Microeconomics Ch. 11, 12, 13

(Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate the change in consumer surplus from an unregulated monopoly to a regulated monopoly.

$2,800

(Figure: Monopoly Profits) Refer to the figure. The monopolist earns a profit of:

$420

(Figure: Monopolist 3) In this figure, the monopolist's maximum profit is:

$45

If a firm has revenues of $100, explicit costs of $50, and implicit costs of $50, then its accounting profit is:

$50

The change in total cost from producing the eightieth unit of output is ______, and the change in total revenue from producing the seventh unit of output is ______.

$5; $14

(Table: Barrels of Oil) Refer to the table. The change in profit from producing the second barrel of oil is ________, and the marginal cost from producing the seventh barrel of oil is ________.

$60; $140

(Table: Competitive Firm 2) Refer to the table that shows the revenue and cost schedules for a competitive firm. What is the marginal cost at the profit-maximizing quantity?

$80

(Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate the deadweight loss when this monopoly is unregulated.

$850

(Figure: World Market for Maple Syrup) Refer to the figure. If you are one of literally thousands of maple syrup producers and you wanted to increase your maple syrup production from 100 gallons to 110 gallons, what price would you charge?

$96

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit-maximizing quantity for this monopolist?

110

GlaxoSmithKline prices Combivir, its AIDS drug:

25 times higher than the price of equivalent drugs in countries in which its patent is not recognized

(Table: Two Factories) If the firm in this table faces a market price of $3.00, how many units of output should it produce in each factory?

3 units in Factory 1 and 6 units in Factory 2

(Table: Barrels of Oil) Refer to the table. The profit-maximizing level of output is ________ barrels of oil.

5

(Table: Profit-Maximizing Monopolist) Refer to the table. The profit-maximizing quantity for this monopolist is ________ units.

8

Refer to the figure. The competitive industry level of output is:

80

Monopolies can arise naturally when:

A large firm can produce at lower cost than other small firms

High prices charged by monopolists will cause the monopolists':

Gains to be less than the lost consumer surplus

Deregulation of cable TV rates led to:

Higher prices for cable TV

For a competitive firm, which of the following conditions describes the profit maximization condition? I. P = MC II. MR = MC III. TR = TC

I and II only

Total revenue is equal to:

price times quantity

Today anything beyond the most basic tier cable service is predominantly free of regulation, and cable companies are free to charge a market rate for their services. As a result:

prices have risen since deregulation, but so have the number of channels and the quality of programming.

The greatest use of our limited resources occurs when:

profits in every industry are the same.

According to the elimination principle:

resources are always moving toward an increase in consumer welfare.

In a competitive industry:

resources move across firms in such a way that the total value of production is maximized.

Since a competitive firm sets MR = P to determine all quantities in the short run, we can conclude that:

the demand curve faced by each individual competitive firm is perfectly elastic.

If P > AC in a given industry, then:

there are too few resources in that industry

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the maximum price that the consumer is willing to pay for 100 units?

$100

(Figure: Paint Market) What is the profit or loss for this monopoly?

$100,000

If a firm has revenues of $100, explicit costs of $50, and implicit costs of $50, its economic profit is:

$0

How much profit is the firm making at the profit-maximizing quantity?

A profit of $300

Which of the following best illustrates how resources move from low-value industries to high-value industries in competitive markets? A. Entrepreneurs will move production from low profit industries to high-profit industries B. The invisible hand will always equate prices in the long run. C. Firms will always be able to recognize high- and low- value industries simply by looking at their costs of production D. Entrepreneurs will always find the market in which price is the highest and increase production in it.

A. Entrepreneurs will move production from low profit industries to high-profit industries

Which statement is TRUE? A. 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. B. A monopolist is guaranteed monopoly profits by the government. C. 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. D. When a monopolist produces where MR < MC, it always earns a positive economic profit.

A. 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.

Which of the following best describes a competitive industry? A. Its firms sell similar products and have little control over their prices; there are many buyers and sellers and each is relatively small compared with the overall market. B. Its firms sell similar products and have direct control over their prices; there are many buyers and sellers and each is relatively small compared with the overall market. C. Its firms sell differentiated products and there are few potential sellers. They have little control over the price of their product; there are many relatively small buyers. D. Its firms have little control over the price of their product; the demand curve for each firm's product is downward sloping; there are many firms.

A. Its firms sell similar products and have little control over their prices; there are many buyers and sellers and each is relatively small compared with the overall market.

(Figure: Monopoly 6) If the market in this figure is a monopoly, the consumer surplus is area ______, and the deadweight loss is area ______.

