Intermediate Economics

Scenario 10.1: Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2MR = 40 - 0.5QTC = 4QMC = 4 Refer to Scenario 10.1. How much profit will she make?

$1,296

You work as a marketing analyst for a pharmaceutical firm, and you are trying to gather information about the marginal cost of production for a competing firm. You know that they have a patent on a popular medication that sells for $20 per dose, and you believe the elasticity of demand for this product is roughly -4. Assuming the competing firm acts as a profit-maximizing monopolist, what is the competing firm's approximate marginal cost of production?

$15 per dose

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. How much profit does the monopolist earn?

$4512.50

Refer to Scenario 10.9. What is the maximum amount that Maui Macadamia would be willing to spend in order to maintain its monopoly through rent seeking?

$5,400

The marginal cost of a monopolist is constant and is $10. The marginal revenue curve is given as follows: MR = 100 - 2Q The profit maximizing price is:

$55

Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users?

-1.5

What is the value of the Lerner index under perfect competition?

0

A 10 percent decrease in advertising results in a 5 percent sales decrease. The advertising elasticity of demand is:

0.5

Scenario 10.9: Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8QMC = 4Q Refer to Scenario 10.9. At the profit maximizing level of output, what is the level of consumer surplus?

1,800

Scenario 10.9: Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8QMC = 4Q Refer to Scenario 10.9. What is the profit maximizing level of output?

30

Scenario 10.9: Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8QMC = 4Q Refer to Scenario 10.9. What level of output maximizes the sum of consumer surplus and producer surplus?

45

Suppose that a tax of $2 per unit of output is imposed on red rubber ball producers. What level of output maximizes profit?

5

Scenario 10.7: The marginal revenue of green ink pads is given as follows: MR = 2500 - 5Q The marginal cost of green ink pads is 5Q. Refer to Scenario 10.7. How many ink pads will be produced to maximize revenue?

500

Scenario 10.1: Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2MR = 40 - 0.5QTC = 4QMC = 4 Refer to Scenario 10.1. How much output will Barbara produce?

72

Suppose there are seven firms in a market where the three largest firms supply 20% of the market-clearing quantity and the other four firms supply 10% of the market-clearing quantity. What is the five-firm concentration ratio (i.e., the share of total sales controlled by the five largest firms in the market)?

80%

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. Suppose that in addition to the tax, a business license is required to stay in business. The license costs $1000. What is the profit maximizing level of output?

90

Scenario 10.9: Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8QMC = 4Q Refer to Scenario 10.9. At the profit maximizing level of output, what is the deadweight loss?

900

Use the following two statements to answer this question I. A firm can exert monopoly power if and only if it is the sole producer of a good. II. The degree of monopoly power a firm possesses can be measured using the Lerner Index:

Both I and II are false.

Mixed bundling is more profitable than pure bundling when:

Both the marginal cost of each good being sold is positive and the consumers' reservation values of each good being sold are not perfectly negatively correlated with one or another are correct.

Albatross Software has two main products: WindSong is a program that can be used to edit audio files and SunBurst is a program that can be used to edit digital photos. The two major types of customers are small businesses and home users. The small business customers have a reservation price of $300 for WindSong and $450 for SunBurst. The home users have a reservation price of $100 for WindSong and $125 for SunBurst. Which of the following statements is true?

Bundling the two software products is not likely to be profitable because the demands are positively correlated.

Suppose a firm produces identical goods for two separate markets and practices third-degree price discrimination. In the first market the firm charges $30 per unit, and it charges $22 per unit in the second market. Which of the following represents the ratio of price elasticities of demand in the two markets?

E2 = (21/29)E1

Which of the following statements about natural monopolies is true?

For natural monopolies, marginal cost is always below average cost.

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. Suppose that in addition to the tax, a business license is required to stay in business. The license costs $1000. What happens to profit?

It decreases by $1000

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits?

MRA = MRB = MC.

The authors explain that the marginal cost of production does not have to be constant in order to maximize profits under intertemporal price discrimination. Which of the following is NOT an example of changing marginal costs under profit-maximizing intertemporal price discrimination?

Marginal cost increases sharply after the initial marketing stages when the product is sold to the broader market of consumers.

Which of the following statements is NOT compatible with explanations for why peak-load pricing is more profitable than charging a single price?

Marginal revenue must be the same across different time periods.

Which of the following is NOT true regarding monopoly?

Monopolist can charge as high a price as it likes.

Scenario 10.6: John is the manufacturer of red rubber balls (Q). He has a red rubber ball manufacturing plant in California, Florida and Montana. The total cost of producing red rubber balls at each of the three plants is given by the following table: Refer to Scenario 10.6. If red rubber balls can be produced at any of the three plants, and John decides to produce 1 red rubber ball, at which plant will he produce it?

Montana

What is the maximum value of the Lerner index?

