Deck 11: Monopoly

Question 1

A profit-maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to

A) -3.
B) -1.
C) -1/3.
D) Any of the above-the price elasticity does not matter.

Answer 1

C

Question 2

At an output level of 100,a monopolist faces MC = 15 and MR = 17.At output level q = 101,the monopolist's MC = 16 and MR = 15.To maximize profits,the firm

A) should produce 100 units.
B) should produce 101 units.
C) cannot maximize profits.
D) is not a monopoly.

Answer 2

A

Question 3

If a firm is able to influence its price,

A) it is a monopoly.
B) it has constant marginal revenue.
C) it sells its output at a constant price.
D) it faces a downward-sloping demand curve.

Answer 3

D

Question 4

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then profit maximization is achieved when the monopoly sets price equal to

A) 16.
B) 21.
C) 25.
D) 58.

Question 5

For a monopoly,marginal revenue is less than price because

A) the demand for the firm's output is downward sloping.
B) the firm has no supply curve.
C) the firm can sell all of its output at any price.
D) the demand for the firm's output is perfectly elastic.

Question 6

The above figure shows the demand and cost curves facing a monopoly.Maximum profit equals

A) $0.
B) $100.
C) $1,000.
D) $2,500.

Question 7

A monopolist faces the inverse demand curve P = 60 - Q.It has variable costs of Q² so that its marginal costs are 2Q,and it has fixed costs of 30.The monopoly's profit maximizing price is

A) 55.
B) 50.
C) 45.
D) 40.

Question 8

For a monopoly,marginal revenue is less than price because

A) the firm is a price taker.
B) the firm must lower price if it wishes to sell more output.
C) the firm can sell all of its output at any price.
D) the demand for the firm's output is perfectly elastic.

Question 9

Marginal Revenue is

A) the increase in total revenue from selling one more unit of output.
B) equal to P(1+1/ε).
C) equal to P when the price elasticity of demand is infinite.
D) All of the above.

Question 10

If the inverse demand curve a monopoly faces is p = 100 - 2Q,then profit maximization

A) is achieved when 25 units are produced.
B) is achieved by setting price equal to 25.
C) is achieved only by shutting down in the short run.
D) cannot be determined solely from the information provided.

Question 11

One difference between a monopoly and a competitive firm is that

A) a monopoly is a price taker.
B) a monopoly maximizes profit by setting marginal revenue equal to marginal cost.
C) a monopoly faces a downward sloping demand curve.
D) None of the above.

Question 12

If the inverse demand function for a monopoly's product is p = 100 - 2Q,then the firm's marginal revenue function is

A) -2.
B) 100 - 4Q.
C) 200 - 4Q.
D) 200 - 2Q.

Question 13

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then maximum profit

A) equals $336.
B) equals $882.
C) equals $1,218.
D) cannot be determined solely from the information provided.

Question 14

The above figure shows the demand and cost curves facing a monopoly.The monopoly maximizes profit by selling

A) 0 units.
B) 25 units.
C) 50 units.
D) 75 units.

Question 15

The monopoly maximizes profit by setting

A) price equal to marginal cost.
B) price equal to marginal revenue.
C) marginal revenue equal to marginal cost.
D) marginal revenue equal to zero.

Question 16

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then profit maximization

A) is achieved when 21 units are produced.
B) is achieved by setting price equal to 21.
C) is achieved only by shutting down in the short run.
D) cannot be determined solely from the information provided.

Question 17

A monopolist faces the inverse demand curve P = 60 - Q.It has variable costs of Q² so that its marginal costs are 2Q,and it has fixed costs of 30.The monopoly's profit maximizing output is

A) 5.
B) 10.
C) 15.
D) 20.

Question 18

If the inverse demand function for a monopoly's product is p = a - bQ,then the firm's marginal revenue function is

A) a.
B) a - (1/2)bQ.
C) a - bQ.
D) a - 2bQ.

Question 19

At the current level of output,a firm's marginal cost equals 16 and marginal revenue equals 10.The firm

A) is producing the profit-maximizing amount.
B) should produce more.
C) should produce less.
D) Not enough information.

