Ch. 10 Market Power: Monopoly and Monopsony (Spring 2008)
Multiple Choice Section: 40 questions worth 1.5 points each for a total of 60 points: Put your
answers on a Scantron sheet.
1. Which of the following is true of marginal revenue for a monopolist?
a. marginal revenue decreases with increases in output
b. average and marginal revenue are the same
c. marginal revenue is zero when price elasticity of demand equals 0
d. marginal revenue is greater than price
2. Under pure monopoly, the profit-maximizing/loss-minimizing output could conceivably
be at an output rate where all but one of the following equalities holds:
a. P = MC.
b. MR = ATC.
c. AR = ATC.
d. MR = MC.
3. If a monopolist has positive marginal costs, its best possible price would be where
demand is:
a. unit elastic.
b. infinitely elastic.
c. relatively (but not perfectly) elastic.
d. relatively inelastic.
4. A monopsonist follows which rule to set price?
a. equate marginal cost to marginal revenue, charge the price given by demand curve.
b. equate marginal cost to marginal expenditure, charge the price given by the demand
curve.
c. equate marginal revenue to marginal value, change the price given by the demand
curve.
d. equate marginal value to marginal expenditure, pay the price given by the supply
curve.
e. set marginal expenditure equal to average expenditure, pay that price.
5. The monopolist has no supply curve because:
a. its output decision depends on average cost and the shape of the total revenue
curve.
b. its output decision depends on marginal cost and the shape of the total revenue
curve.
c. its output decision depends on average cost and the shape of the average revenue
curve.
d. its output decision depends on marginal cost and the shape of the total cost curve.
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6. The relationship between price, marginal revenue, and the price elasticity of demand is
a. D = MR (|E| - 1)/|E|.
b. MR = P(1 - 1/|E|).
c. MR = P(|E|/(|E| - 1)).
d. P = MR(|E|/(|E| - MR)).
7. Which factors determine the firm's elasticity of demand:
a. elasticity of market demand, number of firms, and the nature of interaction among
firms.
b. elasticity of market supply
c. number of buyers
d. none of the above
8. Deadweight loss from monopoly power is expressed on a graph as:
a. the area between the competitive price and the average revenue curve bounded by
the quantities produced by competitive and monopoly markets
b. the area between the competitive price line and the marginal cost curve bounded by
the quantities produced by competitive and monopoly markets.
c. the area between the average revenue curve and the marginal cost curve bounded by
the quantities produced by competitive and monopoly markets.
d. the area between the competitive price line and the monopoly price line bounded
by zero output and the output chosen by the monopolist
Answer the following 4 questions using the following diagram.
$P
M
C
J
A
R
B
S
C
ATC
N
H K
G
D
O
E L M
Quantity
M
R
9. In order to maximize profits or minimize losses this firm should produce:
a. OE units and charge price OB
b. OL units and charge price LK
c. OM units and charge price NM
d. OE units and charge price OA
e. OE units and charge price OC
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10. At the profit maximizing output level, the monopolist’s total revenue will be:
a. OEHB
b. OEGC
c. OAJE
d. NM times OM
11. At the profit maximizing output level, the monopolist’s total cost will be:
a. OEHB
b. OEGC
c. OAJE
d. NM times OM
12. At the profit maximizing output level, the monopolist firm will realize:
a. a loss equal to ABHJ
b. a loss of JH per unit
c. a loss of GH per unit
d. an economic profit of ACGJ
e. an economic profit of ABHJ
13. In a bilateral monopoly,
a. equilibrium price will favor the seller.
b. equilibrium price will favor the buyer.
c. equilibrium price will approximate the competitive equilibrium price.
d. equilibrium price will not be determined by a simple rule.
14. If a monopolist's profits were taxed away and redistributed to its consumers,
a. inefficiency would remain, but not because output would be lower than under
competitive conditions.
b. efficiency would be obtained because output would be increased to the competitive
level.
c. inefficiency would remain because output would be lower than under competitive
conditions.
d. efficiency would be obtained because output would be increased and profits
removed.
