Econ 2106- Chapter 16
The process of price cap regulation includes which of the following? 1. a price ceiling 2. marginal cost pricing 3. average cost pricing
1 only price ceiling
The theory that regulation helps producers to maximize profit is the
capture theory
Ownership of a necessary input creates what type of barrier to entry?
ownership barrier to entry
Total revenue is equal to
price multiplied by the quantity sold
If a perfectly competitive industry is taken over by a single firm that operates as a single-price monopoly, the price will _____ and the quantity will ____.
rise; decrease
Assume someone organizes all farms in the nation into a single-price monopoly. As a result, the price consumers pay for food
rises
An example of a monopoly would be
the local water company
Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes and single-monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the price of a pound of steak is
$8
The table above gives the demand for a monopolist's output. What is the marginal revenue when output is increased from 5 to 6 units?
-$2
The situation in the figure above creates a barrier to entry for a second firm because 1. a second firm that produced as many KW-hours as the firm firm would see the market price fall beneath its cost and would incur an economic loss 2. a second firm would produced fewer KW-hours than the first firm would have to charge a higher price and would not gain many customers 3. the first firm's average total cost curve indicates its has been given a patent for the product
1 & 2
Using the figure above, which of the following statements are correct? 1. MR=MC=$42 when 3 haircuts are produced 2. If the firm charges each customer the same price for a haircut, the price of a haircut is $14 3. The firm's economic profit is $12
1 & 3
A natural monopoly's average cost curve 1. intersects the demand curve while the average cost curve slopes downward 2. reaches its minimum before it intersects the demand curve 3. intersects the demand curve below the intersection of the marginal cost curve and the demand curve
1 only
Using the figure above, which of the following statements is (are) correct? 1. MR=MC when 3 haircuts are produced 2. If the firm charges each customer the same price for a haircut, the price of a hair cut is $42 3. The firm's MC equals $30
1 only
Assume someone organizes all farms in the nation into a monopoly. Which of the following occurs? 1. consumer surplus decreases 2. economic profit increases 3. a deadweight loss is created
1, 2, & 3
Which of the following is correct for a single-price monopoly? 1. the firm can determine the quantity it produces and the price it charges 2. it would never profitably produce output in the inelastic range of its demand 3. its marginal revenue is less than price
1, 2, & 3
Which of the following are price discrimination? 1. charging different prices based on differences in production cost 2. charging business flyers a higher airfare than tourist 3. charging more for the first pizza than the second
2 & 3
The above table gives the demand schedule for a single-price monopoly. If the marginal cost is $3, the profit maximizing output for the monopoly will be between
2 to 3 units
Suppose the Busy Bee Cafe is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. What quantity will the Busy Bee produce to maximize its profit?
20 hamburgers per hour
The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC is left unregulated, how many households in Oakland are served?
20,000
In the above figure, the profit-maximizing output for this single-price monopoly is____ units and the price is _____.
200; $30
Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the quantity of steak is
3,000 pounds
Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the quantity of steak is _____ pounds, and when the market is a monopoly, the quantity of steak is _____ pounds.
3,000; 2,000
The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, Paul produces _____ pillows per hour, and if the market was perfectly competitive, ______ pillows per hour would be produced.
3,000; 4,000
The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under a marginal cost pricing rule, how many households in Oakland are served?
40,000
The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The amount of consumer surplus when the market has a monopoly producer is ____ and the amount of consumer surplus when the market is perfectly competitive is ______
ABF; ACE
If the market in the figure above is a profit-maximizing single-price monopoly, consumer surplus is the area
ABH
In the figure above, if the firm is regulated using a marginal cost pricing rule, the consumer surplus created is equal to the area of
ACF
If the market in the figure above is perfectly competitive, consumer surplus is the area
ACG
In the figure above, for a single-price monopoly the deadweight loss is equal to the area
BCE
If the market in the figure above is a profit-maximizing single-price monopoly, the producer surplus is the area ____
BDEH
Assume someone organizes all farms in the nation into a monopoly. What is the monopoly's marginal cost curve?
It is the formerly competitive industry's supply curve
To maximize its profit, a perfectly competitive firm produces so that _____ and a single-price monopoly produces so that _____
MR=MC; MR=MC
A profit-maximizing output for a single-price monopoly is determined by the intersection of the _____ curves and the profit-maximizing price is found on the ____ curve.
Marginal cost and marginal revenue; demand
In the figure above, if the firm is regulated using an average cost pricing rule, the economic loss created is equal to the area of
None of the above because there is no economic loss created
If the market was a monopoly, the quantity would be _____ and the price would be ______; if the market is perfectly competitive, the quantity would be ______ and the price would be ______.
Q1; P2; Q2; P1
Why do publishers print the first edition of a book by a popular author in hard cover and not in paperback?
Readers who want to read the book as soon as it comes out will be willing to pay a higher price compared to those who can wait for the paperback edition
______ natural monopolies is a commonly used, potential solution to the problems presented by natural monopolies.
Regulating
What problem is caused by subsidizing a natural monopoly regulated using a marginal cost pricing rule?
