Deck 11: Monopoly and Monopsony

Question 1

The above figure shows the demand and cost curves facing a monopoly.Maximum profit equals

A)$0.
B)$100.
C)$1,000.
D)$2,500.

Answer 1

$2,500.

Question 2

One difference between a monopoly and a competitive firm is that

A)only a monopoly is a price taker.
B)only a monopoly maximizes profit by setting marginal revenue equal to marginal cost.
C)only a monopoly faces a downward-sloping demand curve.
D)None of the above.

Answer 2

only a monopoly faces a downward-sloping demand curve.

Question 3

If a firm is able to set price,

A)it is a monopoly.
B)its marginal revenue is constant.
C)it sells its output at a constant price.
D)it faces a downward-sloping demand curve.

Answer 3

it faces a downward-sloping demand curve.

Question 4

The above figure shows the demand and cost curves facing a monopoly.The monopoly maximizes profit by selling

A)0 units.
B)25 units.
C)50 units.
D)75 units.

Question 5

If the inverse demand function for a monopoly's product is p = 100 - 2Q,then the firm's marginal revenue function is

A)-2.
B)100 - 4Q.
C)200 - 4Q.
D)200 - 2Q.

Question 6

If the inverse demand curve a monopoly faces is p = 100 - 2Q,then profit maximization

A)is achieved when 25 units are produced.
B)is achieved by setting price equal to 25.
C)is achieved only by shutting down in the short run.
D)cannot be determined solely from the information provided.

Question 7

For a monopoly,marginal revenue is less than price because

A)the firm is a price taker.
B)the firm must lower price if it wishes to sell more output.
C)the firm can sell all of its output at any price.
D)the demand for the firm's output is perfectly elastic.

Question 8

A profit-maximizing monopoly will never operate in the portion of the demand curve with MR equal to

A)3.
B)2.
C)1.
D)-1.

Question 9

For a monopoly,marginal revenue is less than price because

A)the demand for the firm's output is downward sloping.
B)the firm has no supply curve.
C)the firm can sell all of its output at any price.
D)the demand for the firm's output is perfectly elastic.

Question 10

When a monopoly is maximizing its profits,

A)MR > MC.
B)MR < MC.
C)dMR/dQ > dMC/dQ.
D)dMR/dQ < dMC/dQ.

Question 11

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then profit maximization

A)is achieved when 21 units are produced.
B)is achieved by setting price equal to 21.
C)is achieved only by shutting down in the short run.
D)cannot be determined solely from the information provided.

Question 12

The above figure shows the demand and cost curves facing a monopoly.The monopoly maximizes profit by setting price equal to

A)$100.
B)$200.
C)$300.
D)$400.

Question 13

The monopoly maximizes profit by setting

A)price equal to marginal cost.
B)price equal to marginal revenue.
C)marginal revenue equal to marginal cost.
D)marginal revenue equal to zero.

Question 14

A profit-maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to

A)-3.
B)-1.
C)-1/3.
D)None of the above-the price elasticity does not matter.

Question 15

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then profit maximization is achieved when the monopoly sets price equal to

A)16.
B)21.
C)25.
D)58.

Question 16

At an output level of 100,a monopolist faces MC = 15 and MR = 17.At output level q = 101,the monopolist faces MC = 16 and MR = 15.To maximize profits,the firm

A)should produce 100 units.
B)should produce 101 units.
C)The firm cannot maximize profits.
D)The firm is not a monopoly.

Question 17

At the current level of output,a firm's marginal cost equals 16 and marginal revenue equals 10.The firm

A)is producing the profit-maximizing amount.
B)should produce more.
C)should produce less.
D)Not enough information.

Question 18

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then maximum profit

A)equals $336.
B)equals $882.
C)equals $1,218.
D)cannot be determined solely from the information provided.

Question 19

If the inverse demand function for a monopoly's product is p = a - bQ,then the firm's marginal revenue function is

A)a.
B)a - (1/2)bQ.
C)a - bQ.
D)a - 2bQ.

