Deck 10: Market Power: Monopoly and Monopsony

Question 1

Which of the following is true at the output level where P=MC?

A) The monopolist is maximizing profit.
B) The monopolist is not maximizing profit and should increase output.
C) The monopolist is not maximizing profit and should decrease output.
D) The monopolist is earning a positive profit.

Answer 1

C

Question 2

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity.

A) higher; larger
B) lower; larger
C) higher; smaller
D) lower; smaller
E) none of these

Answer 2

C

Question 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.

Answer 3

E

Question 4

Which of the following is NOT true regarding monopoly?

A) Monopoly is the sole producer in the market.
B) Monopoly price is determined from the demand curve.
C) Monopolist can charge as high a price as it likes.
D) Monopoly demand curve is downward sloping.

Question 5

How much profit will the monopolist whose cost and demand curves are shown below earn at output Q1?

A) 0CDQ1
B) 0BEQ1
C) 0AFQ1
D) ACDF
E) BCDE

Question 6

When a per unit tax is imposed on the sale of a product of a monopolist, the resulting price increase will

A) always be less than the tax.
B) always be more than the tax.
C) always be less than if a similar tax were imposed on firms in a competitive market.
D) not always be less than the tax.

Question 7

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

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

Question 8

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.

Question 9

Suppose that a firm can produce its output at either of two plants. If profits are maximized, which of the following statements is true?

A) The marginal cost at the first plant must equal marginal revenue.
B) The marginal cost at the second plant must equal marginal revenue.
C) The marginal cost at the two plants must be equal.
D) all of the above
E) none of the above

Question 10

For the monopolist shown below, the profit maximizing level of output is:

A) Q1.
B) Q2.
C) Q3.
D) Q4.
E) Q5.

Question 11

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the

A) firm is maximizing profit.
B) firm's output is smaller than the profit maximizing quantity.
C) firm's output is larger than the profit maximizing quantity.
D) firm's output does not maximize profit, but we cannot conclude whether the output is too large or too small.

Question 12

To find the profit maximizing level of output, a firm finds the output level where

A) price equals marginal cost.
B) marginal revenue and average total cost.
C) price equals marginal revenue.
D) all of the above
E) none of the above

Question 13

If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:

A) negative.
B) positive.
C) zero.
D) indeterminate from the given information.

Question 14

For a monopolist, changes in demand will lead to changes in

A) price with no change in output.
B) output with no change in price.
C) both price and quantity.
D) any of the above can be true.

Question 15

As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200. You should

A) expand output.
B) do nothing without information about your fixed costs.
C) reduce output until marginal revenue equals marginal cost.
D) expand output until marginal revenue equals zero.
E) reduce output beyond the level where marginal revenue equals zero.

Question 16

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.

Question 17

When the demand curve is downward sloping, marginal revenue is

A) equal to price.
B) equal to average revenue.
C) less than price.
D) more than price.

Question 18

The monopoly supply curve is the

A) same as the competitive market supply curve.
B) portion of marginal costs curve where marginal costs exceed the minimum value of average variable costs.
C) result of market power and production costs.
D) none of the above

Question 19

A monopolist has determined that at the current level of output the price elasticity of demand is -0.15. Which of the following statements is true?

A) The firm should cut output.
B) This is typical for a monopolist; output should not be altered.
C) The firm should increase output.
D) None of the above is necessarily correct.

Question 20

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.

Question 21

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. Suppose that a tax of $5 for each unit produced is imposed by state government. What is the profit maximizing level of output?

A) 0
B) 90
C) 95
D) 100
E) none of the above

Question 22

Scenario 10.3:
The demand curve and marginal revenue curve for red herrings are given as follows:
Q = 250 - 5P
MR = 50 - 0.4Q
Refer to Scenario 10.3. What level of output maximizes revenue?

A) 0
B) 45
C) 85
D) 125
E) 245

Question 23

Scenario 10.3:
The demand curve and marginal revenue curve for red herrings are given as follows:
Q = 250 - 5P
MR = 50 - 0.4Q
Refer to Scenario 10.3. The marginal cost of red herrings is given as: MC = 0.6Q.
What is the profit-maximizing level of output?

