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Berkeley ECON 98 - Quiz 5 - Perfect & Imperfect Competition

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Econ 98-Chiu Quiz 5: Perfect & Imperfect Competition Spring 2004 Name & SID: Date: Page 1 of 5 You have 30 minutes to answer the following questions. Please show all your work and circle your final answers. NO CALCULATORS. Your goal is NOT to finish this quiz. Your goal is to maximize your total number of points. 1. What is market equilibrium price and quantity of sodas? [ 1 point ] 2. The price of water decreases. Assume water and sodas are substitutes. Show what happens in the market for sodas (graph above). How does this affect the equilibrium price and quantity for sodas? [5 points] 3. Name all the main assumptions for perfect competition. [ 4 points ] 4. Define “price-taker”. [ 1 point ] 5. How do perfectly competitive firms make output decisions? In other words, how do perfectly competitive firms know how much to produce? An equation would be acceptable. [ 4 points ] Q P D 2 4 41SEcon 98-Chiu Quiz 5: Perfect & Imperfect Competition Spring 2004 Name & SID: Date: Page 2 of 5 6. Assume that the market for corn is perfectly competitive. Also assume the market price (P1) for corn is $1/ton. The individual firm is making positive profits in Stage 1 at this price. What is the firm’s marginal revenue curve? What is the firm’s demand curve? Sketch and label both the firm’s marginal revenue curve (MR) and firm’s demand curve (d). Shade in the area for firm’s profit. [10 points] 7. Will the price of corn stay at $1/ton? Will the Stage 2 equilibrium price of corn increase or decrease? Will the equilibrium market quantity of corn increase or decrease? How much more or less firm quantity will the individual firm produce compared to Stage 1? Sketch the Stage 2 effects in the market and in the individual firm. [5 points] Market FirmMarket FirmEcon 98-Chiu Quiz 5: Perfect & Imperfect Competition Spring 2004 Name & SID: Date: Page 3 of 5 8. Define “monopoly”. [1 point] 9. Why is the monopoly’s MR curve below its demand curve? Why is the monopoly’s MR curve downward sloping? [10 points] 10. What is the difference between “price-taker” and “price-setter”? [2 points] 11. William argues that a monopoly prices where MR=MC. Do you believe him? Why or why not? Which curve does the monopoly refer to when it decides its price? [10 points] 12. Sketch a typical monopoly graph. Label market demand (D), marginal revenue (MR), marginal cost (MC), monopolist price (Pm), monopolist quantity (Qm), socially-optimal price (P*), and socially-optimal quantity (Q*). [85 points]Econ 98-Chiu Quiz 5: Perfect & Imperfect Competition Spring 2004 Name & SID: Date: Page 4 of 5 13. Microsoft is a monopoly in the operating systems market. How much will Microsoft produce? What price will Microsoft charge to consumers? Label Qm, Pm. How much should Microsoft produce in order for society to be most efficient? What price should Microsoft charge to consumers in order for society to be most efficient? Label Q*, P*. Why is this “socially optimal”? [20 points] 14. The government feels that Microsoft is too powerful. The government taxes Microsoft in order to reduce the deadweight loss to society. Does this work? Why or why not? Show the effects of the tax below. Assume a specific excise tax. [20 points] PDMRMC Q PDMRMC QEcon 98-Chiu Quiz 5: Perfect & Imperfect Competition Spring 2004 Name & SID: Date: Page 5 of 5 15. Does a monopoly have a supply curve? Why or why not? Use graphs if they help you to explain the answer. [30


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Berkeley ECON 98 - Quiz 5 - Perfect & Imperfect Competition

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