Question 20

Marginal Revenue is

A)the increase in total revenue from selling one more unit of output.
B)equal to P(1 + 1/e).
C)equal to P when the price elasticity of demand is infinite.
D)All of the above.

Question 21

If a monopoly is operating on the demand curve where price elasticity is equal to -3,and price equals 3,then MR is equal to

A)-1.
B)1.
C)-2.
D)2.

Question 22

If a monopoly is operating on the demand curve where price elasticity is equal to -3,and MR equals 2,then price is equal to

A)3.
B)2.
C)1.
D)0.

Question 23

Suppose a monopolist has TC = 100 + 10Q + 2Q²,and the demand curve it faces is
p = 90 - 2Q.What will be the price,quantity,and profit for this firm?

Question 24

The ability of a monopoly to charge a price that exceeds marginal cost depends on

A)the price elasticity of supply.
B)price elasticity of demand.
C)slope of the demand curve.
D)shape of the marginal cost curve.

Question 25

If the demand shifts,then for a profit maximizing monopolist,

A)price will change while quantity will remain constant.
B)price will change and quantity will change.
C)Both A and B.
D)Neither A nor B.

Question 26

Suppose a monopolist faces the constant price elasticity demand curve:
p = Q^ε
where ε < 0.The monopolist has a constant marginal cost of c.
a.If ε < -1,can you determine what price and quantity will the monopolist set? Explain.
b.If 0 > ε > -1,what is the price and quantity the monopolist will set?

Question 27

Consider a monopolist facing a linear (inverse)demand curve given by:
p = a - bQ
Show with calculus that the marginal revenue in fact has the same price-axis intercept but twice the slope as the inverse demand curve above.

Question 28

A monopolist faces a demand curve Q = 120 - 2p and has costs given by C(Q)= 20Q + 100.
a.Write the monopolist's profits in terms of the price it charges.
b.Use the derivative (w.r.t.price)to determine the monopolist's profit-maximizing price.
c.Now,derive the monopolist's inverse demand based on the demand equation above.Write out the monopolist's profits in terms of quantity.
d.Use the derivative w.r.t.Q to determine the monopolist's optimal quantity.What price does the monopoly charge?

Question 29

Draw a graph that shows a shift in the demand curve that causes the optimal monopoly price to change,while the quantity remains the same.

Question 30

A monopolist faces the (inverse)demand for its product: p = a - bQ.The monopolist has a marginal cost given by c and a fixed cost given by F.
a.Assume that F is sufficiently small such that the monopolist produces a strictly positive level of output.What is the profit-maximizing price and quantity?
b.Compute the maximum profit for the monopolist.
c.For what values of F will the monopolist earn negative profit?

Question 31

Since there are no close substitutes for the monopoly's product,the monopoly can charge any price it wishes.

Question 32

If the monopoly's demand curve intersects the AVC curve at minimum AVC,the firm will shut down.

Question 33

In a recent court case,an expert witness defined a monopoly as a firm that can "raise price without reducing its total revenue." What does this imply about the elasticity of demand? Would this definition hold for a profit-maximizing monopoly? Explain.

Question 34

The above figure shows the demand and cost curves facing a monopoly.If the firm is a profit maximizer,its Lerner Index will equal

A)1.
B)1/3.
C)1.5.
D)3.

Question 35

Since a monopoly can set any price it wants,it always makes a profit.

Question 36

The above figure shows the demand and cost curves facing a monopoly.At the profit-maximizing price,the elasticity of demand equals

A)-1.
B)zero.
C)infinity.
D)-3.

Question 37

A monopolist faces the (inverse)demand for its product: p = 50 - 2Q.The monopolist has a marginal cost of 10/unit and a fixed cost given by F.
a.Assume that F is sufficiently small such that the monopolist produces a strictly positive level of output.What is the profit-maximizing price and quantity?
b.Compute the maximum profit for the monopolist in terms of F.
c.For what values of F will the monopolists profit be negative?

