Econ Final Exam Ch. 11, 13, 14

How does price discrimination help cover fixed costs?

If price discrimination expands the size of the market, the fixed costs can be spread over a much larger output level.

To maximize profits, a firm in a highly competitive industry should set its price:

at the market price.

The difference between tying and bundling is that:

bundled goods are sold one to one, while tied goods are sold one to many.

(Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate consumer surplus when this monopoly is regulated.

$6,400

Figure: Costs Use the figure. At a price of $20, the firm earns profit of:

$75.

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

110

Table: Barrels of Oil 2 Refer to the table. What is the marginal cost of producing the seventh barrel of oil?

36

(Table: Barrels of Oil 2) Refer to the table. What is the marginal revenue of producing the fifth barrel of oil?

50

Table: Competitive Firm The profit maximizing output for this firm is:

7

(Table: Barrels of Oil 2) Refer to the table. How many barrels of oil should the company produce to maximize profit?

8

In which of the following scenarios will automobile prices be the lowest?

A competitive automobile company buys its steel from a competitive steel producer.

Which of the following statements is TRUE?

High profits in an industry give entrepreneurs an incentive to enter that industry.

Refer to the figure. A monopolist who cannot price discriminate earns profit equal to area(s) ________, and a monopolist practicing perfect price discrimination earns profit equal to areas ________.

b; abc

In competitive markets, the demand curve faced by the individual firm is:

perfectly elastic.

Which of the following conditions would prevent a firm from setting different prices in different markets?

possibility of arbitrage for buyers between different markets

(Figure: Price-Discriminating Monopolist) Refer to the figure. In order to maximize profits, the monopolist should charge a:

price of $16 in Market A and $10 in Market B.

Which of the following is an example of tying?

restrictions that prohibit patrons from bringing their own wine to restaurants

Price discrimination can be defined as:

selling the same product at two different prices in two different markets.

Which of the following is an example of price discrimination?

senior citizen discounts

In a monopoly market:

the lure of above-normal profits may give a firm an incentive to develop new products and technologies.

Tying is:

the practice of a firm selling one product that requires the consumer to purchase another of the firm's products.

If Tom sells 500 sandwiches for $7 and has an average cost of $5, what is his profit?

$1,000

(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

(Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate the change in consumer surplus from an unregulated monopoly to a regulated monopoly.

$2,800

(Table: Barrels of Oil 2) Refer to the table. The maximum profit available to the company is:

$224.

(Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate the deadweight loss when this monopoly is unregulated.

$400

A perfectly competitive industry exists under which of the following conditions? I. The product sold is similar across firms. II. There are many sellers, each small relative to the total market. III. There are many sellers, each with total assets less than $2 million. IV. The threat of competition exists from potential sellers that have not yet entered the market.

I, II, and IV only

Bundling is expected to provide greater profits when the two bundled goods are: I. substitutes. II. goods that have high fixed costs and low marginal costs. III. very close complements.

II and III only

In this graph you can see the demand, marginal revenue, marginal cost, and average cost curves faced by a monopolist. Part 1: Using the double drop line tool, select the price-quantity combination that the monopolist would choose without any government regulations or restrictions and label it as the profit maximizing equilibrium. Part 2: Now, assume the government requires the monopolist to produce the level of output where zero economic profit is earned. Using the double drop line tool, select the price-quantity combination where the monopolist's economic profit is zero and label it as the zero profit equilibrium.

Incorrect. First chose the price-quantity combination where marginal revenue equals marginal cost as the profit maximization outcome and then choose the price-quantity combination where price equals average cost as the zero profit combination. For further review, see Chapter 13: Economies of Scale and the Regulation of Monopoly.

What is the profit maximization condition for a monopolist?

MR = MC

Which of the following statements is TRUE?

Monopolies create incentives for additional research and development.

In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0

Which of the following is always TRUE for monopolies?

P > MR

Figure: Profits and Competitive Firms Refer to the four panels in the figure. Which panel shows a competitive firm making zero economic profits?

