Question 1

-(Exhibit: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's price per unit is:

Accepted Answer

The profit maximizing monopoly will produce where marginal revenue equals marginal cost, which occurs at a quantity of 6. At this level of output, the corresponding price is $29 per unit, as shown in the exhibit. Thus, the correct answer is C.

Question 2

The XYZ Company is a profit-maximizing firm with a monopoly in the production of pennants. The firm sells its pennants for $10 each. We can conclude that the XYZ Company is experiencing:

Accepted Answer

The price of the product alone does not determine the type of returns to scale a firm is experiencing. However, in the context of a monopoly, the concept of diminishing marginal returns is more relevant because it implies that as a firm increases the quantity of output, the additional output from an additional unit of input will eventually decrease. This is a common situation in monopolies as they expand production. Choices B, C, and D are not directly related to the information given about the firm's pricing and monopoly status.

Question 3

Suppose that a profit-maximizing monopoly firm experiences a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost, the firm changes its price in a profit-maximizing way, then we can predict that its total output will:

Accepted Answer

With the decrease in marginal and average total costs, the firm's profit-maximizing quantity of output will increase. This means that the firm will produce more at the same price, or decrease the price to increase demand and produce more at the new equilibrium point. Therefore, the total output of the firm will rise.

Question 4

Assume that Sandy Chip Products, Inc., is the world's only producer of a special kind of computer chip. Its patents assure that it will continue to be the only producer for at least the next decade. Chip production requires clean water. The firm gets its water from a river, which is being polluted by paper mills located upstream. Sandy Chip therefore has to process the water before using it. A recently enacted pollution-control program, whereby the paper mills will be fined for polluting the river, will result in less pollution and thus lower Sandy Chip's costs. Sandy Chip expects its marginal and average cost to fall by $20 per chip.
-(Exhibit: Chip Production) Suppose Sandy Chip lowers its price in response to the reduction in its costs of production. Lowering its price will cause the chip firm's total revenue to:

Accepted Answer

Lowering the price in response to the reduction in costs would increase the demand for the chips, leading to higher sales and total revenue. Therefore, the total revenue would rise.

Question 5

-(Exhibit: A Profit-Maximizing Monopoly Firm) The profit-maximizing firm in this exhibit will produce _______ units of output per week:

Accepted Answer

The answer of 
-(Exhibit: A Profit-Maximizing Monopoly Firm) The profit-maximizing...

Question 6

-(Exhibit: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's profit per unit is:

Accepted Answer

The profit per unit for a monopoly firm is calculated as the difference between the price at which the firm sells its product and the average cost of producing that product. Without specific numbers from an exhibit, the general approach to find the profit per unit involves identifying the price level at which the firm decides to operate (based on demand and marginal revenue) and subtracting the average cost at that quantity of output. Since the correct answer is provided as B) $13, it suggests that in the given scenario, the price at which the firm sells its product minus the average cost of producing one unit of the product equals $13. This calculation is based on the assumption that the exhibit provided specific numerical details to arrive at this conclusion.

Question 7

Assume that Sandy Chip Products, Inc., is the world's only producer of a special kind of computer chip. Its patents assure that it will continue to be the only producer for at least the next decade. Chip production requires clean water. The firm gets its water from a river, which is being polluted by paper mills located upstream. Sandy Chip therefore has to process the water before using it. A recently enacted pollution-control program, whereby the paper mills will be fined for polluting the river, will result in less pollution and thus lower Sandy Chip's costs. Sandy Chip expects its marginal and average cost to fall by $20 per chip.
-(Exhibit: Chip Production) Before the imposition of the pollution fines on the paper mills, the chip firm probably:

Accepted Answer

Since Sandy Chip is the only producer of this special kind of computer chip, it likely had some monopoly power in the market and was able to set a price that exceeded its average total cost. This means it had positive economic profits before the pollution fines were imposed.

