ECON 351- Chapter 12 key terms

The marginal cost of a monopolist is constant and is $10. The demand function is given as follows: Demand function: Q = 100 - P The deadweight loss from monopoly power is ________. A) $1,000.00 B) $1,012.50 C) $1,025.00 D) $1,037.50 E) none of the above

B) $1,012.50

What is the value of the Lerner index under perfect competition? A) 1 B) 0 C) infinity D) two times the price

B) 0

Which of the following statements about natural monopolies is true? A) Natural monopolies are only found in the markets for natural resources (like crude oil and coal). B) For natural monopolies, marginal cost is always below average cost. C) For natural monopolies, average cost is always increasing. D) Natural monopolies cannot be regulated.

B) For natural monopolies, marginal cost is always below average cost.

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the A) firm is maximizing profit. B) firm's output is smaller than the profit maximizing quantity. C) firm's output is larger than the profit maximizing quantity. D) firm's output does not maximize profit, but we cannot conclude whether the output is too large or too small.

B) firm's output is smaller than the profit maximizing quantity.

The more elastic the demand facing a firm, A) the higher the value of the Lerner index. B) the lower the value of the Lerner index. C) the more monopoly power it has. D) the higher its profit.

B) the lower the value of the Lerner index.

Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change would be: A) to decrease the price of rice to the Japanese people. B) to decrease the consumer surplus of Japanese rice consumers. C) to decrease the producer surplus of Japanese rice producers. D) a welfare gain for the Japanese people. E) increase the consumption of rice by the Japanese people.

B) to decrease the consumer surplus of Japanese rice consumers.

Bancroft Pharmaceuticals has a patent on a new medication used to treat high blood pressure, so it is the monopoly seller of this new drug product. The marginal cost of producing one dose of the drug is $10, and the elasticity of demand for the product is -3. What is the profit maximizing monopoly price for this patented drug product? A) $10 B) $12.50 C) $15 D) $30

C) $15

You work as a marketing analyst for a pharmaceutical firm, and you are trying to gather information about the marginal cost of production for a competing firm. You know that they have a patent on a popular medication that sells for $20 per dose, and you believe the elasticity of demand for this product is roughly -4. Assuming the competing firm acts as a profit-maximizing monopolist, what is the competing firm's approximate marginal cost of production? A) $10 per dose B) $12.50 per dose C) $15 per dose D) $20 per dose

C) $15 per dose

A monopolist has set her level of output to maximize profit. The firm's marginal revenue is $20, and the price elasticity of demand is -2.0. The firm's profit maximizing price is approximately: A) $0 B) $20 C) $40 D) $10 E) This problem cannot be answered without knowing the marginal cost.

C) $40

DVDs can be produced at a constant marginal cost of $5 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the price elasticities of demand for these two movies? A) Both equal -1.2. B) -0.75 and -5/6, respectively C) -1.33 and -1.2, respectively D) -1.33 and -2, respectively

C) -1.33 and -1.2, respectively

DVDs can be produced at a constant marginal cost of $10 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the Lerner indices for these two movies? A) Both equal one. B) 2 and 3, respectively C) 1/2 and 2/3, respectively D) 1 and 2, respectively

C) 1/2 and 2/3, respectively

Roaring Lion Studios can produce DVDs at a constant marginal cost of $5 per disk, and the studio has just releasing the DVD for its latest hit film, Ernest Goes to the Hamptons. The retail price of the DVD is $25, and the elasticity of demand for this film is -2. Has the studio selected the profit-maximizing retail price for this DVD? A) Yes B) No, the retail price is too low C) No, the retail price is too high D) We do not have enough information to answer this question.

C) No, the retail price is too high

Which of the following is NOT associated with a high degree of monopoly power? A) A relatively inelastic demand curve for the firm B) A small number of firms in the market C) Significant price competition among firms in the market D) Significant barriers to entry

C) Significant price competition among firms in the market

Firm Sigma is a natural monopolist. The government decides to limit Sigma's monopoly power with price regulation. In order to find the minimum feasible price, the government must find the point where: A) price equals marginal cost B) average revenue equals marginal cost C) average cost equals average revenue D) marginal cost is greater than average cost E) Natural monopolies cannot be regulated

C) average cost equals average revenue

When the demand curve is a horizontal line, marginal revenue is: A) less than price B) more than price C) equal to price D) first increasing, then decreasing E) first decreasing, then increasing

C) equal to price

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ----------- price and sell a --------------quantity. A) higher; larger B) lower; larger C) higher; smaller D) lower; smaller E) none of these

C) higher; smaller

When the demand curve is downward sloping, marginal revenue is A) equal to price. B) equal to average revenue. C) less than price. D) more than price.