A) 0
B) 25
C) 50
D) 60
E) 125

Question 24

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. What is the profit maximizing level of output?

A) 0
B) 90
C) 95
D) 100
E) none of the above

Question 25

Scenario 10.4:
The demand for tickets to the Katy Perry concert (Q) is given as follows:
Q = 120,000 - 2,000P
The marginal revenue is given as:
MR = 60 - .001Q
The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point.
A multiplant monopolist can produce her output in either of two plants. Having sold all of her output she discovers that the marginal cost in plant 1 is $30 while the marginal cost in plant 2 is $20. To maximize profits the firm will

A) produce more output in plant 1 and less in the plant 2.
B) do nothing until it acquires more information on revenues.
C) produce less output in plant 1 and more in plant 2.
D) produce less in both plants until marginal revenue is zero.
E) shut down plant 1 and only produce at plant 2 in the future.

Question 26

Scenario 10.1:
Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows:
Q = 160 - 4P TR = 40Q - 0.25Q² MR = 40 - 0.5Q TC = 4Q MC = 4
Refer to Scenario 10.1. How much output will Barbara produce?

A) 0
B) 22
C) 56
D) 72
E) none of the above

Question 27

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. Suppose that in addition to the tax, a business license is required to stay in business. The license costs $1000. What is the profit maximizing level of output?

A) 0
B) 90
C) 95
D) 100
E) none of the above

Question 28

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. What level of output maximizes total revenue?

A) 0
B) 90
C) 95
D) 100
E) none of the above

Question 29

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. What is the profit maximizing price?

A) $95.00
B) $5.00
C) $52.50
D) $10.00

Question 30

Scenario 10.1:
Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows:
Q = 160 - 4P TR = 40Q - 0.25Q² MR = 40 - 0.5Q TC = 4Q MC = 4
Refer to Scenario 10.1. How much profit will she make?

A) -996
B) 0
C) 1,296
D) 1,568
E) none of the above

Question 31

Scenario 10.4:
The demand for tickets to the Katy Perry concert (Q) is given as follows:
Q = 120,000 - 2,000P
The marginal revenue is given as:
MR = 60 - .001Q
The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point.
Refer to Scenario 10.4. Suppose that the municipal stadium authority imposes a tax of $10 per ticket on the concert promoters. Given the information above, the profit maximizing ticket price would

A) increase by $10.
B) increase by $5.
C) not change.
D) decrease by $5.
E) decrease by $10.

Question 32

Scenario 10.1:
Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows:
Q = 160 - 4P TR = 40Q - 0.25Q² MR = 40 - 0.5Q TC = 4Q MC = 4
Refer to Scenario 10.1. The price of her product will be ________.

A) 4
B) 22
C) 32
D) 42
E) 72

Question 33

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. Suppose that a tax of $5 for each unit produced is imposed by state government. How much profit does the monopolist earn?

A) $4050
B) $4950
C) $450
D) $5

Question 34

Scenario 10.4:
The demand for tickets to the Katy Perry concert (Q) is given as follows:
Q = 120,000 - 2,000P
The marginal revenue is given as:
MR = 60 - .001Q
The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point.
Refer to Scenario 10.4. Given the information above, what are the profit maximizing number of tickets sold and the price of tickets?

A) 0, $60
B) 20,000, $50
C) 40,000, $40
D) 60,000, $30
E) 80,000, $20

Question 35

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. Suppose that a tax of $5 for each unit produced is imposed by state government. What is the profit maximizing price?

A) $90.00
B) $10.00
C) $55.00
D) $52.50

Question 36

Scenario 10.3:
The demand curve and marginal revenue curve for red herrings are given as follows:
Q = 250 - 5P
MR = 50 - 0.4Q
Refer to Scenario 10.3. Suppose that a tax of $5 per unit of output is imposed on red herring producers. The price of red herring will

A) not change.
B) increase by less than $5.
C) increase by $5.
D) increase by more than $5.
E) decrease.

