Practice Problems 2

An electric power company uses block pricing for electricity sales. Block pricing is an example of: A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) Block pricing is not a type of price discrimination.

B

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the: A) firm is maximizing profit. B) firm's output is smaller than the profit maximizing quantity. C) firm's output is larger than the profit maximizing quantity. D) firm's output does not maximize profit, but we cannot conclude whether the output is too large or too small.

B

If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be: A) negative. B) positive. C) zero. D) indeterminate from the given information.

B

The more elastic the demand facing a firm, A) the higher the value of the Lerner index. B) the lower the value of the Lerner index. C) the less monopoly power it has. D) the higher its profit.

B

Under a binding price ceiling, what does the change in producer surplus represent? A) The gain in surplus for those sellers who are still willing to supply the product at the lower price. B) The loss in surplus associated with those units that used to be produced at the higher price but are no longer produced at the lower price. C) The gain in surplus associated with the excess demand created by the price ceiling policy. D) Both A and B are correct. E) Both A and C are correct.

B

What is the value of the Lerner index under perfect competition? A) 1 B) 0 C) infinity D) two times the price

B

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? A) The firm should cut output. B) This is typical for a monopolist; output should not be altered. C) The firm should increase output. D) None of the above is necessarily correct.

A

A situation in which each firm selects its best action, given what its rivals are doing, is called a: A) Nash equilibrium. B) Cooperative equilibrium. C) Stackelberg equilibrium. D) zero sum game.

A

The burden of a tax per unit of output will fall heavily on consumers when demand is relatively ________ and supply is relatively ________. A) inelastic; elastic B) inelastic; inelastic C) elastic; elastic D) elastic; inelastic

A

You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. You will charge the higher price in the market with the: A) lower own price elasticity of demand (more inelastic demand). B) higher own price elasticity of demand (more elastic demand). C) larger teenage population. D) greater consumer incomes.

A

Which of the following statements about natural monopolies is true?A) Natural monopolies are only found in the markets for natural resources (like crude oil and coal). B) For natural monopolies, marginal cost is always below average cost. C) For natural monopolies, average cost is always increasing. D) Natural monopolies cannot be regulated.

B

Suppose a competitive market is in equilibrium at price P' and quantity Q'. If the demand curve becomes less elastic, but the same price-quantity equilibrium is maintained, what happens to consumer and producer surplus? A) Both PS and CS increase. B) CS increases and PS decreases. C) CS increases and PS remains the same. D) Both CS and PS decrease.

C

Under perfect price discrimination, consumer surplus: A) is less than zero. B) is greater than zero. C) equals zero. D) is maximized.

C

What is the welfare impact of a subsidy policy? A) Producer surplus increases, consumer surplus declines, and total welfare declines. B) Producer and consumer surplus increase, and these gains are larger than the government cost. C) Producer and consumer surplus increase, and these gains are smaller than the government cost. D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program

C

Which of the following is NOT associated with a high degree of monopoly power? A) A relatively inelastic demand curve for the firm B) A small number of firms in the market C) Significant price competition among firms in the market D) Significant barriers to entry

C

In comparing the Cournot equilibrium with the competitive equilibrium, A) both profit and output level are higher in Cournot. B) both profit and output level are higher in the competitive equilibrium. C) profit is higher, and output level is lower in the competitive equilibrium. D) profit is higher, and output level is lower in Cournot.

D

In the Cournot duopoly model, each firm assumes that: A) rivals will match price cuts but will not match price increases. B) rivals will match all reasonable price changes. C) the price of its rival is fixed. D) the output level of its rival is fixed.

D

Suppose the market supply curve is upward sloping and market demand is perfectly inelastic. If the market price is held above the equilibrium level, which of the following statements about the resulting outcome is not true? A) The decrease in consumer surplus is fully captured by the producers. B) There will be an excess quantity supplied. C) Quantity demanded will remain the same. D) Quantity demanded will decline.

D

The marginal cost of a monopolist is constant and is $10. The marginal revenue curve is given as follows: MR = 100 - 2QThe profit maximizing price is: A) $70. B) $65. C) $60. D) $55. E) $50.

D

When a firm charges each customer the maximum price that the customer is willing to pay, the firm: A) engages in a discrete pricing strategy. B) charges the average reservation price. C) engages in second-degree price discrimination. D) engages in first-degree price discrimination.

D

Government intervention can increase total welfare when: A) there are costs or benefits that are external to the market. B) consumers do not have perfect information about product quality. C) a high price makes the product unaffordable for most consumers. D) all of the above E) A and B only

E

Import tariffs generally result in: A) higher domestic prices. B) less consumer surplus. C) more producer surplus for domestic producers. D) a deadweight loss. E) all of the above

E

An effective price ceiling causes a loss of: A) producer surplus for certain and possibly consumer surplus as well. B) consumer surplus only. C) producer surplus only. D) consumer surplus for certain and possibly producer surplus as well. E) neither producer nor consumer surplus.

A

With respect to monopolies, deadweight loss refers to the: A) socially unproductive amounts of money spent to obtain or acquire a monopoly. B) net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy. C) lost consumer surplus from monopolistic pricing. D) none of the above

B

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: A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) fourth-degree price discrimination. E) fifth-degree price discrimination.

C

Which of the following is true at the output level where P = MC? A) The monopolist is maximizing profit. B) The monopolist is not maximizing profit and should increase output. C) The monopolist is not maximizing profit and should decrease output. D) The monopolist is earning a positive profit.

C

Which of the following is true when the government imposes a price ceiling on a monopolist? A) Marginal revenue becomes horizontal. B) Marginal revenue is linear. C) Marginal revenue is kinked—horizontal and then downward sloping. D) Marginal revenue is kinked—downward sloping and then horizontal.

C