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Chapter 12: MANAGERIAL DECISIONS FOR FIRMS WITH MARKET POWER

Multiple Choice 12-1 Which of the following is a characteristic of a monopoly market?

a. one firm is the only supplier of a product for which there are no close substitutes

b. entry into the market is blocked

c. the firm can influence market price

d. all of the above

Answer: d

Difficulty: 01 Easy

Topic: Measurement of Market Power

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 12-01

12-2 In a monopoly market,

a. other firms have no incentive to enter the market.

b. profits will always be positive because the firm is the only supplier in the market.

c. the demand facing the firm is downward-sloping because it is the market demand.

d. a and b

e. none of the above

Answer: c

Difficulty: 01 Easy



Blooms: Remember


12-3 A monopolist

a. can raise its price without losing any sales because it is the only supplier in the market.

b. can earn a greater than normal rate of return in the long run.

c. always charges a price that is higher than marginal revenue.

d. both a and b

e. both b and c

Answer: e

Difficulty: 02 Medium



Blooms: Understand


12-4 A firm with market power

a. can increase price without losing all sales.

b. faces a downward-sloping demand curve.

c. is the only seller in a market.

d. both a and b

e. all of the above

Answer: d






Blooms: Understand


12-5 One method of measuring the extent of a firm's market power is

a. the Lerner index.

b. price elasticity of demand for the firm's product.

c. income elasticity of demand for the firm's product.

d. both a and b

e. all of the above

Answer: d




Blooms: Remember


12-6 In a monopolistically competitive market,

a. firms are small relative to the total market.

b. no firm has any market power.

c. there is easy entry and exit in the market.

d. a and b

e. a and c

Answer: e

Difficulty: 01 Easy



Blooms: Remember


12-7 Which of the following would indicate a relatively large amount of market power?

a. Highly price elasticity demand

b. Low cross-price elasticity with other products

c. Low Lerner index

d. all of the above


Answer: b




Blooms: Remember


12-8 A monopolistic competitor is similar to a monopolist in that

a. both have market power.

b. both earn positive economic profit in the long run.

c. both produce the output at which long-run average cost is at a minimum.



d. a and b

e. all of the above

Answer: a

Difficulty: 01 Easy



Blooms: Remember


12-9 Refer to the following table showing a monopolist’s demand schedule:

Price Quantity

$50 300

40 600

20 800

10 1,000

What is marginal revenue for a price decrease from $50 to $40?

a. $9,000

b. $24,000

c. $30

d. $20

e. $40

Answer: c


Topic: Profit Maximization Under Monopoly: Output and Pricing Decisions

AACSB: Analytic

Blooms: Apply


12-10 Refer to the following table showing a monopolist’s demand schedule:

Price Quantity

$50 300

40 600

20 800

10 1,000

If price falls from $20 to $10, then

a. MR = −$10, and demand is inelastic.

b. MR = $10, and demand is elastic.

c. MR = $30, and demand is elastic.

d. MR = −$30, and demand is inelastic.


Answer: d



AACSB: Analytic

Blooms: Apply




12-11 Refer to the following figure showing demand and marginal revenue for a monopoly.

At any price above $______ demand is elastic.

a. $5

b. $10

c. $15

d. $20

e. zero

Answer: c

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply


12-12 Refer to the following figure showing demand and marginal revenue for a monopoly.



If production costs are constant and equal to $10 (i.e., LAC = LMC = $10), what price will the

monopoly charge?

a. $5

b. $10

c. $15

d. $20

e. $25

Answer: d



AACSB: Analytic

Blooms: Apply


12-13 In a monopolistically competitive market,

a. a firm has market power because it produces a differentiated product.

b. a firm earns economic profits in the long run because it has market power.

c. there are a large number of firms.

d. both a and b

e. both a and c

Answer: e




Blooms: Remember


12-14 Monopolistic competition is similar to perfect competition in that:

a. there are a large number of firms

b. firms earn economic profits in the long run

c. firms face downward-sloping demand curves

d. both a and b

e. all of the above

Answer: a

Difficulty: 01 Easy



Blooms: Remember


12-15 A monopoly is producing a level of output at which price is $80, marginal revenue is $40,

average total cost is $100, marginal cost is $40, and average fixed cost is $10. In order to

maximize profit, the firm should

a. produce more.

b. keep output the same.

c. produce less.

d. shut down.

Answer: d



AACSB: Analytic

Blooms: Apply




12-16 The following figure shows the demand and cost curves facing a firm with market power in the

short run.

The profit-maximizing level of output is

a. 60 units.

b. 70 units

c. 80 units

d. 90 units.

e. 100 units.

Answer: a

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply



short run.



The firm will sell its output at a price of

a. $2.

b. $3.

c. $3.75.

d. $5.

e. $6.

Answer: d

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply



short run.

The firm earns profits of

a. $ 75.

b. $120.



c. $150.

d. $180.

e. $300.

