ECON 2000 Exam 3 Practice Test / Problem Set 7

Monopoly

- Only firm in a market - One product - Barriers to entry for outside firms - Socially inefficient because they produce to low but at a high cost - Set their own prices Ex: patented drugs, tap water

Accounting Profit Equation

Revenue - Explicit Costs

Shutdown

Short run decision no to produce due to market conditions - Still pay fixed cost

Alanna is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Alanna helps people organize their houses. Due to the popularity of her home-organization services, Farmer Alanna has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Alanna charges $25 an hour for her home-organization services. One spring day, Alanna spends 10 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce. Alanna's economic profit from farming equals

a.$-80. b.$130. c.$170. d.$-130. 300 - (250 + 130) = -80

Only two firms, Acme and Ultima, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Refer to Table above. Acme and Ultima agree to maximize joint profits. However, while Acme produces the agreed upon amount, Ultima breaks the agreement and produces 5 more than agreed. How much profit does Ultima make?

a.$240 b.$90 c.$280 d.$140

Refer to Table above. What is the marginal cost of producing 280 units of output?

a.$30 b.$0.75 c.$0.48 d.$40

The concert promoters of a heavy-metal band, WeR2Loud, know that there are two types of concert-goers: die-hard fans and casual fans. For a particular WeR2Loud concert, there are 1,000 die-hard fans who will pay $150 for a ticket and 500 casual fans who will pay $50 for a ticket. There are 1,500 seats available at the concert venue. Suppose the cost of putting on the concert is $50,000, which includes the cost of the band, lighting, security, etc. How much additional profit can the concert promoters earn by charging each customer their willingness to pay relative to charging a flat price of $150 per ticket?

a.$50,000 b.$75,000 c.$25,000 d.$100,000

Refer to Figure above. If there are no fixed costs of production, monopoly profit with perfect price discrimination equals

a.$6,250. b.$1. c.$3,125. d.$1,562.5.

Only two firms, Acme and Ultima, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Acme and Ultima agree to jointly maximize profits, and split the profit maximizing production and profits evenly. If Acme and Ultima each break the agreement and each produce 5 more than agreed upon, how much less profit does each make, compared to the profit at to the cartel output?

a.$60 b.$20 c.$90 d.$5 Both sell quantity of 35 (marginal cost at $8) so 5 more = 40. Total revenue difference between 35 q and 40 q is $10 x 2 firms = $20

Gwen has decided to start her own photography studio. To purchase the necessary equipment, Gwen withdrew $2,000 from her savings account, which was earning 3% interest, and borrowed an additional $4,000 from the bank at an interest rate of 7%. What is Gwen's annual opportunity cost of the financial capital that has been invested in the business?

a.$60 b.$280 c.$660 d.$340 2,000 x 0.03 = $60 4,000 x 0.07 = $280 $280 + $60 = $340

A firm's marginal cost has a minimum value of $80, its average variable cost has a minimum value of $90, and its average total cost has a minimum value of $100. Then the firm will shut down in the short run once the price of its product falls below

a.$80. b.$90. c.$100. d.$40.

Suppose promoters at a concert know that 100 adults are willing to pay $12 for admission to the concert on a weekend. Suppose the promoters also know that 200 students are willing to pay $8 for admission on a weekend. The cost of operating the concert on a weekend is $2,000. How much profit will the concert earn if it engages in price discrimination?

a.$800 b.$2,800 c.$1,200 d.$1,600

A monopolist faces the following demand curve: What is the marginal revenue from the sale of the 2nd unit?

a.$9 b.-$3 c.$3 d.$24 1 q x 15 p = 15 2 q x 24 p = 24 24 -15 = $9

Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur? (i) New firms will enter the market. (ii) In the short run, price will rise; in the long run, price will rise further. (iii) In the long run, all firms will be producing at their efficient scale.

a.(i) and (ii) only b.(i) and (iii) only c.(ii) and (iii) only d.(i), (ii) and (iii)

A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market.

a.(i), (ii), and (iii) b.(ii) and (iii) only c.(i) and (ii) only d.(i) and (iii) only

As the sole producer of a good in the market, a monopolist can alter the price of its good (i) without affecting the quantity sold. (ii) without affecting its average total cost. (iii) by adjusting the quantity it supplies to the market.

a.(ii) only b.(iii) only c.(i) and (ii) only d.(ii) and (iii) only

Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues from the sale are $500. Which of the following statements is correct? (i) Marginal revenue equals $5. (ii) Average revenue equals $5. (iii) Price equals $5.

a.(iii) only b.(i) and (ii) only c.(i) only d.(i), (ii), and (iii)

A monopolist faces the following demand curve: Refer to Table above. If a monopolist faces a constant marginal cost of $2, how much output should the firm produce in order to maximize profit?

a.3 units b.5 units c.4 units d.2 units

The table below shows the demand schedule that a monopolistically competitive firm faces: The firm has total fixed costs of $9 and a constant marginal cost of $3 per unit. The firm will maximize profit with

a.30 units of output. b.9 units of output. c.21 units of output. d.15 units of output.

