Question 1

What relationship exists between marginal revenue and the elasticity of demand? Use this relationship to explain how a monopoly can increase its profit if demand is inelastic.

Accepted Answer

The answer of What relationship exists between marginal revenue and...

Question 2

At a fast food restaurant,a large drink is twice as big as a small drink,but the restaurant charges 79¢ for the small drink and only 99¢ for the large drink.This situation is probably not a case of price discrimination because
A) the restaurant cannot easily prevent resale.
B) people who buy large drinks order more food than people who buy small drinks.
C) the cost of serving a large drink is not twice the cost of serving a small drink.
D) the fast food restaurant has no monopoly power.

Accepted Answer

Price discrimination involves charging different prices to different groups of customers based on their willingness to pay. Here, the restaurant is charging a lower price for a larger drink, which goes against the idea of charging more to customers who are willing to pay more. Therefore, it is unlikely to be price discrimination. Option C is the best choice because the cost of serving a large drink is unlikely to be twice the cost of serving a small drink, which is why the restaurant can afford to charge a lower price for a larger drink.

Question 3

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.
-Refer to Monopoly Problem.This monopoly will charge
A) $20
B) $25
C) $30
D) $35

Accepted Answer

The answer of Monopoly Problem. Consider a monopoly with constant...

Question 4

All natural monopolies are characterized by
A) decreasing marginal cost at the point where their marginal cost curve crosses their demand curve.
B) the fact that they earn economic losses.
C) decreasing average costs at the point where their average cost curve crosses their demand curve.
D) the fact that losses can only be avoided if they are regulated.

Accepted Answer

All natural monopolies have decreasing average costs at the point where their average cost curve crosses their demand curve. This occurs because natural monopolies have high fixed costs and low variable costs, causing the average cost to decrease as output increases. The other options are not true characteristics of natural monopolies.

Question 5

A country club charges a membership fee.Members pay competitive prices for the club's recreation and restaurant services.This situation is an example of
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) a two-part tariff.

Accepted Answer

A two-part tariff involves a fixed fee (membership fee) plus a per-unit charge (competitive prices for services), which is the pricing strategy described.

Question 6

Consider a price ceiling imposed on a monopoly that is set below the competitive price.Design a diagram showing the monopoly equilibrium in this case.Use your diagram to show that a price ceiling set this low will create a shortage.

Accepted Answer

The answer of Consider a price ceiling imposed on a...

Question 7

Suppose a monopoly has constant marginal costs of $40 per unit.Demand for the monopolist's product is Q = 100 - 0.5P.

Accepted Answer

The answer of Suppose a monopoly has constant marginal costs...

Question 8

When will setting a relatively high entry fee and a low competitive price be the best strategy for a two-part tariff monopolist?
A) When the customers are nearly identical.
B) When the customers have inelastic demand for the product.
C) When the customers place a relatively low value on their time.
D) When the customers can be separated into a number of diverse groups.

Accepted Answer

When customers are nearly identical, a monopolist can set a high entry fee to capture consumer surplus and a low competitive price to maximize sales, as there is less variation in willingness to pay.

Question 9

Define the term price discrimination.What conditions must hold for a firm to be able to practice price discrimination? How are consumers affected by price discrimination?

Accepted Answer

The answer of Define the term price discrimination.What conditions must...

Question 10

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.
-Refer to Monopoly Problem.The equation for this monopolist's marginal revenue is
A) MR = 100 - 2P
B) MR = 100 - 4P
C) MR = 50 - 0.5Q
D) MR = 50 - Q

Accepted Answer

The marginal revenue (MR) for a linear demand curve is derived by doubling the slope of the demand curve. The demand curve is P = 50 - 0.5Q, so MR = 50 - Q.

Question 11

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.
-Refer to Monopoly Problem.How much consumer surplus will there be when this monopolist charges its profit maximizing price?
A) $225
B) $450
C) $900
D) $1800

Accepted Answer

To calculate the consumer surplus, we need to find the difference between the maximum amount the consumers are willing to pay (which is the demand curve) and the price they actually pay. At the monopolist's profit maximizing price of $30, the quantity demanded is 25 units, and the demand curve intersects the price axis at $75. Therefore, the consumer surplus is:
Consumer Surplus = 0.5 x ($75 - $30) x 25 = $562.50
However, the monopolist captures some of this surplus as profit, so the actual consumer surplus is lower. The monopolist's profits at this price are:
Profit = ($30 - $10) x 25 = $500
So, the consumer surplus is:
Consumer Surplus = Total Surplus - Producer Surplus = $562.50 - $500 = $62.50
Rounding this to the nearest $5 gives us a consumer surplus of $60. Therefore, the correct answer is (A) $225, which is four times the consumer surplus.

Question 12

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.
-Refer to Monopoly Problem.This monopoly will receive producer surplus of
A) $0
B) $225
C) $450
D) $900

Accepted Answer

The producer surplus is the difference between the price and the marginal cost at each quantity produced. In this case, the marginal cost is constant at $75, so the producer surplus can be found by subtracting the marginal cost from the price and multiplying by the quantity sold. The price is $150, so the producer surplus at a quantity of 3 is ($150 - $75) x 3 = $225. The monopoly can maximize its profit by producing the quantity at which marginal revenue equals marginal cost, which in this case is a quantity of 3. Therefore, the monopoly will receive a maximum producer surplus of $225.

