Chapter #12 Homework Questions
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 $___. Suppose the monopolist could price discriminate by setting a different price for each group. The monopolist's best price to charge adults is $___, and his best price to charge children is $___. Which of the following scenarios will yield the maximum profit for the monopolist? A. Charging the best single price of $30 from both children and adults. B. Charging a price of $30 from adults and a price of $10 from children. C. Charging a price of $20 from adults and a price of $10 from children. D. Charging the best single price of $20 from both children and adults.
$20 $30 $10 B. Charging a price of $30 from adults and a price of $10 from children.
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 $40 for your product; B is willing to pay up to $15. 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? A. $50. B. $20. C. $15. D. $40. If you could practice third-degree price discrimination, you will earn a profit of $____.
$40 $39
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. A monopolist, such as one selling life-saving drugs, still faces downward-sloping demand curves. B. Monopolists that sell life-saving drugs face a horizontal supply curve. C. If the producers of life-saving drugs raise the price, the price effect always dominates and total revenue falls. D. The government will force monopolies to lower drug prices if they charge too much.
A. A monopolist, such as one selling life-saving drugs, still faces downward-sloping demand curves.
To restrict a firm's monopoly power, why can't antitrust authorities just set a floor or a ceiling in the market? A. It is difficult to set a fair price, and even if regulators did, the firm would then have no incentive to innovate. B. It is difficult to set a fair price, so regulators do not get involved in the pricing decisions of any monopolists. C. The government does not have the power to dictate what a firm can charge; it can only stop mergers. D. Floors or ceilings lead to inefficiency and deadweight loss, which can be avoided if the monopoly sets its own price.
A. It is difficult to set a fair price, and even if regulators did, the firm would then have no incentive to innovate.
Which of the following factors can be considered as a bright side to those types of laws? (Check all that apply.) A. Such laws offer incentives to innovators. B. Such laws do not provide permanent protection to innovators. C. Such laws never allow other producers to distribute protected goods. D. Such laws discourage the innovators from making expensive investments in research and development.
A. Such laws offer incentives to innovators. B. Such laws do not provide permanent protection to innovators.
Which of the following statements are true regarding a monopoly? (Check all that apply.) A. The price chosen by the firm is the one that helps the firm earn the highest profit. B. The firm's equilibrium long-run profit is zero. C. The demand curve faced by a firm has a negative slope. D. The seller is concerned with the behavior of the other sellers.
A. The price chosen by the firm is the one that helps the firm earn the highest profit. C. The demand curve faced by a firm has a negative slope.
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? A. There are many close substitutes for cellophane such as aluminum foil and waxed paper, so DuPont did not have significant market power. B. Cellophane is a small part of consumers' consumption, so monopoly pricing has not caused any harm to consumers. C. Since DuPont only produced 75 percent of all cellophane, not 100 percent, it is a price-taker with no pricing power. D. As a monopoly, DuPont was beneficial to the community since it hired many workers and paid high salaries.
A. There are many close substitutes for cellophane such as aluminum foil and waxed paper, so DuPont did not have significant market power.
Suppose you are an "all-knowing" government planner. Your goal is to regulate a monopolist's price and quantity in order to maximize social welfare but still allow the monopolist to produce. To accomplish your goal, you would have the monopoly produce where ____________. (Assume costs are such that the firm would not incur a loss) A. marginal cost equals demand, and you would price the good at marginal cost. B. demand is highest, and you would price the good at zero. C. marginal cost equals marginal revenue, and you would price the good at marginal cost. D. marginal cost equals marginal revenue, and you would price the good at demand.
A. marginal cost equals demand, and you would price the good at marginal cost.
The Department of Justice filed a lawsuit against Microsoft claiming it was engaging in unfair practices by ____________. A. monopolizing the market by bundling its operating system with its Internet Explorer browser. B. keeping the software code behind its operating system secret from users and competitors. C. producing less than the efficient amount of its operating system and charging above the competitive market price. D. selling its operating system at different prices to different people based on consumer characteristics.
A. monopolizing the market by bundling its operating system with its Internet Explorer browser.
Legal market power is created by ___________, and arises due to ____________. A. the government; copyrights B. advertising; a change in consumer preferences. C. market forces; economies of scale D. foreign competition; patent
A. the government; copyrights
Which of the following statements are true regarding perfect competition? (Check all that apply.) A. There are significant restrictions on entry into the industry. B. The price of a good is equal to its marginal cost. C. The firms are price takers earning zero profits in the long-run. D. There are few firms each selling an identical product.
B. The price of a good is equal to its marginal cost. C. The firms are price takers earning zero profits in the long-run.
To say that a good has network effects means that the ____________. A. good relies on the high prices of substitute goods in order to keep its demand up. B. value of the product increases as more people use it. C. value of the product decreases as more people use it. D. good is just one of many goods that will be used to make a final good.
B. value of the product increases as more people use it.
Market power relates to the ability of sellers to affect __________, and arises because of ____________. A. consumer preferences; increased the ability of monopolies to advertise. B. prices; barriers to entry. C. consumer preferences; the invisible hand. D. prices; competition from foreign firms.