Answer: b



AACSB: Analytic

Blooms: Apply


12-19

The above graph shows the demand and cost conditions facing a price-setting firm. When output

is 50 units, what will happen to total revenue if the firm sells another unit of output?

a. Total revenue will increase $13.50.

b. Total revenue will increase $11.00.

c. Total revenue will increase $9.00.

d. Total revenue will increase $6.00.


Answer: d



AACSB: Analytic

Blooms: Apply




12-20

The above graph shows the demand and cost conditions facing a price-setting firm.

The firm will produce _____ units of output and charge a price of _____.

a. 40, $8

b. 50, $9

c. 60, $10

d. 50, $6


Answer: e



AACSB: Analytic

Blooms: Apply


12-21

The above graph shows the demand and cost conditions facing a price-setting firm.



What is the maximum amount of profit the firm can earn?

a −$180

b. −$80

c. $60

d. $120


Answer: b

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply


12-22 A monopolist will maximize profit by producing the level of output at which

a. the firm's total revenue exceeds total cost by the largest amount.

b. marginal revenue equals marginal cost.

c. the last unit of output produced adds the same amount to total revenue as to total cost.

d. both a and b

e. all of the above

Answer: e




Blooms: Understand


12-23 A profit-maximizing firm with market power will always produce a level of output where

a. demand is elastic.

b. demand is inelastic.

c. price is greater than average total cost.

d. marginal revenue is greater than average total cost.

Answer: a




Blooms: Understand


12-24 A firm with market power is producing a level of output at which price is $8, marginal revenue is

$5, average variable cost is $6, and marginal cost is $10. In order to maximize profit, the firm

should

a. decrease price.

b. increase price.

c. keep price the same.

d. increase output.

e. shut down.

Answer: b

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply




12-25 A monopolist which suffers losses in the short run will

a. continue to operate as long as total revenue covers fixed cost.

b. raise price in order to eliminate losses.

c. exit in the long run if there is no plant size that will result in economic profit that is

greater than or equal to zero.

d. both a and b

e. both a and c

Answer: c




Blooms: Understand


12-26 Suppose that a profit-maximizing monopolist has a plant of optimal size and is producing a level

of output at which price is $30, average total cost is $55, and average fixed cost is $40. The firm

should

a. operate in the short run.

b. shut down in the short run.

c. exit the market in the long run.

d. continue to operate in the long run.

e. both a and c

Answer: e



AACSB: Analytic

Blooms: Apply


12-27 Columns 1 and 2 make up a portion of a monopolist's production function for a single variable

input, labor. Columns 2 and 3 represent the demand function facing the monopolist over this

range of output:

(1) (2) (3)

Units of Labor Units of Output Price

3 370 $10

4 490 9

5 570 8

6 600 7

7 620 6

How much does the fifth unit of labor add to the firm's total revenue?

a. $1.875

b. $80

c. $150

d. $4,560


Answer: c


Topic: Profit-Maximizing Input Usage


Blooms: Understand






range of output: (1) (2) (3)


3 370 $10

4 490 9

5 570 8

6 600 7

7 620 6

If the monopolist faces a fixed wage rate of $300, how many units of labor will the firm employ?

a. 3 units

b. 4 units

c. 5 units

d. 6 units

e. 7 units

Answer: b



AACSB: Analytic

Blooms: Apply




range of output:

(1) (2) (3)


3 370 $10

4 490 9

5 570 8

6 600 7

7 620 6

If an increase in consumers' income increases product price by $2 at each level of output, how

many units of labor will the firm employ at a wage rate of $300?

a. 3

b. 4

c. 5

d. 6

e. 7

Answer: c

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply


12-30 Which of the following is true of a monopolist in the long run?

a. The firm will charge a price that is higher than long-run marginal cost.

b. The firm will charge a price that is equal to or greater than long-run average cost.



c. The firm will produce that level of output at which long-run average cost is minimum.

d. both a and b

e. both b and c

Answer: d




Blooms: Understand


12-31 A firm with market power will maximize profit by hiring the amount of an input at which the

a. last unit of the input hired adds the same amount to total revenue as to total cost.

b. additional revenue from the last unit of the input hired exceeds the additional cost of the

last unit by the largest amount.

c. last unit of the input hired adds the same amount to total output as to total cost.

d. additional output from the last unit of the input hired exceeds the additional cost of the

last unit by the largest amount.

Answer: a

Difficulty: 01 Easy



Blooms: Understand


12-32 A monopolist is currently hiring 5,000 units of labor. At this level, the marginal revenue of output

is $10, the (fixed) wage rate is $300, and the marginal product of labor is 50. In order to

maximize profit, the firm should

a. keep the level of employment the same because the firm is earning a profit of $100,000.

b. hire more labor because the next unit of labor increases profit by $500.

c. hire more labor because the next unit of labor increases profit by $200.

d. hire less labor because the last unit of labor added more to total cost ($300) than to total

revenue ($10).

