Deck 6: Extreme Markets II: Monopoly

Question 1

Two groups of consumers have different valuations of the two monopoly products you as a monopolist have bundled together.If their valuations for the two products are proportional, i.e.Group A's valuation of X is $10 and Y is $15, while Group B's valuation of X is $20 and Y is $30, bundling the products will be more profitable for the monopolist.

Answer 1

False

Question 2

A monopolist faces a horizontal demand curve while a perfect competitor faces a downward sloping demand curve for their respective products.

Answer 2

False

Question 3

Table 6-1

The following table shows the price and revenue for a monopolist at different levels of production.The monopolist incurs no marginal cost of production.
Refer to Table 6-1.Identify the profit maximizing production level for this monopolist.

A)2 units
B)3 units
C)4 units
D)5 units

Answer 3

C

Question 4

The highest price you are willing to pay for a pair of jeans is $20.However, you are able to purchase it for $14.This implies $6 is the producer surplus.

Question 5

A monopolist always decides on how much to produce by equating marginal revenue to zero.

Question 6

Price discrimination increases producer surplus for a monopolist.

Question 7

In an equilibrium in otherwise identical markets, producer surplus is higher for a monopolist than for a competitive firm.

Question 8

Monopoly output is relatively lower than a competitive market output as resources remain unutilized under the former.

Question 9

When a monopolist's marginal cost of production is zero:

A)the deadweight loss is reduced.
B)production is lower than if marginal cost were positive.
C)the price charged is higher than if marginal cost were positive.
D)maximizing profit is same as maximizing revenue.

Question 10

Historical evidence suggests that monopolization of particular industries had led to lower prices.In such cases the monopolists had reduced profit to increase welfare.

Question 11

Which of the following statements is true regarding the difference between a monopolist and a perfectly competitive firm?

A)Competitive price is higher than the price charged by a monopolist.
B)Supply of output is higher in case of a monopoly than if the market is competitive.
C)A monopoly can choose its price while a competitive firm is a price taker.
D)A market characterized by competition has a higher deadweight loss.

Question 12

A monopolist who attempts to bundle her product with one that is produced and sold in a competitive market is likely to make a smaller profit than one who does not bundle his product with such a good.

Question 13

The rationale behind patents is that if inventors and artists cannot secure the returns from successful projects, fewer new inventions and works of art will be produced

Question 14

People in the city of Maurus have a flatter demand curve for television sets than people in the city of Sienna.It can be concluded that a producer of television sets can price discriminate by charging a higher price in Maurus than in Sienna.

Question 15

A monopolist can:

A)produce as much or as little as it wants without affecting price.
B)decide the price that will be charged in the market.
C)provide discounts below market price to attract more customers.
D)price its products by considering the possible reactions of future competitors or firms that produce close substitutes for its output.

Question 16

The demand curve faced by a perfectly competitive firm is:

A)downward sloping.
B)the same as the market demand curve.
C)horizontal.
D)perfectly inelastic.

Question 17

Justin never keeps track of the sales and discounts offered in the stores at various times of the year, while his sister does.This implies that Justin has a higher price elasticity of demand than his sister.

Question 18

The greater the differences in demand elasticities of consumers within a market, the more the monopolist benefits from charging a uniform price for his product.

Question 19

A monopolist charges $7 per unit for selling 6 units of his product.To sell 7 units, he reduces price to $6.5 per unit.The marginal revenue (net addition to revenue) from selling the seventh unit is then $3.5.

Question 20

A single-price monopolist produces closer to the competitive level than a discriminating monopolist.

Question 21

Figure 6-1
The following figure shows the demand, marginal revenue, and marginal cost curves for a profit maximizing monopolist.
Refer to Figure 6-1.Identify the profit maximizing production level and the profit earned by this monopolist .

A)The monopolist produces OQ and earns a profit equal to the area PQD.
B)The monopolist produces OQ and earns a profit equal to the area OPQ.
C)The monopolist produces OQ' and earns a profit equal to the area OP'D'Q'.
D)The monopolist produces OQ' and earns a profit equal to the area C'P'D'C".

Question 22

Which of the following is a possible explanation for the fall in prices after an industry is monopolized by combining a group of competitors?

A)A monopolist faces a downward sloping demand curve.Hence, output expansion leads to lower prices.
B)A reduction in price increases producer surplus.Hence a monopolist may reduce the price of his product.
C)A monopolist may reduce prices to make it difficult for other firms to compete.
D)A monopolist can increase profits by reducing price when its cost of production declines due to increased size of the new firm.The fall in price is less than the decline in cost.

