Pure Monopoly I. True / False Questions 1, "Price maker" means that a monopoly can decide whatever price it wants to, in order to sell a specific given quantity of its produet. etme oFalse 2. The government may create barriers to entry that serve to foster monopoly power of firms. aLiye False 3. A monopolist can use its pricing strategy as a barrier to entry by other firms ane False 4, The monopolist’s demand curve is more elastic than the industry demand curve. oTme oFalse 5. At the inelastie portion of a monopolist’s demand curve, the marginal revenue of each extra ‘unit of output is positive, o True false 6. A monopolist will avoid setting a price in the elastic segment of the demand curve and prefer to set the price in the inelastic segment. oTme False 7. In order to maximize profits, the monopolist will produce the output level where MR = MC and charge a price equal to MR and MC. oTme False 8. A monopolist, being the sole seller in a market, is assured of positive economic profits. oTme False 9. The supply curve for a monopolist is the upward-sloping portion of the marginal cost curve that lies above the average variable cost curve. oTme False 10. For a monopolist, maximum profits will ‘occur when the gap between average revenue (or price) and average cost is biggest. oTie False 11, In the long-run equilibrium, a monopolist will eam zero economic profits. co Tie oFalse 12, A monopolist is free to charge whatever price it wishes, to sell a certain level of output. o Tue False 13, One of the economic effects of monopoly is an income transfer from consumers to the firm. oTme False 14, Price discrimination is not viable if consumers can resell the products they purchase to other consumers. Te False 15, A price-discriminating monopolist will set a higher price where demand is more elastic and a lower price where demand is less elastic. o Tie oFalse 16. Barriers to entry are obstacles, such as patents. that make it difficult for new consumers to enter a market. oTme False 17, When compared to a competitive market, monopolists tend to charge a higher price and produce a greater level of output oTme False Ealse, 18, A monopolist with the ability to use price discrimination produces more to maximize profit than it would if it could charge only one price. o Tue FalseI. Multiple Choices 1. A natural monopoly occurs when a. the firm is characterized by a rising marginal cost curve. b. production requires the use of free natural resources, such as water or air ¢. the product is sold in its natural state (such as ser or diamonds). average cost is decreasing over the relevant range of output Figure MND. The graph below describes a profit- maximizing monopolist that cannot price- discriminate. 30h? wc B 2» 1s ac 2 i> 0 ZA 3 D ° o 2 15 0 2. See Figure MND. In order to maximize profits, the monopolist should charge a price of. a. $9. b. $12. $20. L $23. 3. See Figure MND. The monopolist would ean total revenues of: a. S81. b. S144, $225. fo 4. See Figure MND. The monopolist would earn profits of: a. $96. b.S117. G@)s120. d. $126. 5. Which of the following would be most likely to have monopoly power? a. an online bookstore municipal water company cc. a local restaurant: da grocery store 6. A fundamental source of monopoly market ‘power arises from a. perfectly elastic demand. >. perfectly inelastic demand. barriers to entry. I availability of "free" natural resources, such as water or air. 7. The defining characteristic of a natural monopoly is a, constant marginal cost over the relevant range ‘output. -conomies of scale over the relevant range of output. ¢. constant retums to scale over the relevant range of output. 4d. diseconomies of seale over the relevant range of output. 8, Fora monopoly firm, ice always exceeds average revenue. (o)price always exceeds marginal revenue. any price - quantity combination will maximize profits. 4d. Allof the above are correct. 9. A monopoly is a market with a. no barriers to entry. b. many substitutes, many suppliers. 6 ma 10. Ifthe technology for producing a good enables one firm to meet the entire market demand at a ower price than two or more firms eould, then that firm has: a legal barrier to entry. a natural monopoly T. increasing average total costs. 4. patented the market. 11, Which of the following goods is the best example of a natural monopoly? natural gas diamonds ©. apatented good first-class mail12. Which bamier to entry is an exclusive right granted to the author or composer of a literary, nusical, dramatic or artistic work? a. government license b. patent public franchise copyright 13. When the government grants an exclusive patent to one firm, that firm enjoys: a. productive efficiency b. antitrust regulation monopoly powers 4. collusive prices 14Which of these could be considered a government-created barrier to market entry? a. Discretionary spending Antitrust legislation Patents and copyrights Progressive income taxes, 15. A profit-maximizing output for a single-price monopoly is determined by the intersection of the curves and the profit-maximizing price is found on the curve. a. total revenue and total cost, total revenue ‘b. marginal cost and marginal revenue: marginal revenue demand and supply: supply () marginal cost and marginal revenue: demand marginal cost and average total cost: demand 16. A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of output where the price on the demand eurve is $38, At this output, average total cost is $15, What is the total profit eamed? a. $225 b. $570 c. $19 a. s28B)s34s 17. Ifa natural monopoly is regulated using a. a total cost pricing rule, the firm will exit the industry b. a marginal cost pricing rule, the fim maximizes its profit. ¢. an average cost pricing rule, the fim maximizes its profit. & a marginal cost pricing rule, the firm ineurs an economic loss. €. anaverage cost pricing rule, the firm inewrs an economic loss. 18, A monopoly creates a deadweight loss because the monopoly 6 sets a price that is too low. produces less than the efficient quantity, %. produces more than the efficient quantity. 4. does not maximize profit €, ears a normal profit. 19. Which of the following explains why the marginal cost pricing nile results in an economic Joss for a natural monopoly? (2 the ATC curve is downward sloping throughout the relevant range, therefore the MC is lower than the ATC. b. The MC is constant and equal to price. ¢. Because output is determined by setting MC equal to the price, consumer surplus is maximized. 4. The demand curve is downward sloping, therefore price falls as quantity increases. (Q Thee firs Ris always tess than ts price 20. With perfect price discrimination, the level of output: a. is the same as the amount produced by any monopoly that price discriminates. @ equals the amount produced by a single-price monopoly. ¢. is the same as the amount produced in a perfectly competitive market. exceeds the efficient quantity. e. isunknown. 21. With price discrimination, a monopoly: a, produces less output than if it does not price discriminate b, converts consumer surplus into deadweight loss. OQ converts producer surplus into economic profit 4. can charge a single price to all customers. €. converts consumer surplus into. economic profit. 22. A single-price monopoly transfers: a, economic profit to the government. D, cousumer surplus to producers. producer surplus to consumers, economic profit to deadweight loss. economic profit to consumers,23. When compared to a perfectly competitive market, a single-price monopoly with the same costs produces price. a. asmaller; a lower a larger, a lower 9 a smaller; a higher smaller; the same the same; a higher output and charges 23. If the Boston Red Sox baseball team is currently charging a ticket price where its demand is inelastic, then the Red Sox’s marginal revenue is a. positive b. zero. ¢. undefined. maximized, negative. 24. The demand curve facing a single-price monopoly is a, the same as only the marginal revenue curve. b. the same as both the marginal revenue curve and the marginal cost curve. below the marginal revenue curve above the marginal revenne curve . the same as only the marginal cost curve 25. A single-price monopoly can sell 10 units of its product at a price of $45 each but to sell 11 units, the monopoly must cut the price to $44. What is the marginal revenue of the extra unit sold? a. $484 b. $450 S34 “SI ©. S44 26. A single-price monopoly faces a linear demand curve. If the marginal revenue for the second unit is $20, then the marginal revenue for the: third unit is also $20. third unit is less than $20. c. first unit is less than $20. d. third unit is more than $20. e. more information is needed to determine if the marginal revenue for the third unit is more than, less than, or equal to $20. 21, For a single-price monopoly, price is: g reater than marginal revenme, equal to marginal even. ¢. less than marginal revenue because the firm must lower its price in order to sell another ‘unit of output. d. less than marginal revenue because the firm cannot increase its total revenue when the demand curve is downward sloping. e. equal to zero because the firm is not a price taker. 28. For a monopoly, marginal revenue is equal to: a. the prive of the product. b. the amount people buy between two prices. the amount people buy at a given price. @ the change in total revenue brought about by ‘a one-tmit increase in quantity sold. e. the price multiplied by the quantity sold, 29. A single-price monopoly is able to raise its price as high as it wants and consumers must still buy from it because itis a monopoly b. can lower its price for only a few select cconstumers if it wants to increase its sales. . must practice price discrimination (C} must lower the price for all customers if it ‘wants to increase its sales. e. will set its price equal to a consumer's © willingness to pay. 30. A natural monopoly’s average cost eurve: i. intersects the demand curve while the average cost curve slopes downward. ii, reaches its minimum before it intersects the demand curve. iii, intersects the demand cuve below the intersection of the marginal cost curve and the demand cwve. a. iii, and i. @) ii ont © indi. iii only. Oia 31, For a natural monopoly, economies of scale: a. as well as constant retums to scale and diseconomies of scale exist along the long-nin average cost curve at least until it crosses the market demand curve. b. are totally absent.