Ch. 9 Monopoly
33. As shown in Exhibit 9-4, in order to maximize its profit (or minimize its loss), what price should the monopoly charge for its product?
$120 per unit.
28. Refer to Exhibit 9-2. Using the rule that focuses on the marginal approach to maximizing profits, the monopolist maximizes profit by choosing price equal to:
$20.
69. Consider Exhibit 9-3. Suppose GeneTech's patent expires and the market for the vaccine becomes perfectly competitive. Which of the following price and quantity combinations would be most likely?
$28 per dose and 450 doses per hour
30. In Exhibit 9-3, what is the maximum hourly profit that GeneTech can earn from its vaccine?
$3,000.
23. At a price of $5, 24 units of the good would be sold; at a price of $7, 25 units of output would be sold. The marginal revenue of the 25th unit of output is:
$55.
53. Suppose that a study of changes in admission prices reveals that when the price of admission to the museum increases by 10%, adults reduce their ticket purchases by 10%, senior citizens reduce their ticket purchases by 20%, college students reduce their ticket purchases by 25%, and children reduce their ticket purchases by 30%. If the cost of having a person visit the museum is the same regardless of whether the person is an adult, senior citizen, college student, or child, which of the following pricing schemes is the most likely to be used by the museum and why?
$8 for children, $10 for college students, $12 for senior citizens, and $15 for adults because the museum can earn higher profits by charging the highest price to those with the least elastic demand and the lowest price to those with the most elastic demand.
70. If the profit-maximizing monopoly in Exhibit 9-7 becomes a profit-maximizing perfectly competitive market, the price will go from
$8 to $6.
38. When the monopolist is maximizing total profit in Exhibit 9-6, the average total cost of producing that output level is:
$8.
35. By calculating the data provided in Exhibit 9-5, how much is the profit if the firm decides to produce 7 units?
0.
25. The marginal revenue of the second unit of output in Exhibit 9-2 is:
10
29. In Exhibit 9-3, how much vaccine should GeneTech produce to maximize its profit?
300 doses per hour.
32. As shown in Exhibit 9-4, in order to maximize its profit (or minimize its loss), how much output should the monopoly produce?
4 units per hour.
34. Refer to Exhibit 9-5. The demand schedule and cost schedule for a monopolist are provided. Which output level maximizes profit?
4.
55. Which of the following does not represent an arbitrage transaction?
A boat manufacturer buys the electrical components for its boats from the lowest cost supplier and then sells the boats to consumers.
77. Which of the following is true about a monopoly?
A monopoly charges a higher price and produces a lower output level than if the market were competitive.
13. What is a natural monopoly? Why is government justified in regulating a natural monopoly?
A natural monopoly is a monopoly that results from very extensive economies of scale. Government is justified in regulating a natural monopoly to ensure that the monopoly does not gouge consumers with "unnecessarily" high prices.
24. In Exhibit 9-1, the marginal revenue curve corresponding to the monopolist's demand curve would be a straight line drawn between points:
A to D.
12. Why do economies of scale and monopoly power exist with network goods?
As the number of people connected to a network increases, the greater the benefits each person gets and the smaller the cost per unit to supply.
18. Why can a monopoly earn economic profits in the long run?
Because a monopoly experiences very strong barriers to entry, keeping potential competitors out of its market, it can earn economic profits in the long run. Barriers to entry may include economies of scale, financial and technological barriers to entry, sole ownership over a strategic resource, and even government laws and regulation.
66. Suppose both a monopolist and a perfectly competitive firm are producing in their respective markets at a point where marginal cost is $8 and marginal revenue is $10. What should the profit-maximizing firms do?
Both the monopolist and the perfectly competitive firm should increase output until MC = MR.
46. Suppose there are four buyers all considering purchasing round-trip airfare from Boston to Miami with the following price elasticities of demand for this purchase: Buyer A: 1.5, Buyer B: 0.7, Buyer C: 1.0, Buyer D: 2.3. If the airline knows of these elasticities and practices price discrimination, which buyer will pay the highest price for the airfare?