15. The price and output that will result in a situation of bilateral monopoly is:
a. where the seller's marginal revenue curve intersects the seller's marginal cost
curve.
b. function of bargaining power and negotiating skill.
c. where the buyer's demand curve intersects the seller's marginal cost curve.
d. where the buyer's demand curve intersects the seller's marginal revenue curve
e. where the curve showing the buyer's marginal expenditure on the good intersects
the buyer's demand curve.
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16. It is generally agreed among economists that:
a. monopoly situations result in a minimal loss to consumer surplus.
b. the losses to consumers from monopoly situations are difficult to determine.
c. monopoly situations result in significant gains to consumer surplus.
d. consumers gain from monopoly situations.
e. none of the above.
17. The situation in which buyers are able to affect the price of a good is referred to as:
a. monopoly power
b. purchasing power
c. countervailing power
d. monopsony power
18. For a competitive buyer, the marginal expenditure per unit of an input:
a. equals the average expenditure per unit.
b. exceeds the average expenditure per unit.
c. is less than the average expenditure per unit.
d. any of the above could be true.
19. Which of the following is true of the antitrust laws in the United States?
a. they are designed to make the business environment more equitable.
b. they are deliberately written in a way to make clear to all what is and what is not
allowed.
c. they are designed to promote a competitive economy.
d. they are deliberately written in a language to promote cooperation among
businesses.
Wage
Marginal Expense
W0
W1
Supply
W2
W3
MRP
labor
Q3
Q1
Q2
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20. In the above graph, if this labor market is monopsonistic, the wage rate and level of
employment will be respectively:
a. W2 and Q1
b. W1 and Q1
c. W2 and Q2
d. W3 and Q3
e. W3 and Q1
21. The degree of monopsony power that a firm enjoys is determined by:
a. elasticity of market demand, elasticity of market supply, and number of buyers in
the market.
b. elasticity of market supply, number of buyers in the market, and how buyers
interact.
c. number of buyers in the market, how buyers interact, and number of sellers of the
resource.
d. how buyers interact, number of sellers of the resource, and elasticity of market
demand.
# of Workers
1
2
3
4
5
6
7
Wage
$6
$7
$8
$9
$10
$11
$12
Value of Marginal Product
$37
$33
$29
$25
$21
$17
$13
22. In the above table, how many workers should the profit maximizing monopsonist hire?
a. 3
b. 4
c. 5
d. 6
e. 7
5
P($
)30
MC
20
15
10
D
10
Q
15
MR
23. In the above figure, the deadweight loss due to the monopoly is
a. $25
b. $50
c. $75
d. $200
e. none of the above
DEMAND DATA
Price Quantity demanded
$5.50
3
5.00
4
4.50
5
4.00
6
3.50
7
2.90
8
2.50
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COST DATA
Output
3
4
5
6
7
8
9
24. The profit maximizing price for the monopolist will be:
a. $5.00
b. $4.50
c. $4.00
d. $3.50
e. none of the above
25. The profit maximizing level of output will be:
a. 6 units
6
Total Cost
$5
5.50
6.25
7.25
8.50
11
14
b.
c.
d.
e.
7 units
8 units
5 units
none of the above
26. The monopolist will realize a:
a. profit of $14.25
b. profit of $16.75
c. loss of $19.50
d. profit of $17.50
e. profit of $18.50
27. A multiplant monopolist will operate where
a. MC1 + MC2 = MR
b. MC1 - MC2 = MR
c. MC1 = MC2 - MR
d. MC1 / MC2 = MR
e. None of the above
28. In the 1960s, public utilities' costs were falling, but regulatory agencies were slow in
adjusting price ceilings. The companies benefited from being able to charge the
higher price in the meantime. This phenomenon is called:
a. regulatory lag
b. the Lerner effect
c. the Hoffner effect
d. deadweight gain
e. rule of thumb pricing
29. All of the following are sources of monopoly power except
a. patents
b. high prices
c. control of inputs
d. economies of scale
30. What will happen if the government imposes a lump sum tax of $2 on the monopolist?
a. Output will decrease by one unit.
b. Output will remain constant.
c. Output will increase by one unit.
d. The change in output is indeterminate.
