TUTORIAL/ECO162/TOPIC 7/ODL

TOPIC 7 – THEORY OF THE FIRM AND MARKET STRUCTURE

PART A

1. In a perfectly competitive market

A. one firm produces the entire market supply.

B. there are a few sellers in the industry.
C. a firm cannot influence the price of its product.
D. the demand curve is downward sloping.

2. To maximize profit, a firm should adjust output until

A. marginal revenue equals marginal cost.

B. marginal revenue equals average cost.
C. price equals cost.
D. marginal revenue is greater than marginal cost.

3. Which of the following is not a characteristic of a monopolistic competitive market?

A. Product differentiation.
B. Mutual interdependence among firms.
C. A downward sloping demand curve.
D. A relatively large number of firms.

4. Which of the followings are barriers to entry?

i. a natural monopoly.
ii. merging of small firms that enter the market.
iii. decentralisation of the firm.

A. i and ii
B. i, ii and iii
C. i and iii
D. ii and iii

5. An industry is expected to expand if firms in the industry are earning

A. normal profits.
B. economic profits.
C. accounting profits.
D. profits that exactly cover all the firm’s opportunity costs.

6. Which characteristic is inconsistent with pure competition?

A. short run losses.

B. product differentiation.
C. freedom of entry and exit.
D. a large number of buyers and sellers.

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7. Under which market structure are the conditions of entry the most difficult?

A. Pure competition.
B. Pure monopoly.
C. Oligopoly.
D. Monopolistic competition.

8. One feature of pure monopoly is that the monopolist is

A. a producer of products with close substitutes.

B. one of the several producers of a product.
C. a price taker.
D. a price maker.

9. Mutual interdependence means that

A. product differentiation exists.

B. each seller faces a completely inelastic demand curve.
C. each firm must consider the possible reactions of rivals when establishing price
policy.
D. when a monopolist chooses a price, it also choose an output level.

10. When a firm is operating in a perfectly competitive market, its marginal revenue is

A. always less than price.

B. equal to zero.
C. equal to average revenue and price.
D. equal to marginal cost at every output level.

11. A perfectly competitive firm has no influence over price because

A. it is unaware of the demand curve it faces.

B. its output is insignificant relative to the market as a whole.
C. its producers are not motivated.
D. consumers establish the price of the product.

Use the following table to answer questions 12 and 13.

Output 0 1 2 3 4 5
(per week)

Total Cost 40 44 52 58 61 66
(RM)

12. What is the value of the firm’s total fixed cost?

A. RM 4.00.
B. RM 4.04.
C. RM 40.40.
D. RM 40.00.

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13. If the output were 5 units per week, the average variable cost and average total cost
would be

A. RM 5.00 and RM 12.20 respectively.

B. RM 5.20 and RM 13.20 respectively.
C. RM 5.50 and RM 13.70 respectively.
D. RM 5.10 and RM 11.20 respectively.

14. The average revenue of a monopolistic competition firm is

A. an inelastic downward sloping curve.

B. a perfectly elastic curve.
C. an elastic downward sloping curve.
D. a perfectly inelastic curve.

15. A price-discriminating monopolist will tend to charge a higher price for its product

A. if the demand in that market is elastic.

B. if the demand in that market is inelastic.
C. if the demand in that market is unit elastic.
D. if the demand in that market is perfectly elastic.

16. A business maximises profit by operating where

A. total revenue equals total cost.

B. marginal revenue equals total revenue.
C. total revenue exceeds total cost by the greatest amount.
D. marginal revenue exceeds marginal cost by the greatest amount.

17. Market structures are

A. groupings of firms that produce similar products.

B. grouping of firms that compete in a geographical area.
C. a classification system for grouping goods and services and how they are
distributed.
D. a classification system for grouping markets according to the degree of
competition among sellers.

18. Which is the correct sequence if we are ranking market structures from that where a
firm has most control over price to that where a firm has least control?

A. Monopoly, oligopoly, monopolistic competition, pure competition.

B. Monopolistic competition, monopoly, oligopoly, pure competition.
C. Pure competition, monopoly, oligopoly, monopolistic competition.
D. Oligopoly, monopoly, monopolistic competition, pure competition.

19. Price discrimination will only be effective except when

A. the discrimination cost is substantial.

B. the markets can be separated.
C. the price elasticity of demand for the goods varies.
D. the seller is a monopoly.

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20. The diagram below shows the cost and revenue structures of a firm.