A; C

Restaurants in tourist's areas will close during the off-season if their:

AVC is less than their TR

In a competitive industry:

All firms produce at the same marginal cost

In which of the following product markets should we see a higher price markup? A. One for a commodity good B. One with few substitutes C. One with a very elastic demand D. One with lots of substitutes

B. One with few substitutes

If these were monopolistic markets, which one would clearly have a greater markup than a monopolized banana industry? A. Electric car B. Organic bananas C. Pencils D. Laptop computers

B. Organic bananas

Which of the following firms most likely possesses the most monopoly power? A. Pepsi B. Rolex C. Ford D. McDonald's

B. Rolex

Which of these equations describes the Invisible Hand Property 1 regarding the minimization of total industry costs? A. P=AC B. P=MR C. P = MC1 = MC2 = ...MCn D. (P-AC)Q

C. P = MC1 = MC2 = ...MCn

Which of the following best help entrepreneurs identify low-value industries versus high-value industries? A. Marginal costs B. Central planner C. Price signals D. Total costs

C. Price signals

In this figure, the marginal revenue of the third unit is given by area:

D-B

Which of the following effects would generally make demand curves more inelastic? A. "You can't take it with you" effect B. Neither effect C. "Other people's money" effect D. Both effects

D. Both effects

Which of the following statements is TRUE? A. Producer surplus under competition is greater than producer surplus under monopoly. B. Deadweight loss is greater in markets where monopoly power is less significant. C. Total surplus under monopoly is greater than total surplus under competition. D. Consumer surplus under competition is greater than consumer surplus under monopoly.

D. Consumer surplus under competition is greater than consumer surplus under monopoly.

Which of the following is always TRUE for monopolies? A. TR < TC B. P > AC C. MR > D D. P > MR

D. P > MR

Which of the following is NOT perceived as a problem with monopolies? A. They create deadweight loss B. They charge too high of prices C. They make too much profit D. The gains to the sellers are greater than the value to buyers

D. The gains to the sellers are greater than the value to buyers

Total costs cannot be minimized if firms:

Face different prices

T/F: A monopolist will charge a higher markup when demand is more elastic.

False

T/F: All monopolies make economic profit, maintained by some sort of barrier to entry.

False

T/F: In markets lacking competition, the invisible hand concept works in society's best interest.

False

T/F: Profit = (P-MC) x Q

False

T/F: The invisible hand dictates that all companies will make the same profit margins in the short run.

False

T/F: The marginal cost curve may intersect the average cost curve anywhere on the curve that is less than the minimum point.

False

T/F: The market for designer jeans is a good example of a perfectly competitive market.

False

Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that: I. all competitive firms produce at the same marginal cost level. II. all competitive firms produce the same quantity. III. all competitive firms make normal profit.

I only

Which of the following factors cause markets to be dynamic? I. changes in tastes II. changes in technology III. new idea development

I, II, and III

Which of the following statements is TRUE? I. Competitive markets channel the self-interest of business leaders toward social prosperity. II. Political structures often channel self-interest toward social destruction. III. Many monopolies are government-created.

I, II, and III

If the government sets the price of all pharmaceutical drugs equal to marginal cost, which of the following statements is TRUE? I. Drug company profits will increase. II. Consumers will pay lower prices for drugs today. III. In the future, there will be fewer new drugs.

II and III

Which of the following statements is correct? Once a patent expires: I. monopoly profits increase. II. deadweight loss is eliminated. III. generic equivalents appear quickly

II and III only

Which of the following statements is TRUE? I. Prices in a competitive market will always be lower than the prices charged by a natural monopolist. II. A natural monopolist arises because of its ability to reduce average costs with large-scale production methods. III. A natural monopoly is a firm that can demand more inputs without increasing its costs of production.

II only

California's "perfect storm," following the deregulation of its electricity industry, eventually resulted in an incredible rise in electricity prices. Which of the following is NOT a reason why this occurred?

Innovations in production, which led to lower average costs of producing electricity

Creative destruction is a teen coined by:

Joseph Schumpeter

A small island nation produces only boxes of macaroni and cheese, most of which it sells in the export market. The world price per box is $10, regardless of the quantity exported. The nation has three macaroni-and-cheese factories, each of which varies in efficiency, but it's impossible for the government to determine each factory's marginal cost. To profit the most as a country, what should this nation's government do?

Let the producers compete in the market to determine the optimal quantity and allocation of macaroni and cheese production.

If the monopolist's demand is given by P = 100 - Q, marginal revenue is given by:

MR = 100 - 2Q

Generating electricity:

No longer requires a natural monopoly, but the transmission and distribution of electricity remains a natural monopoly

Do monopolies always reduce social benefits?

