Micro Week 6 Chapter 8 Quiz Q & A

Refer to the graph below. The profit-maximizing monopolist in it will set its price at:

0J Explanation: Remember, the profit maximizing Monopolist sets quantity at the point where MR and MC intersect. Price is set by extending that line up to the Demand Curve. In this case, quantity will be set at 0V and price will be set at 0J.

Refer to the graph below. The profit-maximizing monopolist in it will set its price and output at:

0J and 0V, respectively Explanation: Remember, the profit maximizing Monopolist sets quantity at the point where MR and MC intersect. Price is set by extending that line up to the Demand Curve. In this case, quantity will be set at 0V and price will be set at 0J.

Which is a major criticism of a monopoly as a source of allocative inefficiency?

A monopolist fails to expand output to the level where the consumers' valuation of an additional unit is just equal to its opportunity cost Explanation: According to the text on page 178, "the monopolist's profit-maximizing output results in an underallocation of resources. The monopolist finds it profitable to restrict output and therefore employ fewer resources than are justified from society's standpoint. So the monopolist does not achieve Allocative efficiency."

Monopolists are said to be allocatively inefficient because:

At the profit-maximizing output, the marginal benefit to society from increasing output is greater than the marginal cost to society Explanation: Allocative Efficiency is defined as producing "up to that output at which price (the measure of a product's value or marginal benefit to society) equals marginal cost (the worth of the alternative products forgone by society in producing any given commodity.)" (p. 177) In a monopoly, Price exceeds MC, so the monopolist is allocatively inefficient. (p. 178).

A nondiscriminating pure monopolist is generally viewed as:

Both productively and allocatively inefficient Explanation: A nondiscriminating pure monopolist is generally viewed as being both productively and Allocatively inefficient. The monopolist is Allocatively inefficient because price is greater than Marginal Cost. The monopolist is Productively inefficient because price is greater than the minimum point of ATC. (p. 178)

Suppose that a monopolist calculates that at present output and sales, marginal cost is $1.00 and marginal revenue is $2.00. He or she could maximize profits by:

Decreasing price and increasing output Explanation: The profit maximizing monopolist will want to produce at the point where MR = MC. If MC is only $1.00 and MR is $2.00, then the monopolist will want to increase output because the next unit of production is worth more than it costs to produce. By doing this, it moves the monopolist down the demand curve to a greater level of output, but that comes at a lower price since the demand curve is downward sloping in this market structure.

A monopoly is most likely to emerge and be sustained when:

Economies of scale are large relative to market demand Explanation: In a natural monopoly, one large firm can supply the market demand at a cheaper cost than several small firms can. This is due to economies of scale. When this occurs, the monopoly structure is likely to emerge and be sustained.

If a monopolist produces 100 units of output at a market price of $5 per unit with marginal revenue per unit equaling $4, we would expect that if the monopolist's good was provided under pure competition, quantity would be:

Higher than 100 units, price lower than $5, and MR = price Explanation: Under pure competition, there is no markup over marginal cost. In other words, MR = MC = P. In the monopoly market structure, this equality is not true, MR still equals MC, but price is greater than MR. This implies that society is paying more for the monopolist's product than it is valued. In order for society's value to match the price, the price would have to fall. Since the monopolist faces a downward sloping demand curve, the way in which this occurs is by expanding the firm's output. Purely competitive markets have greater output at lower prices and the Marginal Revenue is equal to the price.

Suppose that a monopolist calculates that at present output and sales levels, marginal revenue is $1.00 and marginal cost is $2.00. He or she could maximize profits or minimize losses by:

Increasing price and decreasing output Explanation: If marginal revenue is $1.00 and marginal cost is $2.00, then the monopolist will decrease he quantity of output in order to take advantage of a higher price and a larger marginal revenue.

When compared with the purely competitive industry with identical costs of production, a monopolist will produce:

Less output and charge a higher price Explanation: Monopolists are profit maximizers (just like purely competitive market participants). Because of this, they set their MR = MC to determine the quantity of production. Unlike the purely competitive industry though, monopolists MR is not equal to demand because the demand curve is downward sloping for a monopolist firm and MR falls below Demand. This leads to a price that is greater than MC which is greater than the price in the purely competitive industry. For the same reasons, monopolists will produce less than would be produced in a purely competitive industry.

Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by:

Marginal cost = marginal revenue Explanation: The text states "A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry." That rationale is MR = MC.

The supply curve for a monopoly is:

Nonexistent Explanation: In the monopoly market structure, since there is only one firm, that firm will determine the quantity that it would like to produce. Because this is the case, there is no supply curve - it is nonexistent in this market structure.

At the profit-maximizing level of output, a monopolist will always operate where:

Price is greater than marginal cost Explanation: Since the demand curve for a Monopolist is downward sloping, the MR curve will fall below the Demand curve. Recall that Monopolists set quantity where MR = MC, but price is determined by the intersection of the profit maximizing quantity with the Demand curve. Because of this, the price will be greater than the marginal cost.

One feature of pure monopoly is that the demand curve:

Slopes downward Explanation: As the sole producer of a product with no perfect substitutes, the monopolist is the market. It faces the downward sloping market demand curve for its product(s).

One defining characteristic of pure monopoly is that:

The monopolist produces a product with no close substitutes Explanation: In the Monopoly Market structure, there is only one provider of a good or service with no perfect substitutes. Entry into these markets is very difficult with large barriers to entry. Because of this, the monopolist is a price maker in that they can set the price that they would like to charge in accordance with their demand curve. Since there are no close substitutes for their products, most (if not all) monopolists do not use advertising.