firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will make zero economic profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will make an economic profit.
E) might shut down but more information is needed about the fixed cost.

27. If new firms enter a perfectly competitive industry, the market supply
A) does not change.
B) becomes more price elastic.
C) becomes more price inelastic.
D) increases.
E) decreases because each firm produces less than before the entry.

28. Suppose a perfectly competitive market is in long-run equilibrium and then there is a
permanent increase in the demand for that product. The new long-run equilibrium will have
A) fewer firms in the market.
B) more firms in the market.
C) the same number of firms in the market.
D) probably a different number of firms, but it is not possible to determine if there will be more or
fewer firms.
E) a permanent decrease in supply.

29. When firms in a perfectly competitive market are earning an economic profit, in the long run
A) no new firms will enter the market.
B) new firms will enter the market.
C) firms will exit the market.
D) the long-run average cost curve shifts downward.
E) the initial firms continue to earn an economic profit.

30. When new firms enter a perfectly competitive market, the market supply curve shifts
________ and the price ________.
A) rightward; falls
B) rightward; rises
C) leftward; falls
D) leftward; rises
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E) rightward; does not change

31. When firms in a perfectly competitive market incur economic losses, exit by some firms
means the market supply will
A) increase.
B) decrease.
C) not change.
D) become vertical.
E) become the same as the individual producers' supplies.

32. In the LONG RUN, perfectly competitive firms will exit the market if the price is
A) higher than average variable cost.
B) equal to average total cost.
C) less than average total cost.
D) equal to average fixed cost.
E) equal to marginal revenue.

33. A market is initially in a long-run equilibrium and there is a permanent increase in demand.
After the new long-run equilibrium is reached, there
A) are more firms in the market.
B) are fewer firms in the market.
C) are the same number of firms in the market.
D) probably is a different number of firms in the market, but more information is needed to determine
if the number of firms rises, falls, or perhaps does not change.
E) is no change in the market.

34. A permanent decrease in demand definitely

A) shifts a firm's average total cost curve downward.
B) creates diseconomies for individual firms.
C) lowers the market price.
D) decreases the number of firms in the industry.
E) shifts a firm's average total cost curve upward.

35. If firms in a perfectly competitive market are incurring economic losses, then as time passes
firms ________ and the market ________.
A) enter; demand curve shifts leftward
B) enter; supply curve shifts rightward
C) exit; demand curve shifts leftward
D) exit; supply curve shifts rightward
E) exit; supply curve shifts leftward

36. Perfect competition ________ an efficient outcome because ________.

A) achieves; total surplus is maximized
B) achieves; marginal benefit equals marginal cost
C) does not achieve; firms do not get to choose their price
D) does not achieve; firms produce goods with perfect substitutes
E) Both A and B are correct.

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The figure above shows a firm's marginal revenue and marginal cost curves.

37. Based on the figure above, the price of a can is $8; if the price increased to $12, then the firm
would
A) produce zero cans.
B) decrease the amount of cans produces it but not to zero.
C) not change the amount of cans it produces.
D) increase the amount of cans it produces.
E) More information is needed to determine what action the firm will take.

38. Suppose the firm's marginal cost of producing a can increases by $1 per can. Then, based on
the figure above, the firm would
A) produce zero cans.
B) decrease the amount of cans it produces but not to zero cans.
C) not change the amount of cans it produces.
D) increase the amount of cans it produces.
E) More information is needed to determine what action the firm will take.

Part B: Discussion Questions

1. What four conditions define a perfectly competitive market?
2. Does a perfectly competitive producer have any incentive to lower its price so it is below the
current market price? Explain your answer
3. Why do you never see firms in a perfectly competitive market advertise their product?
4. Why does the profit-maximizing level of production occur at the point where marginal
revenue equals marginal cost?
5. If the price received by a perfectly competitive firm is less than its average variable cost, what
will the firm do in the short run? Why?