Answer: c



AACSB: Analytic

Blooms: Apply


12-33 A firm facing a downward sloping demand curve is producing a level of output at which price is

$7, marginal revenue is $5, and average total cost, which is at its minimum value, is $3. In order

to maximize profit, the firm should

a. decrease price.

b. keep price the same.

c. decrease output.

d. increase price.

e. both c and d

Answer: a

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply




12-34 A monopolist is producing a level of output at which price is $65, marginal revenue is $35,

average total cost is $35, and marginal cost is $50. In order to maximize profit, the firm should

a. keep output the same.

b. produce less.

c. produce more.

d. decrease price.

e. both c and d

Answer: b



AACSB: Analytic

Blooms: Apply


12-35 Refer to the following table which gives the demand and cost data for a price-setting firm:

Price Output Total Cost

$ 20 7 $36

19 8 45

18 9 54

17 10 63

16 11 72

15 12 81

What is the profit-maximizing price?

a. $19

b. $18

c. $17

d. $16

e. $15

Answer: b



AACSB: Analytic

Blooms: Apply


12-36 Refer to the following table which gives the demand and cost data for a price-setting firm:

Price Output Total Cost

$ 20 7 $36

19 8 45

18 9 54

17 10 63

16 11 72

15 12 81

What is the maximum amount of profit that this firm can earn?

a. $104

b. $105

c. $106

d. $107



e. $108

Answer: e

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply


12-37

The figure above shows the demand and cost curves facing a price-setting firm. What is marginal

revenue when output is 100 units?

a. $10

b. $20

c. $25

d. $30

e. $35

Answer: d

Difficulty: 01 Easy



Blooms: Understand




12-38

The figure above shows the demand and cost curves facing a price-setting firm. At what output is

marginal revenue $20?

a. 100 units

b. 200 units

c. 300 units

d. 400 units

e. 500 units

Answer: b

Difficulty: 01 Easy



Blooms: Understand


12-39



The figure above shows the demand and cost curves facing a price-setting firm. The profit-

maximizing (or loss-minimizing) level of output is

a. 100

b. 200

c. 300

d. 400

e. 450

Answer: c

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply


12-40

The figure above shows the demand and cost curves facing a price-setting firm. In profit-

maximizing (or loss-minimizing) equilibrium, the price-setting firm earns $______ in total

revenue, which is ___________ the maximum possible total revenue of $________.

a. $7,500; equal to; $7,500

b. $8,000; more than; $7,500

c. $7,650; less than; $8,000

d. $8,000; equal to; $8,000

e. $7,500; less than; $8,000

Answer: e



AACSB: Analytic

Blooms: Apply




12-41

The figure above shows the demand and cost curves facing a price-setting firm. The maximum

profit the firm can earn is $________.

a. −$4,500

b. −$1,500

c. $7,500

d. $7,650

e. $8,000

Answer: b



AACSB: Analytic

Blooms: Apply


12-42



The figure above shows the demand and cost curves facing a price-setting firm. In profit-

maximizing (or loss-minimizing) equilibrium, the Lerner index is _____, and the elasticity of

demand is ______.

a. 1 ; −1

b. 0.6; −1.667

c. 0.5; −2.0

d. 0.667; −1.5

e. 1.33; −0.75

Answer: b

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply


12-43

The graph above shows the demand and cost conditions facing a monopolist. What price will the

monopolist set?

a. $20

b. $30

c. $40

d. $50

e. $60

Answer: d

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply




12-44

The graph above shows the demand and cost conditions facing a monopolist. What is the

maximum profit the monopolist can earn?

a. $10

b. $30

c. $800

d. $1,800

e. $2,400

Answer: d



AACSB: Analytic

Blooms: Apply


12-45 A monopolist will

a. always charge a price higher than average cost.

b. always charge a price higher than marginal cost.

c. always produce a level of output at which marginal revenue equals marginal cost.

d. both b and c

e. all of the above

Answer: d




Blooms: Understand


12-46 If a monopolist is producing a level of output at which demand is inelastic, then

a. the firm is not maximizing profit.

b. marginal revenue is positive.

c. total revenue will decrease if the firm produces more output.

d. both a and b

e. both a and c

Answer: e






Blooms: Understand


12-47 Refer to the following table that gives the demand facing a monopolist:

Price Quantity

$20 20

15 40

10 65

5 70

How much does the 28th unit of output add to total revenue?

a. $2

b. $10

c. $20

d. $200


Answer: b

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply



Price Quantity

$20 20

15 40

10 65

5 70

If a firm earns profits of $250 by producing 40 units of output, the firm charges a price of _____

and has total costs of ______.

a. $15, $250

b. $15, $350

c. $20, $150

d. $600, $450


Answer: b



AACSB: Analytic

Blooms: Apply





Price Quantity

$20 20

15 40

10 65

5 70

Demand is __________ between 65 and 70 units of output because marginal revenue in that

range is ______.

a. elastic, $50

b. elastic, $100

c. inelastic, negative

d. inelastic, positive

Answer: c




Blooms: Understand


12-50 A manager of a firm with market power faces the marginal revenue product and average revenue

product curves shown below. The firm incurs weekly fixed costs of $1,800. The firm employs a

single variable input, labor, which costs $600 per worker each week.