The following 4 questions are based on the information below. Assume that the firm is a
monopoly and that its demand curve is such that one unit of the output can be sold for $15 and
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that the price of all units of output must be reduced by $1 for each additional unit of output sold.
The cost and production levels of the firm are shown in the following table:
Output
1
2
3
4
5
6
7
8
9
Total_Cost
22
24
27
31
36
42
49
57
66
31. What is the marginal revenue associated with the sale of the second unit?
a. $15
b. $13
c. $11
d. $9
e. none of the above
32. What is the profit maximizing level of output for the monopolist?
a. 3
b. 4
c. 5
d. 6
e. none of the above
33. At the firm's profit maximizing level of output, total profits are
a. $11
b. $14
c. $15
d. $19
e. none of the above
34. At the profit maximizing output for a monopolist facing positive marginal costs, the price
elasticity of demand (in absolute value) is:
a. one
b. greater than one
c. impossible to determine without more data
d. less than one
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35. Because a monopolist's demand curve is downward sloping, in order to get more sales the
monopolist must:
a. decrease the price of the product
b. increase the price of the product
c. increase its marginal revenue
d. lower its marginal revenue
36. A natural monopoly is characterized by:
a. decreasing returns to scale
b. patent protection of certain basic processes.
c. a decreasing long-run average cost curve over the range of market output.
d. a firm producing granola and wild hickory nuts. Ha! Ha!
37. In general, which of the following is true for the monopolist?
a. the monopolist's quantity of sales, but not price, will be lower than the competitive
quantity and price.
b. the monopolist's quantity of sales and price will be lower than the competitive
quantity and price.
c. the monopolist's quantity of sales and price will be higher than the competitive
sales and price.
d. the monopolist's price, but not quantity of sales, will be lower than the competitive
sales and price
38. A monopolist reduces its price from $30 to $20, resulting in an increase in total revenue.
Marginal revenue is:
a. more than $30
b. less than $20
c. between $20 and $30
d. exactly $20
39. The monopolist that maximizes profit:
a. imposes a cost on society because the selling price is equal to marginal cost.
b. does not impose a cost on society because the selling price is above marginal cost.
c. does not impose a cost on society because price is equal to marginal cost.
d. imposes a cost on society because the selling price is above marginal cost.
40. If a monopolist's demand curve is downward sloping and linear, then its total revenue
curve must be:
a. a function of output that increases at a decreasing rate, reaches a maximum, then
falls.
b. negatively sloped with twice the slope of the demand curve.
c. a rising function of output that increases at an increasing rate.
d. identical to the demand curve.
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Short problems section: (40 points) Each question is worth 4 points. Show your work on blank
sheets of paper in answering the following 10 questions. For questions 41-44, you can paste this
graph on your paper and draw your answers on it.
Multiplant Monopoly
50
45
40
35
$
30
25
20
15
10
5
0
0
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 10
0
Quantity
Demand
MC1
MC2
41. In the above multiplant monopolist graph, what is the profit maximizing output from
plant 2?
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42. In the above multiplant monopolist graph what is the profit maximizing price?
43. In the above multiplant monopolist graph, what is the profit maximizing output?
44. In the above multiplant monopolist graph, what is the profit maximizing output from
plant 1?
45. If the price elasticity of demand for the monopolists product is equal to -2 and the
marginal revenue is 10, what is the price?
46. Assume the monopolist has the following demand curve and cost curve:
Q = 240 - 4P, TC = 4Q. What is the profit maximizing output?
47. Assume the monopolist has the following demand curve and cost curve:
Q = 240 - 4P, TC = 4Q. What is the profit maximizing price?
48. The marginal cost of the monopolist is a constant $40. The inverse demand curve is P =
200- 2Q. The monopolist maximizes profits at Q = __ and P =__
49. In the above problem, the deadweight loss is:
50. A monopolist is currently charging a price of $12 and has a Lerner index of 0.25. What is
her marginal cost?
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