EC 224 Ch 11

Suppose your pharmaceutical company, which operates as a monopoly, has a patent on a drug with an estimated price elasticity of demand of 1.2. If the marginal cost of producing each pill is $3, at what price should you sell your drug if profit maximization is your objective?

$18

Which of the following correctly describes a natural monopoly a. A natural monopoly is an industry in which products are differentiated from one another. b. A natural monopoly exists if one large firm's long-run average cost curve is upward-sloping. c. A natural monopoly is defined as a firm that operates in an industry that has significant regulatory barriers to entry. d. A natural monopoly is an industry that exhibits economies of scale.

a. A natural monopoly is an industry in which products are differentiated from one another.

Which of the following does not constitute a barrier to entry into a market?t a. Homogenous product b. Economies of scale c. Control of a natural resource d. Natural monopoly

a. Homogenous product

The deadweight loss of a monopoly arises from: a. the loss of consumer surplus being greater than the gain in producer surplus. b. the transfer of producer surplus to consumers. c. the loss in producer surplus being greater than the gain in consumer surplus. d. the combined loss of consumer and producer surplus

a. the loss of consumer surplus being greater than the gain in producer surplus.

For the same demand and cost conditions, which of the following is true a. Consumer surplus and producer surplus are both lesser in a monopoly market compared to perfect competition. b. Consumer surplus is lesser but producer surplus is greater in a monopoly market compared to perfect competition. c. Consumer surplus is greater and producer surplus is lesser in a monopoly market compared to perfect competition. d. Consumer surplus and producer surplus are both greater in perfect competition than in a monopoly.

b. Consumer surplus is lesser but producer surplus is greater in a monopoly market compared to perfect competition.

A monopoly firm will operate on the a. elastic portion of the demand curve where total revenue is maximum. b. elastic portion of the demand curve where marginal revenue is positive. c. inelastic portion of the demand curve where the profit earned per-unit is the highest. d. the inelastic portion of the demand curve where marginal revenue is increasing.

b. elastic portion of the demand curve where marginal revenue is positive.

The markup of price over marginal cost for a monopolist is a. independent of the price elasticity of demand b. inversely related to the price elasticity of demand c. the same as the price elasticity of demand d. the same as the price elasticity of supply

b. inversely related to the price elasticity of demand

The marginal revenue curve of a monopolist a. is the same as the monopolist's demand curve. b. is downward-sloping. c. is horizontal. d. has a slope that is equal to half the slope of the demand curve.

b. is downward-sloping.

A monopolist will never operate on the lower half of the demand curve because for this range of output a. average revenue is negative. b. marginal cost exceeds marginal revenue. c. total revenue can be increased further. d. marginal revenue is positive.

b. marginal cost exceeds marginal revenue.

The Lerner index shows monopoly power as the markup of _____, as a percentage of the product's price. a. price over average cost b. price over marginal cost c. profits over price d. total revenue over price

b. price over marginal cost

The monopolist's demand curve slopes downward because a. the good sold by a monopolist is easily substitutable. b. the monopolist is a price maker in the market. c. average revenue decreases with each unit sold. d. the marginal product of labor is diminishing.

b. the monopolist is a price maker in the market.

Which of the following is true of a monopolist a. A monopolist takes the price of the product as given and produces as much output as possible. b. A monopolist can price the product at any price, regardless of demand. c. A monopolist can choose to produce at any price along the market demand curve. d. A monopolist prices products at the highest point on the demand curve.

c. A monopolist can choose to produce at any price along the market demand curve.

An important difference between a monopoly and a competitive industry is that a. a monopoly earns zero profits while competitive firms earn positive economic profits in the long run. b. a profit-maximizing monopolist equates price and marginal cost while profit-maximizing firms in competitive industries equate marginal revenue and marginal cost. c. a monopoly is a price maker while a competitive industry faces a horizontal demand curve. d. a monopoly has a vertical supply curve while a competitive firm's marginal cost curve is the supply curve.

c. a monopoly is a price maker while a competitive industry faces a horizontal demand curve

For a monopoly firm to maximize profits, its price markup should: a. be at its maximum possible point. b. equal the price elasticity of demand. c. equal the inverse of demand elasticity d. equal marginal revenue

c. equal the inverse of demand elasticity

Monopoly power does not guarantee positive profits because a. demand elasticity in monopoly markets is relatively low b. monopoly firms are price takers c. sales and profits of monopoly firms are restricted by the demand curve d. the monopolist's demand curve is the same as the marginal revenue curve

c. sales and profits of monopoly firms are restricted by the demand curve

All of the following are sources of monopoly power, except a. patents b. unique access to an essential input c. economies of scale d. homogeneity of products

d. homogeneity of products

In response to a rightward shift in the demand for a commodity, a monopoly firm that is producing at the profit-maximizing level of output will: a. decrease price and output. b. decrease output and increase price. c. increase price but maintain the level of output. d. increase output and price.

d. increase output and price

Compared to a competitive industry, ceteris paribus, a monopoly a. sells a higher quantity and charges a higher price. b. sells the same quantity but charges a higher price. c. sells a smaller quantity but charges the same price d. sells a smaller quantity but charges a higher price.

d. sells a smaller quantity but charges a higher price.

A monopoly firm will maximize profits by producing the level of output where: a. total cost is equal to total revenue. b. total revenue is at its maximum. c. the difference between marginal revenue and average revenue is maximized. d. the difference between total cost and total revenue is maximized.

d. the difference between total cost and total revenue is maximized.

The smaller the value of the Lerner index, _____ a. the greater the firm's monopoly power b. the more price elastic the firm's supply curve c. the greater the difference between marginal cost and marginal revenue d. the smaller the difference between marginal cost and price

d. the smaller the difference between marginal cost and price

For a monopoly firm, marginal revenue is negative when a. the demand curve is upward-sloping. b. demand is elastic. c. demand is inelastic. d. demand is unit elastic.

demand is inelastic.