Quiz 7 - Intermediate ECON

Which of the following is NOT true for monopoly?

At the profit maximizing output, price equals marginal cost.

Use the following two statements to answer this question: I. A firm can exert monopoly power if and only if it is the sole producer of a good. II. The degree of monopoly power a firm possesses can be measured using the Lerner Index: L = (P-AC)/AC

Both I and II are false.

Refer to Figure 10.4.3. At output Qm, and assuming that the monopoly has set her price to maximize profit, the consumer surplus is:

CDE.

Which factors determine the firm's elasticity of demand?

Elasticity of market demand, number of firms, and the nature of interaction among firms

Which of the following statements about natural monopolies is true?

For natural monopolies, marginal cost is always below average cost.

Refer to Figure 10.4.3. In moving from the competitive level of output and price to the monopoly level of output and price, the deadweight loss is the area:

GEH

Use the following two statements to answer this question: I. For a monopolist, at every output level, average revenue is equal to price. II. For a monopolist, at every output level, marginal revenue is equal to price.

I is true, and II is false.

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. Suppose that in addition to the tax, a business license is required to stay in business. The license costs $1000. What happens to profit?

It decreases by $1000.

DVDs can be produced at a constant marginal cost, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. If the Lerner indices for Rambeau 17 divided by the Lerner index for Schreck 10 equals 0.5, what is the constant marginal cost of producing both DVDs?

MC = $15

Which of the following is NOT true regarding monopoly?

Monopolist can charge as high a price as it likes.

Refer to Scenario 10.6. If red rubber balls can be produced at any of the three plants, and John decides to produce 1 red rubber ball, at which plant will he produce it?

Montana

Suppose a government sets the price for a natural monopoly at the competitive level such that P = MC. To keep the seller from taking a loss under this policy, the government could provide a lump-sum payment to the firm. How could we determine this payment?

Multiply the competitive quantity by the difference between MC and AC

Roaring Lion Studios can produce DVDs at a constant marginal cost of $5 per disk, and the studio has just releasing the DVD for its latest hit film, Ernest Goes to the Hamptons. The retail price of the DVD is $25, and the elasticity of demand for this film is -2. Has the studio selected the profit-maximizing retail price for this DVD?

No, the retail price is too high

To find the profit maximizing level of output, a firm finds the output level where:

None of these

Refer to Figure 10.4.2 above. If the monopolist is not regulated, the price will be set at:

P2.

Refer to Figure 10.1.1 above. For the monopolist shown below, the profit maximizing level of output is:

Q1

Scenario 10.8: Adriana is a monopolist producing green calculators. The average and marginal cost curves and average and marginal revenue curves for her product are given as follows: AC = Q + (10,000/Q) MC = 2QAR = 30 - (Q/2)MR = 30 - Q Refer to Scenario 10.8. Suppose that the regulatory agency sets your price where average revenue equals average cost. How much profit will Adriana make?

She will break even.

Which of the following is NOT associated with a high degree of monopoly power?

Significant price competition among firms in the market

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?

The firm should cut output.

Refer to Figure 10.2.1 above. Which monopoly charges a greater price markup?

The monopoly in panel (b).

Suppose your firm develops a new pharmaceutical product that may be used to reduce blood cholesterol levels, so the firm is the monopoly seller of this drug. If the elasticity of demand for this new product is -4, what markup should your firm use to set the profit-maximizing price for the product?

The price-cost markup is 25% of the price.

The firms in a market have decided not to compete with one another and have agreed to limit output and raise price.

This practice is known as collusion and is illegal in the United States.

Under which of the following scenarios is it most likely that monopoly power will be exhibited by firms?

When there are few firms in the market and the demand curve faced by each firm is relatively inelastic

Refer to Figure 10.4.1 above. The producer net gains equal:

area A - C

Deadweight loss from monopoly power is expressed on a graph as the area between the:

average revenue curve and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets.

A manufacturer of digital music players uses a proprietary file format that is not used by the other firms in the market. This action by the firm may be an example of using a ________ to reduce the number of firms in the market and to maintain a relatively inelastic demand for its products.

barrier to entry

At the profit-maximizing level of output, demand is:

elastic, but not infinitely elastic.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. At the profit-maximizing level of output, demand is:

elastic, but not infinitely elastic.

If the regulatory agency sets a price where AR = AC for a natural monopoly, output will be:

greater than the monopoly profit maximizing level and less than the competitive level.

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity.

higher; smaller

The monopolist that maximizes profit:

imposes a cost on society because the selling price is above marginal cost.

Scenario 10.4: The demand for tickets to the Katy Perry concert (Q) is given as follows: Q = 120,000 - 2,000P The marginal revenue is given as: MR = 60 - .001Q The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point. Refer to Scenario 10.4. Suppose that the municipal stadium authority imposes a tax of $10 per ticket on the concert promoters. Given the information above, the profit maximizing ticket price would:

increase by $5.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. Suppose that a tax of $5 per unit of output is imposed on red herring producers. The price of red herring will:

increase by less than $5.

The regulatory lag:

is likely to occur with rate-of-return regulation.

When the demand curve is downward sloping, marginal revenue is:

less than price.

