Deck 11: Monopoly and Monopsony

Question 1

The monopolists average revenue can be defined as

A) Total revenue per unit of average revenue
B) Total revenue per unit of output
C) Average revenue per unit of input
D) AR = AR / Q

Answer 1

B

Question 2

A monopolist faces inverse demand P = a - bQ. The monopolist's marginal revenue function is

A) MR = a-bQ.
B) MR = a - Q.
C) MR = a - 2bQ.
D) MR = a/Q - b.

Answer 2

C

Question 3

Which of the following statements regarding a monopolist's profit maximizing condition is false?

A) The monopolist's profit-maximizing price will be greater than marginal cost for the last unit supplied.
B) A monopolist can earn positive economic profit.
C) Because monopoly price is above marginal cost and a monopoly earns positive economic profit, there are no benefits to consumers in the monopoly market.
D) Price equals average revenue at the profit-maximizing quantity of output.

Answer 3

C

Question 4

To compute the optimal monopoly price with a linear demand curve, the monopolist

A) should set MC = MR, which would determine the optimal quantity and price would equal MC and MR as well.
B) should set MC = MR, which would determine the optimal quantity and price would be found by inserting the optimal quantity into the monopolist's demand curve.
C) should set MC = MR, which would determine the optimal quantity and price would be found by doubling the marginal cost.
D) should set output where total revenue would be the greatest.

Question 5

Which of the following statements is true?

A) Monopoly profits are generally zero.
B) Monopoly profits are maximized when total revenue is maximized.
C) The condition, MC = MR, is the optimizing condition for monopolists and firms in perfectly competitive markets.
D) Usually the demand and marginal revenue curves for a monopoly are the same.

Question 6

Identify the truthfulness of the following statements. I. For the monopolist, the average revenue curve is the demand curve.
II) For the monopolist, marginal revenue is less than average revenue.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 7

Identify the truthfulness of the following statements. I. A monopolist faces a downward-sloping demand curve, whereas a perfectly competitive firm faces a horizontal demand curve.
II) A monopolist maximizes profit, whereas a perfectly competitive firm cannot.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 8

To maximize profit, the monopolist sets

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

Question 9

A monopsony market is one with

A) one buyer and one seller.
B) one buyer and many sellers.
C) many buyers and one seller.
D) many buyers and many sellers.

Question 10

Inverse demand for a monopolist's product is given by $P = 300 - 6 Q$ while the monopolist's marginal cost is given by $M C = 3 Q$ . The profit-maximizing quantity of output for this monopolist is

A) 33.33
B) 100
C) 50
D) 20

Question 11

A monopolist faces an inverse demand curve $P = 300 - 6 Q$ and has a constant marginal cost of 20. The monopolist's profit-maximizing output is

A) 46.67
B) 23.33
C) 20
D) 35

Question 12

One argument for allowing monopolies to exist is

A) it would be inefficient to break up natural monopolies into smaller units.
B) monopolies lead to net economic benefits as a rule.
C) the free market acts as a more effective regulator than the government.
D) they allow for greater standardization of products and improved quality control.

Question 13

A monopolist faces inverse demand $P = 300 - 6 Q$ and has marginal cost $M C = 120 + 6 Q$ . What price should this monopolist charge to maximize profit?

A) 10
B) 50
C) 210
D) 240

Question 14

Inverse demand for a monopolist's product is given by $P = 300 - 6 Q$ while the monopolist's marginal cost is given by $M C = 3 Q$ . The profit-maximizing price for this monopolist is

A) 100
B) 180
C) 60
D) 150

Question 15

A monopolist maximizes total revenue where marginal revenue

A) equals marginal cost.
B) is maximized.
C) equals zero.
D) is negative.

Question 16

For a monopolist

A) selling price is greater than average revenue.
B) selling price is equal to average revenue.
C) selling price is less than average revenue.
D) selling price may be above or below average revenue; it depends on the price buyers are willing to pay.

Question 17

Identify the truthfulness of the following statements. I. A monopoly market consists of a single seller facing many buyers.
II) Because the monopolist is the only seller of her product, she may sell any quantity that she chooses for any given price.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 18

The marginal revenue curve for a monopolist

A) will never take a linear form.
B) will always have double the slope of the demand curve, when demand is linear.
C) will always have one-half the slope of the demand curve, when demand is linear.
D) will slope upward when demand is elastic.

Question 19

For a monopolist

A) selling price is greater than marginal revenue.
B) selling price is equal to marginal revenue.
C) selling price is less than marginal revenue.
D) selling price may be above or below marginal revenue; it depends on the price buyers are willing to pay.