A monopolist faces the following demand curve: Refer to Table above. If a monopolist faces a constant marginal cost of $5, how much output should the firm produce in order to equate marginal revenue with marginal cost?

a.4 units b.6 units c.3 units d.5 units

A firm in a competitive market has the following cost structure: If the market price is $8, how many units of output should the firm produce to maximize profit?

a.7 units b.6 units c.5 units d.8 units

The efficient scale of production occurs at which quantity?

a.A b.C c.D d.B

Which of the following is not an example of a barrier to entry?

a.A soybean farmer is the first in her county to use a new brand of fertilizer. b.A taxi cab driver in New York City obtains a license to legally provide transportation in New York City. c.Microsoft obtains a copyright for its Windows operating system. d.A pharmaceutical company obtains a patent for a new medication to treat migraine headaches.

Which of the following is not an example of price discrimination?

a.A university rebates part of the cost of tuition in the form of financial aid for needy students. b.A local pizza chain offers a "buy three get one free" deal. c.A movie theater charges a lower price for a child's ticket than for an adult's ticket. d.An ice cream parlor charges a higher price for ice cream than for sherbet.

If a monopolist can practice perfect price discrimination, the monopolist will

a.All of the above are correct. b.eliminate deadweight loss. c.eliminate consumer surplus. d.maximize profits.

Refer to Figure above. If the monopoly firm is not allowed to price discriminate, then consumer surplus amounts to

a.$0. b.$3,125. c.$6,250. d.$1,562.50.

Refer to Figure above. A profit-maximizing monopolist would earn profits of

a.$120. b.$117. c.$126. d.$96.

What is the name for a group of firms that act collectively to maximize total profits?

a.monopolistically competitive industry. b.monopoly. c.cartel. d.Nash equilibrium market.

The figure is drawn for a monopolistically-competitive firm. Refer to Figure above. In response to the situation represented by the figure, we would expect

a.new firms to enter the market. b.some of the firms that are currently in the market to exit. c.this firm's profit to move from its current value toward a positive value. d.None of the above are correct.

Oligopoly

- Few competing firms - Significant barriers to entry/exit - Each firms decisions to price are dependent upon other firms actions - Can be identical: no profit in long run - Can be differentiated: positive economic profit in long run

Monopolistic Competition

- Large number of firms selling similar but not identical products - Free entry/exit - Sell any quantity at market price - No barriers - Don't need to lower prices to sell more Ex: sweaters, books, CDs

Perfectly Competitive Markets

- Large number of sellers selling identical products - Sell any quantity at market price - Don't need to lower prices to sell more - MC = P profit maximizing Ex: corn grown by various farmers

Sources of Barriers to Entry

- patents - copyrights - Natural: efficient to only have 1 water/electricity company

Economies of Scale

ATC decreases, Output increases (Ex: Water Company) Efficient Scale: Big

Diseconomies of Scale

ATC increases, Output increases (Ex. Coffee Shop) Efficient Scale: Small

Collusion

All firms jointly produce the monopoly quantity, then split profits - Only applicable for oligopolies

Price discrimination

Charging different prices for the same product - Can recover some of the surplus lost - Eliminates DWL - (extreme case) Can give monopolist all surplus Ex: coupons, discounted movie tickets for students, last minute airline tickets

Average Cost

Cost (fixed, variable, or total) / Quantity of Output

Marginal Cost

Cost of producing the last unit of output Change in Total Cost / Change in Quanity

Variable Cost

Cost that is dependent upon production; Varies Ex: Salary for workers

Fixed Cost

Cost that isn't dependent on production; Constant cost Ex: Rent

Explicit Cost

Cost to run business (Eg. Wages)

Exit

Long run decision to leave market - No fixed cost to pay

Marginal Cost Formula

MC = Change in Total Cost / Change in Quantity

Implicit Cost

Opportunity Cost (Eg. How much $ could be made elsewhere)

A firm will shut down in the short run if

Price of product falls below the AVC

Economic Profit Formula

Total Revenue - (Explicit Cost + Implicit Cost)

On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?

a.Any of the above could be correct. b.The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers. c.The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers. d.The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.

