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  Carleton University - ECON 1000 Chapter 15—Monopoly     What do we know about a monopoly’s marginal cost? It will be less than its average fixed cost

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Carleton University - ECON 1000

Chapter 15—Monopoly

 

 

1. What do we know about a monopoly’s marginal cost?
   1. It will be less than its average fixed cost.
   2. It will be less than the price per unit of its product.
   3. It will exceed its marginal revenue.
   4. It will equal its average total cost.

 

 

 

2. What is the main difference between a competitive firm and a monopoly?
   1. A competitive firm owns a key resource, but a monopoly firm does not.
   2. A competitive firm is a price taker, and a monopoly is a price maker.
   3. A competitive firm produces output at a lower cost than a monopoly firm.
   4. A competitive is subject to government regulations, but a monopoly firm is not.

 

 

 

 

3. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, how will meatball prices compare with marginal cost?
   1. Meatball prices will be less than marginal cost.
   2. Meatball prices will equal marginal cost.
   3. Meatball prices will exceed marginal cost.
   4. Meatball prices will be a function of supply and demand and will therefore oscillate around marginal costs.

 

 

 

 

4. Kureha Corporation holds 70 percent of the market as a supplier for polymer, which is used to make the compact battery for smartphones. Why is Kureha Corporation considered as a classic example of a monopoly?
   1. It is a government- created corporation.
   2. It arises from the ownership of a key resource.
   3. It results in very little advertising of the product that the monopolist produces.
   4. It was broken up by the government a long time ago.

 

 

 

5. Suppose during the tsunami in 2011, Kureha Corporation suffered significant damage. As a result, smartphone makers have to look for other sources for the supply of polymer. In this case, what will happen to Kureha Corporation?
   1. It has less incentive to advertise than it would otherwise have.
   2. It has less market power than it would otherwise have.
   3. It has more control over the price of polymer than it would otherwise have.
   4. It has higher profits than it would otherwise have.

 

 

6. What would result from a reduction in a monopolist’s fixed costs?
   1. The profit-maximizing price would decrease, and the profit-maximizing quantity produced would increase.
   2. The profit-maximizing price would increase, and the profit-maximizing quantity produced

would decrease.

1. 3. The profit-maximizing price would decrease and the profit-maximizing quantity produced would not change.
   4. The profit-maximizing price would increase, and the profit-maximizing quantity produced would not change.

 

 

 

7. When does a natural monopoly occur?
   1. when the product is sold in its natural state (such as water or diamonds)
   2. when there are economies of scale over the relevant range of output
   3. when the firm is characterized by a rising marginal-cost curve
   4. when production requires the use of free natural resources, such as water or air

 

 

             

8. When a firm’s average-total-cost curve continually declines, what is the firm considered?
   1. a government-created monopoly
   2. a natural monopoly
   3. a revenue monopoly
   4. a subsidized monopoly

 

 

 

Figure 15-1

 

 

 

 

 

9. Refer to Figure 15-1. The shape of the average-total-cost curve reveals information about the nature of the barrier to entry that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure? a. a resource monopoly
   2. a natural monopoly
   3. a government-created monopoly
   4. a dynamic monopoly

 

 

 

10. Refer to Figure 15-1. The shape of the average-total-cost curve suggests an opportunity for a profit-maximizing monopolist to take advantage of what? a. economies of scale
    2. diseconomies of scale
    3. decreasing marginal cost
    4. increasing marginal cost

 

 

 

11. Refer to Figure 15-1. In view of what is known about the relationship between average total cost and marginal cost, what do we know about the marginal-cost curve for this firm? a. It must lie entirely above the average-total-cost curve.
    2. It must lie entirely below the average-total-cost curve.
    3. It must be upward sloping.
    4. It must be downward sloping.

 

 

 

12. When an industry is a natural monopoly, what can we expect?
    1. It is characterized by constant returns to scale.
    2. It is characterized by diseconomies of scale.
    3. A larger number of firms may lead to a lower average cost.
    4. A larger number of firms will lead to a higher average cost.