Question 20

If the monopolist is producing where marginal revenue exceeds marginal cost, then the monopolist should ___________ to maximize profits.

A) produce more
B) produce less
C) stop producing
D) raise price

Question 21

Which of the following describes a correct relation between price elasticity of demand and a monopolist's marginal revenue when inverse demand is linear, P = a-bQ?

A) Demand is elastic when Q > a/2b.
B) Demand is inelastic when Q > a/b.
C) Demand is unit elastic when P = a/2b.
D) Demand is elastic when Q < a/2b.

Question 22

An increase in demand for a monopolist will cause the

A) profit-maximizing price to decrease when marginal cost decreases as quantity increases.
B) profit-maximizing price to increase when marginal cost decreases as quantity increases.
C) profit-maximizing price to decrease when marginal cost increases as quantity increases.
D) profit-maximizing price to stay constant regardless of the shape of the marginal cost curve.

Question 23

Which of the following describes the relation between price elasticity of demand and a monopolist's marginal revenue?

A) $M R = P \left( 1 + \varepsilon _ { Q , P } \right)$ .
B) $M R = P \left( 1 + \frac { P } { Q } \frac { \Delta Q } { \Delta P } \right)$
C) MR = 1+?_Q,P
D) $M R = P \left( 1 + 1 / \varepsilon _ { Qf } \right)$

Question 24

Identify the false statement.

A) A monopolist and a perfectly competitive firm both maximize profits.
B) A monopolist and a perfectly competitive firm both produce an output level where marginal revenue equals marginal cost.
C) A monopolist and a perfectly competitive firm both produce where price equals marginal cost.
D) A monopolist and a perfectly competitive firm both charge a price based on the demand curve facing the firm and the costs borne by the firm.

Question 25

The term product differentiation refers to:

A) A situation in which two or more products possess technical differences, which may or may not be perceived by consumers.
B) A situation in which two or more products possess attributes that, in the minds of consumers, set the products apart from one another and make them less than perfect substitutes.
C) A situation in which two or more firms produce products for a given market.
D) A situation in which two or more consumers purchase differing amounts of a product in a market.

Question 26

A monopoly market is one with

A) one buyer and one seller.
B) one buyer and many sellers.
C) many buyers and one seller.
D) many buyers and many sellers.

Question 27

A monopolist faces inverse demand $P = 300 - 2 Q$ . The monopolist's marginal revenue function is

A) $M R = 300 - 2 Q$
B) $M R = 300 - Q$
C) $M R = 300 - 4 Q$
D) $M R = \frac { 300 } { Q } - 2$

Question 28

The monopolist will always produce

A) in the inelastic portion of the demand curve.
B) at the unit elastic point on the demand curve.
C) at the point of perfect elasticity.
D) in the elastic portion of the demand curve.

Question 29

Suppose a monopolist faces a demand curve Q = aP^-b and that the monopolist has a constant marginal cost of C. The monopolist's profit-maximizing price is

A) $P = C ( 1 - 1 / b )$
B) $P = C ( 1 / b )$
C) $P = C \left( \frac { 1 } { 1 - 1 / b } \right)$
D) P = C(-1/b)

Question 30

A natural monopoly refers to

A) Any monopoly based on natural resources.
B) Any monopolized market.
C) A monopolized market where the barriers to entry are not structural.
D) A market for which the total cost incurred by a single firm producing that output is less than the combined total cost of two or more firms producing the same total output between them.

Question 31

The inverse elasticity pricing rule says that the optimal markup of price over marginal cost expressed as a percentage of price

A) is equal to ½ the inverse of the price elasticity of demand.
B) is equal to - ½.
C) is equal to the negative of the inverse of the price elasticity of demand.
D) is equal to the inverse of the price elasticity of demand.

Question 32

A monopolist will produce where

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

Question 33

A monopolist faces a demand curve $Q = 50 P ^ { - 4 }$ and that the monopolist has a constant marginal cost of 75. The monopolist's profit-maximizing price is

A) 25
B) 50
C) 75
D) 100

Question 34

The Lerner Index is

A) equal to (P - MR)/P.
B) a measure of product differentiation.
C) equal to P/MC.
D) equal to (P - MC)/P.

Question 35

Identify the truthfulness of the following statements. I. IEPR states that the monopolist's optimal markup of price above marginal cost can be expressed as follows: the monopolist's optimal markup, expressed as a percentage of price, is equal to minus the inverse of the price elasticity of demand.
II) IEPR tells us that the price elasticity of demand plays a vital role in determining what price a monopolist should charge to maximize profits.

