Answer Key to Study Questions for the Final

Here is the answer key. Let me know if you think there are any errors.

1-A, 2-D, 3-B, 4-D, 5-B,
6-D, 7-C, 8-A, 9-C, 10-B,
11-D*, 12-C, 13-A, 14-A, 15-C, 16-C, 17-D, 18-C,
19-A, 20-C,
21-B, 22-B, 23-A, 24-C, 25-B,
26-B, 27-A, 28-D, 29-A, 30-B,
31-B, 32-B, 33-C, 34-B,
35-C, 36-B, 37-B

*oops. I didn't talk about deadweight loss with respect to monopolies. There is also a statement about monopoly inefficiency on the review sheet that refers to deadweight loss. Let me clarify.

So what is deadweight loss? Well, it is "lost opportunity for mutually advantageous gains". In the monopoly we argue that it produces fewer units of a good at a higher price, when compared to how the outcome would be under perfect competition. This higher price and lower quantity gives rise to this deadweight loss. The way we expressed this in class is merely that monopolies (and really any firm with market power) can set price greater than marginal cost.

When P > MC, there is inefficiencies. Too little of the good is produced and the price is "too high". This is all in comparison to perfect competition which results in P = MC and all mutually advantageous gains have been exploited.

I hope you are not confused now.

For problems 27 and 28, try increasing output initially by 1500 to an industry output of 10,500, which would put the price at $50 (note, that demand curve is "linear" so its easy to figure that out). You'll see the cheater has the incentive to produce that amount and the other firm will have the incentive to retaliate and we wind up with a total output of 12,000 (6,000 each) at the unit price of $40.