 

 

 

13. Which of the following attributes does a firm that is a natural monopoly have?
    1. It is very likely to be concerned about new entrants eroding its monopoly power.
    2. It is taking advantage of loyal consumers.
    3. It would experience lower average total revenue if more firms entered the market.
    4. It experiences economies of scale.

 

 

 

14. Why do additional firms often NOT try to compete with a natural monopoly?
    1. They fear retaliation in the form of pricing wars from the natural monopolist.
    2. They are unsure of the size of the market in general.
    3. They know they cannot achieve the same low costs that the monopolist enjoys.
    4. They see that the natural monopoly doesn’t make a huge profit.

 

 

 

Scenario 15-1

Consider the market for water in a small town in the Old West. Assume that the only source of water is the underground aquifer that lies directly below the town. Wells are used to supply water to the entire town.

 

15. Refer to Scenario 15-1. If dozens of residents have their own wells, which of the following statements most adequately describes the behaviour of sellers of water?
    1. Since water is a necessity of life, there will be no decline in the quantity of water consumed, regardless of how high the price is raised.
    2. Sellers will be able to charge a premium for the water.
    3. The price of a litre of water will exceed its marginal cost.
    4. The price of a litre of water will be driven to equal its marginal cost.

 

 

 

16. Refer to Scenario 15-1. What happens if only one resident owns all the wells in town?
    1. The price of a litre of water will be driven to equal its marginal cost.
    2. The price of a litre of water will exceed its marginal cost.
    3. Since water is a necessity of life, there will be no decline in the quantity of water consumed, regardless of how high the price is raised.
    4. The seller will be able to earn unlimited profit.

 

 

 

17. Refer to Scenario 15-1. Assume that Jack is the sole owner of all the wells in town. He decides to move to a more suitable climate and sells the wells to a couple of dozen different town residents. What will be the result?
    1. The town residents will likely be worse off.
    2. The price of water is likely to rise.
    3. The individual water sellers will not have as many customers as Jack had.
    4. More water will be offered for sale.

 

 

 

18. What shape of demand curves do competitive firms have, and how much output can they sell?
    1. They have downward-sloping demand curves, and they can sell as much output as they desire at the market price.
    2. They have downward-sloping demand curves, and they can sell only a limited quantity of output at each price.
    3. They have horizontal demand curves, and they can sell as much output as they desire at the market price.
    4. They have horizontal demand curves, and they can sell only a limited quantity of output at each price.

  

 

19. In order to sell more of its product, what must a monopolist do?
    1. It must sell to the government.
    2. It must sell in international markets.
    3. It must lower its price.
    4. It must keep its price constant.

 

 

 

20. What is the typical market demand curve for a monopolist?
    1. upward sloping
    2. downward sloping
    3. horizontal
    4. vertical

  

 

Table 15-1

Quantity	Price	Total Revenue	Average Revenue	Marginal Revenue
1	$35	$35
2		$64	$32	$29
3	$29
4				$17
5	$23			$11
6		$120
7	$17			–$1
8				–$7
9		$99	$11	–$13

 

 

21. Refer to Table 15-1. If the monopolist sells eight units of its product, how much total revenue will it receive from the sale? a. $40
    2. $108
    3. $112
    4. $164

 

 

 

22. Refer to Table 15-1. If the monopolist wants to maximize its revenue, how many units of its product should it sell? a. 4
    2. 5
    3. 6
    4. 7

 

 

 

23. Refer to Table 15-1. When four units of output are produced and sold, what is the average revenue? a. $17
    2. $21
    3. $23
    4. $26

 

 

 

24. Refer to Table 15-1. What is the marginal revenue for the monopolist for the sixth unit sold? a. $3
    2. $5
    3. $8
    4. $11

 

 

 

 