Question 37

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. Suppose that in addition to the tax, a business license is required to stay in business. The license costs $1000. What happens to profit?

A) It increases by $1000.
B) It decreases by $1000.
C) It decreases by less than $1000.
D) It stays the same.

Question 38

Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:
Q = 200 - 2P
MR = 100 - Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. How much profit does the monopolist earn?

A) $4512.50
B) $4987.50
C) $475.00
D) $5.00

Question 39

Scenario 10.3:
The demand curve and marginal revenue curve for red herrings are given as follows:
Q = 250 - 5P
MR = 50 - 0.4Q
Refer to Scenario 10.3. At the profit-maximizing level of output, demand is

A) completely inelastic.
B) inelastic, but not completely inelastic.
C) unit elastic.
D) elastic, but not infinitely elastic.
E) infinitely elastic.

Question 40

Scenario 10.3:
The demand curve and marginal revenue curve for red herrings are given as follows:
Q = 250 - 5P
MR = 50 - 0.4Q
Refer to Scenario 10.3. 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.

Question 41

Scenario 10.6:
John is the manufacturer of red rubber balls (Q). He has a red rubber ball manufacturing plant in California, Florida and Montana. The total cost of producing red rubber balls at each of the three plants is given by the following table:
California Florida Montana
Qc TCc Qf TCf Qm TCm
1 5 1 8 1 4
2 10 2 16 2 8
3 15 3 24 3 12
4 20 4 32 4 16
5 25 5 40 5 20
6 30 6 48 6 24
7 35 7 56 7 28
8 40 8 64 8 32
9 45 9 72 9 36
10 50 10 80 10 40
11 infinity 11 infinity 11 infinity
Refer to Scenario 10.6. If red rubber balls can be produced at any of the three plants, and John decides to produce 1 red rubber ball, at which plant will he produce it?

A) California
B) Florida
C) Montana
D) He is indifferent between California and Florida.
E) He is indifferent between Florida and Montana.

Question 42

Scenario 10.5:
A firm produces garden hoses in California and in Ohio. The marginal cost of producing garden hoses in the two states and the marginal revenue from producing garden hoses are given in the following table:
California Ohio
Qc MCc Qo MCo Qc + o MR
1 2 1 3 1 24
2 3 2 4 2 20
3 5 3 6 3 16
4 9 4 8 4 12
5 16 5 12 5 8
6 24 6 17 6 4
Refer to Scenario 10.5. From the perspective of the firm, what is the marginal cost of the 5th garden hose?

A) 4
B) 5
C) 16
D) 12
E) 8

Question 43

Suppose that a tax of $2 per unit of output is imposed on red rubber ball producers. What level of output maximizes profit?

A) -1
B) 3
C) 4.5
D) 5
E) B, C, and D are correct.

Question 44

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

Question 45

Scenario 10.6:
John is the manufacturer of red rubber balls (Q). He has a red rubber ball manufacturing plant in California, Florida and Montana. The total cost of producing red rubber balls at each of the three plants is given by the following table:
California Florida Montana
Qc TCc Qf TCf Qm TCm
1 5 1 8 1 4
2 10 2 16 2 8
3 15 3 24 3 12
4 20 4 32 4 16
5 25 5 40 5 20
6 30 6 48 6 24
7 35 7 56 7 28
8 40 8 64 8 32
9 45 9 72 9 36
10 50 10 80 10 40
11 infinity 11 infinity 11 infinity
Refer to Scenario 10.6. If red rubber balls can be produced at any of the three plants, what is the marginal cost of 5th red rubber ball?

A) 4
B) 5
C) 8
D) 20
E) none of the above

Question 46

Scenario 10.7:
The marginal revenue of green ink pads is given as follows:
MR = 2500 - 5Q
The marginal cost of green ink pads is 5Q.
Refer to Scenario 10.7. Suppose that the firm chooses to produce 200 ink pads. At this level of output the demand for ink pads is

A) inelastic.
B) unit elastic.
C) elastic.
D) unit elastic.

