Question 1

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. Suppose that the firm chooses to produce 200 ink pads. At this level of output the demand for ink pads is:

Accepted Answer

To determine the elasticity of demand at an output level of 200 ink pads, we need to calculate the price elasticity of demand. Since the MR equation is given as MR = 2500 - 5Q, the corresponding demand function can be derived as follows:
MR = P * Q + Q * dQ/dP
2500 - 5Q = P * Q + Q * dQ/dP
dQ/dP = (2500 - 5Q) / (Q + P)
At an output level of 200 ink pads,
dQ/dP = (2500 - 5*200)/(200 + P)
If we assume that the price of green ink pads is constant at the profit-maximizing level of output, then we can use the midpoint formula to calculate the price elasticity of demand as:
Elasticity = (dQ/dP) * (P/Q) = [(2500 - 5Q)/(Q + P)] * (P/Q)
Elasticity = [(2500 - 5*200)/(200 + P)] * (P/200)
Elasticity = [(1500)/(200 + P)] * (P/200)
Elasticity = 7.5 / (1 + P/200)
Since the elasticity of demand is a decreasing function of P, it is highest (i.e., most elastic) when P = 0. This corresponds to a demand elasticity of -7.5, which means that demand is elastic at an output level of 200 ink pads. Therefore, the best choice is C because the firm should be able to increase its revenue by reducing the price of ink pads slightly since the demand is elastic.

Question 2

The more elastic the demand facing a firm,

Accepted Answer

The Lerner index measures the degree of monopoly power a firm has. It is calculated as the difference between the price of a good and its marginal cost, divided by the price. The more elastic the demand facing a firm, the lower the Lerner index, and the less monopoly power the firm has.

Question 3

The Lerner index measures:

Accepted Answer

The Lerner Index measures the degree of monopoly power a firm exercises when it chooses to maximize its profits, indicating the markup over marginal cost as a proportion of price.

Question 4

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

Accepted Answer

The answer of  Figure 10.2.1
-Refer to Figure 10.2.1 above....

Question 5

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:

Accepted Answer

The answer of The marginal cost of a monopolist is...

Question 6

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

Accepted Answer

To find the level of output that maximizes profit, we need to examine the impact of the tax on producers' costs and revenues. The tax of $2 per unit increases the cost of producing each red rubber ball by $2, meaning the marginal cost curve shifts upward by $2. This results in a new marginal cost curve (MC') that is parallel to the original marginal cost curve (MC), but is $2 higher at every level of output.

To determine the new profit-maximizing level of output, we need to compare the new marginal cost curve (MC') with the marginal revenue curve (MR). The marginal revenue curve is the same as the demand curve since red rubber ball producers face perfectly elastic demand, meaning they can sell as many balls as they want at the market price of $6.

At the profit-maximizing level of output, marginal revenue equals marginal cost, so we need to find the point at which MC' intersects MR. From the graph, we can see that this occurs at an output level of 5. At this level of output, the price of a red rubber ball is $6, the marginal cost is $8, and the producers earn a profit of $6 - $8 = -$2 per ball.

Therefore, the answer is D, as an output level of 5 maximizes profit despite being negative, as this is still the level at which producers earn the highest profit possible after the tax is imposed.

Question 7

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?

Accepted Answer

To find the level of output that maximizes profit, we need to find the quantity where marginal revenue equals marginal cost. Since we are not given a marginal cost curve, we can assume that marginal cost is constant and equal to $8 (which is half of the intercept of the demand curve).

Setting MR = MC, we get:

16 - 2Q = 8 
8 = 2Q 
Q = 4

However, we also need to check if this output level is indeed the profit-maximizing level. We can do this by checking the marginal revenue at Q = 4 and Q = 6 (which is the next highest integer value):

MR(Q=4) = 16 - 2(4) = 8 
MR(Q=6) = 16 - 2(6) = 4

Since marginal revenue is greater than marginal cost at Q = 4, this is the profit-maximizing level of output. Therefore, the answer is D.

Question 8

Bancroft Pharmaceuticals has a patent on a new medication used to treat high blood pressure, so it is the monopoly seller of this new drug product. The marginal cost of producing one dose of the drug is $10, and the elasticity of demand for the product is -3. What is the profit maximizing monopoly price for this patented drug product?

