Question

7. Monopolistically competitive firms prevent the efficient use of resources because in long-run equilibrium

	A.	price is greater than marginal cost.
	B.	marginal cost is greater than average total cost
	C.	price is less than marginal cost.
	D.	price is equal to marginal cost.

8. When MR = MC and P = ATC for a monopolistically competitive firm, the firm is in

	A.	short-run disequilibrium and making losses.
	B.	neither short‐run nor long‐run equilibrium
	C.	long-run equilibrium and making zero economic profits. .
	D.	long-run equilibrium and making losses
	E.	long-run disequilibrium and making profits.

9. Use the following general linear demand relation to answer the question below:

Qd = 100 - 5P + 0.004I - 5Pr

where P is the price of good X, I is income, and Pr is the price of a related good, R.

From the demand function it is apparent that related good R is

	A.	normal.
	B.	inferior.
	C.	a substitute for good X. D. A complement for good X.
	D.	a complement for good X.
	E.	none of the above

Answer 1

7) Option A. Long run has zero economic profit so P = AC. But demand lies above the MR curve so MR = MC gives a price which is greater than MC even in long run

8) Option C. As mentioned in 7), Long run has zero economic profit so P = AC. But demand lies above the MR curve so MR = MC gives a price which is greater than MC even in long run

9) Option D. Since the price coefficient of good X, Pr is negative n value, the cross price elasticity would be negative so that two goods are complements in nature.