Econ 302 Chapter 9

33. The inverse demand curve for a monopolist changes from P = 200 - 0.25Q to P = 180 - 0.25Q, while the marginal cost of production remains unchanged at a constant $90. After the change in the demand curve, the price falls _____ and the output falls by _____.

A) $10; 40 units

27. Suppose a firm's inverse demand curve is P = 100 - Q and its marginal cost is constant at $20. What is the value of the Lerner index at the profit-maximizing quantity?

A) 0.67

26. Which of the following statements is (are) TRUE? I. The Lerner index is zero for a perfectly competitive firm. II. If P = $80 and MC = $60, the Lerner index = 0.25. III. If the price elasticity of demand is 1.25, the Lerner index is 0.80. IV. A higher price elasticity of demand leads to a higher price markup over marginal cost.

A) I, II, and III

8. Which of the following are sources of market power? I. government-issued patents and copyrights II. a Minnesota law requiring all new funeral homes to have an embalming room, which costs upward of $30,000, whether or not it is functional or will be used III. a Portland, Oregon, law that makes it a crime for limousine companies to charge less than $50 per ride

A) I, II, and III

29. A profit-maximizing monopolist is selling 20,000 units of output at $1,400 per unit. The marginal cost of production is constant at $600. What happens if marginal cost rises to $680?

A) The monopolist will increase the price by less than $80 and sell less than 20,000 units of output.

9. A firm that can affect the price of its product:

A) faces a downward-sloping demand curve.

43. As Southwest Airlines began operating at various airports around the country:

A) prices at those airports decreased and the number of passengers using them increased dramatically.

4. Which of the following statements is (are) TRUE? I. A natural monopoly owes its existence to economies of scale. II. In contrast to a monopoly industry, industries served by natural monopolies have no barriers to entry. III. Natural monopolies have cost structures characterized by small fixed costs and steeply rising marginal costs.

B) I

10. Bubba Golf, a manufacturer of golf clubs, can sell 3 drivers at $600 each. To sell 4 drivers, Bubba Golf must lower the price to $580 each. The marginal revenue of the fourth club is:

D) $520.

14. A firm's demand curve is given by Q = 100 - 0.67P. What is the firm's corresponding marginal revenue curve?

D) 150 - 1.5Q

28. In a market served by a monopoly, the marginal cost is $60 and the price is $110. In a perfectly competitive market, the marginal cost is $60. If the marginal cost increased from $60 to $75, the monopoly would raise its price _____, and the price in the perfectly competitive market would _____.

C) by less than $15; increase to $75

16. Consider the demand curves facing two firms: For curve 1, a $4 decrease in price increases quantity demanded by 2 units. For curve 2, a $3 decrease in price increases quantity demanded by 1 unit. Curve _____ is steeper, so an expansion of output drives down marginal revenue more along _____.

A) 2; curve 2 than curve 1

7. In Louisiana, it was a crime to sell burial caskets without a funeral director's license. This law was a source of _____ for licensed funeral directors and an example of _____.

A) market power; a government-sanctioned barrier to entry

50. Rent-seeking refers to:

A) the costly actions that firms undertake in their attempt to receive monopoly privilege from the government.

13. For a monopoly, marginal revenue equals:

A) the gain from selling an additional unit at the market price less the loss in revenue from lowering the price on the previous units.

22. The inverse demand for a drug that treats melanoma is given by P = 3,000 - 10Q, where Q measures the number of drug treatments and P is the price per treatment. Suppose that the marginal cost per drug treatment is constant at $10. What is the profit-maximizing price per drug treatment?

B) $1,505

42. Suppose the doll company American Girl has an inverse demand curve of P = 150 - 0.25Q, where Q measures the quantity of dolls per day and P is the price per doll. The marginal cost is given by MC = 10 + 0.50Q. What is the total surplus at the profit- maximizing output level?

B) $12,250

11. Suppose a firm lowers its price to $10, raising the quantity sold from 4 to 5 units. If the marginal revenue of the fifth unit is $2, the firm must have lowered its price by:

B) $2.

41. In market A, a firm with market power faces an inverse demand curve of P = 10 - Q and a marginal cost that is constant at $2. In market B, a firm with market power faces an inverse demand curve of P = 8 - 0.75Q and a marginal cost of $2. Producer surplus in market A is _____ than in market B.

