Answers to Comprehensive Review:
SD-1) b. A lower cost of resources (the displays of smart phones) increases supply.
SD-2) a. “Apps” are a complement to smart phones. A lower price of complement will increase
demand
SD-3) d. Fewer firms (or factories) is a decrease in supply
SD-4) c. Cell service is a complement. If the price of a complement rises, it will decrease demand
SD-5) c. A decrease in the price of a substitute good, tablets, will decrease demand
SD-6) a. Assuming smart phones are normal, an increase in consumer income will increase demand
SD-7) b. More firms will increase supply
SD-8) c. The increase in supply lowers price while increasing quantity
SD-9) a. The increase in demand will drive up price and quantity
SD-10) b. The decrease in supply raises the price while reducing quantity
SD-11) d. The drop in demand lowers price and quantity
SD-12) d. See previous question
SD-13) a. The increase in demand from the rise in income will push prices and quantities higher
SD-14) c. The increase in supply will push price down while expanding quantity
SD-15) d. With B to D, the supply curve is shifting to the left. That’s a decrease in supply.
SD-16) c. D to B is an increase in supply. That would be caused by a lower cost of resources.
SD-17) c. If income rises and it’s a normal good, then demand increases. That would be C to D.
SD-18) b. D to B is moving down (lower prices) and to the right (larger quantity).
El-19) b.
El-20) a. Inelastic demand means as price drops (from the increase in supply), quantity only changes
a little. People are insensitive to the price change. So there’s a large price decrease and only a small
quantity increase.
El-21) c. An increase in the cost of a resource means supply decreases. This raises price and reduces
quantity. If demand is elastic, the price increase will be small and the quantity decrease will be large,
reflecting that people are very sensitive to price changes and will change quantity a lot in reaction.
El-22) d. Goods that take up a small part of the budget will tend to be inelastic.
El-23) e. Goods for which there are few substitutes will be more inelastic
El-24) c. Though gasoline is inelastic, Exxon gasoline, with so many substitute brands to buy, will
have elastic demand
El-25) c. With many available substitutes, demand will be more elastic.
El-26) b. Making your product different will hopefully increase demand but also make demand more
inelastic.
El-27) d. D5 is perfectly elastic. D4 would be the most elastic that isn’t perfectly elastic.
El-28) b. The demand for gasoline is very inelastic, but not perfectly inelastic.
El-29) d. With many close substitutes to Exxon gasoline, demand will be very elastic (see #24 above)
El-30) e. D5 is perfectly elastic.
El-31) d. D4 is elastic, so consumers are very sensitive to price changes. D5, consumers are perfectly
extremely sensitive to price changes.
El-32) e. As supply changes, price won’t change if demand is perfectly elastic.
El-33) e. A perfectly elastic demand curve means the firm is a price taker.
F-34) c.
To find the monopoly price and quantity, you need to add and MR line. Use the half way rule to get
the right location. Then look where MR=MC to set the quantity.
Demand
28
MC=MR
24
20
16
12
MC=ATC
8
4
20 40 60
80 100 120 140
F-35) c. Using the demand curve, the price to charge if the Q=60 is $20.
F-36) b. TR = 20*60 = 1200. TC = 8*60 = 480. Profit = 1200 - 480 – 720
F-37) e. The perfectly competitive industry produces where MC=Demand (which is what is efficient).
Demand
28
24
Demand = MC
20
16
12
MC=ATC
8
4
20 40 60
80 100 120 140
F-38) a.
F-39) b. Since P = ATC, the firms will break even.
F-40) d. The monopoly would produce 60, perfect competition produces 120, so the monopoly
produces fewer goods. The monopoly would charge $20, perfect competition would charge $8. So the
monopoly chargers more.
Ef-41) d. 120. Economic efficiency is where Marginal Value (Demand Curve) equals Marginal Cost
which is also what the competitive equilibrium is.
Ef-42) b. Demand equals MC at $8
Ef-43) e. An economy is economically efficient when it maximizes economic surplus which is
producer surplus + consumer surplus
Ef-44) c. Anti-trust laws were created to eliminate monopolies.
Ef-45) d. Collusion means firms act as a monopoly which generates contrived scarcity and
inefficiency
Ef-46) b. Barriers to entry are a cause of monopolies and inefficiencies, not a policy to lessen
inefficiency. Barriers to entry lessen competition and create inefficiency
IT-47) d. Barriers create monopolies and oligopolies. Since the question says “few” firms, it must
mean an oligopoly.
IT-48) a. Perfect competition prices where MC = Demand.
IT-49) b. A single firm that produces a product with no close substitutes and barriers to entry defines a
pure monopoly.
IT-50) a. Since the goods are identical and there are many firms, then this is perfect competition
IT-51) d. Mutual interdependence is the defining feature of oligopoly
IT-52) c. Many firms that are differentiated is monopolistic competition
IT-53) e. Barriers to entry apply to both monopoly and oligopoly.
IT-54) a. Many firms producing identical products is perfect competition
IT-55) e. Perfect competition and monopolistic competition both don’t make profit in the long run
IT-56) d. Game theory is used when there’s mutual interdependence.
IT-57) d. A few firms that are mutually interdependent is oligopolistic.
IT-58) b. The definition of a monopoly
IT-59) d. Oligopolistic industries can collude. If there are too many firms, collusion is impossible.
IT-60) a. Perfect competition produces homogenous good – everything firm makes exactly the same
thing.
IT-61) a. Perfect competitors are price takers
IT-62) e. All industry types except perfect competition are price makers (or have market power).
IT-63) c. Many firms that are differentiated is monopolistic competition
IT-64) d. The description describes interdependence which means oligopoly.
IT-65) b. Only perfect competition is efficient. The rest are inefficient, but pure monopoly will usually
be the most inefficient.
IT-66) c. No profit in the long run means competition. Monopolistic competition still has some control
over price. Perfectly competitive firms have no control over price; they are price takers.
IT-67) e. Competitive firms break even (fail to make profit) in the long run. This would apply to both
monopolistic and perfect competition.
IT-68) a. Supply and Demand assumes each firm is a price taker which is a key assumption of perfect
competition
IT-69) c. Many firms with differentiated products but where competition eliminates profits in the long
run is the monopolistic competition model.
IT-70) d. Two firms who significantly impact one another and retaliate when one firm initiates a
change are making strategic decisions which are analyzed using game theory. Game theory is used
in an oligopolistic industry.
IT-71) d. This questions concerns collusion which can be a characteristic of oligopolies
IT-72) e. Antitrust laws might be used against a monopoly or an oligopoly.
IT-73) c. Many firms producing a differentiated product is the monopolistic competition model
IT-74) d. Only three firms would be best represented by the oligopolistic model
IT-75) e. This could describe any industry except a pure monopoly where there are barriers to entry.
The oligopoly industry has barriers to entry but if profits are large enough, bigger than the barrier,
it can attract new firms.
IT-76) b. A pure monopoly has barriers to entry that prevents other firms from entering the industry
even if the monopoly is making large economic profits.