Question 1

Since a monopoly can set any price it wants,it always makes a profit?

Accepted Answer

The profit-maximizing price can result in a loss.

Question 2

As other firms enter a monopoly's market,the monopoly's market power

Accepted Answer

As other firms enter a monopoly's market, the monopoly's market power declines. This is because the entry of new firms increases competition and reduces the monopoly's ability to control prices and output. As a result, the monopoly's market share and profit margins decrease, and it may even be forced to lower its prices to compete with the new entrants. This, in turn, reduces its market power.

Question 3

The fact that a monopoly has to take the shapes of marginal cost AND marginal revenue into account when making decisions is reflected in the fact that

Accepted Answer

The answer of The fact that a monopoly has to...

Question 4

Market power is illegal.

Accepted Answer

Market power refers to the ability of a firm to influence the price of a good or service in the market. It does not necessarily guarantee that the firm will charge a price equal to average cost or greater than marginal cost. However, if a firm uses its market power to engage in anticompetitive behavior such as price fixing or monopolizing a market, it can be deemed illegal under antitrust laws. Therefore, while market power itself is not illegal, certain actions taken to maintain or exploit it can be deemed illegal.

Question 5

A firm that has market power

Accepted Answer

A firm with market power can indeed charge a price above marginal cost because it faces a downward-sloping demand curve, allowing it to set prices higher than marginal cost without losing all its customers. Choices A, C, and D are not necessarily true for all firms with market power.

Question 6

The monopolist's supply curve

Accepted Answer

A monopolist does not have a supply curve because it is a price maker, not a price taker. Its output decision depends on the demand curve and its marginal cost, not a supply curve.

Question 7

If a monopoly's demand curve shifts to the right the monopoly

Accepted Answer

The answer of If a monopoly's demand curve shifts to...

Question 8

If the demand for a monopoly's output shifts rightward,the change in quantity produced is

Accepted Answer

The answer of If the demand for a monopoly's output...

Question 9

If the demand for a firm's output is perfectly elastic,then the firm's Lerner Index equals

Accepted Answer

When the demand for a firm's output is perfectly elastic, this means that any increase in price will cause a complete loss in market share for the firm, as consumers can easily switch to a competitor who offers the same product at a lower price. Therefore, the firm has no market power and the Lerner Index, which measures a firm's market power, would be zero.

Question 10

Since there are no close substitutes for the monopoly's product,the monopoly can charge any price it wishes.

Accepted Answer

The monopoly is still constrained by the demand curve,which reflects the price that people are willing to pay for the quantity produced.

Question 11

Suppose a monopolist has TC = 100 + 10Q +  ,and the demand curve it faces is p = 90 - 2Q.What will be the price,quantity,and profit for this firm?

Accepted Answer

The answer of Suppose a monopolist has TC = 100...

Question 12

If the demand for a monopoly's output shifts rightward,the change in quantity produced is not predictable because

Accepted Answer

A monopoly does not have a supply curve because it does not respond to changes in price. Therefore, the quantity produced is not predictable when demand shifts rightward. The other options (A, B, and D) are not relevant to the unpredictability of quantity produced in response to a demand shift.

Question 13

Market power guarantees profit.

Accepted Answer

Market power allows firms to set prices above marginal cost, but it does not guarantee profit. Profit depends on various factors including total costs and demand.

Question 14

The ability of a monopoly to charge a price that exceeds marginal cost depends on

Accepted Answer

The ability of a monopoly to charge a price that exceeds marginal cost depends on the price elasticity of demand. If the demand for the product is inelastic, the monopoly can charge a higher price because consumers are willing to pay a premium for the product. If the demand for the product is elastic, the monopoly cannot charge a higher price because consumers have alternative choices and will switch to a substitute product if the price is too high. Therefore, the price elasticity of demand is the key determinant in a monopoly's ability to charge a higher price than marginal cost.

Question 15

The Lerner Index is

Accepted Answer

The Lerner Index is a measure of market power and is calculated as the ratio of the difference between price and marginal cost to price, which is represented by (Price - MC)/Price. Therefore, choice A and B are correct.

Question 16

A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10.Assuming profit maximization,the implicit demand elasticity is

Accepted Answer

The monopoly's markup over its marginal cost can be calculated as (Price - Marginal Cost)/Price = (50-10)/50 = 0.8. Using the formula for the implicit demand elasticity of a monopoly, which is equal to -1/market power, where market power is the markup over marginal cost, we get -1/0.8 = -1.25. Therefore, the implicit demand elasticity is -1.25.

Question 17

In a recent court case,an expert witness defined a monopoly as a firm that can "raise price without reducing its total revenue." What does this imply about the elasticity of demand? Would this definition hold for a profit-maximizing monopoly? Explain.

Accepted Answer

The answer of In a recent court case,an expert witness...

Question 18

A monopoly incurs a marginal cost of $1 for each unit produced.If the price elasticity of demand equals -2.0,the monopoly maximizes profit by charging a price of

Accepted Answer

To maximize profit, the monopoly should produce where marginal cost equals marginal revenue. Since the price elasticity of demand equals -2.0, the monopoly's marginal revenue is equal to half of the price (since MR = P/(1+1/|E|)), which means marginal revenue equals $1.00 at a price of $2.00. 
Therefore, the monopoly should charge a price of $2.00 to maximize profit.

Question 19

If the demand for a monopoly's output shifts rightward,the change in quantity produced is not predictable because

Accepted Answer

Monopoly has no supply curve because it is not constrained by the market forces of supply and demand. Therefore, the change in quantity produced cannot be predicted by a shift in demand.

Question 20

The more elastic the demand curve,a monopoly

Accepted Answer

When the demand curve is more elastic, consumers are more sensitive to changes in price, meaning that if the monopoly raises its price, it will lose more sales. This will lead to a decrease in revenue and potentially lower profits. The Lerner Index, which measures a monopoly's market power, will be lower with a more elastic demand curve as it is easier for consumers to switch to substitutes. Marginal cost is not directly influenced by the elasticity of the demand curve.

Quiz 9: Monopoly

Since a monopoly can set any price it wants,it always makes a profit?

As other firms enter a monopoly's market,the monopoly's market power

The fact that a monopoly has to take the shapes of marginal cost AND marginal revenue into account when making decisions is reflected in the fact that

Market power is illegal.

A firm that has market power

The monopolist's supply curve

If a monopoly's demand curve shifts to the right the monopoly

If the demand for a monopoly's output shifts rightward,the change in quantity produced is

If the demand for a firm's output is perfectly elastic,then the firm's Lerner Index equals

Since there are no close substitutes for the monopoly's product,the monopoly can charge any price it wishes.

Suppose a monopolist has TC = 100 + 10Q + ,and the demand curve it faces is p = 90 - 2Q.What will be the price,quantity,and profit for this firm?

If the demand for a monopoly's output shifts rightward,the change in quantity produced is not predictable because

Market power guarantees profit.

The ability of a monopoly to charge a price that exceeds marginal cost depends on

The Lerner Index is

A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10.Assuming profit maximization,the implicit demand elasticity is

In a recent court case,an expert witness defined a monopoly as a firm that can "raise price without reducing its total revenue." What does this imply about the elasticity of demand? Would this definition hold for a profit-maximizing monopoly? Explain.

A monopoly incurs a marginal cost of $1 for each unit produced.If the price elasticity of demand equals -2.0,the monopoly maximizes profit by charging a price of

If the demand for a monopoly's output shifts rightward,the change in quantity produced is not predictable because

The more elastic the demand curve,a monopoly