Price and Costs (RM)

MC
AC

MR

Quantity (unit)
0 Qo

The firm presented in the above figure is

A. making a normal profit

B. incurring a loss, once opportunity cost is considered
C. producing at the same level of output as a purely competitive firm
D. producing a standardised product

21. The function of competition under a market economy is to

A. eliminate wasteful advertising.

B. eliminate interest and profits.
C. prevent large firms from driving small ones out of business.
D. force prices to the lowest level consistent with a reasonable profit.

22. Small pizza parlors exist in just about every town. Anyone can open a pizza parlor,
and the pizzas from one parlor typically have different tastes and sizes than pizzas
from another parlor. Thus, the pizza industry is an example of:

A. perfect competition.
B. monopoly.
C. oligopoly.
D. monopolistic competition.

23. A monopoly will not occur if there:

A. are economies of scale.

B. are no close substitutes for the good.
C. are patents protecting inventory.
D. is freedom of entry into the industry.

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24. Which of the following is a unique characteristics of oligopoly?

A. Product differentiation.
B. Advertising expenditure.
C. Mutual interdependence.
D. None of the above.

25. For an economist, a normal profit means

A. the revenue necessary to cover all the opportunity costs of the factors of
production employed by the firm.
B. the amount by which a firm’s sales revenue exceeds its production costs.
C. the amount of profit any firm will make in its equilibrium position.
D. the amount of profit necessary for a firm to stay in business in the long run.

26. In the long run, a perfect competition market allocates resources efficiently because

A. it sets price equals to marginal costs.

B. it sets price equals to average fixed costs.
C. it sets price equals to total costs.
D. it sets price equals to average variable costs.

27. A kinked demand curve explains why firms

A. undertake new investment.

B. have different level of efficiency.
C. make abnormal profits.
D. are not keen to engage in severe price competition.

28. If a profit-maximizing monopolist finds that its marginal cost is increasing and
exceeds marginal revenue, it should

A. increase output and decrease price.

B. increase price and decrease output.
C. decrease both price and output.
D. increase both price and output.

29. The demand curve facing the monopolistic competitor is

A. horizontal.
B. infinitely elastic.
C. negatively sloped and highly elastic.
D. negatively sloped and highly inelastic.

30. Price discrimination involves charging different prices for a product

A. for different classes of customers.

B. in different markets.
C. for different quantity purchased.

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D. all of the above.

2. A firm faces a perfectly elastic demand curve if

A. MC=MR
B. MR=AR
C. AR=MC
D. ATC=AVC

3. A firm in monopolistic competition will face a more elastic demand curve

A. the more sellers there are

B. the fewer sellers there are
C. the greater the product differentiation
D. if the firm’s supply curve is perfectly elastic

4. If average revenue exceeds average cost in the short run, the firm is making

A. normal profit
B. accounting profit
C. subnormal profit
D. supernormal profit

5. The pure monopolist’s demand curve

A. is the industry’s demand curve

B. shows an inverse relationship between price and quantity demanded
C. tends to be elastic at high prices and inelastic at low prices
D. has all the above characteristics

6. Monopolists are:

A. price takers as are competitive firms

B. price takers but competitive firms are price makers
C. price makers but competitive firms are price takers
D. price makers as are competitive firms

7. A gap in the marginal revenue curve results from:

A. price fixing
B. a kinked demand curve
C. price leadership
D. predatory pricing
8. An essential characteristic of a perfectly competitive firm is that:

A. it is a price maker
B. it is a price taker
C. the market-demand curve is perfectly elastic
D. each firm’s demand curve is perfectly inelastic

9. The correct ranking of barriers to entry (from highest to lowest) in the market is:

A. monopoly, oligopoly, monopolistic competition, perfect competition

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B. monopoly, monopolistic competition, perfect competition, oligopoly

C. monopoly, monopolistic competition, oligopoly, perfect competition
D. oligopoly, monopoly, monopolistic competition, perfect competition

10. A monopolist will not produce:

A. if the MR is declining
B. if price is less than the average total cost but greater than the average
variable cost
C. in the inelastic portion of its demand curve
D. if price is greater than average total costs

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PART B

PERFECT COMPETITION

1. The diagram below shows a profit maximizing firm.

RM MC

16 ATC

14 AVC
13
12
MR = AR
10

Quantity
20 23 25

a) In which market structure is the firm operating in? Why?

(2 marks)

b) What is the profit maximizing level of output and price?

(2 marks)

c) Is the firm experiencing profit or loss? State the value.

(2 marks)

d) Would you consider this firm to be in the short run or long run?
(1 mark)

e) Should the firm shut down or continue production? Why?

(2 marks)
f) State two (2) reasons to be considered when a firm makes its decision
whether to shut down or continue production.
(1 mark)
2. The figure below shows the price, marginal cost and average cost curves of a firm,
Inderaputra Berhad.