The ________ elastic a firm's demand curve, the greater its ________.

less; monopoly power

Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers. As more types of MP3 players are introduced into the market, the demand facing Orange becomes ________ elastic and the Lerner index achieved by the firm in this market ________.

more; declines

With respect to monopolies, deadweight loss refers to the:

net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy.

When a per unit tax is imposed on the sale of a product of a monopolist, the resulting price increase will:

not always be less than the tax.

Scenario 10.4: The demand for tickets to the Katy Perry concert (Q) is given as follows: Q = 120,000 - 2,000P The marginal revenue is given as: MR = 60 - .001Q The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point. A multiplant monopolist can produce her output in either of two plants. Having sold all of her output she discovers that the marginal cost in plant 1 is $30 while the marginal cost in plant 2 is $20. To maximize profits the firm will:

produce less output in plant 1 and more in plant 2.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. Compared to a competitive red herring industry, the monopolistic red herring industry:

produces less output at a higher price.

Monopoly power results from the ability to:

set price above marginal cost.

Refer to Figure 10.4.3. In moving from the competitive level of output and price to the monopoly level of output and price, the monopolist is able to add to producer surplus:

the area BCEF less the area GFH.

The more elastic the demand facing a firm,

the lower the value of the Lerner index.

The monopolist has no supply curve because:

the quantity supplied at any particular price depends on the monopolist's demand curve.

Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change would be:

to decrease the consumer surplus of Japanese rice consumers.

Scenario 10.1: Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2MR = 40 - 0.5QTC = 4QMC = 4 Refer to Scenario 10.1. How much profit will she make?

$1,296

The marginal cost of a monopolist is constant and is $10. The demand curve and marginal revenue curves are given as follows: demand: Q = 100 - P marginal revenue: MR = 100 - 2Q The deadweight loss from monopoly power is:

$1012.50.

You work as a marketing analyst for a pharmaceutical firm, and you are trying to gather information about the marginal cost of production for a competing firm. You know that they have a patent on a popular medication that sells for $20 per dose, and you believe the elasticity of demand for this product is roughly -4. Assuming the competing firm acts as a profit-maximizing monopolist, what is the competing firm's approximate marginal cost of production?

$15 per dose

Refer to Figure 10.1.2 above. When the monopoly maximizes profit, how much is the amount of profit?

$15.6

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. Suppose that a tax of $5 for each unit produced is imposed by state government. How much profit does the monopolist earn?

$4050

Refer to Scenario 10.9. What is the maximum amount that Maui Macadamia would be willing to spend in order to maintain its monopoly through rent seeking?

$5,400

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. What is the profit maximizing price?

$52.50

The marginal cost of a monopolist is constant and is $10. The marginal revenue curve is given as follows: MR = 100 - 2Q The profit maximizing price is:

$55

DVDs can be produced at a constant marginal cost of $5 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the price elasticities of demand for these two movies?

-1.33 and -1.2, respectively

What is the value of the Lerner index under perfect competition?

0

DVDs can be produced at a constant marginal cost of $10 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the Lerner indices for these two movies?

0.5 and 0.67, respectively

What is the profit maximizing price?

10

After the imposition of a tax of $2 per unit of output, what is the profit maximizing price?

11

Refer to Scenario 10.5. How many garden hoses should be produced in California in order to maximize profits?

3

Scenario 10.9: Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8QMC = 4Q Refer to Scenario 10.9. What is the profit maximizing level of output?

30

Refer to Scenario 10.6. If red rubber balls can be produced at any of the three plants, what is the marginal cost of 5th red rubber ball?

4

Scenario 10.8: Adriana is a monopolist producing green calculators. The average and marginal cost curves and average and marginal revenue curves for her product are given as follows: AC = Q + (10,000/Q) MC = 2QAR = 30 - (Q/2)MR = 30 - Q Refer to Scenario 10.8. The deadweight loss from monopoly is:

5

Suppose that a tax of $2 per unit of output is imposed on red rubber ball producers. What level of output maximizes profit?

5

Scenario 10.9: Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8QMC = 4Q Refer to Scenario 10.9. At the profit maximizing level of output, what is the level of producer surplus?

5,400

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. The marginal cost of red herrings is given as: MC = 0.6Q. What is the profit-maximizing level of output?

50

Scenario 10.7: The marginal revenue of green ink pads is given as follows: MR = 2500 - 5Q The marginal cost of green ink pads is 5Q. Refer to Scenario 10.7. How many ink pads will be produced to maximize revenue?

500

The demand curve and marginal revenue curve for red rubber balls are given as follows: Q = 16 - P MR = 16 - 2Q What level of output maximizes profit?

6

Scenario 10.1: Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2MR = 40 - 0.5QTC = 4QMC = 4 Refer to Scenario 10.1. How much output will Barbara produce?

72

Suppose there are seven firms in a market where the three largest firms supply 20% of the market-clearing quantity and the other four firms supply 10% of the market-clearing quantity. What is the five-firm concentration ratio (i.e., the share of total sales controlled by the five largest firms in the market)?

80%

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. Suppose that in addition to the tax, a business license is required to stay in business. The license costs $1000. What is the profit maximizing level of output?

90

Scenario 10.9: Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8QMC = 4Q Refer to Scenario 10.9. At the profit maximizing level of output, what is the deadweight loss?

900

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. What is the profit maximizing level of output?

95

For a monopolist, changes in demand will lead to changes in:

Any of these can be true.