Buyer D
48. Which of the following is not a necessary condition for effective price discrimination?
Consumers must tell the seller how much they are willing to pay for the product.
39. According to the information provided in Exhibit 9-7, if the Rudd Ice Company is a monopoly and is currently charging a price of $10, what would you advise Rudd to do?
Decrease price and increase output.
9. Which of the following is true under natural monopoly?
Economies of scale exist.
40. According to the information provided in Exhibit 9-7, if the Rudd Ice Company is a monopoly and is currently charging a price of $6, what would you advise Rudd to do?
Increase price and decrease output.
10. Suppose a single firm can produce 100 units at an average cost of $15. If two firms produce 50 units each, the total cost rises to $2,500. Which of the following is true about this market?
It is a natural monopoly.
16. Which of the following firms best fits the definition of a monopoly?
Local electric utility
75. Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is a competitive price taker?
Marginal revenue and market price are equal for the competitive price taker but not for the monopolist.
80. Which of the following best explains an economic criticism of unregulated monopolists?
Monopolists restrict output, and as a result, they fail to produce units that are valued more than the marginal cost of producing them.
58. Monopolists are criticized because they are inefficient. What is meant by this statement?
Monopolists usually don't produce at the minimum of the ATC.
54. Ricky and Anita are 10 year-olds who have a lemonade stand on a busy beach and would like to practice price discrimination. They know that they are the only sellers of lemonade on the beach and that adults have a less elastic demand for lemonade than kids so they decide to sell their lemonade for $0.25 to kids and $0.50 to adults. Will their price discrimination be successful? Why or why not?
No, the kids who buy their lemonade can practice arbitrage.
41. As shown in Exhibit 9-8, if the monopolist produces the profit-maximizing output, total revenue is the rectangular area:
OQ2DP4.
64. Comparing a perfectly competitive market to a monopoly, which of the following is true?
Price will be equal to marginal revenue in the perfectly competitive market but will be higher than marginal revenue in the monopoly.
68. Suppose a perfectly competitive market results in a long-run equilibrium price of $8 and quantity of 500. If this same market were a monopoly, which of the following price and quantity combinations would be the most likely?
Price: $10, Quantity: 350
36. A monopolist earning economic profit in the short run determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?
Raise price and lower output.
42. Which of the following correctly describes price discrimination?
Selling the same product to different people for different prices.
57. What are the conditions for price discrimination?
The firm must possess some ability to control market price (the firm must possess some monopoly power), the ability to segment customers based on their elasticity of demand, and the product cannot be easily resold.
73. At the level of output where the marginal cost and marginal revenue curves intersect, two firms demand curves pass above their average total cost curve. One firms is a monopoly and the other is perfectly competitive. Which statement is true for both firms?
The firms are making an economic profit.
71. Which of the following is true for a monopolist but not for a firm in perfect competition?
The marginal revenue curve is downward-sloping.
6. Which of the following distinguishes a natural monopoly from monopoly caused by ownership of a vital resource?
The natural monopoly has a downward-sloping long-run average cost curve as opposed to a U-shaped long-run average cost curve.
51. Kayla and Kevin are friends who go together to a used textbook seller who has two copies of the biology book that they both need for their class this semester. The cost to the seller of acquiring the books was $25 each and no other students will need this book. Kayla states that she is willing to pay $40 for the book, while Kevin says he is willing to pay $80. Which of the following describes the most likely conclusion to this scenario?
The seller will sell the books to both Kayla and Kevin for $40 each because if they tried to charge Kevin a higher price, Kayla would engage in arbitrage.
44. Which of the following scenarios demonstrates price discrimination?
Tickets to a play are sold for $15 for students and $25 for adults.
20. Which of the following best explains why the monopolist's marginal revenue is less than the selling price?
To sell more units, the monopolist must reduce price on all units sold.
43. Price discrimination requires:
a firm to be able to segment its customers based on different price elasticities of demand.
49. An example of price discrimination is the price charged for:
a piece of art sold at an auction.
