University of the Philippines

SCHOOL OF ECONOMICS
Economics 11: Markets and the State
1st Semester, AY 2016-2017
Problem Set #4
Ang, Gloria, Guido, Guzman

Prof. Solita C. Monsod

Instructions:
1. Write your name AND section on all yellow pad papers that you will use.
2. Answer all questions completely.
3. Due date is on September 27, during discussion class.
1. A firm that faces a horizontal demand curve will find that its marginal revenue is
(a) Equal to its average revenue
(b) Equal to the price of the product
(c) Greater than, equal to, or less than the price of the product, depending on the particular circumstances.
(d) Both A and B
(e) Both A and C
2. At a monopolists current level of production, its marginal revenue is equal to P10.00 while
its marginal cost is P8.20. In order to maximize profits, what should the monopoly do?
(a) Reduce the price and leave the level of output unchanged
(b) Increase the price and leave the level of output unchanged
(c) Reduce the price and increase the level of output
(d) Increase the price and reduce the level of output
(e) Leave both the price and level of output unchanged

For numbers 3 and 4, use above demand curve.

3. Suppose that the marginal (and average) cost of producing each output is constant at P2.00.
At what level of output and price will the monopoly attain its highest level of profit?
(a) 3 units, P7.00

(b) 4 units, P6.00

(c) 6 units, P4.00
(d) 7 units, P3.00
(e) 8 units, P2.00
4. Suppose further (from number 3) that the firm decided to set the price and quantity at a
perfectly competitive level. It would find that its profit will decline by:
(a) P24.00
(b) P18.00
(c) P16.00
(d) P6.00
(e) None of the above
5. The supply curve of an individual firm in perfect competition (SR) is the same thing as:
(a) the rising segment of its marginal cost curve, above average variable cost.
(b) the rising segment of its average cost curve.
(c) its entire marginal cost curve.
(d) the rising segment of its marginal cost curve, above average cost.
(e) None of the above is correct.
6. If you are a profit maximizing firm you should do which of the following:
(a) try to produce and sell that quantity of output at which marginal cost is equal to
average variable cost.
(b) try to produce and sell that quantity of output at which marginal cost has risen to
equality with price.
(c) try to produce and sell that quantity of output at which marginal cost has reached its
minimum possible level.
(d) never let marginal cost reach equality with price, since this is the point at which profits
become zero.
(e) keep marginal cost above price.
7. Which panel in the figure below best indicates the level of output (denoted by q*) that a
firm will produce in a perfectly competitive industry?

(a) a
(b) b
(c) c
(d) d
(e) e

For numbers 8 and 9, refer to the figure above.

8. Which of the following statements is correct?
(a) B is the shutdown point.
(b) B is the profit-maximizing point.
(c) C is the shutdown point.
(d) A is the shutdown point.
(e) None of the above is correct
9. Which of the following statements is correct?
(a) C is the shutdown point.
(b) C is the zero-profit point.
(c) B is the shutdown point.
(d) A is the zero profit point.
(e) None of the above is correct
10. The zero-profit price for a firm in perfect competition:
(a) is a price just sufficient to cover fixed cost.
(b) is at the point where total revenue from sales is at its minimum level.
(c) occurs at the point where marginal and average cost are equal.
(d) occurs at the point where marginal cost is at its minimum level.
(e) is not correctly described by any of the above.
11. Im losing money, but because of my investment in equipment I cant afford to shut down
at this time. If this entrepreneur is attempting to maximize profits, his behavior is:
(a) rational if the firm is covering its variable costs.
(b) rational if the firm is covering its fixed costs.
(c) irrational since plant closing is necessary to eliminate losses.
(d) irrational since fixed costs are eliminated if a firm shuts down.
(e) None of the above is correct.
12. In a long-run equilibrium, a firm in a perfectly competitive industry will produce at the
point where:

(a) marginal cost equals average total cost.

(b) total revenue is maximized.
(c) price equals average fixed cost.
(d) None of the above is correct.
(e) All of the above are correct

For numbers 13 and 14, refer to the Price War Game as shown in the figure above:
13. Which of the following statements is correct?
(a) Charging the normal price is a dominant strategy for both Duterte and Bato in this
particular price-war game.
(b) Charging the normal price is a dominant strategy for Duterte but not for Bato in this
particular price-war game.
(c) Charging the normal price is a dominant strategy for Bato but not for Duterte in this
particular price-war game.
(d) There is no dominant strategy in this game
(e) None of the above is correct.
14. Which of the following statements is correct (given the first argument is the strategy of
Duterte, and second, that of Bato)?
(a) The strategy set (High Price, High Price) is a Nash equilibrium
(b) The strategy set (High Price, Normal Price) is a Nash equilibrium
(c) The strategy set (Normal Price, High Price) is a Nash equilibrium
(d) The strategy set (Normal Price, Normal Price) is a Nash equilibrium
(e) None of the above is correct.
For numbers 15 17, refer to the following information:
I. Perfectly competitive
II. Monopolistically competitive
III. Oligopoly
IV. Monopoly
15. A firm in this market faces a downward sloping marginal revenue (MR) curve.
(a) I only
(b) II only
(c) II and IV
(d) II, III and IV
(e) None of the above is correct.
16. A firm in this market can enjoy economic profits in the short run.
(a) I only

(b) IV only
(c) III and IV
(d) II, III and IV
(e) None of the above is correct.
17. In order to sell an additional unit of a good, a firm in this market must decrease price on
all units sold.
(a) II only
(b) IV only
(c) II and IV
(d) II, III and IV
(e) None of the above is correct.

For numbers 18 - 20, refer to the graph above.

18. If the market is perfectly competitive, the level of output and price will be, respectively:
(a) F, C.
(b) H, C.
(c) F, B.
(d) H, B.
(e) A, I.
19. If the market is monopolized by one large seller, the level of output and price will be,
respectively:
(a) F, C.
(b) H, C.
(c) F, B.
(d) H, B.
(e) A, I.
20. Compared to pricing under perfect competition, which of the areas in the figure represents
the deadweight loss due to monopoly pricing?
(a) DEG.
(b) ACG.
(c) BCGD.
(d) BCED.
(e) OFEC.