Practice set 6

1) The monopolist has no supply curve because

A) the quantity supplied at any particular price depends on the monopolist's demand curve.
B) the monopolist's marginal cost curve changes considerably over time.
C) the relationship between price and quantity depends on both marginal cost and average
cost.
D) there is a single seller in the market.
E) although there is only a single seller at the current price, it is impossible to know how
many sellers would be in the market at higher prices.

2) Use the following two statements to answer this question:

I. For a monopolist, at every output level, average revenue is equal to price.
II. For a monopolist, at every output level, marginal revenue is equal to price.
A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.
E) Statements I and II could either be true or false depending upon demand

3) Which of the following is NOT true for monopoly?

A) The profit maximizing output is the one at which marginal revenue and marginal cost are
equal.
B) Average revenue equals price.
C) The profit maximizing output is the one at which the difference between total revenue and
total cost is largest.
D) The monopolist's demand curve is the same as the market demand curve.
E) At the profit maximizing output, price equals marginal cost

4) A monopolist has equated marginal revenue to zero. The firm has:

A) maximized profit.
B) maximized revenue.
C) minimized cost.
D) minimized profit.

5) A monopolist has set her level of output to maximize profit. The firm's marginal revenue
is $20, and the price elasticity of demand is -2.0. The firm's profit maximizing price is
approximately:
A) $0
B) $20
C) $40
D) $10
E) This problem cannot be answered without knowing the marginal cost

6)Compared to a competitive red herring industry, the monopolistic red herring industry
A) produces more output at a higher price.
B) produces less output at a higher price.
C) produces more output at a lower price.
D) produces less output at a lower price.
E) not enough information to relate the monopolistic red herring industry to a competitive
industry

7) Bancroft Pharmaceuticals has a patent on a new medication used to treat high blood
pressure, so it is the monopoly seller of this new drug product. The marginal cost of
producing one dose of the drug is $10, and the elasticity of demand for the product is -3.
What is the profit maximizing monopoly price for this patented drug product?
A) $10
B) $12.50
C) $15
D) $30

8) Suppose your firm develops a new pharmaceutical product that may be used to reduce
blood cholesterol levels, so the firm is the monopoly seller of this drug. If the elasticity of
demand for this new product is -4, what markup should your firm use to set the profit-
maximizing price for the product?
A) The price-cost markup is 25% of the price
B) The price-cost markup is 25% of the marginal cost
C) The price-cost markup is 4% of the marginal cost
D) The price-cost markup is 4% of the price

9) The ________ elastic a firm's demand curve, the greater its ________.
A) less; monopoly power
B) less; output
C) more; monopoly power
D) more; costs

10) What is the value of the Lerner index under perfect competition?
A) 1
B) 0
C) infinity
D) two times the price
Answer: B

11) Assume that a firm's marginal cost is $10 and the elasticity of demand is -2. We can
conclude that the firm's profit maximizing price is approximately
A) $20.
B) $5.
C) $10.
D) The answer cannot be determined without additional information

12) Use the following two statements to answer this question:

I. A firm can exert monopoly power if and only if it is the sole producer of a good.
II. The degree of monopoly power a firm possesses can be measured using the Lerner Index:
L = (P - AC)/AC.
A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.

13) Determine the "rule-of-thumb" price when the monopolist has a marginal cost of $25 and
the price elasticity of demand of -3.0.

14) Which factors determine the firm's elasticity of demand?

A) Elasticity of market demand and number of firms
B) Number of firms and the nature of interaction among firms
C) Elasticity of market demand, number of firms, and the nature of interaction among firms
D) none of the above

15) John Gardner is the city planner in a medium-sized southeastern city. The city is
considering a proposal to award an exclusive contract to Clear Vision, Inc., a cable television
carrier. Mr. Gardner has discovered that an economic planner hired a year before has
generated the demand, marginal revenue, total cost and marginal cost functions given below:
P = 28 - 0.0008Q
MR = 28 - 0.0016Q
TC = 120,000 + 0.00062
MC = 0.0012Q,
where Q = the number of cable subscribers and P = the price of basic monthly cable service.
Conditions change very slowly in the community so that Mr. Gardner considers the cost and
demand functions to be reasonably valid for present conditions. Mr. Gardner knows
relatively little economics and has hired you to answer the questions listed below.

a. What price and quantity would be expected if the firm is allowed to operate completely
unregulated?
b. Mr. Gardner has asked you to recommend a price and quantity that would be socially
efficient. Recommend a price and quantity to Mr. Gardner using economic theory to justify
your answer.