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RM
MC
ATC

15

Dd = MR
9
AVC

Quantity (units)
25 104 150

a) Name the type of market structure the firm is operating? Justify your
answer.
(1.5 marks)

b) State the profit maximizing price and output for Inderaputra Berhad. Is this
firm operating in the short run or long run period?
(1.5 marks)

c) Calculate the amount of profit or loss at the equilibrium point and state the
type of profit.
(2.5 marks)
d) What is the value of average variable cost at the profit maximizing level of
output?
(1.5 marks)

e) Looking at the current condition what would be your advice to the firm?
(3 marks)

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3. The following diagram shows the equilibrium position of a firm. Based on the diagram
answer questions (a) to (d).

RM MC
ATC

45

40 42 AVC

30 Dd = MR
15

Quantity
20 24 30 40

a) What is the profit maximization output and price?

(2 marks)

b) Calculate the profit or loss earned by the firm at the equilibrium.

Determine what type of profit does the firm earn?
(3 marks)

c) Should the firm close down its operation? Why?

(2 marks)

d) Is the firm operating in the short run or long run? Explain.

(3 marks)

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4. Consider the following diagram showing the cost and revenue conditions of a firm.

RM MC=MR=15

14 ATC
AVC
13

10
MR = AR
8

Quantity
15 18

a) Identity the market structure the firm is operating in.

(1 mark)

b) If the firm is profit maximizing, determine the price it will charge for its
output.
(1 mark)
c) At equilibrium, calculate the firm’s:
i) Average Fixed Cost
(1 mark
ii) Total Cost
(1 mark)

d) Determine the amount of profit the firm is earning in equilibrium. State

the type of profit.
(3 marks)
e) Based on (d), should the firm continue or shut down its operation? Why?
(2 marks)

f) Copy the diagram and shade the area of total fixed cost.
(1 mark)

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5. The table below shows the average cost for a purely competitive firm. The average
revenue is constant at RM5 per unit and the firm’s total fixed cost is RM4.

Output Total Revenue Average Cost Total Cost Marginal Cost

(Units) (RM) (RM) (RM) (RM)
1 8
2 5.5
3 4
4 3.5
5 3.8
6 4.5
7 6

1. Fill in the value for total revenue, total cost and

marginal cost in the columns provided.

ii. Determine the profit maximizing output

iii. Show the equilibrium of the firm in a diagram

iv. If average revenue falls to RM3 per unit, calculate the firm’s new profit and loss at
equilibrium

v. Based on your answer in d, should the firm continue or

stop production?

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6. Assume that the price of silk ties in a perfectly competitive market is RM15 and that a
typical firm has the following costs:

Output Total cost Marginal cost Profit at P=RM Profit at

P=RM11
0 10
1 17
2 26
3 37
4 50
5 65
6 82
7 101
8 122
9 145
10 170

a. Complete the table above.

b. If the price of silk ties is RM15.00:

i. What is the profit maximizing rate of output for the firm?

ii. How much profit does the firm earn at the rate of output?

c. If the price of ties fell to RM11, how many ties should the firm produce?

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MONOPOLY

1. A monopolist firm is faced with the demand schedule shown in table below.

Price Quantity Demanded Total Revenue Marginal Cost Marginal Revenue

(RM) (unit) (RM) (RM) (RM)
100 1 45
83 2 43
71 3 40
63 4 39
55 5 40
48 6 44
42 7 47
37 8 53
33 9 58
29 10 65

a) Based on the above table, complete the columns for total revenue and
marginal revenue.
(2 marks)
b) Determine the profit maximizing price and output for this monopolist.
(2 marks)

c) At the profit maximizing output, suppose the firm’s total cost is RM210,
calculate the profit.
(2 marks)

d) Briefly explain why a monopolist is faced with downward sloping and

inelastic demand curve.
(2 marks)
e) State two (2) types of barriers that prevent new firms from entering this
market.
(2 marks)

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2. Table below shows the long run data for a company known as Desaria Bhd.

The cost, price and quantity of Good F produced by Desaria Bhd.

Price Quantity demanded (Units) Total Cost (RM)

(RM)
12 0 10
11 1 17
10 2 18
9 3 21
8 4 30
7 5 48

a) Using the total revenue and total cost approach, determine the profit
maximizing level of output.
(3 marks)

b) i. Calculate the firm’s marginal revenue, marginal cost and average

cost.

ii. Sketch marginal revenue(MR), marginal cost(MC) and average

cost(AC) and the demand curves.

iii. Shade the area of profit or loss on the plotted diagram.

(5 marks)

c) Is the firm a monopoly? Justify your answer.

