Review Questions for Chapter 10- Market Power: Monopoly and Monopsony

Review Questions for Chapter 10- Market Power: Monopoly and Monopsony

Review Questions for Chapter 10- Market Power: Monopoly and Monopsony

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

  1. The monopolist is maximizing profit.
  2. The monopolist is not maximizing profit and should increase output.
  3. The monopolist is not maximizing profit and should decrease output.
  4. The monopolist is earning a positive profit.

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

  1. higher; larger
  2. lower; larger
  3. higher; smaller
  4. lower; smaller
  5. none of these

3. Which of the following is NOT true regarding monopoly?

  1. Monopoly is the sole producer in the market.
  2. Monopoly price is determined from the demand curve.
  3. Monopolist can charge as high a price as it likes.
  4. Monopoly demand curve is downward sloping.

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

  1. expand output.
  2. do nothing without information about your fixed costs.
  3. reduce output until marginal revenue equals marginal cost.
  4. expand output until marginal revenue equals zero.
  5. reduce output beyond the level where marginal revenue equals zero.

Scenario 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:

5. Refer to Scenario 1. How much output will Barbara produce?

  1. 0
  2. 22
  3. 56
  4. 72
  5. none of the above

6. Refer to Scenario 1. The price of her product will be _____.

  1. 4
  2. 22
  3. 32
  4. 42
  5. 72

7. Refer to Scenario 1. How much profit will she make?

  1. -996
  2. 0
  3. 1,296
  4. 1,568
  5. none of the above

Scenario 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

8. Refer to Scenario 2. What level of output maximizes total revenue?

  1. 0
  2. 90
  3. 95
  4. 100
  5. none of the above

9. Refer to Scenario 2. What is the profit maximizing level of output?

  1. 0
  2. 90
  3. 95
  4. 100
  5. none of the above

10. Refer to Scenario 2. What is the profit maximizing price?

  1. $95.00.
  2. $5.00.
  3. $52.50.
  4. $10.00.

11. Refer to Scenario 2. How much profit does the monopolist earn?

  1. $4512.50.
  2. $4987.50.
  3. $475.00.
  4. $5.00.

12. Refer to Scenario 2. Suppose that a tax of $5 for each unit produced is imposed by state government. What is the profit maximizing level of output?

  1. 0
  2. 90
  3. 95
  4. 100
  5. none of the above

13. Refer to Scenario 2. Suppose that a tax of $5 for each unit produced is imposed by state government. What is the profit maximizing price?

  1. $90.00.
  2. $10.00.
  3. $55.00.
  4. $52.50.

14. Refer to Scenario 2. Suppose that a tax of $5 for each unit produced is imposed by state government. How much profit does the monopolist earn?

  1. $4050.
  2. $4950.
  3. $450.
  4. $5.

15. Refer to Scenario 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?

  1. It increases by $1000.
  2. It decreases by $1000.
  3. It decreases by less than $1000.
  4. It stays the same.

16. Refer to Scenario 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?

  1. 0
  2. 90
  3. 95
  4. 100
  5. none of the above

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

  1. less; monopoly power
  2. less; output
  3. more; monopoly power
  4. more; costs

18. Monopoly power results from the ability to

  1. set price equal to marginal cost.
  2. equate marginal cost to marginal revenue.
  3. set price above average variable cost.
  4. set price above marginal cost.

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

  1. 1
  2. 0
  3. infinity
  4. two times the price

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

  1. This practice is known as concentrating and is legal in the United States and Canada.
  2. This practice is known as collusion and is illegal in the United States.
  3. In this way firms take advantage of economies of scale.
  4. This is an effective barrier to entry, but is illegal in the United States.

Figure 10.1

The revenue and cost curves in the diagram above are those of a natural monopoly.

21. Refer to Figure 10.1. If the monopolist is not regulated, the price will be set at _____.

  1. P1
  2. P2
  3. P3
  4. P4
  5. none of the above

22. Refer to Figure 10.1. Suppose that the government decides to limit monopoly power with price regulation. If the government sets the price at the competitive level, it will set the price at _____.

  1. P1
  2. P2
  3. P3
  4. P4
  5. none of the above

23. Refer to Figure 10.1. The minimum feasible price is _____.

  1. P1
  2. P2
  3. P3
  4. P4
  5. none of the above

Scenario 3:

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows:

P = 360 - 4Q MR = 360 - 8Q MC = 4Q

24. Refer to Scenario 3. What level of output maximizes the sum of consumer surplus and producer surplus?

  1. 0
  2. 30
  3. 45
  4. 60
  5. none of the above

25. Refer to Scenario 3. What is the profit maximizing level of output?

  1. 0
  2. 30
  3. 45
  4. 60
  5. none of the above

26. Refer to Scenario 3. At the profit maximizing level of output, what is the level of consumer surplus?

  1. 0
  2. 1,800
  3. 2,700
  4. 3,600
  5. 4,800

27. Refer to Scenario 3. At the profit maximizing level of output, what is the deadweight loss?

  1. 0
  2. 450
  3. 900
  4. 1,800
  5. none of the above

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