Panel B

What condition is necessary in a constant cost industry?

Prices of the industry's inputs do not change as the industry expands.

A firm can produce gadgets by employing variable amounts of labor with a fixed amount of capital. Suppose that every time an additional unit of labor is hired, total output rises by 1 unit. Assume each unit of labor is paid $2 and this is the only variable cost. Draw the marginal cost curve for producing gadgets and label it Marginal Cost.

Since every time an additional unit of labor is hired, total output rises by 1 unit and each unit of labor is paid $2 (and this is the only variable cost), the marginal cost curve is a horizontal line at the level of $2. See Chapter 11: What Quantity to Produce?

Which of the following represents the nature of a monopolist's deadweight loss?

Some consumers are willing to pay more than the monopolist's marginal cost of production, but the monopolist does not produce these units.

In the diagram below, draw the marginal cost (MC) and average cost (AC) curves for a competitive firm and label them appropriately.

The average cost (AC) curve is a U-shaped curve. The marginal cost (MC) curve resembles a J and intersects the AC curve at its minimum point. To review these concepts go to Chapter 11: Profits and the Average Cost Curve.

Figure: Calculating Profits- Refer to the figure. How much profit is the firm making at the profit-maximizing quantity?

The firm is not making a profit—it is making a loss of $220.

14. Only two hops farmers exist in the northwest of the United States (Buds NW and Sweetwater Farms). Suppose the two companies decide to form a cartel. The following diagram shows the market demand (D), marginal revenue (MR), and marginal cost (MC) curves for the cartel. Part 1: Use the vertical drop line tool to show where on the marginal revenue curve the cartel will produce (Qc), and the horizontal drop line tool to show the price the cartel will charge (Pc). Part 2: Use an area tool to illustrate the profits made by the cartel (assuming there are no fixed costs). Make sure that you have labeled everything appropriately.

The members of a cartel work together as if they were a monopoly. Optimal production occurs where marginal revenue equals marginal cost; this level of production determines the point point on the demand curve that indicates the price the cartel will charge. Use the vertical drop line tool to mark this point (MR=MC) as the profit maximization level of production for the cartel. The price is on the demand curve immediately above Qc. The cartel earns profits represented by the rectangle between Pc and MC on the vertical axis, and between 0 and Qc on the horizontal axis. For further review, see Chapter 15: Cartels, Oligopolies, and Monopolistic Competition.

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit that the monopolist is earning?

There is not enough information to answer the question.

Which of the following statements is TRUE?

To maximize profits, monopolists will always set a higher price in markets with more inelastic demand curves.

When a single firm can supply the entire market at lower cost than two or more firms, we say that the industry is:

a natural monopoly.

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

def

Under perfect price discrimination:

each customer is charged his or her maximum willingness to pay.

The oil industry is an increasing cost industry because:

expanding output requires firms to use more expensive production methods to find and extract oil from less desirable locations.

The more inelastic the demand curve for a product is, the:

higher is the monopolist's price markup.

To maximize profit the monopolist should set a:

higher price in markets with more inelastic demand.

In general, price discrimination exists because:

higher prices are charged because some customers are willing to pay more.

Airlines try to differentiate their customers by willingness to pay based on:

how long in advance a person books their flight.

Economic profit differs from accounting profits because of its inclusion of:

implicit costs.

Apple's iPod provides an example that market power may arise from:

innovation.

The power to raise price above marginal cost without fear that other firms will enter the market is:

market power.

Total surplus increases with practice of price discrimination only if:

output increases.

A top-performing used-car salesman is able to sell his cars to each customer at their maximum willingness to pay, a practice known as:

perfect price discrimination

Hewlett Packard's pricing scheme is to sell printers at relatively low price and ink cartridges at relatively high price. This practice is known as:

tying.

When comparing a monopoly with a competitive industry, monopoly quantity:

will be lower, and monopoly price will be higher, than that of a competitive firm.

In a competitive equilibrium, firms earn ______ economic profits.

zero