Given the above, the 14th worker hired adds $_______ to the firm's total revenue each week.

a. $200 per week

b. $400 per week

c. $500 per week

d. $700 per week

e. $900 per week

Answer: a



AACSB: Analytic

Blooms: Apply







Given the above, in order to maximize profit, the manager should hire ________ workers per

week.

a. 9

b. 10

c. 12

d. 18

Answer: c



AACSB: Analytic

Blooms: Apply





Given the above, in profit-maximizing (or loss-minimizing) equilibrium, the firm's total variable

costs are



a. $12,000.

b. $6,000.

c. $600.

d. $400.


Answer: e



AACSB: Analytic

Blooms: Apply





Given the above, the maximum profit the firm can earn is _____________.

a. $4,800 per week.

b. $3,000 per week.

c. $2,400 per week.

d. $1,800 per week.

e. -$1,800 per week.

Answer: b



AACSB: Analytic

Blooms: Apply







Given the above, suppose the weekly wage rate increases to $1,400 per worker. The firm would

hire _______ workers and earn a profit of _______ per week.

a. 6 ; $8,400

b. 6 ; $6,000

c. 6 ; −$2,400

d. 6 ; $4,800

e. 0 ; −$1,800

Answer: e




Blooms: Understand


12-55 All of the following could be a barrier to entry EXCEPT:

a. a government franchise.

b. decreasing long-run average cost.

c. patents.

d. switching costs.

e. rising LMC.

Answer: d


Topic: Barriers to Entry


Blooms: Understand


12-56 A monopolistically competitive industry is in the process of moving toward long-run equilibrium.

This period the product of a typical firm has more substitutes than last period. This means that

a. there was entry into the industry.

b. a typical firm will produce more this period.

c. a typical firm's profits will fall this period.



d. both a and c

e. all of the above

Answer: d


Topic: Monopolistic Competition


Blooms: Understand


12-57 If a monopolistically competitive market is in long-run equilibrium, each firm

a. charges a price which is higher than long-run marginal cost.

b. earns economic profits.

c. produces that level of output at which long-run average cost is minimum.

d. all of the above


Answer: a

Difficulty: 01 Easy



Blooms: Understand


12-58 A monopolistic competitor is producing a level of output at which price is $200, marginal

revenue is $100, average total cost is $210, marginal cost is $100, and average variable cost is

$180. In order to maximize profit, the firm should

a. increase output.

b. keep output the same.

c. decrease output.

d. shut down.

Answer: b




Blooms: Understand


12-59 A monopolistic competitor is currently producing 2,000 units of output; price is $100, marginal

revenue is $80, average total cost is $130, marginal cost is $60, and average variable cost is $60.

The firm should

a. raise price because the firm is losing money.

b. keep the price the same because the firm is producing at minimum average variable cost.

c. raise price because the last unit of output decreased profit by $30.

d. lower price because the next unit of output increases profit by $20.

Answer: d



AACSB: Analytic

Blooms: Apply




12-60 In a monopolistically competitive industry in long-run equilibrium

a. each firm is making a normal profit.

b. each firm is producing the output at which long-run average cost is at its minimum point.

c. price equals marginal cost for each firm.

d. all of the above


Answer: a

Difficulty: 01 Easy



Blooms: Understand


12-61 If firms in a monopolistically competitive industry are making an economic profit,

a. new firms will enter the industry.

b. economic profit will fall in future periods.

c. price is higher than marginal cost.

d. all of the above


Answer: d

Difficulty: 01 Easy



Blooms: Understand


12-62 A firm with market power faces the following estimated demand and average variable cost

functions:

Q

d= 39,000 - 500P + 0.4M -8,000P

R

AVC = 30 - 0.005Q + 0.0000005Q2

where Q

d is quantity demanded, P is price, M is income, and

P

R is the price of a related good.

The firm expects income to be $40,000 and P

R to be $2. Total fixed cost is $100,000. What is the

estimated demand function for the firm?

a. Q

d = 71,000 − 500P

b. Q

d = 39,000 − 200P

c. Q

d = 39,000 − 500P

d. Q

d = 40,000 − 200P

Answer: c


Topic: Implementing the Profit-Maximization Output and Pricing Decision

AACSB: Analytic

Blooms: Apply





functions:

Q

d= 39,000 - 500P + 0.4M -8,000P

R

AVC = 30 - 0.005Q + 0.0000005Q2

where Q


P




estimated marginal revenue function for the firm?

a. MR = 48 − 0.002Q

b. MR = 78 − 0.002Q

c. MR = 78 − 0.004Q

d. MR = 48 − 0.004Q

Answer: c



AACSB: Analytic

Blooms: Apply



functions:

