Answers to Week 7 Practice Questions

Multiple Choice

1) c 
2) d
3) c
4) a
5) d
6) d
7) b
8) d
9) c
10) b

Short Answer Questions

1) To find optimal output, we need to determine marginal revenue and
marginal cost (per gallon) schedules as calculated below:
 
  OUTPUT    PRICE    TOTAL   MARGINAL     TOTAL   MARGINAL
(gallons)           REVENUE   REVENUE      COST     COST
_____________________________________________________________
 
 50,000    $0.28    $14,000     $0.28    $6,000     $0.12
100,000     0.26     26,000      0.24    13,000      0.14
150,000     0.22     33,000      0.14    22,000      0.18
200,000     0.20     40,000      0.14    32,000      0.20
250,000     0.16     40,000         0    46,000      0.28
300,000     0.12     36,000     -0.08    64,000      0.36
_____________________________________________________________
 


 A) We would keep producing as long as MR is greater than MC.  Thus, the
water company will produce 100,000 gallons.

 B) The price associated with 100,000 gallons is $0.26, so that will be
the price charged by the monopolist.

 C) Profits = (price - ATC) * optimal output = (0.26 - 0.13)*100,000 = 
$13,000 

 D) Easy to see from the schedules above.

 
 
2.  As we discussed in class, a monopolist could be in any of the same
four cases in the short-run as a perfect competitor.  Graphing these four
cases would be good practice.