25. Refer to Table 15-1. Assume this monopolist's marginal cost is constant at $11. What quantity (Q) of output will it produce and what price (P) will it charge? a. Q = 4; P = $25
    2. Q = 4; P = $26
    3. Q = 5; P = $23
    4. Q = 7; P = $17

 

 

             

26. A monopoly firm can sell 150 units of output for $12.00 per unit. Alternatively, it can sell 151 units of output for $11.95 per unit. What is the marginal revenue of the 151st unit of output? a. –$11.95
    2. –$4.45
    3. $4.45
    4. $11.95

 

 

27. For a monopolist, how do we determine the sign of the marginal-revenue curve?

1. It is positive when the demand effect is greater than the supply effect.
2. It is positive when the monopoly effect is greater than the competitive effect.
3. It is negative when the price effect is greater than the output effect.
4. It is negative when the output effect is greater than the price effect.

 

 

 

 

28. For a monopoly firm, which of the following equalities holds?
    1. Price = Marginal revenue
    2. Price = Average revenue
    3. Price = Total revenue
    4. Marginal revenue = Average revenue

  

 

29. Suppose a certain firm has a monopoly on electricity. To sell the 100th unit of electricity, what must the firm experience?
    1. less marginal revenue on the 100th unit of electricity than it experienced on the 99th unit
    2. more average revenue on the 100th unit of electricity than it experienced on the 99th unit
    3. more total revenue on the 100 units of electricity than it experienced on the first 99 units
    4. more marginal revenue on the 100th unit of electricity than it experienced on the 99th unit

  

 

30. Let P = price, MR = marginal revenue, and MC = marginal cost. For a profit-maximizing monopolist, which of the following relationships holds? a. P > MR = MC
    2. P = MR = MC
    3. P > MR > MC
    4. MR < MC < P

 

 

 

Figure 15-2

 

The figure below reflects the cost and revenue structure for a monopoly firm.

 

 

 

 

 

31. Refer to Figure 15-2. Which curve depicts the demand curve for a monopoly firm? a. A
    2. B
    3. C
    4. D

 

 

 

32. Refer to Figure 15-2. Which curve depicts the marginal-revenue curve for a monopoly firm? a. A
    2. B
    3. C
    4. D

 

 

 

33. Refer to Figure 15-2. Which curve depicts the marginal-cost curve for a monopoly firm? a. A
    2. B
    3. C
    4. D

 

 

 

 

34. Refer to Figure 15-2. Which curve depicts the average-total-cost curve for a monopoly firm? a. A
    2. B
    3. C
    4. D

 

 

 

35. Refer to Figure 15-2. If the monopoly firm is currently producing Q₃ units of output, what will a decrease in output necessarily cause profit to do? a. decrease
    2. remain unchanged
    3. increase as long as the new level of output is at least Q₁
    4. increase as long as the new level of output is at least Q₂

 

 

 

36. Refer to Figure 15-2. If the monopoly firm wants to maximize its profit, what level of output should it operate at? a. Q₁
    2. Q₂
    3. Q₃
    4. Q₄

 

 

 

37. Refer to Figure 15-2. What price will maximize profit?
    1. P₀
    2. P₁
    3. P₂
    4. P₃

 

 

 

 

38. Supply curves tell us how much producers are willing to supply at any given price. What type of supply curves will monopoly firms have? a. vertical supply curves
    2. steeper supply curves than competitive firms
    3. flatter supply curves than competitive firms
    4. no supply curves

 

 

 

39. In a competitive market, a firm’s supply curve dictates the amount it will supply. How does a monopoly market compare?
    1. The same statement applies.
    2. The supply curve conceptually makes sense, but in practice is never used.
    3. The supply curve will have limited predictive capacity.
    4. The supply curve does not exist.

