Econ Ch. 14

Until the 1980s, AT&T held a monopoly over the national market for phone services. Suppose that AT&T argued that it was a natural monopoly because the fixed cost of creating a nationwide phone network generated huge economies of scale, and that there was therefore no welfare loss associated with its monopoly. Which of the following arguments explain how even a natural monopoly causes deadweight loss?

AT&T reduced or restricted quantity to set prices so that marginal revenue equals marginal cost.

Suppose that De Beers and the local water utility are both monopolists in the markets for diamond jewelry and water, respectively. If both monopolies decided to raise prices 15 percent, the monopoly that is most likely to see its total revenue decrease is ________ because it's demand is __________

De Beers more price elastic

If competition places discipline on costs, motivating firms to innovate and find more cost-effective ways to produce, which of the following would then explain why in some markets a single firm without competitors will produce at a lower cost than if the firm faced competition?

Economies of scale Natural monopolies Lowered average fixed cost

The U.S. Postal Service maintains a monopoly on mail delivery in part through its exclusive right to access customer mailboxes. Which barrier to entry best describes this situation?

Government Intervention

Nature's Crunch is currently the only certified organic produce grower in a region that produces lots of nonorganic produce alternatives. To be certified organic, a producer cannot use chemical pesticides. Which of the following scenarios would increase Nature's Crunch's profits?

Income tax cuts for all consumers. A new report about the environmental dangers of chemically treated plants. A tomato blight affecting chemically treated plants. An increase in the cost of chemical pesticides.

Suppose that your state is considering a law that would force all monopolies to charge the efficient price that would prevail if the market were competitive. Which of the following statements explain to your legislator why the state will have to subsidize natural monopolies if this law goes into effect?

Marginal cost (MC) would be less than average total cost (ATC) at the new quantity level. The efficient price will equal marginal cost (MC). Average total cost (ATC) would be above price at the efficient quantity.

Suppose that a producer in a previously competitive market is granted the sole right to produce in the market. Given that demand in the market is unchanged, but now all consumers must purchase from the same producer, which of the following statements are correctly describing the producer before and after becoming a monopoly?

Price equals marginal revenue (MR) before becoming a monopoly. The producer will produce the output where MR = MC both before and after becoming a monopoly. The producer will produce the efficient level of output only before becoming a monopoly. Marginal revenue (MR) is less than price after becoming a monopoly.

Suppose that your state is considering a law that would force all monopolies to charge no more than their average total costs (ATC) of production. Which of the following statements correctly explains to your legislator the pros and cons of this approach?

Pro: this will reduce deadweight loss by increasing production quantity. Con: the monopolist will have an incentive to overstate costs. Con: it is very hard to accurately determine what ATC truly is.

The table below presents the demand schedule and marginal costs facing a monopolist producer. a. Fill in the total revenue and marginal revenue columns. b. What is the profit-maximizing level of output? c. What price will the monopolist charge to maximize profits?

Q----P----TR----MR----MC 0----24----0----N/A----N/A 1----22----22----22----N/A 2----20----40----18------2 3----18----54----14------2 4----16----64----10------2 5----14----70-----6------2 6----12----72-----2-------2 7----10----70--- (-2)-----2 8----8----64--- (-6)-----2 9----6----54--- (-10)-----2 10----4----40--- (-14)----2 b. 6 units c. $12

The table below presents the demand schedule and marginal costs facing a monopolist producer. a. Fill in the total revenue and marginal revenue columns. b. What is the profit-maximizing level of output? c. What price will the monopolist charge to maximize profits?

Q----P----TR----MR----MC 0----8-----0-----N/A---N/A 1-----7-----7-------7------1 2----6-----12------5------2 3----5-----15------3------3 4----4-----16------1------4 5-----3----15---- (-1)-----5 6-----2----12---- (-3)-----6 7-----1-----7---- (-5)------7 8----0-----0---- (-7)-----8 b. 4 units c. $4

Due to arduous certification requirements, Nature's Crunch is currently the only certified organic produce grower in a region that produces lots of non-organic produce alternatives. From a profit-maximizing perspective, would it be better for Nature's Crunch to lobby the government to relax organic certification requirements or to require grocery stores to clearly label its produce as organic?

Require grocery stores to clearly label its produce as organic.

Suppose you are advising a mayoral candidate in your town. The candidate's platform includes strong opposition to monopoly suppliers because consumer welfare is compromised by monopoly pricing. Which of the following statements would present your candidate with an alternative view about why it may make sense to tolerate the existence of some monopoly firms?

Some goods may not exist if it were not for the monopoly profits that a patent ensures to create incentives for research and development. Some goods are too dangerous or important to let "just anyone" produce them. Monopolies reduce average total cost when there are very large fixed costs in production.

