Question

Part VI Multiple Choice: Imperfect Competition 13. If a firm with market power maximizes profit by producing at the unit elastic point on the demand curve, then a. it has no direct competitors. b. its marginal cost must be zero at the profit-maximizing level of output. c. demand must be perfectly elastic. d. it cannot be in long-run equilibrium. 14. Which of the following statements is not always true for a monopolist in short-run equilibrium? a. E 1 b, TR> TVC c. MR = SMC d. P > MR 15. If a firm with market power is not making enough profit (in equilibrium), a. it will lower price thereby increasing total revenue because demand is elastic. b. it will raise price thereby increasing total revenue because demand is inelastic. c. it will exit the industry in the long run if economic profit is negative. d. it will expand sales until it reaches the unit elastic point on demand. 16. If a monopolist can find buyers for 4 units at a price of $7, and if the marginal revenue due to the 5th unit is $2, the highest price at which the monopolist can find buyers for 5 units must be a. $2. b. $3. c. $4. d. $5. e. $6.

Answer 1

Part A

Answer-13

Its marginal cost must be zero at the profit-maximizing level of output

In the profit-maximizing condition are MR=MC and MR=0. Here the demand is unitary elastic, MC must be zero.

Answer-14

TR>TVC

In the short run, the monopolist may have to shut down their business. Because of TR<TVC

Answer-15

It will exit the industry in the long run if economic profit is negative

In the short run, the monopolist cannot increase profits. Because of the already in equilibrium position. But in the long run, if he earns negative profits will exit from the industry.

Answer-16

$6

Here the total revenue for 4 units is $28. And the marginal revenue for the 5^th unit is 2. So the TR for 5 unit is $30. So, the price of 5 units must be $6

Part B

2. Monopoly

3. Monopolistic competition

4. Market definition

5. Lerner Index

6. Strong barriers to entry

7. Switching costs

8. Consumer lock-in

9. Network externalities

10. Marginal revenue product

11. Inverse demand function