Chapter 13 Problem Set

The graph shows the demand, marginal revenue, marginal cost, and average total cost for a monopolist. If the firm produces 250 units, what is the firm's level of profit? A. $1,250 B. $1,500 C. $600 D. $1,000

A. $1,250 Profit will be equal to ($11 - $6) x 250.

The graph shows the demand, marginal revenue, marginal cost, and average total cost for a monopolist. If the firm produces 250 units, what is the amount of total revenue collected? A. $2,750 B. $1,500 C. $2,250 D. $1,750

A. $2,750 The firm will sell 250 units at a price of $11.

What is the amount of profit earned by a monopolist producing 1,000 units at an average total cost of $42 per unit, if the current selling price is $50? A. $8,000 B. $40,000 C. $50,000 D. $6,000

A. $8,000 We can calculate this as ($50 - $42) x 1,000.

Once the monopolist finds the profit-maximizing quantity, how is the price determined? A. Price will be found on the demand curve. B. Price will be set equal to average variable cost. C. Price will be set equal to marginal cost. D. Price will be set equal to average total cost.

A. Price will be found on the demand curve. We find the price that corresponds to the chosen quantity along the demand curve.

The graph shows the demand, marginal revenue, marginal cost, and average total cost for a monopolist. Which of the following statements is FALSE? A. The profit-maximizing point occurs when marginal cost equals average total cost. B. The quantity that would minimize average total cost is 300 units. C. At the profit-maximizing outcome, a deadweight loss will result. D. The quantity at which price would equal average total cost is 375 units.

A. The profit-maximizing point occurs when marginal cost equals average total cost. The profit-maximizing point occurs when marginal cost equals marginal revenue.

An industry is characterized by increasing returns to scale if A. average total cost falls as output increases. B. marginal cost always exceeds average total cost. C. fixed costs are zero. D. average total cost rises as output increases.

A. average total cost falls as output increases. In such an industry, firms will be most efficient when operating on a large scale.

The monopolist's demand curve A. is the market demand curve. B. is perfectly inelastic. C. is perfectly elastic. D. is horizontal.

A. is the market demand curve. As the sole seller in a market, the monopolist faces the industry demand curve.

A patent gives a firm A. a natural monopoly. B. a temporary monopoly. C. a permanent monopoly. D. a guaranteed profit.

B. a temporary monopoly. The firm's market power will be protected until the patent expires.

The ability of a monopolist to raise its selling price above the competitive level by reducing output is known as A. natural monopoly. B. market power. C. strategic pricing. D. quantity control.

B. market power. Market power can be present in market structures other than monopoly.

A deadweight loss arises in monopoly because A. the price charged by the monopolist is too low. B. some potentially beneficial transactions do not occur. C. the firm's profit is too high. D. the quantity produced by the monopolist is too high.

B. some potentially beneficial transactions do not occur. Much of our antitrust policy is designed with the goal of trying to prevent the deadweight loss that would arise from monopoly.

A monopolist's profit is equal to A. total revenue minus marginal cost. B. total revenue minus total cost. C. marginal revenue minus average total cost. D. marginal revenue minus marginal cost.

B. total revenue minus total cost. This can also be expressed as (P - ATC) x Q.

The graph shows the demand, marginal revenue, marginal cost, and average total cost for a monopolist. If the firm chooses to produce 20 units, what will be the amount of its total revenue? A. $2,000 B. $1,100 C. $1,500 D. $400

C. $1,500 Total revenue will be $75 x 20, which is price x quantity.

A monopolist maximizes profit by producing at the point where A. marginal revenue is maximized. B. total revenue is maximized. C. marginal revenue is equal to marginal cost. D. marginal cost is minimized.

C. marginal revenue is equal to marginal cost. This intersection determines the profit-maximizing quantity.

Price discrimination will occur when a firm can segment its existing and potential customers into different groups based on A. education. B. income. C. price elasticity of demand. D. knowledge of the product.

C. price elasticity of demand. The customers with a greater price elasticity of demand will be charged a lower price.

The graph shows the demand, marginal revenue, marginal cost, and average total cost for a monopolist. What is the firm's profit-maximizing quantity? A. 28 B. 33 C. 0 D. 20

D. 20 This is the quantity at which marginal revenue equals marginal cost.

The graph shows the demand, marginal revenue, marginal cost, and average total cost for a monopolist. What is the firm's profit-maximizing quantity? A. 400 units B. 0 units C. 300 units D. 250 units

D. 250 units This is quantity where marginal revenue equals marginal cost.

The sole supplier of a good with no close substitutes is A. a competitor. B. a market leader. C. an industry leader. D. a monopolist.

D. a monopolist. When a firm is a monopolist, the industry is referred to as a monopoly.

If a monopoly firm charges the same price to all buyers, the firm's marginal revenue curve A. is horizontal. B. is always the same as the demand curve. C. is always above the demand curve. D. is always below the demand curve.

D. is always below the demand curve. Note in Figure 13-5 how the marginal revenue curve is derived.

In comparing monopoly and perfect competition, we see that A. the monopolist will produce a smaller quantity and charge a lower price. B. the monopolist will produce a larger quantity and charge a higher price. C. the monopolist will produce the same quantity and charge a higher price. D. the monopolist will produce a smaller quantity and charge a higher price.

D. the monopolist will produce a smaller quantity and charge a higher price. This outcome is the result of the monopolist's profit-maximizing strategy.

The following diagram illustrates the cost and revenue situation for a monopoly that is maximizing profit. Part 1: Use a vertical drop line to identify the optimal output (Qm). Part 2: Use a double drop line to identify the optimal price (Pm). Part 3: Use an area tool to identify the area of economic profit or loss (label this area appropriately as "Profit" or as "Loss").

The key to answering this question correctly is to first identify the curves on the graph using the labels provided. The optimal level of output is the level of output at which marginal cost equals marginal revenue, meaning the point on the graph where the MC and MR curves intersect. Use the vertical drop line tool and label that point Qm. The monopolist will charge as much as it can for that quantity, meaning that it will charge the price associated with Qm as given by the demand curve. Use the double drop line tool to locate the price associated with Qm on the demand curve and label it Pm. Since the price is higher than average total cost (ATC) at the quantity Qm, the monopolist is making a profit. Use the area tool to outline the rectangle whose length is Qm and whose height is the difference between Pm and ATC at the quantity Qm. Label this area as profit. You may wish to re-review Chapter 13; Section: How a Monopolist Maximizes Profit.