1.
For the monopolist shown below, the profit maximizing level of output is:
Correct Answer
B. Q1
Explanation
The profit maximizing level of output for a monopolist is where marginal revenue (MR) equals marginal cost (MC). In the given scenario, Q1 is the profit maximizing level of output because at this quantity, the MR is equal to the MC. Any other level of output would result in either a higher MC than MR or a lower MR than MC, leading to a decrease in profit. Therefore, Q1 is the correct answer.
2.
If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:
Correct Answer
A. Positive
Explanation
If a monopolist sets her output such that marginal revenue, marginal cost, and average total cost are equal, it implies that the monopolist is producing at the level where it maximizes its profits. In this scenario, the monopolist is earning economic profit, which means that its total revenue exceeds its total cost. Therefore, the economic profit must be positive.
3.
Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity
Correct Answer
A. Higher; smaller
Explanation
A monopolist will charge a higher price and sell a smaller quantity compared to the equilibrium price and quantity in a competitive market. This is because a monopolist has control over the market and faces no competition, allowing them to set higher prices and sell fewer goods to maximize their profits.
4.
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?
Correct Answer
B. The firm should cut output.
Explanation
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. A negative value for price elasticity of demand indicates that the demand is inelastic, meaning that a change in price will result in a proportionally smaller change in quantity demanded. In this case, the price elasticity of demand being -0.15 suggests that the demand is relatively inelastic. Therefore, to maximize profits, the firm should cut output as reducing output will lead to a higher price, which in turn will result in a smaller decrease in quantity demanded.
5.
A monopolist has equated marginal revenue to zero. The firm has:
Correct Answer
A. Maximized revenue.
Explanation
When a monopolist equates marginal revenue to zero, it means that the additional revenue obtained from selling one more unit of a good is equal to the additional cost incurred in producing that unit. This implies that the monopolist is maximizing its total revenue, as any further increase in production would result in a decrease in total revenue. Therefore, the correct answer is "maximized revenue."
6.
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:
Correct Answer
D. $40
7.
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:
Q = 160 - 4P TR = 40Q - 0.25^(Q^2) MR = 40 - 0.5Q TC = 4Q MC = 4
Refer to Scenario 1. How much output will Barbara produce?
Correct Answer
B. 72
Explanation
Based on the given information, Barbara's total cost (TC) is equal to 4Q and her marginal cost (MC) is constant at 4. To determine the output level, we need to find the point where MC equals MR. In this case, MR is given as 40 - 0.5Q. Setting MC equal to MR, we get 4 = 40 - 0.5Q. Solving for Q, we find that Q = 72. Therefore, Barbara will produce 72 units of output.
8.
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:
Q = 160 - 4P TR = 40Q - 0.25^(Q^2) MR = 40 - 0.5Q TC = 4Q MC = 4
Refer to Scenario 1. The price of her product will be ________.
Correct Answer
E. 22
Explanation
Based on the given information, the price of Barbara's product can be determined by setting the marginal revenue (MR) equal to marginal cost (MC). In this case, MR is given as 40 - 0.5Q and MC is given as 4. By setting these two equal to each other, we can solve for Q and then substitute it back into the demand curve equation to find the corresponding price. The calculation results in Q = 72 and substituting it back into the demand curve gives us P = 22. Therefore, the price of Barbara's product will be 22.
9.
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 - 0.25^ (Q^2) MR = 40 - 0.5Q TC = 4Q MC = 4
Refer to Scenario 1. How much profit will she make?
Correct Answer
B. 1,296
Explanation
Based on the given information, we can calculate the profit by subtracting the total cost (TC) from the total revenue (TR). The total cost is given as 4Q, and the total revenue is given as 40Q - 0.25(Q^2). Substituting the demand curve equation Q = 160 - 4P into the total revenue equation, we can find the value of Q that maximizes the total revenue. By substituting this value of Q into the total cost equation, we can calculate the profit. In this case, the profit is equal to 1,296.