B) $4 higher

32. The inverse demand curve for a monopolist changes from P = 100 - 2Q to P = 120 - 2Q, while the marginal cost of production remains unchanged at a constant $20. After the change in the demand curve, the profit-maximizing price rises from _____, and the profit-maximizing output rises from _____.

B) $60 to $70; 20 units to 25 units

23. Silky Inc., which sells custom silk ties designed by famous people, faces a demand curve of Q = 150 - 0.2P, where Q is measured in hundreds of ties and P is the price per tie. The marginal cost of production is given by MC = 5Q. What is Silky's profit-maximizing output level? (Hint: Add two zeros to the number you get.)

B) 5,000

15. Suppose a firm's inverse demand curve is given by P = 160 - 4Q. Which of the following statements is (are) TRUE? I. The firm's marginal revenue curve is given by MR = 160 - 8Q. II. The firm's marginal revenue cannot be negative. III. The firm's marginal revenue curve is given by MR = 40 - 0.50Q. IV. When Q = 10, MR = $80.

B) I and IV

24. Suppose a firm's marginal cost is MC = 80 + 2Q and its marginal revenue is MR = 200 - Q. Which of the following statements is (are) TRUE? I. The profit-maximizing price is $180. II. If Q = 20, MR > MC, so the firm should expand output to increase profits. III. If Q = 50, MR < MC, so the firm should reduce output to increase profits.

B) I, II, and III

19. Which of the following statements is (are) TRUE? I. A firm with market power maximizes profit by producing so that P = MC or MR = MC. II. If marginal revenue exceeds marginal cost, the firm should expand output to increase profits. III. If a firm has no costs of production, it should continue producing until marginal revenue falls to zero.

B) II and III

35. Market conditions change for a monopolist with an original marginal cost of MC = 5 + 10Q. The inverse demand curve rotates from P = 40 - 5Q to P = 47 - 2Q. What happens to the profit-maximizing price following the rotation of the demand curve?

B) The price rises from $31.25 to $41.

2. Market power arises from:

B) barriers to entry.

6. Many years ago the Aluminum Company of America owned almost all sources of the ore (bauxite) needed to produce aluminum. This is an example of market power arising from:

B) control of a key input.

30. A monopoly market is characterized by the inverse demand curve P = 1,200 - 40Q and a constant marginal cost of $200. If the marginal cost of production rises to $400, the profit-maximizing output level _____ units and the price rises by _____.

B) decreases by 2.5; $100

3. Suppose that each firm in an industry has a total cost curve given by TC = 7,000 + 50Q. The lowest average total cost of producing 1,000 units of output occurs when:

B) one firm produces all 1,000 units of output.

51. Research by Acemoglu and Linn, which examined pharmaceutical drug development, found that:

B) the larger the potential market, the likelier drug companies are to develop a drug for that market.

48. Government encouragement of monopoly:

B) through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market.

40. A firm with market power has an inverse demand curve of P = 450 - 5Q and marginal cost of MC = 40Q, where Q is measured in thousands. What is the deadweight loss from market power at the firm's profit-maximizing output level?

C) $22,500

49. A drug company produces a new drug to treat baldness. The inverse demand curve for the drug is P = 205 - 20Q, where Q measures the number of pills in millions. The various costs of production are given by TC = 100 + 5Q, ATC = 5 + 100/Q, and MC = 5. If the government grants this firm a patent, it will earn profits of _____. If the government revokes the patent and the firm must sell its drug at marginal cost because of competition, it will earn profits of _____.

C) $400 million; -$100 million

25. At the profit-maximizing quantity, the firm's marginal cost is $40 and it charges a price of $60. What is the price elasticity of demand at the profit-maximizing quantity?

C) -3

44. Which of the following statements is (are) TRUE? I. If the government regulates the price of a natural monopoly such that price equals marginal cost, the natural monopolist may earn a negative profit. II. Government regulation of natural monopolies is straightforward because regulators can precisely estimate the demand and cost conditions of regulated firms. III. Government regulation based on production costs makes firms less likely to reduce costs if lower costs lead to lower regulated prices.

C) I and III

1. Market power occurs when a firm:

C) can influence the price of its product.

47. Antitrust laws:

C) restrict firms from engaging in behaviors that make markets less competitive.

5. Mobile phone portability allows consumers to retain their phone number if they change to a different phone network, which will tend to:

D) reduce market power in the phone industry.