ECON 302 Final CH 9

Suppose a firm's inverse demand curve is P = 100 - Q and its marginal cost is constant at $20. What is the value of the Lerner index at the profit-maximizing quantity? A) 0.67 B) 0.80 C) 0.22 D) 0.33

A) 0.67.

The inverse demand curve for a monopolist changes from P = 200 - 0.25Q to P = 180 - 0.25Q, while the marginal cost of production remains unchanged at a constant $90. After the change in the demand curve, the price falls _____ and the output falls by _____. A) $10; 40 units B) $20; 20 units C) $30; 40 units D) $40; 20 units

A) $10; 40 units

(Figure 9.7) The levels of producer surplus under monopoly and perfect competition are _____ and _____, respectively. A) $800; $0 B) $1,200; $0 C) $800; $400 D) $600; $200

A) $800; $0

Consider the demand curves facing two firms: For curve 1, a $4 decrease in price increases quantity demanded by 2 units. For curve 2, a $3 decrease in price increases quantity demanded by 1 unit. Curve _____ is steeper, so an expansion of output drives down marginal revenue more along _____. A) 2; curve 2 than curve 1 B) 2; curve 1 than curve 2 C) 1; curve 1 than curve 2 D) 1; curve 2 than curve 1

A) 2; curve 2 than curve 1.

Which of the following statements is (are) TRUE? I. The Lerner index is zero for a perfectly competitive firm. II. If P = $80 and MC = $60, the Lerner index = 0.25. III. If the price elasticity of demand is 1.25, the Lerner index is 0.80. IV. A higher price elasticity of demand leads to a higher price markup over marginal cost. A) I, II, and III B) I, II, III, and IV C) II and IV D) III

A) I, II, and III. I. The Lerner index is zero for a perfectly competitive firm. II. If P = $80 and MC = $60, the Lerner index = 0.25. III. If the price elasticity of demand is 1.25, the Lerner index is 0.80.

Which of the following are sources of market power? I. government-issued patents and copyrights II. a Minnesota law requiring all new funeral homes to have an embalming room, which costs upward of $30,000, whether or not it is functional or will be used III. a Portland, Oregon, law that makes it a crime for limousine companies to charge less than $50 per ride A) I, II, and III B) I C) II D) III

A) I, II, and III. I. government-issued patents and copyrights II. a Minnesota law requiring all new funeral homes to have an embalming room, which costs upward of $30,000, whether or not it is functional or will be used III. a Portland, Oregon, law that makes it a crime for limousine companies to charge less than $50 per ride.

A profit-maximizing monopolist is selling 20,000 units of output at $1,400 per unit. The marginal cost of production is constant at $600. What happens if marginal cost rises to $680? A) The monopolist will increase the price by less than $80 and sell less than 20,000 units of output. B) The monopolist will increase the price to $1,480 and sell 20,000 units of output. C) Because the monopolist is already maximizing profit, the increase in marginal cost will have no effect on the price or quantity produced. D) The monopolist will keep the price unchanged but sell more than 20,000 units of output to make up for higher costs of production.

A) The monopolist will increase the price by less than $80 and sell less than 20,000 units of output.

A firm that can affect the price of its product: A) faces a downward-sloping demand curve. B) has no demand curve (i.e., the relationship between price and quantity demanded breaks down). C) has a perfectly elastic demand curve. D) can sell whatever quantity it produces without changing its price.

A) faces a downward-sloping demand curve.

In Louisiana, it was a crime to sell burial caskets without a funeral director's license. This law was a source of _____ for licensed funeral directors and an example of _____. A) market power; a government-sanctioned barrier to entry B) market power; a natural monopoly C) product differentiation; scale economies D) scale economies; a natural monopoly

A) market power; a government-sanctioned barrier to entry

As Southwest Airlines began operating at various airports around the country: A) prices at those airports decreased and the number of passengers using them increased dramatically. B) market power became more concentrated, leading to higher fares and fewer flights. C) consumer surplus and the deadweight loss increased. D) consumer surplus decreased and the deadweight loss increased.

A) prices at those airports decreased and the number of passengers using them increased dramatically.

Rent-seeking refers to: A) the costly actions that firms undertake in their attempt to receive monopoly privilege from the government. B) the government's attempt to limit collusive price setting by industrial groups. C) the ability of some landlords to charge above competitive rental rates. D) any illegal activity designed to increase a firm's market power.

A) the costly actions that firms undertake in their attempt to receive monopoly privilege from the government.

