Question 1

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
A) -0.2.
B) -0.8.
C) -1.25.
D) -5.0.

Accepted Answer

The markup over marginal cost is $50 - $10 = $40. To maximize profit, a monopolist sets the elasticity of demand equal to -1/margin. Solving for elasticity yields -1/4 = -0.25. However, since implicit demand elasticity is always measured in absolute value, the answer is 1.25 or -1.25. Since the price is above the marginal cost, demand is elastic, so the answer is -1.25.

Question 2

The more elastic the demand curve,a monopoly
A) will have a larger Lerner Index.
B) will face a lower marginal cost.
C) will earn more profit.
D) will lose more sales as it raises its price.

Accepted Answer

A more elastic demand curve means that consumers are more sensitive to changes in price, so as the monopoly raises its price it will lose more sales. This would result in lower revenue and therefore lower profits for the monopoly. The Lerner Index (A) measures the amount of market power a monopoly has and is calculated as (P-MC)/P, so a more elastic demand curve would result in a smaller numerator and a larger Lerner Index. A lower marginal cost (B) would result in a lower price for the monopoly, but would not necessarily be affected by the elasticity of the demand curve. Lastly, earning more profit (C) would not be likely with a more elastic demand curve unless the monopoly was able to increase its output and lower its price without losing too many sales, which may be challenging given the more elastic demand.

Question 3

Explain why a monopolist has no supply curve.

Accepted Answer

The answer of Explain why a monopolist has no supply...

Question 4

As other firms enter a monopoly's market,the monopoly's market power
A) is unaffected.
B) declines.
C) increases.
D) increases according to the Lerner Index but decreases according to the price/marginal cost ratio.

Accepted Answer

As other firms enter the monopoly's market, the monopoly's market power declines. This is because the presence of new firms increases competition, which reduces the monopoly's ability to control prices and profits. The market power of a monopoly is determined by its ability to set prices above marginal cost, and this ability decreases as the number of competitors increases. Therefore, the monopoly's market power declines as new firms enter the market.

Question 5

A monopoly's output decision depends only on the shape of its marginal cost curve.

Accepted Answer

The output decision depends on the shape of its marginal costs curve and demand curve.

Question 6

The Lerner Index is
A) the ratio of the difference between price and marginal cost to price.
B) equal to (Price - MC)/Price.
C) a measure of market power.
D) All of the above.

Accepted Answer

The Lerner Index is defined as the ratio of the difference between price and marginal cost to price. This means that choice A is correct. Simplifying, we can see that the Lerner Index is equal to (Price - MC)/Price, which means that choice B is also correct. Lastly, the Lerner Index is used as a measure of market power, or the degree to which a firm can influence market prices. Therefore, choice C is also correct. Thus, the best choice is D: All of the above.

Question 7

If a monopoly can produce a good at zero marginal cost,then its Lerner Index is
A) zero.
B) one.
C) infinity.
D) undetermined.

Accepted Answer

The answer of If a monopoly can produce a good...

Question 8

The ability of a monopoly to charge a price that exceeds marginal cost depends on
A) the price elasticity of supply.
B) price elasticity of demand.
C) slope of the demand curve.
D) shape of the marginal cost curve.

Accepted Answer

The ability of a monopoly to charge a price that exceeds marginal cost is primarily determined by the price elasticity of demand. If demand is inelastic, consumers are less sensitive to price changes, allowing the monopoly to set higher prices without losing many sales.

Question 9

The introduction of satellite television systems would cause the demand curve for cable television to be
A) more elastic.
B) less elastic.
C) perfectly inelastic.
D) unchanged.

Accepted Answer

The introduction of satellite television systems would increase consumer options and competitive pressure on cable television providers, making the demand curve for cable television more elastic. Customers would have more substitutes to choose from, and they would be more sensitive to changes in price and quality of cable television services.

Question 10

The introduction of satellite television systems would cause the Lerner Index for cable television to
A) become smaller.
B) increase.
C) change in accordance to the increase in market power of cable TV providers.
D) be unchanged.

Accepted Answer

The introduction of satellite television systems would increase competition in the market, giving consumers more options to choose from. This would reduce the market power of cable TV providers, causing the Lerner Index to become smaller.

Question 11

Suppose a monopolist has TC = 100 + 10Q + 2Q²,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

A monopoly always operates in the inelastic portion of its demand curve.

Accepted Answer

A monopoly never operates in the inelastic portion of its demand curve.Marginal revenue is negative in this region.