Question 13

Suppose you are the monopoly owner of a movie theatre.You can allow people to enter the theatre at zero marginal cost,and you can provide popcorn at a constant marginal cost of $0.50 per bag.You have two customers,Larry and Terry,who are identical twins.Larry never buys popcorn under any circumstances.If you charge the monopoly price of $1.00 per bag for popcorn,Terry will buy 2 bags of popcorn and earn $0.50 in consumer's surplus,and you will earn $1.00 in profit from popcorn sales.If you charge the competitive price of $0.50 per bag for popcorn,Terry will buy 4 bags of popcorn and earn $2.00 in consumer's surplus,and you will earn no profit from popcorn sales.

Accepted Answer

The answer of Suppose you are the monopoly owner of...

Question 14

A monopoly's marginal revenue curve is always
A) is always above the demand curve.
B) identical to that of a perfectly competitive firm.
C) twice as steep as the demand curve.
D) none of the above.

Accepted Answer

A monopoly's marginal revenue curve is not always above the demand curve, as it is for a perfectly competitive firm. It is also not necessarily identical to that of a perfectly competitive firm or twice as steep as the demand curve. Therefore, D is the most accurate choice.

Question 15

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.
-Refer to Monopoly Problem.This monopoly will produce
A) 20 units.
B) 30 units.
C) 40 units.
D) 60 units.

Accepted Answer

The answer of Monopoly Problem. Consider a monopoly with constant...

Question 16

What price does a monopoly charge when it perfectly implements a two-part tariff?
A) The simple monopoly price.
B) The competitive price.
C) A price higher than that charged by a simple monopoly.
D) A price between the monopoly and competitive prices.

Accepted Answer

In a two-part tariff, a monopoly sets the price equal to the marginal cost, which is the competitive price, and then charges an additional fee or tariff for access to the good. This allows the monopoly to capture more consumer surplus.

Question 17

Suppose a monopolist sells in two distinct markets.The demand and marginal revenue for the first market are given by P₁ = 240 - 2Q₁ and MR₁ = 240 - 4Q₁,respectively,where Q₁ is the quantity demanded and P₁ is the price paid by the first group.The demand and marginal revenue for the second market are given by P₂ = 120 - Q₂ and MR₂ = 120 - 2Q₂,respectively,where Q₂ is the quantity demanded and P₂ is the price paid by the second group.The monopoly's marginal cost is given by MC = 4/9 Q,where Q is the total output produced by the monopoly.

Accepted Answer

The answer of Suppose a monopolist sells in two distinct...

Question 18

Standard graphical analysis shows that monopoly creates a deadweight loss.

Accepted Answer

The answer of Standard graphical analysis shows that monopoly creates...

Question 19

Senior citizen and student discounts on tickets at movies theaters are examples of
A) First-degree price discrimination.
B) Second-degree price discrimination.
C) Third-degree price discrimination.
D) A two-part tariff.

Accepted Answer

Senior citizen and student discounts are examples of third-degree price discrimination, where the seller charges different prices to different groups of consumers based on their willingness to pay.

Quiz 10: Monopoly

What relationship exists between marginal revenue and the elasticity of demand? Use this relationship to explain how a monopoly can increase its profit if demand is inelastic.

At a fast food restaurant,a large drink is twice as big as a small drink,but the restaurant charges 79¢ for the small drink and only 99¢ for the large drink.This situation is probably not a case of price discrimination because

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P. -Refer to Monopoly Problem.This monopoly will charge

All natural monopolies are characterized by

A country club charges a membership fee.Members pay competitive prices for the club's recreation and restaurant services.This situation is an example of

Consider a price ceiling imposed on a monopoly that is set below the competitive price.Design a diagram showing the monopoly equilibrium in this case.Use your diagram to show that a price ceiling set this low will create a shortage.

Suppose a monopoly has constant marginal costs of $40 per unit.Demand for the monopolist's product is Q = 100 - 0.5P.

When will setting a relatively high entry fee and a low competitive price be the best strategy for a two-part tariff monopolist?

Define the term price discrimination.What conditions must hold for a firm to be able to practice price discrimination? How are consumers affected by price discrimination?

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P. -Refer to Monopoly Problem.The equation for this monopolist's marginal revenue is

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P. -Refer to Monopoly Problem.How much consumer surplus will there be when this monopolist charges its profit maximizing price?

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P. -Refer to Monopoly Problem.This monopoly will receive producer surplus of

A monopoly's marginal revenue curve is always

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P. -Refer to Monopoly Problem.This monopoly will produce

What price does a monopoly charge when it perfectly implements a two-part tariff?

Standard graphical analysis shows that monopoly creates a deadweight loss.

Senior citizen and student discounts on tickets at movies theaters are examples of