Deck 9: Market Power and Monopoly

Question 1

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

Answer 1

A

Question 2

Use the following to answer question:
Figure 9.1
(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

Answer 2

B

Question 3

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.

Answer 3

D

Question 4

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) $\Delta$ P/ $\Delta$ Q + P
C) P + ( $\Delta$ Q/ $\Delta$ P)Q
D) Q + ( $\Delta$ P/ $\Delta$ Q)P

Question 5

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.

Question 6

Use the following to answer question:
Figure 9.3
(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

Question 7

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

Question 8

Use the following to answer question:
Table 9.1
(Table 9.1) Which of the following is (are) TRUE?

A) I, II, and III
B) I and II
C) III
D) I and III

Question 9

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 - 3Q
D) 150 - 1.5Q

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

Suppose a firm's inverse demand curve is given by P = 160 - 4Q. Which of the following statements is (are) TRUE?

A) I and II
B) I and IV
C) II and III
D) III

Question 14

Which of the following statements is (are) TRUE?

A) I
B) II and III
C) II
D) I, II, and III

Question 15

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.

Question 16

Use the following to answer question:
Figure 9.2
(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.

Question 17

Which of the following are sources of market power?

A) I, II, and III
B) I
C) II
D) III

Question 18

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.

Question 19

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.

Question 20

Which of the following statements is (are) TRUE?

A) I and II
B) I
C) III
D) II and III

Question 21

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

Question 22

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.

Question 23

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

Question 24

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

Question 25

Use the following to answer question:
Figure 9.6
(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.

Question 26

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

Question 27

Use the following to answer question:
Figure 9.9
(Figure 9.9) Which of the following statements is (are) TRUE?

A) I, II, and III
B) I and II
C) III
D) I

Question 28

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

Question 29

Use the following to answer question:
Figure 9.5
(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.

Question 30

(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

Question 31

Use the following to answer question:
Figure 9.8
(Figure 9.8) Which of the following statements is (are) TRUE?

A) I, II, and III
B) II and III
C) III
D) II

Question 32

Use the following to answer question:
Figure 9.4
(Figure 9.4) Which of the following statements is (are) TRUE?

A) I and III
B) IV
C) II
D) III

Question 33

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

Question 34

Which of the following statements is (are) TRUE?

A) I, II, and III
B) I, II, III, and IV
C) II and IV
D) III

Question 35

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?

A) II and III
B) I, II, and III
C) I
D) III

Question 36

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

Question 37

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

Question 38

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

Question 39

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.

Question 40

Use the following to answer questions 36-37:
Figure 9.7
(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

Question 41

Use the following to answer questions 45-46:
Figure 9.10
(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

Question 42

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.

Question 43

Explain why marginal revenue does NOT equal price for a firm with market power. For a perfectly competitive firm, explain why P = P +

Question 44

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.

Question 45

An amusement park faces a demand curve of Q = 40 - 0.4P and marginal cost of MC = 1.25Q, where Q is measured in hundreds of customers.

Question 46

Use the following to answer questions 45-46:
Figure 9.10
(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.

Question 47

Which of the following statements is (are) TRUE?

A) I, II, and III
B) II and III
C) I and III
D) I

Question 48

(Graph) Complete the table, assuming each customer buys only 1 unit. Comment on why marginal revenue differs from price for a single-price monopolist.

Question 49

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.

Question 50

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

Question 51

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.

Question 52

Suppose the demand curve for a firm is Q = 50 - 0.125P, where Q measures units of output and P is the price per unit.

Question 53

A firm can produce any quantity of good X with the following cost structure: TC = 450,000 + 20Q, where Q measures units of output.

Question 54

Firm A has price elasticity of demand of -1.5 and a marginal cost of $30. Firm B has a price elasticity of demand of -2.0 and a marginal cost of $30. What is the profit-maximizing price of each firm?

Question 55

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

Question 56

Answer the following questions.

Question 57

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

Question 58

Explain how the following types of barriers to entry generate market power.

Question 59

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.