Question 47

After the imposition of a tax of $2 per unit of output, what is the profit maximizing price?

A) 11
B) 21
C) 31
D) 41
E) none of the above

Question 48

What is the profit maximizing price?

A) 10
B) 20
C) 3
D) 40
E) none of the above

Question 49

At the profit-maximizing level of output, demand is

A) completely inelastic.
B) inelastic, but not completely inelastic.
C) unit elastic.
D) elastic, but not infinitely elastic.
E) infinitely elastic.

Question 50

Monopoly power results from the ability to

A) set price equal to marginal cost.
B) equate marginal cost to marginal revenue.
C) set price above average variable cost.
D) set price above marginal cost.

Question 51

The marginal cost of a monopolist is constant and is $10. The marginal revenue curve is given as follows:
MR = 100 - 2Q
The profit maximizing price is

A) $70.
B) $65.
C) $60.
D) $55.
E) $50.

Question 52

Scenario 10.5:
A firm produces garden hoses in California and in Ohio. The marginal cost of producing garden hoses in the two states and the marginal revenue from producing garden hoses are given in the following table:
California Ohio
Qc MCc Qo MCo Qc + o MR
1 2 1 3 1 24
2 3 2 4 2 20
3 5 3 6 3 16
4 9 4 8 4 12
5 16 5 12 5 8
6 24 6 17 6 4
Refer to Scenario 10.5. How many garden hoses should be produced in California in order to maximize profits?

A) 1
B) 2
C) 3
D) 4
E) 5

Question 53

Scenario 10.7:
The marginal revenue of green ink pads is given as follows:
MR = 2500 - 5Q
The marginal cost of green ink pads is 5Q.
Refer to Scenario 10.7. How many ink pads will be produced to maximize profit?

A) 50
B) 250
C) 500
D) 800
E) none of the above

Question 54

A multiplant firm has equated marginal costs at each plant. By doing this

A) profits are maximized.
B) costs are minimized given the level of output.
C) revenues are maximized given the level of output.
D) none of the above

Question 55

What is the value of the Lerner index under perfect competition?

A) 1
B) 0
C) infinity
D) two times the price

Question 56

Scenario 10.7:
The marginal revenue of green ink pads is given as follows:
MR = 2500 - 5Q
The marginal cost of green ink pads is 5Q.
Refer to Scenario 10.7. How many ink pads will be produced to maximize revenue?

A) 0
B) 250
C) 300
D) 500
E) none of the above

Question 57

A firm's demand curve is given by P = 500 - 2Q. The firm's current price is $300 and the firm sells 100 units of output per week.
a. Calculate the firm's marginal revenue at the current price and quantity using the expression for marginal revenue that utilizes the price elasticity of demand.
b. Assuming that the firm's marginal cost is zero, is the firm maximizing profit?

Question 58

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

Question 59

The demand curve and marginal revenue curve for red rubber balls are given as follows:
Q = 16 - P MR = 16 - 2Q
What level of output maximizes profit?

A) 0
B) 4
C) 5.5
D) 6
E) B, C and D all maximize profit.

Question 60

The ________ elastic a firm's demand curve, the greater its ________.

A) less; monopoly power
B) less; output
C) more; monopoly power
D) more; costs

Question 61

What is the maximum value of the Lerner index?

A) Infinity
B) 100
C) Two
D) One

Question 62

A manufacturer of digital music players uses a proprietary file format that is not used by the other firms in the market. This action by the firm may be an example of using a ________ to reduce the number of firms in the market and to maintain a relatively inelastic demand for its products.

A) natural monopoly
B) positive externality
C) subsidy
D) barrier to entry

Question 63

The cartel of oil-producing nations (OPEC) once controlled about 80% of the world petroleum market, but OPEC's market share has declined to about half of its former level. This outcome is a good example of how firms may have:

A) relatively high short-run monopoly power that strengthens in the long run.
B) relatively high short-run monopoly power that declines in the long run.
C) relatively low short-run monopoly power that strengthens in the long run.
D) relatively low short-run monopoly power that declines in the long run.