Question 20

The above figure shows the demand and cost curves facing a monopolist.The monopoly maximizes profit by setting price equal to

A) $100.
B) $200.
C) $300.
D) $400.

Question 21

If the demand for a monopoly's output shifts rightward,the change in quantity produced is not predictable because

A) the monopoly is a profit maximizer.
B) the monopoly is a price taker.
C) the monopoly has no supply curve.
D) the monopoly's marginal cost curve might not be upward sloping.

Question 22

The monopolist's marginal revenue curve

A) doesn't exist.
B) lies below the demand curve.
C) is identical to the demand curve.
D) lies above the demand curve.

Question 23

Which of the following is most necessary for a monopolist to survive in the long run?

A) a legal protection from entry
B) a perfect product
C) a brilliant Chief Operating Officer
D) an excellent marketing campaign

Question 24

If the monopoly's demand curve intersects the AVC curve at minimum AVC,the firm will shut down.

Question 25

Which of the following markets is closest to a monopoly?

A) a firm with a 90% market share
B) the only gas station for 100 miles
C) cable television
D) garbage disposal

Question 26

Since a monopoly can set any price it wants,it always makes a profit.

Question 27

A monopolist faces the inverse demand curve P = 60 - Q.It has variable costs of Q² so that its marginal costs are 2Q,and it has fixed costs of 30.The monopoly's maximum profit is

A) 220.
B) 370.
C) 420.
D) 510.

Question 28

A monopolist changes price from $1 to $2 and sells 10 fewer units.The marginal revenue is

A) $10
B) -$10
C) $0
D) impossible to determine with the information provided.

Question 29

A profit maximizing monopolist

A) is guaranteed to lose money because of a lack of competition.
B) is not guaranteed to make a positive profit.
C) is guaranteed to make a positive profit, hence the desire to be a monopolist.
D) is guaranteed to make a non-negative profit, otherwise government would step in to assist.

Question 30

If the demand for a monopoly's output shifts rightward,the change in quantity produced is not predictable because

A) the monopoly is a profit maximizer.
B) the monopoly is a price taker.
C) the monopoly has no supply curve.
D) the monopoly's marginal cost curve might not be upward sloping.

Question 31

Consider a monopoly who posts an economic profit of $10,000,000.All else equal,this monopolist should expect

A) entry into its market, prices to fall, profits to fall.
B) no entry into its market, prices to remain the same, profits to remain the same.
C) exit from its market, prices to rise, profits to rise.
D) entry into its market, the need to increase price, profits to remain the same.

Question 32

When the marginal revenue curve cuts the horizontal axis,

A) demand is relatively elastic.
B) demand is relatively inelastic.
C) demand is perfectly elastic.
D) demand is unitary elastic.

Question 33

If a firm is a profit maximizer and faces positive marginal costs,

A) there is a natural limit to the size of the firm, where MR = 0.
B) there is no natural limit to the size of the firm; it can be as large as it wants to be.
C) there is a natural limit to the size of the firm, where MR > 0.
D) there is no natural limit to the size of the firm, hence the need for government regulation.

Question 34

In general,the quantity that maximizes revenue for the monopolist

A) is greater than the quantity that maximizes profit.
B) is less than the quantity that maximizes profit.
C) is the same as the quantity that maximizes profit.
D) is illegal according to anti-trust statutes.

Question 35

Since there are no close substitutes for the monopoly's product,the monopoly can charge any price it wishes.

Question 36

If a monopoly's demand curve shifts to the right,the

A) monopoly will charge a higher price.
B) monopoly will charge a lower price.
C) monopoly will sell more.
D) monopoly's decision cannot be determined.

Question 37

A monopolist that chooses price

A) necessarily produces less than a monopolist that chooses quantity, hence the laws against price fixing.
B) produces the same amount as a monopolist that chooses quantity.
C) produces more than a monopolist that chooses quantity, thus the irony of laws against price fixing.
D) could produce more or less than a monopolist that chooses quantity since the demand curve is not specified.