 

 

                                                              

40. Consider the following: The profit-maximizing price charged for goods produced is $16. The intersection of the marginal-revenue and marginal-cost curves occurs where output is 10 units and marginal cost is $8. Average total cost for 10 units of output is $6. What is the monopolist’s profit under these conditions? a. $20
    2. $80
    3. $100
    4. $160

 

 

 

41. Consider the following: The profit-maximizing price charged for goods produced is $20. The intersection of the marginal-revenue and marginal-cost curves occurs where output is 12 units and marginal cost is $9. Average total cost for 12 units of output is $7. What is the monopolist’s profit under these conditions? a. $20
    2. $80
    3. $112
    4. $156

  

 

42. If a monopolist sells 100 units at $8 per unit and realizes an average total cost of $6 per unit, what is the monopolist’s profit? a. $200
    2. $400
    3. $600
    4. $800

 

 

 

 

43. Consider the following: The profit-maximizing price charged for goods produced is $12. The intersection of the marginal-revenue and marginal-cost curves occurs where output is 10 units, marginal cost is $8, and average total cost is $7. What is the monopolist’s profit under these conditions? a. $10
    2. $40
    3. $50
    4. $80

 

 

 

 

44. For a monopoly firm, at the level of output for which marginal revenue equals zero, what also occurs? a. Average revenue is zero.
    2. Profit is maximized.
    3. Total revenue is maximized.
    4. Marginal cost is zero.

 

 

 

45. How is a monopolist’s profit-maximizing quantity of output determined?
    1. by the intersection of the marginal-revenue curve and the marginal-cost curve
    2. by the intersection of the marginal-revenue curve and the average-total-cost curve
    3. by the intersection of the demand curve and the marginal-cost curve
    4. by the intersection of the demand curve and the average-total-cost curve

 

 

 

 

46. In which of the following ways does the profit-maximization problem for a monopolist differ from that of a competitive firm?
    1. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.
    2. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at a point where average revenue exceeds marginal cost.
    3. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level of output is smaller than it is for larger levels of output.
    4. For a profit-maximizing competitive firm, thinking at the margin is much more important than it is for a profit- maximizing monopolist.

 

 

             

Figure 15-6

 

 

 

 

 

47. Refer to Figure 15-6. To maximize total surplus, which of the following outcomes would a benevolent social planner choose?
    1. 100 units of output and a price of $10 per unit
    2. 100 units of output and a price of $20 per unit
    3. 150 units of output and a price of $10 per unit
    4. 150 units of output and a price of $15 per unit

 

 

 

48. Refer to Figure 15-6. To maximize its profit, which of the following outcomes would a monopolist choose?
    1. 100 units of output and a price of $10 per unit
    2. 100 units of output and a price of $20 per unit
    3. 150 units of output and a price of $15 per unit
    4. 200 units of output and a price of $20 per unit

 

 

 

 

49. Refer to Figure 15-6. What is the consumer surplus under the social planner’s outcome? a. $1000
    2. $1125
    3. $2000
    4. $2250

 

 

 

50. Refer to Figure 15-6. What is the deadweight loss caused by a profit-maximizing monopoly? a. $150
    2. $200
    3. $250
    4. $300

 

 

 

Scenario 15-3

 

Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let’s assume that Black Box Cable pays $150 000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to about 20 000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.

 

51. Refer to Scenario 15-3. If Black Box Cable TV is unable to price discriminate, what price will it choose to maximize its profit and what is the amount of the profit? a. price = $20; profit = $400 000
    2. price = $20; profit = $330 000
    3. price = $150; profit = $450 000
    4. price = $150; profit = $600 000

 

 

 

52. Refer to Scenario 15-3. If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate? a. $500 000
    2. $600 000
    3. $850 000
    4. $925 000

 

 

 

53. Refer to Scenario 15-3. What is the deadweight loss associated with the nondiscriminating pricing policy compared to the price discriminating policy? a. $375 000
    2. $400 000
    3. $475 000
    4. $600 000

 

 

 

54. When is price discrimination a rational strategy for a profit-maximizing monopolist?
    1. when the monopolist finds itself able to produce only limited amounts of output
    2. when consumers are unable to be segmented into identifiable markets
    3. when the monopolist wishes to increase the deadweight loss that results from profit-maximizing behaviour
    4. when there is no opportunity for arbitrage across market segmentations

 

 

 

55. If a monopolist is able to perfectly price discriminate, which of the following outcomes results?
    1. Consumer surplus is always increased.
    2. Total surplus is always decreased.
    3. Consumer surplus and deadweight losses are transformed into monopoly profits.
    4. The price effect dominates the output effect on monopoly revenue.

