Week 9

DIAGRAM 21 Refer to the above diagrams. Firm A's average revenue is: zero. $1. less than $1. more than $1.

$1

A pure monopolist will maximize profits by producing at that output where price and marginal cost are equal. True False

False

If profits are maximized (or losses minimized), which of the following conditions are common to both unregulated monopoly and to pure competition? MC = P MC = ATC MR = MC P = MR

MR = MC

An unregulated pure monopolist will maximize profits by producing that output at which: P = MC. P = ATC. MR = MC. MC = AC.

MR = MC.

DIAGRAM 21 Refer to the above diagrams. The demand for Firm A's product is perfectly elastic. True False

True

DIAGRAM 22 Refer to the above diagram for a monopolist. At output R economic profits will be zero. True False

True

A pure monopolist is: any firm realizing all existing economies of scale. any firm whose demand curve is downsloping. any firm which can engage in price discrimination. a one-firm industry.

a one-firm industry.

A pure monopolist's demand curve is: downsloping. upsloping. parallel to the vertical axis. parallel to the horizontal axis.

downsloping.

DIAGRAM 23 Refer to the above diagram for a pure monopolist. Monopoly output will be: between f and g. h. g. f.

f.

A pure monopolist finds that it can sell its fiftieth unit of output for $50. We can surmise that the marginal: cost of the fiftieth unit is also $50. revenue of the fiftieth unit is also $50. revenue of the fiftieth unit is less than $50. revenue of the fiftieth unit is greater than $50.

revenue of the fiftieth unit is less than $50.

A monopolistic firm has a sales schedule such that it can sell 10 prefabricated garages per week at $10,000 each, but if it restricts its output to 9 per week it can sell these at $11,000 each. The marginal revenue of the tenth unit of sales per week is: -$1,000. $9,000. $10,000. $1,000.

$1,000.

Which of the following statements is incorrect? A monopolist's 100 percent market share ensures economic profits. The monopolist's marginal revenue is less than price for any given output greater than 1. A monopolistic firm produces a product having no close substitutes. A pure monopolist's demand curve is the industry demand curve.

A monopolist's 100 percent market share ensures economic profits.

Which of the following is correct? Both purely competitive and monopolistic firms are "price takers." Both purely competitive and monopolistic firms are "price makers." A purely competitive firm is a "price taker," while a monopolist is a "price maker." A purely competitive firm is a "price maker," while a monopolist is a "price taker."

A purely competitive firm is a "price taker," while a monopolist is a "price maker."

DIAGRAM 29 Which of the above diagrams correctly portray a pure monopolist's demand (D) and marginal revenue (MR) curves? A B C D

B

DIAGRAM 28 Refer to the above diagram. To maximize profits or minimize losses this firm should produce: E units and charge price C. E units and charge price A. M units and charge price N. L units and charge price LK.

E units and charge price A.

DIAGRAM 21 Refer to the above diagrams. Both firms are selling their products in purely competitive markets. True False

False

DIAGRAM 22 Refer to the above diagram for a monopolist. At output Q production will be unprofitable. True False

False

DIAGRAM 22 Refer to the above diagram for a monopolist. If the government regulates the monopolist so that it charges the "fair return" price, the monopolist will produce output N. True False

False

DIAGRAM 22 Refer to the above diagram for a monopolist. The profit-maximizing price for this firm is J. True False

False

In the short run a pure monopolist will charge the highest price the market will bear for its product. True False

False

In the short run a pure monopolist will maximize profits by producing at that level of output where the difference between price and average total cost is at a maximum. True False

False

Price discrimination is illegal in the United States under antitrust regulations. True False

False

Pure monopolists always earn economic profits. True False

False

DIAGRAM 24 Assume the above figure applies to a pure monopolist. If this firm is able to price discriminate between children and adults, it should charge prices of: P1 to children, and P2 to adults. P1 to adults, and P2 to children. P1 to both children and adults. P2 to both children and adults.