Suppose a city has a chain of fitness centers (gyms) all owned by the same company, Fit Fun. Then a new company considers opening a gym in the city. Which of the following is an example of an aggressive tactic Fit Fun might take to maintain its monopoly?

Temporarily make its membership dues so low that it operates at a loss.

Suppose a museum charges different entrance fees for children, students, adults, and seniors, but these groups all pay the same amount for souvenirs at the gift shop. Which of the following explains why the museum price discriminates on admission but not souvenirs?

The entrance ticket is individual, while souvenirs are transferable.

Suppose that an inventor discovers a new chemical compound that can change the color of a person's eyes with no negative side effects. Since she holds a patent on this chemical, she has a monopoly over the sale of the new eye-color treatment. However, she's an inventor, not a businessperson. Which of the following statements explain to her how she should set the price for the eye-color treatment in order to maximize her profits?

The inventor should produce all the units for which marginal revenue equals or exceeds marginal cost. The inventor should establish the marginal revenue and cost for each additional unit produced. The inventor needs to establish the demand for her product using market research.

Which (if any) of the following scenarios is the result of a natural monopoly?

There is one train operator with service from Baltimore to Philadelphia.

The figure below presents the demand curve, marginal revenue, and marginal costs facing a monopolist producer. a. What is the profit-maximizing level of output? b. What price will the monopolist charge to maximize profits? c. Determine the efficiency costs (deadweight loss) of monopoly output/pricing. What is the efficiency cost (deadweight loss) of monopoly output/pricing? d. Determine the consumer surplus under monopoly output/pricing. What is consumer surplus under monopoly output/pricing? e. What is the loss of consumer surplus under monopoly outcomes versus efficient outcomes?

a. 3 units b. $35 c. $22.50 d. $22.50 e. $23.18

Suppose there are three types of consumers who attend concerts at your university's performing arts center: students, staff, and faculty. Each of these groups has a different willingness to pay for tickets; within each group, willingness to pay is identical. There is a fixed cost of $1,000 to put on a concert, but there are essentially no variable costs. For each concert: • There are 140 students willing to pay $20. • There are 200 staff members willing to pay $35. • There are 100 faculty members willing to pay $50. a. If the performing arts center can charge only one price, what price should it charge? b. What are profits at this price? c. If the performing arts center can price-discriminate and charge two prices, one for students and another for faculty/staff, what are its profits? d. If the performing arts center can perfectly price-discriminate and charge students, staff, and faculty three separate prices, what are its profits?

a. 35 b. 9,500 c. 12,300 d. 13,800

The figure below presents the demand curve, marginal revenue, marginal costs, and average total costs facing a monopolist producer. a. What is the profit-maximizing level of output? b. What price with the monopolist charge to maximize profits? c. Determine the efficiency costs (deadweight loss) of monopoly output/pricing. d. Determine the consumer surplus under monopoly output/pricing.

a. 4 units b. $12 c. $12 d. $12

a. If this monopolist were regulated, would it prefer average total cost pricing (P = ATC) or efficient pricing? b. Is this a natural monopoly?

a. Efficient pricing, since the profits are higher. b. No, average total cost is not falling in the range of demand.

The figure below presents the demand curve, marginal revenue, marginal costs, and average total costs facing a monopolist producer. a. Identify the profit-maximizing price and quantity. b. Under monopoly pricing, profits are _______. c. Under monopoly pricing, identify the deadweight loss. d. If government mandates pricing such that P = ATC, profits will be ________. Compared to monopoly pricing, deadweight loss will be ________. e. If government mandates efficient pricing, profits will be _________. Compared to monopoly pricing, deadweight loss under efficient pricing will be _________. Compared to a mandate where P = ATC, deadweight loss under efficient pricing will be _______. f. Is this a natural monopoly?

b. positive d. zero smaller e. negative smaller smaller f. Yes

As compared to perfect competition, perfect price discrimination is ___________. In practice, perfect price discrimination is unlikely to occur for all of the following reasons except:

equally efficient it is illegal

Suppose a monopolist has to purchase new equipment and his fixed costs increase. As a consequence, the monopolist's marginal cost will _______ and the monopolist's total cost will ________. Therefore, the monopolist's profit-maximizing output quantity will __________ and the monopolist's profits will _________.

not change increase not change decrease

Suppose a small town has one theater for live performances and several restaurants, including one Indian restaurant. We assume that it will be easier for ________ to price-discriminate because it has _________.

the theater more monopoly power

Suppose a monopolist discovers a way to perfectly price-discriminate. Under this scenario, consumer surplus is _________ What are the efficiency costs (deadweight loss)?

zero zero