Econ - Ch. 10

A monopolist deciding to engage in price discrimination wants to keep the quantity produced the same (or close to the same) because which of the following is true? A. Revenue will automatically go down with price discrimination B. Marginal revenue will be greater than price at that point C. Costs will decrease with an increase in quantity D. Costs will increase with an increase in quantity

D. Costs will increase with an increase in quantity Explanation: Price discrimination raises revenues when producing the same amount. If revenues increase but costs increase by more, then profits would decrease.

All firms that are profit-maximizing, regardless of whether the demand curve is horizontal or downward-sloping, will produce where which of the following is true? A. Marginal revenue is greater than price B. Demand is elastic along the whole curve C. Marginal cost is equal to price D. Marginal cost is equal to marginal revenue

D. Marginal cost is equal to marginal revenue Explanation: Profit maximization occurs where marginal revenue is equal to marginal cost, regardless of whether the marginal revenue is different from the price.

A monopoly would never produce where marginal revenue is negative because which of the following is true? A. Marginal cost is always positive B. Profits would automatically be negative C. A firm is always trying to maximize revenue

A. Marginal cost is always positive Explanation: Profit-maximizing monopolists produce where marginal revenue is equal to marginal cost. Because marginal cost is always positive, marginal revenue will always be positive. On top of that, if marginal revenue is negative, revenue is decreasing while costs are increasing, so profit is automatically falling.

A profit-maximizing monopoly will produce where which of the following is true? Select all that apply. A. Marginal revenue is less than the price B. Marginal revenue is equal to the marginal cost C. Marginal revenue is positive

A. Marginal revenue is less than the price B. Marginal revenue is equal to the marginal cost C. Marginal revenue is positive Explanation: The marginal revenue is always below the demand curve (the price) for a monopoly. Their profit decision occurs where marginal revenue is equal to marginal cost, which occurs when marginal revenue is positive.

If a monopoly faces a demand curve that is downward-sloping, then marginal revenue will be which of the following? A. Must be less than price B. Must be equal to price C. Must be greater than price D. Is not related to the price

A. Must be less than price Explanation: For a firm facing a downward-sloping demand curve, to sell one more unit the firm has to decrease the price (and we assume the price is decreased for all units here). Since the marginal revenue depends on the change in total revenue, it is less than the price since the price was lowered for all units.

A monopoly producing where marginal revenue equals marginal cost will do which of the following? Select all that apply. A. It will make positive profits B. It cannot increase quantity and make a greater profit C. It is producing at the highest profit possible in their market D. It is producing where the additional revenue is just equal to the additional cost for each output

B. It cannot increase quantity and make a greater profit C. It is producing at the highest profit possible in their market D. It is producing where the additional revenue is just equal to the additional cost for each output Explanation: Answer A is the only one not correct because a firm could be producing at the optimal level (where marginal revenue equals marginal cost) and have their average cost be greater than the price. Thus, they would be making a loss.

A profit-maximizing monopolist produces where marginal cost is equal to ________. A. Price B. Marginal Revenue C. 0 D. The minimum

B. Marginal revenue Explanation: If revenue is increasing by more than costs are increasing (marginal revenue > marginal cost), then profits are increasing. If the opposite is true, then profits are decreasing. Therefore, firms will want to produce where marginal revenue and marginal cost are equal.

Why do barriers to entry allow a monopolist to make positive economic profits? A. It causes the monopoly to have lower costs. B. Otherwise, firms would enter the market, resulting in a decrease in price and profits C. It allows the monopoly to be price-takers D. It does not need a barrier to entry because of the market demand.

B. Otherwise, firms would enter the market, resulting in a decrease in price and profits Explanation: Barriers prevent other firms from entering like they do in a perfectly competitive market.

Marginal cost is always positive; therefore, marginal revenue at the profit-maximizing output will have to be ________. A. Negative B. Positive C. Equal to 0

B. Positive Explanation: If firms are profit-maximizing, they set marginal revenue equal to marginal cost. If marginal cost is positive, then marginal revenue will be positive.

In the above situation, is individual demand is elastic or inelastic? A. Elastic B. Inelastic

B. Inelastic Explanation: The percentage change in quantity from the increase in $5 is (1,000/100,000)x100% = 1%. The percentage change in price is greater than that: ($5/$15) x 100% = 33%. Elasticity (percentage change in quantity over percentage change in price) is, therefore, less than one.

Assume that a market is operating in equilibrium. What would happen if the monopoly increased quantity produced but the price did not change? A. A surplus B. A shortage C. People would stop buying from the monopoly altogether D. None of the above

A. A surplus Explanation: If the monopoly tried to increase quantity but the price did not change, then a surplus would occur (quantity supplied being greater than quantity demanded). The surplus would then result in a lowering of the price (as the monopoly wanted to sell the good they produced and consumers are willing to buy at a lower price).

