Chapter 9 Monopoly

Metropolitan Power and Light is a monopoly in the electrical generation and distribution industry. If it charges $1 per kilowatt hour, its marginal revenue could be:

$0.75

Suppose that a monopolist decides to produce and sell 10 units that can be sold in the market for $150 each. If the firm wishes to sell 11 units, it must charge $149 each. The marginal revenue from selling the 11th unit is:

$139

Suppose that a monopolist is selling 100 units of a product at a price of $20 each. If the average total cost (ATC) at this level of output is $15, how much total economic profit is the firm earning?

$500

Suppose that a price-discriminating monopolist faces a downward-sloping demand curve with a vertical intercept of $8. Given the firm's cost conditions, a monopolist would choose a price of $4 and sell 4 units of output. How much consumer surplus would be lost if the firm could practice first-degree price discrimination?

$8

Which of the following Herfindahl-Hirschman Indexes (HHIs) would indicate a highly concentrated industry?

2,600

Big John is a folk artist who works near Maggie Valley, North Carolina, in the Smoky Mountains. One of his most popular types of sculptures are bears he sculpts from tree stumps using a chain saw. He typically charges more for the larger sculptures. This is an example of which type of price discrimination?

Big John is not practicing price discrimination.

__________ is based on individual willingness to pay.

First-degree price discrimination

The market price in a perfectly competitive market is $11 and 1,250 units are bought and sold. Assume the market becomes monopolized. What would you expect to happen to the number of units bought and sold?

It would fall below 1,250 units.

The market price in a perfectly competitive market is $15 and 2,000 units are bought and sold. Assume the market becomes monopolized. What would you expect to happen to the number of units bought and sold?

It would fall below 2,000 units.

The profit maximizing level of output for a monopoly occurs where:

MR = MC < P.

occur(s) when a firm has some control over price.

Market Power

The market price in a monopoly market is $15 and 2,000 units are bought and sold. Assume the market becomes perfectly competitive. What would you expect to happen to price and output?

Price would fall below $15 and output would rise above 2,000 units.

__________ occurs when a firm uses its resources to protect its position.

Rent seeking

Because of the relative ease of developing new operating systems, a company with significant market power, such as Microsoft, may charge less for their product to ward off potential rivals. What is this an example of?

a contestable market

Kip invents a device that extracts water from a tuna fish can after it is opened. Kip most likely has a monopoly on this invention because he has:

a patent

Which of the following is an example of price discrimination?

a restaurant that offers early-bird specials

Which of the following is an example of price discrimination?

an airline charging different prices for similar seats based on when the consumer purchases the ticket

Assume a perfectly competitive market becomes monopolized. What would you expect to occur?

deadweight loss

Bob is a self-trained painter who works near Maggie Valley, North Carolina, in the Smoky Mountains. When customers come to his studio he studies their interest and tries to gauge how much they would pay for a piece, attempting to get as much money as possible from each customer. This is an example of which type of price discrimination?

first-degree

Ken's Barber Shop has a tremendous amount of power over the market equilibrium price for haircuts in its geographic area. This means that Ken's Barber Shop:

has market power.

Metropolitan Power and Light is a monopoly in the electrical generation and distribution industry. It was maximizing its profit when its output was 100,000 kilowatt hours. After the nuclear accident in Japan it was forced to install new equipment for backup cooling of its nuclear plants. Based on this information, its level of output in the short run should:

not change

Under which market structure does a firm face a horizontal demand curve

perfect competition

The Archer Daniels Midland Company is an enormous conglomerate that grows and produces many food products. It is sometimes called the "supermarket to the world." The company has given large donations to politicians. If these donations affect policies regarding the environment or agricultural price supports, then these financial gifts are an example of:

rent seeking

The share of industry shipments or sales accounted for by the top four or eight firms in that industry is:

the concentration ratio.

Microsoft is not a monopoly in the tablet market because:

there are close substitutes for the product or service it provides.

Large airlines might have come close to perfecting price discrimination by creating an incredibly complex pricing system designed to fill as many seats as possible. But once the Internet made it easier for flyers to compare fares, the strategy fell apart. Southwest Airlines founder Herb Kelleher said, "The high-fare, last-minute, walk-up business customer" is "gone forever." Kelleher is referring to what economists would call:

third-degree price discrimination.

For regulating a natural monopoly, the marginal cost pricing rule:

would increase output and decrease prices compared with using the average pricing rule.