10.
Scenario 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 3. The marginal cost of red herrings is given as: MC = 0.6Q. What is the profit-maximizing level of output?
Correct Answer
C. 50
Explanation
The profit-maximizing level of output is determined by setting marginal revenue equal to marginal cost. In this scenario, the marginal revenue is given as MR = 50 - 0.4Q, and the marginal cost is given as MC = 0.6Q. By setting MR = MC, we can solve for Q. Substituting the given equations, we get 50 - 0.4Q = 0.6Q. Simplifying this equation, we find that Q = 50. Therefore, the profit-maximizing level of output is 50.
11.
The demand curve and marginal revenue curve for red herrings are given as follows:
Q = 250 - 5P
MR = 50 - 0.4Q
Refer to Scenario 3. At the profit-maximizing level of output, demand is:
Correct Answer
D. Elastic, but not infinitely elastic
Explanation
At the profit-maximizing level of output, the demand is elastic, but not infinitely elastic. This can be determined by analyzing the marginal revenue (MR) curve. In this scenario, the MR curve is downward sloping and intersects the x-axis at a positive quantity. This indicates that the demand is elastic because a decrease in price will result in an increase in total revenue. However, it is not infinitely elastic because the MR curve does not intersect the x-axis at zero quantity, meaning that there is a limit to how much the quantity demanded will increase as the price decreases.
12.
The revenue and cost curves in the diagram above are those of a natural monopoly.
Refer to Figure 10.1. If the monopolist is not regulated, the price will be set at ________.
Correct Answer
D. P2
Explanation
If the monopolist is not regulated, the price will be set at P2. This can be inferred from the diagram, where P2 represents the point of intersection between the demand curve and the monopolist's marginal cost curve. At this price, the monopolist maximizes its profits by producing the quantity where marginal cost equals marginal revenue.
13.
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 _____.
Correct Answer
D. P4
Explanation
If the government sets the price at the competitive level, it will set the price at P4. This means that the government will set the price higher than the competitive level, allowing the monopolist to earn higher profits. By setting the price at P4, the government is not effectively limiting monopoly power and is instead allowing the monopolist to continue operating with high prices and limited competition.
14.
With respect to monopolies, dead weight loss refers to the:
Correct Answer
C. Net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy.
Explanation
The correct answer is "net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy." This answer accurately describes deadweight loss in the context of monopolies. Deadweight loss refers to the economic inefficiency that occurs when the quantity of a good or service produced is less than the socially optimal level. In a monopoly, the monopolist has the power to set prices higher than the competitive market price, resulting in a reduction in both consumer and producer surplus. This leads to a net loss in overall welfare for society.
15.
If the regulatory agency sets a price where AR = AC for a natural monopoly, output will be:
Correct Answer
D. Greater than the monopoly profit maximizing level and less than the competitive level.
Explanation
If the regulatory agency sets a price where AR = AC for a natural monopoly, the output will be greater than the monopoly profit maximizing level and less than the competitive level. This is because in a natural monopoly, the average cost (AC) is higher than the average revenue (AR) at the profit maximizing level. By setting the price where AR = AC, the regulatory agency allows the natural monopoly to produce at a higher output level than the profit maximizing level, but still lower than the level that would exist under perfect competition. This ensures that the natural monopoly can cover its costs but does not have excessive market power.
16.
If a monopolist's profits were taxed away and redistributed to its consumers:
Correct Answer
B. Inefficiency would remain because output would be lower than under competitive conditions.
Explanation
If a monopolist's profits were taxed away and redistributed to its consumers, inefficiency would remain because output would be lower than under competitive conditions. This is because monopolists have the ability to restrict output and charge higher prices compared to competitive markets. When their profits are taxed away, they may reduce their output further to compensate for the loss in profits. As a result, consumers would receive less output at higher prices compared to a competitive market, leading to inefficiency.
17.
