Deck 12: Monopoly

Question 1

If a government regulates a firm with increasing returns to scale for all levels of output:

A)Average cost pricing results in economic losses; a firm will need an additional subsidy to cover its fixed costs to prevent it from leaving the industry.
B)Marginal cost price regulation results in economic losses for the firm and a positive DWL.
C)Average cost pricing results in zero economic profit but a positive DWL.
D)Average cost price regulation allows the firm to make a positive economic profit but eliminates any DWL.
E)None of the above

Answer 1

Average cost pricing results in zero economic profit but a positive DWL.

Question 2

Aletheia is a monopoly supplier of a product in a seaside city.Her marginal cost is $5 per unit and she has no fixed costs.The market demand curve for the product is P = 25 - q.What are the profit-maximizing price, quantity, profit and DWL if Aletheia charges the same price to all her customers?

A)P = $5, q = 10 units, π = $75, DWL = $25
B)P = $15, q = 10 units, π = $100, DWL = $100
C)P = $5, q = 5 units, π = $10, DWL = $40
D)P = $10, q = 10 units, π = $50, DWL = $25
E)P = $15, q = 10 units, π = $100, DWL = $50

Answer 2

P = $15, q = 10 units, π = $100, DWL = $50

Question 3

Suzanne is the monopoly seller of a highly addictive consumer product.Her marginal cost is $2 per unit and she has no other costs.Suzanne knows that new clients have an individual demand curve of P = 10 - q and that previous clients (or repeated customers) have a demand curve of P = 18 - q.Suzanne knows exactly who each client is - that is, whether they are a new client or a previous client.What is Suzanne's profit-maximizing strategy?

A)Sell a bundle of 10 units to each new client for a price of $100; sell a bundle of 18 units to previous clients at a price of $324.
B)Sell a bundle of 8 units to each new client for a price of $48; sell a bundle of 16 units to previous clients at a price of $160.
C)Sell a bundle of 8 units to each new client for a price of $64; sell a bundle of 16 units to previous clients at a price of $128.
D)Sell a bundle of 4 units to each new client for a price of $32; sell a bundle of 6 units to previous clients at a price of $40.
E)None of the above.

Answer 3

Sell a bundle of 8 units to each new client for a price of $48; sell a bundle of 16 units to previous clients at a price of $160.

Question 4

Laura runs a nightclub called 'The 'Gong'.Given the popularity and cache of the club, she has a monopoly position in the market.Males nightclub goers have an individual demand curve of P = 22 - q, whereas female customers each have an individual demand curve of P = 16 - q.Laura has a marginal cost per drink of MC = $2 per unit and no fixed cost.By law, Laura is unable to charge an entrance fee.She can, however, charge different prices for men and women for their drinks (by serving men blue glasses and women customers their drinks in green glasses).If Laura tries to maximize profit, which statement is true?

A)Laura charges both men and women $12 per drink; this is first-degree price discrimination.
B)Laura charges men $12 per drink and women $9 per drink; this is an example of third-degree price discrimination.
C)Laura charges men $9 per drink and women $12 per drink; this is an example of third-degree price discrimination.
D)Laura charges men $10 per drink and women $7 per drink; this is an example of third-degree price discrimination.
E)Laura will use second-price discrimination in order to maximize her profit.

Question 5

Yongling is a monopoly seller of a good in a town.She has a fixed supply of 8 units and no other costs.The market demand curve for the product is P = 20 - q.What is her profit if she sells to all her clients at the same price?

A)$24
B)$36
C)$72
D)$48
E)$96

Question 6

Suzanne is the monopoly seller of an illegal product in a particular city.Her marginal cost is $10 per unit and she has no other costs.She faces a demand curve of P = 130 - q, and she charges a linear price to her clients.Unfortunately for Suzanne, in the city there is a corrupt government official who has the power to shut Suzanne's operation down.This official, however, is willing to take a bribe and let Suzanne continue to sell.What is the highest bribe that Suzanne is willing to pay?

A)$3200
B)$1250
C)$3600
D)$5000
E)$6400

Question 7

Laura runs a nightclub.Given the popularity and cache of the club, she has a monopoly position in the market.Each potential nightclub goer has the same demand of P = 22 - q, and there are 1000 customers in total in the market.Laura has a marginal cost per drink of MC = $2 per unit and no fixed cost.If Laura can charge an entry fee as well as for each drink, which statement is true?

A)Laura charges an entry fee of $200 and $2 per drink; she makes a profit of $200 000; there is zero DWL generated in this market.
B)Laura charges an entry fee of $0 and $12 per drink; there is a DWL of $72 generated in this market.
C)Laura charges an entry fee of $250 and $2 per drink; there is zero DWL generated in this market.
D)Laura charges an entry fee of $50 and $2 per drink; she makes a profit of $0; there is zero DWL generated in this market.
E)None of the above.

Question 8

Laura runs a nightclub, 'Two Standard Drinks'.Given the popularity and cache of the club, she has a monopoly position in the market.The market demand curve is given by P = 120 - q.Laura has a marginal cost per drink of MC = 2q and a fixed cost FC = $150.If Laura charges the same price to all customers, what is the resulting DWL?

A)$100
B)$200
C)$150
D)$400
E)$500

Question 9

Laura runs a nightclub.Given the popularity and cache of the club, she has a monopoly position in the market.The market demand curve is given by P = 120 - q.Laura has a marginal cost per drink of MC = 2q and a fixed cost FC = $150.If Laura charges the same price to all customers, what is Laura's profit?

A)$3200
B)$3050
C)$650
D)$1600
E)$1650

Question 10

Laura runs a nightclub called the 'Two Standard Drinks'.Given the popularity and cache of the club, she has a monopoly position in the market.The market demand curve is given by P = 120 - q.Laura has a marginal cost per drink of MC = 2q and a fixed cost FC = $150.If Laura charges the same price to all customers, what are Laura's profit-maximizing price P^M and quantity q^M?

A)P^M = $90; q^M = 60 units
B)P^M = $60; q^M = 60 units
C)P^M = $120; q^M = 0 units
D)P^M = $30; q^M = 30 units
E)P^M = $90; q^M = 30 units