ECON 300 EXAM 3 REVIEW QUESTIONS

Suppose there are seven firms in a market where the three largest firms supply 20% of the market-clearing quantity and the other four firms supply 10% of the market-clearing quantity. What is the five-firm concentration ratio (i.e., the share of total sales controlled by the five largest firms in the market)?

80%

Suppose a government sets the price for a natural monopoly at the competitive level such that P = MC. To keep the seller from taking a loss under this policy, the government could provide a lump-sum payment to the firm. How could we determine this payment?

Multiply the competitive quantity by the difference between MC and AC

What is the maximum value of the Lerner index?

One

What happens to the market outcome if cartel members cheat on the collusive agreement?

Price declines and quantity increases toward the perfectly competitive equilibrium

What condition may provide for a relatively small degree of inefficiency under monopolistic competition?

The demand curve is relatively elastic so that the price is near the long-run minimum average cost.

Which of the following is NOT conducive to the successful operation of a cartel?

The supply of non-cartel members is very price elastic.

A positive externality is shown by a marginal social benefit (MSB) curve that is

above and to the right of the demand curve for the good that generates it.

Externalities

are not reflected in market prices, so they can be a source of economic inefficiency.

Transferable permits allow emission reduction to be achieved

at the lowest possible cost.

Deadweight loss from monopoly power is expressed on a graph as the area between the

average revenue curve and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets.

If the regulatory agency sets a price where AR = AC for a natural monopoly, output will be

greater than the monopoly profit maximizing level and less than the competitive level.

The optimum level of pollution emissions

occurs where the marginal external cost equals the marginal cost of abatement.

An electric power company uses block pricing for electricity sales. Block pricing is an example of

second-degree price discrimination.

The Lerner index measures

the amount of monopoly power a firm chooses to exercises when maximizing profits.

When a monopolist engages in perfect price discrimination,

the demand curve and the marginal revenue curve are identical.

Some grocery stores are now offering customers coupons which entitle them to a discount on certain items on their next visit when they go through the check-out line. This practice is an example of:

third-degree price discrimination.

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:

$40

Why don't some firms in monopolistic competition earn losses in the long run?

Free exit implies that any unprofitable firms leave the market in the long run.

What happens to the profit-maximizing cartel price and quantity if the marginal cost of production declines?

If demand is downward sloping, the optimal cartel price should decline and the market quantity should increase.

Which of the following is true of the output level produced by a firm in long-run equilibrium in a monopolistically competitive industry?

It does not produce at minimum average cost, and average cost is decreasing.

Which of the following is true when the government imposes a price ceiling on a monopolist?

Marginal revenue is kinked—horizontal and then downward sloping.

Which of the following is NOT regarded as a source of inefficiency in monopolistic competition?

Product diversity

A monopolist has determined that at the current level of output the price elasticity of demand is -0.15. Which of the following statements is true?

The firm should cut output.

Suppose that a firm can produce its output at either of two plants. If profits are maximized, which of the following statements is true?

The marginal cost at the first plant must equal marginal revenue, The marginal cost at the second plant must equal marginal revenue, and The marginal cost at the two plants must be equal.

A firm has two customers with non-identical demands and a constant marginal cost of production. At any positive price, the consumer surplus values for the two customers are related as CS2 ≥ CS1 . What can we say about the optimal two-part tariff for the firm?

The optimal price is greater than MC and the optimal tariff is equal to CS1.

Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then:

consumer surplus increases, producer surplus may increase or decrease.

For a two-part tariff imposed on two consumers, the entry fee is based on the:

consumer surplus of the customer with lower willingness-to-pay.

A multiplant firm has equated marginal costs at each plant. By doing this

costs are minimized given the level of output.

When emissions are measured on the horizontal axis, the marginal cost of abating emissions is

downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain.

At the profit-maximizing level of output, demand is

elastic, but not infinitely elastic.

When a firm charges each customer the maximum price that the customer is willing to pay, the firm

engages in first-degree price discrimination.

For a perfect first-degree price discriminator, incremental revenue is

equal to the price paid for each unit of output.

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the

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

The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because

firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price.

The most important factor in determining the long-run profit potential in monopolistic competition is

free entry and exit.

If all producers in a market are cartel members, then the demand curve facing the cartel is

identical to the monopolist's demand curve.

The regulatory lag:

is likely to occur with rate-of-return regulation.

When the demand curve is downward sloping, marginal revenue is

less than price.

A monopolist has equated marginal revenue to zero. The firm has:

maximized revenue.

When a per unit tax is imposed on the sale of a product of a monopolist, the resulting price increase will

not always be less than the tax.

A firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS2 > CS1 > 0. If the firm sets the entry fee equal to CS2, then the number of customers that actually buy the product is

one.

The pricing technique known as tying

permits a firm to meter demand, permits a firm to practice price discrimination, and enables a firm to extend its monopoly power to new markets.

If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:

positive.

As you move rightward on a marginal cost of abatement curve, emissions are

rising, and the cost of eliminating the marginal unit falls.

To find the social marginal benefit of public goods, one needs to

sum the consumers' demand curves vertically.

The more elastic the demand facing a firm,

the lower the value of the Lerner index.

Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers,

the marginal social cost curve is above and to the left of the supply curve.

The monopolist has no supply curve because

the quantity supplied at any particular price depends on the monopolist's demand curve.

A doctor charges two different prices for medical services, and the price level depends on the patients' income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of

third-degree price discrimination.

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing

third-degree price discrimination.