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ECON 20A Study Guide - Final Guide: Marginal Product, Perfect Competition, Monopolistic Competition

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Amihai Glazer
Study Guide

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1. Consider a monopolist firm that cannot price discriminate. Will
it produce a quantity at which the demand curve is inelastic?
[Recall that elasticity is the percentage change in quantity divided
by the percentage change in price, and demand is inelastic if the
elasticity is close to 0.]
ANSWER: No: If demand is inelastic, then a reduction in
quantity sold (thereby resulting in a price increase) increases
total revenue. So the firm could increase profits by producing
less---it increases revenue and reduces costs.
2. Suppose an assistant professor of economics is earning a salary
of $75,000 per year. One day she quits her job, withdraws money
from the bank that had been paying $5,000 of interest a year, and
uses the funds to open a bookstore. At the end of the year, she
shows an accounting profit of $90,000. What is her economic
ANSWER: Economic profit is total revenue minus total cost,
where cost includes opportunity cost. Accounting profit does
not include the opportunity cost of the foregone salary of
$75,000, and of the lost interest income of $5,000. So economic
profit is $90,000-$75,000-$5,000=$10,000.
3. Each of three firms in an oligopoly has the marginal cost
function MC=10q, where q is its own output. In equilibrium, each
firm produces q=2. Which of the following is firm 1's Marginal
a. 50-5(q1+q2+q3) b. 60-6(q1+q2+q3) c. 40-4(q1+q2+q3)
ANSWER: The firm will produce at that quantity where
MR=MC. At q=2, MC=(10)(2)=20. Substituting q=2 in (a)
yields 50-5(2+2+2)=50-30=20. That equals marginal cost. So (a)
is correct.
4. Initially two firms (duopolists) produced quantity 100 each. One
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