One

Under perfect price discrimination, marginal profit at each level of output equal:

P - MC

Refer to Figure 10.4.2 above. Suppose that the government decides to limit monopoly power with price regulation. If the government sets the price at the competitive level, it will set the price at: Selected Answer: P4. Answers: P1. P2. P3. P4. None of these

P4

Which of the following product pairs would NOT be good candidates for price discrimination through tying?

Pencils and paper

Refer to Figure 10.1.1 above. For the monopolist shown below, the profit maximizing level of output is:

Q1

Which of the following is NOT a potential objective of tying strategies used by firms?

Reduce production costs and avoid problems associated with diseconomies of scale.

Scenario 10.8: Adriana is a monopolist producing green calculators. The average and marginal cost curves and average and marginal revenue curves for her product are given as follows: AC = Q + (10,000/Q) MC = 2QAR = 30 - (Q/2)MR = 30 - Q Refer to Scenario 10.8. Suppose that the regulatory agency sets your price where average revenue equals average cost. How much profit will Adriana make?

She will break even.

Refer to Figure 10.2.1 above. Which monopoly charges a greater price markup?

The monopoly in panel (b).

Which of the following statements about setting optimal two-part tariffs for many consumers is NOT true?

The profit from the entrance fee (tariff) is a convex function of the tariff because if first declines and then increases as the tariff increases.

Refer to Figure 11.2.3 above. In this case, the firm charges two different prices. This pricing scheme corresponds to:

Third degree price discrimination

An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of:

a two-part tariff.

A manufacturer of digital music players uses a proprietary file format that is not used by the other firms in the market. This action by the firm may be an example of using a ________ to reduce the number of firms in the market and to maintain a relatively inelastic demand for its products.

barrier to entry

For a monopolist, changes in demand will lead to changes in:

both price and quantity. Answers: price with no change in output. output with no change in price. both price and quantity. ***Any of these can be true****

A firm setting a two-part tariff with only one customer should set the entry fee equal to:

consumer surplus

For a two-part tariff imposed on two consumers, the entry fee is based on the:

consumer surplus of the customer with lower willingness-to-pay.

Refer to Figure 11.5.1 above. The points on the figure represent the reservation prices of four different consumers. With mixed bundling:

consumers A and D pay $90 for a single good, and consumers B and C pay $120 for a bundle.

Bundling raises higher revenues than selling the goods separately when:

demands for two products are negatively correlated.

Bundling is effective when the demands for the bundled products are ________ and ________ correlated.

different; negatively

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. At the profit-maximizing level of output, demand is:

elastic, but not infinitely elastic.

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should:

have sold less output in the local market and more on the internet auction site.

Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm

is attempting to convert consumer surplus into producer surplus.

In peak-load pricing,

marginal revenue in the peak period is greater than in the off-peak period

monopolistic competition

market in which firms can enter freely, each producing its own brand or version of a differentiated product

A monopolist has equated marginal revenue to zero. The firm has:

maximized revenue.

Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers. As more types of MP3 players are introduced into the market, the demand facing Orange becomes ________ elastic and the Lerner index achieved by the firm in this market ________.

more; declines

With respect to monopolies, deadweight loss refers to the:

net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy

Refer to Figure 11.3.2 above. This figure is a representation of:

peak-load pricing, which is different from third-degree price discrimination.

A local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of:

peak-load pricing.

McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of:

price discrimination

In 1994, the Walt Disney Corporation ran a special promotion on tickets to Disneyland. Residents of southern California who lived near the amusement park were offered admission at the special price of $22. Other visitors to Disneyland were charged about $30. This practice is an example of:

price discrimination.

McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of

price discrimination.

Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then:

producer surplus increases due to new buyers, but the producer surplus from existing customers declines due to the lower price.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. Compared to a competitive red herring industry, the monopolistic red herring industry

produces less output at a higher price.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. Compared to a competitive red herring industry, the monopolistic red herring industry: Refer to Scenario 10.3. Compared to a competitive red herring industry, the monopolistic red herring industry:

produces less output at a higher price.

The manager of a firm is attempting to practice third degree price discrimination. She has equated the marginal revenue in each of her markets. By doing this, her:

revenues are maximized, given her level of output.

is attempting to convert consumer surplus into producer surplus.

revenues are maximized, given her level of output.

The monopoly supply curve is the:

same as the competitive market supply curve. portion of marginal costs curve where marginal costs exceed the minimum value of average variable costs. result of market power and production costs. ***None of these ***

Monopoly power results from the ability to:

set price above marginal cost.

Grocery store chains advertise more than convenience stores because:

the advertising elasticity of demand for convenience stores is near zero and is much smaller than for grocery store chains.

When a monopolist engages in perfect price discrimination

the demand curve and the marginal revenue curve are identical

The more elastic the demand facing a firm

the lower the value of the Lerner index.

The maximum price that a consumer is willing to pay for a good is called:

the reservation price

A pricing strategy that requires consumers pay an up-front fee plus an additional fee for each unit of product purchased is a

two-part tariff.