Deck 11: Price and Output Determination: Monopoly and Dominant Firms

Question 1

When the cross elasticity of demand between one product and all other products is low,one is generally referring to a(n)____ situation.

A) oligopoly
B) monopoly
C) pure competition
D) substitution
E) monopolistic competition

Answer 1

B

Question 2

Which of the following is a source of market power for a monopolist?

A) a firm may have a patent or copyright
B) a firm may control critical resources
C) a firm may have a government-authorized franchise
D) a firm may enjoy economies of scale
E) all of the above are sources of market power for a monopolist

Answer 2

E

Question 3

Of the following,which is not an economic rationale for public utility regulation?

A) production process exhibiting increasing returns to scale
B) constant cost industry
C) avoidance of duplication of facilities
D) protection of consumers from price discrimination
E) none of the above

Answer 3

B

Question 4

A monopolist faces the following demand curve: P = 12 - .3Q with marginal costs of $3.What is the monopolistic PRICE?

A) P = $5.50
B) P = $6.50
C) P = $7.50
D) P = $8.50
E) P = $9.50

Question 5

​Microsoft's success over Apple although Apple had a technologically superior product is the result of:

A) ​increasing returns in a network-based business
B) ​Microsoft's economies of scale over a wide range of output
C) ​the revenue sources derived from Microsoft's intellectual property
D) ​superior marketing and promotions
E) ​all of the above

Question 6

In natural monopoly,AC continuously declines due to economies in distribution or in production,which tends to found in industries which face increasing returns to scale.If price were set equal to marginal cost,then:

A) price would equal average cost.
B) price would exceed average cost.
C) price would be below average cost.
D) price would be at the profit maximizing level for natural monopoly
E) all of the above

Question 7

In the case of pure monopoly:

A) one firm is the sole producer of a good or service which has no close substitutes
B) the firm's profit is maximized at the price and output combination where marginal cost equals marginal revenue
C) the demand curve is always elastic
D) a and b only
E) a,b,and c

Question 8

Regulatory agencies engage in all of the following activities except _______.

A) controlling entry into the regulated industries
B) overseeing the quality of service provided by the firms
C) setting federal and state income tax rates on regulated firms
D) setting prices that consumers will pay
E) none of the above

Question 9

​Which of the following relate(s)to gross profit margin?

A) ​a term often used in manufacturing businesses
B) ​the profit margin after subtracting direct costs from wholesale revenue
C) ​the profit margin after subtracting variable manufacturing costs
D) a and b
E) ​a through c

Question 10

In the electric power industry,residential customers have relatively ____ demand for electricity compared with large industrial users.But contrary to price discrimination,large industrial users generally are charged ____ rates.

A) similar,similar
B) elastic,lower
C) elastic,higher
D) inelastic,lower
E) inelastic,higher

Question 11

The profit-maximizing monopolist,faced with a negative-sloping demand curve,will always produce:

A) at an output greater than the output where average costs are minimized
B) at an output short of that output where average costs are minimized
C) at an output equal to industry output under pure competition
D) a and c
E) none of the above

Question 12

The Zinger Company manufactures and sells a line of sewing machines.Demand per period (Q)for a particular model is given by the following relationship:
Q = 400 ? .5P
where P is price.Total costs (including a "normal" return to the owners)of producing Q units per period are:
TC = 20,000 + 50Q + 3Q² (a) Express total profits $( \pi )$ in terms of $Q$ .
(b) At what level of output are total profits maximized? What price will be charged? What are total profits at this output level?
(c) What model of market pricing has been assumed in this problem? Justify your answer.

Question 13

Declining cost industries

A) have upward rising AC curves.
B) have upward rising demand curves.
C) have ∩-shaped total costs.
D) have diseconomies of scale.
E) have marginal cost curves below their average cost curve.

Question 14

Zar Island Gas Company is the sole producer of natural gas in the remote island country of Zar.The company's operations are regulated by the State Energy Commission.The demand function for gas in Zar has been estimated as:
where Q is output (measured in units)and P is price (measured in dollars per unit).Zar Island's cost function is:
This total cost function does not include a "normal" return on the firm's invested capital of $4 million.
(a)In the absence of any government price regulation,determine Zar Island's optimal (i)output level,(ii)selling price,(iii)total profits,and (iv)rate of return on its asset base.
(b)The State Energy Commission has ordered the firm to charge a price which will provide it with no more than a 12 percent return on its total assets.Determine Zar Island's (i)output level,(ii)selling price,and (iii)total profits under this constraint.
Hint: The roots of the quadratic equation:
(a) In the absence of any government price regulation, determine Zar Island's optimal (i) output level, (ii) selling price, (iii) total profits, and (iv) rate of return on its asset base. The State Energy Commission has ordered the firm to charge a price which will provide it
(b) with no more than a 12 percent return on its total assets. Determine Zar Island's (1) output level, (ii) selling price, and (iii) total profits under this constraint. Hint: The roots of the quadratic equation:
$$a x ^ { 2 } + b x + c = 0 \text { are } X = \frac { - b \pm \left( b ^ { 2 } - 4 a c \right) ^ { 5 } } { 2 a }$$ $$a x ^ { 2 } + b x + c = 0 \text { are } X = \frac { - b \pm \left( b ^ { 2 } - 4 a c \right) ^ { 5 } } { 2 a }$$

Question 15

A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 - 3Q.The fixed cost is $10 and the variable cost per unit is $2.What is the maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 - 6 Q.(Pick closest answer)

A) Q = 10
B) Q = 15
C) Q = 22
D) Q = 37
E) Q = 41

Question 16

A monopoly will always produce less than a purely competitive industry,ceteris paribus.

Question 17

The demand curve facing the firm in ____ is the same as the industry demand curve.

A) pure competition
B) monopolistic competition
C) oligopoly
D) pure monopoly
E) none of the above

Question 18

Unique Creations has a monopoly position in magnometers.If the marginal cost for a magnometer is $50 and the price elasticity for magnometers is -4,what is the optimal monopoly price? Hint: P (1 +1/E)= MC.

A) $37.50
B) $41.25
C) $66.67
D) $75.00
E) $82.50

Question 19

Land's End estimates a demand curve for turtleneck sweaters to be: Log Q = .41 + 2.3 Log Y - 3 Log P
Where Q is quantity,P is price,and Y is a measure on national income.If the marginal cost of imported turtleneck sweaters is $9.00.(HINT: P (1 +1/E)= MC).The optimal monopoly price would be:

A) P = $13.50
B) P = $26.50
C) P = $27.50
D) P = $34.50
E) P = $56.22

Question 20

The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:

A) inverted block pricing
B) second-degree price discrimination
C) peak-load pricing
D) first-degree price discrimination
E) none of the above