Econ Pearson Chapter 12

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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.


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