Question 8

Assume that Sandy Chip Products, Inc., is the world's only producer of a special kind of computer chip. Its patents assure that it will continue to be the only producer for at least the next decade. Chip production requires clean water. The firm gets its water from a river, which is being polluted by paper mills located upstream. Sandy Chip therefore has to process the water before using it. A recently enacted pollution-control program, whereby the paper mills will be fined for polluting the river, will result in less pollution and thus lower Sandy Chip's costs. Sandy Chip expects its marginal and average cost to fall by $20 per chip.
-(Exhibit: Chip Production) If in response to its reduction in cost, Sandy Chip changes its price in a profit-maximizing way, then we can predict that its total output will:

Accepted Answer

Since Sandy Chip's costs have decreased, it can now produce the same amount of chips at a lower price while still earning a profit. This will likely increase the demand for its product, leading to a rise in total output. Therefore, total output will rise.

Question 9

If a change in fixed cost in the long run raises average total cost above the demand curve:

Accepted Answer

If a change in fixed cost in the long run raises average total cost above the demand curve, the monopoly will not be able to cover its costs at any level of output, leading to the business shutting down.

Question 10

Suppose that a profit-maximizing monopoly firm experiences a substantial technological change that reduces its marginal and average total costs by $40. With the reduction in its costs, the firm will probably:

Accepted Answer

If the monopoly firm lowers the price by exactly $40, it would only break even and not make any profit. Therefore, it would likely lower the price by less than $40 to increase its profit margin. However, it would still benefit from reducing the price somewhat since it will attract more customers and increase its market share. Therefore, the firm will likely lower the price, but not by the full amount of the cost reduction.

Question 11

Suppose that a profit-maximizing monopoly firm experiences a substantial technological change that reduces its marginal and average total costs by $40. Suppose also that the firm lowers its price in response to the reduction in its costs of production. Lowering its price will cause the firm's total revenue to:

Accepted Answer

Since the technological change reduces the marginal and average total costs of the monopoly firm, the firm can produce output more efficiently and at a lower cost. This would enable the firm to lower its price, while still earning a profit. When the firm lowers its price, it is likely to increase its sales or demand. In a monopoly market, the firm has some degree of market power and can influence the price and output level. Therefore, when the firm lowers its price, it can attract more customers and generate more revenue. Overall, the reduction in costs and subsequent lowering of price would result in an increase in revenue for the monopoly firm.

Question 12

Assume that Sandy Chip Products, Inc., is the world's only producer of a special kind of computer chip. Its patents assure that it will continue to be the only producer for at least the next decade. Chip production requires clean water. The firm gets its water from a river, which is being polluted by paper mills located upstream. Sandy Chip therefore has to process the water before using it. A recently enacted pollution-control program, whereby the paper mills will be fined for polluting the river, will result in less pollution and thus lower Sandy Chip's costs. Sandy Chip expects its marginal and average cost to fall by $20 per chip.
-(Exhibit: Chip Production) If in response to its reduction in cost, Sandy Chip changes its price in a profit-maximizing way, then we can predict that its total economic profit will:

Accepted Answer

With the reduction in cost, Sandy Chip can lower its price and capture a larger portion of the market, thus increasing its total economic profit. Additionally, since it is the only producer of the special computer chip and holds the patents, there is no threat of competition driving the price down.

Question 13

Assume that Sandy Chip Products, Inc., is the world's only producer of a special kind of computer chip. Its patents assure that it will continue to be the only producer for at least the next decade. Chip production requires clean water. The firm gets its water from a river, which is being polluted by paper mills located upstream. Sandy Chip therefore has to process the water before using it. A recently enacted pollution-control program, whereby the paper mills will be fined for polluting the river, will result in less pollution and thus lower Sandy Chip's costs. Sandy Chip expects its marginal and average cost to fall by $20 per chip.
-(Exhibit: Chip Production) With the reduction in its costs, Sandy Chip will probably:

Accepted Answer

Sandy Chip is the only producer of the special kind of computer chip and has a patent, which means it has a monopoly on this product. As a monopolist, Sandy Chip will have the ability to set its own price for the chip. The reduction in costs will increase the firm's profit margin, and if it chooses to lower the price, it will still be able to make a profit. However, it is unlikely that the firm will lower its price by the full $20, as it has a monopoly and can charge a premium price for its product. Sandy Chip may lower its price by less than $20 to capture more consumers and increase its market share. Therefore, choice B is the best answer.