Question 64

DVDs can be produced at a constant marginal cost, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. If the Lerner indices for Rambeau 17 divided by the Lerner index for Schreck 10 equals 0.5, what is the constant marginal cost of producing both DVDs?

A) MC = $10
B) MC = $15
C) MC = $20
D) MC = $5

Question 65

Under which of the following scenarios is it most likely that monopoly power will be exhibited by firms?

A) When there are few firms in the market and the demand curve faced by each firm is relatively inelastic.
B) When there are many firms in the market and the demand curve faced by each firm is relatively inelastic.
C) When there are few firms in the market and the demand curve faced by each firm is relatively elastic.
D) When there are many firms in the market and the demand curve faced by each firm is relatively elastic.

Question 66

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

Question 67

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.

Question 68

Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers. As more types of MP3 players are introduced into the market, the demand facing Orange becomes ________ elastic and the Lerner index achieved by the firm in this market ________.

A) less, declines
B) less, increases
C) more, declines
D) more, increases

Question 69

You work as a marketing analyst for a pharmaceutical firm, and you are trying to gather information about the marginal cost of production for a competing firm. You know that they have a patent on a popular medication that sells for $20 per dose, and you believe the elasticity of demand for this product is roughly -4. Assuming the competing firm acts as a profit-maximizing monopolist, what is the competing firm's approximate marginal cost of production?

A) $10 per dose
B) $12.50 per dose
C) $15 per dose
D) $20 per dose

Question 70

Which of the following is NOT associated with a high degree of monopoly power?

A) A relatively inelastic demand curve for the firm
B) A small number of firms in the market
C) Significant price competition among firms in the market
D) Significant barriers to entry

Question 71

When a drug company develops a new drug it is granted a ________ making it illegal for other firms to enter the market until the ________ expires.

A) franchise; franchise
B) copyright; copyright
C) government license; government license
D) patent; patent

Question 72

Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change would be:

A) to decrease the price of rice to the Japanese people.
B) to decrease the consumer surplus of Japanese rice consumers.
C) to decrease the producer surplus of Japanese rice producers.
D) a welfare gain for the Japanese people.
E) increase the consumption of rice by the Japanese people.

Question 73

The more elastic the demand facing a firm,

A) the higher the value of the Lerner index.
B) the lower the value of the Lerner index.
C) the less monopoly power it has.
D) the higher its profit.

Question 74

Roaring Lion Studios can produce DVDs at a constant marginal cost of $5 per disk, and the studio has just releasing the DVD for its latest hit film, Ernest Goes to the Hamptons. The retail price of the DVD is $25, and the elasticity of demand for this film is -2. Has the studio selected the profit-maximizing retail price for this DVD?

A) Yes
B) No, the retail price is too low
C) No, the retail price is too high
D) We do not have enough information to answer this question.

Question 75

DVDs can be produced at a constant marginal cost of $10 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the Lerner indices for these two movies?

A) Both equal one.
B) 2 and 3, respectively
C) 0.5 and 0.67, respectively
D) 1 and 2, respectively

Question 76

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.

Question 77

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

Question 78

The firms in a market have decided not to compete with one another and have agreed to limit output and raise price.

A) This practice is known as concentrating and is legal in the United States and Canada.
B) This practice is known as collusion and is illegal in the United States.
C) In this way firms take advantage of economies of scale.
D) This is an effective barrier to entry, but is illegal in the United States.

Question 79

DVDs can be produced at a constant marginal cost of $5 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the price elasticities of demand for these two movies?

A) Both equal -1.2.
B) -0.75 and -5/6, respectively
C) -1.33 and -1.2, respectively
D) -1.33 and -2, respectively

Question 80

The Lerner index measures

A) a firm's potential monopoly power.
B) the amount of monopoly power a firm chooses to exercises when maximizing profits.
C) a firm's potential profitability.
D) an industry's potential market power.