econ CH 13 quiz
When selling e-books, music on iTunes, and downloadable software, the marginal cost of producing and selling one more unit of output is essentially zero: MC = 0. All firms are trying to maximize their profits (profit = TR - TC). Let's think about a monopoly in this kind of market. In the special case where marginal cost is zero, "profit maximization" is equivalent to which of the following statements?
"Maximize total revenue."
Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the profit-maximizing price that a monopolist should set?
$30 explanation:Since demand is linear and P = 50 - Q, we know from the "shortcut" given in your text that marginal revenue has the same intercept as the demand curve with twice the slope, or MR = 50 - 2q. We set this equation equal to marginal cost and solve for Q to find the optimal quantity, Q = 20. Plugging the optimal quantity into the demand curve, we find that the price the monopolist should set is equal to P = 50 - 20 = $30.
Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the total profit at the optimal level of output?
$300
Here is the information on a firm: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10 Which of the quantities given in the choices below yields the greatest total profit for the firm?
20
In the textbook, The Applied Theory of Price, D. N. McCloskey refers to the equation MR = MC as the rule of rational life. What types of firms follow this rule?
All types of firms follow this rule.
Evaluate the accuracy of the following statements: I. When a monopoly is maximizing its profits, marginal revenue equals marginal cost. II. Ironically, if a government regulator sets a fixed price for a monopoly lower than the unregulated price, it is typically raising the marginal revenue of selling more output.
Both statements are true.
Evaluate the accuracy of the following statements: I. When a monopoly is maximizing its profits, price is greater than marginal cost. II. For a monopoly producing a certain amount of output, price is less than marginal revenue.
I is true, II is false.
When a sports team hires an expensive new player or builds a new stadium, you often hear claims that ticket prices have to rise to cover the new, higher cost of the player or new stadium. Let's see what monopoly theory says about that. It's safe to treat these new expenses as fixed costs—something that doesn't change if the number of customers rises or falls. Treat the local sports team as a monopoly in this question, and to keep it simple, let's assume there's only one ticket price. As long as the sports team is profitable, what affect will a rise in fixed costs have on the equilibrium ticket price?
It will not affect the ticket price.
Rapido, the shoe company, is so popular that it has monopoly power. It's selling 20 million shoes per year, and it's highly profitable. The marginal cost of making extra shoes is quite low, and it doesn't change much if they produce more shoes. Rapido's marketing experts tell the CEO of Rapido that if it decreased prices by 20%, it would sell so many more shoes that profits would rise. If the expert is correct, at its current output, what can you infer about its marginal revenue and marginal cost?
MC < MR
Rapido, the shoe company, is so popular that it has monopoly power. It's selling 20 million shoes per year, and it's highly profitable. The marginal cost of making extra shoes is quite low, and it doesn't change much if they produce more shoes. Apollo, another highly profitable shoe company, also has market power. It's selling 15 million shoes per year, and it faces marginal costs quite similar to Rapido. Apollo's marketing experts conclude that if they increased prices by 20%, profits would rise. If the experts are correct, at its current output, what can you infer about Apollo's marginal revenue and marginal cost?
MC > MR
Consider a firm facing the following demand curve and cost structure: Demand: P = 100 - 2q; Fixed cost = 100; Marginal cost = 10. What is the formula for this firm's marginal revenue curve?
MR = 100 - 4q
Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the formula for this firm's marginal revenue curve?
MR = 50 - 2q
When selling e-books, music on iTunes, and downloadable software, the marginal cost of producing and selling one more unit of output is essentially zero: MC = 0. Let's think about a monopoly in this kind of market. If the monopolist is doing its best to maximize profits, what will marginal revenue equal at a firm like this?
Marginal revenue will be equal to zero.
Let's imagine that the firm with cost curves illustrated in the left panel of the figure below is a large cable TV provider. Now assume that the firm is regulated and that the regulator sets the price so that the firm earns a normal (zero) profit. What price does the regulator set?
Price = average cost (AC)
Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the level of output for this firm where marginal revenue is equal to marginal cost?
Q = 20
Consider a firm facing the following demand curve and cost structure: Demand: P = 100 - 2q; Fixed cost = 100; Marginal cost = 20. What is the level of output for this firm where marginal revenue is equal to marginal cost?
Q = 20 explanation: Since demand is linear and P = 100 - 2q, we know from the "shortcut" given in your text that marginal revenue has the same intercept as the demand curve with twice the slope, or MR = 100 - 4q. We set this equation equal to marginal cost (MC = 20) and solve for Q to find the optimal quantity, Q = 20.
Consider a firm facing the following demand curve and cost structure: Demand: P = 100 - 2q: Fixed cost = 100; Marginal cost = 10. What is the level of output for this firm where marginal revenue is equal to marginal cost?
Q = 22.5
Tommy Suharto, the son of Indonesian President Suharto (in office from 1967 to 1998), owned a media conglomerate, Bimantara Citra. In their entertaining book, Economic Gangsters, economists Raymond Fisman and Edward Miguel compared the stock price of Bimantara Citra with that of other firms on Indonesia's stock exchange around July 4, 1996, when the government announced that President Suharto was traveling to Germany for a health checkup. What do you think happened to the price of Bimantara Citra shares relative to other shares on the Indonesian stock exchange that day? What does this suggest?
Shares of Bimantara Citra likely fell by significantly more than shares in firms without such close connections to the president. This suggests that corruption was rampant in Indonesia.
Evaluate the accuracy of the following statements: I. In the United States, government regulation of cable TV cut the price of premium channels down to average cost. II. When consumers have many options, monopoly markup is lower. III. A patent is a government-created monopoly.
Statements II and III are true, but I is false.