For a monopoly, marginal revenue equals: A) the gain from selling an additional unit at the market price less the loss in revenue from lowering the price on the previous units. B) P/Q + P C) P + (Q/P)Q D) Q + (P/Q)P

A) the gain from selling an additional unit at the market price less the loss in revenue from lowering the price on the previous units.

Market power arises from: A) the entry of new firms to an industry in which the firms are earning large producer surplus. B) barriers to entry. C) diseconomies of scale. D) diminishing marginal returns.

B) barriers to entry.

The inverse demand for a drug that treats melanoma is given by P = 3,000 - 10Q, where Q measures the number of drug treatments and P is the price per treatment. Suppose that the marginal cost per drug treatment is constant at $10. What is the profit-maximizing price per drug treatment? A) $2,000 B) $1,505 C) $300 D) $2,900

B) $1,505

Suppose the doll company American Girl has an inverse demand curve of P = 150 - 0.25Q, where Q measures the quantity of dolls per day and P is the price per doll. The marginal cost is given by MC = 10 + 0.50Q. What is the total surplus at the profit-maximizing output level? A) $144,000 B) $12,250 C) $18,120 D) $4,500.

B) $12,250.

(Figure 9.10) If the government regulates the price of this natural monopolist to achieve a perfectly competitive output level, consumer surplus will change from _____ to _____. A) $3,000; $2,500 B) $15,000; $75,350 C) $5,000; $11,000 D) $17,000; $54,600.

B) $15,000; $75,350.

Suppose a firm lowers its price to $10, raising the quantity sold from 4 to 5 units. If the marginal revenue of the fifth unit is $2, the firm must have lowered its price by: A) $8. B) $2. C) $4. D) $10.

B) $2.

In market A, a firm with market power faces an inverse demand curve of P = 10 - Q and a marginal cost that is constant at $2. In market B, a firm with market power faces an inverse demand curve of P = 8 - 0.75Q and a marginal cost of $2. Producer surplus in market A is _____ than in market B. A) $8 higher B) $4 higher C) $2 lower D) $1 lower.

B) $4 higher.

The inverse demand curve for a monopolist changes from P = 100 - 2Q to P = 120 - 2Q, while the marginal cost of production remains unchanged at a constant $20. After the change in the demand curve, the profit-maximizing price rises from _____, and the profit-maximizing output rises from _____. A) $40 to $60; 20 units to 30 units B) $60 to $70; 20 units to 25 units C) $10 to $20; 100 units to 120 units D) $50 to $60; 10 units to 12 units

B) $60 to $70; 20 units to 25 units.

Silky Inc., which sells custom silk ties designed by famous people, faces a demand curve of Q = 150 - 0.2P, where Q is measured in hundreds of ties and P is the price per tie. The marginal cost of production is given by MC = 5Q. What is Silky's profit-maximizing output level? (Hint: Add two zeros to the number you get.) A) 25,000 B) 5,000 C) 450 D) 6,000

B) 5,000

(Figure 9.9) Which of the following statements is (are) TRUE? I. Consumer surplus under perfect competition is given by area A + B + C. II. Producer surplus under monopoly is given by area B + D. III. The deadweight loss from market power is area C. A) I, II, and III B) I and II C) III D) I

B) I and II. I. Consumer surplus under perfect competition is given by area A + B + C. II. Producer surplus under monopoly is given by area B + D.

Suppose a firm's inverse demand curve is given by P = 160 - 4Q. Which of the following statements is (are) TRUE? I. The firm's marginal revenue curve is given by MR = 160 - 8Q. II. The firm's marginal revenue cannot be negative. III. The firm's marginal revenue curve is given by MR = 40 - 0.50Q. IV. When Q = 10, MR = $80. A) I and II B) I and IV C) II and III D) III

B) I and IV. I. The firm's marginal revenue curve is given by MR = 160 - 8Q. IV. When Q = 10, MR = $80.

Suppose a firm's marginal cost is MC = 80 + 2Q and its marginal revenue is MR = 200 - Q. Which of the following statements is (are) TRUE? I. The profit-maximizing price is $180. II. If Q = 20, MR > MC, so the firm should expand output to increase profits. III. If Q = 50, MR < MC, so the firm should reduce output to increase profits. A) II and III B) I, II, and III C) I D) III

B) I, II, and III. I. The profit-maximizing price is $180. II. If Q = 20, MR > MC, so the firm should expand output to increase profits. III. If Q = 50, MR < MC, so the firm should reduce output to increase profits.

Which of the following statements is (are) TRUE? I. A natural monopoly owes its existence to economies of scale. II. In contrast to a monopoly industry, industries served by natural monopolies have no barriers to entry. III. Natural monopolies have cost structures characterized by small fixed costs and steeply rising marginal costs. A) I and II B) I C) III D) II and III

B) I. A natural monopoly owes its existence to economies of scale.