Q

d= 39,000 - 500P + 0.4M -8,000P

R

AVC = 30 - 0.005Q + 0.0000005Q2

where Q


P




profit-maximizing choice of output?

a. 8,000 units

b. 10,000 units

c. 12,000 units

d. 16,000 units

e. 0 units, the firm shuts down

Answer: a



AACSB: Analytic

Blooms: Apply



functions:

Q

d= 39,000 - 500P + 0.4M -8,000P

R



AVC = 30 - 0.005Q + 0.0000005Q2

where Q


P



R to be $2. Total fixed cost is $100,000. What price

should the firm charge in order to maximize profit?

a. $42.50

b. $48

c. $50

d. $62

e. $70

Answer: d



AACSB: Analytic

Blooms: Apply



functions:

Q

d= 39,000 - 500P + 0.4M -8,000P

R

AVC = 30 - 0.005Q + 0.0000005Q2

where Q


P



R to be $2. Total fixed cost is $100,000. The firm

should ______________ because _______________.

a. shut down, P = $62 < TVC = $229.50

b. operate, P = $62 > AVC = $17.50

c. operate, P = $62 > AVC = $22

d. operate, P = $60.50 > AVC = $25.50

Answer: c



AACSB: Analytic

Blooms: Apply



functions:

Q

d= 39,000 - 500P + 0.4M -8,000P

R

AVC = 30 - 0.005Q + 0.0000005Q2



where Q


P




firm's profit?

a. $147,000

b. $120,000

c. $220,000

d. $335,000

Answer: c



AACSB: Analytic

Blooms: Apply


12-68 The market demand for a monopoly firm is estimated to be:

Q

d= 100,000 -500P + 2M +5000P

R

where Q


P


The manager has forecasted the values of M and P

R will be $50,000 and $20, respectively, in

2016. For 2016, the forecasted demand function is

a. Q

d = 300,000 − 500P

b. Q

d = 100,000 − 100P

c. Q

d = 600,000 − 100P

d. Q

d = 200,000 − 500P


Answer: a



AACSB: Analytic

Blooms: Apply



Q

d= 100,000 -500P + 2M +5000P

R

where Q


P




2016. For 2016, the inverse demand function is

a. Q = 300 − 0.005P.

b. P = 600 − 0.001Q.

c. P = 300 − 0.002Q.



d. P = 600 − 0.004Q.


Answer: e



AACSB: Analytic

Blooms: Apply



Q

d= 100,000 -500P + 2M +5000P

R

where Q


P




2016. For 2016, the marginal revenue function is

a. MR = 290 − 0.5P.

b. MR = 580 − 0.001Q.

c. MR = 290 − 0.002Q.

d. MR = 600 − 0.004Q.


Answer: d



AACSB: Analytic

Blooms: Apply



Q

d= 100,000 -500P + 2M +5000P

R

where Q


P




2016. The average variable cost function is estimated to be

AVC = 520 - 0.03Q + 0.000001Q2

Total fixed cost in 2016 is expected to be $4 million. The estimated marginal cost function is

a. SMC = 260 − 0.03Q + 0.000015Q2.

b. SMC = 520 − 0.06Q + 0.000003Q2.

c. SMC = 520 − 0.03Q + 0.000002Q2.

d. SMC = 260 − 0.015Q + 0.000005Q2.


Answer: b





AACSB: Analytic

Blooms: Apply



Q

d= 100,000 -500P + 2M +5000P

R

where Q


P





AVC = 520 - 0.03Q + 0.000001Q2

Total fixed cost in 2016 is expected to be $4 million. The profit-maximizing level of output for

2016 is

a. 1,000 units.

b. 4,000 units.

c. 5,000 units.

d. 10,000 units.

e. 20,000 units.

Answer: e



AACSB: Analytic

Blooms: Apply



Q

d= 100,000 -500P + 2M +5000P

R

where Q


P





AVC = 520 - 0.03Q + 0.000001Q2

Total fixed cost in 2016 is expected to be $4 million. The profit-maximizing price for 2016 is

a. $80.

b. $100.

c. $260.

d. $520.

e. $560.

Answer: e



AACSB: Analytic



Blooms: Apply



Q

d= 100,000 -500P + 2M +5000P

R

where Q


P





AVC = 520 - 0.03Q + 0.000001Q2

Total fixed cost in 2015 is expected to be $4 million. The manager should ________________

because_____________.

a. shut down; P = $520 < TVC = $320

b. shut down; P = $480 < AVC = $500

c. operate; P = $560 > AVC = $320

d. operate; P = 480 > AVC = $300

Answer: c

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



Q

d= 100,000 -500P + 2M +5000P

R

where Q


P





AVC = 520 - 0.03Q + 0.000001Q2

Total fixed cost in 2016 is expected to be $4 million. The firm's profit is

a. $100,000.

b. $200,000.

c. $375,000.

d. −$182,000.

e. $800,000.