Question 14

A profit-maximizing monopoly firm finds that its marginal costs have risen by $10 per unit. It will:

Accepted Answer

A profit-maximizing monopoly firm will typically raise its price by somewhat less than the increase in marginal costs. This is because the monopoly's pricing decisions are based on its marginal revenue and marginal cost curves. An increase in marginal costs shifts the marginal cost curve upward, but the new profit-maximizing price and quantity are determined where this new marginal cost curve intersects the marginal revenue curve. The monopoly's ability to set prices above marginal costs means the price increase is generally less than the increase in marginal costs to maintain demand at a profit-maximizing level.

Question 15

The XYZ Company is a profit-maximizing firm with a monopoly in the production of pennants. The firm sells its pennants for $10 each. We can conclude that the XYZ Company is producing a level of output at which:

Accepted Answer

A profit-maximizing firm in a monopoly will produce at the point where marginal revenue equals marginal cost. As the firm sells its pennants for $10 each, this means that the marginal revenue for each additional pennant sold will be $10. Therefore, the firm will produce up to the point where marginal cost equals $10. Choice A is incorrect as the firm's average total cost does not necessarily have to equal the price of the product. Choice B is incorrect as it implies that the firm is producing at a point where it is making a loss, which a profit-maximizing firm would not do. Choice C is incorrect as it implies that the firm is solely focused on revenue rather than profit.

Question 16

-(Exhibit: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's cost per unit at its profit-maximizing quantity is:

Accepted Answer

The cost per unit at the profit-maximizing quantity for a monopoly firm is determined by the intersection of the marginal cost (MC) curve and the marginal revenue (MR) curve, which indicates the quantity of output that maximizes profit. The cost per unit at this quantity is then found by looking at the average total cost (ATC) at this quantity. Without specific numbers or a graph from the exhibit, the general principle is that the profit-maximizing quantity is where MR = MC, and the cost per unit at this quantity is given by the ATC at that quantity. Since the correct answer cannot be determined without the exhibit, the choice provided (C) is selected based on the premise of needing to provide an explanation without the actual data or exhibit.

Question 17

Suppose that a profit-maximizing monopoly firm experiences a substantial technological change that reduces its marginal and average total costs by $40. If the firm has been operating for over 10 years, it probably:

Accepted Answer

If the monopoly firm has been operating for over 10 years, it is likely that it has been able to earn positive economic profits during this time. The substantial technological change that reduces its costs would increase its profitability, allowing it to continue earning positive economic profits. If the firm had zero or negative economic profits, it may not have survived long enough to experience the technological change. Additionally, the fact that the firm is profit-maximizing suggests that it has been able to earn economic profits in the past. Finally, the fact that the technological change has a large impact on costs suggests that the firm has been operating for a significant period of time, allowing the firm to fully understand its technological capabilities and production processes.

Question 18

The XYZ Company is a profit-maximizing firm with a monopoly in the production of pennants. The firm sells its pennants for $10 each. We can conclude that the XYZ Company is producing a level of output at which the demand for pennants is:

Accepted Answer

A profit-maximizing monopolist will produce at a level of output where marginal revenue (MR) equals marginal cost (MC). If the firm is able to sell additional units of a good at the same price ($10 in this case), it means that the demand is elastic at that level of output. This is because the firm can increase its revenue by selling more units, indicating that the percentage change in quantity demanded is greater than the percentage change in price, which is the definition of elastic demand.

Question 19

Suppose that a profit-maximizing monopoly firm experiences a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost, the firm changes its price in a profit-maximizing way, then we can predict that its total economic profit will:

Accepted Answer

The reduction in costs will lead to a shift in the firm's marginal and average total cost curves downwards. This means that the profit-maximizing output level for the firm will increase, as it can now produce the same quantity at a lower cost. In a profit-maximizing response, this will lead the firm to reduce its price, which will increase its quantity sold. This increase in quantity will lead to an increase in the firm's total revenue. Since the cost reduction is greater than the price reduction required to sell the increased output, the firm's profit will rise. Therefore, we can predict that the firm's total economic profit will rise.

Question 20

A profit-maximizing firm finds that its marginal costs have risen by $10 per unit. In response to the increase in costs it will change its price and it will experience:

Accepted Answer

When marginal costs increase, a profit-maximizing firm will increase its price to maintain or increase its profit margin. However, the increase in price may cause a decrease in demand for the product, resulting in lower total revenue. Therefore, the profit-maximizing firm will experience a decrease in its total revenue due to the increase in marginal costs.

Quiz 10: Monopolistic Competition and Oligopoly