Question 38

The fact that a monopoly has to take the shapes of marginal cost AND marginal revenue into account when making decisions is reflected in the fact that

A) monopolies don't have a supply curve.
B) monopolies don't have a demand curve.
C) monopolies have the same supply curve as perfectly competitive firms.
D) monopolies maximize profit.

Question 39

If the demand for a monopoly's output shifts rightward,the change in quantity produced is

A) positive.
B) negative.
C) zero.
D) not predictable.

Question 40

A monopolist faces the inverse demand curve P = 60 - Q.It has variable costs of Q² so that its marginal costs are 2Q,and it has fixed costs of 30.At its profit maximizing output level,the monopoly's average cost is

A) 11.
B) 13.
C) 17.
D) 21.5.

Question 41

A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10.Assuming profit maximization,the implicit demand elasticity is

A) -0.2.
B) -0.8.
C) -1.25.
D) -5.0.

Question 42

The more elastic the demand curve,a monopoly

A) will have a larger Lerner Index.
B) will face a lower marginal cost.
C) will earn more profit.
D) will lose more sales as it raises its price.

Question 43

Explain why a monopolist has no supply curve.

Question 44

As other firms enter a monopoly's market,the monopoly's market power

A) is unaffected.
B) declines.
C) increases.
D) increases according to the Lerner Index but decreases according to the price/marginal cost ratio.

Question 45

A monopoly's output decision depends only on the shape of its marginal cost curve.

Question 46

The Lerner Index is

A) the ratio of the difference between price and marginal cost to price.
B) equal to (Price - MC)/Price.
C) a measure of market power.
D) All of the above.

Question 47

If a monopoly can produce a good at zero marginal cost,then its Lerner Index is

A) zero.
B) one.
C) infinity.
D) undetermined.

Question 48

The ability of a monopoly to charge a price that exceeds marginal cost depends on

A) the price elasticity of supply.
B) price elasticity of demand.
C) slope of the demand curve.
D) shape of the marginal cost curve.

Question 49

The introduction of satellite television systems would cause the demand curve for cable television to be

A) more elastic.
B) less elastic.
C) perfectly inelastic.
D) unchanged.

Question 50

The introduction of satellite television systems would cause the Lerner Index for cable television to

A) become smaller.
B) increase.
C) change in accordance to the increase in market power of cable TV providers.
D) be unchanged.

Question 51

Suppose a monopolist has TC = 100 + 10Q + 2Q²,and the demand curve it faces is p = 90 - 2Q.What will be the price,quantity,and profit for this firm?

Question 52

A monopoly always operates in the inelastic portion of its demand curve.

Question 53

If the inverse demand curve a monopoly faces is p = 100 - 2Q,and MC is constant at 16,then the firm's Lerner Index equals

A) 58/16.
B) 16/42.
C) 58/42.
D) 42/58.

Question 54

If the demand curve a monopolist faces is perfectly elastic,then the ratio of the firm's price to the marginal cost is

A) 0.
B) 1.
C) 2.
D) None of the above-the answer cannot be determined.

Question 55

The above figure shows the demand and cost curves facing a monopoly.If the firm is a profit maximizer,its Lerner Index will equal

A) 1.
B) 1/3.
C) 1.5.
D) 3.

Question 56

In a recent court case,an expert witness defined a monopoly as a firm that can "raise price without reducing its total revenue." What does this imply about the elasticity of demand? Would this definition hold for a profit-maximizing monopoly? Explain.

Question 57

A monopoly does not have a supply curve.

Question 58

Humana Hospital's price/marginal cost ratio of 2.3 is most likely to decline if

A) the number of nearby hospitals increases.
B) the number of nearby hospitals decreases.
C) the demand curve for hospital services shifts rightward.
D) the demand curve for hospital services becomes steeper.

Question 59

The above figure shows the demand and cost curves facing a monopoly.At the profit-maximizing price,the elasticity of demand equals

A) -1.
B) zero.
C) infinity.
D) -3.

