Econ Pearson Chapter 12
Suppose you are a monopolist and you have two customers, A and B. Each will buy either zero or one unit of the good you produce. A is willing to pay up to $35 for your product; B is willing to pay up to $25. You produce this good at a constant average and marginal cost of $8. If you could not engage in third-degree price discrimination, what price would you charge? If you could practice third-degree price discrimination, you will earn a profit of $44. (For simplicity, assume that if a consumer is indifferent between buying and not buying, he will buy.)
-$25. -$44
If a profit maximizing monopolist sells 100 paintings at a price of $2,000 each, having bought them from various artists for a total cost of $110,000, the monopolist has a profit of $90,000
-$90,000
You are a monopolist who sells textbooks to undergraduate students. Currently you sell 100 books at a price of $100 each, for revenue of $10,000. Each book is essentially costless to print, so you ignore fixed costs and focus on maximizing revenue. Based on research by your marketing team, you learn that some students will not buy the book if the price goes up. Also, if you cut the price, more students will buy the book. Suppose the price elasticity of demand is -0.5. If the price of each textbook is increased by 10 percent, the new revenue earned is $_____________ Suppose the price elasticity of demand is -2. Which of the following is true of total revenue?
-10450 -In order to maximize total revenue, you should reduce the price of each textbook because new sales will make up for the lower revenue per sale.
For simplicity, consider a monopolist with no costs whatsoever; thus profit is revenue, which is just price multiplied by quantity. Demand consists of two groups. There are 14 adults: 10 are willing to pay $30 and 4 are willing to pay $20. There are also 16 children: 6 are willing to pay $20 and 10 are willing to pay $10. The best single (uniform) price to charge is $20. Suppose the monopolist could price discriminate by setting a different price for each group. The monopolist's best price to charge adults is $30, and his best price to charge children is $10. Which of the following scenarios will yield the maximum profit for the monopolist?
-20 -30 -10 -Charging a price of $30 from adults and a price of $10 from children.
In which of the following ways is a monopoly beneficial to an economy?
-All of the above.
People who need life-saving drugs cannot do without them and surely will be willing to pay very high prices for them. So why can't producers of life-saving drugs charge any price that they wish to?
-A monopolist, such as one selling life-saving drugs, still faces downward-sloping demand curves.
Both competitive firms and monopolies produce at the level where marginal cost equals marginal revenue. Then, other things remaining the same, why is price lower in a competitive market than in a monopoly?
-Competitive markets face perfectly elastic demand and marginal revenue, while monopolies face downward-sloping demand and marginal revenue.
All of the following statements about the monopolist's demand curve are true, except:
-If the price effect dominates, lowering price increases revenue.
Which of the following is a key difference between perfect competition and monopoly?
-In perfect competition, no one firm can influence price, but with monopoly, a single seller sets the price.
Why is national defense better off as a natural monopoly? An example of an industry or service that is a natural monopoly is ____________.
-Industries like national defense experience economies of scale since they have high fixed costs. Thus, it is cheaper to have a single firm provide a larger quantity. -City drinking water
To restrict a firm's monopoly power, why can't antitrust authorities just set a floor or a ceiling in the market?
-It is difficult to set a fair price, and even if regulators did, the firm would then have no incentive to innovate.
How does a natural monopoly differ from a firm that becomes a monopoly due to network effects?
-Natural monopolies result from economies of scale, while network effects come from the benefits to consumers from having many people use a service. Your answer is correct.
In a competitive market, a supply curve shows all the price and quantity combinations at which firms will produce. Does a monopoly face a similar supply curve?
-No, a monopoly is a price-maker and its production decisions are determined by its downward-sloping demand curve.
Janet knows a lot of people who do not like Marmite®, a yeast extract that is used as a spread on toast. She says that Marmite is so unpopular that Unilever, the company that manufactures Marmite®, cannot possibly have any monopoly power. Do you agree with this analysis? Edgar says that a single firm in the wind power industry is unlikely to have a significant degree of monopoly power for an extended period of time. Since the cost of producing an additional unit of wind energy is so low, a large number of firms can enter the market and compete away economic profits. Do you agree with this analysis?
-No, monopoly power is based on whether a good has any close substitutes, not whether your friends like the product. -No, Edgar's argument ignores potentially large fixed costs that will act as a barrier to entry.