Answer: e

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply




12-76 If demand is estimated to be Q

d = 240 − 6P, the inverse demand function is

a. P = 40 − 0.1667Q.

b. P = 240 − Q.

c. Q

d = 40 − P.

d. Q

d = 240 − 12P.

e. Q

d = 240 − 3P.

Answer: a

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply


12-77 If demand is estimated to be Q

d = 240 − 6P, the marginal revenue function is

a. MR = 40 − 0.33Q.

b. MR = 240 − 2Q.

c. MR = 40 − 2P.

d. MR = 240 − 12P.

e. MR = 240 − 6P.

Answer: a



AACSB: Analytic

Blooms: Apply


12-78 Using time-series data, the demand function for a profit-maximizing monopolist has been

estimated as

Q

d= 142,000 -500P + 6M - 400P

R

where Q

d is the amount sold, P is price, M is income, and

P

R is the price of a related good. The

estimated values for M and P

R in 2014 are $25,000 and $200, respectively. The short-run

marginal cost curve for this firm has been estimated as:

MC = 200 - 0.024Q + 0.000006Q2

Total fixed cost is forecast to be $500,000 in 2016. The forecasted demand function for 2016 is:

a. Q

d = 212,000 − 500P

b. Q

d = 200,000 − 2,000P

c. Q

d = 80,000 − 500P

d. Q

d = 150,000 − 2,000P



e. Q

d = 110,000 − 500P

Answer: a

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



estimated as

Q

d= 142,000 -500P + 6M - 400P

R

where Q


P





MC = 200 - 0.024Q + 0.000006Q2

Total fixed cost is forecast to be $500,000 in 2016. The forecasted marginal revenue function for

2016 is:

a. MR = 200,000 − 0.004Q

b. MR = 424 − 0.002Q

c. MR = 110 − 0.002Q

d. MR = 424 − 0.004Q

e. MR = 120 − 0.002Q

Answer: d

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



estimated as

Q

d= 142,000 -500P + 6M - 400P

R

where Q


P





MC = 200 - 0.024Q + 0.000006Q2

Total fixed cost is forecast to be $500,000 in 2016.What is the average variable cost function?

a. AVC = 200 −0.012Q + 0.000002Q2

b. AVC = 200 − 0.048Q + 0.000012Q2

c. AVC = 200 − 0.048Q + 0.000036Q2

d. AVC = 200 − 0.012Q + 0.000018Q2

Answer: a

Difficulty: 03 Hard




AACSB: Analytic

Blooms: Apply



estimated as

Q

d= 142,000 -500P + 6M - 400P

R

where Q


P





MC = 200 - 0.024Q + 0.000006Q2

Total fixed cost is forecast to be $500,000 in 2016.What is the profit-maximizing (or loss-

minimizing) level of production?

a. 0 units, the firm should shut down.

b. 1,000 units

c. 1,800 units

d. 2,000 units

e. 8,000 units

Answer: e



AACSB: Analytic

Blooms: Apply



estimated as

Q

d= 142,000 -500P + 6M - 400P

R

where Q


P





MC = 200 - 0.024Q + 0.000006Q2

Total fixed cost is forecast to be $500,000 in 2016. What is the value of average variable cost at

the optimal level of output?

a. $76

b. $96

c. $232

d. $196

e. $112

Answer: c

Difficulty: 03 Hard


AACSB: Analytic



Blooms: Apply



estimated as

Q

d= 142,000 -500P + 6M - 400P

R

where Q


P





MC = 200 - 0.024Q + 0.000006Q2

Total fixed cost is forecast to be $500,000 in 2016.What is the optimal price?

a. This is irrelevant since the firm will not produce in the short run.

b. $200

c. $250

d. $408

e. $520

Answer: d

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



estimated as

Q

d= 142,000 -500P + 6M - 400P

R

where Q


P





MC = 200 - 0.024Q + 0.000006Q2

Total fixed cost is forecast to be $500,000 in 2016. The firm's forecasted profit (loss) in 2016 is

a. a loss of $100,000.

b. a loss of $500,000.

c. a profit of $100,000.

d. a profit of $500,000.

e. a profit of $908,000.

Answer: e

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply




12-85 A price-setting firm faces the following estimated demand and average variable cost functions:

Q

d= 800,000 - 2,000P + 0.7 M + 4,000P

R

AVC = 500 - 0.03Q + 0.000001Q2

where Q

d is the quantity demanded, P is price, M is income, and

P



R to be $53. Total fixed cost is $2,600,000. What is

the estimated demand function for the firm?

a. Q

d = 1,040,000 − 2,000P

b. Q

d = 800,000 − 4,000P

c. Q

d = 800,000 − 500P

d. Q

d = 1,600,000 − 2,000P

Answer: a

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply



Q

d= 800,000 - 2,000P + 0.7 M + 4,000P

R

AVC = 500 - 0.03Q + 0.000001Q2

where Q


P




the estimated marginal revenue function for the firm?