Question 60

If the demand for a firm's output is perfectly elastic,then the firm's Lerner Index equals

A) zero.
B) one.
C) infinity.
D) one-half.

Question 61

The above figure shows the demand and cost curves facing a monopoly.A $100 per unit tax would raise price by

A) $100.
B) $50.
C) $25.
D) $0.

Question 62

If a monopoly discovers that the demand for its output has become more elastic at the original output level,then it will respond by

A) producing more and setting a higher price.
B) setting a lower price.
C) setting a higher price.
D) producing more while leaving price unchanged.

Question 63

A monopoly incurs a marginal cost of $1 for each unit produced.If the price elasticity of demand equals -2.0,the monopoly maximizes profit by charging a price of

A) $1.00.
B) $1.50.
C) $2.00.
D) $3.00.

Question 64

The above figure shows the demand and cost curves facing a monopoly.The deadweight loss of this monopoly is

A) $100.
B) $250.
C) $1,250.
D) $2,500.

Question 65

If the government desires to raise a certain amount of revenue by taxing a monopoly,an ad valorem tax will

A) generate the same loss of consumer surplus as a specific tax.
B) generate a greater loss of consumer surplus than a specific tax.
C) generate a smaller loss of consumer surplus than a specific tax.
D) generate no loss of consumer surplus.

Question 66

The above figure shows the demand and marginal cost curves for a monopoly.The deadweight loss of this monopoly equals

A) h.
B) c.
C) c + f.
D) c + d + e + f.

Question 67

If a monopoly's Lerner Index exceeds 1,then

A) it is earning maximum profit.
B) it has ultimate market power.
C) it must be pricing below marginal cost.
D) marginal revenue is negative.

Question 68

The less elastic is the demand for a firm's product,the greater is that firm's market power.

Question 69

The above figure shows the demand and marginal cost curves for a monopoly.Under monopoly,consumer surplus equals

A) a + b.
B) a + b + c.
C) a + b + c + d + e + f.
D) None of the above.

Question 70

The existence of a deadweight loss associated with a monopoly can be seen because

A) consumers are willing to pay more for the last unit of output than it costs to produce.
B) the cost of the last unit produced is more than consumers are willing to pay for it.
C) the producer surplus is larger than in a competitive market.
D) None of the above.

Question 71

The above figure shows the demand and cost curves facing a monopoly.If a $100 per unit tax is charged,the loss in welfare resulting from the tax is

A) $250.
B) $312.50.
C) $1,250.
D) $1,562.50.

Question 72

Market power guarantees profit.

A) True, which is why firm's locate as far away from each other as possible.
B) False, market power guarantees price greater than marginal cost.
C) True, market power guarantees price greater than average cost.
D) False, market power guarantees price equal to average cost.

Question 73

When would a profit-maximizing monopolist that operates with no government intervention choose to produce the competitive level of output?

Question 74

The above figure shows the demand and cost curves facing a monopoly.If a $100 per unit tax is charged,what is the incidence of the tax on consumers?

A) 100%
B) 50%
C) 25%
D) 0%

Question 75

The loss associated with the fact that at the profit-maximizing quantity consumers value the goods more than it cost to produce them is called

A) deadweight loss.
B) comparative loss.
C) Lerner Loss.
D) Consumer Value Loss.

Question 76

The Lerner Index is derived from the profit-maximizing condition of a firm.

Question 77

Market power is illegal.

A) True, no one is allowed to charge a price greater than marginal cost.
B) False.
C) True, no one is allowed to charge a price greater than average cost.
D) False, because market power guarantees price equal to average cost.

Question 78

It is a conventional practice among apparel retailers to set the retail price of clothing at twice the cost paid to the manufacturer.For example,if the retailer pays $7 for a pair of jeans,the jeans will retail for $14.What must the price elasticity of demand be for this practice to be profit maximizing?

Question 79

Which of the following DOES NOT contribute to the market power of a firm?

A) number of available substitutes
B) the color of the product
C) legal protections
D) the number of firms in the market

Question 80

For profit-maximizing monopolies,explain why the boundaries on the Lerner Index are 0 and 1.