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EC260 Chapter Notes - Chapter 8: Demand Curve, Marginal Utility, Marginal Product

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greenseal220
6 Sep 2016
School
WLU
Department
Economics
Course
EC260
Professor
Olivia Ozlem Mesta

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Document Summary

Characteristics of a monopoly: there is only one seller, the product is unique, the seller has considerable power over price, barriers to entry are very high, non-price competition takes place in the form of advertising. In a competitive market, the market demand curve slopes downward; but the demand curve for any individual firm"s product is horizontal; the firm can increase q without lowering p (mr = p) A monopolist is the only seller, so its demand curve is the downward sloping market demand curve; to sell a larger q, the firm must reduce p (mr p) The unregulated monopolist is free to choose an output level and price that results in the largest profit. As before, profit is equal to tr minus tc. To maximize profit, we take the derivative with respect to output and set that equal to zero. This implies once again that mr = mc.

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Related Questions

Consider the following market demand schedule and total costs for a monopoly.

Q P TR TC MR MC Profit                                        
0 45   4                                              
1 40   9                                              
2 35   19                                              
3 30   39                                              
4 25   61                                              
5 20   91                                              
6 15   130                                              
7 10   172                                              

a) Fill in the blanks.

b) How is the relationship between price and MR different between monopolistic and perfectly competitive markets?

c) Would the demand curve facing a monopolistic competitive market be more or less elastic than the demand curve facing a monopolist, why? Do firms in a monopolistically competitive market make long-run economic profits, why or why not?

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B. If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.

Harry Smith owns a metal-producing company that is an unregulated monopoly. After considerable experimentation and research, total cost and marginal cost curves are: TC = 100 + 60Q + Q2 MC = 60 + 2Q where MC is marginal cost (in dollars) and Q is output. The demand and marginal revenue curves for the product are P = 100 Q MR = 100 2Q where P is the product price (in dollars) and Q is output.

a. If Smith wants to maximize profit, what output should he choose?

b. What price should he charge and what are his profits?