In the long run, the monopolist's economic profits will be ______________ than the total of the competitive firms' profits. A. Higher B. Lower C. The same

A. Higher Explanation: In a perfectly competitive market, firms will enter if there are potential profits, and this entry of new competitors will lower the price and firms' profits.. In a monopoly, however, barriers to entry prevent other firms from entering.

What is a reason that monopolies exist? A. A firm owns a resource that no one else has B. A firm is given legal protection that prevents another firm from entering C. A firm naturally drives out competitors through lower prices D. All of the above are reasons

D. All of the above are reasons Explanation: A monopoly can exist for a number of reasons, but they all relate to there being some barrier that prevents other firms from entering. Any of the reasons listed are possible.

Natural Monopoly

A firm that can produce at a lower average cost per unit of output other than a number of smaller firms producing a similar amount of total output

Monopoly

A single firm in an industry with barriers to entry and no close substitute goods

If a monopoly is currently selling 20 goods at a price of $10 each and it wants to sell 30 units, it needs to ______________ (increase / decrease / hold constant) the price for all goods it sells.

Decrease Explanation: A monopolist faces a downward sloping demand curve, which means that as price decreases quantity increases. To sell more, the monopolist needs to decrease the price.

Consider the following case: price is $100 and 20 units are sold, then price drops to $99 and 21 units are sold.Calculate the marginal revenue: $________.

79 Explanation: Marginal revenue = change in revenue / change in quantity. Revenue increases from $2,000 ($100 x 20) to $2,079 ($99 x 21) and quantity changes by 1. The change in revenue can also be broken down into a decrease in revenue of $20 from reducing the price from $100 to $99 for the original 20 units, along with an increase in revenue of $99 from the additional unit sold at that price. Together, this means that the change in revenue is $79 ($99-$20) because the revenue gained from selling that additional good is greater than the loss in revenue from reducing the price.

As a result of the answers to the previous two questions, the cable company should a.) (increase / decrease) prices for individual customers and b.) (increase / decrease) prices for businesses in order to increase revenues. A - Increase B - Decrease

A - Increase B - Decrease Explanation: Revenues will be increased if the firm lowers prices on businesses who are more responsive to prices (elastic) and raises prices on individuals who are less responsive (inelastic).

Price discrimination

A producer charges different prices for different units of output of the same product for reasons other than different costs

If a monopoly faces a demand curve that is entirely above the average cost function, in the long run they will likely do what? A. Continue to operate B. Increase quantity C. Decrease quantity D. Exit the market

A. Continue to operate Explanation: If the demand curve is above the average cost curve, then the firm will always be making a profit (price > average cost), assuming nothing else changes.

In the above situation, is business demand is elastic or inelastic? A. Elastic B. Inelastic

A. Elastic Explanation: The percentage change in quantity from an increase in $1 is (100/1,000) x 100 = 10%. The percentage change in price is less than that: ($1/$15) x 100 = 6.7%. Elasticity (percentage change in quantity over percentage change in price) is, therefore, greater than 1.

If a monopoly increases the quantity above the profit-maximizing level which of the following will be true? Select all that apply. A. Marginal revenue will be lower than before B. Marginal cost will be greater than marginal revenue C. Price would decrease

A. Marginal revenue will be lower than before B. Marginal cost will be greater than marginal revenue C. Price would decrease Explanation: Because the demand curve is downward-sloping, so is marginal revenue, so as quantity increases marginal revenue is decreasing. Profit maximizing quantity is where marginal revenue equals marginal cost. If quantity increases beyond that level, then profits will decrease. If a monopoly increases quantity, then price will fall.

In the figure above, the firm's profit would be ______. A. Positive B. Negative C. Zero D. Cannot be determined

A. Positive Explanation: The monopoly price is above the average cost, leading to a positive economic profit.

Entry barriers

Any impediment that makes it difficult or impossible for a new firm to enter and compete in a market when economic profits are being earned

Monopolies will price discriminate if which of the following is true? A. They dislike one group more than another and want to increase the price B. At the current price, one group of customers is elastic while another group is not as responsive (inelastic) C. They can increase quantity without changing revenue

B. At the current price, one group of customers is elastic while another group is not as responsive (inelastic) Explanation: Monopolies will price discriminate if they can distinguish between two groups of consumers who have different demand curves. At the original price, one is responsive to a price change (on the elastic portion of the demand curve) while the other is less responsive (on the inelastic potion). They want to increase revenue by more than any increase in cost associated with a change in quantity (if quantity changes at all).

