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Microeconomic Theory

Review questions: Exam #3

Exam 3 will cover chapters: Profit maximization through Monopoly
1. Explain following:
Profit maximization
Consumer surplus
Producer surplus
Conditions for purely competitive environment and their implications
General equilibrium
Comparison of tariffs with quotas (using consumer- and producer-surplus)
Production (technical) efficiency
Allocative efficiency
Distributive efficiency (efficiency in exchange)
Contract curve
Conditions for a pure monopolist
Market power
Barriers to entry creating monopolistic environment
Dead -weight loss in a monopolistic regime
Conditions for successful price discrimination
Natural monopoly
Market power
2. Show graphically the optimum output level in the short-run for a purely competitive firm experiencing:
a. (positive) profit
b. Break-even
c. Accruing negative profit yet continuing to operate
d. Shut-down
3. Explain the short-run supply curve for a purely competitive firm.
4. Comment critically and support your answer with a numerical example: even in the short run, a purely competitive firm
would not operate if losses incur."
5. Explain what happens, in the long-run, to economic profits of a firm operating in a purely competitive environment. Profits of
a Monopolist in the long-run?
6. Explain and show graphically that in the absence of market failures, international trade is preferable to restricted international
trade and restricted international trade is preferable to no international trade.
7. Explain and support graphically that society can reach allocative and technical efficiency without international trade (autarky).
Yet, international trade can help raise overall well being if international relative price is different from the autarky price (this
answer should use the graph with PPC, utility analysis and perfect competition blended together).
8. Show graphically and explain that in an economy producing two goods it does not matter what the initial combination of the
two goods is. The market mechanism will help the society reach the optimum combination (distributive efficiency) that
maximizes overall utility. What may be the issues with this type of efficiency accomplishment.
9. Explain why the Marginal Revenue curve is different from Price for a monopolist.
10. Repeat question 2 for a monopoly
11. Explain why a monopolist does not have a (well-defined) supply curve.
12. Critically comment: regulators at a state regulatory commission had a disagreement among themselves whether the
commission should impose a competition solution or a higher price on a utility company that is a natural monopoly.
13. Comment critically: the government can eliminate the monopoly dead-weight loss by imposing a price ceiling that is not
higher than the competitive price. Support it with a graph.
14. Explain the rationale in the following marketing strategy found in an ad by PH Printer Co. published in the Boston Times:
Turn in your old printer to us. We will give you a $60.00 coupon towards a new HP printer.
15. Comment critically: a country club charges a green fee which seems to clear the market. It is insane for them to also charge
annual membership fee since it will drive golfers away.