Exclusive ownership of a key resource

a.explains why a single firm distributes water to a community. b.is the most common cause of a monopoly. c.is a potential but rare cause of a monopoly. d.explains the monopoly ownership of the US Postal Service.

Joe is a shrimp fisherman who could earn $5,000 as a fishing tour guide. Instead, he is a full-time shrimp fisherman. In calculating the economic profit of his shrimp business, the $5,000 that Joe gave up is counted as part of the shrimp business's

a.explicit costs. b.marginal costs. c.implicit costs. d.total revenue.

A monopolist produces

a.less than the socially efficient quantity of output but at a higher price than in a competitive market. b.more than the socially efficient quantity of output but at a higher price than in a competitive market. c.possibly more or possibly less than the socially efficient quantity of output, but definitely at a higher price than in a competitive market. d.the socially efficient quantity of output but at a higher price than in a competitive market.

A monopolistically competitive industry is characterized by

a.many firms selling identical products. b.a few firms selling products that are similar but not identical. c.many firms selling products that are similar but not identical. d.a few firms selling highly different products.

Which of the following is true in a long-run equilibrium,

a.only a perfectly competitive firm operates at its efficient scale. b.neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal cost. c.both a perfectly competitive firm and a monopolistically competitive firm operate at their efficient scale of production. d.only a monopolistically competitive firm operates at its efficient scale.

The primary reason that economists criticize monopolists is because they

a.produce less than the socially efficient level of output. b.do not innovate. c.produce a large quantity of waste. d.charge a price that equals marginal cost rather than a price that equals average cost.

A monopolist can maximize profits by

a.producing an output level where marginal revenue equals marginal cost. b.charging a price that is greater than marginal revenue. c.earning a profit of (P - MC) x Q. d.Both a and b are correct.

Suppose that a monopolist's marginal costs increase by $1 for every level of production, then the monopoly price will

a.rise by $1. b.not change, but profits will decrease. c.rise by more than $1. d.rise by less than $1.

MC > MR

produce less ( TRUE FOR ALL MARKETS)

MC < MR

produce more ( TRUE FOR ALL MARKETS)

MC = MR

profit maximization ( TRUE FOR ALL MARKETS)

Refer to Figure above. In order to maximize profits, the monopolist should charge a price of

a.$9. b.$23. c.$12. d.$20.

Figure 17-3. Hector and Bart are roommates. On a particular day, their apartment needs to be cleaned. Each person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows: Refer to Figure 17-3. If this game is played only once, then the most likely outcome is that

a.Bart cleans and Hector does not clean. b.Hector cleans and Bart does not clean. c.neither Hector nor Bart cleans. d.Hector and Bart both clean.

Refer to Figure above. Which curve shows the marginal cost curve for a monopoly firm?

a.C. b.B. c.A. d.D.

The FTC's main case against Google in its 2020 anti-trust action is based primarily on the claim that,

a.Google overprices internet search b.Google charges monopoly prices for phones c.Google Ads force others off webpages d.Google ties its web search engine to other products, such as Android OS

Which of the following statements is correct?

a.If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling fewer units at a higher price per unit. b.If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit. c.If the monopolist is earning a positive economic profit, it must be producing where MR = MC. d.When a monopolist produces where price equals the minimum of average total cost, it earns a positive economic profit.

Suppose a firm in a competitive industry has the following cost curves: Refer to Figure above. If the price is $6 in the short run, what will happen in the long run?

a.Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. b.Because the price is below the firm's average variable costs, the firms will shut down. c.Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. d.Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry.

Which of the following statements are true about a monopolistically competitive firm?

a.It has the usual deadweight loss of monopoly pricing. b.It experiences a zero profit in a long-run equilibrium. c.It is said to have excess capacity. d.All of the above are correct.

Which area shows the deadweight loss from monopoly?

a.J+H b.H c.A+B+C+D+F+I+J+H d.J

Refer to figure above. Which price will a monopolist firm choose to maximize profit?

a.P3. b.P5. c.P1. d.P4.

Generic drugs can enter the market after the patent runs out on a patented drug. What happens next in the market?

a.Price increases, and total surplus decreases. b.Price increases, and total surplus increases. c.Price decreases, and total surplus increases. d.Price decreases, and total surplus decreases.