An increase in fixed costs for a monopoly will do which of the following? A. Increase the price B. Decrease the economic profits C. Lower the level of output D. Lower marginal revenue

B. Decrease the economic profits Explanation: Fixed costs will not affect production or pricing decisions, but they do increase the overall cost, thus lowering profits.

If a monopoly is producing where price is greater than average cost (and thus making a profit), more firms will enter the market. A. True B. False

B. False Explanation: In a monopoly market, it is difficult for other firms to enter the market. When a firm is making a profit, other firms will not be able to enter.

The monopoly and perfectly competitive firm are allocatively efficient. A. True B. False

B. False Explanation: Society can be better off by producing more of the monopoly's good and less of the perfectly competitive good because MU/MC for the monopoly is greater than MU/MC for the perfectly competitive firm. However, nothing about the markets will result in that outcome.

Markets of perfectly competitive firms and monopolies both _________. A. Have barriers to entry B. Have downward sloping demand curves C. An easy to enter and exit

B. Have downward sloping demand curves Explanation: Markets for monopolies and competitive firms face downward sloping demand curves. The downward slope of the demand curve in a market does not depend on the type of firms operating.

If a monopoly increased the price above the profit maximizing level, __________. A. Marginal revenue would decrease B. Total revenue would decrease C. Profits would increase D. Profits would be unchanged

B. Total revenue would decrease Explanation: Assume the firm is at the profit maximizing point of MR = MC, and this point will be on the elastic portion of the demand curve. Any deviation from this point will decrease profits. Raising price on the elastic portion of the demand curve will also decrease revenues, since the increase in price is responded by a relatively large decrease in quantity.

In the figure above, the quantity a monopoly would produce would be ___ (C / D).

C Explanation: The monopoly will set the profit-maximizing quantity where marginal revenue equals marginal cost.

Which situation would be labeled a "natural monopoly"? A. A firm owns exclusive rights to a natural resource. B. A firm applies for a patent to exclude others from entering C. A firm has large economies of scale, and is thus able to sell the good for a lower price than would if there were many firms

C. A firm has large economies of scale, and is thus able to sell the good for a lower price than would if there were many firms Explanation: A natural monopoly has decreasing average costs, thus they can charge a price that is lower than the average costs of smaller firms. They will naturally become a monopoly.

A monopoly will engage in price discrimination, if it can, in order to increase profits by doing which of the following? A. By selling more of its goods B. By reducing costs for some of its products C. By continuing to produce the same amount D. By increasing prices for all consumers and producing less

C. By continuing to produce the same amount Explanation: Price discrimination raises revenues when producing the same amount. If revenues increase and costs do not change, economic profits must increase.

Copyrights on movies, books, and music act as a barrier to entry in order to give people what? A. Guaranteed profits B. Starter money for to pay for research and development C. Incentives to create D. Unfair advantages

C. Incentives to create Explanation: By protecting the creator from having competitors for a set amount of time, it allows them to potentially make economic profits and incentivizes him/her to continue creating new products.

A natural monopolist will face which of the following? A. The same costs a competitive industry faces B. Ownership of all of the sources of a natural resource C. Large economies of scale D. Prices that are higher than average costs, while other monopolists will have average costs that are higher than prices

C. Large economies of scale Explanation: A natural monopolist will be able to produce more than competitive firms and force those firms out of business. The competitive firms will not be able to compete with the single large firm. It is "natural" because the situation will naturally (based on cost functions) result in a single firm operating in the market.

The Coca-Cola Company is the only producer of Coca-Cola. Is it considered a monopoly? A. Yes, it is the only firm with the recipe for a real Coca-Cola B. Yes, because Coca-Cola has many close substitutes C. No, because Coca-Cola has many close substitutes

C. No, because Coca-Cola has many close substitutes Explanation: Coca-Cola is not considered a monopoly because there are many substitutes to producing Coke. For example, Pepsi and Dr. Pepper are close substitutes within the soft drink market. On top of that, there are many other beverages that are substitutes to soft drinks. So, while Coca-Cola is the only firm that can produce real Coke, it is not considered a pure monopoly. Coca-Cola is often considered to compete in monopolistic competition, which will be discussed in the next chapter ​[See chapter on Between Competition and Monopoly].

The market demand in a monopoly market differs from the demand the monopoly itself faces by _________. A. The amount of marginal revenue B. The fixed revenue C. Nothing; monopoly is the only firm in the market, so it does not differ D. The monopoly is the only firm in the market so the demand curve is steeper

C. Nothing; monopoly is the only firm in the market, so it does not differ Explanation: The monopoly is the only firm in the market, so the demand curve it faces is the same as the market demand curve.

