Uploaded by maisiv

Microeconomics chapter 4

December 23, 2018
Microeconomics Worksheet 4
I. Definition, Discussion/Explanation and Workout Questions
Define the following concepts:
a. Multi-plant monopoly
e. Bulk discount
b. Price discrimination
f. Block pricing
c. Social cost of monopoly power
g. Perfect price discrimination
d. Natural monopoly
2. Consider a monopolist that charges a uniform price. Is the long run equilibrium of this firm
productively efficient? Why (not)? Is the outcome allocatively efficient? Why (not)?
3. “A (pure) monopolist is a price-maker.” (A) Explain what this means. (B) Why is a monopolist
a price-maker?
4. What is the relationship between price and average revenue in pure monopoly? Will the same
relationship hold under the other market structures?
5. What is the relationship between price and marginal revenue under pure monopoly?
6. What are the conditions that might give rise to monopoly?
7. Draw a figure showing a pure monopolist operating the optimum scale of plant at its optimum
rate of output when in long-run equilibrium. Draw another figure showing a pure monopolist
over-utilizing a larger-than-the-optimum scale of plant when in long-run equilibrium. State the
general condition that determines whether a monopolist will operate scale of plant, a largerthan-the-optimum scale of plant, or a smaller-than-the-optimum scale of plant, when in longrun equilibrium.
8. A non-discriminating monopolist faces the market demand Q = 36 – 0.5P and the total cost
function C = 500 + Q2. Determine:
A. the profit-maximizing rate/level of output.
B. the total profit of the firm.
9. If you visit shopping centers in Muscat during the holidays and like to read advertisements, it is
very likely that you come across something like “Buy Two, Get One for Free!” What concept
you studied in this chapter is reflected in this phrase? (Be as specific as you can!)
10. What is a multi-plant monopolist? How does it differ from a (price-) discriminating monopolist?
11. Consider a multi-plant monopolist facing a demand schedule of Q = 900 – 3P and plant-specific
costs of C1 = 100Q1 + Q12 + 50 and C2 = 200 + 0.5Q22 + 10Q2. In order to maximize profit,
A. how much should the monopolist produce in each plant and in total?
B. what price should it charge?
C. What is the size of profit at equilibrium?
12. A firm, which is the only seller of a bottled beverage (X), has a cost function C = 10X + 50 (in
OR). Assume the total demand for its product is X = 210 – 3P, where P is price in OR per set.
Assume further that the monopolist has established that the demand for its product differs
between the northern and southern parts of the country. The demand functions of the two
separated markets are:
X1 = 90 – P1 ……………………. demand in southern region, and
X2 = 120 – 2P2 …………………. demand in the northern region.
(Clearly X1 + X2 = X.)
Assuming that the factory aims at the maximization of its profit,
A. calculate equilibrium price and output in each market.
B. determine the total profit that the monopolist realizes by applying price discrimination.
C. find price elasticity of demand at equilibrium in each market and describe the relationship
between the elasticities and market prices.
D. determine the total profit that the monopolist realizes by charging a uniform price.
E. Compare your answers in (B) and (D). What do you observe?
II. Multiple-Choice Questions
13. A pure monopolist in short run equilibrium will definitely make supernormal profit if
A. marginal revenue equals marginal cost.
B. total revenue equals total cost.
C. price exceeds average variable cost.
D. price exceeds average total cost.
14. In long-run equilibrium, the pure monopolist (as opposed to the perfectly competitive firm) can
make excess profits because of
A. blocked entry
B. high selling prices
C. lower average costs
D. advertising.
15. If the demand curves for a monopolist’s commodity are identical in two separate markets, then,
by practicing third degree price discrimination, the monopolist
A. will increase total revenue and total profits.
B. can increase total revenue and total profits.
C. cannot increase total revenue and total profits.
D. will charge different prices in the two markets.
III. True/False Questions
16. A pure monopolist will never operate at loss, whether in the short run or the long run.
17. A pure monopolist may or may not achieve productive efficiency but will definitely result in
allocative efficiency.
18. Under pure monopoly, the firm and the industry/market mean the same thing.