A) I and II are true.
B) I and II are false.
C) I is true; II is false.
D) II is true; I is false.

Question 36

A monopolist faces an inverse demand curve $P = 300 - 6 Q$ and has a constant marginal cost of 20. The IEPR formula for this monopolist could be stated in the following way:

A) $\frac { P - 20 } { P } = \left( \frac { 1 } { P / 6 } \right)$
B) $\frac { P - 20 } { P } = \frac { 300 - P } { P }$
C) $\frac { P - 20 } { P } = \frac { P } { 300 - P }$
D) $\frac { P - 20 } { P } = - P ( Q / 6 )$

Question 37

As a monopolist's demand curve becomes more inelastic,

A) the profit-maximizing price goes up.
B) the profit-maximizing price goes down.
C) the optimal mark-up of price over marginal cost goes down.
D) average revenue falls.

Question 38

The inverse elasticity pricing rule tells us the monopolist's optimal mark-up of price over marginal cost. In general,

A) the more price elastic the monopolist's demand, the smaller the mark-up will be.
B) the less price elastic the monopolist's demand, the smaller the mark-up will be.
C) price equals marginal revenue for the monopolist.
D) marginal revenue equals average revenue for the monopolist.

Question 39

Which of the following best explains why there is no meaningful supply curve for a monopolist?

A) The monopolist is the only supplier.
B) Price is exogenous to the monopolist.
C) The monopolist is already maximizing profits; thus, it doesn't need a supply curve.
D) Price is endogenous. That is, the monopolist determines both quantity and price. Hence, there is no longer a unique association between price and quantity supplied.

Question 40

A monopolist faces inverse demand $P = 300 - 6 Q$ and has total cost TC = 120Q + 6Q² and marginal cost $M C = 120 + 6 Q$ . What is the maximum profit the monopolist can earn in this market?

A) 60
B) 240
C) 600
D) 1200

Question 41

**The deadweight loss under monopoly would be

A) 75
B) 150
C) 225
D) 300

Question 42

A monopolist owns two plants in which to produce product A. The marginal cost of producing A is increasing, but currently is lower in plant 1 than in plant 2. How should the monopolist allocate production?

A) Produce all output in plant 1.
B) Produce all output in plant 2.
C) Produce 50 percent in plant 1 and 50 percent in plant 2.
D) Produce in plant 1 up to the point where marginal costs are equated across the plants. (In other words, reallocate production so that $M C _ { 1 } = M C _ { 2 }$ .)

Question 43

Evaluate the truthfulness of the following statements I. The horizontal sum of the marginal cost curves of individual plants is called multiplant marginal cost curve.
II) A group of producers that collusively determines the price and output in a market is cartel.

A) I and II are true.
B) I and II are false.
C) I is true; II is false.
D) II is true; I is false.

Question 44

A monopolist faces linear inverse demand P = a - bQ and constant marginal cost, c. The term a increases by amount Δa. By how much does the monopolist's optimal price increase?

A) Δa.
B) Δa/2.
C) Δa-c.
D) Δa/b.

Question 45

Suppose a monopolist has a marginal cost of $25 and charges a price of $40. The monopolist's Lerner Index is

A) 0.60
B) 0.625
C) 0.375
D) 1.60

Question 46

A measure of monopoly power, the percentage markup of price over marginal cost (P-MC)/P is called

A) The Inverse Elasticity Pricing Rule
B) Lerner Index of market power
C) Monopoly Midpoint Rule
D) Market Power Rule

Question 47

The Lerner Index for a firm operating in a perfectly competitive industry would be

A) less than zero.
B) zero.
C) between zero and one.
D) one.

Question 48

A monopolist owns two plants in which to produce a product which has inverse demand P = (770/3) - 3Q. The monopolist has marginal cost curves of MC₁ = 20+3Q₁ and MC₂ = 10+6Q₂ in the two plants, respectively. Which of the following represents the optimal outputs in the two plants, Q₁ and Q₂ and the market price?

A) Q₁ = 170/9; Q₂ = 100/9; P = 500/3.
B) Q₁ = 100/9; Q₂ = 170/9; P = 500/3.
C) Q₁ = 500/3; Q₂ = 170/9; P = 100/9.
D) Q₁ = 500/3; Q₂ = 100/9; P = 170/9.

Question 49

Suppose that product X is sold by a monopolist who has constant marginal cost for producing X. Further suppose that there is an exogenous shock to the product X market, resulting in an increase in demand for X and a resulting rightward shift in marginal revenue. Which of the following statements is correct regarding the equilibrium price and quantity of X?