Which of the following statements about natural monopolies is true?
Correct Answer
D. For natural monopolies, marginal cost is always below average cost.
Explanation
For natural monopolies, marginal cost is always below average cost. This means that the cost of producing one additional unit of output is always less than the average cost of producing all units of output. This is because natural monopolies benefit from economies of scale, where the cost per unit decreases as production increases. As a result, the marginal cost curve lies below the average cost curve for natural monopolies.
18.
Refer to Figure 10.2. At output Qm, and assuming that the monopoly has set her price to maximize profit, the consumer surplus is:
Correct Answer
D. CDE
Explanation
The correct answer is CDE. This is because consumer surplus represents the difference between what consumers are willing to pay for a product and what they actually pay. In the given figure, the area CDE represents the consumer surplus. This is the area between the demand curve and the price set by the monopoly. Therefore, CDE is the correct answer.
19.
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:
Correct Answer
C. $40
Explanation
The profit maximizing price can be determined by using the formula for the optimal price in a monopolistic market, which is equal to the marginal cost divided by the absolute value of the price elasticity of demand plus 1, and then multiplied by the marginal revenue. Since the marginal revenue is $20 and the price elasticity of demand is -2.0, the optimal price would be $40.
20.
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.
Refer to Scenario 2. What level of output maximizes total revenue?
Correct Answer
D. 100
Explanation
The monopolist maximizes total revenue by producing at the level of output where marginal revenue equals zero. In this scenario, the marginal revenue curve is given by MR = 100 - Q. Setting MR equal to zero and solving for Q, we find Q = 100. Therefore, the level of output that maximizes total revenue is 100.
21.
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.
Refer to Scenario 2. What is the profit maximizing level of output?
Correct Answer
C. 95
Explanation
The profit maximizing level of output occurs where marginal revenue equals marginal cost. In this scenario, the marginal cost is constant at 5. The marginal revenue is calculated by subtracting the quantity from 100. By setting marginal revenue equal to marginal cost, we can solve for the quantity that maximizes profit. When Q is equal to 95, the marginal revenue is equal to the marginal cost of 5, indicating that this is the profit maximizing level of output.
22.
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.
Refer to Scenario 2. What is the profit maximizing price?
Correct Answer
C. $52.50
Explanation
The profit maximizing price can be determined by setting marginal revenue equal to marginal cost. In this scenario, the marginal revenue is given as 100 - Q and the marginal cost is 5. By setting these two equal to each other, we can solve for Q. Substituting the value of Q back into the demand curve equation Q = 200 - 2P, we can solve for P. The resulting price is $52.50.
23.
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.
Refer to Scenario 2. How much profit does the monopolist earn?
Correct Answer
A. $4512.50
Explanation
The monopolist earns a profit of $4512.50. This can be calculated by finding the monopolist's profit-maximizing quantity and price. The monopolist maximizes profit by producing where marginal cost equals marginal revenue. In this scenario, the monopolist's marginal cost is constant at $5, and the marginal revenue is equal to $100 - Q. By setting marginal cost equal to marginal revenue, we can solve for the quantity, which is Q = 95. Substituting this quantity into the demand curve, we can find the price, which is P = 200 - 2(95) = $10. Finally, we can calculate the profit by subtracting the total cost from the total revenue, which is (10)(95) - (5)(95) = $4512.50.
24.
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.
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?
Correct Answer
B. 90
Explanation
When a tax of $5 is imposed on each unit produced, the marginal cost curve will shift upward by $5. To determine the profit-maximizing level of output, we need to find the quantity where marginal cost (MC) equals marginal revenue (MR). In this scenario, MR is given as 100 - Q. By setting MC equal to MR and solving for Q, we find that Q = 90. Therefore, the profit-maximizing level of output is 90 units.
25.