Imagine two firms with identical cost structures that do not exhibit economies of scale at high levels of production. One is competing in a perfectly competitive market and one is a monopoly. In the long run which of the following is true? A. The monopoly and the perfectly competitive firm will produce the same quantity B. The monopoly and the perfectly competitive firm will charge the same price C. The monopoly will charge a higher price than the perfectly competitive firm D. The monopoly will sell a higher quantity than the perfectly competitive firm

C. The monopoly will charge a higher price than the perfectly competitive firm Explanation: For a perfectly competitive firm, the price will be the minimum at the average cost, while for a monopoly, the quantity will be lower and the price higher.

The table below shows a demand schedule and asks you to calculate marginal revenues. The table then shows total cost at each level of output. Calculate marginal revenue and then choose a profit-maximizing rate of output. Finally, calculate economic profits to prove that your choice is correct. The level of output where marginal revenue is less than marginal cost is at any quantity greater than or equal to _______. A. 0 B. 1 C. 2 D. 3 E. 4

D. 3 Explanation: At a quantity of three, the change in revenue from two to three units was $20 (so marginal revenue is $20), while the marginal cost is $50 ($175-$125).

The supply curve in a perfectly competitive market is the sum of all of the individual firm's marginal cost curves. What is the supply curve for a monopoly? A. The marginal revenue curve B. The marginal cost curve C. The demand curve D. A monopoly does not have a supply curve

D. A monopoly does not have a supply curve Explanation: A supply curve represents the quantity supplied at each price. For a monopoly, the quantity is determined where marginal revenue equals marginal cost. The monopoly will then charge the price on the demand curve. The price will then be greater than the marginal cost curve and the monopoly does not have a supply curve.

In the long run, a monopolist facing the same cost curves as a perfectly competitive firm will charge a ______________ price than the competitive market and produce a ______________ output. A. Lower; higher B. Lower; lower C. Higher; higher D. Higher; lower

D. Higher; lower Explanation: The perfectly competitive firms, in the long run, will produce where marginal cost and average cost are just equal to the market price. The monopolist will find that at that level of production, marginal revenue will be much less than the marginal cost. Thus, the monopolist will raise the price and produce less.

In the figure below, the demand curve is represented by (1) ___ while the marginal revenue curve is represented by (2) ___ . ​[Figure description: The graph has dollar values on the vertical axis and quantity on the horizontal axis. Line A and the line B begin at the same point and are straight and downward sloping, but line B is steeper and hence lower. The marginal cost curve is convex and slopes upward. The average cost curve is U-shaped and starts on the left at a point much higher than the marginal cost curve. The marginal cost curve crosses line A at quantity D with the price level at G.The marginal cost curve intersects with line B at a lower quantity C. The corresponding price on line A at quantity C is relatively high (E), and the corresponding price level on the average cost curve is slightly lower (F). ] Demand Curve - Line A Marginal Revenue Curve - Line B - Line C

Demand Curve - Line A Marginal Revenue Curve - Line B Explanation: The marginal revenue curve is always below the demand curve. To sell one more unit, the firm must lower the price for all goods. Thus, the marginal revenue < price.

In the figure above, the price the monopoly would charge would be ___ (E / F).

E Explanation: After choosing the quantity, the monopoly would set the price based on the demand curve (not the average cost curve).

A movie theater price discriminates by charging children and seniors lower prices than adults. The theater is assuming that children and seniors have a more ______________(elastic / inelastic) demand than adults.

Elastic Explanation: A monopoly will lower the price on elastic consumers and increase the price on inelastic consumers. Both changes will increase revenue.

A monopoly will always charge a price that is ______________ (greater than / less than / equal to) marginal cost.

Greater than Explanation: The firm finds the profit-maximizing quantity by setting marginal revenue equal to marginal cost. Since marginal revenue is below the demand curve, the price that the firms charge will always be greater than marginal cost.

Given your answers to the previous question, the marginal revenue is ______________ (less than / greater than / equal to) the price at each quantity demanded?

Less than Explanation: To sell more goods, a monopoly must lower the price for all goods it sells. Thus, the additional revenue gained for each additional unit sold is lower than the price.

When comparing a monopoly and a perfectly competitive market where the costs are the same, the monopoly will produce a ______________ (greater / lower / same) quantity.

Lower Explanation: A perfectly competitive market will produce where the quantity demanded equals the quantity supplied, while a monopoly will produce where marginal revenue is equal to marginal cost. Marginal revenue is less than the demand (price), so the profit-maximizing quantity will be less than that in a perfectly competitive market.