Which of the following statements is (are) TRUE? I. A firm with market power maximizes profit by producing so that P = MC or MR = MC. II. If marginal revenue exceeds marginal cost, the firm should expand output to increase profits. III. If a firm has no costs of production, it should continue producing until marginal revenue falls to zero. A) I B) II and III C) II D) I, II, and III

B) II and III. II. If marginal revenue exceeds marginal cost, the firm should expand output to increase profits. III. If a firm has no costs of production, it should continue producing until marginal revenue falls to zero.

(Figure 9.8) Which of the following statements is (are) TRUE? I. The deadweight loss owing to market power is $225. II. The price under perfect competition is $10. III. Consumer surplus under perfect competition is higher than under monopoly by $337.50. A) I, II, and III B) II and III C) III D) II

B) II and III. II. The price under perfect competition is $10. III. Consumer surplus under perfect competition is higher than under monopoly by $337.50.

(Figure 9.4) Which of the following statements is (are) TRUE? I. If the firm is producing 5 units of output, it should expand output to increase profits because P > MC. II. At a price of $16, the firm's profits would rise if it raised its price. III. The profit-maximizing quantity is 600 units. IV. The profit-maximizing price is $13. A) I and III B) IV C) II D) III

B) IV. The profit-maximizing price is $13.

(Figure 9.1) What is this firm's marginal revenue curve? A) MR = 6 B) MR = 18 - 3Q C) MR = 18 - 1.5Q D) MR = 12 - 0.5Q

B) MR = 18 - 3Q

(Figure 9.5) What happens to the firm's profit-maximizing price and quantity following the increase in demand from D1 to D2? A) The firm will increase the price to P3 and sell Q1 units of output. B) The firm will raise the price from P2 to less than P3 and increase output from Q1 to less than Q2. C) The firm will sell Q2 units of output at a price of P2. D) The firm will reduce output from Q3 to Q2 and raise price from P2 to P3.

B) The firm will raise the price from P2 to less than P3 and increase output from Q1 to less than Q2.

Market conditions change for a monopolist with an original marginal cost of MC = 5 + 10Q. The inverse demand curve rotates from P = 40 - 5Q to P = 47 - 2Q. What happens to the profit-maximizing price following the rotation of the demand curve? A) The price falls from $18 to $15. B) The price rises from $31.25 to $41. C) The price rises from $26 to $34. D) The price falls from $18.60 to $11.20.

B) The price rises from $31.25 to $41.

Many years ago the Aluminum Company of America owned almost all sources of the ore (bauxite) needed to produce aluminum. This is an example of market power arising from: A) extreme economies of scale. B) control of a key input. C) switching costs. D) network effects.

B) control of a key input.

A monopoly market is characterized by the inverse demand curve P = 1,200 - 40Q and a constant marginal cost of $200. If the marginal cost of production rises to $400, the profit-maximizing output level _____ units and the price rises by _____. A) decreases by 6; $100 B) decreases by 2.5; $100 C) increases by 4; $200 D) decreases by 8; $200

B) decreases by 2.5; $100.

Suppose that each firm in an industry has a total cost curve given by TC = 7,000 + 50Q. The lowest average total cost of producing 1,000 units of output occurs when: A) two firms each produce 500 units of output. B) one firm produces all 1,000 units of output. C) four firms each produce 250 units of output. D) 10 firms each produce 100 units of output.

B) one firm produces all 1,000 units of output.

Research by Acemoglu and Linn, which examined pharmaceutical drug development, found that: A) you would rather have a disease that afflicts a small number of people than a common one. B) the larger the potential market, the likelier drug companies are to develop a drug for that market. C) profits are not an important consideration for which drugs are developed. D) pharmaceutical companies earn normal rates of return in the long run, despite considerable market power in the short run.

B) the larger the potential market, the likelier drug companies are to develop a drug for that market.

Government encouragement of monopoly: A) usually leads to lower prices and higher consumer surplus. B) through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market. C) reduces the market power of regulated firms. D) results in the regulated firm producing beyond the competitive output level.

B) through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market.

A firm with market power has an inverse demand curve of P = 450 - 5Q and marginal cost of MC = 40Q, where Q is measured in thousands. What is the deadweight loss from market power at the firm's profit-maximizing output level? A) $15,000 B) $280,000 C) $22,500 D) $9,400

C) $22,500

A drug company produces a new drug to treat baldness. The inverse demand curve for the drug is P = 205 - 20Q, where Q measures the number of pills in millions. The various costs of production are given by TC = 100 + 5Q, ATC = 5 + 100/Q, and MC = 5. If the government grants this firm a patent, it will earn profits of _____. If the government revokes the patent and the firm must sell its drug at marginal cost because of competition, it will earn profits of _____. A) $600 million; $500,000 B) $2 billion; $0 C) $400 million; -$100 million D) $70 million; -$25 million.