No, because monopolies can incentivize innovation

Counterfeit brands carry labels from companies that did not actually make the product in question (e.g., a purse not made by Gucci but carrying a Gucci label). With what kind of monopoly are the makers of these items trying to compete?

One with hard-to-duplicate products

When a firm maximizes profit in the short run, it should consider:

Only variable costs

A firm should exit the industry if which of the following conditions apply? A. Prices are low now but expected to rise B. Lifetime expected profit is positive C. P < AC D. TR > TC

P < AC

What is the profit-maximizing price and output level for the monopolist in this figure?

P = $14; Q = 6

Refer to the set of four panels in the figure. Which panel shows the typical shape of the average cost curve in a competitive market?

Panel A

The Private Express Statutes, passed in 1792 and (in amended form) still in effect today, contain federal civil and criminal laws relating to the delivery of mail. The statutes grant monopoly powers to the U.S. Postal Service. Given the technology available today, the average effect of this monopoly on the price and quality of mail service in the populated parts of the United States is that the ______ because of the monopoly privilege of the USPS.

Price is higher and the quality of service is lower

Price times quantity minus total cost equals:

Profit

If the demand curve for a firm is a straight line with negative slope, which of the following is the shortcut to finding the MR?

The marginal revenue curve starts at the same point as the demand curve and has twice the slope of the demand curve.

The short run is defined as:

The period before entry or exit can occur

(Table: Oil Pumps) Refer to the table. Suppose that this market is producing six barrels of oil from Oil Pump One and two barrels of oil from Oil Pump Two. What happens to the total costs of production if we produce one less barrel of oil from Oil Pump One and one more barrel of oil from Oil Pump Two?

The total costs of production fall by $16.00

Accounting profits are:

Total revenue less explicit costs

(Figure: Monopoly Markup) Refer to the figure. The deadweight loss attributable to monopoly is:

Triangle cef

T/F: A firm's profit-maximizing quantity does not depend on its fixed costs.

True

T/F: A monopolist maximizes profits where marginal revenue equals marginal cost.

True

T/F: A monopoly that is unregulated always causes deadweight loss.

True

T/F: Firms in competitive industries should adhere to: (1) expanding output if MR > MC, and (2) reducing output if MC > MR.

True

T/F: Industry clusters always cause part of the supply curve to be downward sloping.

True

T/F: One source of monopoly power is a patent granted by government

True

T/F: Patent buyouts could reduce deadweight loss from monopolies, while still protecting the incentive to innovate.

True

T/F: The "you can't take it with you" and "other people's money" effects give rise to an inelastic demand for pharmaceutical drugs.

True

T/F: The more inelastic the demand curve is for the monopolist's product, the higher the price is that can be charged for the good.

True

T/F: To assuage the deadweight loss from a natural monopoly, governments could employ a price control.

True

T/F: When any firm charges a higher price, fewer of its goods are sold.

True

The typical average cost curve in a competitive market is:

U-shaped because the firm's fixed costs are first spread over greater quantities, but then increasingly greater quantities will create production capacity constraints

The amount of money that the firm pays for its inputs is called

Variable cost

The rising demand for electricity in California during the year 2000:

decreased the elasticity of demand curve for electricity generators, giving the generating companies an incentive to close down plants and send electricity prices soaring.

In a competitive industry, if the marginal cost of Factory 1 is higher than that of Factory 2, in the short run:

either Factory 1 is producing too much or Factory 2 is producing too little or both.

In a competitive industry, entry and exit decisions:

ensure that labor and capital move across industries to optimally balance production.

Use the table. A firm is considering whether to enter an industry, with the conditions upon entry set forth in the table. Entering the industry would require the firm to pay $800 per day in fixed costs. This firm should ________ the industry, because its profits would be ________ per day.

enter; $150

The value of output is maximized in a competitive market because:

entrepreneurs are always on the lookout to move resources into higher-value uses, in an effort to create more profit for themselves.

One way that has been suggested to eliminate deadweight loss from monopoly power without reducing incentives to innovation is to:

have government pay monopolists to acquire the patent rights

In the short run, if price is less than average cost, a firm:

might shut down, but might stay open.

The following are marginal cost curves for selling chicken in a mom-and-pop (MCM) store and in a big-box retailer (MCB). MCM = 2 + 2QM MCB = 4 + QB If there are 6 total chickens being sold, how many chickens does each firm sell?

mom-and-pop: 2; big-box: 4

A monopoly is able to increase the markup of price over marginal cost:

when the demand is less price-elastic