In 1983, Congress passed the Orphan Drug Act, which gave firms that developed pharmaceuticals to treat rare diseases (diseases with U.S. patient populations of 200,000 people or fewer) the exclusive rights to sell their pharmaceutical for seven years, basically an extended patent life. In other words, the act gave greater market power to pharmaceutical firms who developed drugs for rare diseases. Perhaps surprisingly, a patient organization, the National Organization for Rare Disorders (NORD), lobbied for the act. Why would a patient group lobby for an act that would increase the price of pharmaceuticals to its members?
The act would increase the number of new drugs
Consider the special case of a monopoly in which MC = 0. Let's find the firm's best choice when more goods can be produced at no extra cost. A great deal of e-commerce is close to this model, where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters. Consider a monopoly facing the following demand curve and fixed costs: P = 120 - 12q; Fixed costs = 1,000 Should the firm go into business? If so, how much should the firm produce?
The firm should not go into business.
Consider the special case of a monopoly in which MC = 0. Let's find the firm's best choice when more goods can be produced at no extra cost. A great deal of e-commerce is close to this model, where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters. Consider a monopoly facing the following demand curve and fixed costs: P = 2,000 - Q; Fixed costs = 900,000 Should the firm go into business? If so, how much should the firm produce?
The firm should produce 1,000 units.
Consider the special case of a monopoly in which MC = 0. Let's find the firm's best choice when more goods can be produced at no extra cost. A great deal of e-commerce is close to this model, where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters. Consider a monopoly facing the following demand curve and fixed costs: P = 100 - Q. Fixed Costs = 1,000 Should the firm go into business? If so, how much should the firm produce?
The firm should produce 50 units.
Consider a market, as illustrated in the figure below, in which all firms have the same average cost curve. If a perfectly competitive firm in this market tried to set a price above the minimum point on its average cost curve, how many units would it sell?
The firm would sell zero units.
Consider a typical monopoly firm like the one shown in the figure below. If the monopolist finds a way to cut marginal costs, what will happen?
The monopolist will pass along some of the cost savings to the consumer in the form of lower prices.
Consider a market like the one illustrated in the figure below. If a monopoly in this market tried to set its price above the minimum point on its average cost curve, what would happen to the number of units it sells?
The number of units sold would fall.
Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the total revenue and total cost for the monopolist at the optimal level of output?
Total revenue = $600; Total cost = $300
China developed gunpowder, paper, the compass, water-driven spinning machines, and many other inventions long before their European counterparts. Yet they did not adopt cannons, industrialization, and many other applications until after the West did. Suppose you are an inventor in ancient China and suddenly realize that the fireworks used for celebration could be enlarged into a functioning weapon. Suppose there was no patent system, but you could sell your inventions to the government. What would your inclination be to invest in technological development compared with a world with a good patent law?
You would be less likely to invest.
In the following diagram, the area given by ______ represents the total profit accruing to a firm with market power.
area AEF
In the following diagram, the area given by ______ represents the deadweight loss accruing to society as a result of the monopoly
area EIG
In the following diagram, which curve represents the marginal revenue curve?
curve C
Complete the following sentence: If a pharmaceutical company is trying to decide what kinds of drugs to research, it will probably be lured toward inventing:
drugs with few good substitutes, because the demand for these drugs will be more inelastic
Rapido, the shoe company, is so popular that it has monopoly power. It's selling 20 million shoes per year, and it's highly profitable. The marginal cost of making extra shoes is quite low, and it doesn't change much if they produce more shoes. Rapido's marketing experts tell the CEO of Rapido that if it decreased prices by 20%, it would sell so many more shoes that profits would rise. If Rapido's CEO follows the expert's advice, marginal revenue will _____, and total revenue will ______.
fall; rise
In 2006, Medicare Part D was created to subsidize spending on prescription drugs. One would expect this expansion to ________ pharmaceutical prices, because ____________.
increase; fewer prescription expenses will be paid by those who consume the drugs
Monopolists charge a higher markup when demand is highly _________, and when customers have ____ good substitutes for a product.
inelastic; few
Profits will be higher for a patented drug with an _________ demand, and a drug with a highly elastic demand is ____ likely to be "important" than a patented drug with an inelastic demand.
inelastic; less
A New York City street vendor selling popcorn is ____ likely to charge a larger markup than a movie theater selling popcorn because ____ .
less; there are few close substitutes for popcorn in a movie theater. In addition, there are many close substitutes for a given street vendor's popcorn in New York City
Which of the following is TRUE when a monopoly is producing the profit-maximizing quantity of output?
marginal revenue = marginal cost
A pharmaceutical company selling a powerful new antibiotic is ____ likely to charge a higher markup than a firm selling a new powerful cure for dandruff because ____.
more; the demand for a dandruff cure is more elastic than the demand for a powerful antibiotic
A producer of new, trendy shoes is ____ likely to charge a larger markup than someone selling ordinary tennis shoes because ____.
more; there are fewer substitutes for trendy shoes than for ordinary shoes
Just based on self-interest, who is more likely to support strong patent and copyright protection on video games: People who really like old-fashioned video games or people who want to play the best, most advanced video games?
people who want to play new, advanced games, because they want to encourage innovation by video game companies
Let's imagine that the firm with cost curves illustrated in the left panel of the figure below is a large cable TV provider. Assuming that the firm is free to profit-maximize, which point on the diagram represents the firm's profit-maximizing price?
point A
In the following diagram, ______ represents the profit-maximizing price, while _____ represents the profit-maximizing quantity.
point A; point E
Just based on self-interest, who is more likely to support strong patents on pharmaceuticals: young people or old people? Why?
young people, because they have a longer time horizon to enjoy the benefits of newly invented drugs