Question 1

During the life of a drug patent,the monopoly pharmaceutical firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost.

Accepted Answer

The monopoly pharmaceutical firm will maximize profit at the quantity where marginal revenue (MR) equals marginal cost (MC), where MR is the extra revenue generated from selling one more unit of the drug and MC is the cost of producing one more unit of the drug. This is because at this quantity, the firm is producing the amount that brings in the greatest difference between revenue and cost, which maximizes profit.

Question 2

A monopolist that can practice perfect price discrimination will not impose a deadweight loss on society.

Accepted Answer

A monopolist that can practice perfect price discrimination charges each consumer their individual maximum willingness to pay, capturing all consumer surplus, leaving no deadweight loss. This is because the monopolist is able to extract all of the surplus from the market, resulting in a Pareto efficient outcome.

Question 3

A monopolist earns higher profits by charging one price than by practicing price discrimination.

Accepted Answer

A monopolist can earn higher profits by practicing price discrimination as they can charge different prices to different consumers based on their willingness to pay, rather than charging a single price to all consumers which could lead to some consumers not buying at that price. By practicing price discrimination, the monopolist can increase their total revenue and profits.

Question 4

Movie theatres charge different prices to different groups of people based on the differing marginal costs that exist from group to group.

Accepted Answer

Movie theaters typically charge different prices to different groups of people (such as students, seniors, or military personnel) based on a pricing strategy known as price discrimination, which aims to maximize revenue by charging different prices to different segments of consumers, not based on differing marginal costs.

Question 5

In order for a firm to maximize profits through price discrimination,the firm must have some market power and be able to prevent arbitrage.

Accepted Answer

Price discrimination involves charging different prices to different groups of consumers based on their willingness and ability to pay. In order to successfully implement price discrimination, a firm must have some degree of market power, meaning they are able to control the price without facing intense competition. Additionally, the firm must be able to prevent consumers from arbitraging, or taking advantage of the price differences to resell products at a profit. This requires some level of market segmentation and differentiation to make it difficult for consumers to buy from one group and sell to another.

Question 6

University financial aid can be viewed as a type of price discrimination.

Accepted Answer

University financial aid often takes into consideration a student's financial need and academic merit, which are characteristics that can be used for price discrimination. By offering different levels of aid based on these characteristics, the university can charge different prices to different groups of students.

Question 7

Suppose a profit-maximizing monopolist faces a constant marginal cost of $10,produces an output level of 100 units,and charges a price of $50.The socially efficient level of output is 200 units.Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines.The monopoly deadweight loss equals $2,000.

Accepted Answer

The answer of Suppose a profit-maximizing monopolist faces a constant...

Question 8

The socially efficient quantity is found where the demand curve intersects the marginal cost curve.

Accepted Answer

At the intersection of the demand curve and marginal cost curve, the quantity produced and consumed results in the highest level of consumer surplus and producer surplus possible, indicating an optimal allocation of resources. This represents the socially efficient quantity.

Question 9

Airlines often separate their customers into business travelers and personal travelers by giving a discount to those travelers who stay over a Saturday night.

Accepted Answer

This is true. Airlines often offer lower fares to customers who include a Saturday night stay in their itinerary, as this is a common indicator that the trip is for leisure rather than business purposes. Business travelers who typically take shorter trips during the week are less likely to include a weekend stay in their travel plans, so this discount is seen as a way to incentivize personal travel bookings.

Question 10

Suppose a profit-maximizing monopolist faces a constant marginal cost of $20,produces an output level of 100 units,and charges a price of $50.The socially efficient level of output is 200 units.Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines.The monopoly deadweight loss equals $1,500.

Accepted Answer

The deadweight loss (DWL) in a monopoly can be calculated as the area of the triangle formed by the marginal cost (MC), the demand curve, and the quantity axis between the monopolist's quantity (Qm) and the socially efficient quantity (Qe). Given the MC = $20, Qm = 100 units, Qe = 200 units, and the price at Qm = $50, the height of the triangle is the price difference between the demand curve at Qe and the MC, which is $30 ($50 - $20). The base of the triangle is the difference in quantities (Qe - Qm = 100 units). The area of this triangle, representing the DWL, is 0.5 * base * height = 0.5 * 100 * 30 = $1,500.

Question 11

Suppose a profit-maximizing monopolist faces a constant marginal cost of $10,produces an output level of 100 units,and charges a price of $50.The socially efficient level of output is 200 units.Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines.The monopoly deadweight loss equals $4,000.

Accepted Answer

Since the socially efficient level of output is 200 units, the monopoly is producing at a lower level of output, resulting in a deadweight loss. The deadweight loss, in this case, is calculated as 0.5*(price-cost)*(efficient quantity - monopolist's quantity), which equals $2,000. The statement in the question that the deadweight loss is $4,000 is incorrect.

Question 12

The deadweight loss for a monopolist equals one-half of its profits for any given level of output.

Accepted Answer

Deadweight loss for a monopolist does not necessarily equal one-half of its profits for any given level of output. Deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved. In the case of monopoly, it arises because the monopolist produces less than the socially optimal output level and charges a higher price than in a competitive market, but the size of the deadweight loss is not directly tied to the size of the monopolist's profits in a fixed proportion.

Question 13

By selling hardcover books to die-hard fans and paperback books to less enthusiastic readers,the publisher is able to price discriminate and raise its profits.

Accepted Answer

By offering different formats of the book at different prices, the publisher is able to cater to different types of customers and charge a premium for the hardcover books to avid fans who are willing to pay more. This allows the publisher to maximize profits by price discriminating.

Question 14

A monopoly creates a deadweight loss to society because it produces less output than the socially efficient level.

Accepted Answer

Monopolies have the power to restrict output and raise prices, which leads to a situation where the price is higher than the marginal cost, resulting in a deadweight loss. The socially efficient level of output is where the marginal cost equals the marginal benefit, and monopolies typically produce less than this level, resulting in a deadweight loss to society.

Question 15

By offering lower prices to customers who buy a large quantity,a monopoly is price discriminating.

Accepted Answer

Price discrimination occurs when a company charges different prices to different customers for the same product or service. By offering lower prices to customers who buy a large quantity, a monopoly is price discriminating based on the quantity of the product purchased.

Question 16

A monopoly creates a deadweight loss to society because it earns both short-run and long-run positive economic profits.

Accepted Answer

The answer of A monopoly creates a deadweight loss to...

Question 17

Price discrimination is prohibited by antitrust laws.

Accepted Answer

Price discrimination is not always illegal under antitrust laws. In fact, some forms of price discrimination are legal, such as offering discounts to certain customers, as long as they are not used to harm competition or exploit market power. However, if price discrimination is used to harm competition, it may be considered a violation of antitrust laws.

Question 18

A monopolist's supply curve is horizontal.

Accepted Answer

A monopolist does not have a supply curve in the traditional sense because the quantity supplied is determined by the monopolist's choice of price, taking into account the demand curve, rather than by a market price.

Question 19

A monopolist's supply curve is vertical.

Accepted Answer

A monopolist does not have a supply curve in the traditional sense because the quantity supplied is determined by the monopolist's profit-maximizing decision, which depends on the demand curve and not just on the price.

Question 20

A monopolist does not have a supply curve because the firm's decision about how much to supply is impossible to separate from the demand curve it faces.

Accepted Answer

A monopolist has the ability to set the price for its product or service, and the quantity it produces will depend on the level of demand at that price. Therefore, the monopolist does not have a separate supply curve, as the quantity supplied can't be determined independently of the price charged.

Quiz 15: Monopoly