Multiple Choice Questions (5 points each)

1. Suppose a perfectly competitive firm is maximizing its profit in the short-run. At its profit
maximizing quantity, AR > ATC. Compared to the short-run, in the long-run there will be
firms in the market, and each firm will produce quantity.
a. more; a smaller
b. more; a larger
c. fewer; a smaller
d. fewer; a larger
e. fewer; the same

2. The short-run total cost function for a perfectly competitive firm is

SRTC = 500 + 3q – 5q2 + q3. Suppose that, at its short-run profit maximizing quantity, each
firm is making a loss but chooses to stay open. Which of the following is/are necessarily
true?
a. MR = 3 – 10q + 3q2
b. AR < 500/q + 3 – 5q + q2
c. P > 3 – 5q + q2
d. Both A and B are true.
e. All of the above are true.

3. The short-run total cost function for a perfectly competitive firm is

SRTC = 10 + (0.1 ∗ q2). If the short-run market equilibrium price is $10, the firm's profits
will be
a. $240.
b. $250.
c. $260.
d. -$10 because the firm will shut down.

4. Suppose your firm has a U-shaped average variable cost curve and operates in a perfectly
competitive market. If the quantity you produce is where the product’s price equals average
variable cost on the upward sloping portion of the AVC curve, then your output will:
a. exceed the profit-maximizing level of output.
b. be smaller than the profit-maximizing level of output.
c. equal the profit-maximizing level of output.
d. generate zero economic profits.
5. Identify the truthfulness of the following statements.
I. In the short-run, a profit-maximizing firm will shut down if P < AVC.
II. In the short-run, a profit-maximizing firm will shut down if P < ATC.
a. Both I and II are true.
b. Both I and II are false.
c. I is true; II is false.
d. I is false; II is true.

6. The market for sweet potatoes consists of 1,000 identical firms. Each firm has a short-run
total cost of SRTC = 50 + 100q + 200q2, where q is output. What is the minimum price at
which a firm will stay open in the short-run?
a. P = $0
b. P = $50
c. P = $100
d. P = $200

7. If SRTC = 200 + 2q + 4q2, where q is output, the firm’s short-run supply function is

a. s(P) = 2 + 8q for P ≥ 2 and zero otherwise.

ì0 P<2
b. s qP
( )= í
î0.125P - 0.25 P ³ 2
c. s(P) = 2 + 8q for P ≥ 0 and zero otherwise.
ì0 P <0
d. s qP =
( ) í
î0.125P - 0.25 P ³ 0

8. Each firm in a perfectly competitive market has long-run average total cost represented as
ATC = 100q – 10 + 100/q. Long-run marginal cost is MC = 200q - 10. The market demand
is Qd = 2150-5P. At the long-run equilibrium price, how many firms are in the market?
a. n = 500
b. n = 1000
c. n = 1200
d. n = 2000
e. n = 2400
9. A firm produces a product in a perfectly competitive industry and has a short-run total cost
function of SRTC = 50 + 4q + 2q2. In the short-run, the market equilibrium price is $20 and
the firm’s profit maximizing quantity is . Assuming there is no change in cost
structure, in the long-run the equilibrium price changes to .
a. 4; $24
b. 4; $15
c. 5; $24
d. 5; $15

10. The market for sugar consists of 3,500 identical firms, each with the following short-run total
cost function: SRTC =1,500 + 35q2. The market demand curve for sugar is Q = 11,200 -
30P. What is each firm’s short-run profit?
a. $0
b. $280
c. -$1,080
d. -$1,360
e. -$1,500

11. Each firm in a perfectly competitive market has the following long-run total cost function:
LRTC = 50q2 - 10q + 200. The market demand function is Q = 2150 - 5P. What is the long-
run equilibrium price in this market?
a. P = $200
b. P = $430
c. P = $50
d. P = $190

12. Roaring Lion Studios is a firm with market power in the DVD industry. Roaring Lion
Studios can produce DVDs at a constant marginal cost of $5 per disk. The studio has just
released the DVD for its latest hit film, Ernest Goes to the Hamptons. The retail price of the
DVD is $15, and the elasticity of demand for this film is -2. Has the studio selected the
profit-maximizing retail price for this DVD?
a. Yes.
b. No, the retail price is too low.
c. No, the retail price is too high.
d. We do not have enough information to answer this question.
13. A monopolist has determined that at its current level of output the price elasticity of demand
is equal to -0.15. Which of the following statements is TRUE?
a. The firm should decrease output.
b. The firm should decrease price.
c. The firm should shut down.
d. None of the above is necessarily correct.

14. Which of the following describes a correct relationship between price elasticity of demand
and a monopolist’s marginal revenue when inverse demand is linear and represented by
P = a - bQ?
a. Demand is elastic when Q > a/2b.
b. Demand is inelastic when Q > a/b.
c. Demand is unit elastic when P = a/2b.
d. Demand is elastic when Q < a/2b.

15. For a linear demand curve, when the monopolist operates in the region of the
demand curve, it can increase total revenue by price.
a. inelastic; increasing
b. elastic; reducing
c. Both a and b are true.
d. Neither a nor b is true.

16. If the inverse demand curve a monopoly faces is P = 100 - 2Q, and MC is constant at 16, then
the firm's Lerner Index equals
a. 58/16.
b. 16/42.
c. 58/42.
d. 42/58.

17. The introduction of satellite television systems would cause the Lerner Index for cable
television to
a. decrease.
b. increase.
c. remain the same.
18. If a monopolist sets its output such that marginal revenue, marginal cost and average total
cost are equal, economic profit must be:
a. negative.
b. positive.
c. zero.
d. indeterminate from the given information.

19. The marginal cost of a monopolist is constant and equal to $10. The demand function is
represented by Q = 100 – P. The deadweight loss from monopoly power is .
a. $1000.00
b. $1012.50
c. $1025.00
d. $1037.50
e. none of the above

20. A monopolist faces the following demand and total cost functions for its product:
Q = 200 - 2P and TC = 5Q. How much profit does the monopolist earn?
a. $4512.50
b. $4987.50
c. $475.00
d. $5.00