a. MR = 800 − 0.002Q

b. MR = 800 − 0.004Q

c. MR = 1,600 − 0.004Q

d. MR = 520 − 0.001Q

Answer: d

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply



Q

d= 800,000 - 2,000P + 0.7 M + 4,000P

R

AVC = 500 - 0.03Q + 0.000001Q2



where Q


P




the profit-maximizing choice of output?

a. 8,000 units

b. 10,000 units

c. 12,000 units

d. 20,000 units

e. 0 units, the firm shuts down

Answer: d



AACSB: Analytic

Blooms: Apply



Q

d= 800,000 - 2,000P + 0.7 M + 4,000P

R

AVC = 500 - 0.03Q + 0.000001Q2

where Q


P



R to be $53. Total fixed cost is $2,600,000. What

price should the firm charge in order to maximize profit?

a. $356

b. $400

c. $420

d. $445

e. $510

Answer: e

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



Q

d= 800,000 - 2,000P + 0.7 M + 4,000P

R

AVC = 500 - 0.03Q + 0.000001Q2

where Q


P



R to be $53. Total fixed cost is $2,600,000. The

firm should ______________ because _______________.

a. shut down, P = $356 < TVC = $445

b. operate, P = $510 > AVC = $300

c. operate, P = $560 > AVC = $160



d. operate, P = $600 > AVC = $255

Answer: b

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



Q

d= 800,000 - 2,000P + 0.7 M + 4,000P

R

AVC = 500 - 0.03Q + 0.000001Q2

where Q


P




the firm's profit?

a. $1,470,000

b. $1,200,000

c. $1,600,000

d. −$2,600,000

Answer: c

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply


12-91 In order to maximize profit, a firm that produces its output in two plants will produce the level of

total output at which the last unit of output produced adds the same amount to total revenue as to

the

a. first plant's total cost.

b. second plant's total cost.

c. firm’s total cost

d. both a and b

Answer: c

Difficulty: 03 Hard

Topic: Multiplant Firms


Blooms: Remember


12-92 A firm is producing 10,000 units of output in two plants, A and B, and each plant is producing

5,000 units of output. The marginal cost in plant A is $10 and the marginal cost in B is $6. To

reduce the cost of producing 10,000 units the firm should

a. produce more in A and less in B.

b. produce less in A and more in B.

c. produce it all in B because B is the lower cost plant.

d. do nothing since the output in each plant is equal.

Answer: b

Difficulty: 01 Easy





Blooms: Understand


12-93 To maximize its profit, a firm with two plants should

a. produce the output at which total marginal cost equals marginal revenue.

b. choose the profit-maximizing output then allocate it equally between the two plants.

c. allocate output so that marginal cost is the same in two plants

d. both a and b

e. both a and c

Answer: e




Blooms: Understand


12-94 A firm with two plants, A and B, has the following estimated demand and marginal cost functions:

Qd

= 120 -10P

MCA

= 4 + (1/ 5)QA

MCB

= 6 + (1/ 10)QB

What is the firm's marginal revenue function? a. MR = 12 − (1/5)P b. MR = 12 − (1/5)Q c. MR = 120 – 20P d. MR = 120 − 20Q e. none of the above

Answer: b

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



Qd

= 120 -10P

MCA

= 4 + (1/ 5)QA

MCB

= 6 + (1/ 10)QB

What is the firm's total marginal cost function?

a. MC = 24 + (1/50)Q

b. MC = 10 + (3/15)Q

c. MC = (80/15) + (1/15)Q

d. MC = 2 + (1/10)Q

Answer: c

Difficulty: 03 Hard




AACSB: Analytic

Blooms: Apply



Qd

= 120 -10P

MCA

= 4 + (1/ 5)QA

MCB

= 6 + (1/ 10)QB

In order to maximize profit, how many units of output should the firm produce?

a. 10

b. 15

c. 25

d. 45

e. 50

Answer: c

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



Qd

= 120 -10P

MCA

= 4 + (1/ 5)QA

MCB

= 6 + (1/ 10)QB

What is the profit-maximizing price?

a. $7

b. $8

c. $9

d. $9.50


Answer: d

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply



Qd

= 120 -10P

MCA

= 4 + (1/ 5)QA

MCB

= 6 + (1/ 10)QB

How should the firm allocate total output between the two plants in order to maximize profit?



a. produce 5 units in plant A, 10 units in plant B

b. produce 15 units in plant A, 10 units in plant B

c. produce 20 units in plant A, 20 units in plant B

d. produce 20 units in plant A, 25 units in plant B


Answer: b

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply


12-99

The figure above shows the demand and cost conditions for a firm with two plants. In order to

maximize profit, how many units of output should the firm produce? a. 10 b. 20 c. 30 d. 40 e. 50

Answer: c

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply




12-100

The figure above shows the demand and cost conditions for a firm with two plants. What is the

profit-maximizing price?