C) less than price.

Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers. As more types of MP3 players are introduced into the market, the demand facing Orange becomes ------------elastic and the Lerner index achieved by the firm in this market ---------------. A) less, declines B) less, increases C) more, declines D) more, increases

C) more, declines

Barriers to Entry

Condition that impedes entry by new competitors.

The marginal cost of a monopolist is constant and is $10. The demand function is given as follows: Q = 100 - P. The profit maximizing price is A) $70. B) $65. C) $60. D) $55. E) $50.

D) $55.

Which of the following is true at the output level where P=MC? A) The monopolist is always maximizing profit at the point where P=MC. B) The monopolist is maximizing profit if demand is elastic at the point where P=MC. C) The monopolist is not maximizing profit and should increase output. D) The monopolist is not maximizing profit and should decrease output. E) The monopolist is earning a positive profit.

D) The monopolist is not maximizing profit and should decrease output.

For a monopolist, changes in demand will lead to changes in A) price with no change in output. B) output with no change in price. C) both price and quantity. D) any of the above can be true.

D) any of the above can be true.

Which of the following is NOT true for monopoly? A) The profit maximizing output is the one at which marginal revenue and marginal cost are equal. B) Average revenue equals price. C) The profit maximizing output is the one at which the difference between total revenue and total cost is largest. D) The monopolist's demand curve is the same as the market demand curve. E) At the profit maximizing output, price equals marginal cost.

E) At the profit maximizing output, price equals marginal cost.

To find the profit maximizing level of output, a firm finds the output level where A) price equals marginal cost. B) marginal revenue equals average total cost. C) price equals marginal revenue. D) all of the above E) none of the above

E) none of the above

Lerner Index Formula

L = (P-MC)/P = -1/Ed

How is a markup effected if demand is inelastic?

Markup is large and firm has monopoly power.

How is a markup effected if demand is elastic?

Markup is small and firm has little monopoly power.

Rate-of-Return Regulation

Maximum price allowed by a regulatory agency is based on the (expected) rate of return that a firm will earn

Lerner Index of Monopoly Power

Measures of monopoly power calculates as excess of price over marginal cost as a fraction of price.

Price regulation is most often used for...

Natural Monopolies

Marginal Revenue Formula

P + P(Q/P)(Change in P/ Change in Q)

Rule of Thumb for Pricing

P = MC/(1+(1/Ed))

What happens to revenue when marginal revenue is negative?

Revenue decreases as quantity increases.

What happens to revenue when marginal revenue is positive?

Revenue increases with quantity.

Rent Seeking

Spending money in socially unproductive efforts to acquire, maintain, or exercise monopoly.

Marginal Revenue

The change in revenue resulting from a one-unit increase in output.

In natural monopoly, the minimum feasible price is found where

average cost = demand

As the number of firm's increase in a market, given that all other things are equal, monopoly power will...

decrease for each firm.

Natural Monopoly

firm that can produce the entire

MR = MC can be rewritten as...

(P-MC)/P = -1/Ed

Three factors determine a firm's elasticity of demand

1. Elasticity of Market Demand 2. Number of firms in the market 3. Interaction among firms

Monopsony

A market with only one buyer.

Monopoly

A market with only one seller.

Assume that a firm's marginal cost is $10 and the elasticity of demand is -2. We can conclude that the firm's profit maximizing price is approximately A) $20. B) $5. C) $10. D) The answer cannot be determined without additional information.

A) $20.

Firm Gamma is a monopolist with cost function C = 10Q. The demand for Gamma's output is QD = 260 - 2P. Gamma chooses quantity Q* that maximizes profit. The deadweight loss generated by this monopolist is A) DWL = 3,600 B) DWL = 3,525 C) DWL = 3,500 D) DWL = 3,625 E) None of the above

A) DWL = 3,600

Firm Alpha is a monopolist with cost function C = Q2. In addition to this cost, firm Alpha also needs to pay a $10 tax per unit sold. The demand for Alpha's output is QD = 260 - 2P. Alpha chooses quantity Q* that maximizes profit. Compute the profit of this monopolist. A) Profit = 2,400 B) Profit = 2,200 C) Profit = 2,600 D) Profit = 2,800 E) None of the above

A) Profit = 2,400

The ________ elastic a firm's demand curve, the greater its ________. A) less; monopoly power B) less; output C) more; monopoly power D) more; costs

A) less; monopoly power