C) $400 million; -$100 million.

At the profit-maximizing quantity, the firm's marginal cost is $40 and it charges a price of $60. What is the price elasticity of demand at the profit-maximizing quantity? A) -0.67 B) -1.5 C) -3 D) -0.5

C) -3.

(Figure 9.2) The marginal revenue from expanding output from Q1 to Q2 is represented by area: A) C. B) B + C. C) B - D. D) A + D - B.

C) B - D.

Which of the following statements is (are) TRUE? I. If the government regulates the price of a natural monopoly such that price equals marginal cost, the natural monopolist may earn a negative profit. II. Government regulation of natural monopolies is straightforward because regulators can precisely estimate the demand and cost conditions of regulated firms. III. Government regulation based on production costs makes firms less likely to reduce costs if lower costs lead to lower regulated prices. A) I, II, and III B) II and III C) I and III D) I

C) I and III. I. If the government regulates the price of a natural monopoly such that price equals marginal cost, the natural monopolist may earn a negative profit. III. Government regulation based on production costs makes firms less likely to reduce costs if lower costs lead to lower regulated prices.

(Figure 9.6) What happens to the profit-maximizing price and quantity following the change in the demand curve from D1 to D2? A) The price rises from $5 to approximately $5.75, and the output decreases from 300 to approximately 250 units. B) The price falls from $4.50 to $3, and the output increases from 300 to 500 units. C) The price falls from $5 to approximately $4, and the output increases from 300 to approximately 333 units. D) The price rises from approximately $4 to $5, and the output remains unchanged at 300 units.

C) The price falls from $5 to approximately $4, and the output increases from 300 to approximately 333 units.

In a market served by a monopoly, the marginal cost is $60 and the price is $110. In a perfectly competitive market, the marginal cost is $60. If the marginal cost increased from $60 to $75, the monopoly would raise its price _____, and the price in the perfectly competitive market would _____. A) by $75; increase to $75 B) to $115; remain unchanged at $60 C) by less than $15; increase to $75 D) by $15; increase by $15

C) by less than $15; increase to $75.

Market power occurs when a firm: A) can sell additional units of output without lowering the price of its product. B) must sell additional units of output at a constant marginal cost. C) can influence the price of its product. D) maximizes profit at the output level where P = MC.

C) can influence the price of its product.

Antitrust laws: A) encourage firms to work together on setting prices, market share, and output levels. B) cannot be used to prevent the merger of two firms. C) restrict firms from engaging in behaviors that make markets less competitive. D) ensure that firms with market power are not penalized for colluding.

C) restrict firms from engaging in behaviors that make markets less competitive.

(Figure 9.7) The levels of consumer surplus under monopoly and perfect competition are _____ and _____, respectively. A) $600; $2,000 B) $200; $400 C) $800; $3,200 D) $400; $1,600

D) $400; $1,600

Bubba Golf, a manufacturer of golf clubs, can sell 3 drivers at $600 each. To sell 4 drivers, Bubba Golf must lower the price to $580 each. The marginal revenue of the fourth club is: A) $20. B) $60. C) $580. D) $520.

D) $520.

(Figure 9.10) If the government regulates the price of this natural monopolist to achieve a perfectly competitive output level, the regulated price will be: A) $8.15. B) $14. C) $10. D) $6.30.

D) $6.30.

A firm's demand curve is given by Q = 100 - 0.67P. What is the firm's corresponding marginal revenue curve? A) 150 - 0.67Q B) 100 - 0.67Q C) 150 - Q D) 150 - 1.5Q

D) 150 - 1.5Q

(Figure 9.3) The profit-maximizing quantity and price are _____ and _____, respectively. A) 6 units; $6 B) 10 units; $8 C) 14 units; $4 D) 6 units; $12

D) 6 units; $12

Table 9.1) Which of the following is (are) TRUE? I. A = B = $400 II. C = $200 III. D = $0 A) I, II, and III B) I and II C) III D) I and III

D) I and III. I. A = B = $400. III. D = $0.

Mobile phone portability allows consumers to retain their phone number if they change to a different phone network, which will tend to: A) increase barriers to entry in the phone industry. B) discourage product differentiation and increase switching costs. C) encourage the formation of natural monopolies. D) reduce market power in the phone industry.

D) reduce market power in the phone industry.