Question 23

Figure 6-3
The following figure shows the demand curve and marginal revenue curve for a monopolist who incurs a marginal cost of $2 per unit.
Refer to Figure 6-3.What is the monopolist's revenue when he incurs a marginal cost of $2 per unit?

A)$99
B)$88
C)$96
D)$72

Question 24

Figure 6-1
The following figure shows the demand, marginal revenue, and marginal cost curves for a profit maximizing monopolist.
Refer to Figure 6-1.Which of the following conclusions can be drawn from this figure?

A)The monopolist produces at the point where marginal cost is zero.
B)The monopolist incurs a fixed marginal cost of OC'.
C)The monopolist charges a price of OP' and total revenue is OP'D'Q'.
D)The consumer surplus enjoyed by customers is PC'D".

Question 25

Figure 6-2
A group of firms in competitive market produced 20 units of a good when the market price was $2.They incurred no marginal cost.Eventually they realized the benefits they could get by teaming up and acting as a monopolist.The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist.
Refer to Figure 6-2.What is the consumer surplus under monopoly?

A)$96
B)$48
C)$36
D)$72

Question 26

X-inefficiency implies:

A)the practice of using less than the optimal amount of inputs for production.
B)the practice of using the lowest quantity of input to produce maximum output.
C)always producing less than the optimal amount of output.
D)excessive use of inputs relative to best-practice methods.

Question 27

Figure 6-3
The following figure shows the demand curve and marginal revenue curve for a monopolist who incurs a marginal cost of $2 per unit.
Refer to Figure 6-3.Calculate the deadweight loss when the monopolist incurs a marginal cost of $2 per unit.

A)$31.5
B)$40
C)$24.5
D)$11

Question 28

Table 6-1

The following table shows the price and revenue for a monopolist at different levels of production.The monopolist incurs no marginal cost of production.
Refer to Table 6-1.The profit maximizing output level in this case is determined by which of the following criteria?

A)The monopolist will produce where marginal revenue = 0
B)The monopolist will produce where marginal cost = 0
C)The monopolist will produce where total revenue is highest.
D)The monopolist will produce where per unit price is highest.

Question 29

The peak of the total revenue curve is achieved at the point where:

A)marginal revenue is the highest.
B)price is the highest.
C)marginal revenue is zero.
D)marginal cost is zero.

Question 30

Table 6-1

The following table shows the price and revenue for a monopolist at different levels of production.The monopolist incurs no marginal cost of production.
Refer to Table 6-1.Calculate the marginal revenue from the third unit.

A)$39
B)$11
C)$19
D)$9

Question 31

Figure 6-2
A group of firms in competitive market produced 20 units of a good when the market price was $2.They incurred no marginal cost.Eventually they realized the benefits they could get by teaming up and acting as a monopolist.The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist.
Refer to Figure 6-2.What would be the consumer surplus if this remained a perfectly competitive market?

A)$320
B)$160
C)$280
D)$140

Question 32

Figure 6-4
The following figure depicts the demand, marginal revenue (MR), and marginal cost (MC) for a monopolist.
Refer to Figure 6-4.What price will the monopolist charge when its marginal cost shifts from C to C'?

A)$20
B)$16
C)$15
D)$9

Question 33

Figure 6-2
A group of firms in competitive market produced 20 units of a good when the market price was $2.They incurred no marginal cost.Eventually they realized the benefits they could get by teaming up and acting as a monopolist.The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist.
Refer to Figure 6-2.Calculate the deadweight loss in this market caused by monopoly.

A)$64
B)$32
C)$40
D)$24

Question 34

Figure 6-4
The following figure depicts the demand, marginal revenue (MR), and marginal cost (MC) for a monopolist.
Refer to Figure 6-4.Calculate the profit earned by the monopolist when the marginal cost of production is $15 per unit.

A)$20
B)$35
C)$25
D)$45

Question 35

What is deadweight loss?

A)It is the amount of surplus that consumers lose due to monopoly.
B)It is the amount of surplus that producers lose due to perfect competition.
C)It is the amount of surplus which is completely lost to society due to monopoly.
D)It is the amount of surplus which was earned by consumers under perfect competition and is transferred to producers due to monopoly.

Question 36

Figure 6-3
The following figure shows the demand curve and marginal revenue curve for a monopolist who incurs a marginal cost of $2 per unit.
Refer to Figure 6-3.What is the monopolist's profit when he incurs a marginal cost of $2 per unit?

