Deck 10: Monopoly and Short-Run Fluctuations

Question 1

U.S. Code Title 18 § 1696 states
Whoever establishes any private express for the conveyance of letters or packets, or in any manner causes or provides for the conveyance of the same by regular trips or at stated periods over any post route which is or may be established by law, or from any city, town, or place to any other city, town, or place, between which the mail is regularly carried, shall be fined not more than $500 or imprisoned not more than six months, or both….
The Code of Federal Regulation (CFR) Title 39 Section 310.2 states
It is generally unlawful under the Private Express Statutes for any person other than the Postal Service in any manner to send or carry a letter on a post route or in any manner to cause or assist such activity. Violation may result in injunction, fine or imprisonment or both and payment of postage lost as a result of the illegal activity…
Under these laws, the U.S. Postal Service ________.

A) has a monopoly power over private express mail
B) has a comparative advantage over private express mail
C) competes in an oligopoly market for private express mail
D) competes in a monopolistic competition against other private express mail carriers

Answer 1

has a monopoly power over private express mail

Question 2

U.S. Code Title 18 § 1696 states
Whoever establishes any private express for the conveyance of letters or packets, or in any manner causes or provides for the conveyance of the same by regular trips or at stated periods over any post route which is or may be established by law, or from any city, town, or place to any other city, town, or place, between which the mail is regularly carried, shall be fined not more than $500 or imprisoned not more than six months, or both….
The Code of Federal Regulation (CFR) Title 39 Section 310.2 states
It is generally unlawful under the Private Express Statutes for any person other than the Postal Service in any manner to send or carry a letter on a post route or in any manner to cause or assist such activity. Violation may result in injunction, fine or imprisonment or both and payment of postage lost as a result of the illegal activity…
Under these laws, the U.S. Postal Service has ________.

A) a legal market power in the private express mail market
B) a natural market power in the private express mail market
C) no market power in the private express mail market
D) no market power in the non-private express mail market

Answer 2

a legal market power in the private express mail market

Question 3

Firm A is a monopoly because of network effects, whereas Firm B is a natural monopoly. Which of the following statements is likely to be true in this context?

A) The average total costs of both firms decrease as they increase their output.
B) The value of the product that both firms produce increases with an increase in the number of buyers.
C) Firm A enjoys a monopoly status because its marginal cost decreases with increase in output, whereas Firm B enjoys a monopoly status because the value of its product increases as more consumers buy it.
D) Firm B enjoys a monopoly status because its average total cost decreases with increase in output, whereas Firm A enjoys a monopoly status because the value of its product increases as more consumers buy it.

Answer 3

Firm B enjoys a monopoly status because its average total cost decreases with increase in output, whereas Firm A enjoys a monopoly status because the value of its product increases as more consumers buy it.

Question 4

When a monopolist charges $10 for its product, it sells 500 units of the product. When it lowers the price to $6, it sells 1,400 units of the product.

-Refer to the scenario above. What is the quantity effect of the price change?

A) $1,400
B) $2,700
C) $5,400
D) $6,750

Question 5

The following figure represents the cost and revenue curves of a firm that is producing a service in a monopoly market.


-Refer to the figure above. What is the optimal quantity that the monopolist should produce?

A) Q₁
B) Q₂
C) Q₄
D) Q₅

Question 6

The following figure shows the demand curve for Good X in a perfectly competitive market. Later, the government grants one of the firms the exclusive right to manufacture and sell Good X. MR represents the marginal revenue curve of the firm when it operates as a monopoly. The marginal cost of producing Good X is constant at $5.
a) What is the quantity supplied when the market is perfectly competitive? What happens to the quantity supplied once the market changes to a monopoly?
b) What is the market price when the market is perfectly competitive? What is the market price when the market changes to a monopoly?
c) Compare the consumer surplus when the market is perfectly competitive and the consumer surplus when the market is a monopoly. Is there any producer surplus or deadweight loss in either case? If yes, then how much?

Question 7

Tobac Co. is a monopolist in cigarette market in Nicotiana Republic where the U.S. dollar is used as its official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve


-Refer to the scenario above. When Tobac Co.'s profit is maximized, each pack of cigarette is sold for________.

A) $5.00
B) $4.00
C) $3.00
D) $2.00

Question 8

Economist Reuben Kessel wrote an influential article in 1958 analyzing price discrimination by medical care providers. Kessel interviewed several doctors and dentists in Los Angeles, and found that these providers often provided fee-for-service treatment to traveling business professionals but charged each patient a different amount. These health care providers told Kessel they had their receptionists see the make of car the individual was driving when determining the fee (along with other information the provider gleaned about the client). Assume this information revealed each client?s willingness to pay. This is an example of ________.

A) first-degree price discrimination
B) second-degree price discrimination
C) third-degree price discrimination
D) simple monopoly pricing

Question 9

Peak-load pricing is when a firm charges a different price during the peak (e.g., highest demand) period than during off-peak times, because the marginal cost of providing the good or service during the peak is higher. For example, an electricity producer builds generating capacity to serve peak-period demand but only needs to call on this full capacity during a handful of days of the year. Building capacity to meet peak demand means that there is a discrete change in the marginal cost of providing the good or service across a binding capacity constraint. Is this an example of price discrimination? If so, to which degree? If not, explain why not.

A) Yes; first-degree price discrimination
B) Yes; second-degree price discrimination
C) Yes; third-degree price discrimination
D) No; because the good or service is not the same (it has different marginal costs in peak versus nonpeak periods)

Question 10

Tobac Co. is a monopolist in cigarette market in Nicotiana Republic where the U.S. dollar is used as its official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve


-Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. If Tobac Co. could successfully carry out the first-degree (or perfect) price discrimination, the social surplus would ________ and the consumer surplus would be ________.

A) not be maximized; $112.5 million
B) not be maximized; $0
C) be maximized; $0
D) be maximized; $450 million

Question 11

What makes World's Fair of 1876, in Philadelphia a natural experiment suitable to study the impact of patent protection on innovation? (The author of the study also used the data from the 1851 Fair in London.)

A) Many countries with similar patent laws were represented in the fair, but it was difficult to hold a patent outside the country of origin.
B) Many countries with varying patent laws were represented in the fair, and it was difficult to hold a patent outside the country of origin.
C) Many different types of innovations were exhibited in the fair from countries with similar patent laws.
D) Many innovations of same types were exhibited in the fair from countries with varying patent laws.

Question 12

Why do purely technological theories have difficulty explaining recessions in which real GDP falls?

Question 13

Country A specializes in the production of automobiles, and 45 percent of its population works in the automobile manufacturing industry. A sharp increase in the world prices of automobiles led to a boom in the automobile manufacturing industry in Country A. However, the automobile manufacturers overestimated the demand for automobiles. This led to overproduction, which resulted in a large stock of unsold cars. Which of the following is likely to happen in the near future?

A) The unemployment rate in Country A will increase.
B) Household consumption in Country A will increase.
C) Investment in Country A will increase.
D) The supply of credit in Country A will increase.