ECONONE Reviewer Everything is either TRUE or FALSE. Part I. 1.

The profit maximizing condition in a competitive market is when Price is Equal to Average Cost. . !n perfect competition" the production decisions of one firm will not affect the overall suppl#. $. !n perfect competition" goods are heterogenous. %. The demand curve is horizontal &ecause prices &# firms are dictated &# the market. '. (irms have no market power &ecause there are numerous &u#ers and sellers. (or )*1+" refer to the graph 1 and .
P , C -C

ATC . A 1 2 C 3 ( 4 ! A/ A0C

ra!h "

ra!h #

). The level of cost per unit produced is +1. 5. The Profit*-aximizing 6utput can &e attained at point .. 7. Total /evenue is A.E+. 8. Profit is A.!1. 1+. (ixed Cost is 1!3C.

Part II 1. The profit*maximizing condition for monopolists is -/ 9 -C. . /elative to a perfectl# competitive market" monopolies tend to charge higher prices and lesser quantities" there&# decreasing social welfare. $. !n discriminating price to maximize its profits" monopolists divide the market according to differences in consumer income elasticit# of demand" charging higher prices for the inelastic part of the market" and lower prices for the more elastic prices of the market. %. ,cale &arriers are &arriers to entering the market with a monopolist which entail that the size of the operation is too &ig for regular firms to engage. '. -onopolies are all &ad in all markets. (or )*1+" /efer to the 2raph $.
P -C ATC ( A C 2 . 4 0 1 -/ Q ra!h $ E ! A0C

). The Profit*-aximizing Condition can &e found at point .. 5. At the point of maximum profit" price is the level +C. 7. -aximum profit is A(EC. 8. Total Cost is 2.1+. 1+. Total 0aria&le Cost is 2.1+.

Part III. 1. The profit*maximizing condition is P9-C. . !n a monopolisticall# competitive market structure" each firm has their own demand curve which implies that the &rand the firm is selling has its own market or clientele. $. The decisions of one firm can influence the overall market suppl#. %. !n a monopolistic competition" firms sell completel# identical products. '. !n this market structure" firms are generall# price takers. (or )*1+" refer to 2raph %
P A C -C ATC

( 1 . E 4o 41 0 2 -/ Q ra!h %

). !f the demand curve is 4+" maximum profit is 1AC(. 5. !f the 4emand Curve is 41" maximum profit is 1(E.. 7. A reason wh# 4+ shifts to 41 is the exit of firms from the market. 8. The profit*maximizing level of price is +A. 1+. Total Cost at 41 is .E2+. Part I&. 1. An oligopol# involves ver# few price*taking firms.

. A cartel is an agreement &# firms of the same industr# to set the price and quantities to &e sold. $. The mem&er of a cartel with the most incentive to cheat is the one with the largest marginal revenue. %. The Cournot*:ash Equili&rium requires that all firms must undertake the same action so as to achieve a higher level of equili&rium. '. !n the model of oligopol# that involves an industr# leader" the leader is most likel# to &e the one with the lowest -C. ). ;hen oligopolistic firms act independentl#" the# tend to pursue their own interest causing them to go &ankrupt &ecause the# set the prices too low. 5. An 6utput /eaction (unction follows the form that the output of a firm is dependent on the output of its rivals. (or 7*1+"

E A ( 2

-C ATC -C< ATC< 4

-/ 0 = Q

7. !f the marginal cost is on -C<" the firm<s profit is 1AEC. 8. A firm will lose market power if he sets his price at +1 1+. !f the marginal costs in on -C" Total Cost is +AE=