A)$66
B)$72
C)$77
D)$96

Question 37

The total revenue curve of a monopolist is:

A)U-shaped.
B)inverted U-shaped.
C)upward sloping.
D)downward sloping.

Question 38

Figure 6-2
A group of firms in competitive market produced 20 units of a good when the market price was $2.They incurred no marginal cost.Eventually they realized the benefits they could get by teaming up and acting as a monopolist.The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist.
Refer to Figure 6-2.Calculate the total revenue from production for the monopolist.

A)$96
B)$72
C)$40
D)$80

Question 39

_____ is the practice of using extra resources to compete for obtaining monopoly, and leads to _____.

A)X-inefficiency; a deadweight loss
B)Rent seeking; a deadweight loss
C)X-inefficiency; a loss in producer surplus
D)Rent seeking; a loss in producer surplus

Question 40

When a monopolist faces a fixed marginal cost of production, profit is maximized if:

A)the slope of the tangent to the total revenue curve is equal to the slope of the total cost curve.
B)the slope of the total cost curve is 1.
C)the marginal revenue is zero.
D)the slope of the tangent to the total revenue curve is equal to the slope of the marginal revenue curve.

Question 41

In the small country of Talisman, the liquor industry is monopolized by a single producer Best Drinks Inc.Best Drinks charges high end customers like 5-star hotels a much higher price than it charges local pubs.Identify the correct statement from the following.

A)Best Drinks is aware of the variations in the valuation of its products by different consumer segments.
B)Best Drinks minimizes cost by charging different consumers different prices.
C)Charging different prices for different consumers increases consumer surplus.
D)Best Drinks charges different prices because its sole objective is sales maximization.

Question 42

The following figure represents two types of demand curves, of two sets of consumers visiting an amusement park.$3 is the marginal cost of providing the service.
Figure 6-7

Refer to Figure 6-7.What is the maximum cover charge that can be levied on consumers whose demand curve is D₂?

A)$28
B)$16
C)$32
D)$14

Question 43

In the small country of Talisman, the liquor industry is monopolized by a single producer Best Drinks Inc.Best Drinks charges high-end customers like 5-star hotels a much higher price than it charges local pubs.This discrimination is possible only if:

A)price discrimination is legal in Talisman.
B)we assume Best Drinks can prevent pub owners from buying liquor and selling it to 5-star hotels.
C)consumers in Talisman have similar price elasticities of demand for liquor.
D)we assume Best Drinks is a natural monopoly.

Question 44

Which of the following statements is NOT true regarding DeBeers' rise to monopoly power in the diamond market?

A)DeBeers produces about 40 percent of the world's raw diamonds and controls another 30 percent.
B)DeBeers achieved dominance in this market by gaining control of South Africa's Kimberley "pipe," the world's largest source in the late nineteenth century.
C)DeBeers carefully limited the amount of diamonds it released into the market.
D)DeBeers did not worry about diamonds being discovered elsewhere because it already had full control of the industry in South Africa.

Question 45

Figure 6-4
The following figure depicts the demand, marginal revenue (MR), and marginal cost (MC) for a monopolist.
Refer to Figure 6-4.How does the monopolist's profit change when MC shifts from C to C'?

A)It rises by $43
B)It rises by $63
C)It rises by $38
D)It rises by $44

Question 46

You and your friend go out shopping for television sets for your respective apartments.You find the one you want to buy and pay extra money to have it delivered during the weekend.Your friend is unwilling to pay extra and will wait for the television to be delivered as per the store's usual practice.Which of the following conclusions can be drawn from this information?

A)You have a higher price elasticity of demand for the TV than your friend.
B)Your opportunity cost of time is higher and than your friend's.
C)Your friend's opportunity cost of time is higher than your's.
D)Both of you have the same price elasticity of demand for the TV.

Question 47

Identify some of the basic assumptions of monopoly.

Question 48

The practice of charging different prices on the basis of varying customer preferences is known as:

A)arbitrage.
B)discounting.
C)price discrimination.
D)rationing.

Question 49

The following figure depicts the demand curves for vacation cruises of four individuals A, B, C, and D.
Figure 6-6

Refer to Figure 6-6.A monopoly provider of cruise services recognizes the opportunity to price discriminate and will charge the highest price to individual _____.

A)A
B)B
C)C
D)D

Question 50

The following figure represents two types of demand curves, of two sets of consumers visiting an amusement park.$3 is the marginal cost of providing the service.
Figure 6-7

Refer to Figure 6-7.What is the maximum cover charge that the amusement park can levy on consumers whose demand curve is D₁?