P1 to children, and P2 to adults.

DIAGRAM 25 Refer to the above diagram for a pure monopolist. Suppose a regulatory commission is created to determine a legal price for the monopoly. If the commission seeks to provide the monopolist with a "fair return," it will set price at: P1. P3. P2. P4.

P1.

DIAGRAM 26 Refer to the above diagram for a natural monopolist. If a regulatory commission set a maximum price of P1, the monopolist would produce output: Q2 and realize a normal profit. Q4 and realize a normal profit. Q3 and realize an economic profit. Q4 and realize a loss.

Q4 and realize a loss.

Which of the following is not a precondition for price discrimination? The commodity involved must be a durable good. The good or service cannot be resold by original buyers. The seller must be able to segment the market, that is, to distinguish buyers with different elasticities of demand. The seller must possess some degree of monopoly power.

The commodity involved must be a durable good.

What do economies of scale, the ownership of essential raw materials, and patents have in common? They must all be present before price discrimination can be practiced. They are all barriers to entry. They all help explain why a monopolist's demand and marginal revenue curves coincide. They all help explain why the long-run average cost curve is U-shaped.

They are all barriers to entry.

DIAGRAM 22 Refer to the above diagram for a monopolist. From society's point of view it would be desirable to have the monopolist produce a larger output than M. True False

True

DIAGRAM 22 Refer to the above diagram for a monopolist. If the government regulates the monopolist so that it charges the price that achieves allocative efficiency, the monopolist will produce output Q. True False

True

DIAGRAM 22 Refer to the above diagram for a monopolist. The profit-maximizing output for this firm is M. True False

True

If the XYZ Company can sell 4 units per week at $10 per unit and 5 units per week at $9 per unit, the marginal revenue of the fifth unit is $5. True False

True

Which of the following is not a barrier to entry? patents X-inefficiency economies of scale ownership of essential resources

X-inefficiency

Confronted with the same unit cost data, a monopolistic producer will charge: the same price and produce the same output as a competitive firm. a higher price and produce a larger output than a competitive firm. a higher price and produce a smaller output than a competitive firm. a lower price and produce a smaller output than a competitive firm.

a higher price and produce a smaller output than a competitive firm.

DIAGRAM 27 Refer to the above diagram. This firm is selling in: a market in which there are an extremely large number of other firms producing the same product. an imperfectly competitive market. a market in which demand is elastic at all prices. a purely competitive market.

an imperfectly competitive market.

Other things equal, in which of the following cases would economic profit be the greatest? an unregulated monopolist which is able to engage in price discrimination an unregulated, nondiscriminating monopolist a regulated monopolist charging a price equal to average total cost a regulated monopolist charging a price equal to marginal cost

an unregulated monopolist which is able to engage in price discrimination

The MR = MC rule: applies only to pure competition. applies only to pure monopoly. does not apply to pure monopoly because price exceeds marginal revenue. applies both to pure monopoly and pure competition.

applies both to pure monopoly and pure competition.

If a regulatory commission wants to establish a socially optimal price for a natural monopoly, it should select a price: at which the marginal cost curve intersects the demand curve. at which marginal revenue is zero. at which the average total cost curve intersects the demand curve. which corresponds with the equality of marginal cost and marginal revenue.

at which the marginal cost curve intersects the demand curve.

If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to: minimum average fixed cost. average total cost. marginal cost. marginal revenue.

average total cost.

Which of the following is a characteristic of pure monopoly? close substitute products barriers to entry the absence of market power "price taking"

barriers to entry

A single-price pure monopoly is economically inefficient: only because it produces beyond the point of minimum average total cost. only because it produces short of the point of minimum average total cost. because it produces short of minimum average cost and price is greater than marginal cost. because it produces beyond minimum average total cost and marginal cost is greater than price.

because it produces short of minimum average cost and price is greater than marginal cost.