The taxes required to gain the revenue used as the subsidy results in the deadweight loss that subtracts from gains in efficiency which result from use of the marginal cost pricing rule
A major characteristics of monopoly is that
a barrier to entry keeps out competitors
A price-discriminating monopoly charges
a different price to different types of buyers for the same product, even though there are no differences in costs
Compared to a perfectly competitive market, a single-price monopoly sets
a higher price
If a natural monopoly is regulated using
a marginal cost pricing rule, the firm incurs an economic loss
When economies of scale exist so that one firm can meet the entire market demand at a lower average total cost than two or more firms,
a natural monopoly develops
A gas station in the mountains of Oregon has a monopoly over the retail gas market within a 50-mile radius. The station decides not to price discriminate. As a result, all consumers will pay
a single price
If we compare a perfectly competitive market to a single-price monopoly with the same costs, the monopoly sells
a smaller quantity at a higher price
The figure above shows a natural monopoly that the government must regulate. If the government uses ______, the firm produces _____ units per week.
an average cost pricing rule; 30
Capture theory is
an economic theory of regulation
Natural barriers to entry arise when, over the relevant range of output, there
are economies of scale
For a natural monopoly to cover its total cost, its price must equal its
average total cost
To be able to price discriminate, a firm must
be able to prevent resales of its good
How should a natural monopoly be regulated under the social interest theory of regulation?
by using a marginal cost pricing rule
Which of the following is an example of a two-part tariff?
charging a hookup fee plus a monthly charge equal to marginal cost
Compared to a single-price monopoly, when a monopoly can perfectly price discriminate, the deadweight loss
decreases
The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of the Central Florida community. Compared to a marginal cost pricing rule, under an average cost pricing rule, TWC ______ output by _____ households.
decreases; 10,000
The demand curve for a monopoly is
downward sloping
The key idea behind price discrimination is to convert consumer surplus into
economic profit
Which of the following is NOT a requirement for a firm to be able to price discriminate?
economies of scale
With perfect price discrimination, the quantity of output produced by a monopoly is _____ the quantity produced by a perfectly competitive industry.
equal to but not greater than
When a firm is regulated so it used an average cost pricing rule, the price
equals average total cost
To maximize its profit, a single-price monopoly produces the amount of output so that its marginal revenue
equals its marginal cost
When a regulatory agency uses rate of return regulation, the
firm's managers have an incentive to inflate the firm's cost
For a single-price monopoly, price is
greater than marginal revenue
The good produced by a monopoly
has no close substitutes
Price cap regulation is defined as regulation that
imposes a price ceiling on the regulated firm
A difference between a perfectly competitive industry and a monopoly is that
in the long run, firms in a perfectly competitive industry make zero economic profit and a monopoly can make an economic profit
When marginal revenue is positive, total revenue _____ when output increases and demand is ______.
increases; elastic
A natural monopoly that is regulated to set price equal to marginal cost
incurs an economic loss
Price discrimination occurs when a firm
is able to sell different units of a good at different prices
Under which of the following does a monopoly's demand curve become its marginal revenue curve?
only perfect price discrimination
To encourage invention and innovation, the government provides
patents
Regulated natural monopolies can obey a marginal cost pricing rule and still make a normal profit by engaging in
price discrimination and two-part tariff pricing
Suppose that a monopoly is currently producing the quantity at which marginal revenue is less than marginal cost. The monopoly can increase its profit by
raising its price and decreasing its output
The capture theory of regulation predicts that
regulation helps producers to maximize profits
Earning-sharing regulation involves
requiring that the monopoly share its profits with its customers if the profits rise above a certain level
For a monopoly, marginal revenue is equal to
the change in total revenue brought about by a one-unit increase in quantity sold
The U.S. Postal Service has monopoly over first-class mail service because
the government has granted this agency a public franchise
Rent seeking is the act of obtaining special treatment by _____ to create_____
the government; economic profit
Which of the following is an example of a person or firm that is most likely to have been granted a public franchise?
the local telephone company
The capture theory of regulation is defined as
the use of regulation to assist producers to maximize profits
Price discrimination is possible, in part, because
the willingness to pay can vary among groups of buyers
A single-price monopoly faces a linear demand curve. If the marginal revenue for the second unit is $20, then the marginal revenue for the
third unit is less than $20
Suppose that along a linear demand curve, the elasticity of demand is equal to 1 when the price is $4 and the quantity is 100 units. Then the
total revenue is at its maximum when 100 units are produced
The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a single-price monopoly producer of pillows stuffed with the parrot feathers. When Paul maximizes his profit, his total economic profit is
unknown because more information is needed to determine Paul's profit
Amie's Airlines decides to offer different fares to different customers for the same trip. Amie's price discriminates because Amie
wants to convert consumer surplus to economic profit
If the single restaurant in an Eastern Kentucky town is currently charging a price for its ham and eggs where the demand is unit elastic, its marginal revenue for ham and eggs is
zero
The above table gives the demand schedule for a monopoly. The demand is elastic at all prices between
$6 and $4
Rent seeking
is the act of obtaining special treatment by the government to create economic profit
Assume someone organizes all farms in the nation into a single-price monopoly. What is the monopoly's marginal revenue curve?
it is a line that lies below the new monopoly's demand curve
If a monopoly can perfectly price discriminate,
it produces the same amount of output as would be produced if the market was a perfectly competitive industry
A monopoly definitely incurs an economic loss if
its average total cost is greater than price
Fixed cost are _____ in a natural monopoly; so average total cost _____ as output increases
large; decreases
The demand curve facing a single-price monopoly
lies above the marginal revenue curve
Suppose the Busy Bee Cafe is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. If the Busy Bee produces 40 hamburgers per hour, then
marginal revenue will be negative
Monopolies _____ fair and _____ efficient
might be; might be
A natural monopoly
might exaggerate its costs if it is regulated using rate of return regulation
A _______ between price and quantity sold because ______
monopoly faces a tradeoff; to sell a larger quantity, it must lower its prices
A monopoly
must determine the price it will charge
Two types of barriers to entry are called _____ barriers to entry and ______ barriers to entry
natural; legal
If total revenue falls when output increases, marginal revenue is
negative
Monopolies arise when there are
no close substitutes and there are barriers to entry