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6. Pete is a perfectly competitive rose grower. The above table gives quantities and the price for which
Pete can sell his roses.
a. What is Pete's total revenue if he sells 1 dozen roses? 2 dozen roses? 3 dozen roses? 4 dozen
roses?
b. What is the marginal revenue of the 2nd dozen roses sold? Of the 3rd dozen? Of the 4th dozen?
.
7. The table below gives Amy's total cost schedule for producing holiday wreaths. Amy is a perfect
competitor and can sell each wreath for $9.
a. Complete the table by calculating Amy's total revenue and her profit or loss schedule.

b. When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is her
economic profit or economic loss?
c. What number of wreaths maximizes Amy's profit?

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8. The above figure illustrates a perfectly competitive wheat farmer.
a. What will be the firm's profit-maximizing price and output?
b. When the farmer produces 25,000 bushels of wheat, the difference between the firm's average
total cost and the price is at its maximum. Explain why this amount of wheat either is or is not the
profit-maximizing quantity.

Activity 6.2 – Imperfect Competition

Do the multiple choice and discussion questions below

Part A - Multiple Choice Questions

1. A monopoly is a market with

A) many suppliers each producing an identical product.
B) no barriers to entry.
C) many substitutes.
D) one supplier.
E) many suppliers each producing a slightly different product.

2. A monopoly produces a product ________ and there ________ barriers to entry into the
market.
A) identical to its many competitors; are
B) with no close substitutes; are
C) identical to its many competitors; are no
D) with no close substitutes; are no
E) slightly different from those of its many competitors; are

3. The graph shows the the LRAC facing a ________ where ________ of scale exist when 5
million units are produced.
A) monopoly; diseconomies
B) natural monopoly; diseconomies
C) natural monopoly; economies
D) oligopoly; economies
E) oligopoly; diseconomies
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 4. The graph shows that ________ can meet the market demand at a cost of ________ per unit
when ________ million units are produced.
A) one firm; 10 cents; 5
B) one firm; 20 cents; 3
C) 3 firms; 10 cents; 5
D) 5 firms; 10 cents; 1
E) 5 firms; 20 cents; 5

5. A natural barrier to entry is defined as a barrier that arises because of

A) technology that allows one firm to meet the entire market demand at lower average total cost than
could two or more firms.
B) patents or licenses that exclude others from producing a good or service.
C) many firms producing the good and thereby allowing choice for all consumers.
D) anticompetitive practices by a firm that keep other firms from producing.
E) one firm owning a key natural resource.

6. A natural monopoly arises when

A) one firm controls the supply of a unique resource.
B) a firm has many small firms that it can control.
C) there are firms which act together as a monopoly.
D) the long-run average cost curve slopes downward as it crosses the demand curve.
E) one firm naturally convinces the government to limit competition in the market.

7. A legal barrier is created when a firm

A) has economies of scale, which allow it to produce at a lower cost than two or more firms.
B) is granted a public franchise, government license, patent, or copyright.
C) produces a unique product or service.
D) produces a standardized product or service.
E) has an ownership barrier to entry.

8. Which barrier to entry is an exclusive right granted to the author or composer of a literary,
musical, dramatic or artistic work?
A) patent
B) copyright
C) public franchise
D) government license
E) natural barrier

9. To encourage invention and innovation, the government provides

A) patents.
B) public franchises.
C) government licenses.
D) natural monopolies.
E) easily obtained ownership barriers to entry.

10. If a monopoly wants to sell a larger quantity, it must

A) set a higher price.
B) maintain the current price.
C) set a lower price.
D) implement new technology.
E) increase the barrier to entry that protects it.

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 11. A single-price monopoly
A) sets a single, different price for each consumer.
B) sets a single price for all consumers.
C) asks each consumer what single price they would be willing to pay.
D) sets a single, different price for each of two different groups.
E) sells each unit of its output for the single, highest price that the buyer of that unit is willing to pay.