The marginal revenue curve for a monopolist: is a straight, upward sloping curve. rises at first, reaches a maximum, and then declines. becomes negative when output increases beyond some particular level. is a straight line, parallel to the horizontal axis.

becomes negative when output increases beyond some particular level.

DIAGRAM 23 Refer to the above diagram for a pure monopolist. Monopoly price will be: e. c. b. a.

c.

DIAGRAM 23 Refer to the above diagram for a pure monopolist. Monopoly profit: cannot be determined from the information given. will be ae per unit sold. will be bc per unit sold. will be ac per unit sold.

cannot be determined from the information given.

If a monopolist engages in price discrimination, it will: realize a smaller profit. charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic. produce a smaller output than when it did not discriminate. charge a competitive price to all its customers.

charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.

Price exceeds marginal revenue for the pure monopolist because the: law of diminishing returns is inapplicable. demand curve is downsloping. monopolist produces a smaller output than would a purely competitive firm. demand curve lies below the marginal revenue curve.

demand curve is downsloping.

When a pure monopolist is producing its profit -maximizing output, price will: be less than MR. equal neither MC nor MR. equal MR. equal MC.

equal neither MC nor MR.

X-inefficiency refers to a situation in which a firm: is not as technologically progressive as it might be. encounters diseconomies of scale. fails to realize all existing economies of scale. fails to achieve the minimum average total costs attainable at each level of output.

fails to achieve the minimum average total costs attainable at each level of output.

DIAGRAM 30 Refer to the above diagrams. In diagram (B) the profit-maximizing quantity is: g and the profit-maximizing price is e. h and the profit-maximizing price is e. g and the profit-maximizing price is f. g and the profit-maximizing price is d.

g and the profit-maximizing price is d.

A purely monopolistic industry: has no entry barriers. has a downward sloping demand curve. produces a product or service for which there are many close substitutes. earns only a normal profit in the long run.

has a downward sloping demand curve.

The pure monopolist's demand curve is: identical with the industry demand curve. of unit elasticity throughout. perfectly inelastic. perfectly elastic.

identical with the industry demand curve.

When a firm is on the inelastic segment of its demand curve, it can: increase total revenue by reducing price. decrease total costs by decreasing price. increase profits by increasing price. increase total revenue by more than the increase in total cost by increasing price.

increase profits by increasing price.

A pure monopolist should never produce in the: elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price. inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price. inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price. segment of its demand curve where the price elasticity coefficient is greater than one.

inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.

The demand curve faced by a pure monopolist: may be either more or less elastic than that faced by a single purely competitive firm. is less elastic than that faced by a single purely competitive firm. has the same elasticity as that faced by a single purely competitive firm. is more elastic than that faced by a single purely competitive firm.

is less elastic than that faced by a single purely competitive firm.

The pure monopolist's demand curve: is the industry demand curve. shows a direct or positive relationship between price and quantity demanded. tends to be inelastic at high prices and elastic at low prices. is identical to its marginal revenue curve.

is the industry demand curve.

If a pure monopolist is producing more output than the MR = MC output: the firm may, or may not, be maximizing profits. it will be in the interest of the firm, but not necessarily of society, to reduce output. it will be in the interest of the firm and society to increase output. it will be in the interest of the firm and society to reduce output.

it will be in the interest of the firm, but not necessarily of society, to reduce output.

If a pure monopolist is producing at that output where P = ATC, then: its economic profits will be zero. it will be realizing losses. it will be producing less than the profit-maximizing level of output. it will be realizing an economic profit.

its economic profits will be zero.

A pure monopolist's demand curve: is perfectly inelastic. coincides with its marginal revenue curve. lies above its marginal revenue curve. lies below its marginal revenue curve.

lies above its marginal revenue curve.

