Question 1

GlaxoSmithKline (GSK) maximizes profit by producing a quantity of 800 pills where marginal cost is $2 and average cost is $4. Consumers are willing to pay as much as $10 per pill when the quantity supplied is 800 pills. What is the maximum amount of profit that GSK can earn under these conditions?

Accepted Answer

The answer of GlaxoSmithKline (GSK) maximizes profit by producing a...

Question 2

A firm with monopoly power is able to set a markup price that is:

Accepted Answer

A firm with monopoly power is able to set a higher markup price than the prices on similar goods sold by competitive firms because there are no close substitutes for the product. Monopolies are known for charging a premium on their goods or services.

Question 3

Assuming the same cost structure, a competitive market produces ________ output at ________ prices than a monopoly market.

Accepted Answer

In a competitive market, there are many firms competing with each other, which drives the price down as each firm tries to undercut the others. This results in more output being produced at lower prices. In a monopoly market, there is only one firm, and they have the power to charge higher prices due to their lack of competition. Therefore, a competitive market produces more output at lower prices than a monopoly market with the same cost structure.

Question 4

Use the following to answer questions:
Figure: Monopoly Profits 
-(Figure: Monopoly Profits) Refer to the figure. The monopolist earns a profit of:

Accepted Answer

The answer of Use the following to answer questions:
Figure: Monopoly...

Question 5

To maximize profit, the monopolist increases output:

Accepted Answer

The monopolist can maximize profit by producing the level of output where marginal cost is equal to marginal revenue. At this output level, the monopolist is able to charge a price that is greater than both marginal cost and average cost, resulting in a positive economic profit. Option A is incorrect because producing at full capacity does not necessarily maximize profit, since the monopolist may incur higher costs due to diminishing returns or lower demand. Option C is incorrect because a monopolist would never produce the same amount as a perfectly competitive firm, as this would lead to zero economic profit. Option D is incorrect because the monopolist's output would continue to increase as long as marginal revenue is greater than marginal cost, even if the marginal revenue curve is below the demand curve.

Question 6

In a graph showing a straight-line market demand curve, the marginal revenue curve is:

Accepted Answer

The marginal revenue curve for a linear demand curve is also a straight line that starts at the same point on the y-axis but has twice the slope of the demand curve.

Question 7

To maximize , a monopolist will produce the level of output where:

Accepted Answer

A monopolist maximizes profit where marginal revenue (the change in revenue from producing one more unit) is equal to marginal cost (the change in cost from producing one more unit). This is because producing an additional unit will increase revenue by the marginal revenue, but also increase costs by the marginal cost, so the monopolist wants to produce right up until the point where the two are equal to maximize profit. Average revenue and average cost do not enter into this decision-making process.

Question 8

Table: Monopolist

Refer to the table. What is the monopolist's profit-maximizing level of output?

Accepted Answer

The monopolist's profit-maximizing level of output is determined where marginal revenue (MR) equals marginal cost (MC). In this case, at an output of 4, the MR is equal to $10 and the MC is also equal to $10. At any output level below 4, the MR is greater than the MC, indicating that the monopolist can increase profits by producing more. At any output level above 4, the MC is greater than the MR, indicating that the monopolist can increase profits by producing less. Therefore, the best choice is B, with an output of 4.

Question 9

If a monopolist faces a straight-line negatively sloped demand curve, the price of the units it sells is always:

Accepted Answer

In a monopoly, the demand curve is the same as the average revenue curve, and marginal revenue is less than average revenue because the monopolist must lower the price to sell additional units.

Question 10

The marginal revenue curve is a straight line beginning at the same point on the:

Accepted Answer

The marginal revenue curve is derived from the demand curve and is twice as steep as the demand curve because it shows the extra revenue earned from selling each additional unit. Since the demand curve represents the highest price consumers are willing to pay for each unit, the marginal revenue curve begins at the same point on the vertical axis as the demand curve but with twice the slope. Therefore, option D is the best choice.