Priceline is a Web site that sells flights and hotel bookings based on the price that a consumer states that he or she is willing to pay. So consumers who want to book a flight or a hotel room need to tell Priceline the price that they are willing to pay, and the seller lets Priceline know whether it is willing to accept that price. Which of the following outcomes is likely using this form of pricing? In 1999, Priceline attempted to replicate this pricing strategy with groceries and gasoline. Using this pricing strategy with these two goods soon proved unprofitable. What could explain this? The marginal cost of selling an airplane seat or a hotel room is relatively small, while the marginal cost of selling groceries and gasoline is relatively high.
-Producer surplus will rise, since some price offers by consumers will be higher than the price that Priceline would have charged, causing consumer surplus to shrink. -small -high
As this chapter explains, a monopoly is an industry structure where only one firm provides a good or service that has no close substitutes. This question explores the last part of this definition further. In 1947, the United States government charged the DuPont Company with a violation of the Sherman Act. The government argued that DuPont was monopolizing the cellophane market. At trial, the government showed that DuPont produced nearly 75 percent of all of the cellophane sold in the United States each year. Nonetheless, the U.S. Supreme Court ruled in favor of DuPont and dismissed the case. Which of the following is a likely argument used by DuPont to convince the Supreme Court that it did not violate the Sherman Act? Sirius XM Satellite Radio and XM Satellite Radio were the only two satellite radio providers in the United States. The Department of Justice (DOJ) and the Federal Communications Commission (FCC) approved the merger of the two companies in 2008 even though Sirius-XM would then control 100 percent of the satellite radio market. Which of the following arguments do you think Sirius and XM used to convince the DOJ and the FCC to allow the merger to proceed?
-There are many close substitutes for cellophane such as aluminum foil and waxed paper, so DuPont did not have significant market power. -There are many close substitutes for satellite radio; therefore, Sirius-XM would not exercise market power.
A significant difference between monopolies and competitive firms is that
-a monopoly's demand curve is the industry's demand curve, while the competitive firm's demand curve is perfectly elastic.
A monopolist should continue to increase production until marginal
-cost is equal to marginal revenue.
Monopolists do not use a supply curve because they
-do not vary production based on market price.
By forcing monopolists to set price equal to marginal cost,
-economic loss can occur.
The case for a natural monopoly is characterized by high _______ costs and decreasing average _______.
-fixed -costs
If a monopoly selling 300 computers at $3,000 decides to lower its price to $2,000 in order to sell 100 more computers, then the firm
-has negative marginal revenue.
Eliminating a monopoly
-increases market quantity.
Network externalities and economies of scale both can contribute to the formation of a monopoly. However, they differ in that network externalities deal with
-increasing benefits and economies of scale deal with decreasing costs.
For a monopolist, total revenue __ calculated the same way as in perfect competition; marginal revenue __ ___ equal to price.
-is -is not
A monopoly is selling workbooks to students in a college town and is currently maximizing profits by charging $70.00 per book. The marginal cost of textbooks
-is less than $70.
A monopoly has ___ ________ and _____ _______. Price is set ______ ______ marginal cost.
-one seller -many buyers -greater than
Total revenue for a monopolist is maximized
-only if marginal revenue is zero.
Suppose the government grants an individual or company the sole right to produce and sell a good or service. In this case, the government is granting a ________. Which of the following is not likely covered by a copyright?
-patent -A new type of tire
If Nike developed a particularly strong weave to the fabric used in their running shoes, they could petition the government for a _______ in order to protect their profits. If a competitor tried to promote their brand of running shoes by using Nike's theme song in their commercial, Nike could sue for ________ infringement.
-patent -copyright
A social planner would choose the same outcome as that which results in the perfectly competitive equilibrium, because that outcome maximizes social surplus.
-perfectly competitive -maximizes
Market power relates to the ability of sellers to affect __________, and arises because of ____________. Legal market power is created by ___________, and arises due to ____________. Natural market power is created by ___________, and arises due to ____________.
-prices; barriers to entry. -the government; copyrights. -market forces; economies of scale.
All of the following describe a monopoly market structure, except
-seller is a price-taker.
In reality, practicing price discrimination is difficult because:
-the monopolist doesn't know each consumer's willingness to pay.
Car insurance companies charge males more for insurance than females. This is an example of ______________ A fast-food combo meal costs less than if you bought each item separately This is an example of ______________
-third-degree price discrimination. -second-degree price discrimination.
To say that a good has network effects means that the ____________.
-value of the product increases as more people use it.
First degree price discrimination
eliminates deadweight loss by producing to where marginal cost equals price.