Question 13

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then the firm's Lerner Index equals
A) 58/16.
B) 16/42.
C) 58/42.
D) 42/58.

Accepted Answer

The answer of If the inverse demand curve a monopoly...

Question 14

If the demand curve a monopolist faces is perfectly elastic,then the ratio of the firm's price to the marginal cost is
A) 0.
B) 1.
C) 2.
D) None of the above-the answer cannot be determined.

Accepted Answer

If the demand curve a monopolist faces is perfectly elastic, it means that any increase in price above the market price will result in zero sales, as consumers will switch to the competition. This means that the firm can only charge the market price, which is equal to the marginal cost in perfect competition. Therefore, the ratio of price to marginal cost is 1.

Question 15

-The above figure shows the demand and cost curves facing a monopoly.If the firm is a profit maximizer,its Lerner Index will equal
A) 1.
B) 1/3.
C) 1.5.
D) 3.

Accepted Answer

The Lerner Index is a measure of a firm's market power and is calculated as (P - MC) / P, where P is market price and MC is marginal cost. In the context of a monopoly maximizing profits, the firm will produce where marginal revenue (MR) equals marginal cost (MC), and then it will charge the price (P) that corresponds to this quantity on the demand curve. The slope of the demand curve (which can be inferred from the price elasticity of demand) and the difference between price and marginal cost at the profit-maximizing quantity are crucial for calculating the Lerner Index. Without specific numbers or a graph to refer to, the correct answer relies on understanding the concept. Given the options, 1/3 could be a plausible value for the Lerner Index, indicating some degree of market power but not perfect monopoly power (which would be closer to 1 or higher).

Question 16

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 17

A monopoly does not have a supply curve.

Accepted Answer

A supply curve shows how much quantity a firm wishes to sell at any given price.First,the monopoly does not take price as given.The monopoly determines price based on the shape and position of its marginal cost curve and demand curve.

Question 18

Humana Hospital's price/marginal cost ratio of 2.3 is most likely to decline if
A) the number of nearby hospitals increases.
B) the number of nearby hospitals decreases.
C) the demand curve for hospital services shifts rightward.
D) the demand curve for hospital services becomes steeper.

Accepted Answer

An increase in the number of nearby hospitals leads to more competition, which typically forces prices down or controls their rise. As prices decrease or rise more slowly relative to marginal costs, the price/marginal cost ratio would decline.

Question 19

-The above figure shows the demand and cost curves facing a monopoly.At the profit-maximizing price,the elasticity of demand equals
A) -1.
B) zero.
C) infinity.
D) -3.

Accepted Answer

The answer of 
-The above figure shows the demand and...

Question 20

If the demand for a firm's output is perfectly elastic,then the firm's Lerner Index equals
A) zero.
B) one.
C) infinity.
D) one-half.

Accepted Answer

When the demand for a firm's output is perfectly elastic, it means that consumers are very sensitive to changes in price, and any increase in price would cause them to switch to a competitor's product. Therefore, the firm has no pricing power, and its Lerner Index, which measures the degree of market power, is equal to zero.

Quiz 11: Monopoly

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

The more elastic the demand curve,a monopoly

Explain why a monopolist has no supply curve.

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

A monopoly's output decision depends only on the shape of its marginal cost curve.

The Lerner Index is

If a monopoly can produce a good at zero marginal cost,then its Lerner Index is

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

The introduction of satellite television systems would cause the demand curve for cable television to be

The introduction of satellite television systems would cause the Lerner Index for cable television to

Suppose a monopolist has TC = 100 + 10Q + 2Q2,and the demand curve it faces is p = 90 - 2Q.What will be the price,quantity,and profit for this firm?

A monopoly always operates in the inelastic portion of its demand curve.

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then the firm's Lerner Index equals

If the demand curve a monopolist faces is perfectly elastic,then the ratio of the firm's price to the marginal cost is

-The above figure shows the demand and cost curves facing a monopoly.If the firm is a profit maximizer,its Lerner Index will equal

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 does not have a supply curve.

Humana Hospital's price/marginal cost ratio of 2.3 is most likely to decline if

-The above figure shows the demand and cost curves facing a monopoly.At the profit-maximizing price,the elasticity of demand equals

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

Suppose a monopolist has TC = 100 + 10Q + 2Q²,and the demand curve it faces is p = 90 - 2Q.What will be the price,quantity,and profit for this firm?