UNIVERSITI KUALA LUMPUR BUSINESS SCHOOL

SEPTEMBER 2021

TUTORIAL 2

CHAPTER 5-6

SUBJECT CODE : EIB10203

SUBJECT TITLE : PRINCIPLES OF ECONOMICS
LEVEL : BACHELOR DEGREE
LECTURER : DR YASOTHA NAIR

Student’s Name : BRIAN EIMAN

Student’s ID : 62211121461
SECTION A: STUCTURED QUESTIONS
Q1.
Table 1: Jane’s Farm Production

Quantity Total cost

(gallons per day) (dollars per day)
0 400
100 703
200 880
300 1,008
400 1,160
500 1,410
600 1,840

1) Jane’s Farm produces and sells milk. The market for milk is perfectly
competitive. The market price of milk is $2.50 per gallon. The relationship
between the farm's output and total costs is shown in the Table 1.
a) Calculate Jane’s:

(i) Total Cost (TC)= 400+703+880+1008+1160+1410+1840= 7401

(3 marks)
(ii) Marginal Cost (MC)
Quantity MC
0
100 3.03
200 1.77
300 1.28
400 1.52
500 2.5
600 4.3

(3 marks)
(iii) Total Variable Cost (TVC)
Quantity TVC
0
100 303
200 440
300 608
400 760
500 1010
600 1440

(3 marks)
(iv) Average Variable Cost (AVC)
Quantity AVC
0
100 3.03
200 2.2
300 2.02
400 1.9
500 2.02
600 2.4

(3 marks)
(v) Average Total Cost (ATC)
Quantity ATC
0
100 7.03
200 4.4
300 3.36
400 2.9
500 2.82
600 3.06

(3 marks)

b) By using graph paper, draw Jane’s average variable, average total, and marginal
cost curves. (8 marks)

c) Use your graphs to find Jane’s profit-maximizing output.

(3 marks)

d) If Jane maximizes her profit, how much profit does she make?
(4 marks)

e) What is Jane’s shutdown point? What is her economic profit at the shut-down
point? (5 marks)
f) Should Jane’s shut down? Will farms with costs the same as Jane’s enter or exit
the milk market? Explain. (5 marks)

[Total: 40 marks]

Q2. Answer the following questions based on the Figure 1 below.

Figure 1
(a) If the firm sets a price to maximize profits, calculate the firm’s
i. output (2 marks)
ii. price (2 marks)
iii. marginal cost of the last unit produced (2 marks)
iv. economic profit or loss (4 marks)
(b) Explain one main feature of monopoly market (4 marks)
(c) What type of profit does a monopolist earn in long run. Justify your answer
(6 marks)
(d) Briefly explain the differences between a price taker and a price setter (maker)
(10 marks)

[Total: 30 marks]

SECTION B

Instruction: Answer ALL questions in this section. Each question carries 1 mark. This
section carries a total of 20 marks. Multiple Choice Questions- Please circle/ highlight
the correct answer.

1) In a perfectly competitive industry, there are

A) many buyers and many sellers.
B) many sellers, but there might be only one or two buyers.
C) many buyers, but there might be only one or two sellers.
D) one firm that sets the price for the others to follow

2) Suppose firms in a perfectly competitive industry are suffering an economic loss. Over
time,
A) some firms leave the industry, so the price falls and the economic loss decreases.
B) some firms leave the industry, so the price rises and the economic loss decreases.
C) other firms enter the industry, so the price falls and the economic loss decreases.
D) other firms enter the industry, so the price rises and the economic loss decreases.

3) A perfectly competitive firm is definitely earning an economic profit when

A) P > ATC.
B) P > AVC.
C) P < ATC.
D) MR < MC

4) As firms enter a perfectly competitive industry,

A) the price falls and the existing firms' economic profits do not change.
B) the price falls and the existing firms' economic profits decrease.
C) the price falls and the existing firms' economic losses do not change.
D) the price rises and the existing firms' economic profits decrease.

5)Economists assume that a perfectly competitive firm's objective is to maximize its

A) revenue.
B) economic profit.
C) output price.
D) quantity sold.

6) The following are key features of a monopoly EXCEPT

A) diseconomies of scale.
B) no close substitutes.
C) influence over price.
D) barriers to entry.

7) Which of the following is LEAST likely to be a monopoly?

A) the sole owner of an occupational license
B) a pharmaceutical company with a patent on a drug
C) a store in a large shopping mall
D) the holder of a public franchise

8) A public franchise is
A) an exclusive right granted to an inventor of a product.
B) a government issued license required to practice a profession.
C) a unique source of raw materials.
D) an exclusive right granted to a firm to supply a good or service.

9) In a small town, Marilyn's Christmas Tree Lot has a monopoly on sales of Christmas trees.
In order to increase her sales from 100 trees to 101 trees, she must drop the price of all of her
trees from $20 to $19. What is the marginal revenue?
A) $20
B) $19
C) negative $81
D) $2000

10) A monopolistically competitive firm has ________ power to set the price of its product
because
________.
A) no; there are no barriers to entry
B) some; there are barriers to entry
C) some; of product differentiation
D) no; of product differentiation

11) One difference between perfect competition and monopolistic competition is that
A) a perfectly competitive industry has fewer firms.
B) monopolistic competition has barriers to entry.
C) firms in monopolistic competition face a downward-sloping demand curve.
D) in perfect competition, firms produce slightly differentiated products.

12) Firms in monopolistic competition make products that are

A) close but not perfect substitutes.
B) perfect substitutes.
C) close but not perfect complements.
D) perfect complements.

13) Firms in monopolistic competition can achieve product differentiation by

A) exploiting economies of scale in production.
B) advertising special characteristics.
C) expanding plant size.
D) setting the price equal to average revenue.

14) For a firm in monopolistic competition, the marginal cost curve intersects the average
total cost curve
A) at no point.
B) at the minimum average total cost.
C) to the left of the minimum average total cost.
D) to the right of the minimum average total cost.

15) When firms in monopolistic competition incur an economic loss, some firms will
A) enter the industry, and demand will become more elastic for the original firms.
B) exit the industry, and demand will decrease for the firms that remain.
C) enter the industry and produce more products.
D) exit the industry, and demand will increase for the firms that remain.

16) Advertising by firms in monopolistic competition

A) does not occur.
B) provides consumers with no useful information.
C) wastes resources because the entry of rivals forces firms to be price takers.
D) can persuade customers that product differentiation exists.

17) In oligopolistic markets,

A) there are many firms.
B) there are only a few firms.
C) there are no barriers to entry.
D) all firms are price takers.

18) An example of oligopoly is

A) long-distance telephone service.
B) wheat farming.
C) the clothing industry.
D) the restaurant industry.

19) According to the kinked demand curve theory of oligopoly, each firm believes that if it
raises its price,
A) other firms will not raise their prices.
B) the overall price level will rise by the same percentage.
C) the government will impose price controls.
D) its profits will rise by the same percentage.

20) In the kinked-demand curve model of oligopoly, the firm's marginal revenue curve
A) is kinked at the output level at which the demand curve is kinked.
B) has a gap at an output level that is greater than that at which the demand curve is kinked.
C) is kinked at an output level that is greater than that at which the demand curve is kinked.
D) has a gap at the output level at which the demand curve is kinked.

[Total: 20 marks]

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