 

 

What is a rational pricing strategy for a profit-maximizing monopolist?

1. price discrimination
2. price segregation
3. synergy pricing
4. average cost pricing

 

 

 

 

57. What situation is described by perfect price discrimination?
    1. The monopolist knows the exact willingness to pay of each of its customers.
    2. The monopolist charges exactly two different prices to exactly two different groups of customers.
    3. The monopolist maximizes consumer surplus.
    4. The monopolist experiences a zero economic profit.

 

 

 

58. When a local grocery store offers discount coupons in the Sunday paper, what is it most likely trying to do?
    1. reduce prices for all customers
    2. offer customers a reward for reading the paper
    3. gain some pricing power over the other grocery stores in town
    4. price discriminate

 

 

 

59. Price discrimination explains why many universities often set rules that determine prices of admission (or financial aid). What characteristic of students is this based on? a. their age
    2. their financial resources
    3. their high school GPA
    4. their sex

 

 

 

Table 15-4

 

A monopolist faces the following demand curve:

 

Price         Quantity Demanded

$8            300

$7            400

$6            500

$5            600

$4            700

$3            800

$2            900

$1            1000

 

 

60. Refer to Table 15-4. Consider that the monopolist has fixed costs of $1000 and has a constant marginal cost of $2 per unit. If the monopolist were able to perfectly price discriminate, how many units would it sell?
    1. 400
    2. 500
    3. 700
    4. 900

 

 

 

61. It is not uncommon to find that prescription drugs sell for more in Canada than they do in other countries. How could drug companies’ price strategy affect our social welfare?
    1. Drug companies are engaging in price discrimination, and this practice certainly reduces global social welfare.
    2. Global social welfare could be improved if the price in Canada were reduced to the price charged in other countries.
    3. Global social welfare could be improved if the price in the other countries were increased to the price charged in Canada.
    4. Drug companies are engaging in price discrimination, but this might improve global social welfare if it gives more people access to the drugs.

 

 

 

62. If one were to compare a competitive market to a monopoly that engages in perfect price discrimination, what could one say?
    1. In both cases, total social welfare is the same.
    2. Total social welfare is maximized in the competitive market, but not in the perfectly

discriminating monopoly.

1. 3. In both cases, some potentially mutually beneficial trades do not occur.
   4. Consumer surplus is the same in both cases.

 

 

 

63. Which of the following is NOT an example of price discrimination?
    1. Airline charges a lower price for round trips than single trips.
    2. Many colleges and universities give financial aid to needy students.
    3. Discount coupons are available free to the publi
    4. Prices are different at different gas stations throughout the city.

 

 

             

64. Which of the following solutions to the problem of monopolies does the debate concerning the tradeoffs between “market failure” and “political failure” in the Canadian economy provide support for?
    1. public ownership of monopolies
    2. government regulation of monopolies
    3. government incentives to promote competition in monopolized industries d. doing nothing at all

 

 

65. What is one problem with regulating a monopolist on the basis of cost?

1. Regulators are unable to control prices and/or production effectively.
2. It does not provide an incentive for the monopolist to reduce its cost.
3. A monopolist’s costs, by definition, are higher than costs of perfectly competitive firms.
4. A monopolist is still able to generate excessive economic profits.