a. $20

b. $30

c. $40

d. $50

e. $60

Answer: e

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply


12-101



The figure above shows the demand and cost conditions for a firm with two plants. How should

the firm allocate total output between the two plants in order to maximize profit?

a. produce 10 units in plant 1, 20 units in plant 2

b. produce 30 units in plant 1, 20 units in plant 2

c. produce 40 units in plant 1, 40 units in plant 2

d. produce 40 units in plant 1, 50 units in plant 2

e. produce 55 units in plant 1, 60 units in plant 2

Answer: a

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply


12-102 In order to maximize profit, a firm that produces its output in two plants will allocate total output

between the two plants so that

a. marginal cost is equal for the two plants.

b. marginal cost for the firm is equal to the sum of the plants' marginal costs.

c. marginal revenue for the firm is equal to the sum of the plants' marginal costs.

d. all of the above

Answer: a

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply


12-103 A radio manufacturer has two plants -- one in Taiwan and one in California. At the current

allocation of total output between the two plants, the last unit of output produced in the Taiwan

plant added $8 to total cost, while the last unit of output produced in the California plant added $6

to total cost. In order to maximize profit, the firm should

a. keep the allocation between plants unchanged.

b. produce all its output in the Taiwan plant.

c. produce all its output in the California plant.

d. switch some output from the California to the Taiwan plant.

e. switch some output from the Taiwan to the California plant.

Answer: e

Difficulty: 01 Easy



Blooms: Understand


12-104 A radio manufacturer has two plants -- one in Taiwan and one in California. At the current

allocation of total output between the two plants, the last unit of output produced in the Taiwan

plant added $8 to total cost, while the last unit of output produced in the California plant added $6

to total cost. If the firm switches one unit of output from the California to the Taiwan plant, then

a. profit will increase $6.

b. profit will increase $14.

c. profit will decrease $2.

d. profit will decrease $6.

Answer: c



Difficulty: 01 Easy



Blooms: Understand


12-105

The demand for dishwashers facing the AllClean Co. is given in the figure above. The firm manufactures

dishwashers in two plants. MC1 and MC2 are the marginal cost curves for those two plants. How many

dishwashers should the firm produce?

a. 40

b. 50

c. 70

d. 80

e. 100

Answer: b

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply




12-106

The demand for dishwashers facing the AllClean Co. is given in the figure above. The firm

manufactures dishwashers in two plants. MC1 and MC2 are the marginal cost curves for those two

plants. What price should the firm set?

a. $25

b. $30

c. $40

d. $45

e. $55

Answer: e

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply




12-107

The demand for dishwashers facing the AllClean Co. is given in the figure above. The firm

manufactures dishwashers in two plants. MC1 and MC2 are the marginal cost curves for those two

plants. How should the firm allocate total output between the two plants in order to maximize

profit?

a. 10 to plant 1, 40 to plant 2

b. 20 to plant 1, 30 to plant 2

c. 40 to plant 1, 40 to plant 2

d. 20 to plant 1, 60 to plant 2

e. 20 to plant 1, 50 to plant 2

Answer: a

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply


12-108 A firm with two factories, one in Michigan and one in Texas, has decided that it should produce a

total of 500 units of output in order to maximize profit. The firm is currently producing 200 units

in the Michigan factory and 300 units in the Texas factory.

At this allocation between plants, the last unit of output produced in Michigan added $5 to total

cost, while the last unit of output produced in Texas added $3 to total cost. The firm

a. is maximizing profit; should keep producing 200 units in Michigan and 300 units in

Texas.

b. should produce 250 units in each factory.

c. should produce more in the Michigan factory and less in the Texas factory.

d. should produce more in the Texas factory and less in the Michigan factory.

Answer: d

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply




12-109 A firm with two factories, one in Michigan and one in Texas, has decided that it should produce a

total of 500 units of output in order to maximize profit. The firm is currently producing 200 units

in the Michigan factory and 300 units in the Texas factory.

At this allocation between plants, the last unit of output produced in Michigan added $5 to total

cost, while the last unit of output produced in Texas added $3 to total cost. If the firm produces

201 units in Michigan and 299 units in Texas instead:

a. total cost will decrease $2

b. profit will increase $2

c. total cost will decrease $3

d. both a and b


Answer: e

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply


12-110 In order to maximize profit, a firm that produces its output in two plants will allocate

total output between the two plants so that

a. marginal cost is equal for the two plants.

b. marginal revenue is equal for the two plants.

c. marginal cost for the firm is equal to the sum of the plants' marginal revenue.

d. both a and b

e. all of the above

Answer: a

Difficulty: 01 Easy



Blooms: Understand


Chapter 14: MANAGERIAL DECISION MAKING FOR FIRMS WITH ... · Chapter 12: Managerial Decisions for...

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Transcript of Chapter 14: MANAGERIAL DECISION MAKING FOR FIRMS WITH ... · Chapter 12: Managerial Decisions for...