12. For a single-price monopoly, price is

A) equal to marginal revenue.
B) greater than marginal revenue.
C) less than marginal revenue because the firm must lower its price in order to sell another unit of
output.
D) less than marginal revenue because the firm cannot increase its total revenue when the demand
curve is downward sloping.
E) equal to zero because the firm is not a price taker.

13. Suppose a single-price monopoly sells 3 units of a good at $20 per unit. If the monopoly sells
4 units, the total revenue increases to $72. What is the marginal revenue of the fourth unit?
A) $52
B) $18
C) $60
D) $12
E) $20

14. A single-price monopoly can sell 2 units for $8.50 per unit. In order to sell 3 units, the price
must be $8.00 per unit. The marginal revenue from selling the third unit is
A) $24.00.
B) $8.50.
C) $7.00.
D) $6.50.
E) $17.00.

15. A single-price monopoly can sell 10 units of its product at a price of $45 each but to sell 11
units, the monopoly must cut the price to $44. What is the marginal revenue of the extra unit
sold?
A) $484
B) $450
C) $44
D) $34
E) -$1

Quantity Price
(units) (dollars per unit)
1 8
2 7
3 6
4 5
5 4
6 3
16. The table above gives the demand for a monopolist's output. Between which two quantities is
marginal revenue equal to 0?
A) 4 and 5

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B) 3 and 4
C) 2 and 3
D) 1 and 2

17. The table above gives the demand for a monopolist's output. Between which two quantities is
demand elastic?
A) 6 and 5
B) 5 and 4
C) 4 and 3
D) 3 and 2

18. The table above gives the demand for a monopolist's output. What is the total revenue in
when 3 units of output are produced?
A) $21
B) $20
C) $18
D) $6

19. The table above gives the demand for a monopolist's output. What is the marginal revenue
when output is increased from 5 to 6 units?
A) $18
B) $4
C) $3
D) -$2

20. The table above gives the demand for a monopolist's output. What is the marginal revenue
when output is increased from 2 to 3 units?
A) $18
B) $4
C) $7
D) $6

21. If Microsoft is a monopoly and currently charges prices where its demand is elastic, then
Microsoft's marginal revenue is
A) negative.
B) positive.
C) zero.
D) minimized.
E) undefined.

22. When marginal revenue is positive, total revenue ________ when output increases and
demand is ________.
A) decreases; elastic
B) decreases; inelastic
C) increases; elastic
D) increases; inelastic
E) does not change; unit elastic

23. The relationship between marginal revenue and elasticity is

A) when demand is elastic, marginal revenue is positive and when demand is inelastic, marginal
revenue is negative.
B) whenever the elasticity is positive, marginal revenue is positive.

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C) whenever the elasticity is negative, marginal revenue is positive.
D) when demand is elastic, marginal revenue is negative and when demand is inelastic, marginal
revenue is positive.
E) that total revenue equals zero at the quantity for which the demand is unit elastic.

24. Suppose that along a linear demand curve, the elasticity of demand is equal to 1 when the
price is $4 and the quantity is 100 units. Then the
A) total revenue is at its maximum when 100 units are produced.
B) marginal revenue is positive at 100 units.
C) marginal revenue is negative at 100 units.
D) Both answers A and B are correct.
E) Both answers A and C are correct.

25. The above table gives the demand schedule for a monopoly. The demand is elastic at all
prices between
A) $6 and $1.
B) $5 and $1.
C) $3 and $1.
D) $6 and $4.
E) $4 and $3.

26. The above table gives the demand schedule for a monopoly. The demand is inelastic over the
entire price range between
A) $6 and $1.
B) $5 and $1.
C) $3 and $1.
D) $6 and $4.
E) $4 and $3.
27. To maximize its profit, a perfectly competitive firm produces so that ________ and a single-
price monopoly produces so that ________.
A) MR = MC; MR > MC
B) MR > MC; MR = MC
C) MR = MC; MR = MC
D) MR > MC; MR > MC
E) P = ATC; P = ATC