7. A natural monopoly is a market where:
a single large firm can produce the entire market output at a lower per-unit cost than a group of smaller firms.
2. Which of the following factors is not a barrier limiting the entry of potential competitors into a market?
an inelastic demand for a product
47. The act of buying a commodity in one market at a lower price and selling it in another market at a higher price is known as:
arbitrage.
22. For a monopolist with a downward-sloping demand curve,
as price decreases, marginal revenue decreases.
79. In contrast to a perfectly competitive firm, a monopolist operates in the long run
at a price higher than marginal cost.
63. A monopolist can earn an economic profit only when:
average total cost is less than price and the same is true for a perfectly competitive firm.
65. Suppose both a monopolist and a perfectly competitive firm charge a price corresponding to the quantity at the intersection of the marginal cost and marginal revenue curves. If this price is between each firm's average variable cost and average total cost curves,
both firms will continue to operate in the short run.
60. Suppose a monopolist and a perfectly competitive firm have the same cost curves. The monopolistic firm would:
charge a higher price than the perfectly competitive firm.
50. An example of price discrimination is the price charged for:
college admission.
11. Which barrier to entry results in the creation of a natural monopoly?
economies of scale
21. To maximize its profit, a monopoly should choose a price where demand is:
elastic
67. At any point where a monopolist's marginal revenue is positive, the downward-sloping straight-line demand curve is:
elastic but not perfectly elastic, and a perfectly competitive firm's demand curve is perfectly elastic.
59. The monopolist, unlike the perfectly competitive firm, can continue to earn an economic profit in the long run because of:
extremely high barriers to entry.
52. A price-discriminating monopoly charges the lowest price to the group that:
has the most elastic demand.
15. The monopolist's demand curve is:
identical to the market demand curve.
37. If marginal costs increase, a monopolist will:
increase price and decrease output.
45. The strategy underlying price discrimination is to:
increase total revenue by charging higher prices to those with the most inelastic demand for the product and lower prices to those with the most elastic demand.
81. A monopoly sets a market price that is higher than the marginal cost of production. This fact implies that a monopoly's allocation of resources is:
inefficient.
61. If pizza used to be produced in a perfectly competitive market, and now the pizza market has become a monopoly, we can expect:
less pizza to be sold at a higher price.
26. A monopoly firm can sell its fourth unit of output for a price of $250. To sell more than five units, it must expect to receive a price:
less than $250.
8. An industry is said to be a natural monopoly when:
long-run average cost continues to decline as the quantity of output increases.
1. Which of the following is not associated with the monopoly market structure?
many sellers
72. Both a perfectly competitive firm and a monopolist:
maximize profit by setting marginal cost equal to marginal revenue.
78. Under both perfect competition and monopoly, a firm:
maximizes profit by setting marginal cost equal to marginal revenue.
74. Because monopolists are protected by high barriers to entry, they:
may be able to earn long-run economic profits.
56. Economists do not think price discrimination is unfair because
more buyers are able to purchase the good with price discrimination, some buyers pay a lower price than if there were a single price, and sellers earn higher profit than if there were a single price.
27. A monopoly:
must lower price in order to increase output.
4. Alcoa had a monopoly in the U.S. aluminum market from the late nineteenth century until the end of World War II. Which barrier to entry was the source of Alcoa's monopoly power?
ownership of a vital resource
19. For a monopolist:
price is above marginal revenue.
62. A monopolist will maximize profits by:
producing the output where marginal revenue equals marginal cost, just as a perfectly competitive firm will.
31. If marginal cost exceeds marginal revenue, a profit-maximizing monopolist will:
restrict output to increase the price even higher.
76. Under both perfect competition and monopoly, a firm:
sets marginal cost equal to marginal revenue.
5. Which of the following describes the monopoly market structure?
single firm that is a price maker
14. A monopolist faces a downward-sloping demand curve because:
the entire market demand curve is the monopolist's demand curve.
3. A monopoly is:
the only seller of a good for which there are no good substitutes in a market with high barriers to entry.
17. A monopolist always faces a demand curve that is:
the same as the entire market demand curve.