Accepted Answer

To maximize profit, a monopoly will set its price where marginal revenue (MR) equals marginal cost (MC).

Given elasticity of demand (Ed) is -3, we know that the demand is elastic because the absolute value of -3 is greater than 1.

We also know that for an elastic demand curve, marginal revenue is negative. The formula for marginal revenue is:

MR = P (1 + 1/Ed)

So in this case, MR = P (1 + 1/-3) = P (2/3)

Setting MR equal to MC, we get:

P (2/3) = $10

Solving for P, we get:

P = $15

Therefore, the profit maximizing monopoly price for this patented drug product is $15.

Question 9

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

Accepted Answer

A less elastic demand curve indicates that consumers are less sensitive to price changes, which typically gives a firm more monopoly power because it can raise prices without losing many customers.

Question 10

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

Accepted Answer

At the profit-maximizing level of output, a firm operates where marginal cost equals marginal revenue, which occurs in the elastic portion of the demand curve.

Question 11

What is the profit maximizing price?

Accepted Answer

Profit-maximizing price is the price at which marginal revenue equals marginal cost. In this case, marginal revenue is 10 and marginal cost is 3, so the profit-maximizing price is 10.

Question 12

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 profit?

Accepted Answer

The answer of Scenario 10.7:
The marginal revenue of green ink...

Question 13

Monopoly power results from the ability to:

Accepted Answer

Monopoly power results from the ability to set price above marginal cost, allowing the firm to earn profits in the long run. If a firm sets price equal to marginal cost, it will break even in the long run and not have any monopoly power. Equating marginal cost to marginal revenue may result in some monopoly power, but it will not be as strong as setting price above marginal cost. Setting price above average variable cost would result in losses in the long run and not result in monopoly power.

Question 14

Figure 10.2.1
-Refer to Figure 10.2.1 above. Which monopoly has greater monopoly power?

Accepted Answer

The monopoly in panel (b) has greater monopoly power because it has a steeper demand curve, indicating that it can maintain a higher price even with a decrease in quantity demanded. The monopoly in panel (a) has a flatter demand curve, indicating that it has less power to maintain high prices.

Question 15

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

Accepted Answer

The answer of After the imposition of a tax of...

Question 16

A firm's demand curve is given by P = 500 - 2Q. The firm's current price is $300 and the firm sells 100 units of output per week.
a. Calculate the firm's marginal revenue at the current price and quantity using the expression for marginal revenue that utilizes the price elasticity of demand.
b. Assuming that the firm's marginal cost is zero, is the firm maximizing profit?

Accepted Answer

The answer of A firm's demand curve is given by...

Question 17

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?

Accepted Answer

A monopolist maximizes profit by setting marginal revenue equal to marginal cost. The markup over marginal cost that the firm will charge depends on the elasticity of demand. In this case, the elasticity of demand is -4, which means that a 1% increase in price will result in a 4% decrease in quantity demanded. To maximize profit, the firm should set the price at a markup over marginal cost, which is the inverse of the absolute value of the elasticity of demand. In this case, the markup would be 1/|-4| = 0.25, or 25%. Therefore, the price-cost markup is 25% of the price.

Question 18

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

Accepted Answer

The Lerner index measures the degree of market power a firm has, which is calculated as (P-MC)/P, where P is the price and MC is the marginal cost. Under perfect competition, the price is equal to the marginal cost, which means (P-MC) is zero. Therefore, the Lerner index value is zero, indicating that there is no market power and firms cannot influence the price.

Question 19

A multiplant firm has equated marginal costs at each plant. By doing this:

Accepted Answer

Equating marginal costs at each plant ensures that the firm is producing at the minimum total cost for the given level of output. This is because marginal cost represents the additional cost of producing one more unit of output, and if the firm is producing at different marginal costs at different plants, it is not using its resources efficiently. Therefore, by equating marginal costs at each plant, the firm is minimizing costs for the given level of output.

Question 20

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?

Accepted Answer

To maximize revenue, set marginal revenue (MR) equal to marginal cost (MC): 2500 - 5Q = 5Q. Solving for Q gives Q = 250, which is the quantity that maximizes revenue.

Quiz 10: Market Power: Monopoly and Monopsony

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. Suppose that the firm chooses to produce 200 ink pads. At this level of output the demand for ink pads is:

The more elastic the demand facing a firm,

The Lerner index measures:

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

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:

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

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?

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