(2 marks)

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3. The diagram below represents short run equilibrium of an imperfectly

competitive firm. Based on the diagram answer the following questions.

Cost/Revenue
W
RM

12 X
11
9
6 Y

Z
Quantity of output
15 28 32 (units)

a) Label the followings:

W = ___________

X = ____________

Y = ____________

Z = ____________
(2 marks)

b) Determine the equilibrium price and quantity.

(2 marks)

c) The optimum output of the firm is __________ units.

(1 mark)

d) Suppose the diagram above represents a monopolist, suggest two (2)

ways how the firm can maintain supernormal profit in the long run.
(3 marks)

e) List two (2) characteristics of monopoly.

(2 marks)

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4. The following graph shows the short run equilibrium position of Swastica Co.

Price (RM)
A
B

18
15 C

10
D
Quantity (unit)
10 12 20

a) Label curves A, B, C and D.

(2 marks)

b) What is the equilibrium price and level of output?

(2 marks)

c) In which type of structure does Swastica Co operate?

(1 mark)

d) What is the type of profit earned by the firm at equilibrium? Calculate the
profit earned by the firm.
(3 marks)

e) Give two (2) examples of Malaysian firm that operate in this type of market
structure.
(2 marks)

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MONOPOLISTIC
1. The figure below shows the short run profit maximizing position of a monopolistically
competitive firm.

Costs & Revenue

(RM)

MC

17 ATC
15
14
13 A

B
Quantity (unit)
14 18 22

a) Label curves A and B.

(1 mark)

b) The demand curve for a monopolistically competitive firm is relatively elastic.

Why?
(2 marks)

c) State the profit maximizing output and price. Calculate the total revenue and
total cost at this output level.
(3 marks)

d) Calculate the amount of profit or loss made by this firm at thee equilibrium
output.
(2 marks)

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e) Sketch a diagram showing the long run equilibrium of this firm.

(2 marks)

2. Based on the diagram below, answer the questions that follow.

Price (RM)
MC
AC
20

16
14
12
MR AR
Quantity (unit)
0 50 55 60

i) At which level of price and output should the firm produce to maximize its
profit?
(2 marks)

ii) Calculate the amount of profit received by the firm at equilibrium.

(2 marks)

iii) In what type of market structure is the above firm operating? Give a
reason.
(1 mark)

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3. The following figure shows a profit maximizing firm in a monopolistically competitive

market.

Price (RM)

K MC
L
F AC
E R
C J
S
B

A H
D
MR
Quantity (unit)
G M N

a) How much output will be produced by this firm?

(1 mark)

b) At this output level (refer to question a), what will be the price?
(1 mark)

c) What type of profit does this firm experience at this output level? Identify
the profit area.
(2 marks)

d) Would you consider this to be short run equilibrium or long run

equilibrium? Why?
(3 marks)
e) Draw a diagram to show the firm’s long run equilibrium. Label the output
level, price level and the type of profit earned.

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(3 marks)

4. The table below shows the demand and cost schedules for a monopolistically
competitive firm given in the table below.

Price (RM) Quantity demanded (Unit) Total Cost (RM)

20 1 10

18 2 20

16 3 29

14 4 36

12 5 40

10 6 42

a. At what output level would the firm produce to maximize profits?

(2 marks)

b. What will be the economic profit or loss for this firm at the profit maximizing level of
output?
(2 marks)

c. Calculate the economic profits if the quantity demanded is 4 units.

(2 marks)

d. By using a diagram, show the long run equilibrium for the monopolistically
competitive firm.
(4 Marks)

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OLIGOPOLY

1. The following diagram shows cost and revenue of a firm.

Cost, Revenue
(RM)
MC AC
80
70

40

MR
D
Output
8 12
( unit )

Answer the following questions based on the above diagram.

a) Name and define the market structure that the firm is in.
(3 marks)

b) Determine equilibrium price and quantity.

(2 marks)

c) Calculate the total profit / loss the firm is making at the equilibrium output.
(2 marks)

d) Name the type of profit the firm is making.

(1 mark)
e) State two (2) characteristics of this market structure.
(2 marks)
2. Answer the following questions based on the diagram below.
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Price of X
MC

AC
30

22

15
10
AR
5

Quantity of X
10 15 18
MR

a) What market structure is this firm operating?

(1 mark)

b) The equilibrium output of good X is _________ units and the equilibrium price
of good X is RM _________.
(1 mark
c) State the two (2) assumptions of this model.
(2 marks)

d) Calculate the amount of profit / loss the firm is making at this equilibrium
output.
(2 marks)

e) This firm earns __________ profit because ___________.

(2 marks)
f) State two (2) characteristics of this market structure.
(2 marks)

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