A natural monopoly occurs when: long-run average costs decline continuously through the range of demand. a firm owns or controls some resource essential to production. long-run average costs rise continuously as output is increased. economies of scale are obtained at relatively low levels of output.

long-run average costs decline continuously through the range of demand.

When total revenue is increasing: marginal revenue may be either positive or negative. the demand curve is relatively inelastic. marginal revenue is positive. marginal revenue is negative.

marginal revenue is positive.

For a imperfectly competitive firm: the marginal revenue curve lies above the demand curve. the demand and marginal revenue curves coincide. the demand curve intersects the horizontal axis where total revenue is at a maximum. marginal revenue will become zero at that output where total revenue is at a maximum.

marginal revenue will become zero at that output where total revenue is at a maximum.

If a monopolist were to produce in the inelastic segment of its demand curve: total revenue would be at a maximum. marginal revenue would be negative. the firm would be maximizing profits. it would necessarily incur a loss.

marginal revenue would be negative.

In the long run a pure monopolist will maximize profits by producing that output at which marginal cost is equal to: average total cost. marginal revenue. average variable cost. average cost.

marginal revenue.

DIAGRAM 26 Refer to the above diagram for a natural monopolist. If a regulatory commission were to set a maximum price of P3, the monopolist would: maximize profits. increase output beyond the profit-maximizing level. reduce output below the profit-maximizing level. be unable to make a normal profit.

maximize profits.

To maximize profit a pure monopolist must: maximize its total revenue. maximize the difference between marginal revenue and marginal cost. maximize the difference between total revenue and total cost. produce where average total cost is at a minimum.

maximize the difference between total revenue and total cost.

In the short run, a monopolist's economic profits: are always positive because the monopolist is a price-maker. are usually negative because of government price regulation. are always zero because consumers prefer to buy from competitive sellers. may be positive or negative depending on market demand and cost conditions.

may be positive or negative depending on market demand and cost conditions.

In the short run a pure monopolist's profit: will be maximized where price equals average total cost. may be positive, zero, or negative. are always positive. will be zero.

may be positive, zero, or negative.

In the short run a pure monopolist: always earns an economic profit. always earns a normal profit. always realizes a loss. may realize an economic profit, a normal profit, or a loss.

may realize an economic profit, a normal profit, or a loss.

There is some evidence to suggest that X-inefficiency is: absent whenever two or more producers are competing with one another. not encountered in either competitive or monopolistic firms. more likely to occur in monopolistic firms than in competitive firms. more likely to occur in competitive firms than in monopolistic firms.

more likely to occur in monopolistic firms than in competitive firms.

Assuming no change in product demand, a pure monopolist: can increase price and increase sales simultaneously because it dominates the market. adds an amount to total revenue which is equal to the price of incremental sales. should produce in the range where marginal revenue is negative. must lower price to increase sales.

must lower price to increase sales.

Large minimum efficient scale of plant combined with limited market demand may lead to: natural monopoly. patent monopoly. government franchise monopoly. shared monopoly.

natural monopoly.

DIAGRAM 21 Refer to the above diagrams. The demand for Firm A's product is: perfectly elastic over all ranges of output. perfectly inelastic over all ranges of output. elastic for prices above $1 and inelastic for prices below $1. inelastic for prices above $1 and inelastic for prices below $1.

perfectly elastic over all ranges of output.

DIAGRAM 25 Refer to the above diagram for a pure monopolist. If the monopolist is unregulated, it will maximize profits by charging: a price above P3 and selling a quantity less than Q3. price P3 and producing output Q3. price P2 and producing output Q2. price P1 and producing output Q1.

price P3 and producing output Q3.

The profit-maximizing output of a pure monopoly is economically inefficient because in equilibrium: price equals minimum average total cost. marginal revenue equals marginal cost. marginal cost exceeds price. price exceeds marginal cost.

price exceeds marginal cost.

Because the monopolist's demand curve is downsloping: MR will equal price. price must be lowered to sell more output. the elasticity coefficient will increase as price is lowered. its supply curve will also be downsloping.

price must be lowered to sell more output.