A)$36
B)$31.5
C)$18
D)$27

Question 51

What are the main differences between a monopolist and a perfectly competitive firm?

Question 52

Tying products can be a profitable strategy for facilitating price discrimination only when:

A)the demands for the goods are unrelated.
B)the supply of one of the tied products is low.
C)the demands for the goods are related.
D)the market for one of the goods is competitive.

Question 53

The following table gives the valuations of fruit juices and health drinks by two groups of consumers in the city of Vanilla.A single producer of both products controls the entire market for beverages in this city and is considering strategies to bundle one bottle of health drink with one bottle of fruit juice.Assume that the marginal cost of supplying both varieties is $2 each.
Table 6-2

Refer to Table 6-2.Assume that the monopolist sells only health drinks to Group 1 and only fruit juices to Group 2.What profit will the monopolist earn?

A)$35
B)$10
C)$31
D)$14

Question 54

The following figure shows the demand and marginal revenue for a monopolist, who has many buyers with different valuations of the good.Each buyer demands only one unit of the good, and only two are willing to pay $6.5 for it.The valuation decreases for each additional buyer as shown in the figure.The marginal cost of production is $3 per unit.
Figure 6-5

Refer to Figure 6-5.How much profit will the monopolist earn if he practices price discrimination?

A)$10
B)$25
C)$15
D)$22

Question 55

_____ allow exclusive use of an identifier, such as a brand name, and can be renewed indefinitely.

A)Patents
B)Trademarks
C)Copyrights
D)Licenses

Question 56

The following table gives the valuations of fruit juices and health drinks by two groups of consumers in the city of Vanilla.A single producer of both products controls the entire market for beverages in this city and is considering strategies to bundle one bottle of health drink with one bottle of fruit juice.Assume that the marginal cost of supplying both varieties is $2 each.
Table 6-2

Refer to Table 6-2.If the monopolist bundles the two goods, such that they are no longer available individually, what is the maximum price he can charge for the bundle and what will be his profit?

A)The highest price he can charge for the bundled good is $23 which earns him a profit of $38.
B)The highest price he can charge for the bundled good is $28 which earns him a profit of $48.
C)The highest price he can charge for the bundled good is $26 which earns him a profit of $44.
D)The highest price he can charge for the bundled good is $21which earns him a profit of $34.

Question 57

Bundling of products becomes _____, if the valuations of different customer groups are _____.

A)more profitable; positively correlated
B)less profitable; perfectly elastic
C)less profitable; positively correlated
D)more profitable; perfectly elastic

Question 58

Monopolies exist for each of the following reasons, EXCEPT:

A)competitors are legally unable to challenge them.
B)they have control over resources with very few good substitutes.
C)it is sometimes inefficient to have competition in certain markets.
D)it increases both producer and consumer surplus.

Question 59

The following figure shows the demand and marginal revenue for a monopolist, who has many buyers with different valuations of the good.Each buyer demands only one unit of the good, and only two are willing to pay $6.5 for it.The valuation decreases for each additional buyer as shown in the figure.The marginal cost of production is $3 per unit.
Figure 6-5

Refer to Figure 6-5.If the profit maximizing monopolist does not practice discrimination, what uniform price will he charge and how much profit will he earn?

A)He will charge a price of $6.5, and his profit will be $6.5.
B)He will charge a price of $5, and his profit will be $6.
C)He will charge a price of $4, and his profit will be $4.
D)He will charge a price of $3, and his profit will be $6.5.

Question 60

How does a monopolist choose the profit maximizing output-price combination?

Question 61

What is tying or bundling of goods?

Question 62

Why does rent-seeking behavior lead to deadweight loss?

Question 63

What are cover and commodity charges?

Question 64

The Wells Fargo Bank Tower in downtown Los Angeles displays a sign at its parking entrance that clearly shows that the per-hour parking charges are higher for people who visit the building for a short while.How is this consistent with the general principle of price discrimination?

Question 65

When can a monopolist practice price discrimination?

Question 66

A monopolist serves two markets with constant elasticity demand curves.However, the elasticities vary between the two markets.Graphically show how price discrimination benefits the monopolist in this case.

Question 67

Why is bundling of unrelated products, one of which is available in the competitive market, a losing strategy?

Question 68

How is the profit maximizing price and output calculated for a monopolist when i) it incurs no marginal cost, and ii) when it incurs positive marginal cost? Discuss with an example.

Question 69

What is the general principle of price discrimination?