- D—At a quantity of 4, TFC =$10 and TVC
=AVC ¥q=$5 ¥ 4 =$20. Since TC =TFC +
TVC, TC =$30.
Questions from Chapter 9
- E—Monopolistic competition is characterized by
product differentiation. One way that firms dif-
ferentiate their products and protect market share
is through extensive advertising. - B—The shutdown point is at minimum AVC. If
the price falls below this point, the firm finds it
rational to produce nothing in the short run and
incur losses equal to TFC. - C—When the price rises, the perfectly competi-
tive firm finds a higher level of output where P=
MR =MC. Since this price lies above the ATC
curve, positive economic profits are possible. - E—The question describes a situation where
short-run losses are being incurred. In the long
run, firms exit, shifting market supply leftward,
increasing market price until the firms earn
normal, or breakeven, profits. - C—One of the important results of monopoly
is that while output is set where MR =MC,
price is set from the demand curve, so P>MC.
This creates inefficient resource allocation and
deadweight loss that is not eliminated in the
long run. - B—Oligopolies are industries dominated by a
few large firms but can have either homogenous
or differentiated products. All other choices
describe other market structures in the chapter. - A—These two market structures are fairly simi-
lar, and free entry and exit is one of the character-
istics that they share. They also share the
characteristic of normal profits in the long
run but do not share homogenous products or
efficiency. - E—In perfect competition, P=MR =MC and
resources are allocated efficiently. Since a monop-
oly will not have the situation where P=MR,
regulators might try to force the firm to produce
where P = MC. This point may or may not
ensure a long-run profit for the firm.
Questions from Chapter 10- C—Demand for any type of labor is derived
from the demand for the good or service that the
labor produces. With fewer children in the
household, there will be less demand for kinder-
garten classes and teachers. - A—When the price of a substitute resource (like
capital) falls, two effects move the demand for labor
in opposite directions. The firm wants to substitute
for more capital and less labor, but lower costs
prompt more output to be produced, and this can
require more labor. If the output effect outweighs
the substitution effect, demand for labor may
increase even if capital is less expensive. Labor
demand will increase if the labor becomes more pro-
ductive or if the price of the output produced rises. - C—Competitive labor markets are characterized
by hiring where W = MRPL. This is another
example of decision making where marginal costs
(wage paid) equal marginal benefits (MR ¥MPL). - D—A monopsonist is like a monopolist on the
hiring side of the firm. Monopsonists hire where
MFC =MRPL, and because MFC lies above the
labor supply curve, this means that they will hire
fewer workers and pay lower wages than the com-
petitive outcome.
Questions from Chapter 11- E—Public goods cannot be divided among con-
sumers. If one consumes a public good, the next
person is not denied consumption of it. All other
choices are goods and services that are both rival
and excludable. - A—When individuals and firms exchange a good
that imposes costs on third parties, they have cre-
ated a negative externality. The market produces
“too much” because these spillover costs are not
reflected in the private (or market) supply curve.
Resources are overallocated to the production of
this good. - A—A progressive tax system means that higher
levels of income pay higher proportions of their
income to the tax collector. This system is
designed to redistribute income from higher tax
brackets to lower tax brackets.
Take the Diagnostic Exam ‹ 29