Question 38

Consider a town with a single movie theater,and that movie theater faces a downward sloping demand curve for its tickets.The movie theater has a fixed number of seats available for each show but the marginal cost of filling a seat is zero.Why might it be in the movie theater's interest to not to sell out every show even though the marginal cost of selling additional seats is virtually zero? (A graph will help your answer).

Question 39

The Lerner Index is

A)the ratio of the difference between price and marginal to price.
B)equal to (Price - MC)/Price.
C)a measure of market power.
D)All of the above.

Question 40

A monopoly always operates in the inelastic portion of its demand curve.

Question 41

Humana Hospital's price/marginal cost ratio of 2.3 is most likely to decline if

A)the number of nearby hospitals increases.
B)the number of nearby hospitals decreases.
C)the demand curve for hospital services shifts rightward.
D)the demand curve for hospital services becomes steeper.

Question 42

The above figure shows the demand and marginal cost curves for a monopoly.Under monopoly,consumer surplus equals

A)a + b.
B)a + b + c.
C)a + b + c + d + e + f.
D)None of the above.

Question 43

The introduction of satellite television systems would cause the demand curve for cable television to be

A)more elastic.
B)less elastic.
C)perfectly inelastic.
D)unchanged.

Question 44

A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10.Assuming profit maximization,the implicit demand elasticity is

A)-0.2.
B)-0.8.
C)-1.25.
D)-5.0.

Question 45

If a monopoly discovers that the demand for its output has become more elastic at the original output level,then it will respond by

A)producing more and setting a higher price.
B)setting a lower price.
C)setting a higher price.
D)producing more while leaving price unchanged.

Question 46

The above figure shows the demand and cost curves facing a monopoly.The deadweight loss of this monopoly is

A)$100.
B)$250.
C)$1,250.
D)$2,500.

Question 47

For a profit maximizing monopolist,if the MC = 10 and price is set to be 20,then the elasticity at this price is

A)-2.
B)-1.
C)-0.5.
D)0.

Question 48

If a monopoly can produce a good at zero marginal cost,then its Lerner Index is

A)zero.
B)one.
C)infinity.
D)undetermined.

Question 49

If the demand for a firm's output is perfectly elastic,then the firm's Lerner Index equals

A)zero.
B)one.
C)infinity.
D)one-half.

Question 50

The existence of a deadweight loss associated with a monopoly can be seen because

A)consumers are willing to pay more for the last unit of output than it cost to produce.
B)the cost of the last unit produced is more than consumers are willing to pay for it.
C)the producer surplus is larger than in a competitive market.
D)None of the above.

Question 51

A monopoly incurs a marginal cost of $1 for each unit produced.If the price elasticity of demand equals -2.0,the monopoly maximizes profit by charging a price of

A)$1.
B)$1.50.
C)$2.
D)$3.

Question 52

As other firms enter a monopoly's market,the monopoly's market power

A)is unaffected.
B)declines.
C)increases.
D)increases according to the Lerner Index but decreases according to the price/marginal cost ratio.

Question 53

If the demand curve a monopolist faces is perfectly elastic,then the ratio of the firm's price to the marginal cost is

A)0.
B)1.
C)2.
D)None of the above-the answer cannot be determined.

Question 54

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then the firm's Lerner Index equals

A)58/16.
B)16/42.
C)58/42.
D)42/58.

Question 55

If a monopoly's Lerner Index exceeds 1,then

A)it is earning maximum profit.
B)it has ultimate market power.
C)it must be pricing below marginal cost.
D)marginal revenue is negative.

Question 56

The introduction of satellite television systems would cause the Lerner Index for cable television to

A)become smaller.
B)increase.
C)change in accordance to the increase in market power of cable TV providers.
D)be unchanged.

Question 57

The above figure shows the demand and marginal cost curves for a monopoly.The deadweight loss of this monopoly equals

A)h.
B)c.
C)c + f.
D)c + d + e + f.

