ch10.pdf

Page 1 1. A monopoly is defined as an industry where a firm is: a. one of a small number of firms and there is a barrier to entry. b. one of a large number of firms and there is a barrier to entry. c. one of a large number of firms and there are no barriers to entry. d. the single seller of a good and there is a barrier to entry. 2. All of the following are examples of possible barriers to entry, except: a. patents to produce a particular product. b. the American Bar Association's rule that lawyers must pass an exam before practicing law. c. average cost in the industry decreases as a firm's output increases. d. All of the above are barriers to entry. 3. A natural monopoly occurs when: a. the government designates a single firm to sell a particular good. b. the government grants a firm a patent on a product. c. price exceeds average cost when a single firm is in the market, but is less than average cost when more than one firm is in the market. d. a single firm controls the entire quantity of a natural resource. 4. The demand curve that a monopolist faces is: a. the market demand curve. b. the same as the demand curve that faces a perfectly competitive firm. c. not affected by changes in the prices of other goods. d. generally flatter than the demand curve that faces a perfectly competitive firm. Page 2 !"""""#"""""$ %& P & Q & %&"""""'"""""& %& 9 & 1 & %&"""""'"""""& %& 8 & 2 & %&"""""'"""""& %& 7 & 3 & %&"""""'"""""& %& 6 & 4 & %&"""""'"""""& %& 5 & 5 & %&"""""'"""""& %& 4 & 6 & %&"""""'"""""& %& 3 & 7 & %&"""""'"""""& %& 2 & 8 & %&"""""'"""""& %& 1 & 9 & (""""")"""""* Table 10.1 5. Refer to Table 10.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fifth unit of output is: a. $5, because that is the price per unit of output that Gladys receives. b. $5, because that is the quantity that Gladys sells. c. $1, because Gladys sells one more unit of output than she would at a price of $6, when she sold four units. d. $1, because Gladys earns $1 more in revenues by increasing her output to five units from four units. 6. A monopolist maximizes profits by setting: a. marginal revenue equal to marginal cost. b. marginal revenue greater than marginal cost. c. marginal revenue less than marginal cost. d. total revenue as high as possible. Page 3 !"""""""""""""""""""#""""""""""""""#""""""""""""""""""$ %& Price per Unit & MR & Quantity Sold & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 10 & 0 & 0 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 9 & 9 & 1 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 8 & 7 & 2 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 7 & 5 & 3 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 6 & 3 & 4 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 5 & 1 & 5 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 4 & -1 & 6 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 3 & -3 & 7 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 2 & -5 & 8 & %&"""""""""""""""""""'""""""""""""""'""""""""""""""""""& %& 1 & -7 & 9 & (""""""""""""""""""")"""""""""""""")""""""""""""""""""* Table 10.3 7. Consider the demand curve shown in Table 10.3. If marginal cost were 5, this monopolist could maximize profits by producing ______units of output. a. 3 b. 4 c. 5 d. 6 8. When a monopolist sells two units of output its total revenues are $80. When the monopolist sells three units of output, its price per unit is $30. The monopolist's marginal revenue from selling the third unit of output is: a. $5 b. $10 c. $22.50 d. $110 Page 4 9. For a monopolist, marginal revenue ___________ for all units of output except the first unit. a. is greater than the price of output b. is less than the price of output c. is equal to the price of output d. may be either greater than or less than the price of output 10. You are an economist working for the monopolist whose marginal cost curve and associated demand curve are depicted in Figure 10.1. Suppose that the monopolist is currently charging a price of $5 per unit of output and selling 15 units. What would you recommend to the firm? a. Keep the price at the same level. b. Lower the price to sell more units. c. Raise the price, but sell fewer units. d. Raise the price of output, but also raise your cost of production. 11. At a price of $10, the marginal revenue of a monopolist is $6. If the marginal cost of production is $8, what should the monopolist do in order to maximize profits? a. Increase its price. b. Decrease its price. c. Keep its price at the same level. d. Not enough information to solve. Page 5 12. How do monopoly prices and quantities produced differ from perfectly competitive outcomes? a. Monopoly prices and quantities are both lower than competitive outcomes. b. Monopoly prices and quantities are both higher than competitive outcomes. c. Monopoly prices are lower than competitive prices but monopoly quantities are higher than competitive quantities. d. Monopoly prices are higher than competitive prices but monopoly quantities are lower than competitive quantities. 13. Consider an industry with a demand curve and marginal cost as illustrated in Figure 10.3. Calculate the deadweight loss associated with the monopoly. a. $0 b. $40 c. $50 d. $82 Page 6 14. Consider an industry with a demand curve and marginal cost as illustrated in Figure 10.4. Total surplus in a competitive market can be illustrated as: a. CGF b. BCFE c. ACB d. AGE Page 7 15. Consider an industry with a demand curve and marginal cost as illustrated in Figure 10.4. The deadweight loss associated with a monopoly is: a. CGF b. BCFE c. BCGE d. AGE 16. Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most correct? a. The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent. b. The government should grant a patent to the firm, because it does not have the resources to determine on a case-by-case basis exactly which inventions merit award of the patent. c. The government should grant a patent to the firm, because the firm is entitled to make large profits for all the work it put into research and development of the drug. d. The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent. Page 8 17. A natural monopoly occurs when: a. a firm has a government license to produce a produce. b. the government sanctions the firm to be the only producer of a product. c. a firm has sole ownership of a natural resource. d. there is only one firm in a market and the entry of a second firm would make price less than average cost. 18. If a regulatory agency mandates that a natural monopoly charge a price equal to its average cost: a. the firm will eventually exit the industry. b. the firm will earn economic profits greater than zero. c. other firms will find it profitable to enter this industry. d. the firm will earn economic profits equal to zero. 19. Firms price discriminate by offering customers with a _____ demand a lower price and customers with a ________ demand a higher price. a. less inelastic; more inelastic. b. more inelastic; less inelastic. c. inferior; normal. d. normal; inferior.