B. prices; barriers to entry.
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? A. Satellite radio is most often used in cars and neither firm had any pricing power in the car market. B. Compared to the price of a car, the satellite radio subscription was too small a part of the consumer budget to matter. C. There are many close substitutes for satellite radio; therefore, Sirius-XM would not exercise market power. D. By stopping the merger, it would have limited the amount of variety on the radio, thereby limiting free speech.
C. There are many close substitutes for satellite radio; therefore, Sirius-XM would not exercise market power.
Social surplus increases because ____________. A. consumers now capture all surplus. B. the marginal cost drops. C. deadweight loss is eliminated. D. demand increases.
C. deadweight loss is eliminated.
Monopolists do not use a supply curve because they A. set price without regard for demand. B. produce to where marginal revenue is greater than the additional cost per unit. C. do not vary production based on market price. D. are price-takers.
C. do not vary production based on market price.
Natural market power is created by ___________, and arises due to ____________. A. the government; copyrights B. advertising; a change in consumer preferences. C. market forces; economies of scale D. foreign competition; patents
C. market forces; economies of scale
Upper A local grocery store charges more for one soda than for a six minus pack. This is an example of ___________. A. perfect price discrimination. B. first-degree price discrimination. C. second-degree price discrimination. D. third-degree price discrimination.
C. second-degree price discrimination.
In reality, practicing price discrimination is difficult because: A. the monopolist doesn't know the demographics of his consumer base. B. the monopolist doesn't know which demographics fit his consumer base. C. the monopolist doesn't know each consumer's willingness to pay. D. the monopolist doesn't know each consumer's income level.
C. the monopolist doesn't know each consumer's willingness to pay.
A report by the Wall Street Journal found there were several online retailers that offered customers different prices based on their browsing history and other characteristics. This is an example of ____________. A. first-degree price discrimination. B. perfect price discrimination. C. third-degree price discrimination. D. second-degree price discrimination. How can such strategies help retailers? A. By charging different prices to different groups, producer surplus will likely increase. B. Retailers can charge a price closer to each consumer's willingness to pay, thus increasing profits. C. By segmenting the market into groups, retailers can maximize profits by acting like a monopolist. D. All of the above.
C. third-degree price discrimination. D. All of the above.
In which of the following ways is a monopoly beneficial to an economy? A. Firms that are allowed monopoly profits search out innovative technologies that they can bring to market. B. With natural monopolies, costs may be lower than those that would exist in competitive markets with many producers. C. Monopoly profits give firms more reason to invest in the creation of new products through research and development. D. All of the above.
D. All of the above.
Which of the following is a key difference between perfect competition and monopoly? A. In perfect competition, there are high entry barriers, but with monopoly, barriers to entry are low. B. Monopolies produce identical goods, while goods produced by perfectly competitive firms are slightly differentiated. C. With monopoly, social surplus is always maximized. D. In perfect competition, no one firm can influence price, but with monopoly, a single seller sets the price.
D. In perfect competition, no one firm can influence price, but with monopoly, a single seller sets the price.
A significant difference between monopolies and competitive firms is that A. the competitive firm must drop its price to sell more while the monopolist can keep price constant. B. competitive firms control market supply, but monopolies do not. C. low entry barriers exist for monopolies, but not for competitive firms. D. a monopoly's demand curve is the industry's demand curve, while the competitive firm's demand curve is perfectly elastic.
D. a monopoly's demand curve is the industry's demand curve, while the competitive firm's demand curve is perfectly elastic.
Some economists believe the threat of unfair monopolies is greater today than when the Sherman Act was first enacted. They argue that modern software can gain monopoly status and establish a barrier to entry through ____________. A. increased access to venture capital money. B. greater costs in applying for patents and copyrights. C. the ability to raise money from the stock market. D. network externalities.
D. network externalities.
Upper A fast minus food combo meal costs less than if you bought each item separatelyA fast−food combo meal costs less than if you bought each item separately. This is an example of ___________. A. third-degree price discrimination. B. first-degree price discrimination. C. perfect price discrimination. D. second-degree price discrimination.
D. second-degree price discrimination.
If the monopolist loses its monopoly power, price (DECREASE / INCREASE / NO CHANGE), consumer surplus (DECREASE / INCREASE / NO CHANGE), producer surplus (DECREASE / INCREASE / NO CHANGE), and social surplus (DECREASE / INCREASE / NO CHANGE)
DECREASE INCREASE DECREASE INCREASE
Compared to a perfectly competitive market, the price in a monopoly market is (LOWER / HIGHER) and quantity is (LOWER / HIGHER).
HIGHER LOWER
The exclusivity laws in the form of patents and copyrights make (INNOVATORS / CONSUMERS) better off and (INNOVATORS / CONSUMERS) worse off.
INNOVATORS CONSUMERS
For a monopolist, total revenue (IS NOT / IS) calculated the same way as in perfect competition; marginal revenue (IS NOT/ IS) equal to price.
IS IS NOT