DIAGRAM 26 Refer to the above diagram for a natural monopolist. If a regulatory commission set a maximum price of P2, the monopolist would: produce output Q1 and realize an economic profit. produce output Q3 and realize an economic profit. close down in the short run. produce output Q3 and realize a normal profit.

produce output Q3 and realize a normal profit.

DIAGRAM 27 Refer to the above diagram. If this somehow was a costless product (that is, the total cost of any level of output was zero), the firm would maximize profits by: selling the product at the highest possible price at which a positive quantity will be demanded. producing Q1 units and charging a price of P1. producing Q3 units and charging a price of P3. producing Q2 units and charging a price of P2.

producing Q2 units and charging a price of P2.

In which one of the following market models is X-inefficiency least likely to be present? pure competition oligopoly monopolistic competition pure monopoly

pure competition

DIAGRAM 21 Refer to the above diagrams. Firm A is a: pure competitor and Firm B is a pure monopoly. pure competitor, as is Firm B. pure monopoly and Firm B is a pure competitor. pure monopoly, as is Firm B.

pure competitor and Firm B is a pure monopoly.

In which one of the following market models is X-inefficiency most likely to be the greatest? pure competition oligopoly monopolistic competition pure monopoly

pure monopoly

If a regulatory commission imposes upon a natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output, then: the firm will realize an economic profit. the firm will earn only a normal profit. allocative efficiency will be worsened. the firm must be subsidized or it will go bankrupt.

the firm must be subsidized or it will go bankrupt.

For an imperfectly competitive firm: total revenue is a straight, upsloping line because a firm's sales are independent of product price. the marginal revenue curve lies above the demand curve because any reduction in price applies to all units sold. the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold. the marginal revenue curve lies below the demand curve because any reduction in price applies only to the extra unit sold.

the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.

If a regulatory commission forces a natural monopoly to charge a price equal to its average total cost: output will decrease. the monopolist will realize a normal profit. resource allocation will worsen. the firm will earn an economic profit.

the monopolist will realize a normal profit.

If a regulatory commission forces a natural monopoly to charge a price equal to its marginal cost: the monopoly may incur a loss. resource allocation will be worsened. output will decrease. the firm will earn only a normal profit.

the monopoly may incur a loss.

If a pure monopolist decides to sell one more unit of output, the marginal revenue associated with that unit will be: equal to its price. the price at which that unit is sold less the price reductions which apply to all other units of output. the price at which that unit is sold plus the price increases which apply to all other units of output. indeterminate unless marginal cost data are known.

the price at which that unit is sold less the price reductions which apply to all other units of output.

Price discrimination refers to: selling a given product for different prices at two different points in time. any price above that which is equal to a minimum average total cost. the selling of a given product at different prices that do not reflect cost differences. the difference between the prices a purely competitive seller and a purely monopolistic seller would charge.

the selling of a given product at different prices that do not reflect cost differences.

An important economic problem associated with pure monopoly is that, at the profit maximizing outputs, resources are: overallocated because price exceeds marginal cost. overallocated because marginal cost exceeds price. underallocated because price exceeds marginal cost. underallocated because marginal cost exceeds price.

underallocated because price exceeds marginal cost.

If a imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue: may be either greater or less than $35. will also be $35. will be less than $35. will be greater than $35.

will be less than $35.

A monopolist: will never produce in the output range where marginal revenue is positive. will never produce in the output range where demand is inelastic. will never produce in the output range where demand is elastic. may produce where demand is either elastic or inelastic, depending on the level of production costs.

will never produce in the output range where demand is inelastic.

A pure monopolist: will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output. will realize an economic profit if ATC exceeds MR at the profit-maximizing/loss-minimizing level of output. will realize an economic loss if MC intersects the downsloping portion of MR. always realizes an economic profit.

will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output.