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 28. Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma.
The above figure represents the demand, marginal revenue, and marginal cost curves for this
establishment. What quantity will the Busy Bee produce to maximize its profit?
A) 20 hamburgers per hour
B) 30 hamburgers per hour
C) 50 hamburgers per hour
D) 0 hamburgers per hour
E) 10 hamburgers per hour

29. Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma.
The above figure represents the demand, marginal revenue, and marginal cost curves for this
establishment. What price will the Busy Bee charge to maximize its profit?
A) $5.00 for a hamburger
B) $3.00 for a hamburger
C) $2.00 for a hamburger
D) $1.00 for a hamburger
E) $4.00 for a hamburger

30. Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma.
The above figure represents the demand, marginal revenue, and marginal cost curves for this
establishment. In order to maximize profit, the Busy Bee produces ________ hamburgers per
hour and sets a price of ________ per hamburger.
A) 20; $3.00
B) 20; $1.00
C) 30; $2.00
D) 30; $4.00
E) 50; $5.00

31. Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma.
The above figure represents the demand, marginal revenue, and marginal cost curves for this
establishment. If the Busy Bee produces 40 hamburgers per hour, then
A) marginal revenue will exceed marginal cost.

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B) profit will be maximized.
C) marginal revenue will be negative.
D) marginal revenue will be maximized.
E) both the marginal revenue and the price will be negative.

32. A single-price monopoly has marginal cost of $23 and marginal revenue of $28. Which of the
following is definitely correct?
A) It is maximizing profit.
B) To increase profit, it should produce less.
C) To increase profit, it should produce more.
D) It should shut down.
E) It is making an economic profit.

33. 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) $285
C) $345
D) $570
E) $19

34. In the above figure, a perfectly competitive market will have a price of ________, and a
single-price monopoly will have a price of ________.
P
A) 1 and quantity of Q1; P2 and quantity of Q2
B) P2 and quantity of Q2; P1 and quantity of Q1
C) P3 and quantity of Q3; P1 and quantity of Q1
D) P2 and quantity of Q2; P3 and quantity of Q1
E) P2 and quantity of Q1; P1 and quantity of Q1
35. In the above figure, for a single-price monopoly the consumer surplus is equal to the area
A) abP1.
B) acP2.
C) bce.

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D) bed.
E) cQ20P2.

36. In the above figure, for a single-price monopoly the deadweight loss is equal to the area
A) abP1.
B) acP2.
C) bce.
D) bed.
E) P1beP3.

37. A difference between a perfectly competitive industry and a monopoly is that

A) in the long run, firms in a perfectly competitive industry make zero economic profit and a
monopoly can make an economic profit.
B) a firm in a perfectly competitive industry can perfectly price discriminate but a monopoly cannot.
C) only monopolies have an incentive to maximize profit.
D) perfectly competitive firms can have a public franchise.
E) a barrier to entry protects perfectly competitive firms in the short run and protects a monopoly in
the long run.

Part B – Discussion Questions

1. Ron's Hamburger Joint is the only restaurant in town. The above figure represents Ron's cost, the
market demand, and marginal revenue curves. Ron operates as a single-price monopoly.
a. How many hamburgers does Ron produce?
b. What price does Ron charge for a hamburger?
c. What is Ron's total revenue?
d. What is his total cost?
e. What is Ron's economic profit?

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2. The above figure represents a perfectly competitive industry that is taken over by a single firm and
operated as a monopoly.
a. What was the competitive price and quantity?
b. What is the monopoly price and quantity?
c. What area represents consumer surplus under perfect competition?
d. What area represents consumer surplus under monopoly?
e. What area represents the deadweight loss of monopoly?

3. The above figure shows the demand for cable and the cable company's cost of providing cable.
a. What price and quantity will be produced if the company is unregulated and profit maximizes?
b. What price and quantity will be produced if the company is regulated using the marginal cost
pricing rule?
c. What is the advantage of the marginal cost pricing rule?
d. What price and quantity will be produced if the company is regulated using the average cost
pricing rule?

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e. What is the advantage of the average cost pricing rule?

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