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Intermediate Microeconomic Theory II ECONOMICS 2151B-001 Department of Economics Western University PRACTICE EXAM Multiple Choice Questions 1)A monopolist faces a demand curve and that the monopolist has a constant marginal cost of 75

Economics

Intermediate Microeconomic Theory II

ECONOMICS 2151B-001

Department of Economics

Western University

PRACTICE EXAM

Multiple Choice Questions

1)A monopolist faces a demand curve and that the monopolist has a constant marginal cost of 75.  The monopolist's profit-maximizing price is

1. 25
2. 50
3. 75
4. 100

2. The marginal revenue curve for a monopolist  A) will never take a linear form.

1. will always have double the slope of the demand curve, when demand is linear.
2. will always have one-half the slope of the demand curve, when demand is linear.
3. will slope upward when demand is elastic.

3. Which of the following statements regarding price discrimination is true?

1. In order to capture more surplus, the firm must have some market power.
2. Third-degree price discrimination is illegal.
3. Second-degree price discrimination refers to pricing differently for different market segments.
4. First-degree price discrimination is relatively easy to implement.

4. With second-degree price discrimination

1. the firm tries to price each unit at the consumer's reservation price.
2. the firm offers consumers a quantity discount.
3. the firm charges different consumer groups or market segments a different price.
4. a buyer can only purchase one product by agreeing to purchase some other product as well.

Use the following to answer questions 5-9.

Use the following diagram to answer the question(s).

5. The total economic benefit under monopoly would be

1. 300
2. 600
3. 900
4. 1,200

6. The total economic benefit under perfect competition would be

1. 2,700
2. 1,350
3. 675
4. 500

7. The deadweight loss under monopoly would be

1. 75
2. 150
3. 225
4. 300

8. The profit-maximizing price for a perfectly competitive firm would be

1. 180
2. 210
3. 240
4. Between 210 and 240

9. The profit-maximizing price for a monopolist would be

1. 180
2. 210
3. 240
4. Between 210 and 240

10. A monopolist will produce where  A) demand is elastic.

1. demand is perfectly elastic.
2. demand is inelastic.
3. demand is perfectly inelastic.

11. Which of the following is a real-world example of first-degree price discrimination?

1. A pizza parlor sells large and small pizzas.  Although the large pizzas are twice as big as the small pizzas, they cost less than double the price of a small pizza.
2. An electric company sells “blocks” of power at different prices.  Specifically, any customer who buys more that Q1 units of electricity can purchase additional units at a lower block price.
3. Different prices are charged to different customers at a flea market.
4. A movie theater charges senior citizens a cheaper price for movie tickets than it charges non-senior citizens for the same movie ticket.

12. A monopolist faces inverse demand P = 400 – 4Qd  and has constant marginal cost MC = 80.  If this monopolist engages in first-degree price discrimination, total output will equal

1. 20 units
2. 40 units
3. 60 units
4. 80 units

13. Suppose that a firm faces a demand curve for its product of P = 10 – Qd .  The corresponding marginal revenue curve is MR = 10 – 2Q.  The firm has a constant marginal cost of \$4 per unit.  If the firm engages in uniform pricing, what price will the firm charge?  A) \$7.

1. \$5.
2. \$4.
3. \$3.

14. When a monopoly sells its product in multiple markets, it should

1. add the demand curves in both markets, derive the marginal revenue curve from the aggregate demand curve and optimize its output by setting marginal cost equal to marginal revenue derived from the aggregate demand curve.
2. add the demand curves in both markets, derive the marginal revenue curve from the aggregate demand curve and optimize its output by setting price equal to marginal revenue.
3. let managers in each market determine the optimal output based on cultural preferences.
4. produce its product in each market and set MC = MR as any single market monopolist.

15. When a movie theater charges a lower ticket price for senior citizens and/or students, the movie theater is engaging in  A) price gouging.

1. third-degree price discrimination.
2. first-degree price discrimination.
3. second-degree price discrimination.

16. A monopolist faces linear inverse demand P = a – bQ and constant marginal cost, c.  Which of the following gives a correct formula for the monopolist's profit maximizing price?  A) P = (a/b – c)

1. P = a/2.
2. P = (a+c)/2
3. P = a/2 + c.

1. A monopolist faces an inverse demand curve  and has a constant

marginal cost of 20.  The IEPR formula for this monopolist could be stated in the

 following way:
 A)
 B)
 C)
 D)

1. An example of first-degree price discrimination would occur
1. if a sales agent illegally sold a commodity to a federal agent above the competitive market price.
2. when you sell something illegally to an individual through the mail.
3. if a car salesman could accurately guess the maximum amount each customer would be willing to pay for a vehicle and charge him/her that price.
4. when you order 12 of something online and you pay less per unit than if you had bought only one.

19. All consumers are alike and each has an inverse demand curve for a monopolist's product of P = 100 – 2Q.  The marginal cost of production is constant at MC = \$10.  Let the monopolist charge a price of \$10 per unit purchased and a subscription fee of \$2025 that must be paid by each purchaser.  What is the amount of consumer's surplus generated by this scheme?