Refer to Figure above. How much output will the monopolist produce?

a.T b.W c.Z d.O Where MC = MR

This figure depicts a situation in a monopolistically competitive market. Refer to Figure 16-3. Which of the following will occur in the long run in this industry?

a.This firm will incur losses. b.Firms will enter this industry. c.This firm will continue to earn positive economic profits. d.Firms will exit this industry.

The figure is drawn for a monopolistically-competitive firm. Refer to Figure above. As the figure is drawn, the firm is in

a.a short-run equilibrium but it is not in a long-run equilibrium. b.a short-run equilibrium as well as a long-run equilibrium. c.a long-run equilibrium but it is not in a short-run equilibrium. d.neither a short-run equilibrium nor a long-run equilibrium.

Based on what we have learned in class, what must a monopolist do in order to sell more of a good?

a.advertise. b.lobby the government for a subsidy. c.enact barriers to entry in related markets. d.lower its price.

A fundamental source of monopoly market power arises from

a.availability of "free" natural resources, such as water or air. b.barriers to entry. c.perfectly elastic demand. d.perfectly inelastic demand.

In a typical cartel agreement, the cartel maximizes profit when it

a.behaves as a perfectly competitive firm. b.behaves as a duopolist. c.is flexible in enforcing production targets. d.behaves as a monopolist.

Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML

a.cannot choose either the price at which it sells it butter or the quantity of butter that it produces. b.can choose the price at which it sells its butter but not the quantity of butter that it produces. c.can choose both the price at which it sells its butter and the quantity of butter that it produces. d.can choose quantity of butter that it produces but not the price at which it sells its butter.

If a monopolist practices perfect price discrimination, then that company

a.charges one group of buyers a higher price than another group, such as offering a student discount. b.creates no deadweight loss. c.charges a higher price but produces the same monopoly level of output as when a single price is charged. d.charges some customers a price below marginal cost because costs are covered by the high-priced buyers.

Refer to Figure above. When the market is in long-run equilibrium at point W in panel (b), the firm represented in panel (a) will

a.choose to increase production to increase profit. b.have a zero economic profit. c.have a negative accounting profit. d.exit the market.

If long-run average total cost decreases as the quantity of output increases, the firm is experiencing

a.coordination problems arising from the large size of the firm. b.economies of scale. c.fixed costs greatly exceeding variable costs. d.diseconomies of scale.

Suppose that the government regulates the price that a natural monopolist can charge to be equal to the firm's average total cost. Then the firm will

a.earn positive profits, causing other firms to enter the industry. b.earn zero profits. c.minimize costs in order to lower the price that it charges. d.earn negative profits, causing the firm to exit the industry.

A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will

a.rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium. b.not rise in the short run because firms will enter to maintain the price. c.fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. d.rise in the short run. Some firms will enter the industry. Price will then rise to reach the new long-run equilibrium.

In the case of a typical natural monopoly, average total cost (ATC) is

a.rising, often because fixed costs are very large. b.rising, often because marginal costs are very large. c.declining, often because fixed costs are very large. d.declining, often because marginal costs are very large.

Which of the following industries is least likely to exhibit the characteristic of free entry?

a.satellite radio b.bookstores c.yoga studios d.hairstyling salons

For a construction company that builds houses, which of the following costs would be a fixed cost?

a.the $2 per worker-hour paid to the state government for workers' compensation insurance b.the $20 per hour wage paid to a construction foreman c.the $30,000 per year salary paid to the company's bookkeeper d.All of the above are correct. Salary is the only constant cost.

The table shows the town of Rauston's demand schedule for milk. For simplicity, assume the town's milk seller(s) incur no costs in selling milk. Refer to Table above. Suppose there are exactly two sellers of milk in Rauston: Tellon and Bandstop. If Tellon sells 150 gallons and Bandstop sells 200 gallons, then

a.the two firms are colluding and earn monopoly profits. b.Tellon's profit is $450 and Bandstop's profit is $600. c.consumers in Rauston are worse off than they would be if the two firms colluded. d.Tellon's profit is $1,050 and Bandstop's profit is $1,200.

For a firm, the relationship between the quantity of inputs and quantity of output is called the

a.total-cost function. b.quantity function. c.production function. d.profit function.

The diagram depicts the market situation for a monopoly pastry shop called MuffinHaus. ​Refer to Figure above. Given that MuffinHaus chooses the profit maximizing price and quantity, what profit level will it obtain?

a.​$700. b.​$280. c.​$490. d.​$980.