Question 1

When a per unit tax is imposed on the sale of a product of a monopolist, the resulting price increase will:

Accepted Answer

The price increase will not always be less than the tax because it depends on the elasticity of demand for the monopolist's product. If the demand is relatively inelastic, the monopolist can pass on most or all of the tax to consumers in the form of a higher price, resulting in a price increase that is greater than the tax. However, if the demand is relatively elastic, the monopolist may not be able to pass on the full amount of the tax, resulting in a price increase that is less than the tax. In a competitive market, the price increase would be less than if a similar tax were imposed on a monopolist because there are many firms competing, which puts downward pressure on prices.

Question 2

To find the profit maximizing level of output, a firm finds the output level where:

Accepted Answer

E

Question 3

Figure 10.1.1
-Refer to Figure 10.1.1 above. For the monopolist shown below, the profit maximizing level of output is:

Accepted Answer

The profit-maximizing level of output is where marginal revenue equals marginal cost. In this case, that occurs at Q1.

Question 4

Which of the following is NOT true for monopoly?

Accepted Answer

In a monopoly, the price charged by the monopolist is typically higher than the marginal cost at the profit-maximizing output, which is a key difference from perfect competition where price equals marginal cost at equilibrium. This is because a monopolist has market power to set prices above marginal cost, creating a price markup.

Question 5

As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200. You should:

Accepted Answer

In order to maximize profits, a firm should produce at the level where marginal revenue equals marginal cost. When marginal revenue is less than marginal cost, each additional unit produced results in a loss. Therefore, the firm should reduce output until marginal revenue equals marginal cost. Choice A is incorrect because expanding output would result in a higher marginal cost than marginal revenue, which would result in a loss. Choice B is incorrect because fixed costs are not relevant to this decision. Choice D is incorrect because expanding output until marginal revenue equals zero would result in a loss. Choice E is incorrect because reducing output beyond where marginal revenue equals zero would result in lost profits.

Question 6

Use the following two statements to answer this question: I. For a monopolist, at every output level, average revenue is equal to price.
II) For a monopolist, at every output level, marginal revenue is equal to price.

Accepted Answer

Statement I is true because, for a monopolist, the price charged is the average revenue per unit sold. Statement II is false because, for a monopolist, marginal revenue is less than the price due to the downward-sloping demand curve, meaning that to sell additional units, the price must decrease, affecting the revenue generated from all units sold.

Question 7

Which of the following is NOT true regarding monopoly?

Accepted Answer

Monopolist cannot charge as high a price as it likes because it has to consider the demand for its product in the market. If the price is too high, the quantity demanded will decrease, reducing the monopolist's total revenue. Therefore, the monopolist must balance the price and quantity to maximize its profit.

Question 8

When the demand curve is downward sloping, marginal revenue is:

Accepted Answer

Marginal revenue is the change in total revenue that results from a one-unit increase in output. When the demand curve is downward sloping, the firm can only increase its sales by lowering the price. This means that the marginal revenue will always be less than the price.

Question 9

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity.

Accepted Answer

A monopolist faces a downward sloping demand curve, meaning that in order to sell more units of output, they will need to lower the price. However, since they are the only seller in the market, they have market power and can charge a higher price than the competitive equilibrium price. Therefore, the monopolist will charge a higher price and sell a smaller quantity compared to a competitive market.

Question 10

The monopoly supply curve is the:

Accepted Answer

A monopoly does not have a supply curve like a competitive market because it is a price maker, not a price taker, and its output decision depends on demand and marginal revenue, not just marginal cost.

Question 11

For a monopolist, changes in demand will lead to changes in:

Accepted Answer

A monopolist can adjust both price and output in response to changes in demand, depending on the specific circumstances and the monopolist's objectives.

Question 12

Suppose that a firm can produce its output at either of two plants. If profits are maximized, which of the following statements is true?

Accepted Answer

For a firm to maximize profits, it must allocate its resources in such a way that the marginal cost (MC) of producing an additional unit of output is the same across all its production facilities and equal to the marginal revenue (MR) from selling that unit. This ensures that the firm is not spending more to produce goods in one location than it could in another, and that it is not producing more goods than it can sell at a profit. Therefore, all of the statements A, B, and C are true, making D the correct answer.

Question 13

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the:

Accepted Answer

When marginal revenue exceeds marginal cost, the firm can increase its profit by producing more. Therefore, its current output is smaller than the profit-maximizing quantity.

Question 14

A monopolist has equated marginal revenue to zero. The firm has:

Accepted Answer

When a monopolist equates marginal revenue to zero, it means they have reached the point where any additional unit sold does not add to total revenue, indicating the maximization of total revenue, not necessarily profit.

Question 15

The monopolist has no supply curve because:

Accepted Answer

The monopolist has no supply curve because the quantity supplied at any particular price depends on the monopolist's demand curve. The monopolist has the ability to control the quantity of output supplied and can choose any price it wishes to charge, resulting in a situation where the quantity supplied depends on the price demanded by consumers. The monopolist does not have a fixed relationship between price and quantity and does not operate on a traditional supply curve.

Question 16

A monopolist has set her level of output to maximize profit. The firm's marginal revenue is $20, and the price elasticity of demand is -2.0. The firm's profit maximizing price is approximately:

Accepted Answer

The monopolist sets output where marginal revenue equals marginal cost to maximize profits. We are given that marginal revenue is $20. To find the optimal price, we need to know the price elasticity of demand, which is -2.0. We can use the formula:

Price elasticity of demand = (% change in quantity demanded) / (% change in price)

To maximize revenue, the monopolist should increase price if the elasticity is less than 1, keep price constant if the elasticity is equal to 1, and decrease price if the elasticity is greater than 1. Since the elasticity is -2.0, the monopolist should increase price. We can use the formula:

Marginal revenue = Price x (1 + 1 / absolute value of price elasticity of demand)

Solving for price, we get:

$20 = Price x (1 + 1 / 2)

$20 = Price x 1.5

Price = $13.33

Since this is below the profit maximizing price, we know that the optimal price must be higher. We can try $40:

$20 = $40 x (1 + 1 / 2)

$20 = $40 x 1.5

Price = $40

Therefore, the profit maximizing price is approximately $40.

Question 17

A monopolist has determined that at the current level of output the price elasticity of demand is -0.15. Which of the following statements is true?

Accepted Answer

A negative value for price elasticity of demand indicates that an increase in price would lead to a decrease in quantity demanded. In this case, a price decrease would lead to an increase in quantity demanded.

Since the monopolist has determined that at the current level of output, the price elasticity of demand is -0.15, it means that the demand for its product is inelastic. In order to increase its revenue, the monopolist should decrease the quantity supplied, which would lead to an increase in the price. Therefore, the firm should cut output.

Question 18

If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:

Accepted Answer

The answer of If a monopolist sets her output such...

Question 19

Figure 10.1.2
-Refer to Figure 10.1.2 above. When the monopoly maximizes profit, how much is the amount of profit?

Accepted Answer

When the monopoly maximizes profit, it produces at the quantity where marginal revenue equals marginal cost, which is Q = 6. At this quantity, price is $16.60 and marginal cost is $4.00, so the monopoly's profit is ($16.60 - $4.00) x 6 = $75.60. However, since there is a deadweight loss of ($16.60 - $6.00) x 6 / 2 = $30.60, the net profit is only $75.60 - $30.60 = $45.00. Therefore, the correct choice is C, $15.6, which is the profit per unit at Q = 6.

Question 20

Which of the following is true at the output level where P = MC?

Accepted Answer

The answer of Which of the following is true at...

Quiz 10: Market Power: Monopoly and Monopsony