Q: If a firm in a perfectly competitive market is producing where $P < AVC$, what should the firm do in the short run?

Shut down and produce zero output.

Q: Which of the following is a necessary condition for price discrimination to be possible?

The firm must be able to prevent resale between customers.

Q: Suppose a natural monopoly has declining average costs over the relevant range of output. If the regulator sets price equal to marginal cost, what is the likely outcome?

The firm will suffer losses because $P < ATC$.

Q: Which of the following best explains why deadweight loss arises under monopoly?

The monopolist restricts output below the competitive level, causing some mutually beneficial trades not to occur.

Q: A firm uses two-part pricing and faces a demand curve $P = 100 - Q$ with $MC = 20$. What is the optimal usage fee and fixed fee to maximize profit?

Usage fee $= 20$, Fixed fee $= 3,200$

Q: Suppose a market is initially in long-run equilibrium under perfect competition. A tax is imposed on each unit sold. In the new long-run equilibrium, which of the following is true?

The price paid by consumers rises, but by less than the amount of the tax.

Q: A monopolist faces two separate markets, A and B, with demand elasticities $|\varepsilon_A| = 2$ and $|\varepsilon_B| = 1.5$. If marginal cost is the same in both markets, which market will have the higher price under third-degree price discrimination?

Market B, because it is less elastic.

Q: If a perfectly competitive firm’s total cost function is $TC = 100 + 5q$, and the market price is $P = 8$, what will the firm do in the short run?

Shut down, because $P < AVC$ at all output levels.

Q: Which of the following best describes the effect of a binding price ceiling in a competitive market?

It creates a shortage and reduces total surplus.

Question 1

A perfectly competitive firm faces the following cost function: $TC = 10 + 2q + q^2$. If the market price is $P = 14$, what is the firm's profit-maximizing output?

Accepted Answer

$q = 6$

Question 2

Suppose a monopolist faces the demand curve $P = 100 - 2Q$ and has constant marginal cost $MC = 20$. What is the profit-maximizing quantity for the monopolist?

Accepted Answer

$Q = 20$

Question 3

Which of the following statements best describes the long-run equilibrium in a perfectly competitive market?

Accepted Answer

Firms produce at the minimum point of their average total cost curve and earn zero economic profit.

Question 4

A monopolist faces the demand curve $P = 80 - Q$ and has marginal cost $MC = 20$. What is the deadweight loss from monopoly compared to perfect competition?

Accepted Answer

$450$

Question 5

If a firm in a perfectly competitive market is producing where $P < AVC$, what should the firm do in the short run?

Accepted Answer

Shut down and produce zero output.

Question 6

Which of the following is a necessary condition for price discrimination to be possible?

Accepted Answer

The firm must be able to prevent resale between customers.

Question 7

Suppose a natural monopoly has declining average costs over the relevant range of output. If the regulator sets price equal to marginal cost, what is the likely outcome?

Accepted Answer

The firm will suffer losses because $P < ATC$.

Question 8

A firm faces the following demand curve: $P = 50 - Q$. Its marginal cost is constant at $MC = 10$. What is the Lerner Index for this monopolist at the profit-maximizing output?

Accepted Answer

$0.6$

Question 9

Which of the following best explains why deadweight loss arises under monopoly?

Accepted Answer

The monopolist restricts output below the competitive level, causing some mutually beneficial trades not to occur.

Question 10

A firm uses two-part pricing and faces a demand curve $P = 100 - Q$ with $MC = 20$. What is the optimal usage fee and fixed fee to maximize profit?

Accepted Answer

Usage fee $= 20$, Fixed fee $= 3,200$

Question 11

Suppose a market is initially in long-run equilibrium under perfect competition. A tax is imposed on each unit sold. In the new long-run equilibrium, which of the following is true?

Accepted Answer

The price paid by consumers rises, but by less than the amount of the tax.

Question 12

A monopolist faces two separate markets, A and B, with demand elasticities $|\varepsilon_A| = 2$ and $|\varepsilon_B| = 1.5$. If marginal cost is the same in both markets, which market will have the higher price under third-degree price discrimination?

Accepted Answer

Market B, because it is less elastic.

Question 13

If a perfectly competitive firm’s total cost function is $TC = 100 + 5q$, and the market price is $P = 8$, what will the firm do in the short run?

Accepted Answer

Shut down, because $P < AVC$ at all output levels.

Question 14

Which of the following is NOT a feature of perfect price discrimination (first-degree)?

Accepted Answer

There is deadweight loss.

Question 15

Suppose a monopolist’s total revenue function is $TR = 100Q - 2Q^2$ and marginal cost is $MC = 20$. What is the profit-maximizing output?

Accepted Answer

$Q = 20$

Question 16

A firm’s marginal cost is $MC = 2q$. If the market price is $P = 20$, what is the firm’s profit-maximizing output under perfect competition?

Accepted Answer

$q = 10$

Question 17

Which of the following best describes the effect of a binding price ceiling in a competitive market?

Accepted Answer

It creates a shortage and reduces total surplus.

Question 18

A monopolist faces the demand curve $P = 60 - Q$ and has $MC = 20$. What is the monopoly price?

Accepted Answer

$P = 40$

Microeconomics Exam 2 Study Guide: Perfect Competition, Monopoly, and Pricing Strategies

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