 

 

 

66. What is the key issue in determining the efficiency of public versus private ownership of a monopoly?
    1. the tendency for efficient management of publicly owned enterprises
    2. the inability of private monopolies to get rid of managers that are doing a bad job
    3. the propensity of private monopolies to generate excessive profits
    4. how ownership of the firm affects the cost of production

 

 

 

67. Why may private ownership of a monopoly benefit society?
    1. The monopoly will have an incentive to charge a price that is consistent with that of a benevolent social planner.
    2. The monopoly will have an incentive to charge a price that prevents some people from buying.
    3. The monopoly will have an incentive to price its good according to the intersection of marginal cost and average revenue.
    4. The monopoly will have an incentive to lower its costs so that it can earn more profit.

 

 

 

68. Policymakers are discussing various proposals regarding how to deal with natural monopolies. Transportation Minister Gaston wants to regulate natural monopolies by equating price with average total cost. Gaston contends that such a policy will ensure that monopolies make every effort to reduce costs. Finance Minister Chen wants the government to own natural monopolies. Chen argues that government-owned monopolies usually do a better job of holding down costs than privately owned monopolies. Which Minister’s argument is correct? a. Transportation Minister Gaston’s argument
    2. Finance Minister Chen’s argument
    3. both ministers’ arguments
    4. neither minister’s argument

  

 

69. What is one method used to control the ability of firms to capture monopoly profit in Canada?
    1. government purchase of products produced by monopolists
    2. government distribution of a monopolist’s excess production
    3. enforcement of antitrust laws
    4. regulation of firms in highly competitive markets

 

 

 

70. What may antitrust laws do?
    1. enhance the ability of firms to capture profits from a concentration of market power
    2. enhance the ability of firms to reduce economic losses
    3. restrict the ability of firms to operate at the socially efficient level of production
    4. restrict the ability of firms to merge

 

 

 

71. A monopolist faces market demand given by P = 200 – Q. For this market, MR = 200 – 2Q and MC = 3Q. What quantity of output will the monopolist produce in order to maximize profits? a. 20
    2. 40
    3. 50
    4. 60

 

 

 

72. A monopolist faces market demand given by P = 200 – Q. For this market, MR = 200 – 2Q and MC = 3Q. What price will the monopolist charge in order to maximize profits? a. $140
    2. $150
    3. $160
    4. $180

 

 

 

73. A monopolist faces market demand given by P = 200 – Q. For this market, MR = 200 – 2Q and MC = 3Q. What is the deadweight loss due to the monopoly? a. $0
    2. $100
    3. $200
    4. $400

 

 

 

74. A monopolist faces market demand given by P = 60 – Q. For this market, MR = 60 – 2Q and MC = Q. What quantity of output will the monopolist produce in order to maximize profits? a. 20
    2. 30
    3. 40
    4. 50

 

 

 

75. A monopolist faces market demand given by P = 60 – Q. For this market, MR = 60 – 2Q and MC = Q. What price will the monopolist charge in order to maximize profits? a. $20
    2. $30
    3. $40
    4. $50

 

 

 

 

76. A monopolist faces market demand given by P = 60 – Q. For this market, MR = 60 – 2Q and MC = Q. What is the deadweight loss due to the monopoly? a. $100
    2. $200
    3. $300
    4. $400

 

 

 

77. A monopolist faces market demand given by P = 120 – Q. For this market, MR = 120 – 2Q and MC = 4Q. What quantity of output will the monopolist produce in order to maximize profits? a. 20
    2. 24
    3. 80
    4. 120

 

 

 

78. A monopolist faces market demand given by P = 120 – Q. For this market, MR = 120 – 2Q and MC = 4Q. What price will the monopolist charge in order to maximize profits? a. $40
    2. $96
    3. $100
    4. $104

 

 

             

79. A monopolist faces market demand given by P = 220 – 5Q. For this market, MR = 220 – 10Q and MC = 10Q. What is the deadweight loss due to the monopoly? a. $101.75
    2. $203.50
    3. $407.00
    4. $610.50

 

 

             

80. A monopolist faces market demand given by P = 250 – 0.5Q. For this market, MR = 250 – Q and MC = 100. What is the deadweight loss due to the monopoly?

1. $5625
2. $7500
3. $11 250
4. $15 000