Question 58

The more elastic the demand curve,a monopoly

A)will have a larger Lerner Index.
B)will face a lower marginal cost.
C)will earn more profit.
D)will lose more sales as it raises its price.

Question 59

The loss associated with the fact that at the profit-maximizing quantity consumers value the goods more than it cost to produce them is called

A)deadweight loss.
B)comparative loss.
C)Lerner Loss.
D)Consumer Value Loss.

Question 60

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then the deadweight loss from monopoly equals

A)$21.
B)$441.
C)$882.
D)$1,764.

Question 61

Consider a monopolist with linear (inverse)demand p = a - bQ and constant average and marginal cost,c.Derive the monopolist's profit and the deadweight loss generated.Show that in such cases of linear demand and constant average and marginal cost,the deadweight loss is 50% of the monopolist's profits.

Question 62

Why is the monopoly total welfare lower than the competitive total welfare?

Question 63

A specific tax imposed on a monopolist may increase the price by more than the tax.

Question 64

The above figure shows the demand and cost curves facing a monopoly.If a $100 per unit tax is charged,the loss in welfare resulting from the tax is

A)$250.
B)$312.50.
C)$1,250.
D)$1,562.50.

Question 65

What is the advantage of the government imposing an ad valorem tax over a specific tax when facing a monopoly?

Question 66

The less elastic is the demand for a firm's product,the greater is that firm's market power.

Question 67

For profit-maximizing monopolies,explain why the boundaries on the Lerner Index are 0 and 1.

Question 68

The deadweight loss represent the sum of added consumer and producer surplus if the firm would produce the quantity where P = MC.

Question 69

It is a conventional practice among apparel retailers to set the retail price of clothing at twice the cost paid to the manufacturer.For example,if the retailer pays $7 for a pair of jeans,the jeans will retail for $14.What must the price elasticity of demand be for this practice to be profit maximizing?

Question 70

The above figure shows the demand and cost curves facing a monopoly.If a $100 per unit tax is charged,what is the incidence of the tax on consumers?

A)100%
B)50%
C)25%
D)0%

Question 71

If the government desires to raise a certain amount of revenue by taxing a monopoly,an ad valorem tax will

A)generate the same loss of consumer surplus as a specific tax.
B)generate a greater loss of consumer surplus than a specific tax.
C)generate a smaller loss of consumer surplus than a specific tax.
D)generate no loss of consumer surplus.

Question 72

Suppose that market demand for a good is Q = 480 - 2p.The marginal cost is MC = 2Q.Calculate the deadweight loss resulting from a monopoly in this market.

Question 73

The Lerner Index is derived from the profit-maximizing condition of a firm.

Question 74

An ad valorem tax imposed on a monopolist will reduce the deadweight loss generated by the monopolist.

Question 75

If the government imposes a specific tax on a monopoly,the consumer's tax incidence

A)can exceed 100%.
B)will always be between 0-100%.
C)may be negative.
D)will be the same as when the tax is imposed on a perfectly competitive firm.

Question 76

When would a profit-maximizing monopolist that operates with no government intervention choose to produce the competitive level of output?

Question 77

The above figure shows the demand and cost curves facing a monopoly.A $100 per unit tax would raise price by

A)$100.
B)$50.
C)$25.
D)$0.

Question 78

For a monopoly market,if the Lerner Index is 2,then

A)the monopoly is maximizing its profit.
B)the price elasticity of demand is -2.
C)the price elasticity of demand is -0.5.
D)None of the above.

Question 79

The government prefers an ad valorem tax to a specific tax that reduces the monopoly output by the same amount because

A)consumers are not harmed by the ad valorem tax.
B)the monopoly prefers the ad valorem tax.
C)consumers prefer the ad valorem tax.
D)the ad valorem tax transfers more revenue from the monopoly to the government.

Question 80

If the government's goal is to generate a certain amount of tax revenue,a specific tax and an ad valorem tax on a monopoly have the same impact on social welfare.