1. 0
2. \$2025
3. \$2025 multiplied by the number of consumers in the market.
4. \$90 multiplied by the number of units purchased.

20. Suppose that the perfectly competitive soybean industry in the United States is monopolized.  Under perfect competition, the equilibrium price was \$2 and quantity was 100,000.  The monopolist raises price to \$5 and restricts quantity to 70,000.  Assume that the monopolist is maximizing profits and that the monopolist faces a linear, upward-sloping marginal cost curve that begins at the origin.  Also assume that this marginal cost curve is the industry supply curve under perfect competition.  What is the loss in consumer surplus that the monopolist captures in the form of profit?

1. \$500,000
2. \$350,000
3. \$300,000
4. \$210,000

21. Let the inverse demand curve for a monopolist's product be P = 100 – 2Q and the marginal cost of production be constant at MC = 10.  Suppose that the firm considers moving from a uniform pricing strategy to a two-block tariff where the first block provides 15 units at a price of P1 = \$70 and the second block provides an additional 15 units at a price of P2 = \$40How much does the monopolist's profit rise with this scheme?

1. \$225
2. \$337.50
3. \$450.50
4. \$512

1. By approximately a factor of 2.43.
2. By approximately a factor of 37 percent.
3. By approximately a factor of 70 percent.

23. Suppose a monopolist faces a demand curve Q = aP-b and that the monopolist has a constant marginal cost of C.  The monopolist's profit-maximizing price is

 A)
 B)
 C)

D) P = C(-1/b)

24. A monopolist faces inverse demand P = a - bQ.  The monopolist's marginal revenue function is

1. MR = a-bQ.
2. MR = a – Q.
3. MR = a – 2bQ.
4. MR = a/Q – b.

25. The reason that profit-maximizing firms willingly incur the added expense of advertising is that they hope that successful advertising will increase profits by  A) increasing average costs.

1. increasing marginal costs.
2. increasing supply.
3. increasing demand.

Use the following to answer questions 26-28.

Use the following table to answer the question(s).

 Customer Product A Reservation Price Product B Reservation Price 1 1,000 200 2 800 400 Marginal Cost 500 100

26. If the firm does not bundle the products, what single price should the firm charge for product B to maximize profit?

1. 100
2. 200
3. 300
4. 400

27. If the firm does not bundle the products, what single price should the firm charge for product A to maximize profit?

1. 500
2. 800
3. 900
4. 1,000

28. If the firm bundles the products, what single price should the firm charge for the bundle to maximize profit?

1. 600
2. 800
3. 1,000
4. 1,200

29. A monopolist maximizes total revenue where marginal revenue  A) equals marginal cost.

1. is maximized.
2. equals zero.
3. is negative.

30. You own a small bookstore.  You have hired a marketing firm to calculate your own price elasticity of demand and your advertising elasticity of demand.  The firm has provided you with the relevant numbers regardless of minor adjustments in price or advertising budget.  Your own price elasticity of demand is around –1.7, and your advertising elasticity of demand is around 0.05.  Interpret the advertising elasticity of demand.

1. A one-percent increase in advertising expenditures will stimulate demand by about five-hundredths of one percent.
2. A one-percent increase in advertising expenditures will stimulate demand by about five-tenths of one percent.
3. A one-percent increase in advertising expenditures will stimulate demand by about five percent.
4. A one-percent increase in advertising expenditures will stimulate demand by about one-fifth of one percent

1. Suppose a profit-maximizing monopolist producing Q units of output faces the demand curve P = 20 - Q. Its total cost when producing Q units of output is TC = 24 + Q2. The fixed cost is sunk, and the marginal cost curve is MC = 2Q.

1. If price discrimination is impossible, how large will the profit be? How large will the producer surplus be?

1. Suppose the firm can engage in perfect first-degree price discrimination. How large will the profit be? How large is the producer surplus?

c) How much extra surplus does the producer capture when it can engage in firstdegree price discrimination instead of charging a uniform price?

2. The demand curve for a certain good is P = 100 - Q. The marginal cost for a monopolist is MC(Q) = Q, for Q  30. The maximum that can be supplied in this market is Q = 30, that is, the marginal cost is infinite for Q > 30.

1. Graph the market demand and the MC.

1. What price will the profit-maximizing monopolist set?

1. What is the deadweight loss due to monopoly in this market?

3. A firm produces output, measured by Q, which is sold in a market in which the price P = 20, regardless of the size of Q. The output is produced using only one input, labor (measured by L); the production function is Q(L) = L. There are many suppliers of labor, and the supply schedule is w = 2L, where w is the wage rate. The firm is a monopsonist in the labor market.

1. What wage rate will the monopsonist pay?

1. How much extra profit does the firm earn when it pays labor as a monopsonist instead of paying the wage rate that would be observed in a perfectly competitive market?

4. The monopolist faces a demand curve given by Q = 10P−3. Its cost function is TC = 2Q. What is its optimal level of output and price?

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