©. and diseconomies of seale exist along the long- run average cost curve at least until it crosses the market demand curve lead to a legal barrier to entry. exist along the long-run average cost curve at least until it crosses the market demand curve. 32. A natural monopoly a. occurs when one firm controls a natural resource. D, arises when one firm can meet the entire market demand at a lower average total cost than two or more firms. rises as a result of legal barriers to entry. joth answers A and B are correct. ©. Both answers A and C are comect. 33. A natural barrier to entry is defined as a barrier that arises because of: technology that allows economies of scale over the entire relevant range of output b, patents or licenses that exclude others from producing a good or service. ¢. many firms producing the good and thereby allowing choice for all consumers. 4. one firm owning a key natural resource e. anticompetitive practices by a firm that keep other firms from producing. TIT. Short-Answer, Essays, and Problems 1. Use the graph to answer these questions for a pure monopolist: (a) What price should the monopolist charge to maximize revenue? P, (b) What is the elastic and inelastie portion of the demand curve? 2. Use the graph to answer these questions for an unregulated pure monopolist: (a)What is the price and quantity that will be charged by the monopoly? P 4 oy (b) What area represents the efficiency loss? (c)Suppose the government were to break-up the ‘monopoly and create a purely competitive market. What is the price and quantity will the market move toward? Will this outcome be more or less efficient Q, 3. A pure monopolist determines that at the current level of output the marginal cost of production is $2.00, average variable costs are $2.75, and average total costs are $2.95. The marginal revenue is $2.75. What would you recommend that the monopolist dg to maximize profits? mexeose (PRBEEBS 4. A pure monopolist sells output for $4.00 per unit at the current level of production. Atthis level of output, the marginal cost is $3.00, average variable costs are $3.75, and average total costs are $4.25. The marginal revenue is $3.00. What is the short-run condition for the monopolist and what output changes would you recommend? 5. What are the relative values of price, ATC, and AVC when a monopolist experiepees: (a) a profit "PS HC SAVE (0) loss but continues to produce (I Z- (6),a Igga but ceases production POAT Pe ic ZPNC 6. The demand schedule forthe product produced by @ monopolist is given in the table below. Complete the table by computing total reveme ‘and marginal revenue. Quantity Total Marginal demandedPricerevenuerevene 1 s325s3)S $s -_ 2 30 G90. 275 3s 2S 200 1 39 1000 75 s mst25 195 200 1200 73 1B Poave Elashc$22 (a)What do the data in the table indicate about the relationship between total revenue and marginal revenue? Explain. (b)What do the data in the table indicate about the elasticity of demand? 7. In the following table are demand and cost data for a pure monopolist. Complete the table by filling in the columns for total revenue, marginal - revenue, and marginal cost. Answer these three questions,, (a) What output will the monopolist produce%® (b) What price will the monopolist charge? (c) What total profit will the monopolist 6% $ receive at the profit-maximizing level of.output? Total Marginal Total Marginal Quantity Price revenue revenue cost __ cost 0 saa sO $ 20 1 x2 37 332 3% sic_ 2 30 60 28 46 1d 3 2 £4 24 50 S 4 26 Iou JO s+ oO 7 8 9 10 4 8.Why is there a supply eurve in pure competition Dut no supply curve in puge monopoly? On ei rote diller emt oupuls 9.Are groouse pricing schemes below examples of price discrimination? Explain. (a) Sending out coupons in the local newspaper (b)Charging the same price for a train ticket regardless of how far the customer is travelling. F (Ofte senior citizen discount at a restaurant. 1 (@Sunday newspapers. which inelude additional coupons and comies, offen are more expensive than the weekly version. F 4 10.In the table below are cost and demand data for pure monopolist. for Quantity demanded Price 0 $35.00 32.00 $ 32.00848.00 29.00 26.00 30.00 12.00 26.00 20.00 23.34 23 00__ 21.00 ‘Marginal Average Marginal revenue cost 20.00 8,00 20.00 16.00. 2 5017, T 14.00 -4.00 19.28" 18.00 8 11.00 -10.00 18.68 18.50 9 8.00 16.00 18.72 19.00 23: (a)What is the level of price, output, and amount of profit for an unregulated monopolist? (b)Using the data in the table, what are the price, output, and profit for a regulated monopolist that, sets price equal to marginal cost compared with an unregulated monopolist? ~'S 20 (Using the data m the table, what are the price, output, and profit for a regulated monopolist that charges a “fair-retum” price compared with an unregulated monopolist? Q PTO: (@Analyze the effect of regulation on the allocation, gf resources. Which situation is most efficient Which situation is most likely to be chosen by government? ¥ ve 1LDraw a graph that illustrates the dilemma of regulation for a natural monopoly. On the graph, show the: (a) “socially optimal” price: (b) “fair retum” price; and (¢) profit-maximizing price for the unregulated monopolis Some P