If a monopolist's profits were taxed away and redistributed to its consumers:
Correct Answer
A. Inefficiency would remain because output would be lower than under competitive conditions.
Explanation
If a monopolist's profits were taxed away and redistributed to its consumers, inefficiency would remain because output would be lower than under competitive conditions. This is because monopolists have the ability to restrict output and charge higher prices due to their market power. When the monopolist's profits are taxed away and redistributed to consumers, it does not address the issue of the monopolist's market power and ability to restrict output. Therefore, the output would still be lower compared to a competitive market where multiple firms compete and there is no market power.
26.
If a monopolist's marginal cost is constant at $4.00 and the price elasticity of demand facing it is -3, the profit maximizing price the monopoly will charge will be :
Correct Answer
C. $6.00
Explanation
A monopolist maximizes profit by setting the price where marginal cost equals marginal revenue. In this case, the marginal cost is constant at $4.00. The price elasticity of demand is -3, which means that a 1% increase in price will result in a 3% decrease in quantity demanded. To maximize profit, the monopolist needs to set a price where marginal revenue equals $4.00 and the quantity demanded is consistent with the price elasticity of demand. The only option that satisfies these conditions is $6.00.
27.
Exhibit. Exercise page 388. A firm faces this demand curve: P = 120 – 0.02 Q, where Q is weekly production and P is price in cents per unit. The firm’s cost function is given by: C = 60Q +25,000. Assume the firm maximizes profits.
Look at the exhibit above. What is the level of production Q, price P and total profit per week:
Correct Answer
C. Q = 1500 P = 90 cents Profits = 20,000 cents
28.
Exhibit. Exercise page 388. A firm faces this demand curve: P = 120 – 0.02 Q, where Q is weekly production and P is price in cents per unit. The firm’s cost function is given by: C = 60Q +25,000. Assume the firm maximizes profits.
Look at the exhibit above. If the government levies a tax of 14 cents per unit on this product, what will be the new levels of production Q, the price P paid by the consumer, and total profit per week:
Correct Answer
B. Q = 1150 P = 83 cents Profits = 1450 cents
Explanation
The correct answer is Q = 1150, P = 83 cents, Profits = 1450 cents. When a tax of 14 cents per unit is levied on the product, the firm's cost function remains the same. However, the price paid by the consumer decreases by the amount of the tax, resulting in a new demand curve of P = 120 - 0.02(Q+14). To maximize profits, the firm will produce the quantity where marginal cost equals marginal revenue. By setting the derivative of the total cost function equal to the derivative of the new demand function, we can solve for Q and find that it is equal to 1150. Substituting this value into the demand function, we can find that P is equal to 83 cents. Finally, we can calculate the total profit per week by subtracting the total cost from the total revenue, which is equal to 1450 cents.
29.
Exhibit Exercise 6; Suppose an industry is characterized by the following:
C= 100 + 2q^{2 }each firm’s total cost function
MC = 4q each firm’s marginal cost function
P = 90 - 2Q Industry demand curve
Look at the exhibit above. If there is only one firm, what will be the monopoly’s price p, quantity Q and the level of profits.
Correct Answer
E. Q = 11.25 P = 67.5 Profits = 406.25
30.
Exhibit Exercise 6; Suppose an industry is characterized by the following:
C= 100 + 2q^{2 }each firm’s total cost function
MC = 4q each firm’s marginal cost function
P = 90 - 2Q Industry demand curve
Look at the exhibit above. If the industry is competitive, find the price, quantity and level of profits.
Correct Answer
B. Q = 15 P = 60 Profits = 350
Explanation
In a competitive industry, firms operate at the level of output where marginal cost equals price. From the given information, we can see that the marginal cost (MC) function is 4q and the industry demand curve is P = 90 - 2Q. Setting MC equal to P, we can solve for the quantity (Q) and price (P) at which this equality occurs. In this case, the quantity is 15 and the price is 60. To find the level of profits, we can substitute the quantity and price into the total cost function (C = 100 + 2q^2) and subtract it from the revenue (P * Q). The resulting profits are 350.