Question 60

A firm's demand curve is Q = 2 - 0.01P, where Q is measured in millions.
a. Derive the firm's marginal revenue curve.
b. Calculate the level of output at which marginal revenue is zero.
c. Calculate the level of output at which marginal revenue is -$50.
d. What is marginal revenue at Q = 0.50?

Question 61

A monopolist with a marginal cost of MC = 15Q faces the inverse demand curve P = 80 - 5Q. The profit-maximizing level of production would be _____.

Question 62

Use the following to answer question:
Figure 9.12
(Figure 9.12) Suppose the demand curve for the firm's product increases from D₁ to D₂. The firm's marginal cost is given by MC = 5Q.

Question 63

Find marginal revenue for the firm that faces the demand curve

Question 64

A monopolist with a marginal cost of MC = 20Q faces the inverse demand curve P = 90 - 5Q. The elasticity of demand at the profit maximizing quantity would be _____.

Question 65

A monopolist with a marginal cost of MC = 15Q faces the inverse demand curve P = 80 - 5Q. Complete the table.

Question 66

A medical device manufacturer sells its sterilization equipment in a market with an inverse demand curve of P = 6,000 - 400Q, where Q measures the number of sterilizers in thousands and P is the price per unit. The marginal cost of production is constant at $4,000.

Question 67

The inverse demand for a product is given by P = 400 - 5Q, where Q measures the number of units and P is the price per unit. Suppose that total cost is TC = 100Q + 2.5Q² with marginal cost per unit of MC = $100 + 5Q. Technological innovation reduces total cost to TC = 25Q + 2.5Q² and marginal cost per unit to MC = $25 + 5Q. Identify equilibrium price and quantity before and after the cost reduction. How does profit change?

Question 68

The inverse demand curve for a monopolist changes from P = 200 - 2Q to P = 100 - 4Q. The marginal cost of production remains unchanged at a constant $10. Its Lerner index at the profit-maximizing quantities goes from _____ to _____, indicating that its market power has _____.

Question 69

Answer the following questions.

Question 70

Suppose that market demand is Q = 660 - 12P and marginal cost is MC = 5.

Question 71

The inverse demand for a product is given by P = 400 - 5Q, where Q measures the number of units and P is the price per unit. Suppose that the marginal cost per unit is $100 + 5Q. Graph demand, marginal revenue, and marginal cost. The producer surplus at the profit-maximizing price and quantity will be _____.

Question 72

Suppose a firm faces the demand curve , which gives a constant price elasticity of demand of -2. To answer the next two questions, it will be helpful to recall the Lerner index.

Question 73

Using the nearby graph, identify the regulated (as a perfect competitor) and unregulated price and quantity. What happens to consumer surplus as a result of moving to the regulated outcome?

Question 74

Suppose that P = a - bQ. Marginal revenue can be expressed as:

A) a - bQ.
B) a - 2bQ.
C) aQ - bQ².
D) aQ² - bQ³.

Question 75

Suppose a product's demand curve can be expressed as Q = 10 - 5P. Marginal revenue is:

A) 10 - 5P.
B) 10 - 10P.
C) 2 - 0.2P.
D) 2 - 0.4P.

Question 76

A firm with market power faces the demand curve Q = 400 - P/4 and a marginal cost of MC = 2Q. Calculate the area of the deadweight loss triangle.

Question 77

Use the following to answer question:
Figure 9.13
(Figure 9.13) Answer the following questions.

Question 78

A monopolist serves market A with an inverse demand curve of P = 12 - Q. Another monopolist serves market B with an inverse demand curve of P = 22 - 2Q. Suppose that both monopolists have a constant marginal cost of $2. Calculate the producer surplus earned in each market. Why is producer surplus higher in market B than in market A?

Question 79

Suppose a firm's inverse demand curve is P = 150 - 5Q, its Lerner index is 0.8 at the profit maximizing quantity, and its marginal cost is constant at $10. What is the profit-maximizing quantity?

Question 80

Complete the table. The profit maximizing quantity will be _____ at a price of_____, generating _____in profit for the monopolist.