Question 11

Use the following to answer questions:
Figure: Monopoly Profits 
-(Figure: Monopoly Profits) Refer to the figure. What is the monopolist's optimal price and output level?

Accepted Answer

The answer of Use the following to answer questions:
Figure: Monopoly...

Question 12

Use the following to answer questions:
Figure: Maximize Monopoly Profits 
-(Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by producing at output equal to:

Accepted Answer

A monopolist maximizes profit by producing the quantity where marginal cost (MC) equals marginal revenue (MR). In the figure, this occurs at output level Q2.

Question 13

Suppose that a monopolist can sell five units of output at a price of $5 or six units of output at a price of $4. What is the marginal revenue of the sixth unit?

Accepted Answer

Marginal revenue is the additional revenue generated from selling one more unit of output. In this case, if the monopolist sells 5 units at $5 each, their total revenue is $25. If they sell 6 units at $4 each, their total revenue is $24. Therefore, the marginal revenue of the sixth unit is -$1 (the change in total revenue from selling the fifth unit to selling the sixth unit).

Question 14

Monopoly power is best described as the ability to:

Accepted Answer

Monopoly power is the ability to earn economic profits without facing competition from new firms entering the market. A monopoly can restrict output and increase prices, which results in higher profits. It is not necessary for a monopoly to produce at the profit-maximizing output level or at the point where marginal revenue intersects halfway between the origin and the demand curve.

Question 15

Which statement is TRUE?

Accepted Answer

If a monopolist's marginal revenue is greater than its marginal cost, it can increase profit by producing and selling more units, even if it means lowering the price per unit, until MR equals MC.

Question 16

If the quantity demanded for a hand-carved pineapple is two at a price of $16, and the quantity demanded will increase to three if the seller lowers the price to $14, what is the seller's marginal revenue from selling 3 units of pineapple?

Accepted Answer

Marginal revenue is the change in total revenue resulting from a one-unit increase in sales. In this case, if the seller lowers the price from $16 to $14, the quantity demanded will increase from 2 to 3. So the total revenue at a price of $14 will be 3*$14 = $42. 
The marginal revenue from selling the third pineapple is the difference between the total revenue at 3 units sold ($42) and the total revenue at 2 units sold ($16), which is $42-$16 = $26. 
Therefore, the seller's marginal revenue from selling 3 units of pineapple is $26. However, the question only asks for the seller's best choice. In this case, the best choice would be to sell at a price of $14, since it results in the highest total revenue ($42) and the seller can sell more units.

Question 17

A monopolist can sell 300 units of output for $29.00 per unit. Alternatively, it can sell 301 units of output for $28.25 per unit. The marginal revenue of the 301st unit of output is:

Accepted Answer

The marginal revenue is the change in total revenue from selling one more unit. Selling 300 units at $29 each gives $8,700. Selling 301 units at $28.25 each gives $8,502.75. The marginal revenue is $8,502.75 - $8,700 = -$197.25.

Question 18

Typical evidence for the existence of market power would be market prices:

Accepted Answer

Market power implies the ability of a firm to influence market prices above the production cost level. Therefore, prices that are above production costs are a typical evidence of the existence of market power. Prices below production costs would indicate losses and are not sustainable in the long run. Prices equal to production costs suggest perfect competition, where firms earn only normal profits. Prices varying with supply and demand conditions are common to all market structures, including perfect competition.

Question 19

Use the following to answer questions:
Figure: Maximize Monopoly Profits 
-(Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by charging a price equal to:

Accepted Answer

A monopolist maximizes profit where marginal cost (MC) equals marginal revenue (MR). At this point, the monopolist will charge the highest price consumers are willing to pay, which corresponds to the demand curve at that quantity, typically shown as P₂ in such diagrams.

Question 20

When a monopolist decreases the price of its good, consumers:

Accepted Answer

The answer of When a monopolist decreases the price of...

Quiz 13: Monopoly