A) Both price and quantity will rise.
B) Both price and quantity will fall.
C) Price will rise; the effect on quantity is uncertain.
D) Quantity will rise; the effect on price is uncertain.

Question 50

**The total economic benefit under monopoly would be

A) 300
B) 600
C) 900
D) 1,200

Question 51

**The profit-maximizing price for a monopolist would be

A) 180
B) 210
C) 240
D) Between 210 and 240

Question 52

**The total economic benefit under perfect competition would be

A) 2,700
B) 1,350
C) 675
D) 500

Question 53

**The profit-maximizing price for a perfectly competitive firm would be

A) 180
B) 210
C) 240
D) Between 210 and 240

Question 54

Identify the truthfulness of the following statements.
I. IEPR applies to any firm facing a downward-sloping demand curve for its products, not just a monopolist.
II. Firms producing differentiated products face downward-sloping demand
a) I and II are true.
b) I and II are false.
c) I is true; II is false.
d) II is true; I is false.

Question 55

When a monopoly sells its product in multiple markets, it should

A) add the demand curves in both markets, derive the marginal revenue curve from the aggregate demand curve and optimize its output by setting marginal cost equal to marginal revenue derived from the aggregate demand curve.
B) add the demand curves in both markets, derive the marginal revenue curve from the aggregate demand curve and optimize its output by setting price equal to marginal revenue.
C) let managers in each market determine the optimal output based on cultural preferences.
D) produce its product in each market and set MC = MR as any single market monopolist.

Question 56

A monopsonist maximizes profit when

A) marginal revenue equals marginal cost.
B) marginal revenue product of labor equals marginal cost.
C) marginal revenue product is set equal to zero.
D) its marginal revenue product of labor equals its marginal expenditure on labor.

Question 57

A monopolist faces linear inverse demand P = a - bQ and constant marginal cost, c. Which of the following gives a correct formula for the monopolist's profit maximizing price?

A) P = (a/b -
B) P = a/2.
C)
C) P = (a+c)/2
D) P = a/2 + c.

Question 58

If a monopolist's marginal cost shifts upward,

A) total revenue will remain unchanged.
B) total revenue will increase.
C) total revenue will fall.
D) total revenue may rise or fall depending on the slope of the demand curve.

Question 59

In order to calculate the Lerner Index for a particular firm, you need to know _______ and ______ for that firm.

A) marginal cost; marginal revenue
B) marginal cost; price
C) price; quantity
D) price; demand

Question 60

Which of the following examples comes the closest to describing a monopsony market?

A) The market for beryllium.
B) The market for Microsoft Windows.
C) The market for breakfast cereal.
D) The market for United States military uniforms.

Question 61

When comparing a monopoly with a perfectly competitive equilibrium, moving from a situation of perfect competition to monopoly leads to a

A) deadweight gain.
B) deadweight loss.
C) net economic benefit.
D) welfare improvement.

Question 62

Suppose that the perfectly competitive soybean industry in the United States is monopolized. Under perfect competition, the equilibrium price was $2 and quantity was 100,000. The monopolist raises price to $5 and restricts quantity to 70,000. Assume that the monopolist is maximizing profits and that the monopolist faces a linear, upward-sloping marginal cost curve that begins at the origin. Also assume that this marginal cost curve is the industry supply curve under perfect competition. What is the loss in consumer surplus that corresponds to dead-weight loss?

A) $210,000
B) $200,000
C) $90,000
D) $45,000

Question 63

Economists consider monopolists

A) to be efficient, since they earn greater profits than perfect competitors.
B) to be inefficient since all consumer surplus is transferred to the monopolist in the form of profits.
C) to be inefficient since they earn less producers' surplus than all firms taken together in a competitive market.
D) to be inefficient since the monopolist restricts output from the competitive level, thus creating dead-weight loss.

Question 64

A monopsonist only uses labor to produce an output according to production function Q = 2L, where Q is output and L is labor. The output sells for a price of $20 per unit. The supply curve for labor can be written w = 4+L. What is the monopsonist's demand for labor in this market?

A) L = 12.
B) L = 18.
C) L = 22.
D) L = 24.

Question 65

Suppose that the perfectly competitive soybean industry in the United States is monopolized. Under perfect competition, the equilibrium price was $2 and quantity was 100,000. The monopolist raises price to $5 and restricts quantity to 70,000. Assume that the monopolist is maximizing profits and that the monopolist faces a linear, upward-sloping marginal cost curve that begins at the origin. Also assume that this marginal cost curve is the industry supply curve under perfect competition. What is the loss in consumer surplus that the monopolist captures in the form of profit?

A) $500,000
B) $350,000
C) $300,000
D) $210,000