Chapter 10&13

A firm will attain more monopoly power as demand for its product becomes more elastic.

False

A firm with no competition faces a perfectly inelastic demand curve.

False

A monopoly maximizes profit by finding the output level where the difference between marginal revenue and marginal costs is as large as possible.

False

A profit-maximizing monopolist chooses the output level where MR = MC and chooses the corresponding price from the marginal revenue curve.

False

An example of a transaction cost for a shirt is the price you pay for a shirt.

False

An external cost is built into the market price of a good and thus paid by the consumers.

False

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

False

Deadweight loss is present in both competitive and monopoly markets.

False

For a monopoly, the entire consumer surplus is transferred to the monopolist as profit.

False

When externalities are present in a market, social surplus is maximized.

False

(Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by producing at output equal to:

Q2.

A Pigouvian subsidy should be set equal to the amount of the external benefit.

True

A government can maximize efficiency in monopoly markets by setting prices equal to the monopolist's average cost of production albeit at the cost of reduced long term innovation.

True

A monopolist maximizes profits where marginal revenue equals marginal cost.

True

A monopolistic industry will have lower output and higher prices than a competitive industry.

True

A monopoly is a firm with market power, and market power may arise from economies of scale, patent protection, and innovation.

True

An externality is either an external cost or external benefit that spills over to bystanders.

True

Tradable pollution permits:

have helped reduce sulfur dioxide and carbon emissions.

A free market with an external benefit is ______, and one with an external cost is ______.

inefficient; inefficient

A monopolist can raise its price further above marginal cost, the more ______ is the ______ for its product.

inelastic; demand

An external cost:

is a cost paid by people other than the producer or consumer trading in the market.

A Pigouvian tax:

is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.

(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, SC represents the:

social cost of production: the private cost plus the external cost.

An efficient equilibrium occurs when

social costs equals social benefits

An external cost is a cost paid by:

people other than the consumer and the producer trading in the market.

When the government intervenes in markets with external costs, it does so in order to:

protect the interests of bystanders.

All of the following would be government solutions to externality problems EXCEPT:

public sector charities.

An efficient equilibrium occurs whenever:

social surplus is maximized.

A free market void of externalities ______ social surplus.

sometimes maximizes

(Figure: Monopoly Markup) Refer to the figure. Consumer surplus under monopoly is represented by:

triangle abc.

Figure: Monopoly Markup) Refer to the figure. Consumer surplus under competition is represented by:

triangle adf.

(Figure: Monopoly Markup) Refer to the figure. The deadweight loss attributable to monopoly is:

triangle cef.

For a linear demand curve, the marginal revenue curve has:

twice the slope.

For a monopolist, MR is always less than P because:

when a monopolist lowers the price to sell more units, it must lower the prices of all units sold.

(Figure: Monopoly 8) If the government set price equal to average cost, the natural monopolist in this figure would produce:

14 units of output.

Refer to the figure. The competitive industry level of output is:

80.

(Figure: Monopolist 3) In this figure, the profit-maximizing monopolist sells:

9 units of output at $11 per unit.

(Figure: Monopoly 8) The natural monopolist in this figure would produce:

9 units of output.

(Figure: Monopoly 6) If the market in this figure is a competitive market, consumer surplus is given by area(s):

A + B + C.

Figure: Maximum Willingness to Pay) Refer to the figure. What is the maximum price that the consumer is willing to pay for 100 units?

$100

What is the profit or loss for this monopoly?

$100,000

Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropical rainforests to grow the plants that excrete the oil. With this externality, what is the deadweight loss (if any) of producing palm oil?

$100,000,000

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit-maximizing quantity for this monopolist?

$110

(Figure: Paint Market 2) What is the deadweight loss (if any) from the monopoly in this diagram relative to its optimum quantity?

$125,000

(Figure: Monopoly Profits) Refer to the figure. The monopolist earns a profit of:

$420.

(Figure: Monopolist 3) In this figure, the monopolist's maximum profit is:

$45

(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, what is the external cost of using dishwashing detergent?

$6

If this figure represents the demand and cost curves for a firm with market power, what price should the firm charge to maximize profits?

$60

(Figure: Monopoly 6) If the market in this figure is a monopoly, the consumer surplus is area ______, and the deadweight loss is area ______.

A; C

(Figure: Efficient Market Outcome) Refer to the figure. Which point represents the efficient equilibrium?

C

When significant externalities exist:I. the market equilibrium is no longer efficient.II. the market equilibrium is only efficient if the externality is an external benefit.III. social surplus is not maximized.IV. the government may increase efficiency by imposing a tax on the market.

I and III only

In this figure, the monopolist's marginal revenue curve is:

MR2

(Figure: Monopoly Profits) Refer to the figure. What is the monopolist's optimal price and output level?

P = $16.50; Q = 40

(Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity are, respectively:

P2 and Q1.

Refer to the figure. Which price and quantity combination represents the efficient equilibrium?

P2 and Q2

(Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by charging a price equal to:

P2.

A(n) ______ subsidy is a subsidy on a good with external benefits.

Pigouvian

A(n) ______ is a tax on a good with external costs.

Pigouvian tax

According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market?

Your neighbor's dog routinely gets out of his yard and does his "business" in your yard.

An external cost is:

a cost paid by people other than the consumer or the producer trading in the marke

Tradable allowances for pollution:

allow firms to reduce pollution levels at lower costs

Refer to the figure. Which of the following answers correctly indicates the profit earned by this monopolist at the profit-maximizing quantity?

area A

Refer to the figure. The monopolist's price markup is:

b - d

Transaction costs:

can keep private parties from solving externality problems.

(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The market's outcome generates a(n):

deadweight loss of approximately $750

Refer to the figure. Deadweight loss caused by monopoly pricing is represented by the area:

def.

A free market with externalities ______ social surplus.

does not maximize

An external benefit in a market will cause the market to produce:

less than is socially desirable.

When external benefits are significant:

market output is too low

When external costs are present in a market:

market prices send incorrect signals.

Economists call a single firm that can supply the entire market at a lower cost than two or more firms a __________ monopoly.

natural

(Figure: Paint Market 2) If the fixed costs were halved, deadweight loss would:

not change

Antibiotics may be ________ since people consider only the ________.

overused; private and not the social costs of consumptio

When external benefits are present in a market:

the market outcome is inefficien

When patients or farmers choose whether to use more antibiotics, they compare:

their private benefits with the market price

A natural monopoly occurs when:

there are economies of scale over the relevant range of output.

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

too high; too low