Review Questions for Chapter 10- Market Power: Monopoly and Monopsony
1.Which of the following is true at the output level where P=MC?
a.
b.
c.
d.
The monopolist is maximizing profit.
The monopolist is not maximizing profit and should increase output.
The monopolist is not maximizing profit and should decrease output.
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.
a. higher; larger
b. lower; larger
c. higher; smaller
d. lower; smaller
e. none of these
3.Which of the following is NOT true regarding monopoly?
a. Monopoly is the sole producer in the market.
b. Monopoly price is determined from the demand curve.
c. Monopolist can charge as high a price as it likes.
d. 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
a.
b.
c.
d.
e.
expand output.
do nothing without information about your fixed costs.
reduce output until marginal revenue equals marginal cost.
expand output until marginal revenue equals zero.
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:
Q  160  4P
TR  40Q  0.25Q 2
MR  40  0.5Q
TC  4Q
MC  4
5.Refer to Scenario 1. How much output will Barbara produce?
a.
b.
c.
d.
e.
0
22
56
72
none of the above
6.Refer to Scenario 1. The price of her product will be _____.
a.
b.
c.
d.
e.
4
22
32
42
72
7.Refer to Scenario 1. How much profit will she make?
a.
b.
c.
d.
e.
-996
0
1,296
1,568
none of the above
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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?
a.
b.
c.
d.
e.
0
90
95
100
none of the above
9.Refer to Scenario 2. What is the profit maximizing level of output?
a.
b.
c.
d.
e.
0
90
95
100
none of the above
10.Refer to Scenario 2. What is the profit maximizing price?
a.
b.
c.
d.
$95.00.
$5.00.
$52.50.
$10.00.
11.Refer to Scenario 2. How much profit does the monopolist earn?
a.
b.
c.
d.
$4512.50.
$4987.50.
$475.00.
$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?
a.
b.
c.
d.
e.
0
90
95
100
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?
a.
b.
c.
d.
$90.00.
$10.00.
$55.00.
$52.50.
2
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?
a.
b.
c.
d.
$4050.
$4950.
$450.
$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?
a.
b.
c.
d.
It increases by $1000.
It decreases by $1000.
It decreases by less than $1000.
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?
a. 0
b. 90
c. 95
d. 100
e. none of the above
17.The _____ elastic a firm's demand curve, the greater its _____.
a.
b.
c.
d.
less; monopoly power
less; output
more; monopoly power
more; costs
18.Monopoly power results from the ability to
a.
b.
c.
d.
set price equal to marginal cost.
equate marginal cost to marginal revenue.
set price above average variable cost.
set price above marginal cost.
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19.What is the value of the Lerner index under perfect competition?
a. 1
b. 0
c. infinity
d. 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.
a.
b.
c.
d.
This practice is known as concentrating and is legal in the United States and Canada.
This practice is known as collusion and is illegal in the United States.
In this way firms take advantage of economies of scale.
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 _____.
a.
b.
c.
d.
e.
P1
P2
P3
P4
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 _____.
a.
b.
c.
d.
e.
P1
P2
P3
P4
none of the above
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23.Refer to Figure 10.1. The minimum feasible price is _____.
a.
b.
c.
d.
e.
P1
P2
P3
P4
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?
a.
b.
c.
d.
e.
0
30
45
60
none of the above
25.Refer to Scenario 3. What is the profit maximizing level of output?
a.
b.
c.
d.
e.
0
30
45
60
none of the above
26.Refer to Scenario 3. At the profit maximizing level of output, what is the level of consumer surplus?
a. 0
b. 1,800
c. 2,700
d. 3,600
e. 4,800
27.Refer to Scenario 3. At the profit maximizing level of output, what is the deadweight loss?
a.
b.
c.
d.
e.
0
450
900
1,800
none of the above
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